Path Breaking Innovation—Forget the Planning, Work with the Story

Torkel Tallqvist, August 30, 2011

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If there is one thing you should know about path breaking innovation, it is that innovation is context dependent. There are not two historical situations alike. That is why you cannot find, and should not look for, the all–powerful formula for the creation of successful innovation. At the same time, it is evident that innovation is not merely about random luck. How is that? Simply because if it was about luck, then Graham Bell, Henry Ford, Steve Jobs and Mark Zuckerberg would receive a greater portion than rest of the billion of people on the earth. It is an ecosystem of knowledge that you should be looking for. I have written about the prime mover of that ecosystem in my essay The Prime Mover of Innovation. In it, I want to connect the piece of knowledge of the opportunity for innovation and the piece of knowledge of viable business interpretation of that opportunity.

Despite the fact that every situation under which innovations emerge is unique, there is a proposed (Schumpeter, 1942) pattern of these situations when innovations have emerged. The root of innovation is linked to different classes of discontinuances or changes resulting in dramatic new situations. Firstly, it can be a technological discontinuity, like the invention of electricity. Secondly, it can be a social change, like the urbanization movement. Thirdly, it can be a demographical change, like the aging population in Europe. Fourthly, it can be a political movement, like the fall of communism in the former Soviet Union, leading to (some kind of) democracy. And finally, it can be a regulatory change, like the principle of free flow of capital in the European Union. All these instances are followed by a wave of diverse new opportunities.

Let us look closer to one of these, urbanization. The year 2008 was historic, as it was the first time when the urban population of the world grew bigger than the rural population, as presented in the figure below. Urbanization can be understood as a sociological process of rationalization.

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Figure 1: Percentage of World Population.

The trend is clear, isn't it? Without going into the causes of urbanization, let me concentrate on the consequences. How do we face a discontinuity, like that of diminishing rural living? What implication will it have on my business? The opportunity related to the discontinuity is not self evident. Not only is it difficult to understand the meaning of the change, it is also difficult to figure out the effects of a discontinuity. What new situations will emerge? What are those situations made up of ? Where? Whom does it concern? What is the emerging new shortage or need? (I have written of the user situation in the essay The Need of the Spoilt Consumer is Overrated). The below, said by an innovation activists, illustrate this situation and the opportunity recognition:

"When we read the speech about Margaret Thatcher's vision—that the micro chip would revolutionize our lives—it was hard for us to imagine that the chip would also be in our products one day. Now it is." In this case, Thatcher's words mediated a meaning to those who later integrated the chip into a faucet; the touch free faucet came out as a result, 10 years later.

However, imagine the situation in Tunisia, Egypt and Libya 2011. The former ruler is gone, but what comes after that? One sees a hostile environment, another sees an emerging opportunity where an agile strategy is needed.

My argument is that the major part, yet not all, of the apparatus of strategic thinking, is useless in a mature firm in the situation when you face the open window of opportunity for innovation. Why is that? I regard strategy first and foremost as a plan. Innovation ventures rarely go according

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to plan. In my mind, planned innovation is lip talk, regardless how much you hear about it. A great contradiction, isn't it?

There is, however, no such thing as contradiction, only wrong premises resulting in what seems to be a conflict, as Platon stated it. To confront this debate, we need to revisit what innovation is. I rely on the argument that the cycle of innovation has six characteristics (Leifer et.al. 2000): Firstly, it is highly uncertain and unpredictable. Secondly, it is sporadic: it has stops, starts, deaths, and revivals. Thirdly, it is nonlinear, requiring a recycling back through activities in response to discontinuities and setbacks. Fourthly, it is stochastic; players come and go, priorities change, exogenous events are critical. Fifthly, it is context dependent; history, experience, corporate culture, personalities, and informal relations all matter. Finally, it is long term, commonly lasting ten years or more. These need to be the premises when you think of path breaking innovation. If these are not the premises, then innovation is lip talk or diluted improvements. Always.

Okay, when these are the premises, then what part of the strategy apparatus is of relevance, if strategic planning is not? As the firm is dealing with a path breaking innovation then that has consequences on the fundamental idea and purpose of the firm. In general managerial terms, the purpose of the firm is usually stated as the mission—a higher strategic meaning of the firm. If the mission is seen as part of the strategy agenda, it includes a statement about how the firm is acting with respect to its competitive environment (Mintzberg, 1994). The mission of the firm is largely seen, not as related to the time factor, but in the domain of creating value in the environment in which the firm participates. In a managerial sense, it defines "what role the firm has in what larger system" (Normann, 2004). An example:

Our mission. At the Coca–Cola Company we strive to refresh the world, inspire moments of optimism and happiness, create value and make a difference.

An alternative strategy concept is to address the discontinuity by stating the vision. The vision is about the future, about the gap between the present state and the imagined future state. Furthermore, the concept of the vision also tells about the effects on the external world, and the future state of the organization.

KONE delivers the best People Flow™ experience.

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Fine, but why do these concepts not do in the case of path breaking innovation? The major short–coming of both the mission as the vision statement is that they disregard the discontinuity, which is the starting point when you are dealing with the potential for path breaking innovation. The fundamental purpose of the firm needs to relate to interpretations of the opportunity in a changing environment. The purpose defined by the top management has no meaning, unless in association with the environment. Strategy thinking is strong in the context of war and competition, but when it comes to a "blue ocean strategy" (Kim et.al. 2005) —when you are embarking on a journey with a hazy destination—something else is needed. Strategy is useful when an organization defines the parts of the concept, in reflecting the division of labor in the organization. Strategy is not first and foremost about describing how the parts work together for a particular purpose. That is why I want to bring in the business model thinking. The breakthrough of the business model term occurred in the late 1990s.

Figure 2: Abstracts 1975–2000.

The increased availability and use of the personal computer has been helpful in popularizing the business–model thinking. In the 1960s, computing took many years to be completed, and cumbersome programming was used in large corporations to deliver pro forma financial statements. Along with advancement of computer technology in late 1970s, the corporate planning model had spread to almost all US Fortune 100 companies, primarily serving as a tool for simulation and optimization.

The term business model was propelled at the dawn of the popularization of the Internet and the World Wide Web during the breakthrough years for

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information technology. The change happened hand–in–hand with new prospects for business, which, in the most radical statements, was said to have rewritten the basic rules of the economy (Kotha, 1998), also called the new Digital Economy. At the dawning of the major, indefinite e–commerce, discontinuity opened the field for local interpretation in those communities participating in the change.

What is then a contemporary business model like? Here is an example of a viable business interpretation connected to urbanization, stated by an industrious entrepreneur:

"In the seventies, volumes of apartments were built in Finland as a part of urbanization, but the living environment was disregarded, which was where we came in with our new theme of modular playgrounds for children and young families," said the founder of the firm.

The business model is a conceptual principle—a "theory" of the firm set by senior management on how to serve the market. It is analogous to a cook who has a recipe baking for a cake that someone will eat. Beyond defining the purpose, however, the business model also tells in a sense–making way how it comes about.7

What is then the connection between this ideology of business model and the ideology of business strategy? There is apparently a good deal of overlap, as the terms strategy and business model are frequently confused. Critics of the school of strategy point to the shortcomings of strategy analysis: it delivers parts of the whole rather than a synthesis of the whole. One interpretation is that the business model appears to be a reflection of greater freedom of movement, and the less predefined and given structural elements of the firm are not included. If the strategy smells of a plan of being competitive, the business model is more of a story of doing, and the effect of that doing new things. Researchers have found that the business model is effective and valuable in cases when the firms have a novelty–centered business model in combination with various market strategies, whereas it is not as evident in cases when firms have efficiency–centered business models.

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Conclusion: This paper is about how you make money out of a wave of opportunity that you can see, emerging as a consequence from a discontinuity creating dramatically new situations. It also tells you about putting in place needed structures of thinking and action ensuring that it actually will happen. This is not yet another repetition of a strategy lessons. This is a proposition that strategic planning is not what the senior management should spend their time on. Strategic programming is the concern of middle management. The role of the senior management is to see the world, to interpret what the emerging change and to spend their time on making and trying out recipes—the business model—for how you make money on that wave of opportunity.

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