In Part 1 of this series of articles I looked at how insidiously a company can be blinded to disruption by its own successes. In the Nokia example we saw that a blindness to disruption persisted even despite their release of a supposedly comparable product line to test customer reception. Nokia’s fate emphasizes that disruption can present an unacceptable corporate risk. Their disruption blindness also points out that dominant companies can lack the means even to identify the risk. How to respond faced with this quandary? Companies that want to avoid a fate such as Nokia’s (and many other disrupted companies no longer with us today) need to put in place a corporate process that deals effectively with disruptive innovation over time. The first objective of that process should be to create visibility into the future so that disruptive conditions can be identified. As we have seen in the first part of the series, the difficulty does not lie simply in managing a response – you can’t respond to a problem you are unable to see.
An effective method must be found for addressing the existential risk that may present itself at any point in time, and that implies solving the problem of creating disruptive innovations within the context of organizations that tend to reject disruption. The core of what is needed is a robust corporate process enabling the creation of visions of the future as outsiders might see them. Only then will a company be able to evaluate these disruptive alternatives and develop effective responses.
To see how a corporate process can be designed to create disruptive innovation, I start with the key objectives of the process. The specifics of an effective process can be quite different when designed for different industries and for companies with different levels of market success. When establishing a disruptive innovation program under the constraints of a specific company environment, staying aware of the four main objectives will help keep the focus on the most important tasks. The four key objectives are:
- to develop disruptive visions of the future as outsiders might see them;
- to evaluate the disrupted futures, disseminating risk awareness throughout the organization, and strengthening the disruptive innovation team’s business plan;
- to launch and fund the qualified disruptive innovation team as an independent startup; and
- to support a continuing disruptive innovation process within the company over the longer term.
Each of these objectives needs a process designed to achieve it within the unique situation of the company, leveraging individual strengths and finding ways to avoiding weaknesses.
As I have argued, the first objective, and the most important one, is to develop disruptive visions of the future as outsiders might see them. It might seem obvious that the threat of disruption comes from the outside. The very thing that makes disruptive innovation so dangerous is that it creates new understanding of customer needs and business models that are very different from the insider view. Yet the tendency at leading companies to stay with the insider view is very strong since that view has been risk reduced and cost reduced and honed to a fine competitive edge.
The corporate process required to support this first objective must meet certain constraints of separation. A typical startup is not burdened by the assumptions of the leading company. In fact, the successful startup looks for asymmetric advantages – market segments and product features and business models that tend to clash with the assumptions of the leading companies. The company team who is charged with developing the disruptive vision of the future must be supported and protected so as to enable them to do the same. The successful startup is a great model for the team to emulate, and the separation constraints must protect the disruption team from the assumptions inherent in the way the parent company currently does business. Sufficient separation is required to enable the vision of a disrupted future as it might actually arise from a competitor that does not share those status quo assumptions.
Note that the first objective is not met by a list of potential product specifications. What is needed is a thorough conception of the disruptive opportunity. The disruptive innovation team should be required at a minimum to show how the value proposition engages customers in a different way, how the product can be profitably brought to market given the constraints of pricing (e.g. “free”) in that segment, and how it will protect itself strategically against more powerful entrenched adjacent competitors. By design, these multiple requirements are the same as those faced by any would-be disruptive competitor, because the vision of the future the team creates must be credible. It should be anticipated that many cycles of trial and failure will be required to identify a good product-market fit that meets both requirements of being disruptive and being a good investment.
To be successful, the team should be staffed with the right range of skills, including technology, customer knowledge, marketing and sales, financial, strategic, and leadership skills. It should come as no surprise that the team will look a lot like a typical startup. The company is, in effect, incubating the business plan of a new company with its own personnel. As with the startup, there should be no commitment to continue the team in existence, putting it under periodic “fundraising stress” to demonstrate that it should continue at its task of identifying a real disruptive opportunity. The potential of failure should be sufficient to cause the team to quickly investigate, learn from, and if necessary reject many possible futures in the same way real startups pivot their way to success. The difference in this case from a real startup is that the objective is different: it is really to identify a potential opportunity that is disruptive to the mother company. If the disruption team were to pursue something completely different, this alternate outcome might be good for the company to support as a strategic investor, but it is beyond the purpose of protecting against disruptive innovation. Notice that even in this case, the company has learned a valuable fact about the future: the disruptive innovation team has been unable to identify a practical disruptive opportunity given the environment in place this year.
The second objective is to evaluate the disrupted future. Perhaps the main result of the evaluation is a strategic risk identification that gives the company visibility of what might happen in the future. Management can then react early and well, and achieve the best possible future for the company by continuing to monitor the disruption as it evolves. With such information, for example, a Nokia could perhaps have changed its future and captured the role of leading smartphone provider with Apple and Samsung snapping at its heels.
Another objective of the evaluation process is to provide the tools the company will need for capturing that best possible future outcome. There are two outcomes from a well-run evaluation process that can be used as tools to capture the future: alerting strategic staff throughout the company that disruption looms and they should pay attention; and funding the new company that might change the world and capture the disruptive opportunity. These two outcomes are so important I include them in the definition of the objective.
The evaluation process should be designed to raise difficult questions along multiple dimensions. For example, if a competitor is successful in disrupting the future of the market, how will the company’s existing business change? What will be left after the disruption matures? How long will it take for the market to shift and mature? What additional businesses might be created by the maturation of the disruption? Are they attractive to invest in? What responses are possible for the disrupted company? How will a competitor structure its business to protect itself against the disrupted company? Does the company want to own the competitor’s market share? How can the disrupted company manage its existing businesses while at the same time capturing new business that competes with itself? These questions will be difficult for existing staff because they challenge deeply held assumptions that may have gone unexamined for many years. They are difficult for the innovation team because they demand justification of projections into the future where market behavior will be different from today.
Answering the questions raised in view of a credible alternative vision for the future can be a valuable learning experience for everyone as assumptions get questioned and new potential directions are evaluated. The company benefits strategically whatever the outcome. An awareness of the risks posed by a disrupted future is spread throughout the organization where counter measures can best be developed. Assumptions are surfaced and their limitations discussed. For the disruptive innovation team, the evaluation process forces maturation and change, perhaps bringing their business plan to a stage where they can raise funds to support their continued existence.
In an organization accustomed to their leading market position, there will be resistance to a future that is disrupted in such an unfamiliar way.
A good process will leverage the natural conflict between innovation advocates and key company personnel into creative energy that drives the evaluation forward. The process should be set up to allow this conflict to occur over time while questions are surfaced and answered. Challenge and counter challenge are essential between defenders of the status quo and advocates of the disruptive future vision. The process needs to be staffed in a way that supports the resisted new ideas, but the evaluation activity must include challengers representing many corporate functions.
As the evaluation process unfolds, threat responses will of course be examined by the company, and action items will be taken by division personnel and corporate staff in response to a better understanding of the competitive environment and its direction. These action items lie within the scope of responsibility of existing corporate units and need not be a function of the disruptive innovation process per se, so I do not include them objectives of the process.
Whatever were the action items at the end of the evaluation process, the market is going to have its way over the next few years and the potential disruptive change will play its way out. During this process, the company can take one of several different postures. It can do nothing. It can create an internal division to develop its own disruptive products (not recommended – that pathway didn’t work out well for Nokia). Or it can spin out a unit to pursue the opportunity outside the constraints of the mother company. The innovation team that created the vision of the future in the first place is still intact after the evaluation process, and they are stronger than ever after working their way through the many challenges of the evaluation process. This team is now tried by fire, proud of what it has achieved, and armed with a well-criticized disruptive business model that might just change the world. In my view, the third objective of the corporate process is at this stage to launch and fund the team as an independent startup. Of course, stock ownership will be retained according to the various investments that have already been made, but the startup must be allowed to operate independently, motivate personnel with stock options, find independent investors, and do everything it needs to succeed. This leaves the host company with multiple good options: as an investor it has visibility into the successes and failures of the new unit; the company CEO can (and in my view should) play a key role in coaching the startup management to keep up with their evolving business model; and the company can of course bid to acquire the startup at any time as it demonstrates successful execution of its business plan.
The final objective is to support a continuing disruptive innovation process within the company in a way that is robust to challenge from competing interests and evolving business priorities. The risks (and opportunities) presented by disruptive innovation do not disappear once the first avenue of disruption has been found and evaluated. The right business processes needs to be self-sustaining. The process should continue indefinitely to protect the company over time: soliciting new ideas, creating disruptive visions for the future, evaluation, follow-up action, and company spinout for teams that get that far. New technologies and services are constantly being created, and these developments keep changing what is going to be important to the company’s customers in the future. At times, opportunities will emerge for the disruption of market segments and business models. The appropriate response is to put in place a permanent process to identify and evaluate these opportunities that will work equally well today as it will in the future. A process following the four objectives above will likely generate enough ancillary value to justify its continued existence even if it does not identify a disruptive opportunity in any particular year.
This is the second article of a series on Disruptive Innovation entitled “Insuring the Future in Companies that already ‘Have it Made’”. Check back here next week for Part 3 of the series.