I just spent a day working with Bob, the Chief Innovation Officer of a very smart large company I’ll call Acme Widgets.

Bob summarised Acme’s barriers to innovation.

“At our company we have a culture that fears failure. A failed project is considered negative to a corporate career. Even if someone does start something new, our management structure has so many financial, legal and HR hurdles that every initiative needs to match our existing financial metrics, processes and procedures. So we end up in “paralysis by analysis” – moving slowly to ensure we don’t make mistakes and that everyone signs off on every idea (so we can spread the collective blame if it fails). And when we do make bets, they’re small bets on incremental products or acquisitions that simply add to the bottom line.”

Bob looked wistful, “Our founders built a company known for taking risks and moving fast. Now we’re known for “making the numbers,” living on our past successes. More agile competitors are starting to eat into our business. How can we restart our innovation culture?”

What drives innovation?
I pointed out the irony to Bob. In a large company, fear of failure inhibits speed and risk-taking while in a startup fear of failure drives speed and urgency.

If we could understand the root cause of that difference, I said, we could help Acme build a system for continuous innovation.

I suggested the best place to start the conversation is with what I think is the 21st century definition of a startup: A startup is a temporary organisation designed to search for a repeatable and scalable business model.

The startup spirit and how to get it
Startups have finite time and resources to find product/market fit before they run out of money. Therefore startups trade certainty for speed, adopting “good enough decision-making” and iterating and pivoting as they fail, learn, and discover their business model.

The corollary for a large company is: A company is a permanent organisation designed to execute a repeatable and scalable business model.

That means in their core business, large companies have a series of knowns. They’ve found product/market fit (what products customers want to buy). They’ve learned the best distribution channel to get the product from their company to the customer. They’ve figured out the revenue model (subscription, license, direct sale, etc.) and how to price the product. They know the activities, resources and partners (manufacturing, regulation, IP, supply chain, etc.) – and the costs to deliver the product/service and have well defined product development and product management tools that emphasise the linear nature of shipping products to existing customers. There are financial metrics (Return on Investment, Hurdle Rate, etc.) for new product development that emphasise immediate returns. And everyone has job titles and job descriptions that describe their role in execution.

Why execution and innovation need different tools, cultures and organisations
Talking to Bob I realised that at Acme Widgets (and in most large companies) the word “failure” was being used to describe two very different events:

  • failure in execution of a known product in known market
  • failure in searching for innovation when there are many unknowns

Therefore, in a large company, failure to meet a goal – revenue, product delivery, service, etc.– is a failure in execution of an individual and/or organisation to perform to a known set of success criteria. In corporations, the penalty for repeated failure on known tasks is being reassigned to other tasks or asked to leave the company.

As I sat with Bob and his innovation team, I realised that all of Acme’s new product innovation initiatives were being held to the same standard as those of existing products. Acme was approaching innovation and disruptive product ideas using the same processes, procedures, schedules, and incentives within the same organisational structure and culture as its existing businesses.

No wonder innovation at Acme had stalled.

The ambidextrous organisation – execution and innovation
That companies should be simultaneously executing and innovating isn’t a new insight. For decades others have observed that companies needed to be ambidextrous. Corporate innovation initiatives have spent decades looking at other corporate structures as models for innovation when in fact we should have been looking at startups for innovation models – and adapting and adopting them for corporate use.

That’s now changed. The strategy and structure for 21st corporate innovation will come from emulating the speed, urgency, agility and low-cost, rapid experimentation of startups.

Startup corporation
In the last five years, as the need for continuous innovation in companies has become critical, Lean innovation methodologies (Lean LaunchPad/I-Corps) have also emerged. These methods allow rapid experimentation – at startup speed – with the same rigor and discipline as traditional execution processes. Adopted by the National Science Foundation and large companies, over 1,000 teams have used the process, and the resulting commercialisation success speaks for itself.

But running a Lean Startup inside an organisation designed for execution is an exercise in futility. Working with large corporations, we’ve learned that innovation groups need their own structure, culture, tools (Lean, Design Thinking, etc.), metrics (validated/invalidated hypotheses, Investment Readiness Level) and processes. And both organisations – execution and innovation – need to understand that the success of the company rests on how well they can cooperate.

Bob’s eyes lit up as he said, “Now I understand why innovation seemed beyond our reach.”

Essentially, Bob’s company was missing four ideas:

1. Accepting failure and running at speed are part of an innovation culture.

2. Companies need to separate out innovation risks from execution risks.

3. There are now proven Lean innovation methodologies (Lean LaunchPad/I-Corps) that a company can use off the shelf in building an innovation culture without inventing its own.

4. Companies need to make sure that management no longer uses execution metrics to manage and judge innovation teams.

Lessons learned

  • In a startup “fear of failure” drives speed and urgency.
  • In a large company “fear of failure” inhibits speed and risk
  • Innovation means experimentation in searching for a business model. Often failure is the norm, not the exception.
  • Innovation processes and metrics need to be different from those of the execution organizations
  • There are proven Lean innovation methodologies that work in large existing companies

The post Corporate stagnation: What makes corporations stop innovating? appeared first on GeekTime.