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10 Rules for Strategic Innovators Book Summary

“Forget, Borrow and Learn” is your guide to growth in unexplored territory. (Click to Tweet)

In 2 Minutes

Evaluate strategic experiments based on what you learned from them (not based on profits).
If you establish a new division, enable it to borrow knowledge and resources from the parent company – but minimize tensions.
To guide strategic experiments, and to learn from them, use “theory-based planning,” which includes testing and revision.
Frequently revise any plans involving strategic experiments in light of what you’ve learned along the way.
As you start new projects, forget the corporate culture of the older institution. Undue politics, inside competition and bad planning can disrupt learning.
Beware of organizational factors that inhibit innovation.

10 Rules for Strategic Innovators Book Summary
In 10 minutes

Strategic Innovation and Strategic Experiments

Change dominates business today. Companies face great pressure to give birth to the next major innovation. However, rather than waiting for change or stumbling across discoveries, you want to engage systematically in strategic innovation, redefine your customer relationships, and re-examine the assumptions underpinning your company and industry. This requires understanding your company’s organizational code, an underlying structure that parallels the human genetic code.

Strategic experiments are at the heart of strategic innovation. Such experiments offer great growth possibilities, because they happen in new or not-yet-defined industries, and because they can change your assumptions about how organizations succeed. Strategic experiments also can alter how you define business and success (rather than just making you better at what you know and do now).

Strategic experiments generate uncertainty. You won’t know how to evaluate them and you’ll find them unprofitable at the start. Because of this uncertainty, keep strategic experiments distinct from your stable, familiar core business. To emphasize this distinction, call the strategic experiment NewCo and the parent business CoreCo. Follow the ten rules for strategic innovation, which are:

1. In all great innovation stories, the great idea is only Chapter 1

2. Sources of organizational memory are powerful.

3. Large, established companies can beat start-ups if they succeed in leveraging their enormous assets and capabilities.

4. Strategic experiments face critical unknowns.

5. The NewCo organization must be built from scratch, with new choices in staffing, structure, systems and culture.

6. Managing tensions is job one for senior management.

7. NewCo needs its own planning process.

8. Interest, influence, internal competition and politics disrupt learning.

9. Hold NewCo accountable for learning and not results.

10. Companies can build a capacity for breakthrough growth through strategic innovation.

To understand how these rules work, first you need to know what strategic innovation is not. It isn’t continuous process improvement, in which you make a lot of little changes, as GE does through Six Sigma. It isn’t a process revolution, where your process stays the same, but you improve productivity, as Wal-Mart is seeking to do by using RFID (radio frequency identification) tags to track inventory. It isn’t product or service innovation, in which you create new items for sale, but leave the existing business model in place.

Strategic innovations may include any or all of these steps, but always involves unproven business models. However, you can create strategic innovations without changing your product, service or technology. To understand the different kinds of innovation, envision a spectrum. Put process revolution and product innovation in the middle. Continuous process improvement is at one end and strategic innovation is at the other. At the continuous process improvement end, changes are small, cheap and quick; results are fairly predictable.

At the strategic innovation end, change can take an unknown amount of time and money, and then it may not work, at least not initially. However, strategic innovations offer greater potential for growth, especially the nonlinear growth that transforms an industry, bringing big potential profits. You and your colleagues probably won’t face the opportunity to carry out strategic innovation all that often in your careers (maybe only once), so it’s unlikely that anyone will have sufficient direct experience with such change to be of much help.

To Innovate Strategically, Do Things Differently

You’ve probably heard a CEO announce that things are going to be different. He’s got a world-changing idea. He studies, plans and organizes…and then shifts his focus away. Everything withers because he’s bought one of the great myths about innovation – that it is all about the great idea. It’s not. That is why Rule 1 says that a great idea is only the start. Unsupported, even the best idea will die. For innovation to succeed, at least one top executive must protect the idea by generating funding, resources and support without a lot of managerial involvement, and by helping the organization learn quickly from the trial steps in developing the idea.

This innovation champion must remember Rule 2’s warning that organizational memory springs from a powerful source. When your organization starts something new, it will tend to repeat things it already does well. That isn’t innovation. When you do something new, you can’t plan methodically or follow a regular process. Instead, encourage thinkers to explore new ideas or products. Eventually NewCo will be efficient, but now it needs to be creative.

That means forgetting how CoreCo defines itself, its core competencies and even its business model. At the same time, NewCo wants to borrow expertise from CoreCo, and to design itself so it can learn. To consciously set CoreCo’s habits aside, follow Rule 5’s dictum that NewCo has to start fresh with new systems. Hire new people (creators, not implementation experts), organize them differently (a flatter structure, not a hierarchy), and breed an independent culture that is open to risk, and that emphasizes experimentation and learning.

Forget, Borrow and Learn

The three core challenges in establishing NewCo are forgetting, borrowing and learning. As you try to forget CoreCo’s powerful organizational culture, ask how your new business model must differ. Who are your new customers? How will you serve them new ways? Which areas of expertise does NewCo need and in what proportions? Where can you use predictions and where do you have to deal with uncertainty? How should you evaluate management performance in a project that requires risk or could even collapse? Organizational memory gives you the business instincts that let your company react quickly to challenges, but if you don’t forget the old responses, you are doomed to fail.

To address organizational and technical challenges, hire a mix of old and new people. Set up new behavior models, especially in accountability and performance. One tough challenge is deciding when NewCo must make money. Too often start-ups are held to arbitrary demands that they show a profit, when, in reality, you need to expect them to lose money at first (they are experimental, after all) and give them grace periods.

Borrowing Tangible and Intangible Resources

You want to forget CoreCo’s constraints and culture, but you also want to borrow resources from it as needed. For example, the Internet division of the New York Times Company, New York Times Digital (NYTD), borrowed its initial organizational models directly from its parent firm, which lent it personnel and credibility. As a result, NYTD took only limited advantages of the Internet’s possibilities. Then, eager to pursue fresher opportunities, Martin Nisentholtz of NYTD hired more outsiders for new jobs, upgraded tech support and let new ideas emerge in a bottom-up, amorphous fashion, following emerging markets and technology. This created tension, turf wars and divided loyalties. Such tensions accompany any new project, because as NewCo succeeds, it seems to consume CoreCo’s resources and make it obsolete. Yet as NewCo moves into new areas, it will lose money, so negative comments may fly from both sides.

Nonetheless, as Rule 3 says, established organizations can defeat innovative upstarts if they can leverage their assets. NewCo should borrow from CoreCo, but it must diffuse the accompanying stress. That’s why Rule 6 explains that senior management’s primary job is to manage tensions. The two entities should plan for cooperation and demonstrate common ground. NewCo should borrow only in the areas where borrowing gives it a great advantage. Don’t link support departments (i.e., HR, legal, purchasing, etc.) even if that would be easy, because they are strong carriers of an organization’s DNA and will make NewCo too similar to CoreCo. Establish NewCo outside CoreCo’s physical limits (not the same building or campus), but near enough to borrow easily. As NewCo takes loans, find ways to repay.

Heed all interactions, including how you price the transfer of resources. If you answer to both CoreCo and NewCo, coach colleagues at each one differently. Work to coordinate NewCo and CoreCo processes. When you create new projects, try to benefit both organizations. Let NewCo boost CoreCo’s established brand. Finally, use CoreCo’s established manufacturing capabilities and knowledge.

Focus on Learning

To survive, emphasize learning. As Rule 4 cautions, strategic experiments face crucial unknowns. Your greatest learning task is to address these unknowns through better predicting and functioning, even though an unknown or emerging industry can’t use formal prediction tools or intuitive rules of thumb. Instead, you must learn through trial-and-error as you engage in repeated experiments. Make your experiments clear, repetitious and speedy (as soon after one another as possible, so they stay fresh in your memory). Determine what you think will happen. Plan, execute, measure your results and review how the results compare with your predictions.

This will put you far ahead of most people who engage in strategic experiments, because they either don’t understand the learning process or they execute key elements badly. They ignore their predictions, plan badly and hastily, or they execute but don’t compare their results. That is why Rule 7 for strategic innovation mandates an independent planning process for NewCo.

Barriers to Learning

Barriers to learning are crucial. As Rule 8 explains, many factors can disrupt learning, including influence, inside competitiveness and political jockeying. Flawed planning also disrupts learning, as seen in Hasbro’s late-1990s attempt to develop interactive toys. Some insiders there manipulated predictions to support their positions, and made faulty and rigid predictions based on flawed assumptions. They also sought profit too quickly, which can sink an innovation. That is why Rule 9 makes NewCo accountable for learning, instead of results.

Surprisingly, management also can inhibit learning by being reasonable, inspiring or diligent – at the wrong times. These good qualities are likely to be informed by CoreCo’s values or, more simply, to be misapplied. A mature company can insist on a lot of planning data because it operates in a known field. An innovator in an unknown field cannot, so seeking more planning information will force attention there, and away from learning.

Theory-Focused Planning

Planning in a new or changing industry might seem futile. Much planning is, but you can gain a great advantage with theory-focused planning, in which you create a theory with testing in mind and then test it. Describe the new business and what it must do. Then identify metrics, by asking what you can measure. Set goals and spending guidelines. Predict outcomes and identify areas where you cannot presume a result. Note and test assumptions. Analyze the gap between what you predicted and what happened, and revise your plan based on what you learned.

The first, essential step in theory-focused planning is making sure everyone agrees on the business function. Using graphic organizers, such as an influence diagram (also called a bubble-and-arrow diagram) can show how the planned steps relate to each other. Show the chain of cause and effect. Your plan will differ from traditional approaches. You’ll revise it more often, since traditional annual planning is too slow. Fill in the unknowns in your plan as you develop your business. Make the theories behind your business explicit. Revisit that logic as your experiment develops. Include more factors in your plan, such as tracking trends that shape your emerging industry.

To review performance, balance this wider focus with a detailed historical examination. Finally, hold managers accountable for learning. They can’t just execute known processes; they must understand and articulate new ones, so that all of NewCo gains a better understanding. And everyone will agree with Rule 10, that strategic innovation is the way organizations can generate breakthrough growth.

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