On getting company leaders on board with the innovation agenda—a case study from IBM.
In Lead and Disrupt, Charles O’Reilly and I describe how firms explore new markets, without sacrificing their core businesses. With some tremendous case studies, we demonstrate that innovation need not be the preserve of start-ups. Netflix, Amazon, and Walmart, among others, all show how it is possible for established firms to beat the “innovator’s dilemma” and lead the next wave of change in their markets.
How do you make the leap to achieve the balance between exploratory innovation and core operations?
I know that this may seem like an impossible dream, an idealistic moonshot. After all many successful firms are gripped by the demands of quarterly targets to deliver on short-term performance. Managers make their careers by squeezing out additional points, optimizing sales channels or making incremental improvements to existing product lines. The leadership teams of such firms are packed with good people whose strengths lie in this sort of operational management. They know innovation is important, but it’s risky and uncertain. So, how do you make the leap to achieve the balance between exploratory innovation and core operations? One key steps is to get leaders on board.
Take IBM. By the late 1990s, IBM had become a disciplined machine for short-term performance, but had stunted its ability to innovate and grow. It faced disruption from a panoply of new technologies, some of which IBM itself had invented, but failed to commercialize: routers, web infrastructure, voice recognition, and RFID.
IBM’s response was to set its sights on “emerging business opportunities” (or EBOs) with a mission to test new markets, learn what value propositions worked, and establish IBM’s market position as quickly as possible. Staffers who participated in EBOs weren’t ring-fenced by the usual focus on profit growth and cost management. Instead, they were given the freedom to think long-term. Leaders of the EBOs could find new ways of working, breaking IBM’s typical approach when necessary, and recruiting deep specialist skills to solve customer problems. However, these teams were not lone wolf outfits. They were also tightly integrated into IBM, leveraging people and resources from the core business to achieve scale faster than any start-up could.
The EBOs had senior level sponsorship, which allowed them to escalate issues when they felt stymied by the machine. But they needed more than that. They needed a social network of leaders who were capable of advocating for their causes that was autonomous from the official hierarchy. Without this kind of grassroots support, rounding up resources for experimentation, while continuing to hold operating units to high goals would have been a recipe for resentment, if not resistance or revolt.
IBM’s Senior Vice President of Strategy Bruce Harreld knew that he couldn’t build bottom-up pressure for the transformation in the context of daily work. So, he designed a three-and-a-half-day Strategic Leadership Forum led by business school faculty and specialist facilitators, in which business teams would work on how to solve the “performance” or “opportunity” gaps. Seminars lightly provoked and challenged executives; evoking IBM’s recent history, educators highlighted the “tyranny of success,” the risk leadership teams face when they became complacent about the threat of disruption.
Each team arrived at the forum with a clearly articulated gap statement (e.g., “We have lost market share in each of the past three years” or “We aim to build a $1 billion business in 5 years”). They applied a disciplined problem-solving approach, modeled by the faculty, to get to the root causes of the performance gaps or plan the critical success factors for closing an opportunity. These were intense experiences. Each session led to a set of commitments for action, based on the analysis developed during the session. But, recognizing the half-life of workshop outputs, Harreld’s team adopted a rigorous follow-up approach to ensure that these pledges were fully met.
Important though these tangible outputs were, the lasting value of the sessions came from the intangible benefits. Participants were struck at the complex interdependencies across the firm and outside the company; they learned about the broader strategic context of which their unit was a part, built the necessary support for the EBOs, and ultimately opened the door to create a strategic renewal agenda. While most of the firm’s strategic opportunities depended on connections across business units, the company was organized and measured from a line-of-business, country, or functional point of view. Beyond these forums there lie a culture of risk aversion and incremental change, a process mentality, low tolerance for mistakes, and little trust across the lines of business—all colluding to diminish innovation. And, this had to be righted.
That kind of realization would not have surfaced in the midst of business as usual. And yet, it was critical in shifting the mindset of the executive population, positioning initiatives, like EBOs, within strategic context. By 2005, 80% of the top 50 IBM executives either attended or hosted a Strategic Leadership Forum, and more that 60% of the top 300 executives had been to at least one. By 2006, EBO’s alone had contributed more than $15 billion dollars to IBM’s incremental growth and were a more effective growth instrument than acquisitions. In 2012, one senior executive told us that he estimated 45% of IBM’s profits derive from these initial EBOs.
IBM learned how to grow through experimentation. But, this would not have been possible without a social network of leaders that understood its importance. So, when you consider your innovation agenda, put leadership buy-in high on your list. You need support from above, pressure from below, room to create change, and an honest look in the mirror to get things headed in the right direction. Dinosaurs can beat unicorns (to borrow from mach29)—but they need the right approach to outrun extinction.
Some advice for established firms and what they can do to stay competitive.
THE AMAZON MODEL
The retailer-turned-tech firm exemplifies a powerful two-pronged approach to innovation.