Monday, January 16, 2017

Signal versus Noise

The post today frames a classic issue in communications:  how to improve a signal and hopefully eliminate or at least mitigate noise.  The noisier the communication is, the more difficult it is for the sender and the receiver to communicate.  Thus, we try to eliminate noise from the communication, so only the signal is received.

That sounds easy, but it is actually difficult, because there are no pure communication media.  Noise always creeps in, and conflicts or masks the signal.  This is true in electronics - the noise on your cell phone or fuzziness on your TV screen - as well as in business and life.  Our verbal communications, whether face to face or over a communication infrastructure, are full of noise.

The attempt to eliminate noise from an operating system or a business process is an interesting and perhaps worthwhile challenge, until one considers the question:  what is the real signal?  What is creating the noise?  In many businesses today, there are several signal: noise conflicts. These include:
  1. What management says it wants versus what it reinforces
  2. What the operating systems support versus what is needed
  3. The amount of risk that is encouraged versus that which is tolerated
It begins to raise the question:  is innovation noise, or signal?

Strategic need and communication

Let's start with a classic issue:  sending a signal that isn't meant to be received or implemented, or worse failing to understand that a signal isn't correctly received.  Many executives have concluded that innovation is important and must become a cornerstone of their business strategies.  However, they have little understanding of how innovation works.  To them, innovation must seem like magic pixie dust:  sprinkle it around, encourage it and new innovative products will spring to life.  So, they take to the lecterns and advocate for innovation, but don't change deliverables or goals or investments.  So people hear about innovation but don't see the requisite change in risk attitudes or investments, so they become conflicted.  In this case, innovation is NOISE introduced to a consistent SIGNAL that is business as usual.

What actually gets done

What's worse, perhaps, is that some new, good ideas may get created by resilient innovation teams or individuals. But those new ideas will encounter all of the existing measures (ROI) and decision making gates that expect fully formed, fully proven products rather than nascent, unproven and risky ideas.  Processes that have been honed to perfection, where randomness, variability and risk have been eliminated, treat innovation as NOISE, while consistency, efficiency and predictability are the SIGNAL.  We place filters in these communication programs to eliminate NOISE (innovation) and improve business as usual (SIGNAL).

What the market signals

However, at the same time the market and customers are signalling needs for new products and services. They do this by preferring new products that meet unmet needs, expecting lower prices for products and services that become commoditized, and shifting alliances to solutions that understand their journey and expectations.  The markets and customers are constantly signalling their needs and expectations, but too often we listen through filters of 1) past experience, 2) the investment we have in existing products and 3) the risk and change associated with creating new products.

In this case there are actual signals, clear signals of the need for new products and services that are ignored or filtered out by the way corporations listen (if they listen) or respond to customer requests and market trends.  In this case clear signals are either ignored, filtered out or overcome by the NOISE of business as usual.

Many people would like you to believe that innovation is difficult.  Nothing could be further from the truth.  Innovation, creating new ideas that become new products and services is easy.  It happens all the time, across the globe, every day.  The real challenge to innovation is cultural, both on the corporate side and the consumer side.  And a real underlying issue within those cultural challenges is the inability to distinguish signal from noise - in other words, to communicate. This occurs both internally (as we've seen:  what management wants versus what it supports) in the operations (what we reinforce - efficiency and what we resist - creativity) and what we hear from customers and markets.

To succeed at innovation, there are some very simple rules:  What executives say, matters.  They must both say they want innovation and then reinforce the desire with new investments and priorities.  What business as usual dictates and expects, matters.  If efficiency matters more than innovation, you are communicating a value proposition.  What customers and markets say, matters.  Are you listening?  Or are you filtering to hear what you'd like to hear?  Can you separate signal from noise?

Perhaps the most important first step of any innovation activity is to ask:  what signals are important?  How are they received?  How can we amplify and clarify the important signals? What do we filter?  How can we listen, hear and respond more effectively?
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posted by Jeffrey Phillips at 6:48 AM 0 comments

Friday, January 13, 2017

Disruptive innovation: where, not what

First, a slight diatribe.  Why is it that companies think their people can do successful innovation when they don't share a common language?  In the title I've used the word "disruptive", and by this I mean innovation in the "third horizon" - incremental, breakthrough and disruptive.  I'm defining disruptive innovation as new products, services or business models that "disrupt" existing products or markets.  For example, Apple and iTunes disrupted Tower Records.  Netflix and its rental model disrupted Blockbuster's retail store model.  But I've been in plenty of places and talked with plenty of customers who don't have a consistent language.  They toss around "breakthrough", transformative, disruptive and other language without defining it, and then are dismayed when they get at best incremental innovation.  But this is just a language problem, you'll say.  And I'll say you are correct, but if we depend on language to communicate, and to direct assets, people and risk tolerances, if our language isn't right, then nothing will be right.

Ok, diatribe over.  Thanks for letting me get that off my chest.

Now, on to the real topic:  Disruptive innovation is a where question, not a "what" question.

Again, I'm defining disruptive innovation as a structural change to a product offering, a business model or a market.  Clearly, you have to have a new and compelling offering to have that kind of impact.  That means the "what" - the outcome of the innovation activity, must be fairly interesting, compelling, valuable for customers and so on.  And you'd be surprised to learn that many companies generate viable, disruptive ideas on a fairly regular basis.  It's not as hard as it seems.

It's the "where" that matters
The difficulty is in the "where".  Too often existing business models and knowledge are very attuned to existing markets, customers and segments.  Existing products generate the revenues and profits that innovation teams depend on, and that drive wealth and bonuses for product teams.  Who wants to mess with that?  Existing firms, living in their existing markets, serving customers, can't afford to disrupt their own markets, customers or segments.  They'd put their own revenue streams out of business.  That's a no brainer.  Everyone recognizes this.

But risk enters the picture when you create a disruptive idea, then recognize that you can't afford to implement it in your existing market. Clearly it needs to be implemented and launched in an adjacent or new market, where it will impact other companies and customers, but not your own.  This becomes far more risky, however, because the existing corporate assets and knowledge don't know much about that adjacent or new market, don't think they have the rights to play in that market and don't have partners or channels to access that market.  Thus, there will be a heavy investment to enter that new segment or market, and is the idea worth the cost?

Generating is easy, implementing is hard
You see, GENERATING a disruptive idea is easy.  Implementing a disruptive idea in your own market is next to impossible, so the idea, if it will see the light of day as a product, must be implemented somewhere else.  This is when the "WHERE" question comes in.  Too often, the WHERE question is asked too late in the game.  You have an interesting idea that seems to have some market validity, but no one bothered to think about where the idea should have impact before it was developed.

If you want to do "disruptive" innovation, first, make sure that everyone shares the same definition and has the same risk tolerances.  Then, define the market, customer or segment that you want to disrupt, then create ideas, recognizing that disruptive ideas will disrupt your revenue streams if you deploy the idea within your own market or segment.  Generating disruptive ideas is easy, deploying disruptive ideas, especially in markets or segments you don't understand, is difficult.
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posted by Jeffrey Phillips at 6:55 AM 0 comments

Tuesday, January 10, 2017

Becoming an innovative company: better late

So, after over a decade of innovation consulting, I can say without doubt that companies that are just starting to innovate have it much better than those that were attempting it years ago.  That's because as more companies try more innovation, more tools are vetted, more methods explored and exposed.  Today, there are more proven methods and more people with more innovation skill and experience, so if you are starting now you can get started on the right foot.  In this case it may be better to be late.

But if you are just starting out, here are some recommendations I'd make that may be a bit counter-intuitive based on experiences in the past.

Determine what innovation should do for you

In the past, all innovation was focused on product innovation, to create new and better products.  While product innovation is a good place to get experience, you'll want to move quickly to other forms and types of innovation, because product innovation is so well understood, and becoming very competitive.  The real impact (and real return) is in business model, experience and service innovation.  If you lack experience in innovation, then every innovation type is difficult.  Why start with product innovation when so many others are already ahead of you, and when that's where competition is the most fierce?

There's less experience and less understanding of business model, channel, customer experience and other forms of innovation, and potentially a lot more opportunity.  If you are going to innovate for the first time, go where the opportunities are more plentiful.

Determine who will do innovation for you

The old saw that everyone can innovate is true, but unless you train your teams and give them the freedom and recognition they need to take new risks, you can only really count on a small subset of your existing team to do innovation well.  That leaves you with a couple of options:
  • Outsource innovation to an experienced innovation company.  Good if you plan to innovate once
  • Hire experienced innovators.  Good if you want to build an innovation competency
  • Learn how to leverage open innovation to use the ideas of others.
These recommendations aren't mutually exclusive.  You can, for example, leverage a good external innovation company in one product group or setting, while hiring and building innovation competencies in another group.  Both can leverage open innovation.

If you are determined to build innovation competencies and capabilities from within, be sure to find the best people within your organization, give them the training they need and free them up from day to day work.  By best people I don't mean those that do the everyday stuff well - I mean the best innovators, who may be people that aren't at the top of the list when it comes to day to day production.

Determine and provide clarity about your targets

If you want incremental innovation - small changes to existing products and services - then say so.  If you want radical disruptive change, build to it, don't attempt it at the start, until your teams have some innovation experience. If you want disruptive or radical ideas and innovation, detail where they should have impact.  While you may want to disrupt the market or segment you are in, the people who rely on revenues and profits from your existing markets will resist ideas that disrupt their bread and butter.  Disrupt someone else, increment within your existing markets and segments.

But above all, provide clarity on what types of innovation you want, what problems or opportunities your innovators should address and where the innovations should have impact.

Worry less about tools and more about culture

Too many new innovators worry about finding and learning one tool or methodology that becomes their mantra.  Whether it's lean innovation or design thinking or open innovation or whatever, the tool becomes the focus, when in reality there are a range of tools for a range of outcomes, and many paths to get to your destination.  In the midst of learning methods and tools, companies forget about the most important factor or force - the organizational culture.

For 30 years we've focused on improving efficiency and effectiveness, and spent virtually no time on risk, uncertainty, variability and exploration.  So, when the new tools ask for more risk, more exploration, the natural reaction based on years of cultural training is to resist.  If you don't focus on your culture and what it values and rewards, you will become experts in innovation tools that you can only use in very limited context.

Conclusion

If you are late to the innovation game, in some regards you may be better off, because we know where the pitfalls and traps are, and there are more people with more experience to help you on your way.  Learn from these experiences, but especially learn that innovation and its activities are leadership and cultural challenges, not something that always translates easily into discrete tactical activities.
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posted by Jeffrey Phillips at 6:53 AM 0 comments

Friday, January 06, 2017

Innovation Confidence Course

Recently I read a nice article in Inc Magazine about 10 Innovation Killers.  The author refers to a lot of factors that stymie innovation, including many of the usual suspects:
  • holding a brainstorm and then doing nothing
  • sustaining a fear of failure
  • thinking innovation is something the technology guys do
One of the factors that caught my eye also got me thinking, however. That factor was "create an obstacle course for ideas".  Here the author was talking about making it difficult for people to work on ideas or making the process difficult.  Now, being a natural contrarian (I know, strange attribute for an innovator) I thought:  the only ideas that matter are those that can make it through a number of hoops and hurdles, internal and external.  What's wrong with an obstacle course?  Shouldn't the best ideas be the result of an obstacle course?  And then I remembered that my father, once and always a Marine, never referred to these as obstacle courses, but "confidence courses".  Young marines are put through an arduous obstacle course to prepare them for obstacles they may encounter in warfare, but the purpose of the course is to build confidence and teamwork.  In the same way, corporate innovators should expect their ideas to compete for time, attention and resources - a corporate obstacle course - but they need to know how to guide ideas through this course effectively.  What we need, it seems, are people who are versed in running the obstacle courses, who understand the issues and challenges that ideas are likely to face, and know how to get over, around or through them.  Ideas, by themselves, are never going to make it through an obstacle course.  People who don't understand the obstacles aren't going to be able to guide ideas through the course.  Companies that don't define the course and present unusual or unexpected obstacles won't be able to sustain innovation.

Two important factors

What we need is not to think of innovation as a lonely idea facing a huge set of obstacles.  Rather, what we need is either 1) a clearly defined path for ideas to follow that will assess, develop and validate ideas effectively or 2) confident idea partners who are experienced in running the obstacle course.  Frankly, the first alternative sounds wonderful:  a virtual automated assembly line for ideas.  However, this magical process doesn't and won't exist, because ideas by themselves have little momentum and without a defined pathway and workflow simply won't get to market, much less attract the resources to reach product or service development.

Obstacle or Confidence?

Every new idea, product or service, whether it is based on existing capabilities or introduces new solutions or technologies, faces an obstacle course.  If creating new, valuable products and services were easy, then everyone would be a millionaire.  The fact is, it is difficult to create even incremental new products and services.  Every new product or service will face an obstacle course:  competing priorities, limited bandwidth and resources, conflicting goals.  The question is:  will the ideas have confident mentors or supporters who can move through the obstacles and address important questions?

The answer to this is:  it depends.  Ideas and products that are very similar to existing products and services will face fewer hurdles and have more support to go through the evaluation and product development process.  New, interesting or divergent ideas will face larger hurdles and find that few people know how to navigate the process, or even that the process doesn't exist.  This is why so few new, interesting ideas become new products or services.

People who have been through the obstacle course and know how to navigate the barriers and hurdles have confidence, and can accelerate even disruptive ideas through the course.  We don't need to worry about creating barriers to ideas - many exist for good reasons.  What we need to do is create confident people who understand the pathways and obstacles and who have the confidence to move through the appropriate decisions and gates.

Consistent Course / Experienced Guides

This means there are at least two important factors that must be implemented to accelerate good ideas to market.  The first is that there is some consistency to the obstacle course.  That is, ideas must clear certain thresholds or hurdles, and those remain reasonably consistent, not changing with the whims of decision makers.  The second is that there are people who understand the reasonable and consistent hurdles or obstacles and can find ways over, through or around them, or who can invent an entirely new way to move through the path.  These are experienced, confident people who've been there and done that before.

Ideas need to, in fact must face, reasonable, consistent obstacles within your decision making process, because the products and services they'll become will face obstacles and objections in the marketplace.  We can't create a frictionless path for ideas inside the organization any more than we can create an objectionless product for customers.  What we can do is define the path, ensure the obstacles are well-defined and reasonable for the variety and range of ideas, and support the ideas with people who have been through the obstacle course before.  If ideas can make it through an internal confidence course scale to the value and impact of the idea, then they can make it in the "real world".

Idea Obstacle Courses

In fact the idea of an idea obstacle course - or confidence course - is brilliant.  If an organization wants to innovate, and recognizes the issues and challenges associated with innovation and acceptance of new products in the market, it will create a defined set of hurdles, obstacles and challenges that ideas must meet or achieve.  Further, it will train people to be able to understand and clear the obstacles, giving them confidence that they and their ideas can move through the course.  We don't want a frictionless system, which means the ideas won't encounter real world objections, but equally we can't leave the maturation and testing process for ideas to random chance.

What we need is a defined obstacle course for ideas, complete with defined objections and hurdles, "drill instructors" who push teams to move through the course at speed, and experienced guides who have been through the course before.  Then, and only then, can we say that we have a good pipeline and process for ideas.
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posted by Jeffrey Phillips at 5:26 AM 0 comments

Monday, January 02, 2017

Riding the whirlwind

One of my favorite apocalyptic texts is the saying that if you sow the wind you'll reap the whirlwind.  This is from the Old Testament, where the prophet Hosea is telling the people that they need to change their ways.  Obviously the passage has a rather negative connotation.  I think, however, we are the brink of some seismic changes and those firms that are ready will be able to ride the coming whirlwind, surf the tsunami, or benefit from the size and magnitude of the coming change.

Change is coming

Dylan said you don't need a weatherman to know which way the wind blows.  Right now, the wind is at our backs, propelling us forward.  That wind is the increasing pace and nature of change - technological, societal, governmental, economic, ecological, you name it.  There are only a few times in history when so many different forces were converging, and so much change was accelerating at the same time.  This consistent breeze at our backs which nudges us along will soon freshen into a real gale, pushing many firms into competitive spaces they didn't intend to pursue, creating situations they didn't anticipate.

Change is coming in the form of new entrants, new business models, new competitors.  And all of this change is arriving just as customers are growing restive, consumers aren't quite sure of the future, our economies and even governments are reacting to powerful movements against the status quo and the perceived failure of economic integration.  Look no further than Brexit and Monti's failure to reform the Italian government.  The EU, once seen as the great unifying force is now seen as a millstone on the neck of Europe.  Many countries will want to renegotiate their relationship with others in Europe.  The Euro and the European Union economy is stagnant, virtually lifeless.  Voters have noticed and are changing their governments.

Change is coming in every region. The Middle East is in turmoil and will take years to shake out.  Old leaders like Syria and Egypt have lost clout.  New leaders like the UAE and Iran are rising and will have different priorities and relationships with the West.  China will claim the sea lanes between itself, the Philippines, Japan and Indonesia as its own, asserting and expanding control over a wide area and as a naval power.  None of these countries individually, and perhaps not even together, can stand in China's way.

Change is coming in transportation, communication, business structure and models.  We'll finally get the car that drives us to work, the smart assistant that has all the answers.  We'll automate more and more of the jobs that blue collar workers used to do.  All of this knowledge and automation will increase uncertainty for people with less than a college education, while creating more profits and opportunity for people with IT and finance skills.  Increasingly no one makes things, and no one will own things. 

Change is coming in business creation.  A firm started by three guys seeking to rent out a spare bedroom has a larger market value than a hotel chain with over 75 years of experience. Companies claim outsized market valuations with no real assets or infrastructure, while those with significant investments, tooling, and cash on hand fall in value.

Something is going to give

For students of history, we can look back and see that these conditions have existed in prior generations.  For example, just before WW I the world was as integrated and traded as aggressively and extensively as we do today.  Movements seeking to overthrow the status quo were oppressed but eventually won (in Russia especially with socialism).  People were leaving the rural areas to move to the cities in one of the first major population movements.  Economies were integrating. Yet through a series of misunderstandings and linked alliances, a few critical acts threw the entire world into war.

We aren't suggesting that the world is a few steps short of war now, but many of the same conditions exist as they did then, and at other critical points in time.  History has a way of repeating itself, and we have a habit of building the same infrastructure and expectations as in the past, expecting that the conditions and rule we set will sustain, and that disruption is difficult if not impossible.  Yet our rigid but fragile relationships, structures, financial models are coexistent and interdependent.  Pull the wrong Jinga block and everything collapses - remember the housing debacle from 2008?  Think we've fully recovered from that?

Just the opposite.  We face even more change and uncertainty than in that time frame, we've just done a better job papering over the issues.  Greece is still Greece and dependent on the EU while thousands of migrants move in.  Northern Europe pushes away from Southern Europe as the UK pushes away from both.  Russia moves in to fill the void and take advantage of the chaos of both Europe and the Middle East. The US has pulled back, moving toward greater isolationism.  There is no concordance of action or responsibility.  No global policeman.  In fact increasingly it's every country or region for itself, at least economically speaking.

Are you ready for the change?

If this sounds dire or ominous, it's not.  Fear is allowing uncertainty and the unknown to cause panic or doubt.  Confidence is predicting the future and taking advantage of the opportunities.  When everyone else is selling, will you be buying?

Understanding the vital forces at play in your markets and in our economies and world is important.  Significant change is going to be unleashed. Those that are nimble and agile, those that have the insight to see what's happening and those prepared to act will benefit, tremendously.  Those that can innovate to create not only new products but new markets, new experiences and new business models will win outsized rewards while those that "stick to their knitting" will be viewed in the same way we talk about Blockbuster or Tower Records today.  It's just that there will be more of them to use as case studies.

Right now you should be gathering the trends and assessing the scenarios, predicting what you think will unfold in 2017.  It will be more dramatic than you think.  Donald Trump and his like don't get elected to sustain the status quo.  There will be change.  Understanding that, preparing for it and anticipating it, and building the skills to surf when the wave breaks will be the difference between the firms that are lampooned in the coming case studies and those that grow and expand in the coming gale forces.

Sure, we can't tell you when the gales will break or exactly where, or which Jinga block will collapse the structure.  Each industry or geography will have a different assessment.  Understanding that it can happen and it is likely to happen, and playing out the scenarios to respond effectively as it happens, and having the innovation and agility to morph as it happens is what matters. 

We aren't sowing the wind as much as we are simply neglecting or ignoring the tensions that are building.  Coming markets will experience a whirlwind, and you have the opportunity to reap that whirlwind or to ride it to new places.  The choice is yours, the skills and knowledge are evident, the investment decisions must be made.
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posted by Jeffrey Phillips at 10:30 AM 0 comments

Friday, December 16, 2016

Why innovation portfolios matter

At this point in business evolution, every CEO understands the need for more innovation.  After a decade of reading about it, getting pounded over the head with the Jobs/Apple story and watching new innovations disrupt entire industries, businesses are starting to react.  More and more of them are doing innovation, with drastically different outcomes.  Some are successful.  Many are making significant investments and have had little success.  Some are frankly abject failures.  What I constantly fail to understand is why innovation is treated so cavalierly, with so little regard for planning and integration to strategy.  In many cases it's as if executives throw up their hands and succumb to the idea that innovation is black magic.

Innovation does require creativity and expansive thinking.  It requires divergent thinking and exploration, the willingness to explore customer needs and market trends.  It can require creating new products or services or business models that don't align and may even cannibalize existing products and services.  It requires a new way of thinking, new expectations and often, new skills and tools.  But none of this is even remotely new, or poorly documented, or beyond the reach of many of the people you already employ.  Nothing about innovation is black magic, although many executives and decision makers continue to act as if it is - mostly from a lack of understanding or limited time to fully grasp the approach.

Language, as an example

Take for example the idea of creating a simple, consistent language for innovation.  Defining the terms you'll use to ask for and measure innovation activities.  For example, are the ideas you want "incremental" signalling small change to existing products and services, "breakthrough" or "disruptive" to signal increasing difficulty and impact.  These terms are reasonably well known and defined in the innovation canon, and using them consistently sends signals that help innovations do new and interesting things.

The definitions I've just provided also align to what many of us know as the "three horizons" model - the idea that innovations can have different impacts.  Incremental innovation is sustaining, extending the life and value of existing products and driving revenues, while disruptive innovation is transformative, seeking to create entirely new markets or segments or fill valuable but unmet needs.  The former is less risky and much easier to do with existing, conventional tools, while disruptive innovation takes far more research, takes longer to prove, is more likely to fail but when successful has outsized implications.

All of that should be relatively obvious so far.  If so, why don't more companies define an innovation portfolio and set intentional goals for the amount of innovation investment in a specific year, and how to divide that investment across the three horizons?  Certainly companies are good at product portfolio and roadmaps, making decisions on how much to invest in older technologies, how much to invest in newer products and the roadmaps and versions that should be developed.  Good product management requires that we consider the maintenance and investment to sustain older products and contrast that with the effort to develop and launch new products.  Product portfolios help rationalize opportunities and investments.  Product roadmaps help us think through how a product will morph and add value over time, to remain valuable for customers by adding new capabilities or features.  Most product management teams assign resources and plan projects based on the product portfolio, company objectives and roadmaps.  The question is:  why don't innovation teams do the same thing?  Where are the strategies, portfolios, investment plans for innovation?

Linking innovation to strategy

This last question raises several issues or objections.  The first has to do with linking innovation to strategy.  Often innovation becomes viable when companies decide that they need a compelling new product or service, to respond to customer needs or competitive threats.  Too often this is not in response to strategic planning but a reaction to something from the external market.    These reactions mean that innovation often isn't planned or budgeted, but reactions to market forces.

A number of reactions to market forces doesn't create a cohesive strategy, and usually isn't even good tactics.  Lacking a comprehensive plan or portfolio, and with few upfront financial resources, innovation is done haphazardly on a shoe string.  Without a holistic, comprehensive plan, innovation is done in fits and starts across the organization with wildly different outcomes.

Further, since there is often little definition or clear expectations of outcomes, most innovation outcomes are incremental, since that type of innovation relies most heavily on how things are done today.  This is why so much innovation work seems to fail to achieve expectations and ends up as modest changes to existing products.

Innovation Portfolio

Now, compare and contrast the haphazard approach with a company that defines an innovation portfolio plan.  In this it may determine that some portion of its innovation efforts will be incremental, some breakthrough and some disruptive.  These allocations are made based on expect competitive maneuvers, customer demands, the age and viability of existing products and so on.  Many companies use a "rule of thumb" to divide the portfolio into 70% incremental, 20% breakthrough and10% disruptive.  This ensures the majority of the innovation activity is focused on near term products that have a high probability of success but lower potential, but also ensures that the company is taking some significant risks and focusing on longer term and potentially more valuable opportunities.

With an portfolio in hand executives can ask about the importance and value of each innovation activity, and make determinations to increase the risk and uncertainty by pushing for more disruption when necessary, or identifying needs or gaps in the portfolio.  It's also helpful to use the portfolio as a way to manage product groups and teams.  First to understand if the team has done some successful innovation and if not, walk them through the steps from incremental to disruptive.  Second to measure the innovation goals they had at the beginning of the year and compare to actual outcomes at the end of the year.  Did the team achieve its expected allocation of incremental, breakthrough and disruptive innovation?  If not, why not?

Formalizing Innovation

If you are thinking that an innovation portfolio, budgeting process and roadmap seems like we are formalizing innovation, you are correct.  Innovation needs to become a recurring competency that we plan for.  We have tools like a portfolio to help frame the goals and discussion.  There's no reason to leave a valuable opportunity like innovation up to chance.  There's an important balance between locking innovation down with too much bureaucracy and overhead, and leaving it with little or no guidance at all.  The happy medium that provides guidance but leaves room for exploration is the portfolio.
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posted by Jeffrey Phillips at 6:21 AM 0 comments

Wednesday, December 14, 2016

Understanding innovation's past leads to incredible insight

We tend to be very short sighted, we corporate executives.  Our lifespans are relatively brief, all things considered.  There are over 240 years since the founding of the United States, and using a 20 year cycle for generations that suggests approximately 12 generations of people during that brief window.  Most of us work for approximately 40 years, but we rarely consider the events or recent history before we started working.  In fact there's very little rationale to think about history in many cases, except for some hoary old stories about the founding of a company and its emergent culture.  Most of our waking, productive time is focused on the now, the current quarter, the next quarter, because that's what we are evaluated on, compensated for.  There's little time to worry about what might happen in the future, and even less time to worry about what happened in the recent past.

It's this lack of context and historical appreciation that makes innovation so interesting, because our short term focus convinces us that the way things are right now is a permanent condition, when in reality it's a fleeting experience that will change again shortly.

A brief innovation history lesson of the US

From its founding in the early 17th century until well after the US Civil War, the vast majority of people lived in small, rural settlements.  Many of the people who lived in that period grew the food they ate, raised the beef or chicken they consumed and had little financial resources.  Very few companies existed and most "innovation" was in the realm of transportation - primarily moving goods and/or people on waterways (canals, steamships) or rail.  Other than the military and the emerging railroad business, there were few large organizations and even fewer models for how to build and manage a business.

After the Civil War and up to the Great Depression there was a significant flowering of major industries, building on the transportation infrastructure built earlier and on the idea of mass production.  Oil, steel, railroads and other monopolies emerged, and banking and financial services grew alongside these emerging industries.  Yet still the vast majority of people lived hand to mouth in rural settings.  Innovation in these days was often focused on communication - Marconi, the "wireless", radio and other devices reduced the distances and built common stories for the American public.

World War Two changed everything.  Washington DC, formerly a very small, sleepy city, grew dramatically during the war, and the federal government grew in importance.  As we entered the Cold War, the growth that the World War created was sustained by fears of Russia and a new emerging Cold war.  Innovation during this time was focused on technology - especially weaponry.  The nuclear bomb, the ability to deliver weapons at a distance, the space race. 

The 1960s through the 1990s were boom years (discounting the Oil embargo) mostly due to dividends we reaped from the investments in technology and the space race.  The US emerged as the sole large economy undamaged by the Second World War and grew to dominate its allies.  The space race with Russia and military investments created a range of new technologies that were quickly converted into consumer technologies.

The 2000s and onward are less about product innovation and more about business model innovation and financial engineering.  Increasingly the US is becoming a high cost country in terms of labor and manufacturing, and outsourcing jobs to less costly locations.  We are focused on changing the terms of compensation and payment for services (Google funded by ads rather than licenses) and financial engineering in banking, financial services and other industries.  GM for a long time was profitable not because it built cars but because it financed them. 

Up until the 1880s the vast majority of people were farmers, mechanics, craftsmen.  They worked with their hands, with deep, innate knowledge about their services and skills.  This model changed as Henry Ford and others created the mass production line, which has in many cases reached its logical conclusion, at least as far as human workers on the line are concerned.  We retain many of the measures and metrics of an agrarian economy - taking vacations in the summer, planning and budgeting around an annual cycle, reporting on a quarterly basis - that have no real meaning in today's knowledge based economy that competes on a global basis.

What emerges about innovation from this review of history?
  1. In the past, a lot of innovation was driven by the most important impediment or challenge in a specific timeframe:  transportation of goods and people in the colonial era, banking and communications during the dawn of larger enterprises, communication technologies as the country grew, defense and technology as the country fought and was threatened with a cold war, business models and financial engineering as the technology investment petered out.
  2. Innovation comes in waves and as one wave is peaking, another wave is just starting to emerge.Innovations take time to proliferate but almost always proliferate faster than we might expect.
  3. There is a cyclical, repetitive nature to innovation, which we ignore at our peril.  Take for example the nature of retail.  Sears grew because it had a huge selection and could deliver goods anywhere.  The Sears catalogue is an analogue to today's Amazon website.  Sears modified its business model to move toward a physical retailing model as the US expanded and as people moved to the suburbs and seems to have forgotten its mass, virtual retailer roots.  Today, Amazon and other virtual retailers dominate, but we can imagine a future where hyperlocal retailers blending virtual and physical stores and delivery emerge.
  4. Business models and business conditions are temporary.  The concept of mass production is an idea that may be relevant to exactly one century - the 20th century - for the US.  The fact that mass production worked then, in those conditions, does not mean that it should and must continue to work as an operative model now, because many conditions have changed.  The internet and ecommerce make it much more possible for individuals to be craftsmen (Etsy for example) or self-employed (Uber, AirBnB), which is simply a return to an earlier model, with much more technology underpinning.
  5. Technology introduces change, customers and innovators change technologies into solutions that change the market.  Technologies change but unless they can be harnessed and adapted to create benefits and solutions that customers need and want, they aren't meaningful.  The transistor by itself is interesting, a smaller, cheaper portable radio provides a huge benefit to consumers.  We innovators fall in love with technology but fail to understand that it is the customer need and benefit that is paramount.
  6. Much innovation in one era is built on the investments of a previous era.  Mass production isn't all that useful unless there is a good transportation infrastructure, as an example.  The dot com boom was based on research and technologies that were sparked during the Cold War.  Currently those technologies are reaching end of life, and we see far more innovation in services, business models and customer experiences than in technologies, and far more financial engineering than is probably good for the economy.  This is because we haven't had a real flourishing of either new technologies, new infrastructure or a real competitive threat like the Soviet space race.  In other words, we've coasted for the past 20 years, harvesting previous investments without laying a foundation that future generations can build on, unless they want to bet on sub-prime mortgages.
  7. A lot of innovation was created by those outside the status quo - new immigrants (Andrew Carnegie as an example) or those outside the establishment, typically on the frontiers, who sought to solve problems faced by the emerging population, while the establishment was relatively comfortable.  The median age of the US was relatively low, and few people lived into old age.
What can we predict about innovation in the near future based on the past?

  1. We should be on the cusp of some significant new emerging innovation, but for the life of me I can't figure out what that is.  It could be a continuing evolution of business models and customer experiences.  We lack a real compelling burning platform like the Soviet Space race and are more distracted and less unified than in previous generations.  Also, corporations spend less on R&D than in the past and the government is spending less on a percentage basis on technology and R&D.  This means that future innovation is less likely to be technology driven and more focused on experiences, services and hopefully business models.
  2. The older command and control hierarchies and mass production thinking may give way to new organizational models, new governance and new ways of building companies.  As we move from an agrarian calendar and mass production models, new business models, relationships and organization models will emerge and may drive new innovation in organizational structures and customer relationships.
  3. The individual or small business becomes as important to the economy as large corporations.  More people can work as craftsmen or knowledge workers on their own, leveraging virtual workspace technologies and the increasing value of knowledge work.  Larger business increasingly want to outsource work to find the best value for their money, retaining only the mission critical or activities that reflect competitive advantage.  The infrastructure in terms of software and ancillary services exists to support a larger workforce of independent contractors and small businesses.
  4.  Past innovations were often launched by public works or investments by the government.  Transportation was either privately financed by large groups or by the government.  Defense, aerospace and technology were funded in response to the Cold War.  Future innovations will emerge from customer needs and those that can aggregate them quickly, and less from technologies or challenges identified by the government.  Indeed the government is becoming a consumer of commercial innovations rather than a springboard for future innovation, with the possible exception of healthcare, aging and green technologies.  This means a more distributed and diversified innovation future, less focused on one large population or government challenge and more competition over standards and protocols.
  5. Immigration, like it or not, will play an important role in future innovation.  The resident population is aging, and less likely to be as active innovating and solving problems because of the wealth transfer to older populations through retirement savings and health care transfers.  More innovation is likely to come from immigrants who refresh the population at the lower end of the age scale, who face more challenges and difficulties than some of the native born population.  Aging populations by definition are less innovative, so to refresh the innovation spirit and energy we need to recruit immigrants who can create compelling new innovations.  As the country ages, and boomers retire, there will be far more emphasis on innovation in terms of products and services for the boomers, who are used to having their own way and will demand far better products and services than their parents did when they retired.
  6. The pace and nature of innovation will accelerate as more people in more places become part of the global economy and more consumers achieve middle class status for the first time.  There are far more competitors in far more regions and geographies, which means more competition.  However, there are far more people entering the middle class who have buying power and will want new products and services. This means, though, that innovations must be conceived for global consumers, as the markets for new innovations will be in many more markets than just the US.  Our understanding of the needs and expectations of the US-based customer is poor; our understanding of needs and expectations of newly emerging customers in other countries is virtually non-existent.  We need to move faster, with greater urgency, to create innovations that meet global needs, not just US needs.
Those who don't study the past are doomed to repeat it

I started out this post commenting on the lifecycle of the average manager, and how narrow their time focus is.  While we live out our work lives over 40 years we do so in 90 day increments, often failing to appreciate how repetitive and cyclical business and innovation are.  The more we understand about how innovation has unfolded in the past, the more we are likely to be able to predict how innovation will emerge in the future.  There are two great quotes that are relevant here.

The first is Spinoza's quote:  Those who cannot remember the past are condemned to repeat it.  And we do, quite often, repeat the experience and mistakes of the past.

The second is Faulkner's:  The past is never dead.  It's not even past.

We can learn from the past about how innovation unfolds, and use that insight to determine how innovation is likely to emerge, and what the key drivers will be.  Doing so makes us smarter and more prepared to engage innovation as it occurs, and to use those innovation drivers to our benefit.
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posted by Jeffrey Phillips at 6:15 AM 0 comments