I’ve been working in and around innovation for many years but increasingly my interest is focused on the support systems needed to nurture disruptive innovation.

This week I have been re-reading what I believe is the definitive book on disruptive innovation: The Innovator’s Dilemma by Clayton Christensen. First published in 1997, it remains as relevant today as ever. For it’s not really about the technology which will continue its rapid and accelerating shifts, but much more about the organisation ecosystems and forces that either help or hinder disruptive innovation.

I think it’s compulsory reading for innovators and leaders, but not everyone has the time or the inclination, so here’s a 2 minute highlight reel just for you.

All innovation is not created equal and Christensen makes a clear distinction between disruptive innovation and sustaining innovation. Disruptive Innovation breaks the rules of the old business models and rewrites them in ways the former industry leaders didn’t see coming.

In this world where digital disruption abounds, I have heard many organisations assert they have built an innovation capability and promise they can defy the odds and disrupt themselves and create new ground. Yet across company after company and industry after industry, the data is compelling and unequivocal: unless you carefully calibrate and nurture the settings required for disruptive innovation to thrive, then failure is almost certain.

Disruptive innovation by incumbents is possible, however it takes courage, and a commitment to addressing the systemic issues that keep incumbents from disrupting themselves. To have a chance at success you need to be aware of these issues. I’ve summarised my research on disruptive innovation into a Checklist of seven rules to follow to establish a system that supports and protects the innovation. In this post, I cover the first four rules.

Rule #1: The innovation must serve the higher purpose and vision of the organisation.

Alignment with the organisation’s purpose is key for this is the glue that connects innovation to the wider organisation while also helping leaders craft a narrative about why this and why now.

Rule #2: Start with a hypothesis that you can test

Forming a hypothesis of how value will likely be generated in the future is key to focusing your efforts. Disruptive innovation is not an exercise in random ways to develop and explore new markets in areas where the organisation has no capability. There needs to be a connection with the organisation’s core purpose, and a strategic frame for experimentation. The Corporate StartUp by Tendayi Viki, Dan Toma and Esther Gons has a helpful discussion on the need for what they call an “Innovation Thesis”. This hypothesis or thesis is critical to defining and guiding the establishment of success metrics (see Rule #3).

Rule #3: Measure what matters most. It will not be ROI or another financial metric.

This is a very controversial statement and will be a magnet for the resistance! However the reality is that management systems in incumbents are biased against disruptive innovation. Christensen in The Innovator’s Dilemma:

“Good managers consistently make wrong decisions when faced with disruptive technological change. The reason is that good management itself was the root cause.”

In the case of disruptive innovation, it can be virtually impossible to meet traditional investment criteria. Christensen again in The Innovator’s Dilemma:

“..the only thing we may know for sure (about) experts’ forecasts about how large emerging markets will become is that they are wrong.”

Of course the “system” wants you to measure it based on effective resource allocation methods of ROI and market opportunity. The difficulty here though is that if you follow these measurements you will never invest in disruptive innovation.

A different approach is required that recognises the level of uncertainty and identifies the key areas of learning required to test your hypothesis, not using metrics that are both impossible to forecast and impossible to achieve. If you’re interested in exploring this subject further, checkout the discussion on Innovation Accounting in The Corporate StartUp by Tendayi Viki, Dan Toma and Esther Gons.

Rule #4: Incentives need to feed not starve innovation.

Jim Collins & Bill Lazier in Beyond Entrepreneurship 2.0 tell a story of a conversation with a CEO who complained that he could not get his team to be more innovative, and that they “spend all their time managing their current divisions and no time developing new things.” The leaders’ incentives were based on annual revenues, and when the CEO confirmed that working on innovating new business models would be a distraction from achieving performance bonuses it was very clear that there was a misalignment of incentives. It is not just financial bonuses that need to be considered here – career progression opportunities are equally important. You will need to make sure that career progression incentives are also aligned with your innovation objectives and not working at cross purposes.

Next week I will cover the three remaining rules, as well as a little about what it means for directors seeking to encourage innovation.