By: Tim Jones
The latest Innovation Leaders research shows that there is an increasing number of high-growth companies that are prepared to take greater risk and make big bets. Rather than focus just on incremental growth, they are being bolder and are seeking to develop more radical innovation opportunities. Despite requiring significant investment and offering no guarantee of success this approach has been transformational for some. Where and why is this happening and what has changed that has made this approach more common?
Big Bet Successes
Until recently the vast majority of large multinational companies have focussed on producing consistent, incremental innovation to deliver growth. Inditex, PepsiCo and Reckitt Benckiser are perhaps the most notable successes here. However today even the more conservative organisations such as Bank of America and Delta Air Lines seem willing to bear additional risk in order to seek greater returns. Some leaders, such as Apple, Amazon and Google, have always been comfortable to take a considered gamble and have often been successful in identifying and perusing completely new opportunities. Indeed Google has completely embraced the idea of risk and even realigned itself its corporate structure in its honour; Alphabet (Google’s holding company) is seen by its CEO, Larry Page, as where alpha-bets take place – ‘alpha’ being investment return above benchmark. The organisation is organised into Google and ‘Other Bets’ that include such activities as Nest (smart home devices), Verily (disease prevention), Calico (extending life), Deep Mind (AI) and Astro Teller (secret moon-shots and other outlandish projects). While Alphabet, Apple and Amazon are, for some, the established innovation heroes that consistently embrace big challenges and change the game, they are not alone. Since delivery of its first Roadster in 2008, Tesla as a company has led the transformation the market for electronic cars while LEGO has recently made some very successful expansion choices – think LEGO Movies – that have helped it to become the world’s most valuable brand. Add to these well known companies, firms such as Nvidia that has effectively repositioned itself, expanding from its home in the gaming sector to become a leader in AI and advancing partnerships with established players in other industries, most noticeably the automotive sector. Across multiple industries we can see more companies being bolder in their innovation and growth ambitions and taking more radical moves to achieve these. Although they are only one part of a growth / innovation portfolio, more companies are taking this route.
They have a desire to replicate the successes being achieved by others;
They want to mitigate the threats of disruption from fast-growing unicorn start-ups;
The corporate appetites to risk is changing; and
More business leaders are willing to be bolder.
While few organisations have the resources and firepower to necessarily copy Alphabet, the sustained success of Amazon and LEGO, the iconic platforms created by Apple over the years and the continual media coverage of Tesla’s exploits are all creating momentum. Sustained growth, breakthrough innovation and so-called ‘strategic pivots’ are all having impact time and time again. Over the last four years (Jan 2013 to Jan 2017), Alphabet’s share price grew by 137% Amazon’s by 225% and Tesla’s by 615%. Others want similar results. As such expectation is building that it is perfectly possible for others to achieve similar success by raising the stakes and adopting bolder growth ambitions. As this builds, once closed doors are being nudged open. For example, IBM is waging big on cognitive intelligence and machine learning while Microsoft is focused on bots –conversation platforms that will drive new services. Cisco by contrast has three areas of focus – smart cities, the Internet of Everything and cyber-security. Clearly not all bets will succeed – consider Tesco’s Fresh & Easy retail foray into the US, Nintendo’s Wii U, the Segway and even Apple’s Newton. However, given the potential upside from a blockbuster hit, the desire to replicate the success of the winners is increasingly pervasive across many a corporate boardroom.
For some sectors the threat of disruption is becoming more evident and accelerating. Sometimes however it is difficult to see where the danger lies. Five years ago, for example, Airbnb was largely seen as a side issue for many in the hospitality sector, not even considered to be a proper competitor and so little was done to prepare for change. Now Airbnb not only has scale but it is up there with the leading firms in terms of brand awareness and, importantly for the bottom line, ‘room nights per year.’ With undiminished ambition it aims to reach half a billion within five years and a billion by 2025. The established brands of Marriott, Hilton, IHG and Accor have just over 3m hotel rooms between them so, in order to collectively achieve the same scale as Airbnb, they need to have nearly 100% occupancy rates over the equivalent period. New options for generating significant growth beyond building more hotels are, not surprisingly, now a core focus across all major hotel brands.
Elsewhere the ‘uberisation’ of many different industries is becoming an established way of describing new competition that challenges assumptions and causes established players to undergo a strategic rethink. To both respond to the current disrupters and head off the impact of potential new ones, many are seeing the need to start their own more radical business models, often a challenge for the more traditional organizations. GE Ventures is probably the most well known but others such as Castrol Innoventures are also having impact. Rather than wait to be disrupted and manage the downside, significant incumbents are trying to get on the front foot and in doing so acknowledge the need to place major bets. Castrol’s most public venture to date is its Nexcel platform. As well as bringing about more sustainable, convenient 10-second oil changes to its core business, this new product innovation is driving a business model change across the whole of the global automotive after-market. No longer requiring garage facilities for an oil change, servicing is able to go mobile to wherever your car may be – at home, at work or even at the gym or shopping mall.
Appetite for Risk
Given the evident successes and the associated growth in shareholder value, market sentiment to more radical innovation is also changing. Even investors that traditionally looked for safe, sustained single-digit growth, want more and increasingly expect the significant R&D and innovation investments being made in major organisations to deliver higher levels of double-digit growth. To achieve this their tolerance of risk is also changing. Across sectors from pharmaceuticals and chemicals, hospitality and even banking, markets and analysts are building expectations of higher impact based on intelligent, well-informed bets.
In the investment community, risk is being more widely accepted. A recent CEB blog highlighted that “what’s most interesting about the best performing firms of the past 20 years, and their ability to consistently fund big, risky growth bets, is that their management teams are experts at growth anchor removal. Whether it’s addressing finance bureaucracy, short-term incentives, a ‘dangerous-to-fail’ culture, or capacity constraints, these companies constantly product innovative ideas to ‘un-anchor’ their businesses.”
The change in sentiment seems to be freeing some of the more old-school CEOs from being wedded to their traditional, conservative, low-risk strategies. A recent Deloitte report exploring how higher-risk (Division-X) innovation is driving growth identified that “75% of companies with the highest growth expectations for the coming 24 months (above 10%) also own a Division-X (or equivalent).” Moreover 35% of the companies consulted have radical innovation as a discussion point on their board agenda. Double digit growth is not just for unicorns and start-ups.
Most large firms’ decision-making processes are consensus-oriented, so when faced with big strategic calls, they often default to conservatism and the protection of the status quo. This is especially true of public companies and not necessarily of private ones like LEGO and Cargill. One view shared recently by Julian Birkinshaw, Professor of Strategy and Entrepreneurship at London Business School, is that the companies that are most successful at major innovation-driven growth are led by CEOs, many of who could be could be characterised as benevolent dictators. In the same way as the leaders of the city-states of Singapore and Dubai, they have the authority and freedom to align resources on big, bold moves. They don’t have to gain consensus and so can make major future focused decisions without excessive consultation. “They call the shots, and they rule their organisations through a combination of charisma, fear and brute force.”
Many of these ‘benevolent dictators’ have been company founders such as Steve Jobs, Jeff Bezos, Richard Branson, Elon Musk, Larry Page and Sergy Brin. Today, others who are increasingly acting in a similar manner are empowered new CEOs such as Ginni Rometty at IBM, Chuck Robbins at Cisco, Satya Nadella at Microsoft and Pablo Isla at Inditex as well as Rakesh Kapoor at Reckitt Benckiser, Brian Moynihan at the Bank of America and Jim Andrew as EVP, Corporate Strategy, at PepsiCo. Within the constraints of their respective sectors, many of these leaders are showing increased confidence and boldness and, as part of this, they are supporting greater growth ambitions and embracing new business models. While some sectors avoid risk and eschew gambles, others with bolder leaders are placing bigger bets.
While being bolder and making these larger wagers is not for every sector, momentum is evidently building and more are keen to try to reap the rewards of high impact intelligent bets. However, given that most large, listed companies often have to moderate long term growth with managing short term shareholder interests, getting the right balance is no easy task. Moreover, being willing and able to scale emergent opportunities fast can often be compromised by excessive consultation and consensus building.
In our experience of working with many of the companies mentioned above, we see three pivotal issues to address in order to both make intelligent bets and successfully scale them to have major impact. These are:
Foresight and Insight – While foresight can be compelling in itself, decoupled from strategic insights, it can lead some into dead-ends. Seeing not only what is coming and understanding the future context better but also uncovering more information about the underlying state of things can often bring together the insights that identify the potential sweet-spots. We often, for example, find mixing technology foresight with both ethnography and semiotic analysis brings together a unique combination of external views that when overlaid on industry trends and companies’ strategic assumptions can highlight the most promising opportunities. We are seeing this at the moment with the anticipation around new data marketplaces – something that many are excited about but, in reality, only a subset have the insight and capabilities to exploit.
Incubation not Isolation – Many organisations like to nurture radical new innovation within skunk-works or incubators – think of Amazon’s Lab126, Xerox PARC and Boeing’s Phantom Works. Successfully shielding new innovations from both the outside as well as the corporate ‘mothership’ in the early stages of development is considered to be best practice by many. However doing so for too long in isolation of the main organisation can often lead to challenges such as tissue-rejection by main corporate body and lack of traction. Balancing this need for protected development with the requirement for ensuring corporate buy-in when needed is no easy task and one that many fail, even if the innovations are strong. A ‘benevolent dictator’ type of CEO helps in some organisations but in others managing the multiple stakeholders concurrently is an often critical but insufficiently prioritised core capability.
Collaboration and Sharing – While some of the companies mentioned above have been able to go it alone, funding development, launching and rapidly scaling some of their big bets, others often bite off more than they can chew. While owning and controlling 100% of a new venture is frequently the starting point, a good number of successful serial big impact innovators have been proactively open to greater collaboration and sharing – taking part of a bigger pie rather than trying to own all of a smaller one. Some, such as Adidas, Nike and LEGO are collaborating with other brands to together break new ground. Others are focused more on sharing equity. GE Ventures is a leading example here but equally so is Virgin, a brand that has consistently found investor partners to support its mature market disruptions – most recently with multiple investors for Virgin Hotels and Bain Capital for Virgin Voyages.
These three are not necessarily mutually dependent; however many of the more successful organisations placing and gaining the rewards from bigger, bolder bets are displaying these core innovation characteristics. As the trend for companies seeking increased growth and greater reward from more substantial innovation continues to evolve, we will be interested to see which capabilities and approaches endure and which new ones emerge. As the Innovation Leaders research moves forward, we will continue to share and update insights accordingly.
About Innovation Leaders
The Innovation Leaders research that identifies the companies that achieve the most from their innovation activities and deliver tangible, sustained growth. Now in its 16th year, this annual analysis profiles the global leaders across 25 different sectors, highlighting the shifts taking place and identifying new achievements. Undertaken by members of the Growth Agenda team, its aim is to inform organisations on the most effective approaches for success. It is regularly used by governments and companies around the world to inform policy, guide investment and refine growth strategies. The analysis and insights are widely shared via multiple platforms.
About the author
Dr. Tim Jones is a recognised expert in innovation, growth and futures. He is the author / editor of eight books and a regular speaker on innovation leadership, growth platforms and future trends. For over twenty-five years he has worked with many leading multinationals, governments and universities identifying emerging opportunities: A leader in collaborative programmes, Tim has made his name in helping organsiations to see the world through a different lens and so reveal new areas for potential growth. Tim is Programme Director of the Future Agenda – the world’s largest open foresight programme; leads the annual Innovation Leaders analysis that profiles the companies making the most of their innovation investments and is also co-founder of a global advisory network, The Growth Agenda.