Innovation

The organisational roots of disruptive innovation

The classic definition on disruptive innovation has two main parts. One is the existence of organisations that have the power and resources to scale a new but untested technology; the second is that incumbent organisations focus on the current and near term needs of their existing clients. That means they spend their resources on responding to these with incremental or sustaining innovations rather than being radical.

October 3, 2016

What if that characterisation were wrong?  It goes without saying that innovation and disruption are bound to be more complex than this two-factor model and it is probably that we have been over-simplifying. In this article I want to:

Illustrate this with reference to one of the best-known examples of disruption, Kodak, then suggest a more up-to-date analysis of disruptive innovation in action, and outline some concrete steps for becoming disruption-ready.

The KODAK Assumption

KODAK is part of innovation folklore – the wet film giant undone by its inability to respond to digital cameras.

That storyline, however, is false. Well before digital became a problem KODAK had begun losing revenues. KODAK lost market share in wet film to Fuji and the reason for this lay in changes to the retail sector in the US, in particularly the rise to dominance of Walmart. Walmart wanted cheap photo-processing solutions and chose Fuji as its supplier, ahead of KODAK. Given Walmart’s scale this one contract was a game changer.

Quite apart from this wet film challenge (Fuji used exactly the same technology as KODAK), KODAK was actually a highly successful innovator in digital technology.

KODAK engineers had invented to OLED displays that are now common in smartphones and autos. However, they chose a licensing model rather than direct manufacturing and became a barrier to OLED uptake because of high licensing fees. Their inexperience in IP management almost killed an industry that they led.

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In digital cameras, KODAK was number 1 in the US market in 2005 and was making billions of dollars from sales. Sadly KODAK’s production costs were far too high and, despite being a leader, the company was losing money on digital camera sales, a problem that became more acute as the market for digital became commoditized.

These three factors alone suggest that KODAK is not a simple “disruptive innovation” story. The very fact of losing market share in its traditional business was enough to shake investor confidence. The complex run of events in large corporations made it difficult to innovate while under pressure from investors; and the OLED experience must have added to the sense that senior executives could not get innovation right.

All that culminated in an organisational feud between the wet film and digital divisions. In an article in MIT SLoan Management, ex-KODAK executive Willie Shih explains that management tried to integrate these divisions, with fatal results.

There’s a couple of other factors to take into account. Semiconductor manufacture, essential for digital, has a quite different learning curve from wet film.

Semiconductors require scale but they also require a very fast learning curve, a factor that was well suited to Asian producers.

Digital is all about sensor technology and having the gate arrays to extract data and then manipulate it. At the same time the technology was being miniaturised and began appearing in mobile phones.

Rethinking disruptive innovation

When thinking about disruptive innovation today it is important to distinguish between vertical innovations, those that belong to one industry sector; and horizontal, those that are cross-sectoral.

In generic terms, several horizontal technologies had began to emerge at the time of KODAK’s demise.

The first, of course, was semiconductor technology, which could be applied in a growing range of products; another was the CMOS camera on a chip, the miniaturised sensors that permitted photography everywhere; the other was the intrusion of software and the ability to build applications around sensor data.

This idea of horizontal technologies is extremely important. It continues with innovations like the platform and ecosystem model of the enterprise. Platform companies like Alibaba now have an extraordinary range of activities because ultimately they are not in any one business. They are in whatever businesses they want to be in.

Platforms bring with them a second order threat to every non-platform company. They do not function in verticals. They function horizontally. They function best where industries are converging. And they force convergence onto industries – look at how Alibaba is forcing the convergence of retail, logistics, and finance.

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What to do about disruptive innovation today.

Platform disruption consists of five significant elements:

The new organizational model, the platform. This is coupled to the broader drift towards horizontal economic activity as distinct from verticals. That horizontal feature is powered by the ability to leverage third party assets – cars, flats, developers, content, drones, etc. Currently this is being powered further by participation platforms that draw thousands of customers into product and service feedback loops.

Scale through infinite endpoint management. That is the capacity to break the scale barrier and grow exponentially without adding undue cost to the business.

The transition in innovation models away from invention, and even away from lean, to improvement cultures such as the Asian incremental change model, and organizational learning. This is often process model innovation not business model innovation.

Integration – the move away from single service offerings to the kinds of integration of services on one platform that we see with Alibaba.

The externalization of core functions – an early observation that Nick Vitalari and I made in the Elastic Enterprise is the capacity of firms to externalize risk to an ecosystem. In many cases externalization goes further – and it will have to. Laggards in process model innovation will have to externalize any of their processes but they can do so more easily than ever because of the Cloud and microservices (see companies like Form3 in banking).

The question remains how does an enterprise plot a roadmap for this type of process model?

The traditional view of disruptive innovation is that you must delegate innovation to a new unit or separate subsidiary and go from there – Intel’s Celeron processors are a good example of that.

But this separate and conquer policy has now gone too far. There are labs, skunkworks, incubators and accelerators, all dragging core innovation responsibility to an isolated place where executives no longer oversee radical innovation and where that innovation therefore gets lost.

That’s not to say the delegation is wrong. In some cases it doesn’t go far enough. In a study of over 5,000 companies and their innovation reputations, I found that externalising core processes was a key to separating winners from losers. That research has been validated again and again. Externalising core processes is critical to success.

Those successful companies also thought like platforms and pushed strongly into new IT processes as early as possible. In other words they wasted no time in making essential intellectual infrastructure changes and  in implementing process model innovation,

In the past, the key to significant changes has lain in building effective learning models rather than in creating new units to scale new products. The key was process model innovation.

Japanese companies obliterated the US TV receiver industry because they were able to learn more quickly about semiconductor production improvements. South Korean companies like Samsung won at OLED because they hired Russian TRIZ experts who introduced a new form of problem solving into the enterprise. Apple and Google win, in large part, because their IT systems are set up to learn about customers in as many ways as are imaginable.

In my experience, if you are not already a platform company, it is the small teams that are focused on learning that can make the difference. These are least appreciated by their organization but they could be the most powerful asset.

Maverick teams led by people who are prepared to take on career risk to get things done are the people who need to be unleashed.

Lurking behind all this is the need to maintain investor confidence, so nobody should pretend the decisions are easy but here nonetheless is a sample agenda for change.

  1. Begin thinking like a platform by examining what third party assets are underutilised in your ecosystem, communities or general economic environment. Believe your industry will transform. It will converge with others; it will be damaged and yet also improved by being caught up in a horizontal wave.
  2. Take a chance on scale – just for a minute abandon the idea that you are already highly scaled and think of a customer base 10 or twenty times the size of the one you have now. What might the enterprise look like if it were delivering to that? What products, services and price points would work? What kind of customer participation would make this kind of scale easier?
  3. Identify the people you know who have taken career risk before and talk with them about their teams and their learning agendas. What is top of mind for them – IoT, AI, microservices, the sheer struggle to keep up? What is blocking their performance? Talk to them about the corporate decision process (in another study we found over 60% of executives used traditional decision criteria in transformation projects). In most cases decision making remains episodic (the yearly budget cycle) when it needs to become continuous (responding to data) – what collegiate structures might allow this to work?
  4. What sacred cows can you externalise to the Cloud and to third party providers in order to unblock your organisation? What core processes, from marketing to applications to key infrastructure? Which of your precious core competencies will you abandon?
  5. Adapt senior management thinking to the thinking and customs of the new ecosystems emerging around you. In The Elastic Enterprise Nick and I referred to this as building peer leadership capabilities. Take a good look at GE, where CEO Jeff Immelt has increasingly aligned himself with the diversity of his workforce.
  6. What services would you need to integrate in order to grow continuously?