Dealing with Darwin

Dealing with Darwinby Geoffrey Moore

“How To” Guide for Companies in Transition

Summary by Brian KisselBusiness CIO, Juniper Networks

Overview

• Core & Context

• Business Architectures

• Market Stages

• Innovation– 3 Objectives

– Challenges

– Models

• Innovation in Growth & Mature Markets

• The Innovation Cycle

• Resource Extraction

• The Process for Your Company

The Role of Core & ContextCore• Innovation that creates differentiation leading to customer preference during

purchase

• Combats commoditization and margin compression

Context• Everything else, not a source of differentiation

• What was once core becomes context over time

• Can be a source of business and management inertia

Goal of Separating Core from Context• Extract resources from Context to invest in Core

Focusing on Core

• Declare Strategy for Differentiation– Establishes Core– Some legacy Core becomes Context– Context can become “the breeding ground for inertia” and risk-averse

behavior can prevail

• Redeploy Resources from Context to Core– Reengineer current workload to consume fewer resources and less top talent– Standardization replaces differentiation as primary focus– Redeploy workforce, consistent with its talents, to meet needs of next

generation of Core

Core/Context Analysis Framework

• Clearly Identify Core and Context

• Separate Mission Critical from Non-Mission Critical processes

Overview

• Core & Context


• Market Stages


– Challenges

– Models





2 Basic Business Architectures

Volume Operations• Example: Consumer transaction-focused like Dell

Complex Systems• Example: Enterprise commerce-focused like IBM

Company Challenge• How to support both models in the same company and in some cases at

the same customer?

Complex Systems vs. Volume Operations

Value ChainElement

ComplexSystems

VolumeOperations

Research Qualitative Scenarios Quantitative Analytics

Design Integration of Modules Modules That Integrate

Source At the Margin At the Mean

Manufacture Adaptive Methodologies Deterministic Processes

Market Value Chain Orchestration Branding and Promotion

Sell High-Touch Persuasion Low-Touch Distribution

Service Open-ended Consultations Close-ended Transactions

Volume Operations

Characteristics

• High volume, low cost

• Offer-enabling technology

• Optimized for price, availability, and selection

• Economies of scale

• Low touch

• Don’t really “sell,” but enable customers to “buy”

Complex Systems

Characteristics

• Organized around the customer

• Solution sales

• Consulting and integration services

• Application specific templates

•Modular building blocks coupled with integration platform

Overview

• Core & Context


• Market Stages


– Challenges

– Models





Market StagesEarly• Technology adoption cycle

Growth• >10% revenue growth with healthy margins• Entire market is expanding

Mature• Growth from selling more to existing customers or taking market share from

competitionDeclining• Even market leaders seeing no/low growth and declining margins• Ripe for technological or business model innovation

End of Life• Incumbents rendered obsolete by innovative alternatives• Possible “long tail” opportunity to harvest brand, distribution channel, and/or

customer relationships

Overview

• Core & Context


• Market Stages


– Challenges

– Models





3 Objectives of Innovation

Differentiation• Must be bold enough that, if it wins, achieves separation

Neutralization• Just enough to undermine competitor

Productivity• Business Process Re-engineering & Outsourcing• Free up resources from Context for Core

Waste• Don’t go far enough on Differentiation• Go too far on Neutralization• “Nice to have” instead of “need to have”

2 Typical Challenges to Innovation

Risk Reduction Mentality• Shun bold actions that jeopardize existing assets & relationships• Remain focused on Context, not Core

Lack of Corporate Alignment• Innovation is highly decentralized• Proceeds on many fronts, in multiple directions• No amplifying affects• Remedy is prioritization and focus across the company

4 Innovation ModelsProduct Leadership• Best for growth markets • Heavy R&D• #1 priority is market share, #2 is profits

Customer Intimacy• Good for mature markets• Lower return on product innovation

Operational Excellence• Good for mature markets with few other sources of differentiation• #1 priority is cost, #2 is time to market & speed of adaptation

Category Renewal• Market is in decline• Harvest while reinvesting in new markets• Acquisitions most helpful here

Product Leadership Innovation

Disruption

New technology (complex system) or business model (volume operation) New offer and market, highest risk and reward Typically a big price/performance advantage or disruptive business model that

destabilizes established markets i.e. digital photography, search engine marketing

Application / Solution

New markets for existing products Complex system: vertical marketing, whole product solution, alliances Volume operations: target demographic vs. vertical markets i.e. fault tolerant computers to run ATMs, Mac for desktop publishing, document

management systems for drug approvals, Blackberry

Product Focus on features and function i.e. hybrid cars, cameras in cell phones, wireless laptops

Platform Layer to mask legacy complexity VAR partners often helpful i.e. DOS and Intel 8086 become platform for PCs

Customer Intimacy Innovation

Line Extension Existing products to new customers or new products to existing customers i.e. minivan, SUV, laptop, running shoe

Enhancement Improve existing products in existing markets i.e. auto navigation, cherry coke, teflon frying pans

Marketing Out-sell, not out-product competition i.e. viral marketing, product placements, P2P marketing, Mac store

Experiential Most relevant in commoditized consumer markets i.e. Starbucks, business hotels that remember your preferences, etc.

Operational Excellence Innovation

Value Engineering Extract cost from materials and manufacturing i.e. substitute standard for custom parts, pre-integrated subsystems

Integration Reduce maintenance cost of complex systems i.e. mutual funds, data center management SW, all-in-one printer/copier/fax/scanner

Process Remove non-value added steps from the process i.e. WalMart vendor managed inventory, Dell direct sales model, Toyota kanban

manufacturing process

Value Migration Redirect business model away from commoditized elements i.e. razors to razor blades, printers to ink cartridges, answering machines to voicemail

Renewal Innovation

Organic Solve new problems for existing customers i.e. IBM from HW to e-commerce enablement

Acquisition Buy new capability or roll into strategic partner i.e. BEA buying WebLogic, Lotus selling itself to IBM

Overview

• Core & Context


• Market Stages


– Challenges

– Models





Growing & Mature Markets

DisruptiveInnovation

ApplicationInnovation

ProductInnovation

PlatformInnovation

EnhancementInnovation

IntegrationInnovation

ExperientialInnovation

ProcessInnovation

MarketingInnovation

Value MigrationInnovation

Line ExtensionInnovation

Value EngineeringInnovation

Harvest& Exit

Renewal Innovation

OrganicRenewal

AcquisitionRenewal

Innovation by Market

Growth Markets

Innovation in Growth Markets

Product

New Existing

MarketNew Disruptive Application

Existing Product Platform

“If you are innovating in a growth market, you must focus on one, and only one, innovation type based on…”– Stage in technology adoption lifecycle– Position of competitors– What you excel at

Innovation in Growth Markets

Disruptive

Application

Product

Platform

• Enterprise: Genentech (recombinant DNA)• Consumer:Skype (VOIP)

• Enterprise: Landmark (3-D seismic interpretation)• Consumer:Amazon (Internet retailing)

• Enterprise: Juniper Networks (Internet routers)• Consumer:Cuisinart (food processors)

• Enterprise: Oracle (relational databases)• Consumer:Sony (game machines)

Return on innovation requires differentiation All these companies achieved separation from their competition

Growth Markets: Disruption (New Product, New Market)

Complex Systems Must wrap discontinuous technology in a blanket of services that

fulfill promise of competitive advantage May require partners i.e. Oracle HW independent DBs, Apple/Aldus/Adobe for desktop

publishing

Volume Operations Focus on disruptive business model, not technology Often displace intermediaries i.e. Charles Schwab, Federal Express, eBay, Southwest Airlines

Growth Markets: Application (Existing Product, New Market)

Complex Systems Leverage vertical marketing, whole-product management, and alliance

marketing May require partners i.e. Sun dominating financial services, SGI dominating graphics, Silicon Valley

Bank dominating VC-backed companies

Volume Operations Not typically done Usually pursue line-extension & enhancements Some exception when you can focus on demographic segments that leverage

existing sales, marketing, and support infrastructure i.e. RIM BlackBerry, Nintendo GameBoy

Growth Markets: Product (New Product, Existing Market)

Complex Systems Hard to achieve Be confident there is a “killer app” Over-deliver in only one or two critical dimensions that drive demand, just good enough

in the others Need end-to-end ecosystem capability – product, sales, support, partners, etc. i.e. Applied Materials (integrated multi-step wafer fab), EMC (platform independent

storage)

Volume Operations R&D creates genuine product breakthrough Marketing drives home a single game-changing claim Capacity can ramp quickly to meet demand i.e. Google, Pampers, Gatorade

Growth Market: Platform (Existing Product, Existing Market)

Complex Systems Drive product ubiquity

• Must have proprietary technology and high switching costs

Open up the platform to partners

• SOA, modularization, etc.• Provide partners access to customers and technologies

that would be difficult/costly for them to pursue alone i.e. Juniper Networks, EMC, SAP

Volume Operations Declare platform goal from birth Achieve ubiquity with high switching costs

• Adobe has it, Netscape didn’t

Innovation by Market

Mature Markets

Innovation in Mature Markets

Characteristics– Indefinitely elastic middle– Hierarchy of established vendors becomes more entrenched– Optimize existing customers, markets, products, & processes– ROI is lower, but risks are too

Approaches– Volume Operations: Customer Intimacy to enhance customer loyalty while

retaining operational excellence– Complex Systems: Operational Excellence focusing on productivity, maintenance,

and total cost of ownership

Mature Market: Customer Intimacy For Volume Operations

Line Extensions First step in filling up fractal space Generally highest risk-adjusted ROI Only works if you have a strong brand Tylenol, AmEx, People Magazine, Toyota/Lexus

Product Enhancements

Focus on justifying premium pricing Differentiation, not neutralization Consider McGrath & MacMillan Consumption Chain exercise Pampers, Swatch Watch, Mont Blanc, Barbie

Marketing Programs Risk is not going far enough If you're not going to lead with this, only invest to meet threshold needs Nike, Avon, Apple

Customer Experience

Underlying offer is commoditized, experience is replicable Design processes from the customer back, not operations out Starbucks, Disneyland, Cirque de Soleil, AOL, Progressive Insurance

Mature Market: Operational Excellence For Complex Systems

Value Engineering

Disaggregate system into modules, cost reduce each module Emphasis on specialization and outsourcing TSMC, Infosys

Integration Simplifying architectures and relationships Focus on parts of value chain that are perceived as burdensome costs by the

customer Most compelling when you have a significant installed base SAP, IBM, Intel

Process Process insight and innovation is key Need to believe you can establish competitive advantage in this domain Celera (human genome), BP, Bandag (retreads), Nucore

Value Migration Generally highest risk-adjusted ROI Razor/razor blade, Inkjet cartridge model Computer Associates, IBM, GMAC, Affymetrix

Fractalization: Expanding the Franchise

Add value at the surface, extract resources from the base

Consumption Chain: MacMillan & McGrath• Key Questions

1. How do people become aware of their need for your product or service? 2. How do consumers find your offering? 3. How do consumers make their final selection? 4. How do customers order and purchase your product or service? 5. What happens when your product or service is delivered? 6. How is your product installed? 7. How is your product or service paid for? 8. How is your product stored? 9. How is your product moved around? 10. What is the customer really wanting your product for? 11. What do customers need help with when they use your product? 12. What about returns and exchanges? 13. How is your product repaired or serviced? 14. What happens when your product is disposed of or no longer used?

• Uncover opportunities to:1. Improve on your product 2. Add to your product line 3. Add a disposal or recycling service for which the customers will pay for or be alerted to restock your product 4. Solve problems before they arise 5. Discover new places to find customers 6. Redesign your product 7. Overcome objections 8. Improve service 9. Add service for your product 10. Rewrite a more attractive guarantee which may attract more customers

Recovering Resources for CoreCore becomes Context Over TimeThe End of Core is Commoditization

CoreConte

xt

Overview

• Core & Context


• Market Stages


– Challenges

– Models





Understanding Innovation Cycle• Every opportunity has a lifecycle

• Need to manage organization and processes accordingly

• Put top talent in the right roles

• Extract, re-train, and redeploy

Resource-Recycling Zones

Understanding Innovation Cycle

Invention Zone– Entrepreneurs who make things happen– Driven by idealistic vision but are also exceedingly pragmatic– Quick, self-confident, focused

Deployment Zone– Harden programs and processes for mission-critical deployment– Gifted program managers lead cross functional teams– Set expectations, define deliverables, metrics, accountability, measuring progress– Generally overkill for Context work, but they and the organization are reluctant to

redeploy themselves

Optimization Zone– Focused on continuous improvement in productivity and quality– Led by process optimizers, using 5 levers– Evangelists of continuous improvement across and between all functions– Need to be rewarded for freeing up resources to reinvest in Core

Managing Transitions (Handoffs)

Invention to Deployment (Handoff #1)– Entrepreneurs want to hand off too early, Deployers want to take

it late– Hold Entrepreneurs accountable for a successful transition to

deployment– Program managers need to free up resources to “onboard” next

generation innovation

Deployment to Optimization (Handoff #2)– Program manager wants to hold on too long– Optimization manager needs to have executive level support to

begin taking over mission critical programs once they have transitioned from Core to Context

– Freed-up resources need to be re-cycled back into Core Innovation deployment

Overview

• Core & Context


• Market Stages


– Challenges

– Models





5 Levers of Resource ExtractionGoal: Become Radically More Productive

1. Centralizea) Ops under single authority to reduce overhead and single decision making to

manage risk

2. Standardizea) Reduce variety and variability of processes delivering similar outputs

3. Modularizea) Deconstruct the system into component subsystems and standardize interfaces

4. Optimizea) Eliminate redundant steps, automate standard sequences, streamline, substitute

lower cost resources, instrument the process for monitoring and control

5. Outsourcea) Drive processes out of the enterprise entirely to reduce overhead, variabilize

costs, and minimize future investment

b) Incorporate monitoring systems into SLAs

From Context to Core: Recognizing The Challenges

• Majority of revenues from markets that are mission-critical, but not Core– Resources should be reduced and reapplied to mission critical core

– Manage such that established businesses produce more revenues with fewer resources

– Align career progression and financial incentives accordingly

• Warning Signs– Company’s flagship products become over-featured

– Over-funding breeds more Context, accelerating the decline into inertial stasis (risk aversion, resource consumption)

• Staff functions– Staff functions are not necessarily Context

– Given definitions of Core, how can IT, finance, accounting, legal, customer support, etc. contribute to differentiation

Overview

• Core & Context


• Market Stages


– Challenges

– Models





Managing Innovation

1. Socialize the Ideaa) Should be introduced by an outsiderb) Assess relevancy and value give company’s current situation

2. Analyze the Portfolioa) Assess w.r.t. product line maturity, historical sources of innovation and differentiation, performance

relative to competition, motivations for changeb) Select one or more categories to target for innovation

3. Analyze the Target Categorya) Overall, complex system vs. volume operations, company vs. competitionb) Competitive strategies and execution vs. companyc) If change is worth considering, identify the most relevant & attractive vectors (14)

4. Reduce the Number of Innovation Types Under Considerationa) Eliminate least attractive: inconsistent w/ category maturity, preempted by competition, poor fit w/ core

competenciesb) Reduce to top 3 contenders

5. Develop Attractive Optionsa) Executive sponsor for each approach, form “Darwin Teams”b) Characterize and rank each approachc) Perform financial analysis on each approach

6. Select a Prime Innovation Vectora) Executive sponsors select one innovation program for each category

7. Engage the Entire Organizationa) CEO declares the “Core,” extract resources from Context to focus on Core

7 Step Process1. Core/Context analysis

a) Complex Systems: By product category, customer industry, and geographyb) Volume Operations: By product category, consumer demographics, and sales channel

2. Resource allocation analysisa) Top performers allocated to invention, deployment, and optimization

3. Set a more ambitious agendaa) Identify one or more opportunities for intensified attentionb) Assign (or hire) top performers to drive programsc) Target key “Context” opportunities for resource extraction and assign top performers

4. Plan your moves as a teama) Extracting resources from context to repurpose for core is organizationally difficult, need high level buy-in

and support5. Focus on time to market

a) Create proper sense of urgency, test assumptions that limit rate of progress6. Get the gears moving

a) Free up top performing leaders from “Context” to assign to “Core”b) Assign optimizers to free up resources from “Context”c) Manage Inventors more closely with more aggressive goals

7. Keep the gears movinga) Continue the cycle of freeing resources from “Context” to invest in “Core”

Dealing with Darwin

Business

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