Saturday, October 24, 2015

Do Rules Help Innovators? A Practical Paradox for the Digital Age

In the domains of strategy and innovation, the book titled “Ten Rules for Strategic Innovators” authored by Vijay Govindarajan and Chris Trimble, Professors at the Tuck School of Business, (Harvard Business School Press, 2005) provided an interesting thesis, ten years ago. The book was inspired by the authors’ belief (shared still by the author of this blog post) that innovation is at the core of economic vitality as it drives growth, creates jobs, builds wealth, provides purpose to employees and revitalizes organizations. The authors, in their work, held that innovation would enable companies to simultaneously enhance society and increase profits in two ways of improving productivity and commercializing new products and services. According to the authors, knowledge of the genetic code served as knowledge of the fundamental rules that guide human behaviour. Genetic code is, as then and to date, researched to cure illnesses more effectively, seek immunity from disease proactively and hopefully resist or reverse the ageing process itself. Ten years after the postulate in the book, human genetic understanding continues to hold promise with sporadic discoveries on the above lines.

Vijay and Chris proposed strategic innovation as the organizational code for exploring a set of experimental strategies that could help corporations reduce dysfunctions, sustain growth, and lengthen the average corporate life span beyond that of a human being. The authors held that strategic innovation differed from continuous process improvement, process revolutions and product or service innovations in that, unlike others, strategic innovation would involve unproven business models. Strategic innovation would be successful with or without the three other types of innovation, they held. They also cautioned that strategic innovation offered major challenges to entrepreneurs and professional CEOs, in terms of one-time career challenges in starting and growing a new company as part of, or distinct from, the core established company. The authors proposed ten rules for success of strategic innovation, therefore. Ten years after the postulates in the book, a wave of start-ups with disruptive business models and technologies validate the need for strategic innovation but also challenge us with a leadership paradigm that goes beyond any classic rules of innovation.

The ten rules

Vijay and Chris considered the case of innovation being driven by a new company (NewCo) set up by a big parent company and argued that the middle phase that would exist between ideation and execution required the typical NewCo to forget or unlearn some past practices, borrow the good practices and learn new relevant processes.  The organizational DNA comprising staff, structure, systems and culture was proposed as the compelling inner logic. All the rules, the authors stated, reflect learnings from various case studies of strategically innovative (but also challenged) companies that form the core chapters of the book. They proposed that understanding the relative roles of creativity (typically required at the beginning) and execution (typically required at the end), and the need for identifying the process of strategic innovation through the middle of converting ideas into actions.  The base assumption of parent-child relationship in fostering innovation limits the canvas of strategic innovation, however.

The authors, in their last chapter, distilled and emphasized ten rules (that are summarized herein), rule 1 and rule 10 being general rules. These rules are prescriptive as well as cautionary.  Rule 1 states that in all great innovation stories, the great idea is only Chapter 1. Rule 2 is that sources of organizational memory are powerful. Rule 3 is that large, established companies can beat start-ups if they can succeed in leveraging their enormous assets and capabilities. Rule 4 states that strategic experiments face critical unknowns. Rule 5 is that the NewCo organization must be built from scratch. Rule 6 is that managing tensions is job one for senior management. Rule 7 states that NewCo needs its own planning process. Rule 8 cautions that interest, influence, internal competition, and politics disrupt learning. Rule 9 suggests to hold NewCo accountable for learning and not results. Rule 10 is that companies can build a capacity for breakthrough growth through strategic innovation.

Ten years later…

As observed in the beginning, the book by Vijay and Chris was published in 2005. Today, in 2015, we witness a completely new dimension of innovation. Facebook founded in 2004, Twitter founded in 2006, WhatsApp founded in 2007 and Uber founded in 2009 as well as iPhone launched in 2007, which together represent a completely new dimension of start-up innovation bring into question some of the rules detailed in the book. Ten years later, there is now a clear recognition that strategic innovation, deploying disruptive technologies and disruptive processes, has already rewritten the rules of innovation. These start-ups which grew in less than a decade into mega phenomena (including the earlier ones such as Google and Amazon) came into being with no parentage or legacy and no prior brands or resources to leverage. They had nothing to forget and nothing to borrow from any established entity and everything to learn and everything to execute from their own inspiration. And, some of them have been dazzling successes.

Recognizing what a fresh mind and innovative thought can achieve, the start-up ecosystem has been attracting some of the largest investments ever. The start-up wave has clearly been raising in India, long seen as a country of professional preferences for the tried and tested as well as safe and secure options. While there are certain bubbled up expectations, there is no doubt that not only individual firms but also whole segments of industries (be it the Internet or Biologics) are being built on, and around, start-ups. The sentiment even among the large corporations seems to be to neither compete nor mimic start-up characteristics in their established ecosystems but instead let start-ups come up their own way and acquire them at an opportune time. We have two challenges now, relative to the base case with which Vijay and Chris started a decade ago. The first is that start-up firms need rules that help them make them successful. Secondly, both the large and start-up firms need helpful rules of engagement in the event of acquisition or merger.

The new ten rules

Ten years later, the rules of strategic innovation, according to the author of this blog post, need to be completely different. These are as follows:

Rule 1: Innovation does not necessarily come from new discovery; it would emerge from digital development of physical and biological processes. From email which digitized physical mail to Uber which digitized taxi hiring, digital face of innovation is evident. 

Rule 2: One has to only look around, but extremely perceptively, for the multiple opportunities that exist for strategic innovation. Every physical or biological activity will one day or the other ‘virtually’ mapped to a digital activity. Keeping a health track of biological parameters is just the beginning.

Rule 3: The route to innovation in the digital age is not necessarily perfection; once the core clicks, the rest easily falls into place. Twitter moving from mere text tweets to hashtags and vine is an example.

Rule 4: In the new age, collateral earning capability of a strategically innovative platform is as important as the fulfillment of core business need. Each product or service tends to be a purveyor of social networking. On-line newspapers are an example.

Rule 5: Strategic innovation may have several chapters but passion is the binding thread of all the chapters; from idea to delivery, through several chapters of execution. When passion starts ebbing, practicality, including sell-off, begins as can be seen from the increasing trend of early sell-out of start-up stakes.

Rule 6: Strategic innovation may be aided by establishment of R&D Centres and creation of Innovation Offices but it is nurtured only with an organization-wide culture of innovation. The inner DNA of an innovative organization condones failure as much as it seeks success.

Rule 7: Unlike established organizations where management’s primary responsibility is to resolve intra-organizational tensions, the primary responsibility of managements of experimentally innovative businesses is to resolve the tensions between themselves and their investors. The issues faced by certain start-ups are reflective of this.

Rule 8: Frontend digital innovation can come about only when there is someone to back it up with innovation in both back-office and shop floor. Without huge fulfillment centres and competitive products, for example, it is impossible to snap billions of deals!

Rule 9: Innovative organizations must be established and run almost as academic laboratories where the talent has no obsession other than bringing the products and services through successful pilots, betas and eventual commercialization.

Rule 10: Whether it is portfolio investors or established companies, the firms betting on strategic innovation should aim at more than one initiative of strategic innovation, for in respect of some, others could be ahead of them, and in respect of others, their own initiatives could be ahead of time. 
The rules reflect the reality that while digital is the new dimension of strategic innovation, digital alone cannot provide the complete solution. Classic corporate stuff, from physical brick and mortar to human aspirations and ambitions would be an integral part of strategically innovative firms.

Innovate to live or morph?

Logically, leadership of strategic innovation requires a talent landscape that covers more than conversion of innovative ideas to commercial fruition; it requires leadership that not only dwells deeper into the core of product or service innovation but also connects the dots of innovation across the business value chain. It is a high intensity leadership that finds not only inspired internal owners in the organization but also like-minded external sponsors amongst investors, vendors, buyers, bankers, regulators and so on. The greater the intensity of competition in the innovation space, the greater would be the need for a leadership bench that is actually deeper and broader than that exists solely in either the classic, established and brick and mortar businesses or the neo, emerging and digitally driven businesses.

It was noted in the beginning of the blog post that Vijay and Chris wrote their book in 2005 hoping to institutionalize a rule set of strategic innovation that helps firms reduce dysfunctions, sustain growth, and lengthen the average corporate life span beyond that of a human being. The reality, just ten years later, is that highly innovative companies are a complex set of universe; some have such compelling power of universal innovation that they have become the new mega corporations with new rules of perpetuity while several others are not necessarily looking for life beyond the next decade, let alone beyond the average human life span. It is, however, becoming increasingly clear that established firms as well as the new mega corporations need smaller but sparkling innovative firms and entities in increasing measure to stay relevant in the digital age.

Given the amazing pace of innovation and the frenetic entrepreneurial zeal, it is not surprising that the book by Vijay and Chris finds itself overwhelmed in just a decade of its writing. It is certainly clear that any book on strategic innovation would need to be rewritten every two years!

Posted by Dr CB Rao on October 24, 2015 

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