By: Chuck Frey
Can companies sidestep or blunt the effects of disruptive innovation? It’s possible, but not likely, explains Steve Denning in a recent Forbes column.
Denning analyzed the recent talks and writings of innovation expert Clayton Christen to learn what The Innovators’ Dilemma author is currently thinking on this important topic. What he discovered is that even Christensen isn’t certain about what works today. Denning says the Harvard innovation guru has outlined three possibilities in his recent work:
1. There is no escape from disruptive innovation: “At times, Christensen seems to take the pessimistic view that there is no escape from disease of disruptive innovation. It is simply part of the inexorable life and death of firms.” There may not be any way to avoid it.
2. Setting up a separate business unit: Christensen describes IBM’s success in spinning out its PC business as evidence that setting up a separate business unit helped it to sidestep the destructive forces that took down its rivals. But Denning questions whether this leap to a business model actually “saved” Big Blue, or simply served as a reprieve, because the company eventually had to sell the PC business to Lenovo. Even though IBM has had some success in exploring different business models, Denning says these moves are not part of a larger, cohesive innovation strategy, but rather isolated events: “IBM saved itself by setting up a series of traditional businesses, each focused on making money, but without endowing any of the business units with the DNA to survive in a marketplace of rapid change. Thus what we see in IBM is a series of spasms of innovation followed by long periods of milking the cash cow.”
3. Continuous innovation as the new bottom line: Denning believes this theory makes the most sense to him: “What if the firm was driven, not by the goal of short-term profitability, but by the goal of continuous innovation in service of finding new ways of delighting customers? The new bottom line of this kind of organization becomes whether the customer is delighted. Conventional financial measures such as maximizing shareholder value are subordinated to the new bottom line. Profit is a result, not a goal. Experimentation and innovation become an integral part of everything the organization does.”
“Apple, Amazon and Salesforce are examples of prominent firms that are pursuing this model. They have shifted the bottom line and the very purpose of the firm away from making money so that the whole organization focuses on innovation. Thus experimentation and innovation become an integral part of 100 percent of what the company does. As a result, experimentation is harnessed for the commercial purposes of the firm.”
It sounds like a fundamental change is needed, one that cuts to the very core of how companies regard value and success. It also sounds like very few companies have the cojones to do what needs to be done. Two of the companies Denning cites – Salesforce.com and Amazon.com – were started as online businesses, where it’s expected from Day 1 that constant tweaking of the business model will be the norm. In other words, they started out as entrepreneurial businesses. The third firm he mentions, Apple, got a fair amount of its continuous innovation mojo largely from the strong personality of Steve Jobs. Now that he’s gone, many business pundits question if Apple can maintain its legedary momentum for more than a few years.
Denning refers to an interview that he recently conducted with Gary Hamel (not yet published by Forbes) to describe just how hard such a mindset change is likely to be, and why disruptive innovation is so destructive:
“Any incremental innovation or cost reduction scheme in support of the existing business model has about a 90 percent chance of earning a solid return. By contrast, in basic innovation by adding new value for customers, most of the ideas that we start out with will have less than a 25 percent probability of success.
“When the goal of the firm is making money, managers inevitably choose the cost reduction scheme with a 90 percent chance of a return, ahead of an investment adding new value to customers with less than 25 percent chance of success. It won’t matter that the average return for all of the value-adding schemes will be very high. Since the most likely return on each one is zero, the ideas will be systematically rejected. The firm will automatically gravitate to the high return project, even though it sets the firm inexorably on a track that consistently leads to corporate death.”
My feeling is that companies that are intensively bottom-line oriented will find it hard to jump off of this track. This type of thinking is so deeply embedded in the DNA of most companies, and is reinforced by MBA schooling, that it’s hard to avoid it. What do you think?