Makinginnovationmore

My good friend Paul Hobcraft wrote a nice piece recently about how corporations seem to experience innovation. He compared it to the game of snakes and ladders.  In this country (the US) we recognize it as chutes and ladders, a game that allows a player to progress quickly if they land on a ladder, and regress quickly if they land on a chute.  Paul notes that corporate innovation seems to reflect this experience, sometimes rapidly progressing, then just as rapidly relapsing.  He notes that the game, which he calls Snakes and Ladders, has no strategy. It's simply based on luck.  And to some extent he is making the claim, indirectly, that corporate innovation is not based on strategy, but on luck.

I'd like to take his claim, such as it is, and extend it by noting that many commentators describe luck as when preparation meets opportunity.  Seneca, a Roman philosopher, was the first to suggest that luck is simply the intersection of preparation and opportunity.  If we accept this somewhat trite but accepted definition, we can think a bit about what holds corporate innovation back.

Opportunity

If luck is made up of opportunity and preparation, we can first examine the idea of opportunity.

The question then becomes:  does every organization in a market understand and experience the same opportunity to innovate, and at the same time?  The simplistic answer is: yes.  New customer, market, business model and other opportunities are emerging all the time.  No individual firm has a claim to any emerging opportunity.  These opportunities are agnostic; they don't care who spots them and capitalizes on them.

This means then that opportunities are ubiquitous and available for those who spot them and act quickly to capitalize on them. This means that good innovators are firms that are paying attention to emerging opportunities.  If you aren't paying attention, if you aren't scanning for emerging opportunities you can only be a fast follower.  In the end, every firm has the same chance at spotting an opportunity, the only question is whether or not they are looking.

Preparation

If luck is when preparation meets opportunity, then what is innovation luck?  Being prepared to act, with the appropriate skills and knowledge, when an innovation opportunity emerges.  This assumes that the firm can 1) spot an emerging opportunity and 2) act on the opportunity, which emphasizes preparation.

Preparation to many organizations looks like an investment that has a low potential for pay-off.  Why invest in skills and training for innovation opportunities that may not occur, when budgets and bandwidth is limited?  And, since innovation skills aren't regularly exercised, they often wither or dissipate when they are introduced and not used regularly.  Or they appear strange and unusual when introduced at the last moment, when an opportunity is spotted but the people are unprepared.

The Answer?

We believe the answer lies in a continuous evaluation process, constantly looking for emerging needs, emerging segments and emerging opportunities. Spotting these before others do provides the chance to steal a march on competition. This requires a regular scanning of the market and customers and competition, as well as a close examination of trends that will impact market dynamics.  Along with this scanning and analysis, a regular program of both incremental and disruptive innovation builds and sustains innovation skills, so that people and processes can execute quickly against a new opportunity.  Additional skills or competencies can be added "just in time" when a new opportunity is validated, building on existing skills and processes.


Sometimes, in rare occasions, a firm will find itself alone in the midst of an opportunity and will simply need to act to win.  Far more often, opportunities are emerging than any firm can respond to, and those with the best sensing capability and most preparation will be able to win.  There's another trite but true saying that applies here:  hope is not a strategy.  Rather than hope that you'll end up in a non-competitive but attractive opportunity, act to understand the future that provides innovation opportunities you can meet fully prepared.

Accenture has recently published an innovation survey of 500 executives in the US.  I'm particularly partial to portions of this survey because the authors identify a real and growing problem - the gap between what executives want from innovation, and the organization's ability to deliver.

By now everyone knows that innovation is a top three priority for executives.  That's not news.  You'd have to be a monopolist or simply crazy to suggest as a senior executive that innovation isn't one of your priorities.  But saying that innovation is important doesn't mean it will get funded, get prioritized and get done.  The Accenture article goes to great lengths to note that "US executives are unrealistic in believing they have the capabilities they need to achieve their bold innovation goals".  Ouch.

The authors go on to suggest that "a significant gap exists between what companies want to do in the area of innovation and what they are able to do".  Again, the idea of a distinction between desire and capability.  This isn't new.  There's always been a gulf between desire for innovation and capability.  It's just rare to see a well-known and respected analyst or practitioner admit that the gulf exists, and with their data acknowledge that the problem is actually getting worse, not better.

Even Accenture pulls its punches a little.  In the first figure of the research they note that 84% of executives surveyed know they are dependent on innovation.  But Accenture doesn't ask the commitment question - how many of these executives who admit knowing that innovation is important are actively investing in innovation, building skills, resetting corporate cultures, building bigger visions?  I think this was a miss on the part of the survey.

From the data presented it's clear that "innovation" is still defined very narrowly, as improvements to existing products and services.  While "disruption" is bandied around, few companies have plans to attempt more radical or disruptive innovation, or regularly stray from product innovation into other outcomes like business model innovation, service innovation, channel innovation and so forth.  In other words, most of these executives and their teams are just scratching the surface, when right underneath the surface a range of innovation options and outcomes is just waiting to explode.

Rather than count results and outcomes, the survey is forced to count inputs, so we get the usual stories:  74% say they have established formal innovation processes.  We at OVO have seen some of these "established" processes, which often aren't complete, and no one has been trained to follow.  As I like to say, just because I have a hammer, that doesn't make me a carpenter.  One of my favorite quotes from the survey is about executive engagement.  If you want to know how important innovation is to a company, let's track the time and engagement of the senior executives.  To quote the survey:  superior innovation performance requires more than c-level oversight.  It demands engagement from all levels of the organization.  But I don't see any measures or metrics of increased involvement.  There are all kinds of statistics about how many firms have digital systems such as project management platforms to manage innovation process (85%) or how many are doing virtual prototyping (84%).  If these numbers are to be believed, there are only a couple of conclusions that can be drawn:  either these are highly ineffective (assuming they are being used) because the results don't equate to the investment, or they aren't being used at all.

But my favorite quote in the survey was this one:  Companies' confidence in their innovation performance is not justified.  Wow.  Like a teen-aged driver convinced he's king of the road, executives are convinced that their teams are all well-above average when it comes to innovation.  In this Lake Woebegone environment, where everyone and every firm is well above average, 83% of companies surveyed said their companies were the same or stronger than their closest competitor when it came to the outcomes of innovation.  Clearly, we are awash in great innovation talent, we just haven't seen the new products, services and business models that are on the cusp of delivery to stores and channels near you.

It's not until page 10 that we get this dinger:  67% (two-thirds!) of respondents believe that their organizations are more risk averse than before.  So we are supposed to believe that more companies are doing more innovation, while risk aversion is growing?  And, worse, 82% of respondents do not distinguish between incremental and radical disruption.  They are using the same tools, methods, thinking and decision making criteria for incremental and disruptive innovation, and wondering why all the ideas seem so bland.

Accenture's recommendation, the two engine solution, is appropriate but not new.  Their suggestion is to define a path for incremental ideas, and a separate methodology and philosophy for radical or disruptive ideas.  In this manner the ideas would be treated differently.  What's missing is a portfolio approach, which would indicate how many ideas of each type are valuable or necessary.  OVO has set up systems with clients that track incremental or continuous improvement ideas, and a separate track for disruptive ideas. But until there's clear sponsorship for disruptive ideas, funding and risk tolerance for those ideas and clear metrics and measurements, all ideas will eventually become incremental.


I applaud Accenture for its honest assessment of the state of innovation.  At a time when innovation is in high demand, far too many companies are paying it lip service, then are astonished when new entrants and startups completely disrupt the industry or market.  That disruption is simply going to increase as the pace of change increases.  Large corporations can't afford to pay lip service to innovation or treat it as an interesting experiment.  They need to embrace innovation and make it a core strategic philosophy, well funded and with plenty of resources.  Otherwise they'll play defense and wake up to discover their markets or products have been disrupted.

Henry Ford is perhaps one of the most well-known innovators in the US.  After all, it was his mass production line that helped people make the shift from horses or high cost / low quality automobiles to a reliable, affordable car - the Model T.  Ford wasn't the first to manufacture a car, but he was the first to realize the power of a low-cost, reliable automobile.  Strange then, that his position in the automobile industry was usurped only a few years later.

Ford perfected a process by which he determined the model, the shape, the size and especially the color of the automobile.  "Any color as long as it's black" was his motto.  And when people did not have cars, the allure of a car, even if it did not have many options, was appealing.  Under pressure, Ford introduced the model A as an upgrade from the model T, but Ford wasn't interested in creating a range of alternatives, of introducing a number of options.  Ford was a synthesizer and a manufacturing innovator.

The guy who stole a march on Ford, and really defined the automobile company structure that we have today was William Durant.  Durant foresaw that people would want a range of products and options.  He created what became General Motors by offering people more choice of options, more flexibility and product families.  While Ford grew rich on the Model T, his company grew stagnant and failed to understand the wants and needs of customers.  Durant understood the breadth of customer expectation and worked hard to meet it.  Durant was a merchandiser and understood the potential of product families and brands.

There's an innovation analogy today

Currently, many innovation teams are shaping up a lot like Henry Ford's company.  Instead of cars, they are working on innovations.  And you can have any innovation you like, incremental or disruptive, as long as it results in a tangible product.  We've even got separate names for the different activities:  "fuzzy front end" where ideas are generated, and "new product development, or NPD" for the activities where the ideas are converted into products.

When companies are just beginning their innovation journey, and innovators are far from mature, product innovation focus makes sense.  But eventually companies and individuals mature, and their innovation production should broaden and meet expanded needs.  Instead, today, most innovation teams create product ideas, and feed a machine called New Product Development, which is built to receive product ideas and convert them into new tangible products.  What happens when innovation generates outcomes other than products?  Where do the new ideas go to become new business models or new customer services?  Here lies the rub:  Just like Henry Ford, most corporations have perfected the innovation process, as long as it's a product.  And somewhere out there, in existing firms or new companies, are the Billy Durants, who are thinking about how to expand the definition of innovation and create a range of outcomes, that will simply swamp companies that only think about product innovation.

Beyond New Product Development (NPD) teams

I was thinking about this issue recently when talking to a client about their innovation process.  In their case, innovation is a well-oiled machine (as long as it's a product) and the front end works reasonably well with the new product development process.  What would happen, I asked, if new ideas that represented business model innovation, or channel innovation, or customer experience innovation, originated from the fuzzy front end?  Where would those ideas "go" for further development?  Where was the defined process for business model development?

Of course we both knew the answer.  The NPD process is optimized and streamlined for developing tangible products.  The NPD process will reject anything it can't make.  And, there is no defined process for any of the other types of innovation outcome.  There's not a "New business model development (NBMD)" process or team.  There's no "New Customer Experience Development" process or team.  With luck the CX or UX team associated with product development might recognize a need, but it would have to be related to a new or existing product.

What's the Need?

Sure you might say, but most companies need to create a stream of new products, whereas we may only change a channel or service or business model periodically.  Therefore we don't need a standing process in order to do business model innovation.  But what's true about businesses generally is that they are very good at things they do regularly and are terrible at things they do infrequently.  Without definition, without practice, can your organization create new services, new customer experiences, new channels and new business models?  Because I can easily imagine a "front end" of innovation that generates not only products but services, customer experiences and business models, and further I can imagine a day in the not too distant future where you may decide that one product line or business unit needs more product innovation, while another needs channel or service innovation, while another needs business model innovation.  Is your firm nimble enough to do this?  Does it have enough experience to develop and commercialize different forms of innovation successfully and potentially in parallel?  How long did it take to get new product development processes right?

You need a New business model/service/channel/customer experience Development process

Now that you've got a refined and perfected (well, almost) NPD process, it's time to start thinking about a New Business Model Development process, a New Customer Experience Development process and so on.  The good news is that developing new business models and customer experiences may be a bit less work than developing new products.  The bad news is that there really aren't any well-defined methodologies or worse, much experience around this. Yet the need will only grow as demand for innovation beyond the product grows.

As the range of innovation outcomes increases, the ability to convert new ideas into services, channels, business models and experiences will become paramount.  This doesn't negate the need for NPD, but emphasizes the need for NXD, where X stands for business models, services and experiences.

I've thought for a while now that we are on the brink of something big.  That innovation will finally reach a tipping point, and like Europe in the Renaissance we'll finally leave the "dark ages" and innovation will flourish everywhere.  Right now I believe that for many corporations, innovation is a mystery that seems to promise what we think impossible:  more revenue, more profit, more market share at little cost.  Who can blame people for being suspicious of a perpetual motion machine, when they've been assured that physics tells us it's impossible?

In a few years, a decade at the most, we'll look back at this point in the evolution of innovation as an activity, a tool and a strategy and wonder:  what were they thinking?  When the tipping point occurs, innovation will spread like wildfire, because finally all of the frameworks will be in place, finally corporate cultures will stop resisting, finally people will have the skills and time they need.  When this happens, we'll look back at the innovators of today and wonder why they worked so hard, for so little gain and so much repeated failure.  What we have to face is that the problem isn't innovation tools, or thinking, or people.  The problem with innovation is that we have yet to reach a tipping point, where the need for innovation overcomes the resistance and fear of innovation.  When that point occurs, innovation will run through corporations like the Black Plague through Europe, and possibly with many of the same results.

Two Edged Sword

The opportunity and problem with the innovation tipping point will be that for every "winner" there will be one or more "losers".  The winners for the most part will be those companies and corporations that harness innovation, in all of its forms, for their benefit, adapting to new competitive realities. The "losers" will be those companies and corporations that have been avoiding innovation, trying to "double down" on efficiency and existing products and services.  And when the tipping point happens, entire markets will shift.  We'll talk fondly about the fact that Tower Records and Blockbuster had time to witness their demise.  This is what Schumpeter was talking about when he referenced "creative destruction", and we're going to see more of it, regardless of the form of capitalism we choose to implement.

You see innovation is going to create not just new products and services, but will create new channels, new business models and new customer experiences.  Whole industries will be transformed.  Those companies prepared for a new competitive reality will prosper, as they serve new customers in new ways, with new products and services, constantly adapting to customer needs and rapidly changing competitive environments. Those firms that are too rigid, don't understand the breadth and depth of innovation outcomes will simply collapse from exhaustion, because they won't be able to respond quickly enough.  The fast follower strategy they are intending to implement will demand speeds and agility that they cannot fathom.

The tipping point

So, what's the tipping point look like, and how can we attempt to predict it?  The major barrier to significant innovation across corporations and industries isn't capability, its risk tolerance.  When the fear of innovation and what it means to conventions and industries falls, or when new entrants enter in mass and don't pay homage to the past conventions, and when the value of consistent innovation is higher than merely sustaining the past, then the whole steaming mass of corporate fear, risk avoidance and bureaucracy will tip over.  At that point a mad scramble will begin.

What does the approaching tipping point look like?  We believe it will occur as customers begin to demand not just new products, but true solutions that address their entire needs.  Understanding the customers' journey and solving not just product needs but service needs, business model needs and so on.  Companies will arise which examine the shape and structure of the need, and pay less attention to the historical shape and structure of the industry.  Tesla, NetFlix, Uber, Airbnb and others are already doing this.  Are you paying attention to what they are doing to established industries?

Because it turns out that a younger generation, raised on technology, has never experienced any other type of demand fulfillment.  They don't care so much about how the need is filled, only that it is filled quickly, with style and if possible for free.

Why will innovation be so devastating?

One last thing to keep you up at night.  The innovation tipping point this time will be unlike over social and corporate disruptions.  The reason is that the secondary and tertiary effects will be much larger.  Take, for example, the move from horse drawn carriages to cars.

This transition was significant in many ways, because it transformed the populace and business.  While it caused strife for some existing businesses (stables, horse groomers and the always castigated whip manufacturers) it wasn't so devastating for other firms in the industry.  Carriage makers could transform their skills to build car bodies.  Mechanics who worked on carriages could work on cars.  Even stable owners could covert their buildings into garages.  So while there was transition, and there were winners and losers, many of the firms in support of the industry in question were able to transform during the disruption.  That may not be the case in the future.

Future disruption based on service, experience and business model innovation is likely to invalidate old industry conventions, making it much more difficult for suppliers and partners in an industry to rework their businesses.  Reworking products within the same business model is difficult but possible.  The carriage makers did that.  Reworking your products and services while business models are fluid is difficult if not impossible.  The tipping point will bring with it wholesale changes in the way we work, the business models we build and how new and existing companies are able to compete in a rapidly changing marketplace.  It will be more Black Plague than the Model T.

Finally, the tipping point will exacerbate issues in the workforce, which are already underway.  The more innovation that occurs, especially business model innovation, the more rewards will flow to those with unique skills, and the more we'll automate services and experiences.  Thus, while the groomsman could eventually become a mechanic, it may be more difficult for people to transition their skills as innovation accelerates.

The tipping point is visible, if not well understood

We are closer to the tipping point of innovation than people want to believe.  The current political environment shows us that we are closer to 1789 France than ever.  Significant majorities of both parties, led by aggrieved constituents want change.  They want a more responsive, involved government, even if they aren't sure what that means.  They are rejecting the conventions of the old parties, demanding new forms of governance.  At the same time groups like ISIS are doing much the same thing to the Middle East and religion, demanding a new way of thinking, eliminating states.

What happens when that fervor moves from the religious and political realms into the business realm?  Is it so far removed?  Do corporations and industries have firewalls to keep out the kind of change fueled by this passion?  I doubt it.  The combination of passion, change, consumer demand and evolving technologies and business models is going to fuel an innovation renaissance.  Which side will you be on?

Science, through the Second Law of Thermodynamics, tells us that in a closed system, entropy must increase.  This means as the pace of change accelerates, consumer demands increase, new entrants constantly enter established markets and create new ones,  business models grow and diverge, the business world becomes more disrupted, more disoriented, not less.


We have a choice.  We can predict the tipping point and the changes that will occur, and prepare people, policies and businesses for the change, or we can organize to attempt to resist this change, to insulate ourselves, our companies and cultures from the impending changes.  Ask Blockbuster and Tower Records how insulation and playing catch up worked for them.  Pay attention, prepare for the innovation tipping point and win in the new economy, or ignore the changes and find yourself overwhelmed when the tipping point occurs.

I've had a really good laugh lately at the people running around tripping robots.  I wonder if that's an actual job description (Robot Tripper) or if Google and others simply look for volunteers who are willing to trip the robots. Aren't the people doing this afraid that one day the robots will seek revenge?

But here's where innovation turns down a potentially blind alley.  Why do we need bipedal robots, and is being upright and bipedal a evolutionary feature that may have had an advantage in the past, but no longer?  In other words, if the robot gets tripped, so what?  We humans evolved to operate only in an upright position, but that doesn't mean that robots need to.  If a bipedal robot gets tripped, why doesn't it simply sprout wheels and go on its way?

In all seriousness, what we view now as advantages and features may eventually be bugs.  There are few activities that demand that a robot have bipedal capability or propulsion, when other forms of movement are equally viable and less subject to disruption.  We humans probably evolved in an upright position from a former crouched position because seeing over the grasslands meant earlier warnings about predators.  Since we no longer live in sub-saharan grasslands and constantly scan for predators, we are probably more likely to evolve in the future into beings permanently bent at the waist from sitting so much and permanently bent at the neck from scanning our devices.  Perhaps we should structure our future robots in the shape of a question mark rather than upright.

This is the problem with a lot of innovation thinking - anticipating a future that's based on the observable past.  This approach often fails to incorporate the amount of change, and the direction of change in the environment.  It's what militaries call "fighting the last war", building trenches when the enemy is building highly maneuverable tanks.  In the short run we may need bipedal, upright, humanoid robots simply because the physical environment we live in and work in is designed for humans to operate in, and therefore robots shaped like humans may be more efficient.  But I doubt it will take long before the environments change to adapt to robots and humans will adjust.  Already robots are delivering food and medicines in hospitals, and there are fully automated "dark" warehouses where no humans are employed, only robots.  McDonalds is exploring new restaurant designs that could be fully automated, with few or no human employees.  What's interesting about that design is that the "back office" - kitchen, freezers, etc - could be radically redesigned to save space, since humans will rarely or never go there, while the dining area would retain its human-centric design.

All of this to say that as we innovate, we need to consider two important issues.  First, innovation, especially disruptive innovation, rarely takes on the shape, contour or business model of what already exists.  Just ask BlockBuster or Tower Records.  Second, we have to consider the secondary and tertiary effects of innovation.  Do the robots conform to human centric designs or do buildings and factories become tailored to the robots that work there?  Most likely the latter, since robots don't need light, or heat, or safety equipment, or gyms, or cafeterias.  Too often we "innovate" only the most obvious piece of the equation - the evident product or service - and neglect how much change is occuring.  This evident innovation simply reinforces past ideas and conventions, while the rest of the world is leaving them behind.  Too often we innovate only a component of the total solution - developing a bipedal robot, when we actually should be rethinking the environment where a robot, regardless of its locomotion, is optimally deployed.


I'd love to end this post with a reference to playing checkers or chess, introducing the more complex dimensions of innovation, but that reference won't do.  It's too constrained.  Good innovators need to be thinking about the multi-variant possibilities of future scenarios rather than innovating based on past conventions and needs.  Further, once a potential future option becomes a reality, we must also understand how to operate in that new future.  Why build bipedal robots in an upright position when that's not optimal or valuable, but simply mimicking human construction?

So many companies make so many claims about innovation, and yet so few are really, deeply engaged in innovation.  In the next decade we'll say goodbye to some of the firms who are talking about innovation but aren't exercising the muscles.  Disruption and market transformation will occur (will? is occuring) at a far faster clip than before, and as Warren Buffet likes to say, when the tide goes out we'll know who was swimming in the buff.

How do we get a better understanding of who is merely talking about innovation, and who is actually practicing it?  Beyond that, is there a way to determine who is merely sustaining a veneer of innovation, and which firms are driving innovation into the core of their business?  Can we create a barometer of innovation capability and engagement?  I think the answer is "yes", based on evidence we can observe and measure.

Three maturation paths

There are at least three ways we can determine if a company is truly engaged and serious about innovation.   These are:

• The level of innovation capability
• The breadth of innovation output
• The amount of simultaneous innovation

Let's look at each of these in turn.

Innovation capability

Long ago, over a decade ago when we started OVO, it was unusual to find people who could run an effective brainstorming activity within most companies.  Innovation was rare and brainstorming activities were more likely focused on solving Six Sigma challenges than aligned to creating new products and services.  As time has passed, some innovation skill has filtered in, and many companies have acquired innovation training.  Innovation capacity grows as more people have the skills to lead innovation, and as corporations establish more formal methods and processes.  While there are definitely more people with more innovation awareness in corporations, there is still a lack of consistent innovation methods or processes.  The new explore:exploit mantra, which is emerging and yet I believe incomplete, demonstrates that many companies are beginning to understand the importance of distinctions between the efficient practices that sustain current products and the divergent processes and methods that create new ideas.  Until a company can adequately sustain existing products and efficiency WHILE executing new innovative projects and managing ideas, doing both within a defined framework, there is little innovation capacity.

Breadth of Innovation Output
Beyond the new explore:exploit dynamic we hear, daily it seems, about the importance of "business model innovation".  It seems as though every year introduces a new innovation theme of the year or quarter, with business model innovation as the current hot topic.  Doblin did us all a favor by defining ten types of innovation (products, services, business models, experiences, brands, value networks and so forth).  A firm cannot succeed by innovating in only one of these dimensions, because change is happening in all dimensions.  Focusing on product innovation is important, but so is business model innovation, and customer experience innovation.  Nascent innovators will focus primarily, if not exclusively, on one innovation outcome or type.  People who place inordinate emphasis on one type (like the current business model craze) are doing so for their own purposes, not providing the right emphasis that suggests that multiple types are important.  To assess the maturation level of a particular company, simply review the innovations that they report.  How many different types are represented?  How radical or disruptive are any of the outcomes?  In most cases you'll find little variation, representing only a couple of innovation types.  Further, most innovation in nascent innovators is incremental, with few attempts at radical or disruptive innovation.

Innovation Capacity

When a company congratulates itself on one innovation, it can be evidence of a dramatic innovation, combining business models, design, new product innovation and a host of other factors.  Apple's introduction of the iPhone was such an occurrence.  Since Apple was betting big on a small handful of products, their innovation capacity was less important than the impact of the output and the disruptive behavior of the solution.  Few companies have four discrete products in the way that Apple did at the time.  This means that maturation has not only to do with observable capability (methods, processes and capable people) and a range of outcomes (product, service, business model innovation) but must also sustain multiple, simultaneous innovation activities, in a number of phases.  Any company can sustain one innovation activity for some period of time, but only a company that is truly mature in innovation can sustain multiple projects at the same time with wildly different intended outcomes.  This simultaneous innovation demonstrates that innovation isn't reliant on a few highly motivated people but is a core philosophy anchored in good process and corporate culture.


When you hear companies talking about their innovation acumen, capability or experience, let's evaluate three key factors to see just how capable and mature they are:  their observable and defined processes and people, their plans for and ability to generate a range of innovation outcomes and their ability to sustain operations while managing multiple, simultaneous innovation activities.  These three factors will signal a truly mature innovator.  A company that can demonstrate one or two of these factors will have advantage over others that only demonstrate one, but only a firm that can demonstrate all three is truly innovative.

There's a real sense that we in the corporate world are standing on the brink of an amazing transition, moving from relatively older, static models of competition based on corporate size and mass, to new competitive realities dictated by speed, agility and innovation.  For at least a couple of centuries, as we look back over the dominant corporations of the past, we can see that size and scale were the predominant factors.  Whether we think about some of the original corporations (like those that governed the tea trade in India and England) or more modern corporations like the US automobile companies or banks, the prevailing wisdom has been to grow large and use size, mass and reach to defeat other competitors.  Embedded in this thinking, or perhaps even dictated by this thinking, is an inherent business model:  size matters.  By growing large you can distribute costs more effectively, serve more customers from the same basic set of products, scale revenues and introduce efficiencies and command market power and dominate sales channels.  In a market where size matters, only a few players dominate and the rest compete for the leftovers.

But as we know, large companies become defensive, complacent and inert, held in place by investments and past performance, overly risk averse.  Their size and their business model ultimately becomes a barrier for new innovation and new growth.  The very thinking and models that helped them grow become barriers for further development.  And, of course, the models that got them to a specific position aren't necessarily relevant as tastes, consumers and channels change.  It's strange to think that Sears was once the largest retailer in the world, and actually made a significant transition from a catalog company (in many respects the world's first Amazon) to a company that based its model on presence in shopping malls. Now that Sears is relatively undifferentiated, and consumers are no longer spending time at malls, the model based on stores in malls and a highly distributed assortment of low and mid range products doesn't work.  But Sears is locked into a business model that is exceptionally difficult to change.  They can't pull out of mall stores overnight.  What was once promising as a model is now driving Sears toward a disaster.

This is both the promise and the danger of business model innovation.  Commenters and consultants talk blithely about business model innovation as if existing companies can readily and rapidly change their business models on the fly.  For existing companies, business model innovation is important, if for no other reason that change is more frequent and more disruptive, which leads to the invalidation of old models.  Existing companies must learn to balance the efficiencies gained from existing models and the ability to constantly evolve their models to new competitive realities.  As we like to say when we talk to clients about innovation, we've got to build the plane while we are flying it.  There's no other option, and this is especially true for business model innovation.  Sears cannot suddenly change its business model, abandoning stores, abandoning faithful customers and vendors.  If you want to see how that plays out, go look at JC Penney's attempt to innovate its stores and eliminate coupons and discounting.  That experiment lasted only a year or two before Penney's brought back its former management team.

Penney's experience doesn't suggest that you shouldn't innovate your business model, only that you can't suddenly change it and lose good, faithful customers who don't understand the change.  Business model innovation is something every company should be constantly experimenting with, and communicating to its employees and customers why these experiments are taking place and what changes they are expecting and planning for.

Business model innovation is so compelling because it is so unusual (at least to date) and so powerful.  We can look at examples like iTunes, NetFlix and Airbnb as real business model disrupters.  We can also note that every one of these was a new entrant into an existing industry, not bound by convention or past investments in the industry.  Does this mean that incumbents should ignore business model innovation and simply wait to be disrupted?  Absolutely not.  In fact many of the "innovations" that these disrupters introduced were opportunities that existing incumbents could have addressed but ignored.  Take for example Airbnb.  What Airbnb offers is a reservation system to allow you to rent a vast array of properties, none of which they manage or own.  But Marriott and Hilton don't own many of the buildings they brand, and their reservation systems work just fine in those locations.  What would have happened if Marriott or Hilton had expanded the definition of accomodations to include renting rooms or condos in the same way that Airbnb does?  After all, the hotel chains have a captive audience who trust their branding and want points.  It's not such a stretch to think that Marriott or Hilton or other trusted, established brands could have done what Airbnb did.  And this is only an example of a business model change that expands the opportunities, rather than a change like Netflix that completely disrupts the existing model and market.

Business model innovation is so compelling because it is so difficult for existing companies, but that's not a reason not to do it.  Existing companies should be examining their business models and understanding the impacts of business model innovation.  Which innovations expand the market and model (like Airbnb)?  Which disrupt or destroy the market (like iTunes)?  What can/should we do to evolve, adjust, modify and move our models?  Where are the testing grounds?  How do we experiment with new models before the old models come under attack or become obsolete?

The real challenge is that most companies are barely cognizant of product innovation, which has its own challenges but isn't as difficult or compelling as business model innovation.  This is akin to going directly to high school, skipping elementary and middle school, foregoing the education and experience.  Again, that doesn't mean business model innovation should simply be ignored, because the pace of business model innovation is increasing as we get better and better connectivity, better payments tools and platforms and better information management and data analysis.  These platforms will allow completely new business models, and will shift existing competition very quickly.


In fact, business model innovation is a lot like a terrible accident on the road, so heartbreaking and sad that you can't look, and so compelling and awe-inspiring that you can't help but watch.  We need to get off the sidelines and get involved with business model innovation, but not in the way you've been told.  Every company needs to start defining its existing business models, understanding potential weaknesses that can be exploited.  They need to start experimenting with new business models and understanding new technologies and platforms.  It's naive and wrong to assume that established business models will sustain.  Those that understand the impending changes and put in place the capabilities and mechanisms to experiment, learn and adapt will be the ultimate winners.