The purpose of the time, money, struggle and energy that businesses put towards innovation and differentiation is to enable stronger, more profitable and less disruptive growth. Stop for a moment and think of all of the key initiatives you’ve seen or been involved in at your company over the last couple of years.
It is highly likely that the purpose of those initiatives came down to one or a combination of 3 reasons:
Accelerate the rate of customer acquisition
Increase the average length of time a customer buys from you
Increase the margins of one or both of the above
Now, what grade would you give your company’s efforts? If you’re like most of the people we’ve been interviewing recently for a research project we’re completing, I’d bet you’re suffering from some serious grade inflation. Consider the following facts: we’re in an economy as strong as any in our lifetime, technology is enabling us to easily and inexpensively do things we could have only dreamed of less than a decade ago, and the primary theme of HubSpot’s annual gathering of the world’s best growth executives (Inbound) was #GrowBetter.
Don’t get me wrong, companies--most companies--are growing revenues and accelerating customer acquisition rates. I’ve yet to see any data that indicates that average lifetimes are increasing significantly (the reality is that because of hyped-up growth rates over the last couple of years, we won’t have reliable data on this for a couple of years), and costs are rising.
If you’re investing in innovation, the question shouldn’t be are you seeing improved performance metrics, but rather how are those metrics performing compared to peer companies? This is where grade inflation occurs. More than 70% of the people I’ve talked to give themselves a B or better on their growth efforts, yet very few are actually outperforming the average cohort.
What must your company do differently to drive superior performance and to grow better?
The research we're conducting right now was inspired by ongoing obsession on sustaining mid-market revenue growth, along with a recent read of Geoffrey Moore’s book, Zone to Win. Our findings are quite instructional, highlighting a major Achilles heel of mid-market companies and providing a bit of a prescription to fix it.
If you’re an executive charged with growth, you should ponder making “S” your favorite letter, as in “the S-curve.” The S-curve is the basis of nearly all strategic and tactical growth planning. The theory is along the lines that investments in innovation start off slow, pick up steam to accelerate growth, and (at some point in the future) levels off in terms of growth as the market matures and the next innovation-inspired S-curve kicks in.
The S-curve theory was a reliable planning tool for business for years. As long as execution was strong, businesses knew that their investments in innovation could drive growth for years (or even decades).
But the world has changed. Innovation initiatives stopped being events and became standard, continuous efforts. More importantly, if you look at the vast majority of successful small and mid-market (SMB) companies, you’ll see they succeeded by operating in one of two ways:
Most exploited various innovations as they moved up the adoption curve, serving primarily mainstream markets.
Or they were the force of innovation (the proverbial garage startup) serving the early adopter or the very early mainstream markets.
Very, very few organizations SMBs succeeding at both innovation and exploitation. The rareness of this path was the inspiration to Moore creating his Crossing The Chasm Theory.
Today disruptive innovation plays an added role at SMBs. It still plays to traditional market disruption (typically the early-stage, high-funded startups). What’s different is that even those companies that aren’t bringing truly disruptive offerings to the market (regardless of what their websites claim) must manage internal disruptive innovation. Why? Because of The Commoditization Curve, best illustrated by Marty Neumeier’s (author of the book The Brand Gap) robot curve.
There’s an old adage that goes: if you always do what you’ve always done, you’ll always get what you always got. The problem is that is no longer true. The Commoditization Curve brings a gravitational pull to everything that is or was at one time highly valuable. Today’s high-value, complex, unique offering is tomorrow’s oversaturated, self-serve commodity.
Just look at the example of cloud computing. What cost $5 million dollars in 2000 cost just $5,000 in 2012. That’s a 100x decrease in cost in 12 years. What’s more, what you get for $5,000 today is superior to what you got in 2000.
To win in today’s competitive, highly disrupted markets requires a different mindset and execution model, one based on continuously iterating and innovating to ensure you maintain and enhance your altitude against the gravitational pull of commoditization.
Now, I’m sure the previous paragraph isn’t news to you. You’re likely thinking, “Duh, we’re already doing that. We’re seeking ways to add value every day.” And this is where the SMB vulnerability kicks into high gear.
I’m sure you’ve heard the phrase before. You’ve got to work on your business, not just in your business. I’ve been hearing the phrase for years, and I’ll admit I’ve even used the phrase when talking to others. I have an admission to make. For 25 years I had no idea what the hell the phrase really meant. Candidly it felt a lot like when some motivational entertainer would shout from the stage, “YOU’VE GOT TO GIVE 110%!”
SMBs are inherently weak at working on their business, but not for the reason most people think. They’re bad at it because they don’t have the manpower to do it. Large businesses have teams of executives whose full-time jobs are all about working on the business. Additionally, they allocate the resources and investments necessary to work on the business.
What’s fascinating is that SMBs push for change more frequently and faster than their larger competitors. (We’ve even fooled ourselves into thinking that’s our advantage.) SMBs regularly fail for two reasons:
The people charged with working on the business also have responsibilities for working in the business. The unfortunate truth is that working in the business will always suffocate working on the business.
SMBs push for too much change, too fast. When SMBs become aware of a problem or see degrading performance, they charge their executives and teams to make the necessary changes and FIX IT NOW! The problem here is that the status quo is just too powerful and destroys the effort. Companies are left with the need to manage greater complexity with, at best, incrementally better performance. The response is to just push harder and faster to make up the difference, all while the underlying fundamentals and foundation of the business get sucked further down The Commoditization Curve.
Companies that successfully manifest the power of innovation tend to view the word through three time horizons, not one:
Horizon 1 is The Performance & Enablement Zone focused on activities designed to produce results and positive ROI in less than a year.
Horizon 2 is The Transformation Zone focused on activities geared to generate ROI in a 1 - 3 year period. The Transformation Zone the crucial performance timeline responsible for transforming ideas and innovations into reality.
Horizon 3 is The Vision & Incubation Zone focused on activities that could produce results beyond three years.
Orienting your strategic planning, resource allocation and execution plans around these three horizons creates greater clarity and accountability. Note that for each horizon, you must plan on playing a different game, with different rules, success factors, risks, and opportunities.
Let’s break these horizons down into more of an operational focus:
You can break the horizons into four operations zones.
The Performance Zone (Zone 1A): As the name infers, the entire focus of this zone is performance. Your job here is to do what you have to do to hit your number and/or meet your objectives. The Performance Zone is not the place to test and experiment, it’s the place to get shit done!
This is where small and many mid-market companies get themselves into trouble with innovation and continuous improvement initiatives. They move to implement disruptive changes in The Performance Zone. The causes confusion and chaos, creating a drag on performance and a lack of attention on the new initiative. Think of The Performance Zone as a 3 - 6 month window where changes should be kept to a minimum and the focus should be completely on immediate execution.
The Enablement Zone (Zone 1B): This is the velocity zone. The focus here should be on three primary areas:
Optimization. This is the zone where testing and experimenting is valuable. It’s the place where you improve the CRM, enhance automation and work on making the tweaks to take good to great.
Systemize. This is the efficiency zone. Finding ways to do things faster, and making things more repeatable and predictable.
Programs. This is the effectiveness zone. Programs are the structures and approaches you take to drive objectives. You can think of systems as the engine of performance and programs as the fuel.
The Enablement Zone is a powerful buffer area where regular ongoing improvements are positioned to become a part of the new status quo, and ensuring that The Performance Zone isn’t overwhelmed. Initiatives from The Transformation Zone flow through The Enablement Zone to ensure they’re properly integrated.
The Performance & Enablement Zone make up the right side of the zone matrix. As I noted earlier, the timeframe for positive ROI from these zones is one year or less. As such when you introduce something new to either of these zones, it must be focused on sustaining the existing systems, structures, programs and behaviors already in place. Your focus for enhancing this side of the matrix should be on identifying solutions that you can utilize within your existing operational structure. If the initiative, purchase or idea requires any type of meaningful change of your existing structure or has a time frame of longer than 12 months, it must first go through The Transformation Zone.
The Transformation Zone (Zone 2): This is the power and growth zone. Companies that master The Transformation Zone create a sustainable competitive advantage that enables them to seemingly always be one to three steps ahead of their competition. These are the companies that build the reputation of seemingly being able to read their customers’ minds.
While at first blush it may appear that putting new ideas through (at least) The Transformation Zone would slow things down, the reality is quite the opposite. The focus of The Transformation Zone is where your company’s future becomes your company’s present. This is where ideas & innovation become organizational capabilities.
The specific actions you take in this zone are dependent on a variety of things: your overall strategy; whether the disruptive change you’re dealing with is internal, external or both; and the dynamics of your market.
The key to a strong Transformation Zone (and again, an area where SMBs often fail) is that those accountable for creating results from this zone are only focused on this zone. A common error made here is giving a “forward-thinking executive” responsibilities for this zone, while they are also accountable for Performance Zone results. If someone is accountable for both Performance and Transformation Zone objectives, they’ll fail at both.
A common example of this error is when a company puts a VP of Sales in charge of achieving revenue expectations and for designing the go-to-market approach for the future. When this happens, both zones get mashed-up and the outcome tends to be a focus on performance, with hit-and-miss transformation. The company may continue to hit its number, but the underlying approach is weakened. There’s nothing wrong with having the VP be actively involved in the Transformation; quite the contrary--for success, she must be. The problem is that no one is ultimately responsible for ensuring a strong, sustainable Transformation Zone. If no one can get fired for an ineffective Zone 2, then it’s unlikely it’s going to be as strong as you need it.
The Vision & Incubation Zone (Zone 3): This is where your future can be invented. This is where long-term strategic planning, product/service innovation, new market development, and other activities are best started. The details of what works here are highly dependent on your unique situation. I’ll cover more on this area in a future post.
Zones 2 & 3 make up the left side of the matrix. Whereas the right side is focused on sustaining the existing capabilities, the left side is focused on disrupting them. Now this disruption could be externally (a new technology, product, etc.) or internally focused. Regardless, making important changes to the status quo is what the left-side is all about. This requires an outcomes mindset, instead of a solutions mindset. Remember, if the change matters, the formula is not complete. Don't make the deadly mistake of underestimating or undervaluing the unknown variables. Successfully transforming left-side initiatives into right-side performance relies on the ability to manage the unexpected, adjust and align.
In my extensive experience working with SMBs, I’ve learned that their strengths tend to exist in the first and third zones/horizons. They’re filled with ideas. Their ideas are often better than their (much) bigger competitors. It’s probably the most frustrating feeling about operating an SMB. You’re left wondering, “How can our ideas be so much better than our competitors, but [fill in the blank].”
The issue is typically misdiagnosed as an execution issue, so more pressure - and more change - is put on The Performance Zone (which is likely already stretched beyond its limits). This leads to a vicious cycle that traps most companies into average, or worse, performance.
The reality is that performance or execution is not likely the cause of the problem. Instead, it’s the lack of a defined Transformation Zone. Ideas and innovations are either thrown into the performance mix with unrealistic expectations or they never see the light of day because “the core business is too important.”
I’m often asked how can a company go from doing the things they know are not sustainable but “pay the bills” to adopting what they know should be their future, but won’t yet support the company. The answer is “Build a strong Transformation Zone.”
The key to a successful transformation strategy is to minimize the change that is required in The Performance Zone (which is what is currently driving results), even if what you’re doing is wrong. Placing unreasonable expectations on a new initiative is a recipe for destroying the old and the new.
One of my favorite Geoffrey Moore quotes is, “You can’t have an S-curve without first having a J-curve.” I often say that implementing a new approach in an existing growth business is much like changing the engine of a plane while it’s in the air. While at first, it sounds like an impossible task, if you follow this approach it becomes much simpler, less risky, and far more likely to stick and succeed:
The Transformation Zone allows your team to stay focused on hitting the revenue needs of The Performance Zone, while the new initiative is getting refined and The Enablement Zone is building out the systems and programs needed for success. Then, as the initiative begins getting traction, attention can begin to shift and the company gains strength and momentum.