The answer to disruption is innovation. And yet we hear so much talk about innovation while disruption continues to catch smart people by surprise. One would think that an innovative culture would be a step ahead of disruption. But that’s usually not the case.
“We have a big investment in being right,” says Rita Gunther McGrath, a professor at Columbia Business School. “In an uncertain world, that makes no sense.”
Speaking at a seminar last week as part of BRITE 13, a conference focused on “brands, innovation and technology” and organized by the Columbia Business School Center on Global Brand Leadership, McGrath was referring specifically to the tendency of companies to allow themselves to be blindsided by disruption because they have such heavy investments in their legacy businesses.
We are living in a high-assumption, low-certainty world. And yet conference speaker after speaker spoke of the future in the present tense. They spoke with astounding certainty. Entrepreneurs, consultants, and agencies may need an almost irrational level of commitment to their ideas, but marketers would be well-served to take a much lighter approach, one that has a bias toward fast, low-cost learning and that keeps options open as long as possible.
McGrath counsels a portfolio approach to innovation similar to the way a venture capitalist spreads his bets. She eschews the single, big gamble in favor of an array of lower-cost experiments. “Think about the cost of failure,” she says, “not the rate of failure.” Her approach to innovation is similar to McKinsey’s “portfolio of initiatives” framework in that they both place a high value on flexible, evolutionary processes that allow for midcourse correction.
Business school cases are full of so-called innovative companies with cutting-edge products that never saw disruption coming and never recovered when it hit. McGrath points to the Sony Walkman, the IBM Selectric, and Kodak as a few well-known examples, but you can fill in your favorite example yourself.
No sour grapes here. Those products were displaced by technological and cultural change, fair and square. But shouldn’t the impact of that displacement have been blunted in innovative companies? After all, weren’t all of these products gee-whiz innovations in their day? So why didn’t the company that produced the Walkman also produce the iPod/iTunes?
“We have a vantage point problem,” McGrath says. “The early warnings are often there long before it’s obvious in the marketplace, but we don’t know what to pay attention to.”
Different skills and different processes are necessary for exploring new areas, she says, but that too often companies treat their innovation initiatives like they do their core areas.
Putting all the lip service to innovation aside, McGrath took a deep dive into the data to find what growth companies have in common. Her first discovery: There aren’t very many companies that have consistent sustained growth.
In a 10-year study of public companies with market capitalization greater than $1 billion, she found that 8 percent of all companies achieved revenue growth of 5 percent every year for five years for the five years ending in 2009; 4 percent of all companies achieved net income growth of 5 percent for the same period. And, over the 10-year period, 2 percent had consistent 5 percent revenue growth, and 0.2 percent had consistent 5 percent net income growth.
When she looked closer at those high-performing companies, McGrath found companies that modeled stability around leadership, strategy, values, talent, and customer relationships, but showed great flexibility in resource allocation, budgeting, their business portfolios, and even in job assignments.
“They are highly innovative and experimental, and they invest heavily in excellence,” she says.
Stability of leadership and values creates a platform for innovation. To truly prepare for disruption, develop a culture that encourages flexibility with resources, budgets, and strategy–continual small changes–while maintaining a rigid emphasis on excellence.
“If you need ‘change management,’” McGrath says. “It’s probably too late.”