Dealing with Darwin

Dealing with Darwin
by Geoffrey Moore
“How To” Guide for Companies in Transition
Summary by Brian Kissel
https://www.linkedin.com/in/briankkissel

Overview
• Core & Context
• Business Architectures
• Market Stages
• Innovation
– 3 Objectives
– Challenges
– Models
• Innovation in Growth & Mature Markets
• The Innovation Cycle
• Resource Extraction
• The Process for Your Company

The Role of Core & Context
Core
• Innovation that creates differentiation leading to customer preference during
purchase
• Combats commoditization and margin compression
Context
• Everything else, not a source of differentiation
• What was once core becomes context over time
• Can be a source of business and management inertia
Goal of Separating Core from Context
• Extract resources from Context to invest in Core

Focusing on Core
• Declare Strategy for Differentiation
– Establishes Core
– Some legacy Core becomes Context
– Context can become “the breeding ground for inertia” and risk-averse
behavior can prevail
• Redeploy Resources from Context to Core
– Reengineer current workload to consume fewer resources and less top talent
– Standardization replaces differentiation as primary focus
– Redeploy workforce, consistent with its talents, to meet needs of next
generation of Core

Core/Context Analysis Framework
• Clearly Identify Core and Context
• Separate Mission Critical from Non-Mission Critical processes

2 Basic Business Architectures
Volume Operations
• Example: Consumer transaction-focused like Dell
Complex Systems
• Example: Enterprise commerce-focused like IBM
Company Challenge
• How to support both models in the same company and in some cases at
the same customer?

Complex Systems vs. Volume Operations
Value Chain
Element
Complex
Systems
Volume
Operations
Research Qualitative Scenarios Quantitative Analytics
Design Integration of Modules Modules That Integrate
Source At the Margin At the Mean
Manufacture Adaptive Methodologies Deterministic Processes
Market Value Chain Orchestration Branding and Promotion
Sell High-Touch Persuasion Low-Touch Distribution
Service Open-ended Consultations Close-ended Transactions

Volume Operations
Characteristics
• High volume, low cost
• Offer-enabling technology
• Optimized for price, availability, and selection
• Economies of scale
• Low touch
• Don’t really “sell,” but enable customers to “buy”

Complex Systems
Characteristics
• Organized around the customer
• Solution sales
• Consulting and integration services
• Application specific templates
• Modular building blocks coupled with integration platform

Market Stages
Early
• Technology adoption cycle
Growth
• >10% revenue growth with healthy margins
• Entire market is expanding
Mature
• Growth from selling more to existing customers or taking market share from
competition
Declining
• Even market leaders seeing no/low growth and declining margins
• Ripe for technological or business model innovation
End of Life
• Incumbents rendered obsolete by innovative alternatives
• Possible “long tail” opportunity to harvest brand, distribution channel, and/or
customer relationships

3 Objectives of Innovation
Differentiation
• Must be bold enough that, if it wins, achieves separation
Neutralization
• Just enough to undermine competitor
Productivity
• Business Process Re-engineering & Outsourcing
• Free up resources from Context for Core
Waste
• Don’t go far enough on Differentiation
• Go too far on Neutralization
• “Nice to have” instead of “need to have”

2 Typical Challenges to Innovation
Risk Reduction Mentality
• Shun bold actions that jeopardize existing assets & relationships
• Remain focused on Context, not Core
Lack of Corporate Alignment
• Innovation is highly decentralized
• Proceeds on many fronts, in multiple directions
• No amplifying affects
• Remedy is prioritization and focus across the company

4 Innovation Models
Product Leadership
• Best for growth markets
• Heavy R&D
• #1 priority is market share, #2 is profits
Customer Intimacy
• Good for mature markets
• Lower return on product innovation
Operational Excellence
• Good for mature markets with few other sources of differentiation
• #1 priority is cost, #2 is time to market & speed of adaptation
Category Renewal
• Market is in decline
• Harvest while reinvesting in new markets
• Acquisitions most helpful here

Product Leadership Innovation
Disruption
 New technology (complex system) or business model (volume operation)
 New offer and market, highest risk and reward
 Typically a big price/performance advantage or disruptive business model that
destabilizes established markets
 i.e. digital photography, search engine marketing
Application /
Solution
 New markets for existing products
 Complex system: vertical marketing, whole product solution, alliances
 Volume operations: target demographic vs. vertical markets
 i.e. fault tolerant computers to run ATMs, Mac for desktop publishing, document
management systems for drug approvals, Blackberry
Product
 Focus on features and function
 i.e. hybrid cars, cameras in cell phones, wireless laptops
Platform
 Layer to mask legacy complexity
 VAR partners often helpful
 i.e. DOS and Intel 8086 become platform for PCs

Customer Intimacy Innovation
Line Extension
 Existing products to new customers or new products to existing customers
 i.e. minivan, SUV, laptop, running shoe
Enhancement
 Improve existing products in existing markets
 i.e. auto navigation, cherry coke, teflon frying pans
Marketing
 Out-sell, not out-product competition
 i.e. viral marketing, product placements, P2P marketing, Mac store
Experiential
 Most relevant in commoditized consumer markets
 i.e. Starbucks, business hotels that remember your preferences, etc.

Operational Excellence Innovation
Value Engineering
 Extract cost from materials and manufacturing
 i.e. substitute standard for custom parts, pre-integrated subsystems
Integration
 Reduce maintenance cost of complex systems
 i.e. mutual funds, data center management SW, all-in-one printer/copier/fax/scanner
Process
 Remove non-value added steps from the process
 i.e. WalMart vendor managed inventory, Dell direct sales model, Toyota kanban
manufacturing process
Value Migration
 Redirect business model away from commoditized elements
 i.e. razors to razor blades, printers to ink cartridges, answering machines to voicemail

Renewal Innovation
Organic
 Solve new problems for existing customers
 i.e. IBM from HW to e-commerce enablement
Acquisition
 Buy new capability or roll into strategic partner
 i.e. BEA buying WebLogic, Lotus selling itself to IBM

Growing & Mature Markets
Disruptive
Innovation
Application
Innovation
Product
Innovation
Platform
Innovation
Enhancement
Innovation
Integration
Innovation
Experiential
Innovation
Process
Innovation
Marketing
Innovation
Value Migration
Innovation
Line Extension
Innovation
Value Engineering
Innovation
Harvest
& Exit
Renewal Innovation
Organic
Renewal
Acquisition
Renewal

Innovation by Market
Growth Markets

Innovation in Growth Markets
Product
New Existing
Market
New Disruptive Application
Existing Product Platform
“If you are innovating in a growth market, you must focus on one, and only
one, innovation type based on…”
– Stage in technology adoption lifecycle
– Position of competitors
– What you excel at

Innovation in Growth Markets
Disruptive
Application
Product
Platform
• Enterprise: Genentech (recombinant DNA)
• Consumer: Skype (VOIP)
• Enterprise: Landmark (3-D seismic interpretation)
• Consumer: Amazon (Internet retailing)
• Enterprise: Juniper Networks (Internet routers)
• Consumer: Cuisinart (food processors)
• Enterprise: Oracle (relational databases)
• Consumer: Sony (game machines)
Return on innovation requires differentiation
All these companies achieved separation from their competition

Growth Markets: Disruption (New Product, New Market)
Complex Systems
 Must wrap discontinuous technology in a blanket of services that fulfill
promise of competitive advantage
 May require partners
 i.e. Oracle HW independent DBs, Apple/Aldus/Adobe for desktop
publishing
Volume Operations
 Focus on disruptive business model, not technology
 Often displace intermediaries
 i.e. Charles Schwab, Federal Express, eBay, Southwest Airlines

Growth Markets: Application (Existing Product, New Market)
Complex Systems
 Leverage vertical marketing, whole-product management, and alliance
marketing
 May require partners
 i.e. Sun dominating financial services, SGI dominating graphics, Silicon Valley
Bank dominating VC-backed companies
Volume Operations
 Not typically done
 Usually pursue line-extension & enhancements
 Some exception when you can focus on demographic segments that leverage
existing sales, marketing, and support infrastructure
 i.e. RIM BlackBerry, Nintendo GameBoy

Growth Markets: Product (New Product, Existing Market)
Complex Systems
 Hard to achieve
 Be confident there is a “killer app”
 Over-deliver in only one or two critical dimensions that drive demand, just good enough
in the others
 Need end-to-end ecosystem capability – product, sales, support, partners, etc.
 i.e. Applied Materials (integrated multi-step wafer fab), EMC (platform independent
storage)
Volume Operations
 R&D creates genuine product breakthrough
 Marketing drives home a single game-changing claim
 Capacity can ramp quickly to meet demand
 i.e. Google, Pampers, Gatorade

Growth Market: Platform (Existing Product, Existing Market)
Complex Systems
 Drive product ubiquity
• Must have proprietary technology and high switching costs
 Open up the platform to partners
• SOA, modularization, etc.
• Provide partners access to customers and technologies that would be
difficult/costly for them to pursue alone
 i.e. Juniper Networks, EMC, SAP
Volume Operations
 Declare platform goal from birth
 Achieve ubiquity with high switching costs
• Adobe has it, Netscape didn’t

Innovation by Market
Mature Markets

Innovation in Mature Markets
Characteristics
– Indefinitely elastic middle
– Hierarchy of established vendors becomes more entrenched
– Optimize existing customers, markets, products, & processes
– ROI is lower, but risks are too
Approaches
– Volume Operations: Customer Intimacy to enhance customer loyalty while
retaining operational excellence
– Complex Systems: Operational Excellence focusing on productivity, maintenance,
and total cost of ownership

Mature Market: Customer Intimacy For Volume Operations
Line Extensions
 First step in filling up fractal space
 Generally highest risk-adjusted ROI
 Only works if you have a strong brand
 Tylenol, AmEx, People Magazine, Toyota/Lexus
Product
Enhancements
 Focus on justifying premium pricing
 Differentiation, not neutralization
 Consider McGrath & MacMillan Consumption Chain exercise
 Pampers, Swatch Watch, Mont Blanc, Barbie
Marketing Programs  Risk is not going far enough
 If you're not going to lead with this, only invest to meet threshold needs
 Nike, Avon, Apple
Customer
Experience
 Underlying offer is commoditized, experience is replicable
 Design processes from the customer back, not operations out
 Starbucks, Disneyland, Cirque de Soleil, AOL, Progressive Insurance

Mature Market: Operational Excellence For Complex Systems
Value
Engineering
 Disaggregate system into modules, cost reduce each module
 Emphasis on specialization and outsourcing
 TSMC, Infosys
Integration  Simplifying architectures and relationships
 Focus on parts of value chain that are perceived as burdensome costs by the
customer
 Most compelling when you have a significant installed base
 SAP, IBM, Intel
Process
 Process insight and innovation is key
 Need to believe you can establish competitive advantage in this domain
 Celera (human genome), BP, Bandag (retreads), Nucore
Value Migration  Generally highest risk-adjusted ROI
 Razor/razor blade, Inkjet cartridge model
 Computer Associates, IBM, GMAC, Affymetrix

Fractalization: Expanding the Franchise
 Add value at the surface, extract resources from the base

Consumption Chain: MacMillan & McGrath
• Key Questions
1. How do people become aware of their need for your product or service?
2. How do consumers find your offering?
3. How do consumers make their final selection?
4. How do customers order and purchase your product or service?
5. What happens when your product or service is delivered?
6. How is your product installed?
7. How is your product or service paid for?
8. How is your product stored?
9. How is your product moved around?
10. What is the customer really wanting your product for?
11. What do customers need help with when they use your product?
12. What about returns and exchanges?
13. How is your product repaired or serviced?
14. What happens when your product is disposed of or no longer used?
• Uncover opportunities to:
1. Improve on your product
2. Add to your product line
3. Add a disposal or recycling service for which the customers will pay for or be alerted to restock your product
4. Solve problems before they arise
5. Discover new places to find customers
6. Redesign your product
7. Overcome objections
8. Improve service
9. Add service for your product
10. Rewrite a more attractive guarantee which may attract more customers

Recovering Resources for Core
Core becomes Context Over Time
The End of Core is Commoditization

Understanding Innovation Cycle
• Every opportunity has a lifecycle
• Need to manage organization and processes
accordingly
• Put top talent in the right roles
• Extract, re-train, and redeploy
Resource-Recycling Zones

Understanding Innovation Cycle
 Invention Zone
– Entrepreneurs who make things happen
– Driven by idealistic vision but are also exceedingly pragmatic
– Quick, self-confident, focused
 Deployment Zone
– Harden programs and processes for mission-critical deployment
– Gifted program managers lead cross functional teams
– Set expectations, define deliverables, metrics, accountability, measuring progress
– Generally overkill for Context work, but they and the organization are reluctant to
redeploy themselves
 Optimization Zone
– Focused on continuous improvement in productivity and quality
– Led by process optimizers, using 5 levers
– Evangelists of continuous improvement across and between all functions
– Need to be rewarded for freeing up resources to reinvest in Core

Managing Transitions (Handoffs)
 Invention to Deployment (Handoff #1)
– Entrepreneurs want to hand off too early, Deployers want to take
it late
– Hold Entrepreneurs accountable for a successful transition to
deployment
– Program managers need to free up resources to “onboard” next
generation innovation
 Deployment to Optimization (Handoff #2)
– Program manager wants to hold on too long
– Optimization manager needs to have executive level support to
begin taking over mission critical programs once they have
transitioned from Core to Context
– Freed-up resources need to be re-cycled back into Core Innovation
deployment

5 Levers of Resource Extraction
Goal: Become Radically More Productive
1. Centralize
a) Ops under single authority to reduce overhead and single decision making to
manage risk
2. Standardize
a) Reduce variety and variability of processes delivering similar outputs
3. Modularize
a) Deconstruct the system into component subsystems and standardize interfaces
4. Optimize
a) Eliminate redundant steps, automate standard sequences, streamline, substitute
lower cost resources, instrument the process for monitoring and control
5. Outsource
a) Drive processes out of the enterprise entirely to reduce overhead, variabilize
costs, and minimize future investment
b) Incorporate monitoring systems into SLAs

From Context to Core: Recognizing The Challenges
• Majority of revenues from markets that are mission-critical, but not Core
– Resources should be reduced and reapplied to mission critical core
– Manage such that established businesses produce more revenues with fewer
resources
– Align career progression and financial incentives accordingly
• Warning Signs
– Company’s flagship products become over-featured
– Over-funding breeds more Context, accelerating the decline into inertial stasis (risk
aversion, resource consumption)
• Staff functions
– Staff functions are not necessarily Context
– Given definitions of Core, how can IT, finance, accounting, legal, customer support,
etc. contribute to differentiation

Managing Innovation
1. Socialize the Idea
a) Should be introduced by an outsider
b) Assess relevancy and value give company’s current situation
2. Analyze the Portfolio
a) Assess w.r.t. product line maturity, historical sources of innovation and differentiation, performance
relative to competition, motivations for change
b) Select one or more categories to target for innovation
3. Analyze the Target Category
a) Overall, complex system vs. volume operations, company vs. competition
b) Competitive strategies and execution vs. company
c) If change is worth considering, identify the most relevant & attractive vectors (14)
4. Reduce the Number of Innovation Types Under Consideration
a) Eliminate least attractive: inconsistent w/ category maturity, preempted by competition, poor fit w/ core
competencies
b) Reduce to top 3 contenders
5. Develop Attractive Options
a) Executive sponsor for each approach, form “Darwin Teams”
b) Characterize and rank each approach
c) Perform financial analysis on each approach
6. Select a Prime Innovation Vector
a) Executive sponsors select one innovation program for each category
7. Engage the Entire Organization
a) CEO declares the “Core,” extract resources from Context to focus on Core

7 Step Process
1. Core/Context analysis
a) Complex Systems: By product category, customer industry, and geography
b) Volume Operations: By product category, consumer demographics, and sales channel
2. Resource allocation analysis
a) Top performers allocated to invention, deployment, and optimization
3. Set a more ambitious agenda
a) Identify one or more opportunities for intensified attention
b) Assign (or hire) top performers to drive programs
c) Target key “Context” opportunities for resource extraction and assign top performers
4. Plan your moves as a team
a) Extracting resources from context to repurpose for core is organizationally difficult, need high level buy-in
and support
5. Focus on time to market
a) Create proper sense of urgency, test assumptions that limit rate of progress
6. Get the gears moving
a) Free up top performing leaders from “Context” to assign to “Core”
b) Assign optimizers to free up resources from “Context”
c) Manage Inventors more closely with more aggressive goals
7. Keep the gears moving
a) Continue the cycle of freeing resources from “Context” to invest in “Core”

Dealing with Darwin

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