Why Innovation Needs Design Thinkers
Instagram created a better way for people to share photographs. Their innovation was worth $1B to Facebook (even without revenue). Why couldn’t Facebook develop their own photo sharing solution — for less than $1B. And why didn’t Kodak or Polaroid come up with this idea first?
Instagram is more about user experience than technology. Its 13-person team created a new way to enhance and share photographs by understanding users, testing new features, and implementing continuous improvements … until their user community exploded. Instagram is a classic example of design thinking – the missing ingredient in most innovation processes.
Managers are trained as decision thinkers. When faced with a problem they define objectives, review options, analyze data and calculate ROI in order to make the best decision. Design thinkers take a different approach; they believe that if you uncover the right option, the decision will become obvious. Design thinkers ask questions such as:
“How do we know these are the best options?”
“What if anything were possible?”
To get the raw material they need to create new options, design thinkers spend time observing, talking to, and ‘standing in the shoes’ of customers. According to Suzanne Howard, Design Director at IDEO:
“Design thinkers gather information that helps us understand customer experiences. Once we understand their needs, desires, problems and aspirations—we can identify relevant business opportunities … As we prototype, we learn from people by observing, gathering feedback, and refining our approach. This iterative cycle of learning—trying out new business possibilities, gathering feedback and refining the ideas—is what makes design thinking unique.” American Express OPEN Forum
Design thinkers offer new tools for business strategists, such as the customer experience map – for discovering new market opportunities – and the business model canvas – for finding new ways to make money. These tools enable cross-functional teams to generate a broader array of outside-the-box options for new products, services and business models.
The most valuable tool in the discovery phase is the customer experience map, also know as a customer journey map or customer empathy map. The experience map below examines what customers are doing, thinking, feeling and experiencing during every stage of the shopping, purchasing and consumption process – in order to make Rail Europe a better customer experience (click on this map to open a high resolution PDF).
To design better business models, many design thinkers start with the Business Model Canvas developed by Alexander Osterwalder.
The best practice of growth companies is to incorporate these tools into a four-step innovation process:
1. Observe customers to uncover new problems (customer mapping)
2. Create new solutions (ideation, business model canvas)
3. Prototype and learn in the market (lean development)
4. Implement the best ideas (get to market and keep learning)
However, what most businesses gloss over is the first step: observing customers to uncover new problems or pain points. I’m amazed at the number of companies with great customer franchises who never talk to their customers outside of sales situations.
Unfortunately the design thinking of visionary founders like Edwin Land can get lost as their companies mature, leaving the door open to innovators such Instagram:
In the early days of Polaroid, Mr. Land said photography should “go beyond amusement and record-making to become a continuous partner of most human beings.” His goal was to build a business that would allow any one to feel an emotional connection to photography.
The New York Times, April 16, 2012
Learn how to apply design thinking to your business at Innovation and Strategy, my new Professional Development Program at Harvard Extension offered on June 21 and 22.
This blog first appeared in The Language of Business.
Follow Dave on Twitter: @WDavidPower
Four Keys to Innovation and Growth
What can we learn about innovation and growth from the most successful growth companies?
Global competition and a weak economy have made growth more challenging than ever. Yet some organizations such as Apple, Amazon, and Starbucks seem to defy the laws of economic gravity.
The most successful growth companies adopt at least four best practices:
- Find the next S-curve
- Lean on customers
- Think like a designer
- Lead the way
1. Find the next S-curve
Nothing grows forever. The best products, markets, and business models go through a predictable cycle of growth and maturity, often depicted as an S-curve.
Diminishing returns set in as the most attractive customers are reached, price competition emerges, the current product loses its luster, customer support challenges emerge, new operating skills are required, and so on.
Unfortunately, growth company leaders are often blinded-sided by this predictable speed bump. Once the reality of the S-curve becomes apparent, it may be too late to design the next growth strategy.
The time to innovate—the innovation window—is when the first growth curve hits an inflection point. How do you know when you’re hitting the inflection point? You never know. So the best companies are forever paranoid and make innovation a continuous process.
Steve Jobs understood this when he returned to Apple. In 2002, he challenged his company to break out of the mature computer industry where Apple had never garnered much more than 10 percent market share. He told Time Magazine in 2002, “I would rather compete with Sony than … Microsoft.”
Eight years later, after introducing the iPod, iPhone, iPad, and a game-changing retail channel, Jobs claimed victory and Apple Computer became Apple Inc. While introducing the iPod, Jobs said, “Apple is the largest mobile devices company in the world. Larger than the mobile devices businesses of Sony, Samsung, and Nokia.”
2. Lean on customers
Successful growth companies have a deep understanding of their customers’ problems. Many are embracing tools such as the customer empathy map to uncover new opportunities to create value. This customer insight is the foundation for their lean approach to product innovation: rapid prototyping, design partnerships with lead users, and pivoting to improve their product and business model.
I’m constantly amazed at how few companies invest the time to get out of the office and interact with customers (outside of sales situations). During the turnaround of IBM, Lou Gerstner launched Operation Bear Hug to get the company back in touch with its customers. IBM’s top 50 executives had to visit five customers per week and deliver a write-up to Gerstner.
3. Think like a designer
Managers are trained to make choices, but they don’t always have good options. Innovation involves creating new options. This is where designers excel. Apple’s exceptional user experiences were largely the creation of Jonathan Ive, a professional designer and Jobs’ righthand man.
Design thinking requires a different set of tools. Growth company strategists have abandoned Porter’s Five Forces Analysis because it assumes that markets have well-defined boundaries and competitors must fight for market share. Instead they search for uncontested market space and make competition irrelevant using Blue Ocean Strategy and the Business Model Canvas.
4. Lead the way
Unless the CEO makes innovation a priority, it won’t happen. Innovation requires a level of risk-taking and failure that’s impossible without executive air cover. The best growth companies create a culture of innovation:
- Howard Schultz decided Starbucks had lost its way. He flew in every store manager from around the world to help redesign its café experience.
- Google encourages employees to spend a day per week on new ideas.
- P&G tracks the percentage of revenues from new products and services.
- Gray Advertising gives a Heroic Failure Award to the riskiest ideas … that fail!
More important are innovative leaders as role models. Amazon founder Jeff Bezos has told both employees and shareholders that he cares less about profitability and more about planting seeds that are likely to pay off in five to seven years. He’s so driven by vision that he’s investing over $40 million of his own money in a product designed to last for 10,000 years.
To launch his successful Think Different campaign, Steve Jobs commissioned The Crazy Ones, a video that featured Einstein, Edison, Gandhi, Muhammad Ali, Hitchcock, Richard Branson, and other “trouble-makers” who changed the world. Every employee understood the CEO’s views on risk-taking and innovation.
Adopting these four best practices can help any company drive innovation and growth.
This blog first appeared in The Language of Business.
Follow Dave on Twitter: @WDavidPower
CEO Advice on Growth Barriers: The FreeThink@Harvard Panel
One of the highlights of 2011 for me was a panel I ran at Harvard called “Growth Companies: Succeeding Beyond the Start-up Phase” featuring Brian Halligan, CEO of Hubspot, and Diane Hessan, CEO of Communispace. In addition to having some fun we were all surprised at how much ground we covered on this important topic in about 40 minutes. Thanks to Freethink@Harvard you can see a complete videotape of the panel via this link.
Dave Power, Diane Hessan, Brian Halligan at FreeThink@Harvard
After a brief review of why growth companies stop growing Diane and Brian zeroed in on how everything changes as you evolve from startup to growth company:
|
FROM |
TO |
|
Being an entrepreneur |
Being a CEO |
|
Managing cash flow |
Managing a P&L |
|
One product in one market |
Many products in many markets |
|
Knowing all of your employees, customer, problems |
Knowing “none of that” |
|
A team of utility players |
A team of specialists |
|
“Survival” |
“Growing profitably” |
|
Selling all the time |
Building a scalable culture
|
|
Fundraising all the time |
Managing a board (adult day care?)
|
There was also some practical advice on:
– Defining company values with the help of employees,
– Not ‘shooting’ the founder
– Leaving the ‘weekend voice mail’
– Whether to be like Steve Jobs
– Knowing yourself as a leader
But don’t let me give it all away – watch this panel to learn from two of Boston’s most successful growth company leaders.
Follow Dave on Twitter: @WDavidPower
If you build it, will they come?
One of the most memorable lines in film history comes from “Field of Dreams.” Shoeless Joe Jackson, a baseball legend from the early 1900’s, convinces an Iowa farm owner named Ray Kinsella to build a baseball field in his cornfields, telling him: “If you build it, he will come.” Kinsella builds the field and, soon after, members of the 1919 Chicago Black Sox show up to play.
While building it first worked for Ray Kinsella, does this happen when it comes to launching new products and services ?
Many growth companies make the mistake of launching new offers before they understand the market. (see Why Growth Companies Stop Growing) They believe the value of their new offer will be so obvious to customers that all they need is a great engineering team and a predatory sales force and they can race their idea to market. This build it and they will come approach to product development is also known as technology in search of a market. It’s the business equivalent of oil well wildcatting — the high stakes search for oil in unchartered territory. As a business model, it’s terribly capital inefficient.
Innovators often confuse new technologies with new markets. Location-based services (LBS) for tracking mobile users, near-field communications (NFC) for secure mobile payments, and infrastructure-as-a-service (IaaS) for cloud computing are all important technologies, but may never become the foundation for building great companies. The VC firm Kleiner Perkins created a Java Fund to invest in Java startups; what they learned was that Java wasn’t a company category — it simply became part of the fabric of software development. Open source software is only valuable if it solves a business problem better and cheaper than commercial software; once promising open source alternatives from SugarCRM,Alfresco and Pentaho have yet to gain real traction.
There are two arguments for building a product before validating a market.
- First-mover advantage: “If we don’t launch it now, someone else will emerge as the category leader.” This worked for Facebook but not for ESPN’s Mobile Phone, HP ‘s tablet computer, Solyndra’s solar panels, and countless other half-baked new offers. Furthermore, being the first mover guarantee does not guarantee success: consider Altair (first PC), Netscape (first browser), Wordstar (first word processor) and Excite (first search engine).
- Customers don’t know: Steve Jobs made clear, “We do no market research. Our goal is to design, develop and bring to market good products … we trust as a consequence that people will like them.” Similarly, Henry Ford once said, “If I’d asked customers what they wanted, they would have said ‘a faster horse’ ”. Every century we get a genius or two like Ford and Jobs. Unfortunately, most innovators are not as gifted, and there are many more examples of technology in search of a market that fail like the Segway transporter, Window Vista and HD Radio.
Technology in search of a market is an expensive risk that businesses can avoid by answering two simple but enlightening questions:
1) Who is the customer?
2) What business problem do we solve?
If a company cannot answer these questions, it may have a technology but not a market. The best use of seed funding is not to build and launch a first release, but instead to prototype with enough customers and ‘pivot’ until you find a big, unaddressed business problem. (see How Growth Companies Can Stay ‘Lean’).
One lesson growth companies can learn from baseball is that every team of 9 needs a manager to focus on the big picture. Similarly, every ‘new offer’ team needs at least one customer champion for every 9 developers to be sure to find their field of dreams.
Follow Dave on Twitter: @WDavidPower
How Growth Companies Can Stay ‘Lean’
The lean movement has caught fire with entrepreneurs, thanks to Eric Ries, Steve Blank, and Ash Maurya. But how important are concepts such as minimum viable product, customer development and pivoting to larger growth companies?
Lean development means creating a successful offer before running out of resources — which is as important to growth companies as it is to startups. As early stage companies mature, the process for creating new offers gets bogged down by internal processes: market requirements documents (MRDs), product review committees, business plans and more. Smart growth companies are using lean concepts to streamline their processes.
Being lean is not about being cheap – it’s about speed. If an idea is going to fail it should ‘fail fast’, leaving the company with the market learning, time and resources to try a different approach. The more at bats you can get with limited funding the greater the chance of getting a hit … even better, a home run! … before time runs out.
Growth companies can benefit from three important lean concepts:
- Minimum Viable Product: Get to market quickly with a basic offer
- Customer Development: Learn continuously from customer behavior
- Pivot: Change the offer quickly if something is not working
Minimum Viable Product
The traditional new product development process has many steps: conduct market research, create a market requirements document (MRD), design and develop an offer, test a beta version with early adopters, limit feature creep, release Rev 1.0, and hope for the best. The time from project launch to real market feedback can be a year or longer.
The concept behind the minimum viable product (MVP) is to get into the market as quickly as possible with the most basic offer so that customers can drive decisions about features and business model. How ‘basic’ can this offer be? Dropbox proved that the minimum viable offer can be as basic as a web landing page with a description of a new offer to capture interest and prospect names. Inc Magazine describes a similar MVP approach used by TPGTEX solutions.
Customer Development
In the new lexicon of lean, customer development should happen in parallel with product development. That is, companies need to focus more on developing new customers — through trial and error with new offers. Steve Blank describes the Four Steps to the Epiphany:
The key is to iterate on Steps 1 and 2 to validate the new offer before investing resources in scaling a new business. This critical step is called the pivot.
Pivot
What happens when customer feedback on your MVP does not support the business model? You pivot. That is, you make one or more changes, grounded in customer learning, to find a better business model. These changes might involve features, market segments, pricing, channel, or other business model elements. A sophisticated version of the pivoting process involves market experiments, or A/B testing. Each experiment provides feedback on what to keep and what to get rid of as the company pivots its way to success.
Pivoting is not just for startups. Larger growth companies can also avoid failure by pivoting in time:
- The Nespresso coffer maker and its proprietary coffee capsules were too expensive for either offices or consumers; the business was nearly shutdown. However, by targeting wealthy consumers with a personalized home delivery service (the Nespresso Club), Nespresso found a large growth market in a highly profitable segment.
- Nearly bankrupt in 2001, Amazon recovered from an over-investment in its worldwide logistics platform by recruiting other retailers such as ToysRUs as customers. Ten years later the company has pivoted its platform business for online retailers into the marketing leading cloud computing service: Amazon Web Services.
Action Items for Growth Companies
What steps can growth companies take to become more lean?
- Use customer feedback from Day 1 to design new offers. Get members of the ‘new offer’ team out of the office and in front of customers. In every new offer discussion ask, “What are customers telling us?” (I continue to be amazed at the number of successful companies who don’t talk to their customers.)
- Shift from MRDs to MVPs. Challenge the new offer team to get into the market much sooner with a very basic offer.
- Measure customer behavior versus expectations. When it’s clear that the business model isn’t working, pivot while you have the time and resources.
Follow Dave on Twitter: @WDavidPower
Market Disruption as a Growth Strategy
Every growth company wants a disruptive strategy. But just what is a disruptive growth strategy? And why are good enough solutions like Google Docs so dangerous to market leaders like Microsoft?
I recently heard the master of disruption, Clay Christensen, at a TEDx event in Boston. It brought me back to first principles on disruptive innovation, laid out in “The Innovator’s Dilemma”. His ideas are more relevant now than when he first published them in 1997. And it comes down to this: beware of new entrants with ‘good enough’ solutions.
Photo courtesy of Jon Werner, TEDx Boston
The Disruption Model
Christensen created a simple model of markets driven by innovation. At the high end are ‘luxury’ products and services with the highest price and performance customers are willing to pay for (e.g., Mercedes). At the low end are products and services that are inexpensive but barely acceptable (e.g., the $2,500 Nano car from India’s Tata Motors).
Disruptors sneak up on market leaders (the innovators) by entering an underserved market with a low cost and easy to use offer that’s ‘good enough’ to get the job done. The dilemma for innovators is how to respond to disruptors without cannibalizing their high margin business.
At the TEDx event, Christensen’s consulting firm, Innosight, ran a group game called Innovation Pictionary to illustrate the differences between disruptive innovations (e.g., VisiCalc, Poloroid, Zipcar) and sustaining innovations (e.g., Reebok Pump, Bose noise-cancelling headphones, Gillette 5 track razor). Because ‘sustaining’ innovations are simply evolutionary improvements to existing products, new entrants are wise not to take on incumbents in these arenas.
Sun’s Dilemma
Sun Microsystems confronted the Innovator’s Dilemma during the last decade. The high margin on its server products was protected by its proprietary operating system, Solaris. Nonetheless, Red Hat targeted Sun’s market with a disruptive offer: an ‘enterprise’ server using the Linux open source operating system. What made this strategy disruptive? Linux was ‘free’ and it ran on inexpensive Intel processors.
Initially customers bought Red Hat servers for simple applications such as web servers. However the economics of Linux were so compelling that innovations such as ‘clustering’ and ‘virtualization’ enabled Linux to match the performance of Sun’s high end servers and compete for ‘mission critical’ applications. Without a response to the Red Hat challenge, Sun was ‘boxed’ into a shrinking high end segment of the server market and ended up as a division of Oracle.
Could Sun have responded differently? It wouldn’t be called a dilemma if there were easy answers. What’s remarkable about this story is that two decades earlier Sun had used a disruptive strategy to topple Digital Equipment. Sun combined commodity hardware with its ‘open’ Unix operating system – later branded Solaris – to attack Digital’s proprietary and expensive VAX/VMS servers.
Microsoft’s Dilemma
How many more features do you need in Word? The Microsoft Office Suite is a dominant but expensive and over-featured market leader. Can Google Docs disrupt this market? It’s popularity with high school students suggests it’s becoming good enough: free, web-based, and designed for collaboration. Unfortunately, Google Docs users are not yet able to exchange word processing docs or spreadsheets with Office users. Will Google disrupt? Can Microsoft sustain? This will be an interesting battle.
A History of Disruption
The Innovator’s Dilemma is not new, nor is it limited to technology markets. For example, Fidelity Investments disrupted the stock brokerage market by introducing the mutual fund. This service allowed small investors to have diversified portfolios without expensive advisory fees. Here’s a partial list of other well-known disruptive products and services:
|
INCUMBENT |
DISRUPTOR |
| Single Lens Reflex Cameras | Kodak “Brownie” Camera |
| Steel Mills | Mini-mills |
| Retail stores | Wal-Mart |
| University education | MIT “Open Courseware” |
| Accounting services | Quickbooks |
| Long distance phone | Skype |
| Printed books | Kindle |
* * *
Back to the car market. Mercedes can safely ignore the $2,500 Nano for now. But recall that Toyota entered the US car market with a barely acceptable Corona in the 1960s; over time, Toyota used its foothold to create the Lexus and compete directly with Mercedes. So what if Tata acquired Tesla Motors – the Silicon Valley startup behind a sporty but expensive all-electric roadster – and introduced a $25,000 Telsa roadster? That could be pretty disruptive.
Follow Dave on Twitter: @WDavidPower
Ten Things the New CEO Needs To Do
You’ve just been hired as the first ‘professional manager’ in a growth company run by the founder. What’s your plan for the first 100 days?
I asked David Patrick to address my Harvard Extension class on this topic. David is well qualified having served as the first professional CEO at Ximian, XKoto and now Apperian. Here’s are his guidelines for CEOs joining founder-run companies (captured in the first person):
1. Get to Work. Don’t show up just to be a manager. Telling everyone what to do is not a full-time job. You need to find a role for yourself to contribute immediately to set an example and build respect.
2. Find a Role for the Founder. The company can’t have multiple leaders. You need to find out what role the founder wants on the org chart. It could be CTO, Business Development, Services, Strategy or a comparable executive role. It’s important to get past this awkward issue quickly.
The worst example of a CEO coming into a founder-run company was John Sculley who joined Apple and then fired Steve Jobs. Sculley acknowledged later that this was his biggest mistake.
3. Make Sure the Founder’s Not Going Anywhere. Some founders may be thinking, “How long do I have here now that we have a new CEO – one year, two years, the length of my options?” It’s important for the new CEO to address this right away. I make it clear: “If you’re not staying, I’m not coming on board.”
The VC’s say that the average venture now takes 9 years before realizing an exit. So I often say to my business partner, the founder, “Remember … 9 years!”
4. Don’t Change the Culture Overnight … but you may have to change the culture. You can destroy productivity by moving too quickly to a more professional business culture with normal business hours. But over time, the new CEO needs to begin this transition.
At one company I had executives from HP visiting and was looking frantically for the founder. There were developers in the office who had been working all night and I couldn’t wake anyone up. Finally someone told me the founder was in his office. It was true – he was asleep on the floor of his office and we could not wake him so we started the meeting without him.
Some of the engineers were in the office for days so I always kept a stack of fresh T-shirts in case we had a customer visit.
5. Don’t Make All The Decisions. I mentor — I don’t make all the decisions. You eliminate ownership by the team when you make all the decisions. Any small company will need to change strategies many times, often returning to the investors for more capital. We all need to share ownership in success or failure.
6. Stay Positive. In the growth stage there are usually eight ways you can be a failure but only two ways to be right. Many days I go into work knowing the deck is stacked against me. So every day I go into the office and think about how we are going to win.
7. Pick Early Goals and Exceed Them. When I arrived at Apperian I defined success as (1) raising money, (2) recruiting a team, and (3) developing a two- year operating plan with deliverables and dates. I wanted to overachieve on all of these goals to give a sense of momentum.
8. Hire “A” Players. I try to hire people smarter than I am. “A”s hire “A”s while “B”s hire “C”s. Hiring is the most critical task for the CEO. The first hire is the most important because it sets the tone – take twice as long on your first hire.
9. Have Some Fun. It’s important to celebrate every milestone without trying to be everyone’s best friend.
10. Have a Supportive Partner. My wife added this. You need to have someone who understands trips with no notice, interrupted dinners and other sacrifices that go along with running an early stage company.
Follow Dave on Twitter: @WDavidPower
Bowstreet and Groove: A Tale of Two Ventures
Whatever happened to Groove Networks and Bowstreet? Both were founded in the late 1990s by industry veterans, and backed by smart investors. Groove Networks created collaborative software for workgroups under the direction of Ray Ozzie, the brains behind Lotus Notes. Bowstreet introduced web services for accessing applications over the web – long before the era of cloud computing – under the leadership of Frank Moss, the founder of Tivoli systems.
Yet 7 years later, both companies were still struggling to gain traction. Each was stuck on its first S-Curve, with sales of $20M or less. (See “Why Growth Companies Stop Growing”). In 2005, Groove Networks was acquired by Microsoft and Bowstreet was acquired by IBM.
Stuck on the S-Curve in 2005
What are the barriers to growth for companies like Groove Networks and Bowstreet? Each had a great idea and vision for growth, but couldn’t scale revenues. We may never know, but in my view there are five areas where things can go wrong: market, product, business model, team and capital. Any one of the five can keep a growth company from reaching its potential.
Finding the Groove.
On the surface, Groove Networks had a lot going for it:
Team? It doesn’t get better than a team led by Ray Ozzie, now the CTO of Microsoft. √ Capital? With $155M from Accel Partners, Intel Capital, and Microsoft, Groove was well-funded. √ Product? Groove’s collaborative workgroup software went on to become the foundation of Microsoft’s successful SharePoint product line. √
Here’s where things may have gone off track:
Market. Groove was too early for the market. X In creating a new market, Groove had to find customers willing to take on the risk of something new. The problem with innovators as customers is that there aren’t enough of them to generate meaningful revenues. The rest of the market has to be educated on the new solution and convinced of an ROI – a lot of work for an early growth company. To avoid overspending on product and market development, a growth company needs to gauge the timing of broader market acceptance.
Business model. Groove couldn’t close Fortune 500 deals. X Groove’s product was most useful when installed on every desktop, but Groove didn’t have the distribution and support to make large, complex sales with corporate IT departments. Ray Ozzie confirmed this point:
“It’s very difficult for a small, independent vendor to make headway in today’s buying environment. Corporate I.T. buys from the big incumbents—Microsoft, IBM, Oracle.” – Ray Ozzie, Baseline Magazine, 5/4/2005
In acquiring Groove, Microsoft knew it could solve this business model problem with its dominant channel to desktop computers.
Positioning Bowstreet.
Like Groove Networks, Bowstreet was led by an all-star executive team. √ It had $140M in capital from over 25 global venture capital firms, investment banks, and corporate investors. √ Bowstreet’s biggest problem was explaining its product to its customers and developing a market. X
Can you make sense of its positioning statement?
“The Bowstreet™ Business Web Factory is a web services development and assembly platform that automates the creation and maintenance of complex web applications on demand. The Business Web Factory enables Fortune 500 enterprises to form dynamic, distributed networks that leverage the strengths of the entire value chain while providing rich, streamlined web experiences for their employees, partners and customers.” – Bowstreet Website, 2001
Maybe they could have called it a simple approach to building information portals.
Another challenge was making money with a business model based on the XML open standard that Bowstreet championed. X Since any vendor could implement XML solutions, Bowstreet had to out-execute all of them in creating interoperability tools. This approach requires heavy lifting, with significant upfront investment and lots of arms and legs to make things happen. At its peak, the company had 350 employees.
There wasn’t much of a stand-alone market for Bowtstreet’s developer tools but these tools did make it easier to turn an application server into an information portal. It was no surprise when IBM acquired Bowstreet and bundled its tools with the IBM Websphere application server.
The Five Barriers to Growth
Like Groove Networks and Bowstreet, every company has its unique challenges. However, these barriers to growth generally fall into five categories:
- Market: There’s no market, the market is too early or the market is too small.
- Product: The product doesn’t solve a problem (technology-in-search-of-market), or its benefits are simply nice-to-have’s.
- Business Model: Pricing, margins and operating costs are such that the business won’t scale to profitability.
- Team: The business outgrows the leadership team.
- Capital: The company is unable to attract growth capital and assemble a growth stage board.
Overcoming these barriers is the subject of another blog.
Follow Dave on Twitter: @WDavidPower
Why “Growth” Companies Stop Growing
Not all growth companies keep growing. Promising companies that pass $10M in revenue can lose momentum before they reach $20M. Most growth companies are sold before they reach $30M in revenue, long before they’ve realized their full value.
Why do so many “growth” companies stop growing?
After two decades as a growth company leader and advisor I’m convinced that taking a company from $10M to $100M+ in revenues involves its own set of challenges. Companies that are not prepared for the transition from startup to growth company can get stuck. This is bad news for investors and employees, and worse news for our economy – growth companies create two out of every three jobs (Kauffman Foundation, SBA).
I created this blog series to share the tools and best practices that can help growth companies scale from $10M to $100M… and beyond.
The $30M ceiling. A bewildering 70% of companies are sold before they reach $30M in revenue, well short of the $100M or so in revenue they need to go public. Why do former darlings of venture capital – companies such as Amp’d Mobile, Mazu Networks, and Ounce Labs – get stuck?
Software Company Exits 2007-2010
Source: Shea & Company
Growth follows an S-curve. Successful new products are like bacteria in a Petri dish. At first they grow exponentially, taking advantage of an abundance of early adopters, but then growth tapers off as the opportunity for the first generation product runs its course. To sustain growth the company needs to reach new markets with better products through more efficient channels…all while supporting customers of the first generation product. Unfortunately, entrepreneurs get blind-sided by this predictable speed bump. The financial forecasts of early growth companies assume that exponential growth will continue unabated – as though the Petri dish kept getting bigger. When the reality of the S-curve becomes apparent the company finds itself unprepared to drive the next wave of growth.
The S- Curve: Expectations and Reality
Successful growth companies plan ahead for this inevitability. Two good examples are iRobot and Apple.
IRobot’s Innovation Engine. Founded in 1990, iRobot first introduced robots for the military to help soldiers with reconnaissance, disposal of land mines and other dangerous missions. Over its first 12 years iRobot built a $14M business for the government market. Then in 2003 the company introduced robots for the home: Let Roomba to do your vacuuming while you create playlists for your new iPod. iRobot’s consumer products put the company on a growth trajectory that led to a successful IPO in 2005.
If growth in home product sales ever tapers off, what will iRobot do for an encore? iRobot anticipated the need to develop a pipeline of new product lines in order to sustain growth. In its IPO filing in 2005 the company described its Innovation Engine — a process to create future robotic products for vertical markets beyond the military and the home:
“Our innovation engine, comprised of our robot technology, roboticists and robot market experience, enables us to design and introduce new products rapidly in a wide range of markets:
In 2009, iRobot announced a Healthcare Division to serve the aging population. A new line of robots will monitor patients, remind people to take their medications on time, and lift and transport objects. Will iRobot find its next S-curve? Whether healthcare or another vertical, I think it’s just a matter of time.
Apple’s Golden Decade. Steve Jobs has introduced one breakthrough product after another – first the Mac, then the iPod, then the iPhone, and most recently the iPad – while marketing and supporting all of its other products. It’s hard to appreciate Apple’s achievements over the last decade without looking at the growth of its individual product lines.
If Apple were merely a computer company, it would have had a decade of solid growth on the strength of the MacBook which gained share in the desktop market. But in 2004 Jobs performed his first miracle, creating a new product category with the iPod. Three years later, iPod and iTunes had doubled the company’s revenues. However, iPod sales peaked in 2008 and the company needed its next S-curve.
Over the next two years, Apple introduced two more category-creating products. The iPhone and the iPad again doubled the company’s revenues. What’s more, the iPhone positions Apple in the most explosive growth market since internet computing – mobile computing. I’m sure that Steve Jobs is already challenging his team to find new, extra-large Petri dishes.
Apple Product Revenues
Finding the Next S-Curve. What iRobot, Apple and other successful growth companies have learned is that the search for the next source of growth is never over – and can never start too soon. The time to search for the next growth path is when the current product or service is hitting its stride. A growth company has an ‘innovation window’ to develop and launch new growth strategies before the current business matures.
© Power Strategy Inc, 2010
Unfortunately, companies encounter a number of roadblocks during this critical innovation window. The most common roadblocks fall into five areas: market, product, business model, people and capital. The causes of these roadblocks are outlined my blog, “The Barriers to Growth“.
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This blog describes a new program I created for the Harvard Extension School called Strategic Management of Growth Companies (http://www.extension.harvard.edu/courses/23550) . This program, offered Tuesday evenings during the Fall Semester, prepares aspiring leaders to manage growth – typically in companies with $5M to $200M in revenue and annual growth of 50% or more. I teach participants about decisions in four critical areas:
– Strategy
– Execution
– People
– Cash
The curriculum, described below, is a combination of case studies, simulations, role play exercises and guest lectures designed around the unique challenges of growth companies. Perhaps the best feature of the program has been the shared experiences and spirited debates among future leaders, business partners and others interested in growth companies.
Growth Company Challenges
Growth companies are the engine of our economy. No longer startups, these private companies are defining new markets, creating new jobs, and building value through innovation and disruption. Massachusetts is home to nearly two hundred Inc 5000 companies, including Carbonite, eClinical Works, Second Wind, and Zipcar. Sustained growth, however, creates a unique set of management challenges. Many would-be growth companies stall as their business models mature and they outgrow the processes and teams responsible for their early successes (Why “Growth” Companies Stop Growing). Often these companies are acquired before they reach their full potential.
Course Design
Strategic Management of Growth Companies is designed to address theses issues and to help more companies make the successful journey from $10M in revenues to $100M and beyond. Readings draw from respected growth management experts including Clay Christensen, Jim Collins, Orit Gadiesh, Geoffrey Moore, Verne Harnish, Patrick Lencioni and Bill Sahlman. The program includes 15 sessions as described below:
Part I: Growth Strategy. The first four sessions address managing growth, market opportunity analysis, market selection and new product launch. Case studies include Linden Lab, Black Duck Software, HubSpot and Apple. Tim Yeaton, CEO of Black Duck Software, was a guest speaker this year.
Tim Yeaton (CEO, Black Duck Software)
Part II: Execution. The next three sessions focus on execution planning, sales and distribution management, and go-to-market tactics. Participants assess ZipCar’s business model, develop a distribution plan for Mercado and manage the go-to-market strategy of MM Orthopedics, a business simulation, through 8 quarters of growth.
Part III: People.Three sessions are devoted to the topics of building teams, scaling the organization and implementing change. Participants discuss founder transition issues at Socaba, Meg Whitman’s impact on eBay as a new CEO, and decisions to implement change at Ben & Jerry’s Ice Cream. David Patrick, former CEO of Ximian and currently CEO of Apperian, visited the class in March to talk about the 10 Things The New CEO Needs To Do.
David Patrick (CEO, Apperian) and the 2011 SMGC Class
Part IV: Cash. The next four sessions focus on financing growth, managing a board of directors, growth through acquisition, and exit strategy. Case studies include Aspen Aerogels, eClinical Works, and Nantucket Nectars. Omar Hussain, CEO of Imprivata, discussed his approach to managing successful board meetings and Steve O’Leary, founder of investment banking firm Aeris Partners, will shares his insights on exit strategy.
Omar Hussain (CEO, Imprivata)
Part V:Success. The final session will evaluate and contrast the growth company leadership strategies of Howard Shultz, Meg Whitman and Steve Jobs.
* * * * * * * *
This course will be offered again in the 2012 Fall Semester. Please spread the word about this course to future leaders, business partners and others with a passion about growth companies. The pilot program has been a terrific experience for the class, our guest speakers and me.
For Growth Company Leaders ... 