Is Your Company Too Comfortable to Innovate?

There are really only two types of company: Those who need a fresh strategy every year and they know it, and… those who need one but don’t know it.

To be fair though, the urgency of strategic reinventions varies hugely across space and time.

Let’s start be reminding ourselves of one of the most fundamental concepts in innovation management: Explore vs Exploit.

Exploit is about optimising an existing business model that we already understand. It involves driving efficiency and improving our market position in order to squeeze out more profits.

Explore, meanwhile, is about searching for new business models, with the understanding that much trial-and-error is required on the way to disrupting the status quo and finding new sources of revenue.

Each domain requires fundamentally different mindsets, attitudes and behaviours. The tension that exists between them can probably explain 80% of why companies struggle to achieve the results they desire from innovation.

Some leaders lose sleep over how to strike the right balance between Exploit and Explore. Others sleep soundly at night because they don’t understand the difference.

But does every company need to Explore? Do they all need an ambitious strategy for reinvention at all times?

There are 2 key points to make here.

1. The first is that while companies facing rapid change or driving innovation themselves must prioritise Strategy (i.e. strategic thinking), those in more stable environments have the luxury to focus more on efficiency.
2. However, none should get as complacent as they do. Even companies who perceive their world as stable should implement measures to avoid being caught off-guard by unexpected changes.

I. The Need for Strategy and Innovation Culture

A key reason why organisations need to invest time in their Strategy is because the environment in which they operate is dynamic.

Plenty of industries –from retail, to media, from energy, to finance– have been through, and continue to experience, significant transformations.

The disruptive forces of technology, regulation, demographics and geopolitics have the capacity to quickly alter the dynamics of any given market.

Strategy (done well), then, operates as a kind of guiding framework for business leaders.?

When we’re surrounded by complexity and volatility, Strategy provides well-needed clarity and direction, because it forces us to make our assumptions explicit and to formulate clear choices.

It empowers us to allocate resources towards responses to the change we witness, responses like innovation.

Speaking of which, innovation is also a tool through which we capture new opportunities – not just a defensive response to change we can’t control.

But to actively Explore in this sense, it’s essential that we provide the foundations for an innovation-friendly mindset and culture.

Largely, this means encouraging a culture where new ideas are welcomed and explored – in other words, where psychological safety is a reality .

It requires an openness to experimentation and a commitment to learning from failure, that don’t come naturally to most large companies.

But this is precisely where leadership has to step up. A culture of innovation can only thrive if the company’s leadership team themselves model behaviours that support creative thinking, experimentation etc.

Whether their company is facing existential change, or taking the initiative to discover new business models for itself (Explore), the responsibility is on them to establish a clear vision and insipire the teams that will go out and perform the difficult (but exhilarating) work of innovation.

Ideally, employees are well-incentivised and given the autonomy they need to take ownership over their projects – with some element of skin-in-the-game, assuming the company is serious about realising their Strategy.

As I’ve argued before, diversity here is a true superpower . If a company can leverage it successfully, it’s well placed to execute on any ambitious strategy for explorative innovation.

But the empowerment of employees needs to go beyond some fancy statements. At a governance level, there needs to be a clear formalisation of the ways in which authority is delegated from those who formulate the strategy –the leadership team– to those who execute innovation.

Having seen the consequences of excessive internal ambiguity, I propose an Innovation Mandate as the primary tool through which companies can most effectively achieve this clarity, because it sets boundaries and ensures alignment with company strategy.

By decentralising decision-making, an Innovation Mandate allows teams to make swift decisions without a constant reliance on bureaucracy.

It also signals that we trust in the expertise of innovation professionals to drive innovation forward – which should be the least controversial proposition ever.

A final characteristic of companies that anticipate change and give themselves the capabilities to Explore is that they reason in terms of scenarios and options .

When we view investments in innovation as options that provide the right, but not the obligation, to pursue certain paths, it has the benefit of enhancing our ability to manage risk, but also to maintain flexibility – i.e. to scale successful initiatives or abandon less promising ones.

The best way for a company to begin with a Real Options approach to investing in innovation is to develop the habit of launching prototypes, pilots and experiments (as opposed to building finished products) and to define a systematic way to allocate metered funding to projects.

But as we’ll see, many companies don’t feel a sense of urgency to focus on Strategy or Explore.

II. Strategy Applies to Stable Environments, too

If you’ve ever worked in or with a large, established organisation, that knows it can count on billions of annual revenue, you’ll know how challenging it can be to draw their attention to the need to innovate – but also to the need to take Strategy seriously.

Indeed, when companies are in Exploit mode, their focus is entirely on efficiency, on operational excellence, on profit maximisation.

Any mention of innovation is welcome, so long as its intent is to further streamline operations, reduce costs, and generally enhance productivity.

It’s a mindset of continuous improvement and stability. Competitiveness is to be maintained via incremental innovation only.

Even Strategy takes a back seat. In a status quo organisation, “strategy” tends to get demoted to a crude form of planning – with the assumption that most variables are under the company’s own control.

While the temptation to Exploit is clear, the complacent behaviours that almost always come with it are a dangerous source of complacency.

This complacency –not just in innovation but in Strategy more broadly– creates new vulnerabilities.

Unexpected changes, like “out-of-nowhere” technological advancements (remember OpenAI?) or sudden shifts in consumption patterns (like during Covid and post-Covid) have a habit of disrupting formerly stable markets.

Likewise, regulatory changes or geopolitical events (like trade wars) can impact operations in unexpected ways.

From Nokia, to Borders, to BlackBerry, to legacy airlines, the list grows ever longer, of companies who lost relevance sharply as more innovative competitors entered their market and decimated their market share.

Moments like these can be very humbling for once-prominent corporations and their leaders (not to mention for their employees and shareholders).

Better, then, to show some humility when the sun is shining. No business is invincible, so it makes sense to apply some of the tools of Strategy and Innovation Management even when we don’t feel we need them.

“Always-on Strategy”, in other words. But what can this entail?

The most obvious way to stay prepared is to implement some form of continuous market monitoring. Indeed, most companies perform some kind of industry trend analysis – looking at competitive dynamics, changing customer preferences, technological advancements, regulatory changes.

But the least complacent of companies do this in a structured way, with dedicated teams and meaningful resources. If “trend monitoring” is the fifth bullet point on one person’s job description, you can be certain that it will get little attention.

Rather you need, depending on the size of the organisation, anything from one full-time employee to a full department of team members focused on continuous monitoring.

Once a company has some structure in this area, its leadership team also need to get more serious about simulating likely and unlikely scenarios and their impact on the business.

Scenario planning is the main way companies do this, as it allows them to prepare for a range of possible futures.

But I’m particularly bullish on companies who push things a step further and engage in war games.

I’m not a fan of military analogies in general, but business wargaming is powerful in that it simulates many of the complexities and second-order effects of the various scenarios and the decisions the company takes.

Wargaming not only helps companies identify potential threats and opportunities; it also enhances flexibility and organisational resilience.

And, arguably most important of all, it gives leaders a glimpse into their emotional reactions under stress and into the psychological biases of the organisation once it comes under threat.

It takes scenario planning out of Microsoft Excel and demonstrates the role of emotional intelligence in dealing with uncertainty.

Alongside “Always-on Strategy”, we can talk of “Always-on Innovation”. While some companies turn off the resource tap for innovation when times get tough, other companies restrain innovation when they’re doing fine.

The logic, in other words, can be: Some don’t fund innovation because they can’t afford it; others because they don’t need it.

While there may some short-term merit to this logic, it makes no sense for any business with a time horizon beyond two years.

But even companies who’ve decided to put their emphasis firmly on Exploit (at the expense of Explore) need to build a healthy Culture of Innovation.

Thankfully, the ways of doing this present many similarities to an innovation culture that supports Explore:

• Leaders need to encourage continuous improvement, for example by empowering employees to suggest process improvements and implement them quickly. Likewise, they need to recognise and reward team members who contribute towards efficiency enhancements
• Even though we would’t expect the same prevalence of wild, disruptive ideas in Exploit, leaders should still model openness to new ideas and support risk-taking (within reasonable bounds).
• They also need to improve the cross-pollination of ideas, particularly by boosting collaboration between silos

Companies that get used to exercising their innovation “muscles” in these ways are not just better prepared for whatever fate might throw at them; they’re also better placed to serve today’s customers better and drive greater profitability in the short term.

There are some great examples of companies that have been able to combine both Explore and Exploit over the years – often shifting their focus, but still retaining an element of balance between the two.

Nintendo is one. Shifting its primary business from playing cards to video gaming required a great deal of vision but also of operational flexibility. During its most successful periods, pumping out huge revenues in Exploit mode, it was still able to Explore new business models – like licensing its nostalgia-heavy characters to toy manufacturers today.

Adobe is another example of a company that was doing very well selling its industry-leading software on DVD and via digital download. Yet despite this successful Exploit model, it radically shifted to a cloud-based subscription model, that has driven its revenues further in recent years.

So while it can be tempting to fall back on Exploit –either because it’s comforting or because believe we can’t afford to do otherwise– there are countless ways companies of all sizes carve out resources for proper Strategy and Innovation, a few of which we just saw.

Conclusion

While few companies would self-identify as complacent, taking a long-term break from Strategy and Innovation is a luxury no company can afford.

Whether you're milking it, with stable profits, or facing the threat of imminent disruption, the need for serious strategic thinking and innovation is universal.

Ignoring this reality is fine during calm times, but becomes disastrous when conditions change.

Embracing an "Always-on Strategy" means constantly scanning the horizon, anticipating shifts, and being ready to adapt. It requires that leaders develop a culture where innovation isn't a buzzword but a professionalised, daily practice, embedded in the fabric of the organisation.

By empowering teams through a clear Innovation Mandate and delegating decision-making, companies can unlock their full innovative potential.

Similarly, adopting an "Always-on Innovation" mindset ensures that a company remains agile and responsive, even when everything seems to be going well.

Even in Exploit mode, it’s about cultivating the habit of continuous improvement and not shying away from experimenting with new approaches, no matter how comfortable the present may feel.

History is littered with examples of giants that fell not because they did something majorly wrong, but because they failed to do something different. Maybe they were just too comfortable.

Change will happen. So you need to get adept at Change.

That means taking a professional, structured approach to Strategy and Innovation – and giving them the time and resources that they need.

Stay curious, stay vigilant, and most importantly, stay uncomfortable. Don't let success and complacency be the killers of your company's future.

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Happy reading and listening over lunch,

Stephen