Not Invented Here

Less than 71 companies on the original Fortune 500 list, in 1955, are there today. The rate at which large American companies left the Fortune 500 increased fourfold between 1970 and 1990. Today there are 50 new companies added to the Fortune 500 each year, compared to 10 in 1960?—?8 out of America’s largest 25 companies did not exist 50 years ago. In fact, 19 out of the world’s largest bankruptcies have occurred over the last 12 years. And yet global growth came to a screeching halt in 2008, with the world’s largest companies and most revered brands taking a brunt of the force of the global crunch.

Life Expectancy of Fortune 500 Companies

At the same time, the last 20 years have been some of the most active and innovative years in the history of business. Driven by pervasive internet and mobile connectivity, the world is smaller and more complex at the same time, information asymmetries continue to decline, individual empowerment has resulted in the democratization of innovation?—?no longer making it the purview of large companies, and the speed of technological change combined with a much bigger pool of human ingenuity is resulting in faster cycles of creative destruction. The future is less predictable, change is faster, competitive advantage is tougher to maintain beyond a few financial cycles, and more black swans lurk in the background than ever before in our history.

So what does that mean for Fortune 500 CEOs? It means reevaluating the traditional idea of “competitive strategy,” and moving more towards “adaptive strategy” and “open innovation.” The former connotes a zero-sum game where the “winner takes all,” the latter is founded on the axioms of market-driven, real options-based, and non zero-sum outcomes. But this shift is obviously a non-trivial one. As Henry Chesbrough, the “father” of Open Innovation recently remarked, “ A startup is a temporary organization in search of a repeatable, scalable business model. A corporation, by contrast, is a permanent organization designed to execute a repeatable, scalable business model.While a simple statement, this is a profound insight. When companies want to innovate a new business model (vs. innovating new products and services within an already scaled business model), the processes that companies have optimized for execution inevitably interfere with the search processes needed to discover a new business model.” And there you have one of the biggest insights, and the Achilles heel of most large corporations.

As many have studied over the years, and as I have observed through my experience as a strategist, innovation practitioner, venture investor, and entrepreneur over the past decade and a half, there are a handful of levers to experiment with in order to course-correct, and in order to rebuild your organization into a resilient engine of growth:

1. Governance, culture, and leadership?—?In order to manage a portfolio of innovation that ranges from incremental product development, to disruptive business models, change and commitment have to begin with the BOD, CEO and Executive Team. New structures are required, decision-rights need an overhaul, and a new set of cultural values and norms have to be established. Leadership and talent profiles across all innovation organizations have to be systematically reevaluated.
2. Growth strategy?—?Innovation may be unpredictable, but it is not random. In a finite resource environment, Executive Teams have to be very clear about the domains and the projects they want to pursue. Elon Musk did not create Tesla by focusing on a dozen different domains, and Astro Teller did not invent Google Glass with his team by focusing on building microscopes and submarines. There is a difference, however, between focus and learning agility & adaptivity. You may have to launch several different experiments and approaches in order to solve a particular innovation problem, but you do have to be focused on a finite and contained set of problems. The other point is about opportunism and serendipity?—?it is absolutely crucial to leave room for these phenomena to happen. My general heuristic is to invest a quarter to a third of your innovation resources in opportunistic and unexpected ideas and sources of innovation.
3. Innovation execution?—?In an era of democratizing innovation, where modern tools and methods can enable just about anyone to create and launch new products and services in the matter of months, large enterprises have to redesign their product development and innovation execution processes. Gone are the days of linear and waterfall methods. Gone are the days of lab developed and market untested products. Gone are the days of expending tens of millions of dollars before a concept sees the light of day. And gone are the days of committees of Executives picking the winners. When well over two-thirds of routine product development programs fail, when corporations consistently fail to launch exciting innovations, when R&D and innovation productivity across industries continues to decline, it’s time to swallow ones pride and rethink the innovation “dilemma.” It’s good for you, and it’s good for your shareholders. In place of the old, the new methods (like Lean Startup, like Customer Development, like Design Thinking, etc.) emphasize highly collaborative, non-linear, market-rooted, customer-driven, and iterative approaches to innovation. They focus on capital efficient methods for shaping, iteratively developing, and continuously validating hypotheses to de-risk projects and to increase their market probability-of-success.
4. Venturing and open innovation?—?You may have the most brilliant collective of in house designers, engineers, scientists, and innovators. A few thousand, maybe even tens of thousands. But there are tens and hundreds of millions of people on the outside who are also very smart, likely less encumbered, and have probably solved the very problem that you have been working on for the past several months or years. We no longer live in the post World War II era, where the IBM’s and the Bell Lab’s of the world house Nobel prize winners working on basic research that ultimately translates in breakthrough innovations. Too many intrinsic and extrinsic factors have changed for that model to remain true, in fact that model hardly exists anymore. The advent of obsessive “shareholder returns” and a parochial focus on quarterly profits, starting in the seventies, and culminating into a forceful cultural meme in the eighties and beyond, has precluded most public companies from making the type of longer term investments that they once used to make. In addition, the information and connectivity revolution, combined with the advent of venture, angel, and now crowd-sourced capital has significantly improved the flow of capital, labor, and ideas outside the corporation. The incentives for brilliant people with big ideas to remain within a large, seemingly monolithic and bureaucratic organization are much less than the “organization man” of the fifties. So it is now a necessary condition for corporations to rid of the “invented here” hubris and connect pervasively with the world outside be it academia, suppliers, entrepreneurs or customers. We no longer live in a zero-sum world, platformed and networked business models among others, create collaborative behaviors that results in non zero-sum outcomes for all parties involved.
5. Portfolio management?—?“You can’t manage what you can’t measure,” as Deming famously said. To a large extent that axiom still holds true. Executive Leaders have to be obsessed about the strategy, the process, and the outcomes of innovation across the corporate portfolio. The Chief Executive is also the Chief Innovation Officer. Innovation portfolios have to be shaped to the risk-reward profile of the firm, and they have to be continuously evaluated and updated, with projects being killed and added with ruthless efficiency based on measurements, data, and outcomes. It’s not unlike the work top quartile VC’s do. They are intimately familiar with, and involved in the portfolios that they have invested in. And because individual biases can distort any one person’s judgement, it is important to have a diverse team of insiders and outsiders to probe, evaluate and decide on the progress of the portfolio. There are at least two dimensions to optimize the portfolio around: one is the risk-reward profile; the other is the closeness or distance of the innovation to your core business. There may be a correlation between the two, but I have generally looked at them distinctly to keep decisions cleaner. On the former, experience tells us that most companies prefer to keep a moderately “risk averse” portfolio, and on the latter the general heuristic is to keep a 70-20-10 portfolio i.e. 70% of your innovation investments happen in the core business for routine product development, 20% are “transformational” i.e. these innovations redefine existing categories thereby changing the competitive and market share characteristics of the particular category, and 10% in “disruptive” innovation i.e. new business models and “blue ocean” concepts that fundamentally create new economics or dramatically shift existing ones.

Over the last several decades, we have seen the democratization of many major industries: from retail banking, to mobile telephony, to direct-to-consumer retail, to air travel and hospitality among many others. For the remaining industries that have retained their old monolithic business models, like healthcare, education or energy, the signs of fissure are clear. Democratization of information, products and services is inevitable. For those that have already made the transition, moving those business models from transactional ones to experience-based ones, from “rent seeking”ones to “profit seeking”ones, from internally focused ones to externally responsible ones, and from closed ones to open ones is the next big opportunity that is supported by the weight of history today. So what’s in your innovation wallet?