One of the things that’s perplexing about the lack of innovation in big, established organisations is that they’re often much better resourced than most of their modern, fledgling counterparts. Large organisations have much better access to capital, a sizeable workforce and an existing customer base. So what’s stopping them from getting fit for the future?
Netflix once courted a deal with Blockbuster to purchase the then DVD-by-mail rental company for $50 million.
Legacy companies tend to inadvertently create their own barriers to success, most actually inherit them. When there was a period of relative stability amongst big corporations, their focus was on protecting market share rather than on finding new markets. This led to rigid structures, governance and reporting practices that were only concerned with the optimisation in production of the product and the marketing of it. This has created barriers which undermine the long term success of the corporation in an unstable world, namely:
1. Employees are hired and promoted based on established rather than emerging skill sets
Hiring managers in legacy organisations tend to recruit by benchmarking the mastery of that employee’s skills against their own. If the hiring manager doesn’t understand the skills needed to operate successfully in a modern environment then they’re not likely to hire people who possess them.
2. Failure is punishable and not a commercially or culturally acceptable option
There is no experimentation and absolutely no tolerance for failure in organisations who believe they already have their cash cow. Why would a company want to risk loss of capital on ‘side-projects’ when they have a perfectly acceptable existing product?
3. Business models and core propositions are irrefutable in case of cannibalisation of revenue
Most R&D focuses on driving down the cost of producing the core product and introducing variations of the same product to market. There is no appetite for innovation around the business model or value proposition for fear it may cannibalise existing operating models.
4. Customers are to figure out how to interface with the company rather than companies starting with the customer
Companies have traditionally started with an assumption about what customers might buy and the successful ones have developed a product which prove that assumption to be correct. This arms-length customer relationship has created corporate cultures where focus is on the product, not the customer.
5. Product development is seen as expensive, time consuming and unwieldy
Rather than placing a series of small bets on multiple potential products and testing and learning as it’s developed, research programmes are commissioned, requirements are gathered, contractors are appointed to develop it in a waterfall way. At best new product development is expensive, at worst it fails and ironically they increase risk by trying to be so buttoned-down.
Facebook bought Instagram for $1bn 4 months before Kodak has filed for chapter 11 bankruptcy.
Whenever we hear about failing companies in news reports the analysis often rues the fact that they hadn’t foreseen changes in how customers wanted to interface with product or how new competition and technology was likely to disrupt the status quo. The job overcoming these barriers and leading on foresight must sit squarely with the CEO. There are 5 key questions they should be obsessed with:
1. Do our people have the skills required to operate in today’s environment?
You need to have the capabilities required in your business to keep up with the rate of change amongst customers, competitors and technology. Design thinking will bring a customer focus, lean startup will enable you to de-risk and industrialise innovation and agile will get you to market much faster.
2. Where can I help to de-risk innovation in our business?
An environment needs to be created in which it’s ok for employees to fail provided they learn. Provided you approach innovation as a series of small bets with an acceptance of relatively high failure rate you can de-risk it.
3. Who are our emerging direct and indirect competitors?
If you believe that your direct category competitors are where customer expectations will come from then you’re wrong. They’re being set at the digital-first companies they interact with every day. This is also where the next disruptive business model is more likely to come from.
4. How could we better serve our customers unmet needs?
Getting close to customers, seeing the whites of their eyes and listening to the jobs they’re trying to get done will be the best source of optimisation ideas for the existing experience as well as the catalyst for new product development.
5. Are we including customers in the development of new products?
Developing new products and services in isolation of customers is a fast-track to failure. Bring them into the process and use modern methodologies to build, test and learn cyclically.
Jeff Bezos credits Amazon’s Midas touch to an obsession with customers.
We need not just a digital transformation amongst legacy companies but a mindset, people and methodology transformation too in order to get fit for the future.