Leveraging Innovation for Business Survival in the Age of Disruption
According to Gartner, 100 million online consumers will be using Augmented Reality for their shopping by 2020.
At present, artificial intelligence (AI) is automating low-level tasks and eliminating millions of unskilled jobs across the world. But, by 2025, AI will be powerful enough to replace knowledge workers too!
The sheer magnitude of the disruptive potential of these emerging technologies is overwhelming. These are part of a new generation of technologies that are making well-established businesses obsolete. Netflix v/s Blockbuster, Android v/s Nokia, and Airbnb v/s the hotel industry are just some of the examples of how start-ups leveraged digital technology to take their respective industries by the horns and tamed them.
Across the board, a great many established businesses with massive operational scales are struggling to stay relevant in their industries.
One common theme that has emerged across these David v/s Goliath fights for survival is that large, established enterprises have demonstrated remarkable inertia for innovation. To give credit where it is due, large enterprises do have a dedicated focus on innovation, but it is typically more myopic. To understand the nature of their efforts to innovate and its impact on their business survival, it is essential to first take a closer look at the various approaches to innovation.
Types of Innovation
There are two types of innovation — exploitation, and exploration.
Exploitation innovation is the pursuit of incremental innovation that allows businesses to discover new features and capabilities to add to their core businesses. Businesses invest in exploitation innovation to improve their products, develop new lines of products in the same category, and keep their existing customers or target audiences interested in their offerings. Exploitation innovation is essential for generating sustained revenues in the short term, as it delivers rapid results that can be monetized quickly and efficiently.
Exploration innovation is the pursuit of new knowledge, capabilities, and business models that go beyond the existing ones and add fresh core competencies to the enterprise. Exploitation innovation allows businesses to discover new businesses, markets, and opportunities that will allow it to prepare and overcome the challenges of disruptive innovation from emerging technologies and businesses around them. Businesses must ask questions like — How can AI change my business? How can BlockChain transform my operations? How can I leverage IoT technology to deliver superior services to my customers and simultaneously create a wealth of invaluable data? Such questions will help them discover new business models for their enterprises. After all, it is not the products or services that help businesses survive, but their business models.
Exploration innovation grants businesses sustainable competitive advantages that allow them to generate consistent or growing revenues over the medium and long-term.
Only by combing exploitative and explorative innovation can enterprises ensure their competitiveness and survival in the short term, medium term, as well as long-term.
Challenges to Exploration Innovation
When the businesses are young, they are more risk-friendly and take bold decisions that help them leapfrog in their respective industries.
While it is true that large enterprises have an obsessive focus on exploitative innovation, it is not because of the lack of business sense.
Exploration innovation comes with a multitude of challenges that can be difficult to navigate even for businesses with immense resources. Here are some of the examples of these challenges:
1. Financial Validation
CFOs are under tremendous pressure to allocate their business’s limited resources most efficiently. Naturally, they tend to prioritize projects that can deliver tangible and rapid returns. In the case of exploration innovation, it is often extremely difficult to quantify or even identify the specific advantages that will come out of the approach, until the process is complete. Consequently, it is a monumental challenge for business leaders to provide the financial justification for such projects, no matter how visionary they are.
2. High Failure Rates
Start-ups are the most risk-friendly businesses. They are not afraid of exploration innovation and are ready to forgo short-term gains in favour of long-term, sustainable results. At the same time, start-ups also have the highest rate of failure. This is not a coincidence. The returns from exploration innovative are not always guaranteed. The rewards are realized after a series of experiments and initiatives, most of which will end up failing. A bulk of the start-ups hit their financial rock bottom before their experiments bear any fruits. Sure, large enterprises have the wherewithal to pursue such experiments, but that ends up ballooning their budgets to gigantic proportions, which inevitably leads to the previous point.
Start-ups tend to encourage a culture of failure. In the corporate environment, failure has a strong negative perception. Nobody with a strong focus on their career is inclined to take up experimental projects that have high rates of failure, for fear of suffering stagnation in their career growth. Very few companies like Apple, Google, and Microsoft have displayed the aptitude to engage their best brains in pursuing experimental projects and perpetuate such a culture.
Overcoming the Challenges
McKinsey’s three horizons of growth framework provides the necessary foundation businesses require in overcoming the challenges involved in pursuing exploration innovation. Horizon one encompasses a business’s core capabilities that deliver the greatest profits during the short term. In this phase, exploitative innovation drives the company’s growth. Horizon two offers growth opportunities that can generate substantial profits in the medium term but could require significant investments. Both exploration and exploitation innovation characterizes this phase.
Lastly, Horizon three comprises of ideas, research projects, investment opportunities in start-ups, and so on which have a great transformational potential to create new business models and protect the existing business from disruptive innovation.
As can be seen here, the three horizons framework requires businesses to think like investors and act like start-ups.
Use a framework to innovate
The framework helps business overcome the challenges associated with exploration innovation by directly addressing their root cause. It firmly establishes some patterns and steps that can be adopted to minimize uncertainty and improve the odds of success of an exploration innovation initiative. These patterns combine the incremental method of learning with experimentation to successfully create short-term profits and long-term sustainability.
QUESTION: How do you innovate?
Let us know exactly how you address innovation in your organization. Do you organize innovation into different categories? If so, what are those categories? What are some of the challenges you’re facing making real change through innovation in your organization?
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