Radical innovation must come from the outside - not within

Photo by Jay Ma on Unsplash

Creating radical market-shaking innovations isn’t easy for large firms. Stories of incumbents that lost their momentum over time are far more common than those of large corporations that managed to radically renew their business and enter completely new lucrative business areas.

Typically, innovations created by the staff of incumbent corporations are incremental in nature. They help the company improve efficiency and sustain the existing business, for instance, but given the current digitalization in all industries, incremental innovations may no longer be enough. As new competitors with lower cost structures and no legacy systems or legacy people enter the market and radical new business models are introduced, simply doing the same old thing slightly better may not be sufficient. A complete rethinking of the business foundations might be required to stay in the game. For incumbents, that means introducing breakthrough innovations.

Big, radical and innovative = impossible?

But why is radical innovation so difficult for large corporations? There are several reasons:

• These companies are typically built for stability, reliability and predictability in everything they do.
• The incentives built for management often encourage short-term focus, prudence and modest investments, not radical renewal of business.
• Focus is on this quarter’s financial results and when this quarter is over, the focus shifts to the next quarters financial results, and so on and so forth.
• The structures and processes of the corporation keep distinct corporate functions separate, discouraging people from sharing their ideas with other relevant people.
• Expressing ideas or creating radically new stuff that might cannibalize the existing core business might not even be safe for people in corporations and might result in some sort of punishment or humiliation.
• The corporate cultures and management styles of corporations might be decades old, with top-down control and strong chains of command, but very little room for ideation, experimentation and adaptability to changing market circumstances.

A huge volume of business books have been written on innovation in large firms (see, for instance, here and various methodologies have been developed, too. While these might be a good and necessary read for many leaders, we think that unleashing innovation requires much more than a new fancy methodology, a few hackathons here and there, and putting aside some dollars for experimentation in the corporate budget.

In our opinion, it all starts with organizing the company for radical innovation. We believe that radical innovation must come from outside, not within. Business leaders should realize that the legacy organization can only do so much to support innovation and renewal. The legacy business and existing organization should be in good enough shape - it should protect and improve the core and keep it competitive. Further, the legacy business should be responsible for incremental innovations that take the existing core business to a new level. But that’s more or less it.

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Set the innovators free!

If corporations wish to unleash radical innovation they must cut it loose from the mothership. It is essential that the truly radical innovation activity is separated from the core business into another entity that works under different rules, structures, incentives, metrics and culture. All the new crazy stuff needs to be created outside the core, in a separate innovation environment (or lab, or hub, whatever you call it). In that environment, the culture needs to favor openness, transparency, freedom, long-term focus, experimentation, creativity, cross-fertilization of knowledge as well as responsibility for the end results. In that environment, radically new ideas often come from outside and are commonly created in cooperation with customers, partners, vendors, universities and startups.

This all means innovation on the edge, not in the core, by putting strange innovative people together to think of crazy stuff without any boundaries. Once new, radical products have been created, corporations need to allow them to fly, provide adequate support in terms of money and talent, and accept the fact that some of the new radical innovations might eventually cannibalize the core - or in some cases fail.

Two-speed innovation requires courageous leadership

The world is dramatically changing due to digitalization, so if corporations wish to radically renew their business, they need to engage dual transformation:

1. The legacy business is maintained competitive through incremental innovations by the existing staff.
2. Radically new stuff is experimented in a separate open environment by separate creative and slightly crazy people.

It is all about reckoning this duality in innovation, and making the necessary changes in the organization model to nurture this de-coupling. Only then can various innovation methodologies, processes and tools be useful.

From business leaders, this dual transformation requires above all courage and persistence. A transformation like this might be complicated, slow and painful, and cutting radical innovation loose might prove hard to implement in practice. The inertia of the legacy business may make de-coupling of incremental and radical innovation very difficult. The legacy business and organization will always favor its own interests, and remind the leaders that they make the biggest business impact (which is, of course, true in the short term). In their opinion, all the radically new stuff typically is “nice, small things, but they will never truly move the needle on the corporate level”.

Simply looking at the numbers, wouldn’t it be safer to invest in the incremental renewal of the core business and leave radically new things out of the equation, since they entail so much risk, pain and uncertainty?

But the answer to that question is exactly the reason why courageous leadership is needed for corporations to thoroughly renew their business. Management needs to systematically and persistently favor radical over incremental in investment decisions and people nominations. Management must resist the strong inertia of the status quo.

Management also needs to make sure that the corporation doesn’t fall apart as a result of the de-coupling of radical and incremental. A sufficient number of common denominators need to exist for employees to share a common purpose.
We believe that radical innovation is a management challenge, not a technology, tool, process or methodology issue.

This blog was written as a cooperative effort by Mark Zawacki, the founder of 650 Labs, a strategy consulting firm that advises large corporations globally on strategy, innovation and corporate development, and Mika Ruokonen, digital business advisory and one of the business heads at Futurice, a new breed of innovation consultancy with digital values at its core and offices located in Helsinki, Stockholm, London, Berlin, Munich and Tampere.