Cultivating Disruptive Innovation in the Enterprise

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Innovation is a word that lots of businesses are throwing around today, but let’s unpack exactly what we mean about it here. There are at least two major categories of innovation: “sustaining” and “disruptive”.

“Sustaining innovations” are built on top of existing products, where a viable business model is already known. They are designed to compete with rival companies and typically manifest as incremental enhancements to product offerings and operational cost reductions. For example, iPhones have gotten faster and thinner and are equipped with higher resolution screens with every major new release.

“Disruptive innovations” create a new value network that either gains foothold in previously ignored markets or creates entirely new markets. Disruptive innovation usually takes time to gain traction and the disruptor is commonly overlooked by current market leaders, but eventually they displace the established market leaders and their existing product dominance. Blockbuster getting completely destroyed by Netflix is a good example. Netflix’s initial product offering only appealed to a few customer segments: movie buffs who didn’t care about new releases, early adopters of DVD players, and online shoppers. However, as new technologies allowed Netflix to shift to streaming video over the internet, it became appealing to Blockbuster’s core customer base as well. This is a classic case of market disruption.

Where Should My Enterprise Invest?

Sustaining innovations help reinforce dominance in an enterprise’s existing market. So it only makes sense that a large majority of investments in an innovation portfolio be allocated to generating innovations that have a near-term payoff and makes today’s cash-cow healthier and more productive. This is where large-scale enterprise Lean and Agile adoptions have demonstrated impressive results.

But don’t let the word “sustaining” give the impression that these incremental advancements can sustain your business indefinitely. In spite of your market dominance, your enterprise may fall victim to the next Netflix, Uber, or Tesla as well, even with sustaining innovations. It’s not just the B2C corporations who are being disrupted, either: it’s happening at an unprecedented rate to B2B corporations as well, across nearly every industry.

Unfortunately, many enterprises don’t invest in any kind of innovation focusing all hands on supporting current product offerings. Meanwhile, other enterprises invest in structures like innovation labs or “intraprenuership” programs, which are ineffective as a means to create disruptive innovation. Innovation labs tend to focus on idea generation, not necessarily generating new viable businesses. Meanwhile “intrapreneurship” programs commonly equate to 10% of employee time, which asks them to divide their focus between current, urgent business generation and long-term prospects–and the urgent stuff always wins.

Now that we’re clear on the two types of innovation, let’s focus on effectively generating disruptive innovation. At the risk of oversimplifying, I’d recommend that 5 – 15% of an innovation portfolio should be allocated to generating “disruptive innovations”.

How Are Disruptors Innovating?

Historically, disruptive innovations tend to be created by outsiders and entrepreneurs, not market-leading companies. In recent years, startups have been disrupting the enterprises at an ever increasing rate. Consider how Marriott, Hilton, and other hotels chains are being disrupted by AirBnB for example. Below is a short list of what makes it possible for startups to reign in the disruptive innovation arena.

Access to Enabling Technologies

Today technologies like 3D printing, cloud-based hosting, and even Platforms as a Service have lowered the barrier of entry into most markets. Previously only enterprises and very large organizations could afford these resources and services and provide them to their people. The playing field has now been leveled and startups are now on equal footing.

Urgency Drives Speed

The constraints of a limited financial runway, otherwise know as “the burn rate”, or more dramatically “the startup death clock”, is one of the greatest motivators to finding success for entrepreneurs in a startup. They worry about having to layoff employees, shut the doors, and it all ending badly. Those fears cause them to hustle with everything they’ve got. It creates a bias toward actions and ensures experiments generate new learning in the most efficient way possible. Enterprises have the luxury of putting off to the future the very things that make startups such effective innovators. The false sense of comfort enterprise product managers have in time and funding often makes them sluggish and complacent.

No Bureaucratic Antibodies

Startups are able to fail fast, so they learn fast and then pivot based on new learnings without major friction.They have no committees to put decisions in front of, no one has to open and answer an IT ticket to deploy changes, there’s no marketing department to debate if the company image will be tarnished by risky public experiments. Startup decisions are rapid yet data-driven. Startups can hypothesize and run enough experiments to invalidate five new business models and pivot to something more viable in the time it takes enterprise decision makers to schedule and hold one meeting. They take action at the speed of Tesla accelerating in “Ludicrous Mode” given a green light.

Fail Fast, Succeed Faster

Finally, the greatest advantage the startup has is the rate at which they are able to learn and the ease with which they can act on that learning. Disruptive innovations are discovered under conditions of extreme uncertainty where the customers and the solutions to their problems are often unknown. The Lean Startup applies the scientific method to the challenge of understanding what customers really want, not just what they say they want or you think they should want. Many of the most successful startups today are applying the Lean Startup methodology to quickly generate hard evidence, often invaliding assumptions about the problem they’re trying to solve and the customer they’re trying to solve it for. For every major successful product-market fit they have, they will have failed through 99 bad ideas based on false assumptions. Learning through experimentation at the rate needed to achieve a new product-market fit is untenable in most enterprise organizations, because it would simply take too long.

In comparison to the lumbering enterprise giant, a healthy Lean Startup is egoless, unattached to their solutions, and nimble in the face of change. The startup understands that its mission is to continuously search for viable new business models and mature them to product-market fit — and very little else matters to them.

What are Innovation Colonies and What do They Do?

One strategy that enterprises can use to survive and even thrive in spite of the onslaught of startup competition is to build an “innovation colony” — a new organizational structure aimed specifically at generating disruptive innovations at an even faster rate than most startup incubators do. In an innovation colony, the principles of Lean Startup, Customer Development, Design Thinking, and modern Agile delivery processes are the only mode of operation. Innovation colonies are part design studio, part startup incubator, part corporate product development, and part investment fund. Companies such as Lockheed Martin, Adobe, Disney, and Microsoft all include innovation colonies in their long-term investment strategy.

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Innovation colonies are typically settlements of two to ten small teams each consisting of three to five fully dedicated members. Teams in the colony are cross-functional and require a strong balance of business, design, and technology experience and expertise. Team members are highly entrepreneurial: versatile, risk-willing, and resilient. Employees who populate the colony come from the mothership enterprise but are heavily screened for entrepreneurial qualities and attracted by a different set of incentives as part of recruiting.

Innovation colonies are completely separate from other product development functions of the organization both in location and reporting structure. They have their own office spaces, their own infrastructure, and are often located in another building or city. They have their own managing innovation officers, who report directly to the CEO and board.

As with any startup, teams working in the colony have limited financial runway and are accountable to investors from the mothership. Colony teams use “innovation accounting” to demonstrate progress to investors and drive investment decisions regarding steady funding, increased investment, or termination.

Inside the innovation colony, teams test high volumes of new and risky ideas through structured experiments. They discard the failures and further incubate the ideas that show the right kind of traction. Only a small fraction of ideas will achieve product-market fit, but it only takes one successful disruptive innovation to create the enormous returns that justify the investment of the whole colony.

Once one of the colony-born startups achieves product-market fit and is ready to scale the business model to a large customer base, the mothership enterprise can exercise first rights to do one of three things: integrate the new business into enterprise operations, establish the new business as a separate entity, or sell it to an outside buyer.

Got a burning question for Jeff — follow @JRSBerg on Twitter and tweet it to him!

Resources

The Innovator’s Dilemma, Clayton Christensen. 1997.

The Lean Enterprise, Trevor Owens. 2014.

The Lean Startup, Eric Ries. 2012.

Want to Learn More?

This is part of a larger conversation about enterprise innovation. Jeff Steinberg recently gave an exciting webinar on just this topic: the webinar “Innovation Colonies: Incubating the Future of Your Business” dives into the business benefits of establishing a healthy innovation colony and what makes them so powerful in driving disruptive innovation.

 

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