Archive for February, 2017

Dismantle the business model.

When companies want to innovate, there are three things they can change – products, services and business models. Products are usually the first, second and third priorities, services, though they have a tighter connection with customer and are more lasting and powerful, sadly, are fourth priority.  And business models are the superset and the most powerful of all, yet, as a source of innovation, are largely off limits.

It’s easy to improve products. Measure goodness using a standard test protocol, figure out what drives performance and improve it. Create the hard data, quantify the incremental performance and sell the difference.  A straightforward method to sell more – if you liked the last one, you’re going to like this one. But this is fleeting. Just as you are reverse engineering the competitors’ products, they’re doing it to you. Any incremental difference will be swallowed up by their next product. The half-life of your advantage is measured in months.

It’s easy for companies to run innovation projects to improve product performance because it’s easy to quantify the improvement and because we think customers are transactional. Truth is, customers are emotional, not rational. People don’t buy performance, they buy the story they create for themselves.

Innovating on services is more difficult because, unlike a product, it’s not a physical thing. You can’t touch it, smell it or taste it.  Some say you can measure a service, but you can’t. You can measure its footprints in the sand, but you can’t measure it directly. All the click data in the world won’t get you there because clicks, as measured, don’t capture intent – an unintentional click on the wrong image counts the same a premeditated click on the right one. Sure, you can count clicks, but if you can’t count the why’s, you don’t have causation. And, sure, you can measure customer satisfaction with an online survey, but the closest you can get is correlation and that’s not good enough.  It’s causation or bust.  You’ve got to figure out WHY they like your services. (Hint – it’s the people who interface directly with your customers and the latitude you give them to advocate on the customers’ behalf.)

Where services are difficult to innovate, the business model is almost impossible. No one is quite sure what the business model actually is an in-the-trenches-way, but they know it’s been responsible for the success of the company, and they don’t want to change it. Ultimately, if you want to innovate on the business model, you’ve got to know what it is, but before you spend the time and energy to define it, it’s best to figure out if it needs changing.  The question – what does it look like when the business model is out of gas?

If you do what you did last time and you get less in return, the business model is out of gas.

Successful models are limiting. Just like with the Prime Directive, where Captain Kirk could do anything he wanted as long as he didn’t interfere with the internal development of alien civilizations, do anything you want with the business model as long as you don’t change it. And that’s why you need external help to formally define the business model and experiment with it. The resource should understand your business first hand, yet be outside the chain of command so they can say the sacrilegious things that violate the Prime Directive without being fired.  For good candidates, look to trusted customers and suppliers.

To define the business model, use a simple block diagram (one page) where blocks are labelled with simple nouns and arrows are labelled with simple verbs. Start with a single block on the right of the page labelled “Customer” and draw a single arrow pointing to the block and label it.  Continue until you’ve defined the business model.  (Note – maximum number of blocks is 12.)  You’ll be surprised with the difficulty of the process.

After there’s consensus on the business model, the next step is to figure out how the environment changed around it and to identify and test the preferred evolutionary paths. But that’s for another time.

Image credit – Steven Depolo

Full Circle Innovation

It’s not enough to sell things to customers, because selling things is transactional and, over time, transactional selling deteriorates into selling on price. And selling on price is a race to the bottom.

Sales must move from transactional to relational, where people in the sales organization become trusted advisers and then something altogether deeper. At this deeper level of development, the sales people know the business as well as the customer, know where the customer wants to go and provide unique perspective and thoughtful insight.  That’s quite a thing for sales, but it’s not enough.  Sales must become the conduit that brings the entire company closer to the customer and their their work.

When the customer is trying to figure out what’s next, sales brings in a team of marketing, R&D and manufacturing to triangulate on the future.  The objective is to develop deep understanding of the customer’s world.  The understanding must go deeper than the what’s.  The learning must scrape bottom and get right down to the bedrock why’s.

To get to bedrock, marketing leads learning sessions with the customer.  And it all starts by understanding the work.  What does the customer do? Why is it done that way? What are the most important processes? How did they evolve? Why do they flow the way they do? These aren’t high-level questions, they are low-level, specific questions, done in front of the actual work.

The mantra – Go to the work.

When the learning sessions are done well, marketing includes experts in manufacturing and R&D.  Manufacturing brings their expertise in understanding process and R&D brings their expertise in products and technologies.  And to understand the work the deepest way, the tool of choice is the Value Stream Map (VSM).

Cross-organization teams are formed (customer, sales, marketing, manufacturing, and R&D) and are sent out to create Value Steam Maps of the most important processes.  (Each team is supported by a VSM expert.)  Once the maps are made, all the teams come back together to review the them and identify the fundamental constraints and how to overcome them.  The solutions are not limited to new product offerings, rather the solutions could be training, process changes, policy changes, organizational changes or business model changes.

Not all the problems are solved in the moment.  After the low hanging fruit is picked, the real work begins.  After returning home, marketing and R&D work together to formulate emergent needs and create new ways to meet them.  The tool of choice is the IBE (Innovation Burst Event).

To prepare for the IBE, marketing and R&D formalize emergent needs and create Design Challenges to focus the IBE teams.  Solving the Design Challenges breaks the conflicts creates novel solutions that meet the unmet needs.  In this way, the IBE is a pull process – customer needs create the pull for a solution.

The IBE is a one or two-day event where teams solve the Design Challenges by building conceptual prototypes (thinking prototypes).  Then, they vote on the most interesting concepts and create a build plan (who, what, when).  The objective of the build plan is to create a Diabolically Simple Prototype (DSP), a functional prototype that demonstrates the new functionality. What makes it diabolical is quick build time.  At the end of the IBE is a report out of the build plan to the leader who can allocate the resources to execute it.

In a closed-loop way, once the DSP is built, sales arranges another visit to the customer to demonstrate the new solution.  And because the prototype designed to fulfill the validated customer need, by definition, the prototype will be valuable to the customer.

This full circle process has several novel elements, but the magic is in the framework that brings everyone together.  With the process, two companies can work together effectively to achieve shared business objectives.  And, because the process brings together multiple functions and their unique perspectives, the solutions are well-thought-out and grounded in the diversity of the collective.

Image credit – Gerry Machen

Transcending Our Financial Accounting Systems

In business and in life, one of the biggest choices is what to do next.  Sounds simple, but it’s not.

The decision has many facets and drives many questions, for example:  Does it fit with core competence? Does it fit with the brand? How many will we sell? What will the market look like after it’s launched? Do we have what it takes to pull it off?

These questions then explode into a series of complex financial analyses like – return on investment, return on capital, return on net assets (and all its flavors) and all sorts of yet-to-be created return on this’s and that’s.  This return business is all about the golden ratio – how much will we make relative to how much it costs.  All the calculations, regardless of their name, are variations on this theme. And all suffer the same fundamental flaw – they are based on an artificial system of financial accounting.

To me, especially when working in new territory, we must transcend the self-made biases and limitations of GAAP and ask the bedrock question – Is it worth it?

In the house of cards of our financial accounting, worth equals dollars. Nothing more, nothing less.  And this simplistic, formulaic characterization has devastating consequence.  Worth is broader than profit, it’s nuanced, it’s philosophical, it’s about people, it’s about planet. Yet we let our accounting systems lead us around by the nose as if people don’t matter, like the planet doesn’t matter, like what we stand for doesn’t matter. Simply put, worth is not dollars.

The single-most troubling artifact of our accounting systems is its unnatural bias toward immediacy.  How much will we make next year? How about next quarter? What will we spend next month? If we push out the expense by a month how much will we save? What will it do to this quarter’s stock price? It’s like the work has no validity unless the return on investment isn’t measured in days, weeks or months. It seems the only work that makes it through the financial analysis gauntlet is work that costs nothing and returns almost nothing. Under the thumb of financial accounting, projects are small in scope, smaller in resource demands and predictable in time.  This is a recipe for minimalist improvement and incrementalism.

What about the people doing the work? Why aren’t we concerned they can’t pay their mortgages? Why do we think it’s okay to demand they work weekends? Why don’t we hold their insurance co-pays at reasonable levels? Why do we think it’s okay to slash our investment in their development? What about their self-worth? Just because we can’t measure it in a financial sense, don’t we think it’s a liability to foster disenchantment and disengagement? If we considered our people an asset in a financial accounting sense, wouldn’t we invest in them to protect their output? Why do we preventive maintenance on our machines but not our people?

When doing innovative work, our financial accounting systems fail us. These systems were designed in an era when it was best to increase the maturity of immature systems.  But now that our systems are mature, and our objective is to obsolete them, our ancient financial accounting systems hinder more than help. The domains of reinvention and disruption are dominated by judgement, not rigid accounting rules.  Innovation is the domain of incomplete data and uncertain outcomes and not the domain of debits and credits.

Profit is important, but profit is a result.  Financial accounting doesn’t create profit, people create profit. And the currency of people are thoughts, feelings and judgement.

With innovation, it’s better to create the conditions so people believe in the project and are fully engaged in their work. With creativity, it’s better to have empowered people who will move mountains to do what must be done. With work that’s new, it’s better to trust people and empower them to use their best judgement.

Image credit – Jeremy Tarling

Imagination

If you can’t imagine it, it can’t be done.

But if it can’t be done, how can you imagine it?

No one is buying a product like the one you imagined. There’s no market.

No one can buy an imaginative product that doesn’t yet exist. There may be a market.

Imagine things are good, just as they are.

Imagine an upstart competitor will obsolete your best product.

Let’s fix what is.

Let’s imagine what isn’t, and build it.

Don’t waste time imagining radical new concepts. There’s no way to get there.

Use your imagination to create an unobtainable concept, then build a bridge to get there.

Imagine the future profits of our great recipe. Let’s replicate it.

Imagine our recipe has a half-life. Let’s disrupt it.

To be competitive, we’ve got to use our imagination to reduce the cost of our products.

To be competitive, we’ve got to use our imagination to obsolete our best work.

Put together a specification, a detailed Gannt chart and make it happen on time.

Imagine what could be, and make a prototype.

Let’s shore up our weaknesses and live to fight another day.

Let’s imagine our strength as a weakness and invent the future.

We are the best in the industry. Imagine how tough it is to be our competitor.

Imagine there’s a hungry start-up who will do whatever it takes to get the business.

We’ve got to protect our market share.

Imagine what we could create if we weren’t constrained by our success.

Imagine how productive we will be when we standardize the work.

Imagine how much fun we will have when we reinvent the industry.

Ask the customer what they want, built it and launch it.

Imagine what could be, build a prototype, show the customer, listen and refine.

Let’s follow the script. Imagine the profits.

Let’s burn the script and imagine a new one.

Image credit — Allegra Ricci

Mike Shipulski Mike Shipulski
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