Building the self-renewing organization through continuous innovation

Citation

Leavy, B. (2006), "Building the self-renewing organization through continuous innovation", Strategy & Leadership, Vol. 34 No. 4. https://doi.org/10.1108/sl.2006.26134dae.001

Building the self-renewing organization through continuous innovation

Building the self-renewing organization through continuous innovation

Dealing with Darwin: How Great Companies Innovate at Every Phase of their EvolutionGeoffrey A. Moore, Penguin, 2005, 281 pp.

One of the most notable features of the post-Enron era is the renewed interest in innovation as the primary strategy for driving top-line growth. As Jeffrey Sonnenfeld, president of Yale’s Chief Executive Institute, recently noted: for the most recent breed of CEOs, “the art of the deal is fading, and the value of the idea is once again on the rise,” as reflected in the IBM of Sam Palmisano, the GE of Jeffrey Immelt, the P&G of A.G. Lafley and the Pfizer of Henry “Hank” McKinnell Jr., to mention just a few of the more prominent examples. Furthermore, this “return to the power of ideas” is riding on a wave of new concepts on how to harness innovation for business growth. These not only include product and process innovation, but also disruptive innovation, “blue ocean” market innovation, business model innovation, experience innovation, and several others that have considerably widened the options available.

How do we begin to gather this collection into a more integrative framework that can help us match the type of innovation to the nature of the competitive challenge and the particular phase of a category’s evolution? This is where Dealing with Darwin, Geoffrey Moore’s latest book seeks to make its contribution. Few authors come to their task with more credibility. In his previous books, Crossing the Chasm, Inside the Tornado and Living on the Fault Line, Moore has added significant insights to one of the oldest tools in the strategy toolkit, the product life cycle (PLC), further enhancing its application to high technology markets. He is a managing director with TCG Advisors, a consultancy firm specializing in strategy and business transformation services, and a venture partner with Mohr Davidow Ventures.

Moore named his new book Dealing with Darwin, because “free-market economics operate by the same rules as organic systems in nature,” and he is seeking to address the fundamental question that Darwinism poses: “how can we innovate forever?” His primary concern is with how to create competitive advantage “in an increasingly commoditizing world.” A central obstacle in the way of evolutionary adaptability is inertia, and a fundamental premise of his book is that “innovation and inertia are so deeply intertwined that both must be engaged with concurrently.” In this regard, he draws a key distinction between core and context. In the Moore lexicon, core refers to innovation that creates differentiation – everything else is context. Context may be very important in the generation of current revenues, but it should not be the primary focus for future competitive differentiation and growth. Take the example of champion golfer Tiger Woods: most of his current revenue comes from commercial endorsements (context), but his competitive advantage is rooted in his superior golf skill (core). Companies tend to allocate most of their attention to what is context and not nearly enough to enhancing competitive advantage, if Tiger Woods were to take that approach, the endorsements would soon dry up. So the formula offered for tacking innovation and inertia in tandem is “extract resources from context to repurpose for core.” This provides the axis around which the book’s main insights revolve.

Dealing with Darwin is structured into three parts. The first presents foundational models, the second focuses on managing innovation and the third on managing inertia. The early chapters identify and examine the four main outcomes of innovation effort: differentiation, neutralization (closing the gap with competitors), productivity (freeing resources for other types of innovation) and waste (innovation that produces no economic value). This last outcome tends to be much larger than most organizations would like to believe, and the “worst form of waste occurs when an innovation project actually succeeds in meeting its specified targets but fails to achieve competitive separation in the marketplace because it did not go far enough.” One or both of the two main “enemies of differentiation” are usually to blame. The first of these is a risk reduction attitude that may be a “sensible strategy” for managing context but is “a horrible tool” for managing core. The second is a lack of corporate alignment and focus, with too many innovation vectors pulling in too many directions. How do you go about first deciding which line of innovation to choose and then mustering up the courage to back it to the hilt?

These early chapters also provide the basic foundations for book’s main prescriptive frameworks, including the concept of the “category-maturity cycle,” a five-phase version of the PLC, with Moore’s extended insights about innovation from his previous work, such as the “chasm,” “tornado,” and “fault line,” incorporated and reprised (see Exhibit 1). As the author points out, “if you are going to be successful with innovation, you have to understand that different categories reward different types of innovation at different points of time.”

Exhibit 1 Four innovation zones

This first part of the book is then rounded out by making a key distinction between two very different business architectures, “complex-systems” and “volume operations”; the former specializing “in tackling complex problems and coming up with individualized solutions with a high proportion of consultative services” (as exemplified by IBM, SAP and Boeing), and the latter tending to excel at “serving volume markets through standardized products and transactions” (as typified by P&G, Sony, Microsoft and Google). According to Moore, the first question a competitive advantage strategy has to answer is “are we going to play the complex systems or the volume operations game?” So fundamental is the difference between the two that they “create a divide across which best practices in innovation must not be shared.” Both play to different sweet spots not only on the complexity-volume continuum but also over the category-maturity cycle.

Armed with these foundations, Dealing with Darwin moves on to examine the management of innovation and the range of options available. According to Moore, “there is never a time when the market rewards not innovating.” Reflecting this belief, the central section of the book offers us 15 different types of innovation ranging over the entire category-maturity cycle. The author further groups these into four zones of innovation, product leadership, customer intimacy, operational excellence and category renewal, the first three borrowing openly from the Michael Treacy and Fred Wiersema concept of value disciplines, and the fourth added by Moore himself (see Exhibit 2). Taken in tandem, the category-maturity cycle and innovation-types model are seen to offer a very powerful toolkit to company strategists. The first provides “a framework for analyzing market forces affecting your competitive advantage strategy,” while the second “allows you to target a specific vector of differentiation to gain definitive separation from your competitive set.” Together “they lay out the landscape upon which you will define your core,” and defining your core, is the “single most important act of strategic leadership.”

Exhibit 2 The category maturity lifecycle

The central part of the book goes on to use these frameworks to examine the challenge of managing innovation in the major phases of the category-maturity cycle, with separate chapters devoted to managing innovation in growth markets, managing innovation in mature markets and managing innovation in declining markets. All of the key distinctions developed in the earlier part of the book are invoked in presenting comprehensive, coherent and accessible coverage of the 15 innovation types and their applicability to the different phases of the cycle. For example, the product leadership zone of innovation is seen to be most applicable to the growth phase, with all of the innovation types in this zone, aimed primarily at differentiation and top-line growth. Drilling down a bit deeper, we also see that each of the four innovation types within this zone is at its most effective at different stages of the technology adoption life cycle, the “cycle within a cycle” that characterizes the front end of Moore’s expanded version of the category-maturity cycle for high technology products.

When we turn to the challenge of managing innovation in maturing markets, the most effective options are those in the customer intimacy and operational excellence zones. In this phase of the category-maturity cycle the emphasis shifts to both top- and bottom-line growth, “more on the top if you focus on customer intimacy and more on the bottom if you focus on operational excellence,” with the “overarching notion that you should major in one and minor in the other.” At this stage, the market no longer rewards innovation aimed at adding features to the basic design, which is becoming more and more of a commodity. The target for differentiation, and the creation of “new delighters” for customers, must therefore shift to secondary attributes around the “surface” of the offer, while increasing stability and standardization in the base design, or “substrate,” generates significant opportunities for value creation through gains in productivity. So the guiding mantra for this phase becomes “add value at the surface, extract resources from the base.” We also see that the main innovation options in the customer intimacy zone of line extension innovation, enhancement innovation, marketing innovation and experiential innovation, taken in sequence, present the opportunity for “increasing capital efficiency made possible by migrating the venue of value creation out of the physical world and into the customer’s mind.” In a similar vein, the options in the operational excellence zone of value engineering innovation, integration innovation, process innovation and value migration innovation represent a progression from “the one closest to the product to the one most abstracted from it,” reflecting increasing stability in the “base functionality of the product” and the channeling of the search for ongoing differentiation into other avenues for value creation. Again within the customer intimacy and operational excellence zones, the most effective choices of particular innovation types are seen to vary with the basic business architecture.

When thinking about managing innovation in declining markets, the choices move into the category renewal zone. The main options are here to renew or to harvest and exit. Meaningful renewal in a declining market will require a category shift back into a growth market, with all the opportunity and risk that this entails, and can be done through either product innovation or application innovation, though only the product innovation is likely to have the kind of impact on the top line that larger companies will tend to require. The process can also take the path of organic or acquisition renewal, and the choice here will depend on “time and the current state of your core competences,” and since renewal is “a high risk endeavor” in whatever form, management needs to be prepared to face the harvest and exit option decisively, if the renewal strategy fails. The author rounds out this section with a seven-step guide to selecting an innovation strategy and getting an organization aligned around it.

Finally, clarifying your innovation strategy for differentiation is seen to be what distinguishes core from context, and getting this relationship right is the key to optimizing resource allocation in the innovation effort. The author shows how core and context are hewn from the same material: what once was core over time evolves into context, as companies, in a commoditizing world, eventually lose their differentiation. Managers have to find a way to reverse this natural migration on a continuous basis through “extracting resources from context to repurpose core.”

The final chapters of the book identify the two primary challenges to promoting this dynamic – reengineering your workload and recycling your workforce. Moore offers a practical “core-context” analytical framework for helping executives to deal with them.

Overall, Dealing with Darwin is teeming with ideas and practical advice. It presents an impressive examination of fifteen innovation types, richly illustrated by over one hundred examples of companies from a wide variety of industry contexts that have “used them to achieve competitive separation within their chosen category and target markets.” As a further bonus for readers from the technology sector, it also features an in-depth examination of Cisco, which is used as an illustrative anchor case throughout.

It might be argued that Dealing with Darwin tends to remain too much rooted within the Product Life Cycle mindset, at a time when other researchers, such as Youngme Moon of Harvard Business School and W. Chan Kim and Renée Mauborgne (Blue Ocean Strategy, HBSP, 2005), have recently been pointing us towards the opportunities for “rejuvenating categories and creating whole new markets” by breaking away from it. Nonetheless, Moore’s new book is still a very significant and valuable addition to the strategist’s bookshelf.

Brian LeavyAIB Professor of Strategic Management at Dublin City University Business School (brian.leavy@dcu.ie) and a Contributing Editor of Strategy & Leadership.