Co-written with fellow Future Shaper, Sabine Simon.
You’ve got to start with the customer experience and work back toward the technology – not the other way around,“ Steve Jobs said. However, external factors like rapid market developments, crises, or over-regulation make this more difficult than ever before. They belong to the fourth category of Innovation Killers: The Environment
In the previous three articles of the Innovation Killers series (The Failure, The Organisation, The Team and the Individual), we covered the roles of organisations, teams, and individuals in the failure of innovation. In the conclusion of the series, we will analyse another Innovation Killer: The Environment.
Before we turn to the fourth killer, we want to emphasise one essential aspect, particularly deficiencies at the level of competencies or skills that affect all three killers equally. For example, the individual innovator will make wrong decisions without sufficient knowledge of the innovation process. A team will not be able to generate ideas without appreciative cooperation. An organisation will not be able to establish a culture of innovation without the necessary psychological safety. Individuals, teams, and organisations do not exist in isolation. All factors are interdependent – they influence each other, and interactions arise. Challenges and killer potential thus can emerge at the structural level and process level. On the one hand, the individual, the team itself, or the organisation can change, and on the other hand, the tasks that need to be resolved can vary, too – sometimes both even simultaneously.
To round off the analysis of the first three killers (organisation, team, and individual), we will focus on their interface to the market. A deep understanding of demand and markets is key to successful innovation. An imperfect market analysis comes back to haunt corporates and start-ups alike and ultimately dooms innovative ventures to failure. The same is true for an insufficient customer-centricity. The user or customer needs to be at the center of innovation. It is tempting to put the innovative idea, the product, or service at the heart of the project. However, then the creation might either fail to materialise or be short-lived. Alternatively, as Professor William A. Sahlman (Harvard Business School, Business Administration, Entrepreneurial Management) put it: “Products don’t create value. Customers do!“ A clear view and fundamental understanding of the current market situation and development, its driving factors, the specific demand of customers or users, or the strategies and tactics of competitors are all vital for innovation success. Otherwise, the fourth Innovation Killer might strike!
Changes in the environment are a decisive driving factor for innovation, both positively and negatively. The years 2019 and 2020 represented extreme dynamics and unpredictable developments so that the acronym VUCA no longer fit our current reality. For many years, this framework has served well in dealing with the changes and finding our way in this disorder. However, we may require a new definition, such as the one first presented by Jamais Cascio in April 2020, to make good decisions in a paradigm characterised by constant shattering and confusing changes in technology and culture. BANI. The new acronym stands for brittle, anxious, non-linear, and incomprehensible.
This environment creates a myriad of new opportunities. Unfortunately, it also jeopardises innovation activities. “If the rate of change on the outside exceeds the rate of change on the inside, the end is near.“ says one famous quote from Jack Welch.
Rapid and disruptive market shifts
As mentioned above, increased market dynamics put a lot of pressure on existing and previously successful enterprises. Shrinking revenue streams cause organisations that strongly rely on the success of obsolete business models to increase the focus on short-term activities at the expense of innovation. When they identify, understand the circumstances clearly and finally decide to act, it is often too late. Many famous and successful companies – Kodak, Polaroid, Blockbuster, to mention a few – have suffered this fate. Systems that previously seemed rock solid suddenly can no longer withstand the pressure. They are brittle and therefore they break.
Okay, markets are more dynamic, and enterprises are struggling. Although more information is available than ever and computing power has rapidly increased to project different scenarios, forecasting trends and market developments has become more complicated. The forecasts still rely on historical data to some extent. In a volatile or brittle world, this aspect weakens their validity and can negatively affect decisions concerning innovation projects. The same is true for the noise caused by the overload of information distorting the view of the facts.
Market cycles are part of the general evolution, we might say, even if they are more volatile and dynamic than ever before. However, there are more powerful external factors at play. They cause uncertainty, possibly even anxiousness, and are among the most destructive forces for innovation.
We have already covered the potential consequences of a crisis from the perspective of an organisation in our second article. The complexity is so enormous that cause and effect can no longer be understood in a linear way. Crises negatively impact the willingness for long-term investing in uncertain innovation projects. In a survey covering the innovation activities of over 5,000 companies, Daniele Archibugi, Andrea Filippetti, and Marion Frenz elaborate on the impact of the economic crisis on innovation. They discovered that the increase in innovation activities dropped from 38% in 2008 before the crisis to 9% during the crisis. At the same time, the number of companies that decreased innovation activities rose from 9% before the crisis to 24% during the crisis. Noteworthy is that the negative impact from crises also negatively affected the planned investment for innovation for the subsequent years. These observations underline that the effects last much longer and are not limited to the duration of the crisis.
Research on the effects of the COVID 19 pandemic shows the same outcomes. The findings of a McKinsey survey from April 2020 indicates a shift in priorities from innovation (a drop of 32 percentage points from before the crisis to during the crisis) to short-term activities. Furthermore, the results underline that this crisis has been devastating for innovation activities through reprioritisation in most industries, except Pharma and medical supplies. Innovation in other sectors (especially Tech), not regarded in the survey, might have also benefited from the challenges of the crisis – or as Satya Nadella, CEO of Microsoft put it, „We’ve seen two years’ worth of digital transformation in two months.“ In 2020 Microsoft initiated a study on Building resilience & maintaining innovation in a hybrid world with the Boston Consulting Group and KRC Research, supervised by Wharton management Professor Michael Parke. He elaborates that working remotely also impacts innovation negatively due to reduced collaboration, which is a fundamental part of innovative and creative activities. Limitation to video conferencing tools and email is not enough to make up for the personal interaction required for effective and successful innovation.
Remote innovation is possible but difficult. An experimental study at the University of Cologne and Leibniz University of Hanover confirms old research that creative output is significantly lower when we don’t collaborate face-to-face. David Shrier, program director at Oxford Cyber Future, wrote for Raconteur: “Research from Massachusetts Institute of Technology has shown successful innovators build a foundation of trust around micro-interactions that occur in the workplace. And the Allen Curve shows that if you don’t see someone face to face, you don’t collaborate with them.” Video conferencing WITH LIVE PICTURE! can moderate the effect, yet we will always need face-to-face contact with other people to interact with them. This builds trust, and creativity can emerge. In a post-pandemic world, where working remotely will be part of the business, companies that either don’t appreciate this or don’t support their teams to build exactly this, will create additional barriers for innovation.
If crises are a considerable challenge for established enterprises, start-ups are even more vulnerable to exogenous shocks. With their focus on entering or expanding their market and, in most cases, with limited financial resources, they are not in any way prepared to handle it properly. The pandemic shows how many business processes, value chains, and the potential of business models are affected by a crisis. The adverse effects of liquidity strains or funding inconsistencies hurt innovative small market participants particularly severely. It is apparent that innovation requires sound and reliable funding. A lack of liquidity and funding proves to be a massive impediment. In a crisis, venture capitalist firms still invest, but they focus their investments much more on specific sectors or start-ups. Furthermore, start-ups often do not get the same attention and do not have the same access to comprehensive and dedicated protection measures through financial aid packages as established enterprises do. They are not eligible as they do not meet all of the criteria to obtain loans.
In crises, there is always an opportunity for growth. The urgency to overcome significant problems has always been a colossal innovation booster. However, very often, this is limited to very few industries, enterprises, or start-ups. Looking at the whole picture, it seems that crises inflict more significant damage on innovation projects. Without the necessary investments, many corporate innovation projects and start-ups run out of fuel and drop out of the race.
Regulation (economic, social, and administrative) can affect all elements of the innovation process. While it is essential to point out that regulatory measures can be very effective stimulators, excessive regulation can also put a stranglehold on projects and new ventures. Jaques Pelkman and Andrea Renda state in their EU Commission study (July 2014) “How can EU Legislation enable and/or disable Innovation“ that “different types of regulatory measures have different impacts on innovation.“ They elaborate that more prescriptive, rigid regulation can hamper innovative activity by reducing the attractiveness of engaging in R&D, constraining modes of commercialisation and creating lock-in effects that force the economy into suboptimal standards. “Especially administrative and compliance burdens can negatively affect innovation through legal requirements. Timing of regulation is also essential. An implementation span for new regulatory measures that is too short will delay or even bring innovation to a sudden halt. The focus automatically shifts from innovating to understanding and adopting new standards. One aspect is essential to point out. Rising complexity in today’s markets has to lead to an increased number of regulatory measures from authorities. Often they require specialist knowledge to address them adequately. This creates uncertainty about either regulation itself or its pending reforms, causing a delay of decisions and investments and a reduction of innovation itself. As the time to market has become a crucial key to success in dynamic and complex environments now more than ever, the negative impact of regulation, especially administration and compliance, has to be intensely monitored.
How will new regulations, tariffs, and commissions affect international collaboration, value chains, and business models? How far will consumer behaviours change or the currency exchange rate be affected? Geopolitical measures also can cause a lot of uncertainty. The main issue is that both markets and regulations will become more unpredictable for a certain period. The effects on innovation are the same as already mentioned above, but here perhaps to a lesser extent.
The Innovation Killer environment does a lot of damage through creating uncertainty as it affects organisations, teams and individuals in the same way. Uncertainty about the future is paralysing and it diminishes the ability to act, leading to additional worries and anxiety. All this harms the prospects of innovation.
Innovation projects hang by a thread right from the beginning and they are vulnerable to all kinds of factors. That is why over 90% of innovations fail. This compiled list of innovation killers is by no means comprehensive. Our main objective is to provide further clarification by introducing categories, details on some of the main drivers, their interdependencies, and the mechanics of how they jeopardise innovation.
In his book “Outliers, “Malcolm Gladwell elaborates on plane crashes. While recognised as a single catastrophic event, it usually is an accumulation of several problems in consecutive ways (‘the typical accident involves seven consecutive human errors“) that causes a plane to crash. The same is valid for innovation.
Innovation rarely fails due to one single mistake or effect but because of an accumulation of missteps. Those could happen within the same category (individual, team, organisation) or over several categories enhanced by a challenging environment. One wrong decision from an individual does not necessarily cause an innovation project to fail. Especially if the team or organisation provides some kind of safety net. However, suppose the team is unwilling to challenge a decision because the organisation lacks psychological safety and trust. In that case, one decision might be enough to put an end to a promising innovation.
It is essential to point out – even if it is obvious – that the more influence a factor has on the innovation process, the more it can also damage the potential success of an innovation. However, the importance of the respective factors differs significantly from situation to situation. For this reason, there is no one-size-fits-all solution. Often innovators are so much involved in their process of bringing their new idea to the market they do not regard potential pitfalls sufficiently. It is vital to observe each innovation environment, each constellation individually and in detail, analyse the interdependencies, understand the network of possible effects and thus do justice to its complexity.
Finally, we would like to return to the first article of our Innovation Killer series – to close the circle, so to speak – by getting back to the most central theme of innovation. Failure is an integral part of it! In addition to a thorough analysis of the root causes of previous failures, it is crucial to work through previous failings relentlessly and honestly to create transparency and gain critical insights.
This is often not of the highest priority as the clear focus lies on achieving the desired outcome, and negative consequences of a wrong decision or insufficient market research are not instantaneously felt. When a plane crashes, there is a visible disastrous result. It has an imminent effect. It’s all over the news and calls for action.
In most cases, innovation failure does have this short-term effect. Furthermore, we avoid talking about it, and the severity of the consequences is often felt only within the immediate environment. Therefore, innovation failure tends to disappear from view rather quickly, soon to be forgotten. This complicates drawing valuable insights from failing. Today we benefit from improved flight security because of learning from failures. The same has yet to happen for innovation.
Image by Oumie-Hawa Bah
To increase the probability of success of innovation, we need to change the game. We need to rethink our approach. We should start paying more regular visits to the cemetery of failures to understand the reasons behind it fundamentally and to be reminded just how many pitfalls await unprepared innovators. ”Fuck-up nights” provide a good source for information here.
Understanding the nature of the innovation killers and their mechanisms is a fundamental first step – and one of many – to improve the success rate of innovation. In addition to all other obligatory activities, it might be helpful to use one mental model in particular right at the beginning of innovation projects – and to return to it over and over again as the projects progress: Inversion Thinking1. „All I want to know is where I’m going to die, so I’ll never go there,“ Charlie Munger, Vice-Chairman of Berkshire Hathaway, said. The basic idea is not to reach a goal the direct way but via avoiding adverse factors. Inversion thinking means thinking backward to spot, evaluate and eliminate potential pitfalls. Munger elaborates that you have to start with the question, “What do you want to avoid?“. Knowledge of the pitfalls and understanding of their mechanics provides us with an opportunity to address them either beforehand or in time. Not only by trying to achieve the goal of innovation directly but also through creating awareness, transparency, and eliminating the obstacles and innovation killers, the probability of success will rise tremendously.
We found it particularly helpful to use the four categories, creating and continuously enriching lists of the potential threats for each of the Innovation Killer categories that could jeopardise a project, for example, in premortem workshops. This is possible, even during the current pandemic or afterwards in the world of New Work. Video conferencing with camera, multiple tools to interact with each other, informal dailies, augmented reality and team coaching and team building all contribute to teams getting in touch, communicating with each other and not about each other and building trust. The Machwürth Team International2 conclude in their study that team coaching will be seen as a tool for systematic competence development and quality assurance in the future and will become more of a focus through New Work in order to strengthen cooperation and collaboration – all essential for successful innovation.
Pearl Zhu, a digital visionary, puts it like this: “Innovations succeed when failure is seen as a learning step to great success,“ Let’s not bury it, but create awareness instead and learn from it in a noble and intelligent way.
Thanks for the wonderful illustration to Oumie-Hawa Bah!
1 Derived from the German mathematician Carl Gustav Jung („You always have to invert“!)
2 Journalistische Publikationen Archive | Machwürth Team International (mticonsultancy.com)