What Corporate Innovators Can Learn From The Disruptors

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(Images not working? LinkedIn article version: https://www.linkedin.com/pulse/what-corporate-innovators-can-learn-from-disruptors-tyler-motherwell)

(My colleague Nico Gonzalez has put together an excellent post discussing the different types of innovation and the portfolio approach to innovation. I would recommend watching that video first in order to better understand the terms “disruptive” and “core” innovation!)

Introduction

Though over 20 years old, there is much that we can still learn from the late Clayton Christensen’s “The Innovators Dilemma“, especially when taken through the modern lens of current technology and management practices.

The Innovator’s Dilemma was primarily written to diagnose why established companies fail to get into the disruptive innovation game, as well as outline some potential solutions. However, the vast majority of product developers are not in the disruptive innovation game, as that is usually only a small part of a company’s innovation portfolio. They work on established products for established companies, making them better bit by bit. This core innovation is hugely important to a company’s profitability after all! How, then, are disruptive innovation practices applicable to them?

There are significant lessons embedded within the tactics that disruptive innovators take that can be used to enhance the beating heart of a company’s products, the core innovation. Let’s look at the recommended countermeasures for the Innovator’s Dilemma and see what can be extracted for use in the other parts of a company’s innovation portfolio.

We’re not so different, you and I

When looking at how to solve the Innovators Dilemma, Christensen recommended 4 counter-measures established companies can take and increase their chances of gaining a first-mover advantage in a disruptive market. Examining these recommendations reveals some interesting insight that we can then apply in order to improve our core innovation practices:

1. Create a self-sufficient ecosystem that matches the type of work being done

A well-run company will always put its resources where they can make the most measurable impact, which will always be servicing the current customer base. The only way to maintain focus on developing disruptive products is to create a separate spin-off organization, one where the people and resources are untouchable by the parent organization.

What this tactic fundamentally accomplishes is to create a self-contained ecosystem, where the denizens have everything they need to accomplish their goal. When we look at core innovation, it is clear that we can take a similar tactic, but in a slightly less extreme form.

A simplified functional org structure
An organization set up to be product-centric

Consider a relatively flat, product-centric organization (instead of the traditional functional organizations). This type of organizational structure shares the trait of being self-contained (though probably not quite to same degree) with the spin-off organization. Each division can have a very different innovation profile (due to speed of market or phase of product lifecycle) and tailor their efforts accordingly. Taking the tactic down one more level brings us to the idea that not only should products be self-sufficient, but teams as well. Teams that deliver core innovation can majorly benefit by reducing dependencies (or the organizational distance of those dependencies) in order to increase the pace of core innovation.

To learn more about decentralized & product-centric organizational design, I would recommend reading this post by Jeff Anderson on organizational principles, or pick up a copy of Organize for Complexity by Niels Pflaeging.

2. Match the size of the organization to the size of the demand (and grow over time)

Disruptive innovation requires serving a market that is decidedly smaller and different from current customers in the mainstream. Attempting to serve them using either the existing organization or a spin-off that is too big for the current customer base is a recipe for failure (not the good kind!). Costs increase as organizations scale, and attempting to preemptively scale brings a host of challenges and extra costs that can cripple a product’s performance in the market (for example: adding teams to work on projects/features with lower ROI, diluting focus and culture, inadvertently slowing high ROI projects/features).

Note the size of backlogs for each product and the proportion to teams, as well as the lack of organizational layers in the Disruptive org

The same lesson applies when creating product portfolios for core innovation. Organizations are not designed, they are grown to match sources of demand, and as such change over time in response. This can mean that the organization further separates as new innovations catch on with customers and become their own organizations, or start to see declining profitability and are absorbed into a larger portfolio.

3. Use resources of the parent company, but avoid the processes

Christensen defines a useful framework for thinking about the characteristics of a company:

  • Resources: things or people that a company has access to
  • Processes: the method by which a company executes tasks (eg. software development, procurement, project funding, customer research, bookkeeping, etc.). Can be formal or informal (i.e. this is how it’s done around here)

Comparing along these dimensions looks something like this:

PropertyEstablishedDisruptive
ResourcesLarge, infrequent funding to accomplish tasksSmall, frequent funding to achieve objectives
ProcessesOne-size-fits-all,
manage by adherence
Tuned to customer base, manage by outcome

When it comes to how companies acquire resources, disruptive companies typically have a much shorter funding window (whether they are true startups or corporate spin-offs). This short feedback loop has the side-effect of limiting the size of bets that can be made (as the market is highly unknown), and ensures that progress towards an objective (as well as learning) is regularly showcased to those making funding decisions.

Core innovators can borrow some of the same tactics, even in the context of the large-batch funding models that are common in large companies. These processes may be unwieldy, but by funding products, not projects progress can still be made toward a product-centric organization. Another important piece of the puzzle is tying funding to teams based on their directional objectives (eg. increase paid customer conversion), in contrast to the traditional approach where specific scope items are funded. This approach works to further decentralize decision making and increase response to customer and market feedback.

Processes in disruptive companies are under-developed compared to their counterparts in established companies. Additionally, disruptive companies manage their processes by objective, rather than by adherence. The net effect is that their processes are very finely tuned to the market they are trying to serve, and lack the bureaucratic bloat that tends to accumulate over time.

So what can established companies learn from this? Should we dismantle all our processes and live in start-up land? Far from the case! But it is evident that processes in established firms are quite heavyweight, usually due to trying to be everything to everyone, as well as attempting to become fool-proof. Pareto’s law applies here, attempting to get to 100% (or even 80%) error-proof simply is usually not worth it when you compare the cost of errors vs the time penalty and cost of delay.

Putting processes in the hands of the people that use them and standardizing on the process’s outcome rather than the process itself allows teams focused on core innovation to tweak the specifics to their needs, while preserving ability to integrate with other parts of the organization.

4. Fail early and cheaply in searching for new markets (or in other words, Fit is King)

Markets for disruptive innovation are inherently unknown, and require a probe and respond method to find and correctly distill. Going all-in on a single business model and market without quantitative validation significantly reduces your chances of building a viable business, and no amount of market research is a substitute for actually attempting to sell a product.

A typical flow for a startup business product looks something like the following:

Lean Startup inspired progression

Disruptive innovators are generally starting from a place of extremely high uncertainty, and therefore spend a LOT of time trying to nail the Problem Customer Fit (as they usually do not have a good idea who their customers are).

Core innovation can use a similar thought process to validate the small ideas and tweaks made to improve the product over time. In contrast with disruptive innovation, core innovators can get through the stages much more quickly. Often the customer base is known, we typically work in a solution space is reasonably well defined, and the market is typically known. The challenge instead comes from the temptation to skip steps, to reject humble inquiry, to fall prey to the allure that you can predict wants and needs (spoiler: we cannot).

Progression modified to be more aligned with realities of core innovation

The solution is to establish an experimentation mindset based on engaging with real users. We want our people to use both qualitative and quantitative experimentation every corner of the organization in order to flesh out and prove the best ideas, even if they seem counter-intuitive at first (though this is much easier said than done!). Many organizations today jump right to Scale, instead of bring new ideas through any sort of fit process, and there are huge benefits to taking the extra little bit of time. Most teams doing core innovation in established companies are not aware of the business model, customer, problem, and economics of what they are solutioning, which leaves them blind to small things that add up to a compromised user experience. Additionally, the fit process can uncover hidden assumptions and false hypotheses that can minimize the number of products we build that no-one will buy!

Conclusion

So where does this leave us? With a lot of new ideas! Even when working on core innovation there is opportunity to take lessons from disruptors and apply them in even the largest of corporations. So much of a company’s business relies on this activity that it would be foolish to neglect it and allow how we execute to become stagnant. In coming articles, I intend to address the specifics around the techniques that can be used at each step along the way to help innovation flourish!

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