Four candles from Maurice Reeves on Flickr. Used under a creative commons license.  (https://www.flickr.com/photos/mauricereeves/3139315903)

Four things big innovators do differently

This originally appeared as a guest post for Geckboard.

Large companies all have different strategies and approaches to coming up with what’s new. Some centralize innovation, while others distribute it. Some rely on acquisition, while others prefer to incubate. And some move cautiously, while others cast about wildly for the mythical unicorn that will catapult them into a new industry.

But all of the really successful innovators with whom I’ve spoken do four things that help them discover new markets and product offerings: they keep score differently, they frame product creation as a study, they innovate on product, market, and method, and they manage a three-maxima portfolio. Some of these patterns are at the core of this investigation into Intrapreneurship, so I’ll get into a bit more detail on each of them.

Different ways of keeping score

One of the biggest challenges Intrapreneurs face is that of competing metrics. Large businesses have annual budgets, and tie compensation and bonuses to the attainment of known goals rather than to the discovery of new ones.

Companies that manage to innovate recognize that tomorrow’s businesses look bad when seen through today’s lenses. Consider Blockbuster and Netflix. Blockbuster made much of its revenue from late fees; Netflix had none, so it looked less attractive to the incumbent.

To deal with this, companies create new metrics (such as the number of assumptions confirmed or repudiated) and different timeframes (such as weekly or monthly budgeting.) Data on innovation projects is reported in aggregate on an annual basis to the host company, but the individual projects are shielded from the tyranny of long budget cycles.

scoreboard by Ross Hawkes on Flickr. Used under a Creative Commons license.

I should point out that many of the ideas here aren’t new. Long before startups raised the banner of product/market fit, H. Igor Ansoff’s two-dimensional matrix described innovation along those two dimensions. The Three Horizons model of innovation comes from McKinsey and Geoffrey Moore’s writings. And the tension between sustaining and disruptive innovation is at the root of Clayton Christensen’s Innovator’s Dilemma.

It’s not innovation, it’s research

To tackle the stigma of failure, some of the companies I’ve talked with treat innovation as a form of research. Small startups might be surprised at how much primary research costs large businesses. A global study, conducted by a large research company, requires many months and hundreds of thousands of dollars to complete.

Rather than saying, “we’re going to create a new division to sell widgets,” some Intrapreneurs say, “we’re going to study the widget market.” Then they use the budget for the study to enter the market with a minimum viable product and learn quickly.

This has two key consequences:

  • First, it provides more direct understanding of users and emergent markets. The project is free to talk to anyone—and more often than not, in truly disruptive innovation, the new users aren’t part of the current business.
  • Second, it satisfies the organization’s need for predictability and success. If the innovation is a failure, the Intrapreneur can say, “great news, we now know all about the widget market, and here’s why we shouldn’t enter it.” If, on the other hand, the innovation is promising, then she can say, “the widget market is attractive, and we’ve already created a beach-head product.”

For a more modern example of listening to the wrong customers, consider the cloud computing industry. When large server vendors asked their best customers what they wanted, they were told, “more of the same, bigger and cheaper and faster.” At that time, cloud computing offerings from Amazon Web Services failed these tests in every respect: they were less powerful, more expensive, and less reliable than physical servers.

But Amazon wasn’t targeting CIOs and enterprise IT. Instead, it was talking to startups, application developers, and CTOs—who wanted involved pay-as-you-go pricing, high aggregate capacity, and quick launching of new servers. This is a classic example of the Innovator’s Dilemma; studying a market by entering it, cheaply, is a far more effective way to discover new criteria than surveying your existing customers.

Later, of course, cloud technology matured so that it’s possible to build faster machines (by sharing the load among many of them), save money (by varying capacity with demand), and create more reliable applications (by failing gracefully across data centers worldwide.) So in the long run, cloud computing met all of the CIO’s needs—which is why incumbent server vendors are scrambling to launch cloud offerings.

Product, market, method

Startups often talk about product/market fit, the moment when you’ve found the right product for the right market and things just snap into place. I’ve found there are three big dimensions, and the third one—method—is often overlooked.

Marketing purists will point out that the broadest possible definition of product includes the entirety of brand, channel, delivery, pricing, and surrounding services, so there’s no need for the “method” dimension. While this is true, it’s a point often lost on organizations of all sizes, particularly those for whom sales is a separate function from product management or research and development.

Innovation on method is one of the reasons we’re in a renaissance of entrepreneurship: we have a fundamentally new channel through which we can source and deliver products. We’ve moved from physical channels with high coefficients of friction to online models made up of bits, mobile devices, and web sessions. Many of today’s innovations aren’t new products or even new markets—they’re new methods.

3-dimensions

Consider Amazon as a book publisher:

  • In its early days, it sold books (an existing product) to readers (an existing market.) What was new was the method it employed: centralized distribution and web-based ordering.
  • Later, the company introduced the Kindle e-reader—a new product to the existing market (readers) through now-existing methods (online purchase.)
  • And finally, because e-readers had variable font size, the company could reach a new market (the legally blind) with an existing product (e-readers) and channel (online purchase.)

There have only been a few other truly fundamental changes in written history, such as the replacement of muscle power with steam power, and the resulting industrial age; or the replacement of word-of-mouth with mass printing and literacy. Both of these changes offered an entirely new method of doing things, and triggered a flurry of innovation.

As a sidenote, I’m a big believer that much of the flurry of innovation we see today isn’t truly disruptive—that word is used far too frequently. Instead, it is the introduction of a new method (digital channels replacing physical ones) to nearly every aspect of our lives. The disruption is the move to digital; most innovations are a result of applying this disruption to an existing product and market, such as travel booking or retail sales.

Intrapreneurs in big companies know this, and spend much of their time on method innovation—sometimes called go-to-market strategy, but with a far more speculative and experimental angle.

Three-tiered portfolios

Big companies don’t work on one thing at a time. They have a portfolio of innovation projects, and they manage them much as an investor might manage investment, balancing risk and novelty with predictability and familiarity. The best companies put innovation into three distinct portfolios: sustaining, adjacent, and disruptive.

  • Sustaining innovation means doing more of the same, better than before. It’s focused on continuous improvement and optimization, and it’s required to remain competitive against known threats. Sergio Zyman, CMO of Coca-Cola, once described the role of marketing as “selling more things to more people for more money more often more efficiently,” which is a good summary of companies in the first tier of a portfolio. Traditional accounting metrics and KPIs apply in this tier; execution matters.
  • Adjacent innovation involves changing one aspect of a business model—either the product, the market, or the method. There is risk and uncertainty involved, but it’s close enough to the existing business that it’s familiar to the organization. The metrics in this tier are different, however, so it’s important to learn quickly. Iteration matters most. Projects “graduate” to the first tier of the portfolio when they become predictable and find a home within the existing organization.
  • Truly disruptive innovation involves changing many aspects of the business at once. It’s unfamiliar to the existing business, and needs buy-in from the very top of the company to happen. Metrics here deal with the speed at which the organization is identifying and testing new ideas, and discovery matters most. Projects either “graduate” to the second tier of the portfolio when they become measurable, or they warrant the creation of an entirely new business group—often one that has made the existing one completely irrelevant.

We can summarize the difference between these three groups by their core focus and how well we understand the problem and solution:

Innovation areaSustaining/coreAdjacentTransformative/disruptive
Core actionOptimizing/improving (Sergio Zyman's "five mores" of marketing)Experimenting (changing one of: product, market, or method)Searching/inventing (moon shots, hoverboards)
Score to watchKnown metricsRemoval of riskDiscovery of needs and validation of assumptions
Where it will liveIn the current business unitIncubated centrally, then integrated into a line of businessAs a new, separate entity or replacing existing, now outdated, business unit
Problem isKnownKnownUnknown
Solution isKnownUnknownUnknown
Build usingWaterfalls, project plansAgile/scrum approachesLean Startup tactics

Four isn’t enough

These are four broad patterns Intrapreneurs embrace. What’s key is that there are significant differences in the way organizations need to run disruptive innovation. Google X, for example, runs in relative isolation from the rest of the search behemoth, and embraces failure as long as something has been learned. That’s vastly different from the attitude with which we should score a new marketing campaign or a product launch in a new territory.

2 thoughts on “Four things big innovators do differently

  1. It is refreshing to read your post. All along I thought something was wrong in the logics of my thinking. You have cleared uo several of those notions. There is nothing wrong with me I just think differently than most people. Thanks

  2. Great study for companies new and traditional Like your breakdown…we can all learn from this at levels…c-ze-dukes…director of Genius Club Global Trading.

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