How to Nurture Disruptive Innovation

• Scarce but Secure Resources
• Established organizations are adept at using politics to enlarge their budgets but know that those budgets are somewhat loose. They often acquire as large a budget as possible and prepare to defend it against incursions from other departments.Politics means that they sometimes win and sometimes lose: if a crisis emerges elsewhere in the organization, their budget might suddenly be reduced by 10 percent.Teams will have to work harder and do more with less. Most likely, the budget has some padding in anticipation of this kind of eventuality.Thus, startups are both easier and more demanding to run than traditional divisions: they require much less capital overall, but that capital must be absolutely secure from tampering.
• Independent Development Authority
• Startup teams need complete autonomy to develop and market new products within their limited mandate. They have to be able to conceive and execute experiments without having to gain an excessive number of approvals.I strongly recommend that startup teams be completely cross-functional, that is, have full-time representation from every functional department in the company that will be involved in the creation or launch of their early products.They have to be able to build and ship actual functioning products and services, not just prototypes. Handoffs and approvals slow down the Build-Measure-Learn feedback loop and inhibit both learning and accountability.Of course, this level of development autonomy is liable to raise fears in a parent organization. Alleviating those fears is a major goal of the method recommended below.
• A Personal Stake in the Outcome
• Entrepreneurs need a personal stake in the outcome of their creations. Where a bonus system must be used instead, the best incentives are tied to the long-term performance of the new innovation.I do not believe that a personal stake has to be financial. This is especially important in organizations, such as nonprofits and government, in which the innovation is not tied to financial objectives.The parent organization has to make it clear who the innovator is and make sure the innovator receives credit for having brought the new product to life if it is successful.Financial incentives aside, employees will always feel that if they have their names on the door, they might have more to lose and more to prove than someone else. That sense of ownership is not insignificant.This formula is effective in for-profit companies as well. At Toyota, the manager in charge of developing a new vehicle from start to finish is called the shusa, or chief engineer:Shusa are often called heavy-weight project managers in the U.S. literature, but this name understates their real roles as design leaders.They assured us that the shusa has final, absolute authority over every aspect of vehicle development.On the flip side, if awards are handed out by senior management on the basis of no one knows what. And if there are no objective criteria by which a team can gauge whether it will win this coveted lottery, then teams will have little confidence that they will receive any long-term ownership of their innovations.

Creating a Platform for Experimentation

Next, it is important to focus on establishing the ground rules under which autonomous startup teams operate: how to protect the parent organization, how to hold entrepreneurial managers accountable, and how to reintegrate an innovation back into the parent organization if it is successful.

• Protecting the Parent Organization
• Most problems revovle around the following: The use of vanity metrics instead of actionable metrics, an overly long cycle time, the use of large batch sizes, an unclear growth hypothesis, a weak experimental design, a lack of team ownership, and therefore very little learning.In the end, decisions are not made based on data. Instead, the executive running the meeting is forced to base decisions on the most plausible-sounding arguments. It is as if each advocate sensed that he or she was about to be ambushed; if another team managed to bring clarity to the situation.Conventionally, advice about internal innovators focuses on protecting the startup from the parent organization. I believe it is necessary to turn this model on its head and challenge the status quo.We often frame internal innovation challenges by asking, How can we protect the internal startup from the parent organization? I would like to reframe and reverse the question: How can we protect the parent organization from the startup?
• Rational Fears
• This company served two customer segments: a business-to-business enterprise segment and a consumer segment.Part of the cause of this lack of growth was the current pricing structure. Like many companies that sell to large enterprises, this one published a high list price and then provided heavy discounts to “favored” corporate clients who bought in bulk.Naturally, every business salesperson was encouraged to make all of his or her clients feel favored. Unfortunately, the published list price was much too high for the consumer segment.Anyone who has been in a multisegment business will recognize that there are many possible solutions to this problem, such as creating tiered feature sets so that different customers are able to purchase different “levels” of the product (as in airline seating) or even supporting different products under separate brand names.Yet the company was struggling to implement any of those solutions. Why? Out of fear of endangering the current business, each proposed experiment would be delayed, sabotaged, and obfuscated.It’s important to emphasize that this fear is well founded. Sabotage is a rational response from managers whose territory is threatened.
• The Dangers of Hiding Innovation inside the Black Box
• The imperative to innovate is unrelenting. Without the ability to experiment in a more agile manner, this company eventually would suffer the fate described in The Innovator’s Dilemma: ever-higher profits and margins year after year until the business suddenly collapsed.In my experience, people defend themselves when they feel threatened, and no innovation can flourish if defensiveness is given free rein.There are examples of one-time successes using a secret skunkworks or off-site innovation team without executive consent. The building of the original IBM PC in Boca Raton, Florida, was completely separate from mainline IBM.Consider it from the point of view of the managers who have the innovation sprung on them. If something of tremendus magnitude could be hidden, what else is waiting in the shadows? Over time, this leads to more politics as managers are incentivized to ferret out threats to their power, influence, and careers.From the point of view of established managers, the message is clear: if you are not on the inside, you are liable to be blindsided by this type of secret.It is unfair to criticize these managers for their response; the criticism should be aimed at senior executives who failed to design a supportive system in which to operate and innovate.
• Creating an Innovating Sandbox
• My suggested solution is to create a sandbox for innovation that will contain the impact of the new innovation but not constrain the methods of the startup team. It works as follows:Any team can create a true split-test experiment that affects only the sandboxed parts of the product or service (for a multipart product) or only certain customer segments or territories (for a new product).One team must see the whole experiment through from end to end.No experiment can run longer than a specified amount of time (usually a few weeks for simple feature experiments, longer for more disruptive innovations).No experiment can affect more than a specified number of customers (usually expressed as a percentage of the company’s total mainstream customer base).Every experiment has to be evaluated on the basis of a single standard report of five to ten (no more) actionable metrics.Every team that works inside the sandbox and every product that is built must use the same metrics to evaluate success.Any team that creates an experiment must monitor the metrics and customer reactions (support calls, social media reaction, forum threads, etc.) while the experiment is in progress and abort it if something catastrophic happens.Unlike in a concept test or market test, customers in the sandbox are considered real and the innovation team is allowed to attempt to establish a long-term relationship with them.Whenever possible, the innovation team should be cross-functional and have a clear team leader, like the Toyota shusa. It should be empowered to build, market, and deploy products or features in the sandbox without prior approval. It should be required to report on the success or failure of those efforts by using standard actionable metrics and innovation accounting.True experiments are easy to classify as successes or failures because top-level metrics either move or they don’t.
• Holding Internal Teams Accountable
• We already discussed learning milestones in detail in Chapter 7. With an internal startup team, the sequence of accountability is the same.Build an ideal model of the desired disruption that is based on customer archetypes, launch a minimum viable product to establish a baseline, and then attempt to tune the engine to get it closer to the ideal.Operating in this framework, internal teams essentially act as startups. As they demonstrate success, they need to become integrated into the company’s overall portfolio of products and services.

Cultivating The Management Portfolio