A HARVARD BU S I N E S S R E V I E W A N A LY T I C SERVICES REPORT

EMBRACING
DISRUPTION WITH
INNOVATION
Copyright © 2016 Harvard Business School Publishing.
SPONSOR’S PERSPECTIVE

Innovation at Our Core

Chief executives tell us that they feel great urgency to respond to market disruption
with innovation. KPMG’s recent CEO Outlook Survey reveals that 51 percent of CEOs
expect their top-line growth over the next three years to be five percent or less.
So, to stay competitive and keep shareholders satisfied, even highly successful
companies must consider innovation a business imperative.

First, let’s clarify what we mean by innovation. Although • A clear method of choosing whether to build, buy, or
many associate innovation with new technologies, forward- ally to expand our innovation ecosystem. The linchpin
thinking companies put equal emphasis on social change of our innovation approach is to build capabilities by
such as demographic shifts, evolving buyer behaviors, and tapping our top thinkers; market-leading Strategy
the communication preferences of millennials. Insights are Practice; Data & Analytics team; and creative labs. When
derived from ethnographic research that analyzes human market speed demands, we selectively buy capabilities
behavior. Corresponding innovations—new products, through strategic acquisitions. Additionally, we ally with
services, channels, or even business models—are brought the world’s best-known innovators, exemplified by our
to life through human-centered design thinking. key alliances with Oracle, Microsoft, and IBM Watson
(which enabled us to have first mover advantage in
Walking the walk. At KPMG, we don’t just advise clients
cognitive business solutions).
on how to embrace disruption with innovation, we’ve
embedded innovation into our own DNA. By creating a • Dedicated labs and alternative workspaces.
culture where it is safe to experiment and fail fast, the KPMG explores innovative ideas in three revolutionary
ideas we generate are inventive and bold, built by teams workspaces: (1) Innovation Labs, where we delve deeply
notable for their diversity of skills, thinking, experiences, into market disruptors and customer trends; (2) Ignition
and outlooks. One of our strategic priorities is Innovation Centers, cross-functional project spaces dedicated
at Our Core, which starts with our vision and strategy and to uncovering new technologies and transformation
forms the core of how our people think about themselves, opportunities; and (3) our Insights Center, which
their clients, and the firm. Most important, our innovation facilitates the visualization of future business uses of
efforts are managed with a tangible commitment and data and analytics. Many innovations are conceived in
hands-on role by senior leadership. these creative workspaces, after which they are scaled
by our business and deployed.
Some of the factors that distinguish KPMG’s culture of
innovation are: It is clear to us that companies must disrupt before they are
disrupted. What’s at risk is not just reputation but survival.
• A continuous sensory approach to monitoring a global
By accepting the reality of a vastly transformed market
network of political, economic, social, and technology
environment and taking steps to elevate innovation to a core
(PEST) sources for weak signals that could turn into
competency, businesses can thrive in an age of disruption.
disruptive trends. Business decisions are informed by
PEST insights and our trend indexes, which monitor
venture capital flow, startup launches, and new
Mike Nolan
technology investments. Our clients also benefit from
Vice Chair, Innovation & Enterprise Solutions
this rigorous approach of signal tracking leading to
KPMG
insight and then action.
EMBRACING DISRUPTION
WITH INNOVATION
Business leaders have long understood the power—and the threat—of disruptive Innovation is not a
innovation. As formally defined two decades ago by Harvard Business School
nice-to-have capability,
professor Clayton Christensen, the theory describes how a smaller company
with limited resources overtakes a larger competitor with a cheaper product or
but an imperative that
service, either by targeting the low end of the incumbent’s market or by reaching directly impacts brand
out to potential customers the incumbent has been ignoring. figure 1 The upstart perception and value,
then moves inexorably upmarket, ultimately threatening the industry stalwart. top-line growth, and a
Think Netflix overtaking Blockbuster, or Zipcar racing past traditional rental car
companies to lease vehicles by the hour.
company’s relevance—
and sometimes survival—
Today, as technology speeds the pace of change in industry after industry,
simply understanding how disruptive innovation works isn’t enough. CEOs must
in the marketplace.
position their companies to take advantage of innovation before they’re beaten
by it. That requires creating an environment, and processes, for searching out
and spotting disruptive innovation when it arises, defending their turf where
it is threatened, and, just as importantly, ferreting out opportunities to employ
disruptive innovation themselves, beating would-be disrupters to the punch. In
short, innovation is not a nice-to-have capability, but an imperative that directly
impacts brand perception and value, top-line growth, and a company’s relevance—
and sometimes survival—in the marketplace.

THE CHALLENGE: WHERE TO START, AND HOW

Managing disruptive innovation isn’t always complicated. In some cases, it can be
as simple as acquiring the company doing the disrupting. In 2014, Spanish bank
BBVA saw what fintech startups were accomplishing in the financial services
industry and decided to scoop up fast-growing Simple, a Web-based virtual
bank headquartered in the U.S.1 More recently, Unilever PLC agreed to buy Dollar
Shave Club for $1 billion after seeing how quickly the startup, an online seller
of discount disposable razors, was eating away at the market share of Procter &
Gamble’s Gillette unit.2

At the opposite extreme, managing disruptive innovation can require a wholesale

reinvention of a company’s core business model, or a component thereof, perhaps
after a long period of retrenchment. That’s what happened at IBM in the 1990s,
when CEO Lou Gerstner redefined the company as a software and services player
after it had faded in the PC and disk drive businesses it had largely invented. It may
be happening at IBM again today as the company further deemphasizes its history
and ties its future to cognitive computing. Note that transformative transitions
such as IBM’s used to take 10 to 20 years to play out. Today the timeline is much
shorter; some companies are transforming through disruptive innovation in as
few as two to five years.

1 “BBVA Acquires Simple to Accelerate Digital Banking Expansion,” BBVA.com, https://info.bbva.com/en/

news/economy/corporate/finance/bbva-acquires-simple-to-accelerate-digital-banking-expansion/.
2 Sharon Terlep, “Unilever Buys Dollar Shave Club,” The Wall Street Journal, July 20, 2016.

EMBR AC IN G D I S RU PT I O N W I T H I NNOVATI O N 1
 FIGURE 1
UNDERSTANDING DISRUPTIVE INNOVATION
Incumbent companies introduce products for the high end of the market, overshooting the
mainstream and low end of the market, and leaving an opening for disrupters to introduce
less-profitable products at the lower end of the market. Disrupters then move upstream to
challenge the incumbents.

HIGHER

PRODUCT PERFORMANCE
ND
HIGH E RKET
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AINI
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KPMG ANALYSIS CU MAINS
IN
A recent KPMG study of more than
400 U.S.-based CEOs found that 85 Y
OR
percent do not believe they have the ECT
AJ
TR
right amount of time to strategize TIV
E
about the forces of disruption and RUP
’S DIS D
innovation. And nearly 40 percent NT LOW ENRKET
RA MA
assess their approach to innovation EN
T OF THE OFITABLE
PR
LEAST
as unpredictable, siloed, and
outsourced—if they have an innovation
strategy at all. LOWER

TIME
SOURCE CLAYTON CHRISTENSEN INSTITUTE FOR DISRUPTIVE INNOVATION

Reinvention isn’t easy, of course. Occasionally the mark of a first mover, it is

more often a defensive move, and almost always comes with significant risk.
To avoid being forced down the reinvention path, companies need to create a
culture adept not only at spotting disruptive technology, but also—and perhaps
more importantly—at elevating innovation to a core competency. See sidebar:
In Focus: How AIG Is Creating a Culture of Innovation

Indeed, the most innovative companies ruthlessly foist innovation upon

themselves before others do it to them. Consider General Electric Co., whose
reputation for innovation stretches back to cofounder Thomas Edison. Today
GE’s many diverse operations include a $16 billion-plus business serving the oil
and gas industry, but the company is not content to merely tend that market.
It has simultaneously created a $6 billion-plus renewable energy business that
looks to the day when fossil fuels no longer play a dominant role in generating
the world’s energy.

Companies hoping to create a culture of innovation can start by defining what

innovation means to their organizations. In industries that have largely become

2 H A RVA R D B U S I N E S S R E V I E W A N A LY T I C S E RV I CES
commoditized, it might mean finding better, faster, more efficient ways of doing Once companies have
business. In others, it might mean focusing not only on making existing products
and services incrementally better, but also on developing new technologies or
defined what innovation
business models that can deliver products or services customers didn’t know they means to them, they
needed or never imagined they could afford. At insurer American International can start to develop an
Group Inc., it means both. “Our mission is to reduce fear of the future and innovation strategy—
empower our clients with our risk expertise and our financial strength,” says
a commitment to a set
AIG President and CEO Peter Hancock. “The insurance industry is a reflection of
society. What people fear today isn’t necessarily what they feared in the past or of coherent, mutually
will fear tomorrow. To the extent society is going through constant innovation, reinforcing policies
the insurance industry needs to innovate in parallel. Internally, meanwhile, there or behaviors aimed
are constant opportunities to improve the effectiveness and efficiency with which
at achieving a specific
we are able to meet our clients’ needs.”
competitive goal.
Once companies have defined what innovation means to them, they can start
to develop an innovation strategy—a commitment, as Harvard Business School
professor Gary Pisano has explained it, “to a set of coherent, mutually reinforcing
policies or behaviors aimed at achieving a specific competitive goal.” The idea, Pisano
writes, is to “promote alignment among diverse groups within an organization,
clarify objectives and priorities, and help focus efforts around them.”3

Here are three broad steps toward getting there.

STEP 1
KEEP YOUR HEAD ON A SWIVEL
Innovation can pop up anytime, anywhere, but it’s not always easy to spot. While
new technology is often at the root of disruption, it can take years before viable
business models emerge around that technology and drive real change. Mobile
phones and location-based services were technology innovations, for example,
but it took Uber’s business model to combine them and throw the car service
industry into turmoil. In addition, political, economic, and social developments
can roil markets and create new opportunities and challenges.

Companies that hope to keep pace need the ability to find and assess potentially
disruptive innovations before they begin chipping away at market share. One way
to do that is by appointing a senior-level executive to oversee innovation activities
without having to be distracted by other day-to-day responsibilities. Another is
by creating and empowering cross-functional teams to conduct ongoing research
aimed at identifying potential new disruptors.

A consistent and organized effort to spot innovation early is important simply

because doing it well can be difficult. In the same article announcing Unilever’s
acquisition of Dollar Shave Club, The Wall Street Journal reported that Procter
& Gamble executives had privately acknowledged being caught off guard by
the startup’s success, with one unnamed insider conceding that “we weren’t
necessarily having the right conversation around what might disrupt us.”4

3 Gary P. Pisano, “You Need an Innovation Strategy,” Harvard Business Review, June 2015.
4 Sharon Terlep, “Unilever Buys Dollar Shave Club,” The Wall Street Journal, July 20, 2016.

EMBR AC IN G D I S RU PT I O N W I T H I NNOVATI O N 3
Because it is hard to Now, another Journal article reports, P&G’s 7,500-person R&D operation is
remaking itself, hiring more industrial designers and looking to hire more people
break the mold of a legacy with entrepreneurial backgrounds.5
business, companies often
Casey Carl, chief strategy and innovation officer for retailer Target Corp., agrees
find it more difficult to that companies can’t allow themselves to become too insular. “Organizationally,
identify opportunities to we have to be incredibly external facing and incredibly open to adaptive learning,
disrupt their own markets always actively listening and surveying the external landscape,” Carl says. As part
than to spot disruptive of its efforts on that front, Target fosters relationships with venture capital firms
and investment banks to monitor and understand what’s in their investment
innovations outside the
portfolios. It also has created a digital advisory council whose members, drawn
company. largely from the tech community, meet regularly with Carl and other Target
leaders to help inform and shape the company’s digital strategy.

Because it is hard to break the mold of a legacy business, companies often find
it more difficult to identify opportunities to disrupt their own markets than to
spot disruptive innovations outside the company. It’s not impossible, though. In
2002, Dow Corning altered the market for commodity silicones when it created
Xiameter, an online, lower-cost, self-serve sales channel and brand for B2B
customers who knew what they wanted to buy and were happy to forgo research
or technical support in order to get it at a cheaper price.6 Dow Corning didn’t
abandon its traditional customers—it continued to serve them as it always
had—but it created a new way to attract those who might have been priced out
of its traditional distribution model. Elsewhere, Netflix drove a nail in the coffin
of DVD rental stores in 1998 when it started renting DVDs via mail service, and
later did it again when it started streaming content to customers’ homes via the
internet. Today Netflix is helping to disrupt the television broadcasting business
by producing its own original programming.

Assessing Threats—and Opportunities

A big part of the innovation challenge is determining which innovations have
the power to be truly disruptive. Accurate assessments are important not only to
making sure companies don’t overlook potential disrupters, but also to making
sure they don’t overestimate threats and so embark on costly changes, such as
price cuts, that unnecessarily hurt their margins.

In their Harvard Business Review article “Surviving Disruption,” Christensen and

venture capitalist Maxwell Wessel suggest a three-step process companies can
use to assess the threat of potential disrupters. It begins with identifying the
strengths of the disrupter’s business model, identifying your own company’s
relative advantages, and, finally, evaluating “the conditions that would help
or hinder the disrupter from co-opting your current advantages in the future.”7

5 Sharon Terlep, “P&G Seeks to Turn Tide by Direct Selling,” The Wall Street Journal, July 20, 2016.
6 Linda Rosencrance, “Dow Corning Launches Business Unit, Xiameter,” Computerworld, March 14, 2002.
See also: Bob Frei and Chris Musso, “Innovation in Chemicals: An Interview with Dow Corning’s CEO and
CTO,” May 2011, McKinsey & Co.
7 Maxwell Wessel and Clayton M. Christensen, “Surviving Disruption,” Harvard Business Review,
December 2012.

4 H A RVA R D B U S I N E S S R E V I E W A N A LY T I C S E RV I CES
That’s largely the approach employed at GE. Vic Abate, GE’s chief technology The more broadly and
officer, says he pushes engineers and researchers in the company’s 10 Global
Research Center locations around the world not only to think at the nanoscience
deeply executives
level when pursuing and evaluating innovative ideas, but also to simultaneously understand how technology
consider the ecosystems in which GE competes. He then challenges them to can transform not only the
figure out how GE’s products compare against those of its competitors, identify products but also the whole
the technology advantages GE enjoys, and find a way for GE to leverage those
ecosystem, the better
advantages to offer products that better meet customer needs. The more broadly
and deeply executives understand how technology can transform not only the
equipped they’ll be to spot
products but also the whole ecosystem, Abate adds, the better equipped they’ll important innovations
be to spot important innovations and adjust their strategy accordingly. “If you and adjust their strategy
understand how technology and the whole ecosystem works, you have a bigger accordingly.
seat at the table.”
Vic Abate, CTO, GE
“Our leadership team spends a lot of time talking about what early signals of
disruptive innovation mean for our agenda,” says Target’s Carl. “Some innovations
are just really cool, so we watch them. With others, we may see a great opportunity
and decide to accelerate what we’re already doing to take advantage of them.
Others suggest we need to pivot and maybe go in a different direction. But we
always bring it back to our strategic agenda.”

At AIG, Hancock says that when his team looks at disruptive companies that
may be small but are attacking parts of AIG’s value chain, he encourages them
to focus not on the reasons the disruptors might fail, even though most will, but
rather on the reasons why one of them might succeed—and then to embrace
those companies’ innovations in a form of self-disruption. “I think the height of
hubris for a large company is to assume that all those small disrupters will fail,”
Hancock says. “By the time one succeeds, it’s too late.”

STEP 2
BUILD, BUY, OR PARTNER
Once companies have grasped the disruptive forces at work in their industries, they
can begin to assess how those forces are impacting, or could impact, their specific
businesses and operating models. Then, they can begin to reshape themselves in
response. Inevitably, this will require making a decision about whether to build
out a new technology or business model themselves (innovate organically), buy
the technology or business model (acquire innovation inorganically), or ally with
someone else (partner with another innovator).

These options are not mutually exclusive, and often a mix of two or all three will
be the right answer. Ultimately, companies need to develop the strategic agility
to arrive at the optimal solution quickly. “It’s a very situational decision,” says
Target’s Carl. “The better we are at seeing around corners, the more optionality
we have around our suite of choices: buy, build, or partner.” See sidebar: Choosing
a Route to Growth: Organic vs. Inorganic

EMBR AC IN G D I S RU PT I O N W I T H I NNOVATI O N 5
 Innovating Organically
To bolster their internal innovation capabilities, companies may want to slice
off a segment of their R&D resources to act as a startup within the company,
where they may wind up disrupting their own industry. New York-based IBM
famously built a team in Boca Raton, Florida, for example, to create the first
IBM PC in the early 1980s.8 More recently, a GE team in China developed an
inexpensive, portable ultrasound machine using a laptop computer equipped
with special peripherals and software. That innovation not only found a home
in China, but also went on to have application in the developed world.9

While considered desirable, locating research activities away from core operations
can nonetheless present researchers with a difficult balancing act, says David
Eun, president of Samsung Global Innovation Center. That center, which supports
the company’s consumer electronics and mobile device businesses, pursues
innovation from offices in four cities around the world: San Francisco, New
York, Tel Aviv, and Seoul. “You can’t get in the way of people working on core
products, because anything that isn’t core is a distraction or a threat or both,”
Eun says. “However, you can’t be so far away that people forget about you.
You want to be at arm’s length from the mother ship, but still close enough to
influence and navigate the mother ship.”

Not all companies have the scale and resources of Samsung Electronics or a GE,
of course, and so may not be able to operate stand-alone innovation centers.
But GE’s ultrasound example illustrates the potential creativity that can be
unleashed when employees are given the freedom to explore new ideas absent
day-to-day oversight from corporate headquarters.

Innovating Inorganically
In instances where companies lack the internal resources to capitalize on an
KPMG ANALYSIS innovative idea or trend on their own, they need a mergers and acquisitions strategy
An Appetite for M&A that lets them take advantage of disruptive capabilities outside the company. This
In a recent survey of CEOs by KPMG, means buying those capabilities, investing in them, or simply partnering with a
44 percent of the respondents said disrupter to co-opt their technology or business model. Walt Disney Co. effectively
they would form new partnerships/ pursued the latter approach in the mid-1990s when it signed a distribution deal
alliances to accelerate execution of their with Pixar, ultimately giving Disney a string of successful Pixar movies to market
strategy, behind only “hire new talent.” at a time when its own animated films weren’t winning the box office wars.10
In addition, 65 percent confirmed that When Target decides whether to build, buy, or partner, Carl says, the company
“collaborative growth” (utilizing external first looks to see whether there is anybody already functioning as a leading player
partnerships or collaboration with other in the space. By way of example, he points to Target’s sale of its pharmacy and
firms) will be a key ingredient in driving clinic businesses last year to drugstore chain CVS Health, which in turn contracted
shareholder value. to operate pharmacies within Target stores. “We aligned with CVS because we
shared a similar philosophy about the importance of wellness, and they clearly
were the leader in that space,” Carl says. “It was a great association for our brand
to have them running pharmacies in our stores.”

8 “The Birth of the IBM PC,” IBM.com, https://www-03.ibm.com/ibm/history/exhibits/pc25/pc25_birth.html.

9 Jeffrey R. Immelt, Vijay Govindarajan, and Chris Trimble, “How GE Is Disrupting Itself,” Harvard Business
Review, October 2009.
10 Bruce Orwall and Nick Wingfield, “The End: Pixar Breaks Up with Distribution Partner Disney,”
The Wall Street Journal, January 30, 2004, http://www.wsj.com/articles/SB107541081328315628.

6 H A RVA R D B U S I N E S S R E V I E W A N A LY T I C S E RV I CES
CHOOSING A ROUTE TO GROWTH: ORGANIC VS. INORGANIC

Where innovative technologies or business models Companies should stage their

offer the potential for growth, companies must decide investments and be ready to pivot
whether to develop them organically in-house or
as they learn.
inorganically via a merger, acquisition, or partnership.
The decision process often starts with determining
which factors are likely to drive growth in the new Regardless of the approach, smart companies
business or market, and assessing the potential will want to go into such decisions recognizing
value of the opportunity. Companies then need to they are more likely to be wrong than right about
undertake a clear-eyed assessment of their own the opportunity they’re pursuing, at least initially,
competencies and assets to see whether they are simply because the trend they are responding to will
well-positioned to take advantage of the opportunity continue to evolve. Accordingly, rather than place a
organically. Inorganic growth makes sense if they are large bet and commit themselves to one direction
not positioned to go it alone, or if a market is evolving or expected outcome, companies should stage their
so rapidly that it makes a fast response critical. investments and be ready to pivot as they learn.

By contrast, Carl says, Target had not identified any lead players in the Internet
of Things space when, in 2015, it opened Target Open House, a 3,500-square-foot
space in San Francisco where the public can explore how devices like door locks
and thermostats are being connected with each other and with homeowners via
the internet. “We had the capabilities to build a physical experience, so we did
that—and pulled some partners in on an agency basis,” Carl says. “With each
opportunity, we have a unique conversation and assess how it matches around
our current capability set and our strategic positioning. We ask if it makes sense
for us. If it’s super interesting, but we’re not well-positioned to do it ourselves,
we ask whom we should partner with to really help accelerate our efforts.”

STEP 3
SET THE RIGHT TONE FROM THE TOP
Leadership from the C-suite is always important to driving change, and innovation
is no exception. At Samsung Electronics, says Eun, senior leaders regularly remind
employees that the company cannot afford to rest on its laurels. “It’s a constant
theme,” Eun says. “The glass is always half empty. It’s a slightly different version
of [Intel Corp. cofounder] Andy Grove’s mantra that only the paranoid survive.
We’re in relentless pursuit of making sure we’re ahead of not just the competition,
but also of ourselves. That is communicated right from the top.”

CEOs can help on this front by making employees comfortable with innovation.
This means motivating employees to pursue new ideas, technologies, and business
models, and making it acceptable to fail fast in the name of finding a true solution.
It also means making sure they understand that failure is not an automatic threat

EMBR AC IN G D I S RU PT I O N W I T H I NNOVATI O N 7
IN FOCUS: HOW AIG IS CREATING A CULTURE OF INNOVATION

American International Group Inc. president and delight customers—much as Starbucks did when
CEO Peter Hancock takes innovation seriously. Five it reinvented the coffee shop by offering a mix
years ago, even before taking over as CEO of the of coffee, free Internet service, and comfortable
giant insurer, Hancock created the position of chief chairs. At AIG, a similar example can be seen in the
science officer at AIG. That person leads a diverse company’s new approach to the large-limit property
team of researchers who leverage partnerships insurance marketplace. For the past four years, the
with academic institutions, think tanks, and other company has been supporting that business with
research-minded, for-profit organizations to a team of more than 500 property engineers, who
improve AIG businesses and processes and uncover provide consulting advice on construction methods
opportunities to innovate. Meanwhile, AIG also that mitigate exposure to quake, flood, wind, and
leverages insights from its 90 million customers fire risks at very large industrial installations. “That
around the world, not only by reviewing and advice was already available from independent
analyzing the roughly one million claims it pays each consultants,” Hancock concedes. “But what’s new
month—what went wrong and why—but also by is that it’s now integrated with our willingness to
forming and hosting client councils that allow AIG put up as much as $2.5 billion dollars of insurance
and its customers to share insights directly. capacity per building. This integrates our balance
“We don’t have to be the source of all the good sheet strength with scientific consulting advice,
ideas,” Hancock says. “We just need pathways to and it’s the combination of the two that creates a
collaborate with the best thinkers in the world, customer experience that’s quite different.” Since
whether they be Nobel Prize winners—we’ve been adopting this approach, Hancock says, AIG has won
collaborating with three in the past five years—or more than 400 mandates in the large-limit property
the very broad and diverse span of clients we do insurance market, where it’s also enjoyed a much
business with, which ranges from 98 percent of the higher persistency of policy renewals and better
Fortune 500 and the equivalent in Europe to small underwriting results.
farmers in India.” Today AIG is embracing innovative new ways to
To nurture an innovative spirit in the farthest reaches collect data from new sources, exploring the use of
of the company’s ranks, Hancock pushes AIG to sensors and the Internet of Things and employing
give its employees a mission they can believe in. “In a fleet of drones to assess loss sites, and looking
financial services, innovation has, in the relatively to marry that data with existing internal and
recent past, gotten a bad name because, I think, it external data sources to create new insights and
was misused,” Hancock says. “We’re making it very opportunities for the company. “There are certain
clear that our culture is to use innovation to help enduring aspects of insurance that will not change
our clients. That attracts a certain type of individual; over the decades or centuries,” Hancock says.
they’re mission-driven, and prioritize innovation “But there are ways in which to pool risk that
projects that add to long-term, repeatable earnings— are very different, that cut across conventional
which in turn come from satisfied clients.” boundaries, that exploit microsegmentation, that
are feasible and cost-effective today in a way that
Hancock notes that innovation doesn’t have to was unthinkable before.”
lead to wholly new products or services but can
combine existing ones in new configurations that

8 H A RVA R D B U S I N E S S R E V I E W A N A LY T I C S E RV I CES
to their careers. (At Google parent Alphabet Inc., employees of its X research
lab are eligible for bonuses for pulling the plug on a project they conclude is no KPMG ANALYSIS
longer promising.11) Eighty percent of CEOs surveyed
recently by KPMG believe they are
CFOs can contribute to an innovation culture by identifying metrics for measuring capable to highly capable of fostering a
success or failure, clearly defining the organization’s tolerance for risk, and culture of innovation. A key component
finding creative ways to fund innovation initiatives. CIOs and CTOs can help of this is creating an environment
employees understand how they can use data, analytics, and cognitive computing where failure and experimentation
to spot emerging trends and assess their disruptive potential. In short, all C-suite are encouraged. Sixty-eight percent
executives can function as allies to the innovation effort. “I have a senior title, but of CEOs believe their companies are
I’m just one person,” notes Samsung’s Eun. “To have others at the senior-most capable to highly capable of creating
level of the company providing support is really crucial.” such an environment.
Sean Belka, senior vice president and director of Fidelity Labs, the research and
development arm of the diversified financial services company Fidelity Investments,
says employees at his company “are expected to innovate as part of their jobs,” and
that “this is communicated from the very top.” He notes that the group he leads
was started by Fidelity Chairman Edward C. Johnson III in 1998, and that Fidelity
CEO Abigail Johnson also is “very focused on innovation.” Mistakes and restarts
are expected, he says. “In the language of startups, we may start somewhere and
pivot two or three times because we’ve learned that something about our original
hypothesis was not accurate. We’re pretty open to that.”

Belka adds that the 100-plus software developers, designers, researchers,

product managers, librarians, and “entrepreneurs in residence” at Fidelity
Labs pass this kind of leadership down through the ranks of the organization
by providing the tools, techniques, and research their business-unit colleagues
need in order to innovate. Fidelity Labs also runs “hackathons” in which Fidelity
employees from around the world assemble into teams for two days to develop
new ideas, build prototypes of the product or service they’ve imagined, and
pitch it to their colleagues and Fidelity executives. Like the innovation team at
Target, Fidelity Labs personnel also spend a lot of time in the entrepreneurial
community and have forged relationships with venture capital firms, startup
companies, and academics.

In driving the innovation agenda, C-suite executives should encourage researchers

and business unit leaders to pursue a balance of long-term and short-term projects.
Some should be incremental and close to the company’s core operations, designed
to maintain competitiveness. Others should look further out, aimed at engaging
new customers or inventing additional things to sell to current customers. Still
others should be step-out opportunities where the company is designing new
business models for new customers and new offerings. The balance across these
differing types of innovation may shift based on market conditions.

11 Conor Dougherty, “They Promised Us Jet Packs. They Promised the Bosses Profit,” The New York Times,
July 23, 2016.

EMBR AC IN G D I S RU PT I O N W I T H I NNOVATI O N 9
Be willing to incubate new Other keys to creating a culture of innovation include:

technologies or business • Making sure any teams tasked with identifying potentially disruptive
models outside the core innovations are truly cross-functional, staffed with people from all the
company’s key disciplines.
business, even if the new
technology or business • Keeping innovation teams connected to the core business. While companies
may fund early-stage innovation centrally, they will want to graduate completed
model yields lower margins
capabilities to the business that will own them. That’s exactly what happens at
than do legacy businesses. Fidelity, says Belka, who notes that promising ideas developed within Fidelity
Labs get pushed into the business units for further refinement, drawing on the
deep understanding business unit leaders have about what their customers
want. At GE, Chairman and CEO Jeff Immelt has sought to tie innovation more
closely to the company’s core businesses, Abate says, by filling more of GE’s
officer ranks with engineers. Abate, a mechanical engineer by training, was the
first such promotion by Immelt. Prior to taking over the CTO post, Abate had
been president and CEO of GE’s Gas Power Systems, and before that president
and CEO of its Renewable Energy business.

• Assuring the active engagement of senior leaders. At GE, Abate oversees an

Engineering Leaders Council in which he and the company’s leading engineers
meet quarterly to discuss and review innovation initiatives and opportunities,
and to share information about their work that could be transferred across GE’s
businesses. They also plan the rotation of staff engineers between business
units and different types of engineering assignments to facilitate knowledge-
sharing and career growth. In addition, each of the various GE business unit
leaders and their lieutenants meet quarterly for a couple of days to talk about
technology, products, and services at the company’s Global Research Center
in Niskayuna, New York.

• Being willing to incubate new technologies or business models outside the core
business, even if the new technology or business model yields lower margins
than do legacy businesses. Again, companies either disrupt themselves or have
it done for them. “Within Fidelity Labs, we’re always looking for opportunities
adjacent to our core business,” Belka says. “We’re trying to do things for which
the market isn’t there yet.”

• Identifying and mitigating the governance risks associated with innovation,

and maintaining the right balance of controls to encourage efficient
experimentation. Specifically, companies should establish deliberate milestones
with tangible go/no-go criteria for moving from one stage of development to the
next. These milestones should be reviewed and evaluated by an independent
executive team. “We have very precise approaches and methods on go/no-go,
including set milestones for what we expect each startup’s evolution to be like,”
says Samsung’s Eun. “Yes, we want people to be open, flexible, and iterative,
but that doesn’t mean we’re not buttoned up. We want to be thoughtful and
rigorous about the decisions we make. In fact, we have to be—even more so
than other groups—because of the nature of what we’re doing. It’s all new, and
it takes time to get tangible evidence that something has been truly disruptive.
So along the way we want to make sure people aren’t doubting how responsible
we’re being with the capital and the trust they’re putting in us.”

10 H A RVA R D B U S I N E S S R E V I E W A N A LY T I C S E RV I CES
IN FOCUS: TARGET RECLAIMS ITS INNOVATION ROOTS

Discount retailer Target Corp. began life as a disruptive innovation. The chain
was launched in 1962 by department store retailer The Dayton Co., which
recognized that consumer buying patterns were changing in ways that would
test the sustainability of traditional department stores. Its experiment with
Target—launched the same year Walmart and Kmart were founded—proved
wildly successful. By 1975, Target would become the top revenue producer in
what was by then Dayton-Hudson Corp. Over the ensuing decades, Target largely
maintained its reputation for innovation. In 1988, for example, it became the first
mass merchandiser to introduce UPC scanning at all of its stores and distribution
centers. By the start of the new millennium, however, Target was directing the
bulk of its investment activity to building new stores, and paying a little less
attention to innovation.
“We became far too insular as an organization,” says By the start of the new millennium
Casey Carl, a longtime Target executive who was Target was directing the bulk of its
named to the newly created post of chief strategy
investment activity to building new
and innovation officer in late 2014. “We didn’t invest
enough in new areas of growth and the capabilities
stores, and paying a little less attention
necessary to bring those to life successfully, whether to innovation.
that was forays into international retailing or the
importance of data security and privacy. We had some tough days as it relates to
not investing in those capabilities early enough to understand their importance to
our strategic agenda and what they meant to our guests.”
More recently, the company has reembraced its innovation roots. In 2013, the
company introduced Cartwheel, a digital coupon app developed in partnership
with Facebook that Target says has saved its in-store customers approximately
half a billion dollars. That same year, it opened the Target Technology Innovation
Center in San Francisco to help it find and test new technologies, including things
like augmented reality, wearable computing, and gamification.
“We’ve recognized we need to be far more externally facing, far more effective
at seeing around corners to position our organization strategically for what’s
coming, take full advantage of that, and create new levers for growth,” Carl says.
“This is paramount for the retail industry as a whole. The U.S. market is growing
quite conservatively, so the only way to grow market share is by stealing it from
competitors or creating entirely new business models. We need to do that through
new platforms, channels, and services.”
continued on next page

EMBR AC IN G D I S RU PT I O N W I T H I NNOVATI O N 11
Target, continued

Recently, Target teamed with Techstarts, a tech In service of that mission, Casey assigns team
startup accelerator, to provide funding and members to work with Target’s merchandisers
mentoring for small companies developing retail and marketers to build product assortments, and
technology.12 The company also is working on a with suppliers to create promotions and deals—
concept store where, it has been speculated, it may activities aimed at deepening relationships with
test the use of robots in a retail environment.13 Just existing customers and attracting new customers.
outside Boston, Target has established the Future But he also has built up a small stable of in-house
+ Food coLab in the Kendall Square tech district, innovators, including a trio of “entrepreneurs
a partnership with design firm IDEO and the MIT in residence” who are specifically focused on
Media Lab that is exploring innovations in food. And launching new businesses. “These people all have
in San Francisco, Target has launched Target Open strong backgrounds as ‘intrepreneurs’ within large
House, a 3,500-square-foot smart house open corporations or as entrepreneurs, with proven track
to the public. In a variety of ways, the company is records starting new businesses multiple times over,”
focusing on how trends in artificial intelligence, Casey says. “They’re engaged in specific bodies of
social media, and the Internet of Things will impact work: the future of food, looking around corners
its business near-term and farther into the future. to where the grocery industry is going, where the
“The creation of my position a little over a year and agricultural industry is going, and positioning Target
a half ago was a great signal to the organization and to take advantage of new business opportunities
the external community about the importance of related to the trends they are able to identify.”
innovation at Target,” Carl says. “It’s not just that All this, Carl suggests, is a process. “We are still very
we have that position, which reports directly to the much on the journey, building up new muscles for
CEO and is tasked with driving innovation, but also the organization,” he says. “We by no means have it
that it’s coupled with strategy. Our mission isn’t to all figured out. We have a lot of irons in the fire, but
go explore passion projects, but instead is linked to they are all strategically positioned.”
our strategic agenda. How do we create new growth
platforms to help extend our core business, but also
help diversify our overall business portfolio?”

CONCLUSION
Faced with a potentially disruptive innovation, weak companies often succumb
to analysis paralysis as they try to define the future with perfect certainty before
acting. Others struggle to see the world without the lens of their current business
model in place, as Blockbuster did when it couldn’t see how to build a Netflix-like
business without using its stores as an asset and differentiator. For companies like
these—indeed, for any company that has yet to establish an innovation culture and
build an innovation strategy—it is important that they do so quickly. Companies
that embrace the challenges and opportunities presented by disruptive innovation
are the ones that will be best positioned to build sustainable businesses.

12 Phil Wahba, “Target Wants to Turn Minneapolis into a Mini Silicon Valley,” Fortune, September 20, 2015.
13 Jacob Siegal, “Target Plans to Test Robot Workers at Its Upcoming Concept Store,” September 21, 2015,
http://bgr.com/2015/09/21/target-robot-workers-concept-store/.

12 H A RVA R D B U S I N E S S R E V I E W A N A LY T I C S E RV I CES
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