Innovation sport – Established company Vs Startup

posted by Ravi Arora July 13, 2017

Starting point for an innovation is ‘RESOLUTION’ – Resolution for a particular innovation – something specific – that one feels strongly about. Ask any founder of a startup, you will get this answer. Unfortunately, resolutions are not popular because of two reasons: (a) It invites unnecessary pressure to perform (b) Fewer people make new-year resolutions and out of those 92% are not met. People do not put the required efforts to meet their new-year resolutions and forget about them as there is no social pressure. Innovation resolutions in most established companies are unfortunately similar to new-year resolutions – either not made or those who make don’t meet. To make innovations happen, we need to change this trend. We would like more leaders and managers to make resolutions to innovate and do their best to fulfill them and not forget them.

Resolutions are usually made by a person for something that is mostly under his control. Do you think innovation resolutions can be made ? Perhaps No – One can make a resolution to work hard towards an innovation but due to the inherent risk and uncertainty, the end result i.e innovation, may not necessarily result from this effort. Hence the person can make a resolution only to invest (hard work with right resources) in an innovation and can place a bet on that innovation.

The moment we replace ‘Innovation resolution’ by ‘Innovation bet’, it gives a feeling that one could accomplish them by doing nothing but just relying on luck. – Very similar to a Lottery. We should know that there are bets which are more involved (eg. horse racing) in which the bettor needs to analyse past information to make predictions. Similarly, ability to make predictions about technology, products, behaviour etc is an important skill to create choices for the innovation bet. Interestingly, there are people who claim to be in the business of making future predictions. They are either advisors or palmists. Unfortunately they neither get involved in ensuring that their predictions should come out true nor are they held accountable for making wrong predictions. They don’t get rewarded either for making right predictions. The role of an innovator is far more challenging – It is like a palmist who has the courage to buy stakes in the future fortunes of the people for whom he is making predictions!

Once innovation bets are decided, there are two choices in front of the person (a) Share the bets openly with the relevant/interested people upfront like it is shared in the Promissory Note (b) Don’t share the bet/resolution immediately but decide a date or a milestone when it will be shared – similar to Death-will. The first one doesn’t give flexibility change and the later one gives. This sharing of bets is an important step by which the organisation would make it difficult for people to forget their innovation bets and resolutions of investing in those bets.

There is no sport in which the bettor is involved ethically in winning it! Innovation is one such sport.

In this sport the bettor is actually on the steering wheel to navigate (keep his resolution) and accomplish the innovations to win his bet! With so much of freedom, is this Innovation sport played often by people in organisations? Perhaps no. Why? Simple – This sport has risk and uncertainty – which people shy away from.

While ideas can be bottom-up, Innovations are always top-down. All ideas travel upwards until it finds a person who is willing to play this sport by placing bet on it. This means that all innovations don’t have have to be CEO led. Senior leaders should select innovations that they will like to own and drive (and take them as their innovation bet)

There are people who feel adoption of TQM practices would automatically drive innovations. This is somewhat misplaced. Let me explain using two major pillars of TQM:

1) Companies use the SII (Standardization, Improvement and Innovation) model to sustain and improve their competitive position.

This model is undoubtedly very useful but it doesn’t accelerate innovations. Companies follow this SII model in sequence – they focus on Standardization and then on Improvement. Every Improvement warrants new Standardization. Improvement also keeps the leadership satisfied and excited and the cycle between S and I continues. Is there an end to Improvement?No! Carrying out improvements continuously keeps everyone so busy and satisfied that most don’t reach the last ‘I’ (innovation)! Many such companies at some point in their journey realize that they are not doing much on innovation. They acknowledge that they are still in the Improvement phase and not yet ready to focus on Innovation. In my view, the solution to this problem is the reversal of the model: Make it IIS. This is more relevant in today’s world where established organisations are getting disrupted by startups.

2) PDCA cycle to identify and execute improvement projects has been perfected by companies to identify and deliver Improvements.

PDCA supports the SII model discussed above. PDCA was designed to drive Improvements and Innovations. Unfortunately, the PDCA hasn’t been effective for delivering innovations. Why? – The main reasons are (a) ‘Rotating the PDCA cycle’ is the language often used by the practitioners of TQM and it encourages managers to identify projects that have shorter cycle-time thereby making the rotation faster and visible. On the other hand we know that innovation projects usually have longer lead times and cannot rotate the PDCA cycle as fast. (b) The first step of PDCA i.e. ‘P’ almost always foretells if the project will lead to an innovation or improvement. Unfortunately, there is no Check that looks at the Plan (P) to separate innovation projects from improvement projects. I propose a small change – Use PCDCA instead of PDCA.  The check after Plan has been introduced to generate feedback if the Plan is likely to result in innovation or not. This change will be more effective if we change SII to IIS as discussed above.

Coming back – How do we encourage or entice leaders and managers to play this sport? As discussed earlier, the starting point of this sport is to place bets on those innovation that one believes in, followed by a strong resolution to put resources and efforts behind those bets. The time it takes for an idea to finish as an Innovation is long (Some people confuse between innovation and those creative exercises that have a commercial value). The execution time for most innovations span more than one calendar or financial year thereby expecting companies to focus on long term plans. Unfortunately companies focus dominantly on Short term plans or annual plans but rarely prepare or review the Long term (LT) plans. Companies who prepare LT plan need to clearly spell out their innovation bets, which we discussed earlier. The milestones of these innovations bets should be embedded into short term or annual plans. The interesting question to ask is: If innovation is a long term game and companies focus on annual plan, what measure should be taken in the annual plan which would ensure that the game is played well for longer term?

Typical measures that we use in annual plan are Revenue increase, Cost reduction, Customer satisfaction, Customer acquisition, Market share, Employee satisfaction etc. In my view, the best measure for innovation in an annual plan is – Our share of future innovations. This measure represents the quality and quantity of Innovation bets which have been detailed in the LT Plan. This is a lead measure for ‘future market share’ and ‘future market share of profits’.

This ‘share of future profits’ reminds me of an analysis that I carried out to find out why most profitable companies are not necessarily the most innovative companies and vice versa? The list of most profitable companies is usually drawn from the actual numbers reported in Profit loss statements. On the other hand, the list of most innovative companies is drawn on the basis of the difference between their Market Cap and the NPV of their cash flows. Market cap is based on the shareholders’ perception about the future Product/Service innovations.  Process innovations are the hallmarks of successful established companies as they contribute greatly in sustaining and improving the profits by reducing costs. Unfortunately these process innovations do not have any impact on raising the shareholders’ perception. Why? Primarily two reasons – To shareholders the new products are visible but new processes are invisible. Secondly the impact of product innovations on the Profit-loss statement can be made very visible through measures like ‘Revenue/Profit from new products’ but impact of process innovations cannot be reported in a manner that is as authentic. Why? This is simply because the ERP systems capture the ‘actual cost’ after the process innovation and do not capture the cost ‘without the innovation’. Profitable companies and Process innovations will get their due share in innovativeness rank if ERP companies and accounting professionals come together to find a solution.

Companies try their best to maximise the revenue from new products for a a long time – as much as they can. To achieve this they protect their innovations through patents. I believe patents alone do not provide this protection. There are other ways to avoid the competition copying and enjoying the success of the innovation.

Let us come back to the innovation sport and discuss reasons why people are hesitant to play this sport. There are two main reasons:

1) Organisations thrive on having a defect free operations. Everyone is rewarded (eg bonus or variable pay) for achieving predicted outcomes with least deviation.

In established companies, immediate outcomes of innovation do not majorly improve the annual performance. We also know that annual performance serves as an input to decide the annual awards and bonuses. The contribution of new innovations in a year is much smaller when compared to the revenue or cost base of an established company. Combine this with the fact that innovations inherently have higher risk as compared to other jobs that are well-defined and deliver expected outcomes. What is the reward for people to play this risky game when they can happily play other safer games that would deliver better performance awards? The only way to encourage leaders and managers to play this risky game would be to have a considerable upside for being successful in accomplishing the innovation bets. Innovation bets have longer duration and there is no established method today to reward (compensate) people for identifying, committing and then winning innovation bets. We need to redesign our compensation that takes into account achievement of innovation bets.

Some companies feel that in spite of their best efforts, innovations do not happen because they don’t have a culture of innovation. I believe that the Innovation culture is not the holy-grail but can be built by pursuing a set of processes for a very long time. Here are two examples that show how a culture that encourages employees to share their creative ideas can be built with the help of processes. Here is another example to show how a process like performance appraisal chisels away the innovativeness of managers and we feel that we don’t have culture of innovation.

2) Innovation projects need perseverance for a much longer time. This perseverance is needed by the managers who are leading innovation projects and also their managers. Can organisation design contribute to developing this perseverance?

The CFO and her team can play a vital role in supporting managers in developing this perseverance. I suggest that innovation projects should be considered a precious inventory by the CFO and the end of every year a financial report giving details of the inventory should be presented and discussed by the senior leadership team – very similar to typical inventories which are valued and removed from the book if they are not valuable. 

Managers in their passion and excitement to accomplish their innovations over-stretch their perseverance. From the organisations’ point of view, the resources are always scarce and therefore it is fatal to overspend resources on any particular innovation… especially if is heading to become a dead wood. Getting stuck with one’s own innovation project beyond a point when there is no hope is what I call Obstinacy. Organisations need to keep a watch on the team’s transition from Perseverance to Obstinacy.

What can companies do to avoid obstinacy? Obstinacy kicks in because failures are not accepted in companies and the ‘people measurement’ system penalizes all types of failures. This drives managers to show reluctance in recommending a closure (killing) of their unfinished project and accept failure. To change this behaviour, companies need to have a mechanism of identifying creative failures, celebrate them and in the process kill those projects which could transition into obstinacy. Of course, we need to extract precious lessons from all such unfinished projects.

The starting point of the innovation sport is ideas after which one needs a resolution and resources to complete the execution.  Indians are gifted with Associative thinking, which is an important enabler for getting to the starting point. The growing Venture Capital in India is increasingly helping those innovators with resources who have a strong resolution and do not have a short term view. What about established companies? How does an established company compare with a startup in this sport?