Thursday, September 23, 2010

“EPIC Insights” Podcast Series Features Innovation Authority Mark Johnson

Innosight Chairman and Author of “Seizing the White Space” Offers Blueprint for Operationalizing Innovation

“Get out of your own way,” advises business model innovation authority Mark Johnson. For established Fortune-class companies, in particular, this may be the first and most difficult step toward building and sustaining a culture that fosters the capacity to innovate and create new growth opportunities.

Johnson – with his business partner, Harvard’s Clayton Christensen – has mastered the art and science of helping companies harness disruption for competitive advantage.

In this first installment of the expert interview series, “EPIC Insights: Innovation Activation,” Johnson outlines the framework for an organizational approach to managing radical change that can not only inoculate a company from disruptive external forces, but predispose it to shaking things up from within.

Mark Johnson will share his model for unlocking transformational growth opportunities in detail at IIR USA’s 1st Annual EPIC (Entrepreneurial Partnerships Innovation Conference) October 27-29 in New York City.


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Download the transcript or read it below

Greetings and welcome to the Institute for International Research Podcast Series: “EPIC Insights – Innovation/Activation”. This will be the first installment in a series of interviews with thought leaders and experts in the Innovation/Activation domain, each of whom will be featured at IIR’s First Annual EPIC Event taking place October 27th through the 29th in New York City.

This group of speakers encompasses a wide variety of industries and functions, but they share one common denominator. Each of them has a unique talent for realizing the untapped commercial potential of what I’ll call: “The innovation surplus stockpiled in the minds and on the shelves of corporations and individuals alike.”

Today, we are very fortunate and most delighted to welcome Mark Johnson. He is the Chairman of Innosight and the author of: “Seizing the White Space – Business Model Innovation for Growth and Renewal.”

Before we get started, why don’t you tell us a little bit about your background and a little bit about Innosight?

Mark: Sure. Well, my background, I started actually in the US Navy. I went to the US Naval Academy and spent eight years in the nuclear power program of the US Navy on a surface ship and was in the first Gulf War and decided to get out. I enjoyed the management aspect of the Navy, but not deployment. So, ended up going to Harvard Business School. That’s where I met Professor Clayton Christensen of “The Innovator’s Dilemma” fame and we decided to start a company together to apply the principles of disruptive innovation. We started Innosight together in January of 2000. So, Innosight’s been around for just a little over 10 years. We are a strategic innovation consulting and investing firm and we are really focused on helping companies identify and develop new growth opportunities to help them address disruption that may be happening to their industry or just stagnation in their core markets. So, how do you create those really powerful, game-changing, new growth opportunities and how do you make that a repeatable process? That’s what Innosight’s about. It’s a pretty dynamic duo. (Laugh).

Can you tell us a little bit about: “Seizing the White Space.” What inspired you to write the book and tell us a little bit about it.

Mark: Well, the company started based on disruptive innovation. Clay Christensen’s work from “The Innovator’s Dilemma”, which was all about how well-intended, good management run companies all of a sudden lose their way. So, what was the root cause behind that? It became about these disruptions; these disruptive technologies, these innovations that happen that topple the top firms. As we dove more into the work, we realized that it wasn’t really about disruption in the sense of the technology. It was really that companies weren’t able to address the threats because of their established business model. We intuitively knew that, but we didn’t really have a good understanding of what does it mean when we talk about business models and business model innovation. So, this book is really about getting deeper and understanding in a fairly straightforward and as fairly simple a way as possible how to understand a business model, how to innovate a business model and how to manage that kind of innovation to create new opportunities. But also as it relates to simply managing the change that might be necessary in the organization to get out of its own way and do things differently to create that new growth opportunity.

It’s almost a professional Darwinist aspect to it as though these companies don’t really seem to have the, if you will, intuition to adapt to anything that might come along the way. Is that kind of the approach that you are looking at here?

Mark: That’s exactly right. I mean, they have the intuition of when they are going to be threatened or at least the insight to know when there is a threat on the horizon. Or the idea that: “Boy, we better do something different” as it relates to trying to come up with a new product or do things for a customer a different way. But, when it comes to the organizational adaptation, having to organize a different way or operate and coordinate in a different way or turn a profit in a different way, those things are very difficult for companies to do.
They have a real hard time, just as people do, of really changing in any fundamental way. So, one of the ways to help is to get at why a company is in business in the first place and what is the core DNA of what makes a business successful? If we can get at that and self-recognition of what we are about as an organization, then we have a better chance of understanding how we might need to change it to address the fundamental changes that are happening in the environment.

So, with that as a background, let’s use that as a launch pad into discussing a real concept that you referenced, obviously in the title of your book, but frequently elsewhere. And that is the concept of white space. Can you explain what this means to our listeners?

Mark: Well, white space is not a new term. I think it’s at least perceived to be an area that’s about doing something that’s unchartered; an unchartered market, uncharted territory, a whole brand new market. An area where some company or some individual hasn’t gone before or it hasn’t been developed. Those are all true statements, but as I thought about white space in the sense of a clean slate, of going into those places that one has not gone before, I think the crisper definition of that is when companies not only have to go into a new market, but when they have to change again the way they make money or the fundamental way they organize and have a different, say, operating model. When they have to make those changes to the fundamental business model, that’s truly a company’s white space. That’s where the slate really is a blank slate and they have to really think in a way that puts pieces together in ways that hasn’t happened before. When you think about new markets, you can say that’s white space and unchartered territory, but oftentimes companies are leveraging what they’ve done all along. They’re just putting it into a new context. Therefore, they are not really working off of a blank slate. They are doing things the way that they’ve known how to do it for a very long time. That’s the distinction I’m making.

On some level, we are talking about being equipped to handle what might be considered an external threat. But, on another level, I think what you are getting at (and correct me if I’m wrong) is a company’s innate ability to think differently and to exploit opportunities that really they might have been blind to because they are accustomed to, again, doing things in a very traditional sort of conventional way, dependent upon the company’s culture. When you and I spoke earlier, you mentioned that even very established and stable traditional companies periodically need to undertake what we’ll call “radical steps”, even if the threat isn’t immediate. So, I’m wondering if you could elaborate on that. Why do you believe it? And could you provide us with a couple of examples of instances where this approach has been successfully embraced, as well as perhaps instances where it wasn’t embraced to the company’s detriment when it should have been.

Mark: Sure. Well, I think every company faces the reality that the market is going to change before them. Products that were once highly differentiated over time become commoditized and growth in these markets slows as more and more people are consuming and the market becomes saturated. So, they can face growth gaps. They can face margin pressures as these products commoditize. They can face new technologies that come in that disrupt the existing technology, such as what happened in the computer industry and the personal computer disrupting the mini computer, which actually disrupted the mainframe computers. So, there’s technological evolution. There’s just major market shifts that happen, such as what we are experiencing in energy and clean tech and the need to have renewable energy for the whole concern about the environment. So, the reality is that any company that sustains or lasts for a long time is going to face some of these market forces. And the ability to be able to undertake radical change (being able to do things fundamentally different to address what might be a whole new customer with a new value proposition or a major change that’s going to happen in the industry) requires the ability to not only establish and extend their core business, but create new business opportunities that in the term “radical” is radical compared to operating and just strengthening the core business.

A number of companies have demonstrated in a very successful way the ability to periodically make these radical steps while continuing to operate and sustain the core business. For example, IBM is a maker of mainframe computers, but was still able to understand that personal computers could be disruptive to mainframe and its mini-computer business. They established a separate operating company that worked in a different way down in Florida to sell personal computers, which were very disruptive to the mainframe business. Disruptive in the sense that it was a different business model; it was a different way of making money and operating and distributing to customers. Hewlett Packard set up a different way of selling printers with its inkjet printer group that was run in a very different way than the laser jet printing group that was in Boise, Idaho. It was able to do both, but it required the ability to set up a different business. Apple Computers, as we all know the famous story about the iPod, that was a big shift for Apple because it was doing something they never did before, which was to get into music retailing; an entirely new market for the company. And it required not only selling a product, but a service called: “iTunes.” And then, of course, there have been all kinds of added businesses since then. But, again, it’s been a very successful example of being able to embrace doing things radically in order to, in Apple’s case, address declining market share and break out of the role of being the perpetual niche player in the personal computer market.

On the failure side, unfortunately, there are a whole host of failures to cite. Kodak was never really able to embrace digital imaging until it was too late, I think, for the company to be sustainable or relevant in any real way. The whole newspaper industry, as an industry, has been so late to the game of being able to address its disruption through the Internet and be able to devise things that go beyond just putting newspapers online, but coming up with whole new business models to embrace delivering content in novel ways. The list could go on. In the airline industry, established incumbents like Delta trying to get into discount airlines, but only doing it half-heartedly with Delta Song and as a result, having to shut down only a few years after its start.

The one that always comes to mind for me is Smith Corona in word processing. But to your point, sometimes these aren’t overnight events. They can be death by a thousand cuts, sort of gradually. What is of interest to me is that you were talking about innovation. You mentioned that it can be disruptive from multiple perspectives. So, operationally being one example. Obviously, your market is another and so on and so forth. So, we are not necessarily talking about line extensions or the sort of safe innovations that companies typically turn to. This is, at its core, almost a business model for innovation that you’re going after. Is that safe?

Mark: Yes. The focus here is really about those circumstances in going after whole new growth or addressing a threat where serving a customer in a fundamentally new way because you are now in a new market or because the existing market has been reinvented. In order to serve that customer in that value proposition it’s going to take not only changing the product or changing the marketing approach, but the organizational approach behind that, the business model, to include the way that you make money. That would have to change, as well. That’s what I mean by business model innovation. There’s those fundamental, systemic, organizational, financial changes in order to support the ability to serve either new customers in fundamentally new ways or existing customers in fundamentally new ways because you’ve moved to get to that next level of need through them, such as they want to just have something done in a much more customized and convenient way.

I guess the million-dollar question is how to do that. And along those lines, “radical” is a very scary word for most people and, certainly, for most organizations. But, according to you it need not be provided the organization has the appropriate structure in place. So, you advocate a framework, almost a philosophy, a methodological approach to innovation. Can you tell us a little bit more about this?

Mark: Well, I think the first point about white space is to think about: “Well, gosh, this is this area of high ambiguity” as a way I define it, where you have to change the whole way you operate and turn a profit, as well as reaching these new customers and new markets, etc. So, you have all of these unknowns and assumptions of how are you going to go and do that? So, then that level of mystery leads companies to say: “I’m not going to do that because it seems so risky and so scary.” Especially compared to the way companies are sustaining themselves day-after-day, which is they have a core business and they are basically executing and operating because they know what they are doing and they’ve been doing it for a very long time. So, if you’re going to go into this now stark area, stark contrast from what the core business is doing, you have to go in with some structure and some way of thinking about how do you de-risk some of those elements that you’re going to have to address and how do you get started and how do you think about the steps? That’s where coming up with a definition and a framework for a business model is the first step. It’s to understand what is your core business model, how does it work and then going into these new markets. We need a way to say: “How do we build the appropriate business model to achieve this new growth area that’s in our white space?” The very first step is to start with the most important piece of the business model framework that I articulate in my book, which is you have to understand the most important, unmet jobs that these customers you are trying to reach need to get done and build a powerful value proposition, an offering that defines how to address those jobs. Once you’ve done that, then you can talk about designing on paper a business system using again the Four-Box Model that can address that value proposition. That’s the second step. Then the final step is to recognize that any new business creation effort requires iteration. No successful new venture has got it right the first time. In fact, 90% of successful new ventures change their business model four times before they get it right. So, for the third step, you have to have an approach that’s about learning and testing, but not learning and testing like you would do in an R&D setting or a product development setting. It’s got to be in a large market in the market. It’s about what AG Lafely of P&G said was transactional learning. So, if you can think about those three major steps (focus in the market to understand important, unmet jobs and build value propositions that you know are compelling. Second, get into design thinking mode to construct a business model that can address, in the right way, those value propositions and then third, have the ability to test and learn in the market, which means go more slowly that what an established business would do with its market and customers). Then you have structure and you have a process and approach by which you can make these new areas of growth much more predictable and much more disciplined.

It’s an interesting complement, for lack of a better term, to what the EPIC Conference IIR is putting together is all about, which is really about creating strategic partnerships to activate what, again, I’ll call that innovation surplus that’s tucked away on shelves at many companies collecting dust and sitting in the back of people’s minds. Where do the principles that you’re advocating fit into this and how can they be applied to bring some of these neglected ideas to life?

Mark: I think the first point I would make about this is oftentimes the innovation ideas that are tucked away in the shelves are product ideas, are concepts, are technologies, or inventions that just haven’t yet been commercialized. I remember having this workshop or actually a CEO Summit that included Bob Higgins, who is the Managing Director of Highland Capital Partners. And he observed, going through this business model effort and discussion, said: “I recognize now when we invest in technologies and companies that have these technologies, our outcome is really 50/50 of whether we’re going to be successful. But, every time we invest in great business models behind these business ventures, we win.” So, I think where this fits together, or where I know this actually fits together, is understanding that great businesses are about wrapping great business models around enabling technologies and products and ideas that have the opportunity to have impact and have the opportunity to get commercialized and sustained through the means by which a company can create economic value for itself. But, that requires these business model techniques, this understanding about how value is created and delivered, then captured beyond just the innovative product ideas and sort of unique ideas in order to create true success. I think for an audience like EPIC, which has many entrepreneurs, of course, and investors in it, getting beyond the investment in just the technology to understand the importance of the business model that needs a wrap around it and the ecosystem can get us to a higher level and a higher hit rate in a much more predictable pattern of success.

One final point on this question is I’ve talked about this in a Harvard Business Review article I wrote about jumpstarting the clean tech economy. The reason I wrote it is because I observed with clean tech, we have all this investment in technology; billions and billions of dollars, venture-backed, Government-backed and we have a lot of effort going on to try to get the right policies in place to get these technologies actually implemented in the market to be true renewables. But, I don’t see much investment in any real, serial-incubating of businesses of matching that into target markets where you could actually think about this systemically and making it happen. Until we can get beyond just technology and policy to integrate with business model understanding, we are not going to see the actual commercialization of things the way we would if we had a broader view of what are the different levers of innovation beyond the technological one.

For anybody who is listening, if you would like to hear more from Mark Johnson, he is going to be our Keynote Speaker at IIR USA’s First Annual EPIC Event that’s taking place on October 27th through the 29th. I believe Mark is speaking on the 28th, if I’m not mistaken, in New York City. Mark’s presentation is entitled: “How Entrepreneurs and Intrapreneurs can Unlock Transformational Growth Opportunities through Business Model Innovation.”

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