R&D on an Island
Is your innovation process on an island?
I recently ran my Innovation and Strategy workshop for executives at the Insper Institute in Sao Paulo, Brazil. As I always to, I asked participants to describe or diagram their current innovation process. It’s a great starting point for any discussion on innovation. And the responses usually range from enlightening to entertaining.
One executive from an oil company told the group that his company’s R&D team was located on an island – literally. What a great metaphor! It triggered a broader discussion about the limitations of the traditional R&D organization. Too many are on an island – figuratively.
Innovation starts with an understanding the customer –what they deal with every day, what problems they need to solve and what could make their experience dramatically better. To understand any of this, product teams need to spend time out of the office observing and listening to customers. They need to develop empathy for the customer by standing in their shoes. Only then can they begin the process of designing solutions that deliver a differentiated customer experience.
Customer experience is the new IP (intellectual property). It’s a proven way to create a sustainable competitive advantage. Just ask Zappos or Virgin Airlines. I would rather deliver a distinctive customer experience than own a patent or a trade secret.
Unless your customers are shipwrecked, you’ll never design a better customer experience if your innovation team is on an island – literally or figuratively. Innovation is the job of everyone responsible for company growth—not just the R&D department. And the way to contribute is to get out of the office to understand what it’s like to be a customer—and to ask how you can solve the problems they have today, and how you can help them realize their goals in ways they never imagined.
Get your innovation process off the island and back on the mainland.
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Follow Dave on Twitter: @wdavidpower
Position the Problem, Not The Product
Positioning is arguably the most critical element of company strategy. Before you can win business with customers they need to know what problem you can help them solve. Your can either explain this to them directly, or rely on them to figure it out on their own.
Most positioning statements revolve around a company’s product or service. Let me illustrate, using two leading companies from the emerging Big Data industry:
- Hortonworks develops, distributes and supports enterprise Apache Hadoop.
- BlueKai Data Activation System (DAS) is an enterprise-level, cloud-based platform that manages your data assets and provides a common data management system for all your marketing and customer interaction programs.
The problem with this approach is that it makes customers work too hard to find a connection between the product or service and a critical problem the customer needs to solve. If you know you need Apache Hadoop, you might want to talk to Hortonworks; otherwise, why would you ever contact this company? BlueKai tells you what their product does, but isn’t explicit about how this product can help you solve your company’s problems.
There’s a better way: position around the customer problem. A good positioning statement makes it clear who the customer is and what business problem they need solve. If you do a good job of defining the customer problem, you don’t need to describe your product; the customer will want to learn more in the next conversation. Here are two other Big Data leaders; notice how they define their companies based on a customer problem:
- ZestFinance helps lenders in all credit segments better assess the credit risk of potential borrowers.
- Quid software makes sense of the world’s public data to help your company answer billion-dollar questions.
One of my favorite positioning statements comes from the electronics recycling company Gazelle:
- At Gazelle, we pay you for the cell phones, iPads, Macs and other Apple devices you no longer need – helping you upgrade faster or just putting a little extra cash in your pocket.
I don’t know how Gazelle delivers this service– I just know that I need it.
The most effective way to position a company is to lead with the problem, not the product. Of course, if you’re not sure what problem you solve for your customers, you may need to get outside the building and ask them directly.
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Follow Dave on Twitter: @wdavidpower
To Design Great Products Start With A Problem
In 1974, British industrial designer James Dyson was using his Hoover Junior vacuum cleaner and became incredibly frustrated by how weak the suction was, and how quickly it clogged up. From that moment on, he became convinced he could build a more efficient vacuum cleaner. It took many years and over 5,000 prototypes, but in 1993 he created the Dyson DC01. Within 18 months it became the biggest selling vacuum cleaner in the U.K.
Fast forward to last month at the International Automobile Show in New York City. According to the Wall Street Journal, while many automobile manufacturers were showing off their models’ latest tech bells and whistles, it was a centralized vacuum cleaner in the Honda Odyssey mini-van that “stole the show.” The idea originated from an engineer at Honda who went on a road trip with his family and was frustrated by all the crumbs and trash that accumulated in his own minivan. His engineering team at Honda realized that a centralized vacuum system “would have a lot of value to their customers.”
While vacuum cleaners might not be the flashiest of products, they don’t need to be. Dyson and Honda succeeded because clearly they solved problems for their customers. A flashier example may be Amazon Web Services.
Most people think of Amazon’s customers as the millions of consumers who buy books and other retail products online. But Amazon also serves more than 100,000 retailers who use Amazon’s eCommerce platform for their online stores – from specialty retailers to Target. In 2003, Amazon realized that its retail customers had a problem: they would never realize the costs savings of cloud computing because they lacked the technical sophistication. An entrepreneurial employee proposed to Jeff Bezos that Amazon create a service business to provide their retail customers an easy way to access computing power and storage on demand. Amazon got a head start in this emerging market and its Amazon Web Services business went on to become the market leader in cloud computing – bigger than the cloud computing businesses of Google, IBM, HP, and Rackspace. And all because they started with a customer problem
If you want to design a great product, find a good customer problem to solve.
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Tesla Motors: Preparing for the Next S Curve
Electric carmaker Tesla Motors has tripled its valuation to $10B over the last two months. What do investors see in the company’s growth strategy?
Both Motor Trend and Automobile magazines recently named Tesla’s high end Model S car, with a base price $69,900, Car of the Year. And Consumer Reports said it was “the best car they’d ever tested”; high praise from the most influential publication for car buyers. But Tesla has more than a great car going for it.
To the ire of the auto industry, Tesla CEO Elon Musk is also disrupting the traditional car sales model. Instead of using dealers, Tesla has set up its own showrooms in shopping malls and other high traffic areas. And it’s selling its cars at full sticker price – no negotiations or haggling allowed.
The formula is working. Tesla posted its first profit several weeks ago. The question is, what is Tesla doing right that other electric-car makers, like the nearly bankrupt Fisker Automotive, did wrong?
To me, the most interesting part of Tesla’s strategy is the way it is planning ahead for changes in its business model, or S Curves (as I written about before.). Tesla decided on a high-end sports car for its first S Curve. This allows its engineers time to perfect the design while also giving the company the profits it needs to invest in the next S Curve: an ‘affordable’ electric car. In fact, Elon Musk hopes to build an even lower cost family sedan a year or two after that as his third S Curve. Says Musk, “With the Model S, you have a compelling car that’s too expensive for most people…what the world really needs is a great, affordable electric car.”
It’s interesting to see the analogy to Apple’s product strategy: start with high end products, then reach a broader market with lower cost products. A fan of Steve Jobs, Musk also chose to control the customer experience with his own retail stores.
The Tesla product “master plan” is brilliant in its simplicity. Elon Musk even outlined it in his blog:
- Build sports car
- Use that money to build an affordable car
- Use that money to build an even more affordable car
- While doing above, also provide zero emission electric power generation options
Tesla Motors is an innovation role model for growth companies. Interestingly, at the turn of the century another CEO ran an automotive company that started producing high-end roadsters, and then transitioned to producing a low cost vehicle that became the most popular car in the United States. The CEO of that success story was Henry Ford and the low cost car was the Model T. If they keep on their current trajectory, Elon Musk and Telsa Motors may prove to be just as iconic to the electric-car age as Henry Ford and the Model T were in their time.
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Follow Dave on Twitter: @WDavidPower
Why Growth Companies Matter
When we emerge from the Great Recession, growth companies will have led the way. Growth companies are the engines of economic growth and wealth creation. No longer startups, growth companies are private companies, typically with revenues of $5 million to $100 million. They create most of the new jobs in our economy, and that is why investors, job seekers and policy-makers have an enormous stake in the success of our growth companies.
So what is the profile of these companies?
Size and Number of Growth Companies
Tracking growth companies and their impact can be challenging since there is no single source of information. Fortunately we can learn a lot about the impact of growth companies from several reliable sources:
- According to the Kauffman Foundation, 5 percent of US companies, or about 273,000 firms, create two-thirds of new jobs in any given year. The top 1 percent, or about 55,000 companies with fewer than 250 employees, generate 40 percent of new jobs in any given year.
- According to Middle Market Foundation (Ohio State Fisher College and GE Capital) the Middle Market is the largest source of sustainable economic growth and job creation today. It’s important to note that 95% of these companies have revenues below $50 million.
Photograph by Erik A. Drabløs
Gazelles: Fastest of the Growth Companies
The fastest growing companies are often called gazelles – a term created by David Birch and promoted by Verne Harnish. According to Birch, a gazelle is a company whose revenues have increased 20% or more per year for four consecutive years from a base of at least $1 million. His research indicates that gazelles represent about 4% of US business but create 70% of new jobs.
Inc Magazine created the Inc 5000 to track the fastest growing private companies in the US. The makeup of the Inc 5000 by company size is as follows:
- $2 – $10 million: 47%
- $10 – $100 million: 44%
- $100 million+: 9%
When you think about growth companies you might think of young technology companies. However, David Birch’s research indicates that many of the 350,000 gazelles, have been in business more than 25 years. And this Inc 5000 infographic shows that our fast-growing companies span all industries and geographies.
Growth Company Success = Sustainable Economic Success for the U.S.
Clearly we all have a big stake in the success of growth companies. However their success is not guaranteed; sustaining high growth rates is a challenge for any company. Tragically, most private companies fall off the curve before they reach their potential. (See Why Growth Companies Stop Growing). Fortunately, they can learn a great deal from the best practices of the most successful growth companies (See Four Keys to Innovation and Growth).
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Follow Dave on Twitter: @wdavidpower
No facts in the building …
As an advisor to mid-size companies, I continue to be struck by how few leaders make it a strategic priority to talk with their customers. If you’re searching for the next big thing for your business, be it an improved product or a brand new one, chances are your customers have most of the answers.
Too many companies suffer from ‘customer amnesia’ – as though they’ve forgotten how to have routine conversations with their customers (I’m not including selling situations). When it comes to new product development, these companies jump right to product design, assuming they know what customers need, and then ship the finished product as soon as possible. They skip two critical steps that can insulate them from new product failures. The first is to find out what problems you can solve for the customer before designing the product. The second is to get early feedback on new product concepts from customers by showing them initial prototypes.
I recently read on Mashable about an interesting start-up called Charlie. Charlie is a web application that helps you prepare for meetings by doing research on the people and companies you will be meeting with. It will even tell you if you have anything in common with your meeting attendees, such as an alma mater or a love of the Red Sox. Charlie was a finalist in the Accelerator Competition at this year’s SXSW conference.
How did they achieve this early success? Charlie’s founders tested the product concept early and often with business professionals – their target audience – to get initial feedback. It was only after they discovered that their product filled a need that hadn’t been met by anything else in the market that they started building the first complete version of the product.
Dropbox took a similar approach en route to growing a multi-billion dollar business. The first ‘version’ of Dropbox was simply a landing page that described the product concept and asked for the email addresses of those who wanted to be beta users. Everything they built was something customers were asking for. Think of the capital efficiency!
The founders of Charlie and Dropbox know what many, much larger companies have yet to learn– that listening to customer prospects before designing products, and getting feedback on early product concepts can save time and money in the innovation process.
If your company can overcome customer amnesia by setting up informal meetings on a regular basis, you’ll find the rewards can be invaluable. Think of it as sifting through sand for gold. You might schedule ten customer conversations and even if the first nine don’t reveal new opportunities, you’ve still built a stronger relationship with your customers just by being there. But it’s that tenth meeting, the one that reveals a customer problem that no one has solved, that can point to product and service innovations and new sources of revenue. You won’t get that kind of insight on a white board in your office or in a conference room with your co-workers.
Steve Blank, author of The Start-Up Owner’s Manual: The Step by Step Guide for Building a Great Company, says it best: “There are no facts in the building, so get outside.”
If routine conversation with your customers is not in your company’s comfort zone, it’s time to step outside of it. Making time for these conversations might take your business in directions you have yet to imagine.
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This blog first appeared on Harvard Extension’s The Language of Business.
Follow Dave on Twitter: @wdavidpower
Find Your Market Segments … Socially
There’s a new shortcut for finding your best market segments – it’s social media. Your ‘ideal customer profile’ can reveal itself to you … if you hang out in the right circles and pay attention to what’s going on in the social media sphere. Two online boutiques, ModCloth and Nasty Girl, provide excellent case studies on how to do this successfully.
ModCloth created a program called Be The Buyer to coax its market into revealing itself. Through this program, prospective customers view clothing samples from trade shows online and vote on which ones the company should sell. According to founder Susan Gregg, 17 million people have chimed in since the program started.
17 million people, and each one providing a profile. Just a few years ago, a company like ModCloth would rely on a combination of market research and guesswork to select their target markets. In the era of social media, your customers can do this work for you. Using Be The Buyer, ModCloth learns who their customers are and what products they want to buy. The success of this program has allowed the company to raise $25 million to expand their business.
Regardless of the size of your business, social media can be a powerful tool to understand the profiles of your ideal customers. Here are a few specific tactics:
Discover the Communities
If you want to listen to your customers, go where they hang out online. If you’re selling camera lenses, find the Google+ groups and Twitter hashtags that camera buffs use. Join the Pinterest groups and follow the Facebook and LinkedIn pages of the influencers. Market segments are composed of people with common interests, and people with common interests are already finding each other on social media. Your job is to find them and learn what they want (without being too blatantly commercial about it).
This is how Sophia Amorusa built a $100 million online retail business called Nasty Gal. She found ‘friends’ for her MySpace page by reaching out to sites of complementary brands such as Nylon, the music and fashion magazine. She gave prizes to Facebook fans who came up with the best names for her products. When her market segments evolve and fashion tastes change, Amorusa will learn this first hand from the 100,000+ followers that visit her site for at least six minutes every day.
Find the Influencers
Whatever your product is, chances are high that there are bloggers and opinion leaders on social media sites that are influencing what customers think about it. Find these influencers and build relationships with them. One of many places to look is Forbes’ list of the Top 50 Social Media Power Influencers.
Invite Your Customers Through Collaboration
ModCloth and Nasty Girl invited their customers to participate in the design and merchandising process. With social media, there are many ways to invite your customers to collaborate in your business. Some examples:
- Allow them to write product reviews on your site;
- Create an interactive blog on related topics;
- Engage them with Twitter hashtags or Meetups;
- Create a Pinterest page with your latest and greatest
offerings and ask for feedback;
- Reward active participants with giveaways and discounts.
For small to mid-size companies, one of the biggest advantages of using social media for market segmentation is the low cost of entry. It costs nothing to open an account on Twitter, Facebook, LinkedIn or Pinterest. Once you get started, with a little time, creativity and planning, you can discover your best market segments before your competitors gets there.
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Follow Dave on Twitter: @wdavidpower
In March, Fast Company magazine announced “2013’s 50 Most Innovative Companies”. Number one on this list wasn’t one of the hot new start-ups on the block like Pinterest or Square, it was Nike. Started as a humble sneaker company over forty years ago, Nike has established itself as a $24 billion dollar global brand. It’s tag line: “Inspiration and Innovation for Every Athlete in the World.”
This year Nike launched not one, but two new products that many are calling revolutionary. The first product, the FuelBand, is an electronic bracelet that measures your daily movements. The second is the Flyknit Racer – feather light, environmentally friendly shoes that Nike says will “turn the shoe industry on its head”.
To launch one new groundbreaking product in a year is a feat; two is extraordinary. But Nike is a highly successful growth company because it lives and breathes what every company must learn to survive: that innovation must be an integral part of your business operations and corporate culture.
So how do they do it?
According to Amy Martin, author of Renegades Write the Rules, the secret sauce is in Nike’s Innovation Kitchen. Here are a few of the ingredients:
- Swoosh scientists are obsessed with “What if…?” questions.
- Nike has an innovation process never ends, and there is no finish line.
- Nike athletes and consumers are a part of the process via clever social media channels. Check out Nike+ Basketball in this video.
Nike designer Michael Shea, one of Nike’s 125 Kitchen-mates says, “You’re paid to question things.” He describes the essential qualities of new Innovation Kitchen hires: has initiative, is a self-starter, can take direction, can take it to another plane, and is socially open and fun.
Innovation is Not a Fire Drill
Every growth company needs an innovation process. It’s the bridge between today’s core business and the new business that will drive future growth, as I show in my S-Curve diagram.
Like many successful growth companies, Nike has built their innovation process into the rhythm of their operations – balancing investments in new business development with the demands of their core business. It remains to be seen whether some of the much younger companies on Fast Company’s 50 Most Innovative will have the staying power of Nike. The sooner they understand that innovation is not a fire drill but an inherent part of their overall business, the more likely they will be on a path to long term growth and success.
Follow Dave on Twitter: @WDavidPower
Strategic Management of Growth Companies – An Update
I created a course for the Harvard Extension School that I’ve been teaching for several years called Strategic Management of Growth Companies. The course seems to have hit a sweet spot with entrepreneurial executives who want to know how to sustain growth: whether in a startup that’s achieved initial success, or in an established company whose current business model faces maturity. The course provides a 360 degree view of what it takes sustain success in a growth company, as I describe in this video:
Most of the participants have represented countries outside the US — including every continent except Antarctica. And why not? As Yogi Berra once said, “It’s an international world.” To reach an even broader audience, I’ll be teaching the course via live web conference starting in January 2013.
For busy executives there is also an intensive two-day version — or Professional Development Program — offered several times a year. Again, most executives have come from outside the US.
At a time when every economy is searching for growth and new jobs, growth companies are more important than ever.
Follow Dave on Twitter: @WDavidPower
Have Your Customers Inspire Innovation
In the middle ages, theologians debated the number of angels that could dance on the head of a pin. In the modern era, entrepreneurs debate whether innovation comes from technology breakthroughs or customer needs. In both cases, it’s the wrong argument.
Those who argue that technology drives innovation will cite Henry Ford or Steve Jobs – two guys with a lot of credibility. Ford once said, “If I asked customers what they wanted they’d have said faster horses.” And Steve Jobs was famous for saying, “It isn’t the customer’s job to know what they want.”
UNDERSTANDING THE PROBLEM
The middle ground—which too many companies miss—is the enormous advantage of understanding what problem the customer needs to solve. In fact, Henry Ford made a big bet that customers wanted an automobile—the problem was that few could afford one. Steve Jobs believed that music fans wanted to bring their music with them, but none of the available options were attractive. Watch the public launch of the iPod and you’ll see Steve Jobs going through great pains to describe what consumers were lacking in the available choices: CD player, MP3 player, and flash drive.
If you understand the customer problem you dramatically improve your odds of successful innovation. Clayton Christensen, author of The Innovator’s Dilemma, underscores this point when he encourages innovators to understand the jobs customers need to get done. When Apple launched its ill-fated Newton device, no one understood what problem it was supposed to solve. Later, when Apple launched the iPhone we all understood that this was the way to carry one digital device instead of a separate phone, music player, and organizer.
WHAT’S MISSING
Companies don’t spend enough time understanding the changing needs of their customers. They spend too much time on product development and not enough time on what Steve Blank calls customer development. Ask any executive how many customers they talked with last month—not including sales situations and service problems. You may be surprised at the answer. One of the first things Lou Gerstner did when he joined IBM was to require his top executives to visit a certain number of customers per week and send him a write-up by end of day Friday. Most people got the message.
How did Amazon get into the cloud computing business? Someone in the company observed that Amazon’s retail customers, the thousands of small businesses that use Amazon’s eCommerce platform, were not sophisticated enough to take advantage of cheap computing and storage in the cloud. This Amazon renegade pitched Jeff Bezos on the idea of creating a new business that would make it easy for small retailers to lower their IT costs using a simple cloud computing service from Amazon. Today Amazon is the market leader in cloud computing – bigger than IBM, HP, Google, Microsoft, and other tech giants.
If innovation is your goal, by all means look to technology for opportunities to disrupt the current playing field. But if business success is also your goal, make sure your innovation lines up with a critical customer problem that no one has solved. And if you’re wondering what that problem is, ask your customers.
This blog first appeared in The Language of Business.
Follow Dave on Twitter: @WDavidPower
For Growth Company Leaders ... 