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Innovation Machine

| Posted by Jonathan Irwin Follow 0 Followers on Dec 29, 2014. Estimated reading time: 11 minutes |

Technology has changed the game. Today, every company, in every sector is vulnerable to competition and disruption. The power has shifted from companies to consumers, and markets are changing. It’s an exciting time for small, nimble companies. But for the big incumbents, it’s terrifying. Or at least it should be. The little guys are coming to eat your lunch. They are more innovative, creative, and faster. Startups are scaling at a global level. The good companies know this, and are fighting back with R&D Groups, Labs, and Innovation Teams of their own. But it’s not enough to simply put the same people in a different room, arm them with Post-It notes and Sharpies, and hope for the best.

How do you do it? How do you break down years of learned behavior, functional silos, and broken processes? How do you start making products and solutions customers care about? How do you create new, disruptive, and viable businesses, for new markets, in a new way? You have to pull out all the stops and commit to progress. Take cues from StubHub, Etsy, Medium, and other small and large companies that work this way.

“If you want to disrupt, you have to be disruptive.”

Developing and launching new businesses requires a platform. Teams need to work in a new way, and be led, staffed, and measured differently. Let’s explore some of the big components of the platform for delivering innovation.

The new product studio at Neo.com

The Studio

The Studio is more than just a space — it’s a collection of people, thinking, behaving, and working differently — to create the new businesses that will move your company into new markets. There are many components to great studios, and many reasons studios fail. The difference between the successful and failed studios comes down to leadership, company/studio alignment, in or out strategy, smart people, and a physical space.

“Anything coming from the studio that’s not aligned with the strategic initiatives and goals of the company is simply innovation theater.”

Leadership

Who is this leadership role? Where do they sit? And who do they report to? Because new product ventures are inherently risky, they need trust, budget, autonomy, and a direct line of sight to the strategic imperatives of the company. To ensure this, I think it’s important that the studio head report directly to the CEO (or similarly empowered individual). This is critical. Political positioning and traditional budgeting reviews takes time the studio doesn’t have. The studio needs to be executing quickly, and alignment is crucial. Why is this alignment key? Because, anything coming from the studio that’s not aligned with the strategic initiatives and goals of the company is simply innovation theater — the act of designing creative solutions to problems your customers don’t have. Or worse, solutions your company can’t own (we’ll talk more about this later in the article).

Company/Studio Alignment

What’s the goal your company is trying to accomplish? New, disruptive products? Brand awareness in a new market? New products that support your core? Increasing revenue? You have to be clear about it, and put it on the wall. Robert Kaplan has a great video about leadership, vision, and priorities you should watch.

The final note on leadership and alignment is to clarify that alignment doesn’t mean lock-step. Your studio needs independence and autonomy from the mother ship to enable creativity and innovation. If we’re all tied to the same release cycles, the same way of doing things, and the same measurements — your new ideas will fail. Align, but practice autonomy by aligning small, cross-functional, dedicated teams to accomplishing an outcome, and measuring them using an innovation accounting framework (which I’ll talk more about later in the article)

In or Out Strategy

Right now you’re saying, “This studio idea is great, but all these ideas that come from outside always fail.” That’s right. Ideas that are intended to scale internally, don’t align to strategic initiatives, get measured on ROI, and don’t have a safe place to land inside the core company will fail. For opportunities destined for the mothership, it’s another of the studio lead’s responsibilities to foster executive partnerships so that the key stakeholders feel heard, involved, and ownership. Engage business owners and product teams early and often in the process. Invite them to observe daily standups, participate in weekly decision meetings, and challenge them to ask hard questions in your monthly business reviews. Get these people on your side. Because when things go well, they’ll want to know how to scale these ideas. But if the new businesses can scale on their own, outside of the company, they should. If we’re lucky, 25% of the ideas the studio explores become viable, new businesses — some of which will need to be adopted and welcomed into core product. These relationships are so important to foster and grow from day one.

Smart, Entrepreneurial People

The final component of the studio is, of course, it’s people. If you take all the people in your current organization and put them in a different room, with white boards, Sharpies, and Post-Its, they won’t automatically be innovative. The studio lead needs the vision and authority to recruit, hire (and fire when needed) differently. Look for talent inside your company, but it’s highly likely you’ll need to look outside at first. You may also consider acquisitions as a strategy for recruiting talent. But, as your studio model proves itself people in your company will want to work this way – but it takes time to build momentum. At Neo, we hire smart, entrepreneurial, designers/engineers/product strategists. The key in that statement is the order in which the attributes appear. 1) Smart 2) Entrepreneurial 3) Skill they have. To create new and disruptive businesses, you need people who think about the “why” first. The why is the customer and business problem. The “how” — what technology you use, how it looks, or how it’s positioned comes next. These people use the skills and experience they have to solve painful problems in the market. And they are focused on outcomes — the changes that occur in the market because of a product, service, or feature they’ve created.

If you give these people an environment where they are aligned but independent, encouraged to collaborate and experiment, inspired to solve painful problems with elegant simple solutions, and rewarded consistently you have accomplished step 1. Now, what do we do with all the ideas your company, and these people come up with?

Idea Flow

Every company has ideas. But how do you differentiate between ideas and opportunities, and how do you make informed decisions on where to invest? Start with the goal. If these ideas became successful businesses, how would they help your company accomplish its strategic initiatives? In that context, quickly rank your ideas, then deep dive into each one in priority order. Carve out one day per idea — you can do 5 in a week, or 4 over a month — but the goal is to validate/invalidate each ideas opportunity impact. A side-effect (which may, in fact, be more valuable than your initial list of ideas themselves) is what you will learn about your customer, their problems, possible solutions, the competition, and new market opportunities in the mean time. These focused days are learning machines. Fire them up!

One-Day Learning Machine

For each learning machine session, gather a small team (3–5 people) of people who are excited about the idea — A business or product owner, a designer, an engineer, and anyone else who could be a potential stakeholder — and hide away in a conference room, or better yet, off-site location. Run through an assumptions exercise using a Lean Canvas, do a simple competitive analysis, and double check the market size. Finally, schedule a couple one-on-one conversations with real customers to build some empathy and hear their problems first hand. A great prerequisite for these conversations is Giff Constable’s Talking To Humans. It’s a fun, quick read, and you’ll find the assumptions exercise on page 68 of the free PDF download.

Now your day is over. Ideally you’ve determined if this idea represents a real opportunity, or not. Best case scenario you’ve found something worth exploring. Worst case? There is no worst-case. You’ve spent ONE DAY validating or invalidating an idea your company is interested in.

After you’ve run a few of these sessions against your top ideas, you should have one or two viable candidates worth making a bigger investment in. For each idea, assemble a small studio team (I like one-pizza teams: one product designer, one product developer, and one product manager), fund them for a three-month time block, and give them the freedom to accomplish an outcome. The outcome should be a combination of qualitative and quantitative metrics that will help you make the next investment decision — to kill, pivot, or persevere. But how do you know what to measure?

Innovation Accounting

Traditional financial accounting is a great way to run a business — and the most efficient way to kill new ideas. We have to agree on a new framework for accounting against early-and-mid-stage businesses before they’ve gained enough traction to be measured on revenue. This framework is based on three phases of product development and Dave McClure’s Pirate Metrics. Each phase has it’s own set of metrics that matter.

“Do you have a problem worth solving?”

Problem Phase

Is the addressable market large enough to be interesting? And is the problem painful enough that people are actively looking for, or paying for solutions? This phase is all about customer development and qualitative data. Most of your time will be spent Talking To Humans, and running problem interviews.

  • How many customers have you reached out to?
  • How many customers agreed to have conversations with you?
  • How many conversations have you had?
  • How many of those conversations opt-ed in for follow up conversations?
  • How many of those conversations referred you to a friend?
  • Is the problem worth solving?

These questions measure Acquisition and Activation. They seem simple, but they’re important indicators of problem/solution fit. Remember, the most successful businesses provide elegant solutions to painful problems in an addressable market. When you’re asking people about their problems, ask “How are you solving this problem today?” If the answer is something simple, you should question your assumptions again. But if the answer is something complex and convoluted (hacking systems, big compromises, therapy!), you’re on to something interesting. You’re looking for pain.

“Do you have a solution customers will adopt and pay for?”

Solution Phase

Again, this phase is mostly about customer development and qualitative data, but now you get to play with solutions. Start by testing value prop messaging & solution sketches. As your confidence grows and uncertainty decreases, increase fidelity by testing paper prototypes, buying AdWords, and creating simple marketing landing pages. Betterdecisions.co is one of my favorite examples. On this landing page, the company has learned that you have the problem, that you’re willing to pay for it, how much you’re willing to pay, and gets your email address – before they’ve built any product! Brilliant.

  • How many customers asked to join an early Beta? Were they prompted?
  • How many customers referred you to a friend?
  • How many customers offered to pay for your solution?
  • How are your ads converting to landing page views?
  • How many people signed up for an email newsletter?

These questions are also measuring Acquisition and Activation, and give you a signal about how your solution is being received. Experiment early and often with your customers to find the best performing solution. Then it’s time to move on.

“Do you have a product that keeps customers coming back?”

Product Phase

Now you’re on to something. You’ve got confidence in your metrics, and customers are activating — maybe even actively using your MVP (Minimum Viable Product – the most simple product you can build to test and validate your business model). Because we love our customers, you should continue low-fidelity customer development and gathering qualitative metrics, but now we’re building stuff to test.

  • What’s your acquisition rate, and cost/channel?
  • What’s your activation rate?
  • What’s your retention and churn rate?
  • What are your referral rates and channels?
  • How do you define active use, and how many active users do you have?

These questions are measuring Acquisition, Activation, Retention, and Referral. And if you’re really on it, you’re making some Revenue, which completes the Pirate Metrics framework — and pushes you into the next phase. Now you’ve got a business. Remember those traditional accounting frameworks? You can handle them now.

Firing Up The Machine

The framework is simple. But creating an idea flow that identifies meaningful opportunities, a studio where great ideas can thrive, and an accounting framework that enables emerging businesses is hard work.

The first steps are aligning on a goal, and getting support from the C-level. Without these, you’re lost. David Bland, a startup Advisor at Neo says, “You can’t just tell your people to create new disruptive products, you need to design an environment where these products can emerge.” He’s right. Start small, and experiment. Make some progress and learn from your mistakes. The most important step is the first one. And don’t forget, if you want to disrupt, you have to be disruptive.

Thanks to Sam McAfee and David J Bland

About the Author

Jonathan Irwin is the Managing Director of Neo San Francisco. Jonathan is a product guy. He loves working with data and small, cross-functional teams to make usable, feasible, valuable solutions to real, painful problems that exist in a reachable market. He's passionate about aligning fitness & tech, and loves disruption in personal finance, education, and health care. At Neo, he represents product strategy, and specializes in getting shit done.

 

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Innovation? by Alejandro Quesada

This article sounds so corporate (stakeholders, cross functional teams, ROI, Robert Kaplan), not innovation

Re: Innovation? by Jonathan Irwin

Well, you're correct Alejandro. This article was intended to provide a roadmap for how to build innovation capability in large companies. Small companies have less political and organizational friction keeping them from innovating. At the end of the day, it's about aligning creative, entrepreneurial people to outcomes the organization wants to accomplish. This is significantly more difficult in organizations that are designed for predictability and risk mitigation. Thanks for your comment!

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