8 Make-or-Break Rules for Innovation

In my last posting, I laid out three reasons for why large companies should out-innovate start-ups to capture the disruptive opportunities that are being enabled by a perfect storm of technological innovations. In this post, I offer eight rules for how they can do so. Based on research on thousands of innovation efforts—both successes and failures—that went into The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups, corporate innovators should apply these rules to help their companies get out of their own way and leverage their assets. By doing so, they can take better advantage of innovation opportunities than start-ups can. The eight rules fall under three general categories that distinguish winners from losers: Thinking Big, Starting Small and Learning Fast. Successful innovators “think big” by considering the full range of possible futures. They facilitate innovation by daring to pursue “killer apps”—new products and services that might rewrite the rules of a category. By contrast, failed innovators tend to “think small.” They assume that change will be a slight variant of the present and just look for incrementally faster, better or cheaper innovations. Here are three rules designed to help you think big: Rule 1. Context is worth 80 IQ points. As you start to “think big,” you must understand the information-technology environment in which you are operating. Six technological innovations—combining mobile devices, social media, cameras, sensors, the cloud and what we call emergent knowledge—are reshaping both what is possible and the competitive landscape in every information-intensive industry. Mary Meeker, the noted business analyst, argues that these technologies are putting more than $36 trillion in market value up for “reimagination.” ($36 trillion is the total market value of the 10 industries most vulnerable to change over the next few years.) You must understand all the traditional forces inside your industry and come to grips with these six technological megatrends, both individually and in combination. Rule 2. Embrace your doomsday scenario. Thinking big is not just about bold aspirations; it also requires understanding the starkest threats facing your organization. One reason to look for doomsday scenarios is that it helps spot vulnerabilities and spark improvements even if doomsday never comes. Another reason is that it helps to build alignment. Getting beyond vague views and developing detailed, shared views of existential threats and how quickly they might arrive can help management teams develop consensus on timing and move forward in unison. But people tend to avoid thinking about truly worst-case scenarios, so this rule is designed to make sure that they do so. Rule 3. Start with a clean sheet of paper. A markets change, large companies’ strategic assets too often become liabilities. Success brings with it priorities to juggle, budgets to protect, bonuses to maximize, resources to defend, loyalties to reward, egos to stroke. People have all sorts of incentives in big organizations to slow or halt innovation, and many manage to do so. That’s why it is important to periodically start with a clean sheet of paper and think about key trends and looming inventions, then envision how everything could come together to transform the business—without worrying about what people, capabilities and other assets have to be added or subtracted to become that perfect version of the business. Start Small Successful companies “start small”after thinking big. Rather than jumping on the bandwagon for one potentially big idea, they break the idea down into smaller pieces for testing and take the time to make sure that key stakeholders are working in unison. By contrast, companies that fail in the face of a disruptive technology tend to swing from complacency to panic. Initially, they not only don’t see the opportunities; they can’t accept that they’re in danger. When they finally see the disruption, they panic. They make a last-chance, massive bet on a single idea—only to have it not pan out. Here are three rules that ensure you are starting small: Rule 4. First, let’s kill all the finance guys. To start small, make sure you don’t settle on financial projections too soon; they can’t be accurate, and they hamstring innovation. By definition, disruptive innovations deal with future scenarios that are hard to read and where the right strategy is not clear; the right strategy has to emerge over time. This rule, then, is a reminder to take a more iterative approach to understanding the finances of new businesses. A culture has to be established, beginning at the very top of the organization, that says newborns get to crawl and walk and maybe even start preschool before their talents are evaluated. Rule 5. Get everyone on the same page. While the tendency is to leap into action as soon as a possible killer app is identified, it is crucial to take the time to step back, assess where the organization is and identify possible impediments to change. One challenge is to understand who wins and who loses if the envisioned innovations succeed. If an innovation has to kill the core business to succeed, it won’t be possible to get everyone to embrace it. Those in the existing business will always try to kill rather than be killed. In some cases, you can delay an uprising by being discreet. In other cases, where those not on the same page can’t cripple you, you can be overt and simply pit a new business against the existing one (while protecting the new efforts sufficiently). Another challenge is to understand the cultural implications of the desired innovation. Many executives believe they can change a culture to suit a strategy, rather than try to make the strategy fit the culture. That route is possible but usually takes longer than most are willing to admit. Sometimes it is better to work with what you’ve got. The key is to understand that there is no silver bullet to managing change. Instead, you must form a cleared-eye view of the particular circumstances that must be addressed and manage accordingly. Remember Nelson Mandela’s admonition, “Lead from the front but don’t leave your base behind.” Rule 6. Build a basket of killer options. Once you are ready to start building killer apps, make sure to invest only small amounts and test a number of possibilities. At the early stages, any fledgling killer app is more likely to fizzle than sizzle. Do not waste a lot of money plunging toward The Answer. What you really want is a finely nuanced understanding of The Question. Do this by employing the discipline associated with financial options. Rather than investing tens or hundreds of millions of dollars to build out a full-fledged business, invest in iterative experiments that can be expanded as they prove out, or be set aside if they don’t. It is important to limit the number of options to a handful. Innovations of transformative potential require CEO attention—which is limited—to make sure the efforts are protected from the organizational antibodies; to make sure they do not take on a life of their own; and, to shepherd them to scale if their potential proves viable. (In most organizations, only the CEO can play this role.) Our experience is that the right number is around three “killer options” and no more than five. Learn Fast In addition to thinking big and starting small, successful innovators “learn fast.”They take a scientific approach to innovation. They figure out how to gather comprehensive data and quickly analyze both what’s working and what isn’t. They have the institutional discipline to set aside or alter projects based on that analysis. By contrast, companies that fail have neither the time nor the inclination to learn. They fall into the “it’s all about implementation” trap and end up expertly implementing a failed strategy. Here are two rules to make sure you are learning fast. Rule 7. A demo is worth a thousand pages of a business plan. Too often, early success or optimism about a big idea quickly transforms it into a conventional business development program: a long march where the only acceptable outcome is to get a product to market. As a result, people do all the analysis they can, however imprecise, and the result becomes The Plan. Some of this is due to habit—planning is what big companies do, and business initiatives can’t typically proceed without detailed business plans and reams of confirming spreadsheets. Our research revealed the need for less planning and more testing. Rather than prematurely building out the new business, keep prototyping to explore key questions, such as whether the technology will work, whether the product concept will meet customer needs and whether customers will prefer it over the competitive alternatives. Rule 8. Remember the Devil’s Advocate. Setting up the right process for demos, prototypes and scaling is crucial but only half the battle. The other half is making sure you ask the tough questions during the process and remain open to hearing uncomfortable answers. Devil’s advocates are individuals or groups whose role is to stress test critical assumptions, key forecastsand other make-or-break aspects of a potential killer app. The goal is not to interject an abject naysayer into the decision-making process but rather to drive at the answer that best serves the long-term success of the organization. Nor is the goal to relegate the task of critical thinking to the devil’s advocate. Instead, the devil’s advocate process serves as a safety net, and, because everyone knows that tough questions are forthcoming, they’ll be more likely to confront them. Done right, a devil’s advocate frames the most important questions that need to be answered before moving to the next stage of commitment. The advocate also guides the process along, making sure that the right amount of uncertainty is reduced at each step and that the possibility of a graceful exit is always preserved. * * * Following these eight rules won’t guarantee killer-app-level innovation. Business is a contact sport. Some companies win. Some companies lose. That won’t change. What following these rules will do, however, is help you overcome the biggest barriers to innovation and turn size into an advantage. You’ll do a far better job of sensing what’s really going on in your market and of putting yourself at the forefront of the powerful trends that are transforming our economy.