Magnus Penker on Innovation

Adapt or die. That’s a summation of the evolutionary theory known as the Red Queen Effect. Under certain environmental conditions, some organisms must remain in a state of continuously adaptation or their entire species will face extinction. That’s eerily similar to the situation faced by organizations trying to stay profitable under the current global economic picture. Innovate or be disrupted.

The name of the Red Queen Effect comes from a character in “Alice Through the Looking Glass.” The Red Queen told Alice, “Here, you see, it takes all the running you can do to keep in the same place.” Many people forget that Lewis Carroll, the creator of Alice and the Red Queen, was the nom de plume for Charles Lutwidge Dodgson, a respected 19th-century mathematician with keen insights into chaotic systems.

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Schumpeter’s Response

Once you are inside a Red Queen situation, it can be extremely hard to break out and prepare for the future, as many C-Levels have discovered. The solution would come from the Czech-Austrian economist Joseph Schumpeter, one generation after Dodgson. Schumpeter is best known for his assertion that, “Innovation is the creative destruction where the entrepreneur combines existing elements in new ways.” Schumpeter argued that innovation and entrepreneurial thinking at medium- to large-sized enterprises were the engines of a new economic reality.

Innovation 360’s Magnus Penker recently invoked Schumpeter’s views on innovation to reset the dialogue about the origin and purpose of innovation. In a discussion at the Swedish Computer Association, Penker explained, “Today, innovators build things with existing components that have exponential effects.” One of the clearest examples is TCP/IP, a protocol that began as a way for a few computers to network together across vast distances. This gave rise to a chain of events that brought us the internet, the web, the cloud, data centers, mobile apps and soon quantum distributed computation.

Four Forces

Penker went on to add that those exponential results are just one of four large-scale forces driving the next wave of business innovation. The second force is the prolonged period of low interest rates around the world and even negative rates in some regions. That has made it possible for firms to engage in larger scale investments at lower costs. The third force is digitization, which has augmented the speed and effective productive capacity for everyone from sales to administration. The last force is globalization that has opened access to both greater demand and deeper talent pools.

For C-Lecvels such as CEOs, CIOs and CTOs, these forces can become overwhelming. To adapt and survive, they need to lead their enterprises in a dual innovation strategy. They must deploy innovation to maximize immediate operational efficiencies, but they must simultaneously plan out how to move beyond the company’s core competency in the near future. The reason why involves a reassessment of the three innovation horizons proposed by McKinsey.

Three Horizons for the CIO

A fuller understanding of how the three innovations horizons impact strategy will help CIOs put their innovation management plans into perspective. Penker started by pointing out that the core competencies tend to develop along an S curve — they grow, plateau and decay. H1 technologies must improve operations for today, lowering costs and boosting productivity. Digitization has taken on this role most often, helping companies get smarter and respond more immediately to market changes. The problem is that too many companies are investing 99 percent of their technology budgets in H1. CIOS really need to drop that down to 90 or 85 percent to make room for what’s coming next.

H2 and H3 innovations will also follow an S curve, so they should already be in the works in order to meet the demand for future services. H2 represents where the business will be in 12-18 months. You can expect the market to present some unpredictable shifts in that time due to effects like advances in AI capabilities or new business models. Customers will demand that the market serve them in ways that make more sense to them, and some players will certainly respond to that. To prepare for H2, perhaps as much as 10 percent of technology investment belongs here.

The final horizon, H3, describes where the business will be in 3-5 years, and it deserves at least 5 percent investment in advanced research projects. CIOs tend to avoid H2 and H3 investments because leadership normally wants metrics on effective returns and quarterly results. That’s not possible with future R&D. Immediate problems start to take over the discussion, and the Red Queen Effect intensifies. Keeping all three horizons healthy demands a new level of portfolio management from C-Levels. Too often, they get overrun by the speed of market forces before their H2 innovation is ready.

The Lesson of Sweden

In turbulent times of unpredictable change like the contemporary global marketplace, it’s impossible to predict the future based on the past. Data analytics is doing a better job every day of pulling patterns out of chaotic inputs, but even that is only reliable for a few months out at best. What has proven to be much more successful at predicting the future is an innovation shop that creates the future.

Sweden has emerged as a major innovation hub second only to Switzerland in a recent report by Innovation 360. The composition of those two country really share little in common except for their radical innovations. The most instructive lesson here, however, is that Sweden’s unicorns — companies like Spotify, Skype, Paradox, King and Mojang AB — have skewed the results and may not reflect the overall innovative capabilities of the country. It takes a finer grain innovation assessment to produce actionable advice for CIOs fighting the Red Queen Effect in their own industries.