The Innovator’s Dilemma – why companies still don’t get it

Why do so many Fortune 500 companies fail with their innovation programs? Because they don’t address the three things needed for success – Keeping start-up “founders” involved, transparently managing internal politics, and being patient as the business scales.

Clay Christensen's seminal work, "The Innovator's Dilemma" (Harvard University Press, 1997) posited that companies have difficulty recognizing and dealing with disruptive changes to their business model because the efficiency built to scale their primary business is so efficient it creates a significant barrier to transformative innovation.

While there has been some criticism of his methodology, since its publication in 1997 we have seen several additional examples of companies that couldn't deal with disruptions that ultimately undermined their core business; Kodak, Borders and Nokia are just three that come to mind.

Many of these disruptions are the result of Internet and digital technology, and the pace of change in those industries has spiraled into an even faster pace of change across a host of businesses ranging from hospitality to media.  For example, in just the last 15 years the music industry’s dominant revenue stream has moved from selling CD's to individual songs online to now selling music as part of streaming services like Pandora and Spotify.

The question is, since Christensen's work is well known by CEO's, how come so many companies, from the Fortune 500 on down, continue to have a woeful success rate in scaling new businesses to address innovation in the marketplace? 

Having successfully worked as an intrapreneur launching start-up businesses or channels for most of my career, including stints at 3 Fortune 50 companies (GE, Citigroup, and MetLife), I’ve seen that  most big companies are pretty good at creating new products and processes to address changes in the marketplace.  This is particularly true for companies founded on technology and innovation, such as Xerox creating the first Graphic User Interface and the Mouse (built on work done at Stanford), and Kodak inventing digital photography.

The issue most company’s face is in selecting and scaling start-up businesses or channels.  Companies (particularly those in the Fortune 500) have had groups dedicated to innovation for decades, and had the resources to buy smaller companies which threatened their core business.  The problem arises when they try to scale the start-up or new company by integrating it with existing business units built for scale with a strong entrenched interest in maintaining the core business model.  Like anti-bodies that ward off a perceived disease, these vested interests, which are measured by delivering efficiency and the yearly P&L, are deep in the organization and they fight the flexibility and resources required to scale the new business.  

One example of this resistance to change was the reluctance to add a URL to Citi Cards Direct Mail so people could respond online to a card offer.   The Direct Mail marketing team thought that if the URL was added to the Direct Mail pieces, it would suppress response, as potential customers would be unsure if they should send back the application, call-in, or go online.  It took a year of testing before the individual Credit Card business units would allow the Internet team to make this change, but within 2 years 50% of Direct Mail response came through the Internet without suppressing overall response rates.

To successfully scale new businesses and channels to address disruptive change, CEO's need to do more than staff and fund an innovation group and then mandate when it should move over to the appropriate line of business.  They must take three actions while exhibiting patience to nurture new business opportunities through their start-up to scale adolescence:

1.    Keep Start-up Management/Founders Involved - While the creators of the new business or channel may not be the right people to help scale it, they need to help guide its evolution to insure that the essence of the new opportunity isn't watered down as compromises are made for the sake of efficiency or expedience.  This is particularly true when leveraging technology and operations, which at most large companies lack the flexibility and nimbleness needed to iterate new businesses. Many start-ups within large organizations outsource technology/operations to 3rd party vendors for that very reason. As the technology and operational infrastructure are brought back in house, features and functionality can be compromised to the point of ruining the start-up's effectiveness.  Steve Jobs was famous for insisting that new products, which he was often personally involved in developing, not be compromised as they scaled, despite the economic inefficiencies sometimes caused by staying true to the original vision. 

2.    Transparently Manage Internal Politics - Managers of core businesses are often baffled when precious resources - which could be used to incrementally improve their business with a more profitable return - are diverted to the start-up. When the start-up is moved to the core business to scale, this resentment can result in under-resourcing the start-up or forcing it to work within the core business' processes and procedures.  One way to avoid this is to track and incentivize core business managers to grow the start-up, even at the expense of investing in the core business.  This was done at NBC to help raise awareness of and interest in CNBC by providing media inventory on the network. To get the Citi Cards business units to allow marketing a new debt consolidation product to their cardholders (which threatened their highly lucrative revolving balances but which were being picked off by competitor products), I moved the P&L for the new product to the Citi Card business it came from.  For example, if I marketed to an AAdvantage cardholder, the Citi Card AAdvantage business unit got the financial benefit if the cardholder took the new product.  This aligned business interests internally, enabling the business to triple in receivables in consecutive years. 

3.    Be Patient - Growth Isn't Linear- For most companies, the new business inherently will take time to become "meaningful" compared to the core business, and will have setbacks.  At Citigroup, I had a manager dismiss the growth of the Internet channel, which went from 0 to 10% of new loan originations in less than 3 years, because its impact in the company’s P&L was "a rounding error".  A few years later, the Internet was significant contributor to Citigroup's business and an anchor for its banking business.  By rewarding year over year growth, celebrating milestones, and tracking results for the new business as part of yearly financial and strategic reviews, the momentum for the start-up can continue as it matures.  It is also critical to understand that without some failure, you cannot truly innovate or scale a start-up business.  The Direct to Consumer business at MetLife took several years to scale, but when two new products were launched based on customer feedback and learnings from previous setbacks, the business saw a marked step change in growth.

As any parent knows, adolescence is a difficult time when children establish their own identity distinct from the rest of the family.  Scaling start-ups is equally difficult and companies may lose patience as core business process and procedures look to absorb and inadvertently smother the new product, channel, or process. Companies must address and overcome The Innovator’s Dilemma by recognizing that scaling is even more crucial (and difficult) than starting a disruptive innovation, and requires an abundance of nurturing, patience, and protection.  After all, only as an “adult” can the start-up meaningfully contribute to the growth of the company and offset declines in legacy businesses.

Why companies need a Chief Digital Officer

At the beginning of 2007, the iPhone hadn't yet been launched, the iPad was a gleam in Steve Jobs eye, Pinterest didn't exist, and Facebook was a niche site for college kids with 15 million users. In roughly 5 years, the digital world has changed dramatically and, more importantly, the pace of change is accelerating given the rapid adoption curve of new devices and sites over the last 2 years.  Want proof?  Consider that  the Ipad is just over 2 years old, yet accounted for over a quarter of online retail sales last Christmas.  Or the rapid adoption of QR codes in both media and at Point of Sale.

This pace of change, combined with the fact that digital initiatives cut across multiple functional areas (Marketing, Sales, Technology, Operations, Customer Service, PR/Communications) has driven a growing call for a new, senior level role - The Chief Digital Officer (See Tim Bourgeois' article in CEO Magazine, or Maija Palmer's recent article for the FT - The Digital Career Switchover - sorry, you have to register to see it). Tim Bourgeois even provides a threshold at which point a company should hire a CDO.  If the company spends more than 5% on digital initiatives that cut across 3 or more functional areas, the company needs a Chief Digital Officer. The reason is simple - given the pace of change, having a flexible, cross-functional digital strategy is critical across three time parameters - 12 months, 24 months, and 36 months (beyond 36 months is almost impossible given the rapid rate of technological changes).  Having a senior level executive with the CEO's ear and keeping on top of the impact that emerging trends have on your business is critical to both the long AND short term success of the company.  Industry leaders such as Borders, Kodak, Blockbuster, and Blackberry have been destroyed due to underestimating the pace of change and adoption of new technology.

Digital doesn't fit neatly into any functional area.  Consider the following:

Marketing - The days of your brand, product, or service being defined by a 30 second TV spot or billboard are long gone.  How should you engage with customers across the purchase funnel (Awareness through advocacy)?  How do you use social media, mobile, crowdsourcing, loyalty/CRM programs, and other tools for digital customer engagement?

Sales/E-Commerce - Sales of products and services online are growing at double digits across virtually every category, and B2B sales have been accelerating.  But how does E-Commerce interact with physical retail?  How do you diversify existing distribution channels and place bets on emerging ones?  Pinterest wasn't on the radar 9 months ago and now is a leading sales generator for several retailers.

Technology - The move from local to Cloud based hardware and software over the last 3 years is revolutionizing technology, as is the move to increasing powerful mobile devices driven by employee adoption rather than business adoption (look at how iPhones and iPads are replacing Blackberrys in the workplace). How will the growth of voice recognition software affect business processes going forward (think SIRI)?


Operations - iPads have moved to the factory floor and into stores, supply chain initiatives are rapidly replacing proprietary networks with Cloud based resources, and customers are getting used to less paper and more online interaction.  But which SaaS companies are the best fit for a business?  Which ones will be around in 3 years?  Where is technology and process re-engineering going?  Given the long cycle times to re-engineer a part of the supply chain, are you sure choices being made a year or more out are the right ones?

Customer Service/Experience- The old adage was, if a customer is happy they'll tell 2 friends, if they're unhappy, they'll tell 10. With Social Media, that becomes thousands. Understanding customer expectations, leveraging advocates, and engaging with them to gain insights on process, product, and promotional improvements are critical for success in building the business.

PR/Communciations - PR leaders took the initiative a few years ago to "own" social media in most organizations, and have been successful using the Internet to optimize company communications for SEO and pickup.  In terms of Social Media however, the challenge has been that digital customer engagement goes well beyond communications to touch on customer experience and marketing, which has created conflicts within larger organizations over ownership and messaging strategy.

The new CDO has to work across all of these areas, and ideally has some level of experience in at 3 of the functions with respect to using digital platforms.  (S)he must be able to work cross-functionally, be a team player, and be comfortable that specific executional resources should reside within the appropriate department to maximize success.  Will this become an established C-level role within the next three years?  If not, companies risk the fate of being in the buggy whip businesses as cars fill the road.

5 Key Digital Trends in 2012

As the year comes to an end, with more sales online on Cyber Monday than in physical stores on Black Friday, I see 5 key trends that a CEO needs to plan for in 2012:

Key Trend 1 – Mobile is here and is being adopted faster than any new technology in history

While you can debate whether or not an Ipad should be considered a Mobile device (I do due to the portability and touch screen), the adoption of smartphones and the move of information consumption and buying from computers to mobile devices is staggering. The Ipad is less than 2 years old, yet there will be 50 Million in use in the US by the end of the year. Smart Phone penetration is over 44%, and this Holiday season over 15% of online purchases were made on a mobile device, over three times last year. The one millionth mobile app was released last week, a ten-fold increase from 2 years ago. 7.5 Million QR codes were scanned between Thanksgiving and December 4th this year, and 65% of smartphone users used their mobile device to find a business and make an in store purchase. Amazon offered a $5 credit if you used their Price Check app to scan a bar code in the store before a purchase. And 20% of all emails are now opened on a mobile device. Whether you are a physical retailer, a B2B company, a service provider, or a wholesaler/manufacturer, the accelerating pace of mobile adoption, which is a historical trend that seems to be following a Moore’s law type of pace, means that you can’t afford to wait to see how mobile sorts out. At a minimum, you need to have at least a test and learn mobile strategy in 2012 or risk falling behind competitors.

Key Trend 2 – Digital customer engagement (formerly social media) will generate lead generation and have measurable sales impact

While Digital Customer Engagement (which ranges from Facebook to Customer Reviews to B2B blogs) has been an emerging factor for the last several years, 2012 will be the year it becomes trackable to measure true business impact. Whether it is leveraging LinkedIn groups and data to generate appropriate B2B leads, adding ratings and reviews to lift conversion rates, or starting a referral or loyalty program to enable your biggest fans to sell for you, it is critical to have a plan to leverage digital customer engagement to drive business next year. Mommy Bloggers are already making a good living by using their influence to market products and services to their readers, and 10% of people share their purchase on Facebook from the confirmation page of an E-Commerce site when that option is available. Finding a company or hiring a resource to help create a plan and track the results of digital customer engagement in 2012 will pay for itself if executed properly.

Key Trend 3 – Video, video, video (or whatever digital broadcasts should be called)

48 hours of video are uploaded to YouTube every minute, but more importantly video is playing a critical role in search and customer engagement. Whether it is online tutorials, product demonstrations, communicating key trends/whitepaper information, or just providing background information on a company or management, video will be an expectation of online customers in 2012. There is a reason television was the most dominant channel in terms of media consumption until the Internet recently surpassed it (due in large part to the consumption of television and movie content online). It is still the most powerful way to connect with a person in terms of a story or message, and the growth of animated videos to explain software as a service products has become standard (for a good example, check out http://www.hubspot.com). Unfortunately, a good online video (which shouldn’t be more than 2-3 minutes) can be expensive to produce, and not all CEO’s are comfortable in front of a camera. Think about how video can enhance your product message or create interest in your product and company, and get at least a few up in 2012.

Key Trend 4 – Data Management

The proliferation of online data, due to the power of cookie technology and increasingly powerful, cloud based servers which can crunch that data into actionable information, will be harnessed in 2012. Several companies are making inroads in terms of truly mastering online business intelligence, and we’ll see a standardization of dashboards based on business type and industry take hold by mid next year. While I don’t think we’ll see the “holy grail” of a dashboard documenting the business impact of all online and offline marketing efforts by the end of next year, we are getting closer. The key is not to just collect data, but to understand its implications and get recommendations on what actions to take to drive the business forward. Too many companies have collected multi-tab spreadsheets documenting traffic sources, on site activity, shopping cart abandonment, and customer purchase or engagement behavior without turning that data into insights. Next year, start with key business priorities and task internal or external analytics resources to figure out which data can be used to track those priorities and to provide insights on how to accomplish them. This should include a daily, weekly, and monthly dashboard with key trends/insights included to help manage and grow the business.

Key Trend 5 –The world is getting smaller

Quietly, the growth in cross-border purchasing and media/information consumption, particularly non-U.S. customers buying or interacting with U.S. based websites, has exploded. A typical U.S. business site gets 20% of its traffic from overseas visitors, and with credit cards and PayPal the payment vehicles of choice for the Internet, it is easy for an international customer to buy from a U.S. site. Cross border shipping is being figured out (check out i-Parcel.com as one example), as are translation services provided on a SaaS basis to translate your site on the fly (check out Smartling.com). Check your server logs or Google Analytics to see how much traffic is coming to your site from overseas customers. If your product or service has the potential for international distribution, 2012 is the year to start testing it.

Feel free to let me know your perspective on 2012 trends below.

Steve Jobs, Intuitive marketer

Steve Jobs great life and career ended today at the all too young age of 56. Whatever he was like as a person and a boss, you can't argue the fact that he will go down in history as a great man who is more personally responsible for the digital era than anyone else. Jobs not only tranformed computers and portable digital devices, he revolutionized music and animation, and his design and product development genius led Apple to become the most valuable company in the world. His impact was so great that people felt connected to him on a personal level, evidenced by the outpouring of sadness both when he left Apple and upon news of his death. The devices and services he created are so personally important to people, the emotional connection with them was extended out to Jobs as the creator.

At the heart of his genius, Jobs was an incredibly intuitive marketer. His distrust for research was legendary - he allegedly never got consumer feedback on any product or service, insisting that customer input was unnecessary and even counter productive. How can you get input on a product the customer doesn't even know he or she wants yet? As someone who believes in using analytics to improve marketing outcomes, and that customer research is a key part of understanding unmet needs, I can only envy Jobs ability to know what people will covet. He had a sense of how to make products so cool, people lined up at stores and happily paid a premium to get them (there were never direct competitors, just inferior alternative products that did some of the tasks of the Apple product). He was ruthless in his vision and his attention to design details (his name is on 313 patents, ranging from PC's to package designs to the glass staircase in Apple stores), controlling every aspect of product design and development as well as marketing.

He knew what people wanted before they knew - a graphical interface for PC's to make them easier to use (the MacOS), portable music devices holding thousands of songs that looked as good as they sounded (iPod), a tablet that is quickly putting paper based media out of business(iPad), animation that seemed to leap off the screen (Pixar). Sure he had some misses (notably the Next Cube), but when you swing for the fences every time up (and Jobs did), you have to put up with the occassional strikeouts.

People have called him a modern Thomas Edison or Leonardo Da Vinci, and they are valid in terms of his record of invention. But I think the world has also lost one of it's greatest intuitive marketers, and it will be a long time before we see another one like him.

Google is a complete failure - the need for curation

Google is a complete failure. Not as a business venture, although if it doesn't fix the shortcomings of search I don't think it will be nearly as profitable in 5 years. Not in terms of technology. Google has terrific search algorithms that usually do very well finding everything important related to a keyword or search string. No, it is a failure in curating the results of what I'm looking for so that I get the EXACT result I'm interested in within the first three listings. Instead, I get literally millions of results. Student Loan generates over 31,000,000 results. Travel to Costa Rica (a personal favorite), 186,000,000 (as an aside, I'd love it if I could skip to the very last page of results to see what's there). You used to at least be able to use the "I'm feeling Lucky" button (although honestly I rarely got lucky), but with Google Instant, I'm not sure that is even an option anymore. And with businesses dedicated to gaming search (and as a consultant I've advised clients to do the same), Google is fighting a losing battle using technology. The opportunity has given rise to Blekko and others that actually use human beings to provide better search and curation, which is truly ironic given that Google put Yahoo's manually curated search out of business during the last decade.

I'm not just picking on Google and search however. The same things goes for finding customized content. I get half a dozen newsletters a day to keep up with digital media and E-Commerce, and it takes far too long for me to sort through them to find out the key stories I need. Groupon keeps sending me Brazilian Wax offers (which sounds pretty painful), even though I haven't clicked on one in a year. What is desperately needed is professional curation, and I'm not sure technology alone can do the trick. I've written a few times about the New York Times and the value it provides curating news for me (http://lewisgoldman.blogspot.com/2009/01/why-nytimescom-should-charge.html). The Times decides what is on the Front Page based on the gut feel of their editors, not based on any statiscal model. Same goes for Travelzoo, which culls the best travel deals on the web and sends 20 of them to me every week. Curation is clearly the next big opportunity in terms of Internet and Mobile content, and those who understand it will be the next wave of winners. If you'd like to see how powerful it can be, try the search I did for Student Loan on Google, Bing, and Blekko. Google and Bing's top organic results are both studentloan.com, which is the URL I secured for Citigroup when I was running E-Commerce for their lending businesses in the late 1990's. Its a great site, but lets face it, its goal is to get you to apply for their Student Loan. On both search engines, Citigroup is followed by Sallie Mae, another student loan lender. Blekko's top two results - a Government run site about Student loans and a blog with great Student Loan information. Neither are perfect (top choice should be Finaid.org in my opinion, having worked in the industry a few times), but both are at least providing information rather than selling a product.

The businesses and sites that can curate and provide relevant results quickly will be the big winners. I don't know anyone who has time to go through 31 million sites.

The Pivot

The Pivot. That key moment when a business needs to change its business model, target, product - sometimes all three - dramatically to either survive or thrive. At larger companies, it can be wrenching to acknowledge that it is needed and even more difficult to follow through. The entire enterprise is build around a business model, and the realization that it's not working anymore is akin to (especially if the founder is still in control) to acknowledging their beautiful child has turned into a monster as an adult. Kodak had to transform itself with the rapid demise of film cameras (see http://buswk.co/8EEIae for an overview, http://bit.ly/mVcA63 for the details from a financial standpoint, and http://bit.ly/g5Hpmf for the most recent update). Jeffery Hayzlett is making a nice career writing books and lecturing about Kodak's success. IBM also pivoted, moving from a hardware to a services company. But for every big company success, there are legions of failures, in some cases because the pivot to the new business didn't match the speed at which the old business model was collapsing (GM and Chrysler, which survived only because of US bailouts, are two examples. So is Borders, which didn't get a bailout). To a large extent, that's what is happening in publishing today, particularly to newspapers. Newspapers are a Baby boomer item - people under the age of 35 simply don't read them in there paper form. I wrote a couple of years ago that the New York Times was making a critical mistake not charging a subscription fee (http://lewisgoldman.blogspot.com/2009/01/why-nytimescom-should-charge.html), which they finally corrected more than a year later. Their most recent financial results touted 224,000 online subscribers in the first quarter of launch. They've even started to advertise the digital version seperately from the print subscriptions. With the Ipad version, you'll see an acceleration of digital subscribers and, most importantly, re-engagement with a younger demographic which will pay off in advertising dollars. To complete the Pivot, they need to acknowledge their print version is for Boomers, increase the typeface (Please!), and focus on stories and news that that demo is interested in reading.

While big companies have trouble with the Pivot, start-ups can also struggle with it. The biggest impediment tends to be the passion and focus of start-up CEO's. They had a vision which they sold to investors, employees, the press, customers. Admitting that vision either won't work or is missing a bigger opportunity is an admission of failure, and many start-up founders struggle and delay the Pivot as a result. Having worked in business that wouldn't or couldn't Pivot, both big and small, it's clear to me that acknowledging the need for a pivot and then moving as rapidly as possible towards the new business model is critical for success. Otherwise competitors without the baggage of another business will pass you by.

The ignored digital baby boomer

I'm a digital immigrant, as are all Baby Boomers. We grew up with 5 or 6 channels of TV, black phones with cords, and 8 Track tapes. Defined as people born between 1946 and 1964, Baby Boomers are the largest segment of the US population, have the most wealth (despite the setbacks of the last few years), and should have more available time to spend online given their kids are grown and some are approaching retirement (ok, maybe not so much given the economy). For the first time in history, there are more people over the age of 65 than under 5. But reading about technology and business, it seems that the Baby Boomer generation which got so much attention in the 1980's and 1990's has disappeared. They're not on Foursquare, they don't tweet. They've learned to text, at least those with teenagers, and they like iphones but still don't use the mobile web very often. They watch TV on, well, a TV. And the vast majority of startups don't seem to be targeted to them.

Fact is, Facebook only became big when the baby boomers started going on and using it. Zynga's games, particularly Farmville, took off when 40 and 50 something women became obsessed about getting a tractor. The growth of Flash Sale sites (and to a lesser extent daily deal sites) have been driven by boomers. And LinkedIn's valuation (and value) is a direct result of baby boomers connecting with one another. Baby boomers drive the Internet economy, but there is still a dearth of products and services specifically targeted to support them. For example, a recent report indicated that the most expensive keyword to buy on Google is Insurance. Think Gen X or Gen Y is driving that? Boomers have been distracted for the last decade dealing with paying for kids in college and aging parents, with little help from the Internet. Where is a a one stop resource for elder care? A good financial planning site besides Mint? Advice on funeral preparation to help with dealing with lost parents. When marketers start to figure out products and services for Baby Boomers, you'll see another step function jump in E-Commerce and Internet advertising revenue.