Executive Summary (1)

2. ExecutiveSummary(1) • The book is about managing innovation and overcoming inertia in established enterprises. • Its major thesis is that most companies love to innovate but hate to take risk, the net result being lots of me-too innovations that lack economic impact because they do not have the force to distinctively differentiate their offers. • Its primary prescription is to pick a single vector of innovation and march so far down it that your competition either cannot or will not follow. • The book describes fourteen innovation vectors all told. Different types are privileged at different points in the category maturity life cycle, so that innovation strategy must adapt to life-cycle dynamics. The overall model is used to help management teams winnow down innovation vector choices to one or two and align the bulk of their investment behind that choice.

3. Executive Summary (2) • The book includes two secondary prescriptions. • The first is that companies can fund innovation by extracting resources out of context to repurpose for core. This funding strategy has the added benefit of reducing inertia, which builds up in context activities. • The second is that they should focus resource management around balancing the disciplines of invention, deployment, and optimization. Most people think established enterprises lack invention capability, but in actual fact they invent plentifully but have trouble deploying their inventions. The reason why is that their deployment resources are stuck trying to grind out the next quarter's numbers from an increasingly aging prior set of innovations. If these companies could better optimize their resource utilization in established markets, they could free up the necessary resources to build the market for their next set of inventions.

5. Value Engineering Innovation • Definition • An innovation type in the operational excellence zone that differentiates a mature market position by extracting costs from an established product or process design. • Examples • Complex Systems Model: TSMC (Silicon foundries) • Volume Operations Model: BIC (Ballpoint pens) • Key Insight • To differentiate on this type requires relentless focus. Once you start down this path, you must never look back.

6. Integration Innovation • Definition • An innovation type in the operational excellence zone that differentiates a mature market position by integrating a set of established products and services into a single more easily managed offering. • Examples • Complex Systems Model: SAP (Enterprise Resource Planning) • Volume Operations Model: Victorinox (Swiss army knives) • Key Insight • This type is optimal for a mature market where the complexity of maintaining the system is exceeding the perceived value of the offering.

7. Process Innovation • Definition • An innovation type in the operational excellence zone that differentiates a mature market position by reengineering fundamental processes to create exceptional gains in cost reduction, quality, or time to market. • Examples • Complex Systems Model: Celera (Shotgun sequencing human genome) • Volume Operations Model: McDonald’s (Fast food) • Key Insight • The most potentially disruptive innovation type in a mature market, it can redefine business models by disintermediating players in the current value chain.

8. Value Migration Innovation • Definition • An innovation type in the operational excellence zone that differentiates a mature market position by transferring focus from a value-losing element in a value chain to a value-gaining one. Two classic value chain migrations seen in maturing markets are the shifts from product to consumables and from products to services. • Examples • Complex Systems Model: IBM (Products to services) • Volume Operations Model: Gilette (Products to consumables) • Key Insight • This type of innovation pivots the offering while keeping the customer relationship constant. It is the most internally disruptive of all innovation types

9. Platform Innovation • Definition • An innovation type in the product leadership zone that differentiates a growth market position by consolidating the interface to a legacy environment in service to a next generation of emerging offerings. • Examples • Complex Systems Model: Oracle (Relational databases) • Volume Operations Model: Sony (Game machines) • Key Insight • Normally platform franchises are a second-generation outgrowth of a product franchise where the company achieved dominant market share. This allows the platform to inherit ubiquity at birth, the challenge being to convert what was a closed product into what now must be an open platform.

10. Product Innovation • Definition • An innovation type in the product leadership zone that differentiates a growth market position by R&D to improve. • Examples • Complex Systems Model: Medtronic (Pacemakers) • Volume Operations Model: Cuisinart (Food processors) • Key Insight • This innovation type is optimal for grabbing share in high-growth markets where the category has been accepted and now it is features and functions that are driving customer preference. Time-to-market is at least as key as design imagination to success with this type.

11. Disruptive Innovation • Definition • An innovation type that initiates a growth market by creating a new category through one of two mechanisms: discontinuous technology or value-chain disruption. • Examples • Complex Systems Model: Genentech (Biological engineering) • Volume Operations Model: eBay (Online auctions) • Key Insight • The one type of innovation that requires a “crossing the chasm” approach to strategy and program development.

12. Application Innovation • Definition • Creating differentiation by finding and exploiting a new application or use for an existing technology. The cornerstone of solution-oriented marketing. • Examples • Complex Systems Model: Sun and Sybase (Wall St. trader workstations) • Volume Operations Model: Citibank (Automated Teller Machines) • Key Insight • This form of innovation is optimal for penetrating mainstream markets. The critical success factor is to fuse domain expertise with technology understanding and design the system from the ground up to revolutionize a problematic business process.

13. Line Extension Innovation • Definition • An innovation type in the customer intimacy zone that creates a new sub-category to engage a new customer or re-engage an old one by targeting their unique preferences. • Examples • Complex Systems Model: Boeing (737 line of aircraft) • Volume Operations Model: Johnson & Johnson (Tylenol products) • Key Insight • This innovation type is optimal for extending the growth of a market that is just beginning to mature. It applies design focus to more actively engage with customer-specific concerns in underserved market segments.

14. Enhancement Innovation • Definition • An innovation type in the customer intimacy zone that differentiates a mature market position by leveraging a modest R & D investment to create a large increase in the perceived value of an established offer to re-stimulate customer interest. • Examples • Complex Systems Model: Caterpillar (Cabs of construction equipment) • Volume Operations Model: Swatch (Fashion watches) • Key Insight • This type is optimal for mature markets where core functionality is perceived as a commodity and secondary attributes are driving customer preference. This is a bitter pill for engineering-driven technology companies to swallow.

15. Marketing Innovation • Definition • An innovation type in the customer intimacy zone that differentiates a mature market position through novel go-to-market programs affecting interaction with the prospective customer, typically in marketing communications and distribution channels. • Examples • Complex Systems Model: McKinsey (Relationship marketing) • Volume Operations Model: Mattel (American Girl) • Key Insight • The most trumpeted marketing innovations all come from volume operations model enterprises. Virtually all of them are counter-productive when used by a complex systems model company.

16. Experiential Innovation • Definition • An innovation type in the customer intimacy zone that differentiates an otherwise commoditized offer in a mature market by modifying the customer’s end-to-end experience from initial encounter to ultimate disposition. • Examples • Complex Systems Model: World Economic Forum (Davos conference) • Volume Operations Model: Starbucks (Coffee houses) • Key Insight • This type is optimal for highly commoditized markets where the offer itself has no further opportunity to differentiate. It is particularly rewarding for volume operations companies who can perform it at scale cost-effectively.

17. Organic Innovation • Definition • An innovation type in the category renewal zone that differentiates a declining market position by migrating resources from a declining category to a growth one, typically through in-house R&D. • Examples • Complex Systems Model: Alcatel (From voice to video) • Volume Operations Model: Apple (From PCs to consumer electronics) • Key Insight • This type of innovation is most challenged by inertia and requires a dedicated resource recycling commitment to bring off.

18. Structural Innovation • Definition • Creating differentiation through acquisition and divestiture, regardless of whether you are the acquiring or acquired party. • Examples • Complex Systems Model: EMC (From storage hardware to software) • Volume Operations Model: Altria (From tobacco to food & beverage) • Key Insight • In this type of innovation it does not matter whether you are the acquiring or acquired company. All that matters is the competitiveness of the company that results from the merger.