Thought Leadership in Innovation

Innovation Lessons Found Between Martha's Vineyard and Singapore

It started at 4:30 a.m., Eastern Standard Time, last Saturday. The cell phone on my nightstand started ringing with a 336 area code. It was US Airways. "We're sorry, but last night's weather meant the crew got in late. Your 8:20 a.m. flight from Martha's Vineyard to LaGuardia is now leaving at 11 a.m.," the representative said. "We've checked, and that still should give you enough time to get to Newark for your 3:15 p.m. flight to Hong Kong." Through the early morning haze, I asked, "Do I have any other options?" "Not that we can see," the agent said. I tried to go back to sleep, but it was impossible. I had been in the States for four days — the primary purpose of the trip was celebrating Innosight's 10 year anniversary — and was pretty desperate to get back home to Singapore. My planned route was to fly from Newark to Hong Kong, layover for an hour, fly to Singapore, and make it home before midnight Sunday. The US Airways flight ended up taking off right before noon. As it touched down at 1 p.m., I figured I had about a 60 percent chance to make it through the traffic between LaGuardia and Newark. In the taxi ride, I noticed I had a voicemail. It was an automatic message from Continental, my carrier from Newark to Singapore. It reported a travel disruption, but my "new flights" were the same time as my old flights, so I figured it had just caught my US Airways blip. My taxi pulled into Newark at 2:05 p.m., safely in time for my flight. When I got my boarding pass the agent looked at his computer quizzickly. It too showed a flight disruption but he said I was still on the same flights. Off to security and a triumphant return to Singapore. I got through security and looked at the monitor to find my gate. I saw the words all travelers dread: "HONG KONG - DELAYED - 9 PM DEPARTURE." It was nearly a six-hour delay. That delay meant that my one hour layover in Hong Kong would now be seven hours, minimum. To its credit, Continental handled the situation well. I received $50 in meal vouchers to use at Newark airport (which has a surprisingly high number of food choices), a 10% off coupon for any Continental flight, and a complimentary room in the airport hotel in Hong Kong. Staff were uniformly apologetic and incredibly helpful to me and the dozen or so other travelers in similar situations. So, approximately 44 hours after that early wakeup call in Martha's Vineyard, I finally touched down in Singapore's Changi Airport. If you've never been to the Changi airport, it's a frequent traveler's dream. Instead of having centralized security, it has security screening at each gate. That means that arriving passengers can go wander around the peaceful airport, shop duty free, and so on. When I arrive in America, I mentally prepare for 20 to 30 minutes to wait in the line for immigration. Not in Changi. I swipe my passport in the machine, have my fingerprint scanned, and am through in seconds. I didn't check bags this trip, but even when I do they somehow seem to arrive within minutes. I blasted through customs, and hopped into a taxi. The total time from leaving the plane to getting in a taxi: 11 minutes. I'm not an expert in airport design, but Changi's approach seems to have several advantages to me: You never have to obsess about whether a busy airport will impact your ability to make it through security to catch your flight. The airport's overall traffic level has little impact on the time it takes to get from the front entrance to your gate. You have ample opportunities to shop when you land, which can be helpful for those of us who sometimes forget to get presents for the family when traveling. The airport's interior is designed like an oasis, with calming music, carpet, gardens, free wireless, and ample seating. I strangely enough look forward to spending time in it. So, what does this all have to do with innovation? There are two key lessons here, one from my experience with Continental and one from my experience with Changi. Bad stuff happens. There's no way around it. Sometimes a flight gets delayed. Sometimes the test you are running doesn't pan out. Sometimes a lead customer falls on tough times and reneges on a promise. The key isn't whether or not you encounter difficulty. It's what you do with that difficulty. I left my 40+ hour journey with good feelings about Continental. The customer is boss. Changi, in my mind, is an example of intelligent design with the traveler in mind. It's pleasant, peaceful, and efficient. Innovators should always look at the world through the eyes of the customer. Is there a way to challenge common assumptions, like Changi does with distributed security, to delight the customer? The best news of all is that the trip was so exhausting that I had no problems at all falling asleep Monday night. No jet lag this time! 07/27/2010

A Tale of Two Innovators Going Public

A few weeks ago, electric vehicle manufacturer Tesla Motors issued stock to the public. Its charismatic CEO Elon Musk was once touted by Wired as a "triple threat" disruptor based on his previous experience with PayPal and Space Exploration Technologies. A successful stock market introduction led to Musk being worth millions, on paper at least. Last week, a company called QlikTech issued stock to the public. The company is more than a decade old. Most people wouldn't recognize CEO Lars Bjork if they ran into him on the street. A Google News search found 2,180 articles about Tesla, and 68 about QlikTech. Tesla's the sexier company, but is it better positioned for success? I flagged QlikTech last year in The Silver Lining as one to watch during today's tough economic climate, noting that "Companies seeking to find prudent ways to manage in tough economic times are going to be hungry for easy, affordable ways to analyze data. QlikTech is in a great position to be the software vendor of choice to these companies." QlikTech is following a textbook disruptive approach. The company's solutions make it simple and easy for companies to run analyses to better understand their business. It has a solid business model. The company's revenues have grown from $24 million in 2005 to $157 million in 2009. It has been profitable since 2008. Meanwhile, Tesla is undoubtedly following a novel approach, but it isn't adhering to the disruptive pattern. Rather, it's attempting to be performance competitive with existing solutions. Its first car — the Tesla Roadster — is sexy, and a powerful showcase of the potential of Tesla's technology. But its $100,000-plus selling price has relegated it to a niche product. The company did rack up more than $100 million in sales in 2009, but losses for the year exceeded $50 million. Analysts generally expect Tesla's fortunes to come down to a car it hopes to introduce in 2012 — the "Model S" sedan targeting the mass market. That puts it in direct competition with traditional manufactures such as General Motors, whose all-electric Volt product is due to arrive later this year, and emerging players such as BYD, a Chinese company that already has an electric vehicle on the market and recently announced a joint venture with German giant Daimler. Tesla believes it has several sources of competitive differentiation. It hopes to revolutionize the car buying experience by bringing in outside talent with experience working with The Gap and Apple. The company claims that its Silicon Valley roots provide a different perspective from traditional car companies. One example? Third-party developers will be able to create "apps" for the Model S. Finally, Tesla hopes to strike novel partnerships with traditional manufacturers to help enable their move toward electric vehicles. Toyota invested $50 million in the company, and Tesla might help the company develop electric vehicles in the future. My sense is that last area provides the most long-term hope for the company. It's not really a disruptive play (as we define it, at least). Rather, it involves providing the performance-enabling subsystem that helps other companies achieve their strategic goals. While analytics and automobiles don't seem to have much in common, I'll be watching these two companies carefully over the next few years. 07/19/2010

Chart a Middle Course in Strategy and Innovation Conflicts

With two older sisters and two younger brothers, I am a true middle child. Like many middle children, my natural tendency is to be a peace maker. I seek compromise and harmony between conflicting demands. Reading through some of the ongoing dialogues around strategy and innovation makes me appreciate these tendencies. So many arguments are framed as either do this or do that. One example is an emerging "battle" between "East Coast" strategic thinkers and "West Coast" design thinkers. Another "either/or" is well summed up by this great blog post by Eric Paley (a Dartmouth classmate of mine who has had entrepreneurial success and writes a great blog). Paley's post discussed a debate he had with the co-founder of his successful startup Brontes Technologies about the best way to approach innovation. Paley favored a more analytical approach, which he dubbed "Moneyball" after the Michael Lewis book describing the statistical approach favored by Oakland A's general manager Billy Beane. His co-founder was more of a believer in "Blink," after the Malcolm Gladwell book describing the merits of instinctive judgment. The middle child in me responds to these kinds of discussions with, "Why can't we be both?" I generally think the best entrepreneurs blend these two characteristics. Their instincts might point them to an opportunity, or tell them it is time to focus resources on developing a particular feature or serving a particular customer segment. But analysis helps them determine which opportunity to pursue, or how they will actually go about the important task of, you know, actually making money. A well known example is Jeff Bezos. While working at D.E. Shaw in 1994, instincts drove him to consider creating a startup online venture. But well-structured analysis pointed him to starting with books and locating his company in Seattle so it could tap into technological talent and be close to leading book distributors. Clayton Christensen has written extensively on what are the hallmarks of good management theory. In short, he notes that a good theory starts with a good categorization scheme that parses out the different circumstances a manager might face. It then pinpoints causality, helping the manager understand what action in that circumstance will lead to a desired result, and why. This view, coupled with my middle child tendencies, lead me to ask two questions when confronted with opposing viewpoints: Are we in a circumstance where we have reasons to believe one approach would be better than another? What would happen if we made the "or" an "and"? Let's use these questions to address the analysis vs. action schism. One can imagine there are circumstances where analytical approaches are very valuable. If you were asked to optimize the pricing of an existing offering, assess why historical approaches to crack into a market segments failed, or compute an estimated value of different market entry strategies, analysis would rule the day. But if you had to predict how customers would use something they had never seen before or how line managers would respond to a re-organization, you would bias more towards action. In all cases, I'd be looking for the intersection. Can you run a quick test to figure out if your optimized pricing strategy will work? Can you analyze similar re-organizations to get a sense as to how people might respond? This view is explained in much more eloquent ways in Roger Martin's worthy read The Opposable Mind. Martin's essential argument is that leaders are increasingly facing seemingly conflicting aims — cut costs or innovate, focus on established or emerging markets, growth or profitability. The opposable mind looks at projects from different perspectives and finds a way to resolve or manage the conflict. A more recent book from Inder Sidhu, appropriately titled Doing Both, compellingly argues that the new leadership imperative is to break perceived tradeoffs. If you keep asking "What are the circumstances?" and "How do I make an 'or' and 'and'?" I am willing to bet you will find unanticipated solutions to seemingly never-ending debates on a range of topics. 07/13/2010

Grooming Leaders to Handle Ambiguity

How would you identify the up-and-coming leaders in a company about which you knew nothing? You'd likely start by pinpointing the executives who control the most employees or revenues. You might give bonus points to relatively young mangers. If you had consulting DNA you might create a sophisticated ratio combining the span of control and age to identify the leader in the horse race to be the next big boss. You are working off a simple hypothesis that's right in almost every company — that size matters. Power flows from financial contributions and legions of employees. You groom leaders by giving them progressively larger, more challenging opportunities. This approach seems logical. The bigger the business, the more it matters to a company's near-term performance. And certainly, larger businesses tend to be more complex. Tomorrow's leaders surely need to be able to deal with complexity! But I wonder if companies might be approaching leadership development the wrong way. It's pretty clear that tomorrow's leaders are going to face the "new normal" of constant change. It is no longer enough to be an operator that can master today's complexity. You have to be prepared to deal with tomorrow's complexity, "black swan" events, sudden shifts in the basis of competition in your industry, competitors springing up around the globe, and more. I've never run a multi-billion dollar company, but I'm willing to bet the difference in complexity between managing $1 billion and $10 billion in revenues, or 1,000 versus 10,000 employees isn't that great. In other words, giving up-and-comers more responsibility helps them to refine skills they already have, when what they need to do is to develop the capability to flexibly respond to unanticipated challenges. A related challenge is that size-matters-grooming companies can find it hard to convince talented managers to work on new growth initiatives. After all, those initiatives typically start small, both in terms of headcount and revenue. Managers with their eye on their next assignment naturally want to work on projects that will "look good" on their internal resume. Perhaps it is time to rethink this approach. Instead of giving up-and-comers larger assignments, consider intentionally giving them smaller, more ambiguous ones. Have them crack into a new geographic market. Ask them to lead the development of a completely new business model. Force them to think creatively about how they will access or assemble the resources to solve the challenge. Facing highly ambiguous challenges will help managers develop a set of tools that prepare them for the uncertainties they will increasingly encounter as they ascend up the corporate ladder. Shifting from size-matters to ambiguity-matters development requires rethinking other key assumptions. Most companies, for example, look to what a manager has achieved to assess their performance. But in ambiguous circumstances with uncertain outcomes, you need to look at how a manager has acted. Sometimes you can do everything right and forces beyond your control lead to "failure." I'll write more about this topic in a future post. I'd love to hear additional thoughts about ways in which you are grooming leaders to be ready for the known — and unknown — challenges that lay ahead. How is your company responding to this challenge? 07/06/2010

Microsoft and the Innovator's Paradox

"The Odds Are Increasing That Microsoft's Business Will Collapse" That's a pretty good title if you (like Henry Blodget from Silicon Alley Insider, the writer of the article) are trying to grab eyeballs. It also provides a useful introduction to what I call the "Innovator's Paradox." Blodget's article was provocative. He argued that Microsoft is in a no-win situation. It isn't sitting on any idea that is on the cusp of turning into a multi-billion dollar business. The personal computer is losing its dominance to mobile devices and tablets. The company's core profit drivers (Windows and Office) are under disruptive assault from Google's freely available applications and operating system. At best, Microsoft will respond with its own free products and erode its profit margin. The most telling thing in Blodget's post was a chart that showed the sources of Microsoft's profits over the past few years. Microsoft's core business has continued — despite continued proclamations of the company's coming demise — to throw off cash and to grow. But new growth businesses that were specks in 2006 (entertainment and devices and online services) remain tiny, and Microsoft hasn't created any material new businesses over the past few years. So the real problem isn't what Microsoft is doing today. It's what Microsoft did, or didn't do, five, or even 10 years ago. At the time, its base business was a bastion of strength. Today's threats were in their infancies. It would have been the perfect time to plant seeds that today would be blooming profit generators. Why didn't it? It's The Innovator's Paradox: When you don't need the growth, you act in ways that lead to you not getting the growth you will need. And when you do need the growth, you can't act in ways that deliver it. Got that? I use this chart to illustrate this point. It's helpful to stimulate discussion among a company's leadership team. As the chart shows, when times are going great ("exploitation"), companies have ample resources to invest in growth. But because times are going great, innovation efforts tend to be undisciplined. New growth efforts get flooded with cash. Companies don't worry about iterating to find a successful business model. Overpriced acquisitions occur. Then, inevitably, maturation sets in. The need for new growth intensifies. But resources are harder to come by. Acquisition targets would rather join forces with the new kid on the block whose rapidly appreciating stock acts as a powerful acquisition currency. The acute need for growth gives an almost gravitational pull to large, existing markets. After all, that's where the money is. But large, existing markets are an innovator's fool's gold; glimmery, shiny, but not of much value. So what do you do about the Innovator's Paradox? Consider what my colleague Clark Gilbert found in his doctoral research. He looked at how newspaper companies responded to the Internet, intersecting the disruptive innovation research of Clayton Christensen and the famous behavioral research of Amos Tversky and Daniel Kahneman. Some companies in Gilbert's study viewed the Internet as a threat. That led to them committing resources to innovation efforts. However, they responded in very rigid ways (typically creating replicas of the newspapers online). Other companies viewed the Internet as an opportunity. That framing allowed for more expansive response strategies, but made it difficult to support serious resource allocation. Gilbert summarized this challenge by saying, "Absent a sense of threat, response to disruptive opportunities is inadequate; but with threat, the fully funded response is too rigid." The trick, Gilbert argued, was to decouple the allocation of resources from the use of the resources. Breaking the Innovator's Paradox requires similar logic. Companies have to recognize that their core business, no matter how great it seems today, has a limit. That recognition should drive consistent allocation of resources to new growth efforts, especially when times are good. But those resources can't be burdened with a "bunker" mentality, or else they will struggle. As one friend told me, "No great growth business was built from a defensive crouch." Further, companies have to make sure they avoid the "curse of abundance" that can lead overly resourced growth efforts to struggle. So, all you have to do is invest when you don't need to, break psychological barriers that might unintentionally inhibit creativity, and somehow avoid the abundant resources that would seem to be your primary source of competitive advantage. No one said this was going to be easy. 06/24/2010

Think and Act Like Your Customers

My colleague Alex Slawsby made an observation while we sat in the office of one of our clients the other day. "Look around," he said. "The room is full of products made by the company." Doesn't seem so fascinating, does it? After all, any member of a "tribe" has markers to demonstrate their allegiance to the tribe. But Alex continued. "Don't you think instead this room should be bursting with products made by competitors? Or other solutions consumers turn to instead of the company's products?" It was a thought provoking point. At most companies, it is a mark of shame to use anything other than the company's product. I doubt that you would see many tubes of Crest at Colgate-Palmolive. Try bringing a Coke product into Pepsi. Steve Ballmer from Microsoft famously berated an employee last year for using an iPhone at a company event. I remember a few years ago when we were working for DHL and we committed a cardinal sin. Not only did we send the company something via FedEx. It was an invoice. (Fortunately a friendly client interceded and saved us from trouble). It's kind of silly, isn't it? An innovation-focused company shouldn't have an avoid-the-competition-at-all-costs mindset. Instead, the company should always be wondering: What is the competition up to? Why might people prefer their products to ours? How does the customer think through purchase-and-use decisions? Some companies have people who focus solely on competitive intelligence, but the simplest form of competitive intelligence is to encourage employees to act like "regular" customers. Pick whatever solution gets the job done better than anyone else. Intentionally try the competitor's products to see what works and what doesn't work. Don't consider it a mark of shame. Tell your boss that you are spending every minute doing market research to try to identify the competitor's weaknesses — or your own. 06/21/2010

The 4 Ps of Innovation

A few weeks ago, an innovation team was painstakingly working through a meticulously crafted spreadsheet detailing the growth potential of their idea. Executives trying to look smart lobbed in "gotcha" questions about specific assumptions in their calculations. Much discussion ensued. I was an observer in this meeting. I sat quietly and took some notes. After the meeting the team leader said, "That was a really good review. The executives were really involved and we have deeper buy-in to our plan." I had a different perspective. "I don't think a single executive could tell you the essence of the idea, or what makes it compelling," I said. "You survived the meeting, but I don't think you are any closer to convincing executives that they should invest in this idea." I explained how, based on the pioneering thinking from Rita McGrath and Ian MacMillian, I like to focus these discussions on three simple questions: "What size matters?" In other words, how big does an opportunity have to be to matter inside a company? "What is a simple calculation that crosses that bar?" "What leads you to believe that calculation is plausible?" Any marketer can quickly rattle off the so-called "4 Ps" of marketing (product, price, place, and promotion). Innovators should also be able to quickly recite the 4 Ps that capture their idea's potential: population, penetration, price, and purchase frequency. Companies looking at a specific revenue target can simply multiply the addressable population, the penetration of that population, the price per purchase, and the purchase frequency to get to annual revenues. Typically I suggest people try to be quite precise about their target population, give their best estimate based on in-market analogies of the pricing and purchase frequency, then determine what penetration they would need to hit their targets. This deceptively simple calculation neatly captures many of the elements of an idea's business model. Does the idea target a niche or a mass population? Is it an occasional or frequent purchase? What channel would support the target price point? What kind of support would be necessary given the purchase frequency? Once you do the 4P calculation (and of course, if you add in a fifth — profit margin — you can look at profits instead of revenue), the focus shifts to finding systematic ways to determine whether the assumptions behind the calculation have any hope of being true. The deep thinking that goes into creating complicated spreadsheets for ideas can be very useful. But it also can be a way to mistake motion for progress. Make sure you can answer the simple questions before you worry about the complicated ones. 06/10/2010

Kindle Isn't Dead Yet, and Other Reflections on Apple's iPad

I picked up an iPad in late April when I was swinging through the States. The Anthony family has been experimenting with it during the last six weeks in Singapore. I have five reflections on the device: Magazine companies hoping that the iPad will "save" the industry could be disappointed. I downloaded the Wired magazine app, but have largely found the experience to be disappointing. Sure, there are a couple bells and whistles, but for the most part I find it to be a worse experience then reading a magazine. You never want to give consumers something they consider worse than existing solutions. What job do people "hire" a magazine to get done? I use magazines to browse, discover, relax, and unwind. A hard copy magazine gets these jobs done very well. Of course, magazine companies find it more economical to distribute content digitally, but they have to make sure that the experience doesn't disappoint readers. The tablet format will transform education. It is utterly amazing to watch my kids use the simple, intuitive device. They have been reading books, playing number games, learning the alphabet, and so on. It's pretty easy to envision next-generation interactive textbooks with ties to customized tutoring solutions (conflict alert — we are an investor in such a solution, called Guaranteach). And Apple does have a strong historical connection to education. I can also see the tablet format becoming a big deal in healthcare and for salespeople. The iPad is rugged. The device survived a tantrum from my two-year-old daughter Holly and an effort by my four year-old-son Charlie to use it as a surfboard! Amazon's Kindle isn't dead. I have been using the iPad (and the iPhone) for book reading, but I've been using Amazon's Kindle application and buying books from Amazon's store, and I still throw my Kindle device in my briefcase when I travel. Amazon is working hard to make sure the Kindle format is available on all devices, which is a smart move. It might turn out that the real value of the Kindle device was simply to prime the pump of the e-reader market, with the real money lodging in the provision of compelling content. Apple still needs a twist. The iPad has found a comfortable niche in the Anthony household, but it certainly hasn't replaced the laptop; in fact I find I use apps on the iPhone far more frequently than I pick up the iPad. Selling 2 million devices in such a short period of time is a testament to the goodwill Apple has built up and the fact that the iPad is a well designed, intuitive product. But I'm not ready to pronounce Apple victorious yet. It could be that the real winners in the tablet world will be application providers that find unique ways to tackle opportunities in education or healthcare or develop other higher end, special purpose applications for the iPad or televisions. 06/02/2010

Are You Tapping Your Creative Capacity?

It was hard to ignore the results of the IBM CEO study that arrived last week. As one of my colleagues noted, "Wow. This looks just like something we could have written." Indeed, top-level headlines describing how change is accelerating, how leaders need to become better at reinventing their businesses, and the critical importance of customer focus, echo critical themes explored by me and my colleagues in recent years. It's good to see growing alignment about the need to confront the "new normal" of constant change. Yet, while I agree with many of the report's broad findings, something nagged me as I thought about it over the weekend. I finally put my finger on it as I touched down in Manila on Monday night: I worry that leaders seeking to meet the challenges spelled out in IBM's report will completely miss the mark. That concern is most acute when it comes to the report's first section, which described how CEOs were looking for more creative leaders. As IBM Chairman and CEO Sam Palmisano noted in the report's introduction, respondents viewed creativity as the "single most important leadership competency for enterprises seeking a path through this complexity." The report suggests that creative leaders should "embrace ambiguity," "take risks that disrupt legacy business models," and "leapfrog beyond tried-and-true management styles." Executives certainly feel the need for this kind of creativity. IBM's survey provides one clear example. My own experience suggests that executives often lament how their organization "isn't good at developing good ideas" or "isn't as creative as it should be." One leader put it bluntly: "Can't you just get my people to be more innovative? If not, can you help me find some new people?" What's behind questions like this is an implicit assumption that creativity is a human capital problem. If this assumption is right, the answer is coaching, cajoling, or — in an extreme case or — replacement. But having spent a lot of time inside a lot of companies, I believe that human capital isn't the problem. Organizations tap a mere fraction of their creative capacity. I've seen companies — even ones that from the outside look staid and stuck in their ways — produce beautifully creative ideas, and wonderfully creative plans...on paper. Of course, banks don't accept business plans as legal tender. And that's the problem. Most companies don't have the systems and structures to turn paper plans into profits. I call this the "First Mile" problem. Trying to increase individual creativity without addressing the factors that cause the First Mile problem — namely human resources, strategy, resource allocation, metrics, and incentives — is destined to disappoint. Working on those factors, however, could provide rocket fuel to a company's innovation efforts, by releasing the constrained creativity languishing in most organizations. Organizations don't really need more creative leaders. They need to organize in a way that channels their untapped but inherent creativity.   05/26/2010

Three Critical Innovation Lessons from Apple

It was September, 2005. I was fresh off of a workshop with a media company where the company's CEO noted, "Trees don't grow to the sky forever." The company's core business was strong, but the CEO told the group it had to innovate to sustain success in an increasingly turbulent environment. A couple of days later, I was talking to my colleague Matt Eyring. He said, "So Scott, you've been a big supporter of Apple over the past few years. What do you think about buying some stock?" "Trees don't grow to the sky forever," I told Matt. Whoops. Since late 2005, Apple's stock has quintupled. With a market capitalization of close to $250 billion, Apple is (at least today) the third most valuable company in the world, behind ExxonMobil and Microsoft. It's a stunning story that's been dissected to death, but still remarkable enough to warrant reflection. Ten years ago — three years after Chairman and CEO Steve Jobs had returned to "rescue" Apple — the company was still largely treading water, with a relatively meager $3 billion market capitalization. Its personal computer products had a loyal following in niche markets, but that was about it. Over the past decade, Apple has launched five legitimately game-changing innovations: The iPod. The elegant MP3 player that started Apple's decade of disruption. iTunes. Beautiful software with a powerful business model that showed that people would in fact pay for music if the price was right and the interface was simple enough. The iPhone. Dubbed the "Jesus Phone" by supporters, a smartphone that three years later still hasn't been matched by rivals. The AppExchange. Sure, no one needs 98 percent of the apps that Apple offers, but wow, what a selection. The Apple Store. The quietest part of Apple's revolution, today close to $2 billion worth of goods move through Apple revolutionary stores. Many expect the iPad to be Apple's sixth big success. It's still too early to tell (and, as noted before, I'm waiting for the twist), but watching my four- and two-year old children play around with our iPad leads me to believe the device has only scratched the surface of its disruptive potential. That's not to say the next decade will be as great for Apple as the past decade. It now has to think hard about how to manage conflicts that will emerge at the intersections of its businesses. The company will inevitably find it hard to maintain its growth rate as revenues approach $100 billion. Looking back, my mistake in dismissing Matt was pretty simple. I didn't count on the impact of items three through five on the list above. It's a natural enough mistake. The number of companies that have organically created three distinct multi-billion dollar new businesses in a decade is pretty short. And if Apple had indeed stopped at the iPod, my advice to Matt would have appeared smarter. After all, iPod sales have slowed over the past few years as that market has approached saturation. But Apple's brilliance has been to relentlessly push the pace of innovation. Reflecting on Apple's decade of disruption highlights three critical lessons: Don't just focus on building beautiful products. Build beautiful business models, new ways to create, deliver, and capture value. The iPod and iPhone would not have had nearly as much impact if they hadn't been matched with iTunes and the AppExchange respectively. Think in terms of platforms and pipelines. Competitors that chase Apple's latest release find themselves behind when six months later Apple introduces its latest and greatest offering. Take a portfolio approach. While Apple has been on a phenomenal run, not everything it has introduced has been a home run. For example, Apple TV hasn't had the "revolutionary" impact that Jobs predicted upon its launch in 2007. Many companies I've spoken to dismiss the learning from Apple's success. "Apple has Steve Jobs," they'll note. "We don't." Of course, Jobs has been a central player in Apple's success. It's indeed unlikely that Apple could have been as successful without such a visionary, charismatic leader. But my own view is that the "black box" of innovation has cracked open, making innovation success more widely available. Innovators around the world — whether they are intraprenreurs working for large companies or entrepreneurs set out to create the next great business — can meaningfully increase their odds of success by drawing on the increasingly deep pool of academic research and case examples. Whether they wear mock block turtlenecks is up to them. 05/18/2010

How P&G Quietly Launched a Disruptive Innovation

The Edison Best New Products Awards recently bestowed a Gold medal in the Consumer Packaged Goods, Consumer Drug Segment to "Align Probiotic Food Supplement" from Procter & Gamble. This gives me the opportunity repeat a story that has important lessons for innovators everywhere. I first met the Align team in 2004. The team was developing a probiotic pill whose daily use could alleviate the symptoms of irritable bowel syndrome. More than 30 million people in the United States alone are reported to have this condition. The best that most can do is to modify their lives to account for the condition. The idea was brimming with disruptive potential. A pressing problem with no adequate solutions. A potentially category-creating way to get the job done. The product had unique intellectual property, and consumers who tried it reported that their lives were changed. And, of course, it was about to get shut down. Why the disconnect? The original market forecast said that the opportunity would be relatively small. Launching a new brand is expensive, and the team hadn't yet worked out all the technological kinks. Big investment, high risk, small return is not a recipe for corporate approval. Yet, the team, under the guidance of Nancy McCarthy, persevered. We helped the team conduct scenario analysis to identify the assumptions that would have to prove true to justify a full-scale launch. Management agreed to provide a small amount of money to learn more about these assumptions. The team quietly launched the product over the Internet. It didn't spend tens of millions in advertising; rather it used its existing pharmaceutical sales force to push the product in a few cities. P&G then moved to sell the product online through websites like Walgreens.com. Finally, the product launched nationally early last year. Important insights came from this process. Instead of simply having a vial with a bunch of pills in it, the Align team created a "blister pack" with days of the week on it to remind consumers to take the pill every day. Branding changed as well. Initial packaging said Align was "from the makers of Metamucil." Today Align stands alone. As Chief Technology Officer Bruce Brown told me for a 2008 Forbes article describing Align, "The team stair-stepped to market, never investing ahead of learning." (You can also read more about Align in Chapter 6 of The Silver Lining.) Anyone who has seen me speak knows that one of my favorite quotes is Intuit founder Scott Cook's wonderfully pithy, "For every one of our failures, we had spreadsheets that looked awesome." The lesson is not to confuse an awesome spreadsheet with an awesome business. Similarly, crummy market forecasts can obscure solid business opportunities. Innovation success requires looking at the numbers critically before making investment decisions. Look for the assumptions behind the numbers and find simple, affordable ways to pressure test those numbers in as-close-to-market-conditions as possible. 05/11/2010

The Key to Spotting Disruption Before It Happens

The April 15 issue of The Economist published a simple chart that gave me chills. Look at it for a minute. What looks scary to you? The chart displayed the number of pieces of mail sent by year over the last decade. When you look at the chart, the first thing you probably noticed was the precipitous decline in mail volume over the past few years. Indeed, mail volume has sagged 17 percent since 2006. Even though the postal service has furiously cut staff over that time period, it's still pleading with regulators to allow it to consider additional strategic responses to address the disruption clearly affecting its business. That's not what scared me though. I found the years from 2000 to 2006 to be particularly frightening, when nothing much was happening in mail volume. How could a relatively flat line be scary? It just looked so eerily familiar. Go back and look at what happened to CD sales from 1996 to 2001. Or check out newspaper company revenues from 1996 to 2005. Or Kodak's film sales during the 1990s. Or Blockbuster's revenues in the early part of the 2000s. Or Digital Equipment Corporation's revenues in the 1980s. And on and on and on. In the early days of transformation, market leaders tend not to feel deep pain. The transformation takes root away from the mainstream, or in a seemingly non-connected market. It's not yet good enough for mainstream markets. Or, the overall increase in consumption acts as a "rising tide" that lifts the boats in the mainstream market. This makes it easy for executives to say, "I get what you are talking about. But my business is healthy! It's all overblown." It's only after the not-good-enough transformation gets better that a "Big Switch" begins. And when that magic tipping point hits, the switch accelerates rapidly. The lesson for executives is that it's important to look beyond revenue or basic market share data to determine whether or not a would-be disruption is a legitimate threat. If the U.S. Postal Service had measured its market share of "pieces of communication" (which, it very well might have) it would have noticed sharp share declines even as its revenue was increasing. Similarly, while Digital Equipment Corp. might have felt great that its revenues went up from $3 billion to $11 billion during the 1980s, that growth paled in comparison to the explosive growth in the personal computer market. Another Big Switch in the offing might be television viewership. I remember an executive from a leading cable broadcaster telling me a couple of years ago, "This YouTube thing is all hype. You add up all the hours ever spent on YouTube, and it's less aggregate time then one night of primetime." That's correct, and while television ratings have declined over the past few years, they haven't fallen off a cliff. But I have observed my own family's habits shifting. We increasingly watch content on portable devices and our computers. For the most part, this viewing is additive, but you can see the Big Switch coming. I hope that cable executive is looking at share the right way, and responding accordingly. Spotting transformation requires looking beyond the traditional boundaries of your business. Growing revenues can hide a looming threat that demands your immediate attention. 05/04/2010

Three Questions for Entrepreneurs

The other day I was meeting with the leadership team of a startup company brimming with transformational potential. The team had made tremendous progress in a year, going from an idea on a piece of paper to a fully functioning business earning real revenue. Of course, any new venture is fragile. While revenues are growing, the company hasn't yet hit breakeven. Its current projections suggest that point is still at least six months away. The company has some cash in the bank, but recently began looking for further external investment to help ensure it remains solvent. Our discussion went something like this: Me: "So, how important is it that you get external funding?" Team: "It's important, but not critical because we have cash in the bank." Scott: "How much?" Team: "A few hundred thousand dollars" Scott: "What are your current spending projections?" (I hear a shuffling of paper...) Team: "30 to 50 thousand a month." Scott: "Well, that seems pretty urgent to me. You have about six months of life left." One of the first lessons taught to me by my Harvard Business School finance professor sticks with me to this day: The only reason a business fails is that it runs out of cash. As such, the first question every entrepreneur should be able to answer in a second is, "How many days do I have to live?" That helps the entrepreneur think about how to manage their costs and their funding strategy. The second question I look for an immediate response to is, "Why are you doing this?" Starting up new businesses is incredibly hard. Most fail. The ones that succeed require hard work and constant attention. An entrepreneur who doesn't have a good answer to this question is unlikely to succeed — and is certainly unlikely to raise external capital. Fortunately, the team I was guiding could answer this question easily. They believed their approach could fundamentally change the category and dramatically improve the lives of their consumers. The early data supported their view. Finally, I always want an entrepreneur to tell me the two critical things they are working on at any given time. Of course, any new venture will have dozens of areas that need attention on a daily basis. But a good entrepreneur can step back and highlight the two things they are really hoping to learn during a set time period. These aren't always the fires burning brightest. Ideally, they relate to the biggest unknowns in the hypothesized business model. Time will tell if the team I was working with will succeed. But by focusing on how long they have to live, why the hard work is worth it, and what the most critical issues are, I know they will maximize their odds of success. 04/21/2010

Twitter Ads Add Intrigue

For what seems like forever, Twitter has been the white-hot startup staring at a critical, unanswered question: How will it translate hype, and seemingly never-ending traffic growth, into profits? Yesterday the company announced its intentions to offer corporations the opportunity to sponsor Tweets. So-called "Promoted Tweets" will appear when people search for particular terms. Only a single sponsored Tweet will appear alongside search results. The Tweet will appear as long as it demonstrates "resonance" with the audience by being clicked or re-Tweeted. Twitter doesn't plan to charge companies whose sponsored Tweets don't generate high resonance. Presumably Tweets with high resonance scores will pay price premiums. What's to like about this move? While it's easy to dismiss "Promoted Tweets" as just another advertising play, Twitter's attempt to measure resonance is intriguing. Remember, companies don't advertise for advertising sake. Rather, they advertise to help them achieve other business objectives, such as attracting new customers, or further enhancing brand loyalty. Finding novel ways to track the impact of advertising — and pricing that advertising accordingly — carries interesting potential. Also, Twitter recognizes that its quest to develop its business model is just beginning. Senior executives plan to proceed at a judicious pace (aided, of course, by the $160 million the company has raised from venture capitalists.) The company is still in learning and experimentation mode, which is appropriate given uncertainties around its new business model. After all, it took Google a couple of years before it ironed out the kinks in its search-based advertising model. So, there's a potential twist and a sensible way for Twitter to learn its way to success. While this doesn't yet classify as a breakthrough, it is an encouraging development for Twitter. 04/13/2010

Major League Baseball's Good Enough Gamble that Paid Off

On Wednesday I launched the Major League Baseball At Bat app on my iPhone during my commute to work and started watching the Boston Red Sox battle the New York Yankees. Later that morning I watched the end of the game on Major League Baseball's website. My first thought was, "Wow, what a wonderful world we live in! Crystal clear video on multiple platforms anywhere in the world." My second thought was, "I can't remember the last time I saw the end of a weeknight Sox v. Yankees game. Twelve hour time zone differences have their advantages." (I'm in Singapore.) My third, most important thought was, "What a wonderful job Major League Baseball has done building a new growth business." A decade ago, MLB brilliantly decided to centralize its Internet operations. Each of the major league teams signed over control of their digital assets to a newly created organization called Major League Baseball Advanced Media (MLBAM). Each team agreed to invest about $1 million a year for several years to kick-start MLBAM's growth. When MLBAM started, it wasn't yet feasible to offer streaming video online, so MLBAM's first commercial product was online audio feeds. Its primary target was passionate baseball fans that had moved but still wanted to be able to follow their hometown team. To minimize conflicts with the clubs, it only let people listen to out-of-town games. Over the last decade, MLBAM has steadily improved its product, adding streaming video, upgrading the quality of that video, and bringing video to mobile devices like the iPhone. While MLBAM doesn't share its financial figures publicly, analysts suspect that it pulls in more than $500 million a year. Profits from the venture are split equally between the 30 major league teams. Over time, perhaps online offerings will generate sufficient revenues to balance out disparities in local television revenue between clubs in large media markets and clubs in smaller media markets. Established companies looking to create their own growth businesses can draw four lessons from MLBAM's success: Embrace "good enough." MLBAM's first online offering wasn't great. But the target customer was delighted because their alternative was nothing at all. MLBAM could have waited until online video was perfect before launching, but its approach allowed it to build a fan base and refine its business model based on in-market learning. Other sports leagues that hesitated before going online now are playing catch up to MLB. Rethink the model. MLBAM created entirely new content and revenue models. People can watch condensed games, see virtual play-by-play, get mobile alerts, and more. The majority of MLBAM's revenue comes from charging individual subscription fees, a completely new model for the league. Give the new growth organization substantial autonomy. Building a separate company helped MLB organize its business in a value-maximizing way. Instead of clinging to the past, or trying to conform to historic business models, MLBAM was free to build the best business it could. Bring in fresh blood. MLBAM hired a number of outsiders to help flesh out its management team, such as George Kliavkoff who previously had worked at RealNetworks and in 2006 became the first CEO of Hulu.com (Kliavkoff current works for media conglomerate Hearst). Even tradition-bound organizations can create substantial new growth businesses by following the right approach. And for that, this life-long baseball fan who just moved to Singapore is extremely grateful! 04/08/2010

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