Innovation: Value-Generating Disruption

Innovation: Value-Generating Disruption

“In large companies, disruptive innovation implies taking risks that are difficult for middle management to tolerate.”

Édouard Le Maréchal is a graduate of ESSEC Business School, an expert in Creative Problem Solving and Chairman of Crea-France. In 1996 he founded Tangenciels, specialized in innovation and transformation. He developed the Butterfly Process, the first method for innovating in an uncertain context. He published ‘Innover à l’âge du Papillon’ in 2017. He also writes a blog (lagedupapillon.com).

Innovation covers many contrasting realities within companies. Here are 3 definitions to consider.

Maintenance innovation, also called incremental innovation. This is aimed at maintaining and consolidating the company’s position with its customers, who are subject to boredom and always hungry for novelty. This type of innovation has been practised for decades, for example in the mass consumption markets. The best organisational models are based on a culture focusing chiefly on customer knowledge combined with creativity and on a structure consisting of specialised teams who provide the data and the processes to the product managers.

This type of innovation enabled qualitative marketing (anthropological, psycho-sociological, etc.), and then user-centric and Design Thinking approaches to flourish. Incremental innovation, founded on consensus and convergence of opinions, may also be applied to the continuous improvement of production processes.

Performance innovation, also called disruptive innovation. This type of innovation is motivated by the desire to surpass the competition or keep it at bay by introducing a sustainable competitive advantage or by improving the company’s performance by breaking with its established production or marketing practices. It used to be seen as a cyclical thing, triggered by external events, technical inventions or new regulations; today it is perceived as an everyday necessity to enable companies to survive in an increasingly competitive world.

Disruptive innovation requires an innovation culture at the company’s operational decision levels, meaning an ability by middle management to take measured (and measurable) risks in order to offer a new solution that significantly broadens the customer base, durably improves or increases profits by optimising the value chain, or steers structural investments towards a sustainable technology.

With this innovation model, fostered by the cross-fertilisation of ideas, networks and information enabled by the Internet, companies tend to rely on Innovation Departments – whose mission consists of observing the sector in order to identify opportunities (which include connecting with start-ups), promoting methods and processes for conducting innovative projects, and helping teams to take the risk of challenging an imperfect but comfortable present in favour of a desirable but less certain future.

In large companies, disruptive innovation implies taking risks that are difficult for middle management – under pressure from short term quantitative performance indicators – to tolerate. Moreover, the approach is isolated, ring-fenced within dedicated entities (labs, intrapreneur incubators, etc.) that are temporarily freed from the rules of management control and fed with “good ideas” generated on the ground. Methods such as Agile Culture, Jugaad, BMC and Blue Ocean thrive in these entities, developing a spirit that is brash, divergent, but still ambitious in terms of performance. The key to success for this type of innovation is top management’s ability to protect the projects and support their adoption by the rest of the company.

Therefore, the bigger the company, the more difficult it is for top managers to respect this prerequisite, as it implies them going down into the operational depths of the company. Difficult but not impossible, if steadfast efforts are made (in communication, HR and financing). Renault seems to be succeeding in this type of disruption with electric vehicles. On the other hand, international financial institutions who turned disruptive innovation over to HR or Communication are delivering few significant projects.

Radical innovation. This type of innovation only happens in one set of circumstances: when the CEO becomes aware that the company’s business environment is going through such an upheaval that it must inevitably reinvent itself completely. Such a situation is brought about by a concurrence of megatrends that have been at work for decades and whose effects are accelerating: the digital revolution; the globalisation of the economy, cultures and knowledge; the environmental crisis; and the redistribution of collective and individual authority.

Radical innovation thus initially depends on the visionary capacity of top management, and perhaps also on top management’s access to foresight expertise.

The second phase involves sharing with the various teams the compelling necessity to call everything into question: the company’s technology, its organisation, its culture and its economic model. To get through this major crisis period, which generates a range of reactions (denial, discouragement, enthusiasm, etc.) and the need for the company to remobilise and regroup with a new vision, the company’s communication capacities and collaboration tools are key; a simple hierarchy and a consensual HR culture are advantages.

The third stage is about assimilating the fact that radical innovation is not just going to reinvent the company, but its market too: the radical redefinition of the value chain also has to be considered. In other words, one must be willing to step away from the traditional customer-distributor-supplier structure to observe one’s ecosystem and imagine a new form of value sharing. BlaBlaCar and Vente-privée built their success on this plastic view of their markets. Diversity of employee profiles (initial training, career paths) will represent a major advantage for effecting this Copernican reversal.

Lastly, the innovation project must adopt not a linear approach but a concentric one — from its conception, to defining its business model, to its launch: at every step of the way it is necessary to think about the deployment mechanisms, the economic paradigm shift, the definition of the offer and even the influence strategy necessary to convince stakeholders and convert them to the same view.

Where incremental innovation was user-centric, and where disruptive innovation focused on supply-demand balance, radical innovation places the entire ecosystem at the centre of the thinking process. This means setting up multidisciplinary, cross-functional programmes that are connected directly to top management, that communicate with the whole of the company, and that are inclusive – meaning that anyone who wishes to be part of the approach can. It revolutionises the company’s culture and organisation, with virtuous effects on the commitment of its various teams.

Some examples of radical innovation? There’s La Redoute which, thanks to the conviction of the two people who had bought the company, began in 2015 to remobilise teams left listless by the violent systemic crisis it was going through. The plan was to transform the company by not only completely reinventing the offer (distribution, product listing, positioning, etc.) but by also redesigning the company’s organisation, redefining its identity and reshaping its value chain.

There’s the IT consultancy firm that, in anticipation of the combined impact of artificial intelligence, competition from Asia and new information management compliance frameworks, is redefining its social contract, reinventing its value chain (a customer today, the company is to become a supplier) and developing new skills (in particular soft skills) within its basic offer.

There’s the healthcare mutual whose business will be slashed by 70% in 2019 at the stroke of a regulatory pen, and that is completely rebuilding itself (business model, organisation, offer) based solely on its raison d’être.

Radical innovation builds its success on:

  • The sustainability of governance driven by a forward vision
  • The ability to bear monetary expenditures for “benefits” that are not initially measurable in the economic sense: image and reputation, original know-how and understanding of market mechanisms, motivation of teams.
  • The creation of a complex value proposition model in which these benefits are ultimately transformable into monetary units.
  • Shareholders’, investors’ and financial sponsors’ conviction that the major share of a radical innovation’s economic value does not come directly from selling the product, but from the opportunities opened up by the resulting new practices or needs.

These three forms of innovation thus create disruptions that ultimately generate value: for a specific operational function of the company, these disruptions may be slight and transitory; for some stakeholders they may be more profound; for the ecosystem as a whole they are irreversible. What level of turbulence the company is prepared to tolerate, for what level of benefit, thus remains to be defined.

Written by ÉDOUARD LE MARÉCHAL