Article contributed by Paul Hobcraft.
The Art of Strategic Innovation
Excerpts from an interview with Costas Markides, Professor of Strategic and International Management, London Business School.
On defining what strategic innovation is:

Strategic Innovation is the discovery of a new way of playing the game in your business, which is fundamentally different from the way most other competitors are playing the game. Strategy is finding answers to 3 interrelated questions:
i. who will I target as my customer
ii. what shall I offer to these customers
iii. how can I do this in an efficient way
Strategic innovation is the discovery of a new “who-what-how” position in the business – a position that all other competitors have missed. By discovery of this new position, we discover an untapped source of value in our industry.

On how to recognize strategic innovation:
When a company suddenly starts to play the game in a totally different way from everyone else – they have strategically innovated.

On the radicalness of strategic innovation:
Strategic innovation is discovery of a new strategic position that allows the company to develop not only something new but also something large – something that captures a significant market segment. In any business there are niche players and they are, by definition, playing the game in a way different than the mass market. But if they remain small, no one pays much attention to them. However if a company discovers a niche, a new customer segment, a new delivery method, etc., and that niche actually grows to become 10%, 20%, 30% of the market, that is when people take
notice and say: Isn’t that interesting, isn’t that innovation?

The other element to the definition if strategic innovation is that it is a new positioning. Although there is no precise answer about the degree of “newness”, one can generally tell when a company starts playing the game in a fundamentally different way.

On the question of “Who generally innovates?”
A list of strategic innovators mostly has new entrants or new business start-ups.
They will usually be entrepreneurial start-ups that, having identified a new positioning in the business, pursue it rigorously. It is very rare to find an established company strategiclaly innovating because they already have a positioning that enables them to make money – so why look for any other positioning? Another problme is the inertia of success. Well established, with a certain market share, profitable – why the hell should they change? Then there is also the problem of actually identifying a new positioning. A new entrant on the other hand starts with a clean slate and a fresh perspective, allowing him or her to identify a position that has not been taken yet.

On playing two totally different games:
The traditional economic argument made popular by Michael Porter is: a company should not try to play two games att he same time. Porter argues that there are too many conflicts in trying to play two games and as a result most companies that try are doomed to fail. He cites Continental Airlines as an example. Continental was playing the airline game the traditional way, based on the hub-and-spoke system. But they wanted to respond to Southwest who was playing a totally different game, the game of low cost, point to point direct flights. To play this game, Continental created a new subsidiary, called Continental Lite. Porter points out that the new subsidiary failed because there were conflicts in trying to play these two games.

What are these conflicts that Porter talks about?
• One such conflict is the risk of cannibalization. A company may lose existing
customers to the new game (which happens to be low-margin).
• Another is distribution conflict. Why doesn’t IBM try to sell its computers direct? Well, how would IBM dealers feel if, all of a sudden, everyone could buy an IBM personal computer direct? Porter also argues that, in trying to play two games, a company may harm its reputation.
• And finally there is also the factor of organizational conflicts. If an organization follows a certain strategy it needs a certain culture, structure, incentives. If all of a sudden the company wants to follow a different strategy, it needs a very different culture, structure, incentives.

My own position is that Porter is wrong in advising companies not to play two different games. I agree with him that playing two games is really difficult given all these conflicts, but not impossible. Conflicts can be managed! Over the past year, I have been studying companies that seem to be able to play two games at the same time. One generalization we can make at this stage is that these organizations have found ways to overcome these conflicts. How? For example, they minimize cannibalization by
(a) creating a totally separate brand name for the new business and
(b) addressing a different customer segment.

For example, look at VW and Audi, British Airways and Go, Midland and First Direct, Swatch and Omega. All these companies are playing more than one game but they have different names for their products. Physical separation of the units also contributes to a reduction of conflicts.

On strategic and technological innovation:
Strategic innovation happens in the absence of technological innovation, it is different from technological innovation. Strategic innovators don’t discover a new product or a new technology; they just find a new way of playing the game in the existing business. But we can learn much about strategic innovation by looking at the literature on technological innovation, for example, the importance of separating the old and the new. Research tells us that if a company is to succeed in promoting a new, different technology it has to set out a separate unit to promote this new technology. It cannot do it internally; it cannot do it with the existing organization. The existing status quo will suffocate the new technology and the
new unit.

On how to innovate – strategically:
There is, obviously, no correct way to go about it. There are a variety of tactics a company can use to improve the probability of coming up with new strategic ideas.

One is to fundamentally question the existing mental models and the existing unquestioned assumptions of the organization. Every organization operates under certain mental models, paradigms, assumptions: these are our customers, this is how we sell and this is how we do business. My proposition is that an organization will never discover anything new unless it first questions what it already has and says: why are we doing it like this, could there be another way? As long as they are happy and satisfied with what they have, they are not going to search for something new – and will never discover anything new as a result.
The first step in this voyage of discovery should be to question what you have.
Now, having said that let me also say that most companies, on a rational basis, say: “Yes, that sounds good, we will question”, but they never do it.

On why they don’t do it:
The primary reason is that we are all very busy people. As a result we set priorities in life and we say, first we do number one and then number two, then number three and we go through the list of priorities and do whatever time allows us. Now there is also the demand to innovate and we agree that it is important. But even though it is important and we want to do it, we believe that there are many more important things in an organization to be done. As a result we do these more important things and by the time we come to the just important ones, we have run out of time and we never do it. Unfortunately innovation is important but not urgent. And as a result it stays in the middle of the bottom of the list and we never find time to do it. In my experience, for an organization to encourage the honest questioning to take place, it has to create a positive crisis. It has to create some
kind of shock.

On how to achieve positive crisis:
First, you have to develop a new challenge, a new stretching goal for the people. But that is the easy part; it is only 1% of the work. The other part of creating a positive challenge, which is by far the more important, is to sell this new challenge to your people. It is not enough to create a stretching goal, it is not enough to create a mission statement that states ‘I want to be number one’ or ‘I want to be the best’. You have to sell it to your people so that they become true believers in that new objective, that stretching goal.
If it really is a stretching goal, the first reaction of your people should
be: “my god, that’s impossible, we can never do that!” But that implies that
you have to focus all your energy on the next task: to convince people that this
new stretching goal is meaningful and that it is important to them.

At the end of this selling process you should find people who are enthusiastic, and
energetic, and passionate about what the company is trying to achieve. However, it is not easy and it is very time consuming – but the selling is the most important part of the job of any top management team. If you just create a stretching goal and fail to sell it, all you will have created in your organization is de-motivation, cynicism, sarcasm.

On the four step process:

COMMUNICATION: Develop the stretching goal and communicate it to people tell them what it is. But mere knowledge does not create passion.
EXPLANATION: Explain why it is important. Why is it important to them, why is it important to the organization? But neither does explanation create passion. The first reaction should be “this is impossible.”
MAKE IT BELIEVABLE: One way to make it believable is through the creation of early victories. It is success that slowly turns people around and they start saying “maybe, afterall, we can do this!”
EMOTIONAL COMMITMENT: Transform it from a rational to an emotional process. With the first three steps you have told them what it is and convinced them that it is important and that they can achieve it. All you have done is to win their minds. But what you want to do is win their mind and their hearts. To achieve this final step of winning their emotional commitment you can use a variety of tactics:
— Make them feel very special
— Reinforce the feeling of uniqueness by being very selective on who is invited into the team
— Enforce the feeling of being part of a special team by creating symbols for the team.
— Allow them to participate in the creation of the objective
— Empower them to go out and do things to achieve the objective
— Create a credible enemy for them

On the greatest obstacle to strategic innovation:
The greatest obstacles in my mind are our own mental models, the unquestioned assumptions, the stereotypes and beliefs that we individually and as organizations, have. They don’t have to be explicit, they don’t have to be written down but they are there nevertheless. They are like our genes, they control our behavior and we don’t even know that they do so. Every organization has a lot of sacred cows which they are unwilling to bring to the surface and question. And these sacred cows condition what an organization does, what the people in the organization do. The first thing we need to do is to question these sacred cows. These sacred cows have to be brought out, questioned and sacrificed before anybody can come up with any new ideas.