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Dealing with Darwin

Innovating to Survive & Thrive



               Geoffrey Moore
               Managing Director
               August 10, 2010
Agenda


    •   Focusing Innovation

    •   Funding Innovation




2                             Dealing with Darwin © 2006, TCG Advisors LLC
                                                           August 11, 2010
Focusing Innovation




3            Dealing with Darwin © 2006, TCG Advisors LLC
                                          August 11, 2010
Three Returns on Innovation

    •   Differentiation
        • Your offers are distinctly preferable to the competition, and
          customers seek them out and pay a premium for them


    •   Neutralization
        • Your offers are competitive with others in your category and
                                                          category,
          you win sales based on execution and price


    •   Optimization
        • Your offers cost less to produce than they used to, giving you
          the ti
          th option of lowering price or i
                      fl     i     i     increasing margins
                                                i       i



4                                     Dealing with Darwin © 2006, TCG Advisors LLC
                                                                   August 11, 2010
Innovating for Differentiation
    Focus on Competitive Separation

                                                             Amplify a specific
                                                            vector of innovation

              *
                                                 *      Gain bargaining power
          Competitor 1
                                                         by getting separation
                           *
                          YOU                                 from your
              *
         Competitor 2
                                                            competitive set
                              *
                         Competitor 3
                                                          Failure to separate
              Competitive Set
              C     ii S                                 means low to no relief
                                                           on profit margins

5                                   Dealing with Darwin © 2006, TCG Advisors LLC
                                                                 August 11, 2010
Core vs. Context
    •   Core:
        • Processes that enable and amplify your chosen vector of
          competitive separation.


    •   Context:
        • All other processes.
        • C
          Context is determined by what you choose to make core.


    •   Differentiation
        • It is not sufficient just to be different—everyone is
        • Your differentiation has to be “unmatchable”
                                              unmatchable
        • And the customer has to really want it


6                                      Dealing with Darwin © 2006, TCG Advisors LLC
                                                                    August 11, 2010
Declaring Your Core
                   Where Can You Be “Unmatchable”?
                     e e Ca   ou e U    atc ab e

     Product
                  Disruptive
                       p           Solution                     Product                  Platform
    Leadership   Technology      Specialization               Engineering               Ecosystem
       Zone
                 Genentech         Accenture                       BMW                    Google


    Customer     Power Brand
                                    Product                     Marketing                Quality of
    Intimacy        Line
                                    Design
                                    D i                         Programs
                                                                P                       Experience
                                                                                        E     i
                  Extension
      Zone
                   Mattel            Apple                       Amazon               Cirque du Soleil


Operational                                                                              Business
                   Value            System                    Process
Excellence       Engineering
                 E i     i        Integration
                                  I t    ti                  Optimization
                                                             O ti i ti
                                                                                          Model
                                                                                        Innovation
  Zone
                   WalMart           SAP                          Toyota              Salesforce.com


7                                      Dealing with Darwin © 2009, TCG Advisors LLC
                                                                    August 11, 2010
How NOT to Manage Innovation
    Remember Your Vector Math Class!




                                          = 0
        Bubble-up I
        B bbl     Innovation
                        ti

             When organizations innovate “bottoms up,”
                  competitive separation i small,
                          titi          ti is     ll
                and differentiation is easily matched:
             Lots of activity, not much to show for it.

8                                Dealing with Darwin © 2009, TCG Advisors LLC
                                                              August 11, 2010
Focusing Innovation for Separation

    • You will innovate in many different areas
       • This is necessary to keep up with market evolution
       • It is not about differentiation

    • You will not achieve competitive separation in many areas
       • You must focus intensely to achieve “unmatchability”
                                              unmatchability
       • Even then there is no guarantee

    • You must be highly directive in declaring your core
       • Investment must be very assymetrical
       • Gi i everyone th i f i share i a l i strategy
         Giving          their fair h is losing t t



9                                   Dealing with Darwin © 2006, TCG Advisors LLC
                                                                 August 11, 2010
Innovating for Neutralization
      Focus on Meeting the Market’s New Norm
                           Market s


                                                Regain market viability
      *
Competitor 1                                    by getting back into the
                                                    competitive set
      *
Competitor 2
                    *                             Rejoining is i i
                                                  R j i i i mission-

                     *
               Competitor 3
                                                  critical as failure to do
                                                   so means exclusion
                                                  from future purchase
 *
YOU                                                       decisions
Competitive Set
C     ii S




 10                           Dealing with Darwin © 2006, TCG Advisors LLC
                                                           August 11, 2010
Differentiation vs. Neutralization

     • Differentiation creates competitive separation
        • This is how you create superior profit margins
        • It requires major investments to be “unmatchable”

     • Neutralization overcomes competitive disadvantage
        • This is how you stay in the game
        • It requires modest investments to be “good enough”

     • Anything spent in between is waste!
        • Customers appreciate the extras but will not pay you for them
        • B i b t in class i a sucker’s b t
          Being best i l   is       k ’ bet



11                                   Dealing with Darwin © 2006, TCG Advisors LLC
                                                                  August 11, 2010
Innovating for Optimization
     Focus on Productivity

                           YOU                                Competition drives
                                                               commoditization
                *
           Competitor 1

                                                          Productivity gains are
               *
          Competitor 2
                                                           critical to keep pace
                                *
                                    *
                          Competitor 3
                                                         Optimizing is mission-
                                                         critical because failure
               Competitive Set
                                                           means no profits to
                     Price                                        reinvest
                    Deflation



12                                   Dealing with Darwin © 2006, TCG Advisors LLC
                                                                  August 11, 2010
Where to Optimize

     • Do not optimize when you are trying to be unmatchable
        • This is your core
        • You save elsewhere in order to overspend here

     • Do optimize when you are neutralizing—but carefully
        • You must achieve “good enough” status
                            good enough
        • You do not need to do more than that

     • Optimize intensely everywhere else
        • Context work which does not affect competitive outcomes
        • Thi is where you can “
          This i h             “save t invest”
                                     to i     t”



13                                  Dealing with Darwin © 2006, TCG Advisors LLC
                                                                 August 11, 2010
Return on Innovation
                Differentiation        Neutralization
                CORE                                    CONTEXT
                                                        Competitive

       Failed
      Attempts                                                               Optimization
                                                                                 CONTEXT
                                                                               Not Competitive

        Waste
         Sources of Waste:
         • Differentiation projects that don’t go far enough
         • Neutralization projects that go beyond good enough
         • Unaligned innovation efforts that cancel each other out
14                                    Dealing with Darwin © 2009, TCG Advisors LLC
                                                                   August 11, 2010
Funding Innovation




15            Dealing with Darwin © 2006, TCG Advisors LLC
                                           August 11, 2010
Where Are Your Resources Invested?
 Current Core Becomes Context Over Time

                              Electric Cars

                          Entertainment Systems

                    Navigation Systems

                Hybrid Engines

            Power Steering, Brakes, Windows
                  Steering Brakes
        Automatic Transmissions

     Combustion Engines
     Resources get trapped at the bottom
16                          Dealing with Darwin © 2006, TCG Advisors LLC
                                                         August 11, 2010
Resources Get Trapped in Context
       Context                                 Core




        Core
        C                                  Context
                                           C t t
        Agile
         g                                    Aged
                                               g
       Context delivers diminishing returns
       Organizations become uncompetitive
17                      Dealing with Darwin © 2006, TCG Advisors LLC
                                                     August 11, 2010
Fund Innovation
 by Freeing Trapped Resources

       Extract Resources from Context
            to Repurpose for Core




             “Coins in the Couch”

18                    Dealing with Darwin © 2006, TCG Advisors LLC
                                                   August 11, 2010
Where Are Your Resources Deployed?

                                     Core                                Context
                                Success increases                Success does not
                                 your competitive                affect competitive
                                  differentiation                  differentiation

        Mission Critical
       Failure is material to
     your current performance         7                                   65




                                                                                           SK
                                                                                         RIS
     Non-Mission-Critical
      Failure is not material         3                                   25
                                               REWARD

19                                        Dealing with Darwin © 2006, TCG Advisors LLC
                                                                2005,
                                                                       August 11, 2010
The Cycle of Innovation:
 What You Would Like to Have Happen
                               Core                 Context
              Deploy
              D l
          Differentiation                                                            Manage
             At Scale                                                             Mission-critical
                                                                                    Processes
                                                                                     At Scale

     Mission Critical
                            2.
                            2 Deploy                3. Manage
                                                    3 M



Non-Mission-Critical                                                                     Extract
                                                                                       Resources
              Invent        1.
                            1 Invent                4.
                                                    4 Offload                         To Repurpose
          Differentiated                                                                For Core
             Offering
                                Fund next innovation

20                                     Dealing with Darwin © 2006, TCG Advisors LLC
                                                                    August 11, 2010
What Actually Happens: Challenge #1
     The Mission Critical Context Resource Trap
         Mission-Critical

               But lack of
                                   Core                     Context
             resources here                                                                   Resources
            results in failure                                                                 get stuck
               to deploy!                                                                        here
                                                                Mission-
     Mission Critical                                           critical
                                                                  risk
                                 2. Deploy                    3. Manage


Non-Mission-Critical
               Resources
               R                                                                            Resources are
                 still get       1. Invent                       4. Onload
                                                                    Offload                 added here for
             invested here                                                                     support




21                                           Dealing with Darwin © 2006, TCG Advisors LLC
                                                                          August 11, 2010
Freeing Resources Trapped in Context
The Six Levers Model
                      1.   Centralize. Bring operations under a single authority to
                           reduce overhead costs and create a single decision making
                                                                      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.
                            i k
                      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.
                      6    Outsource. Drive
                           O tso rce Dri e processes o t of the enterprise entirel to
                                                        out                   entirely
                           further reduce overhead, variabilize costs, and minimize future
                           investment. Incorporate vendor use of monitor-and-control
                           systems into Service Level Agreement.


22                                     Dealing with Darwin © 2006, TCG Advisors LLC
                                                                    August 11, 2010
What Actually Happnes: Challenge #2
The Human Resources Recycling Trap
                    Core            Context

         Mission
         Critical




        Enabling


     Resources                                                         Resources
      Wanted                                                            Available
       Here                                                               Here




           People being released lack the skills
            to
            t fill the positions being opened
                   th     iti    b i        d
23                          Dealing with Darwin © 2006, TCG Advisors LLC
                                                         August 11, 2010
Freeing Resources Trapped in Context
Resource Recycling Zones                                                                       Deployers
                                                                             Use conventional methods to ramp
                                                                                and manage mission-critical
                                                                                    processes at scale

                                          Deployment
                                              B
                                             Zone
     Inventors
 Use unconventional
methods to create and




                                                                                Optimizatio
 incubate new core
                        Invention
                                n




                                                                                   Zone
                          Zone



                                              II    III
                          C                                                       A                Optimizers
                                              I     IV




                                                                                          on
                                                                                                Use the Six Levers to
                                                                                                extract resources from
                                                                                                 context to repurpose
                                                                                                        for core

                              Orchestrators
                           Manage transitions and
                             facilitate hand-offs
                            between the zones

24                                                  Dealing with Darwin © 2006, TCG Advisors LLC
                                                                          2005,
                                                                                 August 11, 2010
Perpetuating Innovation



 Change                                                                            Change
  Gears
  G                                                                                 Gears
                                                                                    G
                             Deployment
                                Zone




                                                 Optimiz
                    ention
                    one




                                                    Zon
                   Zo
                 Inve




                                                       ne
                                                       zation

      Innovation flows as fast as your slowest gear
      I     ti fl         f t           l    t
25                                  Dealing with Darwin © 2006, TCG Advisors LLC
                                                                 August 11, 2010
Recap

     •   Focusing Innovation
         • “Unmatchable” differentiation
         • “Good enough” neutralization
         • “Save to invest” optimization


     •   Funding Innovation
         • Extract resources from context to invest in core
         • Use the Six Levers—in sequence
         • Recycle resources—let people use their strengths
               y                  p p                     g



26                               Dealing with Darwin © 2006, TCG Advisors LLC
                                                              August 11, 2010
27   Dealing with Darwin © 2010, TCG Advisors LLC
                                  August 11, 2010

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Geoffrey Moore: Using Innovation to Thrive and Strive

  • 1. Dealing with Darwin Innovating to Survive & Thrive Geoffrey Moore Managing Director August 10, 2010
  • 2. Agenda • Focusing Innovation • Funding Innovation 2 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 3. Focusing Innovation 3 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 4. Three Returns on Innovation • Differentiation • Your offers are distinctly preferable to the competition, and customers seek them out and pay a premium for them • Neutralization • Your offers are competitive with others in your category and category, you win sales based on execution and price • Optimization • Your offers cost less to produce than they used to, giving you the ti th option of lowering price or i fl i i increasing margins i i 4 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 5. Innovating for Differentiation Focus on Competitive Separation Amplify a specific vector of innovation * * Gain bargaining power Competitor 1 by getting separation * YOU from your * Competitor 2 competitive set * Competitor 3 Failure to separate Competitive Set C ii S means low to no relief on profit margins 5 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 6. Core vs. Context • Core: • Processes that enable and amplify your chosen vector of competitive separation. • Context: • All other processes. • C Context is determined by what you choose to make core. • Differentiation • It is not sufficient just to be different—everyone is • Your differentiation has to be “unmatchable” unmatchable • And the customer has to really want it 6 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 7. Declaring Your Core Where Can You Be “Unmatchable”? e e Ca ou e U atc ab e Product Disruptive p Solution Product Platform Leadership Technology Specialization Engineering Ecosystem Zone Genentech Accenture BMW Google Customer Power Brand Product Marketing Quality of Intimacy Line Design D i Programs P Experience E i Extension Zone Mattel Apple Amazon Cirque du Soleil Operational Business Value System Process Excellence Engineering E i i Integration I t ti Optimization O ti i ti Model Innovation Zone WalMart SAP Toyota Salesforce.com 7 Dealing with Darwin © 2009, TCG Advisors LLC August 11, 2010
  • 8. How NOT to Manage Innovation Remember Your Vector Math Class! = 0 Bubble-up I B bbl Innovation ti When organizations innovate “bottoms up,” competitive separation i small, titi ti is ll and differentiation is easily matched: Lots of activity, not much to show for it. 8 Dealing with Darwin © 2009, TCG Advisors LLC August 11, 2010
  • 9. Focusing Innovation for Separation • You will innovate in many different areas • This is necessary to keep up with market evolution • It is not about differentiation • You will not achieve competitive separation in many areas • You must focus intensely to achieve “unmatchability” unmatchability • Even then there is no guarantee • You must be highly directive in declaring your core • Investment must be very assymetrical • Gi i everyone th i f i share i a l i strategy Giving their fair h is losing t t 9 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 10. Innovating for Neutralization Focus on Meeting the Market’s New Norm Market s Regain market viability * Competitor 1 by getting back into the competitive set * Competitor 2 * Rejoining is i i R j i i i mission- * Competitor 3 critical as failure to do so means exclusion from future purchase * YOU decisions Competitive Set C ii S 10 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 11. Differentiation vs. Neutralization • Differentiation creates competitive separation • This is how you create superior profit margins • It requires major investments to be “unmatchable” • Neutralization overcomes competitive disadvantage • This is how you stay in the game • It requires modest investments to be “good enough” • Anything spent in between is waste! • Customers appreciate the extras but will not pay you for them • B i b t in class i a sucker’s b t Being best i l is k ’ bet 11 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 12. Innovating for Optimization Focus on Productivity YOU Competition drives commoditization * Competitor 1 Productivity gains are * Competitor 2 critical to keep pace * * Competitor 3 Optimizing is mission- critical because failure Competitive Set means no profits to Price reinvest Deflation 12 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 13. Where to Optimize • Do not optimize when you are trying to be unmatchable • This is your core • You save elsewhere in order to overspend here • Do optimize when you are neutralizing—but carefully • You must achieve “good enough” status good enough • You do not need to do more than that • Optimize intensely everywhere else • Context work which does not affect competitive outcomes • Thi is where you can “ This i h “save t invest” to i t” 13 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 14. Return on Innovation Differentiation Neutralization CORE CONTEXT Competitive Failed Attempts Optimization CONTEXT Not Competitive Waste Sources of Waste: • Differentiation projects that don’t go far enough • Neutralization projects that go beyond good enough • Unaligned innovation efforts that cancel each other out 14 Dealing with Darwin © 2009, TCG Advisors LLC August 11, 2010
  • 15. Funding Innovation 15 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 16. Where Are Your Resources Invested? Current Core Becomes Context Over Time Electric Cars Entertainment Systems Navigation Systems Hybrid Engines Power Steering, Brakes, Windows Steering Brakes Automatic Transmissions Combustion Engines Resources get trapped at the bottom 16 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 17. Resources Get Trapped in Context Context Core Core C Context C t t Agile g Aged g Context delivers diminishing returns Organizations become uncompetitive 17 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 18. Fund Innovation by Freeing Trapped Resources Extract Resources from Context to Repurpose for Core “Coins in the Couch” 18 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 19. Where Are Your Resources Deployed? Core Context Success increases Success does not your competitive affect competitive differentiation differentiation Mission Critical Failure is material to your current performance 7 65 SK RIS Non-Mission-Critical Failure is not material 3 25 REWARD 19 Dealing with Darwin © 2006, TCG Advisors LLC 2005, August 11, 2010
  • 20. The Cycle of Innovation: What You Would Like to Have Happen Core Context Deploy D l Differentiation Manage At Scale Mission-critical Processes At Scale Mission Critical 2. 2 Deploy 3. Manage 3 M Non-Mission-Critical Extract Resources Invent 1. 1 Invent 4. 4 Offload To Repurpose Differentiated For Core Offering Fund next innovation 20 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 21. What Actually Happens: Challenge #1 The Mission Critical Context Resource Trap Mission-Critical But lack of Core Context resources here Resources results in failure get stuck to deploy! here Mission- Mission Critical critical risk 2. Deploy 3. Manage Non-Mission-Critical Resources R Resources are still get 1. Invent 4. Onload Offload added here for invested here support 21 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 22. Freeing Resources Trapped in Context The Six Levers Model 1. Centralize. Bring operations under a single authority to reduce overhead costs and create a single decision making 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. i k 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. 6 Outsource. Drive O tso rce Dri e processes o t of the enterprise entirel to out entirely further reduce overhead, variabilize costs, and minimize future investment. Incorporate vendor use of monitor-and-control systems into Service Level Agreement. 22 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 23. What Actually Happnes: Challenge #2 The Human Resources Recycling Trap Core Context Mission Critical Enabling Resources Resources Wanted Available Here Here People being released lack the skills to t fill the positions being opened th iti b i d 23 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 24. Freeing Resources Trapped in Context Resource Recycling Zones Deployers Use conventional methods to ramp and manage mission-critical processes at scale Deployment B Zone Inventors Use unconventional methods to create and Optimizatio incubate new core Invention n Zone Zone II III C A Optimizers I IV on Use the Six Levers to extract resources from context to repurpose for core Orchestrators Manage transitions and facilitate hand-offs between the zones 24 Dealing with Darwin © 2006, TCG Advisors LLC 2005, August 11, 2010
  • 25. Perpetuating Innovation Change Change Gears G Gears G Deployment Zone Optimiz ention one Zon Zo Inve ne zation Innovation flows as fast as your slowest gear I ti fl f t l t 25 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 26. Recap • Focusing Innovation • “Unmatchable” differentiation • “Good enough” neutralization • “Save to invest” optimization • Funding Innovation • Extract resources from context to invest in core • Use the Six Levers—in sequence • Recycle resources—let people use their strengths y p p g 26 Dealing with Darwin © 2006, TCG Advisors LLC August 11, 2010
  • 27. 27 Dealing with Darwin © 2010, TCG Advisors LLC August 11, 2010