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“Every act of creation is first an act of destruction” Pablo Picasso

Ying and Yang, the Phoenix bird, Brahman and Shiva, the Garuda. Most cultures have some form of symbolism to stress the importance of balancing creation and destruction. In economics Schumpeter coined the term ‘creative destruction’. A process in which markets destroy existing structures to create space for the new.

As we maybe have forgotten, most successful big companies did not start big. They were founded by entrepreneurs with most of the time a breakthrough (horizon 3/transformational) innovative business model. This phase can be characterized by a passion-driven urge to build. At some point in the maturity level of the company the focus needs to shift to a complete different mindset. Managing operating processes in a controllable, cost-efficient and stable way. For most founders, this is not their thing and ceo’s shift at this point in time. This also takes the necessary reflection skills and courage of the original founders. Don’t forget at the end of the day we are all humans with emotions, fears, needs and ego’s to take care off.

Evolution of organizations

What happens when companies grow is that they add layers of complexity, more workstreams, control processes, information systems, decision making systems. This invisible organizational architecture creates ‘a way of working’ in the organization. Mental models are formed, a certain culture will evolve based around the execution of the daily business.

Transformative innovation stagnates and will move to sustaining/incremental innovation, making existing products and services better. Why? Because the way projects are financed, and designed in its organizational architecture, are all focused on businesses as we know it.

Big companies have in general three fears when it comes to transformative innovation;

  1. Cannibalization of existing business,
  2. Dilution of earnings
  3. Competing with your existing customer base

MARKETS DONT CARE ABOUT THIS. Markets don’t care about corporate problems. 

Innovators in organizations that recognize these fears need to be on the lookout that their innovation lab is not innovation theatre. Then it is not about getting new products and services in the market but just ticking the box during annual reports and events. Innovation is then a brand of young energetic people, being agile and of course rule breaking. Innovation becomes a fantasy to compensate for unfulfilled needs in the real world.

Corporations are fortresses designed not to change. Small innovation teams are buried deeply in existing reporting lines. The rare individuals that try to make a difference are slapped in the face because they did not meet their set of reporting KPI’s. Innovation becomes serious if we organize it, have different KPI’s to measure success and start funding these initiatives as internal investors. Innovation is not a paragraph in a project plan but should be right under the chairman of the board where a chief entrepreneur is running the innovation engine.

 

Balance creation and destruction

Corporations need to master the dynamic balance between creation of the new and destruction of existing structures. Destruction like innovation, can be incremental, substantial or transformative. Where innovation is categorized (for some know as horizon, 1/2/3) by the newness of the innovation (in relation to the existing companies business) and the amount of wealth created. In the case of destruction, the level of change depends on the extent of destruction and the amount of wealth at risk if destruction is not carried out. Most of the companies go through some form of incremental destruction. Procedures are changed, processes untwined. In change management this is known as first-order change. We change at the level of rules. This kind of destruction does not challenge the existing basic mental model in the organization; it is essential for the improvement of the operating routine of the corporation. Like incremental innovation, this form of destruction can be successfully carried out by the existing organization. This happens unnoticed day in day out. Substantial destruction, like a decision to terminate a joint venture or kill an area of research – is not a decision that can be taken by the front line alone. Senior management must be involved. Such decisions are usually unpleasant to contemplate, plan, and implement. But they are vital to the long-term competitiveness of the organization. Substantial destruction is warranted when major systems (f.e. corporate planning) get old and need to be replaced by modern equivalents. Such replacement can trigger a fundamental change in the mental model of the corporation. Transformational destruction, like innovation irreversibly changes the course of the corporation. Closing down a heritage product line – as for example Intel did with its DRAM business – putting the company into play, and declaring bankruptcy are examples of transformational destruction. And remember Intel was breathing, eating and sleeping DRAM. It was their DNA. What Schumpeter meant with ‘gales of creative destruction’ is the closest to transformational destruction. Schumpeter envisioned companies and even whole industries begin replaced. We all know the examples. Broadcasting companies need to reinvent their model now players like Netflix changed the basis of competition in the market. Logistic companies need to think twice about their existing business model now players like Google enter this market with new technology driven business models. Publishing companies need to reinvent their business model since Adwords is existing.

We can start imagining the transformation of different industries by artificial intelligence, blockchain and other upcoming technologies. The 7th wave in the Schumpeterian cycle of innovation and entrepreneurship.

The question becomes; where in the value chain is the money to be made in the future?

Transformational destruction

Transformational destruction is often triggered by market events, such as the entrance of foreign competition. In this case, as Clayton Christensen describes, from the low-end, with just ‘good enough’ products or services but user-friendly, more accessible and cheaper. What happens then, is that if more competition starts to operate in a certain market tier, prices drop because of the emergence of oversupply. The result; commoditization. The almost reflex reaction from big companies is to ignore low-end disruptors by fleeing upmarket.

Why is this? Big companies focus on improving existing product lines for high-end customers, incremental/sustaining innovations. Starting to compete at the low-end of the market does not make a lot of sense. Or does it?

Like the three forms of innovation, all three kinds of destruction are crucial for corporate health. As corporates grow, mature and stabilize, they become more complex. The complexities manifest itself in rules, manuals, procedures, politics and bureaucratic growth. Following the process is the goal because when there is a fuck up we can blame somebody else. The path to mediocrity is a fast one. Destruction is the one sure way to eliminate this encrustation. But can we handle the ambiguity of the ‘dark’ emotions that always come with destruction? Most companies and people cannot deal with anything that is negative, they are not in favour of conflict because they want to avoid the feeling of being alone. Do we have the emotional stable and creative people in our organizations to execute constructive destruction? Because our corporate systems need to be cleaned, keeping them fresh. The longer one waits to remove the crust, the more dramatic the act of destruction must be.

Within Innoleaps we developed an integrated approach to build a system that enables companies to grow and fund new growth models systematically. In the new year, we will give a masterclass about this topic. If you are interested, please sent me an email; misha@startupbootcamp.org

 

 

 

Misha de Sterke

Chief corporate innovation Innoleaps