Howbankscanovercomethe INNOVATOR'S DILEMMA
In Chapter 4, we introduced the Innovator’s Dilemma. We examined how new technologies can get the better of established companies and destroy their market share unless they focus on disruptive innovation themselves.
We have already examined this in Part One where we learned that large multinationals are ill-suited to spearheading disruptive technology they might have invented themselves when they focus on their existing operations and markets. In this chapter, we focus on strategies for market leaders to overcome this dilemma. There are ways for market leaders to stay on the edge of innovation if they avoid certain pitfalls. Clayton Christensen explains how established companies can become innovators in potential new markets that don’t even exist yet.8 He puts forward four different strategies to achieve this: develop disruptive innovation in a separate company; plan to fail cheaply; let those in charge of innovation formulate their own rules and processes; and find new markets. The following paragraphs briefly describe each of them.15.4.1 Develop disruptive innovation in a separate company
By definition, innovation always starts small. Sometimes, it needs several years to achieve even tiny market share. It is easy for managers of large companies and large divisions to drop projects without an immediate or foreseeable payoff. High-performing companies have excellent systems for weeding out those ideas that their customers have no use for. This is why most companies under-invest in disruptive technology and lower-margin opportunities.
Instead of developing them firmly in-house, projects related to disruptive innovation should be placed in small companies separate from the main company. Some companies and banks already do this, for example, by financing spin-off companies from universities or sponsoring innovation platforms.
However, innovations still have to filter back into the larger company to gain velocity for positive impact on a larger scale.Small teams and companies can get excited about modest opportunities and small wins, which is the only way disruptive innovation can flourish. In addition, only a satellite company can provide the framework for innovators that will help them perform at their peak. As long as entrepreneurs and innovators have to comply with corporate processes in a rigid structure, they will hardly find their stride. Banks should therefore create innovation labs separate from their main organizations that can fly under the radar of public scrutiny. Of course, this may be a political challenge. Especially in a field such as FinTech that garners much media coverage and has a fresh and innovative flavor, a bank’s top management may wish to position themselves as those who bring a fresh wind into a crusty institution, but without taking imprudent risks. They might want to use high profile initiatives with quick results to bolster their public personas.
Obviously, this approach will defeat the purpose of working with innovators. Just as politicians before an election will steer clear of any issues that might end in failure, a bank’s top management has little interest in taking risks with unproven innovations. As long as managers are at the helm of innovation initiatives, they will only invest in the sure bets with a certain payoff. We already know where this will lead: towards an innovation culture that focuses on rapid return maximization without concern about the longer term. Instead, FinTech innovation should be a low-profile affair with banks, but one they take seriously enough to buffer with ample funding and then leave in the hands of the innovators themselves. Such an approach has the potential to foster an innovation culture that eventually spawns new financial products, and looks beyond the immediate bottom line.
There is another argument for separating the regular operations of incumbents from the innovative business units.
When big organizations are supposed to innovate, a division opens up between those forces in favor of the status quo and those who seek radical change. Author Salim Ismail notes that it is important for big companies to assign potential change agents to the edges of the organization and give them free reign to experiment with new business models that cater to digital customers.9 Ismail calls information-enabled, rapidly scaling organizations Exponential Organizations (ExOs). Their growth potential is not linear, but explodes exponentially because their lean structures take advantage of technology with every step. Leaders in FinTech and marketplace lending are ExOs. To understand how banks could partner with them or replicate their business models, banks should leverage the strengths of their internal change makers.In the best case, a cutting-edge ExO that emerges from the edges of a bank can serve as catalyst to transform the rest of the business, which might eventually create a new core business that replaces the legacy operation. Again, banks cannot expect that all their innovation programs will produce ExOs with bottom lines in the billions. Creating exponential growth may take a long time. It needs trial and error and the will to persevere even when moving ahead is counterintuitive and unpopular. This is only possible when innovation takes place outside of the limelight—on the periphery, in a structure that is separate from main operations.
15.4.2 Plantofailcheaply
Successful disruptive innovators plan to fail early and inexpensively in the search for productmarket fit for their technology. Their markets often emerge through an iterative process of trying, failing, learning, and trying again. The perception of failure always looks bad in the press, no matter how much positive spin a PR department might pile on it. Most managers prefer a definitive, long-term strategy that they can budget for and stick with. However, such a strategy stifles innovation before it begins.
Successful innovation needs room to fail and fail again, until it no longer fails almost by coincidence. There is no need to point out that this idea, too, will be hard to swallow for most banks. They will gladly leave the failing to startup entrepreneurs, and will only work with successful FinTech companies.We have already examined why banks should build innovative capabilities in-house when we discussed Prahalad and Hamel's classic model of the corporation as a tree in Chapter 4. In-house core competence is at the heart of being able to compete in the long term, and the ability to fail is an integral part of building competence.
15.4.3 Let those in charge of innovation formulate their own rules and processes
For innovation to thrive in larger organizations, innovators should have the opportunity to utilize the resources of the organization without leveraging its processes and values. Innovators should have the leeway to create their own rules that allow them to experiment with a disruptive technology. We have already discussed part of this approach, postulating that innovation should take place in a small satellite company that lives on the fringes of a larger corporation. A good example of this approach is Lockheed's Skunk Works, a program that successfully developed military aircraft in WWII. As a separate and secret unit, a small team of engineers with an anything-goes mentality was shielded from the bureaucracy of the main company. Because they were free to approach their challenges anyway they pleased, they managed to deliver a jet—from idea to finished product—in just 143 days.10 Many companies have copied the Skunk Works model, and it would work well for banks also.
15.4.4 Find new markets
By now, we already know that new products in their early stages will rarely be compatible with the demands of existing customers of large multinationals. Large companies often adopt a strategy of waiting until new markets are “large enough to be interesting.” This is understandable.
Markets that don't exist are impossible to analyze, and large companies never launch into an unknown market. Demanding market data where none exists is hardly a successful strategy to foster disruptive ideas. Regardless, new and unknown markets are where disruptive opportunities lie. Successful innovators need to find or develop new markets that value the attributes of their disruptive product, rather than search for a technological breakthrough so that the disruptive product could compete as a sustaining technology in mainstream markets. New ideas developed in small companies are a better fit for small markets.Innovation is more than knowing what to do. It also has to take into account why and the how we do something. Part of this is looking at the markets in which banks currently have little traction and interest. If they were already in these markets or scrambled to get a share of them, they would hardly be the markets that yield the largest gains in the future. Of course, in their main operations, banks must still pursue their home markets. These markets are the turf of banks, and they know them inside and out. However, finding new markets will be like entering a dark room without knowing where the light switch is. Market discovery—like planning to fail—will demand from banks that they overcome the stigma that has to do with doing what is less obvious when they focus on innovation.
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