Getting Smarter at Failure

Interview – Mark W. Johnson – Part 1

I had the opportunity to interview Mark W. Johnson, a co-founder and senior partner of Innosight, and author of Seizing the White Space recently.

Here is part one of this two part interview:

1. When it comes to innovation, what is the biggest challenge that you see organizations facing?

Organizations don’t fully understand the term innovation. They think about it as some kind of monolithic term. But the fundamental challenge that organizations face with innovation is something most of them aren’t really aware of. That’s the fact that there are really two kinds of innovation — innovation to sustain the core and innovation for creating new business platforms in the long term.

The two couldn’t be more different. They play different roles in strategy. They need to be developed according to different timetables, with different levels of resources and different people, rewarded in different ways.

Innovations meant to sustain the core – like Windows 7 or the next Nokia camera phone – are developed within a company’s current business model and so fit very comfortably within its existing processes. These are generally short- and medium-term projects. The company devotes large teams and substantial funding to and then rightly expects large revenue payoffs pretty soon in return.

But innovations meant to fuel the future – those like the Apple iPhone/iTunes combination or the iPad – need to operate more like start-ups do, starting as small projects overseen full-time by a small group of people given a small amount of funding. And, critically, they need to be understood as long-term seeds for growth. They need to be given enough time – five to seven years in many cases — to find their path to fulfilling their potential before demands are made on them to contribute significantly to the top line.

All too often, companies fail to distinguish between the two and treat all innovation efforts as short-term, core initiatives. So as a practical matter, the people chartered with fueling the company’s future end up having to split their time over too many projects both short and long term. Worse, they subject both kinds of projects to a single time scale and are rewarded with the same incentives. In my view, that’s the critical problem that companies trying to innovate need to confront.

I was just on the phone with the CEO of a large health care company, who was asking, “How are we going to think about innovation?” And I said, “First off, your teams – your game changers who you want to develop your new business platforms — are being asked to do innovation part-time. How are they going to be successful when they’ve got their day job and that job is from a totally different discipline from the one you want them to do as new-growth innovators?” One job is control and execute the core, and the other is create something new.

2. Are any of the boxes in the four-box model more important than the others?

The short answer is no: The essence of a company’s competitive advantage lies in the way all the elements of the model come together. Southwest Airlines’ business model works because all of its elements – flying from low-cost hubs, using a single type of plane to cut maintenance costs, eliminating reservations to increase turnaround times at airports, and so on – come together to fulfill its low-cost, no-frills customer value proposition. Song Airlines was not able to replicate that because it tried to combine elements of a low-cost business model – it emulated the single plane, for instance – with elements of parent Delta’s traditional higher-cost model — union pilots, high-cost hubs, expensive in-flight service, etc. Song never found a viable way to deliver on its vision of low-cost but fun travel for its “discount divas.” Was the concept bad? Not necessarily. But the devil is clearly in the integration details.

In our own work, we use an expanded diagram of our four-box model, which includes many of the aspects of each category (so, say, under Key Resources we lay out the set of subcategories – people, brand, technology, partnerships, channel). As we use it to analyze companies’ business models and to conceive of new ones, it forces an interdisciplinary approach. You have to start thinking about marketing and finance and operations and so on in terms of how they all fit together.

Ordinarily, everyone stays in their silo—the marketing, the finance, the ops, and the supply chain people – they all do their jobs within their silos. That’s why corporations struggle so much with business model innovation and creating new growth. Even the new-guard kind of ventures like Intel Ventures—really all they’re doing is providing breakthrough ideas to feed the core. And the people I’ve spoken with there would admit that. The current model has created the organizing principle that has created the silos in the first place, so it’s very difficult for people to escape it. There’s no way anyone can think of anything beyond what can be delivered inside their current model.

That said, there is an orderly way to go about constructing and implementing a new business model, which generally requires considering the elements of the model in a certain order – devising the CVP first, then considering a range of possible profit formula scenarios, which you narrow down through a set of carefully designed, small-scale experiences in which you work out which resources are truly key to carrying out the necessary processes that allow you to deliver the CVP reliably and at scale. And I can’t emphasize enough that that is a process that takes — not money — but time.

3. What can organizations do to get smarter about failure and to tolerate the long lead times that innovation often requires?

Say a $40 billion company wants to grow 10% a year. That means it has to come up with an additional $4 billion in revenues every year — $4 billion is a lot of growth to get. Companies want to innovate to fill that annual gap, but here’s the problem: The biggest opportunities for transformational growth need to start small and take time to develop. You can’t use transformational growth innovations to keep growing your core year to year.

The only way you can use innovation projects to generate sustained revenue growth from year to year is to manage them as you would, say, a Christmas tree farm. The trees you harvest each year were planted years ago. Successive revenue gains are the result of seedlings planted in successive years and nurtured appropriately as they grow larger. Some companies understand this and build new growth year after year. Apple is probably the most obvious example, but IBM is pretty good at this too, and Amazon is perhaps the best at it. But that growth is not the result of a succession of $4 billion innovation projects they produce every year—it’s the result of long-term investments they’ve made in the past.

You have to recognize that there is a business rhythm to developing new-growth initiatives, and that business rhythm requires a patience for growth. The only way to tolerate the long lead times is to set expectations correctly—internally and with Wall Street. If you set the expectations that you are engaging in a tree-harvesting process that will grow to maturity in the future, if you have built up a portfolio of innovation projects that includes both long-term transformational innovation projects and more near-term sustaining innovations – and you properly distinguish between the two in the way you manage them, then you can overcome that impatience for growth in your new-growth businesses and resist the temptation to apply near-term success metrics to the wrong projects. You can develop them in the right way so that the future revenue will arrive.

If you don’t do it, some other company will. Five to seven years from now, the future will be the present, and if you did what you should have done correctly now, you will be able to use new-growth initiatives to close your growth gaps. But there are simply no shortcuts and no substitute for good planning.

You’ll find our book review of Mark Johnson’s book “Seizing the White Space” here.

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Braden Kelley is a popular innovation speaker, embeds innovation across the organization with innovation training, and builds B2B pull marketing strategies that drive increased revenue, visibility and inbound sales leads. He is currently advising an early-stage fashion startup Voilá! and is the author of Stoking Your Innovation Bonfire from John Wiley & Sons. He tweets from @innovate.