Tim Kastelle

Tag: innovation matrix

  • Innovation Matrix 4.0 – Now With More @Nilofer

    Innovation Matrix 4.0 – Now With More @Nilofer

    If you google “innovation,” you get more than 417 million results. If you narrow it down to “Innovation Management” you knock that number down to 3,160,000 results.

    On amazon, you get 228,716 hits for “Innovation.”  54,485 of those are in Books.  You can cut the number down to 1,330 in the Patio, Lawns & Garden category, but that probably doesn’t do you much good.

    If you’re trying to make your organisation more innovative, how can you navigate all of the available resources?

    That’s one of the problems that I’ve been trying to solve with The Innovation Matrix.  It’s changed a lot since the last time you’ve seen it.  I’ve been using my Artefact Cards to help figure out how things work.

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    First up, the big news: I’m collaborating on this now with Nilofer Merchant! She and I are developing the ideas together, and as we start to roll them out in earnest, you’ll see some big differences.  She explains what we’re up to here:

    It is an idea that when developed could help any organization figure out where they are, and the moves to take based on where they want to be.

    We’ll be sharing as we go. Which means anyone — quite possibly you — will have ideas on what to include or cover or you will start to challenge our thinking and in doing so, shape ours. You will ultimately be the sharers of those ideas, if you deem them worthy.

    For now, I’d just like to outline the rationale behind this tool.

    Innovation is important because it drives growth.  It may seem like a buzzword, but if you want to grow, you’ll need to innovate.  That’s why you need to find a way through all those results on google and amazon.

    Innovation is executing new ideas to create value.  You need to do all three to innovate successfully – the ideas must be new, you have to actually execute, and they have to create value.  Often, when innovation initiatives fail it is because innovation is managed as an event (I got a new idea!) rather than as a process.

    When organisations try to become more innovative, their first step is usually to increase their innovation effort.  They put “Innovation” into their company values, or buy idea management software, or spend some money on R&D.  Their hope is that by doing these things, they’ll get better innovation outcomes – that they will improve at executing new ideas to create value.

    In a perfect world, as you increase your innovation efforts, your outcomes will improve proportionally – just like on the card on the bottom right up there.

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    Unfortunately, that’s not the way it works.  If you map firms based on their innovation efforts and outcomes, the outcomes don’t follow a nice, straight line.  They scatter all over the place.

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    The problem for most of these attempts to improve innovation is that effort does not equal outcome – and this is a problem.

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    If we think about how organisations innovate, you can divide them in three categories based on effort, and three more based on outcomes.

    Organisations in the left column aren’t trying to innovate much at all.  They are content with their current business model, and they are happy to keep working it as hard as they come.  Growth comes mainly through acquisitions, and if they do innovate, it is usually done to improve efficiency – to cut costs.

    This might sound bad, but there are loads of successful, profitable companies in this region.  Most of the traditional strategy tools that organisations use are designed to get you into this category – where you have a sustainable competitive advantage and you can build a protective moat around it to keep others out.

    The organisations in the middle column realise that innovation is important, and they are committed to doing it.  Most of the time, these organisations have a core value that they use to differentiate themselves, and all of their innovation is done to support this core value.

    On the other hand, innovation itself is the core value, and the main source of differentiation for the organisations in the column on the right.

    We can sort organisations in the same way in rows.  Those on the bottom aren’t getting any positive innovation outcomes.  They might not be generating any ideas at all, or they might be generating plenty of ideas, but those ideas aren’t creating value, and they aren’t spreading.

    Organisations in the middle are pretty good at executing new ideas to create value.  They do it regularly.  However, nearly all of their innovations are incremental – this is how we can tell them apart from organisations in the top row.

    The ones on top are the ones that are great at innovating.  They come up with both incremental innovations, and bigger ones – new product categories, or new business models.  They probably innovate everything – products, services, processes, and business models.

    If we put these six categories together, we can identify nine types of innovative organisations:

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    This has some important outcomes:

    • It helps you identify where you are right now, and where you want to go. This journey is a big part of developing a strategy, and it can help you figure out where innovation should sit in your business model.
    • You can discover which tools to use.  The big problem with many of the 54,000 innovation books is that they try to provide one-size-fits-all solutions.  The problem is that in a complex world, using a one-size-fits-all tool can do more harm than good.  The Innovation Matrix will help you figure out which ones are right for you in your current situation.
    • No one stays in the same box for long.  When you start mapping organisations using this tool, you quickly realise that nothing stays the same.  Organisations follow trajectories through the various regions.  The dynamics of innovation are very important.

    Traditional strategy is dead – so what should you do?  Innovate.

    We’re working on new names for the nine categories (to answer the most common question I get when I say that – yes, Unicorns are still there), tools, operating rules and investment strategies that you can use in each region, and examples of how organisations have changed through time.

    We’re going deep on this, and we’ll let you know what we learn.

    If you have any questions, or problems that you need help with, please tell us.  If we connect up to discuss these, it’s likely to help make this a more useful tool for everyone.

     

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  • Xiameter Case Study: Adding Business Model Innovation

    Xiameter Case Study: Adding Business Model Innovation

    I recently spoke with Stacy Coughlin and Kristina Bobrowski about Dow Corning and their experiences with business model innovation in the creation of Xiameter. The story is a great case study of how an established, successful firm can still improve their innovation efforts.

    The story has been told by others pretty well already – Xiameter has been made into a Harvard Business Review case study authored by Clayton Christensen, Mark Johnson and Henning Kagermann.  Kay Plantes and Jeffrey Phillips have also written excellents posts on this case after speaking with Stacy.  Here is how Jeffrey describes the advent of Xiameter:

    Traditionally, Dow Corning has provided silicone to a range of clients, but wrapped that product in a lot of information, service and support. It became evident to individuals within Dow Corning that a large segment of the potential customer base didn’t want or need anything except the silicone product itself, so Xiameter was launched to offer a radically different business model and distribution of the product to those customers who didn’t want, or need, the service or support associated with the sales and distribution by Dow Corning.

    I won’t recap too many details of the case, but I’ll use it to make some points.  This is how the introduction of Xiameter changed Dow Corning’s position on The Innovation Matrix:

    Prior to Xiameter, Dow Corning was a Fit for Purpose innovator.  They have been a market leader in the silicon industry since its inception – and their strategy was built around providing the best possible product.  Consequently, all of their innovation efforts were put into sustaining this market-leading position.  They had substantial investments in R&D, significant resources sunk into customisation for lead customers, and a high level of commitment to continuing to build market-leading products.

    But at the end of the 1990s, they noticed that a large part of the market didn’t want or need this level of service and support.  For many applications, silicone was becoming a commodity.  The environment around Dow Corning was changing.

    Xiameter was developed in response to this.

    It represented an increase in Innovation Commitment in two ways.  First, it had very clear support at the CEO level, and this was reinforced by the allocation of resources – people, time and money.  Second, the economic investment was significant.

    Xiameter also helped Dow Corning increase their Innovation Competence.  In addition to their skill at product and service innovation, the development of Xiameter built a business model innovation competence as well.  Also, this increased the scope of Dow Corning’s innovation portfolio – this was a clear Horizon 2 investment.

    This case illustrates several important points:

    • Your position on The Innovation Matrix is dynamic.  I’ve made the point before in talking about Procter & Gamble – you control your position on The Innovation Matrix, and it can change over time.  Shaun Coffey makes this point in a comment on that post:

      The emphasis on the dynamic nature of a firms position is important, and often misunderstood. Many firms do not recognise that a business model exists at a point in time – and, like all complex systems, every time you act in the market you perturbate the system and a new configuration of the business model emerges. It is simply too easy to conceptualise this once, and then stick with a fixed model until is is so disfunctional that you are in crisis mode.

      This is exactly the problem that Dow Corning avoided by undertaking this initiative.

    • A new business model often requires a standalone division. This has some interesting interplay with points raised by Ralph Ohr in his last post. Big companies have some significant advantages in building new business models – in particular, they have the resources to do so. Constantinos Markides has written about this too – and he outlines the factors that lead to success in new unit spinouts designed to support new business models.
    • Separate business models work best when they share resources. This is where it helps to be big. Plantes outlines one of the key issues in the success of Xiameter:

      Product line managers oversee product category platforms, determining where products are in the life cycle and deciding which products fall under which brands, all with an eye to balancing capacity and brand mix to maximize overall profitability. Everything else except sales and marketing – in other words manufacturing, governance, sustainability and C-level management resources – is shared by the two brands.

      “We also have a highly integrated SAP system utilized in real time, allowing us to offer two brands without adding operational costs, which also adds to efficiency” Coughlin notes.

      Stacy made the point to me when I asked why the Xiameter model hadn’t been copied by competitors. Her response was that they were all running multiple instances of SAP. This is actually kind of mind-boggling. The inability to integrate back-end data is preventing them from achieving economies of scale – and this is one of the keys to successfully implementing the multiple business model strategy.

    • To succeed over time, you have to risk cannabilisation. There definitely appears to have been concern internally about the potential of Xiameter to cannabilise the core Dow Corning customers. Here is how Phillips discussed this:

      But there are several factors at play here. First, Xiameter was introducing a business model to serve unserved or underserved customers who had chosen not to interact with the existing business model, so they were additive to the customer base. Second, Xiameter is more than willing to co-exist with a high-touch, high service business model that Dow Corning provides. In this case, and I suspect in many cases, business model innovation expands the pie and attracts new customers. It does not have to be a zero sum game.

      There are still issues here.  One is that Xiameter achieves its lowest total cost position by taking advantage of resources within Dow Corning, and this can have negative impacts on incentives within the parent firm.  Managing this issue is very tricky. But overall, the business model innovation undertaken by Dow Corning expanded their addressable market – it didn’t just replace existing customers with new ones.

    Dynamics are critically important – even if you are just executing a currently successful business model with increasing efficiency, you are rarely standing still. And over time, this approach can be dangerous. Your market may be turning into a commodity as the silicon market was for Dow Corning.

    The Innovation Matrix is a tool for you to evaluate where you currently are, but more importantly, it is there to help you figure out how to get to where you want to go.  You can use it to plan the innovation moves that will transform your organisation.

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  • Where Does Innovation Fit in Your Business Model?

    Where Does Innovation Fit in Your Business Model?

    Business models are important – they go a large part of the way towards determining how successful your organisation will be.  So here’s a question: where does innovation fit in your business model?

    There are a number of different ways in which people describe and talk about business models – the common feature is that they describe how an organisation’s activities interact to create and deliver value for their stakeholders.  Today, I’ll use the Business Model Canvas version of the business model to illustrate the discussion:

    The answer to the question of where innovation fits is not very satisfying.  The answer is: it depends.  On what?  On where you sit on The Innovation Matrix:

    So let’s work through where innovation fits in a variety of business models.

    The three boxes in green are the three categories where your innovation effort and your returns from innovation are in balance.  These are all reasonable places to be, depending on what you are trying to achieve.

    If you are Not Innovating Very Much, then innovation doesn’t fit into your business model at all.  For this to be a stable strategy, you must be in a relatively stable market, with a strong competitive position.  In other words, your current business model is working well, and you don’t need to do anything very innovative.  You could even argue that attempting to innovate from this position is a waste of resources.

    On the other hand, if your competitive position isn’t strong, or your market or environment are changing, then you’ll need to innovate. Which means that you’ll need to change your business model.

    If you are a Fit for Purpose Innovator, then innovation needs to support your value proposition.  In this quadrant, your primary value is probably not based on innovating.  Here, your value proposition is probably based on being the lowest total cost provider, having the best product, or providing the best customised solutions.

    In this situation, then innovation will mostly be focused on the back-end operations – it will be a key activity, which requires some resources, and possibly partnerships.  All of the innovation will need to support improving your primary value proposition.  Alex Osterwalder describes these firms as Business Model Masters – they are organisations that “outcompete others with a superior business model where every one of the business model building blocks reinforce each other.”

    If you are a World Class Innovator, then innovation is central to your entire business model.  Your value proposition will be somehow based around your innovation capability.  Osterwalder calls these organisations Invincible – they “continuously disrupt themselves while their business models are still successful.”

    As is the case with Business Model Masters, all of the business model building blocks reinforce each other, but in this case, innovation will be at the core of all of these blocks.  As I said, the value proposition will be innovation-based, key activities, resources and partnerships will also need to organised around innovation.

    In these three cases, your business model is basically balanced with your innovation effort – that’s a big part of why these are three stable innovation strategies to follow.  The other six locations in the innovation matrix have some problems.

    The three red squares are all situations where your business model is based on having some level of innovation, but you’re not delivering the level of innovation that you need to support that strategy.  The worst position to be in is Bewildered.  Organisations here have invested a lot in innovating, and it is likely that their value proposition is innovation-based.  An example here is Procter & Gamble in the late 1990s – their slogan was “Touching and improving lives” – which implies that they are innovating.  Yet, at the time, despite heavy investment in innovation efforts, they weren’t delivering that at all.

    This is a sign of a business model that is not coordinated through all of the building blocks.  In the case of P&G, their key activities did not support getting innovative new ideas out the door, and they had to completely realign their cost structures, key partnerships and revenue streams to better support their innovation efforts.  As they did this, P&G evolved to become a World Class Innovator.

    Organisations that are Thinking About Innovation are in a similar situation.  For them, it is likely that they are trying to become Fit for Purpose innovators – they want to use innovation to improve and support their core value proposition, which is not innovation-based.  But again, they have business model misalignment.  Most of the time, these organisations fail to organise their key activities and resources to support innovation.  So again the business model is not coordinated.

    The organisations in the red squares tend to have customer-facing activities that require innovation to succeed, but their operational back-ends fail to support these aspirations.

    The organisations in yellow are in a slightly different situation.  We won’t talk about Unicorns (firms that are great innovators without putting any effort into it), since they are mythical and don’t exist. But the other have business models that are often the opposite of the ones in the red squares: their operational back-ends are innovative, but their customer-facing activities are not built around innovation.

    In other words, even though these firms are often very innovative, they do not necessarily think of themselves in that way.  So they are not differentiating their value propositions based on innovation.

    Here are some of the key points:

    • Your position on the Innovation Matrix will determine which parts of your business model need to be innovation oriented.  One of the key points with The Innovation Matrix is that your innovation activities need to be consistent with your strategy.  Similarly, your building blocks of your business model must reinforce each other.  If you do both of these things, then your business will be built to execute your strategy.  And innovation will support this.
    • Your position on The Innovation Matrix is dynamic. The P&G case study shows firms evolve over time.  They started out Bewildered, but as they changed their innovation capabilities, and got their business model aligned, they turned into a World Class Innovator.  The Innovation Matrix is a tool for identifying where you currently sit – but where you are now isn’t where you’ll always be – you can change!
    • Changing your innovation performance requires a change in business model. There is no one-size-fits-all approach to how much innovation you need.  One of the critical points with The Innovation Matrix is that it is not enough to just talk about being more innovative – if you do this, it leads you into the red zone.  Instead, to successfully change your innovation outcomes, you must change your innovation-oriented activities, and your investments in innovation.  Innovation requires a change in behaviour.
    The business model approach is very useful for assessing where your innovation efforts are most effectively applied.  To innovate successfully, you need to have a coordinated business model, with innovation in the right places.
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  • Why Lean Startups Turn Into Innovative Firms

    Why Lean Startups Turn Into Innovative Firms

    One of the exciting trends in innovation right now is the lean startup idea.  The basic premise is that when ventures are starting out, building a scalable business model needs to be a top priority.  People like Steve Blank, Eric Ries, Ash Maurya and Alex Osterwalder are all doing great work in this area.

    I’m all for lean startups, and if you’re building a new venture, this is an essential approach.  However, the area that I keep focusing on is this: how can we make established firms more innovative?  One of the reasons that I love the lean startup movement is this: it embeds the innovation DNA into the venture from the word go.

    I’ll use The Innovation Matrix to illustrate:

    As I’ve said before, most startups begin as accidental innovators.  They have to successfully execute an innovation, or they won’t survive, but they don’t have any kind of innovation infrastructure in place.  The problem is that if they don’t think about how to embed innovation, then even if they are successful, they are likely to become less innovative over time.

    This is largely due to the management structures that you need to put into place as you scale.  Ben Horowitz describes this well in a great piece about how to scale effectively:

    When you scale an organization, you will also need to give ground grudgingly. Specialization, organizational structure, and process all complicate things quite a bit and implementing them will feel like you are moving away from common knowledge and quality communication. It is very much like the offensive lineman taking a step backwards. You will lose ground, but you will prevent your company from descending into chaos.

    Horowitz’ approach is built around managing communication above all else in building your organisation, and this makes good sense.  The problem, though, is that often the structures that we put in place end up impeding innovation as it gets stifled by other management processes.  On the innovation matrix, this is shown by the blue arrows, as the firms lose their innovation capability over time.

    This is where the lean startup approach is particularly useful.  If you successfully execute one of the lean startup approaches, you will move in the direction of the red arrow.  At worst, this will leave you as a fit for purpose innovator, but in the best case, it will set you up to become a world class innovator.

    Here’s how:

    • The first management structure you put in place is an innovation process.  Lean startup is a management process.  Or as Eric Reis puts it, “entrepreneurship is management.”  Here is how he frames the problem:

      I think the root cause of these mistakes is the fact that most MBA’s are not adequately educated about entrepreneurship. The problem afflicts general managers who try to innovate within big companies, too. In fact, I hope longtime readers will recognize these as the exact same mistakes that afflict us as entrepreneurs when we try to hold ourselves and our teams accountable. Are we making progress? Is what I’m working on creating value? What should I work on next? These are the enduring startup questions.

      By putting these questions up front, the lean startup gets the management thinking about questions that are important not just for startup success, but also for long-term innovation success. The lean startup approach makes your first management systems innovation systems. These are the kinds of skills that you need to be building in firms. This increases innovation commitment.

    • Lean startup approaches also increase innovation competence. Of course, one of the core insights from using The Innovation Matrixis that increasing Innovation Commitment by itself isn’t enough – in fact, it can often be dysfunctional. The overall objective must be to improve your ability to successfully execute ideas.Lean startup techniques do this.First off, the lean approach forces you test hypotheses as you build a dynamic business model. Ben Yoskovitz has a great post explaining how to do this:

      Try structuring your hypotheses this way:

      “I (or We) believe…”

      Finish that statement and see what comes out of it. Each key element in that sentence is a variable in your experiment, and potential feature/component of your MVP. Each variable in your experiment has to be properly tested. If a variable passes a test it may very well become a cornerstone of your value proposition. Remember: The statement has to be testable, and it has to have the potential of failing.

      If you do this, you are building a culture of experimentation into your venture right from the start. This increases your Innovation Competence from the word go.

    • Lean Startup builds a competence in business model innovation. I am starting to suspect that to be successful, any new innovation will require a business model innovation as well. Alex Osterwalder says that you can compete on business models, and I agree. He identifies four levels of business model mastery:

      Level 0 Strategy – The Oblivious: Focus on products/value propositions alone rather than the value proposition AND the business model.
      Level 1 Strategy – The Beginners: Use the Business Model Canvas as a checklist.
      Level 2 Strategy – The Masters: Outcompete others with a superior business model where every one of the business model building blocks reinforce each other (e.g. Nintendo Wii, Nespresso, Dell).
      Level 3 Strategy – The Invincible: Continuously disrupt themselves while their business models are still successful (e.g. Apple, Amazon.com).

      Apple and Amazon are two of the firms that most people think of as World Class Innovators. The point is that by using the lean startup approach, you build a competence in business model innovation from day one. This is necessary if you are going to hit the Level 2 or Level 3 strategies that Osterwalder describes.

    The best way to be an innovative big firm is to start out as an innovative small venture. The lean startup approach helps with this in several ways. It has a focus on innovating the business model, which is a critical skill to build. It helps a venture develop a culture of experimentation, which is also essential. And it helps to build an management structure that supports innovation.

    If you’re starting out, this is the way to go.

    If you’re already big, this is what you’ll be competing against. So how you can you build the same skills? Find an answer to this question, because you’ll need them.

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  • The Complete Innovation Matrix

    This post collects all of my thinking on The Innovation Matrix. I will update it as I add more posts.

    There are a few things that you can do with this. The cool thing is that it can collect all of the posts into one file, that you can then read in order (though the graphics in them aren’t great).

    If you click on the link, it will take you to an index page that is similar to the one that is embedded here. From there, you can:

    • Click through to read the individual posts in your browser.
    • Send all the collected posts to your kindle, iPhone or iPad to read there.
    • Send all of the collected posts to yourself via email.
    • Download a copy as an e-book. This comes in ePub format – which needs a reader. Here is a list of PC ePub readers, and some for Mac too.

    You can also do all of that through the “Export” and “Share” links embedded in the post here.

    Thanks to everyone that has commented on these ideas, or shared them with others. I really appreciate the feedback. If you have further comments, I’d love to hear them. And, of course, sharing a link to this page would be great!

    Going forward, my plan is to continue to refine The Innovation Matrix as a tool, so I will continue to write posts using it. And I’m also working on a book idea that will incorporate The Innovation Matrix as well.

    So there’s more to come!

    Note: If you’re reading this on RSS feed or email, there’s a pretty good chance that the embedded bit isn’t showing up, so you’ll need to click through to the actual post to see it.

  • Procter & Gamble – Using Open Innovation to Become a World Class Innovator

    Procter & Gamble – Using Open Innovation to Become a World Class Innovator

    Note: This is part of a series of posts discussing The Innovation Matrix. See this post for a description of the full model and what can be done with it.

    We can use The Innovation Matrix to help us understand how the innovation capability of firms evolves over time. A great case study in this regard is Procter & Gamble. Starting from the late 1990s, this is the path that they’ve travelled:

    In the late 1990s, their innovation program had lost its way. Successful product innovation was at the centre of their competitive strategy, but their performance had been slipping. P&G had reviewed their Research & Development strategy and increased their budget for the five years leading up to 1999, even though they already had one of the largest R&D budgets in the world.

    The problem was that the increased R&D spend didn’t improve their performance – a classic case of Innovation Commitment increasing without an equivalent increase in Innovation Competence.

    By 1999, R&D expenditure as a proportion of sales had increased from around 4% to nearly 7%, new product success rates were stuck at 35%, P&G had developed a huge collection of patents, but fewer than 10% of them were being used in actual products. The last one is the fact that still blows me away. The outcome of this was a drop in the P&G stock price from $118 per share to $52.

    At this point, P&G was Bewildered. They were sinking a huge amount of resources into innovation, but they were not getting a very good return at all on this investment.

    Their response to this state of affairs is well documented now – they initiated the Connect & Develop program, which was designed to use open innovation to improve their innovation outcomes.

    The interesting thing here is that this wasn’t just another increase in Innovation Commitment – P&G’s first move was actually to decrease their innovation infrastructure. They significantly reduced their R&D spend, they changed their innovation metrics and they cut back on activities that weren’t leading to the kinds of outcomes they needed.

    The next step was to use Connect & Develop to get more ideas out into the world – one of their major weaknesses previously. As they did this, they moved into the Fit for Purpose category. P&G got better at executing ideas, and they were learning about how to use their resources more effectively within the new open innovation approach.

    The outcome of that learning was a diagonal move into the World Class Innovator category. Once they consolidated their learning, they reinvested money into innovation and improved their idea selection process, increasing their Innovation Commitment. They also started to come up with breakthrough ideas again – such as Swiffer. Their Innovation Competence took another jump forward.

    In an interview with Stefan Lindegaard, Chris Thoen of P&G outlines some of the outcomes from the Connect & Develop initiative. Some of these stats come from him, while others come from other sources:

    • They have extensive research networks (both proprietary and open ones) that that regularly lead to the development of new ideas.
    • The percentage of patents in use in products has increased from less than 10% to better than 50%.
    • Their new product success rate has increased from 35% to better than 50%.
    • The percentage of new P&G products that include elements developed outside of the firm has increased from 15% to over 35%

    The end result is that Procter & Gamble is now considered to be one of the most innovative companies around, and is certainly a world leader in using open innovation.

    This case illustrates a couple of important points about The Innovation Matrix:

    • You can’t become a World Class Innovator in one jump. The dangerous thing about a lot of the case studies that we hear about is that they often make it sound as though highly innovative firms were either born that way, or that they were improved their innovation capability very rapidly to become world class. Neither is true. Becoming a World Class Innovator is always a process – it takes time and effort, and multiple steps.

      If things go well, you can move up diagonally – when an increase in support for innovation is matched by an increase in innovation outputs – the ideal outcome. Nevertheless, it will require the patience and focus to make multiple moves to improve.

    • If you’re Bewildered, a step backwards can help. When things aren’t going well, it doesn’t make sense to just increase what you’re currently doing. Instead of spending more again on R&D, Procter & Gamble instead cut it. What they realised was that they were not effective all the way through the idea management process.

      They were generating TONS of ideas in 1999 – they had one of the largest patent pools in the world at the time. The places they had difficulty were in selection and diffusion. They would only pursue new product ideas with the potential to be $1 billion businesses – so they cut a lot of promising ideas. Connect & Develop enabled them to bring these ideas to market in collaboration with partners that better equipped to deal with the relatively smaller returns.

      This also led to more experimentation – no one expected Swiffer to become as big as it did. This is an idea that almost certainly would have been patented but then killed in the old system. These moves improved both their selection and their diffusion processes.

      None of this would have been possible without that first backward step.

    I’m going to work on more case studies like this, because it’s critical to gain an understanding of how firms move through The Innovation Matrix. Such an understanding will help us figure out the best routes to take, and the best tools to use in different circumstances.

    The value of that first step backwards if you’re Bewildered never occurred to me until I started to think about the Procter & Gamble case in more detail.

    Stay tuned for more thoughts about how to use The Innovation Matrix to improve your innovation capability.

    Note: most of the facts here came from two papers on P&G – one by my colleagues Mark Dodgson, David Gann and Ammon Salter, and the other by P&G employees Larry Huston and Nabil Sakkab.

  • Comet Coffee – Innovation Matrix Case Study

    Note: This is part of a series of posts discussing The Innovation Matrix. See this post for a description of the full model and what can be done with it.

    This morning I gave a talk on The Innovation Matrix up in Mackay. It was great to see that the ideas in it resonated with people up there, even though the business environment there is a bit different from many of the other places that I work.

    After the talk, I dropped by Comet Coffee to have a coffee and a chat with owner Jane Turner, who I met at the talk. She started Comet about a year ago. As we talked about what she’s done in that time, I realised that Comet Coffee makes a pretty interesting case study of how firms move through The Innovation Matrix.

    As a startup, Comet Coffee began as an Accidental Innovator. They were founded with two initial innovations, but they did not have any kind of systematic innovation processes in place.

    Their first innovation was in bringing high quality coffee to Mackay. This was probably viewed as a bit risky – was there enough of a market? Schumpeter talks about opening up a new market as a form of innovation, and this is a good example. The second innovation was a new service – starting their day at 5:30, a time when not much else was open in Mackay.

    And both ideas worked.

    Since then, Jane and company have done a great job of developing a culture of experimentation, combined with a good sense of what their customers value. The outcome has been a deepening of the relationships they have with their core customers, along with good levels of organic growth.

    One example of experimenting is their installation of airplane seats. Jane said that when they first put them in, people didn’t take to the idea immediately. But soon, the seats became popular as a comfortable place to sit while you wait for your coffee. They’ve continued to test ideas too – not all of them work, but enough do to continue to improve the experience.

    They’ve listened to customers by introducing a series of environmental initiatives, including serving all of their coffee in biodegradable cups.

    As I left today, I asked Jane where she thought Comet Coffee fit on The Innovation Matrix. She said that they were probably just moving into the Fit for Purpose category. That’s exactly what I had been thinking.

    The culture of experimenting has led to a more explicit embrace of innovation as a core culture (even though they don’t necessarily think of it as “innovation”) – indicating an increasing Innovation Commitment. But while this has happened, they have maintained their reasonably high level of Innovation Competence.

    Comet Coffee is an interesting case study, which illustrates some key points:

    • Their evolution follows a desirable path. This is pretty much the ideal path for a startup to follow. Some startups get caught up in putting business processes in place that end up killing the innovative spirit that was there at the beginning. The route that Comet Coffee has followed is better. They have increased both their Innovation Commitment and their Innovation Competence in the year that they have been operating. This bodes well for the future.
    • Anyone can innovate. A coffee shop is not a high tech venture – they’re not inventing new to the world technology. And yet, Comet Coffee introduced a number of new ideas successfully. They developed a novel value proposition within their environment – and that’s innovative. If they can do this, so can you.
    • Many Fit for Purpose innovators are not high profile. I heard about another great thing today, which is the Tropical Innovation Awards. Check out their website – they’re doing really interesting work. Many of their award winners are also in unglamorous industries. One of the key messages with The Innovation Matrix is that you can be an effective innovator without being Apple or Google. Comet Coffee and the firms involved in the Tropical Innovation Awards are great examples of this.

      This is why the Fit for Purpose category is so important. If you are not aiming to differentiate yourself based primarily on innovation, this is a reasonable place to be. As long your innovation supports your primary source of differentiation, you can be successful without having to be a World Class Innovator.

    All in all, I had a very enjoyable trip up to Mackay. I learned a lot, met some great people, and heard some interesting stories. Next time I’m up that way, I’m looking forward to seeing what Comet Coffee will come up with next.

  • How to Improve Your Innovation Competence – Experiment!

    Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

    I presented The Innovation Matrix at a conference last week. After the other three speakers in my session had given their talks (all excellent!), the first question we got threw me for a bit of a loop. The point that was raised was that the guy thought that everything that we had presented was very linear, and not very systems-oriented.

    This made me realise that I didn’t make one of the key points that underpins The Innovation Matrix – it’s actually based on complex system thinking. And the key insight that I get from it is this: there is a (sometimes huge) disconnect between the effort you put into innovating, and the return that you realise. The relationship between the two is non-linear.

    You can have an extremely high level of Innovation Commitment, and sink large amounts of time and resources into it, and still be lousy at innovating.

    The whole point of the matrix is that this non-linearity exists, it surprises people, and we need to be aware of it.

    What is the best way to address this?

    The most important skill to deploy in complex systems is experimentation. When faced with high levels of uncertainty, and systems that respond non-linearly, we can’t predict in advance which ideas will succeed.

    This is why building a culture of experimentation is an essential part of Innovation Competence. This is the approach that is outlined by Peter Sims in his excellent book Little Bets: How Breakthrough Ideas Emerge from Small Discoveries.

    I just read another equally outstanding book that discusses a similar approach. It’s by Grant McCracken – Culturematic: How Reality TV, John Cheever, a Pie Lab, Julia Child, Fantasy Football . . . Will Help You Create and Execute Breakthrough Ideas.

    In his last book, Chief Culture Officer: How to Create a Living, Breathing Corporation,McCracken explained why it is important to pay attention to culture. In Culturematic, he outlines how to undertake cultural innovation.

    Nearly all of his examples come from popular culture (the Old Spice campaign, Andy Samberg on Saturday Night Live, etc.), but the approach that he outlines is actually a general one. Here is how he describes it:

    Eventually, I found an idea that helps explain these oddities. I call it Culturematic. A Culturematic is a little machine for making culture. It is designed to do three things: test the world, discover meaning, and unleash value.

    Why does Samberg’s standalone production studio work so well for SNL?

    It was to give SNL a little spaceship that could go places and do things out of the range of the SNL players. At 30 Rock, no one invests so much as a second in something that might not work. Because the clock is ticking. But The Lonely Island can try stuff until something works. Here, failure is acceptable, because, as Michaels puts it, it’s the guys, not the cast, who “take the risk.”
    …
    Many Culturematics return nothing. This is not to say they fail. They tell us that this is a tree up which we no longer wish to bark.

    That’s experimenting! And that’s how we innovate.

    Here is how McCracken describes innovation at Unilever – think about where this would put them on The Innovation Matrix:

    British researcher John Kearon recently looked at the innovation record of Unilever, a Dutch-British corporation. The results were surprising. Unilever has a great track record, creating not just new brands and products but entire categories in the U.K. consumer market: laundry powder, fabric softener, margarine, and moisturizing soap. Kearon noticed that none of these discoveries came from the innovation centers Unilever set up in the 1990s. Everything about the innovation centers looked right. They hired the best people. They spent real money. They centralized Unilever’s creative efforts. And as Kearon explains, by and large they failed: The innovation center model is good at creatively farming existing brands and has added significant value to the likes of Dove, Lynx and Flora. However, as a model of innovation it is too centralized, too evidence-based, too marketing-science orientated to have the freedom and contrariness to originate new categories that can create even greater value. Kearon recommends another approach. If you want to innovate as Google, Apple, and Red Bull have, he says, you should follow a couple of rules: Don’t look for big ideas. Seek small ideas that can grow. Fail fast. Fail often. Keep learning and never give up. Excellent, very Culturematic advice.

    Very Culturematic, and very Little Bets.

    The question at the conference threw me because I hate linear models – they almost never describe the real world. And The Innovation Matrix is not linear. It actually describes a non-linear problem: that we can’t predictably increase our innovation capability simply by increasing our commitment to innovation, or simply by throwing more resources at it.

    There is always mystery about which ideas will actually work. This is part of what creates the disconnect.

    In a non-linear world, the best strategy is to innovate through experimentation. As Saul Kaplan says: Think Big, Start Small, Scale Fast.

    Figuring out how to do this is the best possible first step if you are trying to change your position on The Innovation Matrix, because it’s the best way to actually get better at executing ideas.

    (And if you want some tips on how to proceed, I can’t recommend the books by Sims and McCracken strongly enough)

  • Nearly Great Innovators – The Innovation Matrix

    Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

    Potential Stars

    Some firms have a high level of Innovation Commitment, and they also have a reasonably high level of Innovation Competence.

    They have all of the processes and structures in place that need to be outstanding innovators, but they aren’t quite great. I call them Potential Stars.

    Characteristics

    These firms have everything in place that they need for innovation success – their Innovation Commitment is high. This means that they have innovation as a core value, and it is integrated into their strategy. They have resources committed to innovating, including high-level management time and attention. They have tools, systems and processes in place to support innovation, and they have good metrics for measuring innovation success.

    And with all of this in place, they are pretty good at executing ideas, so their Innovation Competence is about average. This might be viewed as a problem, though, since they are investing a lot into innovation. They want to be stars but they’re not quite there yet.

    What is missing?

    Typically, firms in this category will be very good at executing one particular kind of idea, but not a broad range of ideas. They’ll be pretty good at all of the components of the idea management process – generating ideas, selecting the best ones, executing these and then getting the to spread. If they have a weakness here it will usually be either in their selection process or in idea diffusion.

    The area that prevents them from being World Class Innovators is their breadth of innovation. Maybe they are only good at product innovation, but don’t do anything with services, ways of doing things or business models. Or they are great at incremental innovation, but not very good at executing bigger ideas. Or perhaps risk aversion has crept in so they are not very good at learning from failure.

    One way or another, they have a gap in their Innovation Competence that prevents them from getting a full return from their Innovation Commitment.

    Examples

    John and I ran into a great example of a firm in this category recently. They have adopted Lean principles whole-heartedly, and the consequences of this have been very good. They have a great participatory culture (in an industry that is not known for this at all), and they are exceptionally good at executing incremental innovations. The outcome has been that they have been able to use this innovation to drop their operating costs by about 20% over the past three years.

    So what’s the problem?

    The main problem for this firm is this: they are terrible at executing big ideas that might be potentially disruptive innovations. They have tried multiple times over that same three year period to execute ideas that could change their industry, and they have failed each time. Normally, this might not be a big issue. However, their industry is in flux right now, which means that they really do need to succeed with some of these bigger ideas.

    Otherwise, they will end up getting increasingly efficient at executing a business model that is no longer relevant.

    They are an example of a firm that has become a Potential Star by building up their innovation capability. They still have some gaps to address, but their success to date suggests that they will. You can also end up in this box when your innovation capability is in decline. Often, this is the where World Class Innovators end up when they start to lose it.

    When that happens, they still have all of the infrastructure in place that made them great – their Innovation Commitment remains high. The problem is that their results are starting to slip. This can happen for a few reasons. Often, this is a result of business model lock-in. If you stop innovating business models, it is difficult to continue to be world class. This can come about through a decrease in experimentation, or by an increase in fear of failure.

    For example, think about Nokia. They were highly innovative, and on top of their market not that long ago. However, they have not adapted well to the rise of smart phones (business model lock-in), so even though their Innovation Commitment is just as high as it was when they were dominant, their Innovation Competence has slipped.

    Innovation Strategies

    There are two very different prescriptions for firms in this category. The first thing that you have to do is figure out if your innovation capability is on the rise, or in decline.

    If you are on the rise, then you have to identify the remaining gaps in your Innovation Competence. Once you have done this, you need to try to fill in these gaps. One of the tricky parts here is that this often requires you to build management skills. In the example of the firm that is great at Lean, they need to build the skills that support projects that do not fit into the Lean methodology. The skill sets are different, which is one of the reasons that there are plenty of tensions in managing high-level innovative firms.

    If you here because your innovation capabilities are declining, it’s a different story. This requires some forensic work to figure out what went wrong. What has caused the reduction in Innovation Competence? The first place I would look is the breadth of innovation that you are undertaking.

    Whether you are on the rise, or slipping a bit, firms in this category still have the potential to be World Class Innovators. In both cases, the biggest obstacle that you have to fight is complacency. The firms on the rise are usually doing well, so why should they worry about improving their innovation? On the other hand, the firms that are slipping are coming from a position of strength, which makes it hard to find the urgency you need to change.

    This is why Stephen Elop at Nokia sent the “Burning Platform” memo – to try to shake the firm out of its comfort zone.

    In either case, this isn’t a bad place to be. Your innovation capability is good, you just have to figure out the last few steps that you need to make it better. That’s why firms here are Potential Stars.

  • How Much Innovation Commitment Do You Need? The Innovation Matrix

    Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

    Stars (at Risk)

    How do you describe firms that have a high level of Innovation Competence but no Innovation Commitment? My contention is that these firms don’t exist – so I call them Unicorns.

    However, there are some firms that are awfully good at executing new ideas and getting them to spread who don’t have huge levels of Innovation Commitment. This is a pretty interesting category. They are innovation stars, but the big question is whether or not that success is sustainable. I call them Stars (at Risk).

    Characteristics

    This is an interesting category because in some ways, this seems like the best place to be. Your innovation outcomes are excellent – that’s why you’re a star. But your investment is smaller than that of the World Class Innovators. This is because the Innovation Commitment for Stars (at Risk) is lower. Typically, this shows up by having fewer resources invested in innovation – less employee time earmarked for it, lower R&D spend, etc.

    The same results for less investment has to be good, right?

    Well, not necessarily. The issue with firms in this category is that because their innovation commitment is lower, their success is at risk. The tricky balancing act here is figuring out how much investment in innovation is enough. The fact of the matter is that if you want to make your innovation success a consistent, repeatable process, then it requires commitment.

    Examples

    The kinds of firms that end up in this category are often rising stars. They may have just made the transition from being a startup to being an established firm. Startups usually begin life as Accidental Innovators. As they cross the chasm into serving mainstream markets, they must add management capability and processes in a number of areas. One of these is innovation. As they do this, some make the transition from Accidental Innovator up to Stars (at Risk) by using this increase in structure to really start cranking out innovation.

    Facebook a few years ago is probably a pretty good example of a firm in this category.

    The other route to here would be an established firm that is a Fit for Purpose innovator who gets better at idea execution. I have a harder time coming up with examples here, because this is a much harder route to take. Once you are an established firm, with routines and processes in place, it is hard to make this jump in Innovation Competence without either changing your processes or increasing your Innovation Commitment.

    Innovation Strategies

    The critical issue for Stars (at Risk) is balance. They are innovating very well – that’s why they are stars. Adding more structure through increasing Innovation Commitment can be risky, because the threat is that doing this will introduce bureaucracy, which might actually reduce innovation outputs.

    Here are some steps to take for firms in this category:

    1. Assess why you are successful: it’s likely that there is still an element of randomness to the success that firms in this category are seeing. Consequently, it is important to try to understand what is working so well. Try to figure out what works, and what it is that is driving your current innovation success.
    2. Identify ways to increase your Innovation Commitment: once you have a better understanding of why you are currently successful, the next step is to increase your Innovation Commitment in a way that supports your current strengths, eradicates current weaknesses, or both. It may be the case that there is limited top management involvement in innovation – particularly if you are a transitioning startup. Now would be a good time to increase that. Or to integrate innovation into your overall strategy. Or to increase the resources available for innovation by giving your people more time and opportunity to innovate.
    3. Figure out how to differentiate yourself through innovation: this ties in closely to the idea of integrating innovation with strategy. What is it that makes you distinctive? Now is the time to implement processes that will enable you to use innovation to emphasise this point of difference.

    Overall, being a Star (at Risk) isn’t a bad place to be. After all, the level of innovation success is high, while investment is low. That seems like a great situation. The key issue is to work out how to make that success sustainable. Firms in this category have the opportunity to build a competitive advantage based on their innovation prowess. If they do this, then they’ll be a World Class Innovator.

  • Mythical Innovators – The Innovation Matrix

    Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

    Unicorns

    In the last post, I discussed the three stable states in the Innovation Matrix. These are the places where Innovation Commitment is roughly equal to Innovation Competence. The consequence of this balance is that for firms that are Not Innovating Very Much, Fit for Purpose and World Class Innovators, the returns to their innovation efforts should seem about right.

    It’s not the same story for the firms at the other two corners – firms that are either Bewildered or Unicorns. Firms can’t be Bewildered for too long because with no Innovation Competence, they are seriously overinvesting in innovation. If they don’t make progress and improve their competence, then they will eventually give up.

    On the other hand, it would be great to be a Unicorn wouldn’t it? You don’t invest any effort into innovation, and yet you’re still very good at it. Well, you know what they say about things that sound too good to be true…

    Characteristics

    One of the insights that got me thinking about this Innovation Matrix is the fact that I keep running across firms that are actually reasonably good at innovating, even though they don’t put a lot of effort into it. This seemed like a paradox.

    And it leads to a question: if firms can be pretty good at innovating with no effort, can they be also be great with no effort?

    I don’t think so, and that is why this square is named for a mythical creature – the Unicorn.

    The Accidental Innovators may be in a position where they have to do new things just to survive, or they have developed a culture that supports experimentation, or they are good at learning. Experimentation and learning from failure are two of the elements of Innovation Competence, and it’s possible to do these without explicit processes in place to support them. And some organisations are naturally good at generating, selecting, executing and diffusing ideas.

    It’s the other components of Innovation Competence that are pretty hard to come by without trying. Doing both incremental and more radical innovation at the same time takes conscious effort, because it’s really hard to do. You don’t automatically have an innovation portfolio. And it’s hard to practice multiple types of innovation without making an effort.

    That’s why Unicorns are mythical – they don’t exist.

    Innovation Strategies

    The main issue here is to avoid magical thinking. I was talking with Michael Raynor today, and he said an interesting thing: innovating in established firms is a solved problem, but the reason that more firms don’t do it is because it’s really hard. The analogy that he used is that anyone can run a marathon if you do the following things: run 20 miles a week for six months, doing at least four days a week, slowly ramping up the mileage. If you do this, you can run a marathon. If you don’t do this, you probably can’t.

    It’s the same with innovation. To do it, you have to put in the effort. Because it’s hard work, most firms don’t.

    If you expect to innovate without commitment, you might as well go to the forest looking for unicorns. It will be an equally productive use of your time.

    PS: Michael gave a terrific talk today at PARC’s Power of 10 Conference – more on this next week.

  • How Much Innovation is Enough? The Innovation Matrix

    Note: This is part of a series of posts explaining the individual parts of The Innovation Matrix. See this post for a description of the full model and what can be done with it.

    Fit for Purpose and World Class Innovators

    In a perfect world, as firms increase their Innovation Competence, their Innovation Commitment, should increase at the same rate. A mismatch between the levels of Innovation Commitment and Competence leads to an unstable state. If you are highly committed to innovation, but still not very good at it, it leads to frustration, cynicism, and the perception of wasted effort. On the other hand, if your Innovation Competence is high, but you are not very committed to innovating, then it is very likely that your success will fade over time due to lack of innovation process.

    This means that there are three stable states in the innovation matrix: Not Innovating Very Much, Fit for Purpose, and World Class Innovators.

    Characteristics

    Earlier, I outlined the circumstances in which it is a reasonable to strategy to be Not Innovating Very Much. The identifying characteristics of firms in this square is that there isn’t much going innovation-wise. There is little Innovation Commitment, so there aren’t really any processes in place to support innovation. And there is also little Innovation Competence, so there aren’t too many new ideas being executed either.

    Firms that are Fit for Purpose are better. They share all of the characteristics described for firms that are Thinking About Innovation, but they are significantly better at executing ideas. In practice, this means that they are probably reasonably good at the idea management process. They have the ability to capture ideas, the have a process for selecting the best ones, they can execute the ideas, and they can get them to spread.

    Firms that are World Class Innovators up the ante in both categories. They are more committed to Innovation. This means that they have a full complement of processes in place to support innovation. And they are outstanding at executing ideas, they undertake different forms of innovation – not just innovating new products, the do both incremental and more radical innovation, and they manage a portfolio of different innovation efforts across multiple time horizons.

    Examples

    The examples of World Class Innovators are not always obvious. Of course there are firms like Google, Apple, and Procter & Gamble. But John and I have run across some much smaller firms that do pretty well too. You don’t have to be a huge multinational to fit into this category.

    The firms that are Fit for Purpose are even harder to find. They are usually not undertaking innovation that grabs your attention. But they still consistently seem to come up with interesting new ideas that they have executed. A good example here is probably Microsoft.

    Microsoft’s major innovation in the 1980s was actually their modular business model structure. Since then, most of the things that they have introduced originated somewhere else. However, to integrate ideas that arrive through collaborations or acquisitions still requires quite a bit of internal innovation skill.

    Innovation Strategies

    The first strategy to pursue is to concentrate your innovation efforts on whatever makes you distinctive. This is where the linkage between innovation and your overall strategy is crucial. If you are in either of the Fit for Purpose or the World Class Innovator categories, then your innovation effort and your innovation output are pretty well balanced. This is good. The critical question to ask then is: which of the two categories do we need to be in?

    My answer would be: if you are differentiating yourself on innovation, then you need to be a World Class Innovator. However, if your point of difference is something else, then you just need to be Fit for Purpose, but you need to focus most of your innovation efforts on whatever your point of difference is.

    Take a look again at the diagram that John uses a lot:

    If you use this framework, then you can use best practice approaches to meet the minimum required levels in whichever areas you’re not concentrating. The one that makes you distinctive, however, is where you need to innovate. This is true both for Fit for Purpose and for World Class Innovators.

    The second point is that for both of these, you need to have absorptive capacity. Absorptive capacity is one of those ugly academic terms that is actually fairly useful. Paul Hobcraft does an excellent job of explaining it, and you should check out his post. The official description is a firm’s “ability to recognize the value of new, external information (knowledge), assimilate it, and apply it to commercial ends.”

    Research on absorptive capacity has consistently shown that in order to take advantage of good ideas that come from outside of your firm, you have to good at generating and executing good ideas inside the firm already. This point is critically important if you are looking into open innovation as a strategy, and it is especially important for firms that are Fit for Purpose. Here, you are often relying on adapting ideas that others have come up with – but in order to do this you need to have enough absorptive capacity to recognise good ideas, and to be able to execute them effectively.

    So the prescription for firms in these two boxes is this:

    • First, determine if your innovation capability is adequate for whatever strategy you are trying to execute.
    • If it is, then keep doing what you’re doing.
    • If you’re a Fit for Purpose Innovator that wants to move up to World Class, then you have to devise steps that will get you there. The first place to look is at both your Innovation Commitment and your Innovation Competence to find your current gaps. Then figure out which skills you need to add, and in what order. Then do it.

    The good news about both of these categories is that they are stable. As long as your environment is stable, then you will be fine if you just keep doing what you’re doing. If your environment is changing rapidly, then you might want to think about how to become a World Class Innovator, because the best way to deal with uncertainty is to create the future yourself.