Chasms, Criteria… and Innovation

The concept of the ambidextrous organization is gaining traction. It describes companies who can innovate in the current business at the same time as creating new business options for the future. This is achieved through:

• Parallel projects in the same organization; or
• Different groups organized separately in the same company; or
• Internal groups focused on existing business, with strategic alliances or start up investment looking to the future; or
• A mix of the above.

The projects looking to support today’s business are often termed exploiting, the further out ones referred to as exploring.  For a more comprehensive overview of the ambidextrous organization, check out this article from Ralph Ohr.

All of the models should clearly distinguish between projects that are aiming to support the current business and those looking to change the company. From what I’ve both read and experienced, most companies do not have any problems in principle with this approach. The issues arise when there is interchange between the two areas.

Many of you reading this will be familiar with Geoffrey Moore’s work, Crossing the Chasm. This focuses on bridging the sales growth gap between the early adopters, the technology-loving enthusiasts; and the broader market where potential customers are in much greater numbers and more investment is needed to reach critical mass.

A similar chasm exists in the ambidextrous organization when novel initiatives move from the experimental groups to the everyday business. The nature of this chasm is cultural, political and practical.

The efficiency engine which is the core of the company is focused on short-term objectives. After all, failure to meet quarterly or half yearly earnings targets rarely goes down well with investors, who then feel nervous about the ability of the company to meet long-term growth goals. The culture tends to focus on the here and now, integrating activities to meet medium term goals.

Managers of the core business often see radical new business projects as risky, uncertain and potentially distracting. This view isn’t helped by companies failing to incentivize those managers to take the new stuff on board.

Finally, and practically, quite often the core business does not possess the capabilities and competencies to take the new exploring work on board; whether that be people, supply lines, customer access or other aspects of the novel business.

So, it isn’t surprising that this internal chasm exists.

I was once working with a company who had established a new ventures group to go out and explore radical new options for the company, a “strategy-stretching” exercise.  Almost all of the things they came up with were rejected by the core business divisions because they were – wait for it – off strategy. The new ventures group did not have the permission let alone ability to go to market independently, as this was seen as duplication.

This contrasts with the approach taken by DSM.  They specifically give the brief to their new ventures group to deliver Emerging Business Areas (EBAs), “new growth platforms not (yet) within the scope of our current businesses”. The EBAs have access to the rest of DSM, with back office support, giving a good balance of improved efficiency and reduced control.

Ultimately, the existence of the chasm and the ability to cross it boils down to criteria. There is no point applying the same criteria for acceptance of new business projects to both exploiting and exploring projects. The two areas need different success criteria, and to decide the transfer of responsibility from one area to another. Here are some of the key ones:

STRATEGIC – there should be complete alignment at the top level, driven by the CEO, on the role of exploring projects, particularly if the adoption of something new requires a change in strategic direction.

PORTFOLIO – quite often the exploring projects are managed as part of a separate innovation portfolio. If so, as the budget allocation between exploiting and exploring is an executive committee issue and each company should determine the balance to be struck between the two.

FINANCIAL – the financial criteria applied to innovation projects often use threshold principles, e.g. a minimum sales volume in year 3 of $xM, a minimum gross margin of x%, etc.  Exploiting projects have the advantage of feeding into the existing efficiency engine.  Exploring projects often need to create a new business model with new financial dynamics.  It doesn’t make sense to automatically apply the exploiting financial criteria to all projects.

This is perhaps the area in most need of different criteria for the two types of projects; it has a direct impact on the overall portfolio as it determines the projects that are in and those that are out.

HANDOVER – despite all the agreements in principle on the criteria above, the crunch comes in those companies whose model requires a handover from one part of the structure to another. The criteria for such a handover should facilitate, not impede.  There should be a clear incentive for the exploring group to deliver something worth giving away; the exploiting group should have a clear incentive to receive it.  Those incentives should be personal and related to financial rewards.

For example, why not have a bonus target incentive for the future business value handed over, not just for the donating group but also for the receiving group? As long as it’s correctly audited, this can work.

So, the key message is that there will inevitably be a gap to be bridged between exploring and exploiting groups. That gap should not be a chasm. Do everything you can to make it easy; make sure the gap is bridged by a solid superhighway of support, not a shaky tightrope too difficult to negotiate.

image credit: bigstockphoto.com

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Kevin McFarthing runs the Innovation Fixer consultancy, helping companies to improve the output and efficiency of their innovation, and to implement Open Innovation. He spent 17 years with Reckitt Benckiser in innovation leadership positions and also has experience in life sciences. Follow @InnovationFixer