Two Track Transformation: Run the Business While Building the Future

“Innovation is the ability to see change as an opportunity—not a threat.” — Steve Jobs

I’ve seen leaders small and large, including those in charge of tens of thousands around the world mess up business growth.

Innovation failure rarely comes from lack of ideas.

It comes from the wrong mental model.

Leaders treat innovation as a side activity instead of a parallel system for building the future.

It’s a common trap and it happens because most leaders don’t have a modern or useful mental model for innovation.

They have a one-track business mind, where they focus on business growth of the core business.

What they really need is a mental model that embraces disruptive innovation.

To master your destiny, you need to disrupt yourself before the market or startup does it for you.

If you can master both sustaining and disruptive innovation in parallel, then you can realize your full business potential.

---

What HBR Research Reveals

Sustaining innovation protects and improves the current business.

Transformational innovation, while smaller in investment, often generates the majority of long-term value.

Research published in Harvard Business Review found that companies typically invest about 70% of their innovation resources in core improvements, yet those efforts generate only about 10% of the long-term return.

Transformational innovation often receives about 10% of investment but creates roughly 70% of the long-term value.

This insight is not about abandoning the core business.

It’s about managing the present and the future at the same time.

---

How Do Leaders Break Their Business Growth?

Leaders wrap their business around their top paying customers and solve their top problems.

It’s MBA 101.

This is how to focus on growing your current business and optimizing it.

You’re innovating, but really, you’re doing sustaining innovation, and you are reinforcing the innovator’s dilemma.

You drive your business with KPIs that optimize for your current business model.

Meanwhile, you ignore other customer segments and lower end products that serve growing segments in the market.

That’s disruptive innovation, and you let other companies eat your future.

Inside your org, you fire, fight, or sideline innovation efforts that competes against your core.

And that’s how the fast eat the slow and how the incumbents get laid to waste over time.

Remember the SEARS catalog, where you could buy anything in the universe?

Sears significantly underestimated Amazon and the broader shift towards e-commerce.

---

Why Transformational Innovation Creates Outsized Returns

Here is a key insight from the Harvard Business Review article “Managing Your Innovation Portfolio” by Bansi Nagji and Geoff Tuff.

Most companies invest the majority of their innovation resources in improving their current business.

Roughly 70% of innovation investment goes into core improvements.

Yet those efforts generate only about 10% of long-term innovation returns.

Meanwhile, transformational innovation often receives only about 10% of the investment but creates roughly 70% of the long-term value.

The lesson is not to abandon the core business.

The lesson is to manage an innovation portfolio.

You must run the business while simultaneously building the future business.

---

Two Types of Innovation: Sustaining vs. Disruptive Innovation

As a leader, you need to create clarity around two categories of innovation:

1. Sustaining innovation
2. Disruptive innovation

Leaders will say they are doing innovation, but usually it’s sustaining innovation, which is effectively the “core innovation”.

And that’s 10% growth.

Transformational innovation is really disruptive innovation and leads to a new business model.

Over time, that’s 70% growth.

Example #1: Google Sustaining and Disruptive Innovation

• Sustaining Innovation:  Google Search: Google continuously improves its search algorithm with updates like Panda, Penguin, and Hummingbird. These updates enhance search accuracy, user experience, and relevance, maintaining Google’s dominance in the search engine market.
• Disruptive Innovation:  Google AdWords/AdSense: These advertising platforms revolutionized online advertising by allowing businesses of all sizes to target specific audiences and measure their ad performance effectively, disrupting traditional advertising models.

Example #2: Netflix Sustaining and Disruptive Innovation

• Sustaining Innovation:  Content Personalization Algorithms: Netflix continuously refines its recommendation algorithms to better suggest content to its users, enhancing user engagement and retention.
• Disruptive Innovation:  Streaming Service: Netflix transitioned from a DVD rental service to a streaming platform, fundamentally changing how people consume television and movies and disrupting the traditional cable and broadcast TV industries.

Example #3: Amazon Sustaining and Disruptive Innovation

• Sustaining Innovation:  Amazon Prime: Amazon continuously adds benefits to its Prime membership, such as faster shipping, exclusive deals, and access to streaming services, to retain and attract subscribers.
• Disruptive Innovation:  Amazon Web Services (AWS): AWS transformed the IT industry by providing scalable, on-demand cloud computing services, disrupting traditional data centers and IT infrastructure models.  Another example would be grocery retail with Whole Foods acquisition.

Example #4: Tesla Sustaining and Disruptive Innovation

• Sustaining Innovation:  Autopilot and Full Self-Driving Updates: Tesla regularly releases software updates to improve its Autopilot and Full Self-Driving features, enhancing safety, performance, and user experience.
• Disruptive Innovation:  Electric Vehicles: Tesla’s electric cars, with their long range, high performance, and Supercharger network, disrupted the automotive industry by accelerating the shift away from internal combustion engines to electric vehicles.

Example #5: Airbnb Sustaining and Disruptive Innovation

• Sustaining Innovation:  Enhanced User Experience: Airbnb continually updates its platform to improve user experience through features like personalized search, better review systems, and flexible booking options.
• Disruptive Innovation:  Home-Sharing Platform: Airbnb disrupted the hospitality industry by creating a platform where people can rent out their homes or rooms, offering travelers unique and affordable lodging options, and challenging traditional hotels and motels.

These examples demonstrate how companies can use both sustaining and disruptive innovation to maintain their market position and drive industry transformation.

How Microsoft’s Developer Division Embraced Disruptive Innovation

In The Customer-Driven Culture: A Microsoft Story, Travis Lowdermilk and Monty Hammontree share the story of how Microsoft Developer Division embraced disruptive innovation.

DevDiv’s primary product, Visual Studio, had been in market for more than two decades.

In technology circles, a product division with that kind of legacy could easily be dismissed as a dinosaur.

Leadership embraced disruptive innovation and shipped Visual Studio Code.

Visual Studio Code is a lightweight alternative to Visual Studio and addresses an underserved audience.

Some leaders would consider Visual Studio Code a competing product.

Some leaders would consider Visual Studio Code off strategy because of a different customer segment and product.

Embracing disruptive innovation helped the Visual Studio team grow from 1.5 million monthly active users to nearly 14 million active users with Visual Studio and Visual Studio Code.

And the Net Promoter score (NPS) grew beyond 55.  Based on NPS standards around the world, a score above 50 for a product is considered excellent.

Apple’s Journey of Sustaining and Disruptive Innovation

The journey of Apple’s iPhone through disruptive and sustaining innovation provides an insightful case study into how a product can transform an industry and then continue to dominate it through continuous improvement.

iPhone Disruptive Innovation Phase

When the iPhone was first introduced in 2007, it was a prime example of disruptive innovation.

It fundamentally changed the landscape of the mobile phone market in several ways:

1. Integration of Technologies: Unlike other smartphones of the time, which were largely focused on communication and business applications (like BlackBerry focusing on email), the iPhone integrated music, video, and web browsing capabilities, making it a versatile device for entertainment, communication, and work.
2. User Interface: The iPhone introduced a user-friendly touchscreen interface, which was a departure from the keypads and styluses that were standard at the time. This change made the device more accessible and appealing to a broader audience.
3. Software Ecosystem: Apple’s introduction of the App Store created a new platform for third-party developers to develop and sell their software directly to consumers, which was revolutionary in the way mobile phone users could extend the functionality of their devices.

These innovations disrupted the mobile phone and technology markets by changing consumer expectations for what a mobile device should do, which led many existing manufacturers to alter their product lines and business models significantly.

iPhone Sustaining Innovation Phase

After establishing the iPhone as a leading product in the smartphone market, Apple shifted its focus towards sustaining innovation. This approach focuses on making incremental improvements to an existing product to enhance its appeal and maintain market leadership.

Key aspects of the iPhone’s sustaining innovation include:

1. Hardware Improvements: Each new iPhone version includes enhancements such as faster processors, improved cameras, and better displays. These improvements help keep the product at the cutting edge of technology without altering its fundamental appeal.
2. Software Updates: Regular updates to the iOS operating system introduce new features and improvements, keeping existing customers satisfied and making the ecosystem more robust and secure.
3. Market Expansion: Apple has gradually expanded the iPhone’s feature set to appeal to a broader range of consumers, including various models at different price points to attract both premium and mid-range buyers.
4. Customer Loyalty and Brand Strength: Through consistent quality and customer service, Apple has cultivated a strong brand loyalty that ensures sustained sales and less sensitivity to competitive pressures.

This phase of innovation doesn’t shake up the industry structure but rather strengthens Apple’s position within it, ensuring continued growth and profitability through improvements that meet evolving user expectations without radically changing the product concept.

---

Two Track Transformation for Innovation

I found the simplest way to get leaders to play the game of innovation well is to manage two tracks in parallel:

1. Track #1: Current Business:  This is your sustaining innovation track.  This is where you work on your current business model, including your current customers and current products and services.   This is where you “run the business.”
2. Track #2: Future Business Today:  This is your disruptive innovation track.  This is where you work on your Future Business now.    You don’t work on your future business in the future.  You work on it today through small business experiments to validate value for the future.

I call this approach Two Track Transformation for Innovation.

There are several mental models and frameworks for managing innovation: McKinsey 3 Horizon, Pivot to the Future, The 3 Box Solution, The Innovation Ambition Matrix (Core, Adjacent, Transformational), etc.

In my experience, they are more helpful after you create clarity around two tracks.

See Two Track Transformation for Modern Innovation in the Age of AI for more information.

---

How To Visualize Two Track Transformation

Here is one way I whiteboard the Two Track Transformation for Innovation model:

Here is another way I whiteboard the Two Track Transformation for Innovation model:

---

3 Keys to Leading Innovation Better

In my experience, it’s far more effective to create clarity around 3 simple things:

1. Think of your business in two tracks in parallel: Current Business + Future Business
2. Track #1 is sustaining innovation and track #2 is your disruptive innovation track.
3. Your Future Business track should be doing small business experiments to figure out new business models.

If you orient your business from this vantage point, you will embrace innovation and become a better leader and make greater impact.

---

Adopt a Two-Track Approach for a Sustainable Future

To truly master your destiny, you must disrupt yourself before the market or a nimble startup does it for you.

Adopting a two-track approach—managing both current business operations and future business experiments—can help you innovate and grow your business with skill.

By doing so, you can not only safeguard your core business but also unlock new avenues for substantial growth.

Sustaining innovation strengthens and protects your current business.

Transformational innovation creates new sources of growth and future value.

The research is clear: companies tend to over-invest in improving the present while under-investing in creating the future.

The leaders who win manage both at the same time.

They run the business and build the future business in parallel.

That is the essence of Two Track Transformation.

By integrating both types of innovation into your strategy, you position your organization to thrive amid change and seize the opportunities of tomorrow.

In the end, the ability to innovate effectively, by balancing both sustaining and disruptive approaches, will determine whether your business survives or truly thrives in the modern marketplace.

You Might Also Like

Innovation Hub
What Makes a Good Innovation Coach?
Two Track Transformation for Modern Innovation in the Age of AI
MBA vs. Innovator Mindset
All the Big Ideas of Innovation on a Page
Amazon Leadership Principles for Innovation and Impact
Best Innovation Books
How To Become an Innovator