How Great Companies Innovate

Dealing with Darwin

Managing Innovationin a Commoditizing Marketplace

Geoffrey MooreManaging Director

Darwin and the Demon © 2004, TCG Advisors LLCApril 10, 2023

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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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Four New Ideas About Innovation

• Return on Innovation

• Innovation Strategy

• Funding Innovation

• Perpetuating Innovation


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Return on Innovation


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When Innovation Creates No ReturnIt’s A Vector Math Problem!

= 0Bubble-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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What Darwin DemandsInnovate to Achieve Competitive Separation

Competitor 2*

Competitor 1*

Competitor 3*

YOU*Gain bargaining power by getting separation

from your competitive set

*

Competitive Set

Failure to separate means low to no returns

on innovation

CORE


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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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FailedAttempts

Waste

Return on Innovation

Differentiation Neutralization

Productivity

Waste: Innovation projects that even when they succeedfail to create sustainable competitive advantage


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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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Innovation Strategy


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Time

Rev

enu

e G

row

th

Technology AdoptionLife Cycle

GrowthMarket

Mature Market

Declining Market

Indefinitely elasticmiddle

End of Life

A

FaultLine!

E

DC

B

Category Maturity Life CycleLandscape of Competitive Advantage Changes


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Building an Innovation StrategyPlay to the Forces Active in Your Marketplace

ProductLeadership

Zone

OperationalExcellence Zone

CustomerIntimacy Zone

CategoryRenewal

Zone


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Innovation Comes in Many FormsEach is a Potential Vector of Differentiation

DisruptiveInnovation

ApplicationInnovation

ProductInnovation

PlatformInnovation

DesignInnovation

ExperientialInnovation

MarketingInnovation

Line ExtensionInnovation

IntegrationInnovation

ProcessInnovation

Value MigrationInnovation

Value EngineeringInnovation

Harvest& Exit

Category Renewal

OrganicInnovation

StructuralInnovation


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Innovating in Growth MarketsThe Product Leadership Zone

ApplicationInnovation

Take an established product or service into a new market where it can tap unmet demand

RIM

ProductInnovation

Take share in an established market with a new offer that dramatically outperforms current market leaders

AMD

PlatformInnovation

Stimulate and dominate next-generation growth markets by collaborating with partners

Google

DisruptiveInnovation

Create a new category, build the value chain to serve it, and ride its adoption to success

eBay*

*

*

*


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Innovating in Mature Markets The Customer Intimacy Zone

EnhancementInnovation

Gain margin share by creating greater perceived value at the surface of an existing offer

Motorola

ExperientialInnovation

Gain customer preference through differentiating the experience of the offer and its delivery

World of Warcraft

MarketingInnovation

Gain customer preference through differentiated communication and delivery methods

Apple

Line ExtensionInnovation

Gain market share by modifying an established brand to appeal to an underserved market segment

HP*

*

*

*


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Innovating in Mature Markets The Operational Excellence Zone

ProcessInnovation

Win share or margins by productivity gains from reengineering business practices

Dell

Value MigrationInnovation

Win margins by migrating to a new and more highly valued business model

IBM

IntegrationInnovation

Protect and extend market share by eliminating the complexity of managing many disparate elements

SAP

Value EngineeringInnovation

Take market share by being first to the next price-elasticity inflection point

CDW*

*

*

*


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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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Funding Innovation


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Where Are Your Resources Invested?Current Core Becomes Context Over Time

On-line transaction processing

Internet-enabled transactions

Personal computing

Visualization and simulation

Mobile computing

Differ

entia

tion

Reporting and analytics

Digital media

Neutra

lizat

ion

Resources migrate to the bottom


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ContextCore

Resources Get Trapped in Context

CoreContext

Agile Aged

Context delivers diminishing returnsOrganizations become uncompetitive


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Free Trapped Resources to Fund Innovation

Extract Resources from Context to Repurpose for Core

“Coins in the Couch”


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The Cycle of Innovation

2. Deploy

1. Invent 4. Offload

Core Context

Mission Critical

Non-Mission-Critical

3. Manage

ManageMission-critical

ProcessesAt Scale

ExtractResources

To RepurposeFor Core

InventDifferentiated

Offering

DeployDifferentiation

At Scale

Fund next innovation


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BCG Model for Funding InnovationThe Growth/Share Matrix

Hi Growth Lo Growth

Hi Market Share

Lo Market Share ?Fund next innovation

Great model but . . .Must first fix two fatal flaws first


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Where Resources Get TrappedMission-Critical Context

CoreProcess creates

differentiation that wins customers

ContextAll other

processes

Mission CriticalProcess shortfall creates

serious and immediate risk

Non-Mission-CriticalAll other processes

Differentiation

Ris

k

MajorChallenge


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Mission Critical

Non-Mission-Critical

How the Cycle Breaks Down Clinging to Mission-Critical Context

2. Deploy

1. Invent

3. Manage

4. Offload

Resourcesget stuck

here

Resources areadded here for

support

Resourcesstill get

invested here

But lack ofresources here

results in failure to deploy!

4. Onload

Mission-

critical risk

Core Context


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Core Context

Freeing Resources Trapped in ContextThe Six Levers Model1. 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 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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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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Perpetuating Innovation


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The Problem with OutsourcingWe Are Losing Our Work Force Investment!

Resources Available

Here

ResourcesWanted

Here

Core Context

MissionCritical

Enabling

People being released lack the skillsto fill the positions being opened


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Revitalizing the Work ForceResource Recycling Zones

AC

B

Work circulates clockwisePeople recycle counter-clockwise within zones

IV

IIIII

IInve

nti

on

Zo

ne

DeploymentZone

Op

timizatio

nZ

on

eInventors

Use unconventional methods to create and

incubate new core

Deployers Use conventional methods to

ramp and manage mission-critical processes at scale

Optimizers

Use the Six Levers to extract resources from context to

repurpose for core


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Perpetuating Innovation

Inve

nti

on

Zo

ne

DeploymentZone

Op

timizatio

nZ

on

e

HandoffHandoff

Executives focus on managing the hand-offs


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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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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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Thank You

[email protected]

How Great Companies Innovate

Business

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