After Lehman: How Innovation Thrives In a Crisis

The economic shocks that reverberated through the economy a year ago could easily have marked the end of the nascent “Innovation Movement.” After all, how could companies prioritize developing innovation programs in the face of very real questions of fundamental survival?

A year later, it is clear that innovation has never been more important. And, in a strange way, the scarcity forced on many companies has been a hidden accelerator of efforts to systematize innovation.

Certainly companies like General Motors faced such critical operational issues that innovation efforts had to be de-prioritized, if not shut down. Arguably the struggles of these companies highlighted how very important it is for companies to get ahead of the innovation game by investing in innovation before they need to invest in innovation.

More and more executives have come to terms with the fact that the “new normal” of constant change necessitates developing deep competencies around innovation.

The increasing pace of change is not really new. Long-term research by Innosight Board member Dick Foster shows how the pace of “Creative Destruction” has been accelerating for some time.

One simple way to demonstrate this increase is to look at the turnover in Standard & Poor’s index of leading U.S. companies.

The S&P index goes back to 1923. Foster’s research found that in the 1920s (when the list contained 90 companies), when a company got on that list, it would stay on for about seventy years. That meant that people who joined an S&P company might be joining the same company their parents worked for and might expect their children to work there as well.

In the 1960s, a company that entered the S&P index could expect to stay on it for about 40 years — long enough for one career at least.

Today, a company that enters the S&P 500 index will stay on it for less than 20 years. That means if you join an S&P 500 company today, it most likely won’t be an S&P 500 company by the end of your career because it will have failed, shrunk, or been acquired.

Increasingly, companies that buck the trend and last 30 or more years will do so only by mastering the ability to perpetually transform themselves. As Foster notes, “It’s an entirely different world where the balance between continuity and change has moved to change.”

Companies that continued to focus on innovation in the midst of the downturn, such as Amazon.com, IBM, and Procter & Gamble, are very well positioned to create substantial distance between themselves and their competitors. Their success will provide further fuel to arguments that innovation isn’t a nicety, it is a necessity.

The good news for companies evaluating their innovation investments is that innovation is one area where less truly is more.

For example, time and again resource-constrained entrepreneurs have won disruptive battles to transform existing markets and create new ones against large companies with hordes of talented employees, great brands, and deep pockets.

The root cause of large corporate struggles, ironically, is abundance. Too much patience. Too much investment. Too many people. Abundance leads companies to lock into bad strategies early. It leads to overly slow decision-making processes.

Strategy can’t be scheduled. Making decisions on a quarterly basis when new information comes in daily consigns companies to miss the innovation mark.

Constraints are innovation enablers. Small teams are faster than big teams. Teams with tight budgets make decisions more quickly than teams with loose budgets. Tight milestones force teams to address critical assumptions early, facilitating the re-direction that typifies the entrepreneurial process.

Innovation-seeking companies have two choices. One is to “outsource” innovation by developing world-class expertise in investing in and acquiring emerging disruptive businesses. For a long time Cisco has demonstrated the power of developing this expertise.

Of course, following this approach requires sometimes paying substantial acquisition premiums. And it denies companies the important process-based learning that comes from organic innovation efforts. Remember, failed efforts often are the springboard to future success.

The second choice — and my admittedly biased preference — is to develop deep competency around organic innovation. This kind of competency comes from treating innovation like a discipline with six, interlocking components;

1. An innovation strategy that details targets, tactics, and required resources
2. An innovation process that iteratively spots and shapes new growth businesses
3. Structures that support the nurturing of innovative ideas, providing a “safe place” for innovation
4. Supporting processes that helps ensure that companies don’t succumb to the “sucking sound” of the core
5. A common language that helps build corporate alignment
6. Metrics that help senior leaders appropriately track their innovation efforts

These efforts need not require massive investments. In fact, a far better approach is to treat the creation of an innovation capability like a startup venture. Give a small team a small amount of money to address critical organizational uncertainties. Invest more only as the team learns more, demonstrates success and adapts its strategy based on “in-market” learning. Ensure that senior leaders “lean forward” and role model the importance of innovation.

There are ample tools in the academic literature and in the accumulated experiences of early corporate adopters to accelerate this journey.

As an innovation practitioner, I am grateful for the 2008 crisis. Rather than killing the innovation movement, it forced a scarcity mindset that will do the innovation movement much good. I suspect that history will ultimately judge 2005-2010 as the years where the innovation movement really took an important step from the fringes of the corporate world towards the mainstream.