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Chapter 3: Become an innovation powerhouse

Create your transformation roadmap
Company transformation to fully empower innovation is imperative to remain competitive today

It is critical to have a sound growth strategy before jumping into any innovation initiatives. The organisation needs to be clear where to innovate internally and where to leverage external innovation or partner with startups.

For the identified innovation streams in your organisations, intrapreneurs need to be identified and innovation teams formed. An innovation board must be established to provide the overall innovation governance. Organisational realignment is required to make the innovation engine work and vital shifts needed to adopt innovation culture as part of a company’s “new DNA”.

The transformation blueprint outlined below in figure 7 reflects best practices required for organisational restructuring to succeed in times of an industry disruption. Companies can use this framework and create their own transformation roadmap.

 

The ‘Transformation blueprint’ depicted here outlines the key steps of organisational restructuring. It is not meant to be linear and requires an agile approach towards planning, execution, and implementation. The actual journey includes parallel activities on multiple fronts with many iterations.

Discover industry disruption

The discovery phase is the most important aspect of any transformation; akin to starting a new business. You need to understand the current offerings, technology and services; and you need to know the future trends. This can be achieved with a few simple initiatives summarised below.

The transformation journey should begin with a thorough understanding of industry disruption and relevant emerging technologies. There are several sources of adequate thought leadership on these topics. The World Economic Forum facilitates multiple research projects to assess the impact of technologies on different industries and society overall. Management consulting companies are increasingly focusing on digital transformation and industry disruption. Books on innovation help leaders understand different idea generation and product design methodologies, intrapreneurship principles, and startup partnership best practices. There is a new breed of conferences focused on FinTech, InsurTech, HealthTech and other industry-specific startup innovations. Finally, there is an increasing number of articles and publications in the media about emerging technologies and innovation methodologies.

Visits to Silicon Valley and other startup ecosystems open executives’ eyes to the scale of startup innovations happening today. Corporate leaders realise that startups are not just few ‘techies’ in a garage any more. These are well-funded, highly intelligent groups of people who apply the latest technologies to solve real business problems.

Visiting startups in their own offices is quite a different experience than listening to a lecture in a stylish auditorium at a leading university. In such settings, one can “touch and feel” the innovation culture and enthusiasm of new ideas. Direct dialogs with startup founders are not only insightful, but also have a lasting motivational effect. At the end of such visits, executives are full of energy to kick-start their own company’s innovation initiatives.

Researching new solutions developed by startups for your industry delivers an amazing insight into the future. Some of these solutions will be competing products, others will be complementary to your business or serve as components of your own next generation product. There are market research firms that can help you navigate the startup landscape with their startup databases and industry trends reports. Universities and research labs are a great resource to discover technologies that will soon be available for real-life business applications.

 

Define business strategy

The discovery phase is followed by refinement of your existing business strategy. Although this is easy to conceptualise, it is hard to finalise, therefore an agile strategy is recommended – where business strategy is formulated using a lean startup. This involves real-time customer engagement during the process at frequent intervals (the feedback loop is shorter).

A successful transformation must include rigorous definition of the organisation’s new business strategy. Companies traditionally were focused on winning in their existing industries by creating incrementally better products, improving performance and reliability, and running more creative marketing campaigns. In contrast, a company’s survival now depends on a host of factors, including its ability to diversify, smartly leveraging the existing customer base and other core strengths of the organisation.

With shorter industry life-spans, traditional businesses need to disrupt themselves before being disrupted by ’unicorns’ or more dynamic peers in the industry. Disrupting your own business obviously leads to a loss in revenue. The only alternative to grow the business overall is to go after new fast-growing markets. First-movers have a chance to gain significant market share. As an example, Amazon grabbed market share of 44 percent in US ecommerce[i] and 47 percent in cloud computing[ii] businesses. It is very difficult for competitors to catch up given that even a small timing advantage is essential in these quickly developing markets.

Traditional physical products and services are undergoing radical digital transformations. Many products have been given a “digital wrapper” for a better user experience. Some products are now getting upgraded for smartness and autonomy. In the car industry, cars are on their way to becoming self-driving. Washing machines will order laundry detergent on their own. In the airline business, dynamic ticket pricing models using big data and machine learning now determine success or failure of a company more than any incremental operational cost savings.

As differentiation between businesses moves to the technology space, each company needs to become technology-driven. Today, digital technologies are used for improved user interface and enhanced support. In coming years, physical and biological technologies will also mature and become available for business applications.

Technology should be applied not only inside the company’s products, but also for the whole manufacturing process of creating traditional products. Robotics and AI can enable significantly higher level of automation and transform the company into a robotic enterprise.

If the company decides to go after new high-growth, high-margin businesses, it needs to decide what role in the whole value chain it plays. For example, Nike and Apple design their products, but don’t manufacture their products themselves. Marketing is also highly outsourced.

Back-office functions can be consolidated and outsourced to information technology (IT) and business process outsourcing (BPO) vendors, potentially even sold to these providers as a recurring business. For example, Procter & Gamble has already outsourced nearly 80 percent of their back-office functions.[iii] General Electric spun off Genpact as a standalone entity in 2005.[iv] VEON consolidated its finance, human recources (HR) and IT in centralised shared service centres as part of their restructuring to reduce cost and increase agility of these functions.[v]

Another area to re-examine is the global supply chain. With 3D printing, the difference in labour costs internationally will no longer be a decisive factor in choosing a production location. The greater spatial flexibility with 3D printing will bring production closer to sale locations and drive major changes in redistribution of production and outsourcing across the globe. Fashion retailers such as Zara are already relying on local factories for their production needs. [vi]

Launch products and services

Now that your strategy is defined, you have to design and launch products and services. This section summarises a few initiatives to undertake.

Entering a completely new market that has not been explored before is very different than the incremental innovation practiced by most traditional businesses. The customer requirements are not yet known and the sustainable business model is not yet found. This is where corporate startups come in. Steve Blank defines a startup as “a temporary organisation designed to search for a repeatable and scalable business model”.[vii]

To operate at this high level of uncertainty, companies need to adopt a method of rapid experimentation with continuous progress measurements, quick learning to prove or dismiss the initial assumptions, and pivoting when required. The Lean Startup methodology has been popularised as an operational model for startups. Eric Ries describes it as “a set of practices for helping entrepreneurs increase their odds of building a successful startup”.[viii]

The effort to launch new products can commence with few talented and energetic managers taking on an interesting innovation initiative, and eventually expanding this approach across the company. Companies then learn how to efficiently manage multiple internal startups and launch new offerings using the latest emerging technologies.

Given that startup innovation is already such a powerful source of new solutions, companies need to adopt a comprehensive approach leveraging corporate investments, M&A, and startup partnership engagement models.

  • Corporate investments are typically done in collaboration with independent venture capital firms. Corporate investment teams are continuously evaluating the market for breakthrough ideas and solutions acting as the “eyes” of the company. Even when the company decides not to set up a standalone investment fund, tactical investments can still be done while engaging early stage startups on joint projects.
  • Mergers and acquisitions allow an organisation not only to add new products but also enhance the leadership team with new entrepreneurial talent. To retain this talent, the company should show the acquired management team a bigger scope for expansion and provide the needed support.
  • Startup partnerships are used to bring on board third party products for internal automation or as components in a bigger customer offering. These activities should bypass bureaucratic procurement processes to be successful.

While the latest technologies are applied towards new products and services, the same needs to be done with the product manufacturing, service delivery, supply chain and back-office functions. Advanced robotics can take over more and more steps at an assembly line. AI enables comprehensive data analysis at a better level than even talented individuals can accomplish. The ‘internet of things’ can help reduce product maintenance cost and improve product uptime.

Automation in the past would mean a multi-year software development project to build a custom application. Customization of COTS (commercial off the shelf) products later became a more efficient way of deploying ERP and CRM systems. Today, with micro-services architecture, the overall solution is assembled from individual product components. Some of these could be developed in-house, while others could be developed in collaboration with startups even when a startup doesn’t have a fully functioning product yet.

Change organisation and culture

We admit this stage expends a lot of effort, requiring significant leadership and executive support. This stage goes to the heart of redesigning the organisation, hence its culture, a critical aspect of becoming an innovation powerhouse.

Many fundamental changes in organisational structures are required to enable corporate startups and drive innovation across the company. Independent innovation teams are formed as internal corporate startups. Innovation boards are established to oversee companywide innovations. Corporate investments, mergers and acquisitions, and startup partnerships teams are formed and integrated into the overall governance model.

A “business portfolio” model is now gaining momentum, when each of several businesses under one umbrella operates independently and has its own product design, manufacturing and supply chain. In this approach, certain back-office functions can be moved to a shared services centre to support multiple businesses within the portfolio. Some corporate startups can grow into such independent businesses over time.

Hierarchical reporting with multiple management layers is giving way to “flat” organisational concepts with redefined roles, in which everyone contributes as opposed to a group of people simply managing others. Such self-management practices are aggregated under the concept of “Holacracy”.[ix]

Innovation teams need to have entrepreneurial managers, often called intrapreneurs. Without this type of personnel nothing will move. The good news is that most organisations have this kind of talent, but are not fully unleashing the creativity of these people and are not properly supporting their innovative initiatives.

Intrapreneurs can undergo training and mentorship in the lean startup operating model and other innovation methodologies. Leading universities have begun introducing special educational programs for intrapreneurs. Talent coming into the company from startup acquisitions can be retained when these people feel empowered and see that they can do more within an enterprise than outside on their own.

The times when innovation is done strictly inside the R&D department are over. Successful organisations today, through employee empowerment, allows everyone to be responsible for innovation. Multiple independent innovation teams led by intrapreneurs in each business unit are experimenting and testing their ideas in the marketplace. Experimentation becomes the norm, and failures on innovation projects are treated with respect and used for continuous learning.

An innovation culture needs to become part of the DNA of every enterprise. Strong corporate values, customer-centricity, employee empowerment, flat organisation, experimentation, big thinking and agility are just some of the key principles practiced by successful organisations. Startups built on these ideas release new products at amazing speed while operating within extreme financial constraints. As an example, Amazon has a well-established and diligently-practiced fourteen management principles.[x]


End notes

[i] Molla, R., 2017. Amazon could be responsible for nearly half of U.S. e-commerce sales in 2017. Viewed 8 November 2017. Available at: https://www.recode.net/2017/10/24/16534100/amazon-market-share-ebay-walmart-apple-ecommerce-sales-2017

[ii] Coles, C., 2018. Overview of Cloud Market in 2017 and Beyond. Viewed 9 November 2017. Available at: https://www.skyhighnetworks.com/cloud-security-blog/microsoft-azure-closes-iaas-adoption-gap-with-amazon-aws/

[iii] Spagat, E., 2002. Procter & Gamble to Outsource About 80% of Back-Office Work. Viewed 14 November 2017. Available at: https://www.wsj.com/articles/SB1024004703670348160

[iv] Genpact, 2017. Genpact and GE Extend Master Services Agreement with a Deeper Leverage of Digital Technology and Analytics. Viewed 14 November 2017. Available at: http://www.genpact.com/about-us/media/press-releases/2017-genpact-and-ge-extend-master-services-agreement-with-a-deeper-leverage-of-digital-technology-and-analytics

[v] Trentmann, N., 2017. Veon to Overhaul Finance, Back Office Systems in Bid to Increase Transparency. Viewed 15 November 2017. Available at: https://blogs.wsj.com/cfo/2017/08/04/veon-to-overhaul-finance-back-office-systems-in-bid-to-increase-transparency/

[vi] The Fasion Law, 2016. Fast fashions green initiatives don’t believe the hype. Viewed 16 November 2017. Available at: http://www.thefashionlaw.com/learn/fast-fashions-green-initiatives-dont-believe-the-hype

[vii] Blank, S. 2017. Why Companies are Not Startups. Viewed 16 November 2017. Available at: https://steveblank.com/2014/03/04/why-companies-are-not-startups/

[viii] Ries, E., 2011. The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. Crown Publishing Group (USA). pp 26.

[ix] HolacracyOne, 2018. How it works. Viewed 21 November 2017. Available at: https://www.holacracy.org/how-it-works/

[x] Amazon.com, Inc., 2018. Amazon: Leadership Principles. Viewed 22 November 2017. Available at: https://www.amazon.jobs/principles