Facing saturated markets, companies have found that traditional growth models are, at best, a source of incremental revenue replacement given the rate of commoditization and price erosion due to increased competition. As a result, forward-looking companies are focusing on more sophisticated forms of innovation—strategic innovation—to provide a platform for new, sustained growth. Strategic innovation, a fusion of strategy and innovation, is best understood as innovation at the core of the business concept level. It involves the introduction of new business models (frameworks for creating customer and economic value) that radically transform industry economics and upend entire markets, often at the expense of sleepy industry incumbents.
Today’s competitive environment presents difficult challenges for executives in many mature organizations: global competition, industry convergence, disruptive technologies, new entrants, evolving customer needs, and the rapid commoditization of products and services. Facing ongoing growth and earnings pressures, executives are increasingly asking people to ‘think differently’ about the business, to look at markets expansively, and to conceptualize new sources of customer value that will catalyze new businesses and revenue streams. In the language of the new competitive playing field, they are asking for strategic innovation.
A radical ethos underpins much of the thinking around strategic innovation given its power to transform customer expectations, the rules of competition, and industry economics. In Gary Hamel’s terms ‘Pioneers do not make minor adjustments to established business concepts, they rethink them from the ground up in unconventional ways to create entirely new models’. As Hamel admonishes, ‘a company that is not experimenting with new business concepts is probably living on borrowed time’.
The evidence, however, shows that most strategic breakthroughs are launched by newcomers, the so-called nontraditional competitors, not industry incumbents. Notwithstanding this imperative, why then is strategic innovation so difficult to achieve in mature organizations? The answer, we believe, may lie in the dynamic interplay between two person-environment factors in mature organizations: cognitive complexity and the invisible hand of organizational orthodoxy.
Strategic innovation is by nature a cognitively complex process requiring sophisticated ways of knowing and higher-order learning capabilities. It requires much more than simply ‘being creative’. According to the prestigious researcher on innovation Jeffrey S. Kuhn, conceptualizing new sources of customer value, business models and revenue streams in a complex, dynamic environment requires sophisticated cognitive capabilities as the following:
- Sense making: A macroscopic lens to scan and interpret, rapidly reframe, and generate insight into the changing environment.
- Strategic Thinking: Pattern recognition, the ability to “connect the dots” at a strategic level, to see underlying patterns, discontinuities, and future scenarios, and how they interact to create opportunities for new growth.
- Critical Thinking: The ability to examine and transform strategic assumptions, orthodoxies, mental models, and other blind spots that impede divergent thinking and strategic innovation.
- Divergent Thinking: The capacity to expand the boundaries of mental models and see things from, often paradoxical, perspectives. The ability to break existing frames, and make new combinations among seemingly disparate elements.
- Conceptual capacity: The ability to conceive and conceptualize; to think holistically and abstractly in terms of concepts, models and architectures.
- Malleable learning orientation: A malleable, non-linear learning orientation that is “at home” in a dynamic environment rife with ambiguous information, loosely structured problems, deep uncertainty, paradox, and complex tradeoffs. The ability to learn through continuous experimentation as well as from and through experience.
The ability to think in ways that achieve strategic innovation can be hampered by the invisible hand of organizational orthodoxy. Orthodoxies are self-imposed beliefs and theories of success about the business, the boundaries of the industry, the business the firm is in, how customer value is created, the basis of competition, how the value chain is structured, etc. There are both industry-level orthodoxies (the way to do business in this business) and company-level orthodoxies (how we do things around here). Here are some examples: This is a mature industry, there’s no room for innovation in this business… This is a commodity business, it’s all about scale, not innovation…This is a cyclical business, the art is in riding the pricing cycles…This is a highly-regulated industry, our hands are tied…Innovation equals new products, there is no value in being the first mover...Our innovative products will be imitated by the competition the day they hit the market.
Organizations of all shapes and sizes undergo a series of life-cycle changes as they evolve from nascent start-ups to established enterprises intent on defending their hard-earned market share. Too often as an organization matures, an entrepreneurial spirit of discovery gives way to complacency, risk aversion, inward focus and incrementalism. The gravitational pull of the past and forces of equilibrium make it difficult to contemplate alternative futures. Core competencies turn into core rigidities. As a result, companies devote much more energy to optimizing what is than to imagining what could be, leaving the job of strategic innovation to nimble newcomers.
In the past firms often maintained a business model for long periods, but this is often no longer possible. New competitors with different products and services, changing patterns of demand, new product, production or distribution technologies, new communication channels like the internet and new opportunities for collaboration – all may erode the power of established business models. Due to the rapidly changing business environment, firms need to review and adapt their business model – and become adept at doing so. This requires turning the innovation effort back to the core.