Why the path to innovation is dual track

Opinion

The larger an enterprise becomes the harder it gets to change course. Responding to changes in the marketplace, and new technological developments, is much easier for smaller, more agile companies. The surest path to survival for corporations threatened by change is dual-track transformation: arms-length innovation units which are free to grow alongside, and eventually replace, business as usual.

Companies are a lot like living organisms. A cooperative collection of autonomous individuals (much like cells in the body), they start off small, nimble and with the capacity to learn new skills and assimilate new knowledge. Over time however, they become specialised and set in their ways, as the ageing body succumbs to sclerosis. Just like animals, they self heal and come up with ingenious defense mechanisms to protect themselves against threats. It’s innate, they can’t help themselves. When thousands of people in an organisation can best serve their interests by preserving the status quo, no amount of management updates, strategy changes and top-down transformation plans can change what’s already there.

The double-bind of senior management

But change is essential. As Marshall McLuhan observed, new technology is a revolutionizing agent. New technologies saturate and reshape society around themselves, rendering old forms redundant. To invoke the spectre of Kodak has become cliche when talking about digital disruption, but cliches become cliches for a reason.

At the same time, business as usual lasts longer than anyone typically imagines. Take the long-predicted death of in-store retail. Online shopping was supposed to have emptied out every last high street and mall of retail units by now, and yet, according to the US Department of Commerce, e-commerce represented just 11.7% of retail sales in 2016 (meaning, of course, that 88.3% were in store).

This places the leadership at large enterprises in a bind. On the one hand, innovation is essential for long-term survival. If you can’t bring new products and services to market as effectively and efficiently as your competitors, you will become obsolete. On the other hand, business as usual still brings in the majority of revenue. And the layers of middle-management whose prestige and income largely depend on their departmental headcounts have absolutely no personal incentive to support the internal changes required for innovation.

So what’s the answer?

Dual-track transformation as biological imperative

Let’s return to our biological metaphor. How do living organisms perpetuate their existence into the far future, knowing that their bodies will no longer be up to the task of survival at some point in the near to mid term? As soon as an organism has reached maturity, and satisfied themselves that they have staked out enough territory and fought off enough competitors to assure short-term survival, they set about the task of reproducing themselves. They create separate, autonomous entities, which due to youth are better able to adapt to their surroundings than their parents, and keep them safe, fed and watered until it’s time to hand over the baton.

In the business world, this process is mirrored in dual-track transformation.

In one track, the existing organisation focuses solely on keeping itself running as efficiently as possible. It uses AI, Big Data, IoT and any other emerging technologies to maximise productivity and returns. In doing so, it outcompetes competitors and sticks around for longer than many imagine.

At the same time, a separate innovation function is established. It sits completely separate from business as usual. There are no shared services such as HR, procurement or even real estate. It operates completely at arms length, reporting only to the board. It’s role is to innovate within the existing industry.

“Kodak acted like a stereotypical change-resistant Japanese firm, while Fujifilm acted like a flexible American one.”

Adopting this approach not only avoids the frustration and waste that arises from failed top-down transformation efforts, it also maximises overall returns. When the existing business is outperforming competitors and the challenger organisation is gaining traction, stakeholders enjoy a bumper few years.

Dual-track success stories

My favourite case study of a large organisation successfully executing dual-track transformation is that of Fujifilm, historically the 2nd-place make of photographic film. As the Economist remarked, “Kodak acted like a stereotypical change-resistant Japanese firm, while Fujifilm acted like a flexible American one.” Instead of trying to outcompete its rivals through marketing, Fujifilm made a series of acquisitions of companies in verticals where their proprietary technologies – like nanotechnology – could be useful and kept these businesses separate from the existing enterprise. Today they have a market cap greater than $17bn and are acknowledged leaders in the fields of imaging, information and document solutions.

Another example of dual-track transformation in action is FutureLearn, the startup created by Open University to innovate in the MOOC space when the institution realised that this new model of higher learning would threaten its existing business model and that it didn’t have the skills in house. By offering online exams for its 3.6 million registered users which count towards degree or MBA courses, FutureLearn is on track to build a viable freemium business model while perpetuating the institution’s historic mission to extend quality education to the greatest number of people.

Recap

While smaller, more nimble organisations might be able to pull off top-down transformation – if the leadership team is strong enough and has a very clear vision – for large enterprises it’s almost always a non-starter. The rigidity of hierarchies and the instinct of individuals for self-preservation present too high a barrier for the kind of change that’s needed. Instead, large organisations should foster a dual-track approach where the existing business concentrates on survival while new, arms-length entities take on the task of innovating in the space.

Don’t just take it from me – nature uses the same method very successfully.