“Strategy, structure and leadership are the holy trinity of disruptive innovation”
An interview with Costas Markides of London Business School “Costas is fantastic” Peter Hinssen told me when I asked him about Costas Markides, Professor of Strategy and Entrepreneurship at the...
The building blocks of disruptive innovation
When I inquired about the building blocks of disruptive innovation, Costas affirmed that “structure, leadership and strategy are definitely the holy trinity in that matter”. He explained how - because of its cannibalistic nature - disruptive innovation is often perceived as a threat to the existing core of a company: people fear that it will endanger their prize pony core revenue. Take the example of Nestlé and Nespresso: the Nestlé group knew very well that if Nespresso worked out well, it might “eat” part of the profits of Nescafé. So what most companies do in this case - just like Nestlé - is to protect and separate its disruptive innovation from the rest of the core in a separate STRUCTURE.
“A lot of companies make the mistake to imitate, almost copy, the strategy of the disruptors.”
“But even if you separate the unit from the core, the conflicts between the two will not disappear”, Costas continued. “Someone has to manage the innate ‘antipathy’ between the two structures. And that’s why LEADERSHIP is so important as well: to manage this opposition AND at the same time, put the necessary integrating mechanisms in place so you can exploit the possible synergies between the disruptive unit and the core. “It’s a very tricky balancing exercise: you have to protect the disruptive team by keeping them far enough, yet hold them close enough to maintain them integrated, valuable and alive.”
You may remember Peter Hinssen describing this very same catch-22 when he wrote about the tragic Xerox PARC affair, which came up with some of the most radical inventions in history, without ever commercializing them: “isolating your Day After Tomorrow efforts in a separate unit inside your company is a good idea. But make sure you do not disconnect the entity. If it’s too far removed – like PARC was from Xerox – it can backfire.”
This is one of the biggest challenges of ambidextrous organisations: “knowing exactly how to divide your attention, time, talent and resources over your disruptive unit and your “roots”; being able to exploit the core so you have enough revenue to be profitable while at the same time exploring new markets that will allow you to stay relevant in the Day After Tomorrow. It’s about balancing the present and the (distant) future. Like energy providers that are making a transition from oil to renewable energy: they might start as 95% oil and 5% renewables and as time goes by, they have the decrease and increase the investments in both sides. Knowing how, and when, is one of the most difficult challenges in business.
Last, but not least: if you are trying to disrupt a disruptor in your market, Costas explained that you have to adopt a STRATEGY that’s unique. “A lot of companies make the mistake to imitate, almost copy, the strategy of the disruptors. This almost never works. Customers have already flocked around the disruptor and if you don’t differentiate yourself, they will simply not follow you. It’s like British Airways trying to create new business by copying Easyjet and Ryanair. I don’t believe in that type of approach. And the customers certainly won’t.”
“If your incentives system is tied to how well your people manage your business Today, they will not invest their time in finding new markets for the Day After Tomorrow.”
In radical innovation, culture is key
When I asked Costas about CULTURE, which is most often seen as a crucial part of innovation, he agreed that it was, but - here again – its importance greatly depends upon the type of innovation you are trying to achieve. “If your disruptive innovation is protected in an outside unit, then the culture of the core - though obviously still important - will have less impact than if you want innovation to happen INSIDE the core. With radical product innovation inside your core, culture is immensely essential: you need a culture of questioning, of experimentation, of autonomy, personal responsibility and connection with the outside. And the only way to achieve this is by encouraging every last person of your company to behave like this. And they will only do so when these two parameters are true: if management adopts and sticks to these behaviours as well and if the incentive systems are adapted accordingly.”
“Time and time again, I have seen companies fail at radical innovation because of this highly underestimated reason: if your incentives system is tied to how well your people manage your business and your budget TODAY, there is no way that they will invest their time in finding new markets for the Day After Tomorrow. They will act upon the metrics that their work is judged upon which often is: “how much money are you making us now”? If the incentive system is not adapted accordingly, why ever would your management staff - which typically tend to be a bit more senior in age - invest in disruptive innovation that will probably only be profitable in 10 to 15 years. They will be lying on a beach by then, and not in any way benefiting from it.
Another way to invest in the Day After Tomorrow is to acquire the innovations of the future by investing in promising start-up firms around the world. Google, for instance, invested in hundreds of start-ups around the world that develop new technologies and new markets. If these turn out to be successful, Google will immensely profit from their equity investments. Another solid approach is investing in incubators, like Barclays’ 13-week Accelerator programme “which has the objective to help innovators develop new disruptive fintech technologies, particularly in the investment banking, wealth management and credit cards industries.”
Don’t scare people into innovating
When we discussed the lack of sense of urgency for Day After Tomorrow thinking in a lot of companies, Costas warned against the often-used tactic of scaring people. “Look at all the disruptions around you”, they tell their people: “If we don’t react, we are going to go bankrupt!”. That just does not work, and the reason is pure psychology. A Harvard medical school study uncovered that - even in the most dire situations - people will not adapt their habits because of fear: 90% of people who had undergone major heart surgery, went back to their old unhealthy habits within six months after their operation even after their doctors had warned them that they would die if they did not change. You’d think that the threat of death would be enough to scare them into a more healthy life, but strangely enough, it did not.
Now, the 10% that did change and stuck to that change, were those whom the doctors had tried to persuade with positive emotional incentives. They had told them something along the line of “When you go home, do you want to be able to spend quality time with grandchildren, make long walks in the forest, travel to foreign countries,…? If you do, you need to exercise, cut salt, alcohol and fat from your diet, stop smoking, etc. The very same can be applied to the Brexit: the Cameron government tried the discourse of fear to persuade the Brits to stay in the EU: “if we leave the EU, things will get really bad for us”. People don’t respond to that. They need a positive vision. That is how you create a real sense of urgency. That is how you get them to create your Day After Tomorrow: by showing them the benefits and the opportunities.”