Perspectives

Tackling the Innovator’s Dilemma – When to Defend Your Core, and When to Disrupt Your Sector

This is a summary of an event we held in 2014 at Wayra, the Telefonica-owned start-up accelerator, on 1st July. The evening’s topic was ‘Tackling the innovator’s dilemma – when to defend your core, when to disrupt your sector (or be disrupted…).’ The speakers were Natalie Ceeney whose current responsibility is improving HSBC’s customer service and complaint handling following four years in the role of CEO and Chief Ombudsman at the Financial Ombudsman Service, Dan Salmons, Managing Director of Paypoint Mobile & Online, responsible for digital payment solutions including the parking app, PaybyPhone, and Mark Stansfeld, Chairman of Giffgaff the innovative mobile network set up by O2, and someone involved in developing a string of innovations as Sales Director at O2 between 1999 and 2008. The discussion has been summarised by Simon Caulkin, former management editor of the Observer.

Tackling the innovator’s dilemma – when to defend your core, when to disrupt your sector (or be disrupted…)

By now it’s a familiar story. Out of the corner of an eye, you’re aware of a start-up with a new angle on your marketplace. But it’s tiny, a bit weird, and not a product our customers have been asking for – good luck to them. Next time you look, well, OK, they’ve got their act together and attracted some customers, but, hey, our bottom line’s unaffected, and anyway it’s not our demographic.

But when you turn round again, the whole world has changed: your stores are too big and in the wrong place, your customers doing business peer-to-peer, and your online competitor has tens of employees to your thousands.

Suddenly you’re no longer the industry boss; you’re having to dance to someone else’s tune, and it’s not a pretty sight (although plenty of others are enjoying it). Now it really is a question of change or die – you might die anyway – and it’s more wrenching and painful than you’d imagined possible.

How and when does an incumbent react to avoid becoming the protagonist in this scenario? These were the tricky questions explored at an absorbing July Foundation Forum. Already wicked questions, they are raised to a different dimension of hardness by the near impossibility for most organisations simultaneously to cultivate both the qualities necessary for enduring success in turbulent times. In the management literature, being good at both exploiting existing possibilities and exploring new ones is termed ‘ambidextrousness’, and the reason that ambidextrous companies are as uncommon as ambidextrous humans is that the properties required for each conflict. For efficient exploitation, the more grooved the routines and processes the better. But the more well-worn the groove, the harder it is to change. Mark Stansfeld, chairman of Telefonica owned mobile phone network Giffgaff (‘run by its members, for its members’), forcefully fingers unhelpful KPIs that emphasize efficiency at the expense of business growth (‘the tyranny of finance’), unimaginative boards and ‘the ways things are done round here’ as ‘the three big things that stifle any form of innovation within an established business’. It also has to fight the ingrained short-termism of the financial system as a whole – a powerful deterrent, he argues, to growth and investment in new ideas in general.

Natalie Ceeney, having served as both head of ops at the British Library and CEO of the National Archives, adds that
the different roles require different people: ‘The people I would have put on incremental innovation would have been pretty useless at the radical stuff and vice versa. Picking people whose brains are wired differently for this stuff is really important, because they are in direct contradiction’ – often to the point of wanting to cannibalise the other’s
business model.

Cannibalisation is one of the ugliest heads to be raised in disruptive change, frequently causing vicious infighting and sometimes derailing needed change altogether.

As boss of an ambitious project to make Barclays more innovative, Dan Salmons notes that the amused scepticism
initially generated by his group’s efforts later morphed into open hostility when powerful senior colleagues saw it attracting news columns and serious funding within the business. He jokes that on his preferred measure of precariousness – how long he would last in the business if there were a change of CEO – he was down to a couple of hours at one stage.

Companies that bottle out of the cannibalisation challenge rarely live to tell the tale (RIP HMV). But even if in hindsight the outcome seems inevitable, at the time the decision is never easy. Scarred by experience at the British Library, where a decision to not to cull 600 photocopying jobs turned out to be only a short-term respite, in her next post at the National Archive Ceeney made it plain that her overriding task was to protect the long-term future of the institution, regrettable though the effects on some staff jobs might turn out to be. ‘That’s quite a hard message to give and not a very popular one’. At National Archive, there could be no compromise: as a result, destroying one business model by making family-history archives free online through partnerships with IT firms cost some reading-room jobs but injected £100m of innovation into the economy, reckons Ceeney. Even bolder was destroying other organisations’ business model by putting forward, and getting accepted, a proposal to free up Crown Copyright for low-resolution applications like mapping and the weather. This caused initial fear and loathing at Ordnance Survey and the Met Office. But setting data free did, as predicted, generate extra demand over time, and ‘the most important thing, it created an awful lot of innovation.’

The-Collaborative-Economy-1

Bringing off an important innovation initiative under these kinds of pressures requires steady nerves and steely commitment to the purpose – but also opportunism and a willingness to break eggs and rules to achieve it. The latter two qualities usually being anathema to the corporate hierarchy, the speakers broadly share the view of Harvard’s Clayton Christensen (currently holder of the unofficial title of the world’s most influential management guru) that as far as possible such efforts should be set up and managed separately from the main business. Ceeney agrees: ‘Even if you’re trying to incrementally innovate and do something radical, you need some separate governance. At National Archive we had separate governance, separate KPIs, separate metrics, as well as very different people.’

Autonomy is essential to preserve the freedom to compete in fresh ways; it also mitigates the inveterate tendency of the centre to meddle, whether by insisting that a start-up should leverage existing corporate efficiencies, by foisting on it unwanted central personnel, or just requiring that things be done by the book: ‘Business plans, come on, how many have actually delivered what you said?’, challenged Stansfeld. It’s the customer insights that are the lead indicators to success.

Stansfeld recounts that nine months after launch Giffgaff was not firing to the plan, and there were many who wanted to shut the fledgling network down. Stansfeld, Chairman of the business, chuckled and said he was sure that it wasn’t shut down as he didn’t go to of the review meetings, so no decision could be made, but by then Mike Fairman and the team had taken learnings and pivoted and tuned the proposition and the rest is history. But it was a near thing. ‘Make no mistake, it would have been closed down, The fact is we had insight on the community involvement, but this hadn’t transletd into the numbers – sometimes you just have to believe the insights.

At Barclays, Salmons’ mission was to provoke a whole organisation to become more innovative, so the project couldn’t be run as a separate unit. Instead a hybrid structure was developed, with a small central team and individual projects staffed by people seconded from the business. Salmons knew that the project was starting to work when 18 months in the hostility generated among senior managers by the successful ventures was undercut ‘by a lovely quiet revolution underneath as people came up to me saying, please can I get involved with one of the projects, but don’t tell my boss.’ His team lost it a bit in the final phase when it tried to control innovation sprouting everywhere – until it realised that that was the point, something to celebrate as a measure of success. With hindsight, Salmons points to marketing and PR as ‘a missing chapter in the innovation book’.

For a PR department, the stream of news emerging from the early-stage innovations was a treasure trove. ‘For me it’s the earliest business benefit for a big business of having innovative stuff. Sometimes we do something that costs £10k and we get £100k of publicity for it. But it was also, of course, fuel for my team and for the business, to feel excited about what we were doing’.

For organisations facing disruptive change, the one predictable thing is that the outcome can’t be
predicted, so short of outrageous luck the response will never be 100 per cent right. Holding out until all the information is available is one sure route to disaster. Doing nothing is another.

Being unprepared to alter tack as circumstances change is a third – as Henry Mintzberg wrote, ‘setting oneself on a predetermined course in unknown waters is a perfect way of sailing straight into an iceberg’. On the other hand, when the course is clearly right, holding it may mean changing other elements that you hold dear. When the idea of music streaming was taking shape, Sony, with all the necessary elements in-house, was the obvious front-runner to bring a product to market. Save one: it was organised in divisions, each with its own P&L. Thanks to Steve Jobs, Apple had none of these internal schisms, and while Sony’s divisions were fighting each other to a standstill to preserve their
turf it was able to piece together what became iTunes, unburdened by past legacy. Broadly speaking, in reacting to the unexpected organisations that think in boxes and straight lines are likely to have a harder time than rivals that can capitalise on a profoundly human characteristic. Innovation, says Salmons, ‘is a fundamental sort of human joy – I love what happens to people when you bring them the opportunity to innovate, whether in a big business or small… the energies, the buzz’. Or as Warren Bennis put it, innovation and problem-solving ‘is the task we evolved for – it gives us as much pleasure as sex.’

Reflections from The Foundation

There were three ideas which struck us most strongly:

  1. The conversation described the massive challenge in getting organisations to engage with disruptive change and big new ideas. My observation is that this stems from an unspoken belief that the world will continue roughly as it is if the business keeps on keeping on. But the evidence from our speakers and from examples in the audience was that this is false hope. A more useful belief to promote would be that the situation will change dramatically at some point and the only question is when. You will have a greater risk of failure if you never change than if you do, and especially if you move forward with relatively low cost experiments that are given a high priority
  2. If you accept the need to challenge and re-think, then the second big learning point was about how you give direction to the innovation. It needs to be sufficiently broad to allow disruption and not so open that paralysis of choice or unwise crusades in a random direction are the result. The purpose of the organisation should bring the guidance needed, or at least point in a useful direction. It will ideally reflect the way the organisation creates value for those it serves and if more precision is needed, then answering the question ‘what problems are we really solving or what value are we creating for our customers?’ will help. For example ‘making aspirational quality accessible to all’ was an M&S expression of purpose that helped us explore what they should do in future, an unchanging quest to understand what customers aspired to and thought of as ‘quality’, and what prevented wider access. ‘Being more sustainable’ was one answer and Plan A was, eventually, one result
  3. Structure can never be ‘right’, and no large organisation full of people will work entirely smoothly. But structure can get in the way to a greater or lesser degree, and the contribution I enjoyed in this area was the observation that you just need to keep working at it. See the issues, adjust to get around them. Make silos the enemy and narrow goals and targets clues to where they are hiding!

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