COVID-19 isn't the first pandemic to afflict the human race, but it is the first with a global impact to unfold in the information age. We have insight into what is happening around us in real time that is unmatched in our history. Information on everything from enabling your employees to productively work from home through to prognostications on the u, v, or w shape of the post COVID-19 recovery, the latest global infection rates, and “dire” economic indicators fills our news feeds, social media, and inboxes. Amid this deluge of information (much of it negative) and with the very survival of many organisations in question, it is entirely understandable that business leaders have spent time ‘bunkered down’ and inwardly focussed.
As leaders emerge from dealing with the first phase impacts of COVID-19 and increasingly turn their attention to what comes next, will they be deemed a luxury pastime - out of step with the needs of a business in survival mode, and therefore surplus to requirements? Or will leaders embrace innovation as a crucial capability for navigating the path out of lockdown and creating new growth options for the future?
At our most recent IE Leaders Lunch, we heard that COVID-19 has shown companies that they can make rapid decisions overnight with ideas that previously would have taken much longer to implement. To an extent, the risk to human life has seen some of the usual bureaucracy disappear and as a result has helped accelerate decision-making.
Accelerated decision-making is a welcome sign, but systematic corporate innovation at scale requires a commitment to building a sustainable capability. Established innovation titans like 3M and current juggernauts like Amazon don’t just run a few Hackathons and end up with a pipeline of amazing new products or businesses. At IE we like the framing of being “ambidextrous”, initially highlighted by Tushman and O'Reilly. Covid 19 has forced a step change to adapt, but sadly many of Australia’s largest corporates are lagging behind when it comes to maintaining an ongoing commitment to innovation.
Over the last few years we’ve seen the likes of global giant GE Fastworks, and local corporates like NAB, Qantas, Telstra, Village Roadshow, REA and many more create specific innovation labs or divisions. Unfortunately these innovation projects tend to lack a clear plan or foundation and don’t last, burning both cash and stakeholder appetite for innovation in the process. Innovation functions that spring to life as a ‘quick fix’ intended to deliver unrealistic growth targets tend to wither on the vine as unrealistic expectations collide with a lack of strategic clarity.
Mandatory quarterly reporting can see ‘innovative projects’ used as window dressing for boards and investors. In other cases the innovation program is entirely tethered to the existing core business, rather than patiently developing a pipeline of potential growth options. We often find that growth expectations for corporate innovation sit at one of two extremes. At one end sits high return with low investment, fast. Got a revenue gap? Get busy with innovation! At the other end there is a mindset that says - the returns will take care of themselves. Let’s make some big bets, early. Startups don’t make money at the start, right? So let’s throw big piles of corporate money at prematurely scaling ideas without properly validating the customer market or underlying unit economics. Both paths result in disappointment and lead to money being reallocated behind proven processes, rather than being used to tackle risky but potentially rewarding innovation ideas.
“Any period of volatility can create opportunities that businesses can leverage if they are prepared. In the case of the COVID-19 outbreak, organisations that take a more assertive and longer-term approach can spark innovations that will define the ‘next normal.’” - Punit Renjen in the WSJ.
Strategists at Bank of America Merrill Lynch recently ran a scenario planning exercise, which led them to conclude that “the coronavirus pandemic will permanently disrupt the world's economies and accelerate some macro trends that would have taken years to play out” and “Coronavirus is the political, economic, and psychological event of our lifetimes, that will drive disruption and transformation for years to come. It will bring a radical transformation of the kind that occurs only once in a generation.” The World Economic Forum recently framed the challenge facing manufacturing companies as...
“Sinking, Swimming, or Surfing…COVID-19 has created the need for rapid and radical innovation in both businesses and operating models. The future belongs to those who are able to manage uncertainty and innovate rapidly.”
It would appear that the winners in the post pandemic world, will be those who can couple strategic agility and alignment with rapid experimentation and validation (also known as systematic innovation!). So where to start? Aligning internal and external stakeholders on the ambition and strategic focus areas for innovation is vital and should be agreed up front, across all levels of the organisation, as part of developing an Innovation Thesis. Failure to do so can result in the innovation program successfully executing against a strategy that doesn’t meet the needs of the business and its board. Recently we worked with the Board and Executive team at Yarra Valley Water to create their Value Creation Thesis, helping them focus their innovation effort for the next wave of strategy. The process of agreeing on the Thesis ensured that the board and management at YVW are aligned to direct and drive systematic innovation in areas which address strategic risk or opportunity. Our process prompted deep discussion and led to strategic decisions on risk appetite, innovation ambition, key opportunity areas as well as a posture (such as market leader or pragmatic accelerator) for each opportunity area.
The desire to innovate often arises from the emerging threat of disruption. It is an unfortunate irony in the corporate innovation game that the need to innovate, and the ability to actually do so are often inversely related. When an organisation is already being cannibalised by new digital competitors, industry shifts, and value chain disruption it becomes that much harder to dedicate focus and funding to innovation. With the post COVID-19 environment likely to accelerate existing trends, and trigger new disruptions, now is not the time to retreat from innovation. But how to manage the tradeoff between short term survival and positioning for medium to long term prosperity? A Harvard Business Review study looking at recovery from the past three recessions across 4,700 companies found that those that cut costs fastest and deepest were less likely to outperform after the economy recovered. The lesson from past recessions is that balance is required between short term cost cutting and positioning for future success. Building or maintaining a strategic, systematic, and lean (low-cost) innovation capability is a great way to position your organisation to succeed in an uncertain environment.
In Sensis and its once mighty Yellow Pages directory, we have a fantastic case study of the challenge of innovating in the face of disruption, and what can happen when innovation is treated as a series of disjointed initiatives, rather than as a strategic response to a clear and present danger. Sensis was the first directory business in the world to digitise its directory back in 2004. They built an open API, ran internal and external Hackathons with big prizes, expanded into adjacent (digital) markets, undertook a classic ‘digital transformation’, and sent teams out to co-working spaces to establish start-up business units. You may recognise many of these activities from your own organisation today. Despite all that innovation activity over so many years, Sensis fell from a valuation in the multi-billions (some estimated $10 billion) to around $650 million, likely due to both strategic mis-steps (short-sighted expansions into crowded digital marketing adjacencies) and systematic neglect (initiatives competing with established business units for funding).
Corporate boards are required to monitor and mitigate organisational risks (such as digital disruption) and shape the strategic direction of the organisation. Recent findings of an AICD study into Australian director practices around innovation are concerning. As AICD CEO and Managing Director, Angus Armour said at the launch of the report “The study tells us that innovation is often missing from Australian boardroom agendas...Boards that collaborate with their executive team to set and oversee the innovation strategy are much more likely to realise their innovation objectives”. The best way to combat disruption is by working with the Executive team to create a clear innovation strategy (or innovation thesis), to reach a collective understanding of where the risks and opportunities lie, before articulating how the organisation plans to respond.
Managing growth through innovation isn’t impossible, it is just different. One of the biggest issues for executives is that the very things that probably got them to the top - deep domain expertise and execution excellence on top of proven business models - aren’t useful for managing new growth initiatives. Successful innovation in the face of these challenges requires an experiment, rinse, and then repeat (or systematic) approach. It also requires that senior leaders empower their teams to run experiments that will more than likely find that the idea was never going to work. In this environment, leaders need to move away from a directive leadership style (this is what I think will work!) to a question based style (what are the results of these experiments telling us?).
The rewards for leaders who can make this transition are demonstrated time and again by innovation behemoth Amazon.
“Our success at Amazon is a function of how many experiments we do per year, per month, per week, per day.” Jeff Bezo, CEO of Amazon
This is an insight into the mindset that has delivered success stories such as Amazon Web Services, Amazon Marketplace, and Amazon Prime. In another recent move, Amazon spent years investing and incubating in the fresh food space, testing prototypes, researching how to manage cold storage and looking into how to manage and transfer produce before investing US$13.4bn into the industry when it purchased Whole Foods. It validated the elements of the business model, made sure it understood the industry and had a clear plan for growth.
We need to get innovation right for the Australian economy. We’ve been lucky to fall back on the natural resource and financial sectors for decades, as CSIRO Chairman David Thodey so aptly stated on The Corporate Innovator. If we are to prosper in a post COVID-19 world, it’s time we turned some risk appetite toward innovation in other areas of our economy. The future is uncertain, and there are many potential scenarios, but we will close with a positive vision for the future courtesy Mohit Joshi at the World Economic Forum, “We will emerge from this period stronger, wiser and more connected as a global society. Resilience will be at the forefront of every strategy, yet it is agility that will ensure competitiveness, and an ability to respond to the unexpected. To achieve this, businesses will have to re-evaluate where they must be strong and where they must be flexible.”