So what are the rules for ‘natural innovation’ and how can they be applied in today’s world?
Patience
Contrary to popular belief, eureka moments are rare. In fact, studies show that innovation rarely comes in a blinding flash of insight, but more often as the result of a steady stream of improvements that follow a hunch or gut instinct otherwise known as simple intuition. So innovation actually is a function of sheer effort and resource – something that should immediately place larger firms at an advantage. As mentioned earlier, natural selection takes this to extremes and bets on every outcome – a luxury beyond the practical realities of business.
Nevertheless, many large firms have a huge number of formal and informal innovation initiatives underway across their businesses. And yet it is surprising just how uncoordinated these efforts actually are in many cases. This is because innovation is part of every business process and so initiatives tend to spring up in haphazard ad-hoc ways, with different objectives, different methods and different reporting lines. On top of this, and somewhat ironically, innovation can often be seen as something that just gets in the way of the daily running of the business and so all too easily gets marginalised.
Without change there can be no innovation
The title of Richard Dawkins’ book, The Blind Watchmaker, says it all. Nature doesn’t have an ultimate objective, she simply wants to make things better. Key to this is having as many throws of the evolutionary dice as possible and this is just as true for promoting natural innovation in larger firms. The trick, though, with only limited dice throws available, is knowing when and where to throw them.
A good starting point is to look at where the interaction with your customers is most frothy as this often indicates dissatisfaction with the status quo on one, either or both sides. Another is to look at new areas adjacent to the current business, whilst a third, although less dynamic approach, is to look at new entrants into a relevant market.
What is then needed, as in nature, is a mechanism to simplify, direct and focus there efforts in order for large firms to leverage their size and resources. Key to this is communicating these directions of travel repeatedly to all parts of the firm. This allows the varied innovation activity dispersed around the firm to coalesce around a small number of goals so that their combined expertise can be amplified. It is equally vital, therefore, that these different groups are in regular contact with each other. The sad truth, however, is that in many cases they are not even aware of each other’s existence.
In this way, a firm might decide that its key directions of travel are a new asset class, a new area of workflow or the application of a specific new technology to an existing business line. This drumbeat can then be picked up by the firm’s technical, commercial and business thinkers and turned into incremental, innovative – yet directed – evolution. This approach allows self-direction to come into play, but without interfering or trying to bully the delicate innovative process itself.
Having decided on the directions of travel it is essential to try and think concurrently about all aspects of the problem domain – new technical approaches, deployment strategies and commercial models – rather that force new ideas through existing constructs. Perhaps counter-intuitively, simply asking for things to be done differently is a great way for large firms to boost innovative progress in these areas. Smart people work for large firms too, and so by allowing them to work unconstrained when it comes to innovation, they can be just as insightful or creative as their peers in the Silicon Valleys, tech roundabouts and other such hangouts.
Nature doesn’t care where innovation comes from
Many large firms think of innovation as something they either do themselves or buy in through acquisition. And yet nature is full of symbiotic relationships where two seemingly diverse species find a way to cooperate to their mutual benefit. These relationships are strong and enduring because they work better at solving a problem than either could on its own and so provide an evolutionary shortcut to more efficient or better outcomes. The global finance industry is ideal for this type of cooperation as it throws up significant compliance, brand, information security, regulatory and other highly challenging barriers to small firms seeking to make headway. These are all issues that, by definition, the large dominant firms will have satisfactorily solved for already.
This theme was explored in my previous paper, Innovation Ecosystems, in which I discuss how large firms can create a lens that focuses innovation on their established customers and so is an essential aspect of the naturally innovative firm. Key to their success is to avoid the tendency to become precious about innovation or where it comes from. If a new idea works and improves the customer experience, then that is all that should matter. This is especially true of emerging or growth categories as shipping early is vital. It may also be that the category turns out to be less glamorous than at first thought, and so whilst this is a less desirable outcome, it is better for both parties to discover this early and move on to other projects.
Rewarding success and failure
Mother Nature has plenty to teach us about rewarding success and failure. All too often in large firms, new business ideas that fail either tarnish their owner’s reputation or, worse still, are dressed up as ‘successes’ in order to appease senior management.
Mother Nature is ruthless in condemning failure but she doesn’t measure it with spreadsheets, quarterly sales forecasts, shipment units or the other metrics executives use to run existing business lines. Instead the measurement is far more subtle, more qualitative and, crucially, happening all the time. The lesson here is that the measurement for success of any new innovation needs to be performed more regularly and focussed around the dynamics of what is happening across the complete category. Yesterday’s competitor maybe tomorrow’s customer or partner in the fast-moving world of emerging and growth categories. Winning requires flexibility.
Obviously winning in business overall is just as much about execution as it is about strategy and execution requires precise measurement in order to be effective. The trick is in treating those areas previously identified as “directions of travel” differently, by being prepared to try, to fail, to change course and then to try again.
Goals and targets for innovation do not have to be woolly, but they do need to be more incremental and reviewed more regularly along the journey. For example, “grow sales by x percent per quarter” or “reduce operating expenses by y percent” are fine for established business lines, but they won’t work for innovation. So, “prove the efficacy of the core business idea to 5 potential customers” or “build a prototype in a new technical infrastructure” might be better targets. This highlights another challenge of innovation in large firms. Because it is not associated with the same rigorous metrics, it can all too easily become trivialised or seen as somehow not being part of the real business. In fact, the opposite is true, as without innovation no organisation can continue to dominate.
Just as in nature, some new ideas will fail. In fact more will fail than succeed which is why a granular approach works best. Knowing whether an idea has failed or not is particularly difficult with innovation, but if the directions of travel have been set correctly, then is some sense there is no failure, just steps on the journey.
Conclusion
Just because a firm is small it doesn’t mean that it is inherently better (or even good) at innovation. And yet the traditional rules of successfully deploying new fintech do seem to favour smaller firms. Rather than try to beat the little guys at their own game, however, there is another approach for larger firms that operates with different rules and reflects some of the unique challenges of the financial markets industry. These borrow from the principles that make natural selection such a powerful, innovative force and allow large firms to leverage their weight and resources.
Only time will tell if ‘natural innovation’ will prove to be the answer for larger firms, but it does offer an approach that plays to their strengths rather than those of the fintech newcomers.
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Natural Innovation: A Theory Of Innovation For Larger Firms In Financial Markets
