Friday, January 29, 2016

Business Model Innovation: reaching and grasping

I'm a fan of Robert Browning, and really any one who can create a really pithy but meaningful quote.  Today's quote is from Browning, who said: "a man's reach should exceed his grasp, Or what's a Heaven for?".  Of course any quote taken out of context can be used in any way I choose, but I like to think that Browning was writing about innovation.  In my way of thinking, Browning was exhorting all of us to innovate in ways that stretched us beyond our capabilities and comfort zones.  That part about reaching exceeding his grasp has that in spades.  If all of our reaching is within our grasp, if everything remains close and easy, within our knowledge and comfort zones, we will never make change.  And, to use another of my favorite quotes, from Shaw, all change is due to the "unreasonable" man, because reasonable men adapt themselves to their conditions, while "the unreasonable man adapts surrounding conditions to himself." 

From these two quotes we can learn that innovation demands that we reach beyond our capability, knowledge and comfort zone (exceeding our grasp) and by doing so we may be seen as "unreasonable" and fomenting change.  But that's what innovators do.

Now to pull the rug out

After all this lofty praise for reaching beyond the grasp and fomenting change, I'd like to issue a warning.  Currently, there is a lot of talk being thrown around on the web and in business periodicals about all kinds of innovation - business model innovation, service innovation and so forth.  This is both exciting and terrifying at the same time, because innovation needs to move beyond product innovation, but there comes a time when the reach far exceeds the grasp, and innovation goals or targets become unreasonable. 

I'm actually glad to see the increasing focus on innovation other than product innovation.  We've often said that product innovation is both the easiest to do, and the easiest to copy, while other innovation types, like customer experience innovation or business model innovation are far more difficult to replicate.  That's why there are many retail stores but only one Nordstroms, for example.  But it's a far cry from doing simple, incremental innovation around existing products to attempting to innovate a business model.  That's why Airbnb can disrupt the hotel industry from the outside while larger firms can only watch and wonder.  The larger firms had simply too much invested in the status quo.  They may or may not have been willing to do the innovation, but it simply seemed too unreasonable to do it.

Gaining skills and increasing vision

Innovation of any form, resulting in any outcome, can be challenging, but the more the result becomes intangible (services, experiences) or upsets a dominant paradigm (business models) the more difficult it becomes, for several reasons.  First, it's difficult because it is unusual.  Most companies can do some product innovation when forced to, but haven't conducted any more robust or intangible innovation.  Second, by their very nature, these outcomes are intangible:  hard to see, hard to test, hard to prove.  You almost have to create the solution before you'll know if it will work.  That's the reverse of most corporate thinking, which seems to suggest you should prove it will work before you experiment.  Third, these kinds of innovation are difficult because they challenge a very valuable existing paradigm:  an industry convention, a viable business model, that few want to destroy.

While many corporations have some innovation skill, the idea of business model and customer experience innovation may still be instances where the reach far exceeds the grasp, to paraphrase Browning.  Talking about business model innovation and building expectation is dangerous when few established companies know how to do it, and further, have the unreasonableness to try.  Because it will take more than skill to innovate a business model in an existing industry.  It will require either an outsider who has no stake in the market, or an incumbent who is willing to tear up an existing convention (that they also benefit from) and start again.

Since many corporations are also public corporations dependent on shareholders, only visionary or desperate CEOs will suggest that the company slit its own business model throat and innovate a completely new way of doing business.  Talk about unreasonable!

What's likely to happen

None of this means that I don't think business model innovation is going to occur.  It's already underway, and every large corporation is watching and trying to understand what's going to happen.  A lot of investments are being made "just in case" to buy time.  GM invested in Lyft "just in case" the Millennials never make the shift to acquire cars, and the baby boomers all give theirs up.  GM hasn't yet innovated its business model, which is really a financing model, but it probably needs to.  And GM isn't alone.  Every business model is under siege.  Intel built its model based on the dominance of the PC, but tablets and smartphones are far outpacing the growth of desktops and laptops.  We can go on and on about the business models that are at risk, and how hard it can be to innovate out of an existing model.

Startups, entrepreneurs and new entrants will conversely have a field day, because many new platforms and technologies will allow them to enter and change the dynamics of an industry or business model with relative ease.  Airbnb and Uber are two examples, as is NetFlix, and all are dependent on the power of the internet, which has become a platform for business model change.

Right now, there's an overabundance of talk about business model innovation, by people who know how difficult it can be. Those who need business model innovation most don't have the depth of skill or experience necessary, and are often too locked-in to their existing models to innovate effectively. They aren't yet willing to be unreasonable.  But the new entrants are fully willing to disrupt and subvert the business models, and new technologies and capabilities are making it easy for them to do so.  You can believe everything you read about business model innovation and its importance, but pay attention to the companies that actually do it.  They will be the ones with the skills and unreasonableness (if they are larger) or the utter lack of investment in the convention (if they are entrepreneurial or crossing industry boundaries).  Business model innovation is just emerging and will happen quite regularly, but it will be driven primarily by the new entrants and the boundary hoppers. 
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posted by Jeffrey Phillips at 7:10 AM 0 comments

Wednesday, January 27, 2016

Moving beyond Explore and Exploit

Perhaps one of the biggest challenges innovators face is the lack of shared conventions or definitions.  This starts with the definition of innovation, which we all agree is important but no two people agree on the definition.  Moving on from there, we have different types of innovation, different tools and outcomes, differences in focus and intent.  I honestly believe that innovation teams in corporations attempting to conduct innovation suffer, because of the host of different and often proprietary innovation methods, processes and tools.

There's little I'd like more than to create shared platforms and models, and to create holistic solutions rather than increment our way to good frameworks.  One of the challenges I'll address and attempt to solve today is the emerging dichotomy currently represented as explore and exploit.  This is, in itself, an evolution, because the vast majority of work in corporations recently could be represented by a single activity:  exploit.  But I'm going to argue that while the emergence of the explore:exploit duality if a good thing, we need to go much further.  This explore:exploit duality is emerging simply to isolate two different activities with different goals and tools.  Explore seeks to discover new ideas, using high divergent tools and methods, while Exploit seeks to maximize profits using highly convergent tools and methods.  Thus we isolate and inoculate them from each other. 

Missing the Forest for the Trees

But this is a forest and trees problem, because Explore and Exploit represent key activities, not the entirety of a end to end innovation or idea process.  Yes, they are important activities, but they overlook, ignore or simply attempt to subsume important activities like Experimentation, Execution, Enhancement and Evisceration.  Let's not stop with the emergence of explore and exploit.  Let's pull back the viewfinder and take a broader look at the entire end to end innovation process, from the earliest hints of needs in Exploration to the last dying gasps of an outdated product in Evisceration.  As we define and share a common framework, we can educate our clients, remove mystery and speak clearly and directly about specific tasks and outcomes.  We can highlight what our clients do well (define and build new products, maximize revenue and profits) and what they do poorly if at all (discover new needs, experiment to find the best solutions, create a graceful end of life for products).

The proposed six phases of an idea lifecycle
We've published a new white paper entitled Beyond Explore and Exploit, seeking to define an entire end to end idea lifecycle using six "E" words you've probably already noticed scattered throughout.  Those "E" words represent sequential steps in an idea lifecycle, from birth to death:
  • Explore - to find new insights, discover new needs, create new ideas
  • Experiment - to evolve the ideas and validate the features
  • Execute - to convert good ideas into new products or services and launch them
  • Exploit - to maximize profits and gain returns on the investments in the first 3 phases
  • Enhance - to extend the life of a product or provide new features or benefits
  • Eviscerate - to create a logical, graceful end for products, rather than leave them as zombies
You can find the entire whitepaper on our website here, along with other articles and papers.  I'd like to thank my good friend and frequent collaborator Paul Hobcraft for his thoughts and comments.  Any oversights or mistakes are of course mine alone.

So, what say you, gentle innovators?  Ready to think about creating one common, shared innovation life cycle?  What did we get right with this model?  What did we get wrong?  How do we lower the barriers for our clients through shared innovation models and frameworks?  Ready to give it a try?
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posted by Jeffrey Phillips at 7:49 AM 0 comments

Wednesday, January 20, 2016

What the GE Innovation Barometer really tells us

Like many of you I look forward to the annual reports about innovation that a number of larger corporations and consulting firms publish.   It's interesting to get a large, multinational examination of the state of innovation, and to see how the data is interpreted.  Each year BCG and other consulting firms release an innovation report.  From the business perspective,  GE does a nice job every year of interviewing a large number of executives around the globe, and analyzing the data for insights

Before I drill into what I believe the data tells us, remember a couple of factors.  First, how a question is asked matters, as well as which questions were asked and which were not asked.  There may be as much to learn from what wasn't asked as their is in what was asked.  Second, analyze the analysis.  Look at the data itself and how it is presented.  There are connections in the data that seem interesting to me that GE does not call out.  GE may refrain from calling these out because the data or conclusions differ from what GE is interested in presenting. Or, GE simply took a different perspective than I did.  There are many reasons why the analysis from the same data set may be slightly different. 

It's clear what's important to GE - examining the report suggests a couple of areas that GE wants to highlight, including business to business collaboration, data analytics and support for innovation from governments.  GE also covers a wide array of innovation topics, and the overall report and analysis they provide is reasonably good.

My analysis

Here's my analysis of their report and the subsequent data they provided (charts/figures noted by page number).  This analysis is based on the 88 page PowerPoint I downloaded from the main Barometer site:

Page 5 - 2016 Key Findings.

GE presents four key findings (Welcome Revolution, Embracing new models, Disruptive Innovation and Everybody's starting up).  Within these findings two concepts caught my eye.  First, while executives recognize the need for "disruptive" innovation (never really defined as far as I could see), 81% worry about being left behind, or have fear of becoming obsolete (a new acronym:  FOBO).

But here's the question:  does this "fear" translate into any action?  Do executives communicate this fear to their organizations?  More importantly, do the executives allocate resources or investments based on these concerns?  We don't know from the research.

Second, the research states that "Inertia and risk aversion are growing".  God help us if this is true.  Inertia and risk have traditionally formed some of the biggest barriers to innovation.  If inertia and risk aversion are growing, as the report states, then together we face an immense struggle to innovate.  Large corporations face enough challenge to innovate without an increase in inertia and risk aversion.  The report says nothing about how to overcome these issues.

Page 22 - Increased Financial Return

According to this slide, firms in leading innovation countries are recognizing growing innovation return from collaboration.  Almost 90% of the firms surveyed are growing innovation collaboration, with the global average at 77%.  While innovation is growing and collaboration is increasing, this data is overstated or does not represent the average company in the countries where the research was conducted.  In our experience "open innovation" is still a buzz word for many companies, and while collaboration and open innovation can be game changers, the vast majority of companies are not actively collaborating for innovation success.

Page 25 - Being disruptive is the gold standard

Again, other than defining disruption in the previous slide as "creating a market that didn't previously exist" we don't have a good definition of disruption.  Moreover, 60% of the companies surveyed have difficulty coming up with radical and disruptive ideas.  47% say the development of new products and services "contributed" to business performance, but doesn't mention what the contribution was.  Companies can label any new product and its associated revenue as "innovation", and this statistic doesn't equate to "disruption", merely to new products or services.

The entire analysis argues for more disruption, but doesn't address how difficult it is or what firms are doing to grow the skills necessary to innovate effectively.  Later we'll see another conundrum, the concern about working on disruptive projects versus the need to get to market quickly.  Conversely, the report doesn't talk much about what's causing industry and segment disruption.  Disruption is increasing - look no further than Airbnb or Uber for examples - but many industries don't understand the disruptive forces or how to defend against them.  Most larger corporations would be better served to learn to understand the potential disrupters and purchase, block or co-opt them.  If inertia and risk are big barriers to every day innovation, what kind of barriers will larger corporations encounter when they try to "disrupt" something?

Page 31 - The majority of business executives continue to favor a "safer" approach

Here's research that simply confirms what we already knew.  Executives prefer innovation that doesn't interfere with day to day operations.  But what we actually need is a "both/and" approach:  the ability to conduct excellent day to day operations to drive revenue and profits while simultaneously conducting innovation to create new products.  Currently, almost two-thirds of the respondents note that they intend to protect the core business as much as possible, which will starve innovation activities.

Page 32 - Many businesses innovate incrementally...

On this slide we see what appears to be a logical tradeoff:  63% of respondents favor incremental innovation because they want safety and low risk, while recognizing they need to get to market quickly.  What they miss is that innovation can be disruptive AND rapid, they just don't have the processes or skills to conduct innovation in that way. And, when new entrants with the ability to be both disruptive and rapid emerge (look at Zara, or Uber, for example), there will be disruption in their markets and industries.  It's not enough to recognize what the disrupters are doing, corporations have to adopt these skills and capabilities or they will be disrupted.  Corporations must become more capable innovators, must become more agile, more able to make quick decisions and become proactive rather than react to market conditions or competitive actions.

Page 36 - Having an innovation strategy...

This slide suggests that two thirds of the firms surveyed have a "clear innovation strategy", which is probably true but almost certainly irrelevant.  What is relevant is having a clear strategy, that is regularly and capably communicated to the entire organization, and is backed by executive commitment, new funding, project prioritization and other factors which ensure innovation is actually done.  You can see how little having a clear innovation strategy matters when you read that 62% of those firms with a clear strategy "struggle to come up with radical and disruptive ideas".  Ultimately this chart tells us that over 60% of the firms that responded (62% of 68% and 57% of 32% = 60%) struggle to come up with radical and disruptive ideas.  This is further reinforced by the next slide...

Page 37 - We see polarized views in approach to innovation strategies

France, Indonesia and India lead the way in responding to the question:  Does your company have a clear innovation strategy, yet I think few experts would claim that these countries or the preponderance of firms in these countries are excellent innovators.  On the flip side, Japan is noted earlier in the research as an innovation champion, and we can easily toss in Israel and Sweden, all three at the opposite end of the scale, lacking clear innovation strategy.  Either having a clear innovation strategy doesn't matter (which it does) or it is not enough (having a clear strategy is useful only if other conditions, like executive commitment, funding, resources and other factors are also put in place).  Further, we need to move away from the reliance on countries and governments.  Too often governments create incentives and hope to pick winners and losers, rather than simply creating conditions where the best ideas and industries succeed.

Page 41 - Identifying best practices and integrating them...

I especially like this chart, but I think the developers of the material missed a key opportunity here.  If we look from left to right we can identify key factors that become barriers to innovation. They are:
  • a lack of PROCESS (to have a clear process and structure in place)
  • a lack of PEOPLE (to encourage and reward innovative people)
  • a lack of innovation CULTURE (to create a connected culture) and (to reward those...)
  • a lack of GOVERNANCE (to create a set of metrics..)
  • a lack of CUSTOMER INSIGHT (to rely on consumer research...)
These factors have been innovation challenges for years.  To see them show up in this research is almost reassuring, but ultimately damning.  For these to show up in this way, in this order means that for over a decade corporations have known what the challenges are and haven't moved the needle very much.  We know these are problems.  When will leaders arise who will focus on them and fix them?

 Page 42 - The Informed Public think internal inertia and lack of leadership...

Here's a real conundrum.  The factors that keep firms from innovating effectively (business models, integration, inertia, lack of investment, lack of skill sets) are all factors that are internally controllable.  None of these arise from external competition or are unobtainable or unchangeable.  All of them are within the purview of the executives who were interviewed to change!  Let's get to it!


GE has once again done a great job surveying a broad population of executives, who have indicated that innovation is important and who recognize that their companies must get better at doing innovation consistently and in a more disruptive fashion.  Yet these same executives, who recognize the key challenges and skill gaps, don't have answers to basic changes necessary in order to innovate.  In this regard, there's nothing new under the sun.  We are still faced with issues like risk, uncertainty, the tradeoffs between day to day operations and innovation, and everyone recognizes the skill gaps, cultural barriers, inertia and other innovation blockers.

The real problem identified by this report is how uncomfortable most corporations are with the types of innovation they need to be doing.  The report confirms that most respondents are uncomfortable with radical or disruptive innovation, while recognizing that these factors pose significant challenges to their current business prospects.  Change is accelerating and disruption is accelerating.  Executives understand this but don't seem to have plans to address them.  At a minimum, larger firms should be paying close attention to potential disrupters, and taking a proactive yet defensive stance to block the disrupters, delay the disrupters or create conventions or regulations that stymie them.  Better yet, the corporate leaders could learn from or acquire the disrupters.  The best possible scenario is that larger corporations become far more proactive, creating new solutions and identifying emerging markets and needs before the disrupters do.  But this will require a change in culture, rewards, focus, business model and ultimately, leadership.

This should be a wakeup call to new managers and junior executives who are climbing the corporate ladder.  Now is the time to build these skills, to put new processes and mechanisms into place.  The pace of change is accelerating.  Disruption is occurring.  FOBO (obsolescence) won't occur on the current management watch.  It will occur just as you reach the top, unless you are prepared to make changes to the way your company operates.

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posted by Jeffrey Phillips at 6:15 AM 0 comments

Monday, January 18, 2016

Innovation in the file cabinet

Not long ago our innovation team was asked by a client to lead an innovation project to create a new product.  As always when we are asked in by a new client, we did a quick survey.  It's important to understand what the client knows about innovation, what they have learned or attempted previously.  Innovation can be strange and new, and if other tools or methodologies are familiar or in use, it's often valuable to incorporate them into our processes if possible, rather than ignore them.

In this case we were told that Yes, the client had adopted another consulting firm's innovation methodology.  In fact when we met with the client team, they provided a binder of information on a step by step innovation process, that from the looks of things was relatively straightforward and complete.  Of course every consulting firm has its own ways of doing things, and there are factors and characteristics that will differentiate one consulting firm from another, but at the heart of the matter innovation is always about defining challenges, understanding future market needs and conditions, gathering customer insight on unmet needs or jobs to be done and generating solutions.  That's the basic "front end" in a nutshell, and no matter how you spin it or package it, all innovation programs have some flavor of these steps.

Anyway, back to the client.  As I noted, the client team pulled a binder out and showed us another consulting firm's methodology.  They presented sample deliverables.  They presented a sample workplan.  And at some point I began to wonder:  what do they need us for?  All the step by step instructions, all the information necessary to innovate was here.  Had they adopted this methodology, I asked?  The answer, as you might have guessed, was sheepish.  No, the client team responded.  The other consulting firm had built the process for them, given them "training" on the process and the client team had agreed to "take it from there".  A year later, no innovation had been completed, because no one was there to reinforce the innovation process, too many other priorities had sprung up to compete with innovation, and it seemed a bit unusual and risky.

Needless to say, I was both shocked and relieved.  Shocked that so much effort had been expended to develop a reasonable innovation program that had not been implemented.  And relieved to note that virtually none of it had had an impact on the team or company.  Which meant we could ignore it as part of our effort, much as the client team had ignored the existing materials.

Innovation in the file cabinet

While the client shall remain nameless, this is in fact a situation that occurs quite frequently.  From an innovation methodology or process point of view, there are very few companies that are truly "green fields".  Most have heard of innovation, many have purchased books or sent people to innovation training, and a fair number have partnered with one or more innovation consulting firms.  Yet far too often when we do our initial reconnaissance to determine what a client has done from an innovation perspective, all we find are old methodologies that reside in a binder, somewhere in someone's file folder or file cabinet.  Do they have innovation processes or methodologies?  Sure, if what's buried in the file cabinet counts.  No one wants to appear unprepared, but many simply haven't implemented what they have.

Why would firms pay for innovation training, advice, methodology and consulting and then shelve all of the knowledge?  There are a number of reasons, but the most important ones have to do with priorities and risk.  Steven Covey introduced the idea that managers spend time on things that are URGENT or IMPORTANT.  Innovation falls into the category of IMPORTANT.  It is important that a company create new products, or develop a new business model.  Most day to day operations fall in the category of URGENT.  It is urgent that we respond to this competitive move or that new piece of legislation.  And, as Covey noted, the URGENT always beats the IMPORTANT.

Good innovation knowledge, methodologies and training ends up on the shelf because the teams in question don't have the bandwidth, the resources, or the approval to pursue new and interesting ideas.  Heck they can barely keep up with the day to day stuff they are tasked with, much less add on new projects.  Innovation training and inspirational speeches amp up enthusiasm which is quickly overturned by business realities.

General aspiration or firm commitment

Here's what you need to know if you hope to do any innovation, at any level of the company:  is innovation a general aspiration, or a firm commitment?  Aspirations are important, but often lack the resources and investment necessary to implement.  Further, Aspirations talk about change but don't have the commitment to make the change a reality.  Innovation requires a firm commitment, from senior executives who are willing to change the status quo, and who will resource interesting challenges and projects immediately, with the best people.  Firm commitments are signaled when innovation projects get top billing, when the best people clamor to join those projects and when they are adequately resourced and regularly called on to report advancement and achievement.

You'll need to quickly work out each innovation request, to see if it is a firm commitment.  There are a few signs that can signal the breadth and depth of commitment.  First is the level and commitment of the person who demands it.  CEOs demanding innovation are a dime a dozen: they all demand innovation but don't follow up.  Executives who demand innovation and strip their best people from other activities or redirect resources and funding to innovation create a much clearer picture.  A second opportunity to demonstrate clarity is by defining an interesting and valuable scope.  Rather than simply ask for "innovation", people with true commitment ask for a new solution that's X times better than what's in the market, for a specific set of customers.  Innovation without scope is boiling the ocean.  Finally, you'll get a sense of the depth of commitment by the way activities are measured.  If no one every bothers to understand how innovation is proceeding, if there aren't frequent assessments of the effort, then you know that the effort isn't serious.

The reason so much innovation methodology, process and knowledge ends up in binder on bookshelves and file cabinets is that there's exceptionally little follow through on the part of executives. These individuals want innovation, but don't want to disrupt the status quo, so their innovation becomes aspirational rather than a firm commitment.  And when that signal is received by a designated innovation team, the materials go back on the shelf, to wait for another day when the commitment is higher.

Out of the file cabinet

The problem with innovation in the file cabinet is that it isn't being exercised.  If you have a method or process, implement it, learn it and perfect it by doing innovation.  It will be difficult and messy at first, but like any human endeavor you'll get better with more practice.  Parking the information in a file cabinet does nothing for anyone, in fact it is a waste of time and develops internal cynicism when people know they've received training or been introduced to a process they aren't encouraged to use.

Which, of course, raises the final question:  should corporate teams even try to innovate internally, or should they simply rely on external consultants to help generate ideas, or acquire other technologies or companies?  The simple answer is that doing innovation well is difficult, so perhaps we should outsource innovation.  But that leaves aside the question of integrating new ideas, technologies and products built by others into an existing portfolio of products and services.  Which can easily become a jumble of disparate solutions with no common theme, when you constantly seek to purchase ideas from the outside.  Innovation can be outsourced, but the transition of new products and services into the existing corporation can be very difficult.  With this in mind it is always better for a firm to build innovation capabilities, even if most of the work is outsourced, because when ideas originate internally there is a practical transition path to new products and services that is developed, which can help external ideas and products as well.

Getting innovation knowledge and expertise out of the file cabinet and into every day activities is important, and the importance increases daily, as new competitors enter the market and old industry conventions crumble.  Building on investments you already have or knowledge and skills already developed will be crucial for long term success.
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posted by Jeffrey Phillips at 7:04 AM 0 comments

Friday, January 15, 2016

The Big Short demonstrates customer research

I don't know if you've seen the movie The Big Short, and if you haven't I won't spoil it for you.  It's a good movie, and gets to the heart of the financial meltdown attributable to CDOs and sub-prime mortgages.  If you lived through the stock market issues of the last decade, and are living through what the stock market is doing right now (feels somewhat similar, no?) then you can recognize that there was a shift in perceptions or reality.  At that time, the "given" that was suddenly no longer so certain was the idea that housing prices were firm, and would always go up.

The Big Short is interesting as a movie about the financial crisis, but what I enjoyed (as an innovator) is the fact that one small hedge fund group recognized something wasn't quite right.  And rather than stand around in their offices in New York assuring themselves that the facts all lined up, they did their own research.  In this case they decided to go see for themselves whether or not the data suggesting that defaults were increasing was true.

In one of the most moving scenes in the movie, two of Steve Carrell's team go to Florida as the new home market is melting down.  They are stunned to see empty houses, even empty neighborhoods.  When they find one house that is occupied, it is a rental, and the guy living there claims to be paying rent regularly to his landlord.  Later, the two guys drive around and go into an empty house that has been abandoned.  The residents had left the mail on the counter.  The two guys go outside and see a pool, only to find an alligator in the water.  That's symbolic of nature taking the neighborhood back once it's been abandoned by people who can't pay their mortgages.

Customer Research / Ethnography

Now, the movie is illustrative of a larger point about the sub-prime meltdown.  There were signals in the data that the market for sub-prime mortgages was terrible and getting worse.  People in Wall Street and other financial services firms should have paid more attention to the data.  But anyone willing to leave NYC and go to Florida, or Nevada, or Arizona, or Southern California at the time could have interpreted what was going on. In other words, if more of the financial community had done some basic trend spotting and customer research, we might have been experienced less of a tragedy than we did. 

What did it take to confirm the problems with sub-prime lending?  Riding around for a day or two in abandoned subdivisions. Driving around with a real estate agent who is very keen to move houses, that simply aren't selling.  In perhaps the most interesting instance of ethnography I've seen, Steve Carrell's character finds out that, let's call them exotic dancers, are buying homes.  During a personal encounter with an exotic dancer (keeping this PG for the kids), Steve Carrell is shocked to discover that many of these individuals have multiple mortgages, because, what could go wrong?  I've never done ethnography quite like that, but Carrell and his team discover a lot, for very little cost, by simply going and finding out.  While this seems evident, you'd be shocked at how little actual interaction with customers, in their settings and in their environments, is actually conducted.

Carrell and his crew discover that the signals in the data are true, and in fact the underlying leverage is worse than anyone in the financial markets seems to know about.  This allows them (and others) to short the market, because they've got insight on a coming crash that the majority of the market either doesn't care about or ignores.  While this isn't necessarily an innovation story, it plays out like one, because a small team of people discover something that's emerging, discover an opportunity that will arrive soon, and use interactions with customers to understand and validate the opportunity.

Lessons for Innovators
Too many times corporations are just like the Wall Street bankers and financiers portrayed in the movie. They believe that everything is OK, that existing products and services are adequate and don't need to be radically changed or modified.  All the while little signals, trends and other data contradict those assumptions, and no one goes to find out the truth.  If the movie tells us innovators anything, it is to beware of commonly shared assumptions that are too good to be true, and to go find out the truth for yourself, which is easy, and shockingly, few people actually do it.

Movie Review

As an aside, I really liked the movie, which did a good job of explaining what caused the market expansion and crash.  The pacing was good and the human side of the crash was explored as well.  It doesn't hurt that some of the arrogant financiers got taken down a peg or two.  Frankly we are still feeling the effects of that market meltdown, and housing prices are in many places just returning to pre-meltdown values.  You should see this movie, if only to get a better understanding of how interrelated all facets of the financial market are, and why you should pay more attention.
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posted by Jeffrey Phillips at 7:38 AM 0 comments

Tuesday, January 12, 2016

Innovation requires hands, heads, hearts

Lately I've been reading a lot of white papers, blogs and tweets about the importance of ambidexterity in corporations.  Innovators and analysts have apparently decided that trying to convince organizations to simply become more innovative is too difficult.  Innovation distracts from highly efficient day to day operations.  Therefore we innovators, and other management thinkers, create a new way to think about introducing innovation, acknowledging the importance of efficient operating models while emphasizing the importance of innovation.  Thus is born the ambidextrous organization:  one that can operate in a highly efficient manner, cranking out products and services, while at the same time operating in a highly innovative manner. 

The Hands
This idea isn't really new, but it does have some importance.  The importance isn't about a duality between efficient operations and innovation capabilities, it's about doing more innovation, more regularly and more capably while sustaining the business as usual engines. There are several challenges the individuals promoting ambidexterity face, including the fact that for over 30 years organizations have built capabilities, cultures and reward systems narrowly defined around ever efficient operational processes, and have no history or experience building innovation capabilities and skills.  In the past I've referred to this as the Fiddler Crab syndrome.  If you know the Fiddler Crab you'll know that its one unique feature is that it has one enormous claw and one tiny claw.  It is unbalanced, and one of the few animals in the wild deliberately so.  Most modern corporations and the people within them are like Fiddler Crabs - evolved to have a lot of capability and focus in efficiency and short term productivity and no real capability around innovation.  So when thinkers, innovations and academics expound on the idea of ambidexterity, they must acknowledge the yawning gap in capabilities between conducting efficient operations and executing innovation.

The Head
The skill gap alone is tremendous, but there's more to this concept than simply skills.  The work of innovation is different than familiar day to day operations, requires different skills, operates on a completely different clock and requires more experimentation and divergence.  It's not simply a matter of two different hands (ambidexterity) it's a matter of two heads.  The contextual reality of innovation requires a completely different way of thinking than regular day to day operations.  Rather than narrowing choices and making the most efficient decision, innovators must expand choices and scope, examine a range of options, discover new needs.  The mental game is as compelling as the physical one.  In my experience, many top notch people who have years of successful work experience managing known, familiar and repetitive processes simply cannot work in an innovation environment.  The requirements and expansive scope are just too different for them to tolerate. They prefer the safety, reliability and conciseness of efficient operations.

The Heart
Which points us to the difference in culture, or, as I've labeled it above, heart.  Efficient operations will regularly encounter problems, which solutions like Six Sigma were invented to fix. By this I mean there are challenges in day to day operations, but those challenges require elbow grease and simple alternatives.  People rarely lose heart or throw up their hands when working on an operational issue.  Quite the opposite is true with innovation.  To innovate you've got to be able to throw yourself into a not quite fully defined problem, with limitless possibilities, unusual and qualitative information and a wide array of choices.  You will be confronted with a number of seemingly insurmountable obstacles with no easy solutions.  You'll have to work with exceptionally limited budgets.  The only people who succeed in innovation are those with passion for the problem or challenge, who put their whole heart into the solution.  There is no middle ground; you are either part of the solution or you are part of the barriers, obstacles and negativity that rejects innovation.

All, or None
What individuals, teams and companies fail to realize is that this is a definitive exercise.  You can't have some of the hands, and some of the heads, but no heart.  Good innovation requires a deep commitment from all three.  People with deep passion but no experience or skills aren't any more valuable than people with good insights but no passion.  This has relevance to how you plan your innovation, how you build skills and experience, and most importantly how you build your teams.  There must be passion on the team (the heart). There must be good thinking, expertise, willingness to explore (head) and there must be experience (the hands).  They don't necessarily need to be the same people representing each skill, and it's tough to find anyone with deep skills at all three.

Ambidextrous, but so much more
So, those talking about ambidexterity are right, but missing some of the other key factors.  We've got to balance the engagement and skills of both operational excellent and innovation, but we've also got to have the skills and experience, the willingness to explore and the passion to sustain when things get weird or tough.  Solving for ambidexterity without considering these other factors won't create more innovation, but will create more frustration and cynicism. 
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posted by Jeffrey Phillips at 7:51 AM 0 comments

Tuesday, January 05, 2016

Preserving and/or Disrupting

I'm reading a lot about "disruptive" innovation from firms that I think have a lot to protect and preserve.  When I read that, I become fairly suspicious, because I'm not sure it's possible to simultaneously protect what is "important" and disrupt at the same time, unless the disruption is taking place in a market or business adjacent to or distant from whatever the corporation is trying to protect.  Can you simultaneously protect and disrupt the same product, segment or market?  I think the answer is "no".  So what are all of these corporations disrupting?

Larger corporations are really, really good at preserving products, customers and industries. It is in their best interest to preserve as much of the status quo as possible, since their revenues and stock valuations rely on doing so.  For this reason, talk of disruption is uncomfortable, unless it refers to disrupting someone else's product, customers or industry.  But the further one gets from one's area of expertise or experience, the less capable and less qualified you are to innovate, let alone disrupt.  So what is everyone "disrupting"?  Or are we simply using a word to suggest that ongoing innovation is larger than it really is?

Leading or Following

Don't get me wrong, there is active disruption happening right now, and even the larger firms are admitting it.  Yesterday I wrote about GM's investment in Lyft, which validates a slow disruption of several important factors in the US economy.  GM has evolved from a metal bender to a finance organization and is now trying (desperately) to become part of the knowledge and sharing economy.  We can see convergence in two powerful factors - information technology and new business models - in this investment, leading to autonomous vehicles, that eventually you access when and where you need them, perhaps rather than owning them.  When GM recognizes and invests in a trend, you know it's well on its way to becoming reality.  But in reality GM isn't disrupting anything.  No, it's trying to get on board the train that is slowly but surely disrupting car ownership and car management.  GM is doing so to preserve its place in the value chain, rather than see its place eliminated or replaced by other automakers or new entrants.  Let's be careful to say that what GM is doing is investing in innovative concepts and business models, in order to preserve what GM is still today - a financing engine that happens to bend metal.

True Disrupters

I've become a fan of "Fight Club" and I think that what's true about Fight Club is true with disrupters.  The first rule of disruption is that you don't talk about disruption.  You just go and do it.  Disruption happens when someone, something or some trends create dramatic shifts in the existing order.  The leading IT companies, like Google, along with those who build ubiquitous networks (yikes, the cell companies) and others have created a platform that can be leveraged to pilot cars.  As autonomous cars drive us around, increasingly they'll do other things that disrupt other markets and jobs (transfer truckers, you are in the crosshairs).  But that's just technology replacing people.  The merger of this capability with the sharing and rental economy suggests that one car can be distributed across several people over the course of the day, driving one person to work, then picking up groceries for another and taking a third to an appointment, arriving back in time to drive the office worker home.  This capability reduces the need for cars, optimizes the use of existing cars and reduces the need to own a car.  So GM's core business is still shaky, and they will do all they can to sustain car ownership and accelerate the development of autonomous cars.  Or, they'll (and here's where the deal with Lyft comes in) sell cars or lease cars to firms that then make them available on a fractional basis to consumers.  Because ultimately GM's model is based on selling, leasing and financing a large quantity of cars.  If the "buyer" changes, they don't care.

True Disrupters aren't trying to sustain or preserve the status quo.  In fact it's the status quo they are trying to replace, reject, rebuild.  It's difficult for someone or some company with something to protect to "disrupt" their own markets, which is why Sony didn't build iTunes, and why Apple did.  Apple didn't have a stake in the revenue flow of album sales, while Sony couldn't quite wrap its head around 99 cents per song.  Apple had a lot to gain, but Sony had a lot to protect and preserve.

Not you, not me, but the man behind the tree

There's an old saying in Congress, that new taxes shouldn't affect you or me, but "the man behind the tree", in other words, someone else.  That's also true for disruption if you have a stake in the market.  Disruption should happen, but it should happen somewhere else.  Thus, financial services firms want disruption, but they want it to happen somewhere else in the value chain, not to retail banks or treasury applications.  Retailers want disruption to happen, but not to their stores, their malls, their websites.  It must happen, but somewhere else.

But the further away from core capabilities a firm tries to innovate, the less experience and knowledge it has, and the less effective it can be trying to innovate or disrupt. Which leads us back to the dilemma between being a preserver or disrupter.  If you are a preserver, you want to protect what is value to you (industries, markets, customers, products) and that's what you know best.  You certainly aren't going to disrupt your own markets or customers or business models, so you cast about for something else to disrupt.

So, for all the talk about disruption, we know two things:  first, very few firms will disrupt their core capabilities, where their knowledge and strength lies.  Second, if they try to disrupt distant markets or customers, their knowledge and experience isn't helpful, and they aren't well known in the industries they try to disrupt.  So local disruption is unlikely and distant disruption is fraught with challenges.

Is this why corporations struggle to innovate?

I think this is one really good reason why so many large corporations struggle to innovate. If they are preservers, their instinctive nature is to build, grow and preserve their markets and customers.  Disruption would be drastic, perhaps fatal.  Many ideas that they conjure up are valuable, but would impact or eventually disrupt business models, operations or customers.  This leads to more and more incremental ideas in existing and adjacent markets, and more and more haphazard innovation activities in markets and industries that they know little about.

Does this mean that preservers can't innovate?  No, but it does mean they need to establish very clear goals and expectations about what should be preserved and protected, and the amount and range of innovation in core markets and capabilities, and where and when it is right to disrupt.  They'll need to innovate and disrupt outside of their core markets with partners, because they cannot influence a distant market or customer base alone.  That means that preservers better get awfully good about identifying potential markets to disrupt, and finding the right partners to help them, something they haven't done well in the past.
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posted by Jeffrey Phillips at 7:41 AM 0 comments

Monday, January 04, 2016

When the business models shift, innovators rejoice

There's news today that GM, that historic dinosaur of a car company, has seen the future and decided to hedge its bets.  Watching Google try to create a self-driving car, and observing the potential power of the sharing economy that Uber and Lyft have defined, and recognizing that millennials and others seem less interested in car ownership, GM has decided to place a substantial bet on Lyft.  The sound you heard in Detroit is the sound of a business model shifting, and thousands of businesses gasping in response.  Yes, it's possible a major tsunami has started, and no one is sure what things will look like when it is over.

The reigning champion

For close to 100 years, GM has had one prevailing business model:  they create cars and the American consumer acquires them.  After all it was Billy Durant who developed the idea of a model family, so that consumers could own progressively more elaborate automobiles all from the same manufacturer.  He is also responsible in part for planned obsolescence, encouraging people to continually upgrade their cars every 3-5 years.  The whole basis of GM through the 1970s and 1980s was to build more cars for more US buyers.  Then, of course, the entire US automotive industry shifted its model, from a manufacturing model to a financial model.  In the last 20 years most US manufacturers made more money on the financial aspects of the automotive industry (loans, leasing, etc) than they did on building and selling, you know, their main product.

But the financial crisis created great concern about the long term profitability and viability of that model.  So the industry is groping for a new, viable, sustainable model, just as a new generation of buyers seems less interested in car ownership, more adaptable to mass transit, and more interested in the "sharing" economy.  GM and the other manufacturers are making bets that the old days of car ownership (at least at historic rates) are over.

The new contender

What does a monolithic company based on either manufacturing or financing do when neither of those models seems particularly attractive in new market conditions?  It aligns itself with a potential business model innovator that seems more in touch with new customers and new models.  Strange to see that GM is aligned with Lyft, since it is a distant second in the marketplace to Uber.  Further, it seems strange that GM will be forced to compete to some extent with Google, in terms of the self-driving or self-navigating vehicle.  After all, GM's one real, successful information innovation is OnStar, but it hasn't been put to the full use that it could be, and GM has fallen behind Google and others in self-driving technology.

What does an innovator do when the reigning business model tumbles?  He or she starts to figure out not only what the behemoths are doing, but what the secondary and tertiary implications of the new model will be.  For example, if cars really become autonomous, we can park them in lots far from our houses and gain more living space by doing away with garages.  After all, we can simply schedule the car to pick us up (whether it's driven by Uber/Lyft or autonomously) when we want.  No longer do we need to provide a space for the car to rest in the house.

Or, we can change and expand auto maintenance and repair.  Self-driving cars can schedule their own maintenance appointments, during the day while office workers are at work, or during the evening when people no longer need transportation services.

One could easily imagine an entire new HOV lane of traffic, full of cars with no occupants driving to pick up a passenger to take them to work, or to pick up a kid from school.

The social impact

But what about the social impact of this shift?  Car companies today engage us with the idea that a car is part of your personality.  A BMW or Mercedes says something about who you are and what you appreciate.  How does the idea of a car as a social ornament translate when you no longer own a car?  Will it be more socially sophisticated to not own a car, to only Uber or Lyft?  Will that enhance social status?  And if so, what will people do with the money they save?

The shift shouldn't be a surprise

The fact that GM is making this investment may be surprising, but the conditions that drove them (ha) to this conclusion have been evident for quite some time.  Cars are under attack from a number of sources:
  • Cities are congested, traffic is terrible and it's everyone else that's to blame
  • Cars are expensive and constantly require fuel and maintenance
  • Parking is at a premium
  • Cars emit pollutants
  • The vast majority of cars are used less than 10-15% per day.  The vast amount of time of a car's life it sits in a parking stall
Beyond the car itself, the model is breaking down, financially, economically and socially:
  • Younger generations aren't as interested in car ownership
  • Uber and Lyft are ubiquitous among the younger generations
  • The companies themselves aren't certain which business model is most attractive

These and other trends have been evolving (and relatively evident) for years.  Adding the constant flow of information, ubiquitous networking and real-time analysis capabilities mean that companies like Google are fascinated by completely automating the transportation network, meaning that disruption will occur based on a competitor with different skills that suddenly become more valuable.  GM, say hello to Blockbuster, another "giant" disrupted by the internet.

Why didn't GM do this first?

Another question, relevant to GM but extendable to every company in every industry that considers itself a "leader":  why didn't you do this first?  Why didn't GM, back when it had 60% market share, innovate solutions in a range of alternatives - low cost, high quality cars that would have defeated the Japanese entry.  New ownership or drivership models (OK they did leasing).  What I still wonder is why no modern automobile manufacturer doesn't realize that none of us who own cars wants to be responsible for maintenance.  Offer us a car or service that has dealer managed regular maintenance for the life of the car, standard.  Don't make me think about whether or not the oil should be changed or the tires rotated!  Treat the car as a service rather than a discrete sales relationship.

But GM, like Sony and Tower Records (in the iTunes saga) never saw that customers were frustrated by the fact that they had to work to integrate all components of the life cycle of their products.  In fairness, some of the automotive manufacturers are beginning to move toward more sustained maintenance, but here's my ultimate dream:  fractional ownership, in which I can use a sedan during the week, a pickup or SUV on the weekends, and a sports car for that special getaway with my spouse on special occasions.  The cars could be delivered to me, properly maintained on a schedule I establish.  I don't worry about depreciation, or maintenance, or potentially even insurance, and as the cars start to drive themselves I don't have to even worry about passing the driver's test!

The canary in the coal mine?

So the question for innovators is:  Is GM the canary in the coal mine?  Are they the first major metal bender to shift to a new business model, signalling that others should begin to innovate around business models?  Does GM doing it allow others to do it?  Once a large, venerable corporation makes this kind of commitment, it appears to be either done out of panic or out of astute strategic thinking.  What will other manufacturing companies do?  More importantly, will other companies, not in the automotive sector, recognize the fact that business models are now the place to innovate, and start to innovate before their model shifts?
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posted by Jeffrey Phillips at 7:06 AM 0 comments