After 88 years on U.K.’s high streets, British Home Stores (BHS) shut their doors for the last time on Sunday, 28 August, 2016. This was a sad occasion, especially for former employees, who are still not sure how a $747 million pensions black hole will be resolved. As the administrators continue to sell store fixtures and fittings to recoup some money for creditors, a question that has arisen among commentators is why BHS failed.
There are several reasons that have been outlined in a number of articles. However, a recent article by James Quinn for The Telegraph argues that BHS was a case study in how to not be a retailer in the 21st century. According to Quinn, BHS failed to adapt to changes in the retail business environment; while competitors such as House of Fraser, Debenhams and Next successfully adapted.
The story of corporations failing to adapt and then collapsing is something that is now repeated quite often in business news cycles. It appears that an extended period of success can become an achilles for innovation in large companies. In a candid interview on Nokia with INSEAD, Olli-Pekka Kallasvuo, the former CEO describes how “it is sometimes difficult in a big successful organization to have the sense of urgency and hunger.”
A key question in all these conversations is whether large companies can innovate like startups. Faced with a choice of starting your own company or joining a large corporation, Steve Jobs thought that it was “more fun to be a pirate than to join the navy.” I am sure Jobs was right, but I am also equally convinced that it is possible to for intrapreneurs to be pirates within the navy.
Large companies can be just as innovative as startups. But in order to do so, they have to be aware of the paradoxical situation they find themselves in. This awareness in itself can be curative. Established companies need to be aware that they are not startups, nor should they be striving to be. Unlike startups who can focus on the single mission of succeeding with one main idea, large companies have to handle a myriad of competing concerns and paradoxes.
Below are seven paradoxes that large companies should be aware of and manage well in order to succeed at innovation:
1. Searching While Executing
According to Steve Blank, a startup is a temporary organization whose goal is to search for a sustainable and profitable business model. On the other hand, an established company mostly executes on a known business model that addresses the known needs of known market segments. Blank’s distinction is really helpful for startups to understand where they are on their journey. However, the second part of the distinction is only partially helpful to established companies who want to be innovative.
For established companies to innovate successfully they have to figure out a way to be searching while they are executing. Exploiting current advantages is important for a company’s viability today; whereas exploring new opportunities is important for a company’s future viability. This dilemma lies at the core of all the innovation paradoxes presented below.
2. Create New Products, Manage Established Products
Management practices for creating new products are different from the practices for managing already successful products. Managing established products can mostly be done using traditional accounting methods, cost optimizations and operational effectiveness. Success can be measured using traditional metrics such as profits, ROI, NPV and ARR.
In contrast, the creation of new products has to be managed using startup methodologies such as design thinking, customer development, experimentation and iteration. Success is measured by examining how well the innovation teams are doing in their search for profitable business models (i.e. innovation accounting).
These two different management practices have to be done simultaneously within the same organization. This means that leaders have to know how to run a startup and an established company at the same time. They have to be able to read numbers on a P&L and balance sheet; and also review hypotheses, minimum viable products and data from experiments with customers.
3. Deliberate Strategy, Emergent Strategy
Established companies have traditionally developed strategy in a top down and deliberate manner. The leadership team set the strategy and the employees executed. In order to innovate successfully, companies have to use a combination of deliberate strategy based on vision and emergent strategy based on learnings from the market.
Within the company, the business units that are working on innovation will be constantly testing their products and business models with customers. The results from these experiments will inform an ongoing refinement of the business models that are being developed. However, the lessons emerging from the innovation projects should also inform strategy refinement.
As such, even as leadership set the course, they should be a willingness to change based on learnings from the market. This is the best way for a company to be adaptive. Strong opinions that are lightly held.
4. Decentralized Decisions, Increased Transparency
To develop emergent strategy, a key approach is to allow employees who are closest to customers to make decisions and inform executives of what is working or not working. Traditional command and control management does not work well in such situations.
The reason why leaders want to have control is that they may not trust employees to make the right decisions. They may feel they need some control in order to keep employees executing on the agreed strategy. The challenge is that command and control management often stifles innovation.
So leaders have to defer some decision making to their employees. However, even as leaders defer decision making to employees, they can create tools that capture the decisions that are being made. This means that as they lose control, they gain in transparency. The visibility of decision making helps create trust and resolve this innovation paradox.
5. A Single Company, Not A Single Business Model
In order to innovate, large companies need to stop thinking and acting as if they are single monolithic organizations with one business model. According to Quinn, the challenge for BHS was that while competitors such as House of Fraser and Debenhams brought in concessions and third-party brands, BHS did not do this to a large enough extent.
Having a single business model can make a company less adaptive in an ever changing business environment. Rather than a single company based on one model, established companies have to view themselves as an ecosystem of different products and business models. The complexity of managing several business models at different phases of their lifecycle is now the job of every contemporary CEO.
6. Fail Fast, Make Money
Leadership in established companies is expected to execute well and generate profits for shareholders. And yet to innovate, they also have to willingly embrace failure. Failure comes of with costs in financial, physical and human resources. So how can a company fail fast and make money at the same time?
The difficulty of this paradox often makes leaders hypocrites about failure. Although, they claim they are happy for employees to fail fast, they do their best to invest in products that are least likely to fail. These safe bets ensure that companies end up investing in the same types of products they have always done.
The key to managing this paradox is to understand that failing fast is not the ultimate goal. The goal is to use failure to learn fast. What we are learning as a company are better ways to make money with better products. So failing fast can be a way to make more money in the end.
7. Impatient For Profits, Patient For Growth
Established companies are often already operating at scale. As such, there is a tendency to want to take new innovative products to scale as soon as possible. This premature scaling is one of the main reasons that innovation fails. Harvard scholar Clayton Christensen encourages leaders to be patient when it comes to pursuing growth for new products.
A rule for innovation should be that no new product is taken to scale until its business model has been validated. Once we know that we have a sustainably profitable business model, we can then push for growth. Leadership should apply pressure on innovators to validate their business models, before applying pressure for growth.
These are the seven paradoxes of innovation. It is no longer possible for companies to simply carry on with business as usual. Every effort has to be applied to working with and balancing these paradoxes of innovation. If leaders succeed at this, it is highly likely that their companies can avoid the fate of BHS.