Why Adjacent Innovation is Your Key to Managing Risk and Accelerating Growth

Why Adjacent Innovation is Your Key to Managing Risk and Accelerating Growth

It’s not easy leading innovation.  Especially these days.  You need to do more with less.  Take risks while guaranteeing results.  Keep up with competition through incremental innovation and redefine the industry with radical and disruptive innovation.  It’s maddening.  Until you find the Goldilocks Zone of adjacent innovation.

Adjacent Innovation: From Middle Child to Just Right

As HBS Professor Regina E. Herzlinger and her co-authors point out in a recent HBR article, the US is in the midst of an innovation crisis. The cost of lost productivity, estimated at over $10 trillion between 2006 and 2018, is a stark reminder of the economic consequences of a lack of innovation. This figure, equivalent to $95,000 per US worker, should serve as a wake-up call to the importance of innovation in driving economic growth.

The authors identify the root cause of this loss as the ‘polarized approach companies take to innovation.’ While companies focus on incremental innovation, the safe and reliable oldest child of the innovation family, the VCs chase after radical, transformative innovations, the wild, charismatic, free-spirited youngest child.  Meanwhile, adjacent innovation – new offerings and business models fo existing customers or new customers for existing offerings and business models – is, like the middle child, too often overlooked.

It’s time to rediscover it.  In fact, it’s also time to embrace and pursue it as the most promising path back to growth.   While incremental innovation is safe and reliable, it’s also the equivalent of cold porridge. Radical or transformative innovation is sexy, but, like hot porridge, it’s more likely to scorch than sustain you. Adjacent innovation, however, is just right – daring enough to change the game and leapfrog the competition and safe enough to merit investment and generate short-term growth.

Proof in the Porridge: 4x the returns in ½ the time

Last year, I worked with an industrial goods company. Their products aren’t sexy, and their brands are far from household names, but they make the things that make America run and keep workers (and the public) safe. The pandemic’s supply chain disruptions battered their business, and their backlog ballooned from weeks to months and even years.  Yet amidst these challenges, they continued to look ahead, and what they saw was a $6M revenue cliff that had to be filled in three years and a product and innovation pipeline covered in dust and cobwebs.

From Day 1, we agreed to focus on adjacent innovation.  For four weeks, we brainstormed, interviewed customers, and analyzed their existing offerings and capabilities, ultimately developing three concepts – two new products for existing customers and one existing product repositioned to serve a new customer.  After eight more weeks of work, we had gathered enough data to reject one of the concepts and double down on the other two.  Three months later, the teams had developed business cases to support piloting two of the concepts.

It took 6 months to go from a blank piece of paper to pilot approval.

It took just another 12 months to record nearly $25M in new revenue.

Those results are more than “just right.”

Be Goldilocks. Pursue Adjacent Innovation

Every organization can pursue adjacent innovation.  In fact, most of the companies we consider amongst the world’s “Most Innovative” have that reputation because of adjacent innovation. 

How will you become your organization’s Innovation Goldilocks and use adjacent innovation to create “just right” growth?

Yes, You Are Working Harder to Stay in the Same Place.  Will You Do What It Takes to Change?

Yes, You Are Working Harder to Stay in the Same Place. Will You Do What It Takes to Change?

As a leader in your organization, you’re under tremendous stress. Not only do you need to deliver against a “growth strategy” that demands constant increases in revenue and profit, but you also need to cut costs and support employees who are more disengaged and burned out than ever before.  If it feels like you’re working harder and running faster than ever to maintain the status quo, then I have good and bad news for you.

Bad news: You’re right. 

The feeling of working harder or moving faster simply to stay in the same place is called the Red Queen effect or hypothesis.  The hypothesis asserts “that species must constantly adapt, evolve, and proliferate in order to survive while pitted against ever-evolving opposing species.”  Its name is inspired by the Red Queen in Lewis Carroll’s Through the Looking Glass, who explains to Alice, “here, you see, it takes all the running you can do, to keep in the same place.”

You probably feel the same need to adapt to survive “while pitted against ever-evolving opposing species” every time you see new technologies, read about another new management framework, or hear news from your competitors. You also understand that your organization needs to grow and often hear that it needs to do so at all costs, so you buckle down, work hard, and pull off quarterly miracles.

Good for you! You’re reward?  You get to do it all over again, and faster, this quarter.  And, to add insult to injury, all that growth you’re working harder and harder to achieve is a mirage.

75% of companies do not grow.

HBS professor Gary P. Pisano examined the growth rate of 10,897 publicly held US companies between 1976 and 2019.  When adjusted for inflation, the top quartile grew 11.8% yearly, but the other 75% showed little to negative growth. 

Being in that top quartile was no guarantee of success, as only 15% (3% of the total sample) were able to sustain a growth rate of 0.3%+ for 30 years. In fact, only SEVEN companies—Walmart, UPS, Southwest, Publix, Johnson & Johnson, Danaher, and Berkshire Hathaway—were top-quartile growth companies throughout the thirty years studied.

If you worked at one of those 7 companies, congrats!  Your hard work delivered real and repeatable growth.  If you worked at any of the other 10,890, I hope they offer great benefits?

We know why.

Every good academic knows you can’t just throw out some data without trying to find a causal link, and Professor Pisano is a good academic

“I have found that while the usual explanations for slow or minimal growth—market forces and technological changes such as disruptive innovation—play a role, many companies’ growth problems are self-inflicted. Specifically, firms approach growth in a highly reactive, opportunistic manner. When market demand is booming, they go on hiring binges, throw resources at developing new capacity, and build out organizational infrastructure without thinking through the implications… In the process of chasing growth, companies can easily destroy the things that made them successful in the first place, such as their capacity for innovation, their agility, their great customer service, or their unique cultures. When demand slows, pressures to maintain historical growth rates can lead to quick-fix solutions such as costly acquisitions or drastic cuts in R&D, other capabilities, and training. The damage caused by these moves only exacerbates the growth problems.”

(Bold text added by me)

Good news: You Can Do Something About It

In fact, as a leader in your organization, you’re among the few who have any prayer of pulling your organization out of the Red Queen’s race and putting it on track to real and sustainable growth. Achieving this incredible success requires you (and your colleagues) to decide three things:

  1. How fast to grow (target rate of growth)
  2. Where to find sources of new demand (direction of growth)
  3. How to assemble the resources required to grow (method of growth)

Together, these three decisions comprise your growth strategy and enable your organization to achieve the “delicate balance” between demand and supply required to sustain profitable growth.

Getting to these decisions isn’t easy, but neither is slaying the Jabberwocky.  So, as this brief rest stop in your race comes to an end, who do you choose to be – Alice, who works hard and deals with a bit of nonsense to progress, or the Red Queen, content to work harder to stay in the same place?

Take a Hike!  Leadership Choices That Determine Whether or Not Your Business Grows

Take a Hike! Leadership Choices That Determine Whether or Not Your Business Grows

I recently listened to a podcast in which the speaker talked about his hike to Machu Picchu.  He spoke about the difficulty of the hike and the moments when his confidence wavered.  “But ultimately,” he said, “I was so compelled and pulled onward by the opportunity to see such a wonder, that I was able to push through.”

That was not my experience.

Many years ago, I did the same hike (in three days instead of four due to a scheduling error).  And at no time did a feel “compelled and pulled onward.” In fact, about halfway through the first day’s hike, I had a complete meltdown in the middle of a beautiful grove of flowering trees.  Luckily, I was so far behind the rest of my group that only my guide saw and heard the half-hour, expletive-laden beating of walking sticks against trees as I accused him of leading us to our deaths. 

A few hours later, we reached our camp and the sherpas gave me tea and popcorn as they prepared dinner.  I don’t know what was in the tea, but I felt much better after a cup and was grateful that a steady supply was offered throughout the next two days.

WHY you start matters

It was not the “opportunity to see such a wonder” that put me on the path.  It was FOMO (fear of missing out), knowing that my friends were going on an adventure and not wanting to miss out.

Opportunity or FOMO.  One of those is at the start of every journey and steels your mindset for the work ahead.  If you see opportunity, you’re optimistic, resilient, and maybe even a bit idealistic.  If you’re afraid, you rush through things, missing important signals and only seeing how far behind you are.

Companies do the same thing with innovation.  They see a new technology, trend, or framework appear, sense an opportunity to use it to kickstart growth and leapfrog competition, and they start building.  Or they see a new business model or competitor gain share and rush to mimic their approach.

WHAT you choose along the way determines how you end

It wasn’t “knowing where my journey was going, and what the journey was all about” that kept me moving forward.  It was the knowledge that, unless I planned to join one of the Indigenous communities we passed through, I had to keep going. 

No matter how you start, you will face a choice – continue, stay, or turn back – and that choice determines how your journey ends.  If you turn back to the old ways because the new ways failed, you’re giving up.  If you stay where you are, you’re stuck somewhere between the safety of what you knew and the opportunity ahead.  If you keep going, you’ll stay ahead of those you never started, turned back, or stopped AND you’ll achieve the opportunity that “compelled and pulled [you] onward.”

Companies face the same decision moment with innovation.  There’s a market downturn, geopolitical uncertainty, or a major global event, so executives shut down anything that’s not mission-critical while they wait out the uncertainty.  A new leader takes the helm and wants to put her mark on the organization, so she rejects the old strategies and approaches and institutes her own, ignoring the counsel of others in the organization.  A new competitor suddenly finds itself embroiled in controversy or bankruptcy, and executives chuckle and shake their heads because they knew all along that the only way that works is the old way.

What do you choose?

Do you start because you see the opportunity to do better or because you’re afraid of losing out?

When you face the inevitable challenge, do you turn back to “how we’ve always done things,” take up residence where you are because it’s good enough, or do you bravely persevere?

Most importantly, when you face the challenge, do you take a break, talk and listen to the people around you, and have some tea and popcorn before you make your choice?

What’s the Purpose?

What’s the Purpose?

Purpose.  Goal.  Mission.  You hear these words a lot this time of year.  Not because it’s the start of the annual business planning cycle but because it’s graduation season. 

Across the country, commencement speakers and wise family members espouse the importance of having a purpose to guide and sustain graduates as they set out on their next adventures.

All the talk of purpose can feel overwhelming, especially as you listen to graduates’ wide-eyed optimism about how they will change the world while stewing in an existential crisis that makes you wonder if you even have a purpose.

You do.

And part of that purpose is finding and creating purpose.

What is “Purpose?’

Purpose hasn’t reached buzzword status, but it’s close, so let’s start with a definition, or three, courtesy of The Britannica Dictionary:

  1. the reason why something is done or used: the aim or intention of something – The purpose of innovation is to create value
  2. the feeling of being determined to do or achieve something – The team worked with purpose
  3. the aim or goal of a person: what a person is trying to do, become, etc. – He knew from a young age that her sole purpose in life was to be an orthodontist

Three different definitions of purpose.  Three questions that it’s part of your purpose to ask.

“What’s THE purpose?”

Innovation is all about creating value.  Sometimes, to create value, you need to do new things.  Sometimes, you need to stop doing things.  It’s hard to tell the difference if you don’t ask.

That’s why innovative leaders are curious.  You aren’t afraid to ask, “What’s the purpose of this product/process/meeting/decision/(fill in the blank).”  You want to know “why something is done or used,” and they know that the best way to figure that out is by asking.

You ask this question at least once a day.  When you ask it, you’re genuinely curious about the answer.  After all, we’ve all experienced people and cultures that weaponize questions – “Johnny, is that where the scissors go?” or “Why did you think that was a good idea?” – and you reassure people that you’re asking a genuine question, even if they should know that by your tone.

“What’s OUR purpose?”

Innovation is hard.  You live in ambiguity and uncertainty.  You fail (learn) more often than you succeed.  You are told “No” and “Stop” more than “Yes,” “Keep going,” and “Thank You.”

Innovators are courageous.  You do the hard work of innovation because you are “determined to do or achieve something.” 

You also know that sustaining courage and purpose requires a team. 

You aren’t fooled by the myth of the lone genius. After all, Thomas Edison worked with as many as 200 people in his West Orange lab. Heck, even Steve Jobs needed Sir Jony Ive (and a few hundred other people) to bring his vision of “1,000 songs in your pocket” to life.

“What’s MY purpose?”

Innovation takes a long time.  Change happens gradually, then suddenly.  We chose to preserve what we have, rather than take a risk to get more.

Innovators are committed.  You are patient for change, steadfast in the face of resistance, and optimistic when others are afraid because of your “aim or goal…what [you are] trying to do, become, etc.” 

Even if you can’t articulate it in a grand statement or simple, pithy soundbite, you have a purpose.  As Viktor Frankl wrote, “Those who have a ‘why’ to live, can bear with almost any ‘how’.”

Three Purposes.  Three questions

Even if you lack the wide-eyed optimism of a new graduate and feel like you spend most days just muddling through life, because you are here, you have a purpose.  So tell me:

  1. When was the last time you were curious and asked, “What’s the purpose of (artifact of the status quo)?”
  2. When was the last time you were courageous and used your feeling of determination to inspire others to join your purpose, overcome obstacles, and get something done?
  3. When was the last time you had to dig deep, rediscover your purpose, and reinforce your commitment so that you could bear and overcome the “how?”