Transformative innovation opens up new horizons for companies, points to potentially groundbreaking business models, and requires a conscious entrepreneur to lead the way.
Every large company must adapt to constant innovation and market changes. Otherwise, even operating in the 21st century, it can become obsolete. It is unlikely that the organisational structures that characterise today’s established companies will continue to bring them growth.
However, this does not undermine the success that corporations have achieved by finding a successful business model and improving it over the years. They have reached where they are today because they have successfully scaled and continuously improved a proven business model. However, to achieve significant and sustainable growth in the 21st century, companies will need to go beyond improving their existing business model and introducing new products. These activities are simply not capable of generating further satisfactory growth.
Growth will be noticeable in companies that are more dual in nature – those that excel at improving their established business model (exploitation) and at the same time excel at inventing future growth engines (exploration). Growth will come from entirely new value propositions and business models. Simultaneously improving exploitation and exploration is extremely difficult due to the divergence of required skills, different tools and the need for different thinking. However, only those companies that manage to nurture these two cultures have a chance of satisfactory growth in the 21st century.
This is a radical but important change. A 2016 KPMG survey found that 74% of CEOs are concerned that new entrants could disrupt their business models. In the same survey, 53% of CEOs believe that they are not changing their business models enough. In contrast, in a McKinsey study, 80% of CEOs believed that their business models were at risk, and only 6% of executives were satisfied with their companies’ innovation. The organisational structures of many of these entities are simply not configured to deliver breakthrough growth.
Source: https://www.strategyzer.com/blog/why-every-company-needs-a-chief-entrepreneur
So what do we need to do to effectively develop entities in terms of innovation?
First, companies must go beyond traditional research and development, technology and product innovation to focus on new value propositions and business models. This also means creating a completely new organisational structure in which exploitation and exploration can coexist with noticeable growth. These activities must be led by a Chief Entrepreneur. This person will have the same powers as the CEO, but will focus exclusively on planning the future of the company. Their task will also be to manage a team of entrepreneurs and a portfolio of innovative experiments, and they will be the guardian of the culture of innovation in the company.
Understanding innovation and growth in the 21st century
When we talk about “innovation”, we often think of research and development, new technologies and new products. However, it is becoming increasingly difficult for companies to achieve significant results solely through product and technological innovation (classic R&D – research and development). Kodak is often cited as an example of an innovative company that quietly went bankrupt. Despite inventing the basic technology used in digital cameras today, Kodak’s technological innovations were not enough to develop a business model that could be the centrepiece of its future growth strategy.
Organisations are hungry for new growth, but have not yet distinguished between incremental and radical innovations that sustain current operations, and transformative innovations that open up new horizons and perhaps revolutionary business models. For example, a new product model or new product features may generate short-term revenue in a stagnant sector. Cost-cutting measures and business process redesign may stabilise the situation or make the company efficient, but focusing solely on these types of innovations is not enough to survive.
Transformational growth comes from value propositions and business models. New technology can still play a role. However, it must be packaged in an attractive price offering and combined with a strong business model. Nestle achieved this with the Nespresso brand when it reinvented how coffee was sold to households. However, the technology does not always have to be completely new. Despite inferior technology, Nintendo Wii was successful in an underserved segment because of an exciting value proposition combined with a profit-based business model. Nintendo managed to sell over 100 million units of hardware and over 900 million units of software in six years before sales declined. Even Nintendo, despite this success, failed to create something new in time.
Amazon’s ability to continuously experiment and evolve beyond its core e-commerce model makes it another excellent example. In fact, last year, the e-commerce retailer surpassed all of its traditional retail rivals combined. Why? Because Amazon is not just an e-commerce retailer. The company regularly expands into entirely new areas such as logistics, voice services, artificial intelligence and cloud computing. Indeed, its cloud computing arm, Amazon Web Services (AWS), is Amazon’s fastest and most lucrative growth engine. The service has become Amazon’s most profitable arm. AWS, valued at £2.3 billion, accounted for three-quarters of Amazon’s total operating income in 2016. AWS alone is projected to generate £12 billion in revenue.
Why do you need a strong Chief Entrepreneur?
The best CEOs are excellent at growing and running a company within a known business model. What they don’t do well enough is innovate. Not because they are incompetent, but because they are unable to do so for other reasons. CEOs often succeed thanks to an established business model and are pressured to deliver short-term results for the company. Not everyone has the ability, like Jeff Bezos, to be the main driver of innovation. CEOs also do not understand what is needed to develop this innovation, and this causes them to view anything that differs from the company’s previous actions as detrimental to the existing business model. There are also few CEOs who are capable of performing two completely different roles that require different skills and organisational structures. Well, you would have to be schizophrenic to manage and succeed in today’s business while creating the future of your company.
If the CEO is not suited to innovation, who should take care of it?
A new position, which I call Chief Entrepreneur (CE), is needed for 21st-century companies to stay modern. The primary function of the CE is to build the future of the company, while the CEO runs the current business (and funds the CE’s search for new solutions). This is not the role of the Chief Technology Officer (CTO), the head of research and development, or the Chief Innovation Officer (CIO), who report to the CEO. The Chief Entrepreneur is as powerful as the Chief Executive Officer, with clear leadership and authority over transformational innovation in the company. Together with the CEO, they report to the Chairman of the Board on an equal footing. One focuses on exploitation, the other on exploration.
But what does a CE really do?
The Chief Entrepreneur is responsible for managing a portfolio of entrepreneurs who experiment with new business models and value propositions. This is a person with a penchant for taking calculated risks to achieve the following goals:
Build the future of the company. It cannot be said more bluntly. The CE is responsible for developing new business models and value propositions for the future growth of the company.
Lead and support a specific team of entrepreneurs. The CE team searches for and verifies business models and value propositions related to growth opportunities. This means managing entrepreneurs who are able to navigate market trends and behaviours.
Design/create space for inventions. The CE is responsible for creating an environment for their team to experiment, fail and learn. This is an additional culture in which ideas can be thoroughly tested. The CE must defend the culture, processes, motivations and metrics that arise in this space.
Introduce innovation accounting. The CE must develop a new process for measuring progress in building the business. This will reveal how experiments help the team learn, eliminate uncertainty and risk, and make progress.
Establish and nurture a partnership with the CEO. The CEO works with the CE to secure the resources and capital necessary to approve or reject ideas. The CE is responsible for building a partnership to discuss progress and share new ideas. Communication plays a key role in this relationship, as the CEO is the person who can help fund future experiments. The CE must recognise the importance of delivering a proven business model that demonstrates scalability.
Report your progress directly to the chief executive. The CE does not work for the CEO or alongside the CTO, CIO, and CFO. These roles are designed to keep the existing business running smoothly. If the CE reports to the CEO, the CEO may veto ideas in order to reserve resources and protect the company from failure.
I know what you’re thinking: is the role of CE even realistic? Which CEO would be willing to share power at the highest levels of any company? I admit that this is a really difficult task, but it is not impossible. It is important for the board and the CEO to recognise the need for someone at the same level who will shape the future of the company. The real question is: is it realistic to have only one person fill this role?
An innovative dream team
Now a few words about the team that the CEO needs to build. These are the people who will play key roles in managing the exploration of new business models and value propositions. Every day, they will devote time to endless learning and testing of various possibilities.
Chief Portfolio Manager: this is the director responsible for the investment portfolio. They strive to ensure that the company recognises a range of opportunities and business models that will ensure its future growth. Some of these opportunities will be risky, others less so. Some will offer potential returns, while others will guarantee those returns. The Chief Portfolio Manager’s job is to ensure that the investment portfolio allows the company to take advantage of selected options. This is a person who must understand the environment in which the company operates. They must be able to spot whether there is a breakthrough technology on the horizon. What factors influence a given space? The portfolio manager must then adapt the portfolio to this environment so that the company is well prepared financially for the future.
Chief Venture Capitalist: the chief venture capitalist allocates the budget, manages funding rounds and will have the most contact with the entrepreneurs conducting the experiments. The project will not receive full funding immediately, but will receive funds in several tranches. The Chief VC will find business angels to fund early, low-cost experiments. When these experiments are successful and provide evidence of potential success, the VC will invest more money. If you look at our organisational chart, the Chief VC mirrors the role of the CFO (Chief Financial Officer). On the left, the CFO allocates the budget for the existing company; on the right, the Chief VC manages the discovery funds for the new business.
Chief Risk Officer: Some of the experiments that the team will conduct may be harmful to the brand and may entail legal liabilities. Their legality may prove to be a major constraint on experimentation within the company. The Chief Risk Officer is there to support teams in these activities. The CRO is a role that will help entrepreneurs understand how to conduct experiments without exposing the company to risk.
Chief Internal Ambassador: the Chief Internal Ambassador knows everything that is happening on both sides of the company. The CIA knows all the resources, activities and patents that are available in the executive group, but also has the trust of the influential people who manage them. The CIA ensures that the CE and his team benefit from the strengths of the existing company by negotiating access to elements such as customers, salespeople, the brand and its skills. This role is the link between the existing company and its innovative partner. Communication on progress will be key to finding the right relationship between the two sides.
Entrepreneurs: Entrepreneurs build companies, and each is responsible for a specific business experiment as its leader. This role becomes much more serious than that of a regular product manager: they are true entrepreneurs with clear motivations and stakes in the company.
I want to be clear: the new organisational structure is not about creating more managers. The innovation space under the CE’s leadership is so diverse that it requires an extensive team of people to manage it.
Creating and maintaining a culture of innovation
It is no surprise that companies led by good entrepreneurs are often able to reinvent themselves. That is why it is so important for the Chief Entrepreneur to be the guardian of the culture of innovation. Although a “dual organisation” is difficult to achieve, there are several key examples that prove its usefulness. Amazon is one of them.
If you have the opportunity, I highly encourage you to read Jeff Bezos’ annual letter to his shareholders. It is a fascinating example of how a deliberate organisational design and portfolio of business models can deliver great value and growth.
Bezos speaks very clearly and consciously about his company’s entrepreneurial culture and organisational design. Although Amazon employs more than 240,000 people worldwide, the company works hard to avoid the pitfalls of sluggishness, risk aversion and lack of experimentation that often plague large companies. In fact, when it comes to failure, Bezos told shareholders:
“One area where I think we stand out is failure. I think we are the best place in the world to fail (we get a lot of practice!), and failure and inventiveness are twins. To invent, you have to experiment, and if you know in advance that it will work, it’s not an experiment. Most large organisations support the idea of invention, but they don’t want to suffer through the series of failed experiments necessary to achieve that goal.”
Willingness to fail is one of the characteristics of a culture of innovation. Others include a focus on customer needs, patience for long-term thinking, and, most importantly, a willingness to invent and initiate. A culture of action is not a bad thing — it is essential for scaling and improving a known and proven business model, but it will not exhibit the characteristics of a culture of innovation. Action cultures experiment much less; they operate with absolute certainty rather than uncertainty; and they focus on efficiency and implementation.
I often see large companies fall victim to radical changes in smaller or newer market players simply because they are too slow to seize opportunities; they are incredibly focused on their past success. The size of your company should not slow you down; it should be an advantage that leads to success. Large companies have the advantage of access to a larger budget, existing assets and resources that can drive the search for future opportunities. A start-up has to fight for an initial advantage, while a large company literally has the funds for innovative activities right under its nose.
So let me summarise. Real, transformative growth cannot take place in today’s corporations, whose old organisational structures focus primarily on operational excellence and gradual growth. In other words, on leveraging a known business model. The structure of 21st-century companies must be twofold. It requires a Chief Executive Officer who leverages and improves the established business model (or portfolio of business models), while the Chief Entrepreneur is anointed as the patron of innovative growth initiatives (or innovation portfolio) and the associated culture.
Source: https://www.strategyzer.com/blog/why-every-company-needs-a-chief-entrepreneur
