Embedding disruptive innovation in the organisation
Venture Path: Moving beyond ‘lean start-up’
To prepare for an uncertain future, companies need to develop a sustainable innovation engine that facilitates iterating, testing and building new offerings, and embed an operating model that allows this approach to thrive.
The state of play in innovation
Why do European companies care about innovation, what influences their investment decisions, and which investments are they pursuing? These insights are valuable in determining the innovation strategies companies can adopt and how organisational processes can be designed to match.
According to Deloitte’s study Innovation in Europe, most businesses see “the advances in new technologies” (92 per cent) as the primary trigger behind innovation. Businesses across all sectors are seeking to understand the relevance, growth potential and threats that new technologies imply over the next decade. Intertwined with this focus on disruptive technologies are “customer expectations” (86 per cent) and “changes in business models” (83 per cent).
Chart 1. What triggers innovation activity in your company?
Source: Deloitte (2019), Innovation in Europe
When asked which internal processes and assets are important for successful innovation, European companies identified “the sensing and scanning of new technologies and trends” (43 per cent) as most crucial. “The designing of appropriate innovation strategies and setting aspirations“ ranked as the second most important (42 per cent). Numbers three and six in the list of processes and assets that generate successful innovation are “having the right metrics in place to measure innovation success” (39 per cent) and “innovation process to ideate, prototype and scale” (34 per cent).
Despite rating “having the right metrics in place to measure innovation success”, and “the innovation process to ideate, prototype and scale” as key factors for successful innovation environments, companies tend to make the same set of mistakes in these two key areas when developing new innovative initiatives or ventures – resulting in significant waste of time and resources. The most crucial processes and assets for successful innovation are those our clients tend to find most challenging areas, our experience in innovation shows.
Chart 2. Challenging areas in innovation
Source: 2018 MIT SMR and Deloitte business research
For example, one of our clients had an idea for a new online business model, renting out products directly to its end consumers. This is significantly different to the company’s traditional core business selling wholesale products to large B2B distributors. Their approach was to jump straight to execution mode by investing in an enterprise-grade software platform. However, basic questions about the new offering remained unanswered. Did customers really want the new service? What features did they value? What were they willing to pay? In helping the client to explore these key uncertainties, rather than simply build the offering, we were able to save the company millions of dollars and many months of wasted effort.
This is just one example – many of our clients struggle in particular to embed a sustainable innovation engine. For them the questions set out below are the big headaches:
- “What is the best way to test and build new business models?”
- What are the structures, roles and processes we need to innovate more effectively?”
- “How can we consistently track and measure all of our innovation activities?”
To address these challenges companies need to build an innovation engine that will cover the full innovation spectrum – from core to disruptive transformational – which can sustainably cycle through tens, if not hundreds, of ideas a year. This means developing a new culture and teams, skillsets, processes and governance designed to search proactively for the company's future sources of growth. Two things in particular are necessary:
- A ‘lean startup method’ to test and validate new ideas rather than just execute them;
- An operating model that allows the new approach to thrive.
We are convinced that companies need to create hypotheses that they believe to be true and then systematically prove or disprove them in a series of experiments. ‘Learn fast, and correct as you go’ might encapsulate this method. The ultimate goal at the start of a disruptive innovation initiative should be to learn quickly, not grow quickly. Companies that target revenue growth too early are almost certain to fail.
A well-known approach to iterating and testing new innovative ideas is the ‘Lean Startup’ method, which promises to improve the speed and effectiveness of corporate innovation radically. When embedded and executed correctly, it enables companies to invest systematically in ideas that prove successful and ‘kill’ those that do not. Adopting the lean startup methodology is becoming crucial for the survival of large established companies.
So why are not more companies adopting ‘lean startup’?
From our experience at clients, we have identified two main reasons that prevent companies from adopting lean startup at scale. The first reason is that there is simply a lack of widespread knowledge about the methodology, although this is slowly changing. The core principles behind innovation business cases and investment decision-making processes have remained largely unchanged for decades. Therefore new and improved approaches have taken time to become mainstream.
The second reason, however, is more fundamental. Despite efforts to bring about the polar opposite, the operating model of large organisations actively discourages innovative behaviour. People respond to explicit or implicit personal incentives and in large corporates these are typically linked to traditional financial metrics such as short-term growth, sales and margin which are defined top-down by the management team.
This puts significant pressure on employees at all levels to deliver these core metrics. They are rarely, if ever, asked to experiment genuinely with new ideas – either proving or disproving them – and instead are expected to follow instructions and carry out scheduled plans. In consequence all ideas in the organisation are required to prove their return on investment (ROI), make money and thus be perceived as successful. Therefore there is also little or no room for failure. But failure is a natural part of disruptive innovation and should be accepted as part of the overall innovation process.
In practical terms companies need to build an innovation engine that will cover the full innovation spectrum – from core to disruptive transformational – which can cycle sustainably through hundreds of ideas a year. This means developing
a new culture and an organisational mindset of ‘less musts and more wants’
Venture Path: Moving beyond ‘lean start-up’
The truth is that no company knows exactly how their market is going to evolve, especially in the longer term. It is therefore impossible to plan for this uncertain future – no silver bullet can be relied on. Therefore, the companies that thrive in this environment will be those that have fully invested in learning how to iterate, test and build new offerings. It is the ability to search systematically and efficiently for new sources of growth that will permit organisations to reinvent themselves constantly and prepare for an uncertain future.
In order to provide companies with the crucial ingredients they need to develop their own innovation engine, we developed Venture Path - Deloitte’s approach to embedding lean startup innovation in large organisations.
The Venture Path methodology encourages companies to take a different approach to innovation, one that embraces entrepreneurial thinking and rapid experimentation and accepts a degree of failure. As a consulting proposition, it includes both the optimal process to validate and build new business models as well as the structure and governance to make innovation happen repeatedly. Our journey to develop Venture Path began with helping large incumbents use lean startup techniques to triage and repair failing breakout ventures. Implemented in over a dozen organisations since then, Venture Path has evolved into system that enables major corporations to manage ventures systematically at every stage, from seed idea to scaling.
If you would like to know more about Venture Path or find out how your organisation could improve its innovation process, then please contact us.