Innovation Metrics

Innovation Metrics – Part 1

Posted on August 31, 2010 by Boris Pluskowski

Metrics are one of the most important elements of an innovation program’s success – determining everything from a program’s future direction – to whether a program even gets funded the following year. Yet metrics are probably the least understood, and most misused activity in a corporate program agenda. Understanding what to measure, and how to benchmark your performance is paramount to achieving both recognition and validation at the senior executive level – so how do you get it done? I thought I’d paste in a step by step guide over the next few weeks to let you know!

Understanding the Innovation function

1. Start with Strategy – Key to understanding the metrics used to measure your innovation program is understanding what the real goal of that program is. Your whole program should be focused at trying to help the company achieve its strategic objectives (if it’s not – make sure it’s realigned to do so or you risk having a marginalized program that will be cut at the first opportunity!) – so it makes sense to start your journey into metrics by getting a better understanding of what it is exactly that the organization is trying to achieve – where does it want to go? What are the barriers stopping the company from achieving it? Where are the key competitive forces? These and other questions will lead you into a better understanding of how best to target the activities of your innovation efforts to best benefit the organization as a whole.

Don’t be fooled into believing that the answer will always be via the creation and development of the company’s product set either. Sometimes it could be a need to dramatically improve process efficiency that will drive a company forward. For other companies it could be a need to develop innovative business models to drive profitability in the forthcoming years – and yet others might be driven by a need to get out of a commoditized marketplace and develop an entirely new value proposition and new client base altogether (see my earlier White paper on Innovation Dimensions for more on the different dimensions an innovation program can and should be attacking). Even within the same industry – different players will typically be driven by different environmental and competitive factors that will lead the decision to pursue a particular business strategy. This strategy should then lead both the direction of your program and the metrics you use to measure the program’s effectiveness. In the same way that companies do not typically simply copy another’s business strategy blindly, neither should you simply copy their innovation metrics and benchmarks – as what’s appropriate for one company in a certain situation could be disastrous when applied to another. With metrics, the wrong metrics will give you misleading information on your ability to help meet the company goals

Innovation Metrics – Part 2

Posted on September 5, 2010 by Boris Pluskowski

2. Plan the Path – Now that you have a direction to point your innovation efforts at, it’s time to plan the path to get to that effort. In the same way that strategy documents are formulated with multiple time points to set milestones for where the company wants to be at 1,3, and 5 years – so should your innovation plan and strategy as to how you’re going to help the company achieve those aims and the contribution the innovation program will make to the company’s strategic aims.

Your innovation pipeline will be led and directed by the strategic context of the program (see step 1 from last week) below, which follows the general form of:

i) Find and Identify the problems or barriers to achieving the strategic objectives and define each tightly in terms of applicability, feasibility, and commitment to implementation of the solution. Then decide upon the order in which to tackle those problems.

ii) Collect ideas from internal/external sources on how to solve those problems/overcome the barriers, and begin the collaborative process to build those ideas into base concepts, selecting the most effective concepts/solutions for further development.

iii) Build out the selected concepts and begin testing for feasibility, cost constraints, market acceptance, etc – the various tests and building activities carried out in this stage(s) will vary depending on the company, industry, and target of the innovation process.

iv) Decide upon and begin developing that project through effective project management

v) Launch the developed solution in a limited manner – to one geography, one factory, one business unit, etc – and tightly monitor and control to look for effects and improvements

vi) Redevelop based on insights from the limited launch and Re-launch to a wider audience, usually in stages.

Underpinning the program are the dual disciplines of Portfolio Management (ensuring that the quality of the pipeline is sufficiently high and sufficiently robust in order to achieve the company goals) and Foundations (ensuring you have the culture, skill set, tools, processes, leadership, etc to fully enable the innovation process) .

The pipeline is meant to provide you with a guideline as to the general best practice of a robust innovation program – and you will find that most innovation programs will be able to be overlaid onto this model. You’ll need to spend time understanding how to translate your overall program strategy, into a comprehensive program that fits your company’s capacity, culture, and aspirations. Once you have your process set out, you’ll be ready to start sorting out what you’ll need to measure to ensure you’re achieving your aims.

Innovation Metrics – Part 3

Posted on September 12, 2010 by Boris Pluskowski

3) The Three F’s – When beginning to consider innovation metrics – there are three main “F”’s that you need to measure – Form, Flow, and Function.

1.Form – Form is your ability to perform each part of the innovation process.

2.Flow – Flow is your efficiency at both passing stuff through the individual elements of the process as well as the overall process itself.

3.Function – Function looks at the program as a whole and its ability to achieve organizational goals, and the organization’s innovation capacity as a whole.
Taking the innovation process you’ve developed in section 2 (see last week’s post) above, you then go through the process figuring out what metrics are most appropriate taking into account the 3 F’s. For most companies, the metrics will be broadly split into two sections – the form and flow of the pipeline itself – and the function of the program as a whole (Innovation Metrics Worksheet – Form and Flow):



Some good examples of Form and Flow metrics:

1.Problem Identification and Definition stage:
•Number of Problems submitted for consideration (form)
•Number of individual event sponsors recruited (form)
•Number of Event Charters defined (form)
•Number of Events accepted and set up (flow)
•Number of Events in each of the key corporate strategic areas (flow)

2.Idea Collection, Building and Management
•Number of ideas/builds collected (form)
•Number of Event Visitors / Contributors (form)
•Number of Idea/Build Authors (form)
•Number of ideas reviewed and concluded (flow)
•Number of Ideas passed through to concept development (flow)

3.Concept/Opportunity Development
•Number of Prototypes developed (form)
•Number of ideas going into Project Management (flow)
•Potential value of ideas going to Project Management (flow)
•Average time idea spends in Concept Development (flow)

4.Project Management
•Average time to project completion (form)
•Number of projects completed versus target (function)
•Number of projects currently in the pipeline versus target (function)
•Effective capacity versus capability (function)

5.Initial Launch
•Target sales/cost reduction/process improvement versus actual (form)
•Customer satisfaction (form)
•Customer uptake versus local competitor/alternative (form)
•Number of Launches proceeding to Expanded Launch (function)
•Number of Launches failed (function)

6.Revise, Expand, and Re-Launch
•Contribution to profit margin from innovations
And an Innovation Metrics Worksheet for Function:

Bridging the Gap Between Ideas and Products

Bridging the Gap Between Ideas and Products
Posted on December 12, 2011 by Jeffrey Phillips
http://www.innovationexcellence.com/blog/2011/12/12/bridging-the-gap-between-ideas-and-products/

It’s time to assess where things stand from an innovation perspective. Clearly it won’t be news to alert you to the fact that the vast majority of CEOs report that innovation is very important for the success of their businesses. Increasing competition, from a wide range of countries and geographies, increasing customer expectations, rapidly shifting business models, new entrants and a host of other governmental, financial and demographic shifts mean that innovation is no longer a “nice to have” but a must-have for ongoing success. Firms that have spent the last two decades right-sizing, outsourcing, cutting costs, getting “lean”, implementing Six Sigma and a host of other management tools are rapidly realizing that you simply can’t cut your way to growth and differentiation.

The economic conditions in the global market suggest that smart firms will hunker down, save their ammunition in order to fight another day once consumer demand returns. This approach seems reasonable from behind the confines of the ivory towers built in many large, complacent organizations. Meanwhile, emerging new entrants are developing interesting, valuable products and services and learning to compete in this environment while established players simply hunker down. Right now, as the first “green shoots” of economic growth are becoming visible, is the time to develop the skills and capabilities to improve innovation processes and disciplines within your firm and build innovation networks to spot and adopt great ideas that exist outside your firm. The real question becomes – what are the critical skills necessary to thrive in an environment where innovation becomes a critical success factor.

In many organizations, good ideas are a dime a dozen. In fact one could argue that there are too many ideas about too many different priorities. Executives must do a better job of defining important corporate goals that innovation should support. Once fewer but better ideas are generated, the real work begins: spotting ideas that have the best chance to become disruptive products and services and moving those ideas through the decision points and approvals to become a new product or service. This is the key innovation problem that all firms face. There is a yawning gap between idea generation and product commercialization.

This problem can be addressed in one of two methods. First, we can train innovation experts who understand innovation challenges and goals, and are very experienced in every phase of an innovation effort. These individuals will work above the existing business as usual processes and will have the opportunity to supersede existing products, services and processes. The challenge with this approach is that very few people possess the knowledge, skills, breath of insight, thick skin and simple desire to help ideas accelerate through the barriers that they must clear to become new products or services. In this model, the necessary skills to succeed include excellent vision, the ability to spot promising ideas, the strength to champion an idea over a long period of time against significant odds and the ability to attract funding to the ideas they favor. Few people possess all of these skills and can survive and thrive in existing corporate environments.

The other model is to develop an innovation process which defines how ideas should be recognized, developed, evaluated and converted into products and services. These roles are filled by many people throughout the organization rather than one “champion” trying to do all of the work. This innovation process ensures that more people are involved which brings more skills and insights into the process. The process should be funded on an annual basis, so searching for funds should be less of an issue than in the “champion” model. Since the process is dominant, rather than the ideas or champions, there’s less chance of exhaustion or frustration of any one individual. In this model it is important that a broad range of people gain skills in each of the critical steps and phases of the innovation process. In this regard many people can fill the roles necessary to improve ideas and move them through the innovation process.

So, if you choose to follow the “champion” model, you should be recruiting a few people with a very broad range of skills who can spot great ideas, develop the funding and approval models and move them rapidly to new products. You’ll need to constantly recruit these people, as they will burn out rather rapidly and will be hard to find and hard to replace. Most of the innovation effort will be centered on these individuals. They will be unlike your typical recruits.

If you choose to create a systematic model for innovation, then the skills you need have far more to do with defining and improving innovation processes. There may be a bias to simply apply your deep lean and Six Sigma skills to innovation efforts. They can help with defining a process and improving the process, but the vision and perspective for innovation is far different. Ensure you set big goals, including differentiation and organic growth as the targets for your innovation process, otherwise a bias toward process perfection may lead to incremental ideas.

The first model is about finding a few PEOPLE in whom your innovation potential rests. The second model is about defining an innovation PROCESS, which is less reliant on any small group of people. In the end it really doesn’t matter which model you choose. The real choice is in whether or not to consider innovation as a key capability or discipline. That choice, and the investments to bring the choice to reality, are what will matter.

Phases of Innovation and What Stalls Innovation

Posted on December 13, 2011 by Holly G Green


When I ask business leaders to identify which part of the innovation process their organizations struggle with the most, I typically get one of three answers:
1. We have a lot of ideas but most of them get judged as impossible or too hard to implement based on changing the way things currently are.
2. We have a hard time deciding which idea or opportunity to pursue.
3. We come up with a lot of good ideas but can’t seem to execute on them.
Interestingly, these align exactly with the phases of innovation: discovery, evaluation, and execution.
In business, innovation is the act of applying knowledge to the creation of new processes, products, and services that have value for at least one of your stakeholder groups. Obviously, this requires more than just generating a slew of creative ideas.
In order to produce true innovation, you have to actually do something different that has value. In other words, follow through on the good ideas. This requires a very different set of skills and resources than idea generation. If you’re not getting any traction with your innovation efforts, it may be that your organization lacks the skills and competencies to complete one or more of the following phases.
Phase I – Discovery
Phase I has two basic objectives: developing core innovation competencies and generating new and creative ideas, which often includes gathering customer insights and translating them into workable ideas.
Everyone has the ability to think creatively, but most people need some training and coaching in order to bring out those latent abilities. Key activities during this phase include providing learning sessions, workshops, collaboration fairs, ideation boot camps, and other tools that teach people how to think differently.
Innovation enablers during this phase include:
• Encouraging and rewarding idea generation
• Awareness of the brain’s processing and potential hurdles
• Defining winning/excellence
• Balancing big picture and details
• Challenging assumptions
• “What if?” thinking
• Changing perspectives
• Considering the right answer
• Influencing others effectively
Key players during this phase: individual contributors and managers who encourage and support them.
Phase II – Evaluation
This phase separates the wheat from the chaff, as potential ideas and opportunities undergo a rigorous screening process. New ideas are discussed, tested, evaluated, and compared for their potential to add value to customers, generate new revenue streams, or accomplish a specific innovation goal. The primary objective is to identify the highest-value opportunities and determine the feasibility of turning them into reality.
Innovation enablers during this phase include:
• Creating and supporting an idea evaluation framework
• Taking risks
• Balancing day-to-day versus longer term
• Accepting ideas (remain open)
• Looking for “and” versus “but” solutions
• Encouraging some failure (within boundaries)
• Thinking cross-functionally/organizationally
Key players during this phase: managers and leaders who have set clear strategic direction and guidance.
Phase III – Execution
This phase involves making sure that the high-value opportunities identified during the evaluation phase align with your organizational capabilities. Then senior management has to commit the time, money, and resources to make the innovation happen. This is followed by close tracking of the business performance of the new product or service, as well as measuring the process used to develop the innovation and looking for ways to improve it.
Innovation enablers during this phase include:
• Continually communicating the need for innovation as a business focus/strategic mandate
• Linking innovation to key strategies
• Sponsoring innovation projects
• Incorporating innovation reports into the business review processes
• Funding innovation
• Developing risk management strategies and approaches
• Capturing and sharing innovation learnings
• Learning from failures
Key players during this phase: senior management/leaders.
The added benefits of innovation
When innovation becomes a way of life in your organization, you get a lot more than just new products and services.
The organizational mindset shifts to one of relentless improvement, with an increased awareness of opportunities and possibilities for products and efficiencies. There is more listening, less knee-jerk defending of old ideas, and a greater understanding of, and interest in, unmet customer needs.
As individuals begin to understand their roles in the innovation process, you get more clarity on what success looks like and how to achieve it. Standards of performance increase, along with an increased willingness and ability to hold each other accountable for meeting them.
Most important, as you begin to develop a sustainable innovation approach, the emphasis tends to shift from maintaining old successes to considering new opportunities and products – a key element in staying ahead of changing customer needs rather than always trying to catch up.
If you struggle to get new products to market, ask yourself, “Where are we getting stuck? What skills and competencies do we need to develop to move forward?” When you have all the pieces in place to successfully complete all stages, innovation becomes your way of working, not a project or initiative that goes away when the next business buzzword gains prominence!

How to Build Business Metrics

How to Build Business Metrics


Share We’ve written a few posts criticising some of the more common innovation metrics in use, so I thought it would be smart to outline some ways that we can actually develop more effective metrics. Here’s a story that might help:

A while ago I was in charge of managing student recruitment for a tertiary education institution. One of the first things I looked into when I started the job was metrics – how did we measure how well my section was doing? The answer was one number: total number of enrolled students each year. The job that I was given was to increase that number by as much as possible (which begs all kinds of questions about quality, teaching and so on, but let’s set those aside for now…).

The problem was that managing that number as a standalone was hard. Well, impossible, actually. So I looked into what other numbers we had, and I found a that we had measures for total applications received, and total enrolments. I worked with my teams to figure out the path that people took to become students, and we then also figured out a way to measure enquiries. Once we had these numbers, here’s what we did:

We made three metrics: total number of enquiries, the ratio of applications/enquiries, and the ratio of enrolments/applications. Then I made the marketing team responsible for enquiries, the information team responsible for applications/enquiries, and the enrolments team responsible for enrolments/applications.

When my boss told me to increase enrolments as much as possible, he was hoping for a 5% increase. By breaking down the process, developing new metrics, and making people accountable for the measures, we were able to increase enrolments by 12%.

There are several lessons from improving innovation metrics in this:

•Innovation is a process not an event: many things that we often think of as an event are actually processes. Enrolments is a good example – previously my institution only considered the end point, enrolled students. By breaking down the process that we went through to actually get an enrolled student, we were able to improve our ability to get enrolled students.
I think of innovation as a process too – this is the diagram that I use to describe it:



To improve our innovation metrics, we need to first think of it as a process, then build metrics to measure the intermediate steps as well as the outcomes.

•Use multiple metrics: in the enrolments story, we used three metrics that led to the one that we were most interested in (total enrolments). We can do the same for innovation. Once we think of it as a process, then we need to develop metrics for each of the steps that lead to the outcomes that we are looking for from innovation. Innovation is a complex process, and to manage it we need to use multiple metrics.
•Link Your Innovation Metrics to Your Strategy: my tertiary education institution saw increasing enrolments as a central part of its strategy. At the time, the educational sector in New Zealand was fairly turbulent, and there was a strong message from government that it wanted to see the sector consolidated. Increasing enrolments was seen as a way to signal that we were a thriving institution, making it less likely that we’d get absorbed by a larger polytechnic.
We need to do the same thing with innovation – link it to our overall strategy so that it can help drive success. There are a number of broader strategic goals that can be supported by innovation – we just need to be clear about which ones we’re targeting.

•Improve the part of the process that is weakest: when we started tracking the enrolments process, we discovered that we were pretty good at generating enquiries, and very good at converting applications into enrolments. The weak link was converting enquiries into applications.
The information team had been given some sales training before I arrived, which they strongly resisted. They saw their role as helping people, not selling them. We implemented a lot of ideas, but the one that had the greatest impact was getting them to ask at the end of each enquiry that they handled “if you’re interested in the course, would you like to put in an application?”

When they started doing that, the applications/enquiries ratio shot up from about 12% to 18% in a couple of weeks. And we weren’t forcing people to apply for courses they didn’t really want to take – the enrolments/application ratio held steady. If the quality of applications had decreased, this metric would have gone down. It turned out that a lot of people really did want to start studying, but they just needed a small nudge to get started.

In looking at our innovation processes, we need to do the same thing: find the weak link, and figure out how to best improve it. As we’ve said many times before, usually the problem in organisations is not that they don’t have enough ideas, but rather that they need to get better at selecting ideas, or at getting them to spread. In any case, once we have identified the part of the process that is most in need of improvement, then we can figure out to best go about making it better.

Getting innovation metrics right is a challenging task. There is no single number that will tell us everything we need to know to manage innovation. I hope these ideas help you figure out how to measure it better in your organisation.

5 Principles of Innovation

5 Principles of Innovation
2011 December 11 http://www.digitaltonto.com/2011/5-principles-of-innovation/

Are innovators born or made? Surely, those who spawn ideas that change the world are special – different then the rest of us.
Take one look at an Einstein, a Henry Ford or a Steve Jobs and it seems that they were bequeathed with something unique. They have a flair and a surety about themselves that borders on the sublime.

Yet many others also have flair and surety and never accomplish anything of note. Moreover, as I’ve written before, stories of great innovators often contain struggle and privation. Given a deeper look, innovation seems more learned than innate and there is surprising consistency about what drives it. Here are 5 principles to guide you.
1. Think Small
Peter Drucker once wrote, “Effective innovations start small. They are not grandiose.” He’s right. A small idea pursued rigorously is worth infinitely more than the pompous navel-gazing gurus and pundits seem to take so much delight in.
Take a look at any really, really big thing and, inevitably, it modest origins. Microsoft became one of the world’s most valuable companies by focusing on software, an area so inconsequential at the time that IBM was willing to write it off. Apple made a splash with the Macintosh in large part by capitalizing on innovations that Xerox overlooked.
Yet, the great thing about thinking small is that you can risk failure, because failure is sustainable. You can falter, pick yourself up and try again. Eventually you’ll get it right and when you do, there are no limits. If you can suvive, you can thrive.
The absolutely worst thing you can do is pile on a bunch of up-front costs that push the break-even point far into the future. Most likely, that day will never come.
2. Disruptive Innovations are Crappy
Ever since Clayton Christensen published The Innovator’s Dilemma, the idea of disruptive innovation has become super sexy. And why not? What’s more exciting than a new idea coming out of nowhere to upend an entire industry?
What people tend to miss (surprisingly few who blather on about the subject actually have read Christensen’s work) is that disruptive innovation is crappy. It targets light or non-consumers who are over-served by an existing product or service. They’re more than happy to something inferior by conventional standards but superior in some other way.
Tim Kastelle, a professor who studies innovation gives a great example involving Canon and Ricoh, who almost put Xerox out of business by selling inferior copiers that were smaller and cheaper. However, they were “good enough” for most businesses and so size and price won out. From there, performance improved and Xerox was toast.
That’s why disruptive innovations like digital cameras and mini-mills were so easy for incumbents to overlook. The existing customer base wasn’t interested in them at first. However, the innovations won a following elsewhere, picked up steam and by the time the market leaders realized what was happening, it was too late.
3. Innovation is Combination
While we like to think of innovators being lonely men on the mountain, only coming down, like Nietzsche’s Zarathustra, to proclaim great revelations, the truth is that important breakthroughs usually come from synthesizing ideas from different domains.
One famous historical example is that of the discovery of genetics. In 1865, when Gregor Mendel published his groundbreaking study of inheritance of characteristics in pea plants, it went nowhere. It took nearly a half century before the concept was combined with Darwin’s natural selection to unleash a torrent of innovations in medicine and science.
In a similar way, Einstein merged physics with Humean skepticism to come up with relativity. Watson and Crick weren’t the most accomplished scientists searching for the structure of DNA, but they were the ones that knew enough about the separate domains of biology, chemistry and physics to put the pieces together.
A more recent example is the Apple ecosystem. There were plenty of digital music players around when Steve Jobs launched the i-Pod, but he combined his player with i-Tunes, which made content both more accessible and palatable to music companies. He then threw new products into the mix – the i-Phone, i-Pad and now Siri – creating more combinations and greater value.
4. Passion and Perseverance Are Key
The problem with combinations is that finding the right ones takes time. Larry Page and Sergei Brin combined the system of academic cites with computer technology to develop the world’s greatest search engine. However, it was years before they stumbled upon Overture’s business model and found the combination that actually made money.
Spending years in the wilderness before becoming a runaway success is not at all uncommon. As Jim Collins noted in Built to Last, Sony started out as a failed rice cooker manufacturer. Hewlett Packard began by making quirky gadgets like automatic toilet flushers and a machine shocked people to help them lose weight.
Jeff Bezos emphasized the importance of perseverance in Amazon’s success in a recent interview. He said that, “We are stubborn on vision. We are flexible on details. … We don’t give up on things easily.” A lot of times, what looks like brilliance is really just someone who has the balls to stick it out through years of failures.
As I’ve said before, we’re not just competing in an information economy, but a passion economy. Game changing breakthroughs are love children, not test tube babies.
5. The 70/20/10 Portfolio
Of course, beyond all the happy talk, businesses must do more than just innovate. They need to serve customers, pay employees (and sometimes congressmen) and earn money. So prattling on about embracing creativity and failure often gets thrown to the wayside when it’s time to make budget.
Nevertheless, professor Kastelle brings workable scheme to the table with his three horizons model.



Now, professor Kastelle is a learned sort and you can find his intelligent explanation on the link I provided above. However, I’m from Philadelphia, so I just like to think of it as:
- You want to put 70% of your innovation efforts toward taking your competitor’s money
- You want to put 20% of your innovation efforts toward taking somebody else’s money (often a customer or supplier)
- You want to put 10% of you innovation efforts toward creating something new and cool.
In any case, the point is that it’s the mundane stuff that makes breakthrough innovations possible. Without that, you just have a bunch of wild ideas that you’ll never be able to see through. If today’s problems aren’t solved there will never be any future to invent.
So there you have it, 5 principles of innovation. I’m sure I’ve left something important out, so feel free to remind me in the comments below.

Software Eats Everything: Disruptive Software Technology

Marc Andreessen: Predictions for 2012 (and beyond)

by Paul Sloan December 19, 2011 11:22 AM PST
http://news.cnet.com/8301-1023_3-57345138-93/marc-andreessen-predictions-for-2012-and-beyond/
Marc Andreessen's view of the world boils down to software.
From where he stands, as the guy who co-founded Netscape Communications and now co-runs the powerful Silicon Valley venture firm Andreessen Horowitz, no industry is safe from software. Or, as Andreessen put it in a much-discussed piece he wrote for The Wall Street Journal, "Software is eating the world."
Software has chewed up music and publishing. It's eaten away at Madison Avenue. It's swallowed up retail outlets like Tower Records. The list goes on.
No area is safe--and that's why Andreessen sees so much opportunity.
Fueling his optimism: ubiquitous broadband, cloud computing, and, above all, the smartphone revolution. In the 1990s, the Internet led to crazy predictions that simply weren't yet possible. Now they are.
I caught up with Andreessen to talk about 2012 and software's onward march.
Q: Let's start with smartphones.
Andreessen: I think 2012 is the year when consumers all around the world start saying no to feature phones and start saying yes to smartphones. Feature phones are going to vanish out of the developed world and over the course of five years they'll vanish out of the developing world.
Q: That's a big deal because?
Andreessen: That's a big deal because that's the key enabling technology for software eats the world broadly. Because that's what puts the computer--literally puts a computer in everybody's hand.
Q: In a way that the PC industry couldn't?
Andreessen: Most of the people in the world still don't have a personal computer, whereas in three to five years, most people in the world will have a smartphone.... If you've got a smartphone, then I can build a business in any domain or category and serve you as a customer no matter where you are in the world in just gigantic numbers--in terms of billions of people.
Q: Does that mainly help existing players, or also open opportunities for new businesses?
Andreessen: Both. If you're an Amazon or a Facebook or a Google or even a startup, the fact that you can potentially address 2 billion smartphones in the developed world or 6 billion in three or five years, in the entire world, it's just a huge expansive market.
But it also opens up new kinds of businesses. The big thing that happened in 2011 was sort of the rise of the verticals, and e-commerce was the hotbed of that. We saw the rise of a whole category of e-commerce category killers in verticals that 5 or 10 years ago couldn't support high growth companies because the markets weren't big enough.
Q: What e-commerce players are you thinking of?
Andreessen: We just did an investment in Fab, which is just growing by leaps and bounds, and there's Airbnb [Andreessen-Horowitz is an investor]. That company is growing vertically. Its software eats real estate, software eats home furnishings. Another very exciting company, which we're not invested in, is called Warby Parker, an e-tailer for eyeglasses. So it's software eats Lens Crafters.
It's just on and on and on across different verticals because of the number of consumers who a) have PCs, b) are on the Internet, and now c) have smartphones. I expect vertical specialization to continue and there to be killer Silicon Valley style software companies in all kinds of verticals and categories in 2012 and 2013 that weren't viable three or five years ago.
Q: Just e-commerce?
Andreessen: E-commerce was the hotbed of vertical personalization of 2011, and big fat vertical expansion goes into other categories other than e-commerce in 2012. It could be content. It could be new kinds of service providers.
Q: We've seen some already.
Andreessen: One I really like that we're not involved in is Uber. Uber is software eats taxis. It's almost entirely a smartphone-based application bringing town cars to you.... It's a killer experience. You watch the car on the map on your phone as it makes its way to you.
That's smartphone specific, and there's going to be all kind of things like that. Task services like Zaarly and Taskrabbit are delivering a sort of distributed mobile workforce available on demand through your smartphone.
These are slicing and dicing different aspects of the economy into vertical slices or category slices and making them available via smartphones hooked to these really powerful networks with cloud computing on the back-end. We're just seeing a pattern of companies doing this over and over.
Q: So who should be scared in 2012?
Andreessen: I think 2012 is the year that retail--retail stores--really starts to feel the pressure. And I don't say that because I don't like retail stores. I loved going to Borders. I thought it was a great consumer experience. And I was a huge fan of Tower Records.
But the economic pressure is huge as e-commerce gets more and more viable and as these category killers emerge in the superverticals. If I own mall real estate or retail stores in cities, or if I own chains like electronics chains, I'd be concerned.... I think electronics and clothes are going to be a real pressure point. Home furnishing is going to come under pressure. It's going to get harder and harder to justify the retail store model.
The model has this fundamental problem where every store has to have its own inventory and every store is also a warehouse. The economic deadweight of that entire inventory in each store--that's what took down Borders.
Retail runs at very thin margins. So if e-commerce takes a 5 percent or 10 percent or 15 percent bite out of your category, then it becomes harder to stay in business as a retailer. So I think 2012 is the year that that really kicks in.
Q: Doesn't this bode well for the e-commerce incumbents?
Andreessen: For sure, Amazon is going to do really well and anybody with major e-commerce is going to do real well. But the new companies in e-commerce verticals are providing a very differentiating customer experience that is much more like shopping as entertainment.
Fab has more interesting products and merchandising and presents them in a more interesting way with much deeper social interaction. At Fab, something like 25 percent of the purchases over Black Friday weekend were a result of Facebook referrals. There's a whole fun element to shopping and whole entertainment element and whole excitement element that the first generation of e-tailers were not very good at.
Q: Like Amazon?
Andreessen: I like to say that the first generation of e-tailers was really good for nerds. Amazon for me is--I love it--it's like the biggest warehouse superstore of all time. It's just awesome, and I love wandering up and down the aisles and it's like, 'wow, look at that.' If I do enough searches I can discover anything.
The new generation of e-tailers are much more appealing to normal people--people who like to go the mall, have fun with their friends and try on clothes and compare clothes, and go home and brag to their roommate what they got on sale, and all the rest of it. A lot of new startups are not only very viable but also growing very fast because they provide a very different experience.
Aren't there opportunities for startups to help?
Andreessen: Yeah, there's going to be a big opportunity for software assistance for the incumbents at getting better in the new world.
As an example, at eBay [where Andreessen is on the board], we bought a company called Milo, and there' a competitor called Shopkick. These guys expose local inventory on retail store shelves and make it available as part of the e-commerce experience. That's the kind of software that's going to be incredibly useful to retail chains as they seek to compete online because it unlocks the local inventory.
The other category is represented by Groupon and Foursquare [both also Andreessen-Horowitz investments] and a whole new generation of these local e-commerce platforms, which is bringing online the gigantic number of businesses in the world that aren't on the Internet today at all. Whether it's a restaurant or hairdresser or day care center or yoga center or lawn care firms and on and on, there are so many that just aren't online in any meaningful way today, even 15 years into the Web.
Advertising on Google doesn't do them any good because it doesn't matter if people come to their Web site, it's not how they get business. So there's going to be a whole set of new companies, like Groupon and Foursquare, that are going to unlock these local businesses that aren't even online today.
Q: If nothing else, Groupon has done a great job of getting local businesses online.
Andreessen: I've always felt that the criticism of Groupon has been unwarranted. People have really underappreciated what Groupon has done, which is they've created a way for small businesses that aren't online to spend money online and be able to dial up customers on demand. That's a really big deal.
I think Foursquare is a revolution in the local experience of cities and connecting to small businesses around you, through information and, increasingly, coupons and offers. Again, it's customer acquisitions. There are going to be more of these kinds of things--and a whole bunch of new ideas in 2012.
Q: And this all circles back to smartphones.
Andreessen: Foursquare was impossible before smartphones. There was no way to implement it. Then, there's the other side of this. There's the user app for Foursquare, but there's also going to be the merchant app for all these things.
Local merchants, like local restaurant owners, are going to have a smartphone app they can use to dial up customers on demand. Whether that's from Groupon or Foursquare--any of these companies can do that. A lot of small business owners are going to start running their businesses from their smartphones.

Innovation Strategy

Innovation Strategy: Pick a Fight where the giant is motivated to flee rather than fight, Clayton Christenson http://gartner.mediasite.com/mediasite/play/9cfe6bba5c7941e09bee95eb63f769421d?t=1320659595