December 19, 2013
Why Transformation Is The New Innovation

Imagine the leading companies of the future. They will have externalized many of their core functions so they can draw on the best talent, wherever it can be found. They will be highly adaptive and able to acquire new competencies as soon as they see new opportunities.

These companies’ decision making will have a kind of fluidity; they’ll swap resources in and out of long- and short-term goals as needed. They will be Darwinian in the sense that their core mission will be longevity: They would be built to thrive for a long time in contrast to today’s S&P 500, which can expect a lifespan in the Index of only 15 years.[i]

In fact, these kind of companies exist today. They are all around us at differing stages of development. With colleagues from the Apigee Institute, in particular Institute director, Bryan Kirschner, we set out to examine how those companies make decisions about innovation and transformation. We interviewed, in-depth, 29 executives and surveyed over 300 more. Here are some of our key findings.

Surprisingly, some of the new generation of enterprises have old and familiar names.

Intel is renowned for chip manufacturing but is about to launch a new open-source 3D printed consumer robotics project, and recently invested substantially in consumer heads-up display maker Recon Instruments. These moves take Intel deeper into consumer products. The chipmaker is climbing out from its “ingredient” status to become a more integrated company, connecting to all kinds of customers.

Philips, formerly a leader in consumer electronics, is creating lifestyle experiences that combine hardware, software, services and connectivity. In the process, the company is transforming how it secures revenues. Instead of just shipping products to the shelves of retailers, Philips is building long-term customer interactions where it hopes to draw revenues and engagement from user-communities. It is doing that via developer communities and by opening up APIs to its products (like lighting).

Of course, they are far from alone. Companies like Google do adaptive processes very well, too. Amazon is a master of new enterprise processes. And smaller, growth companies like Box are reconfiguring how senior executives relate to the internal “crowd” that is their employee base.

Collectively these pacesetters create a true transformation agenda. They are externalizing important processes, like innovation, via APIs or community development. They are building enterprises that have a high degree of interaction with the outside world. They are not just porous in the sense of being more open, they are actually co-dependent with their partners. And they are scaling their activities through those new dependencies. They are also less focused on their traditional core competencies—we argue they are becoming multifocal—and they take a more exploratory view of how they should measure success, loosening their dependency on traditional financial KPIs.

In contrast, companies that do retain with a focus on ROI and core competency in innovation decision making were typically not making transformational investments, nor were they likely to invest in new foundational capabilities for the firm. Instead they tended to fund many small innovation projects without a clear idea of their strategic impact, and to have a more subservient relationship with the markets.

Those with a transformation agenda seek out new skills and actively pursue new revenue streams and business models. They trial-and-error their way to new enterprise operating principles (orchestrating ecosystems, for example, in the way Philips is attempting) that offer a new kind of platform for the future.

But there are laggards too, as we all know. In fact, we found three types of companies, each dealing with change in different ways. They are on the path to transformation, each by different means, and each at different stages:

The Aggregator—This company is heavily focused on growth, often through acquisition. At their best these companies do align strategy and innovation to good effect, however, they are often over-focused on short-term market reaction and typically avoid investments that suggest radical change. They are too busy trying to create unity to risk change and tend to make decisions based around clear, existing financial metrics.

The Brand-Centered Core—Some companies emphasize core competency rather than, or in addition to, existing financial KPIs. We found this type of company would typically have a strong brand focus. This company typically runs innovation projects top-down. It needs exceptional CEO guidance to push projects through the organization; in the wrong hands, it’s unable to make the right strategic moves and instead will react against change by quoting the integrity of the brand.

The Multifocal Strategist—This company is bold enough to diversify its strategic focus and build new business in new markets, and to adapt enterprise operating processes to achieve its goals as it creates a futuristic agenda for the organization. It invests in new competencies and kicks back on short-term, financial metrics in favour of discovering new ways to measure and incentivize activity. These radical measures take place under the umbrella of a strong transformational narrative that signals to employees, partners and the markets that change is taking place.

These three enterprise cultures have a different worldview. The Brand-Centered Core, for instance, is often hindered by its adherence to old brand values rather than being pushed toward change through strategic innovation.

The Multifocal Strategist is far and away the most adaptive and transformational company. Each and every innovation activity is related to a strategic options portfolio that gives them choices about which markets to address. This culture adapts rapidly to competitors or unforeseen conditions.

We found the Aggregator to be much closer to the Multifocal Strategist, at least where decision making is less driven by traditional financial metrics. In the best Aggregator companies, even the financial KPIs become part of a new discovery process.

At the heart of transformative change in both the Aggregator and Multifocal, though, is the willingness and ability to take a more conceptual view of what the enterprise does.

This does not mean there is less of a bottom line focus. Rather, it means they have thought leaders at the top—executives who can lift themselves out of the day-to-day execution processes to envision a future state for the firm and a viable roadmap to it.

Companies that stick to a core competency and are highly transaction-driven—two traits typical of the Brand-Centered Core and the underperforming Aggregator—are much less likely to build dynamic transformation programs than those that are widening their core capabilities and elevating their thinking above execution mode.

These Multifocal Strategists are a new breed of company with a radical new approach to where they will do business. This “fluidity” is the new enterprise imperative.

Companies that do not get the new fluidity tend to have wide-ranging innovation programs that are disconnected from the strategic direction of the firm. They often have unwieldy, even inappropriate, decision processes around innovation. They are governed by a degree of formality that chokes off good projects or creates delays that stall exciting ideas.

They force innovators in the company to present the same projects repeatedly because they habitually fudge key decisions, due to a lack of deeply embedded decision tools or because they lack vision or the simple resilience to make the calls.

These companies try to stay competitive by innovating faster, when in fact they face a bigger challenge: transformation.

Those that are comfortable with transformation are making space for it by deferring old financial metrics. They recognize the phase change business is going through and are riding the new wave.

Becoming more fluid in decision making and strategic direction allows enterprises to get on top of these new factors. But what can non-fluid companies do about this in the short term?

  1. Many enterprises are inhibited not only by stock market pressures but also by complex decision processes that frustrate their key internal innovators. Enterprises that change this push back on ROI and traditional financial metrics for at least some part of their transformation journey. They begin with a real options approach and they grow this into a strategic options approach where risk is critically analysed for all the opportunities inherent in it.
  2. Lagging companies typically proliferate new innovation activity but create decision processes that act as a drag on the capacity to change. To get to change these companies need to rely more on decision tools and new decision processes. Specifically, they require tools that enable them to envision disruptions to their established market and operating environment—and to offer effective responses. We are currently working on those types of tools.
  3. These companies also need to embrace a credible transformational narrative that they can communicate to markets, employees and partners. Change is only possible in enterprises when the right story is being told, one of a bold future rather than one about the threats and frustrations of a fast changing, uncertain environment.
  4. Finally, ambitious companies can recognize good examples in the market today. The pacesetters are good case studies. There is an abundance of examples. The issue is—can you spot them if you keep retreating to the core?

Our advice for companies that want to change is to look to their decision processes. While most companies have set out some kind of agenda around innovation, very few have realized it takes new ways to make new decisions, especially in times of uncertainty. Early in 2014 we hope to present some new ideas about structuring decisions for uncertain times.

[i] Calculations by Professor Richard Foster, Yale University, quoted by The BBC,

Haydn Shaughnessy
Haydn Shaughnessy is an expert in systemic innovation and has worked as an advisor to governments in Europe as well as to global firms on new innovation processes. He is currently working on better decision-making tools to help speed up enterprises' rate of innovation and a new book called The Fluid Core. See also The Elastic Enterprise and his new white paper on Swapping Innovation for Transformation, Core Competency for Fluid Core.

Other Articles by Haydn Shaughnessy:

8 Leadership Lessons From Apple And Samsung

Getting At The One True Rule Of Innovation

The 3 Leadership Habits Of Innovation Heroes

Who Are Tech's Most Social CEOs?

This Is Why Amazon Succeeds

Only Two Types Of Enterprise That Really Matter

The #1 Reason Top Talent Will Leave Your Company

Steve Jobs & Apple's Astounding Legacy