Chapter And Authors Information
The current state of corporate innovation strategy is broken. Creating a true innovation strategy requires us to understand the purpose of innovation, the difference between corporate strategy and innovation strategy, and how to build an innovation strategy that is truly transformative. We do this by exploring in the right places, launching at the right time, and hacking traditional mindsets. Innovation strategy in a corporate environment requires us to think of strategy as a moving target that requires constant adjustment, with a focus on how quickly we absorb and act on information that can transform the company, and perhaps the market itself.
innovation, innovation strategy, digital transformation, innovation accounting
Shareholders and board members demand a vision for the future and an innovation strategy to get there. Regardless of whether the company is public or private, the story is the same. How will these old, inflexible companies survive in industries facing disruption from scrappy, nimble, three-person startups? How are those startups miraculously gaining market share with little more than pocket money?
In 2008, Blockbuster CEO Jim Keyes said, “Neither RedBox nor Netflix are even on the radar screen in terms of competition” (Munarriz, 2017). Fortunately, most legacy companies have learned from Blockbuster and Kodak that to stay competitive, companies need to innovate, or the revenue will plummet.
So what’s a CEO to do? Every day, another company announces the launch of an accelerator or plans for “digital transformation,” or they proclaim that their innovation strategy is “to innovate” – a useless sentence devoid of meaning.
It’s hard to find a CEO who thinks their company can ignore disruption. But “go innovate” often translates to “go do stuff” without any guarantee that the “stuff” is even relevant in the industry.
A better strategy? Just about anything.
Innovation is not a strategy, it is a process that requires a strategy. With the right strategy, innovation can transform your business. Without a strategy, it’s just innovation theatre.
All the buzzwords come out to play. We start our growth boards. The innovation steering committee meets once a quarter. We do our portfolio mapping. We set up a stage-gate process for our brand new corporate accelerator.
It’s not that these things or processes are inherently bad. There are some great accelerators out there, and the law of large numbers tells us that even bad accelerators will be successes in spite of themselves.
Buzzwords are only problematic when they are used without purpose or understanding. Concepts like agile methodology and design thinking may be smart, necessary ideas, but they are not a strategy. They can easily slip into dogmatism, and become pure process at their worst.
We mistake process for strategy because implementing process feels like we’re in control. It’s satisfying, it’s safe, and it’s what corporations know how to do.
“Go innovate,” they say, and the process begins. But without a clear understanding of what we are trying to accomplish, how will we know when our innovation has been successful?
The current state of corporate innovation strategy is broken. CEOs say they want transformation, but the corporate systems in place have been deliberately designed to avoid any change or deviation from the norm.
Corporate strategy is embedded with a mindset to maintain the status quo – to keep afloat by going slow and not making waves. But innovation strategy is all about the waves – spotting them, riding them, even creating them, which pits corporate strategy against innovation strategy in a fight for the rudder. Creating a true innovation strategy requires us to understand the purpose of innovation, to accept a degree of malleability to traditional corporate strategy, and to build an innovation strategy that is truly transformative.
The Glorious Purpose of Innovation
Today, everyone is launching a digital transformation. You’d be forgiven if you mistook innovation as a synonym for digitization. Every company’s innovation strategy seems to be centered around “moving everything to the cloud,” topped with a healthy sprinkling of agile and lean transformation, just because.
In truth, few companies really know what transformation is, and most of the people actually working in a company have a strong incentive to prevent change. In should not be surprising that 70% of digital transformations fail (Deloitte, 2020).
In 2012, Procter & Gamble said they would be “the most digital company on the planet” (Davenport & Westerman, 2018) but its broad goals failed to translate into specific wins in a difficult economy.
In 2014, Ford Motors created a whole digital division, but since it was separate from the rest of the company, it didn’t work well with the traditionally managed divisions.
In 2015, General Electric began spilling billions into GE Digital, only to watch their stock plummet because they focused on its size instead of its purpose (Morgan, 2019).
Companies want growth. They want to transform their business model, stop fighting the competition, and leapfrog to market dominance.
Companies want the growth of Uber, the brand recognition of Apple, and the profits of Google. They want their stock to be valued at 20x revenue like a tech company instead of 2x revenue like a retail outlet.
The reason no one can agree on a definition of innovation – I dare you to get individual board members to write their own definitions down and compare them – is because innovation is not an end in and of itself.
Whether you want to focus on core innovation, transformational innovation, product innovation, internal innovation, or just plain old disruptive innovation, the purpose of innovation is to grow. And in order to grow at the exponential rate of the tech giants, companies can’t just focus on their core business and do slightly better than the competition. They need business model innovation.
That’s the type of innovation that moves companies from a service provider to a platform, or a messaging app to a social network. Innovation must provide new sources of growth by creating new business models.
Innovation cannot be equated to digitization. Simply digitizing our sales, marketing, and production doesn’t fundamentally alter our business model, and it won’t produce exponential growth.
In Exponential Organizations, Salim Ishmael articulates eleven drivers of exponential growth (Ishmael 2019):
Of these 11 drivers, only Algorithms is explicitly digital, and only Interfaces and Dashboards are directly related to data. There are far more powerful drivers than just “going digital.”
A company like Upwork is valuable not simply because it is online, but because it has no assets that drag down costs. It sells other people’s services. The same with Uber and AirBnB. Digital technologies may enable these companies, but the business model driver is Leveraged Assets.
Organizations and movements such as RAICES and Black Lives Matter are exponential not because they are digital, but because they are powered by communities organized around a common cause. Again, digital technologies enable them, but the business model driver is the Community & Crowd.
Perhaps no large company is as famous for embracing Experimentation as Amazon. From the Fire phone to their initial attempt at video streaming called Unbox, Amazon has had more than its share of failures. But from the lessons of Unbox came Amazon Prime Video. From a small API for self-service inventory data, Amazon experimented its way to the $45 billion juggernaut of Amazon Web Services. A book store became the leading cloud computing provider, beating Microsoft, Apple, Oracle, IBM, and Google to the punch.
These companies do not simply succeed because they are digital or they embrace innovation as a mantra. They succeed because they understand their business model and what drives it. After you understand that, you have to determine how you can transform your business model to take advantage of some of these exponential drivers.
The Failure of Corporate Strategy
“We need a strategy.”
“I’d like to present our strategy.”
“Their strategy is terrible.”
Why is strategy always used as a noun? Why do we talk more about strategy than we do about strategizing? Why do we think of strategy as something static, like a plan?
If the purpose of innovation is to create new business models that leverage exponential drivers, then strategy isn’t where we are going, it’s how we will get there. Strategy should be used like a verb.
A plan, by definition, is something you are not supposed to deviate from. If a plan changes during its execution, it’s seen as a negative. “The best laid plans of mice and men oft go awry,” said Robert Burns.
Well of course they do.
This is why it’s a mistake to regard your strategy as a plan instead of the constant act of strategizing. You don’t have a strategy. You strategize. Any viable strategic direction must be flexible enough to adapt to changes, and have access to resources that allow them to make those adaptations.
I’m not talking about “Plan B.” That’s just a backup plan, and two static plans do not constitute a strategy. I’m talking about the value of strategy in the incredibly uncertain domain of innovation, where you put everything on the line every day for a single idea in a domain full of risks. To quote one of my generation’s great thinkers, “Everyone has a plan until they get punched in the mouth.”
Most innovation departments don’t seem to have even a plan, much less a strategy beyond the shotgun approach of “try a lot of things and see what works,” which is subject to chance and reactive to the whims of industry. This is better than doing nothing, but it’s not very strategic, and certainly not very satisfying for an entrepreneur.
So, what is a strategy?
What is a Strategy?
A strategy is a heuristic for making decisions under uncertainty. It’s a mental shortcut for effective problem-solving. These mental shortcuts help us to make decisions quickly. They make up the core of our high-level plans.
Let’s imagine innovation is a road trip. We’re in Florida and our vision of the future is heading to New York. The strategy, then, is to go north.
It is not a complete plan or checklist mapping out which roads to take or which airlines are best. But when a bus pulls up and we have the option to get on, we can ask, “Is this bus going north?” That services as a mental shortcut to decide if we should get on or not.
If you decide to get on the bus, you are taking that strategy (go north) and applying a tactic to it (take the bus). Another tactic might be to take a plane. Another might be to take a taxi, to hitchhike, or to ride a bike. The tactic we employ depends on our information and resources at the time. A myriad of factors – such as the weather, our budget, and our timetable – go into considering which tactic is best for our strategy.
If Google decides to purchase the world’s most advanced AI to run their data processing, that is a tactical decision that they are applying to an innovation strategy, which itself was borne of their vision statement.
“GOOGLE: To organize the world’s information and make it universally accessible and useful.”
Google’s vision statement is elegant, but hidden in that statement is an understanding that the amount of data in the world is constantly doubling. We’re smothered in notifications, and every fact in the world is at our fingertips.
Modern AI didn’t exist when Google settled on the strategy of investing in machine learning and artificial intelligence. It would be impossible for Google to predict which companies would be founded in the next five years, or even five months, let alone know in advance which ones will be successful enough to warrant M&A dollars.
But their innovation strategy (invest in artificial intelligence) and vision (organize the overwhelming amounts of information), they have been able to make tactical decisions to dominate the industry guided by their heuristics which can be revised as things change.
What Is an Innovation Strategy?
If a strategy is a heuristic for making decisions under uncertainty, then an innovation strategy must relate to innovation decisions. These decisions include:
- What areas will we invest in?
- How much will we invest?
- How will I divide that investment up into an innovation portfolio?
- Who will make investment decisions?
- What capabilities will we need to build to support those investments?
What capabilities are we not capable of building and must acquire or form a partnership for?
An innovation strategy is important because all of these are long-term decisions. As such, they must be based on our vision and the impact of trends. They are not decisions we can put off until later when we have the ideal amount of information. If we make the decisions later, we will be too late.
If the amount of video data in the world is doubling, then waiting 10 years to develop AI video-content analysis is far too long. At that point, Google has lost. They can only hope to make a good acquisition, or to be acquired by a better competitor.
These long-term strategic decisions ultimately serve one goal: to generate options. We do not need to execute every option available. But when we have more information, options allow us a choice. Instead of being forced down a particular path guided by legacy systems, we can choose between the best possible alternatives.
An innovation strategy is not only a heuristic. It’s also a set of long-term investment decisions and frameworks for generating options under extreme uncertainty. It provides guidance on where to invest resources so a company can achieve its vision for the future.
Innovation strategy isn’t like playing chess, where you can see the entire board laid out before you. With innovation strategy, you lack the information needed even to decide your opening moves, because you don’t know what the board looks like or what the rules are. You don’t even know who is playing against you, although you can be certain that at least one person is on the other side.
Innovation strategy is more like choosing which game to play in the first place.
Put simply, this is a Where to Play decision. The Where to Play decision should be made before thinking about How to Win, an approach made famous by A.G. Lafley, Roger L. Martin, and Jennifer Riel in their cornerstone book Playing to Win (Laflety et al, 2013).
The problem with an innovation strategy is that there may or may not be games we could be playing that no one is even aware of yet. We don’t know what the prize is in those possible games. We don’t know if they are fair games. We don’t even know if we’ll be allowed to play.
It’s like trying to make a decision between checkers, chess, Quidditch, and Calvin Ball.
Checkers and chess are pretty safe bets — we know what we’re getting into. Quidditch is a bit more mysterious. We might be able to look up the rules, but maybe we ultimately decide that, being fictional and you not being a wizard, it’s probably a bad game for us.
But Calvin Ball?
Calvin Ball — from the comic strip Calvin and Hobbes — is a game where the rules change from moment to moment. The only rule is that no two games have the same rules. It’s fairly hard to predict if you’ll win or lose.
In incremental innovation (focusing on your core business), the rules of the game are known. In disruptive innovation, they are generally unknown or undefined. That’s what makes it a challenge.
Finding a decent area for disruptive innovation often involves a radical new technology that suddenly changes the rules, or a clever entrepreneur who manages to find a gap in the rule book where things haven’t been clearly defined. Think how Uber offers taxis that aren’t actually licensed taxis. Or how AirBnB offers hotel rooms that aren’t technically hotel rooms.
When incumbents complain that the disruptors aren’t playing by the rules, they are usually correct. Disruptors are guerillas using whatever tactics they find useful. If they are caught breaking the rules, they will sometimes submit, and sometimes just continue cheating.
So innovation strategy is not merely a plan or a heuristic for making choices. It also involves investing in capabilities and deciding where to play. But beyond simply asking how to win, innovation strategy requires us to discover the rules of the game we will be playing.
Building Your Innovation Strategy
A complete innovation strategy absolutely requires all of the above. We must have a vision of the future and we must make strategic decisions to invest in capabilities that align with that future.
But innovation strategy also requires us to consider where to explore, when to launch, and how to hack.
Where to Explore
If you were an explorer in the 2nd century, it was impossible to run out of new places to go.
No matter who you were or where you started from, the globe was mostly a blank space to you. A Roman might have had a slightly more filled-in map than an Ohlone Native American, but compared to the whole sphere, neither knew very much about anywhere else.
Today it feels like that map has been filled in for us. Satellites are able to locate us and send GPS coordinates anywhere, allowing us to get precise directions, an estimated time of arrival, and the location of any police speed traps between here and the nearest Cracker Barrel (a favorite American pitstop for traveling musicians).
But a good explorer looks for the gaps in the map.
If you are Jacques Cousteau, you explore the 70% of the world that is underwater. If you are Elon Musk, you skip the earth and head straight for Mars. If you are Jane Goodall, you explore the empathy of the Great Apes. All are explorers who know to look where others do not.
Figuring out where to explore is one of the biggest challenges innovators can face. Rita McGrath calls these Arenas, and identifying them is the primary focus of her book Seeing Around Corners – a must-read for innovation strategists (McGrath, 2019).
Your innovation strategy should define one or more areas with sufficient uncertainty to represent potential paradigm changes in the industry. These may include areas where the intersection of changing consumer needs, regulatory ambiguity, technology, or other trends are making things unpredictable.
When to Launch
Blockbuster was a pioneer of online streaming.
CEO John Antioco launched Blockbuster’s streaming service in 2004. But by 2007, Antioco was out as CEO, and streaming was no longer a priority at Blockbuster.
This delighted Reed Hastings, CEO of Netflix, who signed a deal to stream Starz movies in 2008. By 2010, Netflix had deals with Disney, Sony, Paramount, and Lionsgate, which earned them 20% of the market share in North American streaming traffic.
That year, Blockbuster filed for bankruptcy. We will never know what would have happened if Antioco had remained and kept focus on Blockbuster’s streaming efforts. But we know that in 2008, Jim Keyes, who replaced Antioco as CEO, didn’t even see the potential, “I’ve been frankly confused by this fascination that everybody has with Netflix… Netflix doesn’t really have or do anything that we can’t or don’t already do ourselves.” Netflix disagreed, and their expansion was well-timed to take advantage of Blockbuster’s misstep.
Innovators must find the right moment to venture into a market. Uber would not have been possible without GPS, ubiquitous smartphones, and probably Twilio providing a simple SMS infrastructure for notifications. Tesla would not be possible without improved battery technology. Coinbase without blockchain. Space X without government de-regulation of space.
Some explorers get lucky, but others have the vision to watch the technology, regulations, and market to recognize when the time is right. Then they stick around for the long gaul. It’s very rare for startups to win with the first version of their business model. Most try, fail, pivot, try again, and pivot again.
At a minimum, your innovation strategy must set aside sufficient resources to persevere for a long-term bet, and not be subject to the quarterly goals and the changing of the guard. Ideally, your innovation strategy should explicitly invest in the right capabilities, exercise patience by setting clear launch criteria, and then commit for the long haul.
How to Hack
This is hacking, not cheating. I’m not a fan of cheaters. I’m not talking about ignoring the rules and putting an extra pair of aces up your sleeve. I’m talking about being a good lawyer and knowing your way around the rules.
If I wait until your back is turned and remove your rook from the chess board while you’re not looking, that is cheating. The rules are well-defined — there is no room for interpretation.
But if you say “Last person to the restaurant buys dinner,” and you are foolish enough to start running while I take a cab, that’s not cheating. That’s being clever. No rules had been established.
A lot of the things we think are rules are not actually rules at all. Clever innovators often look at well-regulated environments and recognize that those regulations are pretty open to interpretation. The interpretation may simply be a tradition, not a law or commandment that is unalterable.
The original Square credit card reader was a great example of this. To attach a credit card reader to an iPhone is not a simple thing. Square needed a card reader and to send data to the iPhone via the dock connector (also used for charging the phone.) But any piece of hardware using that dock would have to go through Apple’s long, tedious, and expensive review process. What’s a hacker to do?
Use the headphone jack.
The headphone jack also allows data from outside the iPhone in. It’s just a different type of data: sound. Jim McKelvey created a prototype reader using the headphone jack by reading in credit card data, translating that into sound, and then having the app translate that sound back into useful data to verify the credit card number (McKelvey, 2020).
Technically, the headphone jack could be used by anyone developing an app without getting explicit permission to do so. Of course, it was risky. An annoyed Apple could have easily removed their app from the App Store, and that would have ended Square before it could truly begin. But the rules had enough ambiguity to get started with a real product, fast.
Innovators thrive in these spaces of ambiguity.
Your innovation strategy has to understand the rules of the games, or lack thereof. Asking where to explore should define the space of ambiguity where entrepreneurs can express their creativity. But a good hacker has to have a crowbar to take a small gap and open it to interpretation. That gap can only be understood by having a clear understanding of the boundaries.
The common thread between these three areas — exploring, launching, and hacking — is that they all deal in information.
Determining where to explore is the act of identifying an area not on any map. It is finding the places where we have no information. Exploring is the act of gathering that missing information.
Deciding when to launch is the act of determining what capabilities are necessary and then just watching for the right moment. Launching is an act of patience and fast reflexes. Launching is acting when the information is available.
Figuring out how to hack is the act of identifying points of ambiguity. It is determining what pieces of information everyone thinks they have, but don’t. It is identifying when assumptions about existing information are wrong.
Corporate innovation strategies can fail for many reasons. They can fail because of corporate culture. They can fail by placing the wrong bets. They can fail because they lack patience or luck.
But too often they fail because the distinction between corporate strategy and innovation strategy isn’t acknowledged. This is a failure at the outset, and puts every innovation team at a decisive disadvantage.
CEOs need to do a better job defining innovation strategy, instead of simply calling for “more innovation.” In doing so, they delegate strategy to the VP of innovation, who often enters with good will and determination, only to fail when the patience of the CEO evaporates with the first bad quarterly earnings report.
CEOs, take heed. Innovation strategy is information warfare. And the person who learns the fastest, wins.
My deepest appreciation to all of the entrepreneurs, intrapreneurs, and innovators who have shared their valuable experience and insight with me over the years. Too numerous to list, too valuable to ignore. Thank you.
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