Organizational Agility Entails Dual Innovation- Valutrics

 

In order to increase agility, should organizations aim to become more nimble across their existing structures or should they capitalize on separated units/ventures – such as innovation or digital labs – being dedicated to initiate and develop explorative ideas and opportunities?

Let’s define agility as an organization’s ability to renew itself, adapt and succeed in a changing, and often highly dynamic and unpredictable, environment.

Proponents of the former usually argue that agility needs to address the running operations and separation may eventually prevent explorative initiatives and agile approaches from getting integrated in the core organization. Those favoring the latter, on the contrary, claim that separation from the core is imperative to be able to grow something novel to the company, be it a product, business model, strategic approach or cultural mindset/behavior effectively and quickly without constraints and biases of existing structures.

Both seems reasonable, right?

In fact, to me the question raised above is a wrong question. Organizations should pursue both directions as underlying purposes turn out complementary: adapting and optimizing the existing (exploitation) vs. creating and implementing the novel (exploration). And here we have it again: think integratively – both/and rather than either/or.

Adaptation vs. Incubation and Scaling

As we have seen earlier, adaptation of an existing core business is primarily driven by evolutionary (or continuous) innovation, i.e. mostly incremental innovation of selected parts of the existing business model or the applied technology. With regard to organizational design, pairing speed with stability through underlying dual operating systems seems to be an appropriate choice to increase adaptive capacity in established organizations – i.e. the capability to deal with increasing uncertainty and pace of environmental change.

In complement, incubating and scaling novel – occasionally disruptive – opportunities, such as technologies or business models, is the essence of revolutionary (or discontinuous) innovation. This innovation particularly strengthens an organization’s disruptive capacity, enabling it to go about disruptive innovation. Disruptive activities come down to two distinct motivations:

• Proactively upending other industries than one’s own by appropriately utilizing established capabilities and competencies.
• Anicipating or reacting to disruptions in the market through self-disruption – proving to be hardly possible from within a “to-be-disrupted” core business.

Pursuing revolutionary innovation requires organizational ambidexterity, i.e. the organizational capability to separate corresponding ventures from the core while at the same time facilitating leverage of core assets and competencies.

Clayton Christensen put it straight: The worst place to develop a new business model is from within your existing business model.

Core Transformation vs. Strategic Transformation

The question above also relates to two distinct types of organizational transformations – suggested by Scott Anthony and mentioned in my recently introduced Model for Dual Corporate Innovation Management:

• Core transformation, i.e. doing what you are currently doing in a fundamentally different way
• Strategic transformation, i.e. changing the very essence of a company

As outlined earlier, organizations ideally need to consider both transformation types simultaneously: While core transformation addresses the adaptation and expansion of the existing core, strategic transformation aims at reinventing the organization by introducing entirely new – and often disruptive – opportunities and strategies.

Case in point: Digital Transformation. Discussions about transforming organizations for the digital age often alternate between the above poles, although overall transformation ultimately has to include both. In the end, digitally mature organizations are required to digitalize their existing core business (e.g. to increase efficiency in their operations or digitalizing offerings) and, in parallel, develop modern, digital products, services and business models, many of which are to disrupt the organizations themselves as well as the industries they are in.

A recent PwC 2015 Global Digital IQ Survey can be considered a backing of the preceding line of thought. The study’s leading author states:

According to PwC’s Digital IQ survey of 2,000 business and technology executives, only 8% of respondents say the main drive of digital is disruption. Don’t get me wrong. Incremental innovation with digital is exactly what businesses should be doing and they are making impressive changes. For example, I’ve seen executives using augmented reality to facilitate inspired conversations with customers. And, businesses are using sensors to take the guesswork out of daily decisions. But they also need to fold disruption into the mix to make the big revenue generating gains that shareholders demand. (…)

In attempting digital disruption, businesses need to understand that incremental innovation and radical innovation with digital requires two different approaches and mindsets. (…)

In a nutshell the following chart visualizes the two distinct, complementary activity streams and their corresponding purposes and characteristics:

Playing defense vs. playing offense

Moreover, the idea of dual directions of impact also goes together with Geoffrey Moore’s debate on playing defense vs. offense. Moore suggests two basic scenarios:

Playing offense: Natural disruptors, such as startups, are proactively trying to catch the next wave. Their first priority is to grow and establish disruptive business models in previously stable markets by differentiating themselves from the indigenous players. Once they have succeeded in shaking up, their ensuing priority is to protect their asserted position by defending and optimizing the operating business.

Playing defense:  The “disruptees” – usually incumbents -, however, mostly play a converse game. Here’s how to act as a defender, according to Geoffrey Moore:

Here your first job is to neutralize the disruptor – not to differentiate from them. Why? Because you are the incumbent. They are attacking you. This is your market. You are already differentiated by virtue of your current market position. That is what they are trying to take away from you. What you have to do is blunt the appeal of their offer by co-opting enough of their magic ingredient such that your customer base is not seduced to defect. You don’t have to outperform them in their area of greatest differentiation. You just have to shrink the distance between your two offers.

That isn’t the whole answer, of course, but it does buy you time (and time is not the disruptor’s friend as they are burning cash like it was cordwood). So once you have gotten your neutralization release in market, you have to start a second wave of innovation focused on optimizing your existing portfolio. Even if you are holding them at bay, the disruptor has reset the price/performance bar in your sector, and that has deflated the margin you can charge, so if you want to stay in this business, you have to step up to that challenge by lowering your costs. That’s priority #2.

That all said, you are going to need growth in your future too, and that is no longer going to come from your established lines of business. So you will need to catch your own wave and leverage it to create your own disruption by leveraging your own differentiation. The difference is, you will be disrupting someone else’s market, not your own. So on defense, neutralize first, optimize second, differentiate third.

In essence, this advises against the widely praised need for “self-disruption” and urges to prolong an existing business by neutralizing the disrupter through adaptation and optimization. To secure long-term development and future growth options, disrupting adjacent industries by leveraging one’s available capabilities and competencies at hand is to be targeted. With regard to linking the distinctive directions of impact to primary objects of disruption and innovation, the following correspondence can be proposed:

• Adaptive capacity = Playing defense = Operating/infrastructure model innovation
• Disruptive capacity = Playing offense = Business model innovation

Let’s close with some thought-provoking questions, meant to be carrying on this discussion:

• Are incumbents by all means forced to proactively disrupt themselves in light of disruptive threat?
• Under which conditions may self-disruption (vs. protection) be the preferred choice?
• How does disruptive capacity in the event of playing defense differ from the capacity required for playing offense, i.e. self-disruptive?

Takeaway

Improving organizational agility entails complementary transformation and dual innovation streams. In order to strengthen their capability to successfully shape and respond to changing environments, organizations are challenged to balance the following tensions in accordance with their individual context:

• Adaptation of core business vs. incubating and developing new ventures
• Evolutionary innovation vs. revolutionary innovation
• Protection vs. self-disruption
• Core transformation vs. strategic transformation
• Playing defense vs. playing offense
• Dual operating system vs. organizational ambidexterity
• Operating model innovation vs.  business model innovation

One of the corporate imperatives to thrive in the future is the ability to successfully integrate opposing alignments. Leaders have to prepare their organizations to learn act consistently inconsistent!