“Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They’re not fond of rules. And they have no respect for the status quo. You can praise them, disagree with them, quote them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things. They push the human race forward. While some see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.”
– Apple Computer advert, 1997
These words capture the essence of the spirit that is at the core of Apple Computer. Even though Apple has been through some tough times and financially challenging moments during its lifecycle as a business, it has always held at its core the spirit of innovation, of creating value by challenging the status quo and doing things differently. Over time this spirit has paid huge dividends. In 2005 and 2006 Apple was identified as the world’s most innovative company through research conducted by Boston Consulting Group, pipping other innovative organisations such as Google, 3M and Toyota at the post. Apple’s efforts have resulted in revenue growth of 37% over a five-year period and net profit growth of 185% per annum over the same time.
What if you could grow your top line by 37% and your profits by 185% over a five-year period? Over and above the financial returns, Apple has delivered a wonderful experience to customers through innovation. You would struggle to find someone who does not love the simplicity, usability and beauty of the iPod or the MacBook.
With the increasing rates of change and the continued opening up of global markets, there is no doubt that innovation is playing an increasingly important role in value creation and success in business. The question is how do business owners and CEOs embrace this concept in a meaningful and practical way in order to drive growth and profit? Can smaller business with little or no research and development budget develop innovative new products and services that will differentiate them in a highly competitive market space? To explore how competitive advantage can be attained through innovation, you need to examine the different types of innovation and different opportunities for innovation within an organisation’s sphere of activities. Understanding this can enable a business owner to look at their organisation with new eyes as they try to identify new opportunities to innovate.
Types of Innovation
Creating value through innovation can happen in many different ways. Traditionally, new ideas have been classified as product innovations, process innovation or business model innovation. In recent times two additional types of innovation come to the fore: branding innovation, where an organisation differentiates itself or its offerings by building a unique brand; and management innovation, where managers use a range of new and different practices to enhance the performance of people working under them.
Innovations can also be classified as radical or incremental. Radical innovations are ideas that are different or new, ideas that break away from what was done in the past. Incremental innovations are improvements and adjustments to current products, services, processes, business models, brands or management practices.
1) Product innovation focuses on the creation of new products or services, or on improving the features of a current product or service. This type of innovation has conventionally garnered the most attention. It’s driven by R&D departments looking for new products or seeking to improve current products to make them more appealing and user friendly. The Kreepy Krauly is one of South Africa’s true radical product innovations, a product that when introduced, completely transformed the pool care industry in SA and ultimately went global. On the other hand the Gillette razor has been through a long series of incremental product innovations. The razor started off with two simple blades; over time the company has systematically improved the product from the Sensor, to the Mach 3, to the M3 Power to the latest version called the Fusion which has five blades on the front, one on the back and battery power to produce micro pulses for additional comfort.
2) Process innovation is the creation or improvement of a process by which a product or service is produced or delivered. Effective process innovations have the effect of stripping out costs, increasing efficiency and improving the customer experience. Henry Ford engineered one of the major process innovations of the 20th century when he created an assembly line for the manufacture of cars. Before Ford, cars were built by groups of two to three people who worked on a car from start to finish. Ford created a moving assembly line with many individuals doing repetitive tasks. This reduced the assembly time for a car from 12,5 hours to 2 hours and 40 minutes.
More recently we have seen a number of successful process innovations, many of which have been enabled by the web and other computer technologies. Michael Dell of Dell Computers created a process where customers configure their own computer and pay for it at the time of ordering; on receipt of payment the company orders all the parts from suppliers who send the parts as they are required on the production line, meaning that the company does not store any inventory. The computer is delivered to the customer 10 days after the order is placed. This process has huge financial benefits for the company: it gets its money before it builds the product; it does not incur the cost of storing inventory; and as both the manufacturer and retailer, the company is able to extract the entire margin from the sale of the product.
In South Africa we have seen Ster-Kinekor reduce the pain and uncertainty of buying movie tickets by introducing process innovations such as Ticketline, online ticket buying and touchscreen service at cinemas.
3) Business model innovation is the creation of new business models or the successful change in an element of a business model that substantially enhances a company’s ongoing performance in delivering benefits to customers and shareholders. Business model innovation usually results in fairly large-scale change and disruption. Google and eBay are two of the most significant business model innovations to have come to the fore in the past 10 years. Both these companies emerged from the Internet bust as stainable businesses and have since gone from strength to strength, proving that it is possible to make a profit as a dotcom company. In South Africa, Outsurance changed the business model for short-term insurance, allowing customers to interact directly with the company and rewarding them for not claiming.
4) Branding innovation is the creation of value within a business through the development of a powerful brand. Not yet recognised by many as a distinct type of innovation, in practice, branding innovation can have a significant impact. Richard Branson’s Virgin was ranked among the most innovative companies in the world in a Boston Consulting Group survey, yet Virgin is nothing more than a brand. Virgin unashamedly copies products, processes and business models from other companies, but it delivers them to the customer in a unique, distinct way under the umbrella of a powerful, recognisable brand.
In South Africa, Kulula.com has claimed a significant chunk of the domestic airline market by being highly innovative in the development of its brand. Kulula.com copied the business models of Ryan Air, Southwest and Jetblue, and its bright green branding, idiosyncratic adverts and humorous approach has set it apart as an innovative and recognisable brand that has disrupted the South African airline industry.
5) Management innovation is the discovery and implementation of new ways of organising, leading, coordinating and motivating employees. Management innovation has only been recognised as a concept in the last few years, but those who have taken time to examine how innovative managers get the best out of their people have come away with some very interesting insights. One of the most fascinating and innovative business leaders of the past two decades is Ricardo Semler, the CEO of Semco, a business based in Brazil. Semler took the business over from his father at the age of 21. For the first few years he consistently worked 18-hour days, including weekends, until one day he collapsed on the factory floor from exhaustion and poor health. This forced him to seriously re-evaluate the way he was managing the business. He transformed his leadership style and management practices, documenting this massive experiment in the book Maverick: the Success Story behind the World’s Most Unusual Workplace. Here are some of the innovative ideas chronicled in the book:
- Each business unit is small enough so that those involved understand everything that is going on and can influence the outcomes.
- Demonstrating trust by eliminating all symbols of corporate oppression as well as the perks of status.
- Sharing all information and eliminating secrets. He believes that you can’t expect involvement to flourish without an abundance of information being made available to all employees.
- Every six months bosses are evaluated by their subordinates and the results are posted.
- Salaries are public information unless the employee requests that they not be published.
- Employees set their own salaries. They are encouraged to consider what they think they can make elsewhere; what others with similar skills and responsibilities make in the company; what friends with similar backgrounds make; how much they need to live on.
- 23% of pre-tax profits are shared with employees. Employees vote how the pool will be split. They must vote to determine the manner of each quarterly distribution. In practice they always vote for equal dollar shares.
- Eliminating policies and rules wherever possible.
- Job rotation; 20% of managers shift jobs each year.
- Setting up workers in their own businesses as suppliers to the company.
Semco has grown from a $4 million to a $212 million business over a 24-year period and has withstood some incredibly tough economic downturns in the Brazilian economy.
Not all these way-out practices may be relevant to every organisation or team, but perhaps they serve as inspiration to drive you to question what you could do differently in running your business or leading your team; this can give employees the freedom to flourish and the incentive to really take ownership and think out the box.
The reality is that you are unlikely to be able to embrace every type of innovation in your business – it would be too risky and too radical to try to innovate in every possible way. As a business owner or leader you should consider which types of innovation are most relevant in your business and work at driving a maximum of two or three types of innovation. If you are in a fragmented industry in the early stages of development, then product innovation is likely to be important. If you are in a more mature industry where cost and speed of service are relevant, then process innovation will come to the fore. Business model innovation will be important in declining industries where you are looking to rejuvenate or radically disrupt the industry. Branding innovations are useful in industries where consumers are highly critical, while management innovations can have broader appeal in many industries in various stages of development.
There are many different definitions of innovation but the majority focus on three core elements: searching for new opportunities and ideas, building and refining a new idea, implementing the idea to create value. Innovation can be defined as the process of recognising an opportunity and turning that opportunity into a new idea that is put into widely used practice. Peter Druker was the first management thinker to recognise the importance of innovation in the value creation process within organisations. He defined innovation as “the means by which entrepreneurs exploit change as an opportunity for a different business or service.”
To build competence as an innovator, you need to constantly be on the lookout for trends and changes that could affect your industry; you need to search for opportunities that emanate from technological, societal, demographic and economic shifts. You need to translate those changes and shifts into ideas for new products, processes, businesses models or brands. You need to work hard at implementing the new idea so that its commercial value is ultimately realised.
Make Innovation Happen
Turn Innovative Thinking into Results
Many a great innovative idea has either fallen short or not even made it out of the starting blocks due to poor, or worse still, non implementation.The process below is based on an article published in the August 2006 issue of Entrepreneur, Making Strategy Work, The 4-phase Process, in an interview by Patty Vogan with Michael Canic, a business consultant and author.
We have taken Michael Canic’s 4-phase process of making strategy work and applied the logic to turning innovation into reality.
1. The Assessment Phase
The key here is that leaders create the time and environment to make innovation happen. (See Making Innovation part of the business DNA) Secondly, as the leader of your organisation, decide on where you can make innovation happen in your business (See Types of Innovation)
2. The positioning phase
The question to ask here is, “What do I want to accomplish in my commitment to innovate?” Break it down to a few simply worded sentences that capture what you wish to achieve (the end goal).
Then develop another simply worded sentence to capture what “winning” would look like. Think of the early days of Apple, when the primary goal was to create the most user-friendly operating system for personal computers.
3. The Planning Phase
The general question to ask here is, “How do I get there?” This is the phase that has to be information-driven. How do you resource the team to brainstorm the innovation and how and when is the time created?
4. The Implementation Phase
Here you must answer the question, “How do I ensure it happens?” This is the most important phase and the one where innovative plans or thinking can fail. A critical and underestimated part of any implementation is alignment – ensuring the factors that impact people (from skills, authority, resources and incentives to processes and structure) are all aligned with the key goal. It’s alignment through the eyes of the people, not just leaders, that counts. A second critical aspect of implementation is commitment building. Be sure to structure regular communications and engagement with employees. Our underlying belief is that information, input and involvement together help to build commitment.
The last part of this phase involves execution management. The leadership team should meet for a few hours every month to track and manage the implementation of the plan, and then every 90 days to recalibrate the plan. Reality changes, and the plan or elements of the plan can become irrelevant. So every three months it’s critical to question the assumptions upon which the innovation plan was built and make adjustments as necessary. Have you lost a key customer? Has a new competitor come into the market? Has a promising investor bailed out on you? What has changed the reliability of your supply chain? When a company vigorously adopts a disciplined strategic management process to ensure a positive outcome of the innovation idea, it’s much more likely to achieve the goal.
The Art Of Pivoting: How To Know If The Time Is Right
Keep the vision, change the strategy to serve the market according to what they really need.
The word “pivoting” has become as over-used as the phrase “disruptive innovation”, but much like innovation, businesses have been pivoting for many decades (if not centuries) before the word became an everyday verb. You only need to look at Twitter, which started as a podcasting business, or Nintendo, which started by selling vacuums, or even Youtube, which was supposed to be a dating site for some inspiration.
These businesses may have all changed their product, service, or even target market in a major way, but they survived and have been thriving ever since. They kept their vision of achieving successful sustainable businesses, despite a change in strategy. And that, my friends, is pivoting: Keep the vision, change the strategy to serve the market according to what they really need.
Ask the right questions to your market: Are you solving a problem?
If you haven’t done user testing, user interviews, focus groups, or called anywhere between 10 and 50 of your highest value possible clients, you might want to take a step back and get that done to define if you actually have a problem to solve.
Many founders start by speaking to a handful of family members, and a handful of friends about their business idea, and are met with unbridled excitement and encouragement that you would expect of people in your life who unconditionally love you.
The reality is, these people have to live with you everyday – they don’t want to risk offending you and shattering your dreams. They basically have to tell you that your idea is great. Get tangible proof from real-world customers or clients that they see the problem you see, and that the problem is as big as you think it is.
Set your vision
What are you really trying to achieve in your business? In other words, what is your “why”? If you set this in a very clear one liner, you will quickly realise that there are many ways to achieve that vision, if you are able to take emotion out of the equation.
This will take you away from the detail to the big picture. For example, a vision along the lines of “To save people time” could be achieved in hundreds of different ways, and your current offering could be tweaked to increase your market size and save people much more time than your current offering, even if it wasn’t that idea you initially got so excited to tell your dog and three cats about.
To paraphrase Eric Ries of Lean Startup, pivoting is simply a change in strategy, not a change in vision.
How do I know when to pivot?
If you’re going through difficult times in the business, I would recommend going back to the most important people in your business – your clients / customers. Get their thoughts and opinions on what’s working; what’s not working; is your offering solving their problem adequately; what would they like more of, etc.
Finding out how to improve your offering from your existing client base will almost certainly not only help you retain your existing client base, but also grow a new client base by helping you solve the problem more effectively. This process can also reveal if your clients see something in your product that you didn’t – ie.to help you pivot. You will find out what your target market really wants and what your product could be if you weren’t so attached.
This requires extreme open-mindedness, and willingness to implement your learnings, even if what your market wants isn’t as “sexy” as your initial offering. On the flip side, if you can keep improving your current offering without changing direction, and if you still have cashflow and clients in the pipeline, it may not be necessary to pivot yet.
Pivoting is often necessary when the current offering reaches a glass ceiling, it’s impossible to close sales, and when cashflow becomes a problem. However, if you realise that your offering is so far removed from what your customers want that you would have to change your strategy and your vision – that, my friends, could be the time to quit and apply the learnings to the next venture. The key lesson from that eventuality is to do more extensive product-market fit research in the beginning next time, and make sure your product is meeting an actual market need.
What if things were different?
I have an experiment for you to apply within your own business. Remember, open-mindedness is essential to break through the glass ceiling:
- What if you kept the exact same product / service, but changed your target market? What would the new target market be?
- What if you changed your product / service, but kept the same target market? What would your new offering be?
- What if you kept the exact same product / service and the exact same target market, but pursued that market in other cities or countries? If your market were the whole of Africa / North America / Europe etc, would that make a difference? Is it feasible? What would have to happen for it to be feasible?
- What if you changed your business to a social business? Would partnerships with NGOs open new opportunities in the market?
- What about the impact you could have and the exposure this could bring to your business?
I highly recommend creating a “what if” business model canvas or pitch deck based on this alternate reality for each of the questions above. This could be a fun activity to do with the team on a weekend away over multiple cups of warm coffee. Good luck, and remember, there is no shame in adapting your business to provide people with what they really need.
An Innovative Culture Absolutely Requires This Unique Capability
What you need is a ‘chaos pilot’ on board at your company. If you don’t have one, think about adding one.
In my line of work, I have the privilege of mentoring and working with start-up entrepreneurs who often offer unique and remarkable ideas that, in my opinion, have the potential for significant commercial impact.
Unfortunately, many of these ideas end up in the dust heap of forgotten businesses that never get traction.
Why do so many great ideas fail? The reality is that many promising new ideas are derived from products or services or systems that have yet to be considered. They are disruptive in nature and typically exist only in the abstract.
Dealing with these ideas therefore demands a unique set of skills that differ from general management capabilities typically associated with running a company.
In a recent article at Harvard.com, Nathan Furr, assistant professor of strategy at INSEAD and coauthor of Leading Transformation: How to Take Charge of Your Company’s Future, explained that a critical, and often missing, element for innovative teams is the capacity to function in the abstract. Furr referred to this capacity as negative capability.
To understand the concept, consider what Robert French of the Bristol Business School has called “positive” capabilities. These skills, as they pertain to new ideas, have been connected with successful general managers, because they can:
- Understand the complexities of new ideas
- Understand and manage the process by which new ideas are executed
- Understand and manage the necessary roles within an organisation or team needed to execute on new ideas.
These characteristics are typically technical skills that involve structure and discipline. They are valuable for managing any company, especially one operating in a business environment requiring constant innovation. Such innovation is needed to iterate new and bold ideas, but these skills alone are not enough.
The reason is that, to stay ahead and execute on a regular basis, new ideas, especially disruptive ones, often take a team and the entire organisation into unchartered territory where there exists no precedent, historical structure or “road map” to guide them. In these cases, positive capabilities based on structure fall short of execution.
As French explained, this type of change “always arouses anxiety and uncertainty,” and teams that are unprepared tend to move toward avoidance tactics – defaulting to known structures, which then lead to the collapse of the new project.
For that reason, it is critical to have members on the team who can handle uncertainty and unknown outcomes and also have the fortitude to pivot when necessary. These types of leaders are what Furr calls “chaos pilots.” To be an effective chaos pilot yourself, you need more than technical management skills. Here are the three other skill sets he lists:
1. Divergent thinking
To think divergently, Furr explains, individuals need to be able to synthesise a multitude of information and “uniquely connect new information, ideas, and concepts that are usually held far apart.” This skill requires the ability to stay constantly focused on a mission while constantly processing new information.
Leaders who operate as divergent thinkers often surround themselves with talented individuals who can handle the day-to-day operations; that capability frees up the leadership team to collaborate and collect valuable data.
2. Convergent action
According to Furr, great chaos pilots do more than just take in new information. They “execute on new ideas in order to create something tangible.” In other words, they synthesise all the information and leverage it to effectively execute on new ideas.
Far too often, entrepreneurs fall short here, getting consumed by FOMO (fear of missing out) and failing to prioritise, or at least balance, output time with input time. Doing so creates an entrepreneur with a wealth of information, but ultimately provides very little value.
3. Influential communication
Finally, thinking divergently and being able to “connect the dots” are great skills, but if a chaos pilot is unable to communicate new ideas effectively and, as Furr states, “inspire other leaders and decision-makers to believe, support, and act on a novel idea or opportunity,” the idea will stop short of execution, no matter how well synthesised.
Over the years, I have been a part of innovative teams (at times leading them) whose sole priority was developing new ideas for clients. I recall a few times leading those teams through a comprehensive mind-mapping process meant to spark new ideas. In these situations, we inevitably would stumble on a truly remarkable idea or two, but like our team, those ideas weren’t rooted in a stable and established process; sometimes they weren’t comparable to what we were already doing.
Our ideas would also sometimes get lost in the insecurities and anxiousness of the group and never even be presented.
Great management skills are clearly needed to lead a company and execute ongoing operations effectively, but to consistently generate and see great new ideas through to execution, it is critical to have an effective change manager – or chaos pilot – on your team. And while these skills cannot be taught, they can be learned and nurtured through experience and an environment that encourages and supports risk taking and failure.
This article was originally posted here on Entrepreneur.com.
How I Built A Company The Lean Way – By Using The Scientific Method
Starting a company is one of the most irrational acts you can do as a human being. That’s why employing hypotheses and experimentation is crucial.
In the past five years, the cloud management company I founded has grown from a one-person business into a global employer of over 300 people. Recently, VMware, the most important provider of infrastructure and technology in our industry, purchased us – an exciting milestone as we look to the future and continue to execute on our vision.
In spite of all the twists and turns I’ve experienced, there’s been one thing I did right in the early phases of building this business: Committing to continuous experimentation.
When I left my previous company, I had an idea of where I could bring the most value in the market, based on my previous experiences in cloud computing. But I’d also been inspired by Stephen Blank’s The Four Steps to the Epiphany and indirectly by the Lean Startup movement. As a result, I knew I would start my business from the top down: By devoting myself to a market (cloud management) and to the scientific method for entrepreneurship – dispassionately testing all assumptions and hypotheses, and following where they led.
So, where did I begin? And where do you begin? Here are the steps.
Develop your initial hypotheses
The process of entrepreneurship starts with a set of hypotheses to identify the product or service you will bring to your customers. A good hypothesis is that it answers critical questions regarding your initial business concept that can be proven only through experimentation.
I started my own journey by putting a poster on the wall and using sticky notes to capture the critical hypotheses I needed to test. Every two weeks, I selected a set of hypotheses and designed experiments to prove or disprove them.
En route, I thought about the ecommerce company Zappos – a supporter of the Lean Startup movement – and its initial hypothesis that people would buy shoes online. For the file-sharing company Dropbox, the hypothesis was that users needed a radically simplified way to share files. For the coffee retailer Starbucks, it was that Americans would embrace the Italian coffee culture.
Design an experiment
Next, choose a set of hypotheses to test, and design an experiment to test them. A good experiment should eliminate all ambiguity from the hypothesis to the answer. It should also prove or disprove the hypotheses with the least possible investment.
I was inspired at this stage by stories from entrepreneurs like Dropbox’s Drew Houston, Zappos founder Nick Swinmurn and Starbucks’s Howard Schultz. To prove his hypothesis, Houston didn’t invest in building yet another file-sharing app; he instead created a video that demonstrated the ease of use of his idea for Dropbox and how it could be a differentiator.
Similarly, Swinmurn didn’t choose to buy inventory for his new online shoe store, instead, he took pictures of shoes. He posted them on a website and purchased the shoes from the store only after receiving a customer order.
Schultz, meanwhile, chose to cram his early concept for delivering Italian coffee culture to American consumers into 300 square feet, inside another retail store.
Experiment and observe
My experiments ranged far and wide – from driving an advertising campaign, to creating an A/B test website, to performing customer interviews with large financial institutions, to delivering professional services.
For example, one of my sticky notes asserted simply that, “Cloud cost management is a feature and not a market.” The experiment I designed to prove or disprove this statement was built around helping five local businesses optimise their cloud costs.
As an early-stage entrepreneur, you have to be willing to conduct these sorts of tests to determine what works, what doesn’t and how you can identify real and durable problems in a market. You need to to take risks, to be willing to fail and understand that you’re always learning.
Dropbox’s own critical video experiment resulted in its beta user requests growing from 5,000 to 75,000 users, validating critical hypotheses without investing in a single line of code. Starbucks’s first store attracted 1,000 visitors per day to a location that had previously never seen more than 200. Zappos’s website resulted in actual sales of shoes, which were fulfilled with purchases – at list price – from a local store.
Discuss results with advisors
Before starting the company, I created my own informal board of advisors, who included a venture investor, two technology CEOs, a business development executive and a technology founder. All were dedicated to my success, with no strings attached.
I met with them for coffee throughout the experimentation process, and always discussed with them what I was learning. Having talented colleagues to provide feedback and advice frequently produced new insights.
Rinse and repeat
Once you secure answers to your first hypotheses, it’s time for you to go back to the drawing board and create new hypotheses, design another experiment and test it. A hypothesis without an experiment does no good. You gain the most knowledge when you’re testing the ideas you propose.
Start the business
I equate the start of my company to an experiment I called “the sale.” After several months of developing hypotheses and running experiments, I had a good sense of where I could add strong and durable value for customers in the market. But what I hadn’t tested was price.
I hypothesised that a prospective customer would need to be willing to spend $50,000 annually – roughly the average price required to sustain the business model – on my product, to support the inside sales-driven model I was projecting. So, I designed an experiment around cold calling a handful of prospective customers and trying to convince them to purchase my minimum viable product for $50,000 per year.
In the process of being rejected, I hoped to learn about the additional features these companies needed to justify purchasing a product at that price point.
As part of the exercise, I first spoke with the CFO of a fast-growing technology company. While the CFO understood the problem I was addressing, he had almost no input on features, and no interest in paying for a solution. But then he surprised me by asking for another call the next day with his vice president of engineering and members of his team.
The assembled team not only had deep knowledge in the area in which I had built my MVP, but had already built many of my features themselves.
By the end of the call, the vice president of engineering made the surprising statement: “Sure, we’ll buy.” When faced with the potential for a sale, the first instinct of every good engineer is to do exactly what you shouldn’t: keep talking. Instead, I proceeded to explain how the CFO was hadn’t been convinced the previous day, and that maybe the engineering VP should talk to him before agreeing to a purchase.
“Our CFO is in the room right now,” the VP said. “We’ll buy. Just send us the contract.”
As I hung up, my excitement at having a first customer was tempered by the reality that I had no contract to send, nor a business entity under which to extend it. Since my experiment had been designed for failure, I hadn’t given much thought to what to do when confronted with success. Thus began my next challenge: Creating a business entity and onboarding a first customer – fast.
Reach a conclusion and communicate it with peers
Starting a company is one of the most irrational acts you can do as a human being. You are taking great personal and professional risk for an unknown outcome. While there is no foolproof way to manage this uncertainty, there is a way to minimise the risk: cContinuous experimentation in the presence of customers. My company exists as a direct result of a commitment to experimentation, a route you should seriously consider when you start down your own entrepreneurial path.
This article was originally posted here on Entrepreneur.com.