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.
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.
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.
Another great example of this two-track approach comes from Alex Osterwalder, inventor of the Business Model Canvas, in his successful book Business Model Generation. In his blog on the Strategyzer website, titled “6 Roles That Can Position Your Company for The Future,” he presents a modern organizational chart. It shows how the two separate tracks work, and what improving and renewing existing revenue and business models (Types 1,2) and innovation (Type 3) look like organizationally. On the Innovation side of the chart, Osterwalder distinguishes six modern roles: the Chief Entrepreneur, the Chief Portfolio Manager, the Chief Venture Capital, the Chief Risk Officer, the Chief Internal Ambassador and the Entrepreneurs.
All these forms and models meet management’s needs to purposefully separate operation of the existing business model from the timely innovation of new business models in order to survive. They prefer some form of slight interaction between the two “engines” to maintain a relationship and enable cross-fertilization.
A and B agendas
A very practical example of dualism is the A and B agendas used by one manager I spoke to. The A Agenda at a meeting deals with day-to-day executive management, while the B Agenda deals with progress of the 3 Types of Change, that together determine the Execution Agenda. This highly systematic approach kills several birds with one stone. It keeps Running the Business and Changing the Business separate, while distinguishing between the three types of change and between short-term and long-term goals. This is the most practical application of agile strategy execution I have ever seen. But whatever innovation structure you decide on, always make sure you create a second speed, a second track, for radical innovation (see Figure 2).
As a result, the organization will end up with a robust two-track approach, each running at its own speed. It’s quite a radical step to consistently implement this approach in your organizational structure. Some organizations will find it easier to live with this type of ‘healthy schizophrenia’ than others, but it really is the best way to use your existing workforce to generate radical innovations. If it sounds complicated, that’s because it is. All workmanship gets complex now and then.
General Electric is a good example. In mid-2015, the company announced plans to sell most of its finance unit and focus exclusively on industrial manufacturing. At the time, the GE Capital business unit was good for half of the overall turnover, but the company decided to retain only part of its aircraft and equipment lease operations. In 2018, these activities were forecast to bring in 10% of its earnings: a real sea change.
But GE’s industrial segment is also undergoing a radical transformation. These days, many of the machines GE manufactures—deep-water oil-drilling equipment, military and commercial jet engines, and trains— are equipped with sensors that collect data. So, GE developed Predix: predictive maintenance software that uses this data to monitor performance and identify opportunities for improvement. GE now has a new Digital Business Unit, which is exploring the possibility of offering deep-sea drilling as a service rather than a product.
And let’s be honest: if the establishment had approached modern strategy execution professionally, the media industry would have created and marketed Blendle and Netflix itself instead of wasting a decade daydreaming about new business models. And Hilton would have come up with the Airbnb model, and the Amsterdam Taxi Dispatch would have thought of Uber.