BIG BUSINESSES ARE DYING YOUNGER: INNOVATE OR DIE

In 1925 the average life of a company on “the Standard and Poors 90” was 65 years. In 1998 the average life of “the S&P 500” was 10 years (Foster and Kaplan). Large corporations are dying younger all the time. We work for one; we’d like it to live long and prosper. We work for Intel, a Fortune 100 company. The company was founded in 1968. The primary product was memory chips (SRAM and DRAM) until the company pivoted in the late 70s to become one of the largest producers of microprocessors. While microprocessors remain a profitable business, further innovation will be crucial to long-term sustainability of the business.

Consultants have been driving LEAN and AGILE techniques into large corporations but the results seem mixed at best. Startups are not small versions of large corps. They are temporary organizations designed to seek and discover a business model. The experimental and ephemeral nature of start-ups is a key tenant of Lean Startup. The problem of how do more permanent corporation employ these temporary techniques to similarly discover transformational business models is a problem we attempt to explore. The techniques work well for small start-ups but what works for start-ups doesn’t always scale up for large corporations. Further, we are interested in a particular type of innovation – transformative innovation. The innovation models are further complicated by the frequently changing market ecosystem dynamics. While we (anderson et. al. 2013) and others have noted the rise of complexity in the ecosystem, strategies for adaption, especially around innovation, are still emerging. While we have discussed the product introduction path, we want to develop the creation of that innovation first, as well as some additional ways to probe the ecosystem. We adapt the FOC (flux, order & catalyze) model (anderson et al 2013) around product development more broadly to innovation. This paper expands on what changes the flux, order and catalyze approach for our innovation work practices.

Let’s start by grounding our use of the term “innovation.” We track three kinds of innovation–core, adjacency and transformative–as a part of company’s innovation portfolio. Core innovations relate to the existing products we produce. This is a focus on keeping a competitive advantage in a well-defined product space. We are solid in this space. Moore’s Law has driven our core innovations for over 40 years. Technological and manufacturing innovations around processors and Moore’s Law have enabled us to be market leaders. To produce adjacency innovation means to use core competencies to look beyond the current business into a space that is adjacent—for example, taking an existing product to a new customer segment or serving an existing customer with a new product. This has been particularly popular since the Great Recession since it allows leveraging assets for new revenues. Adjacency innovation is a moderate risk strategy, producing good payoffs without massive investment.

Transformational innovations are fundamentally different in mind-set and approach. Transformational innovations are about the introduction of a technology and business model that create an orientation of the industry ecosystem to the company that introduces that technology and business model. Of course, transformational innovation potentially alters the way we live and work. This kind of innovation often eliminates existing industries or, at a minimum, totally transforms them as well. Transformational innovations generally have a company calling upon new or untapped assets. To tap these innovations companies need to build capabilities to gain a deeper understanding of customers. They must learn to communicate about products that have no direct antecedents to both customers and partners. Finally, they don’t develop just a product but must develop markets that aren’t yet mature. Obviously, transformational opportunities are rare. Apple’s introduction of the iTunes business is an example that changed not only Apple but also the entire music industry. This would be in contrast to a core innovation like Nabisco’s repackaging of Oreos into on-the-go snackers (Nagji 2012).

Transformational opportunities are usually considered to be high risk and high reward. Our approach is counter-intuitive and even radical in that we seek to reduce the risk but maintain the high reward. Further, while searching for transformational opportunities, we’ve discovered opportunities that align as core and adjacent innovations for the company. This is a fortuitous outcome of doing the work but discovery of those core and adjacent opportunities should not detract from the overarching objective which is to transform a business whose bases of competition have been shifted by a changing market. This is hard work for any company to do and it requires a massive shift in mind-set as well as innovation practice. The fact remains that while honing innovation processes in the core space over the years, expanding out to adjacencies or making transformational innovations remains a challenge for most large corporations.

OUR APPROACH TO TRANSFORMATIONAL OPPORTUNITIES: FOC it

Our approach has 4 key components.

1. Sense social and business ecosystems (flux)
2. Form hypotheses about the opportunity & market (order)
3. Test cheaply to learn, adjust, confirm or disprove (order)
4. Invest for commercial success upon hypothesis confirmation (catalyze) We manage these parts through three phases

In principle, our approach is not very different from some lean models.

Figure 1: Three Parts of Our Process