Last week I was invited to present my thoughts to a CxO and transformation audience with Sullivan and Stanley in London, exploring how enterprises can simultaneously manage innovation and growth. Based on my experience, this is a challenge many companies face today, which is evermore important to overcome considering the rate of change faced as a result of globalisation, digital transformation and technology enablement.
Traditional management practices and cultures in larger companies generally lean towards excellence and efficiency in scaling or mass production and environments of repition. These are effective with mature business models in lower risk environments which inevitably becoming fewer. One such example of a traditional practice includes distribution and allocation of the annual budget and approval practice, supported by financial controls for variance management against the budget. This is effective in more mature markets or lifecycles and less so in disruptive, early stage innovative environments.
Management of the annual budget is good practice with good intentions to enable and support corporate governance controls. This isn’t being challenged as a practice, but simply highlighting its inadequecy for earlier stage ideas. Financial and revenue management can introduce performance restrictions for areas of higher risk or volatility where predictions are fraught with uncertainty. This includes innovation where sustainable business models against customer needs are yet to be discovered and understood. In such scenarios which are deemed more complex, cause and effect relationships are unknown and are better suited to an approach to probing and learning, supported by rapid feedback loops with financial flexibility. Such activities challenge the notion of a predefined business plan or budgets. A valuable alternative is to emulate governance of Venture Capital investors which operate competetively and perform relatively well in the face of such uncertainty.
When investing in innovation-based activities or looking to grow your business, it’s useful to take note of the following 5 points.
1. Innovation Is High Risk
Venture Capital funds report that at least on 75% of all investments fail, some claiming as much as 90%. Taking this into account the funding and performance governance of such investments takes a very different approach than corporate governance traditionally promotes. When you expect failure as the outcome, you invest small, not big and double down as your confidence builds. You govern new ideas for their potential against market fit and opportunity, not financial performance. Therefore requesting business plans and 5-year forecasts at the point you know least about an idea is a futile exercise.
Consider that Venture Capital companies generate and form companies and Private Equity manufacture companies. Unlike these focused funding approaches, Enterprises need to do both. It doesn’t mean that all ideas have to be created in the enterprises and could form part of a later stage M&A strategy no too dissimilar to Seed and Series A investment strategies.
Whatever the investment strategy and activities, awareness and portfolio balance between innovation and execution is incumbent on enterprises to manage. Quite a few successful companies are doing this very well with a clear fund and private investment arms, separating such investment away from the core business activities. However, from my personal experience and observations, such divides lack the governance and culture to capture opportunities which emerge from later stage products and use the venture capital to invest in these within the existing companies framework.
When new ideas and opportunities arise in your organisation, ask yourself if people know where and who to go with their idea and what to next? If there isn’t a clear answer to that question, consider how many potential innovation and growth based opportunities never even make it to the starting line and what cost this has to your business.
2. Innovation Is Complex
For context, let’s define innovation as a new way to generate sustainable value for a business by solving a need for a paying customer who has a specific problem. Behind every successful product is a well thought out and performant business model. Innovation needs to perform on each aspect of a business model, which is ever changing as technologies and environments shift in a competitive market. Until a proven sustainable business model can be demonstrated with supporting evidence, management is emergent and complex. The reason for the failure rates expressed in point 1 are directly related to this complexity.
3. Innovation Is Essential To Survive
Given the economic conditions today, innovation is not just an endeavour for business growth. Innovation is as much a survival strategy to sustain current levels of business. Every product and business active today is by definition in a state of entropy in an evolving competitive market. Therefore the failure to invest strategically into innovation is a high-risk survival strategy. Customers today don’t express the same brand loyalty today as they did 20 years ago, have low switching costs and have access to many competitive products. Forget growth, just retaining customers requires ongoing innovation and support.
4. Innovation Is Non-Linear
Despite the product lifecycle models and ideation methodologies starting at ideas to scale, this does not represent the path of discovery in reality. The journey of success is adaptive and responsive with embedded slack so that emergent opportunities can and should be capitalised on. Traditional linear models are useful tools to frame and capture directional activities and contextualise state but used literally can constrain opportunities to the point of negligence. Ideas can and do occur against each part of the business model at any and every stage of its lifecycle as business models are living states which can and should evolve as opportunities surface. Knowing this it’s important to enable and facilitate environments that can capture such ideas and turn them into real opportunities for sustainable revenue and potential growth.
5. Innovation Is Management
Innovation isn’t reserved for particular companies or sectors such as tech and digital. Every company needs to innovate at a minimum rate to attempt to secure its future and defend its market share. Innovation is a strategic obligation for boards to address and manage to strengthen long-term thinking and success. So much so that this is explicitly identified in the UK’s Financial Reporting Council (FRC) guidance on board effectiveness with a range of other forward looking considerations :
Questions for boards
• How do we know that management is identifying and addressing future challenges and opportunities, for example, changes in technology, environmental issues or changing stakeholder expectations?
• What proportion of board time is spent on financial performance management versus other matters of strategic importance?
• Is the balance between the focus on immediate issues and long-term success appropriate?
• Are we playing an active role in shaping long-term investment plans to underpin delivery of strategy and value creation?
• Is sufficient board time allocated to idea generation, opportunity identification and innovation?
• Are we using scenario analysis to help us assess the strategic importance and potential impact of our challenges and opportunities?
• Are we securing the benefits of ‘big data’ to give us a competitive edge?
• How will we assess and measure the impact of our decisions on financial performance, the value for shareholders and the impact on key stakeholders?
• Are shareholders driving the company to act in a way that is out of line with its purpose, values and wider responsibilities?
When approaching innovation, it’s not uncommon to compartmentalise innovation to dedicated sections or people in the organisation. This approach can have advantages on many fronts including the freedom to explore ideas without the constraints of the parent enterprise, but also can adversely affect the organisation as a whole as divisions such as sending a signal that one side of the organisation innovates and the other doesn’t. Moreover, if ideas emerge in the innovation teams, they can often struggle to gain traction when handovers or integrations occur. There are many opinions on the challenge of business and product integrations far beyond this article. I would suggest one of the most common is the likelyhood to meet resistance because of inclusion and cultural tension leading to internal barriers forming as a result of ‘Not Invented Here’ syndrome. Another common reason is that the parts of the existing operational business have their capacity plans and routes all mapped out already with limited scope and will to integrate.
Utilising The Lean Product Lifecycle For Contextual Management
Underpinning the presentation, I shared some practical guidance on how companies can leverage contextual lifecycle stages of ideas to understand effective governance better. In short, this surfaces the need to ask the right questions at the right time which can be contextually adapted for your enterprise as you see fit.
The first 3 phases of The Lean Product Lifecycle (Idea-Explore-Validate) focus on business model discovery, generation and exploration. The proposed principles behind these phases take the shape of a pitch for investment and start light on governance to nurture ideas as they grow, not too dissimilar in principle to Venture Capitalists approach. Each phase focuses on critical questions to answer to build confidence around the business model.
At each of the phases, just enough investment is provided to answer the questions through customer development and research practices. At each pitch point, teams or individuals can engage with advisory panels, councils or investors to discuss whether to pivot, continue or stop. When product market fit is demonstrated with supporting evidence at the end of the Validate phase, then a decision can be made whether to and how to transition the proposition into the Grow phase. To execute this, a fund like an approach over budgeting is preferred as this provides flexibility and a more fluid approach to execution with smaller, faster bets on ideas while minimising risk.
On the contrary, the second three phases of The Lean Product Lifecycle focus on scaling and growth of the business. This requires a different approach to management, which focuses on monthly and quarterly performance reviews as one would expect in enterprises and is where many have core strengths and advantages over startups when utilised well. The phases of Grow and Sustain can be states of businesses and products for many years when successful. To achieve continued success through innovation, it’s recommended that new opportunities utilise the first discovery practices of Idea-Explore-Validate. This fast feedback and learning approach supports growth and exploration into new customer and market segments including geographical expansion where you could simultaneously be in many states.
Innovation strategy is vital for any company to grow or maintain market share as well as merely surviving the longer term. It’s the responsibility of the board and management to ensure that the practices, culture and framework are in place to maximise the potential of success for the company and shareholders, by continuously providing value to customers.
To deliver on the above, enterprises need to recognise the different approaches and needs between business model discovery and execution. Venture Capital and Private Equity investors have tried and tested playbooks which perform very well against their respective strategies at different stages of products and companies. Larger enterprises need to be effective in both areas simultaneously could look to apply similar tactics to their portfolios and investment strategies distinctly.
When I asked the audience during the talk to raise their hands if their enterprise tolerated a 75% failure rate I was pleasantly surprised to see approximately 1/3 of the room support this. This response demonstrates a promising sign that portfolio management and investment governance is taking shape compared to when I was asking this question back in 2014.
Although it might seem that a ~75%-90% failure rate in Venture Capital investment seems high risk compared to Enterprises, in many respects, you could argue the reverse is true. Enterprises take more risk than Venture Capital funds because they don’t kill ideas quick enough or ask the right questions soon enough, resulting in bigger bets despite the risk. In many cases, they sometimes continue investing long after signals could have been urfaced highlighting uncertainty. So one could argue a key performance metric in your portfolio should encourage a failure/close rate for early-stage ideas, associated with smaller investment average per idea. A lower failure rate could indicate a higher appetite for risk.
This is a topic that I am very passionate about and enjoy engaging with others to explore, develop and learn. This blog post only touches on the subject and deliberately omits many related topics such as governance details, culture, practices and more for reasons of brevity. If you would like me to explore specific points further or engage in follow up topics, please feel free to connect and share ideas or request for follow up articles. I will look to follow up and provide where possible where time is permitting and as well as participating in further conversation.