Wednesday, July 21, 2021

The cost of delaying innovation

 Right now, as we (hopefully) emerge from the COVID pandemic in late summer 2021, there is a real debate underway in a lot of corporations.  The debate is about whether or not to fund innovation work, and if the decision is positive, how much to spend or invest in innovation.

The debate is fueled by the fact that during COVID few really new or interesting products were created, and by the sense that customers are beginning to demand something new and different from the same old products and services.  In this regard, there is clear demand for innovation, for new products, new services and experiences and consumers have the funds to spend on new things.  On the other hand, as my economist friends like to say, is the issue of potential inflation, the issues with clogged supply chains, the sense that many people have that wages or benefits must increase to attract people back to work.  In other words, there is a sense that costs are increasing and will increase.

This means that innovation is caught in an age old quandary:  executives recognize that they need innovation, which should lead to new products and on to new revenue and profit streams, but they also recognize that costs are likely to increase in the short run.  Since innovation almost always pays off only in the longer run, and cost management can be controlled in the short run, the dilemma is obvious.  When you get evaluated in 90 day increments by the stock market, cutting or controlling costs is always an easier decision than investing in innovation.

But we are asking the wrong question.

The question management teams are asking and answering is:  how can we manage our near term costs to keep the investors happy in the short run?  Note that this is NOT a bad question to ask, because investors are constantly watching the effectiveness of the management team and want to see companies hitting their numbers.

Perhaps the question we should be asking is:  what is the cost of delaying innovation?

This is a question that is much more difficult to answer, but in this environment is at least as important as the previous question.  

Our economies are improving and growth is returning as we emerge from the COVID scare.  Growth in the US economy is evident and we anticipate growth in the economy in future quarters. Consumers are returning to the markets at a record pace, and thanks to the government's largess we have more funds to spend.

Yet there are few really interesting or new products on the market and the products and services that exist are becoming commoditized.  If companies choose to manage costs and stay the course with existing products or at best minor improvements to existing products, they can manage costs effectively but will see little change in their revenue and profit outlook.

What do companies that fail to invest in innovation miss?

What the companies that make the decision to maintain cost containment will miss is the opportunity to put new products and services into the product development funnel.  What they are doing in effect is robbing their future revenues and profits to sustain a slow growth model now.

The difficulty in this tradeoff is in understanding what the cost of delaying or postponing innovation is.  If the company isn't all that good at innovation, and what they delay for a few quarters is only incremental innovation that does not radically change the product portfolio, then I think it's reasonable to suggest that delaying isn't all that risky.  Unless their customers and markets are changing quickly, and their products are rapidly commoditizing.

On the other hand, if the company believes in its innovation process or capability, or has exciting new ideas that could be realized as new products and services, the cost of delaying or postponing innovation could be quite high.

What work can be done to improve innovation and shorten time to market?

It's far easier to control cost and postpone investments in the short run, and much more difficult to predict exactly what innovation and new product development will achieve in the long run. There are methods to improve this trade off, but they too require investment:

  • Better innovation skills throughout the organization
  • Defined innovation processes
  • A strategic framework for anticipating innovation across three horizons
  • The ability to bring new products and services to market more quickly - using agile development, MVPs and rapid prototyping
  • The willingness to kill off older products to free up resources for new ideas

The cost of delaying innovation isn't just the potential loss of future revenue and profits, it is also the doubling down on the existing way of doing things, locking the company into more of the same for the next planning cycle.  The gains from doing innovation aren't just new products, but the gains reveal themselves in new ways of thinking, expanded market definition, capabilities to accelerate ideas and products.

What's the real cost of delaying or postponing innovation?

We've got to stop thinking about innovation and new product development as a one off activity that skips across the surface of a company, and start thinking about it as a capability that improves how a company operates and functions.  That's the real cost of delaying innovation - your company never makes the leap to become more strategic, more innovative and more adaptive.

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posted by Jeffrey Phillips at 10:06 AM 0 comments

Wednesday, July 07, 2021

Red pill or Blue pill innovation

 As readers of this blog (and you know who you are) are bound to know by now, I am a movie fanatic.  I love good movies, average movies, older movies and so forth.  I like movies that I can quote, and also like movies that are based on my favorite books.  I am one of those people who is constantly astounded when I say "African or European swallow" and people give me a blank look.

As a movie buff, I fell in love with The Matrix, because it feels like something William Gibson wrote and it introduced an entirely new concept into the sci-fi realm - that we are living in a cyber reality and we need to be removed from the machine in order to see the real reality.  In the movie, in case (again astounded) that you haven't seen it, Lawrence Fishburne offers Neo, played by John Wick, I mean Keanu Reeves, a choice of two pills.  Very Alice in Wonderland-esque.

Take the blue pill and you will go back to your cyber reality, where computers are generating your experiences and your life and decisions are governed by a machine, where you are actually (and this is where the movie lost me just a bit) an energy source for the computers.

Take the red pill and you will be released from your cyber reality, and enter an entirely new existence that is more real, more personal and more dangerous than your cyber reality.  Oh, and the machines that you were once powering will seek you down to either reincorporate you in the machine or kill you.

Innovation choices are like the Matrix choices

When we talk about innovation in corporations, many of the choices individuals make and that innovation teams make are like the red pill / blue pill choice.  Take the blue pill and go back to your regular job, toiling away on the TPS reports (hint:  movie reference) and supporting the overall machine.  Take the red pill and enter a new reality where disruptive innovation and business model change is possible, but corporate culture, decision making, existing infrastructure, budgeting processes and risk all threaten your project.

You may think that this is a good thought analogy, but that life in a corporation is not so clear cut.  That it is never a binary choice to go back to the safe day to day job and avoid innovation, or to risk it all to do really interesting, game changing innovation.  But in some ways the choices are starker on innovation teams than what Neo was faced with.  At least when Neo took the blue pill, he would forget he was ever tempted to leave his sedentary, safe existence for one with a hint of danger.

All superhero movies involve side kicks

Taking the red pill introduced Neo to others who had also made the risky choice.  They, like a lot of innovation team members, were a rag tag group of misfits who had made the choice to leave the borg and try to create something new.  What Neo did not know, and what happens in many innovation teams, is that several of his counterparts longed to go back into the borg, to take their safe and comfortable place back in the hum drum day to day, and would sacrifice Neo and Morpheus to the computer systems in order to do so.

Most innovation teams are made up of one of two types of people:  those who were assigned to the team, who had no choice (and these are often exceptionally strong people who did not want the assignment) and those who choose the red pill.  The people who choose the red pill are often corporate misfits, who are constantly questioning why the company does things a certain way, or who are always looking for a better way to do things.  

Regardless of how you or Neo get on the team, you've made a choice, and the people around you have either been assigned or made the same choice.  Now, what you have to do is determine if your team has the skills it needs in order to succeed, the sponsorship and investment it needs, and the ability to stick to the work, and ignore the desire to go back to the hum drum.

In The Matrix, Joe Pantoliano's character plays the villain, the one who sells out the team in order to go back to the hum drum existence.  Others, like Trinity, play the characters who choose the red pill and never looked back.

Work with the folks who choose the blue pill

No matter where they come from, no matter what their reputation or skill set, no matter who they are, if you are doing innovation work, find the people who chose the red pill.  Those people who desire change, who want to do new things, who are dissatisfied with the status quo.

This is almost a "burn the boats on the beach" kind of commitment.  Too much looking back at the status quo can lead to a realization that innovation is difficult, unusual, risky, often underfunded.  And that can lead to the decision that the old life, no matter how hum drum, was at least comfortable.  Or, it can lead to a narrowing of the scope or outcome, so that the individual can be over and done with the project as quickly as possible.  You'll want to identify these people as quickly as possible, because they will constantly shrink the scope of the project until what you deliver is undifferentiated from existing products.

So, the choice when you are presented with it is relatively easy.  If you want an easy life, take the blue pill and keep plugging away at the day job, comfortable if slightly bored.  If you want change, risk and an opportunity to create something new, take the red pill.  Just understand what it entails.

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posted by Jeffrey Phillips at 10:18 AM 0 comments

Tuesday, June 29, 2021

Innovation and the Baskin-Robbins effect

 I'll start out this post by noting that I like ice cream.  In fact, one could say that I am a connoisseur of ice cream.  I like to eat ice cream at home, and when I am traveling I like to sample the local styles and flavors.  Wisconsin, for example, has a lot of custard shops.  Italy has delicious gelato.  And so on.

A childhood treat was a visit to Baskin-Robbins, which is famous for its range of 31 flavors.  Every child dreamed of going to Baskin-Robbins, because they could choose from exotic flavors you'd never find in stores.  However, when I became a parent I dreaded taking my kids to Baskin-Robbins, because there's nothing worse than a kid who has a product they love, but far too many choices to make.

Most corporations suffer from what I call the Baskin-Robbins syndrome when it comes to innovation - there are far too many options and flavors, and that makes choosing the right innovation activities and investing in the right innovation outcomes exceptionally difficult.

So many innovation flavors

The opportunity and problem with innovation is that it means whatever the speaker wants it to me.  How this plays out in organizations is that one person thinks and says "innovation" and means continuous improvement.  Another says "innovation" and means increased investment in product R&D.  Another says "innovation" and means service models or experience improvement.  Yet another person says "innovation" and means crowdsourcing and employee engagement systems.  And so on.

What happens is that on the surface, all of this activity seems reasonably valuable.  What could possibly be wrong with lots of small experiments all throughout the company on different types of innovation?  In reality, what this leads to is lots of small projects, where many aren't focused on important new opportunities or markets that are vital for the longer term success of the company.  So, while there is a lot of activity, much of it does not address key challenges.

How to choose

This raises another Baskin-Robbins dilemma:  how to choose across highly variable projects with uncertain outcomes.  Many management teams are presented with a diverse range of "innovation" projects and potential outcomes.  Forget about comparing apples to apples - this is often more like comparing apples to anvils - the entire classification and category is different.  These are different asks, for different outcomes, that in many cases don't solve or address interesting problems.

If you as a parent have experienced watching your child try to choose across 31 flavors of ice cream, and the agony that can create, imagine trying to understand and vet requests to fund innovation projects that range from incremental change to existing products to blue sky, disruptive innovation in new markets to creating an internal VC or accelerator.

The most important clarifying question

Perhaps the best, first question you can ask your kids before they go into Baskin Robbins is:  what do you want?  Get them to focus on one flavor or at least one category of flavors, to narrow the selection dilemma.  The same is true for innovation.

Executives should make clear statements about what outcomes they want from innovation, and what they are willing to support and fund.  With these bright lines established, innovation teams can decide to work within those constraints and align to what executives want and expect, and are willing to fund, which makes decision making easier.

This approach allows executives (if they are willing to do so) to align strategy to innovation activities.  It allows them to signal which problems or opportunities are most important.  It signals what kinds of innovation and what outcomes will be important or valuable.

This is kind of like saying to your kids:  you can go to Baskin Robins, but only focus on the chocolate flavors, and only in a bowl.  By setting parameters and narrowing the focus to what is important, the options narrow but the selections and outcomes are more in line with the goals of the business.

When everything is equal

The alternative is that every alternative is equal and has equal merit.  So that a small innovation to improve employee morale is as important as a new R&D project to discover new technologies, or a crowdsourced idea to create a new product.  When presented with these varied options and not clear needs or frameworks, it's no wonder that executive teams simply throw up their hands and refuse to make a decision.

Like it or not, we have to create prioritization frameworks and identify the areas within the business that need the most help, or acceleration, or that have the best chances for new market growth.  Defining where the opportunities lie, and establishing prioritization for projects is what executives should do.

Just like when your parents steer you to the chocolate ice cream and tell you you can't spend more than a $1.  Now, within those constraints, you'll optimize your choices.  But far too often executives leave innovators with the Baskin Robbins effect - all alternatives are good, and none have preference, and there is no clear prioritization model.

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posted by Jeffrey Phillips at 12:49 PM 0 comments

Monday, June 21, 2021

The problem with trend spotting

 I am a huge fan of trend spotting and scenario planning.  Most companies simply do not understand the insight and the power that developing and interpreting trends and scenarios can provide.  Instead of being caught off-guard or surprised by emerging markets or emerging segments or new technologies, wouldn't it be much better to be aware of, or even prepared for, what is going to happen?

Watching trends and developing scenarios can only make you more aware, and give you a better sense of what is likely to happen and where to place important bets.  Yet far too many companies don't do enough trend spotting and scenario development.  Or, if they do conduct trend spotting and scenario planning they do it infrequently or haphazardly, which does not lead to great results.  In my opinion, trend spotting and scenario planning are two innovation activities that have a great return on investment.

Now, having said how important and valuable trend spotting and scenario planning is, let me let you in on a secret.  Trends are everywhere.  One of the key difficulties in trend spotting is deciding which sources of trends are valid, and which trends within those trusted sources should be prioritized.  Let me give you an example.

Here's an example of a recent tweet dealing with emerging technology trends


It's great that Brian Feroldi (I don't know Brian but I do follow his tweets) has put together a list of emerging needs, markets and technologies that are interesting to him as an investor.  More over, he has listed them according to his level of conviction, I guess on the potential size or success of each trend.

This is a great list, and identifies many emerging markets and trends. Brian may be an expert whose opinion you value, so this list of emerging technologies may be important.  However, this is a list of technologies for the most part, not solutions (which is what consumers buy).  We need to develop our scenarios based on emerging trends but always put these emerging technologies into a market or consumer context.  If it were as simple as being a cool technology, we'd all be riding Segways today.

Distinguishing between things

I am using this list as an example, not to criticize Brian but to show you what you need to think about when considering trends.  A few issues:

  • Cloud computing is not an emerging trend, it is a reality now, and we are likely to see more and more of our IT move to the cloud.  It's a bit late to make a big bet on cloud, because so much has already been moved to the cloud.  Same with e-commerce in general, although there are interesting sub-markets and opportunities within e-commerce. 
  • The "War on Cash" - this is interesting, because physical cash is becoming obsolete in many cases except for illegal activities.  Electronic transactions, credit cards, debit cards, Venmo and other platforms are replacing physical cash.  The question is:  where are the opportunities to replace cash with an electronic transaction, and how many opportunity spaces remain? 
  • Autonomous/Electric vehicles.  This combines two related but disparate ideas.  Electric vehicles are a no-brainer.  Within a decade most if not all of the vehicles produced will be electric vehicles.  Think about what this means from the tier one and tier two supplier point of view - entire engine and drive train changes.  New vendors emerge, old ones adapt or disappear.  Who will "win"?  The upstarts like Tesla or the old guard - Toyota, GM, Ford?  We can make bets on the future of electric vehicles, and move beyond cars to small planes and other engines that are gas powered today.

    On the other hand, Autonomous vehicles are another issue altogether.  While the concept shows promise, there are dozens of safety issues, legal issues, regulatory issues, and issues with insurance and licensing that have to be resolved before autonomous vehicles will be produced and used in large quantities.  It's one thing to replace the engine of a car, but keep the vast majority of the remaining vehicle the same.  An electric car drives the same, stops the same, is controlled the same as a gas powered car.  But to replace the driver creates a whole host of legal, regulatory and safety concerns.  This is ultimately not an issue of technology but of acceptance in the marketplace.  Don't conflate the the two - electric vehicles are emerging and will be the dominant engine and drive train shortly.  Autonomous vehicles will take more time.
  • One more - plant based meat.  I think Brian is framing this one too narrowly.  What I think we will see are alternatives to meat that is "grown" on a cow.  It could be that we see meat replacements (which we have now) and/or meat grown in a lab from original cow or pork tissue.  Both are viable, but right now the plant based products are leading because the technology is easier.  Don't miss the fact that we can and will grow meat in a lab - can we scale it to a large production at a reasonable price?  If the biologists and food scientists figure that out, we will continue to consume red meat but produced in an entirely different way - again disrupting an entire supply chain.

Here's a different trend report, this time from McKinsey on emerging technologies:




The point I want to make is that trends are everywhere - on Twitter, in annual reports, in what analysts say or report, in what consumers do or say.  Gathering them and making sense of them - evaluating and critiquing as I have done here - is an important component of synthesizing the information and beginning to decide for yourself what is most likely to unfold in the future.

Data is everywhere.  Information and insight is lacking

There's real work to gather and filter this information.  It needs to be done regularly, consistently and with the same perspectives and frames of reference.  Once gathered, the information needs to be evaluated and synthesized so that it creates insight or meaning.

So, what sources do you trust?  How do you evaluate the trends and predictions they are making?  Should you rely on third parties to do this work for you, or should you develop your own insights and facts about what you think is going to happen and why?

Once you've decided which sources to use and which to trust, and how much gathering and synthesis your teams should perform, you will have a viable trend program and analysis.  With that insight, you can make much more confident predictions about technologies, products and markets and move much more quickly than your competitors. 

Trend insight is not free but it is valuable

As Robert Heinlein used to say "TANSTAFL" - there ain't no such thing as a free lunch.  To get the value of all of the trend signals in the market, you need to invest in gathering, assessing, prioritizing and synthesizing all of the data and turning that data into useful information you can act on.  The information for the most part is free, and freely available, but there is a required human investment to turn the data and trends into actionable information.

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posted by Jeffrey Phillips at 7:54 AM 0 comments