Innovation Formula

The Innovation Formula
the
innovation
formula:
the guidebook
to innovation
for small business leaders
and entrepreneurs
Preliminary Draft Version
langdon morris
INNOVATION
ACADEMY
Copyright 2015 by Langdon Morris.
Cover Photo by the author

The cover photo shows a main street lined with small businesses,
perhaps like yours.
Taichung, Taiwan.
All rights reserved.

No part of this work may be reproduced or used in any form or by
any means graphic, electronic, or mechanical without the
written permission of the publisher.
ISBN-13: 978-1511531634
For more information please contact:
Innovation Academy LLC

257 Castle Glen Rd.
Walnut Creek, CA 94595
www.innovationlabs.com
About this Book

Innovation is as important for small business as for large ones, but most
of the books and other writings available focus on the big firms, so the
purpose of this book is to provide insights to the small business leader
or entrepreneur about how to be fantastically successful at innovation
even with very limited time and capital to invest.
This book is part of a growing family. It has three companion volumes,
Permanent Innovation, The Innovation Master Plan, and The Chief
Innovation Officer. All three of them deal with the challenges of
managing innovation, and focus on how to achieve an exemplary
innovation effort in the face of accelerating change and massive
external complexity.
These books also have two cousins, Agile Innovation, coauthored with
Moses Ma and Dr. Po Chi Wu, and Soulful Branding, coauthored with
Jerome Conlon and Moses Ma.
Innovation is a vitally important, wickedly interesting, and engagingly
complex topic, one that I dearly love. I hope that the ideas I wish to
share with you here are helpful as you hone your innovation
management skills and lead your business forward into the complex,
challenging, and opportunity-filled future.
Please note:
This is a preliminary draft version. You may find some errors, and
well be working to refine the text over the coming months prior to
final publication in the 3rd quarter of 2015.
For more information: www.innovationlabs.com/formula
Also by Langdon Morris

Managing the Evolving Corporation
The Knowledge Channel
Corporate Strategies for the Internet
Fourth Generation R&D
Managing Knowledge, Technology, and Innovation

Co-authored with William L. Miller
Permanent Innovation
Proven Strategies and Methods of Successful Innovators
The Innovation Master Plan

The CEOs Guide to Innovation
The Chief Innovation Officer

Agile Innovation
Managing Knowledge, Technology, and Innovation

Co-authored with Moses Ma and Po Chi Wu
Soulful Branding
Co-authored with Jerome Conlon and Moses Ma
The Aerospace Technology Working Group

Innovation Series
Editor and Co-author
Beyond Earth
The Future of Humans in Space
Living in Space
Cultural and Social Dynamics, Opportunities, and Challenges

in Permanent Space Habitats
Space Commerce
The Inside Story by the People Who Are Making it Happen
International Cooperation for the Development of Space

Sustain the Effort in Space
(Forthcoming)
About the Author
Langdon Morris
Langdon Morris is a co-founder of FutureLab and senior partner of
InnovationLabs LLC, two of the worlds foremost innovation
consultancies. He works with organizations around the world to help
them improve their proficiency in innovation.
He is Associate Editor of the International Journal of Innovation
Science and a member of the Board of Directors of the International
Association of Innovation Professionals (IAOIP). He is also editor of
the Aerospace Technology Working Group Innovation Series, and a
member of the Scientific Committee of Business Digest, Paris.
He is formerly Senior Fellow of the Economic Opportunities Program
of the Aspen Institute, a Contributing Editor and Writer of Innovation
Management Magazine, Senior Practice Scholar of the Ackoff Center
of the University of Pennsylvania and Contributing Editor of
Knowledge Management magazine.
He is author, co-author, or editor of fourteen books on innovation and
strategy, various of which have been translated into six languages,
author of many articles and white papers, and a frequent speaker at
workshops and conferences worldwide.
He has taught or lectured at universities in the US, France, Portugal,
Taiwan, and Argentina, including Stanford University, the Ecole
Nationale des Ponts et Chausses and the Conservatoire National des
Arts et Mtiers, Paris, the University of Belgrano, Buenos Aires, and
Chaoyang University of Technology, Taiwan.
And he really likes innovation!
Dedication
This book has been an intensely collaborative effort among a
very large group of people, and although most of them had no
idea that they were indeed helping to write a book, the fact of
their participation is undeniable.
I mention that because Ive been working in the field of
innovation for nearly 40 years, and its only due to the
countless lessons, discussions, guidance, efforts, and support of
hundreds upon hundreds of colleagues and clients that the ideas
and concepts in this book could be written down.
As such, the book is dedicated to all of them, with my deep and
profound appreciation.
Contents
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Introduction: Innovation in the SME

and Entrepreneurial Context
Complexity and Change
Risk, Great Ideas, and Your
Business Model
Risk and Your Innovation Portfolio
Speed
Engagement
Leadership
Tools
Your Action Plan
41
87
113
137
151
179
197
225
Notes
243
11
17
25
the
innovation
formula
10
11
Chapter 1
Innovation in the SME and
Entrepreneurial Context
There are lots of very good books about innovation, but most of
them are written for big enterprises, global corporations and
multinationals, and they focus on how to help them deal with big
global trends and problems. There are also lots of great books by
and about start-ups, especially in the how-to genre.
But to date there havent been very many books about innovation
and strategy for small businesses, which is why we wrote this one,
and we certainly hope you find it useful!
We all know that no business can remain stagnant and expect to

survive for very long in todays competitive economy.
Technologies, market structures and customer preferences are
rapidly changing as new trends emerge, and leaders know that every
business must respond by adapting and changing, by innovating.
12
But innovation is difficult to achieve, as much art as would-be

science, a domain that is inherently filled with a double dose of
uncertainty. For the external forces are themselves uncertain
things are changing, for sure, but not in ways that we can readily
predict; hence, we must prepare for the unknown future by readying
a wide range of future options, not knowing until even the last
minute what well be required to do, or stop doing, as change
unfolds and as the future arrives day by day. The second domain of
uncertainty is inherent in the nature of the innovation process, where
were doing something that weve not done before in order to create
something that has not existed before.
Slightly tongue in cheek, Einstein is reported to have said, Its
called research because we dont know what we doing, and this
definitely captures to spirit of the innovation endeavor.
And as much as business leaders dislike uncertainty, and they
generally loathe it, they also know that when it comes to innovation,
theyre stuck with it.
So this is the critical background against which youre now
embarking on the innovation journey. As your guides in this book,
our mission is to show you how to live with these inescapable
uncertainties, how to reduce the associated risks, and even how to
profit from them.
Its a lot easier for the CEOs of Toyota or General Motors or Tesla
to allocate the people, the time, and the capital to explore and create
innovatively than it is for the owners or managers of Janes Garage
or Joss Sandwich Shop,
The big firms usually have massive R&D budgets that fund
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hundreds or even thousands of people to peer into the future, to do

the science and technology work to develop new products and
services, and to think through the critical details around innovation
and strategy.
Their staff and consultants have MBAs and
economics degrees that trained them to think about the future and
come up with lots of new ideas. But who do Jos or Jane have to
support their innovation and strategy initiatives?
They probably just have Jos and Jane themselves. And maybe a
few key employees, advisors, or friends.
So in addition to changing the oil and changing the tires and making
the sandwiches, and probably even washing the dishes now and
then, Jos and Jane also do most of the strategic thinking between
managing the major accounts, hiring and firing the staff, counting
the inventory, opening in the morning, closing at night, and a
hundred other tasks that are essential to keeping the business going.
So when do they do the strategic planning? When do they find time
to innovate, to develop new products and services, do the clever
R&D, create smart new strategic partnerships, and all of the deep
thinking thats needed to assure that their businesses remain viable
in these changing times? When, in other words, do they innovate?
A lot of Joss and Janes dont strategize at all, and they dont
innovate much either, because they just dont have time, or they
arent interested. But of course this contributes to the high mortality
rate that businesses like theirs suffer from.
Most of them know they should innovate, or innovate more, and it
often grieves them that they dont find enough time to build their
future because theyre so deeply focused on surviving today, on the
urgent tasks that are, alas, not so important.
If you are like Jos or Jane, a small business owner or leader, this
book is written to help you innovate. The way we go about it is by
14
guiding you through a straightforward and yet entirely proven

process of creating the innovations that will, hopefully, help your
business adapt to the changing world and the changing market, to
survive, and even to become significantly more successful.
Leverage the Power of Questions and Maps

You know intimately about the big challenges your business faces,
challenges including competition, new technology, and perhaps
even globalization is affecting you as well. And since you already
know about these issues the approach we take here is not to go into
a lot of detail about the forces change, but instead to engage you to
think differently, and productively, about how to respond to them,
and hopefully even inspire you to take action.
Our way of doing this begins with a simple but yet long-proven way
of proceeding, namely by asking questions. We approach it this
way because its been the case that since the very beginnings of
history people have found that the right questions, posed at the right
time, can unlock deep and compelling insights. And we believe that
this is every bit as relevant today to help you lead your business as it
was during the times of Socrates and Plato, Confucius and Lao Tsu,
Adam Smith and Karl Marx. Questions do in fact drive useful
thinking and learning for adults and business leaders as much as
they do children and college students.
Consequently, well ask you to consider a lot of questions
throughout this book, and to think deeply about them.
To make this easier we also offer structured worksheets and
templates which may facilitate your own thinking process. These
are really just questions in a bit more structured format, which may
enable you to lead a process of dialog with your colleagues and
partners who may have their own awarenesses, insights, and
15
discoveries to develop and share.

In addition to these questions, the other key tool we rely on is maps.
We love them, whether theyre the GPS-enabled on your phone or
the tools built into your car, or perhaps one pinned to the wall, we
all rely on maps to make complex situations and realities
understandable, clear, and actionable. Maps simplify the complex
and enable us to access huge amounts of information at a glance,
helping to orient and organize ourselves in space and time. The
maps we use here, of course, are not geographic ones, but
conceptual ones intended to help you recognize the critical
relationships that will enable you navigate your way not from here
to your next business meeting, but from today to tomorrow and
beyond.
For these are maps that describe competition, change and the future,
maps of innovation and strategy that are intended to help you
understand the significant forces that are shaping business today,
and to harness the ones that are already shaping tomorrow.
16
17
Chapter 2
In addition to questions and maps, theres a third core element that

this book is organized around, which is the innovation formula.
Yes, we do believe that there is a formula for success at innovation,
and we have found over the years that it doesnt matter whether
youre running a garage, a sandwich shop, or a multinational auto
manufacturer, success in each case relies on your performance in the
same five areas. Whether youre the CEO of GM or the chief cook
and bottle washer, you have think about the same problems, study,
learn, research, experiment, engage in some risk, and manage it
closely. How you do these, of course, is entirely different
depending on the size of your business, but nevertheless the actual
elements seem to be consistent across all businesses.
The formula consists of the six major topics that also constitute the
table of contents: complexity and change, risk, speed, engagement,
leadership, and tools.
Here is a quick summary of the key ideas and the reasoning that
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youll find throughout the rest of the book:

The external environment is an unyielding and unceasing source of
change, and your organization must adapt to it if its going to
survive. Hence, complexity and change literally define the context
in which innovation and its close cousin, strategy, are relevant. It is
to external change that drives market needs and preferences, and
hence it is a critical role of leadership to be attuned to the rhythm,
character, and specifics of what is happening out there in the
increasingly wild world. The other critical role is of course leading
the process of responding to those changes.
Risk
When we understand whats happening in the external environment
we can organize the pursuit of innovation, correctly targeted, so that
we produce the right innovations to meet current and future market
needs. But if only it were so easy. In fact, it is intellectually and
operationally challenging to figure out whats the right thing to do,
the right products and services to create.
Furthermore, having a clear vision of the future products and
services is not at all the same as actually having them in hand.
Hence, there is a double risk. First, anticipating future needs
correctly is by no means an easy task. What if, for example, you see
clearly what the needs of the future will be, but in the end it turns
out that youre wrong? This, of course, is the story of countless
failed companies, which aimed for a target in the future market that
the actual market itself never selected?
19
Second, even if you do get it right, theres still the many problems
associated with developing the right products and services to meet
the anticipated needs. Can your designs and plans actually work?
Can you complete the development work in a timely way? Does
your organization have the internal talent and the right external
partners to master the many challenges?
Risk, then, is inherent in the innovation problem, and it is
inescapable. So the right amount of risk is essentially the least
possible risk.
Least possible, however, is trickier than it may at first sound.
Least, after all, is really none, but of course the point of competition
and change and all that is that taking no risk means making no
innovations at all, which is actually a very risky approach, because
it leaves you entirely vulnerable to those very changes.
Consequently, least possible really means the least you can take
on while still remaining viable, but even knowing exactly how much
risk that is, is actually unknowable.
And so the problem now becomes one of information, because you
probably dont know what innovations your competitors are
working on, nor everything about the new and innovative
technologies that may be coming, etc., etc., which means that while
you cannot afford to do nothing, to just wait for the future to bury
your business, you are obliged to act, compelled to act, to act
proactively yet with incomplete information.
This is the character of the risks you must take. Taking them well,
thoughtfully, strategically is whats necessary. Achieving this,
navigating through this difficult but fascinating landscape will take
some thought and a lot of effort.
20
Speed
So despite the many risks you plunge ahead, thoughtfully, to create
your organizations future. You are now engaged in the depths of
the innovation process itself.
That process is not such an easy one, as it must be thorough and
thoughtful, of course, but above all it must be fast. Again, the
premise here is that your information is incomplete, and you just
dont know how fast your competitors will move, nor do you know
exactly how the market will respond to their new ideas, nor to
yours. So the best way to deal with the compounding of uncertainty
is to go fast, to learn fast, to learn what works and what doesnt
work through techniques such as agile sprints, rapid prototyping,
minimum viable products, a-b testing, and related techniques (which
we will discuss in chapter 5). We express this in the innovation
formula as speed, and of course there is a lot of value in getting
solid results fast, faster than your competitors.
Engagement
The next element of the formula relates to the culture of your
organization, for you and your partner are the ones who are going to
develop ideas, figure out which ones are great, and turn them into
something useful, test them, and bring the very best to the market.
Theoretically, you could find the smartest person in your
organization, set them to the innovation task, and achieve good or
even great results. Practically, though, the issues that have to be
dealt with are probably deeper and broader than a single individual
can master, because todays innovation projects integrate knowledge
across multiple domains, each of which itself runs quite deep.
Hence, we know that innovation is not an individual activity, but a
21
team sport. The optimal innovation process is one in which your

organization is engaged, one in which all of the strengths, thoughts,
and talents of everyone, and also those of the broader ecosystem in
which your organization participates, are fully engaged.
Leadership
Its also true of organizations that deep and thorough engagement
comes about only when there is superbly focused leadership. We
know that innovation can happen in organizations where the risks
are understood, and where the ambiguities and uncertainties that are
inherent in the process are known and acknowledged, and where
there is willingness to engage in the necessary levels of risk taking.
We also know that in organizations where people are punished for
making intelligent mistakes, for thoughtfully trying new things that
fail, for thinking about how to do things better, and differently, the
spirit of innovation is swiftly and decisively stifled.
Hence, leaders must embrace and promote the critical elements
which enable an innovation culture to emerge, or it will not emerge.
Tools
The last clause of the formula concerns the tools and methods that
we use to manage the entire innovation effort. All other things
being equal, better tools and methods are likely to support better
results, and while this does not necessarily mean that you have to
invest a lot of money in new technology, you do need to think
through carefully and invest appropriately in methods, processes,
and organizational structures that enable and promote innovation
efforts, and which set the tone and context in which innovation can
thrive.
22
So these are the six elements in the innovation formula; here they
are expressed in pseudo math:
(Complexity and Change) > Innovation
Innovation = f (Risk) (Speed) (Engagement) (Leadership) + (Tools)
Or in English, Complexity and change means that Innovation is

essential for survival.
Achieving innovation a function of Risk, times Speed, times
Engagement, times Leadership, plus Tools.
In previous books, I and co-authors have examined many aspects

and facets of this formula in considerable detail, and in our work
with enterprises large and small all around the world weve worked
with them to implement it, to make innovation real, important, and
effective for their organizations.
And as I mentioned above, we believe that exactly the same
innovation formula works for GM and Toyota as it does for the
local restaurant and the auto garage, and that it will probably work
for your small business too. So while nearly all of the nuances and
details or its implementation will certainly be different from the
Fortune 500 firm to the local business in Peru, China, New York, or
Auckland, we are convinced based on many years of practice that
the actual thinking process, that the critical questions and the
guiding maps, will be nearly the same.
This book is the fifth one in a series that explores all of this in a lot
detail. It was preceded by Permanent Innovation, The Innovation
Master Plan, The Chief Innovation Officer, and Agile Innovation,
23
and you may be interested in checking these out if youre the sort of
person who likes to absorb a lot of detail and wants to study the
deeper reasoning.
If youre not the person who wants to read a lot of detail, then
hopefully the concise contents of this book will help you to
understand the challenges, and design the right responses.
In each subsequent chapter we will explore the formula one element
at a time, beginning with a quick look at the broader context of
complexity and change, followed by the remaining five elements,
with a particular focus on what they mean for you, the small and
medium sized business leader or entrepreneur, and also with focus
on action and implementation.
This is not intended as theoretical exercise, but rather an entirely
practical guidebook. We hope it helps you to arrive at the right
destination, namely an innovative and thereby successful firm.
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25
Chapter 3
Change is occurring fast today, and its getting faster. This is not
news; youve heard it before, and doubtless you will hear it again.
You also know it from your own experience.
So while we recognize that its not going to be particularly useful in
this book to get into an exhaustive discussion of how change is
happening or why its happening, we also think it would be a mistake
to skip the topic entirely. Because the bare and inescapable facts of
increasing complexity and accelerating change in the external
market are the major forces that define the absolute necessity for
innovation in your business, and in every business. Therefore, its a
critical issue to think about change as we set out to design your
organizations innovation process and program.
Of course if change wasnt occurring, or if it wasnt occurring so
fast as it is, then its possible that you could avoid or evade the
innovation imperative. But it is occurring, and its doing so at a
tremendous pace, and so your organization is required to innovate in
26
order to survive.
Hence, its not enough to wave your hands vaguely and say,
Change is coming. Instead, its entirely necessary to be quite
precise about whats changing, and also why its changing.
Therefore, the following few pages constitute a summary is
intended as a necessary overview of whats happening, as this is the
essential context in which your innovation work will proceed.
[footnote: Tomorrow and the Day After: Your Guide to the
Tumultuous 21st Century]
Of course there are a multitude of ways to explain whats changing,
and we make no pretense that what we offer here is entirely
definitive. Instead, our intent is to provide you with a quick
description and perhaps even inspire you to see possibilities, both
good and bad, that may lie in your own organizations future.
To bring the vastness of this topic down to manageable size were
focused on describing at a high level the five major trends that we
believe are essential to understanding what is occurring today, and
more importantly what will be occurring still tomorrow.
The five trends are technology, science, culture, the human
population, and climate change. These are certainly very big topics,
but even a quick review of the big ideas behind them will help to set
the framework for the choices you will have to make, and the
processes you will implement in order to create and implement your
own organizations innovation process, through which youll be
able to respond effectively to these global trends as well as the
specific local challenges that arise for your own business.
Technology
The first major theme, technology is an urgent, day to day or even
27
hour to hour issue for todays firms, and no matter in what industry
you compete, for your firm as well. Digital technology is taking
over the economy, industry by industry, and the entire global
economy is in the process of becoming digitized.
This matters because digitization has equaled disruption for every
industry that it has touched, and before the trends are fully resolved,
no part of the economy will remain untouched.
One of the significant consequences of this trend is that digital
markets have a unique and brutal characteristic, the tendency of
leading firms to consolidate their power and to gradually vanquish
their competitors, sector by sector. In digital markets there is often
little to zero market share left for laggards, and so these markets are
more and more coming to be understood as winner take all
markets, where there is only first place and there is no second.
This dynamic is becoming more prevalent, and thus the number of
winner-takes-all markets is increasing, because technology
advantages often create massive barriers to competition. Whereas in
the past, for example, a wide variety of local stores usually
competed within a given geographic region, today due to better
transportation, logistics, telecommunications and information
technology systems the leading firms are extending their lead and
effectively locking out the local players.
This might be called the Wal-Mart effect, for the giant retailer has
had a devastating impact on small business in many of the towns
and regions where its stores are located. Wal-Marts size, pricing
advantages, and enormous selection have put thousands of local
merchants out of business. Wal-Marts massive scale gives it
significant advantages over local competitors. With volume
purchasing it negotiates better prices from suppliers, and puts in
place even better technology that smaller firms simply cannot
afford.
This becomes a self-reinforcing spiral, and only a
28
fundamental shift will dislodge them. And what is the core driver of
their ability to reach scale? Digital technology, which is essential
for managing the supply chain, product design, manufacturing,
logistics, finance, treasury, human resources, and operations.
Similarly, the retail market for books has transitioned from one led
by local bookshops and a couple of national chains, to one dominant
digital player, Amazon. Thousands of local shops have closed,
unable to compete with Amazons prices, selection, and delivery.
The company then extended its advantage by creating the Kindle,
which then become the dominant winner in the e reader market.
This is relevant to small business leaders in two ways. First, the
scale of the global digital market means that any of the big players
can look and act local. Geography isnt much protection, and it may
not be any protection, if a big firm wants to compete for your
customers.
Secondly, as the entire world continues the transition to becoming a
single massive digital marketplace, and as every industry feels more
and more the impact of digitization, the consequences are that, as I
mentioned above, you have to think of your business not as
whatever it used to be, but as it will be, which is a digital business.
Consequently, while you may glance over at that neighboring firms
that are in some way or other competing in the digital marketplace
and feel sorry for the intense speed and complex global dynamics
that they have to deal with, you ought to be paying close attention to
the strategies they use to be successful, because sooner or later, and
probably sooner, every business, including yours, is a digital
business.
Wal-Mart, in other words, is a digital business every bit as much as
Amazon is, and every bit as much as your business is also. And
since technology has shifted many market structures to the winnertake-all modality, the biting words of journalist Dana Blankenhorn
29
make the point pretty well: at that point there is one winner and
everyone else needs to find something else to do.
Until, that is, a new generation of technology is invented, and then
we start all over again with a new generation of competitors who
will offer something that Amazon or Wal-Mart do not offer.
Another dimension of advancing technology is its impact and
application in many markets beyond the retail space in which
Amazon and Wal-Mart compete. In the energy industry, for
example, the shift to new sources is facilitated by the development
and application of digital technology that used for collecting and
managing solar and wind devices. Technologies like the smart
grid that manages the large scale distribution of energy, and the
smart thermostat, which manages the energy usage in your home,
are all digital.
If your firm is in printing, then you already know how much
digitization has affected the economy; in the US, the overall amount
spent on printing services dropped from $120 billion to $80 billion
between 2002 and 2010; at one point nearly three print shops were
going out of business each day as the entire industry was
downsized. And why did this occur? Because digital documents
sent over email dont have to be printed.
The advertising industry went through a radical transformation as
Google went from a search engine company to the worlds largest
ad agency, and diverted billions from the ad firms to itself over the
course of the first decade of this century.
The music business was similarly transformed as listeners shifted
from tapes to CDs, and the MP3. The iPod and iTunes changed the
way people collect and listen, and global revenues for the music
industry dropped by two-thirds.
One last example is the growth of the Chinese economy, which
30
from 1990 to 2010 expanded from x to y as the country transformed

itself into the worlds most concentrated center for manufacturing of
all products from furniture to phones to clothing and toys. None of
this could have happened were it not for the digitization of the
global supply chain, simply because the coordination and
management of the massive complex logistics could never have
been accomplished without ubiquitous digitization, from the design
on digital CAD software to the manufacturing in digital factories to
the storage, shipping, and distribution through digitized inventory
tracking and control.
These examples retail, energy, printing, advertising, music, and
manufacturing are but six among hundreds. In fact, during the last
two decades literally every industry has been transformed by digital
technology, and many have been severely disrupted. And the point
for us is that we are still in the early stages of the digital
transformation, so we can expect significant new disruptions are
still in our future.
Conceptually this makes intuitive sense, but we can got beyond
intuition as there is hard data to support this forecast. A key data
point is the cost of computer technology, which continues to
plummet. For example, the smart phone youre likely to be carrying
around is a sleek and sophisticated device that obviously provides a
lot of computing power into a convenient little package, but suppose
it was the mid-1970s and you were going to buy the equivalent
amount of computing in terms of the processing and storage. How
much would you have paid for it?
Four decades of continual progress in miniaturization and constant
expansion of the market size have resulted in devices that sell for
around $500 today, but which pack the processing power equivalent
to tens of millions of dollars worth of 1974 computing in a package
that is a tiny fraction of the size. This process of improvement is
31
unique in human history, as no other industry has been able to

achieve such improvement in performance simultaneously with a
concurrent reduction in cost.
So of course it has been a process of positive feedback the more
computers can do, the more uses we find for them; and the most we
buy them, the more is invested in improving them. Today, every
human activity that has anything to do with the exchange of
information is digitized, which happens to include every form of
economic activity.
The question that needs to be asked, then, is What will be disrupted
tomorrow?
Science
The stunning advances of digital technology are of course based on
equally stunning advances in science. Todays scientists are deeply
engaged in the study of everything, from the tiniest particles to the
enormity of the entire cosmos, and every day new findings and
discoveries are announced in a gigantic array of fields and
disciplines that are themselves proliferating as knowledge becomes
ever more refined and precise and focused.
And as with technology, the rapid advance of scientific knowledge
are also accelerating as it has become universally understood that a
rigorous scientific foundation is mandatory for a modern nation.
Consequently, tens of thousands of scientists and many more times
that number of science students are rapidly pushing back the
boundaries of ignorance, discovering new laws of nature, new
realities that explain the micro and macrostructures and dynamics of
matter and energy, and the patterns and processes of the economy
and society.
32
Because success at science is so essential to the success and indeed

the survival of every nation, and advances in science are central to
the competitive dynamic between nations and regional alliances,
science will remain a top priority for national investment throughout
the coming years and decades. It will thus be a continuing source of
new knowledge that will in turn be a continuing driver of change for
the decades to come.
Culture
As we all know so well, technology and science advance together,
and together create powerful momentum for change that is
amplified by a reinforcing and compounding effect whereby change
in one area adds momentum to changes in another, producing a
much greater overall impact. Nothing in the modern world exists in
isolation, and so many of the forces and impacts are connected and
interrelated that the entire system of modern life is in fact caught in
a whirlwind of acceleration.
The social and cultural consequences of this are of course as
significant as the economic ones. From the 1970s, when Alvin
Toffler coined the term future shock until now, when future shock
has been replaced by now shock, the developed world has become
a much different place, and the less developed economies of the
world have been rapidly catching up.
Many of us, however, are struggling to adapt to the modern world.
This is evidenced by the rapid increase in mental illness worldwide,
as many of the psychological and learning challenges we face are
new ones, and not everyone is becoming adept at the new ways.
The wisdom of elders is unrecognized in the crush of the new, and
at the extreme these social and cultural changes and the concurrent
economic ones provoke an intense reaction that in extreme cases
33
provides an explanation for the marked rise in fundamentalism and

violent extremism.
We should not expect life to get simpler or easier in the coming
years and decades. If anything happens it will be the opposite, and
most of us will endure or perhaps master wave after wave of
lifestyle-altering technology, and we will incorporate new tools into
our ways of doing the most basic functions of social and economic
life. But some, perhaps in increasing numbers, will not master these
new ways.
Population
Underlying the size and vitality of the economy is the size and
dynamic of the population, and there a direct linkage between
economic success of a city, a region, or a nation, and the total
number of people, the rate of population growth, and to the overall
age distribution.
Interestingly, in workshops and speeches over the past five years
Ive often asked people to share their own predictions for the future
of the population, and what Ive found is that about 98% of people
(i.e., almost everyone) have very little idea whats actually going on
with the global population trends. In fact, whats actually occurring
is quite different from the popular image of whats happening, and
the difference is critically important.
As you well understand, population trends evolve over long spans
time, decades and centuries, and even millennia. Looking back
across one hundred millennia or more, the human population grew
fairly steadily throughout prehistory and human prehistory, and as
the era of the great early civilizations emerged, despite the constant
threat of famine, climate changes, and local events, by about 1800
the human population had a reached about a total of about one
34
billion worldwide.
Everything changed, of course, with the beginning of the Industrial
Revolution around 1800, when the human population explosion
began in conjunction with the invention of the steam engine and a
great convergence of related advances in a huge range of scientific
and technical fields including metallurgy, transportation,
agriculture, economics, commerce, medicine, and management.
Thus, it took a few hundred thousand years of humanitys progress
to reach a population of one billion, but only a century and a quarter
more for the population to double, as between 1800 and 1925 the
human population ballooned from 1 to almost 2 billion, as lifespans
increased significantly, the mortality rate declined precipitously, and
we were able to feed ourselves better than ever before. Humanity
built vast cities and enormous national and commercial empires as
the modern era dawned.
The population explosion continued unchecked throughout most of
the 20th century even with the setbacks of two world wars, the
Holocaust, and a couple of major but localized famines, and so
adding the third billion to the human total required only about 30
more years.
Population,
Billions
Year
Interval
1804
1927
1959
1974
1987
1999
2011
2026
2042
123
32
15
13
12
12
15
16
Figure 1: Growth of the Human Population
The interval from one billion to the next thus followed a startling
progression, and with the arrival of the fourth billion by the mid1970s the dangers that Malthus had envisioned a century earlier
seemed to be coming true. We were warned in dire terms of the
35
environmental and social disasters that were immanent, and the

alarm bell ringers had a good point.
The worlds leaders responded in a variety of ways.
Environmentalism became an accepted movement, and most nations
adopted policies to control or counteract pollution, to support public
health, and of course China adopted the one child policy as a
direct attempt to counteract an anticipated population growth that
could have been economically and socially disastrous.
Although many people are not aware of it, by the end of the century
the rate of population growth has slowed significantly, as the table
shows that the interval between the additional billions is now
increasing at the rate of growth slows.
This is of course localized, and while some nations continue to
expand their populations, in many nations the population is actually
declining. In a few the decline is occurring very quickly, and it
seems to be bringing with it tremendous social upheaval. Japan, for
example, is forecast to decline from a population of about 125
million in 2000 to a population in 2100 of about 65 million, and if
this occurs, it will be a vastly different nation, culture, and society
as a result.
Japan is definitely not alone in its predicament, as there are now
about 60 nations in which population decline has become
pronounced, and thus a significant social, cultural, and economic
issue.
But who makes those forecasts, and based on what data? The
forecasters are demographers, and they study birth and death rates
and the other forces and factors that influence how many children
people have, the rates of disease and death, and how social trends
and public health issues impact on entire populations. They can tell
us quite reliably, for example, that nearly billion people will die
36
in the 21st century as a result of cigarettes, and while their forecasts

are not precise to the last decimal, their insights provide essential
guidance for economists, policy makers, and business leaders.
Theres a lot of detail behind this that were going to skip in order to
get to the point, which is that within the next 20 30 years the
human population will probably peak, and by the end of this century
the total population will be about the same or less than it is today.
The consequences will be momentous, and thus in addition to the
immediate and deep impacts of advancing science and technology,
the longer term trends related to population will start to have
broadening impact in the coming years and decades.
For example, one way to interpret Japans economic struggles of the
last two decades is that the future is not reassuring for nations
whose populations are in decline. While no one knows for sure, it is
theoretically possible that Japans prolonged economic malaise is an
early expression of what will only get worse in the forthcoming
population decline. The underlying logic suggests that whereas a
dynamically growing, economically successful nation must
consume a lot to sustain its very growth, consumption patterns in
one that is stable or declining in population are quite different, but
as this has not occurred on a large scale any where in the modern
world, no one is entirely sure.
But suppose that population decline and economic stagnation are in
fact related. This would suggest that what Japan is experiencing
now is a prelude to what many nations will be experiencing with a
decade or two, and what even the global economy may be
experiencing a few decades after that. There are a lot of reasons
why this may not be a bad things, but it certainly will be a different
thing, and the resulting economic disruptions will be fundamental.
Hence, we will likely come to call this the demographic
revolution.
37
Climate and Energy

Another major trend, the last one of the big five we will discuss
here, is one that makes the news nearly every day now. As I write
this, a huge storm has just devastated the island nation of Vanuatu,
and it has been called one of the most powerful storms ever to
make landfall. In and of itself this may not be a decisive bit of
news, but the fact that ten of the ten most powerful storms of the last
century have occurred in the last decade tells us that we will have to
contend with a process of fundamental change in the natural world
upon which we depend.
According to the US National Oceanic and Atmospheric Agency
(NOAA), the frequency of billion dollar storms affecting the US has
increased significantly during the last ten years, even when
adjusting for inflation. There were 15 such storms in 2011, the
most ever.
The key questions are thus how fast will the climate change, and
how fundamentally will it change, and then what impacts will
that have on our organization. For there certainly will be impacts.
For example, if it becomes inescapably clear that carbon dioxide
concentrations are indeed the central driver of this change, as more
than 90% of climate scientists now believe to be the case, then the
regulation of carbon content throughout the energy industry will
also become inevitable, and the shift of the global energy supply
away from oil, gas, and coal and toward wind, sun, and water will
accelerate.
To put this in perspective, today the global energy market achieves
annual revenues of nearly $6 trillion, making it the largest of all
economic sectors. (The next five are agriculture, telecom, auto,
chemicals, packaged foods, and pharmaceuticals; total world GDP
is hard to estimate, but its around $80 trillion.) Since about 85% of
38
the total worlds energy supply comes from fossil fuels, the
transformation of the sector of the economy upon which nearly
everything else relies will affect everything.
And this is already occurring. For example, the price per watt of
solar-generated electricity shows a very interesting progression, a
spectacular improvement from nearly $80 per watt in 1980, to a few
dollars per watt in 2010, to about .20 today. Behind this, of course,
are huge investments in science and technology, substantial
government subsidies in many countries, including China,
Germany, and the US.
Silicon Photovoltaic Cells, $ per watt
$80
$76.67
$70
$60
$50
$40
$30
$20
$10
~ $00.25
1977
1980
1985
1990
1995
2000
2005
2010
2015
Figure 2: The Cost of Silicon Photovoltaic Cells, in $ per watt
If the trend continues, and there are a lot of reasons to think that it
h"p://en.wikipedia.org/wiki/
will, then soon
the price of solar will drop below the price of oil,
Timeline_of_solar_cells8
and then it may become significantly less, which will give
commercial momentum to the environmental or ecological
imperative.
Transitioning the entire economy will be a massive and long-lived
process, one that takes decades, but conversely to assume that things
39
will remain as they are today is risky at best as a business strategy,

and potentially suicidal at worst.
The scale and scope of both the threats and the opportunities are
profound, and it is not an exaggeration to call it the climate
revolution. Still, for most businesses, other than those directly in
the energy sector today, its probably a longer term issue rather than
an immanent crisis.
Changing Change
The convergence of these five forces of change largely defines the
modern world, shapes our experiences and our attitudes about it,
and also defines the market environment to which we must adapt
and respond.
We turn our attention now to the serious challenge that you face,
creating innovations to meet the future needs and expectations of
the market without taking unnecessary risks.
Taking Action
Each chapter from here forward closes with a few actions items that
are intended to help you think about how to apply the ideas and
concepts that youve just read about.
List the changes; prioritize the top 3. Think about how the changes
could impact your business in each of these, prioritize the ones that
you think will be most impactful, and devise a quick strategic
response.
Another task: identify one of the themes thats vital to the future of
your business, and make it your mission to learn more about it.
40
41
Chapter 4
Risk, Great Ideas,
and Your Business Model
Most of the forces of change that we described in the previous

chapter are probably working against your business, in the sense
that in their brutally evil and mercilessly conspiratorial way, they
are plotting to bring deep and enduring change to the market, to
your market, and to make your current products and services
obsolete. They do so without regret or remorse.
In response, you are obliged to innovate.
And in the pursuit of innovation, of course, you will be obliged to
engage in taking risk.
Yes, one of the most significant challenges that every small business
leader faces is that even when youre ready and willing to innovate
you are immediately confronted with the enormous, elephant-sized
issue of figuring out where to invest your precious time and
resources. If youre not hanging around Stanford where hoards of
42
super-smart grad students are cooking up the next HP, Yahoo,

Google, or Cisco, where do you find the really great ideas?
Developing or finding the ideas, choosing the best ones, and
managing their growth and development through to completion are
vital innovation management tasks that well explore in this chapter
and the next one. The goal, of course, is to find the very best highreward, low-risk ideas that will change the market, amplify your
profits, increase your relevance, and sustain your organizations
viability over the long term.
In broad terms, we know that great ideas often come from one of
these four sources, and from combinations of them: customers;
suppliers and partners; your own organization; and new technology.
Shortly well look critically at each of these four areas, but first we
need to frame the problem more precisely by looking at your
business as a whole, its strengths and weaknesses, and its position in
the marketplace relative to the competitors.
Mapping Your Place in the Market

The first perspective we want to develop to assess your business is
to look at its business model. A business model is a description of
how a business makes money, which means it might be a very
simple thing:
We make a product; then someone buys it.
We offer a service; then someone buys it.
Chances are, though, that its not really that simple at all. Why do
people choose to buy? Whats the value proposition that attracts
them? What are the best features that make a difference? What are
the strengths and weaknesses in comparison with competitors?
What goes into determining the price of the product or service, and
43
in which directions are market prices trending?

Our goal here is to locate your business in the market, to see clearly
how it compares with the competition, and then to use this
assessment to chart a future path toward success. Hence, we want to
address these questions:
Where are we today, where are our competitors, and in

which direction lies the future of our industry?
Which business models will be successful in the future?
And thus in which direction(s) should we target our

innovation efforts?
Rather than just using descriptive language to explain this its very
helpful to visualize the market, to map it.
customization
more
Well start with a matrix. Label the horizontal axis market size.
Moving from left to right means reaching more customers, which
thus implies the possibility of decreasing prices as volume
increases.
the market
market size
bigger
Figure 3: The Business Model Matrix
44
Hence, the business model intent of all large scale retailers is to

move progressively to the right, toward ever larger chunks of the
market.
Lower prices every day is not a Wal-Mart advertising slogan by
accident, but a central element of the companys branding and value
proposition. Hence, the lower right hand corner of the matrix
designates the largest mass market, the one with the lowest prices
and the most standardization. This is high volume market, the mass
of the mass market.
In the USA theres a company called The Dollar Store that
occupies that spot. Everything in the store costs, predictably, $1,
and the lure is the pricing, as its obvious to everyone that this is not
the place to be looking for high quality. In fact, the dollar store
business model can exist only because of super-high volume
manufacturing in massive, highly automated, digitally-controlled
factories that crank out impressive (or appalling) volumes of
plastics.
The vertical axis is labeled customization (or if you prefer,
differentiation). Moving from bottom toward the top means that
the customization and differentiation of the product or service is
increasing, which is of course precisely the opposite of the Dollar
Store. Therefore, the upper left corner is where youll find the
exclusive products that only the richest people in the world can buy.
Private yachts and jets, Picasso and Van Gogh paintings, mountaintop estates, and private islands.
Conversely, the lower left corner of the matrix would have to be
considered as the ultimate Dead Zone. This is the place you dont
want to be, because if there were such a possibility as high prices
with no customization, this is where you would find it. (figure 2)
No business leader would intentionally choose for their firm to
occupy this spot.
45
customization
luxuries;
differentiated
markets
non-customized
the market
dead
commodities;
mass market
zone
small
market size
Figure 4: The Business Model Matrix; the Dead Zone
What weve done is that by defining these two axes and thinking
about the position of any individual firm, weve created a map that
enables us to determine our relative place in the market and to think
productively the behavior of our competition, which will of course
then to help us plot our future course, and then to target the
innovations that are likely to be the most strategically valuable.
As an example of how we can use the model, lets take the
hypothetical example of Sears, the formerly huge American retail
company, which was at one time the single most dominant
American retailer and a tremendously innovative company that grew
to enormous size and exceptional influence. The companys
massive catalog was a treasured item, a compendium of everything
that was great about capitalism.
The company prospered by offering great value, and its offers were
very specifically targeted at the core of the market, and very large
numbers of customers found it very appealing to shop at Sears.
46
Both as a matter of its business design and its marketing, it strived

to be the iconic American retailer. Headquartered in the center of
the country, in Chicago, the company exuded confidence and
reliably produced handsome profits for many years. Figure 5 shows
Sears happily at the center of the market as of about 1980.
customization
luxuries;
differentiated
markets
the market
1980
non-customized
sears
1980
dead
commodities;
mass market
zone
small
market size
Figure 5: Sears, sitting happily in the center of the market.
At that time Sears had a much smaller rival, but within 20 years
their roles had reversed and the rival, Wal-Mart, had far surpassed
Sears. Wal-Marts approach was to out-innovate Sears, and while
Sears suffered significant declines in its business Wal-Mart grew
very fast, both in the US and then throughout the world.
The market map of 2000 shows that the overall size of the market
has grown significantly, which reflects a normal process of
economic growth. The map also mentions a key factor, which is
that overall customer expectations changed from 1980, and parts of
the market that were quite viable in 1980 have been overtaken by
the dead zone by 2000. Sears, which stayed resolutely where it was
in its core, and did not appear to even be trying to innovate its
47
business, was simply swallowed up by the staying the same.

Changing customer expectations put it solidly in the expanding
Dead Zone.
customization
luxuries;
differentiated
markets
non-customized
sears
2000
dead
commodities;
mass market
zone
small
market size
Figure 6: Increasing Customer Expectation Swallow Sears
Wal-Mart, in contrast, has consistently demonstrated the qualities

necessary for continued success. By developing new innovations in
its supply chain, product designs, and in fact across the entire scope
of its business model, it succeeded in moving its business model
both upward, with higher quality products, and to the right, with
progressively lower prices.
(It should be noted that Wal-marts employment policies remain
controversial, and one can argue that its success is based in part on a
practice of under-paying its employees by manipulating the labor
laws of the US. For the purposes of this discussion we leave this
important issue aside, but its important to recognize the ethical
problems associated with this practice, and to notice the likelihood
48
that future changes in its business model may be forthcoming in the

near future as a result.)
customization
luxuries;
differentiated
markets
sears
2000
wal-mart
2000
non-customized
1980
dead
commodities;
mass market
zone
small
market size
Figure 7: Wal-Mart Evolves its Business Model to Reflect

Increasing Customer Expectation
Wal-Mart, and another successful business model innovator Ikea,

both continue to aspire to move both up, toward more
customization, and to the right, toward ever lower prices. And so do
all of their competitors. Including, of course, Amazon.
The way things are going its not hard to imagine that by 2020 Sears
will have been buried in the Dead Zone, bankrupt and gone. A
massive infusion of innovation will be utterly necessary for Sears to
survive, while Wal-Mart will probably continue to move up and to
the right on the business model map, even as the Dead Zone chases
it up and outward. Hence, the Wal-Mart of 2020 will be the same as
the Wal-Mart of 1980 in name only, as the economys innovation
process of creative destruction chases it ever forward.
luxuries;
differentiated
markets
49
customization
the market
2020
wal-mart
2020?
sears
2020?
2000
non-customized
1980
dead
commodities;
mass market
zone
small
market size
Figure 8: Wal-Mart in 2020? You have to keep moving
Wal-Marts leaders, and the leaders of all retailers (including Sears,

if its still around then), will ask themselves how they can customize
the experience of shopping; Amazon does so through its delivery
services, and its offer to get your purchase to you within two days,
or a day, or even hours. It also offers recommendations customized
to your interests, based on statistical analysis of the behavior of you
plus millions of other customers. How will Wal-Mart do that for instore shoppers?
Its quite likely that many of its initiatives will involve digital
technology, for as we noted in the previous chapter, every company,
even those that are not specifically technology companies, should
think of themselves as technology companies, and its become an
imperative to sort out how the digital world can enhance or even
transform your existing, non-digital business model.
50
Netflix is a digital entertainment business, and because viewer

recommendations are so important to its success, in 2009 the
company sponsored a contest in which it paid a prize of $1 million
to the programmers who best improved the accuracy of its user
recommendations. Its quite obvious that the goal of the prize is
also to move Netflix upward on the map, toward still better
customization.
The point, obviously is that you may also be able to use the business
model map to help you think about the future of your business, to
compare your own companys performance to your competitors, and
to conceive of the initiatives that will take you in the direction you
want to go.
For another example lets look at auto markets, where a $45,000
Lexus competes successfully with a $65,000 Mercedes. The
$25,000 Chevrolet is situated quite purposefully in the center of the
market, similar in brand identity and corporate culture to Sears. For
decades the center this was a profitable spot, but no more, and like
Sears, Chevrolet was left behind due to growing customer
expectations. The failure of Chevrolet to innovate was indeed a big
part of the problems that GM CEO Rick Wagoner did not fix, and a
significant contributor to the drastic decline of GM between 1995
and 2008.
So as you think about your own business you will seek to identify
where customization can be offered to enhance the attractiveness of
your products and services, and where perhaps the market can
enlarged by lowering prices, thereby moving your entire business
model continually upward and to the right. This may not be
optional, and indeed, when we look at the companies that have
failed, we often see that their competitors offered either lower
prices, or more customized solutions, or both.
For example, you may remember that in its early days, Google had a
51
lot of search engine competitors, but over time they have all fallen
away simply because the search results that Google provided were
simply better, i.e., more customized to the specific requirements of
searchers. This is a great example, by the way, of the winner-takeall dynamics of technology markets.
Remember, though, that this does not mean that Google will forever
be entrenched as the exemplary search company, because theres no
reason to expect Google to retain its dominance forever. Theres no
limit to the business factors that could become important in future
markets, and which some firm other than Google may master.
Indeed, as noted above its very often when the key drivers of
competition change that old companies are pushed aside, and new
ones take their places as leaders. And this happens precisely
because it is so often the new firms that master new competitive
factors first.
We saw this with Nokia, and now we may be looking the same
process right now with Microsoft. The tech colossus is still
dominant in many fields, but is struggling to adapt to markets that
are rapidly changing. Sales of the PC are declining worldwide,
down 10% from 2012 to 2013, while sales of tablets are increasing,
but Microsoft is not benefitting much from this because it did not
foresee the tablet market, and came quite late with its Surface.
This is quite consistent with the companys history as a follower
rather than a leader. How many of Microsofts products are copies
of innovations from others? Its a long list, beginning with DOS,
Windows, and Office, which were copies of CP-M, the Mac OS,
and Word Perfect / Lotus 123, and then Explorer which copied
Netscape Navigator, Bing which is a copy of Google, etc. This
shows that a company can be hugely successful as a clever copiest,
and even as Microsoft Office and Windows remain dominant
software products for PCs, the continuing decline of PC sales
52
requires the company to fight a rear guard action to preserve the

past, rather than a proactive one to create the future. We can well
foresee that when PC sales drop below some currently-undefined
threshold, then Microsoft itself may follow in the footsteps of Nokia
and Kodak, falling below the threshold of non-sustainability at
which point the company implodes, most likely to be sold off in
pieces for its assets.
But the leaders of Microsoft are obviously very smart, and they see
whats happening as well or better than us outsiders. So will they
lead their company to create the next generations of products and
services and business models to sustain the company in the years
ahead? Will they be able to create better business model and new
products and services that move up and to the right on the matrix,
faster and better than their competitors? The hypothesis here, and
the logic of business model warfare, suggests that this should be one
of their overriding objectives, and perhaps a convenient (although
certainly quite simplified) way to assess any given decision or
proposed initiative.
The upper right corner, meanwhile, remains an interesting sort of
business Xanadu. Here you might find an entirely customized
product, which is affordable by literally everyone, because instead
of having to pay for it, its free. Air, for example, is such a product,
essential, free, and (in most places) abundant.
But surely the upper right could not be the location of any company,
for how would it survive?
In fact, however, there are currently two companies occupying the
super desirable corner, and their astounding success has been
achieved precisely because their products (well, services really) are
utterly free and yet totally customized to the uniqueness of each
buyers specific requirements.
53
One of these companies is Google, which is happy to provide you

with a fully customized web search at any time, day or night. It
takes only milliseconds, and the company performed this hugely
valuable service approximately 2 trillion times in 2013, creating 2
trillion generally satisfied customer experiences. Breaking down
this huge number, we see that searches were performed on average 6
billion times per day, or 4 million per minute, or thus about 70,000
per second. (I found out the total number by doing a Google search,
of course.)
An additional interesting result comes when we divide 2 trillion
searches by the approximately 7 billions humans, which tells us that
on average, each of us searched Google about 300 times in 2013, or
about once a day. (On some days I myself search Google 20 or 30
times, and most newborn babies dont use Google at all, so the
average just gives a general idea of how well used this service is.)
luxuries;
differentiated
markets
customized
search results
The
Sweet Spot:
Google
(g-spot)
non-customized
customization
market size:
everyone
dead
commodities;
mass market
zone
small
market size
Figure 9: Where is Google? The g-spot.
54
Overall its quite remarkable what the company has achieved, and
how important its services have become, and still even more
remarkable that all these services are free. Hence, it is in honor of
Google that the name of the super sweet spot in the upper right
corner of the value matrix is the g-spot.
Googles magnificent business model has created a goodly number
of billionaires from among the founding team precisely because the
company is so well and uniquely positioned, because they do indeed
seem to fully understand the extraordinary position it occupies, and
because the firm is so amazingly well managed to exploit and
extend its significant advantage. (figure 7) Microsofts Bing,
meanwhile, plays follower, a position we are accustomed to seeing a
Microsoft product occupy.
There is other company also now occupying the g-spot, sitting
beside Google with a complementary competing business model.
This is Facebook (should we call it the f-spot?), which is also an
entirely free service, one also utilized by millions.
Interestingly, while Googles success is based on its 100%
customization of search results, Facebooks is also built entirely on
total customization, but in Facebooks case the customization is
provided by you, the user, because youre the one who creates your
Facebook page, and nearly a billion of us are happy to participate.
Facebook has also created billionaire owners, and they also seem to
understand their unique situation.
And actually Google also relies on us to do the customization, as
were the one who are creating the 180 million + web sites that
Google searches for us. This is a profound partnership between
content creators, us, platform creators such as Facebook, and
content locators such as Google and Bing.
55
Content
Creators
Content
Locators
Platform
Creators
Figure 10: The Digital Economy Synergy
This triad constitutes a hugely significant phenomenon for all future

businesses and business model innovators. Study it deeply to
understand, exploit, and further develop what the internet age now
has made possible, because it is here that we can anticipate many
innovations and surprises in the future, particularly as computers
become faster, more powerful, less expensive, and still more
ubiquitous.
Along these lines, theres another example that suggests the validity
of the model, the PC itself. As s device, the PC has gotten
considerably less expensive, exceptionally more powerful, and
profoundly more customizable over the last 30 years. The entire PC
industry has moved significantly up and to the right, especially if
you consider your smart phone to be a PC, which would be
accurate. But its evne more accurate to think of a smart phone as a
supercomputer, as todays iPhone has roughly the same computing
power as a supercomputer of three decades ago. If the folks at
Nokia had been thinking about their product in these terms, rather
than as cell phone, then perhaps they would have been better
prepared for the destruction that the iPhone did to their business
model.
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You get the point, which is that for the majority of firms that
compete in the physical world of products and services for which
they must charge money to survive, which is nearly every company,
the g-spot is an incredibly enticing destination, but one that they
will never actually attain. Still, this is direction toward which you
are always compelled to strive through your innovation efforts.
Further, just about every type of competitive advantage can be
represented on the map, so whether youre selling products or
services doesnt seem to matter, as these two basic variables
encompass nearly all business concerns, nor does it matter it youre
selling to consumers or to other businesses, or if youre in
government or the non-profit sector; the basic issues and concerns
are more or less the same which can be expressed as How to
achieve more customization, and how to reach more customers.
As a practical exercise, please locate your business and the
businesses of your competitors on the map. Whats different
between your business and theirs? Do they target higher prices and
a more selective clientele? Then they would be perhaps up and to
the left of yours. Do they offer steep discounts and seek a larger
market share? Then they would be down and to the right.
The important issue to consider is the direction in which things are
headed. In your ideal situation, which spot on the map would you
prefer to occupy? Can you define a pathway from where you are
now to where youd like to be? That could well be your innovation
pathway, and in the quest to target the right innovations to be
working on, you can use this possibility as one key aspect to
address: Does this innovation help our organization move to a
better spot on the map?
Similarly, you should also consider what spot your competitors
would like to occupy, and think about how they might they get
there.
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If you mark these targets also, and draw an arrow from the current
location to the future preferred location, what do you learn? Is
everyone in the market trying to get to the same location? If so,
how do customers distinguish between the players? Do any
companies in the market have a distinctive brand identity that
confers a branding or positioning advantage?
Or are all the competitors just trying to lower their prices to attract
more market share, leading to a price war? Or perhaps theyre
trying to gain market share by adding services without raising
prices.
We recognize that these questions, and the way were asking them,
are oversimplified, but despite this drawback the questions
themselves are nevertheless quite important to ask, and hopefully
they will provoke some useful thinking for you and productive
dialog among your team. The right questions, even simplified ones,
can lead to answers that may be quite important because they may
help us to identify the patterns that lead us to make the right
choices, choices that result in strategic advantage. And since were
inevitably dealing with situations of incomplete information, then
we look for the patterns that can lead us to useful answers.
As we have already mentioned at the beginning of the book,
questions are critically important strategic allies for us in this
journey.
Since there is inevitably a series of questions that pertain to each of
the phrases in the formula (including the complexity and
competition phrase), weve prepared an interactive workbook
containing those questions that is presented as a companion volume
to this book.
As you read through the rest of the book youll see graphics that
represent those worksheets, but it will probably be much easier for
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you if you download a copy of the entire workbook so you have

bigger pages to work from.
You can download it here: www.innovationlabs.com/formula
Great Ideas
Where do great ideas come from? Obviously they come from many
sources, which means that your systematic innovation process has to
support and sustain multiple efforts at ideation in parallel.
In large organizations, exploratory work is happening all the time
through the development of new technology in R&D labs as well as
the evaluation of new technology coming from external sources.
There are ongoing efforts to develop new practices, methods, and
approaches that may also lead to new ideas. And the evolution of
the innovation spirit throughout the organization, and in its broader
ecosystem of partners, customers, and suppliers, constitute vastly
rich sources of ideas, so insiders and outsiders will be providing a
steady flow of interesting and worthwhile possibilities.
In the following sections we will explore some promising ways that
you may be able to find ideas that will take your own business
forward.
Researching Your Own Business Model

One of the most important purposes of the business model map is to
help you understand your own business model, which focuses your
thinking on how your firm is organized to make money, and the
value proposition youve created which results in customers paying
you for the products and services you sell.
To dig into your model more deeply, begin by making a list of 5 to
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10 reasons that your customers are your customers. For example,

do customers come because of your businesss location? Or is it the
distinctive quality of your products? Or perhaps their designs? Or
maybe you have a strong or particularly efficient distribution
system? Are your prices lower? Is your branding better?
Of course you have impressions and insights about this, perhaps a
great deal of insights. But an even better source of the important
information probably isnt your own ideas, its what they think,
what the customers themselves believe, so were going to spend the
next few pages thinking through some techniques you can use to
gain insight about your customers directly from them through a
focused process of researching.
And in addition to talking with customers, it may also be quite
useful to consider non-customers, the ones who dont buy from you,
but could. The question, of course, is Why dont they? Does your
offer lack something they want? Does your brand lack appeal for
them? Why are competing offers more attractive?
Its also useful to find out the views of your partners, as well
suppliers and even community members, for their perspectives on
your business may offer useful insights that could lead you to
discover new innovation opportunities.
Customer Needs, Known and Unknown

To find out what customers want today and may want in the future,
you need to go out and talk with them. Its not a phone call, its a
face to face dialog, preferably in their own workplaces. Ask them
straight out what they want and what they like, and what they dont
like, and youre likely to gain some interesting insights once you get
past the everythings fine talk. Probe deeply by asking openended questions that they have to think about, explore what theyre
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expecting for their own futures and what their needs will mean for
what you can provide to them.
You want them to be fully open, so take it as a gift when they
complain about your firms work, or criticize your staff and dont
try to explain or defend even though it may be very tempting to do
that.
When are things difficult?

simpler?
How can you make them
When are things awkward? How you make them smoother?
When are things unsatisfying? How you can make them

satisfying?
What causes worry? How can you alleviate it?
What causes confusion? How you make things clearer?
What causes waste? How can you eliminate it?
All of these themes may lead to opportunities for improvement of

their experience, and when you improve their experience you create
brand loyalty. We call these types of opportunities unmet needs,
and theyre exactly what you need to find since every unmet need is
also an innovation opportunity.
In the words of innovation teacher Clayton Christensen, your task is
to understand the job that the user/customer wants to do, and then to
figure out how to do it more simply, more efficiently, with less
waste, and with more fun. When you discover experiences that are
difficult, awkward, unsatisfying, etc. you know that a task or job is
being done inefficiently, and hence youve also found the
opportunity to remove inefficiency and replace it with the opposite,
simplicity, ease, or fun, and get paid for doing it.
In addition to your customers, youre likely to also learn a lot from
non-customers. If you can find out why they choose products or
services offered by your competitors instead of yours youll
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probably be gaining a lot of insights into your brand and your

organization.
In addition to talking, it may also be worthwhile to simply observe
how they work, or what they do.
Theres a discipline behind this sort of observation, and one of its
insights is that the way people behave is not necessarily exactly how
they say they behave; what they do, that is, is often different from
what they say they do. In fact, what they do is quite often
significantly different from what they tell you, and you may not find
this out unless you observe them.
For example, during a research project for a food company we
interviewed many families who fit into their target market group,
and these consumers were happy to describe for us their very
healthy eating habits. A look into their storage closets and pantries
revealed a rather different view, though, as all the snacks and sugary
treats were there on full view.
So what did we learn? If we had talked to them at the store, or at
our offices, we never would have discovered what they really eat;
we had to actually go to their homes, talk with them, and observe
their own living environments.
A team of researchers at Wells Fargo bank practices the same
techniques and learned so much about their clients, and found so
many new ways to help them as a result, that they trained hundreds
of their sales people in these observation techniques, and they count
the additional sales that theyve achieved in the tens of millions of
dollars.1
So meet with people not in your office or in some neutral (sterile)
focus group meeting room, but in their own homes, offices,
factories, distribution sites, and in their cars, airports, hotels, stores,
and wherever else theyre engaged in doing whatever it is that you
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need to learn about.

These are probably not going to be 10 minute conversations or 10
minute observations, but dialogs of an hour or more. Delve behind
the attitudes and reasons behind the choices to expose hidden
values, beliefs, and expectations. Find out why they make the
choices they make. Learn what works for them; learn what doesnt.
The science behind this is called ethnography, and its derived from
a branch of anthropology thats focused on the study of human
culture. One hundred years ago when ethnography was developed,
the practitioners were Margaret Mead and Claude Levi-Strauss and
dozens of others, mostly academics, and their research subjects were
human cultural groups, tribes and societies who lived in exotic
places. Many of todays ethnographers are working for companies
to help sort out the complexities of human choices and human
behavior in the marketplace. Intel has teams of ethnographers who
study computer usage around the world; ATT has teams that study
how people use phones; and every other type of company has
conducted ethnographic studies, in food, paper, metals, appliances,
cars, banking, energy, health care, and on and on.
Kimberly Clark used ethnography and discovered a new market that
was quickly worth $1 billion in annual sales, as did Alcoa.
And you can do the same thing, by observing closely, withholding
judgment, asking open ended questions, and being open to and
indeed interested in learning whats not working, and how it can be
fixed.
Discovering Whats Less Than Ideal

One of the reasons that its not enough to ask people about their
own experiences is that in many situations they cant tell you much
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of use. This is because many of us are deeply conditioned from a

young age to accept things as they are, even when theyre less than
ideal or even pretty bad.
Someone, someone else, probably an authority figure (often a selfappointed one) has taught us that whatevers not working for us is
our problem, not theirs, and we have to endure it, and this pattern is
so common that we often fail to notice how bad things really are.
Until there is a better alternative. And then given a choice, people
rush to use it, and readily abandon whatever wasnt working. This
is true whether were talking about people rushing out of East Berlin
upon the fall of the Berlin Wall and the collapse of the USSR, or if
the subject is the mass migration from cell phones to smart phones.
At the exact moment that people become aware of a better option,
the contrast between the old, worse way and the new, better way
becomes abruptly crystal clear, and they switch.
Waiting in line at the post office was accepted as normal until Fedex
showed that it was unnecessary. And
Drinking coffee was normal until Starbucks offered

higher quality beverages and a much more pleasant
experience.
Using DOS was fine until there was Macintosh.
A corded phone was great until there were cordless ones.
Cell phones were good; smart phones much better.
Sears was fine until Wal-Mart was better.
Taxis were ok; Uber is better.
Many innovations transform experiences that are accepted as normal

and natural without question, into those that are better, or even
much better. So your task as an innovation hunter is to identify
how, where, and why your current customers, non-customers, and
future customers, arent (or wont be) getting what they would
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prefer to have, what they really want, or even what they need. And
when you figure out how to do that at a price they like, your
business moves into the category called innovative.
Outside-In
Youre learning to think in a new way, because youre becoming a
problem-seeker. You learn to see as not acceptable what many
others just accept as normal, and your senses become attuned to
the gap.
Many people are pretty good at this, but its not merely an innate
talent because anyone can learn how to do it, including you. Whats
needed is intention, practice, and the willingness to find new
perspectives.
And this last part, perspective, is a really interesting one.
In general terms we can learn about perspective by making a very
useful distinction between insiders and outsiders. Insiders are
the ones who live and work inside a system, inside a paradigm or
viewpoint. They know it intimately; it is their skin, their air. These
are employees in a company who know how it gets work done
because they do it that way every day, and frequent users of a
product or service who depend on it. They know the rules, the
tricks, theyre insiders. Being an insider by definition shapes ones
viewpoint and experience, it provides a context and perspective.
For example, a French person knows intimately the French society,
knows the laws, and the big ideas that shape French culture, knows
the hidden or unspoken rules, knows how to get around Paris, and
can communicate naturally with other French people. An Iranian
knows the same about Iran, a Russian about Russia, an American
about America, and so on, for each and every one of the thousands
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of distinct cultural groups around the world.

But then it goes deeper than that. A person from Brittany, in the far
northwest of France, knows a different version of French culture
from a Provenal of the south, or a person from French Polynesia or
French Africa. Each of these is also a culture, possibly a subculture, and each has its own rules, its own standards, mores and
styles.
And each has its own assumptions, both overt ones that people
discuss, and hidden ones that are deeply important part of
everyones lives, but which are often not spoken of at all.
Outsiders are different. Theyre the ones who are familiar with
none of those things. They are the ones who ask the stupid
questions that all the insiders already know the answers to. Theyre
the ones who, when they ask why, get the response, Because thats
how weve always done it! Often this response comes with some
sense of indignity, as if it is impolite or inappropriate to not know
how we do it.
By the very act of asking, the outsider has branded him or herself
precisely as an outsider, as someone other, and this is a matter of
derision or even condemnation.
In extreme contexts it is wrong to be different. Our ideas and
texts are sacred; yours are profane, and over such issues wars are
sometimes fought, and people die.
These viewpoints, the distinctions between us and them are
characteristic of human culture, and this is precisely the domain that
we must explore, though perhaps not as theologists, but as practical
people looking for a better way to accomplish the tasks of living.
And in this way we searchers and researchers should take on the
perspective of outsiders, for outsiders are often the ones who usually
see more clearly whats not working, or where deeply held
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assumptions have so conditioned peoples minds that they readily

accept less than ideal circumstances, products, or services.
In the history of entrepreneurship it has frequently been the
outsiders who have seen whats not been working, and who then
created many of the great leaps forward. Many of the most
successful, however, have combined deep insider knowledge of a
market or an industry with the outsiders ability to see whats not
working, and to see how solutions introduced laterally from other
industries may solve problems that the insiders may not have even
recognized at all.
Fred Smith was an outsider-insider who revolutionized package
delivery business; he founded Fedex.
Dee Hock was an outsider-insider who transformed personal
finance; he led the team that created the Visa credit card, which
revolutionized personal finance.
Howard Schultz was an outsider-insider who changed the worlds
beverage habits; he made Starbucks into a global brand.
Herb Kelleher was an outsider-insider who transformed air travel;
he co-founded Southwest Airlines, the first discount airline, and the
one that changed air travel forever.
There are plenty of other examples, and they all tell the story of
someone who saw a better way, and knew enough about the inside
of an industry to see how it could become much better.
And what about you? You know your company, your sector, your
industry, and you know it intimately. And as you develop the
capacity to look at it as an outsider youre likely to find many
opportunities to innovate, to grow, to meet new needs in new ways.
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Study Business Model Innovators

What is the most important quality that successful business model
entrepreneurs have in common? You might say that its their
persistence or perseverance, tenacity, determination, or perhaps
cleverness. These are all important, of course, but in our view
theres another factor thats not so well recognized, but it may be
the most significant ingredient that successful business founders
have in common: they combined the attributes of insiders and
outsiders.
Inside
Knowledge
Innovation
Zone
Outside
Knowledge
Figure 11: Inside + Outside Knowledge Creates Innovation
They understood their business domains from the inside, and knew
well the deep intricacies and the qualities and characteristics
necessary to be successful. But they were not content to operate a
business in the conventional way. Instead, they also brought to it
the outsiders perspective on what could or should be done
differently.
Both types of knowledge were essential to their successes, and it
was largely their capacity to combine them, to find new and better
ways to do well-know jobs, that became the foundation of their
super -successful ventures. This, then, is your challenge as well: to
see from the inside what is, and from the outside what could be.
It is your powers as an observer that are most likely to disclose to
you where the opportunities lie.
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Hence, in the outsider role you must set aside what you know about
the business or the company, and see through new eyes, to discover
the insights and possibilities that your insider knowledge and
experiences have blinded you to.
The question, then, is what companies in your business have done
what these business model innovators have done? Who has shifted
the dynamics of business in your own field? And from what, to
what, did they provoke the change?
Understanding their accomplishments and especially the thinking
behind it can lead to a much deeper appreciation for the structure of
your business or industry, and that in turn can sensitize you to new
possibilities and opportunities.
This then relates in a very important way to the definition of luck,
and to the role of luck in innovation. In fact, luck almost always
plays a part in the conception and creation of any innovation, a part
that is nicely explained by the famous comment of the great French
chemist Louis Pasteur, who commented that luck favors the
prepared mind, meaning, of course that the lucky accident comes
about not so much by change, but as a direct consequence of the
preparation which preceded it.
This concept of luck removes the notion of randomness, which is
generally part of how most of us imagine luck happens, and instead
replaces it with the idea that we may seize upon opportunities that
life, fate, or chance put before us if and only if we are able to
recognize exactly those very same opportunities when they are
presented.
By contrast, by its very inpreparation, the unprepared mind is not
capable of seeing what the prepared mind recognizes. This tells that
preparation is entirely required for luck to become present, at least
as far as innovation is concerned.
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The great golfer Gary Player expressed much the same sentiment in
his comment that the more I practice, the luckier I get.
So your studies of past innovators and their work, in your field and
outside of it, are an essential part of your own quest for innovation,
and cannot be overlooked. Knowledge of history is a great friend of
the would-be innovator, and most successful innovators are more
than casual students of history; many are quite rigorous about it.
Engage Your Community

Another useful perspective to consider is based on the awareness
that no business exists in and unto itself. There are always suppliers
and partners and of course customers, both upstream who providing
you business with critical inputs, and downstream, taking your
outputs for their own purposes.
Taken together, this group constitutes a community, or ecosystem,
and your business occupies one niche of it. Do you intend to grow
your business? Then one way to do so is to expand your role in that
ecosystem, to find new ways to add value to the overall process
chain of which your organization is one part. Hence, you have to
figure out where there are opportunities, and course a great way to
do that is simply to engage with other players, individually and in
groups, and through those interactions to find out whats not
working, or what could be working better.
Meetings, formal and informal, conferences, brainstorming sessions
and workshops are all tools you can use to expose new needs,
uncover old but unrecognized problems, and collaboratively design
win-win approaches and solutions.
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Improve Your Supply Chain

Most products and services reach the customer at the end of what
can be a quite long series of transactions, handoffs, and exchanges
that is sometimes called the supply chain. At each junction in the
chain there is an exchange not only of products, but also of
information. And each participant in the chain has to make
decisions about what theyre going to do, and to buy, and what
theyre not.
Hence, if your product or service is part of a supply chain, then
studying that chain in depth may reveal significant opportunities for
improvement. Go and talk to your supply chain partners, and find
out how its going. Whats not working? What should work better?
Where are the bottlenecks, and breakdowns, and gaps? How can the
process be more efficient? Are there customer needs that are not
being addressed? Are there new competitors coming that we should
prepare for?
Apply New Technology

The rapid acceleration of new technology presents enormous
opportunities to meet the needs of existing and new customers in
new ways, but also of course it presents significant potential threats,
because it enables new competitors to enter your market in new
ways.
And as we surround ourselves with more and more technology, we
also create new ways to use technology to connect and to act, and
this changes the structure of the market.
For example, the worlds advertising agencies used to have a
wonderfully protected position in the ad market because they were
the ultra-knowledgeable specialists, but then Google arrived and
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made it possible for all types of organizations to reach directly to

the customers they really wanted, namely the ones who were
already looking for them. Within a decade the share of the
advertising market that the agencies controlled dropped from x% to
y%, and Google became the number one ad agency in the world by
a wide margin.
In hindsight its easy to blame the ad agencies for their lack of
foresight, but in fairness Googles leaders didnt see it either. It
took some years for Page and Brin and Schmidt to recognize that
ad words and auctions were the money machines that would
make the search engine into a world-leading business, and even then
it happened only because one of their competitors did it first.
This is but one tiny example among thousands that show not only
how technology brings change, but also how hard it is to predict
what the impact will be.
Like computers have certainly done, every foundational technology
that has ever been introduced caused fundamental change, and the
last two hundred years of economic growth and development is
essentially a steady parade of new tools that changed how we live.
Steam engines, new metals, railroads, autos, electricity,
refrigeration, vaccines, highways, elevators, airplanes, telephones,
rockets, satellites, computers each brought momentous change.
And yet in most instances, few people who happened to be around
at the time that these revolutions were introduced actually had a
clear picture of what the outcomes would be. Just as the founders of
Google took years to figure out how to make money with the
stupendous innovation, many others did as well.
Hence, while the entire economy has been transformed from stage
to stage, from agriculture to industry to information and services, at
each step its been a process of discovery and invention rather than
any progression guided by a grand plan. Some of the scientists,
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entrepreneurs, and technologists involved in all of these advances

may have had a sense of what was possible, but only a sense.
But what they all saw, each of them, was a better way to accomplish
some immediate objectives, and this set them on the path that led to
economic transformation.
Anticipate Customer Needs

Technology changes the structure of the market by providing new
capabilities, and it also introduces new needs and new desires. In
fact, in the modern world our needs and desires are entirely
confused with one another, and many of us have a hard time
distinguishing the one from the other.
We need food, of course, and water and other necessities of life, but
the need for technology is more ambiguous. Do we need cell
phones and smart phones, or do we just like them a lot? Do we
need apps and tunes and videos?
But we do adore them, oh yes we do! Consumer demand for cell
phones, and then smart phones has exploded worldwide; during the
last half of a single year, 2010, more than 350 million people
became cell phone subscribers. Its a big, impressive number, even
more impressive when we break it down in smaller time increments:
60 million per month, 2 million per day, or nearly 1,350 per minute.
In 2010, in other words, cell and smart phone makers, providers and
service companies were basically printing money, and as a result
many of todays richest people are those who own or owned cell
phone companies, including Carlos Slim of Mexico and Mukesh
Ambani of India.
New phones with new capabilities then bred new services, which in
turn disrupted every consumer market and many B2B markets.
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Mobile banking, retail, distribution, publishing, printing, to name

just four, are all much different businesses than they were before the
smart phone.
The questions that our adoration of technology must lead you to ask
yourself and your colleagues pertain to what it means. With each
new generation of technology new things become possible, desires
become needs, needs become standards of use, and thus new
behaviors emerge.
Your job as a small business leader and aspiring innovator is to
figure out what this means for your own company, and your own
industry.
Did taxi drivers see smart phones as a fundamental threat to their
business? Probably not. Yet this is exactly what theyve become,
and for very good reasons. The transportation services that smart
phones enable are just better. But it wasnt so obvious until
someone put the pieces together felt the need, designed the apps,
built the platform, recruited the drivers, and then convinced the
customers.
And how did that happen? What was the triggering event? The
founders of what became Uber were trying to get a taxi, and there
were none to be found. Angry, frustrated, and wet (it was raining),
they saw how to connect the pieces of technology into a solution,
and they set about to build it. Now Uber is a company worth
billions, and taxi companies are fighting back in the courts to stop
them, but theyre also developing their own apps and platforms, and
it wont be long before all the taxi companies operate just like Uber
does. Or perhaps they wont survive.
Its worth taking a deeper look at how Uber has changed the
experience of hired transportation, because it reveals a lot about
how technology can change the market. While this is not always so,
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in general its reasonable to say that a lot of taxis arent very clean,
that a lot of taxi drivers are rude, and that standing on a corner for
five or ten minutes, or half an hour, and waving at cars going by,
hoping that one of them is an empty taxi that will stop for you,
creates all in all a not very pleasant experience.
So lets say you want to improve that experience what would you
do?
Well, what if you could request a taxi via your phone? And what if
the phone had a map that showed you where all the taxis are, and
especially the one thats coming to pick you up? Then you
wouldnt have to stand on the corner, in the cold and the dark,
waving at cars whizzing by. You could instead wait inside where
its safe and warm until the taxi arrives. And youd know the name
of the driver and the type of car. And youd know immediately the
cost to get to your destination.
In the conventional taxi model you have none of those benefits, but
in the Uber model you have all of them. And all of them are based
on the principle that providing more information and more choice to
customers makes for a better experience. This is what smart phones
enable, and why Uber, as a company, has a huge market valuation
while the taxi companies are complaining bitterly about the new
competition that they are facing.
The smart phone, then, is itself a powerful driver of change, because
it makes things possible that were formerly impossible. This is the
essence of innovation doing something that you previously
couldnt and whats happening is that smart phones enabled with
and connected to a lot of other complementary technologies have
changed how people think about a wide range of issues that are
central to our lives.
Our phones tell us where we are and a lot about where we want to
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go through maps, traffic time estimates, transit maps, transit

schedules, flight schedules, train schedules, etc. This is information
that didnt used to be available to us, but now it is.
Our phones are also financial instruments, as we use them to buy
things, from food to goods and services of all kinds. We also use
them to manage our money, to access information about bank
accounts, and to enable money transfers, payments, etc. And many
vendors now use them as ways to receive payments, through apps
like Square.
Phones are also medical devices, monitoring our heart rates, blood
sugar, and in rural India, theyre connected to probes that do what
EKG machines do, except EKG machines arent portable and they
cost thousands of dollars.
Our phone are also entertaining us, with movies, games, TV shows,
videos, sports, and music.
What else do you use a phone for? Email keeps you connected,
along with Facebook and a slew of other apps that facilitate social
connection and communication. Plus, its a phone.
Its also a camera, a calculator, a thermometer, a drone controller, a
clock, an alarm clock, a calendar, a to-do list, a notebook, a health
care device, and, and, and
If you add up the cost of all the devices that the smart phone has
replaced, its quite significant. So the impact throughout the
consumer electronics industry has also been pretty large.
And the point for you as an innovator is that this is probably just the
beginning. What you want to know is whats coming next, and for
this you will require insight, hard work, research, and your
imagination.
To help you, lets see if we can identify some patterns by looking at
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what various apps do, and the underlying themes and utilities.
Matching: Smart phones enable people with needs to be

matched with others who can meet those needs. This is
what Uber does, and its also what
Transacting: Smart phones enable people to buy, sell, trade,

track bank balances, and all things related to money,
counting, and calculating.
Locating: Smart phone enable you to identify where you

are, discover how to get where you want to go, to find
whats near by, find your friends, find out when the next
subway train is arriving, and find out where Latvia,
Lithuania, and Estonia are too.
Entertaining:
Smart phones bring you all forms of
entertainment; they also enable you to create entertainment
through photography and video.
Informing: Smart phones bring you access to information

no matter where you are.
These are just five of their more general functions, but you get the
point.
Next, expand on this simple list to explore how they may impact
your business in the future. Some questions to consider are
What new forms of information will new technology create

and deliver to us?
What new services will the new information and the new
technologies enable?
How will providers and consumers use that information to

change their environments, their lifestyles, or their own
behaviors?
What might this do to the structure of the market?
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The Cone of Uncertainty and

the Power of Prediction
These are not easy questions to answer, but theyre important ones
to ask, to think deeply about, to discuss with colleagues, and to
come to some conclusions about.
Interestingly, its not entirely necessary that your conclusions are
actually proven correct, in the sense that your predictions and
expectations have to be accurate to be useful. What they do need to
be is specific, and they need to frame your views, right or wrong.
The reason that its more important to make predictions than for
those predictions to be correct relates to the nature of change, the
challenges of making predictions, and the need to take action now,
long before the current trends and patterns become clear. The
underlying issue here is that the farther into the future we think, the
less likely we are to see accurately, but most of us have a pretty
good idea about what were expecting for tomorrow. Aside from
any big unexpected events that are entirely unpredictable, things like
car accidents and terrorist attacks and earthquakes, we pretty much
know how we expect the next day to unfold.
When we think a year into the future, however, things get
considerably fuzzier. We may have some ideas, but its not all that
clear. And five or ten years into the future things generally get
entirely blurry. Most of us only have the vaguest outlines of what
will be happening by then; where well be, what well be doing, and
what the world will be like, well, we can only guess.
We describe the progressively less knowable future as a cone of
uncertainty that begins with today. We know whats happening
now, but the further out in time we go, the wider the possibilities
become, and the less predictable it all is. The spread at the open end
of the cone to the right connotes the progressively higher levels of
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uncertainty that we face the further we get from today.
today8
near
certainty8
the future
extreme
uncertainty8
Figure 12: The Cone of Uncertainty
Of course the unpredictability of the future is a big problem for

business leaders. The more they know about the future the better
are the decisions theyre able to make today, so if, for example, we
knew a particular key product or service is going to become
obsolete by a particular date then we can focus our innovation
investments on meeting that target.
But for the most part we have uncertainty. We dont know, and so
we have to guess, and its precisely because of this innovation
becomes so tricky, so risky, so unsure.
Should we invest in product A or product B? Is service Y going to
be disrupted by new technology, or service Z? The further into the
future were thinking, the more were forced to guess, and when we
dont have much confidence in our guesses, we typically wait and
see rather than acting. As a result of this progressive uncertainty,
most firms focus their innovation efforts on short term needs and
issues about which they have greater clarity. This circumstance
leads them to create incremental innovations, small adjustments to
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existing product and service lines, but to defer or eliminate entirely

the investment in big ideas for the future.
An excess of uncertainty causes investment to stop, and the net
result of this pattern is that there isnt enough investment in big
ideas even by the big firms that will be most severely threatened by
their own inability to change. Most of their current competitors
follow the same pattern, watching and waiting.
The firms that do invest in the big, new ideas are often the ones that
see how existing or new needs can be met with new technologies,
and when they come into the market it is in an entirely disruptive
way. These are often entrepreneurial companies and start-ups.
This pattern explains exactly why the taxi companies didnt come
up with the new approach to their business, but Uber and Lyft did.
The established companies were busy running their day to day
affairs, and they failed entirely to see that (a) people hate rude cab
drivers, dirty cabs, and standing on the corner waving at the cars
going by, and that (b) smart phone apps can link drivers, passengers,
current locations, desired destinations, and the means to pay in a
seamless, predictable, and mutually beneficial way. Its a huge win
for everyone.
Except the taxi companies, for which it is a huge threat.
If they had even bothered to draw a cone of uncertainty about their
own businesses, chances are pretty good that the taxi companies
would have made one that was quite narrow. There just didnt seem
to be much change in their futures.
But the actual cone as revealed in hindsight was a quite heavily
impacted one.
The first point is that this same error is the one made by the majority
of business leaders, whether their companies are large ones or small
ones. Focusing only on the short term needs that have clarity about
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almost always drives them to make choices that are self-defeating

over the long run, because this pattern renders themselves exposed
and vulnerable to the big changes.
The second point relates back to the importance of making
predictions, regardless of how accurate they are. A prediction about
the future becomes a benchmark, and when you make a set of
predictions about change and how it is occurring, and then track
what actually happens, you create the capacity to improve your
predictions, and if you do this diligently over some months and then
years, your predictions will gradually get better and better.
In addition, your predictions will serve as landmarks along the road
of progress. If the landmarks arrive more quickly than you had
anticipated, then youll know that things are going faster.
Conversely, if the landmarks don't arrive as fast as you expect them
to, then youll know that things are changing more slowly. Either
bit of knowledge will have significant impact on the pace and
intensity of your investment in innovation.
To go back to the original point, if you do not make the initial
prediction then you will have no basis for tracking the rate, nor for
tracking the specific events, and thus youll be driving at night, in
the fog, without headlights and without instruments, and you know
that this scenario is not likely to have a happy outcome.
Uber is a good example of the broader pattern of change because the
advent of mobile technologies accessed through smart phones has
impacted every consumer-facing company in a decisive way, and
most of them were indeed driving in the dark, in the fog, without
much if any foresight, and theyve been hammered as a result.
As an aside, its worth noting that many of the companies that do
handle change well, particularly those in technology, use what they
call a technology roadmap to help them anticipate whats coming,
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and to design how they expect to respond. These maps look five,
ten, or even twenty years into the future, and chart the emergence of
new science and new technologies, the obsolescence of old ones, the
progressive transitions of products and services from old to new,
and the associated marketing and sales efforts that help customers
migrate as well. These are also used as tracking benchmarks in
addition to planning tools, and help to calibrate the anticipated rate
of change with the actual rate.
A technology roadmap is thus a giant prediction (giant, because
theyre often poster-sized charts) that in and of itself poses a series
of very significant and influential questions. As a small business
leader, if youre not asking yourself on a regular basis what the
potential impacts of changing technologies are likely to be for your
own firm, then youre taking enormous risks that you may not
recognize that youre taking.
From the questions come answers, which, again, dont have to be
correct to be useful, because they will cause you to take action, and
that action will generate learning. And that learning will generate
adaptation, and will sow the seeds what should sooner or later be the
right innovations at the right time.
In todays environment of accelerating change, its clear, then, that
not innovating is by far the greater risk than innovating and being
wrong. Facebook founder and CEO Mark Zuckerberg expressed
this pretty well: The biggest risk is not taking any risk. In a world
that changing really quickly, the only strategy that is guaranteed to
fail is not taking risks.
The concept of the cone helps us to see that we have to prepare for a
much broader range of possibilities than most of us generally
consider. And it is precisely because most people envision a cone
that is in fact much narrower than the possibilities they ought to be
preparing for that so many businesses falter, and then are entirely
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overtaken by changing conditions, and made obsolete by new

technologies or better business models. In effect, the competition
has figured out how to move the accepted value proposition upward
and to the right, and customers naturally migrate in that direction.
Hence the mental model which tells us that change is slow and
manageable is a flawed model. We have to change our thinking
because the consequences of this deficiency may be critically
important to the future of the enterprise.
Who do so many people get fooled? In general, we can point to
three causes. The first is that change literally is accelerating; things
are simply moving faster today than they did in the past, and while
most of us generally recognize that its different now than it used to
be, many havent thought through the consequences in a thorough
way. Its time now to think about this quite deeply, especially if
youre a business leader.
Secondly, most people dont quite grasp the underlying pattern of
how change unfolds, as noted in a comment by Bill Gates, who once
wrote that people over-estimate change in over the short term but
they under estimate it over the longer term. We expect more from
tomorrow than we get, but we get much more ten years in the future
that we expected: We always overestimate the change that will
occur in the next two years and underestimate the change that will
occur in the next ten. Don't let yourself be lulled into inaction.2
Lulled into inaction is indeed an evocative phrase, as it captures
precisely the nuance thats so important. And of course the point of
this book is to help you, as a small business leader, to define the
best and most effective ways to take that very action. Its our antilull campaign!
The third cause is the topic that we explored in detail above, which
is the age of digital disruption that we are in the midst of. Its a
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dynamic vortex of change where the scale and scope of disruption is

unprecedented, and its going to get significantly more intense in the
next coming years.
What all of this tells us that the necessary and appropriate responses
to this situation should include the following:
1. First, please rethink the cone of uncertainty as it pertains to
your own business. To get a clearer sense of the rate of
change, ask yourself how things have changed over the last
five years and then invert that thinking to consider how
things may change in the coming five. Make a list of the
changes from the past, and anticipate changes that could be
coming in the future.
last 5 years
next 5 years
c2
c2 = 5 x c1
c1
t1
t2
t1 = t2
Figure 13: Change during the Next Five Years

will probably be about 5 times greater than change in the last 5
The next step is to assume that change in the coming five

will be twice to five times greater than what we experienced
during the past five. That could well be frightening, which
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is exactly the point. It will also probably be more a accurate

representation of whats coming.
Look at new and emerging technologies that could impact
your customers and how they think about the world, or
could impact on how you create and deliver the products
and services you provide to them.
Will technology enable your customers to get better
information? Almost certainly it will. How will that
information impact on their purchasing decisions?
2. Second, invest in preparing for a wide variety of degrees of
uncertainty. On this issue you need to create an innovation
portfolio, which we discuss in detail in the next chapter.
3. Third, you need not only to invest, but to invest well. This
means that you need to use a disciplined innovation process
to reduce uncertainty, target future opportunities better, and
increase the success ratio related to your investments. This
will be our topic in Chapter 4, focusing on how to do this at
maximum speed.
Disruption
Earlier we talked about five revolutions that are driving major
change throughout the global economy, the technology revolution,
the science revolution, the culture revolution, the demographic
revolution, and the climate revolution. Each of these is a potent
change maker of change by itself, but because they are so
thoroughly interconnected and combined and intertwined, they
compose an unprecedented market situation of monumental
complexity and happily, immense opportunity.
Now lets return to that list and think through in more detail about
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how these revolutions may impact your own business. What were
particularly interested in are the ways in which these forces may
disrupt the market by enabling or even creating new forms of
competition, and also by altering the needs and perceptions of
customers.
Please take some time now to consider specifically how these trends
may disrupt your business.
As a thought exercise, and without judging how likely or unlikely
your ideas may be, list three potential disruptions in each of the five
categories, which will give you fifteen total disruptors.
Next use the cone of uncertainty map to estimate how soon each one
could possibly appear in the market. Are they short, medium, or
long term disruptions? Its obvious that most of these estimates will
really be guesses, but thats OK. The point here is not necessarily to
be correct, although its fine to be right, of course. But what were
really interested in is establishing benchmarks, some reference
points that you can then use to chart the actual rate of change.
Because without some reference points its impossible to know how
fast change is actually occurring, and thus its impossible to
estimate how soon youll actually need to be ready to introduce the
next generations of products and services that will enable your
business to remain viable.
And once youve thought about the cone and you have a sense of
what coming sooner as opposed to what may be later, you can then
begin to think about how your business might respond in each case.
Each of these disruptions also gives you a great opportunity to
engage in some what-if thinking. What would you need to do to
remain relevant as a company in the face of each of the disruptions
that youve just identified?
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Taking Action
Theres been a lot to think about in this chapter, and weve already
made a lot of suggestions about what you can or should do to being
implementing these ideas.
As noted just above, make a list of possible disruptions pertaining to
each of the major driving forces of change. Assess the short,
medium, and long term impact, and think about the early warning
signs that you might receive to indicate that a possibility is turning
into a reality.
The exercise to list changes in the last five years, and your
anticipated changes in the next five can also be a powerful way to
see more clearly hoe change is occurring, and to prepare for the big
changes that are certainly coming.
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Chapter 5
Managing Risk with Your
Innovation Portfolio3
By definition, business involves risk, and managing that risk well

requires that you understand it. And one of the key nuances to
understand is that there is not just one type of risk, but many. This
is articulated nicely in a recent report from Linda Martinson,
Chairman and President of Baron Funds, the investment
management firm.4 She noted that in managing their investments
they track not only business risk, the possibility that things may go
wrong with a company, but also what she refers to as system risk,
the broader perspective of macroeconomic change, which we have
described in Chapter 2 as the driving forces of change, among
which we highlighted technology, science, culture, population, and
climate. The third type of risk that Martinson discusses is portfolio
risk, which refers to the need for an investment firm such as Baron
to diversify its investments so that the poor performance of any
single investment cannot drag the entire portfolio too far down.
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This is probably the single greatest threat to most small businesses.

It is also technically known as concentration risk, and is perhaps
more easily understood as keeping all your eggs in one basket.
(In case youre not familiar with the metaphor, the point is that if
you have all of your eggs in one basket, and you then drop the
basket, you probably lose all of the eggs.)
Concentration risk has been a subject of focused and eventually
quite sophisticated research by economists and finance experts since
the mid-twentieth century, when investing became professionalized,
and investment managers began to grapple with the problems of
investment risk that would affect middle class investors who were
accumulating modest life savings.5 The new class of professional
managers needed systematic ways to assess the risks of various
types of investments so that they could create investment portfolios
that would achieve targeted investment returns at well-understood
risk levels for their clients.
We know this today as the work of balancing our retirement
portfolios by selecting a mixture among various sectors and types of
investments, mostly stocks, mutual funds, and bonds, so that when
were ready to retire we actually have enough money to live
decently for a few decades.
The design intent of any investment portfolio, whether its your
retirement portfolio, the companys treasury portfolio, a venture
capital portfolio, or your innovation project portfolio, is identical: to
manage risk strategically by choosing a variety of investments from
across different marketplaces which have a variety of performance
characteristics, such that you attain the appropriate level of overall
risk while attaining the necessary level of return.
Those who worked for Enron (to take one very sad example) know
how dangerous concentration risk can be, for the company had
unwisely invested much of its employees retirement funds in its
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own stock, so when the firms frauds led to its collapse, the
retirement savings of a great many employees were lost along with
it.
Most small businesses face the same sort of risk, because by
definition theyre usually only in one or a few businesses, and if
things were to go bad they might not have much, or anything, to fall
back on. Concentration risk is one of the major reasons why the
mortality rate for small business is so high (the other being just
generally poor management). Its worth noting in passing that the
mortality rate for big business is pretty high also, and its climbing
precisely because the big firms are also struggling to adapt to
change, just as small business are. All the statistics indicate that big
firms going out of business at a record and accelerating rate.
Consequently, one of your missions as an entrepreneur/innovator is
to create future product and service options that reduce your
concentration risk. The actions we discussed in the previous chapter
concerning the various ways that you can search for innovation
opportunities explains the process of identifying what those very
options may be.
But thats not the only thing you have to do as an innovator, because
you also have to protect your existing market domain, which means
that you have to organize yourself to innovate in your core business
at the same time that you explore new or adjacent business
opportunities. This is a complex problem, and one of your primary
tools for managing it is your innovation portfolio, the subject of this
chapter.
We already discussed this earlier when we explored the cone of
uncertainty and the three different types of innovations, those
relevant in the short term from now to about two years out, those
relevant from two to about four years, and those beyond four years.
These three categories constitute an innovation portfolio, but there
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are also other ways to organize or structure an innovation portfolio,

so if the cone of uncertainty approach to sorting concepts into three
time horizons doesnt fit well with the rhythm or structure of your
business or your market, then you should of course feel free to find
a different organizing scheme.
For example, in other writings in which we focused on large firms
weve suggested that they must create and manage four portfolios:
incremental innovations to protect market share for the short term,
breakthroughs to prepare long term disruptions, new business
models to leverage new technology, and new ventures to extend the
enterprise laterally and broadly into the future. Each of these
portfolios has of course a different risk profile and a different
reward profile, and this way of thinking about it may also be
relevant for you.
Four Types of Innovation

Incremental innovations are generally small changes to existing
products and services. Companies typically invest in incremental
innovation in order to preserve or sustain existing market share, or
perhaps to make modest gains in market share. In fact, most
companies invest the majority of their innovation efforts in
incremental projects to preserve their position.
Breakthrough innovations are higher risk, and much like venture
capital investing, when successful they result in much higher
rewards. The distinctive character of successful breakthroughs is
that they change the entire structure of the marketplace, which is,
after all, the very definition of a breakthrough. Breakthroughs
therefore create significant competitive advantage for the
organization that creates them.
In the absence of a rigorous portfolio management process, the logic
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of business decision making will tend to drive a companys

investments toward safer incremental innovation, and may entirely
choke out the search for riskier breakthroughs.
The third type of innovation is business model innovation. In this
case the objective is not specifically to develop or sell new products
or services, but rather to provide a different and better sort of
experience to customers. Business model innovations are important
because so many of todays new technologies are creating business
model innovation opportunities that are being used to improve the
customers experience by changing how people access new
information, how they shop, how they communicate with one
another, and also by altering the nature of communication between
customers and companies. On the business model matrix that we
discussed in the previous chapter, the leaps that enable you to move
up and to the right are often business model innovations.
For example, the worlds discount air carriers, led by Americas
Southwest Airlines and Europes Easyjet and RyanAir, have entirely
changed the economic equation of air travel by designing a
fundamentally lower cost operating model
Wal-Mart became the worlds largest retailer by applying new
technologies in supply chain management and distribution to create
a chain of retail stores that are continuing to lower prices. The
company then exploited digital communications technology to
communicate in near real time with manufacturers in China and
elsewhere in the Far East that now make the majority of the
companys products.
Apples iPod MP3 player was only a modest success until the
company introduced the iTunes store, which created an entirely new
business model to distribution digital content.
The fourth type of innovation is new venture innovations, which
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comes about when an entirely new market needs to be explored and

developed, and the best way to do that is through a new brand and
perhaps even a new company. New venture innovations are of
course long-term oriented.
Each of these types of innovation is managed a different way, as
each requires a different approach to project selection, capital
allocation, ongoing monitoring, and the actual staffing of the
innovation design effort. Consequently, each of these four is also
managed through a different innovation portfolio.
There are other ways to think about innovation portfolios, and
authors whom we admire, including Clayton Christensen,6 Larry
Keeley,7 and Rob Shelton,8 have proposed creating portfolios
consisting of sustaining innovations that protect the existing
business, disruptive ones that alter market structure, and internallydirected process improvements, or innovation across ten different
types across finance, business process, product and service offering,
and delivery.
Whats most important, in our view, is that you find the structure or
model that works best for your organization, and that you use it as a
rigorous guideline to give shape to your innovation investment
efforts. As with the necessity to develop a clear point of view about
the future and about how you expect the major drivers of change to
impact on your business, clearly defining your expectations about
your innovation portfolio is the only way to move beyond sheer
blind luck opportunism and toward a rigorous innovation process.
Such a structure enables you to manage tightly to what youve
selected so that you can reap the both the learning benefits and the
equally important benefits of the innovations themselves.
Whichever model you choose, the design of your innovation
portfolio translates the goals and intents of your aims and strategy
into a set of risk-managed innovation projects. This tells you, in
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effect, what youre going to do at a much more detailed level than a

strategy document can, for identifies specifically the types of
projects you want to engage in, the time horizon in which you
expect results to emerge, and the scale and scope of the financial
and human resource investments you intend to make.
As the leader of the business and of the innovation investment
process, you might consider that in this role you are now not only
owner or leader, but also the chief innovation targeting officer, or
the chief risk design officer.
Overcome Concentration Risk

The principle of an innovation portfolio is consistent with any sort
of investment portfolio, whether its stocks and bonds for your
retirement account, or a portfolio of any investments that the
treasury group in a big companys finance department uses to get
the best return from the available cash flow.
Venture capitalists design yet a third type of portfolio, typically
investing in 10 or 20 high-risk companies in the expectation that a
least a couple of them will break through to produce significant
returns within a few years.
The underlying premise of this type of investing is that investors
must anticipate the future direction and needs of the market, and
then seek investment opportunities that match this future vision,
recognizing that while failure is common because of the high risks,
the right combination of qualities and characteristics can also lead to
huge successes.
As we noted above, there is certainly virtue and value in being right,
but its not entirely necessary to be right as long as youre paying
close attention to whats happening. There is also great power in in
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taking an explicit position about the anticipated future of the market

and identifying the specific reasons that support that position,
because by its very explicitness it provides a foundation, a point of
comparison. As events unfold you can then compare your
expectations with what actually occurs, and this is tremendously
valuable because you can then course correct and fine tune your
actions to move into accordance with emerging realities.
Your own predictions, in other words, give you a quite precise way
to match expectations with reality and to adjust if and as they
diverge. And the likelihood that expectations and actual events will
diverge is quite high.
Some years ago a venture capitalist was relating an interesting story
about an investment portfolio he had created, which consisted of
twenty companies, and he talked about the successes and failures
that had occurred. He noted that ten of the companies had failed,
which in this line of work is pretty much to be expected. He went
on to explain that they had followed their original business model,
but events had proven that the models themselves were not fitting to
the markets that emerged. This was a fair and honest assessment of
ten worthwhile attempts.
But then he talked about the other ten, the firms that had been
successful in varying degrees, and this is the key. He noted that
while each of them had had a business plan and a distinct business
model from the outset, in each of these ventures the initial model
had proven nonviable, and the leaders had then created and followed
a revised business model based on the conditions which they had
encountered in the market. They had changed course, in other
words, in response to events and trends. They had adapted.
The point for us is of course that you can only adapt if two
conditions are present. First, you have to willing to change. If you
stick the plan even when the plan is going bad or when the plan is
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definitively a bad fit for market realities, then the result is foretold
by the very fact of your stubbornness. The military has a way to
explain this: No battle plan survives contact with the enemy.
The underlying challenge is that in many situations stubbornness is
a virtue; you have to use heightened discrimination, and a rigorous
process to discern when its good, and when its the short route to
failure.
The second condition is that you have a clear picture of what youre
intending to do and what youre expecting to result from it so that
you can tell if and when your expectations are being met or not met.
The ability to respond quickly to exploit the alignment between
expectations and reality, or to adjust to the lack of alignment, is
perhaps the single most critical characteristic of strong leaders.
Changing the plan, in other words, requires that you a plan in the
first place.
And hence one of the essential characteristics of any management
team that leads a startup organization is perceptiveness, the capacity
to recognize the truth of a situation and to respond appropriately.
Venture investors, experienced ones, know that the likelihood that
the initial business plan or model is correct is often much less than
50%; they also know that the best entrepreneurs are the ones who
will recognize when the plan is wrong and change course.
Conversely, the weaker ones will remain attached to their original
ideas and drive their businesses right up to and even over the edge
of the cliff, and many will do so without sensing that the edge is
there because theyre so focused on executing to the plan that they
fail to realize that its a bad plan.
Here we have, metaphorically, another powerful argument for maps.
For good maps will indeed identify where the cliff edges are, or are
likely to be.
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Astute managers of young companies are those who are fully

prepared to adapt to changing market conditions. Hence, the
successful young company evolves in conjunction with an emerging
market, intending to position itself as the preferred solution provider
as the market expands. Its leaders listen closely to whatever
information they can gather in order to find out where the cliff edge
is, and where the sweet spots in the market are. They also search
actively for new information (again, this was the topic of the
previous chapter).
So the relationship between the venture investor and the
entrepreneur is one in which the investor provides capital and
guidance, and its up to the entrepreneur to apply that capital not in
blind pursuit of the plan, but in a measured process of acting and
responding, probing and listening.
As a small business leader you probably dont have venture capital
backing, though. You may have put in your own money, or perhaps
your capital comes from ongoing operations. But no matter where it
comes from its precious, and the best way to use it for innovation is
to set up a learning system so that you can probe, explore,
experiment, and find out where the best future opportunities will be,
and then get there before your competitors do. This calls for a
rigorous process of portfolio design.
Portfolio Design
The process of designing and developing your own innovation
portfolios occurs as a series of steps that are described in a sequence
because the output of one step will help you to think about the
subsequent ones. The process builds towards design conclusions
and decisions about the choices youll have to make, and then the
investments that will back them up.
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Small businesses and large firms will often have different types of
projects in their portfolios, and the big ones will be investing much
more overall, but the actual process of portfolio design isnt all that
different whats most important is that its a thinking process and
a managerial discipline, and thats the same whether the firm is
large or small.
For the purposes of this description were assuming that you will be
preparing one overall portfolio that consists of three sub-portfolios.
This reflects the three time frames that we discussed in relation to
the cone of uncertainty: short term efforts (now to two years),
medium term (two years to four years), and long term (five years
and beyond).
Step 1: The Rate of Change

The process of designing the ideal innovation portfolio begins by
thinking about how change is occurring in the external environment,
and what the consequences of this are today, and are likely to be
tomorrow for your enterprise.
Weve already explored this in detail in the previous chapter. Very
broadly its obvious that external change is defining what we might
call the strategic terrain, the overall economic and market
landscape in which your business competes.
Change will of course mean impact on your existing revenue and
profit flows, which thus suggests that there is a rate at which current
products and services are becoming obsolete, and therefore the rate
at which future revenues can be expected to decline. This will
impact not only the future marketability of your existing products
and services, but will also affect the evolving competition in the
marketplace and the plans and actions of your competitors.
Understanding this rate will also enable you to forecast how much
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revenue has to be achieved or made up through the innovation

process in order to maintain the current level of revenues and
profits.
While you probably cant predict this with great precision, you can
certainly develop a sense of how fast change is occurring, and the
impact this is likely to have. Again, as with the predictions we
discussed above concerning the cone of uncertainty and the impact
of the major forces of change, this thought exercise has a dual
purpose, as the actual predictions are planning tools and youll
probably make decisions based on what you predict, and the very
act of making a prediction sets up a mental exercise through which
you can compare your expectations with emerging realities, and
thus gain invaluable insight into whats happening. Is change faster
or slower than you had anticipated? You can adjust your rate of
investment and the sense of urgency accordingly. Is change
happening in the ways you expected? If not, you can adjust your
innovation development targets.
In some markets like cell phones the rate of change is very fast;
devices are marketable for about 6 months, so a steady parade of
new ones are constantly in the development pipeline. In other
industries the rate of change is much slower, but regardless of the
industry or industries that your company competes in, the rate of
change is a factor that you must have a clear understanding of.
Without the predictions youre only able to surf on the waves of
change, whereas the fact of making a prediction creates a learning
opportunity that enables you not only to surf, but to steer more
purposefully.
Your action step is to write down a set of predictions if you have not
already done so.
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Step 2. Performance Goals

The next step in designing your ideal innovation portfolio is to
identify the growth goals for your organization, both in terms of
revenues and profits.
Adding together the impact of the rate of change as a process that
may reduce your future revenues and the growth goals youve set
tells you something of great importance, as it indicates how much
growth the innovation process must achieve both in terms of overall
revenues and profits going forward into the future.
In this way the overall mix of your portfolio is very much a topic of
design, and cannot be taken as an assumption; it must be worked out
as a consequence of the performance that youll need to achieve
across your business, whether its one type of product or service, or
many of them.
Your action step is to chart your goals so that you have a clear
visual model of what youre expecting your innovation investments
to achieve in each of the three time increments.
Step 3: Design the Selection Process

A key goal of the innovation process is to gather new ideas, any of
which may turn out to become vitally important new innovation
projects. To select the right ones without letting your own biases
exert too much influence, you need a systematic and orderly method
of evaluating ideas and deciding which ones youre going to invest
in, and why.
Now that youve modeled the external environment and you know
what your strategic goals are, you next develop a list of the specific
evaluation criteria that youre going to use to assess each of the
innovation projects that are already under way, as well as all new
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ideas that are proposed.

The existing projects need to be evaluated because at the time that
they were initiated and funds committed, the decision criteria may
have been different than the criteria that are most appropriate today.
Developing the set of criteria youll use to evaluate all of the ideas
gives you a systematic way to do this. Of course the criteria may be
different for each of the three portfolios (short, medium, and long
term) because the factors you need to use when evaluating
incremental innovations that are relevant in one to two years are
probably different from those youll use to evaluate potential long
term breakthroughs.
The criteria are grouped into two lists, benefit or reward outcomes,
and risks.
Among the benefits that you may want to include on your list are:
Benefit to customers.
Revenue potential.
Competitive advantage.
Fit with digitization.
Enhances our brand value proposition.
Other criteria to consider may include fit with existing products

and services, fit with existing organizational capabilities,
addressing key customer pain points, accomplishes an important
job for the customers, or helps the company adapt to accelerating
change, etc.
Selection and Targeting: The Customer

Value Proposition9
Another way to think about the benefits of any particular idea is by
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exploring the options that customers have. When buying just about
any product or service there are choices that may solve the problem
at a variety of prices. If were talking about cars, then theres basic
transportation at one extreme, as simple and inexpensive as
possible, and theres complete luxury at the other end. If basic is
your goal, you may choose to buy your friends twenty year old
clunker since hell take $500 for it, and it runs. Or if things have
been going really well, perhaps youll choose the high end Lexus,
Telsa, or Mercedes.
At both two ends of the spectrum youll be driving (as long as the
clunker keeps running), but your two experiences would be quite
different.
Everything you can buy comes with more or less the same options,
so we can generalize and say that at one extreme you have a basic
commodity, no frills, and at the other you have such a magnificent
experience that you become a dedicated customer, loyal for life, and
in fact a friend and advocate. You proudly wear the Tesla t-shirt,
and you gladly take your friends for a ride and tell them how great
the car is.
Value Provided:
CUSTOMER s POINT OF VIEW
differentiation
Transformed Value: Loyal Partner
Differentiated Value: Advocate

minimum
Improved Value: Friend
Basic Value: Customer
commodity
Figure 14: The Customer Value Matrix
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This of course relates closely to the business model matrix we

discussed above; as we move up on the matrix, towards more
customization and luxury we experience differentiation, whereas
when we move down towards the mass market we are purchasing
commodities.
The figure shows this as a ladder, from a basic value as a customer
at one end, to differentiated value as a loyal partner at the other. If
we overlay this concept onto the business model map, we can see
that the closer to the upper right corner we get, the more the
experience is differentiated, and the more intimate and aligned the
relationship is likely to be.
non-customized
customization
luxuries;
differentiated
markets
dead
commodities;
mass market
zone
small market
market size
Figure 15: Customer Value and the Business Model Matrix
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Risk
Innovation projects have another side to them of course, the side
related to uncertainty and therefore to risk. Five potential risks to
consider include these:
Financial risk, relating to the cost to develop the innovation.
Risk of not succeeding, i.e., that the idea simply doesnt

work out.
Technology risk, meaning that needed component

technologies are not available, or not available at a price
that fits the intended scope or market for the innovation.
Distribution risk, that your downstream distributors choose

not to handle the product (if it is a product), or that your
internal distribution system cannot readily cope with the
specific requirements related to the innovation. This
implies either a potential failure, or at least higher
distribution costs that you may be accustomed to.
Market risk, meaning that customers simply may not want

to buy.
Pause here and make a list of the reward and risk criteria that make
the most sense for your organization in each of the three time
segments.
Once youve identified the criteria you wish to use, its helpful to
format this in a template that can be used digitally or in print
formats during the actual process you adopt.
Youll notice in the sample template shown here that in addition to
the list of criteria there is a column indicating weighting. Since not
all of your criteria will be equally important, assigning a weight to
each enables you to reflect important nuances in your evaluation
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process. Those that are more important will have a higher

weighting score, while the less critical factors will get a lower score.
126!
Reward8Factors888
Project #!
Innovation Portfolio
Evaluation
Reward Factors:
Idea or Project Name:
Big Idea Project!

Weight
Rating
Score
(1, 2, 3,
5, 8)
(1, 2, 3,
5, 8)
(Weight x
Rating)
1. Benefit to Customers
40
2. Revenue Potential
40
3. Competitive Advantage
4. Enhances our Digital Presence
15
5. Enhances our Brand
15
What are the key external, strategic

benefits affecting our business?
6.
7.
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Total
Risk Factors:
Weight
Rating
(12, 3,
5, 8)
(Weight x
Rating)
1. Financial Risk
25
2. Failure Risk
3. Technology Risk
40
4. Distribution Risk
5. Market Risk
15
What are the key risks with this

idea?
Risk8Factors888
Reward!
(1, 2, 3 ,
5, 8)
Score
6.
7.
Total
84
Risk!
Figure 16: The Idea Evaluation Form
Depending on the type of innovation and the specific internal and

external context at the time you do the evaluation, the weighting can
be adjusted. Significant external changes such as competitors
initiatives, new technologies, or regulatory changes could alter the
overall context and lead you to adjust the weighting, or even to
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change some or all of the criteria altogether.

Note, however, that when you change the criteria you may need to
go back and reevaluate all of the existing innovation projects to see
how well they core in the new environment. Some projects that
used to look very attractive may have become entirely unnecessary,
while others that were marginal or even rejected previously may
now be essential. We refer to this as pivoting the portfolio, and
its an important task to do when external conditions change.
As a detail, note that we recommend that weighting be done using a
scale of 1, 2, 3, 5, 8. The purpose of this is to accentuate the more
highly weighted criteria, bringing your best (and worst) options into
clearer focus.
Later, when you conduct evaluations we recommend that you use
the same scale (technically, its called a Fibonacci scale, named
after the Italian mathematician; each subsequent number is the sum
of the previous 2).
Step 4: Build the Portfolio

Now Ill describe the process we use to conduct the assessment of
risk and reward. The assumption behind this description is that
youre engaged in a process of evaluating a set of ideas, perhaps 10
of them, to decide which ones are worth pursuing at this time.
Youre undertaking this evaluation with a group of people in a
meeting that could last 2 4 hours, depending on the number of
ideas that are being evaluated. Its probably obvious to you why
multiple people are involved youre looking for a variety of
perspectives on these ideas and since each of us brings our own
unique perspective and we each have our own blind spots, we want
to engage in an open and creative conversation with a lot of
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viewpoints and possibilities so we dont miss something important.

You may have a standing innovation committee as participants in
the meeting, but perhaps youve also invited some additional people
from your organization who are experts in topics that relate to the
specific ideas that are going to be evaluated today.
Weve done this with as few as a handful of ideas and four people,
and as many as 100 ideas and 80 people at the same time, and weve
found that the basic format is flexible enough to work well in a wide
variety of settings.
To begin, the participants must of course learn about each idea, so
each one is presented briefly, followed by discussion until everyone
understands it thoroughly. Someone should lead the meeting and
facilitate the discussion to assure that the conversation stays on
track and the conversation is fruitful.
Next, each person does their own, individual scoring for each idea.
Each uses a single form to evaluate each idea, so if there are 5
people and 10 ideas, theyll be 50 pages of data, or 50 electronic
forms created.
While this isnt rocket science it is important that the process be
followed with discipline, because if you dont follow a process with
rigor then it becomes likely that the process of selecting the ideas to
invest in will become skewed by personal bias or preferences,
forceful talkers, bullying, pet peeves, or personality differences, and
that would lead to less than optimal results.
And while it may be tempting to determine the scores for each idea
in a conversational setting, rather than having each individual
participant determine the score for each idea on their own, we dont
recommend that. (In other words, dont do it.) Doing the scoring in
a conversational setting is likely to cause a lot of information to be
lost, and the variety of individual perspectives is likely to be
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clouded under the social pressure that arises in any group when
there is bias toward agreeable dialog that leads to a general
consensus.
Youll get much better results, and more genuine reflection of
individual opinions, if each individual does their own thinking, and
then you compile and discuss their individual scores as the next
step.
So lets say you have 10 ideas under consideration, and each person
has completed the scoring for each idea. Now its useful to have a
conversation to explore why people have scored various ideas
differently on any particular criteria.
These are extremely valuable discussion because they expose
differing assumptions. When theres a difference of opinion, this
presents an opportunity for both people to discover something new
about their views, and perhaps change their evaluation based on new
information they learn in the dialog itself. This is important
learning not only as it pertains to the specific ideas under
discussion, but also for each individuals broader perspective on
management and change, because of course the underlying context
for the discussion is each ones views on what new products and
services will be most successful in the future marketplace. This
conversation, then, becomes part of the ongoing dialog about
change, and how change is occurring, and the impact it will have on
your firm. What youre discussing are the benchmarks and
milestones that youve already established, and youre calibrating
the rate of change and assessing its emerging impact, enabling you
to track how it is unfolding.
Hence, the innovation portfolio design process, and the dialogs that
youll have in the process of designing and managing the portfolio,
become the setting in which your efforts to track change become
focused. Heres where you engage in those critical conversations on
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a regular basis using a rigorous structure; here is where you will

track the cone of uncertainty as the present catches up with the
future, and you can see how accurate your predictions have been.
Total up the scores for each idea and youll most likely see a range
of scores, with some clustering. In aggregate, the higher scoring
ideas are, in the judgment of this group, the better ones, the ones in
which you ought to be investing. But not necessarily.
Its also quite possible that a low scoring idea is the most
strategically important for some reason that is not reflected in the
scores (it can and does happen), or conversely that a high scoring
project isnt really as attractive as its score may suggest. So while
the scores should help enormously with the decision making, a high
or low score in and of itself is not the deciding factor.
Score Comparison Matrix

320
T2
F1
256
R1
O3
T4
R2
192
reward rating
R3
C2
C3
C1
T3
128
T5
O1
O2
Big Idea Project

64
320
T6
F3
256
192
O4
128
64
risk rating
Figure 17: The Score Comparison Matrix
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Once youve gotten the set of individual scores worked out and
averaged, take the information you just created and plot all the ideas
on a single matrix. Label the horizontal axis risk, and on the
vertical axis reward.
Each idea is shown as a single point on the matrix at the intersection
point of its specific risk and reward scores. High reward and low
risk ideas are of course the most desirable, and conversely high risk
and low reward are not attractive.
Note, however, that as with the scores, the matrix should be viewed
as a useful input to the decision making process, but it is never a
substitute for managerial judgment. The conclusions youve reach
here are not definitive decisions about which projects to invest in,
but a robust way to get sound input and guidance from a group of
people who are qualified to have legitimate opinions, as of today,
about the ideas themselves, the future market they would be sold
into, and the best investment options for your organization.
By tomorrow things could change, and the assessment scores might
be different, but you must make decisions each day based on the
knowledge you have that day, so using this process enabled you to
compare the relative merits of a set of ideas which could even be
quite different from one another, and yet to do so in a rational way.
As a result of the evaluation process, youre now looking a matrix
that shows how the ten ideas compare to one another in terms of risk
and reward. Are any of them so inspiring that you feel compelled to
initiate any of the right now? Are there any that address immediate
issues or concerns that you already have? How do these ideas
compare with the ideas or projects youve already been working on?
Now your managerial judgment comes into play, as you need to
select which, if any, youre going to move forward with. The
specific process we propose for doing that is the subject of the next
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chapter, Speed, so for this discussion the point it to know which

youre now prepared to invest in and which youre not.
Portfolio Design Discussion Questions

As you work through the innovation portfolio process, here are
some general discussion questions to consider bringing up that will
help to broaden the conversation and maintain the strategic focus.
What are the right innovation targets for our organization?
How can we align our innovation portfolio with our organizational
strategy?
What we should be prepared for in the future that we are not
prepared for now?
How is the world is changing, how is the market changing, how
technology is evolving, and what will the consequences of these
changes be for our organization?
What capabilities and techniques are our competitors developing
that we also need to develop and implement?
Step 5: Success Factors for Ongoing

Improvement
Managing the portfolio is an ongoing process, and now well
discuss some of the critical factors that will help assure its success.
The first is to realize that in an innovation portfolio, just as in any
other portfolio, some projects will be more successful than others.
Some projects, in fact, may fail, and you may need to remind
yourself, or others, that in the right context this is both inevitable
and positive as long as its not a consequence of carelessness or
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neglect. Unlike most other parts of your business, where failure is

considered entirely negative and stridently avoided, failing in order
to learn is common in the innovation process.
Despite this awareness at the conceptual level, its still often
difficult for managers, even innovation managers, to recognize that
the logic of innovation portfolio management calls for the
possibility of failure, and indeed the likelihood of failure, and that
this can be very positive when it enables you to discover new
opportunities, to identify opportunities that you hadnt recognized
before.
As a small business leader this will definitely have a different tone
that it does in larger firms because your capital is so scarce, but even
so its important for leaders to be advocates for portfolio thinking,
and to help the others understand the role that failure plays in the
overall process of innovation development.
Another key factor to recognize is that investment in innovation
almost always represents a short-term cost with benefits that (crisis
management aside) are likely to be attained only in the longer term.
This is directly opposite of how most profit and loss managers are
incented, and consequently if you have operational managers, its
important to separate innovation investment from their profit and
loss performance assessments.
They probably shouldnt be
expected to invest in innovation projects because it will be a
detriment to their performance evaluations, but their input into the
process of selecting the right projects to invest in, and helping to
guide those projects, should be immensely helpful.
Lastly, remember that your innovation investments should be staged
and aligned with project milestones. Assume that each innovation
project will be funded in small chunks, and each as goal is met
youll have the opportunity to make a renewed assessment of the
quality of the work, and the overall relevance of the idea, before you
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decide to fund it further. This will also support your agility, and
reflect that innovation is a learning process.
Taking Action
It should be obvious that you need to engage in a detailed exercise
to design and build your innovation portfolio. This will perhaps
involve a number of other people, including leaders, managers, and
thoughtful people from throughout the organization, and from
outside as well.
And remember that building and then managing your innovation
portfolio is a process at which youll improve over time. The first
efforts, no matter how unsure, will inevitably lead you in the right
direction as your learn how to make the process work for your
culture and the specific challenges that your organization faces.
Give this time regularly, once each month or two, and allow the
learning that will occur to bring its benefits.
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Chapter 6
Speed
Since were obliged to pursue innovation in a competitive

marketplace, speed matters.10
In fact, it matters a great deal, for your competitors arent waiting,
and you cannot afford to allow them to get too far ahead. The faster
you recognize new trends, threats, and opportunities, the faster great
ideas get discovered and created, the faster they get to market, the
faster you earn money, build brand, and extend the relevance and
reach of your firm into the future.
Weeks or months of delay can be hugely costly, and longer delays
can even be fatal. The market is changing, and while the firms that
get the right products and services to market most quickly are
usually in the best position to gain significant advantage, the ones
that wait may find no market space remaining, especially when we
account for the compounding of advantages that winner-take-all
technology dynamics enable.
The issue for you, then, is knowing how to speed things up.
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Youve already thought through the dynamics of change as it

pertains specifically to your markets, and youve come up with lots
of ides and figured out which ones are the great ones, and by
following rigorous steps to build your portfolio youve identified the
ideal mix of future products and services for the immediate term,
mid term, and long term.
Now all you have to is develop them!
So in this chapter we will explore a set of specific practices and
techniques that should help. Here we describe approaches for fast
and efficient teaming, innovation networks, collaborative design,
rapid prototyping, the concept of the minimum viable product, a-b
testing, and agility.
Behind all of these techniques its worth noting that while you may
think that you have to balance between moving too fast and moving
too slow, in fact thats rarely the case. There are precious few
examples of innovation too fast, while the vast majority of business
failures, the giant mountain of irrelevance and collapse, should
properly be understood as a monument to slowness. The trick, of
course, is to go super fast without taking the wrong kinds of risk.
We will elaborate here.
Fast and Efficient Teaming

Teams are the essential motive force of most innovation projects.
Innovation almost always involves people working together,
integrating disparate sets of knowledge from across the entire range
of the firms operations, including product, finance, marketing,
sales, service, and/or delivery, so youll need to have people with
knowledge of all these facets involved.
However, assigning a group of people to a task and then assigning
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them a meeting room to get the work done, does not an effective
team make. Many teams are entirely dysfunctional, and the reasons
for this are many: interpersonal issues, bias, agendas, personalities,
unclarity of goals, lack of time, and lack of focus all inhibit their
performance and the results.
When they work well, teams are well suited to the fascinating
intellectual challenges of exploration work, because self-organized
team members are likely to be fully engaged and self-motivated and
willing to take on and do a brilliant job with the many complex and
challenging tasks that are required to achieve innovation success.
This is why Steve Jobs said, My model for business is The Beatles.
They were four guys who kept each other's kind of negative
tendencies in check. They balanced each other and the total was
greater than the sum of the parts. That's how I see business: great
things in business are never done by one person, they're done by a
team of people.11
This is of in direct contrast to the unwieldy beast we call the
committee. Committees are often innovation inhibitors because
they represent a form of centralized authority whose deliberations
are typically slower - much slower - than the changing markets they
are set up to address.
For example, during the 1980s when HP was making the transition
from being a maker of electronic instruments to a computer
company, managers throughout the company saw opportunities to
develop new computer products. Soon, however, HPs name was
on a confusing array of different and incompatible machines, so
committees were set up to ensure sufficient coordination. What
happened then was unexpected, as the committee process brought
the pace of new product development to a crawl, and HP quickly
fell behind the market. In the words of HP co-founder David
Packard, By 1990, we faced a crisis. Committees had taken over
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the decision-making process at HP, and decision cycle times had

ballooned. For example, one central committee, the Computer
Business Executive Committee, was intended to achieve better
focus and coordination for computer activities. Instead, it was
slowing vital decisions just as our company entered the lightningfast competitive world of computers in the 1990s. In fact, the
paralysis was spreading to areas of the company that had nothing to
do with computers.12 The committees were scrapped, and the
divisions were freed once again to innovate and compete on the
merits of the value they could create.
So whats the difference between a committee and a team? Give the
team a goal. And make it ambitious. Give them a deadline, and
make it an aggressive one. And make sure to give them the time
and resources to succeed.
Hence, instead of relying on conventional practice and hoping that
people will interact effectively, a team is specifically charged, thus
avoiding the common problem that if everybody is responsible,
then nobody is responsible.
An effective team consists of those with the skills necessary to
analyze the idea, design usage vignettes, develop early prototypes,
interact with the client participants to solicit their input, and
promote the idea across the organization to solicit interest, feedback,
and participation. These tasks are accomplished through iterative
work, each layer of which progresses an idea from its initial state of
fuzziness through advancing levels of refinement.
Overall, success at innovation requires organizations to develop
very high levels of proficiency in forming and managing teams, as
these intentional groups may require focused leadership and careful
facilitation to work effectively, and it may be up to you to provide
it.
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The Right People

One of the downfalls of the business process reengineering (BPR)
movement from the 1990s was the expectation that good processes
could compensate for less capable staff. Getting the right people
wasnt considered to be as critical to success as getting the right
process.
Approaches oriented to speed, are nearly the opposite. While some
structure and process is certainly needed, attaining speed requires a
perspective similar to Steve Jobs, who had no tolerance for anyone
less than world-class talent. Either you were A Team material or
you were entirely unqualified, although his language was often quite
a bit more colorful, replete with terms like complete bozo to
express his disdain for those who were less than excellent. Jobs had
a very clear focus on eliminating bozos and working only with the
A players.
This is how Jobs expressed it to Walter Isaacson: For most things
in life, the range between best and average is 30% or so. The best
airplane flight, the best meal, they may be 30% better than your
average one. What I saw with Woz was somebody who was 50
times better than the average engineer. He could have meetings in
his head. The Mac team was an attempt to build a whole team like
that, A players. People said that they wouldnt get along, theyd hate
working with each other. But I realized that A players like to work
with A players, they just didnt like working with C players. At
Pixar, it was a whole company of A players. When I got back to
Apple, thats what I decided to try to do. You need to have a
collaborative hiring process. When we hire someone, even if
theyre going to be in marketing, I will have them talk to the design
folks and the engineers.
My role model was J. Robert
Oppenheimer. I read about the type of people he sought for the
atom bomb project. I wasnt nearly as good as he was, but thats
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what I aspired to do.13

Allowing C players into the organization was like opening a crack
in a dam. Soon, the whole place would be flooded with mediocrity,
and great work would become marginalized if not utterly
impossible. The whole process slows to a crawl.
Without the right people nothing great gets built; without a laser
focus on speed, extraneous activities creep in that detract from both
quality and timing; and without a useful (but minimal) process
framework youll inevitably see the inefficiencies balloon, and the
level of bureaucracy may soon get out of hand.
Getting the right people implies, of course, that you must also get
rid of the wrong ones. At a more subtle level, it also means that you
need to recruit people with the highly desirable (and therefore
elusive) combination of the right technical skills, the innovation
mindset, and an additional set of innovation-specific skills which
are not so widely understood.
The Right Skills

You already know what the technical business skills are: finance,
marketing, sales, programming, operations, supply chain, etc., and
to attain high speed its also wise to engage with people who have
innovation skills, like interface design, product design, all of the
engineering disciplines, human factors design, and many others.
But engagement and speed are not only a matter of attitude and
vision. Effective innovation teams also require the right requisite
technical skills, a set of talents and aptitudes that are particular to
the innovation process, including empathy, listening, observing,
modeling, ideating, and acceptance of or tolerance for risk.
Its likely that in the future people will include innovation aptitudes
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on their resumes, but at present they fall outside of business norms,

so you may have to probe carefully when youre hiring to find
people who are proficient in these skills:
Empathy. Success at innovation requires people who see

and listen very deeply, a skill known as empathy. Those with high
empathy and great observational skills are essential participants in
the innovation process.
Listening and Observing. In Chapter 4 we explored the

importance of observing how people think and interact, as it enables
us to recognize the emotional connections they have with other
people, ideas, products, services, and brands.
Modeling. Innovation teams require people who can take a

set of observations and extract the essential learnings, the process
we call modeling. These are abstract, conceptual skills.
Ideating. People who are come up with ideas, great ideas,

creative people, wild thinkers, and people who make surprising
connections are all key contributors to innovation.
Risk tolerance. Exploration and experimentation, the

foundations of most innovation activities, involve the risk of making
mistakes of failing and then learning from those mistakes.
Those who are not comfortable in this mode of work may not be
such a good fit for the innovation effort.
These skills are essential, but as they are not the norm in most
organizations, its important that they be protected so that they can
indeed thrive. As Rob Austin and Lee Devin have noted, Artful
managers must also do their part; they must create conditions in
which makers can work at risk. Willingness to work at risk is vital
in artful making, in part because exploration is uncomfortable.14
Its not realistic to expect to find all of these skills in one person, but
talented innovation team members may possess two or three of
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them, and the most successful innovation teams have all of these
skills.
Once we recognize the importance of these roles, its easier to grasp
why most large organizations arent very good at innovation: most
rarely (never?) recruit for these skills, and few compose innovation
teams with these in mind.
Not surprisingly, venture capital backed start-ups that are more
sensitized to the critical importance of innovation often do recruit
for these specific talents, and one of the most prestigious training
grounds for these skills is in the heart of Silicon Valley at the
Stanford University graduate program called the d school. D
stands for design, and the method they teach is called design
thinking, which emphasizes, naturally enough, empathy, ideation,
and prototyping.
The lovely book by Idris Mootee explains this quite eloquently.
Design thinking is the search for a magical balance between
business and art; structure and chaos; intuition and logic; concept
and execution; playfulness and formality; and control and
empowerment.15
Program graduates are highly sought after, and generally have no
problem finding great positions in outstanding companies
throughout Silicon Valley and beyond.16
Rapid Prototyping17
In the disciplined and structured process of innovation we search for
unmet needs and unfulfilled desires, and when we think we find
them we have to construct a sort of a mental map that defines why
our proposed solution will be better than whatever currently exists.
We may use the business model map to show how were using this
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innovation to move up and to the right, or we may use the customer

value ladder to show how this innovation provides differentiated
value. And once were convinced that our idea is a really good one,
the next step is often prototyping.
Those who can sketch, build, create maquettes, and quickly create
elegant prototypes are also essential in helping us transform ideas
into possibilities and then into testable artifacts. Prototypers are
people who like to make things, and prototyping well is an essential
contributor to the speed of your innovation efforts
This is where we translate product and service ideas into tangibles
that we can see, touch, taste and smell (especially if its food), and
certainly use.
This step is critical to transforming concepts into a workable form
that can be evaluated not only for fit with the needs and desires of
customers, but also for manufacturability and packaging, or service
delivery, as well as for design refinement and cost modeling.
A prototype is in fact an experiment, the purpose of which is to
determine what works and doesnt work.
The principles of experimentation in the sciences is defined by the
scientific method. Its an activity done to try something, and in a
rigorous setting every attempt is made in relation to a specific
hypothesis about what the outcome will be. The scientist explicitly
predicts the result before conducting the experiment, and then
compares the results with expectations to discern the validity of the
hypothesis. The progress of science therefore comes as a result of
failures and successes, where outcomes are compared with
expectations, and an explanation for the causal connection is
provided in the form of an underlying theory, and then validated
through subsequent testing.
The predictions you make in relation to the driving forces of change
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thus constitute the hypothesis; the actual outcomes are the

experiment, and the accuracy or inaccuracy is the evidence of
reality. The quality of the learning outcome is defined by the
prediction > test > result cycle because it forces each person to
make their assumptions explicit, and therefore discussable.
Edisons famous experience with the light bulb illustrates the
necessity of systematic failure, and also the social myths that grow
around it. In looking for the best material for the light bulb filament
Edisons team tested a lot of materials; most of them, of course,
didnt work, or didnt work well.
When he was interviewed later, he was how he felt about failing so
many times. The journalist was of course expressing the common
attitude that an unsuccessful experiment must equate with a failure,
and therefore with disappointment, a value-laden viewpoint about
the stigma failure and the joy (and necessity) of success.
But Edison interpreted the process much differently. They were not
failures in his mind, because with each one the research team had
learned something specific. Identifying such a difference of
perspective, and exploring the underlying values and experiences
that would lead anyone to one or the other attitude about
experimentation, success, and failure, is exactly the sort of thing that
would interest an ethnographer; it is definitely tacit.
Collaborative Design
Another way to help a team is to structure its work as a disciplined
process of inquiry. To innovate together, people have to work
together to apply their intellectual abilities to situations of novelty.
Collaborative design occurs when people work together so that their
different points of view, bases of experience, and knowledge of the
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problem and its context can be blended together to yield actionable

solutions. Collaboration can involve two people, ten, one hundred,
or an entire organization, and it can occur in many settings, and
carefully designed and facilitated collaborative processes can lead to
comprehensive solutions, in much less time, compressing months
down to days or weeks.
The goal is to enable 100% of the people to be idea generators and
promoters, and to leverage the critical insights of even people who
are idea killers by using their healthy skepticism and constructive
criticism as creative inputs rather than allowing them to suck all the
energy out of the creative process through their negativity.
Sometimes its also necessary for a team to put a problem aside for
a while, giving potential solutions time to incubate. Former Nissan
USA design chief Jerry Hirshberg notes, Disengaging from an
involving task, one with which we are not yet finished, does not
amount to abandoning it. Quite the contrary. While conscious
focus shifts elsewhere, the subconscious continues grinding away,
considering anything that comes its away as grist for the mill. And
that grist, defined as anything that that can be turned to an
advantage, might be found anywhere. Our preoccupied minds will
mine any new activity, sifting continually through it for previously
unseen connection, for bits and parts to fill the nagging void of an
unfinished, unresolved question.
Its also important to overcome the tendency of people to avoid
controversy in group settings, which Irving Janis labeled
groupthink. Controversy is important in creativity, but group
dynamics normally suppress it in favor of congenial interactions
because there is strong group pressure not to rock the boat. When
youre dealing with complexity, however, rocking the boat is often
absolutely necessary, so skillful facilitation can stir things up
sufficiently to actually prevent a group from settling for easy
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solutions that dont work.

In fact, one study of the group process in a complex problemsolving situation showed that while the group came to a solution
very quickly, they almost immediately discovered that it wasnt
really a solution at all, so had to keep working. In total, they
oscillated between dialoging about the problem and considering
alternative solutions for some time, and along the way they
eventually had considered eight possible options before finally
deciding that the ninth would actually work.
Innovation Networks18
Most effective organizations function as a combination of
centralized hierarchies and distributed networks of semiindependent but connected nodes.
Hierarchies are effective for top down, large scale, piloting and
implementation programs, but networks are good for innovation
because they proliferate multitudes of experiments, testing them in
ad-hoc fashion, and distributing the best in self-organizing cascades.
A culture of innovation works more like a network, composed of
many people from throughout an organization and quite a few from
outside of traditional boundaries, including customers, students,
suppliers, community members, and even competitors.
In
successful and vibrant innovation cultures, the number of members
from outside is likely to be greater than from inside.
Like Amazon, some aspects of an innovation network should come
from the center and pervade outwardly.
Like eBay, networks allow individuals to interact directly with one
another and exchange ideas.
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Like Wikipedia, networks allow everyone, insiders and outsiders

alike, to contribute as peers in an asynchronous way to the creation
of something larger, and results in a product is something that all of
the users can examine and gain value from.
And the network enables subsets of users to form sub-networks to
focus for various durations of time on specific projects, so it takes
on some of the characteristics of a project management intranet.
Creating innovation networks that dont exist but should, and
facilitating existing networks to become more effective, are two key
roles for organizational leaders.
Networks coalesce around the exchange of something of value, and
while trust and self-reliance are the foundations of the innovation
culture, the results are produced as a result of exchange.
To be effective, network users apply tools to evaluate ideas and idea
makers. On eBay, any buyer or seller can see how other buyers and
sellers rank whether theyre trustworthy or not. The community
thus evaluates its own members, and the quality of the services and
products that they each provide to one another. Amazon enables
shoppers to rate products and to rate the value of each others
reviews.
With tools like these its easier to find popular ideas based on their
interest rating. But popular ideas then become more popular, so to
allow backwater ideas a chance in the spotlight, innovation
networks also need to employ a capability for randomness. As users
browse through idea lists and user profiles, they should find not
only with the most popular ones, but also with a random selection of
new or not-so-popular ones as well, to bring forth obscure ideas that
may have merit.
This is because the most useful information in a network is densely
interconnected, so if someone comes up with an idea for an
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innovation, others must be able to see how this idea connects to

other ideas and other people.
In large networks, individual users are thus not only posting ideas
for other people to try out, but also sharing ideas that they intend to
experiment with themselves, or ideas theyve experimented with
already. The network isnt some big suggestion box, but a living,
learning record. And the final destination for ideas is at not the feet
of senior management, but other members of the network, which
includes senior managers not as spectators or judges, but as users
and participants.
The Minimum Viable Product

In Silicon Valley, and elsewhere of course, new approaches to
starting and growing companies are always being tried, and recently
a set of principles has been defined by Eric Ries and documented in
his fine book The Lean Startup.19 One of those principles is the
notion of the minimum viable product.
That is, whats the fastest, quickest thing you can put out in the
market that would indeed be viable as a product, and which will
enable you to learn how potential customers and actual customers
feel.
Minimum means that you dont have to load it up with features that
arent essential, even with features that you know may be needed
later on.
Viable means that you dont just trust the judgment of the product
design team; you actually put the product out there in the market
and see how people really respond to it.
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A-B Testing
Ries also describes the process of split testing, or A-B testing, which
simply means creating two versions of a product and testing both in
the market to see which is more attractive. A structured series of AB tests can yield tremendous insights, eliminate a lot of guesswork,
and neutralize a lot of ungrounded opinions.
Agile: The Scrum and the Sprint

In our book Agile Innovation, Moses Ma, Po Chi Wu and I defined
an approach to business management and innovation based on the
core principle that speed very often wins, that the innovation
process must therefore speed up, and that a very fine model for how
to do this has emerged in the software development field through a
management technique called agile.20
Agile is a software development process that was developed by a
small team of programmers who justifiably became quite frustrated
with the chronic failures of small, medium, and huge software
development projects. Indeed, as programs and projects have
become more and more complex and ambitious, the failure rate has
grown to epidemic proportions. It is a popular sport among
technology writers to lampoon the massive and highly visible
failures, such as the state of Oregon, which spent $134 million on a
health care insurance exchange before giving up on it, the US
Internal Revenue Agency that spent $8 billion on a project that was
abandoned, and a $600 million baggage handling system that was
built for a new Denver airport that never worked.
While the creators of agile technique may not themselves have been
directly involved in those specific disasters, they certainly had
experienced the deeply frustrating techniques used to manage big
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projects that so often led these projects astray. This is a profoundly

important insight that must be emphasized traditional project so
often fail because of how they are managed.
Hence, its not a failure of the people, it may not even be a failure of
the underlying idea, or the goal, nor is it even a misperception of the
customer need. Its the very way that the work was organized that
causes the projects to fail.
Their obvious conclusion was that work must be organized in a
different manner.
Simple, actionable, and profound.
But how? Aha, the multi-million dollar question!
The inventors of agile came up with a powerful set of tools, a
compelling how, and one that works.
They realized that it was the traditional techniques themselves that
resulted in the failures: the very methods for managing software
development were just plain wrong, and were creating the opposite
of the intended results.
Instead of great work, traditional management produced
boondoggles. Instead of on-time deliveries, they got massive
delays. Instead of reliable budgets they got huge cost overruns.
Instead of success they got failure.
And it was not just an isolated few projects that went bad; it was a
trend across the entire industry that extended across every
geography where code was being written, and which endured for
decades, only getting worse and worse as projects became more
critical and more massive. Huge, essential infrastructure project
collapsed health care, infrastructure management, public
administration, etc. etc.
And so they set about to create a better way. The solution they
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invented they called agile, because they knew it had to be fast and
efficient, and now its being used more and more widely for the
very obvious reason that it works stunningly well.
However (and there has to be a however in a story like this),
implementing agile requires some tradeoffs that are operationally
and conceptually challenging for those who manage software
development projects. Specifically, in order to make agile work,
managers have to give up the usual techniques they use to control
these types of projects, and instead to trust a process that is largely
self-organizing and self-managed.
Of course this is exactly what programmers want to be left alone
to write great code. But its definitely not how managers are
accustomed to working. After all, what job do they have if every
project largely runs itself?
Nevertheless, the bold and the brave have proven how well agile
works, through indices like development times cut by half or more,
and quality double or better, and failure rates negligible, not on
every project, of course, but on a significant and impressive
majority.
The underlying discovery, of course, is that need for management
oversight is precisely the factor which leads to the failures. The
instinct to control, that is, becomes the fatal attraction.
The essential work of agile is done by a team of people called a
scrum who work in a process called a sprint. These are the two core
elements necessary to organize people to achieve goals that require
highly coordinated team work in complex problems where there is
value in speed (and there is always value in speed).
So of course this is relevant for you, the small business leader who
is setting out on the innovation journey, because you can easily and
very successfully create innovation scrum teams and organize their
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work into innovation sprints to bring impressive speed to your own

innovation process.
In case its not obvious, I should mention that agile borrows the
notion of the scrum from rugby, where it refers to an ordered
formation of players who lock arms, put their heads down, and push
forward against players from the other team who are doing the same
thing. Scrums occur frequently during a rugby game, as they are
one of the main elements of a typical contest. Teams are considered
superior because of their strength in the scrum and thus their
capacity to push forward against enormous obstacles, i.e., the other
team that is pushing back nearly as hard.
Similarly, the word scrimmage, derived from the word scrum,
describes a basic concept of American football, where the meaning
is the same. In American football, the starting point of every play is
the line of scrimmage.
Scrum is a useful metaphor for software development teams who
puts their heads down and blast their way through writing a given
module or section of code, all the while striving toward a final
product which may be larger and much more complex, but which
has been broken into addressable increments.
As you look to design your innovation process, youll naturally give
a lot of though to who ought to be on the scrum team. Please pay
attention, then, to a key element of the agile process, for theyve
done something profoundly smart here they include the customer
in the scrum. Brilliant thinking, that, because what the customer
brings, of course, is the intimate knowledge of their own needs, the
deeper context in which an innovation must become relevant.
Any product specification, or software specification for that matter,
no matter how detailed, can never capture the full scope and extent
of that context, largely because so much of the necessary
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information is hidden, unarticulated, unrecognized. The customer,

however, lives inside that context and knows it not as an external,
intellectual concept, but rather as a fundamental aspect of their own
existence. Consequently, a customer knows instantly and intuitively
when a given function or feature or element is essential, and when it
is extraneous.
So including the customer as a member of the scrum team is a
clever way to assure that this essential knowledge is constantly and
immediately present throughout the process.
Another of the key features that distinguishes agile from traditional
long-cycle, large scale software development projects is that scrum
teams organize their work into short segments that generally last
two to four weeks each. These segments are short enough to be
termed a sprint, a short foot race that is a contest of speed, as
compared with a longer race such as a 10,000 kilometers (10k) run
or a marathon (26.2 miles), which is a test of endurance. The sprint
is thus one short portion of a much longer process, a single play in
the midst of a longer contest. A sprint is long enough to make
meaningful progress, but short enough to sustain clear
accountability, maintain focus, and identify and achieve specific
deliverables that are already meaningful.
While mega-software projects are very much like marathons, or
even 100-mile long ultra-marathons, agile sprints consist of small,
digestible portions. And since agile projects are broken into sprint
increments, a typical large project may require dozens of sprints to
reach completion. Hence, instead of running the marathon in one
continuous race, its like a marathon composed of 26, one-mile long
races, or 104 quarter-mile sprints.
What are the advantages of that?
First, because a given chunk of work is expected to be completed in
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a series of sprints, the work process can more readily be controlled.

At the end of each week progress is assessed, and plans are adjusted
based on whether the scrum team did, or did not, get to their goal
for that period.
This ensures constant feedback, which allows the opportunity to
fine-tune the process from sprint to sprint. Is someone on the team
doing exceptionally great work? What are secrets that the rest of us
can learn from that person?
Conversely, is one team member lagging consistently behind? In
that case, what do we need to do to improve their proficiency?
When the results of each sprint are there for the entire scrum team to
see, fully evident, fully documented, and fully transparent,
procrastination is not tolerated.
Second, teams can track their progress sprint by sprint, and readily
assess incremental progress toward the final goal. This is important
because, in classic (and failed) software projects, programming
teams often fall into the trap of telling themselves that theyll make
up the lost time later in the year (or next year). In reality, these
projects tend to fall farther and farther behind. Ironically, the
underlying complexity and massive project management overhead
obscure these realities, reducing accountability.
The concepts of the minimum viable product and A-B testing are
relevant here, as they provide guidance for what each sprint may be
designed to achieve. Its makes a lot of sense to design a work
process to get to the MVP as fast as possible, knowing that other
layers of detail and functionality will be required if the MVP is
indeed viable, that is, if customers like it.
And if they dont like it, its easier to shift directions, or abandon it
entirely, and thereby save precious resources.
Third, since each unit of completed work is done in collaboration
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with clients or customers, the scrum team receives valuable

feedback directly from actual end users while working
collaboratively with them. This process optimizes learning about
the value proposition and thus enhances the pursuit of viability,
while unpleasant surprises are reduced or eliminated altogether. No
client of an agile project was ever shocked and dismayed by the
final results, because they were right there with the team, step by
step.
Doesn't this sound like the way innovation projects should be
pursued? Exactly!
So while the variety of activities in a typical innovation project will
likely be far greater than in an agile programming effort, the
principles and the practices are entirely consistent. Innovation
projects can be organized into multi-week sprints, during which
specific deliverables are planned and expected to be accomplished,
and the work is managed accordingly.
Uncertainty
Given the high degree of uncertainty inherent in innovation projects,
at any point in the process three possible outcomes could result:
The completed ideas-become-innovations will be brought to

market, if the feedback shows that they constitute compelling
value propositions in the market.
Some ideas will be discovered to be lacking in some

fundamental aspect, such as insufficient market need or
demand, or insufficient functionality. These will be set aside,
archived, and well move on to other ideas, having learned all
we can from this experience.
Some ideas will remain promising, but the timing for their
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introduction seems to be poor. These we will set aside for

consideration another day.
There are only three possible outcomes: success, abandonment, or
postponement.
The problem, of course, is that at the outset, we dont know what
the fate of a given idea will be. Those we consider at the outset to
be best will get resources, time and effort precisely to figure out
what we do in fact have.
Further, a key principle embedded in agile and in innovation is that
the problem being addressed may not at any time in the process be
fully understood or defined. Innovation projects constantly deal
with this exact form of uncertainty, and the more ambitious and farreaching the goal, the more likely it is that the problem itself may
remain undefined, and sometimes undefinable, even as progress is
being made.
Consequently, innovation teams must create a learning system much
like the agile sprint, an iterative process through which problems
can be defined in progressive levels of detail through multiple
iterations of work.
Technically, however, each problem is not being defined, but
rather it evolves into creation. And thus in our experience, the first
major act of any significant creative process is precisely the creation
of the problem.
The process of solving problems through the act of design begins
with vision. A compelling vision, well expressed, is one of the
most powerful of forces in human society. It sets up the contrast
between what is and what could be, and in this contrast emerges a
driving force, a compelling motive. This contrast is the source of
creative tension, the energy that drives visionaries, whether they are
artists or scientists or entrepreneurs or educators; missionaries or
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presidents or revolutionaries or parents. If you do not somehow

take action to fulfill the vision, it will remain in the vague and
distant future, inconsequential. But once the quest for fulfillment is
begun, this vague future is given distinct shape and form in the
present and offers possibilities that once were only dreamed of. In
this regard the fulfillment of a vision transcends time. The vision
and its contrast with the current condition has, in effect, created a
problem.21
Because customers are essential participants in both the Agile
Software and the Agile Innovation processes, the results of sprint
efforts are tested rigorously and repeatedly in real world
environments where customers experience what we offer and
evaluate and give feedback. Hence, uncertainty is gradually
replaced by awareness and knowledge of what works, as well as
what does not work. Both types of knowledge are highly valuable.
The intent of the innovation process is to transform ideas into
working prototypes and their associated business models, and to do
as fast as possible.
Taking Action
Once youve identified some promising projects, put a team
together and set an ambitious goal. Then give them a lot of support
and coaching so that they can begin working productively.
Encourage speed, which means that you may have to remove
obstacles that impede them.
Remain open to feedback and suggestions, and make sure that
everyone knows that learning is essential and that fast failures are
preferable to slow ones.
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Chapter 7
Engagement
The possibility of innovation is born when people transcend the

beliefs that limit their thinking, and engage in the search for new
and better ways. When people are doing this consistently and
throughout your organization, you will see a pattern begin to emerge
which you will discover is the dawning of the innovation culture.22
This will happen when there is a commitment to the view that
everyone in your organization can make real and meaningful
contributions to the innovation process. And everyone can, in fact,
be an innovator, and part of your job may be to make them believe
so, because in company after company it has become conclusively
apparent that strong and focused leadership is absolutely required to
bring forth and develop innovation on a consistent basis.
And rarely, if ever, has a great company emerged from indifferent
leadership.
However, the notion culture as a quality that describes an
organization is experiential and emergent, meaning the emerges
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through action and behavior, but its not a quality that comes to life
due to a decision that it ought to. Indeed, no one can mandate a
particular type of organizational culture (the beatings will continue
until morale improves), leaders do create the conditions in which it
may emerge, and thus it is in creating such conditions that the role
of leadership is defined. As Lou Gerstner wrote about the
transformation of IBM, Management doesnt change culture.
Management invites the workforce itself to change the culture.23
Culture change comes about when the beliefs and behaviors of
many people, including the leaders as well as many others, become
aligned around intent, values, and action. All three matter, and
deeply: without intent there will certainly not be innovation; without
the contributing values there will not be innovation, and of course
without the requisite actions there wont be innovation either.
Hence, the existence of an innovation culture is not something that
leaders can insist upon, but rather a sensibility that you must evoke
and nurture.
Begin by setting the example of your own behavior, by consistently
sharing your views on the importance of innovation, by constantly
promoting the value of innovation, and especially by making
business choices that favor innovation, even when those choices are
difficult ones.
One of the key choices that leaders must make is to set aside their
own egos and to adopt instead an attitude of support. Egotism and
behaviors that often accompany it, bullying and manipulation, will
squash the spirit of innovation, and will in fact lead to the opposite
kind of culture, anti-innovation.
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People Are the Core

People are naturally at the very core of everything involving
innovation.
People (not computers), have ideas and visions about how the future
could or should be different. People choose the best ones to invest
in. People develop them, transforming rough concepts into precise
objects, processes, practices, and ultimately into products and
services that other people, as customers, are the ones who buy (or
not).
As we saw in the previous chapter, most aspects of the innovation
process involve the work of people organized into teams, and while
we must not discount the role of individuals and their creative
thoughts and inspirations, the bulk of the work is teamwork because
innovation is inherently complex in its nature, and multidisciplinary in its realization.
But as we as also noted, even self-organizing teams are not
leaderless. A crew needs the helmsman to steer the ship in the right
direction; a symphony, and even a quartet, needs a conductor or a
leader; a basketball team needs a point guard, all for the same
reasons. Hence, fully engaged and self-organizing teams aren't
characterized by a lack of leadership, but rather by a certain style of
leadership.
The right style for your organization depends on who you are and
who the team members are, there are consistent themes that recur
across many different types of personalities. You can probably
make your own list based on your own observations of innovators
youve met and worked with in the past; our list includes openness,
honesty, and sincerity, of course, as well as curiosity, patience for
results to emerge, as well as the impatience that drives the process
forward.
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No matter which specific qualities you feel are most important, the
innovation culture as a whole emerges, again when people see their
company as an innovator, when this is how they identify
themselves, and when they feel that preserving, protecting, and
practicing innovation is an essential part of their own selfexpectations and of their behaviors. Once achieved, success at
innovation is thereby reinforced, and becomes a self-sustaining
cycle of attitude, action, and result.
Full Engagement in the Innovation Culture

While senior leaders cannot dictate any particular sort of
organizational culture into existence, by putting the following key
elements in place they can help significantly to bring forth the depth
of engagement that characterizes the innovation culture. These
actions focus on getting the right people and developing the
necessary innovation-related skills, which we discussed in the
previous chapter, and by engaging them in the right roles. Well
discuss these roles here.
Over the course of many years of focused work on innovation,
weve come to recognize that effective and consistent innovation
accomplishments (meaning not just a happy, one-time accident, but
consistent performance over the long term) occur where a corporate
culture exists in which three specific roles are well understood and
well expressed.
Hence, in addition to the agile processes related to portfolio
management and speed, and in addition to creating teams with the
right mix of technical expertise and innovation skills, theres also a
third dimension through innovation must be proactively managed,
and this is in the way you define the major roles in the innovation
process.
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The three essential roles are:
The creative genius, who displays the technical and

innovation skills mentioned above, including empathy,
observing, modeling, and rapid prototyping.
The innovation manager, who can also be thought of as a

facilitator, coach, or champion, and who keeps the
innovation effort moving forward from day to day.
The innovation leader, the senior leaders responsibility to

provide vision, a sense of urgency, resources, and policies
that support and enable innovators.24
This definitely does not mean that each individual can play only one
of these roles; in fact everyone in the organization may be a genius,
and a manager, as well as a leader. However, the three roles are
fundamentally different, and while any individual can indeed play
all three, they shouldnt try to do all three at the same time. When
youre actively engaged in the creative process you may be
participating as a creative genius, but during other phases you may
be functioning as an innovation leader or manager. Confusing the
three leads to dysfunction, and diminishes the quality of the results.
Creative Genius
The essential distinguishing characteristic of a creative genius is the
capacity to see what others do not see, to uncover secrets through
empathy, observation, and ideation that no one else has found.
Examples certainly include iconic geniuses throughout history, such
as Leonardo da Vinci and Thomas Edison, who saw the world in
new ways and discovered concepts, facts, and principles that others
had not seen.
Creative geniuses explore incessantly, ask questions constantly, and
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are driven by their curiosity to understand the world more deeply.

This curiosity often leads them to recognize issues and problems
that others have ignored or passively accepted, and then to envision
how the world could be better. The difference thus created between
their visions of future possibilities and what they experience in
reality is the source of creative tension that then drives them
forward in pursuit of the vision.
Thus, creative geniuses commonly ask questions like why? and
what if? and take creative risk in the quest for satisfying answers.
Many are fearless and inexhaustible in the pursuit of solutions to the
complex problems that theyre curious about. They may also be
quite disciplined about this, gathering research, rigorously
developing models that explain complex realities, and endlessly
exploring new ideas and possibilities. This innate creative process
matches very well with the process of conducting research, and of
course its invaluable during the pursuit of innovation.
However, weve also noticed that some creative geniuses can be
difficult to deal with. Perhaps this is because theyre so focused on
their own curiosity, their own ideas, and on the questions that
particularly interest them, and as result they sometimes neglect
polite conversation or social convention. This is one of the
dynamics that can creep into innovation teams, and it must be
closely managed, as creative individuals can be tremendously
valuable but sometimes annoying, and its critical to prevent
annoyance from ballooning into polarizing anger.
Since creative genius is so tremendously valuable to organizations
precisely because the qualities and characteristics that make the
work of creative geniuses so important, they may need to be
supported in a unique and specific way so that they can remain as
contributing members while avoid creating extra frustration for
themselves or for others.
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Another great characteristic of creative geniuses is that theyre also

quite willing to fail at any given time as long as they feel as theyre
on the road to success. We remember Thomas Edisons experience
developing the light bulb, which required perhaps 10,000 attempts
to find a filament before success was achieved. Edison himself
didnt experience those as failures, and own comment about that
process was very revealing. He supposedly said, simply, We
learned 9,999 ways not to make a light bulb.25
For Edison, this process of learning with certainty was a
necessary and satisfying result, where others may have seen egodamaging failure. Such persistence is also characteristic of the
creative genius, and is a highly desirable attribute for the people on
your team to have on when youre grappling with difficult
problems.
Hence, youll want to recruit many creative geniuses to your
organization, and youll also have to guide and support them. Those
are key roles for innovation champions.
Innovation Champions
The second key role to support the innovation culture is that of
innovation manager or champion. Weve also called this person the
coach or facilitator; all of these titles are valid.
Champions play the role of conductor, captain, and scrum leader,
which they do by opening the way for others, by organizing and
supporting the innovation process, and by providing the right tools
and infrastructure so that others can be successful.
This is not, however, a champion in the sense of an Olympic recordholder, the one and only best athlete, but the older and less selfcentered concept of one who selflessly serves and represents others,
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such as the way a Medieval knight or champion was expected to do

service to his king, lord, or lady.
Champions in contemporary organizations are often are middle
managers who serve as the bridge between senior managers working
at the strategic level, and others who work close to or directly with
customers. Their job in this situation is to understand the realities of
the marketplace, the specific needs and desires of customers, as well
as the organizations overall strategic direction, and to serve as a
conduit of information and guidance in both directions.
And a great thing about being an innovation champion is precisely
because they have both the strategic and the operations perspectives,
they can work around or eliminate entirely the constraints that limit
the performance of the organization. Hence, they know when and
how to modify the rules in order to pursue and achieve innovation
goals that are so important and so valuable that rule-breaking in the
pursuit of the right goals is justified, especially when we recognize
that the point of the rules it to facilitate the work (the innovative
intent), not the other way around (the bureaucratic imperative).
In a project focused role, innovation champions contribute to
success in these essential ways:
Keeping innovation teams fully engaged in their

commitment to speed and results.
Focusing teams on accountability and delivering results
Supporting groups of individuals to function well as a team
Helping all individuals develop their own capabilities
Providing teams with needed resources while removing
roadblocks
Coaching teams and customers
Orchestrating a teams rhythm
Helping teams connect their work with organizational
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priorities and strategies

Hence, the essence of a champions role lies not creating Gantt
charts or status reports (although those are still needed); it is being
focused on creating and facilitating high-performance.
After assembling a great team of people with the right combination
of experience, talent, and aptitude, you may also have to spend
some time managing team alignment. As we mentioned in Chapter
5, even if every member of the team is a bona fide genius, or
especially if they are, then the potential for conflict due to clashing
egos and complex, team-destroying interpersonal issues remains.
Acknowledging this possibility is a first and perhaps most important
step in avoiding it.
Dealing proactively with it is the next. In fact, this role is so
important to success that it deserves an entire chapter, which will
follow after we describe the third critical role in the innovation
culture, the innovation Leader.
A very useful skill for the successful innovation champion to
possess is a systems thinking perspective. The most successful
champions are capable of making the critical links between the
purpose of innovation and the process of achieving innovation in a
comprehensive way, connections that are critical to obtaining
support and to ultimately creating value. Hence, the innovator is
often a generalist with experience across many fields and
disciplines, rather than a specialist with a deep expertise in only one.
Innovation Leaders
The third essential role is that of innovation leader, which is
probably you. This person looks to the future and engages the entire
organization in the quest to achieve the goals, the vision, and the
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better ways that are defined by the organizations strategic

objectives.
Leaders are those who set policies, who determine, for example,
how much capital is going to be invested in the innovation effort
overall. They provide guidance, and may be the final decision
makers who decide the right balance between investment in
incremental innovation and investment in breakthroughs and new
business models. They also set goals, establish the innovation
targets, and define many of the specific accomplishments that the
organization should achieve. And like champions, they constantly
work to keep people fully engaged in the commitment to and effort
to create innovation, as they know that without full engagement,
innovation just does not happen.
Leaders will also articulate their expectations for the innovation
process and for the broad participation of people throughout the
organization in its long and fascinating journey.
However, one of the most important roles for innovation leaders, if
not the most important, is to set the tone by their own example,
demonstrating their commitment to the innovation journey by
passionately inspiring and encouraging, sometimes requiring other
people participate in the process.
Many innovation leaders have also found that celebrating notable
failures and the learning that results is a very positive message for
the organization to receive. At Tata Group, for example, which is
one Indias greatest corporations, the annual worldwide innovation
contest attracts dozens of teams from all the companys dozens of
business units to share their successes and to compete for
acknowledgment. In recent years, the company added another
category to the innovation awards program, a category called Dare
to Try, which acknowledges and celebrates notable ideas that were
not successful - failures, in other words. When Tata Chairman Mr.
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Ratan Tata stands up in front of the annual ceremony and announces

the winners in the Dare to Try category, he sends a powerful
message throughout the organization, reaffirming that intelligent
failure is necessary, appreciated, and valued. From such actions,
and in such a culture, it is quite easy to see the seeds of greatness
emerge.
Support for the innovation process thus requires leaders to accept
and acknowledge the value of intelligent failure in innovation.
A culture in which its safe to fail, both as a matter of policy and as
a reality of daily life and work, allows and encourages people to
explore their own ideas, and to follow these ideas wherever they
may lead. Any sincerely achieved outcome, whether initially
labeled as success or failure, is recognized as valuable since what is
learned from all thoughtful efforts achieves the growth of
knowledge that leads to success.
Together, the three roles played well compose an effective
organizational approach upon which the right people with the right
skills can set on an engaged course to discover and to create the
future. In its fullest expression, the innovation culture is a profound
accomplishment and the basis upon which future successes can be
built.
Innovation Culture Metrics

As you work to develop the innovation culture in your organization,
and to evaluate its performance, one of the most important metrics
to consider is the one we already explored: speed. Applying the
principles and practices described here should lead to a significant
acceleration of innovation project completion, steadily faster year
after year.
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Your organization can also get faster and better at turning ideas into
completed innovations that deliver value in the marketplace, and
over time you should expect to see an increasing number of people
who are participating in the innovation process across all phases,
from research to idea gathering throughout development.
In engaged organizations, innovation is the cool, exciting place to
be, the enthusiastic hope for the future, and eventually everyone will
want to join in on the fun and the satisfaction that comes from it.
That spirit will contribute enormously to achieving your end goal,
which of course is innovations that generate stunning revenues and
handsome profits and organizational vitality and longeivity.
You should also expect the quality of the innovation contributions
of each person to rise. The capability of individuals, teams,
departments and entire business units will improve, and as the
ongoing performance of the organization and its innovation efforts
thrive at the same time, the much sought-after virtuous cycle will
result.
The quality of the ideas that are being shared should also improve.
As people learn, they naturally recognize business opportunities that
are less obvious, and they can propose better opportunities for both
incremental and for breakthrough innovation possibilities.
Overall, the goal is constant improvement, continuous and valuable
learning that is applied and transformed into positive business
outcomes. While the focus is on the actions needed to meet the
challenges of external change, the larger goal is to perceive change
as an ally, to embrace new mindsets that will yield increasing value
for the company.
This is the ultimate benefit of developing an innovation culture in
your organization and is potentially a massive return on the
significant investment of time and effort.
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Taking Action
In general, its really easy to see the strengths and weaknesses of
others, but difficult to get a clear view of your won. To gain a
deeper understanding of the culture of your own organization youll
therefore need to step outside of it and look back to see whats
really going on, how people are relating to one another, where the
tensions and dysfunctions are hidden, and whats working really
well.
Such an assessment can then help you to target the improvements
that will result in strong performance across all three of the critical
roles.
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Chapter 8
Leadership
As you, the leader/entrepreneur, embark on the pursuit of

innovation, there are a handful of your personal skills and talents
that will contribute enormously to the success and joyfulness of
your journey. These skills are of course not just specific to
innovation, and as a successful business person you probably
already have well-developed capabilities in many of these areas.
Nevertheless, its well worth spending a few minutes to review the
key abilities where your refined skill set will result in enormous
benefits. We will look not only at the critical skills youll need to
be successful as an entrepreneur/innovator, but also at the team of
people who will work side by side with you to transform the
promise of innovation into the reality or revenue and profit growth.
Perhaps its not a surprise that these skills are the ones that we also
recommend for anyone who has the role of Chief Innovation
Officer, an emerging job category that has become common among
larger companies that also recognize the importance of the
commitment to and pursuit of innovation. Hence, the following
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overview is adapted from our book The Chief Innovation Officer.26
Generalist
Creating innovation is a complex process, and managing it
effectively is therefore also complex. An effective leader works
across many disciplines, consequently requiring knowledge and the
capacity to dialog across a range of technical and interpersonal
topics. Hence, as I noted above, you may well come to this work
not as a specialist in any one discipline, but as a generalist who is
competent, but not necessarily expert, in any one of them.
Because youll be working closely with people from many different
parts of your organization, and with more who are outside the
organization and who will contribute their thoughts and ideas to the
work of creating innovation, their expertise and their questions and
their opinions all have to converge and align to make innovation
happen, and consequently youll often find yourself in the role of
communications bridge, translator, integrator, and occasionally
peacemaker. Here, therefore, are some of the skills youll probably
need to develop and utilize along this fascinating journey.
Leader
What is your leadership style? Its an important question, as your
leadership is essential to the success of your firms innovation
efforts. Through your leadership youre helping to define and
institute the language of innovation thats used throughout your
organization, and to develop the culture as well. Youre actively
involved in teaching the language so that everyone shares the same
understanding of what innovation means.
Shared language is a critical element in the development of
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organizational culture, and since the effective innovation process

consists of more than a few principles and practices that may be
contrary to what some have long believed and practiced, taking an
active role in spreading knowledge of the right methods is a
necessary and ongoing investment.
For example, lets talk about a dramatically powerful little word that
often has huge impact on the individuals, teams, and departments
throughout your organization: failure. Is failure a stigma in your
company? It certainly is in many. Failure is bad for business, bad
for profits, bad for brand image, and really bad for careers. But as
nearly everyone recognizes, failure is not only good for innovation,
its necessary.
Sound innovation management calls for aspiring innovators to
embrace failure, intelligent failure, that is, because they can learn so
much from it. The objective is to fail in the right ways, in learning
situations that dont the brand or the bottom line, which are failures
in labs, in prototypes, in mock-ups, in concepts, where they tell you
so much about what works and doesnt work.
In the innovation process, in fact, its entirely the case that the faster
you fail the faster you succeed. Hence, there are some language
issues to address around innovation, and in addition to failure
theres a long list of words and concepts and practices to become
conversant in.
Terms such as innovation and creativity need precise
definitions, as do innovation portfolio, empathy, observation,
and business model, to name but a few that we will have
mentioned already.
Additional dimensions of your leadership role will include your key
efforts as a communicator about the purpose of innovation and
about the process itself, a point that weve elaborated on throughout
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this book. In addition, there are roles and skills related to factors as
diverse as learning, curiosity, asking questions, and analyzing, as we
will explore below.
Learner
A leaders job perhaps above all is a learning job, so a great interest
in and love for learning is one of your most important qualities.
This may sound simple, or obvious, or trite, but in fact learning is a
complex undertaking, and not everyone is good at it; to succeed
youll need to be very good at it.
The learning that youre responsible for is not yours alone, but
rather the learning of the entire organization as it pertains to
innovation, and this is neither a simple issue to define nor a simple
one to accomplish.
So what, exactly, is learning? In our brains, learning means that
change is occurring, because the brain is literally wired together as a
collection of connected neurons. The connections are not random of
course, theyre purposeful, and new connections are made when
learning occurs, while old connections may simultaneously be
severed. We can say, then, that learning occurs only when the
existing structure of the brains neural connections are not adequate
to meet the situation, and an investment (a physiological investment
that is) is required to create new neural structure, new connections.
Conversely, when non-learning happens (that is, when a repetitive
action has occurred that did not require learning), it tells us that the
situation at hand required knowledge or skills you already had, and
the existing wiring of the brain was sufficient to the situation.
While this is literally whats happening, it seems also to be a
powerfully apt metaphor for the way that organizations also seem to
be wired for repetition, for doing the same thing over and over.
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They too commonly resist making the necessary investments in new

connections because this appears to be an unnecessary cost. Too
frequently, however, such a decision is revealed to be an error; the
world has changed, and we needed to learn how to do something
new, but we didnt. Business failure is the common result after too
many of these wrong choices
In more common language we would call it a failure to innovate.
Here we list some companies that have been afflicted with this
malady in recent times: Kodak (bankrupt) Nokia (devastated by the
smart phone; sold off to Microsoft), RIM (barely hanging on), Sears
(didnt keep up with Wal-Mart), GM (bankrupt a couple years ago,
following which a massive and very fast learning phase ensued),
Circuit City (didnt keep up with Best Buys changes), etc., etc.
These were all learning failures writ large. Learning at a more
modest scale for the individual and for the organization requires that
the brain, the people, and the organization do things differently, that
they consider new information, develop new patterns, understand
new experiences and new processes.
This is work, and in the interest of physiological efficiency your
brain avoids it when possible, as it requires the investment of
precious energy and attention. In the interest of operational
efficiency your organization may also wish to avoid it, which it does
at its own peril.
In contrast to this pattern, admittedly oversimplified, the learning
brain is constantly changing, constantly adapting itself and its
structure to integrate new information and new experiences into the
old worldview, into the old perspective. Some people, naturally
creative people often, view this investment not as a burden, but
largely as a pleasure; they like to think hard, and for a long time,
about interesting and tough problems.
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Heres an example: it was reported that Bill Gates once took a

vacation with his girlfriend in the days before he was married, and
they supposedly watched videos about biotech and genetic
engineering for an entire weekend, more or less nonstop. It takes a
unique sort of person to consider such a weekend, a vacation, not
to mention the sheer intellectual stamina that must have been
needed. Then again, what did Gates achieve in his life? A penchant
for learning indeed!
And the willingness to engage in absorbing new information,
rewiring his own brain. Youll have some of that skill as a
successful leader. A whole weekend of science videos? Maybe not.
But maybe. Possibly. Yeah, go for it.
As a business leader, your learning responsibility isnt just about
yourself, for in fact you have to inspire and help the entire
organization to be a learning organization, to make that investment
in seeing what is already different, what may or will be different in
the future, and what else can and should be different as a result of
your own efforts.
Theres an aspect of this conversation about learning thats
important to be aware of because it may have some significant
impact on your relationship with other members of the executive
team, particularly if theyre in their fifties or sixties. Consider the
following comments from psychiatrist Norman Doidge:
In childhood, our brains readily shape themselves in response to the
world, developing neuropsychological structures, which include our
pictures and representations of the world. These structures form the
neuronal basis for our perceptual habits and beliefs, all the way up
to complex ideologies. ... these structures tend to get reinforced
early on, if repeated, and become self-sustaining. As we age ... it
becomes increasingly difficult for us to change in response to the
world, even if we want to. We find familiar types of stimulation
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pleasurable; we seek out like-minded individuals to associate with,

and research shows we tend to ignore, or forget, or attempt to
discredit, information that does not match our beliefs, or perception
of the world, because it is very distressing and difficult to think and
perceive in unfamiliar ways. Increasingly, the aging individual acts
to preserve the structures within, and when there is a mismatch
between his internal neurocognitive structures and the world.27
Doidges very fine book The Brain that Changes Itself examines the
ways in which the brain changes and adapts to new demands and
circumstances. In the passage quoted here, Doidge refers to the
work of Bruce Wexler in his book, Brain and Culture.28 Both books
are invaluable resources for the innovation practitioner, for reasons
that the above quote should make entirely obvious.
Here you are, deep in the pursuit of innovation, fending off the
naysayers and the opponents of change, and there they are,
dismissing your great work because it does not match their beliefs.
How many examples of corporate suicide can this neurocognitive
pattern explain? Can it explain why Kodak, which invented the
digital camera, was also destroyed by it? Can it explain why Nokia,
masters of the world cell phone market, was brought down by the
smart phone? Can it explain why Sears, the greatest global retailer
in its prime, is now an also-also ran sucking Wal-Marts exhaust
fumes?
We cannot know for sure, but I believe that in fact the neurolimitations of senior managers may indeed be responsible for a great
many of the corporate failures of the modern world. The inability to
come to grips with change, the incapacity to adequately support
innovation, and the resulting crash of creative destruction, it is
entirely plausible that these can be explained by the cognitive
limitations of senior managers.
So what does this mean? Our theme in this section is learning, and
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the ideal innovative organization is constantly engaged in the

learning process in direct contrast with the learning-disabled.
Leaders of innovative organizations are constantly engaged in
seeking and finding new information and new experiences, and
integrating them into ongoing operations, which activities are also
central to the search for innovation.
Theres a paradox here, for although you, as leader, do indeed have
a responsibility to learn for the organization as a whole, its also true
that you literally cannot learn for someone else; everyone, each
individual, must have their own learning experiences. So part of
your role is to define, create, and structure opportunities for people
to engage with new information, to understand the meanings,
consequences, and the implications of that information for their
roles and for the organization as a whole. Based on Doidges work,
we see that it is especially important for you to create and deploy
such learning experiences for your colleagues on the senior
management team.
In the language of the pertinent and powerful discipline called
accelerated learning, which is focused on understanding how
people learn, and how to help them learn more efficiently, we refer
to a concept called experience first, label second. What this
means is that each individual must have their own experiences, and
based on these experiences we can then help them to organize and
structure their own personal library of knowledge. We do this by
providing labels or patterns or models that explain what their
learning could mean, and how those experiences fit into a larger
whole, into a larger framework. The point of experience first, label
second is that learning occurs most readily when we enable or
allow people to have the experience first, and only afterwards
provide them with the label which pertains to it. In this way, they
actually do learn. In contrast, label-first experience second often
truncates the learning process as it is a great temptation to just
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memorize the label and forego the experience entirely. The

common school room question, Is this going to be on the test? is
an artifact of the label-first teaching model, in that the experience
itself is devalued and the focus of the effort is entirely on meeting
an external validation requirement rather than on the intrinsic value
of the concepts that are the ostensible purpose of the entire activity.
In the brain that has been taught to the test, any real or enduring
capability has been sacrificed to conformity, leaving the individual
lacking depth, comprehension, and true understanding. Learning
has thus not occurred.
This all explains why in chemistry class you actually have to do the
experiments, and not just read about them; and why its different to
walk along the Seine in Paris than it is to read about it in a book, or
even see it in a movie. Experience has a great many more
dimensions than memorization or rote learning, it has a quality and
depth that cannot be substituted, because the impact cannot be
achieved any other way than actually doing it; only in genuine
learning does the brain rewire itself.
Hence, your role is to embody the spirit of learning, to set up
genuine, open-ended, experience-first, label-second learning
opportunities for others (and for yourself, for that matter) whereby
meaningful and important learning does indeed occur.
How will you do that?
You will find many different ways to bring new information and
experiences to your organization, and for them to engage with it in
the process of assimilating its meaning and assessing its
consequences. The information Im referring to will have many
qualities; it will be challenging, interesting, surprising, confusing,
perhaps difficult, or even unpleasant. And it will inevitably be
important, necessary, and provocative.
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It will not all be written, printed, or on a screen; it may also come in

the form of a trip, or a visit, or a trade show, or a conversation, or a
workshop. It may be open-ended, in that you will create a learning
opportunity without knowing what the outcome will be, a journey
into the unknown. This is a journey that will be fueled by a unique
and uniquely human quality, one that has been a core driver in the
remarkable advance of human civilization across thousands and
hundreds of thousands of years. That fuel is curiosity.
Curiosity
As a learner and an innovator, youre naturally a person whos
curious to discover new things, and you exemplify the personality
characteristics that embody learning. Youre always interested in
surprises, because surprises indicate that something that you used to
believe is perhaps not so, and such a discovery can be enormously
helpful to the cause of innovation, as we seek to overturn facts that
are actually not facts at all, but were merely mistaken assumptions.
Oh, how wonderful it is to get rid of an assumption that is
discovered to be untrue, and replace with a better explanation of
reality, for in this lies the very genius of innovation, the genius that
spots something that everyone else overlooked, or misunderstood,
the genius that becomes new insight, new possibility, and new
reality!
And youre always interested in understanding what has caused past
successes and especially past failures, for while the successes
showed how and where your reasoning and expectations were
justified, your failures are, like surprises, learning opportunities to
confront mistaken assumptions that deserve to be overturned, and
the overturning of which will open up new possibilities, new
doorways to innovation.
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You will seek to discover whatever it is that can be learned from

less than perfect results, because all of these occurrences surprises,
successes, failures, and disappointments provide significant
learning opportunities for you and for the organization.
Another word to use to describe the cognitive impact of surprises
and of overturned assumptions is unlearning. Yes, thats right,
unlearning is the process of having discovered that what we thought
we knew just isnt so, and we have to start afresh. How close to
innovation is that? Same exact thing, dont you think...
As a leader, its not your job to be the most creative person in the
organization, nor to be the most innovative person in the
organization. Your job is to structure and organize the entire
process, to support, guide, manage, and coach others, and to assure
that rigorous discipline is being followed throughout the innovation
process, and to measure the results and correct the system such that
all this widespread effort leads to the desired sort of innovation
results, which in turn leads to success and sustainability for the
organization.
Your own curiosity will lead you into the many corners and hidden
places where learning may occur across the scope of the
organizations performance, not only with respect to new products
and services, but also throughout the ongoing and existing
operations.
As youre probably taking the lead in determining which projects to
invest in and which not to invest in, you must be seen as a fair
person, open minded and willing to consider many different
possibilities, willing to discuss openly with others about the projects
and the ideas that theyre working on, both to help them improve
their ideas, and also to help them recognize ideas that simply may
not be ready.
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Through all of these activities you will, most importantly, incite

learning, genuine learning, to occur, both for yourself, and for a
great many other people who are engaged in various ways in the
innovation journey with you.
One of the most direct and yet effective methods you may apply to
get people engaged in learning is to ask them questions, not only
when you suspect that they know the answers, but because questions
themselves open doors, and can quite readily lead people to discover
new and unexpected knowledge that will also carry them forward in
their own quests for information and solutions.
Question Asker
In Chapter 1 we mentioned two of the key drivers of innovation,
maps and questions. As an innovation leader you should be in the
habit of asking questions, as it is a form of interaction that can
provoke profound learning. Youll ask questions of your colleagues
throughout the management team, and of people throughout the
entire organization, and far beyond.
But what can a question really do? And why are questions so
important?
We have found with amazing consistency that the right question,
asked in the right way (i.e., helpfully, as opposed to a gotcha
question), and asked at the right time, can abruptly open a door in a
persons mind, enabling them to see things differently, to see things
that they had never seen or understood before. Questions are
tremendously powerful instigators of innovative thought, and the
capacity to frame and ask great questions is one of the most
important skills that leaders can develop.
Enabling a person to have this sort of experience may help to
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change their perspective just enough to illuminate a difficult

problem, or lead to an insight that unlocks a mystery.
Here are some examples.
The Polaroid camera was invented by chemist Edwin Land, and he
was inspired to make that invention by a simple question. The story
goes something like this (I am paraphrasing). Land enjoyed
photography as a hobby, so of course he took lots of pictures of his
family. He had a young daughter, and one day he asked his
daughter if she would pose for him. The 7 year old posed
glamorously, like movie star, and after he had taken the picture she
ran over to him and practically shouted at him, Daddy, Daddy!
Show me the picture! And he replied, Of course, dear. Well just
go in the house and well develop the film, and then well print the
film, and then youll be able to see the picture. This, obviously,
was going to take a long time, which was not at all satisfying to her.
No, Daddy. I have to see the picture now! Why cant I see it
now?! Now, as in right now, this minute!
Of course Land didnt have the knowledge to make the picture
visible immediately, but her question inspired him to think about
why they couldnt see it now, and what would be necessary for
photography to be, in the phrase that was chosen later, instant. And
so her simple question led him on the journey that eventually
resulted in the Polaroid camera, the instant camera that we know
and love today.
Speaking of the questions that children ask, and the role that plays
in their learning, why do you suppose that we have a widely shared
belief that smaller class sizes are more effective learning
environments for children than larger classes? Aside from the
general level of noise and chaos of a big classroom filled with 30 or
more active, young minds, we know that smaller classes are better
because each child in a smaller class has more opportunities to
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interact directly with the teacher, more chances, that is, to ask
questions. Because asking questions is fundamental to learning.
The story of Land and the Polaroid camera is also important because
it describes a pattern that occurs repeatedly, the power of the right
question to lead in a fruitful direction. This occurs because a
question itself may change how someone looks at a problem, that is,
the topic of the question moves from the domain of We know that
already, i.e., applying an existing solution that has already been
mapped to current reality, to the domain of What if ? and
Suppose that , and these are domains in which visionaries and
innovators, and leaders spend a great deal of their time.
In fact, great leaders and visionaries of history have always
recognized and utilized the power of questions to further their goals.
The history of innovation is the history of questions, because great
questions embody and also may provoke insight into every aspect of
knowledge, from physics to psychology, from to biology to
business. Access to all realms of knowledge is unlocked by asking
the right questions.
So when you read about great leaders, scientists, or statesmen,
consider what questions they may have been asking, and what
answers they may have gotten from their questions. And then
imagine what they then did with the answers that they got, how they
transformed questions and answers into insight and action that
altered the course of history. Questions can indeed do that.
Leonardo da Vinci, for example, was known for his relentless
curiosity. He asked questions of things that he observed in nature,
and that he saw in the human world around him, and this inspired
him to design visionary machines and also to become one of the
greatest painters in history, all because of his curiosity, which was at
root his simple habit of asking questions, and seeking the answers in
his sketchbooks and inventions.
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A more contemporary example is Lou Gerstner, the former CEO of

IBM, who was hired specifically to extract IBM from the greatest
crisis in its history. At the time, 1991, IBM was losing money by
the billions, and there was an active debate among the companys
leaders, board members, and many outside observers about whether
it would be best to break the company up into pieces, or whether it
would be possible to somehow recreate it for a new life.
In approaching his assignment Gerstner therefore asked himself,
What is the right thing to do with the asset called IBM? Through
a systematic process of investigation he realized that IBM needed a
new business model, and then set about to design it. The results he
achieved, of course, were outstanding, and today, twenty years later,
IBM remains one of the most successful and important American
corporations.
Einstein also asked a lot questions. One of them, simple enough,
was: What would it be like to ride on a wave of light as it moves
through the universe? That question inspired him to see reality in a
way that was different than how others saw it, and led him to
formulate the framework in a way that we know today as the special
and general theories of relatively.
Napoleon, one of the greatest military leaders of all time, also asked
questions. His simple question was What can I do to overwhelm
my opponent? His answers led him to reinvent how wars were
fought, and to dozens of victories over much larger armies led by
much less innovative opponents.
Edwin Land, Leonardo, Gerstner, Einstein, Napoleon. And you.
Here are two questions that you, the leader/entrepreneur/innovator,
might ask.
What are the right questions that will provide the necessary
leadership for this organization?
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What is the most powerful or compelling question that will

lead us to or toward where we want to be in the
marketplace?
As I mentioned, your job is not necessarily to know the answers, but

to identify the right questions, and then to seek answers to them
rigorously, to discover robust insights with discipline, within a
system, within a framework for the innovation process.
You might also ask:
What is the future of our industry?
And what is the future of our company?
Whats driving change in our world?
What are the forces and factors that are shaping the future
of the markets in which we compete?
And what should our place be in those future markets?
You may also want to know:
What is the right mix of products, services, business

models, and new innovation ventures to assure the success
of our organization in the future?
And what are the right innovation targets for our

organization to pursue?
In the process of asking these questions youll be shaping

your thoughts about your organizations innovation
portfolio.
You may ask about customers and what they need and want,
and what they may require of your organization today, and
what they will in the future.
And how will we meet these requirements?
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What is our process is going to be for developing ideas and

translating those ideas into innovative products and services
that we offer in the marketplace?
You will also be asking questions to help you to think about how to
inspire everyone in the organization, and in fact, everyone outside
of the organization who are part of your organizational ecosystem as
well.
How can we engage the broadest group to contribute their

best ideas and questions to our innovation process?
What types of research should we be doing?
How can we turn our research into valuable products and

services?
What are the new technologies that will become part of our
future products and services?
What technology development capabilities do we need that

we dont have today?
And you will ask about the best ways to support all of these efforts.
What is the best support structure for innovation throughout

our organization?
What tools do we need?
What software and hardware might enable us to work more

effectively?
To summarize, then, questions are tremendously powerful

instigators of innovative thought, and the capacity to frame and ask
great questions is one of the most important skills that the leader can
develop. And as you ask these questions, and the dozens and
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hundreds of others that will emerge through time, youll discover

that improvement to the quality and effectiveness of the questions
you ask will occur naturally, because conceiving of great questions
is a skill that improves as a result of your dedicated practice.
Root Cause Analyst

In the business methodology known as TQM, or Total Quality, the
principle of asking questions is embedded in a tool called simply, 5
Whys, which is applied in situations when an issue or problem has
arisen, and the individual or team in charge of solving it begins to
address the situation. The context of this scenario is generally some
sort of a failure, such a machine breakdown on an assembly line,
which is one of the domains the manufacturing environment
where Total Quality has proven itself to be so amazingly effective.
The underlying goal in a Total Quality context is not only to address
the immediate problem, but to search for, diagnose, and address the
root cause as well, and hence the 5 Whys is also know as Root
Cause Analysis.
The technique suggests that when looking at a problem, one would
ask why it has occurred, which might lead deeper into the issue to
identify an underlying problem. Ask why again, to get still
deeper. The inference in Root Cause Analysis is that by the time
you have asked the fifth why, youve probably arrived at or close to
a real root cause, and if you then address the root cause, all of the
other resulting layers of problems will resolve themselves and not
recur.
The inverse logic, of course, is that if you just fix the obvious
manifestation of the problem, but do not address the underlying
cause or causes, then the problem will likely recur, which will
multiply cost and further problems in the future.
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Root cause analysis, pursued with rigor, has enabled companies

such as Toyota, Honda, and Samsung to become world leaders in
designing and manufacturing products of amazing quality and
durability. A 2012 Honda car, for example, could well be expected
to last for 300,000 miles of good service to its owner as long as its
properly maintained, whereas twenty years ago, a good car was one
that made it to 100,000 miles.
The point of this, of course, is that Root Cause Analysis is really
just a persistent habit of asking thoughtful and pertinent questions,
and your job as a leader is largely to become, therefore, the Chief
Question-Asker of your organization, or perhaps you might say the
Chief of Curiosity.
(And if your company happens to have an executive in charge of
total quality, this person will likely become a close supporter and
ally of yours, which have the additional benefit of linking the
innovation effort with the quality process, the two being, of course,
really two sides of a single coin.)
The act and spirit of asking questions can provide important
leadership, which may help people throughout your organization to
better understand the future, and to understand the vision that the
organization is aspiring to achieve. Questions can also inspire
people to seek new knowledge, to seek new insights and new
possibilities. Questions can inspire people to learn, and can
organize the search and research processes.
However, as I noted above, questions can also be used as a gotcha,
as a way to demonstrate the superior knowledge and intelligence of
the person asking the question. And this, of course, is not at all
what we mean by the spirit of asking questions, for these questions
are destructive and detrimental. They will not inspire the innovation
culture, but rather they will stifle it. Its important, therefore, that
questions are used as positive inducements, not negative put-downs.
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Manager
So here we are back where you probably started, at management.
Youve managed your company successfully to get to your current
level of success, and now youre considering how to make a
renewed effort, to develop a new set of management skills that will
lead the innovation, with the goal to transformation your firm into
one that is more broadly protected from external changes, and
perhaps a more prominent player in current and future markets.
Your skills in management will be applied as you develop the whole
system of innovation in your organization, and at the same time
youll also be putting efforts into the specific innovation projects,
balancing the whole system with the high potential targets that
youre pursing.
In this role youll balance other factors including short term and
long-term perspectives, as well as risk and reward, and the differing
thinking processes related to incremental thinking and breakthrough
thinking.
And youll be managing the overall innovation budget and budgets
specific to individual projects, as well as the performance of the
overall innovation portfolio. As you see, there will be abundant
opportunities to exercise your managerial savoir-faire.
Facilitator
As an innovation leader you may also find that you are spending
quite a bit of time as a facilitator, and as we saw in the prior chapter,
in this role your job is to help individuals and teams find the best
solutions to the complex problems that theyre engaged with.
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Coach
Another important role for you is as a coach. Here youll both push
and pull. By pushing I mean that there are times when a coach has
to expect great things, and has to demand that individuals and teams
raise the level of their performance to meet those expectations.
There are other times, however, when pushing probably isnt going
to be helpful, when the right thing to do is to patiently encourage
and inspire people to search for great questions and great solutions
to very difficult issues and challenges that theyre grappling with.
The qualities and knowledge that contribute to the success of a
coach, whether youre coaching a team of very young children, or
high school athletes, or elite professionals, are the same.
First and most important is empathy, the capacity to understand
what others are feeling and thinking and to engage them with the
right response that helps them to transcend their limitations. This is
the same skill that, when turned toward customers, enables you to
recognize needs and opportunities in the marketplace. Directly
internally, this ability to listen effectively, and to set aside ones
own judgment in order to understand whats going on in the mind of
the other person is a particularly important skill because so much of
the innovation process is driven by the need to understand exactly
what others are thinking and feeling, whether they are colleagues
among the executive team, your own innovation team members,
innovation project participants, or customers, partners, and even
competitors.
High empathy skill will also enable you to find the best ways of
communicating, also a key leadership skill.
Effective leaders balance a capacity for high empathy with a
forward-looking vision of what ought to be and the drive to achieve
the vision. Merging these three, empathy, vision, and drive enables
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you to communicate with people effectively, in ways that will

indeed inspire and motivate them to effective action, and through
this process they will be more likely to and more capable of helping
you to achieve your vision, while also making progress in achieving
their own visions. (Their visions may be as important to them, as
yours are to you.)
Youre likely to be the person who defines the vision for the
organization as a whole, and its also certainly your responsibility to
articulate the vision for the innovation process, and for everyone
whos engaged in working on innovation throughout the
organization. Likewise, its definitely your job to get as many
people as possible engaged in the work of attaining that vision, and
your coaching skills will help significantly in doing so.
Enthusiasm is important, as well, as a good coach both embodies
and conveys a positive attitude and enthusiasm for the work and
accomplishments achieved throughout the organization.
A prospective athlete, someone in training who is learning to be a
high performing team member and who has the capacity to achieve
such a goal, is likely to have moments of great accomplishment,
personal triumphs and breakthroughs in understanding, capability,
and performance. But there will also be times where nothing seems
to be working at all. A major part of the coachs job is to reinforce
the long term vision, to help overcome the bad days, to help the
aspiring performer see the progress, and to know that there are
inevitably better days and worse days on the long journey toward
success.
Coaches work to bring out the best in each of the players on the
team, and prepares each one to succeed by helping them prepare for
and accomplish everything thats necessary to overcome the
obstacles and challenges along the way.
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Hence, the coachs job is to create a learning atmosphere in which

people understand the significance of the goals that theyre
pursuing, and where each is clear about their own goals, and in
which they understand what is required to remain on a path toward
success.
Each athlete, and each innovator, each member of the team will
have their own experiences; each will bring a unique level of skill
and their own degree of commitment to the sport, and each will
have unique physical and mental attributes; some will be taller,
some will be faster, some will be stronger. It is the coachs job to
blend all of the different individuals and bring forth their best efforts
in molding a successful team.
Designer
Another important skill for the innovation leader is the capacity to
design. The process of design is a matter of searching for elegant
solutions to complex problems, by mastering the principles and
practices of transforming observations and insights into useful
concepts and objects. Does that definition sound rather similar to
the definition of innovation? Of course it does; it is in fact the same
thing.
As a matter of culture we use the word design to describe what
architects do, and what business leaders do when addressing
complex problems, seeking (and creating) elegant solutions to
intricate and engaging challenges. We design organizations and
business models, advertisements and packages, houses and cars and
kitchen sinks.
The discipline of design is the process of thinking through options
and possibilities, arriving at the best solution, and making it real.
Just like innovation. It is an essential skill for leaders.
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The Open Door

If you have the good fortune to be an open and generally optimistic
person these qualities will contribute a great deal to your success.
Youll be highly visible throughout the organization, and you will
want people to feel comfortable approaching you to share their
ideas, asking for help in nudging the bureaucracy, or just seeking
guidance. You welcome these conversations, and theyre a constant
activity for you, because so much of what you want and need to
accomplish is not a matter of what you can do on your own, but
rather a result of what others will contribute through their own
participation in the innovation dialog and the innovation process.
Therefore, this part of your job is a networking job, and the larger
and more effectively youre connected to people throughout your
organization and beyond, the easier it will for you to gather the
talent and engage the commitments that you need.
Your network of contacts will help you to assess the many ideas that
arrive into the innovation domain, and to understand the many
problems that will beset the innovation projects that are under way,
and of course to help solve them, too.
So it will be very useful if youre available and happy to talk to
anyone nearly any time. And it will help if people especially
people you dont already know are aware of your openness, know
how to find you, and feel comfortable reaching out to you.
In this regard, by the way, where is your office?
Is it hidden away in some inaccessible corner far out of sight? Or it
is on the executives floor, locked away in the quiet leadership
spaces where few others venture to go. You wish to be accessible to
people, so these are probably not the best locations for you. Instead,
perhaps you should be located close to the middle of the busiest
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crossroads of the organization, in a spot where people will be

passing by, and where, on the spur of the moment, they can stick
their head in your office which they know that theyre welcome to
do and say, By the way, you know that innovation do-dad we
were talking about last week? Well I had a call with so-and-so over
at such-and-such, and she said that theyd seen a problem like that
last year These are the conversations that do much to move
innovation forward.
Where is that crossroads? Chances are, it may have something to do
with coffee. Yes, if it happens that youre known for the very good
coffee that happens to be right near the door of your office, well,
thats just how it works out sometimes
To make this work, one leader we admired kept two offices. One
was his obligatory space with the other executives, where he could
interact easily with the team; the other was in a very obvious, front
and center spot in the innovation team space, which he had chosen
precisely because sooner or later just about everyone in the
organization would happen by.
Your Self-Assessment
Did you get all that? Its taken a lot, more than twenty pages to
describe the qualities, skills, and characteristics that you may need
to develop to become a successful innovation leader, to achieve
world-class capability in this highly complex domain. Its a lot.
You should expect that your capabilities are stronger in some of
these than others, so you need a development plan, which will
inevitably begin with an honest assessment of your own strengths
and weaknesses, your own capabilities, so that you will know very
clearly areas in which you need extra support or help. A detailed
and honest self-assessment will also tell you a great deal about your
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style of leadership and of communication, and will thus help you to

structure highly effective interactions with others so that you
achieve successful outcomes. Your personal action plan is your
designed pathway to augment the areas where your skill level is
insufficient.
Skills and Personality Assessment

Heres the list of skills weve just discussed. In the accompanying
workbook there are some sheets you can use to develop a more
refined self-assessment.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Leader
Learner
Curiosity
Question asker
Manager
Facilitator
Coach
Designer
The Open Door
Take time not only to answer the self assessment questions, and also
to think deeply about what you learn from it. Where are you
strongest? Weakest? What are the priority actions that you should
engage in to improve in the weak areas?
Taking Action
This is a chapter on leadership, so its fairly obvious that you need
to make a careful and honest assessment of your own leadership
style. Whats working? Whats not working?
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Then move on to the other items for your more complete selfassessment. Set aside some focused, quiet time to think about your
own strengths and weaknesses, and then decide on a couple that you
feel are critical to the future success of your organization, and put
together a study plan to learn how your desire for personal change
can become a reality.
It may be very helpful to discuss these issues with your peers, other
business leaders who have their own companies to run, and who are
facing the same or similar challenges. Peer coaching like this can
be very useful.
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Chapter 9
Tools
The last element of the innovation formula is the tools that enable
you, or support you, to produce better innovation outcomes more
quickly. This is often a sensitive topic for small businesses, which
generally dont have the resources to provide innovation teams with
big work spaces, generous travel budgets, and fancy prototyping
tools.
What you do have is a lot of ingenuity, the willingness to work hard
and achieve solid results through insightful thinking and persistence,
and so the focus here is on supporting and enhancing the skills and
commitment you have without spending much money.
And being able to spend a lot of money isnt always such a good
thing for innovation. We recently met with some of the leaders of a
big, successful biotech company, and they toured us through their
state-of-the-art lab facilities. The place was certainly gorgeous,
shiny and bright and very new. Scientists in lab coats scurried
around and the lab equipment were humming. We expressed our
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admiration for the great architecture and the great reputation of the
firm.
As we were wrapping up the tour, however, one of the facilities
leaders who had been our tour guide, and who had been with the
company for decades, mentioned that while the new labs were
certainly lovely, he noticed that something had been lost over the
years. He remembered the early days of the company, which was
started in left over Quonset huts from World War II.29 These old
buildings were on the funky side, not fancy and really not even all
that nice, but they had a great spirit to them, and he remembered the
labs as crowded and joyful. The company had done great work in
those days, which became the foundation of its present success; and
with success had come the bright, new labs.
And with the new labs had come a change in the culture, and the
sense of teamwork, joy, and making do had been lost. He was
worried that with this loss there was danger ahead.
In the aerospace industry in Southern California there is a similar
story often told, of ad-hoc teams that were created to solve difficult
problems, to do impossible things, and these teams werent the ones
in the shiny labs either, they were out back, in the old part of the
plant, working in improvised spaces that are still to this day called
skunkworks, because theyre often crowded, dirty, smelly, and by
the way, stupendously productive.
Your organization can create a bright and powerful future for itself
in a Quonset hut or a skunkworks perhaps more readily in a neat,
clean, perfect space. Our topic here is how to make that hut really
hum.
There are four different types of innovation tools that well describe
here, including the design of the work place itself, practices that
encourage and even enable effective collaboration, open innovation
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approach to connect inside innovation teams with outside partners

and experts, and online tools that constitute the virtual work place.
Separately and especially together, these can make a tremendous
enhancement in the performance and the satisfaction of individuals,
teams, and your entire organization.
The Work Place

The qualities and characteristics that make Quonset huts and
skunkworks so useful is that theyre open, flexible, and no one is
inhibited about messing around in them and trying something new.
The great qualities of this space are probably in dramatic contrast
with the conference room in your office, the one that youve spent
many hours in. And its probably very similar to conference rooms
youve sat in at other companies, a rectangular room with a longish
table surrounded by chairs.
The physical environment has tremendous influence on our
behavior, yet its an unspoken assumption that meeting rooms have
to fit this traditional shape, size, and layout. Unfortunately, the
architecture profession and office furniture manufacturers have
standardized on this utterly drab and uninspiring concept of what
the physical space ought to be.
The prevailing style is derived from the corporate board room,
which was in turn derived from the kings chambers, and the single
chair for the king, boss, CEO, or chairman at the head of the table
conveys its primary social purpose, reinforcing hierarchical
authority. Need I mention that this isnt a very good environment
for innovation or creativity? Yet in most organizations, its all there
is.
Consultant and author Michael J. Gelb has studied this topic, and he
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makes the following observation. For many years, psychologists

have known that the quality of stimulation provided by the external
environment is crucial to brain development in the early years of
life. Recently, however, brain scientists have discovered that the
quality of environmental stimulation affects the continuing
development of the adult brain. Gelb then goes on to lament the
sterile office environments where most people work, and describes a
project through which a team of people redesigned their own
workplace. Among the changes that they made were removing
photos of machines and replacing them with reproductions of
favorite paintings, replacing fluorescent lights with full spectrum
lights, bring in fresh flowers, and changing the coffee room into a
creative break room. They also instituted the practice of a ten
minute brain break every hour, and over the course of the
following year their organization studied the work effectiveness of
the people in the new environment. They found that productivity
had improved by 90%.30
Thats an astounding difference, and it certainly affirms our
experience that the work place is a pervasive influence, although its
importance is often ignored. Its the container.
Tom Allen and Gunter Henn address this issue in their lively book
about the design of offices: Most managers will likely
acknowledge the critical role played by organizational structure in
the innovation process, but few understand that physical space is
equally important. It has tremendous influence on how and where
communication takes place, on the quality of that communication,
and on the movements - and hence, all interactions - of people
within an organization. In fact, some of the most prevalent design
elements of buildings nearly shut down the opportunities for the
organizations that work within their walls to thrive and innovate.
Hence, the implications of physical space for the innovation process
are profound.31
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Imagine what it would have been like to work in the coolest labs
where amazing stuff was being invented - Thomas Edisons Menlo
Park lab where the light bulb was perfected, or Fords workshop
where he created the Model T, or the Wright Brothers airplane
workshop, or Douglas Aircraft when the first DC-3 was built, or at
Xerox PARC when the PC was being invented. Youd be
surrounded by lots of brilliant, creative people solving difficult
problems with astonishing levels of insight and inventiveness.
Youd be having rich and provocative conversations, making
sketches and designing and making models, arguing, laughing, and
building, testing, learning with great enthusiasm and dedication.
This is exactly what a skunkworks is, and what that biotech
company stumbled onto when they rented a bunch of old huts for
their first office, because that was all they could afford. If youre
going to provide todays innovators with the sort of work
environment to help them succeed in todays challenging world, this
is exactly the kind of place youll create.
In Silicon Valley, its called a garage, and its where companies
like HP, Apple, and Google got started. Theres something about a
not-very-nice garage that inspires people to try new things; they are
tools sitting there, just begging to be used, and dirty old benches to
work on and no one will care if you make a bit of a mess, or even a
big mess.
A few years ago we studied some great R&D labs about the US, and
we found that the designers had focused on three main qualities that
were most important:
Designing for interaction, spaces intended to increase the frequency
of person-to-person interaction. As Allen and Henn note, If you
maximize the potential that people in an organization can and will
communicate, you will vastly increase the likelihood of knowledge
transfer, inspiration, and hence innovation. Organizational structure
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and physical space must be configured to encourage the very

communication that spurs innovation.
The success of the
innovation process today depends on the employment of both
tools.32
Designing for flexibility, layouts and arrangements that enhance the
flexibility of a building so that over time its easy to adapt it to
changing requirements. Garages and skunkworks and Quonset huts
do this automatically. Theyre places where people bring their
ideas, where they work to understand complex systems and create
innovative solutions to problems. This is the sand box for
grownups, and the best ones contain lots of large vertical white
boards that make it easy to collaborate. Furniture is on wheels,
making it easy to reconfigure to support lots of small teams that
happen to be working at the same time, or one large one.
The third common feature is designing for beauty and intrigue,
making buildings beautiful to enhance the joy of work. Colors,
plants, books, graphics, and light can all be designed thoughtfully
and even at little to no cost to enhance the environment, promote
creativity, and support innovation teams.
Effective Collaboration
A lot of the important work that will be done in your innovation
space is collaboration, which as we have already discussed, is
essential to success at innovation.
To creates innovation requires that people engage in exploring new
topics, understanding, diagnosing, analyzing, modeling, creating,
inventing, solving, communicating, and implementing concepts,
ideas, insights, and projects. These attributes are all facets of
learning, and any organization that thrives in a rapidly changing
environment has surely encouraged its members to learn and to
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apply active learning results to keep up with external changes.

The link between learning and innovation is a strong one that has
come up repeatedly in this book, and we also know that speed
definitely matters. The faster people learn, the faster they can apply
that learning to create the next generation of products, services,
business models, and process improvements. By developing a
positive and self-reinforcing feedback loop of accelerated learning
to create innovation, organizations then obtain more learning,
leading to more innovation. The benefits are multi-dimensional:
shorter product life cycles, which leads to quicker learning; and then
yet shorter product life cycles, better profits, etc., all contributing to
competitive advantage. It is that supremely desirable, virtuous cycle
that I described above.
Involving more people in this process, and doing so very
effectively, is one of the best ways to accelerate the pace and
improve the quality at the same time. Alan Mulally, formerly a
senior manager of Boeing and then CEO of Ford put it this way
when he described the development of the companys new 777
aircraft: We cant make a better airplane unless we can figure how
to get everybodys knowledge included in the design.33
As a small business leader you may not be designing new aircraft,
but weve already talked about the importance of engaging a wide
range of people. Innovation is a collaborative process, and its
inevitable and necessary for people to work together to create and
solve the problems that always arise across a wide range of
disciplines and areas of expertise on the road from idea to
innovation.
Ideas almost always get better as they are shared, discussed, and
reworked, and then combined and recombined with other ideas on
the way to becoming innovations. And this will be true regardless
of the physical location where people are working, whether theyre
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in the same room or thousands of miles apart.

Most of the organizations that we admire for their innovation
prowess are also noted for the quality of collaboration that they
carefully and continuously promote. Toyota, for example, has
developed a distinct environment where employees are not just
welcome to put forth ideas, but expected to do so. Year after year,
literally millions of ideas build on one another to add tremendous
value for the company and its customers. In contrast, Toyotas
largest global competitor, GM, was well known not for the quality
of collaboration that it evokes, but rather for the confrontational
nature of its labor relations. Decades of conflict between labor and
management resulted in a culture of discord, which made it perhaps
inevitable that the company would have to go through the trauma of
bankruptcy to restore its viability.
A happier story is that of the 777. Through the early years of its
history, Boeing Corporation developed a company culture that was
at times very adversarial. Conflict characterized the relationships
between the company and its suppliers, and the company and its
unions.
With the development of its new 777 aircraft during the late 1980s
and early 1990s, Boeings leaders consciously chose to adopt a
more collaborative approach. The goal was to enhance innovation
to achieve a better result, and a milestone in commercial aviation.
By reducing or eliminating the conflicts and choosing a win-win
approach, Boeing achieved and perhaps even exceeded its goals, as
the 777 team produced the new airplane in record time.
Developing new insights, testing new ideas, and developing them
into innovations of value to the market are inevitably collaborative
processes that may involve tens, hundreds, or even thousands of
people. The 777 development team consisted of 5000 Boeing
engineers, and many thousands more who worked in Boeings
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supplier companies.
About their work together, Mulally commented, The biggest
problem with communication is the illusion that it has occurred.
We think when we express ourselves that, because we generally
understand what we think, the person that were expressing it to
generally understands it in the same way. When youre creating
something, you have to recognize that its the interaction that will
allow everybody to come to a fundamental understanding of what
its supposed to do, how its going to be made. We should always
be striving to have an environment that allows those interactions to
happen.34
Such interactions reveal important nuances of tone, inflection,
timing, cadence, body language, attention, smell, and facial
expression, all richly present in every face to face encounter, and
these nuances can be critical to successful communication, design
and problem solving activities when we depend on people to
integrate their unique knowledge and diverse vantage points to
address complex problems.
The importance of these unspoken elements is one of the reasons
that face to face interaction is so important for innovation, as the
subtle nuances are captured only partially if at all in interactions
via phones and computers.
This does not mean that phones and computers dont have important
uses, but we all know that theres something unique and
irreplaceable about working together in the same room. So while
we cant always work face to face, it is often preferable. Tom Allen
and architect Gunter Henn help us understand that complexity is the
root cause:
Managers communicate by telephone far more than do engineers
and scientists, and hence they tend to believe that the telephone (or
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email) will work as well for the engineers as it does for them. Why
do they need to travel? managers often ask about engineers and
scientists. Managers must remember that, o average, they deal with
less complex information than do the engineers and scientists
reporting to them. Compared with technical information, a much
greater proportion of management information can be
communicated by telephone. Notably, when managers face a
complex issue, they too recognize the need to meet with the other
parties in the same room.35
And what about the very common experience, that interaction leads
to new insights? As Ive already mentioned, physiology and
cognitive science tell us that the brain and the memory work by
association,36 and that interactions between people stimulate new
associations and new connections that can lead to breakthroughs.
Face to face interactions also enable people to share experiences,
through which they connect as they share tacit and explicit
knowledge, and in the process create new knowledge. From this
process we get the title of James Burke's engaging study of
innovation called Connections, which we also call creativity.37
We can summarize the subtle dimension of collaboration with a
comment from Glaxo Wellcome chemist Dan Sternbach, who noted
that, Nothing replaces two people standing at the board and
drawing things, which is the way we communicate a lot. It's an
interactive situation where, when somebody's drawing something
the other guy says, Well that reminds me of this thing. As soon as
you try to do that by email it takes more time. You can do some of
it that way, but the same conversation would probably happen in a
day versus 20 minutes because of the give and take that goes on.38
Face to face interaction, that is, stimulates the associative powers of
the mind that are essential to innovation.
In many situations, the effectiveness of collaborative efforts can be
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greatly improved through active facilitation, not only for small

teams but also for groups. We discussed your role as a facilitator in
the Leadership chapter, and new we will visit it again.
Facilitators, who are often innovation leaders or champions, guide
groups of people through the creative process using a deep
understanding of the creative process itself, as well as psychology,
which helps them anticipate how individuals will participate
throughout the process, group psychology which helps them
understand and support the needs of large groups, and business
knowledge, which of course provides the context in which many
problems are to be solved.
There are many different collaboration techniques, ranging from
tightly scripted and facilitated design sessions that are often used to
address complex technical challenges, to more loosely structured or
self-organizing processes.
Social Tools
Sometimes you dont even have to be present to provide outstanding
facilitation. I learned this one day not too long ago when I met with
a retired former employee of HP Labs, the companys R&D
department. He lamented the sad decline in the Labs output, and
the lack of esprit de corps he noticed there. This bothered him a
great deal, and he had thought deeply about why it happened. He
attributed some of the decline to the departure of Bill Hewlett, who
had been a very effective leader of R&D, but he also said that the
decline was due to the invention of the small coffee maker, and the
change in corporate culture that it caused. I was frankly a bit
skeptical about the coffee maker part, but I listened politely.
During the best days in the Labs, in the 1950s, 60s, and into the
70s, coffee was brewed in big pots in a basement kitchen. Twice a
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day the kitchen staff would bring up the pots on a cart, and everyone
would fill their cups and stand around for ten or fifteen minutes to
chat while enjoying their coffee.
What theyd chat about in addition to the weather, the favorite
teams, or the news, was work. People often brought problems,
asking for help where they were stuck, and sometimes their
naturally-curious colleagues (this was an R&D group, after all)
would help by brainstorming possible solutions to design and
engineering problems right then and there.
And if todays ideas didnt work out, tomorrows coffee breaks
were another opportunity to get creative input from some very smart
people who were by now aware of what you were doing, and might
even be thinking about it for you. A lot of tough problems got
unstuck at the coffee break.
This is yet another version of the story we all know, the chance
conversation that opens new insights that later proves to be
important; HP Labs twice-a-day coffee break was an organizational
tool that promoted this type of collaboration almost invisibly, and
thus an elegant example of social design.
But when coffee makers became small and cheap (another
industrys innovations), the kitchen staff no longer brought the big
pots around on a cart because all over R&D there were personal
little pots that simmered all day. No more structured coffee breaks,
no more spontaneous brainstorming, and as far as our friend was
concerned, the beginning of the end of the great days of HP Labs.
As I mentioned, I was a bit skeptical about this, but a couple years
later I happened to read Steve Wozniaks autobiography, iWoz, and
when I read the following comment about his days working at HP I
found that my skepticism had been entirely misplaced:
Every day at 10:00 am and 2:00 pm they wheeled in donuts and
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coffee. That was so nice. And smart, because the reason they did it
was so everyone would gather in a common place and be able to
talk, socialize and exchange ideas.39
So there it was, confirmation that the structured coffee break is
indeed a tool to promote effective collaboration, the exchange of
ideas, useful at HP and nearly everywhere else.
We subsequently applied this principle in the design of a new
workplace for a team of 200 software engineers. In addition to
giving them dynamic spaces for collaborative work, we included a
caf, and insisted that personal coffee makers be banned. This
caused everyone to frequent the caf, and thereby increased the
frequency of the chance encounters that promote innovative
thinking.
The new lab / skunkworks / hut / garage is a flexible and inspiring
place, not a boring one. There is a significant productivity increase
to be gained by supporting the essential activities that constitute
effective innovation: thinking, creating, problem-solving, and
collaborating.
And we know that the work place which best supports these
activities is not a traditional conference room. In fact, conference
rooms are proven creativity killers, deadly dull, inflexible, and made
really just to support information exchange in a hierarchical setting.
Avoid them at all costs if your goals have anything to do with
innovation and creativity.
Open Innovation and the

Innovation Ecosystem
As you know, an ecosystem is an environment in which there are
many organisms interacting in the course of their normal process of
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living. They compete and cooperate to survive in a complex web of

relationships, many of which are difficult to recognize or identify
even though theyre critical to every creatures and each plants
survival.
Similarly, innovation happens in a market ecosystem that has
countless influences, as it consists of a firm and its customers, along
with competitors, suppliers, and all manner of stakeholders who
have something to say about what could be done, what should be
done, what should not be done, and why.
As complexity increases in society and in the marketplace, an
important determinant of success is the capacity to actively engage
with that ecosystem, to work effectively with people and
organizations who are outside of our firm and to engage them in the
innovation process thats going on inside our firm. Thats what we
mean by open innovation.
While in the past many organizations kept the innovation process as
a closely guarded domain that stayed entirely in house and was
shrouded in secrecy, and some such as Apple still do, many
companies have switched their viewpoint and found that openly
seeking new ideas from outside, from customers and non-customers,
suppliers, partners, experts, community members, and pretty much
everyone else, and opening up the innovation process, significantly
improves the flow and quality of new ideas. Open innovation is a
name for this new style of working that taps into other people,
perspectives, ideas, critical thoughts, and advice.
An example of open innovation that is entirely transforming the
telecommunications industry is Apples App Stores for iPhone,
iPad, and Mac, through which Apple provides a semi-open
platform, and individuals and organizations then develop
applications for those devices using a standardized toolkit. Apps are
sold or given away through the platforms storefront, and as of
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summer 2014 there were more than a million apps in the Apple
store, and a million more for android, and a stunning cumulative
total of more than 75 billion downloads since Apple first opened its
store in July 2008. The applications themselves range from the
frivolous, such as Crash Bandicoot Nitro Kart 3D, to Google Earth
and Facebook, and even serious tools such as a step by step lesson
in CPR that has been credited as helping save the life of a young
athlete who suffered cardiac arrest during a basketball practice; his
coach had downloaded the CPR app only the day before, and put it
to good use40
By harnessing the creativity of people around the world in an open
development environment, Apple has created tremendous
momentum for the iPhone, and a new source of economic growth
for the ecosystem that consists of the company, app authors, and app
users.
The App Store is just one example of a new creative genre thats
become common to internet companies, all utilizing the principle
that a company with a sufficiently large customer network can
create a business platform that promotes an entire ecosystem so that
other individuals and companies can then use it to create content
and transact their own business.
The term crowdsourcing describes this new way that many people
can participate as contributors of content. The resulting breadth and
depth of content is what makes many of the highly successful
internet businesses so compelling. Wikipedia, eBay, YouTube, and
Google are examples.
Google is now the worlds largest advertising agency, but all the
web sites that Google searches and indexes are created not by
Google. In 2008 Googles indexing system was sorting more than 1
trillion different URLs, all created not by Google, but by the crowd,
namely, us. By 2014 that number had grown to about 30 trillion.
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In Don Tapscotts recent book Wikinomics, he makes a persuasive

argument that these companies are examples of an emerging
economic model that supports knowledge aggregation and social
networking, which suggests that open innovation is not only a
business practice, but a new style of economic activity.41
And its not just companies that have opened up their innovation
thinking to the outside. New York City is looking for great ideas,
too. Have an Idea to Save NYC Money? The city is looking for
innovative ways to save New York City money. If you have ideas
for finding efficiencies in government, submit them today. You
can share yours through the citys web site, nyc.gov
There are also tools to augment and help accelerate the open
innovation process including open innovation software platforms
such as Innocentive, 9 Sigma and Innoget, and theyre are all
defining new ways to collect knowledge and make it more useful,
and also create new knowledge through open innovation
collaboration.
Most small companies will have modest open innovation efforts, but
of course the point is to find ways to interact efficiently to gain
important insights about the market, competition, and new
technology that may inform or support ongoing or new innovation
efforts.
Virtual Tools
A lot of open innovation effort take places online, and as we spend
more and more time working and collaborating via our computers,
connecting with our colleagues and outside partners, customers, and
vendors, the quality of our tools and our skill in using them can
make a significant difference in the productivity of our innovation
efforts, especially since the all of us are now tending now to address
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issues via email that are more and more complex.

The computer infrastructure needs of an organization tend to
increase in complexity at a very high rate as the number of people in
the organization increases, so even medium sized companies end up
with dedicated IT staffs to help them keep the organizations
computing power operational. These firms will apply many
different types of tools across a broad range of functions, including
basic communications via email, chat, and conferencing
applications, the servers that support them, plus the web services
that manage the brand imaging on the internet, accounting and
finance, operations and supply chain, sales, marketing, and
distribution.
The innovation effort, meanwhile, can also benefit from some
specific tools, including social networking, project management,
idea collection, and creativity tools.
We are big advocates for the importance of visualizations, and you
already know this because we started this book by talking about the
importance of maps. We also think its important for you to
visualize your innovation investments, and hence we recommend
that even small organizations develop dashboards that track project
selection and performance, and align the innovation portfolio with
whatever is known about the driving forces that are most significant
for your own organization. The innovation dashboard is an essential
tool to help innovation champions, portfolio managers, and leaders
to maintain a good overview of the process, the details, and the
results.
For the smallest companies a lot of great modeling work can be
done in Excel. So whether youre using a general tool like Excel or
a innovation management tool, its essential to have tools tool can
support major changes in the direction of focus of innovation
efforts, which we referred to in Chapter 4 as the pivot, the act of
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shift the focus of an entire portfolio to reflect changing external

conditions which are proving to be significant for the firm. Without
visibility of the portfolio, and the capacity to model it in real time,
then pivots become difficult if not impossible to achieve.
Taking Action
These four innovation tools can work together nicely to support
creative and innovative people through the many phases and
iterations of their work in the innovation process. When these
methods are combined effectively they can make a tremendous
difference by helping individuals and teams achieve much better
and much faster results.
So naturally you need to ask yourself if your organization should
invest in these tools
If you have offices, you already have. Are they as good as they can
be?
And if you have software tools, you also have. So given the
productivity gains that can be achieved, it may be a very fruitful
investment.
Innovation managers are often the ones who shepherd these tools,
methods, and environments into reality, and thereby support the
quest for high performance for their own organizations.
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Chapter 10
The focus of this book is on the innovation process that makes sense
for small businesses, where lean, simple, and fast are essential. You
may also be interested in a view of the innovation process thats
suited to larger companies, so this chapter provides an overview of
the Innovation Master Plan framework that we use when were
working with larger organizations on innovation projects and
initiatives.
And while many of the issues and concerns of larger firms are
similar or identical to smaller companies and start-ups, some are
quite different. In particular, the challenges that large companies
must deal with precisely as a consequence of their large size relate
to innovation funding, the breadth of the innovation portfolios that
they are obliged to develop, staffing for innovation as well as
decision making about innovation projects, engaging very large
numbers of people, and relationships with outside partners are
generally different from the way that most small firms must handle
these issues. But it is included here as it is often useful to see how
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others deal with the same issues as youre dealing with, and
similarities and differences can be illuminating.
The framework is documented in the first three books in this series,
Permanent Innovation, The Innovation Master Plan, and The Chief
Innovation Officer, and theyre widely read and used by leading
companies, universities, and governments everywhere to help them
organize the pursuit of innovation and its management as a
structured, purposeful, and highly successful organizational process
for business and government.
Overview
Innovation is vitally important, as we all know that all organizations
must innovate to survive in these times of rapid change.
Nevertheless, it remains very difficult for most organizations to
achieve innovation on a consistent basis. We only have to look at
the recent history of global businesses to see the impact of
innovation new and innovative companies are achieving great
success, while the companies and even nations that do not innovate
often fail and fall behind.
Hence, the purpose of this section is to document some key
principles of innovation so you can work more effectively and
productively as an innovator, and thereby contribute to a successful
future for your organization.
In practice, its obvious that a significant part of the innovation
process depends upon the creative capacity of people to come up
with new and compelling ideas, while another aspect of success at
innovation has to do with how we organize and conduct the
innovation process from a technical and managerial perspective.
The intent of this summary is to address all of these aspects, with
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particular focus on the principles, tools, and methods necessary to a

systematic and rigorous business process that can achieve
meaningful and long lasting innovation results.
We call this an innovation system, and we have named it the
innovation master plan. So to justify calling it a system it must
be complete and comprehensive, providing valid solutions for senior
leaders, middle managers, and front line workers who will work
together to evoke, manage, and produce innovative results. Hence,
this chapter presents an overview of a complete set of principles,
concepts, methods, and tools.
While innovation is a challenge for most organizations to achieve,
its also fun, fascinating, and very rewarding. There are few
accomplishments as satisfying as seeing new ideas and decisions
making a positive difference in the organization you work for.
As you learn the details of the Innovation Master Plan framework,
we hope that you will develop a love for innovation, and that you
will then share this love enthusiastically with others so that they,
too, may experience the joys and benefits of success at innovation.
The Innovation Master Plan System is based on the concept that a
comprehensive or systems thinking approach to innovation must
address all six of the critical questions: Why, What, How, Who,
Where, and When.
This diagram shows the complete Innovation Master Plan
Framework.
[insert figure]
From the top, Strategy, Portfolio, and Process are the core
processes, supported by Culture and Infrastructure below.
From left to right, the stages 1 7 outline a common sequence for
innovation activities and projects, beginning with Strategy and
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culminating in Sales of innovative products and services.

The curving arrows go in both feed-forward and feedback
directions, and are meant to show that this is a learning system and
that new insights and discoveries gained at any point in the process
must be shared widely so that the organization as a whole can also
benefit.
On the right side we see a list of the executives typically responsible
for each process.
Why Innovate:
The Link Between Strategy And Innovation
The why of innovation is simple: as we examined in Chapter 2,
change is accelerating, and we dont know whats coming in the
future, which means that we must innovate to both prepare for
change, and to make change in order to improve our position in the
market.
As we already noted, if things didnt change then your company
could keep on doing what its always done, and there would be no
need for innovation. If markets were stable, if customers were
predictable, if competitors didnt come up with new products and
services, and if technology stayed constant, then we could all just
keep going as we did yesterday.
But all the evidence shows that change is racing at you faster and
faster, which means many new types of vulnerabilities. Technology
advances relentlessly, altering the rules of business in all the
markets that it touches, which is of course every market. Markets
are not stable, customers are completely fickle, and competitors are
aggressively targeting your share of the pie. So please ask yourself,
Are we managing with the realities of change in mind? And are
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we handing uncertainty?
Since the alternatives are either to make change or to be
changed, and making change brings considerable advantages while
being changed carries a huge load of negative consequences, then
the choice isnt really much of a choice at all. Youve got to pursue
innovation, and youve got to do it to obtain long lasting benefits.
The decisions to be made focus on how best to prepare for future
markets, and the actions relate to transforming the innovation
mindset into meaningful work throughout the organization, work
that results in the development of innovations that impact the
market, and improve the position of the organization relative to its
competitors. This means, finally, an organization-wide commitment
to designing and implementing your version of the innovation
master plan.
So what were talking about here is the practice of innovation as a
vital aspect of corporate or organizational strategy; the rest of this
chapter explores how strategy and innovation are intimately linked
and should be mutually reinforcing.
A tight linkage between innovation and strategy will certainly be
part of your master plan, as innovation by your competitors and by
your own firm causes existing products, services, and business
models, and indeed entire businesses, to become obsolete. Since
innovation is the driver of change, and change is the most
fundamentally important driver of business strategy, then its not an
exaggeration to say that innovation is the means of achieving
strategy, as we find in the story of Apples turnaround from the
abyss.
When Steve Jobs was asked to return to Apple as CEO in 1997 after
an absence of more than ten years, the company was, to put it
bluntly, a mess. If you thought that the PC market was a war
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between Apple and Microsoft, it was clear that Microsoft had won
big.
Apples market share was about 5% and shrinking, and to many
observers it seemed that the company was fading away. Its product
line was an incoherent collection of 11 different computers, and
there didn't seem to be a clear vision guiding the company forward.
The board of directors was desperate.
But did Jobs have a vision for the 21st century, as he had had in the
1970s? Did he still have the magic?
We know today that he did, but imagine that its 1997 and youre
Steve Jobs, and you have to figure out how to turn Apple Computer
around. What do you do?
Today Apples share of the US PC market is growing, although its
still less than 10%. But the iPod is the undisputed MP3 world
leader, with 70% of the market, the iPhone became the world
standard design for smart phones immediately upon its launch, and
the iPad did the same in the tablet market. And now more than
fifteen years after Jobs returned, Apples total market capitalization
recently achieved an insider milestone when the companys total
stock value surpassed arch-rival Microsoft, and then another
milestone when it became the worlds most valuable corporation.
To summarize, without a focused and successful effort at innovation
Apple surely would not have survived; the quality of its innovative
efforts led not only to survival, but leadership. Innovation was thus
essential to the companys strategy, and it was in fact how the
strategy was executed, so much so that we simply cant imagine
Apple without thinking about innovation.
Innovation plays the same role for many firms.
Do you admire Google? Then ask yourself what role innovation
plays in Googles strategy. Its obvious that we wouldnt admire
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Google, and in fact we wouldnt even know about Google if it

werent for innovation. The very existence of the company is based
on a single strategic insight and on two critical innovations that
made the strategy real. The insight was that as the number of web
pages grew, the internets potential as an information resource was
surpassing all other resources for scale, speed, and convenience, but
it was getting progressively more difficult for people to find the
information they were looking for.
People therefore came to value better search results, and Googles
first innovation to address that need was its PageRank system,
developed in 1995, an algorithm for internet searches that returned
better results than any other search engine at the time.
The second innovation was a business model innovation, which
turned the company into a financial success along with its technical
search success. When Googles leaders realized in 2000 that they
could sell advertising space at auction in conjunction with key
words that Google users searched for, they unleashed a multi-billion
dollar profit machine. The integration of these two innovations
provided a multiplicative advantage, and Googles competitors are
falling by the wayside as the company continues to dominate.
As a result, in November 2010, Ask.com threw in the towel with
only 2% of the market for internet search after trying for five years
to compete with Google following its $1.85 billion acquisition by
Barry Dillers IAC/InterActiveCorp. Diller wrote, Weve realized
in the last few years you cant compete head on with Google.42
Yahoo, a much bigger company than Ask, came to the same
conclusion earlier in 2010 when it decided to position itself as a
media company rather than a technology company, and outsourced
its search function to Microsofts Bing.
What other companies do you like? Do you also admire Starbucks?
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Or Disney? Or Toyota? Or BMW? Theyre certainly innovators,

and many of us appreciate them precisely because of it.
So the relationship between strategy and innovation is vital, and the
important role that innovation plays in transforming the concepts of
strategy into realities in the marketplace tells us that none of these
companies could have succeeded without innovation. This is the
why of innovation.
What To Innovate:
Creating and Managing Innovation
Portfolios
Investors in all types of assets classes create portfolios to help them
attain optimal returns while choosing the right level of risk, and
innovation managers must do the same for the projects theyre
working on.
Innovation is inherently risky. You invest money and time, possibly
a lot of both, to create, explore, and develop new ideas into
innovations, but regardless of how good you are, many of the
resulting outputs will never earn a dime.
Is that failure or success? It could be both. The degree of failure or
success will be determined not by the fate of individual ideas and
projects, but by the overall success of all projects taken together.
Hence, the best way to manage the risk is to create an innovation
portfolio.
So what do you do? You allocate capital across a range of
investments to obtain the best return while reducing risk, and then
you manage each project aggressively to make it work.
The underlying principle of portfolio management is that the degree
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of risk and the potential rewards have to be considered together. In

a rapidly changing market, the nature of innovation risk is
inherently different than in a slower-changing industry such as, say,
road construction, because the faster the rate of change in a
companys markets, the bigger the strategic risks it faces. The faster
the change, the more rapidly will existing products and services
become obsolete, a factor we refer to as the burn down rate. The
faster the burn down, the more urgent is the innovation requirement.
This will necessarily affect the composition of an innovation
portfolio by inducing a company to take greater risks in innovation
its efforts.
Hence, the ideal innovation portfolio of each
organization will necessarily be different: Alibaba, Apple, NASA,
Genentech, Toyota, Union Pacific, GE, and Starbucks are all
innovative organizations, but when it comes to their innovation
portfolios its obvious that they cannot be the same in content or
style.
A further key to the dynamics of a successful portfolio is described
in portfolio theory, which tells us that the components of a portfolio
must be non-correlated, meaning that various investments need to
perform differently under a given set of economic or business
conditions. In the case of innovation, non-correlated means that
every firm needs to be working on potential innovations that address
a wide range of future market possibilities in order to assure that the
available options and here is the key point will be useful under a
wide variety of possible future conditions.
The need for broad diversity in the portfolio also reminds us we
need to develop all four types of innovation, so what were really
talking about are five different portfolios. There will be a different
portfolio for each type of innovation, breakthroughs, incremental
innovations, new business models, and new ventures, and there will
be a fifth portfolio that is an aggregate of all four. There may also
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be portfolios for different business units or products lines, so

depending on the questions at hand, senior managers may have tens
or dozens of relevant portfolio views to consider.
We should also note that each different type of portfolio will be
managed in a different process, by different people, who have
different business goals, and who are measured and possibly
rewarded differently. Hence metrics and rewards are inherent in the
concept of the portfolio, and the master plan also calls for the design
of the ideal metrics by which the portfolio should be measured.
And because were preparing for a variety of future conditions, its
obvious that some of the projects will never actually become
relevant to the market, and they will therefore never return value in
and of themselves. But this does not mean that they are failures; it
means that we prepared for a wide range of eventualities, and some
of those futures never appeared, but we were nevertheless wise to
prepare in this way. This sort of failure is a positive enhancement
of our likelihood of our survival and ultimate success, so its not
failure in a negative sense at all. By analogy, I carry a spare tire in
my car, but its not a failure if I never have occasion to use it.
Therefore, the process of creating and managing innovation
portfolios cannot be overseen by the CFOs office as a purely
financial matter. Instead, the finance office and innovation
managers are partners in the process of innovation development.
Hence, innovation portfolio management is like venture capital
investing, early stage investing where its impossible to precisely
predict the winners, but nevertheless a few great successes more
than make up for the many failures.
And the CFO will also have to accept the idea that the mandatory
investments in innovation mean investments in learning, and that
during the early stages of the development of an idea its future value
is almost entirely a matter of speculation. As work is done to refine
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ideas in pursuit of business value, the key to success is learning, as

the learning shapes the myriad design decisions that are inevitably
needed. The innovation process as a whole therefore seeks to
optimize the learning that is achieved, and to capture what has been
learned for the benefit of the overall innovation process as well as
the portfolio management process. This costs money, which cannot
and should not be avoided.
As the projects that constitute an innovation portfolio mature and
develop, they provide senior executives and board level directors
with increasingly attractive new investment options.
By managing their portfolios over time, a team of executives can
significantly improve the portfolios performance; as they engage
this type of thinking they get more in sync with the evolving market,
and better at identifying and supporting the projects that have
greatest potential.
Still, many will fail. In fact, a healthy percentage of projects should
fail, because failure is an indication that the organization and
particularly the innovation teams are pushing the limits of current
understanding hard enough to be sure that they are extracting every
last bit of value from every situation, and at the same time preparing
for a broad range of unanticipated futures.
Or as TS Eliot said, Only those who risk going too far can possibly
find out how far one can go.43
How To Innovate:
The Innovation Process
Many people assume that creating new ideas is the beginning of the
innovation process, but actually thats not true. Ideation generally
occurs in the middle of the disciplined innovation process, as we
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will explain here.

While the purpose of innovation is simply to create business value
(simply is in quotes because its obviously not so easy to do), the
value itself can take many different forms. As we noted above, it
can be incremental improvements to existing products, the creation
of breakthroughs such as entirely new products and services, cost
reductions, efficiency improvements, new business models, new
ventures, and countless other forms as well.
No matter what type of innovation were talking about, the method
of creating innovation is to discover, create, and develop ideas, to
refine them into useful forms, and to use them to earn profits,
increase efficiency, and/or reduce costs. Here we focus on how to
do that, the process of innovation itself.
In the quest for innovation its obvious that many ideas at the input
stage become a few completed, useful innovations at the output
stage, so people readily visualize the innovation process as a funnel:
lots of ideas come in the wide end on the left, and a few finished
innovations come to market from the narrow end at the right. The
trick to making it work is knowing whats supposed happen inside
the funnel.
So naturally you want to start by creating a whole bunch of ideas,
right? Actually, no.
Ideas are indeed the seeds of innovation, just as ore taken from the
ground is the raw material of steel, or waving fields of wheat
provide the raw material for bread. But it takes a lot of work to
mine the raw ore and transform it into steel, or to prepare the fields
to grow the wheat long before it becomes bread. Its the same with
innovation; we dont start by collecting raw ideas. Instead, we
know that innovation is a core element of our organizations
strategy, so we have to start the innovation process itself with
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strategic thinking to assure that the outputs of innovation are fully

aligned with our strategic intent.
Step 1 is therefore Strategic Thinking. The innovation process
begins with the goal to create strategic advantage in the
marketplace, so in this stage we think specifically about how
innovation is going to add value to your strategic intents, and we
target the areas where innovation has the greatest potential to
provide strategic advantage. This was the topic of phase 1
described above, the why of innovation.
Step 2 is Portfolio Management & Metrics. As we discovered in
phase 2 on the what, one of the important underlying facts of
innovation management is the necessity of failure. We are by
definition trying to do something new, and as we proceed on the
innovation journey we do not in fact know if we are going to
succeed. We have confidence that well succeed eventually, but
along the way we know that there will be many wrong turns, and
many attempts that will never come to fruition. So we manage
innovation portfolios aggressively to balance the inherent risks of
the unknown with the targeted rewards of success, and balancing
our pursuit of the ideal with the realities of learning, risking, failing
in order to ultimately succeed.
Steps 1 and 2 together provide a platform and context for everything
that follows, and so they constitute the Input stages of the funnel,
and so that the activities in the following stages have the best
chance to achieve the best results.
Step 3 is Research. An output of Stage 2 is the design of the ideal
innovation portfolio, which is what we believe, as of today, is the
right mixture of short and long term projects across all four types of
innovation. Once we understand the ideal we can compare our
current knowledge and discern the gaps. Filling these gaps, then, is
the purpose of research. Through research we will master a wide
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range of unknowns, including emerging technologies, societal

change, and customer values, and in the process we will expose
significant new opportunities for innovation.
Strategic thinking has clarified for us how the world is changing and
what our customers may value, and this stimulates new questions
that our research has answered. Research findings provoke a broad
range of new ideas across a wide range of internal and external
topics. This is the abundant raw material, and it is already and
automatically aligned with our strategic intent because it came about
as a result of a direct connection between strategy, portfolio design,
and research.
Step 4 is Insight. In the course of our explorations, the light bulb
occasionally illuminates very brightly, and we grasp the very best
ways address a future possibility. Eureka! The innovation and the
target and mutually clarified; we understand what the right value
proposition is for the right customer.
While many people think of this moment of insight as the beginning
of the innovation process, as you can see, in the well managed
innovation effort we expect insight to come about as the result of
the preceding processes and activities, not at random.
Hence, the innovation process described here is specifically
contrasted with random idea generation; insight is the result of a
dedicated process of examination and development. It doesnt
occur because someone had a good idea in the shower, but because
individuals and teams of people were looking diligently and
persistently for it.
Step 5 is Innovation Development, the process of design,
engineering, prototyping, and testing that results in finished product,
service, and business designs.
Manufacturing, distribution,
branding, marketing, and sales are also designed in at this step, in an
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integrated, multi-disciplinary process.

Step 6 is Market Development, the universal business planning
process that begins with brand identification and development,
continues through the preparation of customers to understand and
choose this innovation and leads to rapid sales growth.
Step 7 is Selling, the where the real payoff is achieved. Now we
earn the financial return by successfully selling the new products
and services. In the case of process improvement innovations
directed internally, we now reap the benefit of increased efficiency
and productivity.
Managing a process of this scope and complexity is of course a
challenge for all organizations, but among the worlds companies
we see that there are some that do this extraordinarily well. The
knowledge that some do it very well, and that its certainly possible
to be an exemplary innovative organization that can attain
exceptional profits, should be a powerful source of motivation to
develop and apply your own master plan.
Who Innovates:
Creating The Innovation Culture
Organizations that are successful at innovation naturally develop a
strong innovation culture. But supposing an innovation culture
doesnt yet exist in your organization. Then how can you develop
it?
Such a culture is much appreciated by customers who say that the
company is a genuine innovator, and its also known among the
people inside the organization as a dynamic and innovation-friendly
place to be.
But supposing an innovation culture doesnt yet exist in your
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organization. Then how can you nurture it? How do organizations

develop an innovation culture? Who should be involved in the
innovation process? And what roles should they play?
Every culture is an expression of behaviors and attitudes, and every
organizations culture reflects the beliefs and actions of its people,
as well as the history that shaped them. The innovation culture, of
course, is likewise an expression of people, their past, and their
current beliefs, ideas, behaviors, and actions about innovation.
We have found that the innovation culture comes into being when
people throughout the organization actively engage in promoting
and supporting innovation, implementing rigorous innovation
methods, and filling three essential roles: Creative Geniuses,
Innovation Champions, and Innovation Leaders. In this respect, the
approaches that are suited for large companies are identical to those
of small business: its all about defining the right roles, and getting
the right people to fill them.
Innovations Creative Geniuses

Who comes up with the critical ideas that are the beginnings of
innovation, and then turns these ideas into insights, and insights into
innovations?
They are Creative Geniuses, and they work
everywhere, inside and outside.
If it seems like a stretch to label these people as geniuses, let me
explain the rationale. No one can innovate if they accept things the
way they are today, so making innovations requires that we are
willing to see things differently. We have to overcome institutional
and bureaucratic inertia that may burden our thinking process, and
challenge ourselves to see beyond conventional viewpoints. This
fits perfectly with the dictionary definition of genius, which is
exceptional natural capacity shown in creative and original work.
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Innovation Managers
Innovation Managers (also referred to as Innovation Champions)
are those who promote, encourage, prod, support, and drive
innovation in their organizations. They do this in spontaneous
moments of insight, in ad-hoc initiatives, as well as in highly
structured innovation programs.
Innovation manager/champions build the practical means for
effective, systematic innovation. They take direct responsibility for
finding creative thinkers and encouraging them to see and work in
new ways; they help people seek new experiences that may spark
new ideas; and they create a regular operations context in which
sharing and developing new ideas is the norm.
While they may work anywhere in the organization, including in
senior management positions, line management roles, staff, or front
line operations roles, the specific nature of the champions role is to
function in the middle, to provide the bridge between the strategic
decisions of senior managers and the day to day focus of front line
workers.
Innovation Leaders
An Innovation Leader is someone who shapes or influences the core
structures and the basic operations of an organization, all with a
clear focus on supporting innovation.
Core structures include the design of the organization itself, as well
as its policies and their underlying principles. Metrics and rewards
can also be core structures.
None of these factors are absolute givens, and all of them can be
changed, and thats the point: they are all subject to design, to
thoughtful choice about what is best. Its generally within the
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power of senior managers to change them, and when they impede

innovation they should be changed to favor it.
The actions and attitudes of senior managers are based, ultimately,
on their philosophies about management, on their mindset, which
we explored earlier in this document. Innovation leaders set
expectations, define priorities, celebrate and reward successes, and
deal with failures, and all of these factors can be done in a way that
makes innovation easier or more difficult, because each can be
arranged to favor the status quo or to favor useful and effective
change.
Do leaders believe in a win-win model, or win-lose? Win-lose
organizations usually are not trusting environments, and because
trust is so important to innovation, when its missing innovation
suffers.
Leaders also set goals, and they dont need to be modest; in fact
they can be outright aggressive. By setting ambitious goals,
managers emphasize the linkage between an organizations strategy
and the pursuit of innovation, elevating innovation to a strategic
concern where it properly belongs. Conversely, if innovation is not
expressed as a specific goal of top management then it probably
wont be a goal of anyone else, either; and if policies are restrictive
and make it difficult to test new ideas, then there wont be many
new ideas. We refer to organizations that are focused on the
present, rather than the future, as status quo organizations.
The firm thats obsessed with the status quo probably wont last
very long, but some managers still seem to believe in this model,
and their domineering attitudes and behaviors reinforce it.
Innovation doesnt happen without leaders who embrace it, nor can
it happen without people who have ideas and are willing to risk
failure to experiment with them. Nor does it happen without
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champions to bridge between the strategic and the operational

questions, and the individuals who have ideas and want to explore
them.
And of course it happens best, and fastest, when all three roles are
consciously implemented and mutually supporting. This does not
mean that each individual can play only one of these roles; many
people are geniuses, and leaders, and champions, and at various
times we play all of these roles.
So what is important is not that we classify people into the various
categories; in fact, we should avoid doing that. We just need make
sure that all three roles are being played, and played well, so that
defining, developing, and implementing ideas that become
innovations becomes the norm.
Where We Innovate:
The Innovation Infrastructure
What are the essential elements of infrastructure and tools to
support the innovation process? There are four key parts of this
infrastructure, the same ones we identified in the previous chapter.
How large companies implement these tools will be different than
small businesses simply because of the larger scale that they must
address, but the core needs and intents are the same.
Organizations that consistently deliver innovation do so because
their employees have the skills to effectively explore, understand,
diagnose, analyze, model, create, invent, solve, communicate, and
implement concepts, ideas, and insights. These are all attributes that
we might consider facets of learning, and naturally enough any
organization that thrives in a rapidly changing environment
necessarily has developed the capability to learn and to apply that
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learning to keep up with external changes.

Certainly the link between learning and innovation is a strong one,
and clearly speed matters. The faster people in a company can
learn, the faster they can apply that learning to create the next
product, service and business model. By creating a positive and
self-reinforcing feedback loop of accelerated learning to create
innovation, organizations then obtain more learning, leading to
more innovation. The results are manifold: shorter product life
cycles, which leads to quicker learning, yet shorter product life
cycles, better profits, etc., all contributing to competitive advantage.
To support the acceleration of learning and innovation we have
found that the proper infrastructure tools make a big difference.
The four key infrastructure elements are open innovation, effective
collaboration, the virtual workplace, and the design of the physical
work place; here is a quick summary paragraph about each.
Open Innovation
While in the past many organizations kept the innovation process
closely guarded as an in house secret, these same companies have
recently discovered that seeking new product ideas from outside can
significantly improve the flow of new opportunities. Applying the
principles of open innovation can significantly accelerate the pace
of innovation, as well as its effectiveness. Open innovation means
expanding the pool of participants in the innovation process to all
types of outsiders, including customers, suppliers, partners, and
community members, tapping into ideas, critical thinking, and
advice.
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Collaboration
Everyone who works in the field of innovation agrees that
collaboration is vital to success at innovation. Mastering and
applying the principles of effective collaboration, not only for pairs
and small groups, but also for groups of tens or even hundreds of
people requires facilitation skills to help nurture new ideas and turn
them into effective innovation, and the benefits can be significant.
The Virtual Work Place

As we spend more and more time working and collaborating on line
with our internal colleagues and with outside partners, customers,
and vendors, the quality of our tools and our skill in using them can
make a significant difference in the productivity of our innovation
efforts. Active engagement in the selection and adoption of the
right tools is a simple but fundamental rule to follow.
The Physical Work Place

As MIT Professor Tom Allen puts it in the lively book he coauthored with architect Gunter Henn called The Organization and
Architecture of Innovation, Most managers will likely
acknowledge the critical role played by organizational structure in
the innovation process, but few understand that physical space is
equally important. It has tremendous influence on how and where
communication takes place, on the quality of that communication,
and on the movements - and hence, all interactions - of people
within an organization. In fact, some of the most prevalent design
elements of buildings nearly shut down the opportunities for the
organizations that work within their walls to thrive and innovate.
Hence, the implications of physical space for the innovation process
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are profound.
The essentials for effective innovation are thinking, creating,
problem-solving, and collaborating, and we know that the work
place that best supports them is not a traditional conference room,
but a mush better work environment that is designed for innovation.
These four elements, open innovation, collaboration, the virtual
workplace, and the physical workplace constitute the critical
elements of the innovation infrastructure, and it is by providing
these tools to the innovative people in your organization that you
can help them do their best to develop the innovations that will
compose your organizations future.
Summary of the Innovation Master Plan

Your innovation master plan will cover each five of the major
elements in great depth.
To enable the development of your plan, its often helpful to
conduct a comprehensive review of your organizations
performance as an innovator to clearly identify whats working well
and what's not working at all, and to design the corrections. (This is
one reason why, by the way, we consider designer to be one of
your essential skills.)
We have found that there are seven technical factors that are critical
to innovation performance, as well as seven additional factors that
are cultural.
7 Technical Factors
We refer to these as technical because they can be assessed in a
relatively objective fashion, and according to specific technical
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criteria.
Alignment of Strategy and Innovation
Youll describe how you intend to align the innovation process with
the strategy process.
Innovation Portfolio Management
You'll assess the contents of the existing innovation portfolios to see
if they have the right balance of incremental and breakthrough
projects, and to asses the projects that are underway to determine if
they really are the right future products and services for the
organization to make and sell.
Research
The purpose of assessing the research process is to determine how
well its capturing the critical tacit knowledge that will feed the
search for unknown and unmet needs.
Innovation Development
Youll evaluate the development process as well, to make sure that
innovation development and market development are proceeding
effectively and in parallel, and providing the right guidance for the
organization.
Alignment with Sales
Youll make sure that the new products and services that are being
introduced are effectively aligned with the sales organization so that
the organization can in fact bring these products and services to
market effectively.
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Innovation Metrics and Rewards

Youll determine which innovation metrics should be used
throughout each stage of the innovation process, and make sure that
those innovation metrics are aligned with the rewards that are
offered to individuals, teams, departments, and business units.
Infrastructure
And youll examine the infrastructure to determine whether the
people who are working in the innovation process have sufficient
information and support to complete their work as efficiently as
possible.
Wherever a stage of the process or a critical skill is not at the level it
ought to be, or if its missing entirely, youll design an improvement
plan or a process to implement it from scratch.
7 Cultural Factors
Assessing these factors will perhaps lead you into a more subjective
dialog than the assessment of the technical factors, but they are
nevertheless critical to effective innovation performance as well,
and you should conduct a robust study of them.
Innovation Culture
A critical issue, of course, is the character of the organization's
culture. Does it favor innovation, or shun it? Do people feel safe in
taking risks, or is this a career-threatening move, and something
which is consistently avoided?
Do people embrace the
characteristics and qualities of the innovation culture, or is it an
organization that seeks the status quo culture?
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Creativity
You'll assess the creativity of people throughout the organization to
see if the new ideas that are under development are sufficiently
creative.
Trust
Youll examine the level of trust in the organization to see if people
are comfortable in their working relationships to allow the
ambiguities and uncertainties of the innovation process to follow a
natural developmental flow, or if the lack of trust forces people to
make innovation decisions too quickly because its not safe to allow
ambiguity to resolve itself over time.
Leadership
Youll assess the performance of leadership across the four delivery
factors, including goal setting, expectation setting, and tone setting.
Mindset
You'll assess the mindset of the leadership team to see how well
they understand the acceleration of change, and how much they're
prepared to support the innovation process as the development of
the future products and services for the company.
Attitude
You'll review the overall attitude that people have towards
innovation to find out if innovation is sufficiently support, and if
people are engaged in the innovation process.
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Tone
And of course, you'll look at the tone as defined as said by senior
leadership to see that innovation is getting the proper support in
both words and actions.
A thorough assessment involves talking with a lot of people, and not

just people in top management, but people throughout the
organization. You may also interview people who are outside,
including customers, suppliers, and partners, to learn their views on
the companys innovation performance, strengths, and weaknesses.
Interviews often last 30 to 60 minutes, although they could also be
longer.
Researching the external environment measures the rate of change
in the market, and assesses the innovation capabilities and
performance of major competitors.
To learn the views and experiences of a larger group of people its
helpful to do an online survey to reach hundreds more people. Ten
to twenty minutes of questions and answers, answered anonymously
and therefore candidly, provide tremendous depth of information
about people's attitudes, feelings and experiences of the innovation
process.
By comparing findings across all three of these information sources
we expect to gain a detailed understanding of current innovation
performance, assess where performance is outstanding, where it's
good, and where it needs to be improved, and where it should be
targeted.
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Taking Action:
Your Innovation Master Plan
You may choose to write up your findings in a plan, and it will
certainly also be the subject of a briefing with your executive team
to help them understand the organizations current capabilities,
prescriptions, and the role that each member of the executive team
needs to play in developing and promoting the dramatically
enhanced innovation capability that you envision, the
transformation of your organization into a genuine innovator.
As you prepare the innovation master plan you should expect to
identify ten to twenty major improvement areas to focus on, and
these may become the primary drivers of your innovation action
plan for the first six months to one year. You can also expect that
during the course of that work you'll be interacting with a great
many people, and both coaching and encouraging them to
participate in the innovation process, as well as for many insisting
that they follow the rigorous innovation structure.
As you will certainly have noticed, a lot of this overlaps with your
needs as a small business leader, but the scale of the ideation effort
that a large firm has to engage in, and the scale of the infrastructure
to support the financial, managerial, and coordination of all that is
probably far more than you need.
And in fact, the very idea of a Master Plan may be beyond the scale
or scope of your requirements. But at the same time its necessary
to plan thoughtfully and engage people effectively as you pursue
innovations to support your own business future growth and
development.
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And of course the advantage that youre likely to have over a larger
firm is the capacity to act quickly. As the leader of a small
company, when you want to move forward you can make a lot of
great stuff happen very fast, while bigger firms may spend weeks, or
months, or even years debating; that can yield you a significant head
start.
This means taking action, and in the next chapter well look
specifically at your own action plan.
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Chapter 11
Your Action Plan
Revisiting the Formula

Is it realistic to suggest that theres actually a formula for
innovation? Now that youve read this far, you certainly have an
opinion about that question.
Change and complexity, the external world that seems to be
different nearly every day.
Risk and the need to come up with great ideas, and to balance
potential rewards with the risks that come with striving to attain
them.
Speed, the imperative to go fast because the external world isnt
waiting around for you or your organization, and your competitors
would be happy to seize your market share and make it their own.
Engagement, because it takes the observations, expertise, and
insights of many people working effectively together to come up
with great ideas, and then transform them into working solutions to
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problems that your customers really do want to solve.

Leadership, because no innovations happen without courage,
commitment, support, and often resources, and these are elements
that you, as leader, must provide in highly visible and emphatic
ways.
And then tools, which can make the path much easier and faster
even if theyre not fancy.
So the formula says that innovation success is a function of risk,
times speed, times engagement, times leadership, plus tools. Has
anything critical been omitted? If you think we have left something
wed love to hear your feedback, as our ongoing dialog with
innovators around the world has been an essential part of our
practice and our learning for more than 20 years, and many of the
most important lessons have come this way.
For the moment, though, lets assume that the model is valid, and
continue to explore how it could or should be implemented.
Making this happen is not just all about you, of course. As you
come to understand the scope of work that youll need to engage in
to get innovation happening in the most effective way possible,
youve realized that you may need a team to work with you, an
innovation team.
Your Innovation Team

This will be a dynamic group of people from many different
backgrounds who have vital roles to play in support of your firms
innovation objectives. Without knowing the specifics of your
situation, your organization, and the unique challenges youre
facing, please consider the following as a suggestion and a general
set of jobs or roles that are useful to the successful pursuit of
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innovation in a small organization, that is, your company.

The innovation formula addresses the very specific tasks that have
to be accomplished for innovation to emerge from your organization
not only as a matter of luck or at random, but through a
concentrated effort that results in sustained innovation performance.
Hence, the roles that we think are most important to your
organizations innovation performance line up with the elements of
the formula: complexity and change, risk management, speed,
engagement, leadership, and tools.
Complexity and Change: The Strategy Manager

We began the discussion of your innovation needs, requirements,
and opportunities by exploring the driving forces of change that are
shaping the world of tomorrow. We talked about technology,
science, culture, the population, and climate change, and these broad
trends as well as some that may be specific to your industry or your
organization present a continually changing panorama that you need
to be paying close attention to, for theres no telling when an
external change will lead to a specific requirement or challenge for
you.
Thus, the innovation team needs someone to track the external
trends, major and minor, that are pertinent to and important to your
organizations strategy, to its competitive position, and to its
innovation possibilities. What is the news about your competitors,
or technology, consumers, media, culture, and your suppliers that
could influence the present or the future? What are the emerging
trends? Who are the thought leaders?
If your firm is very small then this manager is likely to be you, the
owner/entrepreneur, or if its larger then perhaps someone else can
play that role. Its not a full time activity, but more a process of
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diligently gathering data points and once in a while looking to see

what patterns are evident.
Perhaps you keep a bulletin board posted with news, a collection
that everyone in the company can contribute to, as its very helpful
when many people are involved in tracking change and helping to
identify the trends and patterns. Some will turn out to be important,
others not, but the point is to be engaged in the ongoing effort to pay
attention to whats going on, and figure out what the implications
could be.
Risk Management: The Portfolio Manager

The next major topic in the book was risk management, and we
described the importance of an innovation portfolio as the right tool
to help you find the right balance between risk and reward. Since
youre likely to have an innovation portfolio it will need to be
managed, and thus it is a specific responsibility to track the
innovation portfolio and monitor the progress of each of the projects
thats being worked on. If your firm only has one or two innovation
projects then this role wont exist, but if there are five or ten of them
then it can be quite helpful to have someone monitoring the progress
and making an update every week or two. This doesnt have to be
particularly time consuming to be helpful even an hour now and
then can make a difference.
Speed, Engagement, and Tools: The Project Manager

Next we talked about speed, and the critical importance of getting
innovation projects done quickly. This generally means that project
management is needed, especially if youre doing large projects.
Someone, perhaps yourself and perhaps someone else, has to
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oversee the specifics on a day-to-day or week-to-week basis, and

keep the work moving along on time.
And since speed is one of your major performance objectives,
project management is largely about keeping people focused,
defining slightly unreasonable deadlines, and then helping
innovation project teams to meet those deadlines.
Another facet of project management relates to the next theme we
explored, engagement. It is often project managers who create the
programs, projects, and initiatives that nurture and inspire broader
levels of engagement, not only by the innovation teams themselves,
but across the entire organization.
The third role for project management in the context of the
innovation formula is the engagement in defining and implementing
the right tools. As we discussed, tools that facilitate high
performance collaborative work, tools that help people engage
effectively with the broader network or ecosystem, tools such as
innovation or ideas rooms can all make a significant enhancement to
your efforts, and it is often the project managers, who are paying
close attention to the overall performance and always looking for
opportunities to improve, who can best identify the right
investments in tooling that will yield the desired improvements at
the right cost.
Leadership: Peers, Partners, and Advisors

Our next topic was leadership, and you should certainly spend time
regularly honing your leadership skills. In addition, many small
business leaders find it very helpful to work with the leaders of
other firms in peer groups to discuss their issues and challenges,
learn how others may have addressed the same ones, and also coach
and consult with one another to help each grow their businesses.
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Most small businesses operate as part of a local business community

and many have local suppliers and local customers who understand
the local business culture as well as the competitive environment,
and it can be tremendously helpful to engage a few of them from to
participate as advisors for the overall innovation effort, or to provide
feedback on specific innovation projects and initiatives.
For example, it may be helpful to create an advisory board
consisting of a few outsiders who will give guidance and feedback
to innovation activities. Its a good idea to include a mix of people
who are familiar with your industry, and also some who work in
from different industries and therefore have different experiences
and viewpoints on key trends, major issues, and who bring different
ways to look at and solve problems.
Advisory board members can be asked to respond to specific
requests for information, and they may meet as a group a few times
a year to provide a sounding board for new ideas and directions, and
also to critique and advise on projects and portfolios.
Getting Started
As you recruit the best people you can find to participate on your
innovation team, and work to engage with them as your teammates,
colleagues, and fellow travelers on the innovation journey, one of
the most important things to remember is that innovation is driven
by divergent thinking, which we also know as lateral thinking, and
as a leader you must specifically encourage, promote, and indeed
insist on the necessity of divergent thinking across all aspects of the
work, from the design and management of your innovation efforts,
to the conduct of the many ongoing innovation projects.
Divergent thinking brings the possibility of seeing new ideas, of
seeing possibilities that others have not seen, and this is a central
231
objective of all of this work. The outsiders and advisory board

members will be particularly well-positioned to offer such insights,
but you must constantly stress to the insiders you work with,
including the members of your team, that divergent thinking is
absolutely necessary to short and long term success.
We contrast divergent thinking with its opposite, convergent or
analytical thinking. Analytical thinking is the approach that is most
typically used throughout the day-to-day affairs of a business, which
relies on deduction and generally on linear thought processes. This
is sound, logical, and essential for success, but its often an
impediment to innovation.
The first reason is that convergent thought tends to eliminate
possibilities that are outside of the field of view, causing people to
choose from the options that they see immediately before them, and
not to even consider the possibly better options that are over the
horizon.
Second, convergent thought is based on existing knowledge,
whereas it is a core principle of innovation that we must seek new
knowledge. And as the comment from Norman Doidge makes
utterly clear, the mind which is set in its ways is entirely willing to
discount or entirely disregard information which does not conform
to expectations. Such information is often the golden ore which
innovators seek. Divergent thinking is much more likely to expose
this hidden ore, while convergent thinking might never consider it
as a possibility.
To counteract an organizations necessary obsession with somewhat
narrow logic and to support the discovery of useful novelty,
innovation teams do best when they encourage divergent thinking.
This means that their way of thinking and working will be quite
different from how most of the work is done throughout the rest of
the organization. The innovation team must be a learning team, a
232
group of people who use divergent thinking to discover the future,

and create it.
To arrive at a worthwhile destination you have to know where
youre going, so in this chapter weve discussed your skills as an
innovation and the roles that make innovation happen. Youre
curious to discover new insights, you learn nimbly, you ask great
questions, you lead, you manage, you coach, you design, and youre
honest.
Further, youll rely on a great, dedicated, and skillful team thats
spinning along in the groove, getting outstanding work done,
developing great ideas and turning them into profound value for
your customers and for your organization. This is the organization
in which innovation is clearly happening!
Weve covered some essential ground to help you prepare your
innovation journey, and now its time to put these concepts into
action. As you consider the decisions you need to make about the
role of innovation in the future of your company, the Taking Action
Steps listed at the end of each chapter have been intended to help
you frame the themes and issues in a productive way. Theyre
copied here, along with 25 additional suggestions that we hope will
help you to think and plan creatively and productively about how to
make innovation a reality in your organization.
233
Taking Action: Chapters 3 10

Chapter 3: Complexity and Change
List the changes you expect, and then prioritize the top 3. Think
about how the changes could impact your business in each of these,
prioritize the ones that you think will be most impactful, and devise
a quick strategic response.
Another task: identify one of the themes thats vital to the future of
your business, and make it your mission to learn more about it.
Chapter 4: Risk, Great Ideas, and Your Business Model
Theres been a lot to think about in this chapter, and weve already
made a lot of suggestions about what you can or should do to being
implementing these ideas.
As noted just above, make a list of possible disruptions pertaining to
each of the major driving forces of change. Assess the short,
medium, and long term impact, and think about the early warning
signs that you might receive to indicate that a possibility is turning
into a reality.
The exercise to list changes in the last five years, and your
anticipated changes in the next five can also be a powerful way to
see more clearly hoe change is occurring, and to prepare for the big
changes that are certainly coming.
Chapter 5: Risk and Your Innovation Portfolio

It should be obvious that you need to engage in a detailed exercise
to design and build your innovation portfolio. This will perhaps
involve a number of other people, including leaders, managers, and
thoughtful people from throughout the organization, and from
outside as well.
234
And remember that building and then managing your innovation

portfolio is a process at which youll improve over time. The first
efforts, no matter how unsure, will inevitably lead you in the right
direction as your learn how to make the process work for your
culture and the specific challenges that your organization faces.
Give this time regularly, once each month or two, and allow the
learning that will occur to bring its benefits.
Chapter 6: Speed
Once youve identified some promising projects, put a team
together and set an ambitious goal. Then give them a lot of support
and coaching so that they can begin working productively.
Encourage speed, which means that you may have to remove
obstacles that impede them.
Remain open to feedback and suggestions, and make sure that
everyone knows that learning is essential and that fast failures are
preferable to slow ones.
Chapter 7: Engagement
In general its really easy to see the strengths and weaknesses of
others, but difficult to get a clear view of your won. To gain a
deeper understanding of the culture of your own organization youll
therefore need to step outside of it and look back to see whats
really going on, how people are relating to one another, where the
tensions and dysfunctions are hidden, and whats working really
well.
Such an assessment can then help you to target the improvements
that will result in strong performance across all three of the critical
roles.
235
Chapter 8: Leadership
This is a chapter on leadership, so its fairly obvious that you need
to make a careful and honest assessment of your own leadership
style. Whats working? Whats not working?
Then move on to the other items for your more complete selfassessment. Set aside some focused, quiet time to think about your
own strengths and weaknesses, and then decide on a couple that you
feel are critical to the future success of your organization, and put
together a study plan to learn how your desire for personal change
can become a reality.
It may be very helpful to discuss these issues with your peers, other
business leaders who have their own companies to run, and who are
facing the same or similar challenges. Peer coaching like this can
be very useful.
Chapter 9: Tools
These four innovation tools can work together nicely to support
creative and innovative people through the many phases and
iterations of their work in the innovation process. When these
methods are combined effectively they can make a tremendous
difference by helping individuals and teams achieve much better
and much faster results.
So naturally you need to ask yourself if your organization should
invest in these tools
If you have offices, you already have. Are they as good as they can
be?
And if you have software tools, you also have. So given the
productivity gains that can be achieved, it may be a very fruitful
investment.
236
Innovation managers are often the ones who shepherd these tools,
methods, and environments into reality, and thereby support the
quest for high performance for their own organizations.
Chapter 10: Your Innovation Master Plan

You may choose to write up your findings in a plan, and
it will certainly also be the subject of a briefing with your executive
team to help them understand the organizations current capabilities,
prescriptions, and the role that each member of the executive team
needs to play in developing and promoting the dramatically
enhanced innovation capability that you envision, the
transformation of your organization into a genuine innovator.
As you prepare the innovation master plan you should expect to
identify ten to twenty major improvement areas to focus on, and
these may become the primary drivers of your innovation action
plan for the first six months to one year. You can also expect that
during the course of that work you'll be interacting with a great
many people, and both coaching and encouraging them to
participate in the innovation process, as well as for many insisting
that they follow the rigorous innovation structure.
As you will certainly have noticed, a lot of this overlaps with your
needs as a small business leader, but the scale of the ideation effort
that a large firm has to engage in, and the scale of the infrastructure
to support the financial, managerial, and coordination of all that is
probably far more than you need.
And in fact, the very idea of a Master Plan may be beyond the scale
or scope of your requirements. But at the same time its necessary
to plan thoughtfully and engage people effectively as you pursue
innovations to support your own business future growth and
237
development.
And of course the advantage that youre likely to have over a larger
firm is the capacity to act quickly. As the leader of a small
company, when you want to move forward you can make a lot of
great stuff happen very fast, while bigger firms may spend weeks, or
months, or even years debating; that can yield you a significant head
start.
This means taking action, and in the next chapter well look
specifically at your own action plan.
And then44
1. Study. Innovation is a vast topic with countless nuances
and subtleties to master, and there are many sources of great
information. If youve read this book, or any other good
innovation materials recently, go back and look at the ideas
youve highlighted. Make your own list of innovation
initiatives and get working on them.
2. Evaluate your companys innovation results over the last
five years and compare them with your top competitors. In
what areas have they done better, and in what areas has your
firm done better? Which competitor has been the most
innovative over the last five years? Initiate a competitor
intelligence program to figure out how theyve done it.
3. Conduct a detailed audit of your own firms innovation
methodology. Assemble a diverse team of people and do
the audit as a workshop.
Solicit their ideas for
improvements, and have them prepare three initiatives to
address the most important shortcomings.
4. Think about the four different types of innovation and
238
evaluate the last five innovations your firm produced to see

what categories they fall into. What does that tell you about
your existing innovation process?
5. Start asking questions. Talk to five front-line people each
day whom you wouldnt normally encounter, and learn
from their point of view whats working, whats not
working, and where your products or services are falling
short.
6. Assess the rate of change in your industry and determine
the rate at which new companies emerge and old companies
are displaced. Identify the key factors that caused formerly
leading companies to decline, and then assess your own
companys performance on these same variables.
7. Develop your organizations idea vault. Put it to use and
invite users to make suggestions to improve the database
and its interface so that it is optimally useful.
8. Create an Innovation Advisory Board and invite five
outsiders who know your industry to give you their candid
feedback about your firm and its innovation initiatives.
9. Assess your current business model by determining which
elements of your business are most important to your
customers experience, and then deciding how well youre
doing in each area and what you need to do to improve.
10. Assess the role of innovation in your organizations strategy
over the past five years, and then consider what will be
needed over the next five. The next time you have a
meeting on strategic planning spend half the time discussing
innovation.
11. Identify some key themes that you think are very important
to your relationships with your future customers, and
239
engage in detailed dialog to learn more about customer

attitudes, values, beliefs, and motivations.
12. Set up or improve your systems to gather customer
feedback.
13. Focus your next strategy meeting on innovation, and ask
each person attending to propose three new ideas that have
never been discussed before in such meetings.
14. Hold a business model innovation workshop and invite
people from different parts of the organization to come
together for a day to brainstorm new business model ideas
in the morning, and then develop 3 or 4 of them into real
proposals in the afternoon.
15. Go to a magazine stand and buy five magazines that youve
never looked at before that are not ostensibly about your
own field. See how many pieces of information you can
find that are pertinent to your industry or your company.
16. Set aside a space at the crossroads of your office as an idea
room. Invite everyone to prepare and post ideas, and
structure it so that others can give feedback on any idea they
find interesting.
17. Study the ten most important technological trends that will
affect your industry over the next five years, and assess
your firms capability in each area. Prepare a plan to
develop competence in any area in which you have
shortcomings.
18. Do an assessment of top managements innovation
leadership in your organization, and identify the top three
weaknesses. Come up with a plan to overcome them, and
implement it.
240
19. Institute innovation awards that recognize both successes

and failures. The key criterion for winning a prize is the
degree of learning that the effort provided to the
organization. Consider presenting awards that are not
monetary, but rather symbolic and which carry status within
the organization. Hold a luncheon to celebrate ten great
ideas that didnt work, and ten that did.
20. Establish a linkage with a local university by funding an
internship in a social or technical area that are important for
your firms future. Ask them to prepare and present an
analysis of your industry and an evaluation of your firms
positioning, and to propose three research areas they could
work in that would add significant value to your positioning
over the next three years.
21. Conduct an anonymous survey in your firm to assess trust.
Do employees trust management? Do they trust each other?
What can be done to improve trust?
22. Study the risk profiles of the last ten innovations your
industry developed. Determine the degree of risk associated
with each one to find out if youre taking too much
innovation risk, or too little.
23. Identify a company that you admire thats outside of your
industry. Study that company in detail to learn why its so
good, and figure out how to emulate its strengths in your
own organization. Have each member of your team look at
a different company, and compare your findings.
24. Send teams to meet with 25 of your customers to learn
more about how they use your firms products and services.
Have all the teams meet together afterwards to debrief and
prepare an analysis of what theyve learned, and what they
241
think ought to be done differently going forward.

25. Do an obstacles audit on your own firm and find out
whats blocking people from innovation. Then remove the
obstacles.
26. Thats probably enough.
Hopefully this book has given you a lot to think about, and perhaps
also some clarity about some of the next steps that youll take to
achieve innovation in your own organization.
Thus, I have two final recommendations:
First, take some quiet time to think.
And lastly, start your innovation journey now.
242
243
Notes
1
2
3
7
8
10
11
12
13
14
Langdon Morris, Moses Ma, and Po Chi Wu. Agile Innovation.

Wiley, 2014.
Bill Gates. The Road Ahead. Viking, 1995.
Portions of this chapter have been adapted from Langdon Morris, The
Chief Innovation Officer. Innovation Academy, 2013.
Baron Funds, March 2014 Quarterly Report.
http://www.baronfunds.com/BaronFunds/media/QuarterlyReports/Quarterly-Report-33114.pdf
The original work was done by Harry Markowitz. Markowitz, H.M.
(1959). Portfolio Selection: Efficient Diversification of Investments.
New York: John Wiley & Sons.
Clayton Christensen. The Innovators Dilemma, Harvard Business,
1998.
Larry Keeley. Ten Types of Innovation. John Wiley & Sons, 2013.
Tony Davila, Marc Epstein, and Robert Shelton. Making Innovation
Work. Pearson Education, 2006, 2012.
This section is adapted from Langdon Morris, Moses Ma, and Po Chi
Wu. Agile Innovation. Wiley, 2014.
Portions of this chapter have been adapted from Chapter 5 of Agile
Innovation by Langdon Morris, Moses Ma, and Po Chi Wu. John
Wiley, 2014.
Brent Schlender, The Lost Steve Jobs Tapes, Fast Company
Magazine, April 17, 2012.
David Packard. The HP Way. HarperBusiness, 1995.
Walter Isaacson. Steve Jobs. Simon & Schuster, 2011. Page 363.
Rob Austin and Lee Devin, Artful Making: What Managers Need to
Know About How Artists Work. Financial Times, 2003.
244
15
Idris Mootee. Design Thinking for Strategic Innovation. John Wiley

& Sons, 2013.
16
We should also note that one of our most important innovation
mentors, Professor Michael Barry, is on the d school faculty.
17
This section is adapted from Langdon Morris, The Innovation Master
Plan, Innovation Academy, 2011. Chapter 5.
18
This section is adapted from Langdon Morris, Permanent Innovation,
Innovation Academy 2011, Chapter 10. It is based on work by Bryan
Coffman.
19
Eric Ries, The Lean Startup. Crown Business, 2011.
20
Langdon Morris, Moses Ma, and Po Chi Wu. Agile Innovation. John
Wiley & Sons, 2014.
21
Langdon Morris. Managing the Evolving Corporation. John Wiley &
Sons, page 195.
22
Portions of this chapter are adapted from Chapter 7, Langdon Morris,
Moses Ma, and Po Chi Wu, Agile Innovation. John Wiley & Sons,
2014.
23
Louis V. Gerstner, Jr. Who Says Elephants Cant Dance?
HarperBusiness, 2002. P 187.
24
T he description of the three essential roles is adapted from Langdon
Morris, The Innovation Master Plan: The CEOs Guide to Innovation.
Innovation Academy, 2011, Chapter 7.
25
This quote is a probably paraphrase, and the exact number remains a
mystery. Literature searches disclose a range of numbers from
hundreds to thousands, and comments attributed to Edison that vary in
the specific wording, but carry the same basic message.
26
Langdon Morris. The Chief Innovation Officer. Innovation Academy,
2013.
27
Doidge, Norman, M.D. The Brain That Changes Itself. Penguin
Books, 2007. P. 304.
28
Wexler, Bruce. Brain and Culture: Neurobiology, Ideology, and
Social Change. MIT, 2006.
29
Quonset huts were produced in mass during World War II. They were
designed to enclose the most space with the least material, and were
generally made of steel frames covered with corrugated steel sheets.
The US Navy used more than 150,000 during the war, and then sold
most of them afterwards. Many are still in use 75 years later
throughout the US and in the Pacific.
30
Michael J. Gelb. How to Think Like Leonardo da Vinci. Dell, 1998.
P. 138.
245
Thomas J. Allen and Gunter W. Henn. The Organization and

Architecture of Innovation: Managing the Flow of Technology.
Elsevier, 2007. p. 14.
32
Architecture of Innovation. Elsevier, 2008. P. 2.
33 Karl Sabbagh. Twenty-First-Century Jet: The Making and Marketing
of the Boeing 777. Scribner, 1996. p. 70.
34 Karl Sabbagh. Twenty-First-Century Jet: The Making and Marketing
of the Boeing 777. Scribner, 1996. p. 36.
35
Architecture of Innovation. Elsevier, 2007. P. 63.
36 William H. Calvin. The River that Flows Uphill: A Journey from the Big
Bang to Big Brain. New York, MacMillan, 1986.
37
James Burke. Connections. Simon & Schuster, 2007.
38
Langdon Morris. Social Design: The Link Between Facility Design,
Organization Design, and Corporate Strategy. An InnovationLabs
White Paper, 1999. Downloadable at
www.innovationlabs.com/publications
39
Steve Wozniak & Gina Smith. iWoz: Computer Geek to Cult Icon.
Norton, 2006. p 122.
40
http://rivals.yahoo.com/highschool/blog/prep_rally/post/Coach-usesiPhone-app-to-help-save-collapsed-pla?urn=highschool-291472
41
Don Tapscott, Wikinomics. Portfolio, 2010.
42
San Francisco Chronicle, Ask.com layoffs spell surrender.
November 10, 2010
43
T.S. Eliot, Preface to Harry Crosby, Transit of Venus (1931), p. ix.
44
This list is adapted from Chapter 11 of Langdon Morris, Permanent
Innovation. Second Revised Edition, Innovation Academy, 2011. The
suggested action items have been modified to better fit the
environment and needs of a small business, so while the general
themes are similar to the original, the specifics are quite different.
31

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The Innovation Formula

The Innovation Formula

Copyright 2015 by Langdon Morris.

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For more information please contact:

Innovation Academy LLC

The Innovation Formula

About this Book

For more information: www.innovationlabs.com/formula

The Innovation Formula

Also by Langdon Morris

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The Chief Innovation Officer

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Co-authored with Jerome Conlon and Moses Ma

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The Innovation Formula

About the Author

The Innovation Formula

The Innovation Formula

Introduction: Innovation in the SME

The Innovation Formula

The Innovation Formula

The Innovation Formula

The Innovation Formula

We all know that no business can remain stagnant and expect to

The Innovation Formula

But innovation is difficult to achieve, as much art as would-be

The Innovation Formula

hundreds or even thousands of people to peer into the future, to do

The Innovation Formula

guiding you through a straightforward and yet entirely proven

Leverage the Power of Questions and Maps

The Innovation Formula

discoveries to develop and share.

The Innovation Formula

The Innovation Formula

In addition to questions and maps, theres a third core element that

The Innovation Formula

youll find throughout the rest of the book:

Complexity and Change

The Innovation Formula

The Innovation Formula

The Innovation Formula

team sport. The optimal innovation process is one in which your

The Innovation Formula

Or in English, Complexity and change means that Innovation is

In previous books, I and co-authors have examined many aspects

The Innovation Formula

The Innovation Formula

The Innovation Formula

The Innovation Formula

The Innovation Formula

The Innovation Formula

The Innovation Formula

The Innovation Formula

from 1990 to 2010 expanded from x to y as the country transformed