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Harvard Business Review Leader’s Handbook (5. Innovating for the Future)

The enterprise that does not innovate ages and declines. And in a period of rapid change such as the present, the decline will be first. – Peter Drucker

So why is sustained business success so ephemeral for most companies and many leaders? Every rise-fall-rebirth-fall-again story has its own particulars, but in the end, there are always two villains in the plot.

The first is external: even after a company has successfully transformed itself, markets will continue to shift, often suddenly; new technologies will emerge; and global economic shocks will periodically rock the system.

The second villain is internal: success breeds complacency, inward focus, and even arrogance.

Opportunities for innovation exist at all levels. If you’re now heading a company division, a business unit, or even a small team, you need to understand how that team contributes to the overall organizational portfolio of today’s cash tomorrow’s reinvention.

Whatever your leadership level or role, try to learn something that may catch the eye of more senior managers and perhaps become a showcase for next year’s broader corporate strategy.

There are four specific elements of this practice of actively championing future-focused innovation:

  • Balancing he present and future: creating bandwidth to focus on the future while still maintaining high performance in day-to-day operations
  • Getting ready for the future: developing the mindset, the funding, and the market intelligence to invest wisely in future-oriented areas of the business
  • Shaping the future: driving the innovation, experimenting, and learning to move your organization into new territory
  • Building a future-focused culture: infusing your organization with the skills, beliefs, and values to innovate well and to keep innovating and reshaping itself over and over again

Building sustaining success at Thomson Reuters

Smith’s most urgent challenge was to fix the Financial & Risk business, which was by far the largest in the company and had been losing share in a shrinking market for five consecutive years.

To address these issues, Smith set out to create an integrated, customer-focused enterprise that could take advantage of its scale and fuel its growth more through organic innovation than acquisitions – a transformation that would take a number of years.

To kick-start organic growth, Smith launched a number of innovation initiatives, coordinated y a central innovation team, to build a more flexible, dynamic, and forward-thinking culture inside the firm.

In the six years Smith became CEO, Thomson Reuters has become a vastly different company, now focused, as Smith puts it, at the intersection between commerce and regulation. As such, Thomson Reuters strives to help businesses of all sizes – from solo practitioners to global corporations – find answers to their most pressing problems. Along the way, the company has become more focused, more profitable, faster growing, and on the list of most admired and most desirable firms to work for. And while no company’s future is ever guaranteed, Thomson Reuter’s future seems more promising than ever.

Balancing the present and future

One of the biggest challenges for leaders is maintaining the continued operation of the core business or of their unit while also looking ahead to avoid future threats and create opportunities for future growth. While it’s easier to focus on one or the other, as a leader, you must do both, even if you are working in a mid-level role and are primarily responsible for generating cash or other near term operational results.

Creating bandwidth to focus on the future

A leader can easily be so focused on current challenges and problems that there is no time to think about the next quarter, much less the next decade – think of Stephen Covey’s dictum that the urgent drives out the important.

Finding bandwidth is often about personal discipline as much organizational cadence. That kind of discipline is necessary for good leaders at every level.

Taking a portfolio approach to innovation

“Innovator’s dilemma” that Harvard Business School professor Clay Christensen highlighted in his book of the same nave – where the success of innovation threatens the existing business and may result in trade-offs that stifle the innovation.

To manage this tension, consider the model of financial portfolio management: instead of putting all of your money in one place, you spread it around and create a diverse portfolio of different types of investments – stocks, bonds, small cap, large cap, domestic, international, and so on.

Tuck School of Business professors Vijay Govindarajan and Chris Trimble, in their HBR article “The CEO’s Role in Business Model Reinvention,” describe their “three box” approach. They argue that leaders need to balance and then continue to rebalance their investments between what should be “preserved and improved” in their current business, what should be “destroyed” because it is underperforming or has little upside, and what should be “created for the future.” There research suggest that most leaders significantly overweight their focus and investment on preservation, and don’t put enough thinking and resources behind what should be destroyed and created for future.

You can organize your innovation portfolio along a number of different axes. One way is to include projects with different time frames. As Robert Schaffer and Ron Ashkenas described in their book Rapid Results: How 100-Day Projects Build the Capacity for Large-Scale Change, adhesives maker Avery Dennison used a framework developed by McKinsey that separated projects by time horizons: horizon one projects were short-term innovations (less than two years) that would us existing proprietary technology; horizon two were medium-term innovations (two to five years) that required modifications of existing technology’ and horizon three were longer-term (more than five years) breakthroughs that required significant new research and development.

Another way to measure you innovation projects is by focus area.

Taking stock of your project project portfolio periodically, therefore, is a critical step for embracing the future and creating a sustaining enterprise.

Getting ready for the future

To innovate, you need resources and information about threats and opportunities to guide your idea generation and experimentation. You can develop both of these as part of your unit’s or team’s day-to-day work.

Build current surplus to fund the future

Investing in the future requires that you first generate cash from your current operations.

Incremental innovation through adjacencies

Incremental innovation based on your current offerings is a common – and often lower-risk – way to build investment cash.

Consider the matrix of products and markets in figure 5-1

Figure 5-1 Adjacency opportunities for growth

With this framework, you can ask your business leader (or even team members) to identify existing products or services that you could potentially introduce into new markets, and existing markets that would benefit from extensions or variations on your existing products. These categories of incremental innovation (the two shaded areas on the matrix) are called adjacencies.

Diversiting

Another way to free up cash and resources to invest in future opportunities is to sell off or close products, units, or parts of your business that don’t create great returns today and are likely not part of the future business.

Scan the horizon for breakthrough innovation

As you generate the cash, you also must be continually considering how to invest it, based on both potential opportunities and threats on the horizon. Your work in setting a vision and a strategy should give you a sense of this, but even apart from those specific practices, your understanding of a bigger picture for your business can help you identify particular areas for innovation. While some of the areas might be in the adjacency boxes depicted in figure 5-1, others might be in the upper-right quadrant – so-called breakthrough innovation, depicted in figure 5-2.

So-called breakthrough innovation involves a bigger leap (and usually a bigger risk-return profile) toward the future. As a leader, you must expand your awareness of new and more ambitious possibilities.

Figure 5-2 Breakthrough opportunities for growth

Depending on your field, scanning could also include reading specialized research, taking to influences in your field, or making benchmarking visits to noncompetitive visionary companies willing to share how the largest technology is changing their business.

As a leader, you can never become complacent or let your team become satisfied. By incorporating this kind of scanning into your daily work, you’ll prime your team or unit to take advantage of opportunities and avoid threats – right away.

Shaping the future

Once the innovation leaders began to get traction in their own businesses and functions, and bosses understood that innovation was now part of their jobs, ideas and innovation opportunities started to emerge from all corners of the organization.

Every team’s and company’s situation is different, and there is no one-size-fits-all approach for transforming innovative ideas into breakthrough growth engines. You will need to develop your own process. But three ways of thinking about innovation should inform it: getting a jump on disruptive innovation, leveraging the lean startup approach, and embracing failure in the service of learning.

Disruptive innovation

Harvard Business School professor Clay Christensen first coined the term “disruptive innovation.” As he describes, disruptive innovation is a process by which a smaller competitor quietly develops a new business model and, in so doing, suddenly shifts the competitive dynamics of an entire industry and its well-established companies.

In contrast, Christensen defines “sustaining innovation” as continual experimentation to improve and refine an existing business model. While sustaining innovation can provide substantial incremental growth, mastering disruptive innovation means that incumbent companies are more prepared for unanticipated threats and better able to transform as technologies and new ideas around them develop.

As a leader in an established company, you need to realize that unusual and often unseen competitors can disrupt your business at any time.

If you run established company or division, one way to prevent your own business model from being disrupted is to develop disruptive ideas yourself. In their HBR article “Meeting the Challenge of Disruptive Change,” Christensen and Michael Overdorf explain that doing this is usually difficult because your resources, processes, and decisions about priorities and investments are geared to the existing business and won’t accommodate or support an idea that doesn’t fit the current framework.

To overcome that and avoid the rejection of disruptive ideas out of hand, you can set up a special team of dedicated resources, separate from the existing business processes and pressure, to focus on the new idea.

Corporate venturing and partnering

Another way to deal with potentially disruptive competitor is “don’t beat ’em, join ’em” (or have them join you).

To make corporate venturing or acquisition work a source of future growth, leaders need to guide each investment so it prioritizes intelligence gathering and learning over immediate operating returns, though financial rewards may also accrue over time.

lean innovation

A second approach to innovation that is important for building a sustainable enterprise is the “lean startup” model described in Steve Blank’s HBR article, “Why the Lean Start-Up Changes Everything,” which we first referenced in our discussion of strategy. While Christensen’s approach focuses on the outside threat of disruption, the lean approach focuses on the process for advancing, changing, or discarding innovative ideas: it is an approach for systematically testing and developing a new business model for new feature, product, startup, or unit.

The core of the approach is rapid experimentation with real customers. Blank observes that creating detailed theoretical business plans for a new venture is often a waste, since those plans usually reflect a number of untested and usually false assumptions about customer behavior and desires. It’s better to spend your time rigorously and quickly testing those assumptions.

Leader of teams and organizations are often the ones with the most outside view, but the lean methodology requires everyone in the process to connect to potential customers and their understanding of the product.

Encourage controlled failure

Whatever your approach to innovation, you and your organization must be willing to learn from failure. Failure is a necessary component of learning.

To encourage failure in a controlled way, find opportunities for lean testing of initiatives like those described, in which concepts and assumptions are tested incrementally and thus with less risk.

Another way to encourage risk taking, failure, and learning is to set up a separate unit for developing a new business, product or service, similar to what we discussed as part of disruptive innovation. I his HBR article “Planned Opportunism,” Vijay Govindarajan stresses that this kind of “new-co” operates with a different set of metrics and expectations so that it can operate more freely and not have to hit the targets that would ordinarily apply and might stifle risk taking in the “core-co.”

How to learn from failure

Processes for encouraging failure are on thing; learning from it is another. In their HBR article “Increase Your Return on Failure,” Julian Birkinshaw and Martine Hass suggest three steps to make sure that you use your mistakes to grow: learn from every failure, share the lessons, and identify patterns.

In their HBR article “Learning in the Thick of It,” Marilyn Darling, Charles Parry, and Joseph Moore explain that AAR(after-action review) consists of a series of meetings and discussions with participants in a project or innovation team to assess what worked or what did not, what assumptions were used, and what should be done differently to improve either the current project or the next one.

Building a future-focused culture

Setting up a process and structure for innovation in your unit or team is one thing. But the process can never succeed if you don’t also build a culture to match. An innovative culture is one in which your employees are (and you encourage them to be) intellectually curious, open to change, resilient, and flexible. It means that they actively learn new ways of working (and learning from failure). It means they are future oriented, thinking for the long term. And it means that they have an appreciation and capability for innovation itself.

Research by McKinsey’s Dom Barton and others suggests that when leaders build this kind of long-term thinking into the way the company does business, it creates significantly greater financial return, market capitalization, and job creation over the long term – and not by a little, but by a lot (see the HBR article by Barton and others, “The Data: Where Long-Termism Pays Off”).

Developing a learning capability

The ability to learn rapidly is a critical capability for any organization committed to innovation. You can hire for this skill, but you also must develop your existing talent and put in place structures and mechanisms to foster the capability throughout.

Incentivizing innovation

In order for innovation to take root and become part of the culture, people on your team or in your organization have t o feel that you will reward and recognize the pursuit and development of new ideas, and not dismiss or punish them. Doing this is more difficult than it might seem.

In addition, many of Thomson Reuters’s innovation initiatives have helped make organic innovation part of the culture. Driven by an executive sponsor and a full-time innovation leader, these have included:

  • Building innovation metrics such as number of ideas in each stage of the innovation pipeline, the overall participation level of employees by rank and location, and survey results on employees’ sense that they can be innovative and receive recognition for their efforts
  • Appointing “innovation champions” in every business.
  • Orchestrating a communications campaign with blogs, articles, and video interviews with internal innovators and other employees’ views on innovation.
  • Organizing enterprise innovation workshops, with representatives from all parts of the business, to identify and plan efforts that would drive new or existing products or process solutions across the company’s platforms.
  • Launching an “operational innovation fund”, similar to the Catalyst Fund, to encourage more creative backend software development for operations centers.
  • Establishing Innovation Challenges to crowdsource solutions plaguing an area of the business or a customer group.
  • Supporting the innovation lab network, housed within the Technology organization, but leveraged across the entire company to consider emerging technologies and the art-of-the-possible to build solutions for the future.

All these steps, directed by a senior-level innovation steering committee, were initiated as experiments to focus on learning, adjusting, and figuring out what would work over time and then were iteratively improved.

Modeling innovative thinking

Your behavior as a leader sends strong signals about the kind of culture you are trying to create. Thus, to build innovation into your unit’s or company’s DNA, you and your leadership colleagues must personally demonstrate and exemplify it all the time.

Sustainability is up to you

There is no magic formula for continuous reinvention and ensuring that your unit or company will be sustained for the long term. The innovator’s dilemma is still alive and well and is not easy to overcome.

Wherever you sit in an organization, or whatever kind of organization you work in, adding future thinking and discovery to your job is also a stepping-stone for longer-term success. It will doubtless take you out of your comfort zone – there’s nothing easier than simply focusing on tomorrow’s deadlines – but it’s a discomfort every great leader has learned to embrace.

Question to consider

  • Balancing your own time. How much time do you spend focusing on getting things done today versus planning for the future? If your time is overly skewed toward the present, how can you create capacity for developing longer-term opportunities?
  • Scanning the environment. What do you do to identify and keep track of potential threats and opportunities for your team, both inside and outside your organization?
  • Solidifying the core and building surplus. Is your key existing business well managed? Is it creating some extra headroom to explore and pursue future-seeking opportunities?
  • Innovation portfolio. Do you have a portfolio of innovative experiments – with different time frames and risk profiles – that can help you and your team shape the future?
  • Freeing up time for innovation. Which of your team’s activities can you divest or stop that will give you more time and resources for innovation?
  • Building capability to innovate. Do your team members understand different types of innovation such as incremental adjacencies and disruptive and lean innovation? How can you educate them on these different approaches and give them opportunities to learn them through experience?
  • Failure and learning. To what extent is it all right for people on your team to take risks and fail? What can you do to encourage the right kind of controlled risk taking and deliberate learning?
  • Culture for innovation. What can you do to motivate your team members, individually and collectively, to continually look for new and better ways to conduct your business or contribute to your organization and customers? Can you give them time or seed money to shape new ideas? How well do you model a culture of innovation?

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