Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution by Geoffrey Moore at SVPMA Monthly Event December 2006

1. Dealing with Darwin
Managing Innovation
in a Commoditizing Marketplace
Geoffrey Moore
Managing Director

2. Dealing with Darwin
• Darwin @ Work
• Global low-cost competition resulting in commoditization
• Leads to natural selection and survival of the fittest
• Darwin’s Mandate
• Innovate to become sustainably differentiated, or
• Accept erosion in margins and revenues
• The Challenge
• We continue to embrace failed models of innovation
• We need to think about innovation in a new way
• The Goal of This Talk
• Reframe the innovation agenda in a way that works
• Special focus on enterprises with established track records
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3. Four New Ideas About Innovation
• Return on Innovation
• Innovation Strategy
• Funding Innovation
• Perpetuating Innovation
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4. Return on Innovation
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5. When Innovation Creates No Return
It’s A Vector Math Problem!
= 0
Bubble-up Innovation
Many Types
When each unit strives to be unique in its own way,
the net result is little overall differentiation.
Competitors find it easy to neutralize these efforts
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6. What Darwin Demands
Innovate to Achieve Competitive Separation
RE
*
CO
*
Gain bargaining power
Competitor 1 by getting separation
*
YOU from your
*
Competitor 2
competitive set
*
Competitor 3
Failure to separate
Competitive Set
means low to no returns
on innovation
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7. Focus on Your Core
• Core:
• Processes that enable or reinforce your chosen vector of
competitive differentiation
• Context:
• All other processes
This is not the same as your core competence
This is not the same as your core business
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8. Return on Innovation
Differentiation Neutralization
Failed
Attempts Productivity
Waste
Waste: Innovation projects that even when they succeed
fail to create sustainable competitive advantage
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9. Managing Return on Innovation
• Identify a vector of differentiation to define core
• Core is those processes that create the differentiation
• It is the source of your unmatchable competitive advantage
• Define all other work as context
• Necessary to your success, but not differentiating
• Apply neutralization and productivity strategies here
• Commit to “beyond class” outcomes
• A set of offers that direct competitors cannot or will not copy
• No “best in class” waste!
• Elsewhere actively promote “good enough” criteria
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10. Innovation Strategy
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11. Category Maturity Life Cycle
Landscape of Competitive Advantage
Changes
Indefinitely elastic
middle
Revenue Growth
Growth
C
Market D
Mature Fault
Market
Line!
B Declining
Market E
A End of
Life
Technology Adoption Time
Life Cycle
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12. Building an Innovation Strategy
Play to the Forces Active in Your
Marketplace
Customer
Intimacy Zone
Product Category
Leadership Renewal
Zone Zone
Operational
Excellence Zone
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13. Innovation Comes in Many Forms
Each is a Potential Vector of Differentiation
Line Extension Design Marketing Experiential
Innovation Innovation Innovation Innovation
Platform
Innovation Organic
Innovation
Product Structural
Innovation Innovation
Category Renewal
Harvest
& Exit
Disruptive Application Value Engineering Integration Process Value Migration
Innovation Innovation Innovation Innovation Innovation Innovation
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14. Innovating in Growth Markets
The Product Leadership Zone
Disruptive Create a new category, build the value chain to serve
Innovation it, and ride its adoption to success
* eBay
Application Take an established product or service into a new
Innovation market where it can tap unmet demand
* RIM
Product Take share in an established market with a new offer
Innovation that dramatically outperforms current market leaders
* AMD
Platform Stimulate and dominate next-generation growth
Innovation markets by collaborating with partners
* Google
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15. Innovating in Mature Markets
The Customer Intimacy Zone
Line Extension Gain market share by modifying an established brand
Innovation to appeal to an underserved market segment
* HP
Enhancement Gain margin share by creating greater perceived
Innovation value at the surface of an existing offer
* Motorola
Marketing Gain customer preference through differentiated
Innovation communication and delivery methods
* Apple
Experiential Gain customer preference through differentiating the
Innovation experience of the offer and its delivery
* World of Warcraft
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16. Innovating in Mature Markets
The Operational Excellence Zone
Value Engineering Take market share by being first to the next price-
Innovation elasticity inflection point
* CDW
Integration Protect and extend market share by eliminating the
Innovation complexity of managing many disparate elements
* SAP
Process Win share or margins by productivity gains from
Innovation reengineering business practices
* Dell
Value Migration Win margins by migrating to a new and more highly
Innovation valued business model
* IBM
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17. Innovation Strategy
• Pick a small number of innovation vectors for core
• Ideally one
• If more, then fused into one
• Drive your performance beyond category norms
• Competitors either cannot or will not match it
• Their neutralization efforts fall flat
• Declare all other forms of innovation context
• Focus on neutralization where needed (includes table stakes)
• Everywhere else, focus on productivity
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18. Funding Innovation
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19. Where Are Your Resources Invested?
Current Core Becomes Context Over Time
Digital media
n
tio
tia
Mobile computing
en
er
iff
Internet-enabled transactions
D
n
io
Visualization and simulation
at
iz
al
tr
Personal computing
eu
N
Reporting and analytics
On-line transaction processing
Resources migrate to the bottom
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20. Resources Get Trapped in Context
Context Core
Core Context
Agile Aged
Context delivers diminishing returns
Organizations become uncompetitive
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21. Free Trapped Resources to Fund
Innovation
Extract Resources from Context
to Repurpose for Core
“Coins in the Couch”
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22. The Cycle of Innovation
Core Context
Deploy
Manage
Differentiation
Mission-critical
At Scale
Processes
At Scale
Mission Critical
2. Deploy 3. Manage
Non-Mission-Critical Extract
Resources
To Repurpose
Invent 1. Invent 4. Offload For Core
Differentiated
Offering
Fund next innovation
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23. BCG Model for Funding Innovation
The Growth/Share Matrix
Hi Growth Lo Growth
Hi Market Share
Lo Market Share
?
GreatFund next innovation .
model but . .
Must first fix two fatal flaws first
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24. Where Resources Get Trapped
Mission-Critical Context
Core Context
Process creates
All other
differentiation that
processes
wins customers
Mission Critical
Process shortfall creates Major
Challenge
Risk
serious and immediate risk
Non-Mission-Critical
All other processes
Differentiation
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25. How the Cycle Breaks Down
Clinging to Mission-Critical Context
But lack of Core Context
resources here Resources
results in failure get stuck
to deploy! here
Mission
-
Mission Critical critical
2. Deploy risk
3. Manage
Non-Mission-Critical
Resources Resources are
still get 1. Invent 4. Onload
Offload added here for
invested here support
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26. Freeing Resources Trapped in Context
The Six Levers Model
1. Centralize. Bring operations under a single authority to
reduce overhead costs and create a single decision-making
authority to manage risk
2. Standardize. Reduce the variety and variability of processes
delivering similar outputs to further reduce costs and minimize
Core Context risks.
3. Modularize. Deconstruct the system into its component
subsystems and standardize interfaces for future cost
reductions.
4. Optimize. Eliminate redundant steps, automate standard
sequences, streamline remaining operations, substitute
lower-cost components, or otherwise cost- and resource-
reduce.
5. Instrument. Characterize the remaining processes in terms
of the variability of key parameters and develop monitor-and-
control systems to manage their performance.
6. Outsource. Drive processes out of the enterprise entirely to
further reduce overhead, variabilize costs, and minimize
future investment. Incorporate vendor use of monitor-and-
control systems into Service Level Agreement.
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27. Funding Innovation
• There are always resources to reclaim
• Coins in the couch are everywhere
• The more mature and successful you have been, the more
coins there are
• The key is to repurpose them for core
• Identify core before you go after context coin
• Mantra: Extract resources from context to repurpose for core
• Failure to repurpose begins a downward spiral
• Savings are used to make the current quarter
• You start the next quarter at Square One and with fewer coins
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28. Perpetuating Innovation
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29. The Problem with Outsourcing
We Are Losing Our Work Force Investment!
Core Context
Mission
Critical
Enabling
Resources Resources
Wanted Available
Here Here
People being released lack the skills
to fill the positions being opened
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30. Revitalizing the Work Force
Resource Recycling Zones Deployers
Use conventional methods to
ramp and manage mission-critical
processes at scale
Deployment
B
Zone
Inventors
Use unconventional
Optimization
methods to create and
Invention
incubate new core
Zone
II III
Zone
C A Optimizers
I IV Use the Six Levers to
extract resources
from context to
repurpose for core
Work circulates clockwise
People recycle counter-clockwise within zones
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31. Perpetuating Innovation
Handoff Handoff
Deployment
Zone
Optimization
Invention
Zone
Zone
Executives focus on managing the hand-offs
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32. Growing Human Capital
• Focus on building role expertise
• Make it an explicit goal of job assignments
• Maintain it through managed reassignments
• Avoid overvaluing task expertise
• Buys you productivity in the short term
• Creates unproductive populations in the long term
• Be cautious about asking people to change roles
• Most people are most productive staying in role
• Revitalization comes from changes in task content
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33. Recap: Four Ideas
• Return on Innovation
• Performances competitors cannot or will not match
• Innovation Strategy
• Focusing innovation to create escape velocity
• Funding Innovation
• Extracting resources from context to repurpose for core
• Perpetuating Innovation
• Resource recycling: The perpetual innovation machine
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34. Thank You
gmoore@tcg-advisors.com
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