Sunday, June 22, 2008

The Non-Innovator's Dilemma

"The Innovator's Dilemma" refers to the value-reducing situation that arises when a company decides not to innovate, and chooses instead to focus on merely sustaining its existing products and processes.

This phrase was first introduced by Clayton M. Christensen in the best-selling book of the same name. However, I personally think the title doesn't provide an accurate description of the situation.

I would have gone with "The Non-Innovator's Dilemma". Yes, it's less catchy, but it potentially better reflects what actually goes on inside a company populated by both innovators (who are typically not managers) and managers (who are typically not innovators).

First of all, some definitions. The word 'dilemma' comes the Greek words "di" (meaning two) and "lambanein" (meaning, "to take", as in choosing a path). Not every decision results in a dilemma. A dilemma only occurs when the choice becomes difficult, and the decision process becomes prolonged. Dilemmas last only as long as the decision-making process.

"Innovation" usually involves a new or novel approach to solving a problem - i.e. the invention of the telephone solved the need for inter-personal communication, the automobile solved the need for inter-home transportation, the assembly line solved the need for mass-production (in the face of mass-demand), and the advertiser-supported search engine enabled advertisers to place targeted advertisements in front of users via the Internet.

Innovations are often termed "disruptive technologies" because they "disrupt" the markets they enter, displacing older technologies (hello TV dinner, goodbye home-cooked meal) and creating new disruptive manufacturing processes (and new marketing channels, markets and support systems) in the process.

Because true innovators are usually future-aware and focused of the potential value of their innovation, they rarely find themselves in any kind of dilemma at all when it comes to plotting the company's forward path. To them, the reason for the disruption they are proposing is obvious, and value of their tinkering and suggested changes abundantly clear.

The real dilemma usually starts when the non-innovative decision-maker, typically a manager of the type produced by the various business schools, is forced into a room with an innovator and asked (by the innovator) to change his capital allocation budget or the course of the company, either slightly, or in a very disruptive way.

It is this executive, not the wild-eyed innovator/developer, that now faces the true dilemma. Depending on the scope of the new idea, the challenges the manager faces in making a choice whether or not to pursue the disruptive innovation may be enormous, and involve every facet of the corporation's life. Here's an imaginary summary of half a minute's worth of his/her brain activity upon hearing about this new approach:

"I have 'x' amount of capital. I have made firm commitments to my investors as to what our existing product will produce in terms of an ROI (return on investment) for the next three years.

"The cost of ripping up my business plan, disrupting my staff, recruiting new experts, reinventing my processes and legal forms, retraining my sales and support networks, pitching new customers on the new idea, refocusing my development team, and repositioning us in the market is going to be enormous...

"Not to mention the cost of emptying my warehouse/servers of all that old product/code and upgrading customers and the potential liabilities of sunsetting that business - this is going to require me to spend hours engaged with board members and lawyers and other executives and require me to rewrite the budget, and..."

Faced with these kind of challenges, many executives will often just politely tell the innovator "let me think about it", and back away from the table. Or, if they can't articulate these feelings to this basic level, they may instead decide to say something along the lines of:

"You damn guys are the *exact same team of guys* that asked me for millions of dollars to come up with the product that we're shipping *right now* - and now you're saying that it isn't good enough?!"

Sometimes, a decision-maker will listen and respond in cool fashion to disruptive ideas with this time-honored answer - "prove to me that a market exists for this innovation."

In response, the innovator will often mention that the inventors of the car, Coca-Cola, canned food, the radio, the television, PCs, Kool-Aid and Guitar Hero were all unable to show that a market existed for their innovations - until after they were released.

Which brings us to the dilemma.

The imagined scenarios above are, of course, gross simplifications. But regardless of the relative complexity (or not) of the events that lead up to the decision point, it is at the decision point that the non-innovator's dilemma actually begins.

Will the non-innovative decision-maker choose merely to sustain the existing business? Or get in behind the disruption/innovation? (It should perhaps be pointed out that at the moment the executive makes the decision in favor of disruptiveness, he is no longer a non-innovator, but has joined the ranks of the innovators - maybe Clayton has the right title after all.)

I am lucky enough to work with a smart bunch of guys at Authentium, both on the board and in management, that understand that disruptive technologies - like SafeCentral - are solely needed in the security software space. But many other inventors and innovators aren't as lucky - which means their companies wont be as "lucky" either.

Nassim Taleb, author of The Black Swan, suggests that businesses succeed only when they create environments within which "aggressive trial and error" is tolerated - and he goes further to suggest that only with "endless tinkering" can innovative companies get "lucky" and deliver to stockholders the future Black Swans/Googles of the business world.

I think he's right. Interestingly, when you look at shareholder growth, it is the tinkerers that make for a good long-term bet - Bell (Bell), Marconi (Marconi), Edison (GE), Ford (Ford), Jobs (Apple), Page and Brin (Google) all returned huge multiples to their investors.

In fact, several studies have shown that public companies led by an entrepreneur/tinkerer (i.e. Steve Jobs at Apple, or Fred Smith at FedEx) grow 8% faster year on year than companies led by a non-tinkerer. One more myth exploded.

Speaking of myths, in addition to the excellent Nassim Taleb (who causes me to wear a permanent wry smile while reading), I would recommend Scott Berkun's book "The Myths of Innovation".

Berkun does a great job of debunking the stereotypes associated with the typical inventor-genius and provides instead an overview of the kind of hard work - and tinkering - that has always been required to create a successful new product.

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