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Real Corporate Innovation Needs Board-Level Stewardship
Every corporation I work with believes in innovation and claims it’s a priority. Yet very few go beyond incremental improvements. They make their current offerings a little better – but real innovation depends on working differently. Their walk doesn’t match the talk. Something is broken.
The trouble is that we’ve made it too easy for companies to pretend to innovate. Brainstorming sessions, hackathons, even mimicking startups with ping-pong tables, all this innovation theater doesn’t change the structural realities that keep big companies from trying truly new things.
As Clayton Christensen explained decades ago, big companies get that way because they excel in predictable execution at scale. Their processes, culture, and people are all attuned to playing it safe. You can’t tell employees to experiment and embrace failure when everything else in the company has been saying otherwise.
Even when companies set up a skunkworks or other autonomous, separate initiative, the main organization subtly undermines this foreign intrusion. Almost inevitably, executives say, “Why should the company take a chance on unproven ideas when we know our customers would like these minor adjustments?” The worst is when they raid the innovation budget to help make their quarterly numbers.
If skunkworks aren’t the solution, what is? For companies willing to make the effort, it’s time to try something radical, what I call a Sandbox Engine. This might look like skunkworks, but it operates well below the radar. Most of the core business, even some senior executives, doesn’t need to know it exists.
Fundamental difference between the enterprise Core Business focused on proven business models, and a … [+]
THE NOUR GROUP, INC.
Since no one can pick the winners, the sandbox engine takes a venture capitalist approach, betting on multiple innovative business models. The goal is to save the core business from obsolescence by disrupting it internally before the market does. Rather than throw money at random ideas, the sandbox engine gives out resources carefully, in a stage-gate approach, as a proposed business model gains traction. Ideas that don’t advance die out quickly and get replaced by the next promising business model.
Heading up the sandbox engine is not the CTO, CIO, or some other established member of the C-suite. Ideally, it’s an outsider or a high-potential manager who’s so fed up with the current organization that you’re worried about him or her going elsewhere. This “chief entrepreneur” reports directly to the CEO but doesn’t join in C-suite discussions. He or she focuses on the sandbox engine exclusively and ignores the incremental innovation in the main organization. The job is to invent the company’s future, which requires a fundamentally different mindset, skillset, and toolset from what’s needed to lead the core business.
The sandbox engine leader also has a dotted-line relationship with the board of directors, ideally with the chair of an innovation committee. Most boards don’t have this committee, but it’s essential to making the sandbox engine work. Even operating in a semi-clandestine way, sandbox engines are hard to keep secret. Eventually, the CEO will come under pressure to strangle the sandbox engine or reshape it to fix the needs of the core business. So the chief entrepreneur needs a powerful protector along with the CEO.
Companies don’t even need to own their sandbox engine completely – it can be an independent firm with outside investors, or with equity granted to its main employees. The company just needs to be able to absorb the sandbox engine back when a promising business model gains critical mass and definitive market traction.
I’ve seen two kinds of approaches to creating a sandbox engine, both using a separate firm. A large health insurer wanted to disrupt itself, so it launched an innovation sprint within the main business. It then encouraged four members of the winning sprint team to take a two-year transfer to a startup firm that the company had invested in, to make their idea a reality. Startups and sandbox engines often suffer from a lack of exceptional talent – either they get pure innovators who don’t understand the nuances of how mature companies work, or they get corporate types who think incrementally and bureaucratically. This approach elegantly solved the problem and kept some restless employees from leaving entirely.
The startup then tested three new business models for digital health services, discarded two of them, and heavily invested in the remaining one. This approach has gained traction in the market: revenues were up 42 percent in 2020 despite the global pandemic, thanks largely to these talent transfers.
Another company decided to buy an initial base of innovation and expand it. It specialized in extended product warranties offered through big retailers but was considering going direct-to-consumers as well. It discovered a small British firm with that strategy. The startup had only three people, but the big warranty company bought it and beefed up its efforts with an infusion of capital and deep market insights from the core business. The startup then turbo-charged the parent’s experiments in direct-to-consumer, with almost no one in the latter realizing it. Within a few years, it had gone from $3 million to $100 million in revenues. The parent then absorbed the operation into the main business, expanding the business model globally.
In both examples, a few board members, passionate about real innovation, got intimately involved in understanding the innovative business models and personally supporting the CEO’s investment thesis. Their stewardship and protection of these investments’ long-tail benefits paid off when others prodded, questioned, and challenged the ventures.
Not every big company is prepared to go the route of a sandbox engine. Several corporate leaders have passed on the idea when I suggested it. They’ve effectively decided that the sandbox engine is too radical, that they’d rather continue thriving with the core business until the inevitable disruption, and then decline gracefully, maybe long after they retire.
But I’ve also met visionary leaders who want their organization to thrive in a very different and unpredictable future. Even if their current business is running on all cylinders, they want to disrupt it through a new business model.
Besides political daring and courage, leaders need the patience to make sandbox engines work. It takes independent startups an average of 12 years to gain traction with a steady flow of revenue, and it may take nearly as long for an internal corporate initiative. This is another way for the board to help by encouraging visionary executives to persist in these initiatives. With a dedicated innovation committee making disruption a board priority, directors can ask challenging questions and help management think differently.
Tech companies already think this way and are hard at work with internal disruptors to ensure their future relevance. Companies with conventional businesses can do the same. The alternative is a slow decline into obsolescence.