Talking about disruption is easy. Navigating disruption, however, requires the right innovation processes, talent and culture.
Anyone doing business today is doing it in an environment buffeted by shifting commercial models, changing consumer behaviors, and a host of new, agile market entrants. Behind all this, wider political, technological and environmental factors exert deeper, more seismic forces on the worldwide landscape of enterprise.
The most significant of these forces has been that of digitization, which has hastened globalization and transformed every aspect of commerce from product origination, through supply chains to customer experience. Any business hoping to survive, much less thrive, in this transformative age now needs to consider the impact of digital from every angle.
Of course, acknowledging the problem is not the same as solving it. “Most mature multinational enterprises recognize the need to plug into new trends, to listen for weak signals in their ecosystems and to bring the outside in. That’s not the hard part,” writes Liz Bolshaw, Lead Analyst for EY Global Growth Markets.
With that in mind, four digital professionals from across EY here give their views on how businesses can best respond to disruption.
The innovator’s dilemma
Innovation is what equips businesses with the tools with which to respond to disruption– but of course, not everyone has the time and resources to do this. It’s what’s known as “the innovator’s dilemma,” and many organizations struggle with it. Kelly Brough, Partner at EY Asia-Pacific Digital, defines the dilemma as “where companies are maintaining their existing revenue streams and business models, while at the same time developing new ones in parallel.”
The innovator’s dilemma presents a major challenge for all types of businesses. Nearly 50% of the respondents to EY’s CEO Imperative Disruption Readiness Survey said they are unprepared to take advantage of the opportunities of disruptive change. Overcoming this is vital if businesses want to thrive in the digital age. And this means establishing the fundamentals that can support innovation both for today and the future.
Chapter 1: Avoid the Theatre of Innovation
High visibility innovation initiatives are not always effective enterprise -wide strategies
The need to demonstrate results to internal stakeholders can all too often lead to experimentation for its own sake. This is what we call the “theater of innovation” – the creation of high-visibility initiatives, far removed from a comprehensive, enterprise-wide innovation strategy.
An effective strategy needs to be meaningful and aligned to a company’s overall purpose, if it is to make a difference – not something simply bolted on to existing business models.
“Established industries are trying to understand all of the disruption around them to determine what can they do to their old legacy business and innovate from the core,” says Kevin Salsberry, Principal at EY Americas.
It can be difficult, even painful, for organizations with long-running business models to implement a transformational digital innovation strategy. But such approaches may be necessary for their long-term survival in a disruptive world.
“It’s a unique set of circumstances that enables an organization to maintain all of its existing core profits and enter another business in parallel in a way that truly does not cannibalize any of their existing business. But more often than not, I think it’s advisable that companies accept some cannibalization to drive future high-growth business, even if this duality is hard to achieve,” says Brough.
Play to the right rhythm?
Another stumbling block for those looking to avoid the theatre of innovation are the different timescales within which different stakeholders operate. “A culture of innovation requires a long term horizon or infinite game, balanced with an orientation of releasing minimum viable concepts or products to market,” says Salsberry. “However, any public company will tell you they’re playing at a quarterly rhythm, and struggle with how to balance this bimodal model.”
However, EY findings indicate a shift in sentiment is under way. In the disruption readiness survey, 67% of investors indicated they wanted companies to undertake more potentially disruptive projects, even if they were risky and did not deliver immediate returns.
So how should business leaders approach implementing, funding and scaling digital innovation projects that could define the business future success?
Chapter 2: Determine How Much Risk Can You Stomach
Develop a hypothesis first, then test it.
There are many things that separate disruptors from the disrupted. The first thing to do, though, is to start thinking and planning like a disruptor – and this means doing things differently. “Conditions that foster innovation include autonomy and freedom, insulation from the orthodox, small team size, a relentless focus on solving consumer problems, a lean start-up approach that encourages experimentation, no failure stigma and a bias toward non-conformity,” writes Bolshaw.
Balance innovation and risk
“Organizations that are successful at disruptive innovation are those that create a framework that meets their risk profile,” says Brough. If you want to be good at innovation, be realistic about how much risk you can stomach, and how that relates to existing product lines – and then proceed in a way that recognizes this framework.
“If you’ve identified a potential opportunity, you ideally need to start testing that theory in a relatively inexpensive way.”
This gradualist approach can be achieved by finding the metrics that allow you to keep within your risk parameters. “One of the classic pieces of advice given to start-up entrepreneurs as social networks were becoming really popular was to run an ad on a social network and see if anyone clicks on it. That tells you whether people are interested in your idea,” says Brough.
“You bound your risk by the amount you invest, you test a hypothesis, and then you increase your investment as your hypothesis continues to hold true.”
Spin out innovation business units
Spinning out separate innovation units allows for distinct, innovative ideas to be tested without confusion around who owns the project, and without the risk that failure will contaminate other business lines.
However, it’s something that companies are struggling with. In EY’s disruption readiness survey, only 31% said they were good at developing separate and autonomous innovation units.
Albert Lee, EY Asia-Pacific Tax Technology and Transformation and Digital Tax Leader, also stresses the need for genuine buy-in at the leadership level if innovation units are to succeed. “A lot of companies set up innovation hubs and teams, but I think a lot of them are done without an overall strategy and direction, or true executive support.”
“Sometimes the innovation groups are a bit like the modern version of the suggestion box. But it takes commitment to get these ideas executed, after they’ve been collected,” says Lee.
Pick the right partner
Building digital ecosystems that can link multiple capabilities is an essential piece of the disruptor’s toolkit. In practice this can be challenging, particularly for large legacy firms looking to build out their competences through acquisitions. “These big companies are exposed to so many small companies, one of their core challenges is they don’t know how to how to evaluate new innovation,” says Salsberry. “This means they can struggle to ensure their partnership or acquisition strategy will create rather than destroy value to their organization.”
This difficulty can be exacerbated in situations where companies are looking outside their own industry for acquisitions – something which 62% of survey respondents indicated they were doing.
Consider early-stage investing – carefully
Usually associated with venture capital funds and angel investors, early-stage investing is also an increasingly popular strategy with companies, via their corporate venture capital (CVC) arms – which we’ve also written on here. In the five years before 2016, the number of corporate venture firms grew by 300%. Rock band Linkin Park and children’s TV show Sesame Street even have their own CVC units. “Today, corporate venture capital (CVC) participates in one in four venture deals and is active well beyond its heartland in technology and life sciences,” writes Bolshaw.
This isn’t without risks, however, and start-up investments can often fail to take hold. In EY’s survey, companies acknowledged there’s room for improvement in the corporate acquisitions space – just 33% of those surveyed indicated that they were good at start-up investing. But, as Brough says, “you shouldn’t be in early stage investing if you’re not ready to take a leap of faith.”
Will Duckworth, EY Asia-Pacific Digital Leader and Partner, also counsels a gradual approach to investing. “What you do is start with a minimum viable product. Start small and pick one or two, and place a couple of small bets that are not going to break the organization,” he says.
Learn to fail fast
Failure is an essential part of the learning process, especially when it comes to practicing disruptive digital innovation. Keeping struggling projects on life support can sap talent and resource from an organization that could be better spent elsewhere.
“All too often, organizations are too slow to ditch bad ideas,” says Duckworth. “Even organizations that are good at innovation still hate to kill their ideas, because that’s admitting they’ve just wasted money. But I think it’s essential, otherwise you just keep on wasting money.”
Enable organizational change
But as Duckworth points out, “Change in business isn’t actually just about technology. It’s about organizational change, culture change, and process change, and this is a multiyear proposition for many clients.”
So what are these internal changes that businesses should make? How can they develop their capabilities as lean, dynamic organizers? And is the in-house talent up to the job?
For businesses who are committed to making the organizational changes needed to encourage disruptive digital innovation, the next step, then, is to nurture the leadership and talent that can oversee this process.
Chapter 3: Leadership and Talent
Leaders must bring the outside in
All parts of business leadership play a role in the disruptive innovation agenda, from the board, to the C-suite, to other corporate management positions.
- Board: “In terms of acceleration, you need to make sure that, from the board down, you’ve got buy-in for the innovation agenda,” says Duckworth. EY’s survey found that among the most disruptive companies (a category the survey termed “butterfly companies”), 94% reported there was frequent board discussion of disruption issues. Among the least disruptive companies (which the survey categorized as “caterpillars”) that figure dropped to 70%. It’s also important that boards deliver on their status as experts. “Every board member has an obligation to use their area of specialization – the reason they’re on the board – and use that to help drive business, contribute to the strategy, and remove barriers from the organization at the management level,” says Salsberry.
- CEO & C-suite: As with board involvement, leading companies also reported more intensive CEO involvement in innovation. Among butterfly companies, 78% reported the CEO owned the corporate disruption agenda – this figure dropped to 47% among caterpillar companies.
- Function management: Innovation functions are a key element in a disruptive agenda – 58% of respondents indicated they had set up a separate governance function to facilitate such innovation. Managers of these innovation functions need to be chosen carefully if they’re going to be successful at leading this change. “All too often, we just throw in good leaders from other parts of the business, without any prior experience in the new area, and expect them to grow a business. I think you’ve got to mix the talent you have with people who’ve got some track record before of having delivered on a similar agenda,” says Duckworth.
The wider talent picture
Beyond leadership roles, any disruptive innovation strategy needs to be built on a talent and hiring approach that brings together a diversity of opinions and experiences. After all, how can organizations think differently if it’s the same brains as usual doing all the thinking?
“Unless the executive and leadership layer are committed to bringing in outside thinkers, then organizations will completely miss out on the innovation agenda.” says Salsberry. Diversity isn’t just good for its own sake – there is a measurable correlation between greater levels of diversity and better commercial performance, as EY studies have found.
Chapter 4: The Value of Purpose
Don’t just talk the talk, walk the walk
“A finite game is a limited way of looking at things, and is best described as focusing quarter-by-quarter. But innovation is about running beyond your limits and playing an infinite game, where you focus your investment and business strategies several years out,” says Salsberry. “Purposeful organizations focus on the infinite game, figuring out what your organization is going to stand for in the long run, and aligning innovation goals around that.”
If a business wants to leverage innovation to get somewhere quickly, it helps if it knows where it’s going and why it’s going there – and that its employees feel enthusiastic about this journey. This is the value of purpose.
“People who work at leading companies – such as the big Silicon Valley firms – have a belief in the values of the organization, not just the products they make,” says Duckworth.
The link between purpose and innovation
“I believe a lot of what is driving success is culture, and its leadership’s ability to promote a positive message that permeates the culture through the organization,” says Brough.
Purpose gives a company a way of breaking out of the shackles of short-term thinking, and consequently, embrace more disruptive innovation. It creates a clear long-term path for why certain innovation can and should be pursued. It’s also worth noting that imagining a negative future can work too. As Bolshaw notes, “When Jan Timmer, former CEO of Philips, became the electronics company’s President in 1990, one of his first moves was to dummy up a newspaper, dated a few years into the future. Its bold front page headline read, ’Philips Goes Bankrupt!’ Timmer built his senior team’s strategy around that headline.”
This has had measurable advantages for a company’s abilities to innovate. In a study that EY conducted jointly with the Harvard Business Review, it was found that of the executives surveyed, 84% said a strong sense of purpose positively affected their ability to embrace transformation.
In financial terms, purpose-led innovators also had an advantage. Among those companies who were found to be prioritizing purpose, 58% had enjoyed revenue growth of at least 10% over the last three years, and only 15% had seen flat or declining growth. Among those organizations with the weakest sense of purpose, that figure dropped to 42%. Meanwhile, 42% reported flat or declining growth. Purpose means profits.
Walk the talk
However, despite acknowledgement of the benefits of a strong sense of purpose, many companies are still having difficulty embracing it.
In separate, ongoing research by the Harvard Business School, only 20% of managers reported having a strong sense of their own leadership purpose – and this may be why companies sometimes fail to manifest a clear sense of purpose.
There’s particular room for improvement when it comes to companies being able to turn noble intentions into measurable results. In EY’s survey, 80% of respondents reported they are good at being open to outside ideas, and 66% reported they were good at learning positive lessons from failure. However, just 43% said they were good at investing in exploratory projects if those projects fail to offer short term returns on that investment.
“I’m from a technology background, and if 20 years ago, people were talking about just how central the role of leadership and culture is, I didn’t use to really believe them.” says Duckworth. “But take it from me, this stuff is important.”
Towards a more innovative future
Maybe, on the theme of looking beyond your boundaries, it’s fitting to also look beyond the world of business for a final word on the topic. With that we turn to David Bowie, who has the following to say on the importance of moving beyond your comfort zone when it comes to innovating:
“If you feel safe in the area you’re working in, you’re not working in the right area. Always go a little further into the water than you feel you’re capable of being in. Go a little bit out of your depth. And when you don’t feel that your feet are quite touching the bottom, you’re just about in the right place to do something exciting.”
Many widely publicized corporate innovation initiatives end up failing to produce any truly disruptive innovation. That’s because businesses are failing to make the process, structural and cultural changes from which innovation is born.