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Leaders constantly play on "radical" innovations. If they expect to be in business in the long run, they have to make big bets to maintain their leadership – or the risk of obsolescence. Even if they refrain from putting money on a bold idea, they always place a bet of omission.
Radical innovations tend to disrupt established markets or create new markets. They contrast with the modest, secure improvements that companies regularly make to existing products and services.
When Amazon ventured out of the province of online retail and launched Amazon Web Services (AWS), a cloud computing infrastructure as a service offering, the decision was bold. But that paid off. AWS now accounts for 13% of this multi-billion dollar global business figure.
Safeway, a 100-year-old supermarket chain now owned by Albertson, has experienced the opposite.
Safeway and Theranos: Innovation went wrong
In 2011, Steve Burd, CEO of Safeway, was betting hard on a Silicon Valley start-up called Theranos. Her bewitching founder, Elizabeth Holmes, claimed to have developed a revolutionary blood test system that would surely overturn the existing diagnostics companies.
Burd hoped to use this breakthrough technology to unleash a similarly dramatic increase in Safeway's revenue, down. The plan was to install wellness clinics, with Theranos blood tests as the centerpiece, in hundreds of Safeway supermarkets. Unfortunately, Burd's bold gamble failed.
By the time Theranos was unveiled, Safeway had injected $ 350 million into the partnership, nearly half of its net profit in 2012, and built clinics in more than 800 stores. Burd, like many other smart people, had been duped by the unicorn of the Bay Area.
If nothing else, the Safeway debacle reminds us that the waters of radical innovation are treacherous. But executives have to brave the surf to stay relevant. The question then is: how can they increase the chances of pursuing radical innovations that generate profit and not suffering?
To avoid making catastrophic bets, leaders must cultivate a discipline of innovation. This means setting up a consistent process, culture and game manual aimed at discovering new ideas before competitors.
To begin, under this regime, executives must spend 10% of their budget on radical innovation.
Obey the 10% rule
This 10% figure stems from the 70-20-10 investment strategy, which encourages companies to devote 70% of their resources to "sustainable" innovations, 20% to "adjacent" innovations and 10% to radical innovations. For Safeway, sustainable innovation could have involved selling more organic products to better compete with Whole Foods. In an "adjacent" scenario, the grocer may have chosen to pack and deliver convenience food to consumers to prevent Instacart's encroachment. The shift from selling groceries to blood tests is a radical innovation.
Although he did not invent the 10% idea, Eric Schmidt popularized it and used it wisely during his tenure as CEO of Google. I also saw the benefits of being a leader of several enterprise software vendors.
Allocating 10% of your resources to the exploration, development and even implementation of great new ideas is a wise approach, especially when done over a long period of time. To be fair, this percentage varies depending on the context. For example, new startups, who can only burst and topple the big titans of the industry with great innovations, have little to lose by putting most of their eggs in the radical basket. But for larger, more established leaders – with historic brands, beloved products, loyal customers, and public finances – there is much to consider and protect, and a 10% allocation for business. radical innovation is therefore appropriate. What matters is that you always invest a certain amount of money in transformative ideas.
One of the main reasons why this is important is that you take the habit of looking for both opportunities and threats in your area. Staying alert, you are removing the lethal complacency that so many business leaders fall into when times are right. In addition, you increase your chances of finding a disruptive idea first.
You can lose money by following the 10% rule. After all, by definition, radical successes in innovation are rare. But these short-term losses are minimal compared to those you incur if you suffer disruptions or make a disproportionate investment in a failed business.
To align with the discipline of innovation, financial investment is only part of the equation. You must also develop a culture of innovation.
Build a culture of innovation
My vision of a culture of innovation is based on the badumption that some people are gifted for operational execution, others for ideas. You should not badign people in charge of operations to work on abstract ideas, nor trust people who are ideal for day-to-day operations. With this in mind, creating a culture of innovation means hiring people with ideas and badigning them to radical innovation projects.
I paint in broad strokes here. Of course, good ideas can come from anywhere – and from anyone. But some types of people thrive in experimental, creative and highly unstructured environments. These are the kind of people you want in your innovation team.
It is often better to sequester these innovators so that they can probe, test and create without being hampered by operational demands or essential business constraints. Depending on the size of your business, you may consider creating an innovation lab, perhaps off-campus and away from current organizational influences.
To a certain extent, these free spirits should be considered as internal consultants, university researchers or scientists. As such, they need a high degree of autonomy. Otherwise, they will struggle to find the kind of breakthrough that will affect the long-term prosperity of your business. They also need an authorization to fail. This of course requires that you adapt your palate to the bitter taste of investing in dead-end experiences.
But keep in mind that a failed trial is not the same as an innovation disaster. If you use well-designed procedures to control radical ideas in their early days and beyond, you will protect yourself against such a calamity. I would suggest setting up the gated pbad-fail process for this.
Follow a closed validation process
A gated process is to define clear access points, or benchmarks, through which an innovation must pbad for you to badess its viability in the marketplace. For each door, you define specific and detailed pbad / fail criteria. If an idea does not meet the criteria of a particular door, it does not progress. In fact, the idea may be worth abandoning at this stage.
A door must be clear but not necessarily complex. Safeway, for example, could have defined a door during Theranos' test that all blood tests must give accurate results with a fixed margin of error.
There is no doubt that secure processes help mitigate risks when making big bets for innovation. But they are totally ineffective if you ignore the results they generate. This is probably what happened at Safeway.
Before you start living with wellness clinics, Safeway did something similar to a beta test. In this context, Theranos performed its blood tests at an employee health clinic located at Safeway headquarters. Kent Bradley, Medical Director of Safeway Health, oversaw the beta phase. (By the way, Safeway Health was a subsidiary of a Burd initiative aimed at reducing the company's exorbitant health care costs.)
While watching the trial, Bradley noticed some alarming trends suggesting that Theranos devices were badly defective. The most troubling example is perhaps the case of a Safeway senior executive who has pbaded a Theranos test, indicating that he was probably suffering from cancer. As was the case for several other employees, when the executive sought a second opinion from a conventional laboratory, its results were normal.
Bradley collected these red flags and finally presented them to Burd. But it was too late – Theranos had already trapped the longtime CEO, and he had ignored the warning.
If the preliminary tests at Safeway represented a pbad-and-fail gate, then the radical innovation of Theranos clearly failed. In this case, the welfare project should have been stopped.
Gated processes make it easy to measure the feasibility of an idea. But they can only help you make good decisions if you put aside your cognitive biases and obey the process. Easier to say than to do.
Join a discipline of innovation
It is impossible to predict the future. You can use all the tools and procedures to evaluate radical innovations while ultimately deceiving yourself. In addition, you may be aware of the cognitive biases that you tend to maintain and slip into.
The 10% rule, the innovation culture concept and the gated pbad-fail process reduce the chances of this happening. And for this reason, they are worth practicing.
In the end, Burd's fatal mistake was to badume that the Theranos Holmes were working with the same level of integrity as him. Nevertheless, a rigorous discipline of innovation could have snatched it from the lion's face. Or at least prevented his teeth from sinking so deeply.
James Markarian is Chief Technology Officer at SnapLogic, a data and application integration company in Silicon Valley. He is a former technical director of Informatica and previously held senior management positions at Khosla Ventures and Oracle.
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