Innovation as a double-edged sword

Innovation is one of few slogans that the current fashion on management adopts. The problem with every slogan is that it combines truth and utopia together.  Should every organization open a dedicated function for developing “innovation”?  I doubt.  This blog already touched upon various topics that belong to the generic term “innovative technology” like Industry 4.0, Big Data, Bitcoin and Blockchain.  Here I like to touch upon the generic need to be innovative, but also being aware of the risks.

It is obvious that without introducing something new the performance of the organization is going to get stuck. For many organizations staying at their current level of performance is good enough. However, this objective is under constant threat because a competitor might introduce something new and steal the market.  So, doing nothing innovative is risky as well. In some areas coming up with something new is quite common.  Sometimes the new element is significant and causes a long sequence of related changes, but many times the change is small and its impact is not truly felt.  Other business areas are considered ‘conservative’, meaning there is a clear tendency to stick to whatever seems working now.  In many areas, mainly conservative and semi-conservative, the culture is to watch the competition very closely and imitate every new move (not too many and not often) that a competitor implements.  We see it in the banking systems and in the airlines.  Even this culture of quick imitations is problematic when a new disruptive innovation appears from what is not considered “proper competition”.  A good example is the hotel business, now under the disruptive innovation of Airb&b.  The airlines experienced a similar innovative disruption when the low cost airlines appeared.

It is common to link innovation to technology. Listening to music went through several technological changes, from 78 records to LPs, to cassettes to CDs to MP3, each has disrupted the previous industry.  However, there are many innovations, including disruptive innovations, which are not depended on any new technology, like the previous examples of Airb&b and low cost flights, which use the available technology.  Technological companies actively look for introducing more and more features that are no longer defined as innovative.  After all what new feature, in the last 10 years, appeared in Microsoft Windows that deserves to be called innovative?

Non-technological innovations could have the same potential impact as new technology. Fixing flawed current paradigms, like batch policies, have been proven very effective by TOC users. Other options for innovations are offering a new payment scheme or coming up with a new way to order a service like Uber did.  Interesting question is whether the non-technological innovations are less risky than developing a new technology?  They usually require less heavy investment in R&D, but they are also more exposed to fast imitation.  The nice point when current flawed paradigms are challenged is that the competitors might be frightened by the idea to go against a well established paradigm.

It seems obvious to assume that innovation should be a chief ongoing concern of top management and board of directors. There are two critical objectives to include innovation within top management focus.  One is to find ways to grow the company and the other checking signals that a potential new disruptive innovation is emerging.  Such an identification should lead to analysis on how to face that threat, which is pretty difficult to do because of the impact of inertia.

There is an ongoing search for new innovations, but it is much more noticeable in the academy and with management consultants than with executives.   The following paper describes a typical academic research that depicts the key concerns of board members and innovation is not high in their list.  https://hbswk.hbs.edu/item/everyone-knows-innovation-is-essential-to-business-success-and-mdash-except-board-directors

How come that so many directors do not see innovation as a major topic to focus on?

Let’s us investigate the meaning for an executive, or a director in the board, of evaluating an innovative idea. Somehow, many enthusiasts of innovation don’t bother to tell us about the (obvious) risks of innovations. But, experienced executives are well aware of the risks, actually they are tuned to even exaggerate the risks, unless the original idea is theirs.

On top of the risk of grand failure there should be another realization about any innovation: the novel idea, good and valuable as it may be, is far from being enough to ensure success.  Eventually there is a need for many complementary elements, in operations as well as in marketing, and most certainly in sales, to be part of the overall solution to make the innovation a commercial success. This means the chances of failure are truly high not just because the innovation itself does not work, but because of one missing necessary element for success.  The missing element could be is a significant negative consequence of the use of the innovative product/service.  This means a missing element in the solution that should have overcome that negative part of the use of the product.

Consider the very impressive past innovation of the Concorde aircraft – a jet plane that was twice as fast as any other jet plane. It flew from New-York to Paris in mere 3.5 hours.  The Concorde was in use for 27 years until its limitations, cost and much too high noise, have suppressed the innovation.  So, here is just one example for great innovation and a colossal failure due to two important negative sides of the specific product.

When we analyze the risk of a proposed innovative idea we have to include the personal risk to the director or manager who brought the idea and stands all the way behind it.  To be associated with a grand failure is something quite damaging to the career, and it is also not very nice to be remembered as the father of a colossal failure.

This is probably a more rational explanation to the fact that innovation is not at the top concerns of board directors than what the above article suggests. Of course, relatively young people, or executives who are close to retirement, might be more willing to take the chance.

One big question is how we can reduce the risks when an innovation carrying a big promise is put on the table. In other words, being able to do much better job in analyzing the future value of the innovation, and also plan the other parts that are required in order to significantly increase the chance of success.   Another element is to understand the potential damage of failure and how most of the damage can be saved.

‘Thinking out of the box’ is a common name for the kind of thinking that could be truly innovative. This gives a very positive image to such thinking where ‘sacred cows’ are slaughtered.  On one hand, in order to come up with a worthy innovative insight one has to challenge well rooted paradigms, but on the other hand just being out of the box does not guaranty new value while definitely mean high risk.

TOC offers several tools to conduct the analysis much better. First are Goldratt Six Questions, which guide a careful check from the perspective of the users, who could win from the innovation, leading also to the other parts that have to accompany the innovative idea.   Using the Future Reality Tree (FRT) to identify possible negative branches for the user could be useful.  Throughput Economics tools could be used to predict the range of possible impacts on the capacity levels and through this get a clue of the financial risk versus the potential financial gain.  The same tool of FRT could become truly powerful for inquiring the potential threat of a new innovation developed by another party.  We cannot afford to ignore innovation, but we need to be careful, thus developing the steps for a detailed analysis should get high priority.