Riding with the Technology Peloton

One of the most important decisions that technology leaders make is when to strike out and leverage new and unique technologies for competitive advantage and when to stay with the rest of the industry and stay on a common technology platform. Nearly every project and component contains a micro decision of the custom versus common path. And while it is often easy to have great confidence in our ability and capacity to build and integrate new technologies, the path of striking out on new technologies ahead of the crowd is often much harder and has less payback than we realize.  In fact, I would suggest that the payback is similar to what occurs during cycling’s Tour de France: many, many riders strike out in small groups to beat the majority of cyclists (or peloton), only to be subsequently caught by the peloton but with enormous energy expended, fall further behind the pack.

In the peloton, everyone is doing some of the work. The leaders of the peloton take on the most wind resistance but rotate with others in pack so that work is balanced. In this way the peloton can move as quickly as any cyclist can individually but at 20 or 30% less energy due to much less wind resistance. Thus, with energy conserved, later in the race, the peloton can move much faster than individual cyclists. Similarly, in developing a new technology or advancing an existing technology, with enough industry mass and customers (a peloton), the technology can be advanced as quickly or more than quickly than an individual firm or small group and at much less individual cost. Striking out on your own to develop highly customized capabilities (or in concert with a vendor) could leave you with a high cost capability that provides a brief competitive lead only to be quickly passed up by the technology mainstream or peloton.

If you have ever watched one of the stages of the Tour de France, what can be most thrilling is to see a small breakaway group of riders trying to build or preserve their lead over the peloton. As the race progresses closer to the finish, the peloton relentlessly (usually) reels in and then passes the early leaders because of its far greater efficiency. Of course, those riders who time it correctly and have the capacity and determination to maintain their lead can reap huge time gains to their advantage.

Similarly, I think, in technology and business, you need to choose your breakaways wisely. You must identify where you can reap gains commensurate with the potential costs. For example, breaking away on commodity infrastructure technology is typically not wise. Plowing ahead and being the first to incorporate the latest in infrastructure or cloud or data center technology where there is little competitive advantage is not where you should invest your energy (unless that is your business). Instead, your focus should be on those areas where an early lead can be driven to business advantage and then sustained. Getting closer to your customer, being able to better cross-sell to them, significantly improving cycle time or quality or usability or convenience, or being first to market with a new product — these are all things that will win in the marketplace and customers will value. That is where you should make your breakaway. And when you do look to customize or lead the pack, understand that it will require extra effort and investment and be prepared to make and sustain it.

And while I caution selecting the breakaway course, particular in this technology environment where industry change is on an accelerated cycle already, I also caution against being in the back of the peloton. There, just as in the Tour de France when you are lagging and in the back, it is too easy to be dropped by the group. And once you drop from the peloton, you must now work on your own to work even harder just to get back in with the peloton. Similarly, once an IT shop falls significantly behind the advance of technology, and loses pace with its peers, further consequence incur. It becomes harder to recruit and retain talent because the technology is dated and the reputation is stodgy. Extra engineering and repair work must be done to patch older systems that don’t work well with newer components.  And extra investment must be justified with the business to ‘catch’ technology back up. So you must keep the pace with the peloton, and even better be a leader among your peers in technology areas of potential competitive advantage. That way, when you do see a breakaway opportunity for competitive advantage you are positioned to make it.

The number of breakaways you can do of course depends on the size of your shop and the intensity of IT investment in your industry. The larger you are, and the greater the investment, the more breakaways you can afford. But make sure they are truly competitive investments with strong potential to yield benefits. Otherwise you are far better off ensuring you stay at the front of the peloton leveraging best-in-class practices and common but leading technology approaches. Or as an outstanding CEO that I worked for once said ‘There should be no hobbies’. Having a cool lab environment without rigorous business purpose and ongoing returns (plenty of failures are fine as long as there are successful projects as well) is a breakaway with no purpose.

I am sure there are some experienced cyclists among our readers — how does this resonate? What ‘breakaways’ worked for you or your company? Which ones got reeled in by the industry peloton?

I look forward to hearing from you.

Best, Jim Ditmore

 

 

Real Lessons of Innovation from Kodak

At Davos this past week, innovation was trumpeted as a necessity for business and solution for economic ills. And in corporations around the world, business executives speak of the need for ‘innovation’ and ‘agility’ for them to win in the marketplace. Chalk that up to the Apple effect. With the latest demise of Kodak, preceded by Borders, Nokia, and Blockbusters, among others, some business leaders are racing to out-innovate and win in the marketplace. Unfortunately, most of these efforts cause more chaos and harm than good.

Let’s take Kodak. Here was a company that since 1888 has been an innovator. Kodak’s labs are  full of inventions and techniques. It has a patent portfolio worth an estimated $2.5B just for the patents. The failure of Kodak was due to several causes, but it was not due to lack of innovation. Instead, as rightly pointed out by John Bussey at the WSJ, ‘it failed to monetize its most important asset – its inventions.’ It invented digital photography but never took an early or forceful position with product (though it is unlikely that even  a strong position in that market would have contributed enough revenue given digital cameras come for free on every smart phone today). The extremely lucrative film business paralyzed Kodak until it plunged into the wrong sector – the highly mature and competitive printing market.

So, it is all well and good to run around and innovate, but if you cannot monetize it, and worse, if it distracts you from the business at hand, then you will run your business into the ground. I think there are four patterns of companies that successfully innovate:

The Big Bet at the Top: One way that innovation can be successfully implemented is through the big bet at the top. In other words, either the owner or CEO decides the direction and goes ‘all-in’. This has happened time and again. For example, in the mid-80s, Intel made the shift from memory chips to microprocessors. This dramatic shift included large layoffs and shuttering plants in its California operations, but the shift was an easier decision by top management because the microprocessor marketplace was more lucrative than the memory semiconductor marketplace. Intel’s subsequent rapid improvement in processors and later branding proved out and further capitalized on this decision. And I think Apple is a perfect example of big bets by Steve Jobs. From the iPod and iTunes, to the iPhone, to the iPad, Apple made big bets on new consumer devices and experiences that were, at the time, derided by pundits and competitors (I particularly like this one rant by Steve Ballmer on the iPhone). Of course, after a few successes, the critics are hard to find now. These bets require prescient senior management with enough courage and independence to place them, otherwise, even when you have a George Fisher, as Kodak did, the bets are not placed correctly. I also commend bets where you get out of a sector that you know you cannot win in. An excellent example of this is IBM’s spinoff of its printer business in the ’90s and its sale of the PC business to Lenovo more recently. Both turn out to be well ahead of the market (just witness HP’s belated and poorly thought though PC exit attempt this past summer).

Innovating via Acquisition: Another effective strategy is to use acquisition as a weapon. But success comes to those who make multiple small acquisitions as opposed to one or two large acquisitions. Cisco and IBM come to mind with this approach. Cisco effectively branched out to new markets and extended its networking lead in the 1990s and early 2000s with this approach. IBM has greatly broadened and deepened its software and services portfolio in the past decade with it as well. Compaq and Digital, America Online and Time Warner, or perhaps recently, HP’s acquisition of Autonomy, represent those companies that make a late, massive acquisition to try to stave off or shift their corporate course. These fare less well. In part, it is likely due to culture and vision. Small acquisitions, when care is taken by senior management to fully leverage the product, technology and talent of the takeover, can mesh well with the parent. A major acquisition can set off a clash of cultures, visions, and competing products that waste internal energy and place the company further behind in the market. Hats off on at least one major acquisition that changed completely the course of a company: Apple’s acquisition of Next. Of course, along with Next they also got the leader of Next: Steve Jobs, and we all know what happened next to Apple.

Having a Separate Team: Another successful approach is to recognize that the reason a company does well is because it is focused on ensuring predictable delivery and quality to its customer base. And to do so, its operations, product and technology divisions all strive to deliver such value predictably. Innovation by its very nature is discontinuous and causes failure (good innovators require many failures for every success). By teaching the elephant to dance, all you do is ruin the landscape and the productive work that kept the company in business before it lost its edge. Instead, by setting up a separate team, as IBM has done for the past decade and others have done successfully, a company can be far more successful. The separate team will require sponsorship, and it must be recognized that the bulk of the organization will focus on the proper task of delivering to the customer as well as making incremental improvements. You could argue that Kodak’s focus of the bulk of its team on film was its downfall. But I would suggest instead it was the failure of the innovation teams to take what they already had in the lab and make them successful new products in the market.

A Culture of Tinkering: This approach relies on the culture and ingenuity of the team to foster an environment where outstanding delivery in the corporation’s competence area is done routinely, and time and resources are set aside to continuously improve and tinker with the products and capabilities. To have the time and space for teams to be engaged in such ‘tinkering’ requires that the company master the base disciplines of quality and operational excellence. I think you would find such companies in many fields and it has enabled ongoing success and market advantage, in part because not only do they innovate, but they also out-execute. For example, Fedex, well-known for operational excellence, introduced package tracking in 1994, essentially exposing to customers what was a back end system. This product innovation has now become commonplace in the package and shipping industry. Similarly, 3M is well-known as an industry innovator, regularly deriving large amounts of revenue from products that did not exist for them even 5  years prior. But some of their greatest successes (e.g., Post-It Notes) did not come about from some corporate innovation session and project. Instead they came together over years as ideas and failures percolated in a culture of tinkering until finally the teams hit on the right combination of a successful product. And Google is probably the best technology company example where everyone sets aside 20% of their time to ‘tinker’.

So what approach is best? Well, unless you have a Steve Jobs, or are a pioneering company in a new industry, making the big bet for an established corporation should be out. If your performance does not show outstanding excellence, and if your corporate culture does not encourage collegiality and support experimentation and then leverage failure, then a tinkering approach will not work. So you are left with two options, make multiple small acquisitions in the areas of your product direction, and with effective corporate sponsorship, fold the new product set and capabilities into your own. Or, set up a separate team to pursue the innovation areas. This team should brainstorm and create the initial products, test and refine them, and then after market pilot, have the primary production organization deliver it in volume (again with effective corporate sponsorship). Thus the elephant dances the steps it can do and the mice do the work the elephant cannot do.

As for our example, Kodak only had part of the tinkering formula. Kodak had the initial innovation and experimentations but they were unable to take the failures and adjust their delivery to match what was required in the market for success. And they should have executed multiples of smaller efforts across more diverse product sets (similar to what Fujifilm did) to find their new markets.

Have you been part of a successful innovation effort or culture? What approaches did you see being used effectively?

Best, Jim