Friday, February 17, 2006

Geoffrey Moore on 'Innovation'

Author Geoffrey Moore, in his book Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution, talks about how getting a return on innovation requires discipline in moving ideas from core to context, and then reinvesting the profits -- and the people -- back into the next innovation.

CIO Insight interviewed Geoffrey Moore in an article entitled "Innovation Takes More than Inspiration; It Takes Investment, and Persistence." In that interview, Moore discusses how innovation isn't just about inventing the next new thing, but rather it requires a conscious investment strategy, and the will to carry it out.

In Geoffrey Moore's opinion, there's a sense of entitlement in the U.S. economy: that Americans feel entitled to high margins; entitled to use more of the world's resources than any other nation. The challenge for the U.S., according to Moore, is to figure out how to survive the sea change as economic power crosses the Pacific.

Below is an edited excerpt from that interview:

As globalization sets in and competition heats up, companies are looking to innovation to stay on top. But, according to Moore, that will mean little if wonderful new products and services never see the light of day. Consider the notorious fate of Xerox Corp.'s Palo Alto Research Center: Its many great ideas (e.g., ethernet, GUIs & mouse, WYSIWYG editing, object-oriented programming) would never have been commercialized had not others recognized their true value.

There are only three kinds of innovation:
  • You can differentiate through innovation, creating a new value proposition that customers prefer and that competitors don't have. That will win new revenues at attractive margins.

  • You can innovate to neutralize a competitor's innovation. You don't necessarily gain an advantage, but you can begin to overcome a deficit, to catch up. As a result, you gain more sales, albeit not with a really competitive margin. But at least you're in the deal.

  • You can also innovate in ways that don't change your outward competitiveness, though they can change your return on innovation internally. That means doing things more efficiently, getting the same amount of bang for less bucks.
Unfortunately, if you look at the kinds of innovation that go on in established enterprises, more and more innovation is not generating a net new differentiating return. So you see stock prices of established enterprises being flat for years -- like at Microsoft or Cisco Systems. That's because they're not getting a net, new amount of competitive advantage. They're just kind of recycling the existing competitive advantage in their existing categories.

Look at the tech sector where innovation was always thought of as that disruptive stuff that magically creates new categories. You start with mainframes, then minicomputers, then the PC, then the LAN, then the Internet. Nowadays it's mobility. Each change has had a stronger back-flush, until finally, when we got to the real correction, the bursting of the tech bubble, it was really about the legacy inertia of technology refusing to die.

What we're seeing now is the maturation of the tech sector. Yet the idea lingers that if you're not doing disruptive innovation, nothing of interest is happening. And that's complete and total bunk.

The big problem is that too many companies dabble in innovation. It's called smorgasbording. They say, "Well, we've got a little of this, and we've got a little of that." But, since they don't take any one project very far, they never escape the gravitational field of their traditional sector. Their new innovations never resonate. Meanwhile, 95 percent of their revenue is coming from a commodity product or service.

Here's the critical distinction: core versus context. Core is defined as that which creates a return on innovation. Innovation for differentiation is core. Everything else is context. It may be mission-critical context, but it's still context.

The problem is that you can't improve your economic outlook on the context side. You can get more productive, but you can't change your competitive position without changing your competitive-advantage equation. If you don't have any new competitive advantage coming along, every year the environment gets a little bit better at competing against you, and every year you get a little more marginalized.

So you've got to cut a little more cost. And you get a little more marginalized. You cut a little bit more cost. And we watch these very powerful institutions quietly sunset themselves with about a one-degree decline every year, for decades.

How can companies reignite their growth engines? They have to self-fund. They have to extract resources from context to repurpose for core. They have to continue to meet revenue commitments, but do it with fewer resources. How do you do this? Standardize, modularize, optimize, and then outsource. In the 21st century, companies can no longer afford to be vertically integrated with all of their time, talent, and management attention allocated across all of the various functions equally.

If you allocate your resources based on your revenue makers, or margin makers, you're driving forward but looking through the rearview mirror. You're optimizing for what has been successful.

If you're like most companies, you base this year's budget on last year's budget. Thus, you've already institutionalized the resource allocation which means that you're funding context before core. So core gets the scraps after context has been at the trough first. But you really have to fund core before you fund context.

The context people will say, "We have to hit our revenue target, and if you cut that budget, we can't do it."

Unfortunately, the company needs to find someone who can hit the target. With today's economy there's no other choice.

The good news about mission-critical context is that it has inertia on its side. If you're big, and you're in an established category, established categories have inertia. So you ought to be able to take some productivity risks with your business without diminishing your top-line or bottom-line goals.

What happens to the workforce when you start using context to fund core? Most people cling to the task they've been successful at. Eventually, that task becomes mission-critical context, but they're the experts, so they stay with it. And then it starts to get sunsetted, and they stay with it. And then eventually it gets outsourced. And then they're in a bad spot, because they really have nothing else they know how to do. So they either have to go with the work to the outsourcer, or they just lose their jobs.

How can companies do it differently? There's a process model that overlays the evolution of any work. Every process has:
  • a gestation or invention period
  • a prolonged deployment period
  • an optimization period
All these tasks have to happen. But at too many companies, all the resources are getting stuck in mission-critical context. They think they've lost their inventors. They have not. They've lost their deployers. Or rather, they haven't lost them -- they're stuck on mission-critical context. But they need to shift to the next generation of core.

Meanwhile, optimizers are key to getting the work out of the hands of the deployers stuck in the deployment process, down to where it can eventually be outsourced. That frees the deployers to come back to core and begin deploying the next round of invention.

Who are the optimization people? They are all the Six Sigma monks. Six Sigma people shift roles all the time, going from group to group to group, bringing their quality-control capability with them. Deployers are program managers; when they finish one program they go do another program.

Human beings tend to gravitate toward one of these three zones. Companies need to identify their employees' relative interests and passions and skills at doing invention, deployment and optimization. Then they need to detach investment from the task. If leaders are moved, you can trust them to move the rest of the resources with them to make it happen. Getting a return on innovation requires discipline in moving ideas from core to context, and then reinvesting the profits -- and the people -- back into the next core.

Today companies tend to milk an employee's expertise and then throw away the employee. It's not fair to the employee. But if firms can continually invent, deploy and optimize, and think about their employees as part of that process, they can create better capitalist outcomes in a way that aligns with their workforce rather than betrays it. That way, they're preparing to survive in this increasingly Darwinian business world.


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