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.
Saturday, December 31, 2011
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
Average Is Over. What's Your Extra?
HBR Blog Network
BILL TAYLOR
William C. Taylor is cofounder of Fast Company magazine and author of Practically Radical: Not-So-Crazy Ways to Transform Your Company, Shake Up Your Industry, and Challenge Yourself, published January 4, 2011. Follow him at twitter.com/practicallyrad.
Average Is Over. What's Your Extra?
9:05 AM Monday December 19, 2011 | Comments (22)
I approach a book by New York Times columnist Thomas Friedman with a mixture of wariness and anticipation. Wariness because Friedman's books tend to go on for many pages longer than they need to, and many of those pages contain his trademark blend of Davos Man self-congratulation and cheesy metaphors. Yet I still have a sense of anticipation because in every one of Friedman's books there are a handful of insights that are so clear, so sharp, so flat-out right that they frame how you look at the world going forward.
That Used to Be Us, Friedman's newest book (written with Johns Hopkins professor Michael Mandelbaum) has at least one such observation — a principle so clearly true, and so crisply expressed, that it should become a mantra of sorts for leaders everywhere who want to build something great and do something important. Chapter Seven of the book is called "Average Is Over," and it's a rallying cry that captures what it takes to stand out from the crowd in a world that keeps getting more crowded.
"In a hyper-connected world where so many talented non-Americans and smart machines that can do above-average work are now easily available to virtually every employer, what was 'average' work ten years ago is below average today, and will be further below average ten years from now," Friedman and Mandelbaum write. "As a result, everyone needs to raise his or her game just to stay in place, let alone get ahead." In an environment where "average is over," they go on, everybody has to find their "extra" — their unique talent, skill, contribution, or commitment that separates them from the pack and lets them do something special.
Friedman and Mandelbaum are policy wonks, so they explore the notion that "average is over" mainly as it applies to countries and societies, and how we educate kids, train workers, and make public investments. But their insight applies just as powerfully to companies and their leaders. The business world is overflowing with products and services and designs and marketing campaigns that are adequate. The real challenge — and the huge opportunity — is to turn something adequate into something amazing. It's just not good enough to be pretty good at everything. The most successful companies, products, and brands have figured out how to become the most of something. That is, to find and embrace their "extra."
Most organizations don't stand for anything special, of course. In her new book, Tough Cookies, the remarkable Kathy Cloninger, who led a multi-year transformation of the Girl Scouts of the USA, described how hard it is to take a mainstream organization and turn it into something with a distinctive and compelling point of view. If most organizations were honest with themselves, she argues, their mission statements would read, "Acme Widgets: We're no worse than anybody else."
I don't care what field you're in or what kind of company you work for, what qualified as average performance ten years ago is below-average today, and what is average today isn't nearly good enough to create long-term success and outsized value. You can't do something big if you're content with doing things the same way as everyone else. In a world of hyper-competition and limited attention, the only way to stand out from the crowd is to stand for something special.
Photo: © Iwan Baan and MBEACH1, LLLP
A case in point: a truly stunning parking garage in Miami Beach, Florida. The seven-story structure, at 1111 Lincoln Road, serves about as prosaic a function as can be imagined — it's a place to park cars. But when Robert Wennett bought the homely space back in 2005, he decided to turn something adequate into something amazing. As a New York Times report explained, "Parking garages, the grim afterthought of American design, call to mind many words. (Rats. Beer cans. Unidentifiable smells.) Breathtaking is not usually among them."
But this parking garage truly is breathtaking, so much so that it has become an in-demand venue for charity events, wine tastings, even high-priced weddings! Indeed, the top two floors were designed to both hold cars and host events, and they rent for as much as $15,000 per night. "This is not a parking garage," Robert Wennett told the Times. "It's really a civic space."
Talk about positive word of mouth. I first heard about 1111 Lincoln Road when I attended the American Express Luxury Summit in Park City, Utah. That's right — executives from some of the world's most exclusive brands were discussing the beauty and originality of a parking garage thousands of miles away. If that's not moving from adequate to amazing, I'm not sure what is. And it's a great example of an entrepreneur who built an enterprise around something "extra."
Recently, at a conference of marketers and brand specialists, I learned about a fast-growing company called Kulula Airlines, sort of the Southwest of South Africa. Like its role model in the United States, it has low fares, point-to-point routes, and a humorous staff. But its "extra" — what makes everyone stop and take notice — is the exterior of the airplanes themselves. Kulula treats them as flying pieces of art, which it decorates with all sorts of fun, colorful, sometimes downright-hilarious imagery. I have never seen airplanes like these, and I defy anyone who sees one of these planes on an airport tarmac not to stop, gaze in amazement, and want to learn more about the airline behind the planes.
Friedman and Mandelbaum have nailed it. There's no excuse to settle for "good enough" anymore. Average is over. What's your extra?
BILL TAYLOR
William C. Taylor is cofounder of Fast Company magazine and author of Practically Radical: Not-So-Crazy Ways to Transform Your Company, Shake Up Your Industry, and Challenge Yourself, published January 4, 2011. Follow him at twitter.com/practicallyrad.
Average Is Over. What's Your Extra?
9:05 AM Monday December 19, 2011 | Comments (22)
I approach a book by New York Times columnist Thomas Friedman with a mixture of wariness and anticipation. Wariness because Friedman's books tend to go on for many pages longer than they need to, and many of those pages contain his trademark blend of Davos Man self-congratulation and cheesy metaphors. Yet I still have a sense of anticipation because in every one of Friedman's books there are a handful of insights that are so clear, so sharp, so flat-out right that they frame how you look at the world going forward.
That Used to Be Us, Friedman's newest book (written with Johns Hopkins professor Michael Mandelbaum) has at least one such observation — a principle so clearly true, and so crisply expressed, that it should become a mantra of sorts for leaders everywhere who want to build something great and do something important. Chapter Seven of the book is called "Average Is Over," and it's a rallying cry that captures what it takes to stand out from the crowd in a world that keeps getting more crowded.
"In a hyper-connected world where so many talented non-Americans and smart machines that can do above-average work are now easily available to virtually every employer, what was 'average' work ten years ago is below average today, and will be further below average ten years from now," Friedman and Mandelbaum write. "As a result, everyone needs to raise his or her game just to stay in place, let alone get ahead." In an environment where "average is over," they go on, everybody has to find their "extra" — their unique talent, skill, contribution, or commitment that separates them from the pack and lets them do something special.
Friedman and Mandelbaum are policy wonks, so they explore the notion that "average is over" mainly as it applies to countries and societies, and how we educate kids, train workers, and make public investments. But their insight applies just as powerfully to companies and their leaders. The business world is overflowing with products and services and designs and marketing campaigns that are adequate. The real challenge — and the huge opportunity — is to turn something adequate into something amazing. It's just not good enough to be pretty good at everything. The most successful companies, products, and brands have figured out how to become the most of something. That is, to find and embrace their "extra."
Most organizations don't stand for anything special, of course. In her new book, Tough Cookies, the remarkable Kathy Cloninger, who led a multi-year transformation of the Girl Scouts of the USA, described how hard it is to take a mainstream organization and turn it into something with a distinctive and compelling point of view. If most organizations were honest with themselves, she argues, their mission statements would read, "Acme Widgets: We're no worse than anybody else."
I don't care what field you're in or what kind of company you work for, what qualified as average performance ten years ago is below-average today, and what is average today isn't nearly good enough to create long-term success and outsized value. You can't do something big if you're content with doing things the same way as everyone else. In a world of hyper-competition and limited attention, the only way to stand out from the crowd is to stand for something special.
Photo: © Iwan Baan and MBEACH1, LLLP
A case in point: a truly stunning parking garage in Miami Beach, Florida. The seven-story structure, at 1111 Lincoln Road, serves about as prosaic a function as can be imagined — it's a place to park cars. But when Robert Wennett bought the homely space back in 2005, he decided to turn something adequate into something amazing. As a New York Times report explained, "Parking garages, the grim afterthought of American design, call to mind many words. (Rats. Beer cans. Unidentifiable smells.) Breathtaking is not usually among them."
But this parking garage truly is breathtaking, so much so that it has become an in-demand venue for charity events, wine tastings, even high-priced weddings! Indeed, the top two floors were designed to both hold cars and host events, and they rent for as much as $15,000 per night. "This is not a parking garage," Robert Wennett told the Times. "It's really a civic space."
Talk about positive word of mouth. I first heard about 1111 Lincoln Road when I attended the American Express Luxury Summit in Park City, Utah. That's right — executives from some of the world's most exclusive brands were discussing the beauty and originality of a parking garage thousands of miles away. If that's not moving from adequate to amazing, I'm not sure what is. And it's a great example of an entrepreneur who built an enterprise around something "extra."
Recently, at a conference of marketers and brand specialists, I learned about a fast-growing company called Kulula Airlines, sort of the Southwest of South Africa. Like its role model in the United States, it has low fares, point-to-point routes, and a humorous staff. But its "extra" — what makes everyone stop and take notice — is the exterior of the airplanes themselves. Kulula treats them as flying pieces of art, which it decorates with all sorts of fun, colorful, sometimes downright-hilarious imagery. I have never seen airplanes like these, and I defy anyone who sees one of these planes on an airport tarmac not to stop, gaze in amazement, and want to learn more about the airline behind the planes.
Friedman and Mandelbaum have nailed it. There's no excuse to settle for "good enough" anymore. Average is over. What's your extra?
Why big companies can’t change
Why big companies can’t change
There’s a very good TED Talk by Simon Sinek about how great leaders inspire companies by asking why? I think it also goes a long way toward explaining why big companies don’t handle change well. It’s not that they can’t ask why?, it’s that the answer doesn’t make sense at their scale, though it should.
The Dow 30 Industrials that make up that all-important stock average began in 1896 as the Dow 12 and of those original 12 only General Electric survives on the list today. None of the other 11 are on today’s list even under different names, though some of the companies do survive. Many of those former industry titans, though — companies like American Tobacco and U.S. Leather — no longer exist at all. In some ways that’s surprising since big industrial companies take decades to build and we continue to need most of the stuff they make, so what was the problem?
Times change and big companies don’t like to change with the times.
At the polar opposite position from big industrial companies sit startups, nearly every one of which begins with an effortless expression of why? Big companies ask What? then How? but almost never Why? according to Sinek, who I think has it absolutely right. But good startups are motivated from birth by Why?
Nearly every good startup begins with why? and that why? is traditionally quite simple — because the founders want one for themselves. A hardware device or software application doesn’t exist and they’d really like one, so they invent it. For startups why is easy. If it isn’t easy then you probably don’t have a good startup.
If as a founder your answer to why? is “to get rich” you are in the wrong job.
Applied to a more mature company, looking at Apple we can see the why of the iPod and iTunes was “to take your entire music collection with you wherever you go.”
That sort of thinking isn’t common in big companies. Some of this is due to scale, some due to arrogance, and some to simply losing their way. But no matter how big a company grows, asking why? is still vital for continued success. They just don’t know it.
Back in 1986 I helped write the business plan for Illustrator, Adobe Systems’ first consumer product. The Why? for Illustrator was “because (Adobe founder) John Warnock wants a drawing program,” which is traditional startup. As I recall the business plan had the new consumer division with a net-net positive cash position of $87,000 after five years. Millions invested creating an entire new business for a new set of customers through a completely new distribution channel for a lousy $87,000?
Most companies would never have done it.
Yet if you look at Adobe’s market cap of $13 billion today probably $12 billion of that is based on consumer and professional software that began with Illustrator.
That $87,000 grew to $13 billion over 25 years.
Adobe had an OEM cash cow business selling printer controller designs and software in 1986 but that could only grow so big. And thanks primarily to Microsoft cloning Adobe’s PostScript, that OEM business would eventually decline and almost go away. PostScript is a small part of Adobe today.
This sounds to me like the position faced by many large, successful companies with mature product lines facing obvious challenges down the road. Such companies (I’m sure you can name a bunch if you think about it) see the problem approaching but are paralyzed by the need to envision $10 billion replacement markets. They can’t do what Adobe did in 1986 because there is no obvious Why? and $87,000 after five years wouldn’t even get before the board, no matter how important it really is to the company’s survival.
Adobe was lucky to have a curious founder still at the helm. It was lucky to be making enough money to risk a few million on an alternate future, too.
But 2011 is nothing like 1986. Looking five years ahead for business justification isn’t done any more. Heck, five quarters is a long time in business today. But then the average CEO tenure is also, what, four years?
And that’s why big successful companies roll over and die.
There’s a very good TED Talk by Simon Sinek about how great leaders inspire companies by asking why? I think it also goes a long way toward explaining why big companies don’t handle change well. It’s not that they can’t ask why?, it’s that the answer doesn’t make sense at their scale, though it should.
The Dow 30 Industrials that make up that all-important stock average began in 1896 as the Dow 12 and of those original 12 only General Electric survives on the list today. None of the other 11 are on today’s list even under different names, though some of the companies do survive. Many of those former industry titans, though — companies like American Tobacco and U.S. Leather — no longer exist at all. In some ways that’s surprising since big industrial companies take decades to build and we continue to need most of the stuff they make, so what was the problem?
Times change and big companies don’t like to change with the times.
At the polar opposite position from big industrial companies sit startups, nearly every one of which begins with an effortless expression of why? Big companies ask What? then How? but almost never Why? according to Sinek, who I think has it absolutely right. But good startups are motivated from birth by Why?
Nearly every good startup begins with why? and that why? is traditionally quite simple — because the founders want one for themselves. A hardware device or software application doesn’t exist and they’d really like one, so they invent it. For startups why is easy. If it isn’t easy then you probably don’t have a good startup.
If as a founder your answer to why? is “to get rich” you are in the wrong job.
Applied to a more mature company, looking at Apple we can see the why of the iPod and iTunes was “to take your entire music collection with you wherever you go.”
That sort of thinking isn’t common in big companies. Some of this is due to scale, some due to arrogance, and some to simply losing their way. But no matter how big a company grows, asking why? is still vital for continued success. They just don’t know it.
Back in 1986 I helped write the business plan for Illustrator, Adobe Systems’ first consumer product. The Why? for Illustrator was “because (Adobe founder) John Warnock wants a drawing program,” which is traditional startup. As I recall the business plan had the new consumer division with a net-net positive cash position of $87,000 after five years. Millions invested creating an entire new business for a new set of customers through a completely new distribution channel for a lousy $87,000?
Most companies would never have done it.
Yet if you look at Adobe’s market cap of $13 billion today probably $12 billion of that is based on consumer and professional software that began with Illustrator.
That $87,000 grew to $13 billion over 25 years.
Adobe had an OEM cash cow business selling printer controller designs and software in 1986 but that could only grow so big. And thanks primarily to Microsoft cloning Adobe’s PostScript, that OEM business would eventually decline and almost go away. PostScript is a small part of Adobe today.
This sounds to me like the position faced by many large, successful companies with mature product lines facing obvious challenges down the road. Such companies (I’m sure you can name a bunch if you think about it) see the problem approaching but are paralyzed by the need to envision $10 billion replacement markets. They can’t do what Adobe did in 1986 because there is no obvious Why? and $87,000 after five years wouldn’t even get before the board, no matter how important it really is to the company’s survival.
Adobe was lucky to have a curious founder still at the helm. It was lucky to be making enough money to risk a few million on an alternate future, too.
But 2011 is nothing like 1986. Looking five years ahead for business justification isn’t done any more. Heck, five quarters is a long time in business today. But then the average CEO tenure is also, what, four years?
And that’s why big successful companies roll over and die.
Innovation principles by the head of Apple Marketing
Innovation principles by Markkula
The genesis of these thoughts on marketing from Mike Markkula are detailed on page 78 of Walter Isaacson's intriguing biography of Steve Jobs. In their clarity, simplicity, and actionability, they are stunning. As a marketer, I take three lessons from them.
First, they are about people. Markets are made up of individuals. When striving to bring something new and cool to life, we're much better off imagining the life of a single customer than we are trying to disaggregate and disambiguate mountains of anonymized market data. A holistic understanding of the customer experience you wish to enable is a great way to start creating mind-blowing products. As a way of being, empathy is to product developers what The Force is to Jedi Knights.
Second, they are focused on the market. Surely great marketing is always about the market? Not always, and not so often: in my experience, many marketers worry more about communicating with each other internally than they do with real people in the marketplace. They spend more time reading reports created by others than they do learning from the market directly. They don't use products created by competitors, nor do they try to experience their channels in the way that an end user would. They may or may not love their product segment -- I mean, can you imagine Steve Jobs hawking anything other than stuff he believed in? Significantly, none of Markkula's dictums explicitly mention the internal functions or structure of the enterprise. Granted, it could be argued that "Focus" is about both the internal choices an organization makes about what not to do, as well as on all the market-facing features, line extensions, and complementary offerings it chooses not to invest in.
Third, they focus on the big picture and on the smallest details. Yes, you need to understand where the market is going and how culture, politics, and macro economic trends may influence your future state in three to five years. But you also must appreciate the nuances of texture, smell, form, sound, proportions, and color. The realm of the visceral is always there, our minds and hearts want things to feel good and true. Everything matters, and marketers (or designers, or businesspeople, or engineers -- it's all the same to me) ignore this truth at their peril.
Back on planet metacool, I believe the following innovation principles are at work in Markkula's document:
Principle 1: Experience the world instead of talking about experiencing the world
Principle 3: Always ask: "How do we want people to feel after they experience this?"
Principle 9: Killing good ideas is a good idea
Principle 20: Be remarkable
The genesis of these thoughts on marketing from Mike Markkula are detailed on page 78 of Walter Isaacson's intriguing biography of Steve Jobs. In their clarity, simplicity, and actionability, they are stunning. As a marketer, I take three lessons from them.
First, they are about people. Markets are made up of individuals. When striving to bring something new and cool to life, we're much better off imagining the life of a single customer than we are trying to disaggregate and disambiguate mountains of anonymized market data. A holistic understanding of the customer experience you wish to enable is a great way to start creating mind-blowing products. As a way of being, empathy is to product developers what The Force is to Jedi Knights.
Second, they are focused on the market. Surely great marketing is always about the market? Not always, and not so often: in my experience, many marketers worry more about communicating with each other internally than they do with real people in the marketplace. They spend more time reading reports created by others than they do learning from the market directly. They don't use products created by competitors, nor do they try to experience their channels in the way that an end user would. They may or may not love their product segment -- I mean, can you imagine Steve Jobs hawking anything other than stuff he believed in? Significantly, none of Markkula's dictums explicitly mention the internal functions or structure of the enterprise. Granted, it could be argued that "Focus" is about both the internal choices an organization makes about what not to do, as well as on all the market-facing features, line extensions, and complementary offerings it chooses not to invest in.
Third, they focus on the big picture and on the smallest details. Yes, you need to understand where the market is going and how culture, politics, and macro economic trends may influence your future state in three to five years. But you also must appreciate the nuances of texture, smell, form, sound, proportions, and color. The realm of the visceral is always there, our minds and hearts want things to feel good and true. Everything matters, and marketers (or designers, or businesspeople, or engineers -- it's all the same to me) ignore this truth at their peril.
Back on planet metacool, I believe the following innovation principles are at work in Markkula's document:
Principle 1: Experience the world instead of talking about experiencing the world
Principle 3: Always ask: "How do we want people to feel after they experience this?"
Principle 9: Killing good ideas is a good idea
Principle 20: Be remarkable
Sunday, December 18, 2011
Five Common Strategy Mistakes
HBR Blog Network
JOAN MAGRETTA
Joan Magretta is a senior associate at the Institute for Strategy and Competitiveness at Harvard Business School. She is the author of What Management Is
and the forthcoming Understanding Michael Porter: The Essential Guide to Competition and Strategy.
Five Common Strategy Mistakes
1:15 PM Thursday December 8, 2011
by Joan Magretta
I just finished a two-year project looking at Michael Porter's most important insights for managers. Connecting the dots between his classic frameworks (the five forces, for example) and his latest thinking (the five tests of strategy) gave me a new understanding of the most common mistakes that can derail a company's strategy. In a previous post, I focused on the fallacy of competing to be the best. Here are five more traps I've seen managers fall into over and over again. Understanding Porter's strategy fundamentals will help you to avoid them.
Mistake #1. Confusing marketing with strategy.
Correction: A value proposition isn't the same thing as a strategy. If you're trying to describe a strategy, the value proposition is a natural place to begin — it's intuitive to think of strategy in terms of the mix of benefits aimed at meeting customers' needs. But as important as it is to have insight into customers' needs, don't confuse marketing with strategy. What the marketing-only approach misses is that a robust strategy also requires a tailored value chain, a unique configuration of activities that best delivers that kind of value. This element of strategy is not at all intuitive, but it's absolutely essential. If you perform the same activities as everyone else, in the same ways, how can you expect to achieve better performance? To establish a competitive advantage, a company must deliver its distinctive value through a distinctive value chain. It must perform different activities than rivals or perform similar activities in different ways.
Mistake #2. Confusing competitive advantage with "what you're good at."
Correction: Building on strength is a good thing, but when it comes to strategy, companies are too often inward looking and therefore likely to overestimate their strengths. You might perceive customer service as a strong area. So that becomes the "strength" on which you attempt to build a strategy. But a real strength for strategy purposes has to be something the company can do better than any of its rivals. And "better" because you are choosing to meet different needs and performing different activities than they perform, because you've chosen a different configuration for your value chain than they have.
Mistake #3: Pursuing size above all else, because if you're the biggest, you'll be more profitable.
Correction: There is at least a grain of truth in this thinking, which is precisely what makes it so dangerous. But before you assume that bigger is always better, it is critical to run the numbers for your business. Too often the goal is chosen because it sounds good, whether or not the economics of the business support the logic. In industry after industry, Porter notes that economies of scale are exhausted at a relatively small share of industry sales. There is no systematic evidence that indicates that industry leaders are the most profitable or successful firms. To cite one notorious example, General Motors was the world's largest car company for a period of decades, a fact that didn't prevent its descent into bankruptcy. To the extent that size mattered at all, it might be more accurate to say that GM was too big to succeed. Meanwhile, BMW, small by industry standards, has a history of superior returns. Over the past decade (2000-2009), its average return on invested capital was 50 percent higher than the industry average. Companies only have to be "big enough," which rarely means they have to dominate. Often "big enough" is just 10 percent of the market.
Mistake #4. Thinking that "growth" or "reaching $1 billion in revenue" is a strategy.
Correction: Don't confuse strategy with actions (grow, acquire, divest, etc.) or with goals (reach X billion in sales, Y share of market). Porter's definition: the set of integrated choices that define how you will achieve superior performance in the face of competition. It's not the goal (e.g., be number one or reach $1 billion in top-line revenue), nor is it a specific action (e.g., make acquisitions). It's the positioning you choose that will result in achieving the goal; the actions are the path you take to realize the positioning. Moreover, when Porter defines strategy, he is really talking about what constitutes a good strategy — one that will result in a higher ROIC than the industry average. The real problem here is that you will think you have a strategy when you don't.
Mistake #5. Focusing on high-growth markets, because that's where the money is.
Correction: Managers often mistakenly assume that a high-growth industry will be an attractive one. Wrong. Growth is no guarantee that the industry will be profitable. For example, growth might put suppliers in the driver's seat, driving up the industry's costs and limiting profitability. Or, combined with low entry barriers, growth might attract new rivals, thereby increasing competition and driving prices down. Growth alone says nothing about the power of customers or the availability of substitutes, both of which would dampen profitability. The untested assumption that a fast-growing industry is a "good" industry, Porter warns, often leads to bad strategy decisions.
These mistakes are both common and costly. Getting smarter about how competition works and what strategy is will save you from making them.
JOAN MAGRETTA
Joan Magretta is a senior associate at the Institute for Strategy and Competitiveness at Harvard Business School. She is the author of What Management Is
and the forthcoming Understanding Michael Porter: The Essential Guide to Competition and Strategy.
Five Common Strategy Mistakes
1:15 PM Thursday December 8, 2011
by Joan Magretta
I just finished a two-year project looking at Michael Porter's most important insights for managers. Connecting the dots between his classic frameworks (the five forces, for example) and his latest thinking (the five tests of strategy) gave me a new understanding of the most common mistakes that can derail a company's strategy. In a previous post, I focused on the fallacy of competing to be the best. Here are five more traps I've seen managers fall into over and over again. Understanding Porter's strategy fundamentals will help you to avoid them.
Mistake #1. Confusing marketing with strategy.
Correction: A value proposition isn't the same thing as a strategy. If you're trying to describe a strategy, the value proposition is a natural place to begin — it's intuitive to think of strategy in terms of the mix of benefits aimed at meeting customers' needs. But as important as it is to have insight into customers' needs, don't confuse marketing with strategy. What the marketing-only approach misses is that a robust strategy also requires a tailored value chain, a unique configuration of activities that best delivers that kind of value. This element of strategy is not at all intuitive, but it's absolutely essential. If you perform the same activities as everyone else, in the same ways, how can you expect to achieve better performance? To establish a competitive advantage, a company must deliver its distinctive value through a distinctive value chain. It must perform different activities than rivals or perform similar activities in different ways.
Mistake #2. Confusing competitive advantage with "what you're good at."
Correction: Building on strength is a good thing, but when it comes to strategy, companies are too often inward looking and therefore likely to overestimate their strengths. You might perceive customer service as a strong area. So that becomes the "strength" on which you attempt to build a strategy. But a real strength for strategy purposes has to be something the company can do better than any of its rivals. And "better" because you are choosing to meet different needs and performing different activities than they perform, because you've chosen a different configuration for your value chain than they have.
Mistake #3: Pursuing size above all else, because if you're the biggest, you'll be more profitable.
Correction: There is at least a grain of truth in this thinking, which is precisely what makes it so dangerous. But before you assume that bigger is always better, it is critical to run the numbers for your business. Too often the goal is chosen because it sounds good, whether or not the economics of the business support the logic. In industry after industry, Porter notes that economies of scale are exhausted at a relatively small share of industry sales. There is no systematic evidence that indicates that industry leaders are the most profitable or successful firms. To cite one notorious example, General Motors was the world's largest car company for a period of decades, a fact that didn't prevent its descent into bankruptcy. To the extent that size mattered at all, it might be more accurate to say that GM was too big to succeed. Meanwhile, BMW, small by industry standards, has a history of superior returns. Over the past decade (2000-2009), its average return on invested capital was 50 percent higher than the industry average. Companies only have to be "big enough," which rarely means they have to dominate. Often "big enough" is just 10 percent of the market.
Mistake #4. Thinking that "growth" or "reaching $1 billion in revenue" is a strategy.
Correction: Don't confuse strategy with actions (grow, acquire, divest, etc.) or with goals (reach X billion in sales, Y share of market). Porter's definition: the set of integrated choices that define how you will achieve superior performance in the face of competition. It's not the goal (e.g., be number one or reach $1 billion in top-line revenue), nor is it a specific action (e.g., make acquisitions). It's the positioning you choose that will result in achieving the goal; the actions are the path you take to realize the positioning. Moreover, when Porter defines strategy, he is really talking about what constitutes a good strategy — one that will result in a higher ROIC than the industry average. The real problem here is that you will think you have a strategy when you don't.
Mistake #5. Focusing on high-growth markets, because that's where the money is.
Correction: Managers often mistakenly assume that a high-growth industry will be an attractive one. Wrong. Growth is no guarantee that the industry will be profitable. For example, growth might put suppliers in the driver's seat, driving up the industry's costs and limiting profitability. Or, combined with low entry barriers, growth might attract new rivals, thereby increasing competition and driving prices down. Growth alone says nothing about the power of customers or the availability of substitutes, both of which would dampen profitability. The untested assumption that a fast-growing industry is a "good" industry, Porter warns, often leads to bad strategy decisions.
These mistakes are both common and costly. Getting smarter about how competition works and what strategy is will save you from making them.
Friday, December 9, 2011
To Create Something Exceptional, Do Sweat The Small Stuff
Box CEO Aaron Levie:
BY FC Expert Blogger Aaron LevieWed Dec 7, 2011
This blog is written by a member of our expert blogging community and expresses that expert's views alone.
Business schools and most jobs don’t teach you how important it is to sweat the small stuff.
In fact, we’re mostly told the opposite--don’t be a micromanager, don’t be penny wise and pound foolish, don't miss the forest for the trees. The implied wisdom is that abstract and conceptual thinking always prevails over narrow determination and single-mindedness. And yet, when we look at the greatest inventions, greatest companies, and greatest teams of our time, their success always comes down to tireless concern over every last detail.
Big, sluggish companies--you know the ones, with brands that elicit ambivalence instead of aspiration--are fat, dumb, and uncaring for a reason. Their products, from airline flights to consumer electronics devices, feel like the result of an accident or a hassle rather than the core purpose of their existence. In these instances, system thinking--with the goal of managing and improving processes, logistics, and throughput--reigns supreme in the organization, replacing a maniacal focus on delivering great products or services by attending to every last excruciating detail.
It’s certainly easy as a startup to focus on the small things, because when you’re small, every issue is big. This is why, counterintuitively, a small, nimble company with far fewer resources often delivers the most innovation and a superior user experience. By focusing on every level of detail, because survival is on the line, better products and service emerge. As organizations grow, this responsibility dissipates, founders move on, and quality suffers--it can always be someone else’s problem to worry about the small, nuanced, granular things. Those are tactical issues, and I’m strategic, right?
Yet, the best companies in the world are those that have scaled by turning those tactics and granular efforts into the reason for their success. This is why you get a near-uniformly positive experience when flying Virgin compared to often-abysmal treatment from other airlines, or why Apple unequivocally makes products that just feel better than other PC manufacturers.
Why the small stuff is so important
In management, we can easily slip into thinking about the holistic delivery of a product distinct from the perfect delivery of every subcomponent or part that makes up that service. Everyone has been in those meetings--executives feel that the small things can be left to everyone else, instead focusing on the areas of "higher value." Phrases like "this is good enough," or "customers won’t notice" should be stamped out of any management team’s or individual’s vocabulary.
Because ultimately, your product or service is consumed on that granular level that's being ignored. Whether it’s clicking on a link, signing up for a product, playing with a dial, or conversing with an attendant, these are the interfaces from which customers experience your brand. No customer cares that you have the best logistics and supply chain in the world if the final manifestation of your product is flawed.
And with the Internet amplifying how people share their love or hate for products, increasing global competition, and contracting wallets, the quality of these interactions are more important than ever before.
The small things have a disproportionate impact on customers' feelings. It’s the way Kindle knows your name when you first load it up, the consistent experience you get from Starbucks baristas, the dozens of optimizations Spotify does to make sure your music starts streaming instantly, or the richer sound and better comfort you get from Bose headphones. We're taught that quality and cost should scale proportionally, but many of the best experiences don't come with a larger price tag at all. Just a greater level of attention to the details.
The combination of an insane attention to these details and neurotic level of focus on customer experience in all areas is what sets apart the great companies from the good. Organizations that do decide to adopt this level of intensity will always have superior offerings, an instant differentiator from the indistinguishable competition.
Building a culture around sweating the small stuff
"Some people aren’t used to an environment where excellence is expected," Steve Jobs once famously and said.
Most companies have given up on caring about excellence altogether, so there aren’t too many examples that we can live by. M.G. Siegler argues that leaders need to aim for less deference to produce high-quality work. While this has been proven to work across film, fashion, and technology, it’s also a cop-out for the entire team. It should be everyone’s responsibility to push for a higher standard and level of experience.
Unsurprisingly, we're actually well-incented to make our work the very best--it's better for profits, long-term morale, and it's more gratifying--but we often don’t know why it's so critical until it's too late. The product gets shipped to poor reviews: fail. Customer unrest thanks to poor support: double fail. And amidst the infinite varying priorities and market changes, it becomes shockingly easy to undervalue quality even in a well-run organization.
In any organization, quality bars are subjective and moving targets, making them hard to identify and address, let alone maintain. But when they’re not defined or upheld, most organizations will regress to the mean, which we can assume is the average output. But leading organizations are built by exploiting the fringe--the fringe in quality, in performance, in experience, in cost, and so on.
To sweat the small stuff means to be uncompromising about anything that affects the quality of a product or experience for customers. It means making tradeoffs of time and effort for the efficacy of the final output. It means implementing systems, social or formal, that ensure high bars are maintained at all times and in any circumstance. It means delaying product releases, extending work hours, or losing a little extra margin to make things just right.
Asking "What would be best for our customer?" doesn’t go nearly far enough. Leading through this question gets you to average results. Instead ask, "What will blow our customers' minds?" Repeat the question "Can we do better?" until the point of migraine-induced annoyance, and see how much things change. Create a culture that forces this challenge multiple times, every step of the way, and you’ll see remarkable changes in every deliverable. Implement a we-won’t-ship line in the sand that can't be subverted for any reason if quality standards aren't met. There are other tactics to distribute the enforcement as well.
Mark Pincus, the CEO of Zynga, pushes on the notion that every employee is the CEO of something. This empowers individuals to take responsibility for their area of ownership, adding a level of accountability and fulfillment that can drive quality. In many ways this is a psychological trick to ensure success and quality in the most narrow and distinct of areas. For customer delight, Zappos became determined to build a winning culture for its company that would make employees love their jobs, and thus reflect this inspiration and happiness on their clients.
If you don't seem paranoid about perfection, you're probably not aiming high enough. Sadly--for consumers--the vast majority of companies will never put this level of focus on their products, services, or interactions. But building it into your culture, and making sure it's a collective and distributed effort, is a winning way to ensure your products are superior.
Author Aaron Levie is the CEO and co-founder of Box, which he originally created as a college business project with the goal of helping people easily access their information from any location.
BY FC Expert Blogger Aaron LevieWed Dec 7, 2011
This blog is written by a member of our expert blogging community and expresses that expert's views alone.
Business schools and most jobs don’t teach you how important it is to sweat the small stuff.
In fact, we’re mostly told the opposite--don’t be a micromanager, don’t be penny wise and pound foolish, don't miss the forest for the trees. The implied wisdom is that abstract and conceptual thinking always prevails over narrow determination and single-mindedness. And yet, when we look at the greatest inventions, greatest companies, and greatest teams of our time, their success always comes down to tireless concern over every last detail.
Big, sluggish companies--you know the ones, with brands that elicit ambivalence instead of aspiration--are fat, dumb, and uncaring for a reason. Their products, from airline flights to consumer electronics devices, feel like the result of an accident or a hassle rather than the core purpose of their existence. In these instances, system thinking--with the goal of managing and improving processes, logistics, and throughput--reigns supreme in the organization, replacing a maniacal focus on delivering great products or services by attending to every last excruciating detail.
It’s certainly easy as a startup to focus on the small things, because when you’re small, every issue is big. This is why, counterintuitively, a small, nimble company with far fewer resources often delivers the most innovation and a superior user experience. By focusing on every level of detail, because survival is on the line, better products and service emerge. As organizations grow, this responsibility dissipates, founders move on, and quality suffers--it can always be someone else’s problem to worry about the small, nuanced, granular things. Those are tactical issues, and I’m strategic, right?
Yet, the best companies in the world are those that have scaled by turning those tactics and granular efforts into the reason for their success. This is why you get a near-uniformly positive experience when flying Virgin compared to often-abysmal treatment from other airlines, or why Apple unequivocally makes products that just feel better than other PC manufacturers.
Why the small stuff is so important
In management, we can easily slip into thinking about the holistic delivery of a product distinct from the perfect delivery of every subcomponent or part that makes up that service. Everyone has been in those meetings--executives feel that the small things can be left to everyone else, instead focusing on the areas of "higher value." Phrases like "this is good enough," or "customers won’t notice" should be stamped out of any management team’s or individual’s vocabulary.
Because ultimately, your product or service is consumed on that granular level that's being ignored. Whether it’s clicking on a link, signing up for a product, playing with a dial, or conversing with an attendant, these are the interfaces from which customers experience your brand. No customer cares that you have the best logistics and supply chain in the world if the final manifestation of your product is flawed.
And with the Internet amplifying how people share their love or hate for products, increasing global competition, and contracting wallets, the quality of these interactions are more important than ever before.
The small things have a disproportionate impact on customers' feelings. It’s the way Kindle knows your name when you first load it up, the consistent experience you get from Starbucks baristas, the dozens of optimizations Spotify does to make sure your music starts streaming instantly, or the richer sound and better comfort you get from Bose headphones. We're taught that quality and cost should scale proportionally, but many of the best experiences don't come with a larger price tag at all. Just a greater level of attention to the details.
The combination of an insane attention to these details and neurotic level of focus on customer experience in all areas is what sets apart the great companies from the good. Organizations that do decide to adopt this level of intensity will always have superior offerings, an instant differentiator from the indistinguishable competition.
Building a culture around sweating the small stuff
"Some people aren’t used to an environment where excellence is expected," Steve Jobs once famously and said.
Most companies have given up on caring about excellence altogether, so there aren’t too many examples that we can live by. M.G. Siegler argues that leaders need to aim for less deference to produce high-quality work. While this has been proven to work across film, fashion, and technology, it’s also a cop-out for the entire team. It should be everyone’s responsibility to push for a higher standard and level of experience.
Unsurprisingly, we're actually well-incented to make our work the very best--it's better for profits, long-term morale, and it's more gratifying--but we often don’t know why it's so critical until it's too late. The product gets shipped to poor reviews: fail. Customer unrest thanks to poor support: double fail. And amidst the infinite varying priorities and market changes, it becomes shockingly easy to undervalue quality even in a well-run organization.
In any organization, quality bars are subjective and moving targets, making them hard to identify and address, let alone maintain. But when they’re not defined or upheld, most organizations will regress to the mean, which we can assume is the average output. But leading organizations are built by exploiting the fringe--the fringe in quality, in performance, in experience, in cost, and so on.
To sweat the small stuff means to be uncompromising about anything that affects the quality of a product or experience for customers. It means making tradeoffs of time and effort for the efficacy of the final output. It means implementing systems, social or formal, that ensure high bars are maintained at all times and in any circumstance. It means delaying product releases, extending work hours, or losing a little extra margin to make things just right.
Asking "What would be best for our customer?" doesn’t go nearly far enough. Leading through this question gets you to average results. Instead ask, "What will blow our customers' minds?" Repeat the question "Can we do better?" until the point of migraine-induced annoyance, and see how much things change. Create a culture that forces this challenge multiple times, every step of the way, and you’ll see remarkable changes in every deliverable. Implement a we-won’t-ship line in the sand that can't be subverted for any reason if quality standards aren't met. There are other tactics to distribute the enforcement as well.
Mark Pincus, the CEO of Zynga, pushes on the notion that every employee is the CEO of something. This empowers individuals to take responsibility for their area of ownership, adding a level of accountability and fulfillment that can drive quality. In many ways this is a psychological trick to ensure success and quality in the most narrow and distinct of areas. For customer delight, Zappos became determined to build a winning culture for its company that would make employees love their jobs, and thus reflect this inspiration and happiness on their clients.
If you don't seem paranoid about perfection, you're probably not aiming high enough. Sadly--for consumers--the vast majority of companies will never put this level of focus on their products, services, or interactions. But building it into your culture, and making sure it's a collective and distributed effort, is a winning way to ensure your products are superior.
Author Aaron Levie is the CEO and co-founder of Box, which he originally created as a college business project with the goal of helping people easily access their information from any location.
Sunday, December 4, 2011
Don't Let What You Know Limit What You Imagine
Don't Let What You Know Limit What You Imagine
Bill Taylor
William C. Taylor is cofounder of Fast Company magazine
3:03 PM Tuesday November 29, 2011
tOne of the most perplexing features of these troubled times is that so many capable people in so many fields look so lost and ineffective. Whether it's the stubborn inefficiencies of the health-care system, the ever-rising costs of the higher-education system, even the slow-motion collapse of the US postal system, leaders with unrivaled expertise and decades of experience can't seem to develop creative solutions to dire problems.
Why are so many smart executives so ineffective?
One answer may be that all this experience is itself a problem. In her underappreciated book, The Innovation Killer, Cynthia Barton Rabe, a former innovation strategist at Intel, explains how "what we know limits what we can imagine." Many organizations, she argues, struggle with a "paradox of expertise" in which deep knowledge of what exists in a marketplace or a product category makes it harder to consider what-if strategies that challenge long-held assumptions. "When it comes to innovation," she writes, "the same hard-won experience, best practice, and processes that are the cornerstones of an organization's success may be more like millstones that threaten to sink it."
Her answer to the paradox is to populate organizations with "zero-gravity thinkers": innovators "who are not weighed down by the expertise of a team, its politics, or 'the way things have always been done.'" In Rabe's formula, zero-gravity thinkers come from outside the corporate mainstream and work deep within the ranks of the organization. They are designers, ethnographers, anthropologists, and other creative types who get immersed in a project or a team, contribute their unique points of view, and then move on to the next change-the-game assignment. Ideal zero-gravity thinkers, she explains, have "psychological distance" from the setting in which they work, "renaissance tendencies" that draw on a range of interests and influences, and "related expertise" that allows them to find the points where blue-sky ideas intersect with real-world opportunities.
Or, to put it differently, the most effective leaders demonstrate a capacity for vuja dé. We've all experienced déjà vu — looking at an unfamiliar situation and feeling like you've seen it before. Vuja dé is the flip side of that — looking at a familiar situation (a field you've worked in for decades, products you've worked on for years) as if you've never seen it before, and, with that fresh line of sight, developing a distinctive point of view on the future. If you believe, as I do, that what you see shapes how you change, then the question for change-minded leaders becomes: How do you look at your organization and your field as if you are seeing them for the first time?
A classic example of this phenomenon, which I chronicled in my book Mavericks at Work, was the game-changing performance of Commerce Bank, one of the most colorful institutions in the history of retail banking. I first noticed Commerce back in the late '90s, when it was developing a reputation for creativity and had a stock-market value of $400 million. Ten years later, after a period of massive growth, the company sold itself to TD Bank in a stock transaction worth $8.5 billion — not a bad decade. Today, operating under the TD Bank umbrella, the outfit has more than 1,000 branches up and down the East Coast, from Maine to Florida, and a well-earned reputation as "America's most convenient bank."
During its rise to prominence, the bank introduced one unheard-of innovation after another: seven-day-a-week service, free coin-counting machines that were hugely popular with customers, "Red Fridays" in which employees wore special outfits to work. The term it used to describe its strategy was "retailtainment" — making it fun for customers to do business in an industry that was devoid of personality. "The world didn't need another bank on the corner, and then we came along," said Dennis DiFlorio, who spent nearly twenty years in leadership positions, including chairman. "We created a cult brand in a dead business."
Whenever I spent time with the bank's leadership team, they were adamant about their disdain for traditional approaches to "benchmarking" the competition as well as for traditional banks. They didn't evaluate themselves against Citigroup, Bank of America, or Wells Fargo. They looked to "power retailers" such as Starbucks, Target, and Best Buy. (Commerce did study its rivals, but only to discover "the stuff that drives customers at other banks crazy." These were called Competitor Rules and Practices — internal acronym, CRAP.)
"Every great company has reinvented the industry it's in," founder Vernon Hill told me. "So we don't copy the stupid banks. We copy the great retailers." For example, the bank decided to open its branches for 70 to 80 hours a week, including Saturday and Sunday. "It's the simplest idea in the world," Hill said. "But to this day, it's heretical in banking. The first question bankers ask me is, 'How do you staff on Sunday?' I tell them: 'Wal-Mart stays open. The malls stay open. How hard can it be?'"
Commerce was (and TD Bank remains) a unique outfit, but its blueprint for innovation was not an entirely new perspective on making change. Fascinating articles in the Daily Telegraph and the Wall Street Journal described how London's Great Ormond Street Hospital for Children, renowned for its cardiac care, struggled with poorly designed "handoffs" that resulted in errors, complications, even deaths. So Dr. Martin Elliot, head of cardiac surgery, and Dr. Allan Goldman, head of pediatric intensive care, studied high-powered professionals who were better than anyone at organizing handoffs — the pit crew of Ferrari's Formula One racing team.
The doctors and the pit crew, the Telegraph reported, "worked together at [the team's] home base in Modena, Italy, in the pits of the British Grand Prix, and in the Great Ormond Street [operating room] and intensive-care ward." Members of the pit crew were struck by how clumsy the hospital's handoff process was — not to mention the fact that it often lacked a clear leader. (In Formula One races, a so-called "lollipop man" wields an easy-to-see paddle and calls the shots.) Moreover, they noted how noisy the process was. Ferrari pit crews operate largely in silence, despite (or because of) the roar of engines around them. As a result of "one of the more unlikely collaborations in modern medicine," the Journal reported, the hospital redesigned its handoff procedures and sharply reduced medical errors.
Here's the message: You can't let what you know limit what you can imagine. As you try to do something special, exciting, important in your work, as you work hard to devise creative solutions to stubborn problems, don't just look to other organizations in your field (or to your past successes) for ideas and practices. Look to great organizations in all sorts of unrelated fields to see what works for them — and how you can apply their ideas to your problems. Who are the most unlikely organizations from which you learn? Do you have new ideas about where to look for new ideas?
Bill Taylor
William C. Taylor is cofounder of Fast Company magazine
3:03 PM Tuesday November 29, 2011
tOne of the most perplexing features of these troubled times is that so many capable people in so many fields look so lost and ineffective. Whether it's the stubborn inefficiencies of the health-care system, the ever-rising costs of the higher-education system, even the slow-motion collapse of the US postal system, leaders with unrivaled expertise and decades of experience can't seem to develop creative solutions to dire problems.
Why are so many smart executives so ineffective?
One answer may be that all this experience is itself a problem. In her underappreciated book, The Innovation Killer, Cynthia Barton Rabe, a former innovation strategist at Intel, explains how "what we know limits what we can imagine." Many organizations, she argues, struggle with a "paradox of expertise" in which deep knowledge of what exists in a marketplace or a product category makes it harder to consider what-if strategies that challenge long-held assumptions. "When it comes to innovation," she writes, "the same hard-won experience, best practice, and processes that are the cornerstones of an organization's success may be more like millstones that threaten to sink it."
Her answer to the paradox is to populate organizations with "zero-gravity thinkers": innovators "who are not weighed down by the expertise of a team, its politics, or 'the way things have always been done.'" In Rabe's formula, zero-gravity thinkers come from outside the corporate mainstream and work deep within the ranks of the organization. They are designers, ethnographers, anthropologists, and other creative types who get immersed in a project or a team, contribute their unique points of view, and then move on to the next change-the-game assignment. Ideal zero-gravity thinkers, she explains, have "psychological distance" from the setting in which they work, "renaissance tendencies" that draw on a range of interests and influences, and "related expertise" that allows them to find the points where blue-sky ideas intersect with real-world opportunities.
Or, to put it differently, the most effective leaders demonstrate a capacity for vuja dé. We've all experienced déjà vu — looking at an unfamiliar situation and feeling like you've seen it before. Vuja dé is the flip side of that — looking at a familiar situation (a field you've worked in for decades, products you've worked on for years) as if you've never seen it before, and, with that fresh line of sight, developing a distinctive point of view on the future. If you believe, as I do, that what you see shapes how you change, then the question for change-minded leaders becomes: How do you look at your organization and your field as if you are seeing them for the first time?
A classic example of this phenomenon, which I chronicled in my book Mavericks at Work, was the game-changing performance of Commerce Bank, one of the most colorful institutions in the history of retail banking. I first noticed Commerce back in the late '90s, when it was developing a reputation for creativity and had a stock-market value of $400 million. Ten years later, after a period of massive growth, the company sold itself to TD Bank in a stock transaction worth $8.5 billion — not a bad decade. Today, operating under the TD Bank umbrella, the outfit has more than 1,000 branches up and down the East Coast, from Maine to Florida, and a well-earned reputation as "America's most convenient bank."
During its rise to prominence, the bank introduced one unheard-of innovation after another: seven-day-a-week service, free coin-counting machines that were hugely popular with customers, "Red Fridays" in which employees wore special outfits to work. The term it used to describe its strategy was "retailtainment" — making it fun for customers to do business in an industry that was devoid of personality. "The world didn't need another bank on the corner, and then we came along," said Dennis DiFlorio, who spent nearly twenty years in leadership positions, including chairman. "We created a cult brand in a dead business."
Whenever I spent time with the bank's leadership team, they were adamant about their disdain for traditional approaches to "benchmarking" the competition as well as for traditional banks. They didn't evaluate themselves against Citigroup, Bank of America, or Wells Fargo. They looked to "power retailers" such as Starbucks, Target, and Best Buy. (Commerce did study its rivals, but only to discover "the stuff that drives customers at other banks crazy." These were called Competitor Rules and Practices — internal acronym, CRAP.)
"Every great company has reinvented the industry it's in," founder Vernon Hill told me. "So we don't copy the stupid banks. We copy the great retailers." For example, the bank decided to open its branches for 70 to 80 hours a week, including Saturday and Sunday. "It's the simplest idea in the world," Hill said. "But to this day, it's heretical in banking. The first question bankers ask me is, 'How do you staff on Sunday?' I tell them: 'Wal-Mart stays open. The malls stay open. How hard can it be?'"
Commerce was (and TD Bank remains) a unique outfit, but its blueprint for innovation was not an entirely new perspective on making change. Fascinating articles in the Daily Telegraph and the Wall Street Journal described how London's Great Ormond Street Hospital for Children, renowned for its cardiac care, struggled with poorly designed "handoffs" that resulted in errors, complications, even deaths. So Dr. Martin Elliot, head of cardiac surgery, and Dr. Allan Goldman, head of pediatric intensive care, studied high-powered professionals who were better than anyone at organizing handoffs — the pit crew of Ferrari's Formula One racing team.
The doctors and the pit crew, the Telegraph reported, "worked together at [the team's] home base in Modena, Italy, in the pits of the British Grand Prix, and in the Great Ormond Street [operating room] and intensive-care ward." Members of the pit crew were struck by how clumsy the hospital's handoff process was — not to mention the fact that it often lacked a clear leader. (In Formula One races, a so-called "lollipop man" wields an easy-to-see paddle and calls the shots.) Moreover, they noted how noisy the process was. Ferrari pit crews operate largely in silence, despite (or because of) the roar of engines around them. As a result of "one of the more unlikely collaborations in modern medicine," the Journal reported, the hospital redesigned its handoff procedures and sharply reduced medical errors.
Here's the message: You can't let what you know limit what you can imagine. As you try to do something special, exciting, important in your work, as you work hard to devise creative solutions to stubborn problems, don't just look to other organizations in your field (or to your past successes) for ideas and practices. Look to great organizations in all sorts of unrelated fields to see what works for them — and how you can apply their ideas to your problems. Who are the most unlikely organizations from which you learn? Do you have new ideas about where to look for new ideas?
Is M&A The New R&D? Is this hiw companies will innovate in the future?
Can only startups innovate? A brief history of acquisitions
30th November 2011 by Harrison Weber
The magic of startup life is the constant flow of new information; new ways of solving problems with solutions that surface from sleepless nights and wandering minds. Major tech companies like Microsoft and Apple were once startups themselves, small companies with innovative ideas that geared up to expand rapidly.
Microsoft and Apple grew into the powerhouses we know today and knocked IBM off its top shelf, all while constantly being challenged by small, groundbreaking companies that could maneuver much faster than a major corporation.
What happened to IBM can still happen to the likes of Microsoft, Apple and Google, which is why acquisition is their life force and part of every corporation’s recipe for success — bringing in fresh ideas before the whole company goes stale.
Google
After developing an impressive competing network, DoubleClick was bought by Google for 3.1 billion in 2007. This acquisition of DoubleClick brought Google into the display advertising market overnight.
Google Docs was created with the acquisition of Upstartle’s Writely, a web-based wordprocessor, and 2Web Technologies for XL2Web, which led to Google Spreadsheets. Google merged both products together to create a productivity suite that now competes with desktop and cloud offerings from Microsoft Office and Apple’s iWork.
After Google Video failed to gain traction online, it acquired YouTube in 2006 for $1.65 billion. At the time, there was speculation that Google had overpaid; YouTube had zero monetization strategies, and was over-run with copyright infringment. Time has shown that this may be one of the best acquisitions in recent history, with YouTube’s 40% marketshare and successful monetization as outstanding proof.
Android is another high profile innovation, acquired by Google in 2005. Google developed and brought Android to market, from what was a small Palo Alto startup that had run independently for two years.
Since 1998, Google has bought over 100 companies.
Apple
Apple’s largest acquisition was NeXT for $404 million, which brought Steve Jobs back to Apple and laid the foundations for Mac OS X. Other notable Apple acquisitions include Emagic, which led to Garageband, and FingerWorks, which aided in the development of multi touch technology in iOS.
Most notably in recent years, Apple acquired Siri in 2010, which led to a highly publicized release exclusively for the iPhone 4S. This acquisition creates a highly competitive advantage when compared to Android and Windows Phone’s similar functionality.
Microsoft
Microsoft’s first acquisition was Forethought in 1987. Forethought developed a presentation program that would eventually become Microsoft Powerpoint, a significant piece of Microsoft Office. Ten years later, Microsoft acquired Hotmail for $500 million, which was integrated as an MSN service.
Hotmail is still (surprisingly) the largest webmail provider in the world, and is recently seeing more attention from Redmond. Other acquisitions include Bungie, which developed Halo, the Xbox’s “killer app.”
Amazon
After growing rapidly in three years, Amazon purchased Bookpages, which quickly became Amazon’s online UK store. That same year, Amazon acquired Telebook to facilitate expansion into Germany. In 2004, Amazon bought Joyo.com for $72 million. At the time, it was the largest online retailer of books, music and videos in China. These strategic acquisition grew Amazon’s marketshare, while shrinking competition.
Amazon’s transition into the ebook and ereader market was likely strengthened by Mobipocket, a French company that specialized in ebooks and Shelfari, a virtual bookshelf.
Facebook
Other than Beluga, which led to Facebook messenger, most of Facebook’s acquisitions were strictly for bringing in fresh talent (e.g. Sofa). According to Chris Fralic, the Managing Partner at First Round Capital, Facebook acquired Hotpotato because “they really wanted the leadership” (as heard at yesterday’s Startup Acquisitions Meetup hosted at General Assembly).
Here’s Facebook CEO Mark Zuckerberg’s stance on acquisitions:
“We have not once bought a company for the company. We buy companies to get excellent people… In order to have a really entrepreneurial culture one of the key things is to make sure we’re recruiting the best people. One of the ways to do this is to focus on acquiring great companies with great founders.”
Yahoo!
Yahoo started as a website directory and eventually became a full fledged web portal. As of 2000, almost every product released by Yahoo had been fueled by acquisitions. Acquired companies included Net Controlls, Hyperparallel and SearchFox, which formed and built upon Yahoo Search. The acquisition of Four11 led to Yahoo Mail, which was then influenced by acquired companies Oddpost, Stata Labs and Xoopit. The company Classic Games became Yahoo! Games, and eGroups became Yahoo Groups.
Not all acquisitions end well, and Yahoo has had failures in this realm. It acquired GeoCities for $3.6 billion in 1999, and finally killed it off in 2009. Yahoo also acquired del.icio.us in 2005 for $20 million. It was sold off this year to YouTube founders Chad Hurley and Steve Chen.
AOL
AOL, like Yahoo, has a pretty bad track record. In 1998, AOL acquired Netscape for a daunting $4.2 billion. At the time, Netscape had a 90% browser marketshare, which dramatically shrank to >1% after the release of Internet Explorer.
Possibly the worst acquisition in history was the purchase of Time Warner for $164 billion. This deal eventually caused AOL’s stock price to fall $106 billion in value. What’s worse? It’s rumored that the day before AOL decided to “acquire” Time Warner, it was debating whether or not to make an offer for Ebay.
More successful AOL acquisitions include the purchase of Mapquest, which still holds marketshare dominance over Google Maps and Bing Maps. The acquisition of sites like The Huffington Post has helped AOL gain dominance in web news and blogs, although the purchase of Engadget and TechCrunch has soured both writers and readers.
M&A is the new R&D
At yesterday’s Startup Acquisitions Meetup, Gill Beyda, Founder & Managing Partner at Genacast Ventures, said “M&A (mergers and acquisitions) is the new R&D (research and development).” Staying fresh and relevant is imperative for success, and companies like Facebook know this. Acquisitions can be a great thing for the companies involved, and they often give small companies the opportunity to expand at a global scale. Other times, internal conflicts leave new companies stagnating in corporate culture.
To the credit of the major companies listed above, strategy, hard work and talent led them to success. Microsoft’s emergence as a dominant OS and software provider, Apple’s iPad and iPhone sales and Amazon’s eCommerce monopoly are all testaments to good leadership. Disruption and innovation? Leave that to the startups.
30th November 2011 by Harrison Weber
The magic of startup life is the constant flow of new information; new ways of solving problems with solutions that surface from sleepless nights and wandering minds. Major tech companies like Microsoft and Apple were once startups themselves, small companies with innovative ideas that geared up to expand rapidly.
Microsoft and Apple grew into the powerhouses we know today and knocked IBM off its top shelf, all while constantly being challenged by small, groundbreaking companies that could maneuver much faster than a major corporation.
What happened to IBM can still happen to the likes of Microsoft, Apple and Google, which is why acquisition is their life force and part of every corporation’s recipe for success — bringing in fresh ideas before the whole company goes stale.
After developing an impressive competing network, DoubleClick was bought by Google for 3.1 billion in 2007. This acquisition of DoubleClick brought Google into the display advertising market overnight.
Google Docs was created with the acquisition of Upstartle’s Writely, a web-based wordprocessor, and 2Web Technologies for XL2Web, which led to Google Spreadsheets. Google merged both products together to create a productivity suite that now competes with desktop and cloud offerings from Microsoft Office and Apple’s iWork.
After Google Video failed to gain traction online, it acquired YouTube in 2006 for $1.65 billion. At the time, there was speculation that Google had overpaid; YouTube had zero monetization strategies, and was over-run with copyright infringment. Time has shown that this may be one of the best acquisitions in recent history, with YouTube’s 40% marketshare and successful monetization as outstanding proof.
Android is another high profile innovation, acquired by Google in 2005. Google developed and brought Android to market, from what was a small Palo Alto startup that had run independently for two years.
Since 1998, Google has bought over 100 companies.
Apple
Apple’s largest acquisition was NeXT for $404 million, which brought Steve Jobs back to Apple and laid the foundations for Mac OS X. Other notable Apple acquisitions include Emagic, which led to Garageband, and FingerWorks, which aided in the development of multi touch technology in iOS.
Most notably in recent years, Apple acquired Siri in 2010, which led to a highly publicized release exclusively for the iPhone 4S. This acquisition creates a highly competitive advantage when compared to Android and Windows Phone’s similar functionality.
Microsoft
Microsoft’s first acquisition was Forethought in 1987. Forethought developed a presentation program that would eventually become Microsoft Powerpoint, a significant piece of Microsoft Office. Ten years later, Microsoft acquired Hotmail for $500 million, which was integrated as an MSN service.
Hotmail is still (surprisingly) the largest webmail provider in the world, and is recently seeing more attention from Redmond. Other acquisitions include Bungie, which developed Halo, the Xbox’s “killer app.”
Amazon
After growing rapidly in three years, Amazon purchased Bookpages, which quickly became Amazon’s online UK store. That same year, Amazon acquired Telebook to facilitate expansion into Germany. In 2004, Amazon bought Joyo.com for $72 million. At the time, it was the largest online retailer of books, music and videos in China. These strategic acquisition grew Amazon’s marketshare, while shrinking competition.
Amazon’s transition into the ebook and ereader market was likely strengthened by Mobipocket, a French company that specialized in ebooks and Shelfari, a virtual bookshelf.
Other than Beluga, which led to Facebook messenger, most of Facebook’s acquisitions were strictly for bringing in fresh talent (e.g. Sofa). According to Chris Fralic, the Managing Partner at First Round Capital, Facebook acquired Hotpotato because “they really wanted the leadership” (as heard at yesterday’s Startup Acquisitions Meetup hosted at General Assembly).
Here’s Facebook CEO Mark Zuckerberg’s stance on acquisitions:
“We have not once bought a company for the company. We buy companies to get excellent people… In order to have a really entrepreneurial culture one of the key things is to make sure we’re recruiting the best people. One of the ways to do this is to focus on acquiring great companies with great founders.”
Yahoo!
Yahoo started as a website directory and eventually became a full fledged web portal. As of 2000, almost every product released by Yahoo had been fueled by acquisitions. Acquired companies included Net Controlls, Hyperparallel and SearchFox, which formed and built upon Yahoo Search. The acquisition of Four11 led to Yahoo Mail, which was then influenced by acquired companies Oddpost, Stata Labs and Xoopit. The company Classic Games became Yahoo! Games, and eGroups became Yahoo Groups.
Not all acquisitions end well, and Yahoo has had failures in this realm. It acquired GeoCities for $3.6 billion in 1999, and finally killed it off in 2009. Yahoo also acquired del.icio.us in 2005 for $20 million. It was sold off this year to YouTube founders Chad Hurley and Steve Chen.
AOL
AOL, like Yahoo, has a pretty bad track record. In 1998, AOL acquired Netscape for a daunting $4.2 billion. At the time, Netscape had a 90% browser marketshare, which dramatically shrank to >1% after the release of Internet Explorer.
Possibly the worst acquisition in history was the purchase of Time Warner for $164 billion. This deal eventually caused AOL’s stock price to fall $106 billion in value. What’s worse? It’s rumored that the day before AOL decided to “acquire” Time Warner, it was debating whether or not to make an offer for Ebay.
More successful AOL acquisitions include the purchase of Mapquest, which still holds marketshare dominance over Google Maps and Bing Maps. The acquisition of sites like The Huffington Post has helped AOL gain dominance in web news and blogs, although the purchase of Engadget and TechCrunch has soured both writers and readers.
M&A is the new R&D
At yesterday’s Startup Acquisitions Meetup, Gill Beyda, Founder & Managing Partner at Genacast Ventures, said “M&A (mergers and acquisitions) is the new R&D (research and development).” Staying fresh and relevant is imperative for success, and companies like Facebook know this. Acquisitions can be a great thing for the companies involved, and they often give small companies the opportunity to expand at a global scale. Other times, internal conflicts leave new companies stagnating in corporate culture.
To the credit of the major companies listed above, strategy, hard work and talent led them to success. Microsoft’s emergence as a dominant OS and software provider, Apple’s iPad and iPhone sales and Amazon’s eCommerce monopoly are all testaments to good leadership. Disruption and innovation? Leave that to the startups.
Monday, November 28, 2011
How to turn your workplace into an idea workshop
wallace immen
From Friday's Globe and Mail
Published Thursday, Nov. 24, 2011 7:09PM EST
The stereotype of breakthrough innovation is a lone genius having a sudden flash of inspiration in a “eureka!” moment.
But it almost never works that way, says leadership consultant Steven Berlin Johnson. In researching his new book, Where Good Ideas Come From, the California-based consultant found that throughout history breakthroughs have invariably been the result of hunches that sit dormant for years and finally blossom with the help of insights of collaborators and advances in technology.
“A common theme I have in discussions with corporate leaders is that they want to hire people who are more innovative,” Mr. Johnson said in an interview. “But that suggests they aren’t looking at the potential sources of increased innovation that they already have”– the people already on staff.
He suggests simple steps that managers can take to encourage breakthroughs:
Encourage idea logs
“The eureka moment is a myth. It’s always preceded by a hunch that there’s something tantalizing that you want to explore. Ideas often stay in this hunch stage for days or years before the connections come together,” so it’s important to keep those inklings alive, Mr. Johnson says. Managers should encourage employees to keep idea files, jotting down their musings about new approaches to work and potential new products. “The idea you thought didn’t make sense yesterday can make a lot of sense a month from now when you discover something else that makes it feasible.”
Promote pollination
Like a bee who brings the pollen around, a key role of a leader today is to be a pollinator, a person who talks to the engineering people and then talks with the marketing people and then the finance group. It’s important to not only know what everyone is doing but also to encourage people to link up. “The leader can say: Bob, it might be a good idea to talk to Bill because the two of you are facing similar challenges and what he’s finding might be relevant to what you’re doing.”
And this shouldn’t be just the manager’s role, he said. “I’d suggest that people take the initiative because someone who creates those pollinating connections will be appreciated by management.”
Don’t keep secrets
“We spend too much time as a culture dreaming up ways to keep ideas locked up in patents and keeping proprietary ideas secret,” Mr. Johnson said. “We have to remember that in the process we pay an implicit ‘idea tax’ that limits these possibilities. The Internet would not have developed as quickly and as remarkably if it was made a pay-per-search service.”
At the very least, leaders within organizations should share everything they can and people should be encouraged to discuss ideas in progress and share hunches.
Become an omnivore
A key thing to avoid is to be so narrowly focused that you don’t see trends and ideas that are developing elsewhere. “Don’t just read your industry journals, but journals of other industries and businesses that are on the forefront,” he said. “Apple ... has been consistently innovative because Steve Jobs hired people not only trained in technology but in humanities and graphic design. And he let the folks who came in with other perspectives have as much say in product development meetings as the programmers and engineers. If there was poetry in things Apple produced, it was because they have actual poets in the company.”
Don’t be a know-it-all
A seldom-noted trait about truly innovative people is that they’re good at recognizing their strengths, and equally good at knowing their weaknesses. They are willing to supplement their talents with those of the team around them to compete their skill set, Mr. Johnson said. People who think they can do everything are fooling themselves: You always need to a network around you to help you do things.
Leave some think time
If you believe in innovation, you have to give people enough flexibility to be able to think on their own.
For example, Google gives its engineers 20 per cent of their time to pursue their personal ideas. The employer is giving staff a clear directive: Take time in your week to have lateral ideas that aren’t going to be immediately relevant to the daily goals of the company; next quarter or next year, what comes out of these explorations might be the next big thing. G-mail and Google News both grew from ideas that came out of the 20-per-cent time, Mr. Johnson said.
Accept the failures
The hardest thing for managers to accept is that innovative people fail a lot, Mr. Johnson said. “A number of studies of great scientists who were game changers [found that they] often had a string of research papers that zero people cited. Then they had one or two papers that thousands cited,” he said. It’s important for leaders to say, “Go ahead and swing for the fences because even if you strike out this time, we’re confident you’re going to eventually hit the home run.”
SHOW AND TELL
Brainstorming shouldn’t be limited to issues within a company’s business, nor should it happen at scheduled times, says leadership consultant Steven Berlin Johnson. Idea sharing should be going on all the time, he said, but noted that he has encountered only a handful of companies that encourage this kind of discussion.
“Too many companies that want to innovate leave it to a once-a-year ‘creativity retreat.’ They brainstorm in the woods for a day and then it’s, ‘All right everyone back to work, we had our freedom day.’ Or they buy a Foosball table for the staff lounge.”
He’s a proponent of a concept used by design company Ideo Labs, in Palo Alto, Calif., which has developed a number of cutting-edge products, including the first mouse for Apple computers. Owners Tom and David Kelly bring their managers together for 20 minutes every Monday for what they call “show and tell.” The managers talk about things that grabbed their attention: “My seven-year-old just loves this crazy new toy” or “I saw an art installation that was amazing.”
The free-wheeling session clues in people to new ideas “and it’s been a great generator of innovation for the company,” Mr. Johnson said.
From Friday's Globe and Mail
Published Thursday, Nov. 24, 2011 7:09PM EST
The stereotype of breakthrough innovation is a lone genius having a sudden flash of inspiration in a “eureka!” moment.
But it almost never works that way, says leadership consultant Steven Berlin Johnson. In researching his new book, Where Good Ideas Come From, the California-based consultant found that throughout history breakthroughs have invariably been the result of hunches that sit dormant for years and finally blossom with the help of insights of collaborators and advances in technology.
“A common theme I have in discussions with corporate leaders is that they want to hire people who are more innovative,” Mr. Johnson said in an interview. “But that suggests they aren’t looking at the potential sources of increased innovation that they already have”– the people already on staff.
He suggests simple steps that managers can take to encourage breakthroughs:
Encourage idea logs
“The eureka moment is a myth. It’s always preceded by a hunch that there’s something tantalizing that you want to explore. Ideas often stay in this hunch stage for days or years before the connections come together,” so it’s important to keep those inklings alive, Mr. Johnson says. Managers should encourage employees to keep idea files, jotting down their musings about new approaches to work and potential new products. “The idea you thought didn’t make sense yesterday can make a lot of sense a month from now when you discover something else that makes it feasible.”
Promote pollination
Like a bee who brings the pollen around, a key role of a leader today is to be a pollinator, a person who talks to the engineering people and then talks with the marketing people and then the finance group. It’s important to not only know what everyone is doing but also to encourage people to link up. “The leader can say: Bob, it might be a good idea to talk to Bill because the two of you are facing similar challenges and what he’s finding might be relevant to what you’re doing.”
And this shouldn’t be just the manager’s role, he said. “I’d suggest that people take the initiative because someone who creates those pollinating connections will be appreciated by management.”
Don’t keep secrets
“We spend too much time as a culture dreaming up ways to keep ideas locked up in patents and keeping proprietary ideas secret,” Mr. Johnson said. “We have to remember that in the process we pay an implicit ‘idea tax’ that limits these possibilities. The Internet would not have developed as quickly and as remarkably if it was made a pay-per-search service.”
At the very least, leaders within organizations should share everything they can and people should be encouraged to discuss ideas in progress and share hunches.
Become an omnivore
A key thing to avoid is to be so narrowly focused that you don’t see trends and ideas that are developing elsewhere. “Don’t just read your industry journals, but journals of other industries and businesses that are on the forefront,” he said. “Apple ... has been consistently innovative because Steve Jobs hired people not only trained in technology but in humanities and graphic design. And he let the folks who came in with other perspectives have as much say in product development meetings as the programmers and engineers. If there was poetry in things Apple produced, it was because they have actual poets in the company.”
Don’t be a know-it-all
A seldom-noted trait about truly innovative people is that they’re good at recognizing their strengths, and equally good at knowing their weaknesses. They are willing to supplement their talents with those of the team around them to compete their skill set, Mr. Johnson said. People who think they can do everything are fooling themselves: You always need to a network around you to help you do things.
Leave some think time
If you believe in innovation, you have to give people enough flexibility to be able to think on their own.
For example, Google gives its engineers 20 per cent of their time to pursue their personal ideas. The employer is giving staff a clear directive: Take time in your week to have lateral ideas that aren’t going to be immediately relevant to the daily goals of the company; next quarter or next year, what comes out of these explorations might be the next big thing. G-mail and Google News both grew from ideas that came out of the 20-per-cent time, Mr. Johnson said.
Accept the failures
The hardest thing for managers to accept is that innovative people fail a lot, Mr. Johnson said. “A number of studies of great scientists who were game changers [found that they] often had a string of research papers that zero people cited. Then they had one or two papers that thousands cited,” he said. It’s important for leaders to say, “Go ahead and swing for the fences because even if you strike out this time, we’re confident you’re going to eventually hit the home run.”
SHOW AND TELL
Brainstorming shouldn’t be limited to issues within a company’s business, nor should it happen at scheduled times, says leadership consultant Steven Berlin Johnson. Idea sharing should be going on all the time, he said, but noted that he has encountered only a handful of companies that encourage this kind of discussion.
“Too many companies that want to innovate leave it to a once-a-year ‘creativity retreat.’ They brainstorm in the woods for a day and then it’s, ‘All right everyone back to work, we had our freedom day.’ Or they buy a Foosball table for the staff lounge.”
He’s a proponent of a concept used by design company Ideo Labs, in Palo Alto, Calif., which has developed a number of cutting-edge products, including the first mouse for Apple computers. Owners Tom and David Kelly bring their managers together for 20 minutes every Monday for what they call “show and tell.” The managers talk about things that grabbed their attention: “My seven-year-old just loves this crazy new toy” or “I saw an art installation that was amazing.”
The free-wheeling session clues in people to new ideas “and it’s been a great generator of innovation for the company,” Mr. Johnson said.
Innovation – Looking Beyond What Is to What Could Be
Innovation – Looking Beyond What Is to What Could Be
Posted on November 25, 2011 by Jim Clemmer
Customer and market research, competitive benchmarking, and focusing on market share could be detrimental to your organization’s future performance. These approaches are critical improvement tools. Top performing organizations have turned them into a disciplined and useful science. But they can also lead to “me-too” followership or — even worse — commodity products and services that compete only on price.Market share, for example, is only meaningful if you’re in a stable, contained, and well defined market. Fat chance of that today as markets merge, converge, and diverge. In our turbulent markets with such high levels of flux, market share measurements can easily distract you from creating whole new product or service categories, markets, or even industries. How good an indicator of future success was market share, customer satisfaction, and quality levels if you were a horse-pulled carriage maker in 1912?
Many innovations come from a deeper level of customer and market understanding. They go beyond what current customers say they need. They solve problems that customers either don’t realize they have or didn’t know could be solved. These innovations create needs and performance gaps only once customers start using them and get turned on to the possibilities. For example, in the early eighties, no focus group, survey, or customer satisfaction measure could have shown a big demand for fax machines, lap top computers, or cellular phones.
Every product and service we now take for granted was once silly, interesting, or just an odd curiosity. What would you have said to a market researcher asking about a video machine for your TV when there were few movies to rent? How about CD players when there were no CDs to buy? What about a bank card to withdraw cash from an ATM? How about a personal computer?
Walk in Your Customer’s Shoes
Innovation is a hands-on issue. It calls for an intimate understanding of current customers and markets, potential new customers or markets, team and organization competencies and improvement opportunities, vision, values, and mission. You can’t develop that intimacy from a distance. Studies, reports, surveys, graphs, and measurements wouldn’t give it to you. Effective innovation depends on disciplined management systems and processes. But it starts with people. People searching for creative ways to do things better, different, or more effectively. People trying to understand how other people use, or could use, the products or services their organization could produce. That makes innovation a critical leadership issue.
Beyond the management tools of surveys, focus groups, and the like, innovation leaders find a multitude of ways to live in their customers’ world. They’re learning how to learn from the market, not just market research. Innovation leaders look for ways to align the organization’s product and service development competencies with latent or unexpressed market and customer needs. Since customers don’t know what’s possible, they often can’t identify innovations that break with familiar patterns. At the other extreme, leaders recognize that their organizations are constantly in danger of developing products and services with little or no market appeal. So many new (or extended) products and services come from empathic innovation. These are innovations that flow from a deep empathy and understanding of the intended customers’ problems and aspirations.
Innovation Pathways
There are as many ways to innovate as there are potentially new products and services. Here are a few insights and ideas:
•Make sure the “voice of the market” pervades every part of your organization. Bring customers into your company offices and plants for visits, joint problem solving and planning sessions, celebrations, focus groups, conferences, barbecues, presentations, and the like. Get everyone in your organization out to see customers or into the real world on a regular basis.
•Don’t allow any manager, technical specialist, or support professional (such as accountants, marketers, or human resource staff) to participate in product, service, or market development decisions unless they’re spending a minimum of 25% of their time with current or prospective customers and partners in the market.
•Make your senior managers responsible for at least some business development and ongoing customer service. They should be spending 25 – 35 percent or more of their time with customers (the same amount of time should also be spent with external and internal partners). Don’t allow senior managers to only cost cut and quality control their way to profitability and performance bonuses. Make sure it’s balanced with innovation and growth.
•The people selling in your target markets and serving your customers are innovating every day to meet unexpected needs, beat out a competitor, or capitalize on a new opportunity. Unless you have a user friendly, easy process (not an administrative bureaucracy) for gathering all that experience and market intelligence, you’re squandering one of your organization’s richest sources of innovation.
•Identify your leading-edge external customers and partners and bring them into your product and service development processes. Ideally, these are customers and partners who extensively use your products and services. But they keep pushing everything and everybody to the limit. They are always looking for new and better ways to use your products and services. Find out what problems they’re trying to solve that no one else in your market provides solutions for.
•Establish active user and support networks. Provide regular face-to-face, electronic, print, or audio-video forums to help customers, external partners (like distributors and suppliers), and internal partners exchange experiences, ideas, and problems solve. Capture and disseminate all this learning throughout your organization.
Keep asking your customers and partners (internal and external) lots of “what if…” questions. Ensure the answers are circulated throughout your organization. Don’t allow anybody to write all this off as just wishful thinking. Remind them that somebody’s wishful thinking brought us every service and product we use today, developed our modern economy, and gave us one of the richest lifestyles in history. Innovation leaders find ways to translate wishful thinking into the “logical and obvious” products and services we eventually take for granted.
Posted on November 25, 2011 by Jim Clemmer
Customer and market research, competitive benchmarking, and focusing on market share could be detrimental to your organization’s future performance. These approaches are critical improvement tools. Top performing organizations have turned them into a disciplined and useful science. But they can also lead to “me-too” followership or — even worse — commodity products and services that compete only on price.Market share, for example, is only meaningful if you’re in a stable, contained, and well defined market. Fat chance of that today as markets merge, converge, and diverge. In our turbulent markets with such high levels of flux, market share measurements can easily distract you from creating whole new product or service categories, markets, or even industries. How good an indicator of future success was market share, customer satisfaction, and quality levels if you were a horse-pulled carriage maker in 1912?
Many innovations come from a deeper level of customer and market understanding. They go beyond what current customers say they need. They solve problems that customers either don’t realize they have or didn’t know could be solved. These innovations create needs and performance gaps only once customers start using them and get turned on to the possibilities. For example, in the early eighties, no focus group, survey, or customer satisfaction measure could have shown a big demand for fax machines, lap top computers, or cellular phones.
Every product and service we now take for granted was once silly, interesting, or just an odd curiosity. What would you have said to a market researcher asking about a video machine for your TV when there were few movies to rent? How about CD players when there were no CDs to buy? What about a bank card to withdraw cash from an ATM? How about a personal computer?
Walk in Your Customer’s Shoes
Innovation is a hands-on issue. It calls for an intimate understanding of current customers and markets, potential new customers or markets, team and organization competencies and improvement opportunities, vision, values, and mission. You can’t develop that intimacy from a distance. Studies, reports, surveys, graphs, and measurements wouldn’t give it to you. Effective innovation depends on disciplined management systems and processes. But it starts with people. People searching for creative ways to do things better, different, or more effectively. People trying to understand how other people use, or could use, the products or services their organization could produce. That makes innovation a critical leadership issue.
Beyond the management tools of surveys, focus groups, and the like, innovation leaders find a multitude of ways to live in their customers’ world. They’re learning how to learn from the market, not just market research. Innovation leaders look for ways to align the organization’s product and service development competencies with latent or unexpressed market and customer needs. Since customers don’t know what’s possible, they often can’t identify innovations that break with familiar patterns. At the other extreme, leaders recognize that their organizations are constantly in danger of developing products and services with little or no market appeal. So many new (or extended) products and services come from empathic innovation. These are innovations that flow from a deep empathy and understanding of the intended customers’ problems and aspirations.
Innovation Pathways
There are as many ways to innovate as there are potentially new products and services. Here are a few insights and ideas:
•Make sure the “voice of the market” pervades every part of your organization. Bring customers into your company offices and plants for visits, joint problem solving and planning sessions, celebrations, focus groups, conferences, barbecues, presentations, and the like. Get everyone in your organization out to see customers or into the real world on a regular basis.
•Don’t allow any manager, technical specialist, or support professional (such as accountants, marketers, or human resource staff) to participate in product, service, or market development decisions unless they’re spending a minimum of 25% of their time with current or prospective customers and partners in the market.
•Make your senior managers responsible for at least some business development and ongoing customer service. They should be spending 25 – 35 percent or more of their time with customers (the same amount of time should also be spent with external and internal partners). Don’t allow senior managers to only cost cut and quality control their way to profitability and performance bonuses. Make sure it’s balanced with innovation and growth.
•The people selling in your target markets and serving your customers are innovating every day to meet unexpected needs, beat out a competitor, or capitalize on a new opportunity. Unless you have a user friendly, easy process (not an administrative bureaucracy) for gathering all that experience and market intelligence, you’re squandering one of your organization’s richest sources of innovation.
•Identify your leading-edge external customers and partners and bring them into your product and service development processes. Ideally, these are customers and partners who extensively use your products and services. But they keep pushing everything and everybody to the limit. They are always looking for new and better ways to use your products and services. Find out what problems they’re trying to solve that no one else in your market provides solutions for.
•Establish active user and support networks. Provide regular face-to-face, electronic, print, or audio-video forums to help customers, external partners (like distributors and suppliers), and internal partners exchange experiences, ideas, and problems solve. Capture and disseminate all this learning throughout your organization.
Keep asking your customers and partners (internal and external) lots of “what if…” questions. Ensure the answers are circulated throughout your organization. Don’t allow anybody to write all this off as just wishful thinking. Remind them that somebody’s wishful thinking brought us every service and product we use today, developed our modern economy, and gave us one of the richest lifestyles in history. Innovation leaders find ways to translate wishful thinking into the “logical and obvious” products and services we eventually take for granted.
The Innovating Power of Eight Words
Posted on November 24, 2011 by paul4innovating
Lately eight words have come up more often than not as the new imperative for business, not just for the start up but the more established business to measure themselves against. We live in ‘volatile’ times and they reflect what we have to constantly remind ourselves to do and they just are keeping me buzzing at present.
These are: Adapt, Investigate, Agility, Speed, Scale, Impact, Experiment, and Execute.
Here is my take on the power of these eight words that need to be in our innovating lexicon
They don’t need to come all together but I think they need to be applied as a ‘litmus’ test constantly in much of our ‘daily’ thinking to keep aware.
1. Adapt- New conditions are forcing us to change, to alter our ways to simply adjust or we fast become history. We have to often find ways to fit, modify, adjust. Adaptation is leading us more and more to Darwin and natural selection. We adapt to become fitter, to evolve and I think many are struggling on this in these challenging times.
2. Investigate- If we don’t have inquiring minds we are in trouble. We hatch ideas in the office, we ‘dispatch’ them outside talking to our customers and getting the real pulse of the market place. We need to scrutinize, search, shift and study far more than ever. Investigation leads to insights.
3. Agility – Today’s landscape is shifting constantly. Agility comes in different forms, but it’s the ability to quickly adapt too or even anticipate and lead change. I can’t think of anything more important than building an agile company, because the world changes so quickly and unpredictably. Besides it needs to be on my list as I chose this name for my advisory business and innovation work.
4. Speed- Simply everything is speeding up. The rate of what is coming towards us just seems to demand we react quicker, have a rapid and prompt reaction to all that is bombarding us daily but for organizations, it really is the speed of change happening around us to give us all such difficulty to read and react to this. Thankfully we just have to ‘escape’ to that tropical paradise to put a brake on all this, once in a while.
5. Scale- the degree we ‘scale’ our business from its small beginnings to becoming a national then global business is shortening dramatically. We have more tools, more technology, more ability to achieve this but often we lack the two essential ‘fuels’ to power this- the right people and the cash to keep the pace alive.
6. Impact - The ability to be seen, to achieve a more dramatic effect than others around you to get not only noticed, but to fuel the momentum. Often we lack the necessary impact within our presentations and don’t get the required attention. Our products are required to offer impact, our advertising, our design, our sales pitch so we can stand out in a very crowd space of competing voices.
7. Experiment – We are being always asked to ‘prove it’ and encouraged to prototype, to run tests, to hold trials, to provide evidence, to prove or disprove something. This can be a theory, a product, a piece of research, a new innovation tool that might be speculative. Experiments contain and provide the value and proof it can be taken forward.
8. Execute- the ability to deliver. As Chris Trimble & Vijay Govindarajan suggest in their book “the other side of Innovation” that solving the execution challenge is critical. I’ve written numerous blogs about execution as it is where the ‘last five yards’ separate the winners from the losers that others judge the result. When you execute you need to deploy a significant skill set and dedicated resource to bring home the results.
So these are my eight, most powerful innovation words that keep me awake and alert. What are yours?
Lately eight words have come up more often than not as the new imperative for business, not just for the start up but the more established business to measure themselves against. We live in ‘volatile’ times and they reflect what we have to constantly remind ourselves to do and they just are keeping me buzzing at present.
These are: Adapt, Investigate, Agility, Speed, Scale, Impact, Experiment, and Execute.
Here is my take on the power of these eight words that need to be in our innovating lexicon
They don’t need to come all together but I think they need to be applied as a ‘litmus’ test constantly in much of our ‘daily’ thinking to keep aware.
1. Adapt- New conditions are forcing us to change, to alter our ways to simply adjust or we fast become history. We have to often find ways to fit, modify, adjust. Adaptation is leading us more and more to Darwin and natural selection. We adapt to become fitter, to evolve and I think many are struggling on this in these challenging times.
2. Investigate- If we don’t have inquiring minds we are in trouble. We hatch ideas in the office, we ‘dispatch’ them outside talking to our customers and getting the real pulse of the market place. We need to scrutinize, search, shift and study far more than ever. Investigation leads to insights.
3. Agility – Today’s landscape is shifting constantly. Agility comes in different forms, but it’s the ability to quickly adapt too or even anticipate and lead change. I can’t think of anything more important than building an agile company, because the world changes so quickly and unpredictably. Besides it needs to be on my list as I chose this name for my advisory business and innovation work.
4. Speed- Simply everything is speeding up. The rate of what is coming towards us just seems to demand we react quicker, have a rapid and prompt reaction to all that is bombarding us daily but for organizations, it really is the speed of change happening around us to give us all such difficulty to read and react to this. Thankfully we just have to ‘escape’ to that tropical paradise to put a brake on all this, once in a while.
5. Scale- the degree we ‘scale’ our business from its small beginnings to becoming a national then global business is shortening dramatically. We have more tools, more technology, more ability to achieve this but often we lack the two essential ‘fuels’ to power this- the right people and the cash to keep the pace alive.
6. Impact - The ability to be seen, to achieve a more dramatic effect than others around you to get not only noticed, but to fuel the momentum. Often we lack the necessary impact within our presentations and don’t get the required attention. Our products are required to offer impact, our advertising, our design, our sales pitch so we can stand out in a very crowd space of competing voices.
7. Experiment – We are being always asked to ‘prove it’ and encouraged to prototype, to run tests, to hold trials, to provide evidence, to prove or disprove something. This can be a theory, a product, a piece of research, a new innovation tool that might be speculative. Experiments contain and provide the value and proof it can be taken forward.
8. Execute- the ability to deliver. As Chris Trimble & Vijay Govindarajan suggest in their book “the other side of Innovation” that solving the execution challenge is critical. I’ve written numerous blogs about execution as it is where the ‘last five yards’ separate the winners from the losers that others judge the result. When you execute you need to deploy a significant skill set and dedicated resource to bring home the results.
So these are my eight, most powerful innovation words that keep me awake and alert. What are yours?
Sunday, November 27, 2011
Renaissance Innovation and startups
Renaissance Innovation and startups
In More Posts, Process, Theory on November 20, 2011 at 6:57 pm
In this blog we discussed Renaissance Innovations of many companies, small and big, old and new. Some of the startups we have already covered are Diapers.com, Objective Logistics, Amazon.com and many others. I hope that our blog makes it quite clear that the ideas of Renaissance Innovation method apply equally to startups and established companies. However, in this post I wanted to focus just on startups. The approach that is gaining a lot of momentum and good publicity is called “The Lean Startup“, most recently the new book debuted as #2 on the New York Times bestseller list. On the surface, this sounds like doing something on the cheap. These who know something about operations management will also recognize that “lean” is synonymous with Toyota Production System which has little, if anything, to do with startups. However, after reading the book I was struck by how much The Lean Startup approach is consistent with the Renaissance Innovation ideology.
So what is the Lean Startup about? The book argues that any startup company cannot possibly know in advance who its customers are, what are the key features of the product and how much it can possibly cost: there is too much uncertainty in all of these aspects. So instead of trying to raise a ton of money for an unproven business model, the author argues, entrepreneurs should try, step by step, understand both the customers and the capabilities of the firm through controlled experimentation and validation. This is very consistent with the ideology we explained in our Harvard Business Review article. As we argued there, both existing companies and in particular startups, face numerous uncertainties about their Business Models and so some of the best innovations can be done by managing these uncertainties. For a startup, for instance, nobody can predict with any precision what the revenue model and the cost model is going to be, and numerous spreadsheets won’t help resolve these uncertainties, but experimentation will. These ideas are very bold and novel for entrepreneurial community: most MBA students I taught at Wharton and INSEAD believe that startup founders have a great idea that they push throughout, no matter what, by convincing venture capitalists to invest millions. Eric Ries, the author of the book, provides convincing examples and arguments that this is exactly the wrong approach: even some of the most famous startups of our days completely altered the original ideas of their founders after finding that customers do not value what they had in mind, or that the original idea was not economically sound. Eric coins the term “Minimum Viable Product” (MVP) – a stripped-down version of whatever the startup wants to create, which is used to test assumptions and hypotheses without excessive waste. After building the MVP, the company needs to experiment, measure outcomes, and learn from them. This may not sound counter-intuitive, but companies, in my experience, very rarely experiment. Most of the time management picks one idea out of 10 and supports it fully even if it is clearly failing. The Lean Startup approach would say: test all 10, learn and move on.
Experimentation is, indeed, at the heart of the Toyota Production System, even though few people are familiar with this aspect of it. Careful design of experiment by itself is a big and complex topic which we will cover separately at some point. But the key message I want to make here is that, like Renaissance Innovation method, The Lean Startup approach is all about managing and reducing uncertainty. Perhaps in the case of startups these two approaches are even more pertinent than in case of Business Model Innovations for an existing company because startups often have much more uncertainty. Bottom line is: this is a great book and a must-read for anyone interested in innovation. Kudos!
Wednesday, November 23, 2011
Profits First, Growth Second, Always
Why the logic of focusing on growth first and worrying about profitability later is often a bad idea.
By Karl Stark and Bill Stewart | @karlstark | Nov 22, 2011 http://www.inc.com/karl-and-bill/profits-first-growth-second.html
Profits are fuel for a growing company. Without profits, it’s hard to invest in the growth you aim to achieve.
Every management team that wants to build a much bigger business eventually asks itself this question: "Why don’t we focus on growth first and worry about profitability later?"
Bad idea. The logic may be valid, but the strategy is often flawed.
Here’s why: Profits are fuel for a growing company. Without profits, it’s hard to invest in the growth you aim to achieve. A growing company reinvests its profits back into the business in the form of marketing investment, new employees, new equipment, and the like. If you are consistently selling at a loss, you’ll quickly run out of capital to fuel your growth.
There are strategic reasons to focus on profitability as well. If you are continually selling at a loss, you may not be "proving" the sustainability of your business model. If you are selling something that your customers perceive as valuable–but only at a low price–you may find yourself in a bind later because you haven’t created a customer value proposition at a higher price point. In fact, you may be forced to continue to sell at break-even or below to cover the overhead you’ve built up.
Sacrificing some short-term profitability for growth can work–if you are able to quantify your expected losses, if you have a source of capital to fund those losses for a period of time and if your equity providers agree with the strategy.
Profits are essential for growing your business at any stage. Most companies will find that focusing on profitable growth leads them to better strategic decisions and provides a much stronger foundation for a healthy, sustainable business model in the long term.
By Karl Stark and Bill Stewart | @karlstark | Nov 22, 2011 http://www.inc.com/karl-and-bill/profits-first-growth-second.html
Profits are fuel for a growing company. Without profits, it’s hard to invest in the growth you aim to achieve.
Every management team that wants to build a much bigger business eventually asks itself this question: "Why don’t we focus on growth first and worry about profitability later?"
Bad idea. The logic may be valid, but the strategy is often flawed.
Here’s why: Profits are fuel for a growing company. Without profits, it’s hard to invest in the growth you aim to achieve. A growing company reinvests its profits back into the business in the form of marketing investment, new employees, new equipment, and the like. If you are consistently selling at a loss, you’ll quickly run out of capital to fuel your growth.
There are strategic reasons to focus on profitability as well. If you are continually selling at a loss, you may not be "proving" the sustainability of your business model. If you are selling something that your customers perceive as valuable–but only at a low price–you may find yourself in a bind later because you haven’t created a customer value proposition at a higher price point. In fact, you may be forced to continue to sell at break-even or below to cover the overhead you’ve built up.
Sacrificing some short-term profitability for growth can work–if you are able to quantify your expected losses, if you have a source of capital to fund those losses for a period of time and if your equity providers agree with the strategy.
Profits are essential for growing your business at any stage. Most companies will find that focusing on profitable growth leads them to better strategic decisions and provides a much stronger foundation for a healthy, sustainable business model in the long term.
Article on Lean Start-ups
Eric Ries on 'The Lean Startup'
Published: November 22, 2011 in Knowledge@Wharton
It's a reality that haunts every entrepreneur and would-be entrepreneur: Most startups fail. Eric Ries knows firsthand. He has been there. When he cofounded software company IMVU, he and his team tried a different approach by rapidly creating and releasing their product before it was perfected, only to continuously update, revise and re-release it, based in part on customer feedback. It worked. He described this process -- taking less money and time to develop ideas and customers -- as a "lean startup." The concept applies lean manufacturing practices to startups. In his new book, The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, Ries advises entrepreneurs to pursue incremental innovation -- "inch by inch, minute by minute" -- rather than a static business plan.
Below is an excerpt from the introduction to the book.
Stop me if you've heard this one before. Brilliant college kids sitting in a dorm are inventing the future. Heedless of boundaries, possessed of new technology and youthful enthusiasm, they build a new company from scratch. Their early success allows them to raise money and bring an amazing new product to market. They hire their friends, assemble a superstar team, and dare the world to stop them.
Ten years and several startups ago, that was me, building my first company. I particularly remember a moment from back then: the moment I realized my company was going to fail. My cofounder and I were at our wits' end. The dot-com bubble had burst, and we had spent all our money. We tried desperately to raise more capital, and we could not. It was like a breakup scene from a Hollywood movie: it was raining, and we were arguing in the street. We couldn't even agree on where to walk next, and so we parted in anger, heading in opposite directions. As a metaphor for our company's failure, this image of the two of us, lost in the rain and drifting apart, is perfect.
It remains a painful memory. The company limped along for months afterward, but our situation was hopeless. At the time, it had seemed we were doing everything right: we had a great product, a brilliant team, amazing technology, and the right idea at the right time. And we really were on to something. We were building a way for college kids to create online profiles for the purpose of sharing ... with employers. Oops. But despite a promising idea, we were nonetheless doomed from day one, because we did not know the process we would need to use to turn our product insights into a great company.
If you've never experienced a failure like this, it is hard to describe the feeling. It's as if the world were falling out from under you. You realize you've been duped. The stories in the magazines are lies: hard work and perseverance don't lead to success. Even worse, the many, many, many promises you've made to employees, friends, and family are not going to come true. Everyone who thought you were foolish for stepping out on your own will be proven right.
It wasn't supposed to turn out that way. In magazines and newspapers, in blockbuster movies, and on countless blogs, we hear the mantra of the successful entrepreneurs: through determination, brilliance, great timing, and -- above all -- a great product, you too can achieve fame and fortune.
There is a mythmaking industry hard at work to sell us that story, but I have come to believe that the story is false, the product of selection bias and after-the-fact rationalization. In fact, having worked with hundreds of entrepreneurs, I have seen firsthand how often a promising start leads to failure. The grim reality is that most startups fail. Most new products are not successful. Most new ventures do not live up to their potential.
Yet the story of perseverance, creative genius, and hard work persists. Why is it so popular? I think there is something deeply appealing about this modern-day rags-to-riches story. It makes success seem inevitable if you just have the right stuff. It means that the mundane details, the boring stuff, the small individual choices don't matter. If we build it, they will come. When we fail, as so many of us do, we have a ready-made excuse: we didn't have the right stuff. We weren't visionary enough or weren't in the right place at the right time.
After more than ten years as an entrepreneur, I came to reject that line of thinking. I have learned from both my own successes and failures and those of many others that it's the boring stuff that matters the most. Startup success is not a consequence of good genes or being in the right place at the right time. Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught.
Entrepreneurship is a kind of management. No, you didn't read that wrong. We have wildly divergent associations with these two words, entrepreneurship and management. Lately, it seems that one is cool, innovative, and exciting and the other is dull, serious, and bland. It is time to look past these preconceptions.
Let me tell you a second startup story. It's 2004, and a group of founders have just started a new company. Their previous company had failed very publicly. Their credibility is at an all-time low. They have a huge vision: to change the way people communicate by using a new technology called avatars (remember, this was before James Cameron's blockbuster movie). They are following a visionary named Will Harvey, who paints a compelling picture: people connecting with their friends, hanging out online, using avatars to give them a combination of intimate connection and safe anonymity. Even better, instead of having to build all the clothing, furniture, and accessories these avatars would need to accessorize their digital lives, the customers would be enlisted to build those things and sell them to one another.
The engineering challenge before them is immense: creating virtual worlds, user-generated content, an online commerce engine, micropayments, and -- last but not least -- the three-dimensional avatar technology that can run on anyone's PC.
I'm in this second story, too. I'm a cofounder and chief technology officer of this company, which is called IMVU. At this point in our careers, my cofounders and I are determined to make new mistakes. We do everything wrong: instead of spending years perfecting our technology, we build a minimum viable product, an early product that is terrible, full of bugs and crash-your-computer-yes-really stability problems. Then we ship it to customers way before it's ready. And we charge money for it. After securing initial customers, we change the product constantly -- much too fast by traditional standards -- shipping new versions of our product dozens of times every single day.
We really did have customers in those early days -- true visionary early adopters -- and we often talked to them and asked for their feedback. But we emphatically did not do what they said. We viewed their input as only one source of information about our product and overall vision. In fact, we were much more likely to run experiments on our customers than we were to cater to their whims.
Traditional business thinking says that this approach shouldn't work, but it does....The approach we pioneered at IMVU has become the basis for a new movement of entrepreneurs around the world. It builds on many previous management and product development ideas, including lean manufacturing, design thinking, customer development, and agile development. It represents a new approach to creating continuous innovation. It's called the Lean Startup.
Despite the volumes written on business strategy, the key attributes of business leaders, and ways to identify the next big thing, innovators still struggle to bring their ideas to life. This was the frustration that led us to try a radical new approach at IMVU, one characterized by an extremely fast cycle time, a focus on what customers want (without asking them), and a scientific approach to making decisions.
Origins of the Lean Startup
I am one of those people who grew up programming computers, and so my journey to thinking about entrepreneurship and management has taken a circuitous path. I have always worked on the product development side of my industry; my partners and bosses were managers or marketers, and my peers worked in engineering and operations. Throughout my career, I kept having the experience of working incredibly hard on products that ultimately failed in the marketplace.
At first, largely because of my background, I viewed these as technical problems that required technical solutions: better architecture, a better engineering process, better discipline, focus, or product vision. These supposed fixes led to still more failure. So I read everything I could get my hands on and was blessed to have had some of the top minds in Silicon Valley as my mentors. By the time I became a cofounder of IMVU, I was hungry for new ideas about how to build a company.
I was fortunate to have cofounders who were willing to experiment with new approaches. They were fed up -- as I was -- by the failure of traditional thinking. Also, we were lucky to have Steve Blank as an investor and adviser. Back in 2004, Steve had just begun preaching a new idea: the business and marketing functions of a startup should be considered as important as engineering and product development and therefore deserve an equally rigorous methodology to guide them. He called that methodology Customer Development, and it offered insight and guidance to my daily work as an entrepreneur.
Meanwhile, I was building IMVU's product development team, using some of the unorthodox methods I mentioned earlier. Measured against the traditional theories of product development I had been trained on in my career, these methods did not make sense, yet I could see firsthand that they were working. I struggled to explain the practices to new employees, investors, and the founders of other companies. We lacked a common language for describing them and concrete principles for understanding them.
I began to search outside entrepreneurship for ideas that could help me make sense of my experience. I began to study other industries, especially manufacturing, from which most modern theories of management derive. I studied lean manufacturing, a process that originated in Japan with the Toyota Production System, a completely new way of thinking about the manufacturing of physical goods. I found that by applying ideas from lean manufacturing to my own entrepreneurial challenges -- with a few tweaks and changes -- I had the beginnings of a framework for making sense of them.
This line of thought evolved into the Lean Startup: the application of lean thinking to the process of innovation.
IMVU became a tremendous success. IMVU customers have created more than 60 million avatars. It is a profitable company with annual revenues of more than $50 million in 2011, employing more than a hundred people in our current offices in Mountain View, California. IMVU's virtual goods catalog -- which seemed so risky years ago -- now has more than 6 million items in it; more than 7,000 are added every day, almost all created by customers.
As a result of IMVU's success, I began to be asked for advice by other startups and venture capitalists. When I would describe my experiences at IMVU, I was often met with blank stares or extreme skepticism. The most common reply was "That could never work!" My experience so flew in the face of conventional thinking that most people, even in the innovation hub of Silicon Valley, could not wrap their minds around it.
Then I started to write, first on a blog called Startup Lessons Learned, and speak -- at conferences and to companies, startups, and venture capitalists -- to anyone who would listen. In the process of being called on to defend and explain my insights and with the collaboration of other writers, thinkers, and entrepreneurs, I had a chance to refine and develop the theory of the Lean Startup beyond its rudimentary beginnings. My hope all along was to find ways to eliminate the tremendous waste I saw all around me: startups that built products nobody wanted, new products pulled from the shelves, countless dreams unrealized.
Eventually, the Lean Startup idea blossomed into a global movement. Entrepreneurs began forming local in-person groups to discuss and apply Lean Startup ideas. There are now organized communities of practice in more than a hundred cities around the world. My travels have taken me across countries and continents. Everywhere I have seen the signs of a new entrepreneurial renaissance. The Lean Startup movement is making entrepreneurship accessible to a whole new generation of founders who are hungry for new ideas about how to build successful companies.
Although my background is in high-tech software entrepreneurship, the movement has grown way beyond those roots. Thousands of entrepreneurs are putting Lean Startup principles to work in every conceivable industry. I've had the chance to work with entrepreneurs in companies of all sizes, in different industries, and even in government. This journey has taken me to places I never imagined I'd see, from the world's most elite venture capitalists, to Fortune 500 boardrooms, to the Pentagon. The most nervous I have ever been in a meeting was when I was attempting to explain Lean Startup principles to the chief information officer of the U.S. Army, who is a three-star general (for the record, he was extremely open to new ideas, even from a civilian like me).
Pretty soon I realized that it was time to focus on the Lean Startup movement full time. My mission: to improve the success rate of new innovative products worldwide.
The Lean Startup Method
The five principles of the Lean Startup are as follows:
1. Entrepreneurs are everywhere. You don't have to work in a garage to be in a startup. The concept of entrepreneurship includes anyone who works within my definition of a startup: a human institution designed to create new products and services under conditions of extreme uncertainty. That means entrepreneurs are everywhere and the Lean Startup approach can work in any size company, even a very large enterprise, in any sector or industry.
2. Entrepreneurship is management. A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty. In fact, I believe "entrepreneur" should be considered a job title in all modern companies that depend on innovation for their future growth.
3. Validated learning. Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business. This learning can be validated scientifically by running frequent experiments that allow entrepreneurs to test each element of their vision.
4. Build-Measure-Learn. The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All successful startup processes should be geared to accelerate that feedback loop.
5. Innovation accounting. To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work. This requires a new kind of accounting designed for startup -- and the people who hold them accountable.
Why Startups Fail
Why are startups failing so badly everywhere we look?
The first problem is the allure of a good plan, a solid strategy, and thorough market research. In earlier eras, these things were indicators of likely success. The overwhelming temptation is to apply them to startups too, but this doesn't work, because startups operate with too much uncertainty. Startups do not yet know who their customer is or what their product should be. As the world becomes more uncertain, it gets harder and harder to predict the future. The old management methods are not up to the task. Planning and forecasting are only accurate when based on a long, stable operating history and a relatively static environment. Startups have neither.
The second problem is that after seeing traditional management fail to solve this problem, some entrepreneurs and investors have thrown up their hands and adopted the "Just Do It" school of startups. This school believes that if management is the problem, chaos is the answer. Unfortunately, as I can attest firsthand, this doesn't work either.
It may seem counterintuitive to think that something as disruptive, innovative, and chaotic as a startup can be managed or, to be accurate, must be managed. Most people think of process and management as boring and dull, whereas startups are dynamic and exciting. But what is actually exciting is to see startups succeed and change the world. The passion, energy, and vision that people bring to these new ventures are resources too precious to waste. We can -- and must -- do better.
Excerpted from The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. Copyright © 2011 by Eric Ries. Reprinted by Permission of Crown Business, an imprint of the Crown Publishing Group, a division of Random House, Inc., New York.
Published: November 22, 2011 in Knowledge@Wharton
It's a reality that haunts every entrepreneur and would-be entrepreneur: Most startups fail. Eric Ries knows firsthand. He has been there. When he cofounded software company IMVU, he and his team tried a different approach by rapidly creating and releasing their product before it was perfected, only to continuously update, revise and re-release it, based in part on customer feedback. It worked. He described this process -- taking less money and time to develop ideas and customers -- as a "lean startup." The concept applies lean manufacturing practices to startups. In his new book, The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, Ries advises entrepreneurs to pursue incremental innovation -- "inch by inch, minute by minute" -- rather than a static business plan.
Below is an excerpt from the introduction to the book.
Stop me if you've heard this one before. Brilliant college kids sitting in a dorm are inventing the future. Heedless of boundaries, possessed of new technology and youthful enthusiasm, they build a new company from scratch. Their early success allows them to raise money and bring an amazing new product to market. They hire their friends, assemble a superstar team, and dare the world to stop them.
Ten years and several startups ago, that was me, building my first company. I particularly remember a moment from back then: the moment I realized my company was going to fail. My cofounder and I were at our wits' end. The dot-com bubble had burst, and we had spent all our money. We tried desperately to raise more capital, and we could not. It was like a breakup scene from a Hollywood movie: it was raining, and we were arguing in the street. We couldn't even agree on where to walk next, and so we parted in anger, heading in opposite directions. As a metaphor for our company's failure, this image of the two of us, lost in the rain and drifting apart, is perfect.
It remains a painful memory. The company limped along for months afterward, but our situation was hopeless. At the time, it had seemed we were doing everything right: we had a great product, a brilliant team, amazing technology, and the right idea at the right time. And we really were on to something. We were building a way for college kids to create online profiles for the purpose of sharing ... with employers. Oops. But despite a promising idea, we were nonetheless doomed from day one, because we did not know the process we would need to use to turn our product insights into a great company.
If you've never experienced a failure like this, it is hard to describe the feeling. It's as if the world were falling out from under you. You realize you've been duped. The stories in the magazines are lies: hard work and perseverance don't lead to success. Even worse, the many, many, many promises you've made to employees, friends, and family are not going to come true. Everyone who thought you were foolish for stepping out on your own will be proven right.
It wasn't supposed to turn out that way. In magazines and newspapers, in blockbuster movies, and on countless blogs, we hear the mantra of the successful entrepreneurs: through determination, brilliance, great timing, and -- above all -- a great product, you too can achieve fame and fortune.
There is a mythmaking industry hard at work to sell us that story, but I have come to believe that the story is false, the product of selection bias and after-the-fact rationalization. In fact, having worked with hundreds of entrepreneurs, I have seen firsthand how often a promising start leads to failure. The grim reality is that most startups fail. Most new products are not successful. Most new ventures do not live up to their potential.
Yet the story of perseverance, creative genius, and hard work persists. Why is it so popular? I think there is something deeply appealing about this modern-day rags-to-riches story. It makes success seem inevitable if you just have the right stuff. It means that the mundane details, the boring stuff, the small individual choices don't matter. If we build it, they will come. When we fail, as so many of us do, we have a ready-made excuse: we didn't have the right stuff. We weren't visionary enough or weren't in the right place at the right time.
After more than ten years as an entrepreneur, I came to reject that line of thinking. I have learned from both my own successes and failures and those of many others that it's the boring stuff that matters the most. Startup success is not a consequence of good genes or being in the right place at the right time. Startup success can be engineered by following the right process, which means it can be learned, which means it can be taught.
Entrepreneurship is a kind of management. No, you didn't read that wrong. We have wildly divergent associations with these two words, entrepreneurship and management. Lately, it seems that one is cool, innovative, and exciting and the other is dull, serious, and bland. It is time to look past these preconceptions.
Let me tell you a second startup story. It's 2004, and a group of founders have just started a new company. Their previous company had failed very publicly. Their credibility is at an all-time low. They have a huge vision: to change the way people communicate by using a new technology called avatars (remember, this was before James Cameron's blockbuster movie). They are following a visionary named Will Harvey, who paints a compelling picture: people connecting with their friends, hanging out online, using avatars to give them a combination of intimate connection and safe anonymity. Even better, instead of having to build all the clothing, furniture, and accessories these avatars would need to accessorize their digital lives, the customers would be enlisted to build those things and sell them to one another.
The engineering challenge before them is immense: creating virtual worlds, user-generated content, an online commerce engine, micropayments, and -- last but not least -- the three-dimensional avatar technology that can run on anyone's PC.
I'm in this second story, too. I'm a cofounder and chief technology officer of this company, which is called IMVU. At this point in our careers, my cofounders and I are determined to make new mistakes. We do everything wrong: instead of spending years perfecting our technology, we build a minimum viable product, an early product that is terrible, full of bugs and crash-your-computer-yes-really stability problems. Then we ship it to customers way before it's ready. And we charge money for it. After securing initial customers, we change the product constantly -- much too fast by traditional standards -- shipping new versions of our product dozens of times every single day.
We really did have customers in those early days -- true visionary early adopters -- and we often talked to them and asked for their feedback. But we emphatically did not do what they said. We viewed their input as only one source of information about our product and overall vision. In fact, we were much more likely to run experiments on our customers than we were to cater to their whims.
Traditional business thinking says that this approach shouldn't work, but it does....The approach we pioneered at IMVU has become the basis for a new movement of entrepreneurs around the world. It builds on many previous management and product development ideas, including lean manufacturing, design thinking, customer development, and agile development. It represents a new approach to creating continuous innovation. It's called the Lean Startup.
Despite the volumes written on business strategy, the key attributes of business leaders, and ways to identify the next big thing, innovators still struggle to bring their ideas to life. This was the frustration that led us to try a radical new approach at IMVU, one characterized by an extremely fast cycle time, a focus on what customers want (without asking them), and a scientific approach to making decisions.
Origins of the Lean Startup
I am one of those people who grew up programming computers, and so my journey to thinking about entrepreneurship and management has taken a circuitous path. I have always worked on the product development side of my industry; my partners and bosses were managers or marketers, and my peers worked in engineering and operations. Throughout my career, I kept having the experience of working incredibly hard on products that ultimately failed in the marketplace.
At first, largely because of my background, I viewed these as technical problems that required technical solutions: better architecture, a better engineering process, better discipline, focus, or product vision. These supposed fixes led to still more failure. So I read everything I could get my hands on and was blessed to have had some of the top minds in Silicon Valley as my mentors. By the time I became a cofounder of IMVU, I was hungry for new ideas about how to build a company.
I was fortunate to have cofounders who were willing to experiment with new approaches. They were fed up -- as I was -- by the failure of traditional thinking. Also, we were lucky to have Steve Blank as an investor and adviser. Back in 2004, Steve had just begun preaching a new idea: the business and marketing functions of a startup should be considered as important as engineering and product development and therefore deserve an equally rigorous methodology to guide them. He called that methodology Customer Development, and it offered insight and guidance to my daily work as an entrepreneur.
Meanwhile, I was building IMVU's product development team, using some of the unorthodox methods I mentioned earlier. Measured against the traditional theories of product development I had been trained on in my career, these methods did not make sense, yet I could see firsthand that they were working. I struggled to explain the practices to new employees, investors, and the founders of other companies. We lacked a common language for describing them and concrete principles for understanding them.
I began to search outside entrepreneurship for ideas that could help me make sense of my experience. I began to study other industries, especially manufacturing, from which most modern theories of management derive. I studied lean manufacturing, a process that originated in Japan with the Toyota Production System, a completely new way of thinking about the manufacturing of physical goods. I found that by applying ideas from lean manufacturing to my own entrepreneurial challenges -- with a few tweaks and changes -- I had the beginnings of a framework for making sense of them.
This line of thought evolved into the Lean Startup: the application of lean thinking to the process of innovation.
IMVU became a tremendous success. IMVU customers have created more than 60 million avatars. It is a profitable company with annual revenues of more than $50 million in 2011, employing more than a hundred people in our current offices in Mountain View, California. IMVU's virtual goods catalog -- which seemed so risky years ago -- now has more than 6 million items in it; more than 7,000 are added every day, almost all created by customers.
As a result of IMVU's success, I began to be asked for advice by other startups and venture capitalists. When I would describe my experiences at IMVU, I was often met with blank stares or extreme skepticism. The most common reply was "That could never work!" My experience so flew in the face of conventional thinking that most people, even in the innovation hub of Silicon Valley, could not wrap their minds around it.
Then I started to write, first on a blog called Startup Lessons Learned, and speak -- at conferences and to companies, startups, and venture capitalists -- to anyone who would listen. In the process of being called on to defend and explain my insights and with the collaboration of other writers, thinkers, and entrepreneurs, I had a chance to refine and develop the theory of the Lean Startup beyond its rudimentary beginnings. My hope all along was to find ways to eliminate the tremendous waste I saw all around me: startups that built products nobody wanted, new products pulled from the shelves, countless dreams unrealized.
Eventually, the Lean Startup idea blossomed into a global movement. Entrepreneurs began forming local in-person groups to discuss and apply Lean Startup ideas. There are now organized communities of practice in more than a hundred cities around the world. My travels have taken me across countries and continents. Everywhere I have seen the signs of a new entrepreneurial renaissance. The Lean Startup movement is making entrepreneurship accessible to a whole new generation of founders who are hungry for new ideas about how to build successful companies.
Although my background is in high-tech software entrepreneurship, the movement has grown way beyond those roots. Thousands of entrepreneurs are putting Lean Startup principles to work in every conceivable industry. I've had the chance to work with entrepreneurs in companies of all sizes, in different industries, and even in government. This journey has taken me to places I never imagined I'd see, from the world's most elite venture capitalists, to Fortune 500 boardrooms, to the Pentagon. The most nervous I have ever been in a meeting was when I was attempting to explain Lean Startup principles to the chief information officer of the U.S. Army, who is a three-star general (for the record, he was extremely open to new ideas, even from a civilian like me).
Pretty soon I realized that it was time to focus on the Lean Startup movement full time. My mission: to improve the success rate of new innovative products worldwide.
The Lean Startup Method
The five principles of the Lean Startup are as follows:
1. Entrepreneurs are everywhere. You don't have to work in a garage to be in a startup. The concept of entrepreneurship includes anyone who works within my definition of a startup: a human institution designed to create new products and services under conditions of extreme uncertainty. That means entrepreneurs are everywhere and the Lean Startup approach can work in any size company, even a very large enterprise, in any sector or industry.
2. Entrepreneurship is management. A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty. In fact, I believe "entrepreneur" should be considered a job title in all modern companies that depend on innovation for their future growth.
3. Validated learning. Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business. This learning can be validated scientifically by running frequent experiments that allow entrepreneurs to test each element of their vision.
4. Build-Measure-Learn. The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All successful startup processes should be geared to accelerate that feedback loop.
5. Innovation accounting. To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work. This requires a new kind of accounting designed for startup -- and the people who hold them accountable.
Why Startups Fail
Why are startups failing so badly everywhere we look?
The first problem is the allure of a good plan, a solid strategy, and thorough market research. In earlier eras, these things were indicators of likely success. The overwhelming temptation is to apply them to startups too, but this doesn't work, because startups operate with too much uncertainty. Startups do not yet know who their customer is or what their product should be. As the world becomes more uncertain, it gets harder and harder to predict the future. The old management methods are not up to the task. Planning and forecasting are only accurate when based on a long, stable operating history and a relatively static environment. Startups have neither.
The second problem is that after seeing traditional management fail to solve this problem, some entrepreneurs and investors have thrown up their hands and adopted the "Just Do It" school of startups. This school believes that if management is the problem, chaos is the answer. Unfortunately, as I can attest firsthand, this doesn't work either.
It may seem counterintuitive to think that something as disruptive, innovative, and chaotic as a startup can be managed or, to be accurate, must be managed. Most people think of process and management as boring and dull, whereas startups are dynamic and exciting. But what is actually exciting is to see startups succeed and change the world. The passion, energy, and vision that people bring to these new ventures are resources too precious to waste. We can -- and must -- do better.
Excerpted from The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. Copyright © 2011 by Eric Ries. Reprinted by Permission of Crown Business, an imprint of the Crown Publishing Group, a division of Random House, Inc., New York.
Monday, November 21, 2011
Six Keys to Building New Markets by Unleashing Disruptive Innovation
Six Keys to Building New Markets by Unleashing Disruptive Innovation
Published: March 10, 2003
Authors: Clayton M. Christensen, Michael E. Raynor, and Scott D. Anthony
Managers today have a problem. They know their companies must grow. But growth is hard, especially given today's economic environment where investment capital is difficult to come by and firms are reluctant to take risks. Managers know innovation is the ticket to successful growth. But they just can't seem to get innovation right.
When companies keep improving their existing products and services to meet their best customers' needs, they eventually run into the "innovator's dilemma." By doing everything right, they create opportunities for new companies to take their markets away. Established companies historically have struggled when trying to create new markets. Success seems fleeting and unpredictable.
Recent research indicates these problems are systemic. Most companies that are started fail. Of those that succeed, most cannot sustain robust growth for more than a few years. Companies need a way to unlock the process of innovation and create innovation-driven growth businesses again and again. How can managers increase the probability that their decisions will lead to success? Now more than ever, managers need robust theories—statements of what causes what, why, and in what situation—to guide their decision making around innovation.
Managers typically grow impatient when we tell them this. "Theory?" they say. "That sounds like theoretical. That sounds like impractical." But theory is eminently practical. Managers are the world's most voracious consumers of theory. Every plan a manager makes, every action a manager takes, is based on some implicit understanding of what causes what and why.
The problem is, managers all too frequently use a one-size-fits-all theory. But the ground beneath them inevitably shifts. Strategies that worked so wonderfully in the past no longer suffice.
Drawing on the work of a number of thoughtful researchers as well as our own work, we are exploring a set of theories that can help managers respond to the ever-changing circumstances in which they find themselves. Specifically, these six lessons will help managers make the right decisions to successfully build new-growth businesses.
1. Disruptive innovations spur growth.
Companies have two basic options when they seek to build new-growth businesses. They can try to take an existing market from an entrenched competitor with sustaining innovations. Or they can try to take on a competitor with disruptive innovations that either create new markets or take root among an incumbent's worst customers. Our research overwhelmingly suggests that companies should seek out growth based on disruption.
Sustaining innovations, whether they involve incremental refinements or radical breakthroughs, improve the performance of established products and services along the dimensions that mainstream customers in major markets historically have valued. Examples: a microprocessor that enables personal computers to operate faster and a battery that lets laptop computers operate longer.
Companies march along a performance trajectory by introducing successive sustaining innovations—first to remain competitive in the short term. But, as noted in The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press, 1997), firms innovate faster than our lives change to adopt those innovations, creating opportunities for disruptive innovations. Although sustaining innovations move firms along the traditional performance trajectory, disruptive ones establish an entirely new performance trajectory.
Disruptive innovations often initially result in worse performance compared with established products and services in mainstream markets. But disruptive innovations have other benefits. They are often cheaper, simpler, smaller, and more convenient to use.
Consider the small off-road motorcycles introduced by Honda in the 1960s, Apple's first personal computer, and Intuit's QuickBooks accounting software. These innovations all initially underperformed the mainstream offerings. But they brought a different value proposition to a new market context that did not need all of the raw performance offered by the incumbent. They all created massive growth; to flip Joseph Schumpeter's famous phrase, creative destruction, on its head, this is creative creation. After taking root in a simple, undemanding application, disruptive innovations inexorably get better until they change the game, relegating previously dominant firms to the sidelines in often stunning fashion.
Incumbents almost always win battles of sustaining innovations. Their superior resources and well-honed processes are almost insurmountable strengths. Incumbents, however, almost always lose battles where the attacker has a legitimate disruptive innovation. To create a new-growth business, companies—established incumbents and start-ups alike—must be on the right side of the disruptive process by launching their own disruptive attacks.
2. Disruptive businesses either create new markets or take the low end of an established market.
There are two distinct types of disruptive innovations. The first type creates a new market by targeting nonconsumers, the second competes in the low end of an established market.
In a new-market disruption, attackers take root in a new "plane" of competition or a new context of use outside of an existing market. Consumers historically locked out of a market because they lacked the skills or wealth welcome a relatively simple product that allows them to get done what they had always wanted to get done. These markets typically start out small and ill defined. They don't meet the growth needs of large companies. And the incumbent feels no pain at first. Because it creates new consumption, the disruptor's growth doesn't affect the incumbent's core business. But as the innovation improves, it begins to pull customers away from the incumbent. And the incumbent doesn't have the ability to play in this new game.
Transistors were a disruptive innovation. Mainstream suppliers of tabletop radios, which were made with vacuum tubes, couldn't figure out how to use transistors because they couldn't initially handle the power requirements of these components. Then in 1955, Sony introduced the pocket radio. It was a static-laced product with horrible fidelity. But it enabled teenagers to do something that they couldn't before—listen to rock'n'roll out of their parents' earshot. Had Sony targeted consumers in established markets, the pocket radio would have bombed. But for teenagers, the alternative to a Sony pocket radio was no radio at all. By competing against nonconsumption, Sony set a very low technical hurdle for itself: The product just had to be better than nothing in order to find delighted consumers.
The second type of disruptive innovation takes root among an incumbent's worst customers. These low-end disruptions do not create new markets, but they can create new growth. The disruption of integrated steel mills by steel minimills demonstrates how low-end disruptors harness what we call asymmetries of motivation.
Minimills first took hold in the steel industry in the mid-1960s. They were very efficient. They had a 20 percent cost advantage over integrated mills. But the quality of the steel they produced was inferior. The rebar market at the bottom rung of the industry (rebar is small steel bars made from scrap and used to create reinforced concrete) was the only market that would accept the minimills' steel.
As the minimills entered the rebar market, the integrated mills were happy to exit it. Their gross margins in the rebar business were a mere 7 percent, and rebar accounted for only 4 percent of the industry's tonnage. So the integrated mills decided to focus on higher-profit steel products. The minimills made boatloads of money until they finally drove the last of the integrated mills out of the market—and then the price of rebar dropped 20 percent, because rebar had essentially become a commodity market. The minimills' reward for victory was that none of them could make money.
To make attractive money again, the minimills had to figure out how to make better-quality steel in larger shapes—not only angle iron but also thicker bars and rods. Profit margins in this market tier were 12 percent, almost double those of the rebar market; the overall market was also twice as large. So the minimills invested in equipment to make the larger pieces and worked to improve the quality and consistency of their steel. As the minimills began making inroads with better and bigger steel, the integrated mills were happy to exit this market tier to concentrate on more profitable products. When the last integrated mill left the market, the price of angle iron collapsed. Once again, the minimills had to move up to the next tier of the industry in order to survive. And so on.
At each stage of the minimills' climb up-market, an asymmetry of motivation was at work. For the minimills, the need to enter a more profitable market provided the motivation to solve the technological hurdles preventing them from producing higher-quality steel. The integrated mills were happy to leave these markets because the lower tiers in their product mix were always less profitable than products targeting higher-end customers. Eventually, of course, the integrated mills ran out of markets to flee to.
3. Disruptive opportunities require a separate business-planning process.
All innovative ideas start out as half-baked propositions. They then go through a shaping process as they wind their way through the organization to reach senior management. When firms have a single process for all the various forms of innovation, what comes out the other end of the process looks like what has been approved in the past, and it all looks like sustaining innovations.
Consider IBM's efforts to introduce voice-recognition software. Early iterations of IBM's ViaVoice software package featured IBM's "ideal" customer on the front: an administrative assistant sitting in front of her computer, speaking into a headset. It is easy to see why IBM targeted such customers. They constituted a large, obvious market, well aligned with IBM's needs and capabilities. But think about IBM's value proposition to this woman. She types 80 words a minute and almost never makes a mistake. IBM was telling her, "Why don't you change your behavior and use a system that gives you lower accuracy and slower speeds. We promise future releases will get better." The only way to attract great typists would be for voice recognition to be faster and more accurate than typing. This is a very high technical hurdle.
Where has voice-recognition technology begun to take off? Kids love the ability to tell their animated toys to "stop" or "go." "Press or say one" menu commands are another obvious application. In these contexts, people are delighted with a crummy voice-recognition product. Another good market for the technology may be all those executives you see standing in airport lines, trying to punch messages into their BlackBerries. Their fingers are too big to enable accurate typing—they'd be more than happy with a voice-recognition algorithm that's only 80% accurate.
Not surprisingly, disruptive ideas stand a small chance of ever seeing the light of day when they are evaluated with the screens and lenses a company uses to identify and shape sustaining innovations. Companies frustrated by an inability to create new growth shouldn't conclude that they aren't generating enough good ideas. The problem doesn't lie in their creativity; it lies in their processes.
Only by creating a parallel process for developing and shaping disruptive ideas—one that acknowledges their distinctive features—can companies successfully launch disruption after disruption. Such a process relies more on pattern recognition than on data-driven market analysis. After all, markets that do not exist cannot be analyzed. Even when numbers are available, they are never clear.
An intuitive process can still be rigorous if managers use the right tools. For example, discovery-driven planning lets you create a plan to test assumptions; aggregate project planning helps you allocate resources between sustaining and disruptive opportunities; the "schools of experience" theory informs hiring decisions.
4. Don't try to change your customers—help them.
Faulty market segmentation schemes help to explain the stunningly high rate of failure of new-product development. Most companies define markets in terms of product categories and demographics. We just don't live our lives in product categories or in demographics. When companies segment markets this way they often fail to connect with their customers.
How do we live our lives? During the course of the day, problems arise, jobs we need to get done. We look around to hire products to get those jobs done. Products that successfully match the circumstances we find ourselves in end up being the real "killer applications." They make it easier for consumers to do something they were already trying to accomplish.
Some manufacturers pushed digital cameras based on the value proposition that they made it easy to edit out the red eyes from all your images and create an online album of your best photos. Research shows, however, that 98 percent of all photos get looked at only once. Only the most conscientious of us prioritized editing images or creating albums. Where digital camera makers found success was in marketing their products to consumers who used to order double prints of their photos and mail them to relatives. The digital technology enables consumers to use the Internet to do more easily what they already wanted to do.
A business plan predicated upon asking customers to adopt new priorities and behave differently from how they have in the past is an uphill death march through knee-deep mud. Instead of designing products and services that dictate consumers' behavior, let the tasks people are trying to get done inform your design.
5. Integrate across whatever is not good enough.
One critical decision firms face when creating an innovation-driven growth business is determining its optimal scope. Specifically, which activities need to be managed internally and which can be safely outsourced?
The answer often is driven by the fad of the day. During the 1960s, everyone thought IBM's integration was an unassailable point of competitive advantage. Because IBM controlled such a wide swath of the industry's value chain, it could make better products than anybody else. So companies copied IBM and tried to integrate. In the 1990s, everyone thought that Cisco's disintegrated business model that made extensive use of outsourcing was an unassailable point of competitive advantage. So companies jumped on this new bandwagon and sought to disintegrate.
The critical question is: What are the circumstances in which my firm should be integrated and what are the circumstances in which my firm can be a specialist? Integration provides advantages whenever a product is not good enough to meet customer needs. Proprietary, interdependent architectures allow companies to run multiple experiments, pushing the frontier of what is possible. Engineers can reconfigure their systems to wring the best performance possible out of the available technology.
Think about the computer industry. In its early days, you simply couldn't exist as a specialist provider. There were too many unpredictable interdependencies across every interface in the first mainframes. The manufacturing process depended on the design of the computer and vice versa. The design of the operating system affected the design of the logic circuitry. IBM had to be integrated across the entire value chain to produce a mainframe that came close to meeting its customers' needs.
By contrast, the modular architectures that characterize disintegration always sacrifice raw performance. Stitching together a system with partner companies reduces the degrees of design freedom engineers have to optimize the entire system. But modular architectures have other benefits. Companies can customize their products by upgrading individual subsystems without having to redesign an entire product. They can mix and match components from best-of-breed suppliers to respond conveniently to individual customers' needs.
But even in a modular architecture, successful companies still are integrated—just in a different place. Consider the computer industry in the 1990s. The computer's basic performance was more than good enough. What did customers want instead? They wanted lower prices and a computer customized for their needs. Because the product's functionality was more than good enough, companies like Dell could outsource the subsystems from which its machines were assembled. What was not good enough? The interface with the customer. By directly interacting with customers, Dell could ensure it delivered what customers wanted—convenience and customization. Value flowed to Dell and to the manufacturers of important subsystems that themselves were not good enough, like Microsoft and Intel.
In short, companies must be integrated across whatever interface drives performance along the dimension that customers value. In an industry's early days, integration typically needs to occur across interfaces that drive raw performance—for example, design and assembly. Once a product's basic performance is more than good enough, competition forces firms to compete on convenience or customization. In these situations, specialist firms emerge and the necessary locus of integration typically shifts to the interface with the customer.
6. Be patient for growth but impatient for profitability.
Managers inside new-growth businesses often feel tremendous pressure to quickly ramp up sales volume. But disruptive businesses can't get big very fast. The only way to make them grow quickly is to cram them into large, obvious markets. In established markets, customers don't care about the disruptive innovation's strengths. They only care about its weaknesses. This is a recipe for disaster, and one reason why company-backed disruptive ventures can have a leg up. Venture capitalists have become increasingly impatient for businesses to get huge. As long as their core businesses are growing healthily, companies will find it easier to wait for the disruptive businesses to find a foothold market and slowly build commercial mass.
Managers must be patient for growth but impatient for profitability. When you are willing to put up with a lot of losses before a disruptive business turns profitable, that means you are trying to lay the foundation for a huge new business. Insisting on early profitability pushes the new disruptive business to find the markets where its unique capabilities will be uniquely valued. Forced to keep its fixed costs low, the new business can serve small customers who would not meet the needs of a high fixed cost structure.
Managers in large companies who read The Innovator's Dilemma may have finished the book thinking they're destined to fail, no matter what they do. We hope to shift their sentiment from despair to hope. If managers understand the theories of innovation, they have the ability to create new-growth businesses again and again
Published: March 10, 2003
Authors: Clayton M. Christensen, Michael E. Raynor, and Scott D. Anthony
Managers today have a problem. They know their companies must grow. But growth is hard, especially given today's economic environment where investment capital is difficult to come by and firms are reluctant to take risks. Managers know innovation is the ticket to successful growth. But they just can't seem to get innovation right.
When companies keep improving their existing products and services to meet their best customers' needs, they eventually run into the "innovator's dilemma." By doing everything right, they create opportunities for new companies to take their markets away. Established companies historically have struggled when trying to create new markets. Success seems fleeting and unpredictable.
Recent research indicates these problems are systemic. Most companies that are started fail. Of those that succeed, most cannot sustain robust growth for more than a few years. Companies need a way to unlock the process of innovation and create innovation-driven growth businesses again and again. How can managers increase the probability that their decisions will lead to success? Now more than ever, managers need robust theories—statements of what causes what, why, and in what situation—to guide their decision making around innovation.
Managers typically grow impatient when we tell them this. "Theory?" they say. "That sounds like theoretical. That sounds like impractical." But theory is eminently practical. Managers are the world's most voracious consumers of theory. Every plan a manager makes, every action a manager takes, is based on some implicit understanding of what causes what and why.
The problem is, managers all too frequently use a one-size-fits-all theory. But the ground beneath them inevitably shifts. Strategies that worked so wonderfully in the past no longer suffice.
Drawing on the work of a number of thoughtful researchers as well as our own work, we are exploring a set of theories that can help managers respond to the ever-changing circumstances in which they find themselves. Specifically, these six lessons will help managers make the right decisions to successfully build new-growth businesses.
1. Disruptive innovations spur growth.
Companies have two basic options when they seek to build new-growth businesses. They can try to take an existing market from an entrenched competitor with sustaining innovations. Or they can try to take on a competitor with disruptive innovations that either create new markets or take root among an incumbent's worst customers. Our research overwhelmingly suggests that companies should seek out growth based on disruption.
Sustaining innovations, whether they involve incremental refinements or radical breakthroughs, improve the performance of established products and services along the dimensions that mainstream customers in major markets historically have valued. Examples: a microprocessor that enables personal computers to operate faster and a battery that lets laptop computers operate longer.
Companies march along a performance trajectory by introducing successive sustaining innovations—first to remain competitive in the short term. But, as noted in The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press, 1997), firms innovate faster than our lives change to adopt those innovations, creating opportunities for disruptive innovations. Although sustaining innovations move firms along the traditional performance trajectory, disruptive ones establish an entirely new performance trajectory.
Disruptive innovations often initially result in worse performance compared with established products and services in mainstream markets. But disruptive innovations have other benefits. They are often cheaper, simpler, smaller, and more convenient to use.
Consider the small off-road motorcycles introduced by Honda in the 1960s, Apple's first personal computer, and Intuit's QuickBooks accounting software. These innovations all initially underperformed the mainstream offerings. But they brought a different value proposition to a new market context that did not need all of the raw performance offered by the incumbent. They all created massive growth; to flip Joseph Schumpeter's famous phrase, creative destruction, on its head, this is creative creation. After taking root in a simple, undemanding application, disruptive innovations inexorably get better until they change the game, relegating previously dominant firms to the sidelines in often stunning fashion.
Incumbents almost always win battles of sustaining innovations. Their superior resources and well-honed processes are almost insurmountable strengths. Incumbents, however, almost always lose battles where the attacker has a legitimate disruptive innovation. To create a new-growth business, companies—established incumbents and start-ups alike—must be on the right side of the disruptive process by launching their own disruptive attacks.
2. Disruptive businesses either create new markets or take the low end of an established market.
There are two distinct types of disruptive innovations. The first type creates a new market by targeting nonconsumers, the second competes in the low end of an established market.
In a new-market disruption, attackers take root in a new "plane" of competition or a new context of use outside of an existing market. Consumers historically locked out of a market because they lacked the skills or wealth welcome a relatively simple product that allows them to get done what they had always wanted to get done. These markets typically start out small and ill defined. They don't meet the growth needs of large companies. And the incumbent feels no pain at first. Because it creates new consumption, the disruptor's growth doesn't affect the incumbent's core business. But as the innovation improves, it begins to pull customers away from the incumbent. And the incumbent doesn't have the ability to play in this new game.
Transistors were a disruptive innovation. Mainstream suppliers of tabletop radios, which were made with vacuum tubes, couldn't figure out how to use transistors because they couldn't initially handle the power requirements of these components. Then in 1955, Sony introduced the pocket radio. It was a static-laced product with horrible fidelity. But it enabled teenagers to do something that they couldn't before—listen to rock'n'roll out of their parents' earshot. Had Sony targeted consumers in established markets, the pocket radio would have bombed. But for teenagers, the alternative to a Sony pocket radio was no radio at all. By competing against nonconsumption, Sony set a very low technical hurdle for itself: The product just had to be better than nothing in order to find delighted consumers.
The second type of disruptive innovation takes root among an incumbent's worst customers. These low-end disruptions do not create new markets, but they can create new growth. The disruption of integrated steel mills by steel minimills demonstrates how low-end disruptors harness what we call asymmetries of motivation.
Minimills first took hold in the steel industry in the mid-1960s. They were very efficient. They had a 20 percent cost advantage over integrated mills. But the quality of the steel they produced was inferior. The rebar market at the bottom rung of the industry (rebar is small steel bars made from scrap and used to create reinforced concrete) was the only market that would accept the minimills' steel.
As the minimills entered the rebar market, the integrated mills were happy to exit it. Their gross margins in the rebar business were a mere 7 percent, and rebar accounted for only 4 percent of the industry's tonnage. So the integrated mills decided to focus on higher-profit steel products. The minimills made boatloads of money until they finally drove the last of the integrated mills out of the market—and then the price of rebar dropped 20 percent, because rebar had essentially become a commodity market. The minimills' reward for victory was that none of them could make money.
To make attractive money again, the minimills had to figure out how to make better-quality steel in larger shapes—not only angle iron but also thicker bars and rods. Profit margins in this market tier were 12 percent, almost double those of the rebar market; the overall market was also twice as large. So the minimills invested in equipment to make the larger pieces and worked to improve the quality and consistency of their steel. As the minimills began making inroads with better and bigger steel, the integrated mills were happy to exit this market tier to concentrate on more profitable products. When the last integrated mill left the market, the price of angle iron collapsed. Once again, the minimills had to move up to the next tier of the industry in order to survive. And so on.
At each stage of the minimills' climb up-market, an asymmetry of motivation was at work. For the minimills, the need to enter a more profitable market provided the motivation to solve the technological hurdles preventing them from producing higher-quality steel. The integrated mills were happy to leave these markets because the lower tiers in their product mix were always less profitable than products targeting higher-end customers. Eventually, of course, the integrated mills ran out of markets to flee to.
3. Disruptive opportunities require a separate business-planning process.
All innovative ideas start out as half-baked propositions. They then go through a shaping process as they wind their way through the organization to reach senior management. When firms have a single process for all the various forms of innovation, what comes out the other end of the process looks like what has been approved in the past, and it all looks like sustaining innovations.
Consider IBM's efforts to introduce voice-recognition software. Early iterations of IBM's ViaVoice software package featured IBM's "ideal" customer on the front: an administrative assistant sitting in front of her computer, speaking into a headset. It is easy to see why IBM targeted such customers. They constituted a large, obvious market, well aligned with IBM's needs and capabilities. But think about IBM's value proposition to this woman. She types 80 words a minute and almost never makes a mistake. IBM was telling her, "Why don't you change your behavior and use a system that gives you lower accuracy and slower speeds. We promise future releases will get better." The only way to attract great typists would be for voice recognition to be faster and more accurate than typing. This is a very high technical hurdle.
Where has voice-recognition technology begun to take off? Kids love the ability to tell their animated toys to "stop" or "go." "Press or say one" menu commands are another obvious application. In these contexts, people are delighted with a crummy voice-recognition product. Another good market for the technology may be all those executives you see standing in airport lines, trying to punch messages into their BlackBerries. Their fingers are too big to enable accurate typing—they'd be more than happy with a voice-recognition algorithm that's only 80% accurate.
Not surprisingly, disruptive ideas stand a small chance of ever seeing the light of day when they are evaluated with the screens and lenses a company uses to identify and shape sustaining innovations. Companies frustrated by an inability to create new growth shouldn't conclude that they aren't generating enough good ideas. The problem doesn't lie in their creativity; it lies in their processes.
Only by creating a parallel process for developing and shaping disruptive ideas—one that acknowledges their distinctive features—can companies successfully launch disruption after disruption. Such a process relies more on pattern recognition than on data-driven market analysis. After all, markets that do not exist cannot be analyzed. Even when numbers are available, they are never clear.
An intuitive process can still be rigorous if managers use the right tools. For example, discovery-driven planning lets you create a plan to test assumptions; aggregate project planning helps you allocate resources between sustaining and disruptive opportunities; the "schools of experience" theory informs hiring decisions.
4. Don't try to change your customers—help them.
Faulty market segmentation schemes help to explain the stunningly high rate of failure of new-product development. Most companies define markets in terms of product categories and demographics. We just don't live our lives in product categories or in demographics. When companies segment markets this way they often fail to connect with their customers.
How do we live our lives? During the course of the day, problems arise, jobs we need to get done. We look around to hire products to get those jobs done. Products that successfully match the circumstances we find ourselves in end up being the real "killer applications." They make it easier for consumers to do something they were already trying to accomplish.
Some manufacturers pushed digital cameras based on the value proposition that they made it easy to edit out the red eyes from all your images and create an online album of your best photos. Research shows, however, that 98 percent of all photos get looked at only once. Only the most conscientious of us prioritized editing images or creating albums. Where digital camera makers found success was in marketing their products to consumers who used to order double prints of their photos and mail them to relatives. The digital technology enables consumers to use the Internet to do more easily what they already wanted to do.
A business plan predicated upon asking customers to adopt new priorities and behave differently from how they have in the past is an uphill death march through knee-deep mud. Instead of designing products and services that dictate consumers' behavior, let the tasks people are trying to get done inform your design.
5. Integrate across whatever is not good enough.
One critical decision firms face when creating an innovation-driven growth business is determining its optimal scope. Specifically, which activities need to be managed internally and which can be safely outsourced?
The answer often is driven by the fad of the day. During the 1960s, everyone thought IBM's integration was an unassailable point of competitive advantage. Because IBM controlled such a wide swath of the industry's value chain, it could make better products than anybody else. So companies copied IBM and tried to integrate. In the 1990s, everyone thought that Cisco's disintegrated business model that made extensive use of outsourcing was an unassailable point of competitive advantage. So companies jumped on this new bandwagon and sought to disintegrate.
The critical question is: What are the circumstances in which my firm should be integrated and what are the circumstances in which my firm can be a specialist? Integration provides advantages whenever a product is not good enough to meet customer needs. Proprietary, interdependent architectures allow companies to run multiple experiments, pushing the frontier of what is possible. Engineers can reconfigure their systems to wring the best performance possible out of the available technology.
Think about the computer industry. In its early days, you simply couldn't exist as a specialist provider. There were too many unpredictable interdependencies across every interface in the first mainframes. The manufacturing process depended on the design of the computer and vice versa. The design of the operating system affected the design of the logic circuitry. IBM had to be integrated across the entire value chain to produce a mainframe that came close to meeting its customers' needs.
By contrast, the modular architectures that characterize disintegration always sacrifice raw performance. Stitching together a system with partner companies reduces the degrees of design freedom engineers have to optimize the entire system. But modular architectures have other benefits. Companies can customize their products by upgrading individual subsystems without having to redesign an entire product. They can mix and match components from best-of-breed suppliers to respond conveniently to individual customers' needs.
But even in a modular architecture, successful companies still are integrated—just in a different place. Consider the computer industry in the 1990s. The computer's basic performance was more than good enough. What did customers want instead? They wanted lower prices and a computer customized for their needs. Because the product's functionality was more than good enough, companies like Dell could outsource the subsystems from which its machines were assembled. What was not good enough? The interface with the customer. By directly interacting with customers, Dell could ensure it delivered what customers wanted—convenience and customization. Value flowed to Dell and to the manufacturers of important subsystems that themselves were not good enough, like Microsoft and Intel.
In short, companies must be integrated across whatever interface drives performance along the dimension that customers value. In an industry's early days, integration typically needs to occur across interfaces that drive raw performance—for example, design and assembly. Once a product's basic performance is more than good enough, competition forces firms to compete on convenience or customization. In these situations, specialist firms emerge and the necessary locus of integration typically shifts to the interface with the customer.
6. Be patient for growth but impatient for profitability.
Managers inside new-growth businesses often feel tremendous pressure to quickly ramp up sales volume. But disruptive businesses can't get big very fast. The only way to make them grow quickly is to cram them into large, obvious markets. In established markets, customers don't care about the disruptive innovation's strengths. They only care about its weaknesses. This is a recipe for disaster, and one reason why company-backed disruptive ventures can have a leg up. Venture capitalists have become increasingly impatient for businesses to get huge. As long as their core businesses are growing healthily, companies will find it easier to wait for the disruptive businesses to find a foothold market and slowly build commercial mass.
Managers must be patient for growth but impatient for profitability. When you are willing to put up with a lot of losses before a disruptive business turns profitable, that means you are trying to lay the foundation for a huge new business. Insisting on early profitability pushes the new disruptive business to find the markets where its unique capabilities will be uniquely valued. Forced to keep its fixed costs low, the new business can serve small customers who would not meet the needs of a high fixed cost structure.
Managers in large companies who read The Innovator's Dilemma may have finished the book thinking they're destined to fail, no matter what they do. We hope to shift their sentiment from despair to hope. If managers understand the theories of innovation, they have the ability to create new-growth businesses again and again
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