When we say “invincible” we understand that no company is actually invincible. All companies are at risk of failure in one way or another; however, there are things that your company can do to stay ahead.

Alexander Osterwalder hosted a Ask Me Anything session during our recent Innov8rs Connect Unconference. He shared that in his experience, there are three primary factors that help make your company invincible:

  1. Constantly reinvent yourself
  2. Compete on superior business models
  3. Transcend industry boundaries

Successful companies are no longer classifiable within industry boundaries. That’s 1985 thinking, and the world has changed since then. These days, companies need to think beyond their tried-and-true core business in order to remain relevant in a changing business world.

For established companies, the biggest challenge is trying to encompass both Explore and Exploit mentalities. Doing both at the same time is very hard for most organizations, because managing what you have and inventing the future require fundamentally different mindsets, and most of us are not very good at focusing on both. So, how can we incorporate both the Explore and Exploit mentalities to enhance innovation? First, we have to define innovation.

A snippet from Alexander Osterwalder's session during the Innov8rs Connect Unconference, June-September 2020. To watch the full session recording, join Innov8rs Community with a Content or Premium Pass.

3 Types of Innovation

Alex believes that the word “innovation” alone is nonsense, because there are different types of innovation:

Efficiency Innovation entails improving the existing processes and business model. This can include the addition of very sophisticated technology, but the challenge here is that you can mistake advanced technology for advancing the company when you’re really just making the current processes more efficient. At worst, that could mean that your company is just going to more efficiently die with a dying business model. So, what we really need to do is work on sustaining and transformative innovation.

Sustaining Innovation refers to new value propositions but with the same business model.

Transformative Innovation is the most difficult for established companies. This type of innovation focuses on inventing the future. It can be especially daunting because people believe that when creating growth engines involves the cannibalization of existing business. Sometimes that’s true, but it’s not always the case. In fact, it’s one of the most prevalent innovation myths. You can create growth engines that either build on the strengths of your existing business model or extend it into new ares.

Although all three types of innovation facilitate change, only sustaining and transformative innovation fall under the Explore mentality necessary to facilitate true change. Efficiency innovation, while important, focuses only on the improvement of existing processes, and falls solidly within the Exploit culture.

The Portfolio Map

In order to bridge the gap between Explore and Exploit mentalities, we created a tool to harmonize both, the exploration of new ideas and the management of the existing. What we came up with is the Portfolio Map, which makes the two different portfolios explicit: your Explore Portfolio and you Exploit Portfolio:

Explore Portfolio: This portfolio incorporates transformative and sustaining innovation where you create, test, and adapt ideas, and new business models until some emerge that can become new growth engines. .

Exploit Portfolio: This portfolio focuses on ways to detect and prevent disruption and improve your existing business model and operations. This can include advanced technology for more efficient physical operations or a new business model that adjusts the process flow. These ideas may be innovative, but they are not necessarily transformative.

These are two different worlds, with different cultures. The Exploit approach incorporates a professional consultant mindset reason and logic, while the Explore approach is more like pirates, opportunistic and unpredictable. These two very different cultures need to find a way to coexist in harmony and collaborate in order to facilitate transformative innovation.

Ideate, Pivot, Kill

Data from early stage venture capital shows that you’d need to invest in approximately 250 projects to produce one mega-success. About 162 of those projects will fail outright, 87 will produce some level of success, and only that one 1 will be completely successful. In short, you can’t pick the winner, and you will never know which project will succeed until you’ve invested. It’s great proxy data for corporate innovation.

To this end, it is especially important to remember that failure is normal in a healthy innovation process. It’s a well known fact with successful companies that in innovation, you fail all the time. In the beginning “winners” and “losers” look virtually indistinguishable, and sometimes, a bad idea will get a lot of traction because it has a charismatic champion. You still can’t know how successful an idea will be until you test it. This is why portfolio management is the biggest next wave in innovation that we need to get right in order to succeed in transforming a business.

“Avoid big failures, or you’re dead. Embrace small failures or you’re dead.”

The lesson here is that you can’t pick the winner without investing in the losers, and this is the fundamental basis of Exploration logic. Rather than betting on one big project, invest in many smaller projects, but be prepared to embrace the small failures, because that is what will allow the successful projects and teams emerge.

Power Behind Innovation

Alex believes that those who invest in innovation will win; however, the key to success is not the people, the project, or the money. It’s the power. Leaders need to personally allocate time and money into innovation every week, if they want innovation to be taken seriously at their organization. In companies where you have co-CEOs – one focused on Explore and one on Exploit – or with one CEO who is at least 40% focused on innovation, you will see innovation emerge, and you will see companies succeed. Without more than 40% focus from leadership, there will be no innovation in the company, because there will be no power behind it. Convince leadership to focus on innovation, and the money, resources, and people will come.

How To Coordinate Efforts For Coherent Innovation Strategies

Something we see a lot is a lack of coherent overall strategy for innovation. When innovation is missing from your company’s overall goals, it’s never going to happen. Your strategy needs to incorporate both the Exploit and Explore portfolios. We call this Portfolio Guidance. The strategy should inform how you are going to manage both your Exploit and Explore portfolios. With your Exploit portfolio, consider which businesses are at risk, which businesses are you going to get rid of, and which businesses you may want to acquire. For your Explore portfolio, your portfolio guidance should focus on which areas of business you want to explore and what technologies you want to invest in. Finding the right exploration direction depends largely on how you define your corporate identity.

Define Corporate Identity

Defining your corporate identity gives you the portfolio guidance that allows your teams to know what to do in both Exploit and Explore portfolios. With both of your portfolios working together, you can facilitate sustainable and transformative innovation that will keep your company relevant in our changing world.

In order to create a corporate identity, you need three things:

  • Strategic Direction, in order to reallocate resources to innovation.
  • Organizational Culture, in which you redefine your internal culture and hire new talent.
  • Brand Image, which you can craft through investment in new arenas and platforms.

This is a piece from The Innovator's Handbook 2021. If you're keen to dive into the best and latest on corporate innovation, request your copy here. To discuss anything Strategy, Leadership & Governance, join our upcoming Innov8rs Connect online event, 16-20 November.