One of our oldest friends in the field of innovation, or at that awkward place where innovation meets strategy, is Costas Markides of London Business School. The Cypriot is a voluble and enthusiastic teacher, conversationalist and tennis player, as quick with an opinion on our understanding of disruptive innovation as Manchester United’s current form.
“My work has always been about innovation,” says Markides. He champions continual corporate innovation, even when innovation might undermine previous innovations that have spurred still-healthy corporate success. “The one thing I have learned from two decades of study,” he says, “is that innovation and continued success depend on the leader of the organization being willing to take drastic action, even when the organization is doing very well.”
Doesn’t that draw howls of protest from shareholders, analysts and other key constituencies? Yes, Markides admits, “And yet, that’s exactly the right time for organizations to rejuvenate themselves. The problem with companies is that, when they are on the upswing, they never introduce change. When do they introduce change: when they are down and then it’s often too late.”
Markides asserts that the skills, mindsets and attitudes required for breakthrough innovation are not only different from those required for continuing success in existing markets but also conflict with one another. Firms that are good at the former are unlikely to be good at the latter.
What’s more, big established companies do not have the skills and mindsets needed for creating radically new markets, nor can they easily develop those skills and mindsets, because they conflict with those the companies have and need in their existing businesses. However, these corporations do have the skills and mindsets that are needed for taking new market niches developed by others and scaling them up into mass markets.
How to reconcile these differences? Markides’s recommendation: keep the established and the entrepreneurial apart. Draw a line. Build a wall. The exact character of the division is whichever of numerous alternatives might work for the company.
Under this construct, Markides favors a more expansive view of what constitutes innovation. “I believe innovation is two things — the creation of something and, also and more importantly, the commercialization, the scaling up, of that something.”
With this perspective on innovation, the continuous innovation imperative for established firms is not what it is usually presumed to be: creating radical new business models. In fact, it is not in the realm of creativity at all, but rather in that of taking the creation of others and scaling it up to mass-market status.
Markides notes that this is to be expected. “New business models conflict with the established business models of established firms” — for example, with cannibalization conflicts, distribution conflicts, cultural conflicts, incentive conflicts, and so forth. “This implies that no matter how much good advice you give established firms to discover new business models,” Markides explains, “they are highly unlikely to do so. Why discover something that will destroy my existing business or alienate my existing distributors?”
So, if the established firm won’t succeed in responding to a disruptive competitor’s new business model with its own new business model, what response might succeed? Markides suggests two possible responses: “disrupt the disruptor or play two games at the same time.”
As to the first of these, “the established companies that respond successfully look at the disrupter and determine what they can do to disrupt them.” That’s what Nintendo accomplished with its successful Wii. Nintendo “was a traditional established competitor” in electronic games when “Sony and Microsoft attacked Nintendo’s lead with Playstation and the Xbox.”
If Nintendo followed the usual established firm’s response, it would have exited the market entirely or played Sony’s and Microsoft’s game (literally) with Playstation and Xbox imitations. Instead, “Nintendo came up with the Wii, a non-traditional product that emphasizes entirely different dimensions of electronic games.” Result: A market niche wholly owned by Nintendo, and two disruptors quite conclusively disrupted.
As for playing two games at once, the perils that threaten success are many. “In fact,” Markides writes, “there are many examples of companies that have pursued this strategy and failed (such as British Airways with its Go Fly subsidiary and KLM with its Buzz subsidiary) while other companies, such as Nintendo and Mercedes, have succeeded in playing two games without creating separate units. … Only a handful of companies that created separate units were successful in playing two games.” That handful, Markides says, explored five key questions that could improve the odds of success in competing with dual business models in the same industry:
- Should I enter the market space created by the new business model?
- If I do enter the new market space, can I do it with my existing business model or will I need a new one?
- If I need a new business model to exploit the new market, should I simply adopt the invading business model that’s disrupting my market?
- If I develop a new business model, how separate should it be organizationally from the existing business model?
- Once I create a separate unit, what are the unique challenges of pursuing two business models at once?
Markides has recently extended his career-long examination of innovation beyond the confines of the corporate context, to a focus on how people can address major social problems. His belief is simple: innovation really can – and must – change the world.
By Costas Markides:
Game-changing Strategies: How to Create New Market Space in Established Industries by Breaking the Rules, Jossey Bass, 2008.
Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets (with Paul A. Geroski), Jossey Bass, 2004.
All the Right Moves: A Guide to Crafting Breakthrough Strategy, Harvard Business School Press, 1999.
This was originally published in What we mean when we talk about innovation by Stuart Crainer and Des Dearlove (Infinite Ideas, 2016).