What’s more important: core or disruptive innovation? And how can large companies do both? We spoke to Michael Docherty, CEO of Venture2 Inc. and author of Collective Disruption, for his thoughts on this and the paradox he sees at play.

Michael has consulted with a lot of leading companies and believes that many of them do a good job at core, incremental innovation. “That’s important work,” he says, “but it’s no longer enough.” Companies need to continue to innovate their core business, while at the same time create transformative or disruptive innovation to fuel new business growth. Transformative innovation is more important today for growth than ever before. Unfortunately, for these companies, it’s not a game many of them know how to play.

What we used to call innovation is now just what it takes to stay in the game. Today, if you’re planning a new version of an existing product, or even bringing out new extensions of those products, for the most part, you’ll be protecting market share, keeping your shelf space.

For Michael, this truth became very apparent to him back in 2000 when he was the newly hired VP of Innovation at Sunbeam products (Sunbeam, Oster, Mr. Coffee and others) at the start of a turnaround of the small appliance company.

“Our new CEO walked into a room to speak to a group of us, all newly appointed executives who would be part of a difficult business transformation. In one hand, he held up a Sunbeam hand mixer and in the other he had a McDonald’s Happy Meal. ‘Which of these do you think is more expensive?’ our CEO asked. The answer? The Happy Meal was more expensive. At the time, you could buy a hand mixer out of China for $2.”

That was the moment when Michael knew the game had changed. “It had become a brutal kitchen appliances market with competitors selling at little to no margin to maintain share, using cheap products from China. At the same time, our health products business was being disrupted by early predecessors to today’s wearable products.” The new team needed to find a way to survive, by defending Sunbeam’s core business and at the same time creating new businesses and platforms for growth.

The Sunbeam story may be unique, but many companies today are facing the same challenge of moving from the ‘old game’ of innovation to the new one. What’s driving this change?

Michael thinks it’s due in part to rising expectations of consumers (and B2B customers), the speed and lower barriers to innovation, and our interconnectedness. “You’re just as likely to find a breakthrough innovation through a kid with a computer in India, than you are in an R&D facility in Procter & Gamble,” he says. “It’s just come to the point where big companies can’t do it alone. In fact, many aren’t even keeping up.”

So, while companies still need incremental innovation to maintain today’s business, they need transformative (i.e. more disruptive) innovation if they want to grow.

The innovation paradox

Despite efforts from leading corporations to drive disruptive innovation – connecting with startups, setting up innovation outposts in Silicon Valley, hiring innovation sherpas, creating intrapreneurship programs – few are succeeding and delivering the results they need.

Everyone is dabbling and trying to figure out how to become more entrepreneurial and disruptive. For the most part, they’re trying and failing.

This failure is partly because big companies – with their structured policies and systems, their corporate culture and the corporate immune system – are simply not built for this kind of innovation. As these companies matured, they built organizations, reward systems and processes to manage and optimize their increasingly complex businesses. These systems are great for optimizing, but they become a barrier to risk-taking and agility that are needed in exploring new businesses and opportunities.

But Michael believes there’s more to it than that. “I think that there’s something else at play and that is that core innovation and transformative innovation are a bit of a paradox..

We want to be entrepreneurial, but we want to be disciplined. We want to be thorough, but we want to be fast. The paradox is that these aren’t simply opposites – they are interdependent.

He believes that corporations need to stop addressing core and transformative innovation as an ‘either//or’ and start seeing them as two sides of the same coin. “They are interdependent. You can’t build transformative innovation capability unless you have a strong core, or at least are doing it in a way that’s synergistic with the core. You want the core and transformative innovation efforts to be separate but integrated.

I use the metaphor of an island with a bridge to the mainland. Enough separation so that you don’t kill it with corporate antibodies, but enough integration so that you’re designing things that the core business needs and there’s buy in and an alignment along the way.”

Companies need to understand that they have to do both concurrently and to understand that these two types of innovation can support each other. They also need to make the commitment to both for the long term. Too often, Michael sees companies who start working on both types of innovation but, as soon as they have one bad quarter, panic and shut down their transformative work.

In spite of this, he’s optimistic that this can change, especially when he sees how Google is continuing its commitment to its new portfolio structure with Alphabet despite the fact that Alphabet now discloses the substantial losses it incurs in its ‘moonshot’ projects.

“They lost $800 million in that first quarter alone on moonshots. In Google or Alphabet terms, that may not be so large, but you can imagine if this were any other public company. The CEO would be on the investor call acknowledging that they missed their numbers and promising to cut costs and get profitability back in line,” says Michael. “But Alphabet committed to this structure and to this direction. I’m hopeful that more companies over time will start to understand how right Alphabet is for recognizing that.”

Dual growth models

Michael recommends that companies address this dual view of core and transformative innovation at multiple levels: strategy, execution capabilities, collaboration with partners, and finally culture.

For example, develop an interdependent strategy for both long-term and short-term innovation, brought to life through effective innovation portfolio management.

“In this model, what you should be doing is developing what we call dual growth strategy. Short to mid term innovation goals and projects are aimed at the core. Separately, you should be developing a long term or a different mix of higher risk, higher return opportunities, placing small bets on a range of big ideas that have the potential to become a whole new growth business.”

Sounds straightforward enough in theory. But the trick, says Michael, is to do both of these in a way where they support each other.

“Let’s say that I am exploring getting into a new category through breakthrough innovation. What can I do in the short term, in terms of an experimental small bet, that might support the core business with some revenue and some learning that is moving me toward that longer term goal?

Similarly, when I’m working on the core and I’ve got choices of directions I might take, why not give extra weight to the opportunities that are not only providing financial return, but also aligned with long term innovation strategy?”

Dual operating systems

Along with dual growth strategies, we need dual operating systems for innovation – think Windows and Mac running on the same computer. Michael says companies need to develop capabilities and skills to manage two different systems within their enterprise.

Where most companies use disciplined phase-gate systems for their core innovation, in managing transformative innovation, what’s needed is a more agile and experimental approach.

In this model, teams approach management with an idea and a request for funding. Management gives them just enough funding to tackle the riskiest aspect of their idea and either they find a way to overcome that risky barrier, or it become clear that the idea is not worth pursuing.

“It becomes a much more fluid process where teams are basically coming back when either they’ve run out of money, or when they have achieved their learning objective. They’re not predefined milestones, so it’s a very different cadence to it. As well as the fact that there’s much more onus on these teams to act like entrepreneurs in defining the opportunity and pivoting as they go.”

Cisco’s approach to innovation

Michael believes that Cisco is a great example of a large company doing things well. With their five pillar strategy for innovation, they recognize that they need to be putting their attention to both extending today’s business and creating tomorrow’s growth businesses.

“If you look at Cisco’s competitors from 10 years ago, it’s a completely different set of competitors than they are today. That tells you that Cisco has basically, over that 10 year period, reinvented itself,” says Michael.

In the past, Cisco has relied heavily on nurturing startups and integrating acquisitions successfully. Now, with their new strategy, they’re committing to developing innovation internally. This internal innovation won’t just be incremental in nature. The company is working to build new businesses internally.

“We have helped them build a process and set up pilots for internal venture-funding boards, so that teams in certain organizations that have big ideas, can surface and pursue them. There’s separate funding set up for these opportunities. They are specifically aimed at more transformative opportunities, things that normally wouldn’t make the cut,” says Michael.

Though still early in the process, he believes it demonstrates their commitment to overcome the natural bias to focus on short-term, incremental innovation.

Driving innovation with startups

Michael also believes that partnering with startups is key.

“My belief is that you need to have this dual operating system, need to do all the things I’ve talked about in terms of dual strategies and dual processes and you also need to engage the ecosystem,” he says. “You need to find new ways to partner with startups. And the way you partner with startups is going to be different for the core business than it is for the transformative.”

With the core business, you should be working with startups to find opportunities and technologies that can be licensed or acquired. It’s about extending the reach of your own R&D capabilities. “The core business support is often what I call more transactional. You figure out what you need and you find people to help you do that and then you execute against that.”

In the case of transformative innovation, companies should at least explore co-creation with startups.

You’re not going to find those technologies sitting on a shelf somewhere. Nor are you going to be able to define even what you need until you get into it. Why not partner in new ways and much earlier in the process, to actually co-create these new businesses together?

As to how you partner with startups, Michael says there is no one model that is right. He categorizes what he’s seen through his research into these three approaches that can be used successfully:

  • The inside-out model. In this model, the work is done externally by others but still attached to the organization. “Until recently, Cisco had something they called their spin-out/spin-in strategy. They would actually feed a group of entrepreneurs an idea and invest in one case. With Nuova Systems, they invested $70 million and two years later they bought back the same startup for $280 million. It ended up being a smart bet because it became a $3 billion business for Cisco.”
  • The outside-in model. Here, companies bring in the talent and capabilities to build breakthrough innovation inside their organization. “Jarden (now part of Newell-Rubbermaid) is an appliance company I used to work for. They wanted to extend their Crockpot slow cooker appliances into premium food. You can argue about the strategy, but they had their reasons. They knew they didn’t have the capabilities for this premium direct-to-consumer food business. So they hired an entrepreneur who had previously built and exited two of these businesses and brought him on board in a shared-risk/reward model to incubate it.”
  • The inside-in model. With this approach, companies are still partnering with startups and keeping breakthrough separate from core, but in a way that keeps them more in control of the process. “Johnson & Johnson had its own innovation center, so it’s still J&J, but they’ve got physical locations around the world separate from their core business. In these facilities, they have R&D and business people who are partnering with entrepreneurs, co-creating new businesses together.”

Getting into the disruption game

Large companies know that they need to defend today’s business and disrupt these same businesses before others do it to them. That’s the paradox many companies face, just like the situation Michael lived through in the Sunbeam turnaround. And it worked for them. “We launched 10 new products in that first year, and then over 150 by the end of the second year. We set up a separate group for breakthrough innovation and we enlisted outside partners like never before. We didn’t call it ‘open innovation’ but that’s what it was,” says Michael.

“We successfully exited bankruptcy, became a leader in nearly all of our categories and then sold the business to Jarden. We had a unique advantage in having our back against the wall. It motivated us to take risks and try new things. The real challenge is this: how do companies today that know their futures are in jeopardy find the motivation to reinvent themselves before they have to.”

Cisco, J&J and others are showing us that it can happen. Not by doing what you’ve always done and hoping for a different result, but by recognizing and building different innovation systems (for today and for tomorrow) and by engaging startups and entrepreneurs as partners – or, as Michael says, “surrogate risk takers.”

It’s not easy, but companies that figure out how to work this way are more likely to be the ones with a successful future ahead of them.

mike-docherty-intrapreneurshipIf you’re keen on understanding how to build a hybrid innovation engine, join Michael Docherty’s workshop during Intrapreneurship Conference Silicon Valley

In this workshop you’ll gain practical insights into new approaches to portfolio strategies, hybrid innovation processes and new ways to engage the entrepreneurial ecosystem in co-creating new businesses. Filled with case studies from leading companies, this workshop also includes exercises and interaction to put these tools and approaches to work right away.