Want to Win at Business Model Innovation? Put These Four Pillars in Place

By Rick Waldron, Contributing Columnist
Business Growth Architect; Former VP of Innovation Strategy & Partnerships, Nike; Former Senior Director of New Business Initiatives, Intel

Corporate innovation efforts by and large continue to fall far short of moving the needle in any significant, sustained way or of delivering on the promise of future-proofing companies against ever-increasing disruptive forces. While a growing number of companies have begun to find some success in implementing design-centered thinking, lean innovation techniques, jobs-to-be-done analysis, and empowering employees to solve customer and internal process problems, much of the focus has been on supporting current business models – i.e., on incremental rather than game-changing innovation. But this work is merely the table stakes for staying in the current game.

Ensuring that your business will have a bright future — rather than battling competitors for every point of market share — also requires business model innovation. The companies that we view as paragons of success consistently leverage business model innovation along with, or instead of, technology and product innovation. Henry Ford, for instance, took existing Daimler technologies and wrapped a new business model around them to create the first modern industrial mega-firm. Today, companies Tesla, Uber, Lyft, Car2Go, and ZipCar are using business model innovation to write the next chapter in that industry and threatening to disrupt the not only the automobile industry, but adjacent industries, such as insurance, parking, and construction.

Little attention has been paid to the architecture required to stand up a sustainable, impactful new business innovation capability. Those of us battling it out in the trenches are left to learn the hard way. In my 20-plus years of on-the-ground learnings in Fortune 500 companies (in roles ranging from mergers and acquisitions, corporate venturing, business development and internal business incubation) and my extensive benchmarking of fellow travelers, I have come to understand that the following four pillars must be in place to deliver on the potential of business model innovation:

  • Leadership committed to writing the future,
  • Guided by a comprehensive innovation strategy,
  • Who have embraced an investor/entrepreneur mindset, and
  • Who support their innovation teams in using a full set of innovation and corporate development tools.
Committed & Engaged Leadership

Transformative innovation is difficult “change management” work. It requires C-suite leadership that is engaged in and committed to the work. Moving from idea to impactful execution around business model innovation takes time. It requires resources that fall outside of annual budgeting priorities. It is filled with ups and daunting downs. It generally disrupts the status quo and requires a new set of permissions and boundary conditions. So a leadership team that sees its role as merely serving as caretakers of the existing business is insufficient.

The senior leadership team, starting at the board and the CEO level, must have an active interest in writing the company’s next chapter. They must be able to lean into the business transformation challenge and serve as active champions for the future of the company. They must be able to carve out attention and time1 to provide direction and air cover for the innovation work. They must be ambidextrous — i.e., able to engage simultaneously in setting off into an unknowable future, while also delivering near-term results through the existing business. One often sees this type of leadership from founder leaders who have successfully transitioned from being scrappy entrepreneurs to managers of complex enterprises. This rare breed knows what it takes to navigate the twists and turns of standing up a new business, and how that differs from keeping an established business on track. Andy Grove’s pivot of Intel from a memory to microprocessor company, and Jeff Bezos’ expansion of Amazon from online bookseller to a multi-dimensional digital retail and services business are prime examples of this.

Where that leadership commitment and acumen does not exist, the task at hand is to develop it. The work of the corporate innovator will first be to inspire, educate, and catalyze leadership, and put in place an innovation architecture that supports this over time. The focus, scale, and speed of the business model innovation work must track to that. For instance, it may be that the right first step is simply to show how applying design thinking and a lean innovation approach can quickly and inexpensively achieve valuable customer insights to which a leadership team formerly would not have had exposure or access. From there, one could demonstrate in practice how this could be a valuable tool for an R&D effort and help avoid significant investment in technologies or products that do not address customer problems (i.e., avoiding the often-wasteful solution in search of a problem phenomenon). With that understanding and momentum, one could take a next step in showing how these same approaches could be used to risk-reduce and speed up the exploration of new business opportunities. This key is to keep the cycles short and low-cost, and deliver immediate value through a series of tangible wins that both satisfy the operational improvement itch and ignite the excitement of the organization and leadership for more.

Comprehensive Innovation Strategy

An innovation strategy is essential to effective business model innovation. An innovation strategy is simply a commitment to a set of coordinated systems, actions, and resources designed to achieve specific innovation goals around product, business, operations, etc. that will support the overall business strategy. (Easier said than done, of course!) Without one, it is difficult to sustain the interest and engagement of senior leadership or justify any necessary boundary-busting. Without a clear strategy, innovation efforts are likely to simply react to immediate challenges and the current set of competitors (vs. making proactive moves to drive and/or guard against game-changing disruptions.) Innovation teams end up shooting in the dark and delivering a set of fragmented, uncoordinated, and incremental one-offs, rather than transformational new business platform opportunities. In the absence of a clear strategy, it is difficult for the enterprise to make or stick to resource and capital allocation decisions in the face immediate business challenges. As Gary Pisano of Harvard Business School puts it:

Without an innovation strategy, innovation improvement efforts can become a grab bag of much touted best practices: dividing R&D into decentralized autonomous teams, spawning internal entrepreneurial ventures, setting up corporate venture-capital arms, pursuing external alliances, embracing open innovation and crowdsourcing, collaborating with customers, and implementing rapid prototyping….2

All of this seems painfully obvious. It is, however, all too often ignored. The result has been a collective colossal waste of time, money, and opportunity by many successful companies that employ lots of smart people.

Strategy and business model innovation teams can overcome strategy gaps by leveraging each other’s skills and tools. The corporate strategy team should have the access and skills required to support senior leadership in identifying and articulating priorities, resourcing commitments, boundaries, strategic hunting zones, and definitions of success. The innovation team, in turn, can serve as an “applied strategy” tool for the strategy team, helping them refine and build confidence in the strategy through rapid, low-cost, in-market experiments around new potential business platforms, customer solutions, and operating models. That enables both teams to do what they do best and create a symbiotic relationship.

Sustained Mindset Shift

Rick Waldron leads a session at an Innovation Leader Field Study in San Francisco.

The more transformational the innovation strategy, the further a company will be stepping into uncertain, unpredictable territory. You are revealing and creating the future, rather than planning for it. This requires an important leadership mindset shift from operator/manager to investor/entrepreneur. It requires a shift from causal logic to effectual logic (i.e., imagining new ends using a given set of means vs. causal logic where one selects between given means to achieve a pre-determined goal.)3 It is about supporting leadership in embracing VC-like portfolio thinking, where one invests with the knowledge that it is a numbers game; most investments will provide only modest returns (if any), and home runs will be far and few between. It is about appreciating the option value of innovation bets. It is about asking the right questions at the right time (e.g., Has the team zeroed in on a compelling customer problem? Is there the right product-market fit? Does the team understand the key operational levers of the business? Is there a business model that has the potential to operate profitably at scale?) – versus starting with standard revenue, margin, and ROI-type questions to evaluate whether an opportunity is worth exploring and developing.4

The challenge of engineering a mindset shift in a large organization is too often ignored or underestimated. The result is that leadership either never makes the shift, or does temporarily, but slips back into the operator/manager mindset over time, and the innovation investment comes to naught. The typical three-year corporate innovation cycle thus has become all too common:

  • a giddy first year, filled with excitement and enthusiasm for the new
  • a challenging second year, in which maintaining senior leadership attention and building a robust pipeline of things that they care about becomes more difficult after the novelty has worn off
  • a disappointing (and final) third year in which the pipeline has not generated profitable, new billion-dollar businesses.

If entrepreneurs and investors spent just three years trying to grow new businesses before throwing up their hands, Google, Amazon, Intel, Nike, Facebook, Amgen, Netflix, etc. would never have accomplished what they have.

It is therefore critical to install mechanisms that foster and institutionalize the new business innovation mindset shift – organizational constructs and governance structures that support senior leadership’s conscious changing of roles from manager to investor; give enterprises the opportunity to optimize resources, processes and priorities for the unique needs of new businesses; and provide the breathing room to make and commit to longer-term innovation investments. There is not a one-size-fits-all solution here (though we all wish there were). It will depend on a company’s innovation strategy and capabilities, but there are some common elements that should be put in place, including:

  • An ongoing decision forum in which an empowered set of C-suite members participates on a regular basis, and in which they must take off their operator/manager hats and put on their investor/entrepreneur hats, make macro innovation portfolio investment decisions, and keep abreast of and support new business innovation efforts.
  • Multi-year innovation investment set-asides which leadership insulates from yearly and quarterly corporate planning, budgeting, and allocation processes.
  • Innovation teams consisting of internal and/or external talent (that may sit inside or outside of the organization), capable of translating enterprise intention into entrepreneurial action.
  • Empowered, enthusiastic functional champions who willingly volunteer to harness resources and kick down roadblocks in the name of the success of a new business (vs. implementing their standard functional playbook that has been designed to optimize what is required to serve the existing business model).5
  • Putting in place incentives for leaders to invest time, attention and creative energies to innovation efforts. Some companies, for instance, have added in compensation incentives tied to the percentage of revenues from new businesses in addition to those tied to general revenue targets.
Comprehensive Tool Kit

It should be obvious that leadership can increase their innovation strategy’s probability of success by using the best innovation and corporate development tools for the job. Doing so, however, appears to be an exception rather than a rule. Companies too often glom onto the innovation tool or approach du jour. Many limit themselves to what they already know or have — whether that be corporate venture investing, mergers and acquisitions, skunkworks projects, funding research in academic labs, or leader-sponsored special projects. Still others let organizational silos keep them from applying their full set of capabilities to the innovation effort (e.g., R&D, corporate development, and innovation teams do their own thing, with little or no incentive, interest, or effort made to leverage one another). And when all you have is a hammer, that delicate new business opportunity will suffer if it looks anything like a nail.

Leadership should encourage innovation teams to ask whether the business model innovation at hand is best served by a build, buy, partner, or invest approach. It’s also important to realize that the answer to that might change over time, as the work moves from early-stage exploration, to establishing a market beachhead, to growing market share, to achieving scale. This, in turn, will guide the team in identifying (and even creating) the innovation and corporate development tools that are best for the task at hand. For instance, a business innovation team could serve as a deep-dive “due diligence tool” of sorts for the corporate development team by getting out into the market to test product-market fit, operating requirements, and business model assumptions before any further investment or acquisition is made. The business innovation team, in turn, could benefit from the corporate development team’s abilities around equity investments, joint ventures, and M&A, enabling it to rapidly accelerate what the innovation team has validated as a high potential business opportunity. And so on. One of the strongest examples of this out there today is Samsung – its Samsung NEXT group has brought together all of the elements above to create a multidisciplinary team that develops products, invests in startups, and acquires businesses.

Many innovation and corporate development tools, moreover, now can be sourced externally. There are a growing number of groups, for example, that specialize in providing in-market validated new business concepts, corporate venture investing capabilities, or rapidly assembling teams of entrepreneurs and subject matter experts to explore and develop against identified opportunity areas. Examples include PreHype that brings its network of entrepreneurs to co-create in-market validated business plans with its clients and Touchdown Ventures that provides full-service corporate venture capital capabilities to its corporate clients. These can give companies faster and broader access to innovation approaches that may not have been feasible in the past.

It’s an understatement to say that writing a transformative next chapter for an established enterprise is hard. To increase the odds of success, one must begin with an effective innovation architecture consisting of committed, engaged leadership; a thorough and clear innovation strategy; a sustainable investor/entrepreneurial mindset; and a broad suite of innovation and corporate development tools. Think of those elements as the plot outline that an author creates before she puts pen to paper. It takes time, but it dramatically increases the odds of producing a book worth reading — and maybe even a best-seller.


References:

1

    • Often overlooked is the leadership’s challenge in finding time to dedicate to innovation work. Active engagement necessarily requires of calendar time and attention on a consistent and extended basis, something which is actually difficult to pull off in the face of day-to-day management pressures – all too similar to the difficulties of building in a sustainable exercise routine or mindfulness practice for the harried executive.

2 Gary P. Pisano, “You Need an Innovation Strategy,” Harvard Business Review, June 2015.

3 Leigh Buchanan, “How Great Entrepreneurs Think,” Inc, February 2011.

4 This thinking also has to move from the C-suite down the chain to the business units and functional groups (HR, Finance, Accounting, Legal, IT, Supply Chain, Brand, Communications, etc.), on which the new business may ultimately come to depend to move from experiment to implementation. These groups work within a set of highly optimized set of resources, processes and priorities (RPPs) that support the company’s existing business. Those RPPs serve to reduce variability, avoid errors and deliver flawless execution. The natural inclination is for business units and functional groups to apply existing RPPs to what is coming out of the new business innovation efforts, without regard for what is required to make a new business successful.

Clayton M. Christensen and Michael Overdorf, “Meeting the Challenge of Disruptive Change,” Harvard Business Review, March-April 2000.

Vijay Govindarajan and Chris Trimble, “Stop the Innovation Wars,” Harvard Business Review, July-August 2010.

5 Steve Blank recently published a useful piece for practitioners on that subject. Steve Blank, “Removing the Roadblocks to Corporate Innovation – When Theory Meets Practice,” SteveBlank.com, September 19, 2017.

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