Multinationals are facing a crisis in innovation, transformation, and digital (ITD) says business strategist, Mark Zawacki. Although we’ve reached peak ‘innovation theatre’ characterised by innovation labs and Corporate Venture Capital (CVCs), this isn’t translating into business success. Establishing an EDGE business that operates outside business as usual can be the key to successful ITD. However, only if leaders are willing to operate differently.
The playbook of big dreams for multinationals needs to change says Mark Zawacki who joined Savannah Group for our virtual event for business leaders on 21st May.
“We need to disrupt ourselves before someone else does”
“We need to become world class at customer experience and design thinking”
“Let’s open an innovation lab”
“We’ve started a CVC to invest in cool start-ups”
These are all too common aspirations. But most don’t translate into business success. Why not? Because most major established companies are reading from the same playbook; meaning that leaders are not producing the levels of transformation required to thrive in the future. This has led to a crisis in corporate innovation.
Why is there a crisis in corporate innovation?
In our discussion with Mark, we started by exploring the factors that relate back to a lack of correlation between expenditure on ITD and business performance:
1.Structural barriers. How do you bring about change in an organisation that is built to resist it? Traditional multinationals are safeguarded for efficiency, predictability and reliability. Their legacy structure doesn’t lend itself well to innovation, disruption, and high growth.
2.Mindset barriers. In an established business it’s hard to get people to think differently. Large companies are full of smart, but risk averse leaders and employees. Incentives tend to be built around protecting the status quo with little to be gained from intrapreneurship.
3.Operating model barriers. The models we’re using for innovation are just not radical enough. Applying corporate methodologies like CVCs, acquisition, intrapreneurs, labs, accelerators and hackathons are not paying dividends.
4.Cultural barriers. Beliefs about ‘failure’ in the corporate environment leads to no real risk-taking, and a culture in which any mildly radical idea is ridiculed and easily dismissed.
5.Biased advice. Even the experts brought in to offer advice may not be motivated by the need to successfully achieve ITD. Consultants and advisors are rarely incentivised to fix problems quickly then depart.
Successful ITD lives on the EDGE
“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete”
Mark’s experience in this area has led him to believe that the key to successful ITD is adopting a model in which two entirely separate businesses operate – and are rarely integrated. One business continues to operate in business as usual mode and a new business is set up on the ‘edge’:
“All too often, established players fail to accept that their ITD initiatives are incentivised by the very things that kill innovation and transformation: Shareholder returns. By perpetuating the status quo, many innovation labs, start-up engagement programmes, and hackathons fail to deliver true innovation.”
Our discussion then moved on to an interactive session about giving your EDGE business the best chances of success.
Life on the EDGE
Operating a business on the EDGE, as well as maintain growth in an existing business, requires fresh thinking from leaders, according to Mark. Here are some ideas for leaders to keep front of mind in order to give an EDGE business the best chance of success.
1.Don’t kill the EDGE business by integrating it
“What can EDGE organisations can learn from successful start-ups?” asked one of our participants. The first point Mark shared is that once established, EDGE businesses are usually not reintegrated back into the core business: “Why take a high growth asset and put it into a slow growing environment?” As an example, Lockheed pioneered this model 75 years ago through its Skunk Works development programme. This entity still remains independent of Lockheed Martin and is tasked with ‘pushing the boundaries of what’s possible’. It remains on the edge because the established business can’t move fast enough.
2.It’s okay for employees not to transition to the EDGE business
Axa, the French HQ’d insurance firm with 130,000 employees allows employees to transition from the comfort of the corporate life to the start-up environment and reward package of its EDGE business, Axa Next. Axa has found that 95% of employees who have the opportunity to move over, don’t. And Axa’s leadership is fine with that.
One of our participating leaders agreed, adding that “The two-track approach needs one more thing – different people in it. You can separate the mothership from the innovation hub but staff it with ex-motherships and you get a small and painful organisation as opposed to a large and painful organisation.” This is a case in point, says Mark, of why intrapreneurship doesn’t work. Leaders who successfully champion ITD accept that getting the risk profile of your EDGE business workforce right means looking at different talent and reward structures.
3.The EDGE does not report through the established business
“What structure would be appropriate for the type of edge business you propose? Asked one of our guests. “Would it be owned by the legacy business, or a JV, or something different? And what type of governance would be appropriate?”
The core business and EDGE business need to coordinate closely on all buy, build, invest and partner activities under a single entity. But that’s where it stops says Mark. The EDGE business is not a joint venture or a subsidiary of the core business. The only reporting lines from the EDGE are to the CEO and the supervisory Board. The CEO and Board need to be fully engaged with the EDGE business.
4.Stand apart from the established players
“Perhaps acquisition is a good way to kick start this type of initiative?” suggested one leader who joined us on the day.
The real game changers hide from the corporates, answered Mark, citing Uber which didn’t partner with a taxi firm. Likewise, What’s App didn’t collaborate with a telecoms giant, Air BnB didn’t partner with a major hospitality brand. An EDGE business stands apart from established players and its leaders need to be motivated by incentives that promote the true good of the business rather than self-interest.
5.Don’t expect any synergies in business growth
The two-track approach was thought provoking for our group of leaders; “I like the two-track (core and edge approach), reporting back into the same board” said one. “But how do the CEO and Board have to behave differently to orchestrate the two tracks?”
They need to acknowledge that there will likely be no synergy in business growth, says Mark, with the two growing at different speeds. As an example, Google established its holding company, Alphabet, so that the leadership team can efficiently allocate capital to the highest growth opportunities. Alphabet has rejected the idea that it needs synergies between its businesses. Leaders of organisations where there is both an established business and an EDGE business need to be able to flex their investment to direct funds to their most promising assets.
6.Look for more diverse leadership
Tidjane Thiam was the CEO of Swiss bank Credit Suisse from 2015 to 2020. Mark cites his orientation towards a digital mindset, in part related to his age, as one of the characteristics he brought to the role. Conversely, CEOs who are coming towards the end of their career could risk becoming risk averse in order to protect their own future. Similarly, those who report into them could suffer from the same aversion to risk if they think they might be next in line for the top job. Leaders who have diversity of thinking are more likely to hire people who can lead ITD from an EDGE business.
7.Accept that your EDGE company might end up doing something else
“Another challenge is the shareholders who are prepared to back new ventures such as UBER whilst they want traditional businesses to continue to deliver shareholder value and dividends” said one of our guests citing that “This hampers innovation.” In response, Mark shared the example of Philip Morris International.
The world’s leading tobacco company has a vision to ‘deliver a smoke-free future’ which might seem incongruous. But, through the firms EDGE company, the brand is reinventing itself as a healthcare company. In the near future Philip Morris’ 500,000 farmers around the world will be growing high margin plant products with medicinal pharmaceutical value.
8.Don’t make the usual promises to shareholders
Investors and shareholders need to know they’re in for the long term. As one of our group of leaders asked on the day: “Is our inability to value intangible assets in the same way as physical assets in business accounting a significant constraint?” Suggesting that “We do not value ‘speed’ we do not value ‘capability’ – we only look at ‘things’.
To illustrate a different way of doing things Mark shared an example from Google. The technology giant’s transparent communications to shareholders conditioned them from the start about expectations around dividends. Likewise, Facebook openly acknowledged the work the company needed to do in order to become mobile-enabled at the time of its NASDAQ IPO in 2018. This is tough exercise; leaders need to be able to make the argument for long term value over short term dividends and to offer meaningful equity in other ways.
The ITD mindset
Towards the end of our session, one of our participants asked how much structure innovation requires. The current incremental innovation activity that’s already happening in and alongside major businesses is necessary, says Mark. But will be insufficient for the decade ahead: “For large traditional incumbents facing sustained pressure from attackers and the need to continue strong top-line growth, an entirely new model for strategic and transformative ITD is required.”
If you weren’t able to attend the event live, you can listen to a recording of the discussion here: Corporate Innovation Isn’t Working and Here’s What to do About It