Minimum viable innovation system
This post is a summary and interpretation of the article Building an Innovation Engine in 90 Days published in the December 2014 issue of Harvard Business review.
Innovation require individual heroism or serendipity. Efforts to jump start innovation frequently fail. To solve this, companies can implement a minimum viable innovation system (MVIS) that is reliable and strategically-focused.
All innovations fall into one of two buckets:
- Core innovations extend today’s business by enhancing existing offers and improving operations. Core innovations are expected to deliver value in the near future.
- New-growth innovations reach new customer segments or markets, move to adjacent product categories, often through new business models. New-growth innovations take longer to bring substantial revenue.
New-growth innovations are necessary to close the growth gap: the difference between a business’ growth goals and the growth that the core business can achieve.
The further from the core a new-growth innovation is, the more it runs counter to systems and processes designed to strengthen and support the current business. Corporate systems such as budgets, incentives and strategic planning are designed to further today’s business, not to create tomorrow’s. MVIS can help companies overcome this difficulty.
Follow these steps to set up an MVIS.
- Research. Take three weeks to meet with a dozen clients. Probe for unmet needs. Investigate new developments in and around your industry.
- Focus. Identify three innovations that:
- many customers need and no on is addressing well;
- enable customers meet those needs more cheaply, easily or conveniently; and
- you have special capabilities within your company that competitors can’t easily copy. Wandering into a new market where you have no natural advantage is a common innovation trap.
- Form a team. Assign at least one person that gets up every morning and goes to sleep every night thinking about nothing but innovation. If you have no one fully focused on new growth, you’ve decided not to focus on new growth. Here’s how to free up resources:
- Competitive forces and customer demand are likely already creating unsanctioned innovation cycles within your teams. List all efforts with at least one part time employee working on them. Identify the markets these efforts target and estimate the size of the opportunity. Categorize the big enough efforts into core and new-growth, and consolidate these efforts with the ones you identified as part of step 1 and 2 above.
- Fund the projects. Set a threshold investment amount that project teams can spend without leadership approval. Fund projects as needed, not as part of quarterly or annual budget cycles. Ensure the leadership can make quick decisions to keep the momentum.
- Scale the MVIS. Once you see signs that specific projects are will bear fruit, bring the components of the MVIS that are working well into more formal systems. For example:
- Create an innovation portfolio
- Forecast the pace and scale of investment and the financial impact over a multiyear period
- Create tools to regularly monitor the portfolio
- Keeps abreast of market changes
- Look for partnership opportunities to amplify efforts
This is a summary of the article Two Routes to Resilience published in the December 2012 edition of Harvard Business Review.
Companies need to innovate to
- respond to market shifts,
- compete with disruptive star-ups, or
- close the gap to meet future revenue goals.
These transformations are better served through two separate efforts: Transformation A adapts the core business to the new realities. Transformation B creates a new disruptive business. Making both transformations work requires a Capabilities Exchange that ensures resources are leveraged and competing priorities are managed.
Goal: Find the competitive advantage the current model can sustain in the disrupted environment. Remember, disruptive innovation does not destroy all value. To find this advantage, answer these four questions:
- What can we still do better than our traditional competitors and upstarts?
- What must we give up?
- Why do our customers come to us?
- What is the real need that connects our customers to our brand?
- Focus on higher profit niches
- Cut costs (reduce workforce, close stores, etc)
- Redefine your product line to offer better, less expensive options
Goal: Exploit new profits without being encumbered by the revenue requirements and practices of the core business. To achieve this, answer this question: What unmet needs to customers have in today’s environment?
- Conceive a business model that fulfills the unmet needs profitably.
- Implement and evolve the business model, testing essential assumptions first and quickly adjusting as you learn.
- Develop the new model’s own profit formula, staff, processes and culture.
- Embrace the possibilities of new markets as enthusiastically as startups do.
The catch: it can take time (years) for the new revenue streams to reach their potential.
The Capabilities Exchange
The Capabilities Exchange coordinates the two transformation efforts so that each gets what it needs and is protected from interference by the other. Setting up the exchange is a five-step process:
- Establish leadership. Use a centralized approach with three core leaders: the CEO, the leader of the core transformation and the leader of the disruptive business.
- Identify the resources the two organizations can or need to share. Start by identifying the capabilities that organization B can borrow from the core to gain a competitive advantage over startups (i.e. branding, marketing and customer data).
- Create exchange teams. Have the leaders of each transformation allocate resources. Allow groups to form and dissolve without impacting regular operations. Keep teams small and with short reporting lines.
- Protect boundaries. Each organization must operate as if the future of the company depended on it alone. You will be investing in the new venture while cutting the legacy organization, so you may find that you will need to stop legacy employees from trying to meddle with the disruptive new business. It’s also important to avoid bleeding the core to prop up the new venture.
- Scale up and promote the new business. Ideally, the repositioned A organization will remain (or become) profitably self-sufficient. But the disruptive business is the source of future growth. As such, the B organization should receive an increasing share of resources and attention. Top management must put the new business centre stage when talking to the outside world about the company’s vision and prospects. Otherwise markets and customers will not see the evolution.
Disruptive innovation does not destroy all value
This is a summary of the article Surviving Disruption published in the December 2012 edition of Harvard Business Review.
Successful entrepreneurs identify what jobs people need done and how they could be done more easily, conveniently or affordably.
All disruptive innovations stem from technological or business advantages that can scale as disruptive businesses move upmarket in search of more demanding customers.
A disruptor can maintain lower prices while it improves its performance (i.e. computer chips get faster and cheaper).
Disruptors may be able to successfully disrupt an aspect of a business but not others. The extent of the disruption is dependent by the intrinsic value that the incumbent provides, as well as by the barriers that are overcome by the disruptor.
The following examples illustrate how some aspects of a business can be disrupted and how some other aspects of the same business can remain dominated by the incumbents:
- Grocery stores vs. online grocery stores. Customers will always prefer to go to the grocery store to buy emergency items (tonight’s dinner). Online grocers are better at canned food that can be bought at any time and stored. For online grocers to deliver goods to customers as quickly as grocery stores, they would have to adopt the stores’ cost structure.
- Cargo ships vs. air shipping. The existing infrastructure surrounding container shipping using cargo ships makes it hard to disrupt: from ship to crane to tracks to trucks. Changing this infrastructure is expensive.
- Railroads vs. cars, trucks and planes. The cheaper costs offered by railroads make it the best choice for businesses needed to ship goods.
- Ivy League universities vs. eLearning. Hard to disrupt. Ivy League universities confer status that eLearning just can’t provide.
- Movie theatres vs. streaming. Hard to disrupt. Teenagers and dating couples still go to the movies to get out of the house.
- Handheld GPS vs. cellphone GPS. Easy to disrupt. The only advantages of a handheld GPS (it’s durability, ruggedness and long battery life) can be overcome by cellphone GPS.
- Auto sales vs. car sharing services. Buying a car is still a better choice for frequent drivers of long distances.
Barriers to Disruption
From easiest to overcome to hardest-to-overcome:
- Momentum. Requires change in customer habits.
- Tech-implementation. Requires new implementations of existing technologies.
- Ecosystem. Requires changes to the ecosystem or business environment.
- New technology. Requires new technology.
- Business model. Requires new cost structure.
This post is an interpretation and summary of the article published in the June 2015 edition of Harvard Business Review titled You Need and Innovation Strategy.
What is an innovation strategy?
An innovation strategy is a set of processes that helps companies find new problems and solutions. Like any strategy, the innovation strategy must be specific to each company’s competitive needs and strengths, and must be linked to the business core value proposition.
Why is an innovation strategy important?
There are two causes that explain why an explicit innovation strategy is important:
- Aligning competing priorities. Without an explicit strategy, companies can wind up pursuing competing priories. Without an orchestrating strategy, diverse perspectives, a critical component of successful innovation, can become self-defeating.
- Overcoming inertia. Routine innovation is where companies play to their strengths. Without an innovation strategy, companies fail to overcome inertia and follow prevailing patterns.
How to develop an innovation strategy?
The process of developing an innovation strategy starts with the articulation of specific objectives that may enable the company achieve a sustainable competitive advantage. These objectives should answer the following questions:
- How will innovation create value for potential customers? Successful innovation must induce customers to pay more, save money, or access a larger societal benefit such as improved health or clean water. Specific benefits could include:
- Ease of use
- How will the company capture the value that innovations generate? Intellectual property alone cannot prevent customers from defecting to rivals. Companies must think through complementary assets, capabilities, products or services to keep their position strong.
- What types of innovations should be pursued? There are four kinds of innovations:
- Routine innovation builds on core competences and serves existing customers. For example, new versions of an existing product.
- Disruptive innovation requires a new business model but not necessarily new technology.
- Radical innovation involves a purely technological innovation. For example, pharmaceutical companies moving from chemically-synthesized drugs to biotech. The customers and business models don’t change.
- Architectural innovation combines technological and business model disruptions. Requires new competences and new ways to earn profits. For example, successful digital photography companies mastered the building of new hardware and changed from making money selling film, paper, chemicals and services, to making money by selling cameras.
- How does each innovation type fit with the business strategy? Innovation types can be combined or create a continuum. An innovation type may be suitable for the present set of circumstances, while a different type may become necessary as the business encounters new challenges.
- What is the right innovation process? The innovation process must be chosen based on the innovation type:
- Routine and disruptive innovations call for a highly structured process designed to solve as much of the technical and market uncertainty as possible early on.
- Radical and architectural innovations require more experimental, iterative and rapid prototype-driven process.
Implementing the innovation strategy
Who is responsible? Because innovation cuts across just about every function, it is the responsibility of senior leaders to orchestrate such a complex system.
Follow these steps to implement the strategy:
- Allocate resources to each innovation type
- Manage trade-offs
- Manage the instincts of individual functions to satisfy their own interests
- Recognize that the strategy must evolve with continual experimentation, learning and adaptation.
Advice for companies in different stages
A company whose core business is maturing should seek new opportunities through business model innovations and radical technological breakthroughs.
A company whose platforms are growing rapidly would want to focus on building and extending them through routine innovation.
New and better ideas
New ideas are fuelled by diversity, observation, curiosity and humour.
Loosely speaking, we are creatures of habit. We tend to do the same things over and over. We take the same route to work and eat at the same places. Even in our free time, we hang out at our favourite spots. Routine makes it hard for us to look at situations in a new light. Here are ideas on how to breakaway from our comfort zone.
Hang out with diverse people. We tend to surround ourselves with people that are like us. After all, having more in common leads to easily flowing conversations. Resisting this affinity could broaden our insight. More-of-the-same can help to confirm assumptions, but doesn’t expose us to new thinking. Spending time with people of different backgrounds and interests, does. We can use this new understanding to solve long-standing challenges.
Observe closely. You are conducting a survey to understand how people react to a certain stimulus. You ask questions and analyze the results. This practice is well established and it does have a legitimate place. The problem is that in certain cases, people think they’d react in some way while in reality they end up doing something else. This is when observing is better than asking. Seeing what people do in a certain situation instead of asking them what they’d do, will give you more accurate answers.
Ask and be willing to listen. In situations where simply asking can give us the insight we need, be sure to listen. In some cases, we will be trying to convince ourselves that something is a good idea or a bad idea. We try to convince ourselves because the outcome is beneficial to us in some way, which impedes our capacity to stay objective. So when we ask, we really need to listen for what comes back and we need to put it in the right context. Pay special attention to answers that contrast with your beliefs; those are the ones that we tend to carelessly dismiss.
Be curious. Be open to new ideas. New way of doing things. New routes to get to where you’re going. Design your life to encourage serendipity. It may at times feel like you’re wasting your time. You may feel like your way is better. And in many cases it will be. That’s where the challenge is: seek to learn new ways of dong something, but don’t waste your time relearning something you do well already. The best areas for keeping an open mind is when trying to solve a long-standing problem. You may realize that a newbie’s simplification of your complex world, is, in fact, the wiser course of action.
Relax. Curiosity, discovery and learning tends to happen more when we’re not trying to arrive to a specific outcome. Exploration requires that we try things that will fail. Taking things lightly and with some humour encourages failure by avoiding judgement. This helps people be okay with asking dumb questions and taking risks. Without dumb questions and risks, we’ll stay on the safe and predictable side, making it impossible for us to have new and hopefully better ideas.
Iteration leads to innovation
Going from prototype to v.1.0 and beyond
Iteration. Innovation. Disruption. The next big thing. The importance of being innovative isn’t new. Ask any experienced leader. In today’s world of differentiate-or-die, there’s little market share left to me too products. Another important thing is speed. Without speed, teams can be consumed in slowly developing products that by the time they’re ready, they’re obsolete. Leaders need to direct their teams to create something new and valuable, and to do it fast. Here are a few tips that will provide speed on the way to the next big thing:
1. Win quickly, win often. Karl Weick defines “small wins” as “a series of concrete, complete outcomes of moderate importance build a pattern that attracts allies and deters opponents.” In his book Little Bets, Peter Sims advices seeking to have small wins throughout your iterative development process. These small wins will help you keep managers and investors interested and confident. Not only that. Small wins counteract the sometimes inevitable frustration of failure, which is part of any creative endeavour.
2. Mistakes are cool. In searching for something truly new, teams will have to experiment in uncharted territories. Doing this will mean trying things that will fail. Teams need to be okay with failure. They need to see it as part of the journey. Leaders should welcome mistakes but be alert to prevent their teams from making the same mistakes twice. Leaders should also make sure their teams arrive to failure quickly so they can learn without breaking the bank.
3. Keep a growth mindset. Having a growth mindset means having an attitude towards difficulties that one may face while trying to achieve his or her goals. A growth mindset is the antithesis of a fixed mindset. Here’s a simple chart that provides a quick reference of the kind of reactions that each mind-set provides in the face of events.
Sees it as path to mastery
Sees it as fruitless
Learns from it
Success of others
For a complete understanding of the growth mindsets and how it can be developed in yourself and others, read Carol Dweck’s Mindset: The New Psychology of Success.
4. Grow the user base. Now that you have a product, start growing the user base. Community management is important to keep the product being shaped with the right usage. A community manager that likes the product and has a large network can be a surprisingly powerful hire (or partner) in this stage of product development.
5. Release quickly. Speed is important. There are a lot of things you need to learn from the market so it’s important that you learn these things quickly. One way to gain speed is by breaking down big problems into smaller subproblems. Develop a solution to a small problem and launch it. See how the market reacts and use that information to prioritize your next release.
6. Test on the market directly. Avoid at all costs to develop features, or even worse, optimize features, before you have evidence that the market will care about them. This is why you want to release quickly, measure and ask for feedback, and stay emotionally detached from specific features so you can nix them without drama.
7. Measure and ask for feedback. Testing right on the market gives you real time information on how the real world reacts to features as well as to your product overall. When tracking important usage data points, Google Analytics isn’t enough. While Google Analytics can tell you if people are engaging with your product, it cannot tell you how exactly. You will need to think up the important questions and add ways to get your product to give you the answers. Some metrics may include number of account registrations, the last time users were seen using the product, whether users are using a specific feature, etc.
8. Stay cool. Releasing quickly will also help you avoid the trap of getting emotionally attached to ideas or features. Test your ideas with your users before you invest time and money to the point where you must continue because of the investment. Entrepreneurs, particularly founders, too often fall into this trap. They continue betting on failed products for years in spite of evidence showing that the market simply doesn’t care.
9. Be ready to change direction. Another benefit of staying cool and learning from the market quickly is that you will be more attuned to signals that suggest a change in direction is needed. Known as pivoting, changing direction means applying your product (or part of it) to a different industry, or adjusting the mission statement in response to how the market is using your product.
10. User experience and user interface are important. Some product developers fall in the trap of thinking that an incomplete user experience (UX) and a rough user interface (UI) suffice and can be improved over time. Part of this is true: it’s okay to be somewhat imperfect as you iterate. However, it is important to understand that this phase is different from the prototype phase. In the prototype phase, an incomplete UX and clunky UIs may be okay because the point is to validate the idea. In the product development phase, the market will hold you to the expectations set by other products, even when these other products don’t compete with yours. Delivering below expectation is enough to turn users away. And this is unfair your product.