Tag: Technology

A Model for Dual Corporate Innovation Management
As reiterated by Tim Kastelle in the previous post, it’s imperative to distinguish discovery from execution when it comes to startup and innovation activities – bearing in mind that both purposes are complementary and equally important. This suggests following a dual approach for balanced corporate innovation management. The main objective of dual approaches is to sufficiently separate exploration-/discovery-oriented initiatives from exploitation-/execution-oriented ones (e.g. in terms of dedicated tools and metrics to be applied) while at the same time ensuring an appropriate degree of connection and proper interplay among both parts.

In the following, I will outline a model that attempts to help organizations implement a dual approach to innovation management. This model condenses learnings from recent research in this field as well as experiences of my own work with diverse companies in various industries around managing innovation up to now. It aims to integrate objectives, activities, requirements and inherent tensions along the innovation spectrum as well as enabling aspects, often being discussed independently from each other. Therefore, it’s titled a model for integrative innovation management.

Essential premises for balanced and sustainable innovation management

In my view, sustainably successful innovation management systems in organizations are required to be based on a couple of essential premises – all of which can be considered necessary conditions. As successful innovation management also relies on additional factors, they are no sufficient conditions, though.

Premise 1: Innovation management follows a balanced portfolio approach. The entire innovation portfolio is divided into exploitation-oriented and exploration-oriented innovation initiatives, where following characterizations hold:
- Exploitation-oriented initiatives are related to running core business by executing and enhancing existing business models or technological capabilities. The primary direction of impact is value capturing (commerzialization). Examples: Product, service or process innovation, portfolio extension, innovation of selected business model components (e.g. channel or operations), market research.
- Exploration-oriented initiatives are related to developing future business by searching for novel, and often disruptive, business models or technological capabilities. The primary direction of impact is value creation (configuration). Examples: Business model development, platform/ecosystem innovation, basic technology research & development, startup engagement, innovation intelligence.
The target portfolio including new initiatives is derived from a strategic growth gap analysis. In order to fill an identified growth gap, a company needs to start exploitation- or exploration-oriented inititatives with corresponding sizes and time horizons.

Premise 2: Board of Directors and executive management are committed to attributing equal importance to exploitation and exploration initiatives as both are vital for a company to thrive sustainably. This particularly implies receiving a long term mandate and adequate resource allocation for exploration and its initiatives. Probably the most critical requirement for explorative initiatives to flourish is staffing them with dedicated, high-quality full-time workers. Given that the vast majority of startups fail despite mobilizing dedication from a team that has nothing to lose, not dedicating adequate quality and quantity of workers will ultimately consign explorative ventures to failure. The appropriate ratio of resource allocation between exploitation and exploration depends in particular on a company’s strategy and environment, among other criteria. The CEO is in charge to define this high-level ratio for the entire company.

Saul Kaplan has suggested some debunking questions to check whether – or not – you have a company’s executive management, first and foremost the CEO, on board. Some of them are listed in the following, slightly rephrased for our context here:
- Does your CEO/executive management agree that innovation goes beyond breakthrough products to include business model innovation – entirely new ways to create, deliver, and capture value?
- Will your colleagues tell me that failure is a career-limiting move, or will they tell me that the company celebrates experimentation?
- How much time does your CEO/executive management spend strengthening and protecting the current business model, versus designing the next one?
- Does your CEO/executive management have clear and discrete objectives for both exploitative and explorative innovation? Do you organize differently for each?
- Do internal ideas and projects that threaten to cannibalize the current business model get squashed – or nurtured?
- Does your CEO/executive management have a process for allocating resources for explorative innovation projects that lies outside of the control of business units?
- Do executives with responsibility for explorative innovation report to the CEO/executive management, or to another line executive responsible for today’s business?
- Is your CEO/executive management willing to create a sandbox for exploration, even if it means carving out a part of the current business/market to serve as an ongoing real-world innovation lab?
Note: It’s mandatory to receive CEO commitment and alignment among executive management before putting systematic effort in truly explorative activities – otherwise exploration-oriented innovation will eventually be doomed, resources be wasted and people be frustrated.

Premise 3: Exploitation- and exploration-oriented initiatives are separated in terms of organizational anchoring, governance and funding. The distinct setups are proposed as follows:
- Exploitation-oriented initiatives are anchored in the operational business units. Innovation governance is carried out by a business unit’s executive management as overall responsible and a dedicated innovation board as supporting structure. Funding is covered by the annual budgeting.
- Exploration-oriented initatives are anchored in a dedicated exploration unit, headed by a “chief explorer” who reports to the CEO – just as the business unit leaders. He is also in charge for governance, supported by a dedicated “corporate innovation board” which is staffed by innovation-related stakeholders across the entire company – in particular all business units are to be represented. Financing is covered by a corporate fund, following a staged investment approach.
This ring-fenced setup enables each of both “camps” to operate as if the company’s future depended on it alone. The operational units pursue prolonging success of their existing businesses. The exploration unit aims at identifying and scaling novel – and often disruptive – opportunities to build cutting-edge businesses. These mutually complementing purposes correspond well to distinct types of transformation efforts, recently outlined by Scott Anthony:
- Exploitation <=> core transformation, i.e. doing what you are currently doing in a fundamentally different way
- Exploration <=> strategic transformation, i.e. changing the very essence of a company
In the end, this ambidextrous approach involves the highest impact on corporate development. Moreover, it avoids exploration to fall victim to common and dangerous organizational traits: short termism and resource prioritization in favor of core business.

Premise 4: Fostering an innovation portfolio is enabled by a proper idea management system which allows to either assign an internal or external idea to the corresponding unit or to reject it. One common mistake of organizations is to ask employees and external contributors to generate ideas without putting mechanisms in place to act upon them. Therefore, it proves crucial to develop criteria by which to judge and process ideas – particularly including the “crazy” ones. A good example of how an idea management process could look like, is given below. The original figure is slightly adapted for our context.

Adapted from: http://sloanreview.mit.edu/article/institutionalizing-innovation/

Whereas the upper path is taken by exploitation-oriented ideas with high proximity to the core business, the lower path holds for exploration-oriented ideas with no (immediate) fit with the core business. In order to feed the idea management system with potent and explorative ideas, a company needs to be based on an open, collaborative culture, leveraging a cross-pollinating and serendipity-friendly infrastructure and startup engagement.

Three horizons as distinct playgrounds for innovation intiatives

Exploration- and exploitation-oriented innovation initiatives can be assigned to three strategic horizons. As displayed below, the horizons address different proximities to the core business with regard to business model or technological capabilities – and therefore indirectly time scale. The horizons’ strategic objectives can be put in a nutshell:
- H1 – Core: Optimization of existing business models and technologies, addressing of existing markets
- H2 – Growth: Acceleration and scaling of new business models and technologies, adaptation of existing business models
- H3 – Future: Discovery and validation of new business models and technologies, shaping of future markets
Moreover, each horizon is based on dedicated conditions in terms of accounting, metrics, approaches and instruments, as well as organizational and personal requirements. Upcoming posts at my blog will elaborate on this more in detail. In average, the ratio H1:H2:H3 for resource allocation amounts to be roughly 70:20:10. Although this might be a good rule of thumb, a company’s actually required ratio needs to be adjusted necessarily according to its individual context and environment.

Whereas H1 represents the realm of purely exploitation-oriented and H3 the domain of purely exploration-oriented innovation initiatives, H2 can be regarded as interface between both “worlds” – which makes it even more demanding. Main issues in this regard are the integration of exploitation and exploration focus as well as exchange of capabilities between business units and exploration unit for mutual benefit. Consequently, each horizon requires dedicated leadership and management in order to succeed. H1 needs a traditional style if the business environment is stable and rather predictable (e.g. automobile or food industry, public transportation), or a more adaptive style if the environment is highly dynamic and unpredictable (e.g. technology or fashion industry). H3 needs an entrepreneurial one. H2, in turn, relies on a challenging, ambidextrous style at the intersection of H1 and H3. The H2 pipeline is fed from two directions:
- Existing H1 businesses are to be adapted and extended by partially renewing the existing business model or applying new technological capabilities (Adapt).
- H3 initiatives have been validated in terms of their success potential and are supposed to be scaled up. Scaling inititiatives are intended to either end up as new H1 core businesses in case of disruptive innovation or getting integrated in an existing division in case of sustaining innovation (Scale).
Depending on the type of environment a division operates in, either direction tends to be pronounced. If the environment is highly stable and malleable (e.g. offers a potential for disruption), deliberate, and occasionally revolutionary, opportunities from H3 will eventually enter H2. In case the environment is unpredictable and difficult to shape, a more evolutionary and agile approach is indicated: innovation is primarily operationally embedded and driven out of the core business towards H2, where experimentation within the existing business is leveraged to adapt to the changing conditions. In contrast, feeding from both directions is more balanced if the environment is in between those extremes. As most H2 initiatives pose a transformational character, usually coming along with significant organizational change and pain, it’s critical to launch as few of such initiatives as possible at the same time.

Takeway: A model for integrative innovation management

The points made above can be framed in the following model for integrative innovation management:

The model reflects some key takeaways:
- Structural separation of exploration and exploitation is crucial for established companies in oder to pursue revolutionary innovation, i.e. to create novel businesses (e.g. through white space opportunities) and disrupt existing ones, mostly operating in mature industries, respectively.
- Prolongation of established businesses is accomplished through evolutionary innovation within existing business models. It requires integration of optimization and adaptation by means of an operationally embedded, agile organizational structure.
- Appropriate integration interfaces between exploration and exploitation structures have to be designed for collaborative scaling of initiatives and mutual capability leverage.
- Pursuing both complementary directions of impact in parallel entails a balanced innovation portfolio and therefore the highest likelihood for company success over the short and long term.
9 May 2016
Key Issues in Innovation Management – Revisited – Part 2
In part 1 of this post, Ralph revisited key innovation issues that were already addressed by us three years ago. In addition to these still highly topical issues, we’d like to raise another four points which we personally foresee key for innovation management in the time to come – making no claim to completeness:

Organizational Ambidexterity

As you can see from previous posts, I’ve been passionately advocating the importance of organizational ambidexterity for a couple of years now. From my own practice and observations as well as from recent discussions with other innovators in my local and global communites, it’s obvious to me that this issue is increasingly understood and becomes a major organizational requirement. It turns out more essential than ever for corporations to find ways how they can balance their innovation portfolio and to evaluate which structures, strategies and resources they have to put in place. Although, this is highly individual to each company, there may be some common cornerstones – such as the “Three Horizons” concept – structuring this way. Research confirms: development of exploration in parallel to exploitation capabilities proves to be mandatory for established companies in order to compete successfully and sustainably. Streamlining and simplifying existing businesses can be a major lever for resourcing important exploration initiatives. Note: Explorers outperform exploiters in the long run!

Tim’s Comment: I can’t tell you how often I come back to exploration/exploitation as a key concept. It doesn’t always translate to managers, however. Who wants to be an exploiter? One of the key issues in innovation management is figuring out how to frame these important ideas in ways that make sense to managers – finding the right story, metaphor or phrase.

Co-Innovation and startup engagement

One way for established organizations to strengthen exploration is by developing internal capabilities in order to overcome their inherent inertia. Another way is to “outsource” exploration through external engagement with startups. Thus, organizations acknowledge their inertia and focus on their exploitative strengths, rather than on their explorative weaknesses. Steve Blank and Evangelos Simoudis point out that todays’s R&D departments are not capable of accomplishing the exploration work anymore. On top of this, from an incumbents’ point of view, there are legitimate reasons for rejecting a new technology. If it underperforms, there is no business case for adopting it unless there is improvement. Moreover, if the innovation is truly different, then the incumbent would have to overhaul its systems and operations to adopt it. That means high integration costs – and another reason to be wary of new innovation. But incumbents would be willing to make changes if a new technology proves to be truly disruptive and the long-term benefits are worth it. Therefore, more and more companies turn to establishing innovation centers in order to take a “wait-and-see” approach, rather than to predict the future: they connect with startups and increase their stakes in those whose fresh ideas turn out to be taking off.

Most companies will continue to favor a “safer” approach in the time ahead, even while facing disruption. This suggests, this path to explorative innovation may be more appropriate for them. A key issue will remain how to establish co-innovation best and how to leverage new ventures in order to attain strategic or innovation goals. What’s more, proven benefits are also on the side of startups: corporate-backed startups tend to exhibit higher innovation rates compared to those backed by traditional, independent VCs.

Research confirms large companies as well as entrepreneurs to rate the importance of collaborative forms of innovation higher for the future. Further, the ROI (return on investment) of collaborative innovation was found to have been increasing recently. In light of rising connectedness, thinking in complementarities and co-creating in ecosystems with small and large partners (as discussed above) will increasingly take hold. One recent example for strategic complementarity is the announced partnership between GM and Lyft.

Tim’s Comment: There’s one other way that this idea plays out too – figuring out how to use lean startup techniques inside of established organisations. That’s been the core issue in the work that I’ve been doing with the CSIRO. The Stanford Social Innovation Review also looked at how to do this inside of not-for-profits. The advantage to using lean startup is that it increases your exploration ability, as Ralph says, and it also increases your capability in experimenting, as discussed in Part 1.

Digital Transformation

Digital Transformation – the use of digital technology to radically improve performance or reach of companies – affects every industry sooner or later. It will become a hotbed for innovation in 2016 and the coming years. On the one hand, it requires tailored digital strategies for companies, entailing technology-enabled, but highly customer-centered innovation. On the other hand, digitalization poses challenging requirements on organizations to become capable of going about these innovations, becoming truly user-centered and picking up the needed speed for the digital age. Although it should be obvious to companies that they jeopardize their existence if they don’t pursue digitalization with the required focus and speed, there seems to be a severe deviation between target and actual. BCG comments:

(…) it appears that even within the technology sector, many companies are not getting the message; on average, only about a third of executives project big data and mobile will have a significant impact on innovation in their industries over the next three to five years. Even fewer are actually investing in them. (…)

Consumers, who have been educated by the likes of Apple, Amazon, and Google in the possibilities of digital technologies, have moved quickly up the adoption curve. Digital technologies make their lives easier and better, and they want more digital – and mobile – interaction from the companies and other organizations that they do business with. (…) Companies are proving slower to adopt digital. (…)

As of the first quarter of 2014, 30 percent of Fortune 500 companies did not have a mobile app, and less than half had a mobile website. Most companies are not targeting mobile products and capabilities in their innovation efforts. The B2B marketplace has also been slow to catch on. Digital and mobile are only gradually making their presence felt there. (…)

We would expect to see the most intensive innovation focus in big data, given all the attention that has been devoted to the ability of digital data and advanced analytics to generate new products, markets, and revenue streams. Indeed, BCG research shows that big data leaders generate 12 percent higher revenues than those who do not experiment with big data. They are also twice as likely as their peers (81 percent compared with 41 percent) to credit big data with making them more innovative. (…) Still, three-quarters of our respondents said that their companies are not targeting big data in their innovation programs.

These results seem to complement findings of a recent study, conducted by MIT SMR and Deloitte. One major finding was, that organizations can be categorized in different digital maturity and awareness levels. Depending on the maturity level, distinct objectives and priorities are reported (see figure below). “Early”, digitally immature organizations (mostly without any digital strategy) focus on cautious, operationally-driven point investments for improving customer experience and engagement, as well as for increasing efficiency first. They aim at capitalizing on digitalization to advance their existing businesses. Mature organizations (following a dedicated digital strategy), in contrast, also rate bolder objectives, such as improving innovation and transforming the business, as prioritized objectives. From this, it becomes obvious that a certain organizational readiness seems mandatory in order to make use of digital technologies for innovation, let alone transforming business models.

What are critial conditions and factors contributing to digital innovation success in sufficiently mature companies? I’d like to highlight a couple of important ones – it’s where research intersects with my personal experience:
- Digital strategy: Developing and pursuing a digital strategy drives digital maturity. Without a coherent set of vision, priorities and objectives, an organization will hardly be aware and prepared to tap into the transformative power of new technologies.
- Dedicated labs or teams: Companies with dedicated cross-company labs or innovation teams are more than twice as likely to have launched at least one major digital innovation within the last 3 years.
- C-Suite mandate and sponsorship: Of those with labs or teams with direct C-level sponsorship, 100% have shipped significant digital products, indicating a strong C-level buy-in does help get more major initiatives out the door.
- Two-speed organization: A two-speed IT operating model decouples the digital business and traditional business with its legacy systems in order to cope with distinct pace and innovation speeds for each of both. This can be considered a special case of organizational ambidexterity in the digital transformation context. Setting up an independent digital organization is a good way to get things moving quickly, but only if the digital organization collaborates closely with the rest of the business and is properly aligned with the back-end IT developers.
Tim’s Comment: This is a huge gap for most firms right now, at least in Australia. It’s critically important because most of our forecasting tools are based on the assumption that the future will look roughly like the present. That’s been a reasonably safe assumption to make for a long time, but that’s no longer true.

Accelerated shift towards customer experience innovation

The coming years, probably decades, will be determined by two major shifts. First: Services already account for over 60% of the GDP of 35 of the top 40 economies in the world. Business activities, both B2B and B2C, tend to continuously shift towards differentiating services as digital technologies enable new business models (such as sharing services or product-as-a-service, cue: circular economy) as well as make products comparable and accessible on a global scale – and therefore more and more a commodity. Second: Accelerating deployment of novel digital technologies become the norm on the side of companies, but even faster on the side of customers. 75% of all digital data is now created by consumers, much of it via handheld devices. The increasing use of mobile devices results in “always on”, more demanding and powerful customers. Further, ongoing digitization is increasing the number and variety of customer touchpoints. That makes clear: we have been entering a new age of customers and services.

This combination of shifts implies some mandatory changes for companies. They have to
- make their business customer-centered, rather than product-centered
- serve customer needs in the context of life events, rather than selling products
- shift from customizing products to individualized experiences
- optimize the customer journey across all physical and digital touchpoints
Which impact does all this have on innovation considerations? To me, it definitely indicates innovation management will have to focus strongly on the customer experience (CX) by adjusting or renewing business models and adressing one-to-one engagement. Well-suited approaches, such a experience design or jobs-to-be-done help innovation initiatives putting the customer in the center. However, most companies are not yet adept in innovating truly customer-centered and need to build these capabilities in order to stay competitive. Forrester argues:

In the Age of the Customer, consumers are in control of their interactions with businesses. Inundated by endless sources of information, customers expect ready access to content that is personally relevant in the context of what they are doing and accessible anytime, anywhere, and in the format and on the device of their choosing. Attracting, winning, and retaining customers in this environment requires a concerted effort from across the business: The organizational structure, company culture, and business technology must all be aligned in service of the customers, in the spirit of delivering them exactly what they want. For this reason, digital and customer experience strategies are inexorably linked. Most every change that organizations make to aid in their digital transformation is also in pursuit of a better customer experience, whether directly or indirectly.

Gartner predicts that by 2018, more than 50 percent of organizations will implement significant business model changes in their efforts to improve customer experience. Research further confirms CX innovators to outperform their peers. The number one lesson to be learned for the digital era: companies that “own” the end customers, serve their contextual needs and provide a superior customer experience by means of appropriate – mostly platform-based – buiness models are going to win the customer’s trust and take the lead!

Adapted from: http://sloanreview.mit.edu/article/thriving-in-an-increasingly-digital-ecosystem/

Takeaway

Which key innovation issues should companies and innovators have on their agenda in order to stay ahead in 2016 and beyond? Some advisory points in a nutshell:
- Rather than using broad-brush approaches, align your innovation activities with integrative concepts that allow to differentiate but complement distinct innovation contexts. Once again: one size never fits all!
- Develop business model innovation capabilities and provide for essential preconditions – first and foremost: CEO sponsorship and autonomous organizational space.
- We are moving towards a co-creative platform economy. Therefore, evaluate whether to orchestrate your own platform or just participate in an other’s. Either way: be part or be out!
- Develop a culture of experimentation for exploring new businesses, but also for strengthening existing businesses. You will get one of the most critical success factors for innovation in reward: speed.
- Make sure your organization operates ambidextrously. Invest sufficient resources in explorative innovation because explorers outperform exploiters in the long run.
- Innovation is not accomplished solely by one company any more. Reach out to the right partners for co-innovation. Engage particularly with startups if you prefer to play it “safe” but yet intend to drive radical or disruptive initiatives.
- Prior to tapping into the huge innovation potential of digital transformation, build your company’s strategic readiness by conceiving the digital “big picture”. How to go about digital innovation? Setting up a dedicated digital unit, mandated and sponsored by the C-suite might be a promising start.
- A new age of customers and services is on the rise. Shift your thinking and offers from customized products to individualized and contextualized services. Customer experience innovation will be the emerging battleground!
What are your key innovation issues for the time to come? We look forward to hearing them in the comments.
13 March 2016
When Should We Adopt a New Idea?
Often, it’s easier to predict long-term change than it is to figure out what’s going to happen in the short-term. This makes it really hard to develop a sensible innovation strategy.

Kodak invented digital photography, and they knew full well that eventually this would become the dominant technology. In 1997, they predicted that this transition would happen – around 2017. They picked the long-term trend absolutely correctly – it’s the timing they messed up.

Looking backwards now, everyone thinks that the trends were obvious. Why couldn’t the get this right?

It’s not as easy as it looks – and getting this right is going to become increasingly important as the rate of technological disruption increases. Chunka Mui and Paul B. Carroll in their new book The New Killer Apps
outline six technologies that, in combination, will drive this change: mobile devices, social networks, cameras, sensors, cloud computing and emergent knowledge.

Here’s another example of how this might work – let’s take a look at the construction industry.

One of my collaborators likes to say that the last big innovation in construction was the invention of the brick, in Egypt a couple thousand years ago.

That exaggerates things a bit, but still, it’s not the most dynamic industry around.

And yet, things might be about to change.

A construction drone builds a wall

If you put together those six technologies, you can start to see some change coming. Cameras, sensors and mobile devices can let you build a wall with a construction drone.

Now, combine this with Building Information Modeling (BIM):

Building Information Modeling (BIM) is a digital representation of physical and functional characteristics of a facility. A BIM is a shared knowledge resource for information about a facility forming a reliable basis for decisions during its life-cycle; defined as existing from earliest conception to demolition.

BIM uses more of these technologies. When you store the files in the cloud, you can access the plans both on site and in the office. If you network the data internally, you can start to track learning from project to project, creating emergent knowledge.

Now, combine this with sensors – and we can start to track every piece of material, every piece of machinery and every person on a building site.

This is the future of building. But, when?

One of my students has put a lot of thought into this, and here is one of her experiences:

Two weeks ago, I was working with the lead asset management consultant from XXX, who is currently designing the asset management system for the Department of XXX. I broached the subject of BIM with him, and he had a surprisingly negative view. His view was that it was just an IT fad that held no value, and that asset management practitioners would just go back to using excel spread sheets to manage their processes.

This illustrates several important innovation issues:
- Fear is an important obstacle to innovation. How can you possibly think that people will be using spreadsheets to manage projects forever? Partly, it’s fear. Here is how Seth Godin describes it:
  
  … as Steven Pressfield describes it, the resistance. The resistance is the voice in the back of our head telling us to back off, be careful, go slow, compromise. The resistance is writer’s block and putting jitters and every project that ever shipped late because people couldn’t stay on the same page long enough to get something out the door.
  
  The resistance grows in strength as we get closer to shipping, as we get closer to an insight, as we get closer to the truth of what we really want. That’s because the lizard hates change and achievement and risk.
  
  The resistance is why the first stage or responding to disruption is ridicule. Fighting through this resistance is one of the keys to innovating.
- You can see the S-Curve in action. Why do ideas spread though an S-Curve:The time it takes to work through the period marked X always takes long than we expect it to. One of the reasons for this is that it takes some time to figure out how to build a business model around the idea.That’s what is happening with BIM right now. At the moment, it is at the flat part of the curve. BIM is expensive, so only top end customers will look for construction bids that use it. However, as it gets used more, costs will come down, and then projects run using BIM will become substantially less expensive than those using spreadsheets for planning. That’s when it will start to take off.
- BIM will win because of emergent knowledge. Platforms that build emergent knowledge have been winning for a while now. Google’s search algorithm gets smarter the more people use it. Nike Fuel gets better at helping you exercise as it compiles more data from its growing user base.This might help crack one of the biggest innovation problems in project-based firms: if we learn something in one project, how do we transfer that knowledge to other ones? With BIM, this learning will be recorded, and communicated. This is huge. It means that the firms using BIM will start to have much smarter internal networks. This will be part of what drives the costs down. Emergent knowledge will win again.
The tricky part if figuring out when the change will happen. You can get away with your spreadsheets for a few more years at least. But that won’t last forever.

It’s probably a good time for construction firms to be thinking about this.

And if even building construction has to be thinking about disruption today, it’s probably a good time for you to think about the impact that these technologies might have in your industry as well.
20 February 2014
Are You About to be Disrupted?
The New Killer Apps

Here’s a startling quote from Chunka Mui and Paul B. Carroll in their new book The New Killer Apps:

That $36 trillion is the total market valuation of public companies in the ten industries that will be most vulnerable to change over the next few years: financials, consumer staples, information technology, energy, consumer goods, health care, industrials, materials, telecom, and utilities. Incumbent companies will either do the reimagining and lay claim to the markets of the future or they’ll be reimagined out of existence.

Who is covered in that list of 10 industries? Well, everyone.

The six drivers of change that they lay out are:

The technologies are: mobile devices, social networks, cameras, sensors, cloud computing and emergent knowledge. Together, these are the technologies that convert products into platforms.

So here’s a question: what impact will this set of technologies have on your industry?

In my main one, higher education, I suspect that things like MOOCs are actually behind the curve – few of them take advantage of these technologies. What is the next generation of higher education as a platform? I don’t know, but the question is well worth considering.

It’s worth considering for your industry too.

How can you respond to this disruption?

Mui and Carroll make another interesting claim – that big companies are better placed to take advantage of these changes than small ones are:

This book aims to reverse a bit of conventional wisdom that’s taken root in recent decades: that start-ups are destined to out-innovate big, established businesses. The conventional wisdom just isn’t true. Or, at least, it need not be. Yes, small and agile beats big and slow, but big and agile beats anyone—and that combination is now possible.

…

The second reason that we focus our innovation work on incumbents is that they should win. Yes, we all know that big companies are sometimes complacent about threats, especially if those threats start small. But big companies have everything they need to continue to dominate: unmatched people, resources, supply and distribution capabilities, brand power, and customer relationships. And in the context of today’s immense technological opportunities, incumbents have growth platforms that would take start-ups years to build.

The question then, is how do we become big and agile?

Their answer is to do three things:
1. Think big. If you are in one of the industries facing disruption, it’s not enough to think about making changes at the margin. Instead, you have to be thinking about reimagining – you need to look for that 10X performance improvement.
2. Start small. Instead of making big bets, they recommend starting small, then iterating. This means prototyping, and it means experimenting.
3. Learn fast. Mui and Carroll say: “little tests can be cycled through faster than full-scale implementations, and cycle time is crucial when it comes to innovating. If you give us two moves in a chess match for every one you take, we’ll beat you every time, no matter who you are.”
They lay out a compelling case for taking a scientific-method style approach to innovation.

And they’re right in saying that given their resources, big firms should win. But then they spend plenty of time outlining ways in which big firms have failed to leverage the tools available to them.

The danger of ignoring disruption

Mui and Carroll use Google’s driverless car as a case study throughout the book. For me, the most interesting part of this is where they start to look at the impact of driverless cars on other industries. Check out this discussion of the impact that they will have on insurance:

However, based on numerous conversations, it’s clear that insurance-industry executives mostly just roll their eyes if asked to contemplate the implications of driverless cars. Even if driverless cars are possible, conventional wisdom goes, it will be decades before they are relevant. Therefore, there is little need to worry now. Here’s how insurers figure the math: Begin with the assumption that it will be years before the technology matures. Add several more years to sort out the regulatory complexities, including licensing and liability issues. Add some more years to gain consumer confidence. Then, given the long lifespan of cars, add another decade or more before driverless cars make up a significant percentage of the cars on the road. On top of that, the argument goes, even if the frequency of accidents goes down, the severity will go up—as measured in the cost to fix cars with all the cameras, sensors, radars, and so on, that are going into them. And, remember, even if you don’t crash into someone else, someone else might well crash into you. So, it will be decades before anyone could even imagine giving up car insurance. Besides, there might be no short-term cost to being wrong. Fewer accidents would just mean fewer claims, and therefore greater profits, until enough actuarial data proved that driverless technology delivered the conjectured savings and forced premiums down. Thus, the prevailing attitude is probably much like that of Glenn Renwick, CEO of Progressive Insurance, as expressed during Progressive’s February 2013 earnings call: “The technology to do an autonomous car has been around for a while. We’re now seeing them; we’ll see a lot of talk about them. The real issue is exactly how they are able to be part of the fleet of vehicles on the road in America, and that is probably not something that need keep anyone awake for quite some time.”

You can see that they are still at the first stage of dealing with disruption: ridicule.

This is another example of incumbents misunderstanding the S-Curve of technology diffusion. The mismatch between hype and early results makes it very easy to dismiss new technologies. The S-Curve lies underneath Bill Gates’ famous quote about disruption:

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.

When you dismiss disruptive technology early, you are not thinking big. Mui and Carroll give a compelling explanation for how things are changing across many industries these days. The book is well worth reading.

But acting is more important than reading! My prescription is to take the smart small and learn fast ideas to heart. These are the core skills that you need to build a culture of experimentation, and experimenting is the best way to cope with an uncertain future.

If change is inevitable, it’s always better to be the driver of change, rather than waiting for it to come, and then reacting. If you’re big, you have the resources available to do this. But you also have an existing core business that can keep you from acting. If you’re faced with this conflict, the best step is to start experimenting.

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22 January 2014
Failure is Always an Option

Why are we so uncomfortable with failure?

People are deeply uncomfortable with the idea of failing. Almost every time I mess something up, you can trace it back to fear of failure – tackling that is my biggest challenge.

Every time I write a post about the crucial role that failure plays in innovation, I get comments that say things like “tell the families of trainee pilots that failure is good.” But here’s the thing: failure is especially important when we are doing important things where there is no margin for failure.

How can this be?

Clay Shirky has written an excellent piece about the problems with the launch of the healthcare.gov website. In it, he says:

The sinking feeling that all would not be well started with this disillusioning paragraph about what had happened when a staff member at the Centers for Medicare & Medicaid Services, the department responsible for Healthcare.gov, warned about difficulties with the site back in March. In response, his superiors told him…

[…] in effect, that failure was not an option, according to people who have spoken with him. Nor was rolling out the system in stages or on a smaller scale, as companies like Google typically do so that problems can more easily and quietly be fixed. Former government officials say the White House, which was calling the shots, feared that any backtracking would further embolden Republican critics who were trying to repeal the health care law.

The idea that “failure is not an option” is a fantasy version of how non-engineers should motivate engineers. That sentiment was invented by a screenwriter, riffing on an after-the-fact observation about Apollo 13; no one said it at the time. (If you ever say it, wash your mouth out with soap. If anyone ever says it to you, run.) Even NASA’s vaunted moonshot, so often referred to as the best of government innovation, tested with dozens of unmanned missions first, several of which failed outright.

Failure is always an option. Engineers work as hard as they do because they understand the risk of failure. And for anything it might have meant in its screenplay version, here that sentiment means the opposite; the unnamed executives were saying “Addressing the possibility of failure is not an option.”

As always, the entire post is worth reading.

How to use prototyping to avoid large failures

Think about the bit there about NASA. In order to make manned space flight safe, the only way to do it was to fail repeatedly with un-manned flights.

It’s the same when we train doctors – the only way to make them safe as surgeons is to have them fail repeatedly practicing on cadavers and simulators. The only way to make pilots safe to fly is to have them fail repeatedly in simulators.

The critical step is not avoiding failure, but rather to build failure into the system when the price you pay for it is very low. The system that Shirky is describing is the Build-Measure-Learn loop. It is based on prototyping, and it works really well when you’re building software.

It’s easy to see how to prototype a product. And Build-Measure-Learn explains prototyping for software. But you can prototype anything. My colleagues Mark Dodgson, David Gann and Ammon Salter wrote an excellent paper describing the development of a new way of doing things – using elevators to better enable the evacuation of buildings.

This was done through prototyping. A team of fire engineers at Arup in London spent years running 1000s of simulations of building evacuations using elevators in order to figure out how to make this approach work. Each one was a prototype. They eventually used the simulations to work with regulators get this new approach approved. The reason they ran so many simulations (and failed so many times) is that when an emergency strikes in a very large building that requires evacuation, the system must work.

They have used many small prototyping failures to try to avoid a catastrophic failure in a mission critical system.

You can prototype services too. Here is an example of a prototype of a new pharmacy layout that IDEO made out of foamcore when they were working with Walgreen’s:

They used this to test the layout, to see what worked and what didn’t. This was a much less expensive way to fail than trialling it in an actual pharmacy.

Failure must always be an option. The key is to figure out how to fail in the lowest-cost way possible. Now that we have sophisticated simulation techniques available, it has become much less expensive to test out new ways of doing things.

If we’re smart, we’ll use these tools to fail even more, faster and cheaper. It’s the best way to reduce the chances that we’ll fail massively and expensively. The best way to do fail that way, is to pretend that failure isn’t an option.

But failure is always an option. The good news is that to some extent, you get to choose. Small and cheap, or massive and expensive. Which would you prefer?

1 December 2013
Innovation Requires a Bias Towards Action

Dwight Towers wrote a post last week reminding us that a lot of people have their ideas rejected not because everyone else is stupid, but because their ideas aren’t actually very good. He was basically taking on the commonly used Galileo’s Gambit, which goes like this:

They made fun of Galileo, and he was right.
They make fun of me, therefore I am right.

This is obviously a logical fallacy. Carl Sagan’s response to this idea was:

But the fact that some geniuses were laughed at does not imply that all who are laughed at are geniuses. They laughed at Columbus, they laughed at Fulton, they laughed at the Wright brothers. But they also laughed at Bozo the Clown.

It’s easiest to hold this view when your idea is just an idea – the best way to work around it is to try your idea out. This is because the value of an idea is often only found once we try to use it. There is often a huge lag between when we first see a new idea and when we really find out what it is good for – this is when we are working through business model innovation. In his great book Pasteur’s Quadrant, Donald Stokes says this:

…the notable examples from the annals of technology, detailed by Rosenberg and others, in which it took many years for a new technology to find its most important commercial uses. The steam engine was initially seen as a device for pumping water from mines and only later as a power plant for movable ships or carriages. The railroad was initially seen as a feeder of good for canal transport and only later as a fully articulated system of transportation in its own right. The radio was initially seen as a “wireless” substitute for the electric telegraph for communicating between two ponits that could not be connected by wire, such as ship to shore, and only later as a means of “broadcasting” communication to a mass audience. Indeed, this is is an almost universal phenomenon in the evolution of technology. New technological paradigms seldom spring full-blown from the minds of their inventors, and when they do, as in the case of Arthur Clarke’s vision of communications satellites, the visionary is unlikely to be the person who makes the technological dream come true.

Stokes is arguing in the book for a reconceptualisation of research. For quite a while now we have tended to view research as either basic – concerned with discovering new knowledge, but not with use – from applied – concerned only with use. Stokes instead argues that a great deal of important research comes from work that considers both knowledge discovery and use – Pasteur’s Quadrant:

There are a couple of important points here.

First, it’s not enough to have a great idea – you have to actually try it out to find out if it’s any good. That is how you avoid the Galileo Gambit.

Second, even if the idea works, we often don’t know what it’s actually good for. To discover this, we have to put it into use.

Consequently, the best innovation comes when we are concerned with both discovery and use.

Put it all together, and it means that innovation requires a bias towards action.

(I grabbed the diagram of Pasteur’s Quadrant from Michael E. Smith’s nice post applying Stokes’ ideas to archaeology)

28 May 2013
Innovation and Serendipity
This post was first published at Integrative Innovation.

In a previous post, I have pointed out the importance of diversity for innovation and organizational adaptability. Diversity is a crucial precursor to serendipity. In the Power of Pull, John Hagel, John Seely Brown and Lang Davison emphasize the rising need for serendipity:

We need to find ways to attract relevant innovators and edge participants so that we can discover early windows into the developments that will end up transforming how we live and work. Sure, serendipity has always been important, but in a world of near-constant disruption, it becomes essential to survival. Without the pleasant surprises of serendipity, we will instead have to cope with the unpleasant shock of unanticipated disruptions that undermine all that we have worked to achieve. (…)

We increasingly find that we no longer even know what to seek, even with the growing power of search. (…) At times like these, the cursor blinks in the search engine’s textbox, mocking us, asking the existential question: Do you even know what you are looking for? And even if we think we do, it’s guaranteed that “unknown unknowns,” as Donald Rumsfeld memorably called them, are waiting for us, both as opportunities and as barriers.

Innovation is becoming increasingly emergent

Innovation in the future will increasingly happen in more emergent ways by bringing together seemingly disparate fields and pieces of knowledge. The value of searching for information is increasingly limited as we don’t know what to search for in many cases. In face of complex life and work environments, predefined and narrow objectives as well as deliberate strategies often turn out to be inconvenient. Serendipitous “collisions”, in turn, require building up diverse networks and connections.

Google can answer almost anything you ask it, but it can’t tell you what you ought to be asking. – Ian Leslie

Though we increasingly interact within virtual networks and communities, physical spaces are the primary serendipity shapers. Face-to-face interactions are still most conducive to accessing tacit knowledge. We tap into this knowledge through trust-based relationships and closely working together on challenging projects.

Virtual and physical spaces can be seen complementary to each other. On the one hand, virtual spaces are increasingly able to amplify knowledge we generate through personal interactions. On the other hand, diverse virtual connections often create more valuable real-life opportunities.

Figure: Simulated collision of two protons (credit: CERN, cern.ch)

In search of (engineered) serendipity

As firms, like Yahoo and Google see it, close-knit teams do well at tackling the challenges in front of them, but lack the connections to spot complementary ideas elsewhere in the company. The sociologist Ronald S. Burt calls these organizational gaps “structural holes.” In a 2004 study he found that managers who serendipitously bridged these holes were more likely to generate good ideas.

Firms therefore try to come up with new ideas to stimulate interaction between employees who normally do not work together. To make those connections happen, some firms are taking a scientific approach – collecting and analyzing data about their teams and mathematically computing the likelihood that employees will meet. Studies have found that having colleagues work in close proximity to each other does correlate with increased collaboration. Research recently found that when workers shared the same buildings and overlapped in their daily workplace walking patterns – moving between lab space, office space, and the nearest bathroom and elevator – they were significantly more likely to collaborate: for every 100 feet of “zonal overlap,” collaborations increased by up to 20%. Case in point: Online retailer Zappos.

Despite all efforts: it seems to be impossible to engineer the truly valuable interactions and collisions. However, the chances for serendipity can be boosted by arranging its necessary preconditions.

Shaping serendipity

Here is what Frans Johansson advises on how to leverage diversity of thoughts in order to increase the likelihood for serendipity to occur:

For instance, bring together people from outside your organization, or between siloed departments or between different countries or cultures. These interactions will help you find unexpected insights and opportunities — those that others might not have logically figured out. Take statistical advantage of these random moments by placing as many purposeful bets you can afford while not becoming distracted.

What else can we do to shape serendipity? Here are some further suggestions:
- If you just think of serendipity as an interaction with an unintended outcome, you can orchestrate pleasant surprises. Institute simple measures like positioning couches near doorways and stocking rooms with multiple types of seating to encourage lingering conversations.
- Think about companywide lunch hours. You can leverage chance conversations and larger social networks by providing tables, designed to accomodate a higher number of people.
- Abigail McBirnie mentions an interesting quantitative aspect of serendipity: in average, people make up one third of the participants of a serendipity story. The remaining parts are deemed to be either information or physical objects. This suggests to not just expose oneself to diverse people, but also to various information sources and novel physical environments for serendipity to occur.
Serendipity as ingredient for breakthrough innovation

Breakthrough innovation often relies on serendipity. Research from Wharton School suggests knowledge flows to be highly critical for breakthroughs. Knowledge flows involve knowledge that individuals are actively engaging in while doing a task. These flows allow information from peripheral domains to permeate. This can lead to recombination of ideas in novel and useful ways. The reason: information that is available in an individual’s short-term memory (knowledge flows) is more cognitively accessible than information stored in individual’s long-term memory (knowledge stocks).

The researchers also provide some managerial advice: allocate a large portion of a worker’s total work time to one particular assignment or project. If work group members have more attention available to devote to the task or project, the advantages of [paying]attention to a particular peripheral domain will be more likely to outweigh the disadvantages arising from distracting attention from other domains. Hoewever, there remains a risk that workers might focus too much on domains that are actually irrelevant to their task, thus preventing their performance on the primary task. This requires dealing successfully with such tradeoffs on the part of workers and managers.

Takeaway

Innovation and adaptability require deliberate, but also increasingly emergent approaches in order to succeed. Diversity and serendipity can be considered as necessary ingredients to stay competitive in the time to come. Serendipity can’t be literally engineered, but be shaped within given limitations. The likelihood for serendipitous encounters to occur can be increased by establishing appropriate preconditions, such as
- creation of serendipity-friendly virtual and physical infrastructures
- build-up of diverse networks, i.e. weak ties in complement to strong ties
- managers valuing serendipity and trust-based, encouraging leadership style
- ability of workers to adequately balance attention between core and peripheral domains, i.e. abosorbing edge information without being distracted from core tasks
- capability to integrate convergent and divergent thinking, or as Jorge Barba puts it: if you’re told what to look for, you can’t see anything else.
27 May 2013
Talk is the Technology of Leadership

Blinded by the Light?

“It’s raining at night, and a car coming the other way has their brights on – they’re blinding you. What do you do?”

I had already passed my practical driving test after we moved to New Zealand, and now I just had to answer this question, and I’d have my new Driver’s License.

“Slow down until it’s safe.”

“Ok, but what actions would you take?”

Now I had to think about it – what would I do step-by-step? I didn’t know! Now what?

I took a deep breath, then closed my eyes and visualised the situation. I put left foot on an imaginary clutch, my right on the imaginary gas, and grabbed the imaginary steering wheel. Then I talked through each action.

“Well, I’d let my foot off the gas to start slowing down, then I’d look down to the left to find either the white line or the edge of the road. If was safe, I’d pull over, otherwise I would navigate by the line until the car was past.”

That satisfied him. Now I had my new license.

The Things We Don’t Know We Know

When we drive, there are hundreds of things that we do every minute that we don’t consciously think about. Over time, we get so good at making these constant adjustments to speed and direction, gas and brakes, that we forget just how hard it is to actually drive a car. If we’re not careful, our concentration will slip and that can lead to trouble.

The things that we don’t know we know are like that – they allow us to do incredibly complex tasks without thinking about them, but the unconscious nature of the action can also get us in trouble.

Managing is a lot like driving. When you’ve done it long enough, parts of it become automatic. I don’t get to manage much in my current position, so when I get a chance to exercise my management muscles and I can see all these actions coming back, I’m much more aware of them than I was when I was a full-time manager.

Management is all about influencing from a distance. The whole job is nudges and levers, questions and suggestions. Little adjustments to keep on course, or speed up, or slow down. That’s the art of managing.

The academic term for the things we “know” but can’t articulate is tacit knowledge. It includes mostly things that we learn from doing. Think about riding a bicycle – can you explain step-by-step how to balance while you’re moving forward? It’s actually pretty close to impossible – that’s why we need training wheels.

We actually need training wheels as managers too. Here is how Henry Mintzberg puts it in his superb book Managing:

Little of management practice has been reliably codified, let alone certified as to its effectiveness. That is why Hill found that people “had to act as managers before they understood what the role was”

It should be emphasized that, unlike other workers, the manager does not leave the telephone, the meeting, or the e-mail to get back to work. These contacts are the work. The ordinary work of the unit or organization—producing a product, selling it, even conducting a study or writing a report—is not usually undertaken by its manager. The manager’s productive output has to be gauged largely in terms of the information he or she transmits orally or by e-mail. As Jeanne Liedtka of the Darden School has put it (in a talk I attended): “Talk is the technology of leadership.”

Talk is the Technology of Leadership

I love that quote from Jeanne Liedtka – talk is the technology of leadership. When was the last time you thought about how you use words? That’s something we learned to do ages ago. So long ago that we don’t even know what we know about speaking, or listening.

And yet, these are the core technologies of leading. Speaking, and listening.

If you’re leading, or managing, it pays to think about these technologies a little more deeply.

Tom Peters addresses listening in a great document that he posted over the weekend called Presentation Excellence (link to .pdf). The main document is about presentation skills, and it’s useful. For me though, the goldmine is the appendix on listening.

He starts this by saying “Interviewing/asking questions is a critical—and under-studied and under-practiced—skill. Few have treated it as a skill to be mastered akin to learning to play the piano.” He then goes on to give 59 thoughts on becoming a better listener. This is an invaluable resource – check it out.

In terms of speaking, I’ve also run across an excellent resource recently. It’s a book called The Power of Framing: Creating the Language of Leadership by Gail Fairhurst. Like the piece by Peters, this book contains a wealth of practical examples and tips for using language more effectively.

It’s time for us to consciously think about the things we do automatically. If talk is the technology of leadership, than it makes sense to build our skills in this area. As we do this, we should pay attention to one last quote from Mintzberg’s book:

“It’s not [the manager’s] job to supervise or to motivate, but to liberate and enable” (Max DePree of Herman Miller, 1990).

(photo from flickr/fragglerawker_03 under a Creative Commons License)

30 April 2013
Do You Really Know What Business You’re In?
Stop and think about the computer you’re carrying around with you right now. Not your laptop, your phone. Actually, maybe calling it a computer is selling it a bit short.

Check this out:

The picture is from here, and it raises several important innovation points:
1. Your market is never stable. Did phone makers think they were in the camera business in 1993? What about camera makers? We’ve seen an incredible collapse in categories as many different industries become increasingly IT-based. When something like this is happening, you need to be thinking about your business model. As your market changes, it opens up new opportunities for collaboration and value creation, as well as new threats. There is a pretty good chance that your business model will need to change as the boundaries of your market shift.
2. We’re all in the knowledge business now. The control room for a mine looks identical to the control room for a space shuttle launch. Construction companies now are more concerned with getting the right data to the right people at the right time than they are with traditional logistics. Again, this means that you need to be thinking about your business model. It’s getting increasingly difficult to build a competitive advantage based on keeping your customers ignorant (think of the way cars were sold pre-2000 or so). Even if you’re making stuff, knowledge flows are really important.
3. It’s pretty cool! I don’t know about you, but I think it’s pretty cool to have all that capability packed into one device. Yes, it has downsides. It’s dumb to be checking email right when you wake up like I nearly always do. But that’s also part of figuring out the best way to use new tools – do dumb stuff until you find the best applications. Even though some say that we’ve run out of big ideas, I think that we live in pretty amazing times.
The transition from brick-sized handsets to palm-sized supercomputers would have been unimaginable for most of us in 1993. On the other hand, as William Gibson said, the future is already here, it’s just not evenly distributed.

So what ideas that will be transformational by 2033 are here already? What impact will these ideas have on the business that you’re in right now?

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17 April 2013
20 Things Good Managers Know About Innovation
Everyone wants to innovate more, and many people don’t know where to start. Which is weird, since we actually know quite a bit about how innovation works.

Here is a list of some of things that we know are true:
1. Solutions come from empowered people. Delegate decision making as far towards the front line as you can to increase your innovation.
2. You can’t legislate innovation. It doesn’t work to just say to people “go innovate” – your business model needs to support it.
3. It’s not just about ideas. It’s the process of idea management.
4. Innovation is the best way to bridge a gap between where you are and where you want to be.
5. Getting the great idea to spread is just as important as having it and making it work.
6. If every idea you try works you’re not trying enough new ideas.
7. Make lots of little bets.
8. People are way more important than tools.
9. Innovations can be good or bad – make sure you’re creating real value.
10. You need a deep understanding of the problem you’re trying to solve.
11. Ask new questions. Make new mistakes. Learn.
12. A problem in need of a solution is worth lots more than a solution looking for a problem.
13. Anyone can innovate.
14. Connecting ideas is the fundamental creative act in innovation.
15. You need top-down commitment to create a culture of innovation.
16. If you don’t have the support of your manager, you need to innovate by stealth – how much can you get away with?
17. Efficiency is often the enemy of innovation – you need slack!
18. Failing is good – try to fail as small as possible, and make sure you learn from it.
19. Innovation needs to support strategy, but every once in a while it can create it.
20. Innovation works best when you pursue a portfolio of innovative projects.
Innovation is not a black box. If you apply some of these ideas, you can make your organisation more effective at innovating.
11 April 2013