Can (Lean) Innovation Ever Conquer The Board Room?

I’m just back from the fabulous Lean Startup Week in San Francisco. I enjoyed being part of it, re-connecting with friends and innovators, and watching the movement grow year-after-year. Yet, I think that the Lean Startup, and innovation in general, is at an impasse despite the enthusiasm, progress, and great mood. I believe innovation has NOT conquered the boardroom yet.

Eric Ries's new book The Startup Way. This post was originally published on the Strategyzer Blog.

(Lean) innovation has yet to become a second strategic pillar in C-suites and boardrooms besides the more traditional lean cost cutting. Over a decade ago O’Reilly and Tushman described why companies need to be ambidextrous (executing existing business models while creating new ones). Yet in spite of facing continuous disruption, only a few companies (like Amazon) have truly ambidextrous strategies that focus on world class execution, operational excellence, and strategic growth innovation simultaneously. In fact, Amazon's entire organization and organizational culture is designed to be ambidextrous.

Rare are companies that deal with the rapid shifts in channels, customer aggregation, pricing, technology, etc, by creating new business models (Amazon Web Services, Netflix Studios, etc.). Most continue to execute their existing business model or make small extensions to them. In the U.S. in particular, existing companies are afraid of a proxy fight with activist investors who focus on traditional cost cutting and share buy-back programs to please their investors. Steve Blank wrote an excellent article about why this is the case and how the Lean Startup’s poster child, GE, fell victim to it. He explains that there is a surge of activist investors that put pressure on companies to deliver higher share prices, often at the expense of long-term growth innovation. GE, P&G, and Nestlé are just a few examples. 

The multi-billion dollar question is of course: How can C-Suite leadership teams harmonize the demands of public markets and activist investors to cut costs; buy back shares and simultaneously reinvent their organization; unleash entrepreneurial talent, and position it for future growth. I’m chairing a panel about this question at this year’s Drucker Forum in Vienna. Steve Blank (serial entrepreneur), Bill Fischer (IMD), Efosa Ojomo (Clayton Christensen Institute for Disruptive Innovation), and Ashok Krish, (TCS) will attempt to provide us with some answers.

In the meantime, here are four suggestions on how senior leaders can kickstart strategic innovation:

1. Uncompromising Execution: Companies need to provide stellar numbers and great margins in their core business, yet, without cutting fat in the wrong place. From my own little window to the corporate world, I unfortunately see the contrary. Innovation programs are among the first to suffer when major cost cutting programs take firm grip of a company. It’s important to distinguish between making the existing business more efficient and creating the fertile ground for future growth engines.
2. Truly Ambidextrous Org Structures: It’s not that innovation efforts don’t exist in companies. They do. The problem is that innovation often has no power, little prestige, and is rarely considered a viable career track for ambitious and smart people who join major corporations. Innovation can’t prosper if it’s not as powerful and prestigious as execution and general management. We need new organizational structures that give innovation power.
3. Dual Investment Strategy: For the core business, public markets are just fine. Companies need to manage their existing business well to satisfy public & activist investors. For innovation efforts, companies need a more Venture Capital-style investment. VCs know that 6 out of 10 investments won’t return capital and that only about 4 out of 100 investments will become home runs.
4. Portfolio Management (Mature AND New Businesses): Finally, companies need a new and integrated approach to managing a dynamic portfolio of established and emerging businesses. They have to protect established business models from disruption as long as possible, while simultaneously cultivating the business models of tomorrow. A company's innovation strategy should be informed by their vision of the future and potential disruptions of their core businesses.

Ironically, building an ambidextrous organization with the Lean Startup is something that investors should be demanding: it helps companies better allocate capital and put people with the right skills at the right stage of development. But of course, it also means you have to keep investing in new ideas and businesses.