Whether we praise its genius or dispute its validity, it’s hard to deny the influence of Clayton Christensen’s theory of disruptive innovation. In explaining the kinds of technological breakthroughs that enable upstarts to challenge industry incumbents, the Harvard Business School professor’s theory changed the way many organizations develop new products and services.
But what happens when the pace of an industry’s change accelerates to an unprecedented speed? This is the situation in which many incumbents now find themselves, says Howard Yu, a professor of strategic management and innovation at IMD Switzerland.
S+B: Why do you believe that the theory of disruptive innovation needs a refresh?
YU: The classic examples coming out of Christensen’s disruptive framework were from technologically intensive, knowledge-intensive, and manufacturing-intensive sectors: the evolution of hard drive disk storage systems, or mini mills disrupting integrated steel mills. Today the pace of change has accelerated to an unprecedented speed. It took the minicomputer about two decades to displace the mainframe. But when we look at the speed with which new entrants such as Airbnb or Netflix displace incumbents, we are talking about five to 10 years at most.
Historically, for a new entrant to topple an incumbent, it needed to build up the scale of its operation. It needed to be vertically integrated and asset heavy. For Toyota and Honda to displace the Big Three in the U.S., they needed to build factories around the world and expand their manufacturing prowess.
But then came the rise of ubiquitous connectivity — everyone can connect to the Internet via smartphones — and of machines that exchange information under the umbrella of the Internet of Things. Such developments have driven down the transaction costs between organizations. The global supply chain has become frictionless, and many in-house activities can now be outsourced. As a result, companies can rely less on intra-organization coordination. In short, they don’t need to match an incumbent’s internal assets to have the equivalent size and scale in a global market. And with the rise of smart machines, a lot of the know-how residing in the human brain is
S+B: Let’s say you are an advantaged incumbent. What should you be doing right now?
YU: As we see the pace of change increase, it’s important that companies focus on building a growth prospect. Without a growth prospect, your market capitalization can decline despite the fact that you are able to deliver income growth, pay dividends, and so on.
On the other side of the coin, Amazon makes very little money, but its stock price continues to climb because it has a story to tell — it’s able to generate and realize continuous growth over the long run. Of course, not everyone can become Amazon. But you have to be able to play a hybrid role between delivering today and building the growth prospect for the future.
S+B: How can companies identify their best growth prospects?
YU: It’s critical for organizations to experiment. (OPTIONS MANAGEMENT)If they don’t, sooner or later they will run into a crisis. They’ll end up having to bet the house money on a single initiative. Some people would call that a burning platform, and sometimes it works out. But oftentimes it doesn’t.
Instead, companies should focus on experimentation, and then see which idea ultimately generates a big win. This demands that the organization have the ability to form new business units along the way, because when we’re talking about commercializing disruption, the last thing you want is to ask your mainstream business to try a radical idea.(RESOURCING THE SKILLS FOR THE 3 HORIZON MODEL)
At the same time, you need to have the discipline to prune. (PORTFOLIO ANALYSIS) When you experiment, there will be failures along the way, and large, complex organizations often find it difficult to let go of projects. Politically, it’s very hard for executives to declare failure and walk away. Projects drag on, consuming resources. But if an organization truly embraces the spirit of experimentation, the implication is that executives have to call a failure early enough to cut their losses. And that requires a cultural shift.
S+B: What kinds of organizational changes are required to embrace this approach?
YU: Most managers understand they must overcome the “not invented here” syndrome. Companies hoping to embrace open innovation must also learn how to translate those very organization-specific problems or questions into something abstract and general so that they can leverage the wisdom of the crowd.
But besides having great ideas, companies also need to adopt portfolio business models to capitalize on those initial insights. They cannot be one size fits all: Big companies get into trouble because they want to have a set of uniform or unified KPIs across all the business units.
Next, decision making needs to get pushed down to the people on the ground.(FACILITATED BY THE DECISION CRITERIA) Once you have this portfolio of businesses running different models, there’s no way central headquarters has the knowledge to make all the decisions and run the enterprises using command and control. You can run a factory that way, but not a complex portfolio of businesses.
The role of a senior executive is as the final integrator across these businesses. There’s a reason there are silos across an organization. We have limited brainpower as individuals, and we need to specialize in something. That’s a good thing, but then someone needs to ensure that knowledge from one part of the world or from one part of the business gets transferred. This is something that senior leaders cannot allocate: You need to get your hands dirty by moving these pieces of critical knowledge around your organization.
Wednesday, June 07, 2017
Howard Yu Disrupts Disruptive Innovation
The IMD professor describes how the accelerating pace of technological change puts new pressures on established companies.
The importance of growth is paramount in environments where the pace OF disruptive innovation is accelerating.