The Revolution in Innovation Management: The Challenge for Legacy Firms

Abstract

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9.1 Introduction

In today’s rapidly changing world, ongoing innovation is more critical to the long-term success of any business—start-up, twenty-first-century, or legacy—than ever before. Specifically, we see five major interrelated forces of change: advances in science and technology; skeptical and empowered people; an exploding media landscape; disruptive cultural, social, and geopolitical environments; and new business and revenue models. Consider the following:

• Advances in Science and Technology

Imagine that your customers and competitors each have access to an IBM Watson cognitive computer, which, through the use of natural language processing and machine learning can process all data (structured or unstructured) on any topic and in any language and, for any decision, produce a list of options and corresponding probability of success. Imagine the future “Internet of Everything” where everything and everyone is connected digitally. Imagine being able to offer products/services personalized to an individual down to the genetic level.

• Skeptical and Empowered people

Imagine your customers don’t trust you or anything you say. Imagine your every move is scrutinized by a network of individuals all of whom have the ability to broadcast their opinion to the world. Imagine all people alive are “digital natives” who grew up with 24/7 access to the Internet and social media via a mobile phone and the ability to block unwanted ads using ad-blockers and on-demand movie/TV/music services.

• An Exploding Media Landscape

Imagine a world where consumers use upward of five (or even ten) different social media sites in any given day. Imagine there are an infinite number of media outlets and content producers such that the idea of a “mainstream” disappears and every micro-niche group is catered to. Imagine every individual has access to the same content production tools as professional studios (thanks to the sharing economy and crowd funding) such that the lines between producer and consumer become even more blurred than they are today.

• Disruptive Cultural, Social, and Geopolitical Environments

Imagine a world characterized by widespread famine, water scarcity, global warming, and antibiotic-resistant superbugs. Imagine terrorism is pervasive and unpredictable. Imagine even more extreme income disparity where only 0.1 % of the world’s population owns 99 % of the world’s wealth.

• New Business and Revenue Models

Imagine a business that is effective and efficient but owns no physical assets. Imagine a world where pricing for every good and service is dynamic. Imagine engaging with customers to cocreate every aspect of the consumer purchase journey—the marketing, the store design, the product/service itself, and more.

Given how rapidly the world is changing—as evident by how close many of the above-listed scenarios are to being realized—no company can afford to keep doing what they are doing today if they want to be successful in the future. They must innovate. Therefore, it is more important than ever that firms utilize effective approaches for facilitating breakthrough innovation. Furthermore, as innovation management goes through a revolution itself—with the emergence of open innovation, 24/7 development, globalization, and so on—businesses must look to innovate not only in the products and services they provide but in all aspects of the company, including their business models, organizational architecture, and, most critically, their approach to innovation management.

While the leaders of legacy companies recognize their organizations are behind and aggressively pursue innovation, they consistently fail to create breakthrough innovations. Instead, we see over and over again in history that truly revolutionary innovations come from new, young companies outside the industry. Clayton Christensen, in his HBR article “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail,” finds that “despite the established firms’ technological prowess in leading sustaining innovations, from the simplest to the most radical, the firms that led the industry in every instance of developing and adopting disruptive technologies were entrants to the industry, not its incumbent leaders” (Christensen 1997).

The objective of this chapter is twofold: (1) to explore why so many legacy firms struggle to develop breakthrough products and services and (2) to provide practitioners with ten interrelated guidelines for what they could and should do to address this challenge. While our guidelines are designed primarily for legacy firms, they have relevance to all firms, including start-ups and twenty-first-century firms (e.g. Google, Facebook, and Amazon). We end the chapter with a call to action for all readers to start experimenting with some of our proposed approaches.

It is important to note that while this chapter was designed for practitioners, it also provides a research agenda for academics or, ideally, for the collaboration between academics and practitioners.

9.2 The Shackles on the Innovation Engines of Legacy Firms

In this section, we will explore the forces that hinder innovation at legacy firms. We start by looking at ten industries for which breakthrough innovation in recent decades has come from outsiders. Then we look at the trend for legacy firms to acquire or partner with start-ups before addressing the issue of Mental Models, which we see as the fundamental obstacle preventing legacy firms from producing breakthrough innovation organically.

9.2.1 Breakthrough Innovation Comes from Outsiders

In theory, industry leaders are the best poised to come up with breakthrough innovations. These companies, by dominating if not having a complete monopoly on an industry, have everything one might imagine would be needed to innovate, including billions of dollars in revenue, large R&D budgets, strong brand reputations, ability to hire top talent, an understanding of the current industry, customer distribution channels, and access to customer data. Yet, in reality, very few are able to produce the breakthrough innovations necessary for the company’s long-term success, as evident by the fact that only 12 % of the companies found on the Fortune 500 list in 1955 are still on the list in 2015 (“Fortune 500 firms” 2015). In fact, not only do legacy companies often fail to innovate themselves, they have been found to hold innovation back across an industry (e.g. the attack of major record labels on Internet innovations) (Masnick 2013). Instead, most of the breakthrough innovations of recent decades have come from outsiders.

There are certainly exceptions to this rule (e.g. General Electric, 3M, IBM, and others), but there are a significant number of industry leaders (many of whom were once the industry revolutionaries) who missed out on a breakthrough innovation and soon found themselves competing with a company that wasn’t even part of the market just a few years earlier. Below, we take a look at just ten of the more notable examples from a range of industries. Rather than attempting to provide a comprehensive overview of the evolution of all legacy companies, the goal of this section is to analyze notable examples to demonstrate the vulnerability of even the most seemingly dominant firms.

Industry
1. Cell phones	Old: Nokia, Motorola, Palm, Blackberry, etc. New: Apple iPhone By the numbers: Blackberry’s stock reached a peak market value of $83 billion in 2008, just after the arrival of the Apple iPhone in 2007. By June 2015, Blackberry was worth only $5 billion and Apple made $32.2 billion from iPhone sales in Q4 2015 alone (Rodriguez 2015; Buhr 2015). Similarly, Nokia’s share of the smartphone market, which had been as high as 50.9 % in Q4 2007, had plummeted to just 3.5 % by Q2 2012, leading Nokia to sell its mobile device division to Microsoft for $7.9 billion (an acquisition since deemed a “monumental mistake” on Microsoft’s part). (“Global market share” 2016; Keizer 2015). What happened: Before the Apple iPhone, the mental model of a cell phone was that of a device whose function was almost exclusively phone calls and texts, with a few additional features built in for business phones, but all designed with physical buttons/keyboard and stylus as the primary means by which people operated their phones. While Nokia, Motorola, and Blackberry were making billions of dollars from this type of phone, Apple, an outsider to the cell phone industry at the time, was reconceptualizing the role a “cellular phone” could play in people’s lives, and correspondingly rethinking the design of a “phone” to fit this role. The result: the Apple iPhone, characterized by the absence of a traditional physical keyboard and stylus, a multitouch interface with physics-based interactivity, and multitasking that let a user move seamlessly from one function to another and back (Ritchie 2015). From that point on, the other phone companies were rushing to compete, launching unsuccessful touch-screen device after unsuccessful device. For example, BlackBerry’s response, the BlackBerry Storm, was so bad it had a 100 % return rate, leading Verizon to fire BlackBerry as a result (Rodriguez 2015). By focusing on incremental changes to the design and functionalities of their current devices, the major players in the cell phone industry completely missed the opportunity to redesign the “phone” given the other technologies that had evolved at the same time.
2. Hotel	Old: Traditional hotel (Hilton, Marriot, etc.) New: Airbnb By the numbers: In September 2014, Hilton hotels and Marriot hotels had market capitalizations of $24.35 billion and $21.05 billion, respectively (“Hilton (HLT) vs. Marriot (MAR)” 2014). As of January 2016, just under a year and a half later, their valuations had dropped to $17.07 billion and $15.3 billion (Yahoo! Finance 2016). In the meantime, Airbnb, a company started in 2007 by two San Francisco residents who could not afford to pay their rent, has taken the industry by storm. As of 2015, the start-up is valued at $25.5 billion, with approximately $900 million in revenue for 2015 and the conventional lodging industry estimating around $450 million in lost revenue in 2015 as a result of the introduction of Airbnb (Alba 2015; “Airbnb’s $2 Billion Negative Impact” 2015). What happened: How did two guys with no experience in hospitality shake up the entire industry? The answer: they capitalized on the emergence of new technology platforms and the increasingly empowered consumer to bring the sharing economy to the hospitality industry. While the major hotel companies continued with business as usual, focusing on owning more properties and rooms and finding people to fill those rooms, the founders of Airbnb flipped the model. Rather than engaging in the capital-intensive work of building physical assets, Airbnb built a software platform that directly connected people who had empty rooms they were looking to rent out with people who were looking for a room to rent. This approach has proved incredibly successful and Airbnb’s growth shows no signs of slowing down.
3. Photography	Old: Kodak New: Nikon/Canon/Sony New 2.0: Smartphones (Apple iPhone, etc.) and Photo sharing (Flickr, Instagram, etc.) By the numbers: Kodak, by 1997, was worth over $31 billion, with revenues of nearly $16 billion and consistently ranked as one of the five most valuable brands in the world (Crutchfield 2011; “The last Kodak” 2012). Just five years later, the Eastman Kodak company filed for bankruptcy (De la Merced 2012). What happened: Having dominated the camera industry since the company’s founding in 1880, the Kodak company failed not because they lacked ingenuity (Kodak actually invented the first digital camera in 1975) but because they had become complacent and their executives “suffered from a mentality of perfect products,” which was incompatible with a new, high-tech world characterized by a mindset of “make it, launch it, fix it” (“The last Kodak” 2012). Kodak hesitated to develop digital photography for fear of cannibalizing its film business, which the company had come to see as its golden goose after a century of near-monopoly and high-profit margins. Sony, Canon, and Nikon were not so short-sighted and charged ahead with digital photography such that by the time Kodak realized digital was the future it was too late (Dan 2012). Even after this failure, Kodak continued to cling to the physical property it already had, missing opportunity after opportunity. Had they gone back to the original mission of George Eastman—to give the consumer a camera that fit their life and thus make photography a core element of people’s daily lives—it might have been Kodak who would have come up with the idea of developing a photography-centered phone, instead of outsider Apple, or, of developing a photo-sharing platform, rather than new companies like Flickr and Instagram.
4. Grocery stores	Old: Traditional grocery stores and chains New: Walmart New 2.0: Amazon, Alibaba, and Ocado By the numbers: From one store in 1962 to domination of the American retail sector in the late twentieth century, Walmart drastically changed the landscape of grocery stores and, in doing so, changed American culture (Matthew 2012). As of 2014, Walmart was the largest company in the world, with $485.7 billion revenue, operating approximately 11,000 stores in 27 countries and employing 2.2 million employees (Snyder 2015). However, in July 2015, Amazon, founded in 1995, just passed WalMart as the world’s biggest retailer by market value with a market capitalization of $247.6 billion (compared to WalMart’s $230.5 billion) (Pettypiece 2015). What happened: The mental model of grocery store chains had long been frequent sales (whereby the majority of products are overpriced and a rotating selection of products is “on sale” for lower). From his very first store in 1962, Sam Walton challenged conventions of the retail industry by offering “always low prices” (Walmart n.d.). In his pursuit of offering the greatest value and convenience, he reimagined the grocery store—large retail footprints, barely put together (no fancy fixtures, lights, or presentations), and “highly promotional, truly ugly, and heavy with merchandise,” as described by Walton himself, thus pioneering the first “big box” stores (Planes 2013). However, in spite of this dominance, Walmart is not safe from being out-innovated, specifically because of the complacency such dominance encourages. Already well outpacing Walmart’s online sales ($89 billion compared to Walmart’s $12.2 billion), Amazon threatens to dethrone Walmart as the number one US grocery business with its Amazon Fresh program (first beta-tested in 2007), an achievement other new food delivery companies (e.g. Fresh Direct, UK’s Ocado) are fighting for as well (Peterson 2015; Weiser 2015).
5. Shopping	Old: Department stores (Sears, Macy’s, JC Penney’s), Bookstores (Borders, Barnes & Noble) New: Amazon, Zappos, eBay, and Alibaba By the numbers: According to census figures, department store sales hit their peak in January 2001, with sales totaling more than $19.9 billion. Since then, they have been on a steady decline. As of January 2014, sales were down to $14.2 billion. The bookstore chain, Borders, which “pioneered an innovative inventory tracking system that improved the company’s product management and sales projections,” peaked in 1998 with shares hitting an all-time high of $41.75 (Osnos 2011). Soon after, the retailer began losing millions of dollars every quarter such that in 2011, after 40 years in business, the company announced bankruptcy and liquidated shortly after (Borney, 2011). Even as the now “undisputed king of…Huge Chain Bookstores,” Barnes & Noble has still had to downsize and, as of January 2016, its stocks are valued at only $8.79 per share, less than a fifth of their peak value ($46.25 in March 2006) (Yahoo! Finance 2016). In contrast, Amazon, an e-commerce-first company founded in a garage in 1995 on the basis of becoming the “world’s biggest bookstore,” has become one of the cornerstones of the web worth $247.6 billion (see 4. Grocery stores); 20-year-old online marketplace eBay is valued at $28.17 billion; and Zappos (a wholly owned subsidiary of Amazon having been acquired for $1.2 billion in 2009) does $2 billion in revenues annually (Yahoo! Finance 2016; Pontefract 2015). What happened: Conventional department stores and bookstores were too invested in their brick-and-mortar sales and operations to do the kind of breakthrough innovating that Amazon was able to do. Founders Jeff Bezos (Amazon), Tony Hsieh (Zappos), and Pierre Omidyar (eBay), with no investments in any retail space and unhindered by the need to protect current revenue streams, were able to conceive of e-commerce-first businesses that maximized the possibilities of current technology and consumer attitudes and built organizations designed to continuously innovate as these conditions change. For example, Alibaba and Amazon have moved into selling TV shows, movies, games, and other entertainment. As e-commerce players (including Warby Parker and Amazon) open physical stores, department stores are falling further and further behind in the race toward developing an omnichannel approach that can deliver the seamless experience consumers expect.
6. Movie rental	Old: Blockbuster New: Netflix, Redbox, Hulu By the numbers: Once an industry revolutionary itself, Blockbuster Video came to dominate movie and video game rentals, peaking in 2004 with 60,000 employees, 9000 stores, a market value of $5 billion, and revenues of $5.9 billion (Harress 2013). Around the same time, DVD rental-by-mail company Netflix turned its first profit and Redbox launched a kiosk rental service (Carr 2010). By the end of 2010, Blockbuster had filed for bankruptcy (Harress 2013). Today, Netflix has a marketing capitalization of $44.2 billion (Google Finance 2016). What happened: Reed Hastings, after receiving a $40 late fee to Blockbuster, decided he could create a better experience and founded Netflix, forever changing the future of video rental (Carr 2010). Embracing the growing sophistication of computers and the pervasiveness of home computers, Hastings created a DVD-by-Mail company built on the basis of warehouses of DVDs, a website, and a recommendation algorithm, as opposed to constructing a network of conveniently located stores as was the industry model. With sales booming and late fees bringing in a staggering $800 million in 2000 alone, Blockbuster did not see the changes in customers’ expectations or customers’ growing frustration with usury late fees. They were so blinded by their own success that when presented with the opportunity to buy Netflix for $50 million, they passed. By the time Blockbuster launched an online DVD subscription service in 2004, they were already seven years behind Netflix. As the industry landscape continued to change with the growth of Redbox and Netflix followed by the emergence of streaming in 2007 (Hulu was founded and Netflix introduced streaming on its site), Blockbuster was never able to regain a foothold in the video rental business (“Hulu” n.d.; “Company Overview” n.d.)
7. Car service	Old: Taxi companies New: Uber By the numbers: Started just over five years ago in San Francisco as “UberCab,” Uber now operates in 58 countries and is the most valuable start-up in the world, valued at $50 billion (McAlone 2015). The term “ubering” has become a part of the lexicon. What happened: Despite rapid technological changes in the last decade, the experience of hailing a taxi cab has remained essentially unchanged and unpleasant. The passenger is, for the most part, without information or power. In an industry as regulated as taxis, there’s little incentive or ability to innovate. Enter Uber. Embracing the pervasiveness of GPS-capable smartphones and the emergence of the sharing economy (à la Airbnb), Uber redesigned every element of the experience—allowing basically anyone with a car to become a driver and designing a technology platform through which riders and drivers are matched, directions are determined, payment is exchanged, and ratings (of both passenger and driver) are collected—and, in doing so, reimagined what it means to be a “car service.” Rather than accepting the conventions of the taxi industry, Uber owns no cars and employs no drivers, considering themselves a ride-sharing app rather than a taxi service (Frerickson 2015). They defy the industry standards and regulations of cab companies, allowing anyone to become a driver and taking a percentage of each fare, as opposed to the medallion system of taxis which has cab companies fighting for control of scarce medallions and then charging drivers a fee to rent the medallion, that is a fee to work. Taxi companies and car services fighting to protect the business they have are trying to regulate ride-sharing companies into the ground, rather than embracing new technologies and trying to compete, thus threatening to trap car services in the twentieth century. However, with a business model suited to today’s world and customers, Uber has been able to fight back—mobilizing its customers to defeat New York City mayor Bill de Blasio’s attempt to cap the growth of Uber in the city—growing its business and changing the way people travel and, consequently, the way they live their lives (Griswold 2015). But even Uber cannot stop innovating as it competes with other companies operating in the same market, including Lyft and, one day, an ad-powered free taxi service offered by Google’s self-driving cars (Woollaston 2014).
8. Cars	Old: Traditional auto manufacturers New: Tesla New 2.0: Google’s self-driving car By the numbers: Founded in 2003 on the idea that electric cars could be better than gasoline-powered cars, Tesla has grown to a $25.04 billion company with a network of over 500 supercharger stations across the country as of the end of 2015 and receiving over 325,000 preorders for its low-cost Model 3 in the first week after its unveiling (Tesla n.d.; Richard 2015; Niedermeyer 2016). What happened: The auto industry has remained almost stagnant for decades. Traditional car manufacturers have made no attempts to radically change cars for fear of cannibalizing the profits of their existing lines (Quora 2015). While it has been clear for years that battery electric vehicles are the future for cars, it took the founding of a new car company (the first American car company to go public since Ford Motors in 1956) to have the courage to reinvent the automobile industry, building completely electric cars and fighting to sell directly to consumers (rather than distributing via the traditional model of dealerships). Even more radical than Tesla’s electric car is Google’s self-driving car—an innovation which is expected to revolutionize the entire economy as countless jobs are eliminated (truck driver, bus driver, taxi driver, train operator, etc.) and, at the same time, people can use the time they normally spend commuting or waiting for a train to do productive work (Davies 2015). Despite the enormous impact of this innovation, traditional car companies were making no serious investments in this area knowing that driverless cars, in combination with the notion of the sharing economy (already BMW has plans to launch a peer-to-peer car-sharing service that lets BMW owners earn extra cash by renting out their cars), would mean fewer cars on the road and thus fewer car sales (McGee 2016). Rather than pursue an innovation that would hurt their current business even though it would benefit society, they sat idly by until Google, a tech company, began making serious headway. Only then did other car companies begin to pursue this research. While auto manufacturers including Audi and Mercedes-Benz have made great progress, Google still has the greatest head start in this space, both from a hardware and software IP perspective (Hamed 2015). In a few years, the most popular brand of car could be Google.
9. Music	Old: Record labels, CD manufacturers, Music stores, and so on New: Apple iTunes New 2.0: Spotify, Pandora, YouTube By the numbers: In the early 2000s, For Your Entertainment (FYE) had sales topping $1 billion with a network of more than 1100 stores. Attempts by record labels to create digital music services in the early 2000s, such as MusicNet and Pressplay, failed. But in April 2003, Apple, a computer company with no experience in the music industry at the time, opened its iTunes Store. By 2010, iTunes was the “largest music retailer on the planet” and by April 2014 there were 800 million accounts (and 800 million credit card numbers) (Griggs and Leopold 2013; Ulloa 2014). Following the emergence of iTunes, FYE closed more than 600 stores and changed their inventory mix. Despite these changes, sales continued to fall and, as of April 2016, the stock value of parent company Trans World Entertainment was only $3.85 per share, about a quarter of what it was worth a decade earlier (a peak of $14.82 in April 2005) (“Update: Trans World CEO” 2014; Google Finance 2016). What happened: The ravaging of the music sector by Napster in the early 2000s made it glaringly obvious that the music industry was in need of a serious rethinking. Burdened by a bias toward the conventional mental model of how music was sold and distributed, none of the players in the music industry at the time was able to conceive of a legitimate way to earn money from the sale of digital music that would stick. It took a computer company Apple to pick up the gauntlet of digital music, reimagining the way music should be sold, distributed, and consumed in a way that resonated with the modern consumer. By selling single songs, sacrificing quality for convenience (challenging the convention of the music industry that innovations should consistently improve sound quality), and starting from scratch to design a device to play digital music, and launching a brilliant marketing campaign, Apple was able to lead the conversation around digital music (Griggs and Leopold 2013). Now, in 2016, Apple finds itself the legacy company. Spotify, a music streaming company with a freemium model, and Google-owned video platform YouTube threaten iTunes’ music dominance. Spotify, which originated in 2005 with two guys in an apartment in Sweden, is now valued at over $8.4 billion, with 75 million users (20 million paying) and $3 billion paid to music artists (Macmillan and Demos 2015; Crook and Tepper 2015). Apple, with the wisdom to see streaming as the future of music, launched Apple Music, a subscription-only service designed to compete with Spotify, in the Summer of 2015 (Crook and Tepper 2015). A decade after Napster’s takedown, the three biggest music labels are poised for a showdown with YouTube as each is due to negotiate new licensing deals with the platform, which draws more regular listeners and viewers than Spotify and Apple Music combined and is valued at up to $40 billion (Garrahan 2016; Sloane 2014). Music industry executives are concerned by “the disparity between the amount of music listened to for free on the site and the revenues those tracks generate from advertising” (Garrahan 2016).
10. Energy	Old: Oil and nuclear Energy (e.g. Germany’s E.On) New: Renewable and distributed energy By the numbers: As one source put it, “ten years ago, Germany’s biggest utility E.On AG appeared to have it all: dominance in Europe’s largest energy market, a stranglehold over domestic and European regulators, a foothold in the U.S. and a unique lever over Russia’s Gazprom” but fast forwarding to 2015, the company is reporting a €7.25 billion quarterly loss (Smith 2015). Today, the company’s shares are worth just €9.43, a tiny fraction of the €148 price they commanded at their peak in 2008. And E.On is not alone in this. Across the energy industry, companies built on old forms of energy are losing out to renewable energy. What happened: Author, economic theorist, and sustainability activist Jeremy Rifkin has predicted that a third industrial revolution is approaching and it will be based on a new energy regime: distributed renewable energy. Distributed energy sources are energies that can be “found everywhere and are, for the most part, free,” such as sun, wind, hydro, geothermal heat, biomass, and ocean waves (Zeller Jr. 2011). This is in contrast to traditional energy sources (e.g. coal, oil, gas, and uranium) which can only be found in a few places and require massive concentrations of capital and centralized command and control systems to get the energy from the source to the end user (Rifkin 2011). According to Rifkin, these distributed energies can “provide more power than we will ever need for our species until the end of time.” Working in collaboration with Rifkin, the European Union made a formal commitment to “create a matrix for a new economic paradigm” based upon distributed energy. In an effort to fulfill this commitment, Germany has stated that it hopes to increase the percentage of electricity in the country powered by renewable energies from 25 to 35 by 2020 (Rifkin 2015). Consequently, Germany has begun providing generous subsidies for renewable energies. Only now, in response to these subsidies, is E.On making any attempt to salvage some of its business, spinning out the business that has a chance in the new regulatory environment (grids, renewables, and services) into one company and the rest (gas trading and conventional power generation) into another (Rifkin 2015). This situation thus demonstrates what happens when a company’s current success creates a mentality of invulnerability that blinds them to the need to prepare for future scenarios where their core business does not exist.

These ten examples are meant to be parables that illustrate what can happen if a legacy firm relies on current mental models—of their industry, their business model, and their customer—to guide their business strategy, thus demonstrating how, in today’s rapidly changing world, a short-term focus essentially guarantees a firm’s eventual demise.

9.2.2 The Current Solution: Acquisitions and Alliances

In recognition of the threat posed by start-ups and the limitations of their internal abilities to develop breakthrough products and services, legacy companies have begun to invest or acquire promising start-ups, a strategy long-pioneered by pharmaceutical companies with their investments in biotech companies.

For example, in the area of big data and analytics, IBM has been making strategic acquisitions of cloud, big data, and data analytics companies, including a “spree” of cloud acquisitions in 2015 (StrongLoop, AlchemyAPI, Blekko, Blue Box, and Compose as well as a $2 billion acquisition of SoftLayer). Their intent is to boost growth in these areas as a way of compensating for the decreasing strength of their IT, software, and hardware businesses (Shields 2015). Even newer companies are finding the need to augment internal capabilities with acquisitions. Take, for example, Google’s $500 million acquisition of DeepMind, an artificial intelligence start-up, followed by its “acqui-hiring” of the two academic teams behind deep learning start-ups Dark Blue Labs and Vision Factory (Lunden 2014).

We see Microsoft attempting to corner the market on innovation in augmented and virtual reality by supplementing their development of HoloLens through a $2.5 billion acquisition of Minecraft creator Mojang, a $150 million spent on IP assets from the Osterhout Design Group, and acquisition of Havok (the leading provider of 3D physics) from Intel (Knight 2015; Batchelor 2015; Lunden 2014; Kaelin 2015). Also trying to establish itself as a leader in this field, Facebook paid $2 billion to acquire Oculus VR (Luckerson 2014). In the background of these acquisitions is the failure of Google’s internal R&D-based foray into virtual reality that was known as Google Glass, heralded by Time Magazine in 2012 as one of the best inventions of the year but brought to an abrupt end in early 2015 (Montgomery 2015).

And it is not just self-identified tech companies that are trying to do this. Major legacy players in some of the most conventional industries, such as banking and automobiles, are acquiring tech start-ups. BlackRock Inc., one of the world’s largest asset managers, recently acquired robo-advisor company FutureAdvisor to complement the expansion of their “big data” team (Toonkel 2015). In the case of automobiles, General Motors has been laying the groundwork for a self-driving network of cars by introducing the Chevy Volt (“the first mass-market electric car”), purchasing the remains of Sidecar (a defunct Uber competitor), investing $500 million in Lyft (another Uber competitor), and partnering with Mobileye to develop maps for robo-cars (Fitzpatrick 2016; Davies 2016). Additionally, Ford has considered partnering with Google to make self-driving cars, combining Ford’s car-building expertise with Google’s first-mover advantage on self-driving car technology (Ziegler 2016).

Legacy companies are also starting to establish new operational centers (occasionally around an acquisition) in a tech center, in recognition of the importance that technology—specifically digital technology—is transforming every area of our society. For example, in January 2015, Ford opened a new Silicon Valley research center for the purpose of driving “innovation in connectivity, mobility, and autonomous vehicles” (“Ford Opens New” 2015).

While these efforts to augment internal capabilities through acquisition or strategic alliances are good solutions in the short term, it only helps to mask how much legacy companies struggle to organically create breakthrough innovation.

9.2.3 The Reason for the Lack of Organic Innovation

So what is the cause of this? Why, with all their advantages, do legacy companies find themselves out-innovated by start-ups or companies from outside the industry? For many, the answer is fundamentally this: Mental Models. Breakthrough innovation requires challenging and changing the mental model of the firm and industry with respect to the product/service offering, business and revenue models, and operations.

In The Power of Impossible Thinking, authors Jerry Wind and Colin Crook define “mental models” as “mindsets” or “the brain processes we use to make sense of our world” (Wind and Crook 2005). Citing research by University of California neurologist Walter Freeman, Wind and Crook explain that the human brain discards most of the information it takes in about the world through the senses and “uses what remains to evoke a ‘parallel world’ of its own…which is internally consistent and complete” (Wind and Crook 2009). In other words, there is no such thing as objective reality. What each of us sees as reality is inherently a reflection of our internal biases and our beliefs, attitudes, feelings, and behaviors are driven by these mental models, not reality. Take, for example, the story of Roger Bannister. Until 1954, the four-minute mile was considered a natural limit for runners. Within three years of Roger Bannister shattering this barrier on an Oxford Track in May 1954, 16 other runners had also surpassed this limit (Wind and Crook 2005).

Where do these mental models come from? Mental models are shaped by past experiences. If the environment is static, these models can be useful, helping us become more efficient on a day-to-day basis by reducing the amount of information we need to process decision making. However, if the environment is changing, skipping over the environment sensing and processing stage can do more harm than good. By relying on mental models to guide our decisions (as opposed to reality) we might not notice the environment is changing. Even if one does notice, the convenience of mental models and the feeling of security we associate with them make it tempting to resist the change. Thus, in a changing environment, mental models become obstacles to creativity, change, and innovation. Given the unprecedented speed and magnitude of change affecting the business environment today—thanks to the interrelated five forces of change—it is then clear that all firms must become acutely cognizant of their own mental models in order to avoid being blindsided by environmental changes.

Legacy companies, as industry leaders, are particularly burdened by mental models due to their history of past success and current revenue. A history of success is dangerous as we develop a mental model where we see the way of doing things that achieved success in the past as the best—or even only possible—way of doing things. From our ten examples, we see in the cases, from cell phone companies to grocery stores, how past success caused them to become complacent and slow-moving with no sense of urgency regarding pursuing breakthrough innovation. A firm that has never experienced success (e.g. outsiders like Apple or newcomers such as Walmart) does not have this problem. As discussed earlier, this would be fine if the environment weren’t changing but, in today’s world, the environment for every firm is changing. Any firm that wants to be in business in 20 or even 10 years cannot afford to unquestioningly continue doing things today as they have always been done.

Additionally, current success makes legacy firms vulnerable as they become narrowly focused on protecting the cash flow of existing products, rather than making investments in potentially breakthrough ideas, viewing innovation as a threat that will cannibalize existing business, rather than as an opportunity. This bias is acutely evident in the cases of Kodak and its failure to develop digital photography and that of the record industries and digital music. Since companies do not measure or report lost opportunities, the risks of innovating are ambiguous while the benefits of maintaining the current situation—immediate revenue—are acutely tangible. Passing over opportunities for innovation continuing with one’s current business therefore seems less risky than investing in the unknown. The company becomes so preoccupied defending their current market share that they fail to invest in the type of breakthrough innovation that is needed for the long term. In short, the comfort of the status quo blinds organizations to the need for change and the fear of abandoning what has worked in the past inhibits courage.

In contrast, new and outsider companies have nothing to lose. They have no investments in the current way of doing things or any current revenue to bias them. In fact, they are by nature trying to change the status quo in the market and gain their share of wallet. Unlike legacy firms, which have a bias for control and internal reliance, start-up companies are unable to control anything at the outset, thus making them more inclined to leverage open innovation or other external sources of talent or ideas. Additionally, they are able to take a longer-term view on their investments as they are not burdened by the pressure of quarterly stock reports. Consequently, they are able to invest the time and resources required to develop a new major ecosystem, such as the Apple App Developer ecosystem or Tesla’s ecosystem of charging stations.

The ability of “mental models” to inhibit innovation in legacy companies has been noted by others studying innovation in legacy firms. The authors of “Leading the Startup Corporation: The Pursuit of Breakthrough Innovation in Established Companies” assert that “the danger lies in focusing excessively on what has always worked” (Davila and Epstein 2015). In accordance with the section above, McLaughlin et al. (2008) argue that “established companies often lose the propensity to be innovative, as some of the cultural enablers of previous incremental changes become the current cultural inhibitors of radical innovation” and Stringer (2000) finds that “most large firms are poorly equipped to implement a growth strategy based on radical innovation, because most large firms are ‘genetically’ programmed to preserve the status quo” (Chang et al. 2012).

And it is not just the mental models of the executives that handicap legacy companies. The mental models of entry-level employees and middle managers can stifle the efforts of even the most forward-thinking CEO as employees focus on accomplishing short-term objectives, sometimes knowingly to the detriment of the company’s long-term strategy, in an effort to protect the status quo and current way of life. Thus, breakthrough innovation requires challenging the mental models of employees at all levels of the organization (through strong company culture, a change in physical space, new hiring practices, etc.). Further compounding this already daunting challenge is the fact that the longer an employee works for a company or in an industry and/or the closer an employee gets to the end of their career, often the more difficult it is to get said employee to change his/her mental model as the employee is increasingly vested in the current way of doing things (as this is where their expertise lies) and less concerned about the company’s long-term success. It thus comes as no surprise that the larger, more established, and more successful the organization has been, the less likely the company will produce real innovation.

9.3 Challenging Mental Models—Six Approaches

Breakthrough innovation requires challenging the mental model of the industry, as demonstrated by the previous sections. However, most people find this difficult to do. To help overcome this, we outline here six approaches to challenging mental models.

• 1. Look for customer insights and engage consumers

Most companies today hold the mental model that they alone should be in control of conceiving, designing, making, and marketing their firm’s products/services they offer. By focusing more on consumer insights and, better yet, engaging the consumer in the creation and development of the offering, a company is necessarily pushed outside their comfort zone.

A great example of codevelopment with consumers is Vans shoes, a legacy company that has managed to stay relevant for half a century. Founded by Paul Van Doren and three partners, the company has believed in “giv[ing] the customers what they want” since their 1966 beginning in Southern California, such that their shoes quickly became known for the range of color combinations and were embraced by skateboarders everywhere. A recent book on the company recounts the origins of the Vans custom shoe program. As the story goes, a woman came into the store but couldn’t find a color she liked so Van Doren told her to go to the fabric store down the street, pick up the fabric she wanted, and he would make the shoes for her (Tschorn 2009). In 2004, the company brought this philosophy into the twenty-first century, launching Vans Customs at www.vans.com, which allows “would-be fashion designers to create their own Classic Slip-ons utilizing hundreds of different color and pattern combinations” (“The Vans Story” n.d.). The shoes are also sold with the canvas fabric left plain, allowing customers to hand-draw/paint whatever design they want. In addition to enabling consumers to codesign the product, the company has empowered customers to cocreate the brand story by “backing early skate films to creating OffTheWall.TV, a media channel dedicated to the stories of the people who wear their shoes” (Vogl 2015).

Other companies that give customers the power to cocreate the product include Build-a-Bear and Shoes of Prey, which allow women to design customized, handmade women’s shoes. In addition to product cocreation, we see companies increasingly incorporating user-generated content into their marketing, from sponsoring videos by YouTube stars to Dorito’s “Crash the Super Bowl” competition. Such initiatives go a step beyond focus groups and surveys. Rather than simply asking people what they want and trying to interpret it, give the people the power to codesign the products, services, and campaigns they want.

• 2. Set stretch objectives

A stretch objective approach challenges businesses to set objectives that are unattainable under their current way of doing things, forcing them to look for new approaches. For example, in a paper published in 2008, Wind, Capozzi, and Buchwald outlined how Manning Selvage & Lee (MS&L), a leading public relations firm with $33 million in revenues, used a stretch objective approach to reach its ambitious goal of tripling revenues to $100 million in just three years, instead of the five years they originally thought it would take (Wind et al. 2008).

• 3. Develop an idealized design

Most organizations, at any given time, are a combination of Band-Aids, short-term solutions slapped on to fix various problems. In order to break out of this, organizations should use idealized design. Popularized by Russell Ackoff, idealized design instructs organizations to imagine that their company is destroyed and they are starting from scratch (Ackoff 2006). It then tasks them with designing what the organization would ideally look like, given today’s technology, and then move backward from this idealized design to where we are today to see what we need to do now to realize that ideal organization. In this way, idealized design suggests a backward planning approach.

• 4. Bring the radicals in

Conventional mindsets dictate that radical ideas be dismissed. From the perspective of one’s current mental models, they are too risky. However, companies should be doing the exact opposite. Radical ideas, and the radical individuals behind them, are critical to breakthrough innovation. In The Power of Impossible Thinking, Wind and Crook tell the story of IBM and the open source movement. When Richard Stallman first put forth the idea that everyone should be able to obtain software for free, IBM chose to invest and adapt the open source movement, rather than trying to fight it and suing Stallman. By building proprietary products and services on top of open source software, IBM was able to continue to be successful as the open source movement picked up. Contrast this with the response of the recording studios and Napster. Rather than recognizing that digital music is the future and working to conceive of a business model that works with Napster, the studios instead applied their energy and resources to suing Napster. While Napster was eventually brought down, the recording studios missed the opportunity to own digital music, leaving the field open for Apple, an outsider, to step in and claim billions of dollars in revenue and brand value that could have gone to one of the recording studios.

• 5. Destroy your brand

Most employees are reluctant to challenge their employers. As a result, the people in charge and the people who work on designing new frameworks rarely get the complete honest feedback from their employees. In order to combat this issue, the “destroy your brand” approach suggests organizing a small group of people from the organization (excluding the brand manager), taking them out to dinner, asking them to select a company that is outside their industry (if they work for a retailer, they might look to a “sharing economy” company like Airbnb) and to imagine that company is going to enter their brand’s industry. Then they are tasked with designing a strategy for the outsider company to destroy the brand (e.g. what should Uber do in retail to destroy their brand). It is the experience of Jerry Wind, from leading this exercise for over 15 companies, that these teams are very easily able to come up with ways to destroy the brand. Once these vulnerabilities (or opportunities) are identified, the organization can zero in on what are the mental models of the brand managers that are limiting the firm’s ability to innovate and design strategies to prevent the brand’s destruction.

• 6. Zooming in and out and lessons from winners and losers

In making decisions, executives must zoom in and out in order to avoid overlooking details and spot opportunities. For example, in response to the BP oil rig explosion in April 2010, the company’s then CEO Tony Hayward overlooked the full impact of the crisis as he focused narrowly on the details of the crisis and how it would affect his company and his life (Kanter 2011). If he had challenged his mental models, seeing his customers and shareholders as human beings with lives outside buying oil, and zooming out to look at the big picture—the environmental damages, the human devastation, the impact on other industries—he wouldn’t have angered so many Americans and been forced to resign.

To avoid this, firms should zoom out and look back on recent history to identify winning companies and failing companies from the past (as we did in section 2.1). Then, zooming in on these examples, they can identify lessons which can then be applied to their own business. This way, they don’t find themselves repeating the past and winding up on someone else’s list of failing companies.

9.3.1 Revolutionary Innovation: The Case of Beyond Advertising

An example of how to challenge the mental models of an industry comes from the Wharton Future of Advertising Program. In the book Beyond Advertising: Creating Value Through All Customer Touchpoints, Jerry Wind and Catharine Findiesen Hay’s, in collaboration with the Wharton Future of Advertising Innovation Network, propose a new model for the advertising industry which they refer to as “Beyond Advertising Roadmap” (see Fig. 9.1) (Wind, Hays, and Wharton Future of Advertising Innovation Network 2016b). Based on the Program’s Advertising 2020 project¹—an exercise in cocreation and idealized design—the model challenges the current mental models of the industry, proposing an alternative model for advertising and marketing based on today’s environment (as characterized by the five forces of change) with the hypothesis that this model will be more successful at creating value today than a model rooted in the past.

Fig. 9.1

The beyond advertising roadmap: creating value through all touchpoints (Wind, Hays, and Wharton Future of Advertising Innovation Network 2016b)

Key to this roadmap is that it starts with understanding the current environment (Part 1, Five Forces of Change). In Part 2, companies are tasked with challenging their mental models of “advertising” (refer to the approaches outlined in section 2.3). Then, they must design new strategies, implementing Part 3, The All Touchpoint Value Creation Model of aligned objectives, a compelling unifying brand purpose, all touchpoint orchestration, and the R.A.V.E.S. and M.A.D.E.S guidelines. The most important element of this model is the all touchpoint components. The only way to reach consumers in today’s environment is to design a strategy which considers all potential touchpoints between the consumer and the company and then begin the process of identifying and experimenting with different portfolios of touchpoints. Putting this model into practice requires challenging how one approaches advertising, communication, marketing, and even business strategies, as all touchpoint orchestration requires a complete rethinking of a company’s strategy. Specifically, companies must adopt adaptive experimentation, rethink their organizational architecture, and transcend silos and barriers (via aligned objectives, open innovation, and network activation and orchestration), as outlined in Part 4.

This new model requires bold, courageous experimentation in every element of the organization including the organization’s business model, the language it uses, the architecture of the company, the characteristics of a leader, its relationships with external stakeholders, and its metrics for success. Such experimentation cannot be managed by traditional approaches. If one accepts this new model of advertising and marketing, then it is imperative to engage in a new approach to innovation management.

9.4 Guidelines for Shattering the Shackles

In this section, we outline ten interrelated guidelines that can be applied by legacy companies seeking to avoid the previously described “incumbent’s curse” or by any organization looking to increase their likelihood of developing breakthrough innovations, including start-ups and twenty-first-century firms.

• 1. Manage innovation as a portfolio encompassing all three innovation horizons

One of the most helpful techniques for balancing short-term and long-term objectives in an organization is to manage innovation as a portfolio which encompasses the three innovation horizons (see Fig. 9.2). The x-axis in this chart represents the business model/offering/technology (historically, the framework focused just on technology but it is necessary today to look at the entire offering) and the y-axis represents the market. On each axis, there are three different levels: Current, Existing, and New, where “Current” means what the organization currently does, “Existing” means what is used by other organizations but not the company, and “New” means new to the world. Connecting the two axes creates three “horizons” of offerings.

Fig. 9.2

Innovation horizons framework

This model allows for the management of innovation as a portfolio. Just as with a stock portfolio, the individual stocks that are picked matter less than the asset allocation. Furthermore, just as a company’s strategy determines how assets are allocated between different types of assets, a company’s strategy will determine the allocation of resources between the different innovation horizons, with different allocations between the horizons corresponding to different levels of risk and expected return.

It is our belief that no more than 80 % of a company’s resources should be devoted to improvements to the current offering (and even then some of that 80 % should be dedicated to experimentation). In a portfolio where 80 % of the budget is dedicated to Horizon 1, 15 % might be dedicated to Horizon 2, and 5 % to Horizon 3. Even if an organization feels compelled to invest 90 % in Horizon 1, it should make sure at least 7–8 % is invested in Horizon 2 and 2–3 % in Horizon 3. Both these examples are merely illustrative guidelines for allocation. There are an infinite number of ways to distribute resources between these different areas and companies should experiment with different allocations. However, one thing that is certain is that any company that invests 100 % in Horizon 1 is likely not to have a future.

By framing the strategy as “maintaining a portfolio,” people are less likely to fall prey to the mental model that innovation in Horizon 2 and Horizon 3 are in conflict with investments in Horizon 1 and that investing completely in the current business is the least risky strategy. It helps organizations see that diversity of innovation (and experimentation) is, in fact, the least risky strategy.

• 2. Challenge your business models and leverage networks

New research conducted by Libert, Wind, and Fenley find that there are four business models: asset builders, service providers, technology creators, and network orchestrators. Of the four business models, they further find that companies classified as Network Orchestrators “outperform companies with other business models on several key dimensions,” including “higher valuations relative to their revenue, faster growth, and larger profit margins” (Wind et al. 2014; Wind et al. 2016b). Specifically, they find that the average multiplier (price-to-revenue ratio) for the S&P 500 companies in 2013 is 8.2 for network orchestrators, almost double the 4.8 for technology creators, and almost quadruple the 2.6 for service providers and the 2.0 for asset builders. The implications of this research to legacy companies—most of which would be classified as asset builders, service providers, or technology creators—is that they must add a network component to their business model if they want to avoid being left behind when their industry is “uberized.” Most legacy firms have dormant networks employees, customers, distributors, suppliers, investors, and so on, and the challenge is to activate these networks.

• 3. Adopt a new leadership model

Challenging the mental models of the organization and its employees necessitates challenging the mental model of leadership. Research done by Libert, Wind, and Fenley as a corollary to their research on business models finds that “leaders need a broader range of style options to match the broader range of assets companies are creating today.” Specifically, breakthrough innovation in today’s world requires a leader who operates at the intersection of the leader as investor, cocreator, and network orchestrator (see Fig. 9.3).

Fig 9.3

The skills required in a new model of leadership

The leader of an innovative organization must be an investor so they can look at innovation as a portfolio and understand how to distribute assets among the different innovation horizons in a way that is consistent with their company strategy, just as an investor would manage a stock portfolio. He or she must be a cocreator as it is no longer enough to try to innovate with just a company’s internal resources. A company must now cocreate with its customers and prospects as well as engage in open innovation. Executing these strategies requires a leader with a win-win mentality, as opposed to the conventional mentality of totalitarian control and narcissism. Thirdly, the leader must be able to function as a network orchestrator. Innovation often involves different disciplines, different approaches, and different expertise. In order to effectively lead this type of collaboration, the leader needs to have the orientation of a network orchestrator. It is at the intersection of these three leadership mentalities that we find the leadership approach best suited to managing innovation.

• 4. Adopt open innovation

In a competitive business environment, companies generally look internally to find solutions to any problems that arise, limiting themselves to the creativity and knowledge of their own employees. While internal talent is important, a study by leading open innovation company InnoCentive found that “the further the problem was from the Solver’s expertise, the more likely they were to solve it.” Consequently, no company will ever be able to hire all the talent in all the fields it would need to solve its biggest problems. An organization must supplement their internal capabilities by embracing open innovation. The benefit of “opening the innovation process to external knowledge flows” to a company’s ability to successfully innovate has been argued by many authors, including Chesbrough and Crowther (2006) and Rigby and Zook (2002).

In addition to using third-party platforms/accelerators such as InnoCentive, Amazon Mechanical Turk, and DreamIt, companies should establish their own initiatives designed for use by their internal teams in collaboration with outsiders. Companies can do this by sponsoring competitions (e.g. the Netflix Prize), crowdsourcing (e.g. Dorito’s “Crash the Super Bowl” campaign), founding accelerators (e.g. Samsung Accelerator), going open source, or creating online platforms/networks (e.g. Dell IdeaStorm). If focused on critical areas of the firm, these can create a magnet for outside talent to contribute to the selected area. Most of the successful, high-tech, multinational firms (such as IBM and Google) have established such accelerators.

• 5. Foster talent

Talent is essential for breakthrough innovation. No amount of leadership or use of frameworks can incubate breakthrough innovations if the talent simply isn’t there; the ingenuity of even one individual can make all the difference, as evident by the fact that many pharmaceutical firms have based much of their R&D on individual stars. At the same time, the ability to put together the right teams of people has never been more important. Building off of the findings from the previous section on Open Innovation, firms need not rely only on internal talent but should look toward external talent as well.

When it comes to innovation, ingenuity of employees is particularly important. When evaluating applicants for any department, companies should look for characteristics which have been correlated with ingenuity, including creativity and tolerance for ambiguity, as well as an interdisciplinary background and the ability to collaborate.

One example of a company trying to use talent as a means reinvigorating an established organization is Burger King. Having purchased the company for $4 billion in 2010, 3G Capital, a privately held company, began by firing all the company’s traditional managers and hiring young talent (under the age of 30) who were then put through intense training programs (Leonard 2014). This type of shake-up and focus on talent, rather than experience or learned expertise, can help position a company for breakthrough innovation.

• 6. Create a creative culture

In order to foster innovation in employees and retain talent, a company must establish a creative culture, where culture is defined as the company’s values, beliefs, and patterns of behavior (Tushman and Anderson 2004). Specifically, they should create a feeling of openness, freedom, and collaboration. Organizations can develop such a culture through the use of company lore (stories, special objects), visionary leadership, hiring the right people to cocreate this culture, training programs, and design of the workspace.

Ed Catmull, computer scientist and president of Pixar Animation Studios and Walt Disney Studios, outlined the following items as the studios’ principles for creating a creative culture (Catmull 2008):

• Power to the creatives—creative power in a film resides with the film’s creative leadership

• A peer culture—people at all levels support one another

• Technology + Art = Magic—getting people in different disciplines to treat one another as peers

  • Everyone must have the freedom to communicate with anyone

  • It must be safe for everyone to offer ideas

  • We must stay close to innovations happening in the academic community

• Staying on the rails—be introspective in order to systematically fight complacency and uncover problems

However, the heart of any culture is its values. Thus the most essential component of establishing a creative culture is ensuring innovation is valued and supported by the organization’s operations. This includes sending the message that it’s “okay to fail” by providing security for failure (guaranteed an old position) or simply by encouraging experimentation, which implicitly sends the message that it is okay to fail.

• 7. Follow best practices and get the needed buy-in

For any problems, it can be helpful to look to others who have been successful to get inspiration. The key to this strategy is being thoughtful when choosing at whom to look. You want to be conscious of how you define what constitutes “success.” Additionally, while one should look at similar companies (same/related industry or region), some of the most valuable insights often come from studying best practices of companies very different from yours (a completely unrelated industry or geographic/cultural region). Three legacy companies that are generally considered to have been successful at breakthrough innovation are 3M, IBM, and Nike.

3M has outlined its innovation and growth strategy as follows:

Changing the basis of competition requires:

• Doing anything (legally and ethically) that…

  • Upsets the status quo

  • Changes the rules of the game

  • Increases our value to the customer

• Thereby resulting in a novel and powerful competitive advantage that is difficult for competition to respond to

IBM identifies seven key steps to building an innovative environment. In the “setting the stage” phase, one must stamp out fear, paint the picture, and encourage diversity. Then, in the “taking action” phase, one must connect the dots, reach outside, make ideas visible, and motivate for results (IBM Global Business Services 2006). Nike’s sustainable innovation pipeline also consists of two phases. In the first phase, “front-end innovation,” one must explore (landscaping + analysis), scope (business case + strategy), and hunt (proof of concept). The second phase, “commercialization,” consists of pilot (prototype + test), adopt (business transition), and scale (mobilize markets) (Vogel and Garcia 2012).

Additionally, as described in section 2.2, breakthrough innovation requires challenging the mental models of employees at all levels of the organization. Thus, transformation can only be accomplished by getting buy-in from all stakeholders in the company. John Kotter,² in his seminal work Leading Change (1996), outlines an eight-step process for change management based upon a ten-year study of more than 100 companies that attempted such a transformation. The eight steps are establishing a sense of urgency; creating a guiding coalition; developing a vision and strategy; communicating the vision; empowering employees for broad-based action; generating short-term wins; consolidating gains and producing more change; and anchoring new approaches in culture (Kotter 1996).

A recent presentation by Accenture presented the following steps for change management: prepare your people for change; maximize adoption of workday; generate positivity and excitement; open the lines of communication and engagement; limit resistance; drive commitment and ownership; elevate the quality of your solution; empower your people to make better decisions; proactive change management makes it possible.

The key to this process is engaging both internal and external stakeholders in the process of transformation. Specifically, engaging external stakeholders can help internal change. The engagement of customers, prospects, suppliers, and other developers helps to legitimize the move to more innovative management approaches, thus increasing the chances that the company can realize transformation internally.

Furthermore, this process requires a new leadership model focused on this notion of cocreation as well as properly designed incentives and culture (more details in next sections).

• 8. Incentives

Key to any initiative is providing sufficient incentives—both recognition and rewards—to motivate participants to engage. This is true in the case of getting employees and other stakeholders to innovate. In addition to direct bonuses for successful innovation or successful selling of innovative products, companies can offer the opportunity to be promoted to the head of a new business unit as a recognition-based incentive (the promotion could come with a raise or not). Firms can also emphasize the intrinsic rewards of working on innovative initiatives, which include working with interdisciplinary teams, doing technically difficult work, and developing pioneering solutions.

Regardless of the form of the incentive, it is critical that all performance measures and incentives are linked to the stretch objectives of the firm.

• 9. Align the organizational architecture

Finally, in order for all of the above components to work together, one must align the organizational architecture—the creative configuration of strategy, structure, work, people, and culture—for innovation (Nadler and Tushman 1997). Tushman and Anderson argue that “other things being equal, the greater the total degree of congruence or fit among the various components, the more effective the organization.” Figure 9.4, reproduced from Beyond Advertising: Creating Value Through All Customer Touchpoints, outlines the levers of organizational change one must orchestrate.

Fig. 9.4

Levers of organizational change

For example, for a company to successfully innovate, all the levers of organizational architecture must be aligned for speed. This means having a culture of urgency (e.g. Facebook’s motto of “done is better than perfect”) where one is compelled to run with an idea, even if it isn’t perfect. The company’s structures and processes must be designed to enable fast prototyping and rapid, adaptive experimentation, and performance measures must include speed and time.

• 10. Adopt adaptive experimentation

The only way to learn is to experiment. Therefore, companies should adopt adaptive experimentation in all areas of their organization. That means designing and implementing continuous and ongoing real-world experiments to learn and improve business decisions and strategies over time. The key distinction between adaptive experimentation and conventional notions of experimentation is that adaptive experimentation is not a one-time strategy or investment, but rather a continuous improvement philosophy.

In practical execution, adaptive experimentation means rather than taking a single action and accepting whatever result that action may generate, a company should experiment with different variations, measuring the effect each action had and using the findings of each experiment to inform the design of the next. For example, a company might experiment by launching three new approaches for fostering innovation: (1) internal development, (2) an accelerator open to the public, and (3) partnering with an open innovation firm. Based on the results of the first phase, the company might choose to continue with all three initiatives (experimenting with the budget or structure), kill one or more of the initiatives, merge one or more of the initiatives, or add a new initiative, such as an open competition.

This strategy has positive implications for both immediate business practices and the development of an innovative organizational culture. In the immediate, adaptive experimentation allows an organization to identify the causal relationships between actions and results; to learn to make better, more effective, and more efficient decisions; to force measurement and accountability; and to achieve a competitive advantage (as only you know the design of the experiment). Additionally, adopting a philosophy of adaptive experimentation also has the key benefit that it helps to foster a creative and innovative culture (see section 4.6) since people know that not every experiment will be a success, sending the message that it is okay to fail. This gives people permission and an obligation to initiate bold and innovative actions. Adaptive experimentation is also a useful approach for challenging current mental models, as one must necessarily consider other ways of doing things in order to experiment with them.

9.5 Combining the Guidelines—A Morphological Analysis-Inspired Approach

Applying a modified morphological analysis³ approach, we suggest the development and use of an “Idea Generation Framework” (Fig. 9.5)—such as the one we illustrate below based on the guidelines outlined above—to help companies generate new ideas for managing innovation. It should be noted that, while similar to morphological analysis in design, this framework differs from pure morphological analysis in that in our approach, we can accommodate options which do not use elements from all columns (hence the “none” option in some of the columns) or options which use multiple elements. Consequently, possible approaches to innovation management could include an item from a column/columns or even include groups of options from columns (e.g. engaging in two different open innovation initiatives).

Fig. 9.5

Illustrative idea generation framework

The framework was populated based in part on the ten guidelines above as well as an extensive review of the practices, philosophies, and architecture of some of today’s most innovative companies, including Google, Apple, 3M, Amazon, and more. We found that, across these companies, there were a few common “elements” to managing innovation, each of which had several different possible executions. The elements are as follows:

• Open Innovation

• Incentives

• Provide Security for Failure

• Resources for Employees

• Internal Information Sharing

• New Capabilities

• Organizational Architecture

• Create an Innovative Culture

• Management of Innovation Projects

• Allocation (Innovation Horizons)

To use this framework, companies should first review the framework to make sure all elements have been captured with the underlined headings and then that each possible approach to that element has been listed underneath. It is important that each firm design the framework to fit its idiosyncratic conditions and preferences. While our framework can be used as a reference, firms should customize it to their needs—adding columns and entries for columns as suits them. Then, once the framework has been verified with all known approaches, one can begin designing potential strategies to innovation management by connecting at least one item from each of the elements below.

The solid black and dashed grey “lines” in Fig. 9.5 are illustrative of how one can use this structure to design an approach to innovation management, with each line representing a possible strategy for approaching innovation management generated from this framework. Looking at the dashed grey line, the strategy proposed does not incorporate open innovation, incentivizes employees to innovate with the potential for promotion, rewards innovation even if not successful so as to provide security for failure, gives employees seed capital to get potential innovations off the ground, shares information internally using company forums, acquires start-ups so as to bring new capabilities into the company, has a flat organizational structure, creates an innovative culture through visionary leadership and an innovative workspace, manages innovation projects with the philosophy of launch early and often and fail quickly, and, using the Innovation Horizons concept (see section 4.1), invests 90 % of its resources in Horizon 1 innovations, 7 % in Horizon 2 innovations, and 3 % in Horizon 3 innovations.

The “dashed grey line” strategy we believe can lead to innovation in legacy companies as it would force the company to look toward Horizon 2 and Horizon 3 innovations, even while supporting current revenue. A fail-fast approach will break the company out of the tendency to “perfect” any new product, thus reinforcing the message of the visionary leadership that it is okay to fail. The flat organizational culture, open office design, and internal information-sharing forums will encourage idea sharing across the corporation, including between employees and managers and between teams. The acquisition of start-ups will bring new capabilities (and potential new talent) into the firm, empowering existing ideas and/or sparking new ideas as the addition of new capabilities gets people out of routine and encourages them to think outside their mental model while one new person could provide the needed perspective to get past a roadblock. The potential for promotion and knowing they will be rewarded even if they fail encourages employees to innovate and seed capital gives them the means to do so.

Once one has identified a line that outlines an innovation management approach that seems to make the most sense for their firm, the company should begin implementing and experimenting with this approach.

9.6 Conclusion

In conclusion, we suggest that legacy organizations begin their journey to becoming a more innovative organization by first challenging (and potentially changing) their mental models, then reviewing the ten guidelines we cover in Part 4 (see Fig. 9.6 for a summary), assessing how successful they currently are in each of these areas.

Fig. 9.6

Summary of guidelines for innovation

Then, based on this assessment, they can apply a morphological analysis–inspired approach in order to generate new ways of managing innovation. Finally, they should start to design and execute experiments in every aspect of the organization.

While no strategy can guarantee breakthrough innovation—history has shown a certain amount of luck and serendipity is needed—what we can say with confidence is that not following these guidelines makes any organization vulnerable to being relegated to history books and museums, no matter how successful or seemingly dominant they are today. If companies want to continue growing or succeeding, the last thing they can do is become complacent and continue with business as usual, ignoring the fact that the world around them is changing. Instead, they must embrace the idea of a moving target, constantly reflecting on and reevaluating current practices and mental models, and always experimenting with new approaches. It is only through ongoing, adaptive experimentation that companies can hope to keep their finger on the pulse of opportunity and, if they are lucky, stay one step ahead of their competitors.