How Great Companies Innovate

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Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution by
Geoffrey Moore at SVPMA Monthly Event December 2006

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How Great Companies Innovate

  1. 1. Dealing with Darwin Managing Innovationin a Commoditizing Marketplace Geoffrey Moore Managing Director
  2. 2. Dealing with Darwin • Darwin @ Work • Global low-cost competition resulting in commoditization • Leads to natural selection and survival of the fittest • Darwin’s Mandate • Innovate to become sustainably differentiated, or • Accept erosion in margins and revenues • The Challenge • We continue to embrace failed models of innovation • We need to think about innovation in a new way • The Goal of This Talk • Reframe the innovation agenda in a way that works • Special focus on enterprises with established track records2 Darwin and the Demon © 2004, TCG
  3. 3. Four New Ideas About Innovation • Return on Innovation • Innovation Strategy • Funding Innovation • Perpetuating Innovation3 Darwin and the Demon © 2004, TCG
  4. 4. Return on Innovation4 Darwin and the Demon © 2004, TCG
  5. 5. When Innovation Creates No Return It’s A Vector Math Problem! = 0 Bubble-up Innovation Many Types When each unit strives to be unique in its own way, the net result is little overall differentiation. Competitors find it easy to neutralize these efforts5 Darwin and the Demon © 2004, TCG
  6. 6. What Darwin DemandsInnovate to Achieve Competitive Separation RE * CO * Gain bargaining power Competitor 1 by getting separation * YOU from your * Competitor 2 competitive set * Competitor 3 Failure to separate Competitive Set means low to no returns on innovation6 Darwin and the Demon © 2004, TCG
  7. 7. Focus on Your Core • Core: • Processes that enable or reinforce your chosen vector of competitive differentiation • Context: • All other processes This is not the same as your core competence This is not the same as your core business7 Darwin and the Demon © 2004, TCG
  8. 8. Return on Innovation Differentiation Neutralization Failed Attempts Productivity Waste Waste: Innovation projects that even when they succeed fail to create sustainable competitive advantage8 Darwin and the Demon © 2004, TCG
  9. 9. Managing Return on Innovation • Identify a vector of differentiation to define core • Core is those processes that create the differentiation • It is the source of your unmatchable competitive advantage • Define all other work as context • Necessary to your success, but not differentiating • Apply neutralization and productivity strategies here • Commit to “beyond class” outcomes • A set of offers that direct competitors cannot or will not copy • No “best in class” waste! • Elsewhere actively promote “good enough” criteria9 Darwin and the Demon © 2004, TCG
  10. 10. Innovation Strategy10 Darwin and the Demon © 2004, TCG
  11. 11. Category Maturity Life Cycle Landscape of Competitive Advantage Changes Indefinitely elastic middleRevenue Growth Growth C Market D Mature Fault Market Line! B Declining Market E A End of Life Technology Adoption Time Life Cycle 11 Darwin and the Demon © 2004, TCG
  12. 12. Building an Innovation Strategy Play to the Forces Active in Your Marketplace Customer Intimacy Zone Product Category Leadership Renewal Zone Zone Operational Excellence Zone12 Darwin and the Demon © 2004, TCG
  13. 13. Innovation Comes in Many Forms Each is a Potential Vector of Differentiation Line Extension Design Marketing Experiential Innovation Innovation Innovation Innovation Platform Innovation Organic Innovation Product Structural Innovation Innovation Category Renewal Harvest & ExitDisruptive Application Value Engineering Integration Process Value MigrationInnovation Innovation Innovation Innovation Innovation Innovation13 Darwin and the Demon © 2004, TCG
  14. 14. Innovating in Growth Markets The Product Leadership Zone Disruptive Create a new category, build the value chain to serve Innovation it, and ride its adoption to success * eBay Application Take an established product or service into a new Innovation market where it can tap unmet demand * RIM Product Take share in an established market with a new offer Innovation that dramatically outperforms current market leaders * AMD Platform Stimulate and dominate next-generation growth Innovation markets by collaborating with partners * Google14 Darwin and the Demon © 2004, TCG
  15. 15. Innovating in Mature Markets The Customer Intimacy Zone Line Extension Gain market share by modifying an established brand Innovation to appeal to an underserved market segment * HP Enhancement Gain margin share by creating greater perceived Innovation value at the surface of an existing offer * Motorola Marketing Gain customer preference through differentiated Innovation communication and delivery methods * Apple Experiential Gain customer preference through differentiating the Innovation experience of the offer and its delivery * World of Warcraft15 Darwin and the Demon © 2004, TCG
  16. 16. Innovating in Mature Markets The Operational Excellence Zone Value Engineering Take market share by being first to the next price- Innovation elasticity inflection point * CDW Integration Protect and extend market share by eliminating the Innovation complexity of managing many disparate elements * SAP Process Win share or margins by productivity gains from Innovation reengineering business practices * Dell Value Migration Win margins by migrating to a new and more highly Innovation valued business model * IBM16 Darwin and the Demon © 2004, TCG
  17. 17. Innovation Strategy • Pick a small number of innovation vectors for core • Ideally one • If more, then fused into one • Drive your performance beyond category norms • Competitors either cannot or will not match it • Their neutralization efforts fall flat • Declare all other forms of innovation context • Focus on neutralization where needed (includes table stakes) • Everywhere else, focus on productivity17 Darwin and the Demon © 2004, TCG
  18. 18. Funding Innovation18 Darwin and the Demon © 2004, TCG
  19. 19. Where Are Your Resources Invested? Current Core Becomes Context Over Time Digital media n tio tia Mobile computing en er iff Internet-enabled transactions D n io Visualization and simulation at iz al tr Personal computing eu N Reporting and analytics On-line transaction processing Resources migrate to the bottom19 Darwin and the Demon © 2004, TCG
  20. 20. Resources Get Trapped in Context Context Core Core Context Agile Aged Context delivers diminishing returns Organizations become uncompetitive20 Darwin and the Demon © 2004, TCG
  21. 21. Free Trapped Resources to Fund Innovation Extract Resources from Context to Repurpose for Core “Coins in the Couch”21 Darwin and the Demon © 2004, TCG
  22. 22. The Cycle of Innovation Core Context Deploy Manage Differentiation Mission-critical At Scale Processes At Scale Mission Critical 2. Deploy 3. ManageNon-Mission-Critical Extract Resources To Repurpose Invent 1. Invent 4. Offload For Core Differentiated Offering Fund next innovation22 Darwin and the Demon © 2004, TCG
  23. 23. BCG Model for Funding Innovation The Growth/Share Matrix Hi Growth Lo Growth Hi Market Share Lo Market Share ? GreatFund next innovation . model but . . Must first fix two fatal flaws first23 Darwin and the Demon © 2004, TCG
  24. 24. Where Resources Get Trapped Mission-Critical Context Core Context Process creates All other differentiation that processes wins customers Mission Critical Process shortfall creates Major Challenge Risk serious and immediate riskNon-Mission-Critical All other processes Differentiation24 Darwin and the Demon © 2004, TCG
  25. 25. How the Cycle Breaks Down Clinging to Mission-Critical Context But lack of Core Context resources here Resources results in failure get stuck to deploy! here Mission - Mission Critical critical 2. Deploy risk 3. ManageNon-Mission-Critical Resources Resources are still get 1. Invent 4. Onload Offload added here for invested here support25 Darwin and the Demon © 2004, TCG
  26. 26. Freeing Resources Trapped in ContextThe Six Levers Model 1. Centralize. Bring operations under a single authority to reduce overhead costs and create a single decision-making authority to manage risk 2. Standardize. Reduce the variety and variability of processes delivering similar outputs to further reduce costs and minimize Core Context risks. 3. Modularize. Deconstruct the system into its component subsystems and standardize interfaces for future cost reductions. 4. Optimize. Eliminate redundant steps, automate standard sequences, streamline remaining operations, substitute lower-cost components, or otherwise cost- and resource- reduce. 5. Instrument. Characterize the remaining processes in terms of the variability of key parameters and develop monitor-and- control systems to manage their performance. 6. Outsource. Drive processes out of the enterprise entirely to further reduce overhead, variabilize costs, and minimize future investment. Incorporate vendor use of monitor-and- control systems into Service Level Agreement.26 Darwin and the Demon © 2004, TCG
  27. 27. Funding Innovation • There are always resources to reclaim • Coins in the couch are everywhere • The more mature and successful you have been, the more coins there are • The key is to repurpose them for core • Identify core before you go after context coin • Mantra: Extract resources from context to repurpose for core • Failure to repurpose begins a downward spiral • Savings are used to make the current quarter • You start the next quarter at Square One and with fewer coins27 Darwin and the Demon © 2004, TCG
  28. 28. Perpetuating Innovation28 Darwin and the Demon © 2004, TCG
  29. 29. The Problem with OutsourcingWe Are Losing Our Work Force Investment! Core Context Mission Critical Enabling Resources Resources Wanted Available Here Here People being released lack the skills to fill the positions being opened29 Darwin and the Demon © 2004, TCG
  30. 30. Revitalizing the Work ForceResource Recycling Zones Deployers Use conventional methods to ramp and manage mission-critical processes at scale Deployment B Zone Inventors Use unconventional Optimizationmethods to create and Invention incubate new core Zone II III Zone C A Optimizers I IV Use the Six Levers to extract resources from context to repurpose for core Work circulates clockwise People recycle counter-clockwise within zones 30 Darwin and the Demon © 2004, TCG
  31. 31. Perpetuating Innovation Handoff Handoff Deployment Zone Optimization Invention Zone Zone Executives focus on managing the hand-offs31 Darwin and the Demon © 2004, TCG
  32. 32. Growing Human Capital • Focus on building role expertise • Make it an explicit goal of job assignments • Maintain it through managed reassignments • Avoid overvaluing task expertise • Buys you productivity in the short term • Creates unproductive populations in the long term • Be cautious about asking people to change roles • Most people are most productive staying in role • Revitalization comes from changes in task content32 Darwin and the Demon © 2004, TCG
  33. 33. Recap: Four Ideas • Return on Innovation • Performances competitors cannot or will not match • Innovation Strategy • Focusing innovation to create escape velocity • Funding Innovation • Extracting resources from context to repurpose for core • Perpetuating Innovation • Resource recycling: The perpetual innovation machine33 Darwin and the Demon © 2004, TCG
  34. 34. Thank You gmoore@tcg-advisors.com34 Darwin and the Demon © 2004, TCG

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