Innovation on tap

Slow, steady improvements to your products and services won’t guarantee your company’s future: You also have to be capable of making big changes at the same time.

Back in the 1960s, the Japanese firm Hattori-Seiko was a small player in the global watch industry. But as Michael L Tushman and Charles A O’Reilly III relate in Winning Through Innovation, Seiko made a bet on quartz technology — a low-cost alternative to mechanical movement, then the dominant technology-and transformed itself “from merely a mechanical watch firm into a quartz and mechanical watch company.” That move helped reshape the business:

The Seiko story corroborates the conclusions of population ecologists Michael Hannan and Glenn Carroll, who point to similarities between the way that organisations evolve and the punctuated equilibrium that, according to one theory, describes biological evolution. On the one hand, the incremental innovations that make a company more competitive in the short term by improving its efficiency; and, on the other, the architectural innovations (which reconfigure existing technology) and discontinuous innovations (which involve new operating principles in core subsystems or revolutionary process innovation) that ensure a company’s long-term success. Some experts believe that companies’ shortcomings when it comes to innovation stem from not enough deviant or outside-the-box thinking. In fact, most well-established, legacy companies have far more of that than they realise. Other experts argue that companies aren’t deliberate enough in their approach to innovation, waiting around for the next big idea instead of setting up systems and processes to help them bring innovative ideas to market.

But at least as far as incremental innovation is concerned, the leading companies do a pretty comprehensive job of planning. “Taking a portfolio approach, leading companies look not just at the products in the development phase, but also at those one’s in the currently-in-market phase, as well as those at the end stage of the product life cycle,” says Bob Gill, president of the Product Development and Management Association in Mt Laurel, NJ “That way, they can get a better idea of what their expected revenue targets from existing lines will be and thereby determine how much growth they’re going to need from innovation. They’re also very targetted in their approach to identifying new product opportunities. They look at the gaps in their product lines, their core competencies, the markets and technologies in which they excel, and the state of current markets and technologies in which they excel, and the state of current markets-which are saturated, which are growing — to find the optimal arenas for innovation.”

The real problem, say Tushman and O’Reilly, is not a lack of systems and processes; it’s the tendency of incremental processes to strangle discontinuous and architectural ideas. But herein lies a big problem: The culture of incremental innovation often creates an institutional hostility toward the culture of architectural and discontinuous innovation. Streams are so different from incremental streams that some leading experts have recommended that they be spun off into separate organisations. But the common wisdom seems to be shifting. If you can distinguish incremental ideas from nonincremental ones and create separate tracks for shaping and developing them, then having the same management team oversee both streams — despite the “multiple, internally inconsistent architectures, competencies, and cultures” that will be required-has distinct advantages over spinning off the nonincremental streams and having them overseen by a different group. Not only does it become possible to do your job, improve your job, and revolutionise your job all within the same organisational structure, but the opportunities for one innovation stream to cross-pollinate the other also improve.

Multiple innovation streams, one structure

Ciba Vision, which in 1981 became the 27th entrant into the US contact lens market, had by 1995 become a 6,000-person company jostling for global leadership of both the contact lens/lens care and the opthalmics (drugs related to vision and eye health) markets. Under CEO Glen Bradley’s leadership, the company realised that its current products would not be sufficient to sustain market leadership. Ciba Vision’s response was to defend its position in the markets for conventional soft lenses and lens care products by investing in incremental product and process improvements and, at the same time, use the profits from these improvements to fund three autonomous teams working on discontinuous product and process innovations that had the potential to substitute for the company’s current offerings.

In the contact lens market, one team worked on “an entirely new continuous production process to radically reduce the cost of manufacturing disposable soft lenses,” write Tushman and O’Reilly. Another worked on “an entirely new type of contact lens that could be worn safely all day and night.” The teams — made up of people from the R&D, clinical and regulatory, engineering, manufacturing, marketing, and finance areas — were “co-located, headed by strong project leaders, and allowed to work independently from the rest of the organistion.” Similarly, in the opthalmics market, a team set to work developing a discontinuous pharmaceutical product named Visudyne that, in concert with laser therapy, would counteract age-related macular degeneration.

Although these teams were given a great deal of independence, a single group of managers — Bradley and his senior team-oversaw all the work. Keeping the discontinuous experimentation in one organisational structure, explains Tushman in a recent interview, enabled Ciba Vision to leverage its existing customer base. For example, had the extended wear lenses and the cheaper disposables been housed in a spinoff organisation, that new firm would have had a harder time getting access to the same customers Ciba Vision already had close relationships with. Running both processes out of the same organisational structure allows you “to leverage not just your customers, but also your technology and infrastructure” to an extent that wouldn’t be possible if you had spun the nonincremental idea off into a separate organisation, Tushman continues. In fact, as long as your management team is able to differentiate incremental ideas from nonincremental ones and put them into separate development tracks, “the only time you should spin off the nonincremental innovation is when there’s nothing to leverage.”

Cross-pollination benefits

Another advantage of housing incremental and nonincremental innovation streams within the same organisational structure has to do with the often unpredictable nature of innovation itself. “The solution to the problem you’re trying to solve often lies at the edge of the dominant model, or way of thinking about the problem,” says Robert J Thomas, senior research fellow at Accenture’s Institute for Strategic Change in Cambridge, Mass. “A game-changing idea rarely shows up at the precise time it’s needed — isssst often shows up before the problem manifests itself. So you have to have your ryes on the central tendency while allowing your peripheral vision to notice things that are relevant to your business.”  Thus, the chances of the incremental stream’s informing the nonincremental one, and vice versa, improve when you have one team managing both processes.