The right time to innovate

12/05/2017
Successful businesses such as Google, Facebook, Apple, Amazon, Airbnb and Uber are rightly lauded for changing and innovating everything from products and processes to underlying business models. 
 
vivek
Associate Professor Vivek Chaudhri says success requires continual innovation in a process of creative destruction.
“Innovate or die!” business is told as the word disruption becomes a catchcry for companies around the world. Despite the ubiquity of these concepts, there are abundant examples of successful organisations and industries that have been found wanting due to hubris, poor planning and strategy or an inability to conceive of futures that nimble new entrants then exploit.

Part of the problem is the term “disruptive innovation”, introduced by US academic Clayton Christensen who used it to describe a particular style of attack by new entrants. It is now so widely used it confounds and confuses any change an incumbent did not see coming.

Almost every company now pursues the rhetoric of innovation, though they seldom think carefully about what it means for them. In fact, the language of business is now so packed with the emotive nomenclature of innovation and disruption that it’s not fully understood by most organisations even as it is invoked as the platform for change.

Environments dominated by rapid technological change and fickle or uncertain consumer preferences are fertile ground for innovative rivals to displace incumbents content to rest on existing sources of competitive advantage. Thus the timeframes that constitute sustainability in the new business landscape are much shorter than in the past.

Companies that aim to maximise shareholder wealth must seek value-creating opportunities that cannot be readily replicated or displaced by other firms. That success will also be affected by the organisation’s ability to change and continually innovate in a process of “creative destruction”.

When to change

The dilemma for incumbent businesses facing a paradigm shift (through new products or processes or from the “Uberisation” of entire industries) is the timing of change.

When do you move from your existing business model to the new model? Move too quickly, and you may leave a lot of money lying on the old table. Move too slowly, and you may never be a player in the new game.

How do we decide when to move from our existing product portfolios and geographies to new, creative, entrepreneurial opportunities? What shape does our organisation have in such a world? The answers marry strategy with underlying organisational architecture. One without the other is bound to fail.

While far from easy to do, Intel moved from dominance in the semiconductor and then memory chip markets to the ubiquity of the branded microprocessor (Intel Inside) and is now tethering its future strategy to artificial intelligence and the internet of things.

Netflix is a truly disruptive company that began as a mail-order DVD service and has evolved into a platform provider for streaming movies and other entertainment content and a producer of the content itself.

For incumbent businesses, innovation is indeed the key, but many firms espouse the value of innovation while ensuring their organisational architecture doesn’t allow for risk-taking.

Even when companies are willing to think and see differently, there is still a big gap between having a range of plausible ideas and a coherent portfolio of strategic bets embedded in an organisational architecture that will enable the business to capture value across time.

The empirical reality suggests a disconnect between the creativity and innovation aspirations of companies and the reality of mediocrity that mires many.

Herding effect

There are many reasons incumbents fail, but one of the biggest is the tendency to consider the landscape as fixed and to pursue standard practices such as benchmarking as the basis of which the strategic directions of the company are set. This leads to a herding effect that ensures a sameness of endeavour and a limited vision of alternate possibilities.

If we wish to truly be relevant in tomorrow’s world, we must do much more than talk the rhetoric of innovation and disruption, while living the reality of business as usual and seeing tomorrow through yesterday’s lens and hoping if we can catch up to the leader of the pack, we too can earn greater profits.

The reality for businesses around the world is that survival in tomorrow’s world is far from guaranteed. Innovation in its many possible forms is crucial to performance. But the devil, as always, is in the detail.

Starting to see differently and expanding the horizon of possible strategic bets is a necessary condition, but we must also embed a broader portfolio of such bets into the organisational architecture. Companies such as Apple or Amazon are successful because they have created organisations that are geared towards embracing innovation.

Language can often obfuscate detail and the rhetoric of innovation and disruption is clouded and confused. Business performance has always been about creating and capturing value across time. There is no dearth of Australian companies that espouse the value of innovation yet are ripe for all the forces of disruption because of their inability to adequately embrace and harness the organisational architectural shifts required to position for tomorrow.

Right incentives

Australian business has been too easy for too long and that breeds a complacency and reluctance to reinvent companies for the future. Iconic Australian companies such as Telstra in telecommunications, or Myer in retail, even our currently very profitable banks, are far closer to extinction than much of the Australian business community would believe.

The problem for companies today is that tomorrow is coming faster and faster, so they need to plan and strategise differently. With the right incentives, structures and culture, businesses will be able to exploit value from the world as it is and explore for value in the world as it could be. That’s innovation. And a failure to do so is the beginning of the end.

Associate Professor Vivek Chaudhri is the academic director of executive MBA programs at Melbourne Business School. He advises CEOs and boards in Australia and overseas on innovation and strategy.

Reproduced with permission from the Australian Financial Review.