And those who were seen dancing were thought to be insane by those who could not hear the music.
— Friedrich Nietzsche
Thirty years ago, James March [1] wrote about the tension between the Exploration vs. Exploitation imperatives of large companies. In 2017, InnoLead published the results of a survey, “Innovation Teams and Business Units: Allies or Adversaries?” [2]. Clearly the problem has not been resolved.
Deming taught us that variation is the enemy of quality, and we have spent the past 40 years stamping out variation in production, in development, and in all other matters of corporate behavior. Variation is the enemy of operational excellence. Reducing variation is how companies make profits, and how executives get promoted.
But with innovation, businesses must change, which in turn requires variation. Variation (and selection) are the drivers of evolution. Without them, species don’t evolve, and they can go extinct. In a business world without variation, innovation can’t happen, and companies can become irrelevant—and also go extinct.
In 2011, O’Reilly and Tushman [3] built on the Exploration-Exploitation concept to create what they called the Ambidextrous Organization. Such an organization can achieve both operational excellence and transformational growth simultaneously. Unfortunately, this is far easier said than done.
The tension between operational excellence and transformational growth has been exposed and examined. But the problem is becoming ever more complex and companies still struggle. It’s a struggle that is manifested in the “dance of the corporate innovators.” The dance is happening within and between the groups and teams at the company that are “doing” innovation, but nowhere is the dance more evident than in the interaction between a company’s business units and its corporate innovation group. Like any dance, it can be ad hoc and awkward, or it can be choreographed and powerful. More importantly, when the dance is choreographed well, it can channel the natural and unavoidable tension in creative and surprising ways. A new type of dance is needed for corporate innovators.
The Innovation Model that Underlies the Corporate-BU Dance
Operating businesses are now better at sustaining innovation. New tools and processes (such as Open Innovation, Voice-of-the-Customer, Stage-Gate 2.0, etc.) enable operating businesses to innovate successfully in or near to their core.
It’s no longer an issue of “can a business innovate” but what types of innovation can a business achieve on its own? And are they sufficient to achieve strategic objectives (or, worse, to avoid disruption)? Unfortunately, the answer is usually “no.”
To get a better picture of this, a tool such as the Strategic Innovation Canvas, shown to the right, is useful. It lets companies see where they are spending their innovation resources and being successful at it.
In the past 15 years, over 8,000 opportunities from a large number of on-the-ground, collaborative innovation projects with companies in a variety of industries have been mapped using this canvas. The evidence is clear. Even with teams chartered to come up with breakthrough, strategic opportunities, there is a “force” pulling them towards incremental opportunities squarely within the core businesses. This is natural. The closer to the core, the more certain you are of success and the clearer the path forward. The farther from the core, the stronger the force and the greater the tension. This takes many forms, some subtle and some blatant.
“I see no use for a Corporate Innovation Group. They go after unrealistic ideas that go nowhere. My business can make much better use of the money we spend on corporate innovation.”
– President of a $2B business unit within a $10B company
Strategic opportunities are very different than sustaining opportunities. They should not be undertaken with the same processes, methods, and tools used for sustaining innovations. Stage-gate doesn’t work well. You need another mechanism. Companies that are successful at strategic innovation typically embed this different mechanism in their Corporate Innovation Group (CIG).
The problem to solve is not organizational—that is, whether the CIG should be “intertwined” with or “insulated” from the business units—but rather it is operational. And the source of tension occurs at the opportunity level.
There are four types of opportunities that the CIG deals with and needs to manage, both at a strategic level (setting the proper mix) and at an operational level.
Type 1- BU Routine: Opportunities a BU would surely pursue if they only they had more money. These are the opportunities a BU will clamor for the CIG to help with.
Type 2 – BU Stretch: Opportunities that the BU see as interesting…eventually. Today, they are too far out or too risky. The BU can support the CIG pursuing these opportunities and will take them over once they are further along.
Type 3 – BU Transform: Opportunities that the BU can’t see as relevant to their business until there is “proof of value” (e.g., it’s a nascent business creating real traction and revenue).
Type 4: BU Antagonistic: Opportunities that are of no interest to a BU, and never will be—no matter how successful they become. Even though they lie within the strategic vision of the company, the BU sees these opportunities as either a distraction or a threat and resists them.
A corporate innovation group should never take on Type 1 opportunities. It’s a waste of strategic resources. Type 2, 3, and 4 opportunities should be the focus of the CIG. Type 2 should be undertaken with BU participation and with their “head in the game.”2 Type 3 and 4 opportunities should be undertaken with no requirement of up-front BU commitment, but with a path that permits BU participation as the opportunity comes into focus. Type 4 opportunities are the ones a BU will never take on and will become their own BU, or take some other value-creation path (e.g., spin-off, divesture, etc…).
The tension between a company’s short-term growth, driven by operational excellence and sustaining innovation, and long-term growth, driven by strategic innovation and transformational opportunities, becomes ever more pronounced in today’s world of rapid change and uncertainty. The ability to sense potential disruption and transformation, and do something about it, becomes a critical competency. (Indeed, this is one source of Type 3 and 4 opportunities!) But spending time, attention, and capital on this creates the tension that reveals itself in the Corporate-BU relationship every day. It’s a tension that can be destructive. But like a good dance, it can also be powerfully constructive and invigorating. Recognizing the sources and dimensions of this tension is the first step in creating the right type of dance for your company.
Larry Schmitt is Managing Partner at The Inovo Group. InnoLead regularly publishes Thought Leadership pieces written by our Strategic Partner firms.
Notes:
1. For very large companies with multiple large business units, the description and analysis of the Corporate Innovation Group applies equally well at the large business unit level. In this case, there would be two layers of ‘CIG’—one at the overall corporate level, and one within the BU itself.
2. People talk about ‘skin-in-the-game.’ While money is nice, it is attention and interest that are the most valuable.
Bibliography
1. March, J,G.; “Exploration and Exploitation in Organizational Learning”; Organizational Science; v.2 n.1; Feb. 1991; pp. 71-87
2. “Innovation Teams and Business Units: Allies or Adversaries””; InnoLead Research; Q1 2017
3. O’Reilly, C., Tushman, M.; “Organizational Ambidexterity in Action: How Managers Explore and Exploit”; California Management Review Vol. 53, No. 4 Summer 2011
With the emergence of AI, there's a heightened urgency to broaden your innovation horizon and allocate dedicated efforts toward transforming the business, rather than solely maintaining its current operations, writes Ludwig Melik of Planbox.
