Innovation at Scale, Issue 1: What is "Innovation"? Can large companies innovate?

Hi! Welcome to the first issue of Innovation at Scale, a weekly newsletter that talks about what underpins the successes - and failures - of corporate innovation.

Before we get to talking concretely about Innovation, let's talk about the two main kinds of organizations: startups and companies.

As my jumping off point, I'm going to use one of my favourite pieces by Steve Blank, “Why Companies Are Not Startups”. Blank is one of the most important thinkers in contemporary entrepreneurship; his work on "customer development" laid a lot of the groundwork for the philosophy that has helped build many of the great Silicon Valley successes of the last 15 years.

What is a “startup,” and what is a “company”?

According to Blank, "A startup is a temporary organization designed to search for a repeatable and scalable business model." Once that business model has been found, that startup has to grow into a company.

The difference between a startup and a company is that a startup is still *searching*. This means that all the assumptions made about the business are treated as experiments, and are able to change until they find a formula that works. The customer segment, the customer problem, the solution you've developed, the business model, revenue and costs structures, the required competencies of the team, internal processes, and many more pieces are considered experiments to help find the right construction of an actual company.

When startups talk about a pivot, this is what they mean. In response to a failed experiment about a key component of the business model, the startup changes its strategy at a fundamental level. Sometimes this means changing everything: target customers, the customer problem being solved, the product being built, the revenue model. The podcast network Odeo turned itself into Twitter; the online game Glitch turned itself into Slack.

Compare this startup approach to Blank's definition of a company: "A company is a permanent organization designed to execute a repeatable and scalable business model."

Execution, and Sustaining vs Disruptive Innovation

For a company, what matters is executing on known factors. The business models, target customers, value proposition and other key elements of the business are mostly settled. Experimentation is a key part of executing a repeatable and scalable business model, but it typically will target one variable at a time, such as "Can we reach customers via a new channel?" or "Is there a new segment that might respond to different messaging?" Most new things launched by existing companies fit this category of sustaining innovations. There are lots of sustaining innovations in the startup world, too, but when you think of transformative startups, you're thinking of disruptive innovation. Disruptive innovation creates a new market and value network, which eventually disrupts an existing market and value network.

("Disruptive innovation" was coined by Clayton Christensen, who passed away in late January; I'll go further into the definition, uses and misuses of the term "disruptive innovation" in a few weeks.)

Often, large organizations are able to successfully launch sustaining innovations while using a traditional product development playbook, because they rely on making small tweaks to an existing repeatable and scalable business model. The risks of sustaining innovations are lower because the level of certainty is higher across most of the key components of the business. Depending on which key lever of the business is being changed, there may be different levels of risk attached.

Our “Innovation” focus

Most of what we'll be talking about in this newsletter falls into the "disruptive innovation" category, because disruption is the most significant threat to any large company, and these are the hardest innovations for large organizations to try to create. Recent years have seen an increasing desire from corporates to explore disruptive innovations as a means to stave off disruption from startups and from their competition.

It's worth noting that the lessons of successful disruption can also be used to increase the chances of success for any sustaining innovation.

Optimization vs Innovation

"Failure is an integral part of the search for a business model."

That's Steve Blank again, from The Startup Owner's Manual, and it hints at a key reason why large organizations are structurally unable to compete on the playing field of disruptive innovation.

Large organizations are well-oiled optimization machines. Their incentives are typically designed around two key variables: a) minimize risks of failure; and b) improve efficiency in small increments.

This makes perfect sense for a multibillion dollar company. Downside risks, when viewed systemically, seem enormous; meanwhile, the upside risk of even small improvements can be worth hundreds of millions of dollars. The risk-adjusted return of "playing it safe" makes perfect sense for a company with a lot at stake.

(We will return to the challenges of corporate decision-making in a future issue)

As a result of these incentives, large organizations have multiple tendencies that limit their capacity for innovation:

- they build process-oriented cultures focused on efficiency and standardization

- they measure individual performance on narrow KPIs that roll up into higher-level company objectives

- they view "risk" as equal to downside risk, and rarely consider large upside risk

- they attract people who can thrive in the environments they've created

How can companies embrace innovation?

We'll close this discussion of the large company with another quote from Steve Blank's “Why Companies Are Not Startups”:

“Companies looking to be innovative face a conundrum: Every policy and procedure that makes them efficient execution machines stifles innovation.”

To approach solving this corporate innovation challenge, we will need to talk about the three key cultural levers for empowering individuals to work on disruptive innovations: People, Process, and Decision-making. This will be the topic of Issue 3.

What’s next for Innovation at Scale?

Over the course of this newsletter, I'm aiming to share what I've learned about how to identify and overcome these challenges, and how to improve innovation efforts in companies large and small (be they disruptive or sustaining!).

I'll also be refining some of these concepts as I workshop them, so please do reply to this email or on Twitter at @dmcdougall with any suggestions or constructive critiques.

Next week, I'll explore the different kinds of innovation, to try to propose a taxonomy of corporate innovation activities, goals, and types, so we can better understand which tools are fit for purpose to help an organization meet its goals through "innovation."

Reading List

Each week, I'll include links to to articles, books, or podcasts related to corporate innovation, that can help you accelerate the knowledge and progress of your teams.

  1. This issue leaned heavily on two Steve Blank pieces, “Why Companies Are Not Startups”, and his book The Startup Owner's Manual. If you're reading this newsletter, I highly recommend the first; if you're running an innovation team or starting a new venture, you should definitely be using the second.

  2. As I mentioned above, Clay Christensen passed away in late January; I'll be addressing his work in future posts. I really enjoyed this appreciation of his life and work by Ben Thompson (@benthompson) and Clay’s former collaborator James Allworth (@jamesallworth), on the Exponent podcast: Episode 180 — It’s Been a Week

  3. At the risk of self-promotion, I'll link to myself here (it's my newsletter!). The first seed for this newsletter was planted when Venkatesh Rao (@vgr) convinced me to do a Twitter thread about innovation in the oil and gas industry. You can read that thread here:

David McDougall @dmcdougall
Late last year, @vgr convinced me to do a thread about #innovation in the #oilandgas industry. I'm building on those insights to launch a newsletter about the challenges of innovation in large and highly regulated industries you can subscribe here:
innovationatscale.substack.com/p/coming-soon?…

David McDougall @dmcdougall

Venkat has now successfully trolled me into publishing some hot takes on the fossil fuel industry I've been working with Oil & Gas clients over the last 2+ years to help embed innovation in their organisations. I'm excited to do this for new projects & new clients in the future. https://t.co/xTuDOFG0dJ

Thanks for reading! Please do respond with comments or suggestions by replying to this email, or via Twitter.