How A Board Can Encourage A Company To Innovate

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A board should help a company chart out its future, constantly reminding its senior executives that the future is by definition different than its past and that its business model isn't immortal. They can and must be continually reinvented

business plan

“The board of directors’ most important function,” William Wommack wrote in The Harvard Business Review nearly 40 years ago, “is to approve or send back for amendment management’s recommendations about the future direction of a corporation.”

That corporation, Wommack continued, should have a clearly articulated set of objectives and a strategic philosophy to achieve them. That philosophy or business model is developed by identifying opportunities, applying corporate resources and processes to those opportunities, and determining by their success or failure what products or services should be provided to which clearly defined markets in the future. If management’s recommendations meet those criteria, then the board’s job is easy.

There’s two problems with this scenario.

First, how can any set of outside directors, no matter how seasoned, evaluate whether a proposed initiative is a good fit for a corporation’s reigning business model, when most corporate leaders don’t sufficiently understand that model themselves? Quiz them and they will be at a loss to spell out the premises behind its development, its natural interdependencies, and its strengths and weaknesses. They won’t know if they can use their core capabilities to deliver on a new customer opportunity or if that move requires a new business model.

To make an informed judgment about a new business proposition, you must understand it systematically, as an engineer understands a machine.

the four-box business model

The basic architecture underlying every successful business consists of four independent elements that can be represented with four boxes. Every thriving enterprise is propelled by a strong customer value proposition (CVP)—a product, service, or combination thereof that helps customers more effectively, conveniently, or affordably do a job that they’ve been trying to do. The profit formula defines how the company will capture value for itself and its shareholders in the form of profit. Finally, key resources and key processes set out the means by which the company delivers the value to the customer and to itself. These critical assets, skills, activities, routines, and ways of working enable the enterprise to fulfill the CVP and profit formula in a repeatable, scalable fashion. When properly integrated with and fully congruent with the CVP and profit formula, they provide the essence of a company’s competitive advantage.

The second problem is that, while sustaining innovations (adding new bells and whistles to existing products) and adjacency plays (adding new products for markets that a company already serves, or adding new customers for existing products by moving into formerly unserved territories) can add substantial growth, especially early in their lifecycles, the greatest potential for transformational growth comes from white space plays. If a board is truly avid to steer a company into a bigger and better future, it needs to encourage its managers to embrace the challenges and opportunities that lie in its white spaces.

The term white space, as I use it, means uncharted territory or an underserved market. When a company seizes its white space, it sets out to serve existing customers in radically new ways (think of Microsoft making its Office Suite available through the Cloud at an annual rate, instead of selling customers a license and a clamshell filled with discs), or to capture new customers with new products (consider how Starbucks transformed the 50 cent cup of coffee into a high-status, high-priced everyday luxury). In either case, the white space involves the range of potential activities not defined or addressed by the company’s current business model—the opportunities that exist outside its core that require a different business model to exploit.

The opportunity to seize the white space is tantalizing, but it’s also an area where assumptions are high and knowledge is low—the opposite of conditions in the company’s core space. Moreover, the business rules, behavior norms, and success metrics that make an existing business model successful can be poison to new ones. Some of the most common mistakes that businesses make when venturing into their white spaces are:

  • Setting unreasonable limits on how new-and-different a new-and-different proposition can be, precluding precisely the radical new approaches that are needed.
  • Trying to “cram” the new-and-different opportunity into the old-and-flagging business model.
  • Prematurely killing the fledgling effort out of impatience for growth. New products and approaches need to be thoroughly tested before they are scaled.
  • Clinging to the core product’s profit formula, rejecting out of hand the possibility of finding success with different margins.

Here’s where a board can truly help a company chart out its future–by constantly reminding its senior executives that its future is by definition different than its past; that its business models aren’t immortal—they can and must be continually reinvented; and that, like any other living thing, a viable company must be prepared to adapt and change. Rather than holding its management to the tried-and-true, its board should encourage it to make long-term investments in the ventures that will ensure its future.

Read more: Inside The Innovation Stack

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