The Lies We Tell to Justify Fruitless Innovation

Innovation is Hard. But Why??

Ask any corporate employee why innovation fails, and they’ll likely point at any (or all) of three scapegoat responses:

1. Bad Management: Obviously, failure to grow and innovate must be a direct result of the people managing the efforts. Our managers are bad at generating growth.
2. Risk Aversion: Our managers have become too risk-averse, especially as they see some measure of success for the business.
3. Insufficient Data: We simply don’t know enough about the market dynamics and customer needs to truly predict growth.

Fortunately (or, if you’re looking for a scapegoat, unfortunately) history has proven that all of these pat responses are wrong.

Here’s a scary factoid:
Roughly 90% of publicly traded companies fail to sustain above-average shareholder returns for more than a few years. So, unless 90% or more of managers are truly terrible, the issue at play is not bad management.

History also demonstrates that corporate execs consistently bet their multi-billion dollar corporations on risky endeavors — many of which have proven successful. Ergo, not risk aversion.

And, in today’s digital-first landscape, it’s difficult to envision data as an insufficient resource. After decades of chasing the “big data” dream, we have amassed more data than at any point in history. We simply haven’t figured out how to use it effectively.

So…Who or What is to Blame?

The reality of the innovation dilemma is one of our own making. To illustrate, let’s look at two issues engrained in corporate structure and policy that consistently lead to innovation failure.

The Role of Middle Management

Early in a company’s lifecycle, there is NO middle management. The visionary executives lead the charge in a truly hands-on manner, keeping them close to the key decisions that enable fledgling companies to disrupt markets and topple large incumbents. However, as companies grow and teams increase in size, the inevitable happens: layers of management are installed to help guide the machine.

The role of middle managers in the corporate machine can’t be underestimated. They are the gatekeepers, guiding the flow of information and decisions from both directions. Middle managers choose which disruptive ideas and future strategies should bubble from the bottom up to the top. They know that not every idea should be presented to executives for consideration, and it’s their job to determine which get shared and which dwindle into darkness.

And it is explicitly this role of gatekeeper that proves crucial in the growth of an organization. While the interests of top executives, especially in the early days, are aligned directly to the growth of the company they’re building — the same can not be said for middle management. Decisions are no longer grounded solely in the interest of the company; there is an element of self-preservation and personal growth that overlays every decision they make.

As a result, ambitious managers are often hesitant to even suggest bold ideas that they do not thing executives will approve. Fear of negative ramifications and career derailment determine that managers present those ideas which are likely to align to past successes and executive approval.

The Pressures of Upmarket Growth

History has demonstrated that incumbent companies excel at monetizing sustaining innovations that push their offering upmarket. These sustaining innovations target more demanding, higher-end customers by offering better performance than existing products. Tim Cook, for example, has proven to be a masterful sherpa of sustaining innovation at Apple.

Upmarket growth is attractive to incumbent organizations because sustaining innovations require only the advancement of existing technologies as targeted to demanding consumers who will spend more, at higher margins. Think: the next iPhone that’s just good enough to make you want a slightly better camera or incrementally faster processor.

Incumbents nearly always win at the game of sustaining innovation because these efforts capitalize on what the incumbent organizations already do well in markets where they have an established brand presence.

The Contrasting Role of Disruptive Innovation

Unlike sustaining innovations described above, disruptive innovations do not aim to bring better products to established markets. Instead, companies championing disruption do so by focusing on a different area of the innovation curve above. By introducing new products that are not as good as the current offerings, disruptors open new markets at the lower end of the customer value spectrum. They attract new customers with simpler, easier to use offerings at lower price points.

Once disruptors have established a foothold, the cycle continues. The disruptors grow up, often displacing incumbents in the process. They, too, then focus on moving upmarket — taking advantage of a much larger growth opportunity because a greater percentage of their potential customers sit upmarket from their initial target.

And thus, the cycle continues.

This tendency for incumbent organizations to focus on upmarket mobility with little interest in defending the smaller, lower end of their market (and thereby leaving room for disruptors to enter the space) is known as asymmetric motivation.

Disruption Doesn’t Occur by Happenstance

One of the most important things to remember in this dilemma is that very few technologies or businesses are inherently sustaining or disruptive in and of themselves. It is the strategies implemented by those shepherding these endeavors that ultimately determine whether they will be disruptive.

For executives and managers who are actively seeking disruptive opportunities, it’s important not to be blinded by the existing knowledge of what that technology or business looks like today, but rather exploring how it might be applied to either the growth of an existing business or new market opportunities that may prove disruptive.

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