Tag: Rita Gunther McGrath

Two Ways to Deal With Innovation Uncertainty More Effectively

Is Innovation Risky or Uncertain?

If we’re trying to do something genuinely new, then we can’t know in advance whether or not our idea will work. We face this problem every time we try to innovate.

This introduces a problem – we mix up risk and uncertainty. Risk is when we know the odds of success in advance. If we face risk, we can make a calculation of the expected payoff versus the cost, and then make a rational decision about whether or not we should accept the risk. That’s not what we face when we innovate. We face uncertainty.

Uncertainty is when we not only don’t know in advance what the odds of success are, we also don’t know what the payoff will be. With uncertainty, there’s no calculation that helps us out. So what should we do?

We need to forget about risk aversion, and start dealing with uncertainty. Fortunately, there are some good tools that help us out here.

The Power of Scaled Investment

The first tool to use is scaled investment. This is the topic of the terrific book Discovery-Driven Growth by Rita Gunther McGrath and Ian MacMillan. Their core idea is this: treat new initiatives as a series of experiments, which are designed to gather knowledge about your market. As you learn, the uncertainty is reduced, and you can scale up your investments.

When you face genuine uncertainty, this is a great tool to use.

They say:

Breakout growth is not only about launching bold, new initiatives. Many good growth programs begin first with incremental growth, which creates investment in learning where big new opportunities lie. That’s the point at which many companies go for breakout growth. Many breakout opportunities don’t look that way at first—they are the result of combining things until you finally do have a winner (Procter & Gamble’s Swiffer cleaning systems would be an example). There are, of course, many companies out there making what they hope will be breakout moves. What they often find out, painfully, is that they are using the wrong tools to do it and are therefore taking on risk far beyond the potential payoff. Worse, they are learning less than they could otherwise.

Here is an example they use. It is a firm that is trying to decide whether or not to build a new manufacturing plant. The first step is to list the set of assumptions that must be true for the plant to pay off. Then you figure out how to test each of these, with go/no-go decisions after each experiment.

The process looks like this:

Scaled investment case study from Discovery-Driven Growth

Here is where the power of this process comes in. The total cost of putting in this plant is just under $19 million. Many firms simply make a decision about whether or not build the plant, using something like Net Present Value to test out whether the risk is worth it or not. Presumably, the potential value of the plant is well above $19m – so the payoff is potentially high. But if there is a great deal of market uncertainty, you could end up losing all $19m.

However, if you use the scaled investment approach, you start with a $3,000 market study to start testing the assumption that there is demand for your idea. There’s a good chance that this small investment could tell you whether not it’s worth spending the full amount. If the outcome is positive, then you can go to test the next assumption.

It turns out that you can test 18 of the 21 critical assumptions with the first 13 experiments, which cost $363,000 in total. In other words, you can reduce about 85% of the uncertainty by making about 2% of the total required investment.

That’s a pretty good deal. And at the end of those 13 experiments, even if you decide to kill the project, you’ve learned much, much more about the market than you would have if you had simply made a yes/no decision about the plant right from the start.

Instead of asking “will this project be worth it?” you are asking at each step “am I willing to make a relatively small investment to learn the answer to our next question about this opportunity?” Which leads to our second tool.

How Much Can We Afford to Lose?

Saras Sarasvathy has done some great research on how effective entrepreneurs make decisions. She has developed a theory of this process that she calls effectuation. Essentially, it says that effective entrepreneurs are more likely to figure out to best use the resources that they have to hand to build their ventures, rather than trying to figure out what an ideal venture would look like first, then building that.

She explains her ideas here:

One of the five key tools that these entrepreneurs use is the idea of affordable loss. This is:

The effectuator, in contrast, tries to estimate the downside and examines what he or she is willing to lose in order to start the venture. He or she then uses the very process of building the venture to bring other stakeholders on board and creatively leverages slack resources available in the world. At each stage of the process he or she chooses options that create more options in the future.

…

Estimating what is affordable does not depend on the venture but varies from entrepreneur to entrepreneur and even across his or her life stages and circumstances. By allowing estimates of affordable loss to drive their decisions about which venture to start, effectuators do not need to depend on any predictions.

The last point is critical – we don’t need to predict, we simply need to be willing to invest to learn more about the opportunity. In many ways, this is the same principle that McGrath and MacMillan are talking about.

In the case of organisations, the affordable loss can be large or small. When Hindustan Unilever started their Shakti Initiative, they were trying to reach the rural market in India that constituted 40% of the total population. Rolling out a big initiative to reach everyone at the same time would have been prohibitively expense. Instead, they invested $200,000 in order to test the two most important assumptions in their new business model, then they scaled up as they learned.

At the other extreme, when I was trying out my series of experiments in the student recruitment section at the Polytechnic in New Zealand, my affordable loss was $0. I had no discretionary money to spend – instead, I invested my time, and the good will I had with my team to test out the ideas. The overall impact of the 44 experiments that we tried was $2 million, so even if your affordable loss is small, the outcomes can be big. It’s another little bets approach.

Dealing with uncertainty is challenging. The best way to do this is learn about the opportunity that you are pursuing. The same logic applies if you are doing a lean startup, or a corporate innovation initiative. If you combine the ideas of affordable loss and scaled investments, you can increase your chances of success substantially.

20 November 2014
All of Our Innovation Barriers Are Self-Inflicted – Reflections on the Drucker Forum
What should management look like today – and tomorrow?

I just got back to Australia from the 6th Global Drucker Forum that took place over the weekend, where these two questions (and others!) were addressed. Drucker was a great thinker, and one of his pieces inspired the title for this blog – so I was excited to go to the event. Richard Straub and his team put together a great event this year. I learned a lot, and, more importantly, got to spend some time with some awesome people over the days that I was there. Here are some of my thoughts triggered by the event.

Highlights from the Sessions

I liked a lot of the things that happened during the formal presentations:

Clayton Christensen gets off the stage to watch Roger Martin: my favourite moment on day one came when Clay Christensen walked off the main stage so that he could see Roger Martin’s talk. This was also my favourite talk on the day – Martin was one of the few that talked more about what he’s working on now and his latest ideas, rather than going over his greatest hits (Pankaj Ghemawat was the other that did this). I loved Christensen’s move, because it showed respect for the ideas of others – it was generous, and set the tone for the rest of the Forum.

During the discussion after the first set of talks, Martin had a great quote on some of the issues around managing solely for shareholder value:

Every incredibly stupid theory has a core that sounds good.

The Creative Economy is here: Steve Denning, Dan Pontefract and Bill Fischer had a great session looking at how we’re making the transition to the Creative Economy: here’s Dan’s description of the session. One of the highlights here was the focus on actual examples of firms taking action to distribute leadership and build innovation.

$Dan Pontefract, me, and the gorgeous ceiling in the Hall of Sciences in Vienna$
Dan Pontefract, me, and the gorgeous ceiling in the Hall of Sciences in Vienna

Julia Kirby quotes Jim March: Julie Kirby opened the management and innovation session (the best one of the Forum) by quoting Jim March’s key idea on exploration versus exploitation. This is a core innovation idea – the responsibilities of management are split between exploring for new advantages, and exploiting existing ones. Balancing the two is tricky, and that’s one of key challenges in managing innovation.

The balance now needs to shift towards exploration: Rita Gunther McGrath talked about her research, which shows that the lifespan of competitive advantages is rapidly declining (a point that Nilofer Merchant returned to as well). McGrath cited research on what people report as barriers to innovation – then she said:

All of our barriers to innovation are self-inflicted.

Social isn’t just social media: Next up was Nilofer Merchant. I’ve seen plenty of talks by both McGrath and Merchant, since they are two of my favourite management thinkers, and I have to say that their talks at this event were by far the best I’ve seen from them. It was a great session. One highlight from Nilofer came when she stopped and asked us to “do something social for one minute.” Of course, very few of us tweeted – instead, we talked, and connected – leading her to say:

What we do to connect with each and build ideas – that’s social.

Nilofer kills it.

What does collaborative leadership look like? Herminia Ibarra gave a great talk on leadership. Her killer line was:

Our collective imagination has no real alternative to the heroic leader.

She then went on to discuss what collaborative leadership looks like in an effort to start building a more productive set of ideas on this topic.

Organisations should be flatter! In a talk that would have fit well in the Creative Economy session, Vineet Nayar discussed his experiences in making HCL Industries a flatter organisation. It was great to hear some of the issues in making flat organisations work – particularly since HCL wasn’t built that way, they had to reconfigure on the fly.

“Great ideas are great, but without execution they don’t work.”

It’s Not All About the Content

One thing that the Forum brought home for me is that we focus too much on content. The agenda was absolutely packed with talks. On the one hand, this was good because the lineup was awesome. On the other hand, this format also has some serious limitations. One is that when we’re hearing so many great ideas, we need time to discuss and reflect – we need to do those social things that Nilofer talked about.

It reminds me of my executive education courses. When people are new to lecturing, the tendency is to pack in as much content as possible. But over the years, I take out big chunks of content every time I deliver my innovation course, and that always makes it better.

We need to do this at conferences too – an idea I learned from Johnnie Moore.

Day one ended with a monster 2 hour session, and by then my attention was shot. So, while I got to meet John Hagel in person (yay!), I wasn’t able to give his talk the attention it deserved (boo!). However, meeting leads to my real highlights of the Forum, which were:
- Lunch on day one with Rita Gunther McGrath, Nilofer Merchant, Dan Pontefract and Jamison Steeve. The conversation was thought-provoking and fascinating. It was a great group too – Nilofer is a friend, Dan is a friend that I was meeting in person for the first time, I’ve admired Rita’s work for years, and I didn’t know Jamison at all before this, and he’s terrific too. Later, Rita and I both tweeted about the enormous value of meeting people face to face.
- Speaking of which, at lunch on day two I finally met Bill Fischer in person. Like Dan, he’s someone that I’ve been interacting with online for years. But it was wonderful to meet face to face. We’re hatching plots together now too.
- Many other personal encounters throughout the event were also memorable. Distance still matters. Interacting in person is expensive, time-consuming and causes a ton of jet-lag if you live in Australia – and it is completely worth paying the price to have the experience.
I meet Bill Fischer!

We need to build our events to take advantage of the magic that happens face to face. Content is fine, but it is only part of the story.

We Need More Jazz

My favourite part of the formal program was the end – the least scripted part of the event. We finished with eleven of the speakers coming up and giving a five minute summary of their reflections on the Forum, followed by a short Q&A with the editor of the Harvard Business Review and Chair of the Forum, the quick-witted Adi Ignatius. You can see Steve Denning’s summary here to get a flavour of them.

This was a great session. Some of the people struggled with it a bit, and ended up giving versions of their normal talking points. But the people that really engaged with the process were fantastic. They were thinking on their feet, and the whole session was exciting – no one knew what was going to happen next.

It was quite a contrast to many of the formal talks, which were exactly that – formal. Many of them were like classical music concerts – live versions of things we’ve heard many times before. Sometimes, this can be magic, but it can also be a bit stale. The final session was more like jazz – there was improvisation around a theme. This format is dangerous, because you can bomb. But it’s also more exciting, and, ultimately, more rewarding.

We need more jazz in our events.

And now I’m back in Australia. Tomorrow I give a talk of my own for the International CFO Forum in Sydney (check out the cool set of videos that we made for this).

I’m trying to figure out how to get more of the magic of social, and more jazz, into the event. That’s all part of figuring out what management should look like today – and tomorrow.
17 November 2014
This Week in Innovation – 23 February 2014
These are the things that caught my attention this week.

First, this is from Hugh MacLeod’s Daily Newsletter – subscribing to it is worthwhile:

Often in corporate innovation efforts, everyone wants to go for the low-hanging fruit – the quick wins. That’s fine, as far it goes. However, often, there isn’t really that much low-hanging fruit. And the reward comes from solving the tough problems.

Go after those first instead.

In The Strategic Mistake Almost Everybody Makes, Scott Anthony attacks another common innovation mistake: ditching innovation to focus on your core. This seems smart over the short-run, but it’s disastrous across longer time-scales. Here is one of the key quotes:

Every business and business model has a finite life. Products come and go. Customer preferences change. As Rita Gunther McGrath notes, competitive advantage is increasingly a transient notion. The companies that last over long periods of time do so by creating new products, services, and business models to replace yesterday’s powerhouses.

In the rest of the post, Anthony talks about how to address this issue.

Jane Porter tackles a front-end innovation problem in 5 Ways We Neglect Our Own Creativity – And How to Bring it Back. Work worth doing is hard – that’s why the low-hanging fruit isn’t the best option. Porter discusses a few good ideas for making it easier to do the hard work.

The first three posts really get at a core innovation issue: getting better at is a process, and it takes time. That’s also the key message in Neil Perkin’s excellent post Change is a Process, Not an Event. He makes the point by telling the story of one of his failed change efforts. It’s important to envision any big change as a process, and that is especially true for innovation.

Michelle Atagana profiles 14 Really Cool African Tech Startups to Watch in 2014 that are in the process of innovating. We often don’t pay enough attention to the great innovation taking place in other parts of the world. These firms are tackling problems that are often local, but which could have global impact. For example, check out BRCK:

Imagine you could take your internet everywhere with you? Even areas with no connectivity? Yes, that is what BRCK is solving Africa’s connectivity issues. The creators of BRCK describe the product as “the easiest, most reliable way to connect to the internet, anywhere in the world, even when you don’t have electricity.” Think it as a rugged router that can hop from network to network seeking out whatever signal it can find to connect to the net.

That’s pretty cool.

If we’re tackling tough problems, there are tools that can help us. J.P. Rangiswami wrote a great post about the role computers play in our world: But They Are Useless. They Can Only Give You Answers. He talks about a teacher that said “From now on, you will earn my respect, not by the answers you give, but by the questions you ask.” And then he thinks about how we can use computers to handle boring tasks, so that we can put our time and effort into asking better questions.

Finally, my favourite post of the week was probably 28 Books You Should Read If You Want To by Janet Potter. The post is both hilarious and wise. Her premise is that lists of books that we *should* read don’t really do us much good. Instead, she offers a useful alternative list of books that you should check out – closing with:

“You should just keep reading.”

Yes, we should. I will, and I’ll report back next week on what grabs my attention between now and then. In the meantime, check out Potter’s list, and the other great posts here.

Related articles
23 February 2014
Here’s Why You Need to Build Your Innovation Capability
Competitive Advantage is Dead. Or at Least Dying.

Our life expectancy has increased dramatically over the past hundred years. I’ve talked a few times about how this is a pure innovation story. Here’s another innovation story about life expectancies, but it’s less encouraging:

The drawing is by Jay Cross from the Internet Time Alliance, based on data from Richard Foster and Sarah Kaplan’s book Creative Destruction and work from the Deloitte Center for the Edge. It shows that while average US lifespan has increased by sixteen years from 1937 to 2012, over the same period of time, the average time that firms remain in the S&P 500 has fallen from 75 years to 15.

That boggles my mind.

This is one of the pieces that Rita Gunther McGrath uses to argue that competitive advantage is dead in her new book, The End of Competitive Advantage. If your firm had a competitive advantage in 1937, you could expect it to be around for a long time – probably longer than you’d last yourself. That’s not true now.

Now You Have to Innovate

McGrath argues this competitive advantages are still important, but that now they are transient rather than sustainable. And in that environment, we need to innovate. She uses Sagentia as one of the case studies in the book (which is well worth reading), and says this:

At Sagentia, innovation is clearly at the top of the agenda, throughout its operations. As one senior executive noted, “Inherently, companies like ours are super agile, because we are not in control of our own destiny … We can only live off something that our clients have decided to do.” This makes Sagentia a model for where more and more businesses are headed—as competitive advantages shorten and competition comes from everywhere, increasingly firms are in the same position, that is, “not in control of [their] own destiny.” Consistent, ongoing innovation and extraordinary closeness to customers is the only possible response.

This raises a pretty interesting point – as competitive advantages weaken, we have less control over our own destiny. In other words, we need to get more comfortable with uncertainty.

How long will it take to build your consistent innovation capability? McGrath says two to three years. That’s why you need to be working on it now, if you aren’t already.

Steps You Can Take Right Now

In addition to building your organisation’s innovation capability, you also need to build your own skills in this area. Here are some steps that you can take right now to start:
1. Think about how much you can get away with – if you manage a budget, how much discretion to you have? If you don’t have a budget, what are the parts of your job that you control?
2. Make a list of 10 things that you can do within the current scope of your work that will make things better for the people with whom you interact – customers, co-workers, bosses, whoever.
3. Do those things.
4. Figure out which ones worked, and do those more.
5. Figure out which ones didn’t work, learn why not, then forget about them.
6. Apply what you learned to the next set of ideas.
7. Go back to step one.
I’ve always been skeptical of “everything is different now” type arguments. But there’s a fair bit of evidence accumulating that the pace of business is changing. The boundaries of your industry probably are, and your competitors probably are too.

To meet these changes, you have to change yourself. That means you have to able to innovate. It’s a core skill these days.

Related articles
23 May 2013
Here is Why You Need Business Model Innovation
New technologies require new business models to succeed.

I can’t prove this yet, but the more I study the innovation process, the more convinced I am that this is true. If you have an innovative new idea (and this can be a product, a service or a new way of doing things), if you are going to replace something directly, you need to perform at least 10X better than the incumbent. That’s not impossible, but that’s a pretty big jump.

It’s much better to come up with something interesting, and then innovate the business model.

I was talking about this yesterday with my colleague Jeffrey Babin. He agreed with me, and he pointed me to one of the IBM CEO Reports that addresses this issue. There are two key pieces of data in it. The first shows how firms distribute their innovation efforts:

It shows that while most organisations put some effort into innovating across the board, business model innovation gets the least attention. But look at the impact of the three different types of innovation on the bottom line:

This shows the effect that innovating has on profits compared to firms in the same industry that don’t innovate. As Jeffrey said, product and service innovation is baseline stuff – you have to do it to stay in the game. The firms that primarily tried process innovation were actually worse off! And those that undertook business model innovation had a 5% higher compound annual growth rate over five years.

5% higher compound annual growth – the argument should be settled right there – you should probably stop reading right now and immediately start innovating your business model if you aren’t already.

In case you’re still reading, here are a few more thoughts.

If you’re in a startup, innovating the business model is a bit easier than if you’re in a large firm. The whole lean startup approach is basically built on the idea that the main objective of a startup is to build a scalable business modle. This is a big part of the reason that lean startups turn into innovative firms.

Building business model innovation capabilities is a bit more challenging if you are a larger firm. Paul Hobcraft recently discussed some of the issues here. The problem is that you will be competing against startups that are innovating your industry’s business model – if not right now, then in the future. So you need to have this skill. And also, it leads to 5% higher CAGR!

Managing multiple business models within one firm is challenging. However, you can see the payoff. And some very large firms have done this very successfully. I’ve spoken before about how Dow Corning did this with Xiameter, and how Hindustan Unilever did this with their Shakti initiative.

So it’s not impossible, it’s just hard. And that’s exactly why it pays off – there’s no reward for solving easy problems.

I was talking late last year with the Chief Operating Officer from a company I’ve worked with for a while. They are just now starting to benefit from a business model innovation effort that they started nearly three years ago. They are a market-leading firm, but they have been facing increased competition recently as others have entered the market.

First, I asked him how long it took his competitors to copy a new product or service. He said that it used to take 18 months, but now the time was down to 6 months. Next, I asked him what he thought the outcome of their business model innovation would be. He said “Well, it will take our competitors a year or two just to figure out what we’ve done and how we’ve done it.” I pointed out that even then, they’ll have to go through a 2-3 year transition just like he did if they want to copy the business model.

Think about that for a second – product innovation gives them a 6 month competitive advantage, but the advantage from business model innovation is a few years.

Rita Gunther McGrath argues convincingly that competitive advantages have increasingly limited lifespans. I agree with her. Business model innovation is one of the best ways to respond to this. It leads to higher growth, bigger profits, and higher chances of sticking around for a while.

Related articles
- Do You Really Know What Business You’re In?
- Want to avoid being disrupted? Transform your business model.
3 May 2013