Corporate innovation – an introduction
Does your company have the right strategy to achieve growth? Is there an obsessive focus on the customers and the growth opportunities that they present?
1.1Creative destruction is accelerating
Markets change, companies need to reinvent themselves. Their profit-oriented structure is designed to embrace the status quo. At the same time, the pace of creative destruction is accelerating.
Much of the talk about change seems to suggest that merrily rearranging things is enough. Leaders do not simply rearrange things. Leaders envision and create the future. A realistic life expectancy for a corporation is somewhere between 200 and 300 years. The average European corporation reaches 4% of its potential, while large corporations (> 10,000 employees or 5 billion market capitalization) reach 16%1
. In terms of longevity, companies have a lot to gain. The average life expectancy for European and Japanese companies is 12.5 years and around 10% of all companies disappear each year. The logic of creative destruction is that new entrants arrive and incumbents disappear, but FASTER THAN EVER. The year-to-year viability of a company depends on its ability to innovate and create new waves of growth. Given today’s market expectations, global competitive pressures and the extent and pace of structural change, that fact is truer than ever. Corporate lifespan is shrinking. Different pieces of longevity research share the same conclusions:
Record private equity activity, a robust M&A market, and the growth of startups with billion-dollar valuations, are leading indicators of future turbulence.
At the current churn rate, about half of S&P 500 companies will be replaced over the next ten years2
•Retailers were especially hit hard by disruptive forces and there are strong signs of restructuring in financial services, healthcare, energy, travel and real estate.
From a recent benchmark study3
among 270 innovation, strategy and R&D executives, focus shifts in the resource allocation process when it comes to innovation. The ratio of efforts dedicated to Optimize the Core, Renew the Core, and Future Growth, shifted to 50-30-20. The largest companies ($50B in revenue and up) spend even more energy on transformational work, 25%.
Chief executives struggle to make the case that their managerial actions can be reliable to yield a stream of successful new offerings. Typically, they are aware of a tremendous amount of innovation taking place in their enterprises, considering that large corporates invest between 2% and 10% from their topline in R&D. However, they don’t feel that they have a grasp on all the dispersed initiatives. What is the success rate of R&D patents into new revenue models? The pursuit of the new feels episodic and executives suspect that the returns on the company’s total innovation investment are too low. In my experience, what happens is that executives tend to respond with dramatic interventions and strategies.
To achieve top line growth, established companies need to change the way they operate. Consider that the top 50 consumer-goods manufacturers account for nearly 60% of industry sales, yet capture a mere 2% of its growth4
. CEO’s at these companies are nervous about their prospects and concerned about their business models, as they should be. Harvard Business School concludes that each year more than 30,000 new consumer products are launched and 80% of them fail. New waves of growth are hard to achieve.
My methodology is: being innovative pays off. Companies that are marketing and sales innovators are growing at 4.1% faster, when compared to companies5
lagging behind in this field. However, in the last several years, incumbent CPG’s (consumer packaging goods) have struggled to keep up with startups, which have reinvigorated and reinvented categories, ranging from ice cream to diapers. 30 years ago, almost half of the 100 largest companies on the New York Stock Exchange that enjoyed strong shareholders returns but did not post top-line growth, had been acquired or delisted 20 years later. Despite all these numbers, I see that many companies continue to focus on controlling costs as a way to drive earnings. When costs cutting dominates the corporate agenda, it sucks the oxygen out of any growth plan.
Over the past few years, Brazilian investment firm 3G has deployed brutal cost-cutting to raise profits at Anheuser-Busch InBev, Burger King and Kraft Heinz, using an approach called zero-based budgeting. It requires that each expense is justified from scratch each year, as opposed to the traditional approach of adding a couple of percentage points to last year’s line items. The strong implication is that managers should strive to lower all costs from one period to the next, at all costs. A Harvard Business School article in 2016 warned that the technique is “not a wonder diet for companies.” That prophecy was confirmed by Kraft Heinz catastrophic announcement that stock price plunged by 20%. 6
Kraft Heinz desperately needs new products, but that can only be achieved by targeted spending on R&D, marketing and creative thinking. Conversely, companies that systematically pursue a clear agenda for organic growth outperform the competition.
Why is it so difficult for established companies to achieve corporate growth?
1.2The growth paradox and need for continuous innovation
Innovation is the driver of growth and prosperity, though not every innovation is equal and not all types of innovation create new growth, as the Kraft Heinz case tells us. New growth comes from new-market innovations – that is disruptive innovation. Disruptive innovation makes products accessible and cheaper for everybody and creates new market growth. Think about how the T-Ford created an entire new market by making cars accessible to the mass market. On the other hand, we have sustaining innovation, which makes existing products better. The evolution of the television screen went from plasma to HD-ready, to Full HD, to 4K, to 8K, etc. It is advanced technology, but is used in the same product category. Sustaining innovation plays an important role, they improve margins, create bigger market share, but they don’t create new growth in the longer term. Another type of innovation is called efficiency innovation. The purpose of this is to make more with less. This is equally important, because a company that does not get more efficient will probably perish. By its very nature, efficiency innovation kills jobs and Kraft Heinz was focused solely on efficiency innovation. They eliminated jobs and created free cash flow. But where did the money go? The reality shows us that there is no connection between freeing up cash and investing in disruptive innovation. It leads to the dynamic of investing in cost-cutting operations and, when that is successful, continuing that path.
The title of this book, The 10x Growth Machine, is straightforward: to create new growth, corporations should focus on new-market/disruptive innovations. It is the only way for established companies to stay future-proof. Established companies are structured to make money with their current business model and internally aligned (processes, people, metrics etc.) to perform that task. It is this alignment that prevents them from selecting and growing (disruptive) innovations. This is the heart of the growth dilemma that established companies face today.
This book provides an integrated set of building blocks, principles and tools to create different innovations as a structural way of working. Not
by luck or heroism, but by building a Growth Machine that systematically ideates, validates and scales new business models, all brought together in the 10x Growth Machine Methodology.
The 10x Growth Machine Methodology is a battle-tested and integral approach for corporations to manage the startup to scaling-up process in a corporate setting. It enables corporates to create a Growth Machine that co-exists with the mother organization, thus finding a balance between executing the business and inventing future business. It is the change management approach for corporates that have innovation as a top priority and want to cope with the accelerated pace of creative destruction in the markets they operate in. The big idea is to build a second operating system (the Growth Machine), beside the “mothership”, facilitating a discovery-driven entrepreneurial way of working, embedded in a system of processes, metrics and the leadership that nourishes it. Building this system, carefully managing the capabilities and the integration pathways of new business and its people towards the existing organization, is the key to successful ‘scaling-up’.
New growth ventures need to be managed proactively and continuously, instead of trying to find new ventures only when the portfolio dries up. As the previous example shows, most companies know they need to innovate but have not yet learned to do this continuously and strategically. Companies that have the strongest innovation track record can articulate a clear innovation ambition and they have struck the right balance in Optimizing the Core, Renewing the Core and Future Growth initiatives across the enterprise. They have put tools and capabilities in place to manage those various initiatives as part of an integrated whole. To deal with this challenge, we need people who can practice the leadership that deals with all the tensions that innovation brings. We need to understand that the organizational designs and most employees working in them, are not equipped to innovate on these three playing fields.
A European consumer goods company, attuned to the need to keep its brands fresh in retailers’ and consumers’ minds, introduced frequent improvements and variations on its core offerings. Most of those earned their keep with respectable uptake by the market and decent margins. Over time, it became clear that all this product proliferation (splitting the revenue pie into ever-smaller slices) wasn’t actually growing the pie. Eager to achieve a higher return, management launched a strategy aimed at breakthrough product development – at transformational rather than sustaining innovations. Unfortunately, this company’s structure and processes were not set up to execute that ambition, although it did have the requisite capabilities for envisioning, developing and market testing innovations close to its core. It neither recognized, nor gained the very different capabilities needed to take a bolder path. Its most innovative ideas ended up being diluted beyond recognition, killed outright or crushed under the weight of the enterprise. Before long, the company retreated to what it knew best. Little was ventured and less was gained – and this cycle repeated itself.
1.3Corporate innovation challenges
Based on my corporate innovation work with public and private companies – exchanging knowledge with peers and researching the topic of corporate innovation – it is good to share insights on the challenges established companies are facing, when it comes to corporate innovation. Let’s start with a paradox. Good management is probably the number one reason companies like Kodak failed to stay on top of their game. They did everything right, created focus groups to listen to customers, invested in R&D to create better performing products, analyzed market trends and invested in innovations that promised the best return on investment. Still they lost their market leader position.
At top universities we are taught to create business models based on high profits and low-cost structures for our best customers. This perspective holds ground when it comes to improving existing business in known markets. Then it is important to invest in new technology and create better products for a higher margin. But when it comes to building new growth
models, it is the kiss of death
. The alignment that makes execution of the existing business an oiled machine is the reason companies fail in the long term, because this organizational architecture makes disruptive innovations impossible. If existing management practice drives the failure of successful firms faced with disruptive technological change, then the usual answers to a company’s problems – working harder, make operations more effective – all aggravate the problem. This is disconcerting if we look at existing change and cost-cutting management programs within companies. All those programs aim for the same goal: create new growth and become a more Lean and agile organization. But is it achieved?
1.4Why continuous innovation is hard for corporations
“People who lead frequently bear scars resulting from their efforts to bring about adaptive change. Often, they are silenced. On occasion, they are killed.”
– Ron Heifetz
Why is changing a system so hard? Changing one’s individual habits is hard, not to mention trying to change the mental model of the whole organization. Take the example of Bayer. Bayer aspirin drove the growth of Sterling Drug until Johnson & Johnson introduced Tylenol. Out of fear of cannibalizing its Bayer aspirin, the leadership refused to introduce its leading European non-aspirin pain reliever (Panadol) to the United States. Instead, it tried to expand its Bayer line overseas. This failure ultimately led to its acquisition by Kodak. Sterling drug had become effectively immobilized, unable to change its half-century old behavior out of fear. Its strong habits of thinking and doing (culture) – visible in decision-making rituals, processes and metrics for success – blocked its progress and led to its downfall7
. The company was unable to act on the signals the market gave it. Culture is the result of certain processes and the way people think and work. It becomes an intangible and implicit code of conduct.
A lot of people want to achieve long-term benefits for the company. However, they are limited and frustrated by the short-term demands of
the current organizational design; a few bad quarters and shareholders demand change, which creates a big upheaval. The peculiar thing is that you expect companies, managing their employees per quarter deadlines, would embrace a culture of fast experimentation in a strict process of accountability. The opposite is true. Because of the short-term focus, everything that can be done in one quarter has to be highly predictable in order to make future commitments based on its results. The focus lies not on seeing the innovation opportunities that come with short cycles, but on the projects, which they believe can get the highes...