When You Shouldn’t Keep Your Options Open for Innovation

Oct 28, 2020 - 5 minutes read time

Howard Yu, Blog

Big companies have everything they need to innovate. They have R&D labs. They can hire talent. They buy startups. But all of that is the easy part. The issue is that people can mistake the development of ideas for innovation. What really matters is scaling and execution. Without those, a firm can’t survive. 

I teach executive programs, and managers who come to my class already know a lot. Some run design thinking workshops, while others have done venture sprints. They use the business model canvas and practice failing forward. They clearly see where their companies must leap next. 

And yet, their companies get stuck. Inquisitive, explorative companies with big R&D budgets get stuck in history. 

You’ve heard of these stories too. Kodak exploring digital photography. GE exploring the Internet of Things (IoT). Nokia exploring smartphones. These were early movers who squandered their time. They ultimately lagged behind within their own industries. Why can’t these visionaries scale? How did sweet dreams turn into nightmares? 

Don’t confuse experimentation with innovation

Here is a common understanding among most people: An innovative company takes risks. It experiments. It keeps its options open. It explores different areas. It prizes learning.    

But what if this perception is dead wrong? I mean, what if an innovative company needs to stay focused? What if an innovative company needs to minimize failure? What if an innovative company needs to first exploit all it can from the current opportunity before it moves on to the next? 

These questions matter. Because if you are unclear, you make the wrong choices. You decentralize the wrong areas. You empower people with the wrong responsibilities. You build the wrong culture. You squander time.

Microsoft office

To find out the answers, I need to examine a company that has indisputably turned itself around. Here is an ideal candidate: Microsoft. This is a company that was once seen as a staid operation with diminishing prospects for growth. But later, it transformed into an innovator that has scaled its new offerings worldwide.

I can feed everything that’s ever been written about Microsoft into an algorithm. 

But first, a bit of history. 

The importance of culture in scaling innovation

Remember Steve Ballmer? He was the CEO of Microsoft after Bill Gates. Under Ballmer, Microsoft tripled its annual revenue from $23 billion to nearly $78 billion. It introduced Windows 7, which ruled the PC market for almost a decade. But everything other than the PC was a flop. 

Microsoft was losing out to Amazon, Apple, and Google in music players, e-readers, and smartphones. Its new products, like Zune, Vista, Kin, and Bing, were duds. The company took a $900 million write-down on unsold Surface tablet inventory.  

Ballmer stepped down in 2014.  

This is how the next CEO, Satya Nadella, introduced himself. In an open letter to employees, he wrote, “I am 46. I’ve been married for 22 years and we have 3 kids. . . . I buy more books than I can finish. I sign up for more online courses than I can complete. I fundamentally believe that if you are not learning new things, you stop doing great and useful things.”

Under Nadella, Microsoft transitioned to a subscription model. It won big in cloud computing. It ramped up its offerings on augmented reality. It scaled Azure, Microsoft 360, and HoloLens.

You may think Microsoft under Ballmer was hypercompetitive, laser focused, and efficient. You may think Microsoft under Nadella is open-minded, inquisitive, and creative. On the explore-exploit continuum, I once thought that Baller was on the exploit end while Nadella is on the explore side. All these are great theories. 

They are just wrong.

Big data, big rhetoric

My research team took everything that the press has written about Microsoft and fed it to an algorithm. You can feed the algorithm with annual reports, investors’ conference calls, analyst reports, or press releases. In this analysis, we’ve fed it with the standard-bearer of business journalism: Wall Street Journal. All of it. We want to see how Microsoft has talked about itself in interviews and how journalists have described it over the years.

textual analysis of Microsoft

Well, Microsoft under Ballmer was more explorative than it is under Nadella. From the way journalists reported what Microsoft did to what the CEO said in interviews, it’s clear that Microsoft had been a company that kept its options open. It had been very open to new ideas. It ventured further away from where it had been. 

Only after Nadella arrived would Microsoft narrow its focus to a few areas. Yes, it scanned all available options. But most importantly, it started to make relentless progress in the chosen few.

How others see you and how you see yourself

This very ability to focus demands a certain mindset. It needs executives to be obsessed with product performance as opposed to simply “trying things out.” If you are going to focus on cloud computing and nothing else, you will need to make sure the service you launch is world class. You have no plan B. You are “averse” to failure because you can’t afford to fail. 

That’s what we saw in the data. Under Nadella, Microsoft is seen as taking less risk. Journalists see it as the company working harder to prevent failures. There is no more undisciplined experimentation. There is less unaccounted autonomy. Product performance is demanded. Results are required. 

We wanted to cross-check this result with how Microsoft talked about themselves. Do they also change the way they talk in earnings calls? They do. Under Nadella, Microsoft is a more committed organization. It doesn’t place its bets everywhere. It doesn’t keep all its options open.  

textual analysis of Microsoft graph

The curious thing about innovation 

To innovate, you’ve got to have an idea, of course. But anyone can launch a mobile app for a new service. Anyone can display a prototype at trade shows. What you really need is a team of people to advance the thing with the same chosen goal. Scale that to 1,000 people or 10,000 or 100,000. You start to see that the problem is in scaling up. Unless you do, the needle won’t move.   

The danger is that executives continue to explore for too long when the company has, in fact, explored enough. You know what trends matter to your sector the most. You know who’s disrupting you right now. You know where to leap next. But the company suffers from a commitment issue: the inability to exploit that new opportunity. 

Contrary to common belief, companies can, in fact, explore themselves into oblivion. 

 

Stay healthy, 

Howard Yu signature

PS. Where have you seen a company suffer from commitment issues when evidence becomes so clear? Why do you think it hesitates? What do you think is needed for a company to move from noncommittal exploration to determined exploitation of a new opportunity?

This article is co-authored with Angelo Boutalikakis, a research associate at the LEAP Readiness Project.


Comments


6 comments

B
Brian Mooney Oct 30, 2020 at 9:23am

I disagree with the article. No doubt Microsoft has changed under Satya Nadella and now has a more focused strategy. However, I'm sure they are also exploring new strategic options and technologies as part of their $16bn 2019 R&D budget? Not keeping options open for innovation is precisely the reason why companies mentioned in the article, like Nokia, fell into decline. The point is you need to mainain a pipeline and portfolio of products and initiatives to sustain growth. Also, the 'data' for the argument is weak: content analysis of Wall Street Journal articles and earnings calls about Microsoft is hardly enough to justify conclusions about that company, never mind generalizations about innovation. Better to simply to ask Microsoft if their strategy has changed. Catchy title, poor argument.

C
Cassy Murrell Oct 28, 2020 at 11:15pm

Many thanks Professor Howard for such an excellent and comprehensive piece once again!

Howard Yu:
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Howard Yu Oct 30, 2020 at 11:17am

Thanks Cassy!

H
Henry Oct 28, 2020 at 3:13pm

Great article because it tests your / the original hypothesis against the ‘data’. It’s always a balance - sometimes we have a strategy so we (also) know what we are not going to do / which explorations don’t fit. It’s a tough balance to get right.

Howard Yu:
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Howard Yu Oct 30, 2020 at 11:18am

Thanks Henry! That's really the heart of role of top executives. It calls for judgement. Thanks for your observation!

A
Anonymous Oct 28, 2020 at 1:50pm

Love it. There might be a misunderstanding at the moment on what the lean start-up movement (create an MVP or minimum viable product fast, test it, correct and iterate quickly until you possibly fail and start with a new idea or have a success) really means for established organizations. It's as if Microsoft went from that model of testing of bunch of (new) ideas to the more focused discipline of identifying mega trends, then replicating existing solutions (Amazon Web Services pioneered cloud services before Microsoft) and applying its clout and expertise to improving them.

BTW: I love the textual analysis charts applied as you have to the question of what the strategic focus of a firm is. Inspiring for other applications, thank you.

Howard Yu:
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Howard Yu Oct 30, 2020 at 11:17am

Thank you! Yes, it's really to move away from undisciplined activities to a more focused area of innovation. I am glad that you enjoyed the piece.

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Janet Gilmartin Oct 28, 2020 at 1:02pm

Hi Howard,

Yhanks very much for this very interesting And enlightening article about Microsoft.

Best regards,

Janet Gilmartin

Howard Yu:
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Howard Yu Oct 28, 2020 at 1:40pm

Thanks a lot, Janet for your kind words. I am glad that you like the piece. Great to hear from you too!

J
Jeffery Alston Oct 28, 2020 at 12:18pm

Very provocative Howard! Would you say many companies are trapped in exploration? I have a question, what's the sign that a company has explored too much?

Howard Yu:
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Howard Yu Oct 30, 2020 at 11:15am

This is definitely something I am working on. Someone on LinkedIn replies with the following. " If everybody is aware of whats important and the leaders are obsessed in bringing this excellence to market then its probably a good sign." Stay in tune. I'll come back to this question soon.

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