Overcoming the Innovation Readiness Gap
The Most Innovative Companies 2021
More companies say innovation is a top-three CEO priority. Many are allocating the resources to prove it. But are they prepared to deliver?
Creativity is too important to be left in the sandbox. It belongs in the boardroom. Martin Reeves, chairman of the BCG Henderson Institute, explains how to bring it there.
Why do CEOs struggle with the act of imagination when it comes naturally to five-year-olds? And what happens when people and organizations seemingly lose their ability to imagine? Martin Reeves, chairman of the BCG Henderson Institute, argues that imagination is an untapped and essential resource for organizations. This is particularly true in an era when competitive advantages that once lasted a decade can disappear in a year—and as companies see their growth potential decay as they grow and age. Reeves, coauthor of The Imagination Machine, explains how organizations can regain the art of imagination. Hint: it takes practice.
Martin Reeves is chairman of the BCG Henderson Institute, BCG’s think tank on insights from business, technology, economics, and science. He is a regular contributor to HBR, MIT SMR, Fortune and other management journals on business strategy and management. He is coauthor of The Imagination Machine and Your Strategy Needs a Strategy.
GEORGIE FROST: "Imagination is more important than knowledge," so stated Einstein. "For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving birth to evolution." But how can we understand and shape the murky mental territory that leads to good ideas; that realm of imagination? I'm Georgie Frost, and this is The So What from BCG.
MARTIN REEVES: Companies don't shy away from trying to harness other complex aspects of human affairs, like consumer psychology, or team motivation, or team composition. So, it's really rather strange that we shy away from having a handbook of collective imagination.
GEORGIE: Today I'm talking to Martin Reeves, chairman of the BCG Henderson Institute, BCG's think tank dedicated to exploring and developing new insights by embracing the technology of ideas. Martin is also the author of a new book about imagination in business called The Imagination Machine.
MARTIN: Imagination is something every five-year-old can do, but CEOs complain it's very hard for their companies to do. And every company is founded on an active imagination, but we don't have a handbook for it. And then if you're successful at imagination, you're likely to get complacent, so that could be the beginning of your demise. So we thought the world needed a handbook of the imagination, and to play that up a bit the fact that you can actually bias the odds in favor of imagination, we called it The Imagination Machine. Because in the long sweep of history, we really do believe that companies have changed the world as much as any poet or visionary. They're in the business of taking ideas and turning them into new realities.
GEORGIE: You said that any child can be imaginative. Is that why, perhaps, we don't take it that seriously in business, or is it taken that seriously? Maybe I've got that wrong.
MARTIN: Well, I've been working in strategy for longer than I care to admit, and not much has changed on some dimensions. But there's been one absolutely huge change, which is what's called the competitive fade rate—that's the time period over which you can enjoy leadership—has gone from about ten years to about one year. What that means is, it was perfectly reasonable in the past to coast on your previously successful business model, because it would probably last at least ten years. Now it won't, on average, across all public companies. Therefore it's reasonable, I think, to say that companies are in the business of constantly reimagining themselves. You could say that imagination is the new execution. If you don't constantly reimagine yourself, your advantage will decay very quickly.
GEORGIE: Is there an argument that you can imagine too much, too often? Is there any argument to, I don't know if it's resting on your laurels, but sticking true to what your principle was? Is there a danger that we are all trying to be too innovative?
MARTIN: Theoretically, yes. I mean, you could imagine being so hyperactive that you have lots of ideas and you execute on none of them. I think that's sometimes visible in startups. I remember looking at an oncology startup that was spending a lot of cash to develop a new cancer drug, and they found one. But they were so interested in the science, that instead of commercializing that one, they went on to run out of cash by developing many more ideas. So it's possible, but in large companies, it's almost exactly the opposite is a much more common scenario. Which is, you don't have enough ideas or a big enough portfolio of future possibilities so that you renew yourself. The proof of that is we can measure something called vitality, which is the future growth potential of a company. And it declines on average by three percentage points for every doubling of the size of the company, or every doubling of the age of a company. If you call that the gravity of size and age, essentially you could describe the competitive struggling business as defying the gravity of size.
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GEORGIE: Why is that? What stops large companies from being imaginative as they grow?
MARTIN: Well, there are a number of things that stop them on average, but fortunately there are many exceptions. I mean, one of them is just the sheer physics of size. If you increase the size of a sphere, then the surface area to the volume decreases. More and more of the mass is internal, and the same thing's true of a company. Companies become more and more introverted. And the one thing we know about the neuroscience of imagination is it's based on surprise. If you're not seeing the surprise in the world, which is the trigger and the inspiration for imagination, then you're not going to imagine anything new. So, that's one reason.
I think a second reason is what some people call the success trap. Which is if things are going pretty well because you successfully came up with an innovative business model in the past, then you don't feel that hunger, that sense of danger that an entrepreneur feels every day, and you relax. Now, the problem is that the financial indicators may all be in the green, but that's because they're lagging. You need to constantly reinvent yourselves.
And then the other one is, the procedures of yesterday's business model often restrict thinking about tomorrow's.
GEORGIE: Tell me more about surprises that spark imagination.
MARTIN: Well, one of the unique things about humans is that we have mental models in our heads of reality, and we change those mental models. We reimagine reality in response to a surprise if something doesn't fit the pattern. That surprise can come in different forms. It can be an anomaly, which is: Most of the points look like this, but then this customer is doing something different. Or it can look like an accident: I was trying to do this, and then this other thing happened. Or it can be an analogy, which is: That's a bit like this. What if it were more like that? These are the ways of encountering surprise and triggering imagination.
GEORGIE: It brings to mind when I was at university a very long time ago, Martin, and I took part in a psychology experiment of a housemate. I asked them about my response to it. It was all about whether a certain chap was a good or a bad person. Lots of different things about this guy that I had to read examples, but his behavior was so erratic. One day he was good. One day he was bad. I said, "You can't decide." So I just put a big line through the middle and just said, "Well, that's it. I can't decide either way." And I said, "What happened to that?" And he said, "Well, it was anomalous, so we threw it out." Do you think that happens too often in companies? Could I have been actually telling them something else there?
MARTIN: Well, one of the greatest simple-but-powerful mathematical inventions is the average. Companies have to measure and manage vast amounts of information, and so they use averages and aggregates. That is very efficient, but it suppresses the visibility of the points that don't fit. But sometimes those points that don't fit are actually the beginning of a new trend or the seed of a new idea. So it's very important to think like a novelist, and not an accountant, for the purposes of imagination, and to look at the particular.
GEORGIE: For example? Any companies?
MARTIN: Well, there's a great example of a company called Brooks Automation. It was a leader in semiconductor manufacturing equipment, and it was maturing, so it actually deliberately set out to be surprised. So it created a map of all of the people that were using its patents, and all of the people that were referring to those patents, and essentially asked the question, "What's surprising in this picture?" They found that amongst the more predictable electronic companies that were quoting their patents, there was a group of bioscience companies that were using their patents, and they didn't really understand why. They went out into the field, and they investigated, and they saw that biological tissue handling was extremely primitive relative to the sterile, precision, computer-controlled way in which semiconductor wafers are handled. They imagined that, "Well, this could be a new industry. The biobanking industry. The biological materials manipulation industry." So in fact, they created that industry. Became a pioneer in it. And then just a couple of weeks ago, in fact, they sold the previous core business. And now their core business, the new core business, is actually this business that was imagined, triggered by a surprise that they deliberately went out to seek. So, it can happen very practically in very down-to-earth companies.
[Note: In late 2021, Brooks Automation changed its name to Azenta Life Sciences after divesting its semiconductor business division to focus exclusively on the life science business]
GEORGIE: So how do you spot those surprises, those anomalies, those changes? Because, of course, by the time you can see them, it's almost like it's become a trend and it's not going to spark certain imagination and drive in certain directions to give you a competitive advantage.
MARTIN: Well, if you're talking about a trend, by the time something is an established trend, indeed, it's probably too late. It may have been arbitraged away by competitors. It's no use at this point in the evolution of COVID in business to say, "You know what? I've got this great idea. There's a trend towards home-working using video conferences." Well, everybody knows that. That's too late. But incipient trends, nascent trends, anomalies that could become a trend, are quite important. Now, the difference between an anomaly and a trend is manifold, actually. One of them is, it's much earlier. Another one is, it's not a slam-dunk. It's before something becomes an established trend.
Also, it's not an inevitability. It requires shaping and nurturing by the company, and the data may alert you to the possibility, but the possibility has to be imagined. When the company I gave an example of, Brooks Automation, was looking for surprises, the data didn't say, "You must create them via banking industry. There's an opportunity here." It simply said, "This is the way that people handle samples, and it doesn't appear very good relative to the semiconductor industry. Let's think about that." "Well, I have an idea. Let's create a new industry."
GEORGIE: Do we have a case where an anomaly is just an anomaly?
MARTIN: Yes, absolutely.
GEORGIE: Like my psychology experiment that should just be chucked out.
MARTIN: Well, an anomaly, we often throw away the anomalies in a chart, don't we? We say, "That's an outlier." Sometimes that's right. It was an experimental error. It was a freak, one-in-a-million event that won't be repeated. But when you see an interesting anomaly, you can do a couple of things. You can say, "Well, let me look at that from a couple of angles. Is that robust? Do I see it again?" You can look for momentum. Is that anomaly that you're seeing, growing? You can imagine how you might shape it so that you can actually create your own fate. You can say, "Let us do an experiment to see whether in fact there is an opportunity here."
Another example is a company called Turo, which is a company that rents out private cars. It creates a contract between the private car owner, often a luxury car, and the person who wants to rent it for a couple of hours. So they thought they saw an opportunity, and they tested it by handing out postcards saying, "Would you like to hire this Porsche or this Bentley for a few hours at this price?" They handed out a couple of hundred postcards, and the response told them that there was a shapeable opportunity there. They could have got the opposite result. They got a very positive result.
GEORGIE: Well, that's an important one, because imagination is just a step. It's what you do with that.
"Therefore it's reasonable, I think, to say that companies are in the business of constantly reimagining themselves."
MARTIN: Right. So we outline six steps, and I just described them briefly. So the first one is, we call it the seduction. It's when the anomaly seduces you to look more closely and to imagine the trigger. The inspiration, if you like. That's all about looking out of the window. Seeing and caring, basically. Caring about what you see. The second stage, we actually call it the idea, which is the art of working an idea. So, it goes from being a one-liner to a fleshed-out model that you can test.
There is a well-described skill of counterfactual thinking, imaginative thinking. But most of us haven't been taught it since kindergarten, so there's some skills that one needs to build there. And then the third step is what we call the collision, which is when you collide the idea with the reality, maybe in an experiment or by handing out postcards on the corner. Of course, one thing that's going on is, you're validating the surprise, the idea. But another thing that's going on, because most new ideas fail, is that you're actually triggering new surprises. The fourth stage is what we call the epidemic, which is the spread of the idea. Ideas tend not to spread in large corporations, and if they don't spread, then they remain private fantasies. The fifth is the codification of the idea so that the success can be replicated, which is much harder than it sounds. And then the last stage is called the encore, which is not falling into the success trap, and having successfully imagined a new business model, doing so again and again. Not being caught in the trap of the assumptions underpinning your own success. So, it is an entire process.
GEORGIE: When you talk about imagination in terms of business models, and what you were describing earlier about how companies do need to change and to innovate regularly, more regularly than they used to. They can't sit on their laurels. Do we have to reimagine the entire business model, or can imagination just come in little, little steps?
MARTIN: Yes. Well, it comes in little steps and big steps. And the longer you postpone it, the bigger and riskier the steps that you have to take.
GEORGIE: Forgive me. If imagination is just thinking, and we do it all the time anyway ... hopefully that's what we do when we're at work. We think of ideas and ways of doing things, and hopefully ways of doing things better. Why are we measuring it? How can you measure it? Isn't it just obvious?
MARTIN: Well, it's obvious to a five-year-old, but that fade rate that I talked about implies that it's not obvious to large groups of people that are trying to renew their advantage. Which is why we think we need a handbook for collective imagination and for the harnessing of collective imagination.
Now, that may sound unreasonable, because this is a conjunction of the word machine and imagination. Some people say, "Well, we don't need to have a guidebook, and we can't have a guidebook for something so mystical."
GEORGIE: And then apart from reading the handbook, obviously, what do you do as an organization? Do you fill your company with polymaths? Is the traditional division of labor idea dissolving, and if so, is that welcome?
MARTIN: Well, there's a number of things to do. I think the first one is to make sure you have a balanced portfolio. So you have some new possibilities in the portfolio, as well as some things that are delivering cash. That sounds obvious, but if you're using current financial metrics, metrics of current financial performance, you may miss that because they don't measure future option value very well. I think the types of people in the companies is very important. I mean, I think in recent years we've seen the rise of the specialist, and I think there's a role here for imaginative types, for generalists.
GEORGIE: Such as what? How would you find those people? Where would you look? What sort of people?
MARTIN: I think you can measure people in terms of their response to novelty. So Alibaba, for example, the Chinese internet company, has been rather successful--measures not only tolerance of change, they actually measure liking of change. They measure energization by change and new possibility in their recruiting, and they try to fill the company with those people, because those are the sort of people that the company needs right now.
Another interesting thing that you can do is, because often...we all have the capacity for imagination, the other side of this, are we utilizing that in the workplace? Another idea in the book is actually harnessing play, because play is a very serious business. Biologically, play is de-risked, accelerated, spontaneous learning. We play when we're small because it's a lot safer and a lot faster than waiting until opportunities for mortal combat. And we don't find that large corporations are very playful. So there are 16 executive games in the book, which are designed to have people loosen their assumptions.
GEORGIE: For example? Give me a couple. What games can we play?
MARTIN: Let me give you two. So a good icebreaker game is what I call the anti-company game, where you list on one side of a piece of paper all of the core assumptions, all of the sacred assumptions of the business model. And on the other side of the piece of paper, you list all of the things that you would never do, you would never contemplate doing. You reverse of columns, and you create the best business case for the anti-company. Now, it's often humorous. It breaks taboos, but out of this humor emerges some ideas and a flexibility to go on and play a more detailed game.
So a more detailed game, for example, is, we have a game called the pre-mortem game. Where essentially you assume that you're in a press conference in five years' time apologizing for the failure of your company, and you're describing exactly how it happened, and thinking through exactly how you might go off the rails is a very good way of underlining the case for imagination.
GEORGIE: Where does imagination fit it in an ever-increasingly digital world?
MARTIN: Ah, well, that's a great question. So probably over the next decade, we're going to see the substitution of many human managerial activities for machine learning. Many routine cognitive activities will be taken over by machine learning, and the experts are largely aligned that the response to that should be for the humans to focus on more uniquely human capabilities. The three obvious ones are anything to do with empathy—dealing with other human beings—anything to do with creativity, or anything to do with ethics, that machine learning can't do. But it raises the question "Well, is that safe too?"
Well, eventually we have artificial general imagination, and we believe, based on our research, that that is very far off indeed. So, no we won't. But technology, traditional technology, doesn't oppose the activities of imagination. There's a synergy between the two. In fact, we've already discussed one example today, Georgie. The example of Brooks Automation, where they used network mapping software in order to analyze their second-order patent map in order to see the surprises, which triggered the thoughts about creating a new industry. So the new analytical tools can help us to imagine, and throughout the entire process, the six-stage process we talked about, there are tools to that we can use that can power that process.
GEORGIE: Is there an argument then that actually an increasingly digital world will bring out more of the human in us? We get more imaginative?
MARTIN: I think so. Some people lament the demise of routine work because of employment insecurity, and so on, and there's a certain aspect of that. Will we be able to employ the same number of people in companies in the future, or will it require some sort of universal basic income? I see it as a sort of liberation from drudgery, actually. The imperative to emphasize these more uniquely human aspects of ethics and imagination and empathy, I think should lead to a re-humanization and a revitalization of the workplace, which personally I'm very excited about.
GEORGIE: So then where can leaders start?
MARTIN: So, I think they can start by accepting the need for imagination.
We have an example of a wonderful company in Japan called Recruit, which actually has an entire personnel system that's based around the celebration of entrepreneurial activity. They have these hero entrepreneurs that they say are the most important people in the company, and they have a festival where they celebrate new businesses, and anyone can start a new business. Providing one other person wants to join their team, they get first-round funding automatically. And they don't separate the ideas from the initiators of the ideas. They keep them together, because they're interested in creating heroic journeys and a lot of excitement around entrepreneurship. And they have been, in fact, a very successful serial business model innovator.
GEORGIE: Well, thank you very much, Martin, and thank you for listening. We'd love to know your thoughts, to get in contact, do leave us a message at firstname.lastname@example.org. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
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