Consider the straitjacket. It was invented in the early 18th century in France as a way to stop people with mental disorders from hurting themselves. It does its job well, but a person in a straitjacket also loses the ability to do many other things, particularly creative tasks that require typing, drawing, manipulating objects, and so on.
Even the sanest of companies can unintentionally put themselves in a straitjacket that makes it hard for them to create high-potential new growth opportunities. Here’s how leaders unintentionally limit their innovation efforts.
1. Constrained by current capabilities. Companies often say they can’t do something because it is beyond their core capabilities. To consider the ridiculousness of this statement, imagine Mark Zuckerberg in his dorm room saying, “I can’t build Facebook because it is outside of my core capabilities.” Remember how Howard Stevenson from Harvard defines entrepreneurship: “the pursuit of opportunity without regards to resources currently controlled.”
2. Stymied by fear of cannibalization. Many companies act as if they have a degree of omnipotence. That is, their decisions, and their decisions alone, drive customer action. It would be nice to be able to control cannibalization, but the reality is that cannibalization happens. The operative issue is whether a company participates in the process or not. Remember, truly innovative ideas often grow markets. At the margins, the Apple iPad has surely caused Apple to lose a few profitable notebook and laptop sales, but the category growth has made it clearly worth it.
3. Stopped by dread of dilution. When a company is stable, a new idea’s gross margins are a useful thumbnail guide for whether it is a good idea or not. Prioritizing ideas that boost margins over those that dilute them makes sense. However, in changing environments, companies that avoid considering dilutive offerings miss opportunities to explore new business models that could actually produce more attractive free cash flows — just in very different ways. Newspaper companies with 30 percent operating margins naturally looked with some degree of skepticism on lower-margin online models (Jeffrey Zucker from NBC Universal famously described the challenge trading analog dollars for digital pennies). But with the right business model, those lower-margin models can produce real profits.
Scott D. Anthony is managing partner of Innosight.