Innovation is a 2-level game

If we take a look at biological sciences, particularly at the evolutionary theory, we can see that species go through periods of gradual change where the natural process of variation, selection and retention will promote the “survival of the fittest”.

At times, though, there are some drastic environmental changes that interrupt this pattern (i.e. the glaciations, bacteriologic phenomena, etc.). Species that were only able to face gradual mutations get extinguished. In parallel we can say that organizations go through a very similar process. Most industries are characterized by periods of incremental change where market variables are quite stable (the duration of such periods can vary significantly depending on the sector and other factors). After some time, though, discontinuities will appear, either as a result of a market innovation or a technological one, changing the rules of the game.

The “traditional” management thought in business schools is focused on administering companies under stable and mature environments, which is partly the reason why innovation represents such a challenge for most organizations. As I have outlined in the article “Long Term Success or Survival?” practically all large companies fail sustain returns over the long run.

For example take the Forbes 100 Index between 1917 and 1987; out of the 100 companies ranked in the starting year 61 ceased to exist and only 18 managed to stay in the list, of those 16 underperformed the market average (7.5%). Only General Electric (7.8%) and Eastman Kodak (7.7%) managed to generate returns above the average.

In the first level, which can be seen as the short-to-medium term characterized by incremental innovations, companies need strong sales and manufacturing capabilities, lean production lines, centralization with the right degree of hierarchy, a functional structure and a culture that promotes convergent thinking and efficiency. At the second level, which can be seen as the long-term when market or technological discontinuities inevitably appear, companies will instead need a more organic structure, entrepreneurial workforce, decentralization and a culture that encourages risk taking, divergent thinking and flexibility.

Most companies fail over the long run because they do not recognize the 2-levels of the innovation game; each requiring different resources, strategies and values.

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