Organizational Agility Entails Complementary Innovation

Recently, I’ve come across a couple of posts and articles debating on the question:

In order to increase agility, should organizations aim to become more nimble across their existing structures or should they capitalize on separated units/ventures – such as innovation or digital labs – being dedicated to initiate and develop explorative ideas and opportunities?

Let’s define agility as an organization’s ability to renew itself, adapt and succeed in a changing, and often highly dynamic and unpredictable, environment.

Proponents of the former usually argue that agility needs to address the running operations and separation may eventually prevent explorative initiatives and agile approaches from getting integrated in the core organization. Those favoring the latter, on the contrary, claim that separation from the core is imperative to be able to grow something novel to the company, be it a product, business model, strategic approach or cultural mindset/behavior effectively and quickly without constraints and biases of existing structures.

Both seems reasonable, right?

In fact, to me the question raised above is a wrong question. Organizations should pursue both as underlying purposes are complementary: adapting and optimizing the existing (exploitation) vs. creating and implementing the novel (exploration). And here we have it again: think integratively – both/and rather than either/or.

Adaptation vs. Incubation and Scaling

As we have seen earlier, adaptation of an existing core business is primarily driven by evolutionary (or continuous) innovation, i.e. mostly incremental innovation of selected parts of the existing business model or the applied technology. With regard to organizational design, pairing speed with stability through underlying dual operating systems seems to be an appropriate choice to increase adaptive capacity in established organizations – i.e. the capability to deal with increasing uncertainty and pace of environmental change.

In complement, incubating and scaling novel – occasionally disruptive – opportunities, such as technologies or business models, is the essence of revolutionary (or discontinuous) innovation. This innovation stream strengthens an organization’s disruptive capacity, enabling it to react to disruptions in the market and to self-disrupt – proving to be hardly possible from within a “to-be-disrupted” core business. Pursuing revolutionary innovation requires organizational ambidexterity, i.e. the organizational capability to separate corresponding ventures from the core while at the same time facilitating leverage of core assets and competencies.

Clayton Christensen put it straight: The worst place to develop a new business model is from within your existing business model.

Core Transformation vs. Strategic Transformation

The question above also relates to two distinct types of organizational transformations – suggested by Scott Anthony and mentioned in my recently introduced Model for Integrative Innovation Management:

• Core transformation, i.e. doing what you are currently doing in a fundamentally different way
• Strategic transformation, i.e. changing the very essence of a company

As outlined earlier, organizations ideally need to consider both transformation types simultaneously: While core transformation addresses the adaptation and expansion of the existing core, strategic transformation aims at reinventing the organization by introducing entirely new – and often disruptive – opportunities and strategies.

Case in point: Digital Transformation. Discussions about transforming organizations for the digital age often alternate between the above poles, although overall transformation ultimately has to include both. In the end, digitally mature organizations are required to digitalize their existing core business (e.g. to increase efficiency in their operations) and, in parallel, develop modern, digital products, services and business models, many of which are to disrupt the organizations themselves as well as the industries they are in.

The following chart visualizes the two distinct, complementary activity streams including effects and requirements:

Takeaway

Improving organizational agility entails complementary transformation and innovation streams. In order to strengthen their capability to successfully shape and respond to changing environments, organizations are challenged to balance the following tensions in accordance with their individual context:

• Adaptation of core business vs. incubating and developing new ventures
• Evolutionary innovation vs. revolutionary innovation
• Core transformation vs. strategic transformation
• Dual operating system vs. organizational ambidexterity

One of the corporate imperatives to thrive in the future is the ability to successfully integrate opposing alignments. Leaders have to prepare their organizations to learn act consistently inconsistent!

Supplement: After having had published this post, I came across an article citing the recent PwC 2015 Global Digital IQ Survey. It can be considered another backing of the line of thought above. The study’s leading author states:

According to PwC’s Digital IQ survey of 2,000 business and technology executives, only 8% of respondents say the main drive of digital is disruption. Don’t get me wrong. Incremental innovation with digital is exactly what businesses should be doing and they are making impressive changes. For example, I’ve seen executives using augmented reality to facilitate inspired conversations with customers. And, businesses are using sensors to take the guesswork out of daily decisions. But they also need to fold disruption into the mix to make the big revenue generating gains that shareholders demand. (…)

In attempting digital disruption, businesses need to understand that incremental innovation and radical innovation with digital requires two different approaches and mindsets. (…)

The key takeaway here is the strategic flip flop that disruptors make. When it comes to incremental digital deployments, enterprises should view technology through a business lens. They should explore how they can apply emerging technology to solve existing business challenges. But, when trying to invent business models from scratch, letting the emerging technology serve as the source of inspiration for investments might make more sense.