The life cycle of innovation

- When considering the lifecycle of any new business model, product, or innovation, there's a number of models that we like to consider. The first is competitive advantage, an idea introduced by Everett Rogers in his book "The Diffusion of Innovations." And what competitive advantage talks about is the idea that when people introduce new innovations, other business models, products, or services into the market, they initially get an edge, a competitive advantage, over their competitors. Now, when other competitors start to see that idea, innovation start to get traction, they start to mimic it, to copy it. And eventually these ideas become commoditized over time. Similarly, when we think about these ideas, it's also the market that they're targeted at. And we talk a lot about Jeffrey Moore's idea of the crossing the chasm, where he talks about innovators, right through to laggards, all the different people that are involved when they try to reach different markets for innovations. Now, typically innovators are the people who like to play around with new ideas. They're interested. They often have pain about a problem that they really want to solve, and they're happy to be satisfied, often with solutions that are less than ideal or perfect in order to service that need that they have. But then the goal is, as you reach these markets and early innovators start to play around and use your different ideas, tools, or products that maybe some more early adopters start to get hold of this product and want to use it. Now, this is normally the heartland of where innovation takes place, but in order to scale and grow and reach wider audiences, we often need to cross the chasm to move from the early adopters to actual early majority. And this is when big products start to have a real impact. The other thing to think about in this idea is, change is also very similar. We have people who are naturally open to innovation and change that are innovators, but we also have laggards who are resilient to change and often fear it. If you put laggards into a high change environment, you don't break the system, you break the people. So as we know what the life cycle of innovation, these adoption models are technology innovation happen. If they can cross the chasm and gain some traction, they start to grow. They become a mature market, and over time they start to decline, eventually disappearing. And this is very much the truth of the norm that we've expected for many years, or what we've seen in a lot of the time in the industrial age. But that time is no longer with us. Disruption is the new normal. We're starting to see people, small groups of people, be able to introduce new products or business models and scale them infinitely in very short periods of time. Disruption is the new normal. It isn't a disruption in itself. And there's many examples that we see like this in the market. One of the obvious ones was the example of what happened to the telecommunications space with the intervention of WhatsApp. Now imagine you're a head of a telco in 2005. You're looking at the revenue coming in from SMS, every diagrams going up and to the right, you're laughing. You're walking into every board meeting going, "Look at the rewards I'm going to pick up this year." It's amazing. And then suddenly in 2009, a couple of people get together. They hire developers from rentacoder.com and they start building an app, a messaging app. And within a short period of time, all their revenue in the market flips. By 2014, WhatsApp was handling over 7 trillion thousand messages a day. That's 1000 per person. By February 2017, it has become the biggest messaging app in the world with over 1.2 billion users. In an instant, the market has changed. And then you start to think about how they made this change. They had a very narrow focus. They focused initially on just simple messaging, but now they've been able to expand that market into phone calls. Actually, who pays for international phone calls anymore? They've totally reshaped the market and pushed the legacy organizations, or traditional organizations in the telecommunication space, squeeze their margins. Startups see margin as opportunity to make new businesses and disrupt existing organizations. So how do you respond? One of the things we focus a lot when working with companies is helping them have a balanced portfolio of options, optionality built into their business model, their products and services that they offer. We talk about the three horizon model. Now in horizon one, it talks about your current business models, the ones that are executing well and often generate the large majority of your revenue. Horizon two is the bets that will keep the business alive tomorrow. What are the new ideas that you're starting to grow or scale in your business that will be your future success after the horizon one initiatives slowly start to decline? And then finally, there's horizon three, your out there, big bets about what could have potential have an impact on the business on the day after tomorrow. Now when we spend time focusing the clients, it's helping them understand that they need to have a balanced ratio, our bets, across these different horizons. The things that are making you successful today are not going to be the things that make you successful tomorrow, so you need to be managing that transition. The lifecycle of innovation tells us that no business model will remain forever. All business models are transient. So we need to be managing those different horizons and making sufficient investments in each one of them to give us optionality and hope about how we can survive in the future. Classically, how we like to talk about these revenues is 70, 20, 10. And this was a technique that was adopted by many organizations who've embraced this model. They think about putting 70% of their investment into horizon one, to run, operate, and manage their existing businesses that generate large proportions of the revenue today. But then putting 20% into horizon two means that they can invest in growing and scaling the business that eventually transition to horizon one in the future. And then finally, putting that 10% aside to invest in those big moonshot bets for the future. Now often, when we talk to companies about this, they really struggle. They seem to be investing all their money into one cash cow to hopefully keep the business alive. And the danger with this is, it's a very fragile business model. It only takes one disruption to potentially wipe away your entire business. So it's important to think about how you manage and balance these different horizons as you're making investment decisions in your organization. The things that have made you successful today are not going to be the things that make you successful tomorrow, or the day after tomorrow. One of our favorite examples is a company called 3M. They specifically designed their investment portfolios to require that over 40% of their new revenue comes from products that have been created in the last three to five years. They're designing a system of work, or investment strategy, that forces teams to explore new ideas right through from horizon three and collaborate with different parts of the organization to drive revenue that is actually going to be realized in the next two to three years. This forces the company to constantly embrace new ideas, new business models. Famously, everyone talks about the Post-it, which again was created by accident. Somebody was working on a sticky glue and a piece of paper and they stuck together. Next thing we had the Post-it Note. What amazing innovation, and often happen by accident. Another company we like to talk about in terms of embracing the three horizon model is Intuit. Intuit has a number of businesses that are successful today. They're examples of Mint and TurboTax are their horizon one investments. For them, they look at the revenue figures that are working in that area, forecasting. They're thinking about how they can constantly grow that business. But their horizon two thinking goes to ideas like QuickBooks online. So QuickBooks, the application itself, is probably the most used accounting application for small businesses in the United States. But now they're starting to move that product online and growing that market, not only in the US but internationally. They see the future of their business using that tool. But they've got some pretty interesting projects that are happening in horizon three. One of our favorite examples of horizon three is an application called SnapTax. Have you ever heard what SnapTax does? Well, go onto the app store. This product has the best reviews, I think, I've ever seen in my life. Five star reviews across the board. People saying it changed their life. And when the team came up with this idea, most people said it couldn't be done. It was ridiculous. We shouldn't do it. It's never going to happen. But Intuit have a unique culture. When people come up with new ideas, they're not asked to fill out massive business cases and funding documents, and go around stakeholders and look for different coercions so they would have their idea invested in. What happens is, they think about the smallest, fastest, possible thing they can do to test that idea. And SnapTax was a great example of that. Instead of worrying about, "Could we do it? Should we do it?" They took action. They put a small team together, gave them a couple of weeks to explore their idea and see what was possible. So what do you think SnapTax does? Well, at the end of the tax year, you take out your W2, you take out your phone, you take a photo of it, and it does your tax return. Done. Amazing. This is the future of the kind of innovations that are happening in Intuit, where they're embracing uncertainty and stopping debating about whether or not we should do this idea, and have a bias for action and testing with it, to see what's possible to create future growth opportunities for the organization. So how did the company find out if SnapTax was even a great idea? Well, they use a very unique set of metrics in horizon three. They talk about love metrics. How much do customers love their product? So when the team started to build SnapTax, they worked closely with their customers to test the idea, to see who would be interested in using the product, and based on how much those customers loved the product, that gave them sufficient confidence to keep investing in it. Today's SnapTax is a future bet for the organization, with wild success and reception in the app store has been testament to that. When you're considering the different horizons in your organization, be aware and think about how you want to make those various different investments. In your horizon one existing businesses, how much investment do you want to put into it? Often people talk about the 70, 20, 10 rule. At SnapTax, they go for 60, 30, 10. We've even heard at Netflix that they put 10 into horizon one and 80 into horizon three, because technology innovation is so important for their business, just like content innovation is. The metrics that matter in each of these horizons are different. In horizon one, you'll be thinking about growth, market share, the revenue that you're capturing from that product. In horizon two, you'll be thinking about increasing the efficiency and how you grow and scale that product. Or in horizon three, how much do customers love your products? What signal or feedback are you getting from people that you're solving a problem that they have? Now it's time for a quick exercise on your portfolio. So the first question is, what is the weight, or investment ratios on your portfolio? Do you have a concept of horizon one, two or three? How much of your investments are in each one of those different domains? Is there an easy place that you can go and see this information? When you take out the purpose of your organization, and then marry it up to your investments, does it make sense? Does it reflect where the business is going? Similarly, when you hear about the key objectives or the strategies that you're trying to work on for the year, how aligned are those to your investment portfolio? Finally, after you've done the exercise to map out how much you're investing in each one of these areas, what do you think it should be? What's the target condition you should be moving to for each of these domains? And what are the steps you're going to do to get there?