In their speech and conversation with Kaihan Krippendorff, the speakers explain why the key to innovation culture readiness is by assessing leadership support, organizational design, and innovation practice.
No company can be completely invincible, but you can try to stay ahead by building more resilience into your organization. Leaders can build invincible companies by constantly reinventing themselves, competing on superior business models, and by transcending industry boundaries.
Quoting well known venture capitalist, Vinod Khosla: “All interesting things happen at the edges of the system.” Tesla is that ‘interesting thing’ that came from the fringes and disrupted the car industry. The problem with established companies that are not able to break out of the industry boundaries and reinvent themselves is that they do not realize that you need to explore and exploit at the same time. It means that you need to be able to start an entrepreneurial search engine while you are good at exploiting and managing what you have. The search is very different from managing what you have because it requires a lot of exploration, experimentation, and failure to finally find what could work whereas in the management process we scale and improve business models constantly.
The problem with established companies that are not able to break out of the industry boundaries and reinvent themselves is that they do not realize that you need to explore and exploit at the same time.
Strategy and portfolio management
If we want to cover both exploration and exploitation, we need to manage two different portfolios. First, the Exploit portfolio is for managing and visualising business models that we have under execution, which are ranked on two different axes- the returns and the disruption risk. Second, the Explore portfolio is for visualising all the different business models we have in exploration, which are also ranked on two different axes- the expected returns if the business model is launched, and the innovation risk. In the Exploit portfolio, we try to improve the business models, and in the second, we try to invent new business models. In both portfolios, the endeavour is to increate returns/ expected returns and reduce the risks. The process in the Explore portfolio is messy and requires a lot of testing of hypotheses and experimentation before a business model is ready to be launched and transferred to the Exploitation portfolio. However, it is impossible to win on all the business models that one launches, so sometimes there may be failures, but the idea is to keep those failures small.
Competing on business model patterns
It means trying to apply repeatable configuration of different business model building blocks to strengthen an organization’s overall business model. So, in our two portfolios, we would have two different patterns. The first is the Invent patterns in the Explore portfolio. It involves starting with a new opportunity, which is not restricted to bringing out a new product or service to market but is embedded in a superior business model. It means starting from nothing, identifying a market opportunity and applying a business model pattern to create a better business model. The whole idea of patterns is to improve business models to get them to perform better.
An Invent pattern library can be used to explore opportunities and create better business models. It has three different areas- frontstage disruption that includes patterns inspired by innovation in how you reach the market, backstage disruption inspired by different configurations of activities, resources, and partners, and profit formula disruption inspired by different profit formulae, cost structures or completely different margin structures.
The second type is the Shift pattern is used to shift from an old and outmoded business model to a new one. The difference here is that we do not start from scratch but from an original business model, apply a business model pattern and create a new business model. The interesting thing about it is not about throwing away what you have but building on top. It is not necessarily a disruption of everything but a shift from old to new.
Similar to the invent pattern library, a shift pattern library is used to change from old business models to new and better performing business models. It has four areas. The first is a value proposition shift, either from product to service, from low-tech to high-tech, or from sales to the platform. The second to the fourth areas include a frontstage driven shift where we change the manner of market outreach, a backstage driven shift where we change resources, and a profit formula-driven shift where we change the way we make money.
Establishing an innovation culture
One of the biggest challenges organizations face is changing their innovation cultures, possibly because of myths about innovation. People believe that finding the right idea is the most important part when in fact ideas are the easiest part but turning them into a great value proposition that customers care about and a business model that can scale is the difficult part. Secondly, people in established companies still ask for the business plan, but they are the enemy of innovation because that involves writing lengthy documents about an idea together with spreadsheets, which usually turn out to be wrong. Third, many companies still avoid failure when failures are actually mandatory in innovation. Most importantly, companies predict the future based on the past.
The best way to create an innovation culture is to keep the management or execution culture and add the exploration culture instead of choosing between the two. This can be done with a tool called the Culture map inspired by the author and entrepreneur Dave Gray. The culture map helps design culture in an organization, including an innovation culture. The tool has three blocks – the first block is about the desired outcomes, the second is about what behaviours lead to the desired outcome, and the last and the only thing that can be influenced, the enablers and blockers that lead to the desired outcome, or innovation culture in this case.
However, cultures evolve organically and so if we want to design them, we cannot design them like a car but like a garden. This involves working on the third block of enablers and blockers, which is the fertile ground for a culture to emerge.
The best way to create an innovation culture is to keep the management or execution culture and add the exploration culture instead of choosing between the two.
For designing an exploration culture, the enablers and blockers broadly include leadership support, organizational design, and innovation practices. If they are enablers, it would reflect in the behaviours such as people eager to invent and pioneer, CEOs spending 40% of their time in innovation, nobody getting fired for experimenting and failing because innovation cannot be achieved without failure, and the like. Outcomes expected from an innovation culture are growth, resilient organization and one of the most important outcomes but largely ignored, retention of innovation talent. Even today, innovation is not taken seriously enough in organizations because even today there are a lot more blockers than enablers. Innovation lacks power, the short term is often favoured over the long term, or bureaucracy slows down innovation. Hence, it is important to tear down these blockers for creating an innovative culture.
Most CEOs spend less than 10% of their time on innovation. If between exploration and exploitation, the CEOs spend more time on the latter, there should be somebody who has equal power and spends all of their time on innovation. Both positions must have the same level of power because innovation today lacks power. Ping An of China serves as an example where the CEO, Peter Ma focuses on management of the entire company and a Chief Entrepreneur, Jessica Tan spends all of her time creating the future.
Conclusion
Organizations need to look at what they have and score their innovation culture readiness by assessing leadership support, organizational design, and innovation practice.
Kaihan Krippendorff in Conversation with Alex Osterwalder
Alex Osterwalder: People have asked about using this in hospitals and other areas of the health sector. I believe that the health sector is not ready. We don’t know what is going to work to transform the health sector, so we need to explore with the portfolio and accept that with very small amounts of money, you can test many different possibilities, and then also accept that 70% of those projects will not work and will have to be killed after three months, which is okay when the budgets are small. When the budgets are big from the beginning, it is impossible to kill. Nobody is going to stand for a 10 million, or 100 million, or a billion-dollar failure. People think that when they innovate big, they need to make big bets, so it is actually the contrary. The more you innovate, the more you need to start small, and gradually invest in those projects that succeed. That is exactly how venture capital works, so we need a little bit more of that in established companies, and also in established sectors like the health sector.
Kaihan Krippendorff: This reminds of the quote from Jeff Bezos that goes along the line of, if you have one in ten chance of a hundred times payoff, you have got to take that bet every time, but you have to be ready to lose nine times out of 10. You can reduce the financial risk by reducing the cost of experiments, and then have the cultural side being comfortable with losing nine times out of 10.
Alex Osterwalder: Amazon has thousands of bets going on all the time, but they are small bets until they make the big bets. Ping An did it very fast. In seven years, they transformed from a company that was in the top 300-400 of the biggest companies in the world into the top 30, so they grew extremely fast and shifted the company completely from being a traditional financial conglomerate to being a tech player. So, it doesn’t need 20-40 years, you can do it relatively fast. That is in a very extreme and positive case but it just takes the commitment. It sounds trivial but the commitment of the top management is very important. Most top management are not really committed strategically to innovation because they don’t necessarily know how to do it.
Kaihan Krippendorff: Is there a right point at which you need to start shifting to this dual model with respect to the size of the company?
Alex Osterwalder: I think there is no rule, but we are seeing that it is harder and harder to live from one business model. Even for start-ups, often after two-three years when they are starting to feel a bit relaxed, their business model is already getting disrupted, so we are seeing a tendency of business models expiring faster than ever before, so there is no right point. It is all the time. For young companies, it is getting very soon. Once they start to have an established model, they need to start exploring, and it doesn’t need to be huge amounts of resources. We are seeing a compression of these time frames so much that the disruptors are getting disrupted very quickly.
Kaihan Krippendorff: Any last-minute words you have for us?
Yves Pigneur: We will see in the future if we are successful and if more companies are adopting this kind of technique or approach we developed in the past two-three years.
Alex Osterwalder: I think it’s going to make it easier for companies to realize that they need to shift more towards this, because you want to be prepared for disruption. Again, this is more like an atomic bomb scenario but, the resilience can be designed into your systems, which most companies earlier didn’t have.
