Recently we had an opportunity to work with the director of strategy for an organization that had an ambitious innovation agenda. He was feeling dispirited as he prepared for a meeting to kick off the next planning cycle. The company’s innovation efforts over the past two years had largely not delivered, and it was not quite clear why. A lot of people were ducking responsibility. Conversations about why the organization had stumbled were uncomfortable.
It became evident, after a few conversations, that this organization, like many others, was not recognizing that sometimes innovations fail not for the shortcomings of individuals, but because the organization as a whole was designed to do something different.
There are fundamental rules that determine how organizations behave — policies and practices that have a tremendous impact on motivations, capabilities, and behavior. These rules are so powerful, and so often taken for granted, that it is entirely apt to refer to them as organizational DNA. Crucial elements of DNA include hiring and promotion practices, leadership styles, planning processes, performance measures, reporting arrangements, formal and informal power structure, how relationships between groups are defined, how individuals are rewarded, and core values.
All companies have DNA, even small ones. As soon as a company gets big enough that the founder can no longer make every decision on its own, the founder has no choice but to start creating DNA. To succeed, companies must create a DNA that fits their business model.
Organizational DNA and biological DNA have some similarities. They both are difficult to observe directly, and have powerful impacts on behavior. But there are crucial differences, too. Biological DNA is inherited at birth, and cannot be changed. Organizational DNA is created early in life, and can be changed, albeit with some effort.
Some innovation efforts fail because a company’s weaknesses are simply the flip side of its strengths. An organization that is hard-wired for success in one business is highly unlikely to succeed in a much different one. Unless, that is, it creates a subunit with an entirely different DNA.
Thus, once leaders choose a set of innovative ideas to invest in, there must be two separate tracks for converting those ideas to reality – one set for implementation within the existing organization, and a second set of strategic innovations that only have a chance within a distinct subunit that is carefully constructed from the ground up.
There is no exact science to choosing in which track a given idea belongs. To give at a rough analogy, if you are trying to make a swimmer into a faster swimmer, leave the project within the existing organization. But if what you are trying to build is a completely different kind of athlete, it must be taken out of the existing organization. You cannot easily turn a world class swimmer into a professional baseball player.
What constitutes “a completely different kind of athlete,” then? Just what constitutes a strategic innovation? There are a few fundamental questions that define what a business is. Who are your customers? What value do you offer those customers? By what processes do you deliver that value? What areas of expertise are needed to deliver that value? Finally, how much uncertainty is there in the business-that is, how accurately do you feel that you can predict results two years out?
Answer these questions for your core business. Now answer them again with the innovative idea in mind. If your answers are starkly different (that is, the difference is obvious within just a few words, even to someone who knows little or nothing about your industry) for at least two of the above questions, then what you are building is a different kind of athlete. It is a strategic innovation.
Do not bother with strategic innovation if you are not willing to create a different kind of organizational sub-unit. It is not worth your time, or your money. You will fail.
And crucially, do not fall into the trap of assuming that the new subunit can save costs by sharing the same HR group, IT group, and planning group that are used by the core business. These groups are the proprietors of DNA, the owners of the practices and policies that have the greatest power to shape how an organization behaves. The new subunit must be allowed to build its own, or it will revert to form. There will be too many reinforcers of the standard mode of operation.
Strategic innovation is hard, but there are times when it is crucial. Sometimes it is the best way to retain your best people. Sometimes it is the last remaining path to growth. And sometimes it is the only possible defense to a upstart competitor that is redefining the rules of the game in your industry.