Monthly Archives: April 2016

Theory of Innovation

Since 2005, Strategy& has been conducting an annual study of the 1,000 biggest corporate R&D spenders. One conclusion has held true through all 11 installments: There is no statistically significant relationship between the financial performance of the so-called Global Innovation 1000 companies and their R&D spending.

The fact that, in 2015, these companies collectively spent US$680 billion buying R&D lottery tickets bothers Harvard disruption guru Clayton Christensen. “Innovation processes in many companies are structured and disciplined and the talent applying them is highly skilled.… From the outside, it looks like companies have mastered an awfully precise, scientific process,” he and coauthors Taddy Hall, Karen Dillon, and David S. Duncan write in Competing Against Luck: The Story of Innovation and Customer Choice(HarperBusiness, 2016). “But the results show that, for most companies, innovation is still hit or miss.”

Christensen and his coauthors think they have an explanation for this conundrum: Companies know a lot about the characteristics and attributes of their customers, but they don’t know why customers buy their products and services. In other words, companies know the correlations between types of customers and their products and services, but they don’t understand what causes customers to buy their offerings. And without grasping causation, they can’t be sure whether their R&D spending will yield a winning ticket.

Competing Against Luck proposes that companies get to causation by asking customers, “What job did you hire that product to do?” This is a question that surely would have warmed the heart of Theodore Levitt, the Harvard Business School professor who immortalized an otherwise forgotten guy named Leo McGivena for saying “Last year one million quarter-inch drill bits were sold — not because people wanted quarter-inch drill bits but because they wanted quarter-inch holes.” But Christensen et al. take McGivena’s insight far beyond Levitt’s interest in customer needs and desires by cobbling together an approach to innovation that they plainly, if a bit clunkily, call the Theory of Jobs to be Done (aka Jobs Theory).

Jobs Theory holds that to create a product and/or service, you must first understand why your prospective customers will “hire” it. Then, you must translate that understanding into a job spec: “What do I need to design, develop, and deliver in my new product offering so that it does the consumer’s job well?” And finally, you must integrate your company’s capabilities and processes in order to “nail the job consistently.”

Southern New Hampshire University (SNHU) followed a process like this in building its distance learning program. When Paul LeBlanc was appointed president of SNHU in 2003, it was a small liberal arts college with a “sleepy” online education program. By 2016, the school was approaching $450 million in revenue — the result of a 55 percent CAGR over five years. What accounted for SHNU’s growth spurt? According to Christensen, the school realized that the job an online student, who was probably serving in the military, raising a family, or working full-time, was trying to get done was very different from the job a newly minted high-school grad heading off to a four-year college was trying to do. So it stopped treating nontraditional students like traditional students.

I can attest to the effectiveness with which SNHU crafted and delivered on its job spec for distance learners. A few years ago, my wife decided to enroll in an online MFA program and requested application packages via the websites of three schools. She was pleasantly surprised when, just minutes after sending the requests, an SHNU admissions counselor called her. Even better, by the time the applications from the other two schools arrived in the mail, she not only had been accepted into SNHU’s MFA program, but also was already attending classes! Eighteen months later, she graduated.

SNHU is only one of the dozen or so cases drawn from a variety of industries that are described in Competing Against Luck. There’s Intuit’s QuickBooks, which, the authors explain offered, “half the functionality of more sophisticated accounting software at twice the price,” but succeeded nonetheless because the company realized that small business owners didn’t want to learn how to do their books. They just wanted their books done. There’s Kimberly-Clark’s Depends, which succeeded because the company delved into the stigma and struggle attached to adult incontinence, and designed a diaper that was less like a baby’s diaper and more like an adult’s underwear. There’s GM’s OnStar service, which didn’t take off until the division realized that the job that its customers really wanted done was not a high-end, mobile concierge service, but 24/7 safety and emergency response when they were on the road. “In every case,” write the authors, “uncovering why customers make choices allows organizations to better create solutions that get hired.”

Of course, as with most business theories, putting Jobs Theory to work is going to require some effort. Uncovering the jobs that lurk behind a decision to buy is a granular task that must be trusted to produce the holy grail of innovation: actionable insight. Transforming jobs into job specs means addressing every aspect of the customer experience, from pre-contact to consumption. And aligning the business to the job to be done might require rebuilding a company from the ground up.

That said, there is something that feels intuitively right about Jobs Theory. It jibes with why I buy, and why I don’t. Moreover, anything that promises to connect $680 billion in R&D spending to actual financial performance is worth a flyer.

Tips to Be Ambidextrous Leader

A few pages into Lead and Disrupt: How to Solve the Innovator’s Dilemma (Stanford University Press, 2016), business professors Charles A. O’Reilly III and Michael L. Tushman present two lists of companies. At first glance, there doesn’t seem to be too much difference between them. Each features 27 companies, most with familiar names and long histories, such as GM, Siemens, and Lego.

The second list includes some dead companies — such as Circuit City and Bethlehem Steel — and some companies that are shadows of their former selves, such as RadioShack. But the histories of the companies on the first list reveal that many of them have experienced their fair share of hard times, too.

For example, the French media conglomerate Vivendi endured a period of turmoil after a series of aggressive acquisitions in the late 1990s.

Nevertheless, O’Reilly, the Frank E. Buck Professor of Management at Stanford’s Graduate School of Business, and Tushman, the Paul R. Lawrence MBA Class of 1942 Professor of Business Administration at Harvard Business School, see a clear difference in the success of the companies on the two lists. And they peg leadership as its source.

The companies on the first list, they contend, “had ambidextrous leaders who were able and willing to exploit existing assets and capabilities in mature businesses and, when needed, reconfigure these to develop new strengths.” The companies on the second list were not so lucky. Their leaders, say the authors, “were rigid in one way or another — unable or unwilling to sense new opportunities and to reconfigure the firm’s assets in ways that permitted the company to continue to survive and prosper.”

Putting the support for that contention aside, ambidextrous leadership is a beguiling concept. Maybe RadioShack and Circuit City would still be leading electronics today if, decades ago, their leaders had asked the question that O’Reilly and Tushman say all ambidextrous leaders ask: “How can we both exploit existing assets and capabilities by getting more efficient andprovide for sufficient exploration so that we are not rendered irrelevant by changes in markets and technologies?”

As the book’s subtitle suggests, ambidexterity also might offer a solution to Clayton M. Christensen’s innovator’s dilemma, as well as to the challenge of simultaneously addressing the conflicting dictates of exploitation and exploration (pdf) posed by Stanford organizational expert James G. March. Perhaps an incumbent company won’t get caught flat-footed by a new player using a technology that’s barely created a blip in the marketplace if it’s already trying to figure out how to put that technology to work. Further, the ambidextrous incumbent might have an advantaged position with regard to resources. After all, it has a core business that can fund and staff its efforts, while a new player has to scare up external financing/bootstrap its way to scale.

Merchant Required Reading

Nilofer Merchant knows something about value creation. By her reckoning, she has had a hand in launching more than 100 products that have netted a combined US$18 billion in sales — first in stints at Apple and Autodesk, and later as an advisor to technology companies such as Logitech, Symantec, and HP.

Rather than focusing on processes and tools, Merchant sees the humanist values of diversity, inclusivity, and collaboration as the keys to creating corporate value. “It’s not that everyone will but that anyone can contribute,” she says.

Her two books reiterate the message. In The New How: Creating Business Solutions through Collaborative Strategy(O’Reilly Media, 2010), Merchant traces the difficulties that many companies encounter in executing strategy to the conventional top-down approach to strategy formulation. She argues for a more inclusive approach to strategy-making that enlists the people responsible for executing it. In 11 Rules for Creating Value in the #SocialEra (Harvard Business Press, 2012), Merchant contends that social technologies and tools have given rise to a new era in which the basis for value creation is collaboration and co-creation by communities of people who are united by an aspirational purpose.

Named to the Thinkers50 list in 2015, Merchant is also a fellow at the Martin Prosperity Institute, where she is exploring the implications of “onlyness” on the future of democratic capitalism. “Each of us is standing in a spot that no one else occupies,” she says. “This individual onlyness is the fuel of vast creativity, innovations, and adaptability.”

I asked Merchant for a short list of the best reads on value creation. She called out the following three books and a seminal article on organizational learning.

Where Good Ideas Come From: The Natural History of Innovation, by Steven Johnson (Riverhead, 2010). “Johnson identifies the key principles that drive creativity — things like the connected ‘hive mind’ is smarter than the lone thinker; where you think matters just as much as what you think; and the best ideas come from building on the ideas and inventions of others. I recommend his book to leaders to counter any erroneous notions they might have regarding from where and from whom new ideas come. Too often, leaders expect creative thinking and new ideas to come from only a few, duly appointed employees. Instead, they need to know that ideas can and do (and should) come from everyone and everywhere — even outside their corporate perimeters. When we open up our mental apertures to receive new ideas from anyone and from anywhere, we fuel value creation.”

The Change Masters: Innovation and Entrepreneurship in the American Corporation, by Rosabeth Moss Kanter (Simon & Schuster, 1983). “Harvard professor Rosabeth Moss Kanter’s book about the unwritten rules of what actually fuels growth — the ability to create change — is epic. No idea becomes real without changes to the status quo. And anyone who wants to change the status quo needs to learn how to go against the grain without getting shredded in the process. Kanter’s book describes how people react and respond to new ideas and the change agents who promote them, and how change agents can use that knowledge to realize the world they want to create. My copy is dog-eared from nearly 30 years of reading and re-reading.”

“Double Loop Learning in Organizations,” by Chris Argyris, Harvard Business Review, Sept. 1977. “Despite having information up the wazoo, most companies struggle to innovate and create new value. And my experience suggests that internal surveys at these companies would reveal that their ability to get new things done is declining over time, rather than improving. That’s not because they are suffering from a lack of new ideas; it’s because they can’t reinvent themselves — think Kodak and Xerox. As the late, great organizational development expert Chris Argyris put it, they don’t know how to unlearn enough to create new value. I regularly hand out his classic article on double loop learning. Nearly 40 years after it was published, it remains the clearest articulation of how companies can create new value through a continual cycle of learning and unlearning.”

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, by Alexander Osterwalder and Yves Pigneur (Wiley, 2010). “The other day, an entrepreneur came to me. She was thinking big, but she hadn’t given a thought to what her company would need to do to transform big thinking into real value. You create value by lining up the pieces of a complex puzzle: whom do you serve, with what, and how do you reach them. Big becomes real when you figure out what your company needs to do on Day One — and 31, and 61, and 91. Osterwalder’s book, illustrated by Yves Pigneur, is indispensable because it provides a repeatable methodology for doing that work.”