Fundamental innovation

In Strategy = Execution, I distinguish between three types of change: improvement, renewal and radical innovation. Radical innovation (Type 3 Change) in particular has preoccupied organizations. There are many different strategies for organizing and managing such change. Most recently, new digital business models have been the main drivers of innovation, putting successful innovation at the top of every boardroom agenda. Innovation gurus have seized this opportunity and, either deliberately or inadvertently, created a hype around innovation. They’ve suggested that the creativity and brilliance needed for successful radical innovation are smothered by structure and management. They’ve vilified metrics as the ultimate death knell. This misconception has created a tendency to indiscriminately try out all kinds of ideas, at enormous financial and intangible cost.

Such innovation gurus had free rein until Eric Ries published his bestseller The Lean Startup.
The basic idea behind his excellent innovation method is validated learning: a way for startups operating in uncertain conditions to prove that they are making progress. This is much more practical, accurate and rapid than market forecasts or classical business planning. It’s all about learning. Anything extraneous—that is, not required for learning from customers—is eliminated. Validated learning is learning based on the actual development of the organization, substantiated by real customer data. All a startup does is carry out experiments to learn and successfully navigate the company through a period of uncertainty.

Radical innovation

In practice, Type 3 Change, digital innovation, is organized and managed in many different ways. Figure 1 details the various organizational and managerial forms we came across in our research. To do well, you need to organize a healthy dualism. Running your existing business model and implementing changes to this model (Types 1 and 2 Change: improving and renewing), are aimed at fully leveraging your current business model. Your existing organization can handle this. But Type 3 Change is of a different order. This is about radical innovation, introducing new business models, radically changing the way you do business. This type of change can only be achieved through a differentiated, autonomous execution strategy, separate from your regular structure but with at least a minimal interface to facilitate linkage and cross fertilization. This is not to say you shouldn’t foster innovation in your regular organization, but don’t put all your eggs in that basket.

Institutionalize dualism

How do you organize management of all three types of change in relation to day-to-day executive management? How do you organize Changing the Business in relation to Running the Business? The solution is to institutionalize dualism. Figure 1 lists the ways in which Type 3 Radical Innovation can be organized; this is crucial for established organizations to survive. But startups become scale-ups and there comes a day when they’re established companies. 

As you can see, the organization formerly known as Google has opted to explicitly differentiate its established revenue and business models (like Google Search and YouTube) from its Type 3 innovations (like Google X and Google Capital) by introducing a new corporate structure called Alphabet. This is an excellent example of strategy execution that requires differentiation into the three types of change. Google can leverage its existing revenue and business models using Types 1 and 2, while simultaneously ensuring that it leverages Type 3 innovations, its moonshots, in ways best suited to that particular business model. Type 3 innovations may for this reason always remain separate organizations that are never integrated into a larger, existing business unit.

Shareholders also like this logic and transparency, because it makes clear which risks pertain to which division. By rigorously separating its activities, Google—or Alphabet, rather—can protect its brands and experiment with them.

Management thinker John Kotter advocated this dual operating system in his 2014 book Accelerate (XLR8). In his dual operating system, regular execution operates separately from, yet in conjunction with, innovation.