Category Archives: Delivery – Innovation Paradox

How To Execute on Innovation Better

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Failure to execute is a leading reason why organizations don’t gain the full benefit of their innovation initiative investments. Day-to-day business pressures quickly overcome all the good work creating an innovative idea when it comes time to execute. Something we have previously called the innovation-delivery paradox.  An ongoing challenge is how can firms execute on innovation better while still delivering on the day-to-day?

The four disciplines of execution or 4DX method developed by Chris McChesney, Sean Covey, and Jim Huling provides a solid methodology to solve this challenge.

4DX Method

The 4DX method is based on these four disciplines:

  • Discipline 1: Focus on the wildly important
  • Discipline 2: Act on the lead measures
  • Discipline 3: Keep a compelling scoreboard
  • Discipline 4: Create a cadence of accountability

Why The 4DX Method Is Particularly Well Suited To Execute on Innovation

Focus. The 4DX method helps the innovation team bring focus to the main business goal of the innovation and drive cross organizational collaboration for innovation that requires change to the firm’s business model.

Results Oriented. Most business executives are well aware that key performance metrics are usually lag measures and organizations have difficulty linking actions to lag measure results. Lead measures that are often less than obvious enable team members to link their efforts to lag measure results. The 4DX method provides a systematic method to identify and optimize lead measures unique to the innovation.

Allows Experimentation. This is perhaps the most critical reason. Experimentation, failure, and learning are central to innovation. The regular team session based on commitment, accountability, and problem solving supports fast and responsive adaption as the innovation idea is implemented. No innovation initiative can foresee all the challenges in bringing an innovation to market. The 4DX method enables teams to break down the challenges and try different approaches to learn faster.

Enables Change. All innovation requires some degree of change. Change in behaviour. Change in business model. Change in procedures. Failure to execute on innovation is closely tied to failure to change. The 4DX method provides a positive framework to help teams through the change necessary to implement innovation.

Facilitates Engagement. Innovation is a team sport.  Everyone in the firm has to contribute to achieve the full benefit from innovation. The 4DX method facilitates engagement by clarifying how each team member can contribute to success as well as how their efforts achieves results.

Builds Momentum to Success. The regular cadence of the 4DX method along with flexibility to support experimentation helps to build momentum where team members get faster feedback and short term success. Through the medium term repeated application to follow-on innovation enables the culture of innovation execution to be strengthened.

Moving Forward

Adopting the 4DX method to overcome the challenge of innovating while delivering the day-to-day requires effort, commitment, and resilience. Alopex can help you through this process and strengthen your culture of innovation execution.

 

Creativity, Inc. & The Fuzzy Front End

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iStock_000005724324MediumThe fuzzy early stages of any idea that offers the potential to create new value involves more art than science and is very difficult to achieve in business.  Ed Catmull’s book Creativity, Inc. sheds light on these early stages and provides incredible insight into how to lead a development organization’s fuzzy front end in the context of the lean engineering framework.

The fuzzy front end starts with the identification of an unmet customer need and ends with convergence on the optimum solution that a firm can repeatedly produce and sell profitably in new or competitive markets. Ideas that lead to market-creating innovation are of immense strategic importance in today’s competitive markets.  The fuzzy front end is messy, unpredictable, and highly uncertain. Start and end points are ambiguous. The process involves novelty, experimentation, complexity, creativity, and non-routine engineering work. Ed Catmull’s book provides a broad set of management tools and mindsets that every engineering leader needs to master to nurture ideas for new value creation to improve business performance in the fuzzy front end.

Protecting Ideas In The Fuzzy Front End

Catmull does a wonderful job describing the tension that exists in firms between what I call the delivery and innovation paradox. He uses the analogy of ‘The Hungry Beast and The Ugly Baby’ to describe how engineering leaders need to be mindful of the balance between day-to-day delivery and idea driven innovation. His point is the day-to-day delivery (The Hungry Beast) can quickly kill idea driven innovation (The Ugly Baby) because originality is fragile and the fully mature product resulting from the original idea do not just pop into the world as Catmull says ‘already striking, resonant, and meaningful’ to the market. New ideas need to be protected during the fuzzy front end to be developed and enable the convergence on the optimal solution (the best all around solution from among a variety of possible choices).

To create the right environment Catmull suggests several management actions:

  • Seek Balance (Continuously) – Management needs to give continuous attention to achieving strong counter balance in the face of the strong delivery desire for efficiency and consistency of workflow by: enabling give & take from parts of the business; not allowing one function to win at the expense of the whole company by seeing balance as the collective end objective; allow continuous healthy conflict; act on situations where balance has been lost; and ‘hold lightly to goals and firmly to intentions’ which permits adjustment as new information and learning comes to light.
  • Constructive Feedback Through An Advisory Team (Brain Trust) – New ideas don’t develop in a vacuum but rather need a constructive feedback mechanism to evolve, improve, and be tested as they develop through the fuzzy front end.  The Brain Trust at Pixar provided the constructive and iterative feedback system facilitated through candor, challenge,  independent and emotionally disengaged advice, all by people who ‘have been there and done that’ free from overpowering outside agendas. Catmull emphasized that to function effectively the Brain Trust had no authority avoiding negative influence on development team dynamics.
  • Trusting Culture – Management needs to continuously facilitate a culture that enables honesty and candor, accepts failure with no retribution, sees change as good, and pushes employees mindset beyond their comfort zone. Management also has to recognize that they can’t possibly have all the solutions to unforeseen problems trusting all employees to respond with solutions because they are closer to the problem and have the best information.

Engineering leaders faced with the need to continuously innovate in response to competitive pressures should read Creativity, Inc. to understand how they can manage the fuzzy front end. The book is rich with examples, methods, and advice. As Catmull observes ‘discovery means you don’t know the answer when you start’ which capture perfectly the essence of the fuzzy front end.

 

 

 

 

 

 

The Capitalist’s Dilemma Explains A Lot

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Developed economies have settled into a new normal of low growth as a result of the structural change from the recent financial crisis. Clayton Christensen and Derek van Bever recently suggested that The Capitalist’s Dilemma explains why growth hasn’t picked back up like after previous recessions and is the leading reason why “despite historically low interest rates, corporations are sitting on massive amounts of cash and failing to invest in innovations that might foster growth“. The thinking behind The Capitalist’s Dilemma also help to understand the delivery-innovation paradox, Missing M in SME, innovation investment decision risk aversion, low R&D spending, innovation investment behaviour by large firms, and Canada’s poor innovation performance. Business leaders need to understand the implications of The Capitalist’s Dilemma because it may lead to the biggest change of all in current times – the end of capitalism – if the current financial orthodoxy does not change.

The Capitalist’s Dilemma

Christensen and van Bever describe the capitalist’s dilemma as “doing the right thing for long-term prosperity is the wrong thing for most investors, according to the tools used to guide investments“. Readers should refer to their article for their complete argument but essentially they blame the confluence of supposedly success oriented finance metrics (RONA, ROIC, RORC, IRR, etc), false sense of correctness from spread sheet models, low loyalty investors, and analysts pressures to force short term business decisions that result in low returns and low growth and a bias against new value creation. Their argument is based on revisiting the basic economic assumption that capital is scarce and costly which drives the backwards looking finance metrics towards the wrong decisions for developed economies at the macroeconomic level but also for long term value creation for investors through firm level innovation.

Explains A Lot

The finance orthodoxies from before the structural change and the capitalist’s dilemma explain much of why business investment in R&D and innovation is so low, the preference for low risk investment decision alternatives, and why Canadian business leaders don’t adopt innovation as a strategy. Economic growth requires innovation but business leaders given the choice are not investing heavily in innovation or if they do are not receiving good results (in terms of top line growth) or think they are innovating a better future by investing in continuous improvement alone. How can we make sense of better outcomes from innovation investments?

Innovation Outcomes and Impact On Growth

Christensen and van Bever frame innovation in a way that helps to differentiate how different innovation activities(R&D, business model innovation, new product development) , emphasis, and investments lead to positive growth outcomes or not.  By categorizing innovation by outcome (be it top-line revenue growth or more jobs) they propose three categories and how each impact growth:

  1. Performance Improving Innovation – Innovation that replaces old products with new and better models. The impact of performance improving innovation are substitutive in the market place that don’t drive growth.
  2. Efficiency Innovation – Innovation that helps companies make and sell mature, established products or services to the same customers at lower prices. The impact of efficiency innovations raise productivity that frees-up capital for more productive uses.
  3. Market-Creating Innovation – Innovation that transforms complicated or costly products so radically that they create new classes of consumers or a new market. The impact of market creating innovation is growth from new customers. The authors also note that efficiency innovations that turn non-consumption into consumption are market creating innovation.

Using these categories Christensen and van Bever demonstrate that the way that investment assessments are made under the current finance orthodoxy lead to too much performance improving and efficiency improving innovation and with a bias against market-creating innovation. So business leaders say they are investing in innovation by investing in performance and efficiency innovations but these don’t drive growth. To drive growth business leaders need to invest in more market-creating innovation but the finance orthodoxies inhibit this choice. What will it take to change the finance orthodoxies going forward to allow market-creating innovation to flourish?

Actions Going Forward

Developed countries and Canada in particular have several options:

  1. Do Nothing – Allow existing businesses to not grow and slowly fail and the current generation of business leaders, CEOs, CFOs, financial analysts to go extinct to be replaced by a new generation of leaders and financial in those firms that manage to survive.
  2. Change The Rules of the Game –  Christensen and van Bever identify several:
  • Repurpose capital away from migratory and timid capital to enterprise capital through tax policy, loyalty shareholder investment rules
  • Rebalancing business schools away from the success financial metrics.
  • Appropriate risk adjusted cost of capital for the new structural norm enabling longer term investments.
  • Reallocate innovation pipeline emphasis for more market creating innovation rather than heavy weight emphasis on performance and efficiency innovation.
  • Emancipating management and reducing the influence of tourist (short term) investors.

The drivers of corporate change over the last several decades now themselves must change. The question is will they follow their own advice or have they become the dinosaurs. Investment in performance innovation and much of efficiency innovation is not good enough going forward.

 

3 Rules For Superior Performance – A Delivery / Innovation Investment Compass

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Michael Raynor and Mumtaz Ahmed recently published an article in Harvard Business Review describing Three Rules For Making a Company Truly Great.  This study collected data on 25,000 US publicly traded companies between 1966 and 2010 with a focus on long run Return on Assets (ROA) performance because it reliably reflects management actions and levers within their control.   The best performing firms were labelled ‘Miracle Workers’ with ROA in the top 10% , the next ‘Long Runners’ with ROA in the top 20-40%, and ‘Average Joes’ with consistently lower ROAs.

The results of this study provide insight into how firms that successfully manage the Delivery-Innovation Paradox achieve superior long run results.  Although the study covers a vast array of different firms the three rules does suggest how managers of firms that leverage engineering talent (or advanced technology firms) could use the rules as a decision compass to prioritize and sequence delivery and innovation improvement investments for long run company success – A Delivery/Innovation Investment Compass.

The Three Rules For Superior Performance

Based on the large volume of data analyzed in the study, Raynor and Ahmed articulated three rules for long run superior performance:

  1. “Better before cheaper – or competing on differentiators other than price;
  2. Revenue before cost – or prioritizing increasing revenue over reducing costs;
  3. There are no other rules so change anything you must to follow rules 1. and 2.”

Raynor and Ahmed suggest that management should apply the rules to allocate scarce resources amongst competing priorities as they make investment decisions from year-to-year.

Long Run Superior Performance

To help clarify how management can put the rules into action, Raynor and Ahmed’s performance categories can be mapped into a simple 2×2 framework that illustrates value creation and value capture.   The ‘miracle workers’ were firms that consistently in the long run selected steps to be better before cheaper and revenue before cost to maximize value creation and value capture.  The ‘Average Joes’ were firms that consistently in the long run selected steps be cheaper before better and reduce cost before improve revenue.  The ‘Long Runners’ were firms that consistently fell within these extremes.

2x2 Performance Map 4

For superior performance, the first rule leads management to take steps for their firms to compete on non-price value creation (ie. to be ‘better’) rather than competing on low price (ie. to be ‘cheaper’).  To be ‘better’ the authors suggest that firms should invest in continuously improving the non-price benefits of their offerings such as great brand, exciting style, excellent functionality, durability, convenience, selection, or any other market relevant sources of value.   By extension then this implies that for technology firms to be ‘better’ than their competition management need to invest wisely and appropriately through disciplined innovation to create value – product innovation, business model innovation, marketing innovation, or process innovation.

For superior performance the second rule prioritizes value capture by putting increased revenue (either higher price or higher volume) ahead of reducing costs.  To put this into action this rule is really speaking to the importance of the efficiency and effectiveness of delivery by the business to achieve profitability.  To deliver more efficiently and effectively firms need to invest in initiatives that would yield higher grow margins, lower SG&A to sales ratio, lower capital to sales ratio, or higher market share.

Three Rules For Long Run Superior Performance For Technology Firms

With the strong evidence base underpinning Raynor and Ahmed’s study, managers of technology firms can therefore apply the three rules for long run superior performance stated this way:

  1. Use disciplined innovation to create value offer better before cheaper;
  2. Use efficient and effective delivery to capture value with revenue before cost; and
  3. There are no other rules so change anything you must to follow rules 1. and 2.

Paths To Superior Performance – Order Matters

In the long run the 2×2 matrix suggests the 3 rules can be used as a guiding compass as the firm evolves along paths taking them from the ‘Average Joe’ level of performance to the ‘Miracle Worker’ level of superior performance.

2x2 Performance Map 3

The 2×2 matrix implies that there are many paths that a firm can take in the long run.   The first observation one can make though is that order matters in deciding innovation over delivery efficiency because value capture is difficult if it hasn’t been created.  But once value is created management must maximize value capture.  Each path involves an ongoing balance of competing priorities in the face of competitive dynamics while avoid traps at the extremes which are both recipes for disaster.  The two management traps at the extremes are:

  1. Obsolescence Trap – Management continuously decides to prioritize delivery over innovation continuously leading to obsolescence by not refreshing offerings – value capture at expense of value creation ; or
  2. Poor Innovation Execution Trap – Management continuously prioritizing innovation over delivery leading to poor execution – value creation without value capture.

Either trap will lock their firms in a perpetual ‘Average Joes’ level of performance or business failure.  Over time then the optimum path is an incremental ‘zig-zag’ through the middle interrupted by market disruptions and changes – or reminding one of the game of snakes & ladders.    The authors also note through examples when management stop following these rules that performance suffers and the path can take them back down.

The 2×2 framework is perhaps an over simplification of some fairly obvious business principles but it helps to reset management’s thinking if they get lost in the details.  To achieve long run superior performance the results of this study suggests that managers need continuously balance and sequence innovation and delivery investments – the three rules provides a delivery / innovation compass to help guide management investment decisions year-over-year and in response to competitive dynamics.