The most important question facing business leaders is simply this: Can your company invest in innovations that cannibalize its core products while exceeding quarterly financial targets? It must do the former to survive as its core markets decline and continue to do the latter to boost its value to investors.
Sadly, the models proposed for accomplishing these goals leave something to be desired. The late Harvard Business School professor Clayton Christensen proposed that companies should respond to disruptive technologies by setting up a separate subsidiary and charging it to compete with the parent. HBS professor Michael Tushman advocates creating an ambidextrous organization that can both exploit current opportunities and extend into new ones.
There is scant evidence that these approaches produce sustained, rapid revenue growth. Indeed in 2001, separate subsidiaries that Christensen advocated -- such as CNN.com to Walmart.com -- were dissolved. Tushman cited Gannett's ambidextrous creation of USA Today as a standout example. Sadly, Gannett was swallowed up in November 2019 by New Media.
This year I have been analyzing rapidly growing publicly traded technology companies to find out which ones have sustained the fastest growth over decades. I have been interviewing their executives to seek insights into what has driven their growth. And my conversations with other business strategy experts have highlighted other large companies that make room for innovation. All this week, I'll highest a key lesson showing how large companies are making room for innovation. First up:
1. Apply Core Strengths to Build New Products for Adjacent Markets.
In my view, the best way for a big company to make room for innovation is to design its first product so that it is inherently extensible to adjacent markets. Simply put, this means that the company's initial product can solve other problems that are widely shared by many different groups of customers.
What's more, that initial product design can be modified and sold without too much additional time and effort to new groups of customers or to satisfy different needs for their long-standing customers
A case in point is ServiceNow, a Santa Clara, Calif.-based supplier of workflow- management software that tops my list of fastest-growing technology companies -- with a 59.2 percent average annual growth and 44 percent stock price increase in the decade from 2010 to 2020.
ServiceNow's initial product -- developed by its founder and chairman, Fred Luddy -- helped IT departments streamline the workflow for responding to IT department service requests. After the initial success, ServiceNow has extended into adjacent markets -- including IT operations, human resources, and finance. ServiceNow has also added new technical capabilities -- such as artificial intelligence and analytics -- that customers wanted to buy.
Since companies use its product to streamline processes that cross different departments, ServiceNow's strength in workflow management makes it difficult for rivals that specialize in specific functions -- such as human resources (Workday) and sales (Salesforce) -- to copy its product.
As it aims to reach $10 billion in revenue, this 14,000-employee company sees growth potential from expanding to new customer groups (small and medium-size businesses), new geographies, and new vertical markets -- such as telecommunications, finance, healthcare, and manufacturing.
By combining an extensible initial product architecture with an evolving go-to-market strategy, ServiceNow is purpose-built to hire and motivate employees to innovate continuously to benefit customers.
W.L. Gore & Associates, inventor of Gore-Tex, has taken an analogous approach -- applying DuPont's invention of a chemical called PFTE to a very wide range of uses. In 1958, Gore and his wife started the company initially using PFTE to insulate wires and cables.
By finding numerous ways to use PFTE for everything from waterproof jackets to prosthetic blood vessels, the company became famous for its organizational process of breaking itself into 150-person operating units that come together in loose confederations to tackle specific projects and then disband, according to Bloomberg.
The privately held company has enjoyed modest growth. W.L. Gore reached $1 billion in revenue in 1996 and by 2019, its top line had increased at a 5.8 percent average annual rate to $3.7 billion, noted Bloomberg.
Tomorrow: How to drive employee innovation while beating ambitious short-term goals.