Innovation Takes More than Inspiration; it Takes Investment, and Persistence

By Ellen Pearlman  |  Posted 01-06-2006

As globalization sets in and competition heats up, companies large and small are turning to the diligent application of any number of innovation practices to stay on top. Customer innovation, innovating from the edge, innovation road maps—all are well-meaning efforts to help companies with the innovation process.

But according to Geoffrey Moore, a managing director at consultancy TCG Advisors and a partner at venture capital firm MDV in Menlo Park, Calif., innovation means little if all those 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 would never have been commercialized had not others seen and recognized their true value.

Moore's new book, Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution, just published by Portfolio, argues that innovation by itself is not enough. Innovation also requires an investment strategy that puts your resources where they count, and a people strategy that aligns those resources with the best skills of all your employees.

"There's a kind of innovation consulting that tends to be zealous about how to innovate, and about the freedom of imagination," Moore says. "It tends to be highly biased toward disruptive innovation. But it also tends to be semireligious, almost like the way open-systems people get religious. And you want to say at the end of the day, 'No. Be relentlessly pragmatic. Are you getting a return on your innovations?' "

Recently, Moore sat down with CIO Insight editors Ellen Pearlman and Edward Baker to chat about why innovation really matters, and about how best to get it done. An edited version of the conversation follows.

CIO INSIGHT: How did you choose Darwinism as a metaphor for the economic life?

MOORE: The parallels between economic systems and ecological systems are pretty well known. I wanted to find a platform to free ourselves from the sense of entitlement in the U.S. economy: that we're entitled to high margins, that we're entitled to use more of the world's resources than any other nation ever has.

The U.S. economy has sailed with the wind for all of my adult life. And now I think, for the rest of my adult life, we're going to be sailing into the wind. What we're seeing is a sea change in economic power: It's crossing the Pacific. The U.S. is not going to have all the economic power in the future.

It's time for a new set of rules. What Darwinism says is either evolve or get marginalized. Darwin doesn't care. At the end of the day, you perform or you don't. Dealing with Darwin was my metaphor for saying step up, or don't.

So it's "innovate or die"?

Too many established enterprises say to me, "We've lost the ability to innovate around here." That's completely and totally untrue. But something has happened to innovation at these companies that's of concern, and it has to do with return on innovation.

In my view there are only three kinds of innovation: You can differentiate through innovation, creating a new value proposition that the customer prefers and your competitors don't have. That will win you new revenues at attractive margins. That's a good economic return on innovation.

Second, you can innovate to neutralize a competitor's innovation. Not quite as attractive. 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.

And 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—look at Microsoft, look at 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. In that sector we've always thought of innovation as that disruptive stuff that magically creates new categories. The sector has always been about the technology adoption life-cycle. You start with mainframes, then minicomputers, then the PC, then the LAN, then the Internet. Now 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.

What's the alternative?

The big problem is that too many companies dabble in innovation. They say, "Well, we've got a little of this, and we've got a little of that." But that only guarantees—since they don't take any one project very far—that they never escape the gravitational field of their sector. They'll go down a path for a while, and then they'll think, "I like this other idea, too." And so they'll try a little bit of that and a little bit of the other. And their innovations don't resonate. I call it smorgasbording.

Meanwhile, 95 percent of their revenue is coming from a commodity product or service they're producing that they know damn well is never going to get differentiated.

Here's the critical distinction: core versus context. I define core as that which creates a return on innovation. Innovation for differentiation is core. And 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, your future, 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 bit 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?

You have to self-fund. But where are you going to get the resources? My view is that you have to extract resources from context to repurpose for core.

I'll give you an example. Right now, Microsoft is getting beaten up. Everyone is saying Google is winning the IQ awards, and Microsoft is brain-dead. The reason why Microsoft is in such trouble is they have to put all their resources into their two franchises, Windows and Office. But Darwin says no. You have to continue to meet the revenue commitments of those context franchises, but you have to do it with fewer resources, so that you can take some resources and spend them on core, on whatever type of innovation will work for you. This is how they did manufacturing at Cisco Systems. They centralized it, they standardized it, they modularized it, they optimized it, and then they outsourced it.

In the 21st century, you can no longer afford to be a vertically integrated corporation with all of your time, talent and management attention allocated across all of the various functions equally. Darwin will not reward that behavior.

Would this model apply equally to a services company such as an ad agency?

I think it applies to any industry. Anything can be core and anything can be context. The key idea about core and context is that what's context for you could be my core. And my context could be your core. That's a great economic relationship: If it's context for you and it's my core, you're going to want me to do it, and vice versa.

What's core to an ad agency? The weird thing about ad agencies right now is their economic model is not aligned with their value model. They make most of their money through media buying, which is not a value-added process. Over time the ad industry is going to rationalize around what's core—the creative stuff and account relationship management. So long as media buying remains a fairly straightforward process, their clients will decide that it's cheaper to buy their media through dedicated media-buying firms. Ad agencies will say, "But that's how we make all our money." And the clients will say, "Yes, what's your point?" Darwin doesn't care.

But the agencies have to charge for something. I believe they'll become more like consulting firms—for a while. And then, in this increasingly fragmented world, as media itself fragments more and more, those clients will come back to the agencies and say, "I do want you to buy the media, because it's gotten too damn hard. But now I need you to help me with Google. How should I do that ad? Are my clicks at the right level? Do I have the right search algorithms?" And then the agencies will be back to buying the media, and making money that way.

Lots of companies have missed such transitions. How can they get better at seeing what's coming?

If you allocate your resources based on your revenue makers, or margin makers, you're driving in the rearview mirror. You're optimizing for what has been successful. As long as you're on a straight stretch it works. But as soon as you hit a curve, it doesn't work.

If you're like most companies, you take last year's budget and you say okay, let's look at last year's budget. Thus, you've already institutionalized the resource allocation of the prior year. Which means that you're funding context before core. So core gets the scraps after context has been at the trough first. But if you're really doing core versus context, you have to fund core before you fund context.

So where should you start? You have to start with a strategy. And then you find the really, really dirty secret, which is that most companies don't have a strategy. Or they have a strategy but it's sort of an inertial thing. But if you really are going to do core versus context, and get a return on innovation, the company has to work from the same strategy.

So you budget for core first, and then for context, but now there's less money for context than the year before. The context people will say, "We have to hit our revenue target, and if you cut that budget, we can't do it." Then what?

Unfortunately, the correct answer is that the company needs to find someone who can hit the target. "Do you want to resign over this, or do you want to take a shot at it? Because that's the choice."

Now, the good news about mission-critical context is that it has inertia on its side. If you're that big, and you've got that much money associated with you, you're an established category, and established categories have inertia. Think about a merry-go-round. Once you've got a merry-go-round spinning, it takes less energy to keep it spinning than it did to start it. So you ought to be able to take some productivity risks with your business without diminishing your top-line or bottom-line goals.

And the game is, you have to. Because if you don't, you can't fund core.

What happens to the workforce when you start using context to fund core?

Most people cling to the task they've been successful with. Eventually, that task becomes mission-critical context, but they're the experts at it, 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.

That can't be the good outcome. But how would you do anything differently? We came up with a different way of looking at this: There's a process model that overlays the evolution of any work. Every process has a gestation or invention period, a prolonged deployment period, and an optimization period. All these tasks have to happen. Manufacturing has all three. Advertising has all three. Magazines have all three. People invent new magazines. Other people put them out in the market, and then others optimize them.

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. I think 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 and reinvest it in the skill—to shift deployment resources to core to take the next round of invention and deploy it.

Can companies organize the transition from invention to deployment to context without laying off people?

It isn't easy. But the real problem is that if you don't successfully deploy the next invention, you're going to lay off more people again in three years, and again in three years after that, and again in three years after that.

Here's the alternative: Take your top 200 leaders—and this is what Cisco does—and say, "Okay, how many inventors, how many deployers, how many optimizers do I have?" And if you move your leaders, you can trust them to move the rest of the resources with them to make it happen. But if you've got all your leaders stuck in the wrong area, you're stuck.

And the workers?

The way we do it today is to milk an employee's expertise and then throw away the employee. It's not fair to the employee. But if you can continually invent, deploy and optimize, and think about your employees as part of that process, you can create better capitalist outcomes in a way that aligns with your workforce rather than betrays it. That way, you're preparing them to survive in this increasingly Darwinian business world.

Around and Around

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.