Innovation + efficiency = ambidexterity [wk78]

The electives are picking up speed and I have now completed a 4-day long set of lectures with Professor Vangelis Souitaris. The professor has some pretty radical views on how to foster innovation within a company:

Hiring

  • Hire slow learners of the organisational code
  • Hire people who make you feel uncomfortable, even those who you dislike.

Supervision

  • Encourage people to ignore and defy superiors and peers
  • Do not lead (and stifle) innovation by punishing and expelling people who do not do what they are told.

Teamwork

  • Find some happy, optimistic people and get them to fight. Happy optimists have beliefs worth fighting for, and the resulting struggle leads to better ideas.

Reward

  • Reward success and failure
  • Punish procrastination.

Leadership

  • Decide to do something that will probably fail and then convince yourself and those around you that success is certain.
  • Do not try to reduce the number of flops, it drives out innovation. A high failure rate is the hallmark of innovation.

This list looks like the ingredients for a corporate nightmare. How on earth can you set the compass, plan for plain sailing and then entertain mutiny? But you can see what the Professor was getting at here.

Within an organisation, it is quite common to get a management briefing asking all for innovation, at the same time as reminding everyone of their continuing responsibility in identifying and eradicating inefficiencies: one part – take risk; one part – eliminate errors. These are hardly comfortable bedfellows – risk increases variation, does it not?

The kneejerk response seems to be that a well-judged balance is needed. But surely such a balance compromises both ambitions.

Industries that are reliant on innovation will often divide (spin off) and grow their fledgling innovations (e.g. pharma R&D labs), much as 3M has done so famously as part of its Renewal model. Or even more current, the trend for ‘built to suit’ corporate venture capital (CVC) is not just about bringing in outside inspiration, it is also about entertaining a model that recreates the entrepreneurship of young disruptive enterprise, while managing some of the downside risk (e.g. Cisco will often incorporate put options).

Of course, spin offs and CVC are innovative in themselves, so what about those companies that accept that they need to swim, but want to put their toe in the water first. Well, at the very least there needs to be some acknowledgement that incremental innovations need to be treated differently to R&D around new growth platforms that add significant chunks of revenue and profit.

But a company would need to be very ambidextrous to support such streams simultaneously. If appetite for risk is a key differential, the partition will need to be structural. Not only will the efforts need the same ambidextrous management to ensure investment accountability and coordination, but also the units themselves will need to receive different styles of management, metrics and incentives.

The dilemma for innovators [wk76]

I have recently read the fascinating and enlightening ‘The Innovator’s Dilemma’ (1997) by Clayton Christensen. I am late to this book, but it has really struck a chord with my understanding of many of the disruptive technologies that we see emerging today. It also answer’s that begging question, why hadn’t Microsoft or Google done that already?

At its core the book is about how successful, well-led companies carefully pay attention to what customers need. These same companies invest heavily in new technologies, delivering more performance to those clients but will still loose their market leadership suddenly.

This can happen when disruptive technologies enter the arena. Most technologies improve the performance of existing products in relation to the criteria which existing customers have always used. These technologies are called sustaining technologies. Whereas, disruptive technologies do something different. They create a completely new value proposition. This will often entail worse product performance per se, but improved product performance in relation to new criteria; for example:

  • smaller (.mp3 vs .wav)
  • more user friendly (convergence of phones and video streaming cameras)
  • cheaper (storage devices).

Using the disk drive industry as his source material, he surmises that well-run companies are unable to initiate or harness these disruptive forces until it is too late, because they are well run. Their capabilities define their weaknesses.

That is to say…

1. Customers and investors will dictate their resource allocation; i.e. middle managers will tend not to invest in technologies that are not directly appreciated by significant clients because they will not be able to get the quick ROI that investors require.

2. Small markets cannot fulfil the growth need of large companies. Bigger, more successful companies will look at smaller niche and emerging markets (full of those early adopters and pragmatists) as simply not large enough to fulfil growth requirements.

3. Markets that do not exist cannot be analysed. Well-governed businesses will discount such opportunities for the risk of likely failure.

4. Technology supply does not always equal the market demand. Due to its speed, technological progress often overshoots customer demand. This opens the door to products today that underperform the market, but which might meet customer demand tomorrow, particularly when delivered as a new value proposition.

Success breeds failure. Both Peter Drucker and Joseph Schumpeter would have loved this book. I hope the former had got the chance to read it – it sits well with his observations that “The first signs of fundamental change… almost always they show up first amongst one’s noncustomers”. And with Schumpeter’s notion of ‘creative destruction’ of the establishment by innovative entrepreneurs better placed to exploit an opportunity. He would have added that they are necessary to keep economic growth ticking over.

An innovative dissertation [wk69]

For a September cohort of the executive MBA, January of the second year requires the student to bring to a head those thoughts about dissertation topics. Ideally, it should be something that you enjoy; Cass’s preferred term ‘Business Mastery Project’ implies a challenging level of granularity to which you’ll be exposed, partcularly if a subject does not ‘float your boat’. Officially, it needs to draw on multiple modules, but have a relatively narrow focus that lends itself to concrete recommendations. And fundamentally for me, I require a project that will offer clear commercial benefit to an organisation.

And so, I have found myself drawn towards the field of innovation. Regular readers of my blog will have noticed my recent dalliances with the subject. As a marketer, it attracts me. Much like marketing consultants did many years ago, innovation consultants are popping up all over the place, pitching their wares at corporates that can afford their rates. The need is evident. On a macro level, the Western World is at steady state, and the only way to increase growth rates is through some form of technological progress. On a micro level, growing a business in the midst of commoditised and globalised markets requires bold innovation; for unlike operational efficiency, true innovation is very difficult to imitate.

Inevitably, there will be some form of universal innovation function in due course. But while we wait for a transferable model of corporate entrepreneurship, there is something that we can do now. I am certainly not advocating any a silver-bullet solution from an innovation consultant. However, I do think that there are small steps that can be taken to move any business in the right direction and gain a greater competitive edge. This will be the premise of my dissertation.

My dissertation is an opportunity. I have learned from the many case studies that we have studied on the MBA that in spite of any investment of time and money in an opportunity, sustainable success is invariably underpinned by a shift in the market. In week 59, I flippantly stated that innovation and efficiency tend to act like opposing forces – when times are good, innovation is on the agenda; when times are tough, operational efficiency becomes the dominant strategy. But it seems to me, that there is a sea change. Innovation consultants may be questionable harbingers, but I believe that innovation is no longer an option for mature corporates.

Innovation in knowledge-based firms [wk63]

My studies are alternating between innovation and mergers & acquisitions at the moment, so I make no apologies for another dip into innovation thinking, and perhaps more theory about M&A next week.

As a partner of a firm of chartered surveyors for 10 years, I became quite familiar with the implied reasons for successful innovation within the practice. Most innovation was in the guise of service growth or diversification. Therefore, the growth of a new practice area had become a conventional test of the ability to innovate, differentiate and grow. When unsuccessful, it was always perceived to be because the lead partner was not effective enough, or because there was an inability to meet market requirement, or because it was somehow doomed from the start. As the partner responsible for marketing and BD, I have to say that this was not my experience.

I recently stumbled across a paper exorcising these myths in the context of law firms. A joint piece of research from London, Said and Tanaka business schools sets out completely different ingredients for a successful recipe.

  1. Defensible Turf – The new practice needs to delineate itself from other practice areas. It needs to be autonomous, clearly legitimatised by clients and to be accepted by colleagues as financially viable.
  2. Differentiated Expertise – The right type of expertise is required, whether sourced internally or externally to tweak/extend an existing service, or to deliver something new for the business/market.
  3. Organisational Support – Tangible resources from the firm and intangible political sponsorship.
  4. Champion – Someone who has the skill and motivation to mix these three ingredients for success and who has a career that is aligned with the firm’s growth objectives.

For once, I like these extra complications. It offers a more systematic framework that should lend itself to the type of learning environment I mentioned back in week 11. If reason for failure is over simplified, or mythical in any sense, the same mistakes will be made again. While I worked in a different sector to law, I recognise all of the above as key ingredients. I also agree with the authors that they all need to be there, to some degree, and the optimal ratios will generally be a best response to the perceived magnitude of innovation involved, the market conditions and the compensation systems employed internally.

The paper can be read in Laura Empson’s (Cass) book ‘Managing The Modern Law Firm’. If you want to read more online, one of the authors Tim Morris explains more here.

Innovation [wk61]

One always has to look on the bright side, hey? From risk comes reward. From uncertainty comes opportunity. So, from the threat of double dip must come more business model innovation, must it not? Well that’s the message that I am getting from the plethora of newsletter and blog feeds that I receive every week.

Luke Williams says that real innovation is about disruptive ideas; that is, ideas with the power for great impact and influence. But that these ideas are stymied by 3 barriers:

  • conventional shotgun approaches to idea generation (brainstorming),
  • the tendency for ideas to remain abstract and not documented, and finally
  • the treatment of product, service and information as isolated elements.

The answer is to counteract.

Saul Kaplan agrees. If Apple had viewed the product in isolation to such an extent that nothing else mattered, the iPod/iTunes proposition would not have happened. This is one of his 5 reasons why business model innovation fails. Interestingly Kaplan takes a much more political rather than process-led approach to the other four. He feels that:

  • CEOs will often not want change.
  • Any threat of cannibalisation is off the table.
  • Rogues and renegades get no respect.
  • And finally ROI hurdle rates based on a current model will often be too aggressive for a fledgling venture.

Scott Anthony feels that we need to address the 10 myths before we can all start working out how we can contribute to innovation.

  • Innovation is not random, it is a discipline.
  • Process can bring about innovation from all, not just the creative geniuses
  • Innovation is not God-given; it is about 30% nature and 70% nurture
  • Innovation does not just happen in R&D
  • Superior technology does not automatically bring about innovative business models that create, capture, or deliver new value
  • Innovation is not all about improved performance; it can be about sacrificing raw performance in favour of accessibility or affordability
  • Customers will not be a critical source of insight into disruptive growth; they will tell you about your current offering
  • Game changing innovation is not only done by entrepreneurs; think GE and Cisco
  • We will win by creating new markets, not by targeting the biggest markets
  • Innovation does not require big risk; if you want to win big, you should start small.

Alison Provost agrees about small steps. Ideas don’t have to be perfect when you go to market. The true process of innovation is actually the opposite. You have your idea, you take it into the market place, you see the customers and you adjust and adapt. Creativity is incremental.

And finally, PWC flex their corporate machismo and look at innovation through the mosquito net of a survivalist.

  • Jettison what you don’t need. Forget convention and think about what will work. Clean the pipeline and get rid of the innovation projects that are not essential. Reduce complexity by dumping the products and broad portfolios that weigh you down and don’t provide value.
  • Move faster. So put your money where your innovation strategy is and remove any barriers to decision-making.
  • Manage capacity. Find best available resources and identify constrained resources and make sure you don’t make matters worse by cutting those.
  • Convert what you have into something more valuable. Create business model innovations for current products.  Innovate on cost reductions for existing products and services. Leverage strong customer loyalty to provide new customer experiences.
  • Keep your head.

Perhaps like me, you have noted that some of this advice is mutually exclusive. Nevertheless, I would like to add to the list and suggest that innovation is just as much about borrowing other people’s ideas as a source of creative instigation. Hey presto!

Entrepreneurship [wk59]

The derivation of the word ‘entrepreneur’ was an 18thC form of the French verb ‘entreprendre’, which means to take charge. To take charge in today’s world of pervasive change, one needs appetite for risk, contentment with uncertainty, and a knack of seeing opportunity in change.

This heady mix of competences is why business world has fallen in love with the idea of entrepreneurship. The ability to see opportunities and make the most of them not only provides great stories, but also generates the innovation that the Western world needs to grow income, the competitive advantage that businesses need to capture value and jobs that the government needs to keep everything ticking over.

I am currently consulting for two entrepreneurial businesses. While they are different business types at varying stages of development, they both share certain traits – they are small, successful service businesses.

There was a time in the UK when economies of scale ruled and the bigger the better. But with the shift from manufacturing to service industries came the opportunity for much greater personalisation, localisation, and any other point of difference one cares to mention. This variety in service benefits has become the mainstay for businesses that are nimble enough to spot the opportunity. In general, these businesses tend to be small. Smaller firms are better equipped to respond to change and take a risk that larger businesses are unable to make (or unwilling to make, if information asymmetry does not exist).

Information technology has evidently facilitated this trend. Firstly, SMEs (less that 250 employees) have tended to pioneer technology.  Secondly, technology actually facilitates self-employment. And thirdly, IT has reduced the fixed cost barriers to entry that used to exist in so many industries.

In the UK, SMEs (less that 250 employees) now create 59% of employment. This increases to 67% in the EU. If we assume no breakdown or intervention in international trade, the dominance of UK services over UK manufacturing is only likely to grow due to the UK’s comparative advantage. So it would seem that SME’s are likely to become even more important. The US and UK governments certainly think so. However, big business is fighting back with corporate entrepreneurship as a way of keeping innovation on their agenda.

Corporate entrepreneurship is about putting in place an architecture/structure that mimics the small team environments of SME’s to engender divergent, opportunistic and innovative thought.  However, there is one significant barrier. Mintzberg defined innovation as the means to break away from the established patterns. And at present, it is a focus on these established patterns that is bringing about so much of the cost efficiency and predictability that is required in large businesses at present. The corporate architecture would have to be very smart indeed to get around the fact that innovation and efficiency tend to act like opposing forces.

Halo effect [wk58]

The peaks and troughs of semester 3 give a student a little time to catch up on interesting areas that s/he may have touched on in the first year, but did not explore as part of the marked syllabus. I have decided it’s important to let these interests influence my choices of electives and dissertation topic. In semesters 1 (eg. week 6) and 2 (i.e. week 32), I came across the studies of two consultants, Sorcher and Brant, who wrote ‘Are You Picking the Right Leaders?’ for Harvard Business Review in 2002. In the article, they refer to the ‘Halo Effect’. Wikipedia explains that this is a cognitive bias whereby we assume that “a particular trait is influenced by the perception of the former traits in a sequence of interpretations”. That is to say, we assume that because people are good at doing one thing, they will be good at doing all these others things.

At the start of this week, I completed the Private Equity module, during which the lecturer pointed out that to operate in a competitive venture capital environment, failure to take measured risks would only ensure lack of success. He spoke of an investment bank that had recruited a successful executive from their fixed income team to take control of their private equity interests. During his tenure, not one venture capital investment was made. Of course, uncertainty can be paralysing, but that is not my concern here. Rather, I am interested in the halo effect at play. The psychologist Edward Thorndike first coined the phrase in the 1920s, when he used it to describe the way that commanding officers rated their soldiers. He found that officers usually judged their men as being either good right across the board or bad. There was little mixing of traits; few people were said to be good in one respect but bad in another. Sorcher and Brant refer to this as, “overvaluing certain attributes while undervaluing others”.

I have now also read Phil Rosenzweig’s unconventional management book ‘The Halo Effect’. For all of you constructive sceptics out there (yes it is possible), it is an absorbing read. He takes the notion of this overvaluation one step further and challenges much of our thinking about company performance.

“When a company is growing and profitable, we tend to infer that it has a brilliant strategy, a visionary CEO, motivated people, and a vibrant culture. When performance falters, we’re quick to say the strategy was misguided, the CEO became arrogant, the people were complacent, and the culture stodgy.”

This should raise an eyebrow of a case and model-laden MBA student. While this delusion could easily be seen as a harmless, throwaway observation, Rosenzweig explores how such a bias might systemically undermine success. Might company performance create a halo that shapes the way we perceive strategy, leadership, people, culture, and more?

Drawing on examples from leading companies including Cisco IBM and Nokia, Rosenzweig shows how widespread this bias has become. He argues that this undermines the usefulness of the ‘guru’ management books from Peters and Waterman’s ‘In Search of Excellence’ to Jim Collins’s ‘Good to Great’. Even more unconventionally, Rosenzweig goes on to suggest that because these bestsellers claim to have identified the drivers of success, rather than just recounting stories of high performance, these books actually amplify the delusion.

Almost mocking the format of such business books, Rosenzweig identifies 9 popular business delusions. A couple of my favourites are as follows:

  • The Delusion of Absolute Performance – Company performance is relative to competition, not absolute, which is why following a formula can never guarantee results.
  • The Delusion of Single Explanations – Studies that show how a particular factor (e.g. customer focus) leads to improved performance, inevitably discount how other factors are highly correlated. The effect of each one is usually less than suggested.

As a consultant and a student, I am currently looking at how professional services firms address innovation. Are we sure that the same personality types that can be innovative within the constraints of professional client service can also deliver strategic innovation? I would not take it for granted – the two scenarios would seem to be addressing two completely different levels of risk. Moreover, I think that any such ‘delusion’ might be exacerbated by inherent biases in the professions – professionals tend to be well read and no doubt feel they have the intellectual capacity to do most things well if they wanted to; but then uncertainty can do strange things to capacity. Beware the halo effect.

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