I spent several years focused on innovation inside technology companies, small and large. Every organization I worked in grappled with the question, “how do we really make innovation happen?” These questions undoubtedly apply to all business, but especially in software companies you get either grow (innovate) or die. There is no such thing as a software company treading water; and if you think you are treading water, you are probably just drowning slowly.
I’ve concluded that, after you get rid of all the buzzwords and noise, there are basically two possible successful models of innovation – one is to have a visionary leader who dominates the innovation discussion and agenda. Think of Steve Jobs or Bill Gates or Jeff Bezos or Elon Musk. In the visionary leader model, the entire innovation agenda – what to invest in, what to kill, what to explore, is driven by the person at the top of the organization.
I like founder-led tech companies and this innovation model is extraordinarily efficient in the sense that there is zero confusion about how decisions get made. However, the model has two critical flaws – the first being that you must actually have a visionary leader with a clear understanding of what makes for a great innovation in your industry at the top of your organization. The second is that, as the business grows, the model doesn’t scale well with the business – especially when the visionary founder is no longer CEO.
I worked for some good bosses in my career, but none of them were Jeff Bezos or Elon Musk. So, to enable innovation, we had to take a more structured approach- an approach that tried to bake innovation into the mindset, culture, systems, and talent-base of the organization.
And, as anyone who has ever worked in a tech company knows, growing is a lot more fun than shrinking.
Here are my six hard-won lessons from taking a more structured approach to driving innovation:
Double-Down on Growth Markets
Most organizations of any scale allocate their innovation dollars over multiple projects and markets. And lots of different investment criteria can be used to allocate those dollars. In my experience the most important investment criteria is this: is this a market where we can grow our revenues by at least 10% each year for several years in a row?
If the market growth opportunity is there, you can cover up a lot of sins/ execution failures along the way. Perhaps it takes longer to get the new product to market than you thought it would; or it’s more expensive. If you are investing in a grown market, you can still get a very good return – even if it takes longer to get that return.
Too many organizations allocate too much money to poor-growth market opportunities, usually due to inertia (“well, we did this last year”) or internal politics (“wow, it’s hard to say no to this GM – let’s throw more investment money his way.)”
The better approach is to focus your investment dollars on growth market opportunities where you’ve got a reasonable shot to beat the competition.
$1000 invested in Amazon in 1997 would be worth $1.2 million today. That’s a pretty decent return on investment. Amazon has defied all rules in business strategy – no one could imagine a company back then that is the largest on-line retailer but also sells business-to-business cloud services. I think trying several market tests and then doubling-down on growth markets is a big part of their massive success.
Follow the 70/20/10 Rule
The 70/20/10 rule works like this:
- 70% of your investment dollars and time go into improving existing product and operations
- 20% of your investment dollars and time go into extending your existing products and markets (line extensions)
- 10% of your investment dollars and time go into exploring and developing entirely new products and markets (blue ocean)
Google uses this rule to prioritize its investments, and claims some mathematical proof to the rule, which works for me.
The exact percentages are not the most important part of this rule. Established businesses tend to over-invest in defending their existing turf, so the most important part is investing some time and money in new products and markets, which is harder than it sounds. Especially because those new investment dollars may, if successful, disrupt your existing product lines. Measuring your investments (both planned and actual), according to these three categories is a great place to start.
Execute Fast and Cheap Market Experiments
Innovation by definition involves risk. What this means in practical terms is that some of your investment dollars will not yield financial return, which will most likely drive your CFO nuts.
The real problem, though, isn’t that some of your innovation efforts will fail. The real problem is that some of them will fail after you’ve spent a great deal of time and money. And this is especially true if the innovation idea came from someone at the top of the organization (like your CEO) who has the power to keep funding efforts which are not working.
One of the huge benefits of a structured approach to innovation is that you can avoid this problem. This starts with the fundamental realization that you don’t know if a customer will buy the innovation until they actually spend money on it (and it doesn’t matter what they say in focus groups).
You can avoid the huge failures by approaching early-stage innovation as a series of fast and cheap experiments- using prototypes and “minimally viable products” to test the market (see Lean Startup by Eric Reis). This enables you to kill your bad ideas (or the CEO’s bad ideas) fast, and double-down on investing in experiments which get early traction.
Get Your A-Level Talent Working on New Innovation Projects
When it comes to innovation, talent is harder to find than money. There is never enough “A-level talent” to go around. And, today, the A-level talent in your organization is likely focused on an existing market. What’s worse, there is probably a general manager for that market or product who will resist moving that A-level talent into a new innovation project because “everything will fall apart it I lose this person.”
The challenge with this scenario is that the new innovation project is exactly, precisely what you need your best talent working on. Not only that, most A-level talent wants to work on new innovation projects.
Organizations that succeed at innovation are willing to make these hard choices.
Accept (some) Failure as Part of the Process
Many organizations talk a good game when it comes to innovation risk and failure. The real test is when something actually fails. The culture usually supports talking about failing much more than it does actually dealing with failure.
This is a cultural problem, but it can also be a financial problem – because when no one wants to admit failure, you can end up spending more time and money on a project that everyone knows isn’t going to work.
Companies that accept the notion of failure can sometimes find success the ashes of those failures. Because they don’t get paralyzed by their failures. The collaboration software company Slack, which is expected to soon go public at a market valuation in the billions, started out as a gaming company. After three years of failing in the gaming market, Slack realized that the collaboration software which they had built to connect their Canadian and US offices was their real asset.
Build Your Profit Model into Your Business Model Early
How many times have you heard, “well, we aren’t making money yet but we will as we scale the business.” This might be true if your business is one with high fixed costs, but more often than not it isn’t true.
It’s better to focus early in the innovation on creating businesses which make money, and especially make good margins for each new customer. That way, when the business scales you know it will make money.
Let’s take a current example from the many “tech” IPOs that are happening this year. Many of these unicorns have lost tons of money as private companies, but successfully sold a “growth story” to their private investors. I’m skeptical, though, of the businesses that haven’t proven they can make good margins at the customer level. Uber is an interesting example- they seem to be marketing their IPO as “we are to transportation as Amazon was to books.” I think the right question for Uber is, “do you make as much margin on a ride as Amazon makes on selling a book?”
My experience is that it’s hard to scale businesses and make money unless the profit model has been well-developed and proven early on.
All of this is hard work. And it can take a while to bake-in this structured approach to innovation. But, the good news is that when true innovation takes root as a sustainable activity in your organization you are well on your way to long-term growth and success.
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