Early this year, Columbia Business School Professor Rita McGrath, Columbia Senior Fellow for Entrepreneurship Steve Blank, and President and CEO of HarperCollins Publishers Brian Murray had a conversation about innovation in large organizations.

The discussion, titled The Next Wave of Corporate Entrepreneurship: What Comes After Innovation Theater?, is well worth watching.

But if you don’t have an extra 48 minutes to spare, here’s the breakdown.


What is “innovation theater”?

Innovation theater is the phrase Steve Blank coined to describe what tends to happen when large companies set up their corporate innovation incubator – after 3.5 years they have some great coffee cups and posters, but they haven’t actually moved the top or bottom line. In short, they’re going through the motions, but having no measurable impact.

Innovation and growth at a rapid pace is a necessity for many companies, and a critical focus point for the investors who back them and the boards of directors who guide them.

Ask any CEO if they consider innovation to be mission critical, and they’ll say ‘yes’; yet, the data suggests that despite their interest, their action – Silicon Valley study tours, innovation outposts and bootcamps – is not delivering much in the way of results.


What does the data say?

Deloitte’s Center for the Edge reports that a year on year decline in ROI has been underway for 47 years. The topple rate – the speed at which companies lose their leadership positions – has increased by 39% since 1965.

In 1958, the tenure of companies on the S&P 500 was 61 years in 1958. In 2012, the last year a study was done, it had plummeted to just to 18 years.

We’re also seeing a phenomenon of share buy-backs, and returns to shareholders and executives, rather than companies making genuine resource commitments to innovation.

What has emerged is a pattern in which companies are talking about innovation, but struggle to get it right – and overall performance declines. It’s much harder to regain competitive advantage when it slips, and it’s more difficult to keep a pipeline of new advantages going.


Why do large companies have an innovation problem?

The world is undergoing continuous disruption: the rise of China as a global industrial superpower; the internet; digital distribution; emerging machine intelligence. All of these shifts are not just happening, they’re happening all at once – one after another.

Large corporations are world-class execution engines. The nature of a corporation is to find their business model and then execute it repeatedly and scalably. Startups, on the other hand, don’t execute known business models – they search for new ones. And they’ve developed a toolset, lean startup, that puts a methodology and language on this search for innovation, which runs parallel to traditional business school execution tools.

In the 20th century, companies had years, sometimes decades, to adapt and change their portfolio of products as the winds shifted. Now, corporations in some industries need to move at the speed of startups – but don’t have the management structure, the language, the incentives or even the process to think about how to do that.

Sears, Macy’s – they saw Amazon coming to retail, but simply didn’t have the tools in place to respond in time to save their stores.


Corporations, CEOs, and the 3 Horizons

In 1999, McKinsey published their Three Horizons framework – a structure for companies to assess potential opportunities for growth without neglecting performance in the present:

Horizon one represents those core businesses most readily identified with the company name and those that provide the greatest profits and cash flow. Here the focus is on improving performance to maximize the remaining value. Horizon two encompasses emerging opportunities, including rising entrepreneurial ventures likely to generate substantial profits in the future but that could require considerable investment. Horizon three contains ideas for profitable growth down the road—for instance, small ventures such as research projects, pilot programs, or minority stakes in new businesses.

Most CEOs are Horizon one CEOs. They may understand the need to look for Horizon three opportunities, but often get trapped in performance indicators and promotions that incentivize Horizon one activities.


It’s not the idea, it’s the processes

Finding the right idea isn’t the problem for large companies – it’s the lack of a strong incubation and acceleration process.

Steve Blank has seen a repeating pattern at large companies: boards tell Horizon one CEOs that it’s time to innovate, so that CEO implements top-down incubators or labs – innovation theater activities – with no incentive, promotion or budget alignment, and no divisional support. The incubator chugs along, graduating teams, but divisions don’t uptake any of the output.

Execution and innovation require different incentives. If execution departments or divisions aren’t incentivized to adopt and execute on innovations, they’re dead on arrival.

The challenge for CEOs is figuring out how to encourage innovation, while not neglecting or negatively impacting the core business – execution and innovation have to work in harmony.


Fixing and refactoring organizational debt

Startups take lots of shortcuts, and end up with technical debt – they hack together code to get the minimum viable product out in the shortest amount of time. Eventually, those accumulated shortcuts have to be cleaned up, and the cleanup process is called refactoring.

Large companies who start innovation projects away from their mainstream acquire both technical debt, and organizational debt. As Steve Blank puts it:

“Organizational debt happens because in a large company, the people running these innovation projects are the ‘crazy people’. They’re the people who are happy to be working in large companies because of the resources, and normally they’d be fired anywhere else in the company, but they’re wonderful people to start a new project. The problem is, they get the idea going and there’s some traction, but now you try and hand it off to a division or someone else, and there’s this mismatch.”

This refactoring process is part of the innovation model, but once that large corporations are missing – particularly since innovation initiatives tend to be top-down, rather than bottom-up. Steve calls for corporations to implement ‘refactoring groups’:

“In a large corporation, we need a refactoring group that sits in between our innovation engine, wherever it’s occurring, and the execution group…You need a process that makes this an innovation engine that’s continuous, that recognizes that these interfaces need to occur. And that the execution people vs the creative people just have different skillsets, different motivations, and you want them to work as seamlessly as possible recognizing the limitations of each group.”

Rita McGrath calls this refactoring group the ‘sherpa role’:

“One of the things my research has been looking at is the different types of leadership roles you have to have in corporate innovation. You have to have the CEO setting the standards, making the big decisions so people are clear on what the priority is. Then you have to have the startup people, the ‘crazy people.

And in between, there’s this very interesting role which I’ve come to call the sherpa role. Counterintuitively, these sherpa people tend to be people with deep corporate experience, they tend to have a lot of ties and a lot of social capital, and they tend to get a kick out of nurturing of new ventures.

They also tend to be practically invisible, and I see a lot of companies messing up because they don’t understand what job these people are doing… because they don’t know the value, these people get lost in the shuffle, or worse yet they get let go. So you’re missing this essential piece of glue that really ties together your innovation process with your larger corporate overheads.”


What does it look like when a large company gets it right?

When Brian Murray became CEO of Harper Collins in 2008, the book publishing industry employed over 83 thousand people. By 2014, it was down to just over 65 thousand. Despite massive disruption in the industry, he managed to transform Harper Collins into one of the premier properties in book publishing.

He’d been thinking about the future of book publishing since 2004, when Google founders Larry Page and Sergey Brin spoke at the Frankfurt Book Fair about digitizing books for search engines. He sensed there was a sea change in the works, though he didn’t know exactly what that was going to look like.

Once he took over, he began working incrementally, over several years, on how to position and protect the core business against an unknown future that was going to have a heavy digital component.

As the industry experienced a big digital transformation, there was a lot of debate – is it an opportunity, is it a threat? Who is our core customer: is it the consumer, or is it the author?

Brian felt strongly that Harper Collins couldn’t compete for the consumer with companies like Amazon and Google – the only path to survival was doubling down and engaging in the author as their fundamental customer.


Getting clear on core advantage

Brian realized that Harper Collins had to get extremely clear about their strongest position. When talking through their business model, he realized two things:

Publishers are venture capitalists of culture, allocating and committing more than 200 million dollars every year to new books, authors, and works;

Publishers are large global professional networks of professionals, similar to a law firm, that share expertise and best practices.

Brian realized that future growth meant pivoting away from retail, and toward their core strengths. “We’ve done a lot things in terms of trying to understand what our future is, what are our core capabilities for our business today. The ones that can’t be replicated by any large digital platform are the editorial and marketing, and by marketing I mean everything that includes sales and publicity, everything we do to build an audience for an author. Those two capabilities cannot be done by any algorithm.”

Doubling down on the author as customer meant putting authors at the center of everything they did – including how they designed their office space. Brian moved Harper Collins out of their 20-story, closed-door tower in midtown New York to an open-concept downtown location where visiting authors could see designers, editors and marketing teams working, and see the history of Harper Collins authors celebrated on the walls. “If we can keep authors happy and continue to provide and articulate the value we bring to them, then we can work with Amazon and Google and everybody else – because we’ve got the authors.”


Bottom-up experimenting, and keeping what scales

Harper Collins tried several innovations: digitizing their own books; ebook subscription models; interactive features in ebooks. Some worked, some didn’t – but that never held them back from experimenting. Brian says:

“We’ve done a lot of experimentation, again with really zero variable cost – in the digital world, we were freed from many of the constraints and limitations of the physical book world.

My job as a CEO is to look for what will scale. We have a lot of people with a lot of great ideas – we’ll be working on anywhere from 30-40 innovative projects, I monitor them and if I see something that I think can scale, I start putting more resource budget behind it from a corporate standpoint to see if we can get lift-off. It’s very informal, and more bottom-up than top-down.”


Being comfortable with failure

Brian also had to encourage a culture that was comfortable with not getting things right:

“We’re in the book business, most things don’t work out! You have to be comfortable with taking risks and with failure. Failure for us is usually measured failure – a lot of things, I don’t expect them to be hockey sticks where they’re just going to go off. They’re not big risks, they’re more overhead – time, resource risks or maybe reputational risks – than financial risks. You can do a lot with creative people who want to try things on a shoestring budget. The key is knowing whether or not you think something can scale, and really move the needle for the company.

Sometimes I’ve had to push, when I see something I think can scale, and say: ‘look, take this $100K, I want to take a risk here. Let’s spend this over the next three months and then let’s revisit.’ And then you can do another $100K, and things start to grow.”


How to end innovation theater and actually make an impact

According to Brian, corporations need to not only encourage risk-taking, but reward it – because resistance to innovation often stems from the fear of financial repercussions:

“A lot of times you’ll find the resistance comes from: ‘well what about my annual bonus?’ I can’t tell you how many times I’ve said ‘whatever we spend on that this year, you tell me what it is, I’ll make a note, and I’m just going to subtract that from your annual target’. And then all of a sudden people are like: ‘wow, that was easy! Alright, I’m in!’ So sometimes, it’s those simple little things that can break down internal resistance within companies.”

Steve Blank thinks companies need to realize that innovation doesn’t just come from entrepreneurs – it can come from anywhere inside the organization:

“Everybody’s capable of innovation in their daily job. In fact in the 1890’s we used to have suggestion boxes inside of companies. We used to fundamentally understand this notion of continuous improvement across the organization.

My advice is to remember that corporate incubators are not the only place for innovation throughout an organization. And that getting the culture and incentives right – this requires CEO’s to ask: ‘what’s in the way of continuous improvement in my existing divisions?’ That becomes incredibly powerful if you’re doing essentially Horizon one and two innovation, and got the whole company feeling they could all be better for this and make more money.”

In Rita McGrath’s view, though we’re not about to end innovation theater anytime soon, we are getting closer. She likens it to the quality revolution:

“We’re not developing a real complementary set of practices and technologies for how you do this, how you do innovation for real rather than innovation theater. If I talked to you about quality 50 years ago and said ‘ what’s your process for ensuring quality’ I would have gotten back ‘oh we hire the best workers, we train them and we inspect’ and it would have been a whole set of very sensible things, but things that didn’t really belong to the quality revolution as we know it.

It wasn’t until we came in and said ‘there is such a thing as six sigma, and quality really is free, and it’s as much about mindset and culture as it is about specific tools and techniques’ – that’s when the dramatic, world-shaking improvements in quality occurred. And I think we’re perhaps on the cusp of that with corporate entrepreneurship and innovation.”