Why Companies Stop Innovating
Unlike
with startups, larger companies' emphasis on execution often stifles
innovation.
In the last few years we've recognized that a
startup is not a smaller version of a large company. We're now learning that
companies are not larger versions of startups.
There's
been lots written about how companies need to be more innovative, but very
little on what stops them from doing so. Companies looking to be
innovative face a conundrum: Every policy and procedure that makes them
efficient execution machines stifles innovation.
Facing
continuous disruption from globalization, China, the Internet, the diminished
power of brands, and the changing workforce, existing enterprises are
establishing corporate innovation groups. These groups are adapting or adopting
the practices of startups and accelerators--disruption and innovation rather
than direct competition, customer development versus more product features,
agility and speed versus lowest cost.
But
paradoxically, in spite of their seemingly endless resources, innovation inside
of an existing company is much harder than inside a startup. For most
companies it feels like innovation can only happen by exception and heroic
efforts, not by design. The question is: Why?
The Enterprise: Business Model Execution
We
know that a startup is a temporary organization designed to search
for a repeatable and scalable business model. The corollary for an enterprise is:
A
company is a permanent organization designed to execute a repeatable and
scalable business model.
Once
you understand that existing companies are designed to execute, then you
can see why they have a hard time with continuous and disruptive innovation.
Every
large company, whether it can articulate it or not, is executing a proven business model. A business model guides
an organization to create and deliver products/services and make money from
them. It describes the product/service, who is it for, what channel
sells/delivers it, how demand is created, how does the company make money, and
so on.
Somewhere
in the dim past of the company, it too was a startup searching for a
business model. But now, as the business model is repeatable and scalable, most
employees take the business model as a given, and instead focus on the execution
of the model--what is it they are supposed to do every day when they come to
work. They measure their success on metrics that reflect success in execution,
and they reward execution.
It's
worth looking at the tools companies have to support successful execution and
explain why these same execution policies and processes have become impediments
and are antithetical to continuous innovation.
20th century Management Tools for
Execution
In
the 20th century, business schools and consulting firms developed an
amazing management stack to assist companies to execute. These tools
brought clarity to corporate strategy and product line extension strategies,
and made product management a repeatable process.
For
example, the Boston Consulting Group 2 x 2 growth-share matrix was an easy-to-understand
strategy tool--a market selection matrix for companies looking for growth
opportunities.
Strategy Maps are a visualization tool
to translate strategy into specific actions and objectives, and to measure the
progress of how the strategy gets implemented.
Product
management tools like Stage-Gate® emerged to systematically manage
Waterfall product development. The product management process assumes that
product/market fit is known, and the products can get spec’d and then
implemented in a linear fashion.
Strategy
becomes visible in a company when you draw the structure to execute the
strategy. The most visible symbol of execution is the organization chart. It
represents where employees fit in an execution hierarchy; showing command and
control hierarchies--who's responsible, what they are responsible for, who they
manage below them, and who they report to above them.
All
these tools (strategy, product management, and organizational structures) have
an underlying assumption. That is, that the business model--which features
customers want, who the customer is, what channel sells/delivers the product or
service, how demand is created, how the company makes money, etc.--is known,
and that all the company needed is a systematic process for execution.
Driven by Key Performance Indicators (KPI’s)
and Processes
Once
the business model is known, the company organizes around that goal. It
measures efforts to reach the goal, and seeks the most efficient ways to do so.
This systematic process of execution needs to be repeatable and scalable
throughout a large organization by employees with a range of skills and
competencies. Staff functions in finance, human resources, legal departments,
and business units developed Key Performance Indicators, processes, procedures,
and goals to measure, control and execute.
Paradoxically,
these very KPIs and processes, which make companies efficient, are the root
cause of corporations' inability to be agile, responsive innovators.
This
is a big idea.
Finance: The goals for public
companies are driven primarily by financial Key Performance Indicators (KPI's).
They include: return on net assets (RONA), return on capital
deployed, internal rate of return (IRR), net/gross margins,
earnings per share, marginal cost/revenue, debt/equity, EBIDA, price earning ratio,
operating income, net revenue per employee, working capital, debt to equity
ratio, acid test, accounts receivable/payable turnover, asset utilization, loan
loss reserves, minimum acceptable rate of return, etc.
(A
consequence of using corporate finance metrics like RONA and IRR is that it's a lot easier to get these numbers to look great by 1) outsourcing
everything, 2) getting assets off the balance sheet, and 3) only investing in
things that pay off fast. These metrics stack the deck against a company that
wants to invest in long-term innovation.)
These
financial performance indicators then drive the operating functions (sales,
manufacturing, etc.) or business units that have their own execution KPI's
(market share, quote to close ratio, sales per rep, customer
acquisition/activation costs, average selling price, committed monthly
recurring revenue, customer lifetime value, churn/retention, sales per square
foot, inventory turns, etc.)
HR
Process: Historically,
human resources was responsible for recruiting, retaining, and removing
employees to execute known business functions with known job specs. One of the
least obvious but most important HR Process issues--and ultimately the most
contentious--in corporate innovation is the difference in incentives.
The incentive system for a company focused on execution is driven by the goal
of meeting and exceeding "the (quarterly/yearly) plan." Sales teams
are commission-based; executive compensation is based on EPS, revenue, and
margin; business units on revenue and margin contribution, etc.
What
Does this Mean?
Every time another execution process is added, corporate innovation dies a little more. Innovation is chaotic, messy and uncertain. It needs radically different tools for measurement and control. It needs the tools and processes pioneered in Lean Startups.
Every time another execution process is added, corporate innovation dies a little more. Innovation is chaotic, messy and uncertain. It needs radically different tools for measurement and control. It needs the tools and processes pioneered in Lean Startups.
While
companies intellectually understand innovation, they don't really know how to
build innovation into their culture, or how to measure its progress.
What
to Do?
It may be that the current attempts to build corporate innovation are starting at the wrong end of the problem. While it's fashionable to build corporate incubators, there's little evidence that they deliver more than "innovation theater." Because internal culture applies execution measures/performance indicators to the output of these incubators and allocates resources to them the same way as to executing parts of company.
It may be that the current attempts to build corporate innovation are starting at the wrong end of the problem. While it's fashionable to build corporate incubators, there's little evidence that they deliver more than "innovation theater." Because internal culture applies execution measures/performance indicators to the output of these incubators and allocates resources to them the same way as to executing parts of company.
Corporations
that want to build continuous innovation realize that innovation happens not
by exception but as integral to all parts of the corporation. To do so
they will realize that a company needs innovation KPIs, policies,
processes and incentives. (Our Investment
Readiness Level is
just one of those metrics.) These enable innovation to occur as an integral and
parallel process to execution. By design, not by exception.
We'll
have more to say about this in future posts.
Lessons Learned
·
Innovation inside of an existing
company is much harder than a startup
·
KPIs and processes are the root
cause of corporations' inability to be agile and responsive innovators
·
Every time another execution process
is added, corporate innovation dies a little more
·
Intellectually companies understand
innovation, but they don't have the tools to put it into practice
·
Companies need different policies,
procedures, and incentives designed for innovation
·
Currently the data we use for
execution models the past
·
Innovation metrics need to be
predictive for the future
·
These tools and practices are
coming…
BY Steve
Blank http://www.inc.com/steve-blank/why-companies-are-not-startups.html?cid=em01020week10a
No comments:
Post a Comment