Arvind Malhotra is UNC Kenan-Flagler’s T. W. Lewis Scholar and Professor of Strategy and Entrepreneurship. Below, read his insight into innovation, the second in a five-part series with UNC Kenan-Flagler professors.
Why is it important for an organization to master innovation?
In many ways that’s what kept most organizations going into pattern differentiation. Innovation is a good buzz word, but to me it’s also about saying, “How can you sustainably differentiate yourself in the marketplace?” with sustainably meaning over time having an edge over your competition and being seen as superior to your competition. It’s really critical because it’s not a one shot game. It’s over and over and over and over again trumping your competition. That is the only way to go in any economy for that matter
Given that this is the key to sustainably growing and succeeding in your business, why do you think so many organizations find innovation, or sustainable differentiation, so hard?
It’s the inertia of suppressed, that’s one of the major points here. Once you get good at doing something, the tendency is to do more of that, and you get into the rut of doing it slightly better, building a better mousetrap. Organizations have two things to do. One is exploitation, and the other is exploration. Exploration always has rewards that are not instantaneous. There is no instant gratification from doing exploration. In that regard, exploitation is very quarter-to-quarter driven. You do what you’ve been doing better and you keep capitalizing on what you do really well especially when you’re doing something well.
We’ll use this saying, which I think is the bane of all organizations, “Why fix it when it ain’t broke?” Most of the companies that actually are innovators prepare for when things are broke, and that’s hard. When you’re doing something very well, the tendency and the gravity of success pull you back into doing more of it. You spend more money on doing what you do very well, and you spend less money on something you really don’t do well. It’s human nature which channels a lot of organizational behavior, and that is the gravitational pull that’s very hard for organizations to keep away from.
It’s also hard to innovate because you’re going to do things differently, and those who have been doing very well will look at you differently and treat you differently – and you’re almost a pariah in many ways. You’re the maverick, and you have to overcome that tendency too. Because people were doing very well, their successful business lines will demand more money based on the projection of history which says, “Well, we’ve been doing well. We are the cash cow, so invest more in us.” Overcoming this mindset is always a challenge for most organizations.
The need to innovate isn’t new given that it’s the very nature of how businesses succeed, but with new technologies and new approaches to doing business, have you been finding there are innovative ways to approach innovation?
I think your question is a very good one. There’s product and service innovation which is based on one aspect of the organization, and then there’s the business model innovation which is changing the whole game entirely There are cutting edge companies, such as Amazon, which are not about building better bookstores, but are about actually capturing the wallet share and the mind share of the customer over the long term and changing the way in which objects are perceived in the marketplace. It could be any object. It doesn’t have to be a book.
There are subtle shades of innovation, and there is the offering-by-offering innovation. And then there’s changing the whole way in which you do business which translates to new services, a new way of looking at things and looking very differently in the marketplace from what’s come before. You would have never thought in the 90’s that Apple would be a company that distributes music and movies. You’ve asked an important question of how can we engage a business model innovation which changes the model of doing business in the marketplace entirely. It’s not about one product. It’s not about a new blockbuster product, it’s about a completely different way of looking at a company.
Do you have any examples or any steps that are helpful for an organization that wants to approach changing the way it approaches its business and innovate?
I understand your question as “What is a very good approach to being a business model innovator?” To me, the underlying philosophy of these innovative companies is that they experiment and again the cliché, but very true, “Fail fast, fail often and learn from failure and embrace failure.” It’s a risk to seek failure. It’s a risk-seeking behavior, but not one of investing money and hoping for a blockbuster change. Most business innovations come from a series of small experiments that are successful and others that are unsuccessful. I think the central pieces to this are: how well you experiment, how you create your experiments and how you learn from them. It’s not about taking a big risk and failing. It’s about taking swings of risks and managing every experiment as a portfolio.
We’re good at managing a lot of portfolios, but not as good at managing portfolios of experiments… of thinking of experiments as small investments just like venture capitalists would. Venture capitalist treat different companies in exploration as set-up experiments in their portfolio and realize that 70% of them will fail, but that they will learn from them and have enough diversified bets to ensure successes are part of the failures.
Companies like Amazon, Google and Apple have a lot of small experiments and the capacity for a lot of small failures and the capacity to fail fast and move on to the next thing. Google is the persona of that, with a series of things in their Google labs out of which 80% to 90% would fail, but these failures are treated as learning opportunities. It’s important to have a lot of experiments, to learn from them, and to learn to absolve failure and embrace it so that it’s not something to be hidden under the carpet. It’s important for the experiments to be transparent and that the learning from any failures be made equally transparent. 3M does this very well and is not a sexy tech company, but is very innovative and does produce a lot of technology over time and has done very well at undertaking a series of experiments.
The second aspect of this is to be open, realizing that not all ideas will come from the domain of what’s dimensional R&D. Be open to ideas from outside – learning from other companies, learning from customers, learning from suppliers. The more you let your system be open to learning from outside, the more you will learn from experiments having been done by others in their ecosystems.
I imagine if you’ve got a large organization that hasn’t embraced this culture of failing fast and failing often, a number of things need to change – from leadership to how people feel about their job security and reputation. Do you have any quick examples of a firm that wasn’t known for innovation, but went through this transition process to make sure that they could be more competitive in the future?
There is a very big blue firm that’s a classic example of a very stodgy old firm with blue suits called IBM, and within a decade, our friend became very successful again by diversifying itself a series of things simultaneously, rethinking itself as less of a product and more of a service company, and undertaking a diversified set of business lines. And when they failed with one, they nixed it and then they continued with others. IBM’s a very good example of a complete cultural change. The company that went from, “We are the scientists. We do what we do the best. Who else would know how to do anything better? We are going to make very big bets, and we’re going to sell out everything on one big bet” to a company that’s now so diversified in the technology, rethinking itself as a service company and also getting open and trying to get collaborations going from outside the company. IBM learned very fast that sustainability was good. It would be an important issue transforming itself into thinking for a smarter planet rather than thinking of just a product or just a service. To me, that’s a classic example of how you can change your company culture. It doesn’t happen overnight. It’s a sustained clear path of transformation.
Any closing thoughts on innovation?
I think I’d like to readdress the philosophy of experimentation. I think the trick is to learn to do a lot of experiments and to not expend a lot of cost. It’s even better if you could get others to do experiments for you and then learn from those and take the learning and build something on it. It’s about treating a lot of innovation as nothing but good old experimentation done well, and thinking of experiments as low bet portfolios. It’s about betting on a lot of things simultaneously or bookending a lot of things simultaneously and then dropping those that don’t work and going with those that do work. What’s significant for most companies is the fact that they look at success as just one giant success. Instead, success can be found in the sequence of a series of failures. Just finding the adoptive capacity to try to learn from those areas of failure is really critical.