As Agile mindset and processes increasingly enter the management mainstream, firms are learning how to draw on the full talents of those doing the work, involve customers at every stage of product development and so generate innovations that customers value.
As Part 1 of this article pointed out, most organizations implementing Agile are still preoccupied with upgrading existing products and services through cost reductions, time savings or quality enhancements for existing customers (i.e. what one might call operational Agility). What they — and the wider management community — need to realize that the main financial benefits from Agile management will flow from the next frontier: generating innovations that create entirely new markets by turning non-customers into customers, i.e. Strategic Agility. (This is the dark secret of the Agile movement.)
To use a metaphor, operational Agility succeeds in delivering a steady flow of additional value for customers, akin to filling a series of small cups with water. By contrast, Strategic Agility is akin to filling a whole bucket. The shift from cups to buckets is a difference in the scale of the financial impact.
Make no mistake: operational Agility is still a good thing. In fact, it’s increasingly necessary for a firm to survive. And it’s also the foundation for Strategic Agility. But it is not enough. In a marketplace where competitors are often quick to match improvements to existing products and services and where power in the marketplace has decisively shifted to customers, it can be difficult for firms to monetize those improvements. Amid intense competition, customers with choices and access to reliable information are frequently able to demand that quality improvements be forthcoming at no cost, or even lower cost. In addition, firms need to master Strategic Agility.
Part 1 of this article explored the opportunity represented by enterprise-wide Strategic Agility (“Beyond Agile Operations: How To Achieve The Holy Grail of Strategic Agility"). Now Part 2 explores what’s involved in systematically achieving Strategic Agility.
Strategic Agility occurs in two main ways: either as a by-product of operational Agility or through use of an explicit playbook to generate market-creating innovation.
A. By-product Of Operational Agility
At Spotify, for instance, Discover Weekly was intended to solve a known problem with an existing product: the difficulty that existing users were having in locating music that would truly love, in Spotify’s vast library of millions of songs. Users were spending most of their time searching for songs, rather than actually listening to music that they loved. Discover Weekly not only solved that problem for existing users, by matching users’ tastes with billions of existing playlists and presenting a fresh personalized playlist to each user each week. The innovation was so wildly successful that it brought in tens of millions of new users and became in effect brand in itself, in some countries perhaps even better known than “Spotify” itself.
Spotify’s approach to innovation is mainly based on the lean-startup principle that views the biggest risk in innovation to be building the wrong thing. In essence, you start by imagining what you have in mind. Then you check whether any customer would want it. Then you build a prototype. Then you go on tweaking it, adding features that may help monetize the feature.
While this approach can work well in terms of improving existing products for existing users, it has several limitations in terms of systematically generating market-creating innovations.
First, in an ongoing organization as opposed to a startup, Agile teams are mainly focused on making things better for existing users. If the improvement creates new markets of users and non-users, that is a happy accident, rather than the main goal. To get more consistent success in generating market-creating innovations, an explicit focus on attracting non-users is needed.
Second, market-creating innovations sometimes involve eliminating features, not adding or improving them. Paradoxically, less may be more. Thus, a firm may generate market-creating innovation by eliminating elements that it or other firms are marketing as high-value for customers. The resulting simplification can sometimes perform the dual function of lowering costs and drawing in vast numbers of new users. A classic case is Southwest Airlines which based its business on eliminating the very features which the rest of the airline industry trumpet: meals, lounges and seating choices.
As W. Chan Kim and Renée A Mauborgne point out in in their classic book, Blue Ocean Strategy, “Southwest offered high-speed transport with frequent and flexible departures at prices attractive to the mass of buyers… the company emphasizes only three factors: friendly service, speed, and frequent point-to-point departures… it doesn’t make extra investments in meals, lounges, and seating choices. By contrast, Southwest’s traditional competitors invest in all the airline industry’s competitive factors, making it much more difficult for them to match Southwest’s prices.” For many customers, fewer features and lower prices plus a friendly and timely service adds up to a package that is a better deal.
Yet the decision to eliminate seemingly popular features is not one that is easily taken at the level of the Agile team. Agile teams are generally focused on adding new features requested by existing customers. Teams are unlikely to propose or carry out experiments to eliminate key services that would bring in new customers, since it is usually assumed that features being used by existing customers must be valuable to them. Moreover, existing features typically have their own constituencies within the organization: a team that has created a feature often becomes a lobby for retaining and improving it. Unless there is a explicit decision at a higher level to pursue the elimination of features with the goal of attracting new non-customers, it is unlikely to happen. Thus, traditional airlines had difficulty emulating Southwest’s low-cost model with its spinoff Ted, in part because of internal lobbies to keep running the airline the way it has always been run.
Third, market-creating innovations can lead to self-cannibalization of the firm’s existing products and so generate a reluctance to interfere with a current revenue stream. Thus, it wasn’t an easy decision within Apple to include a music-playing capability in the iPhone, because it cannibalized the market for the iPod. Initially, even Steve Jobs himself is said to have opposed it. It was only the realization that if Apple didn’t disrupt itself, some other competitor would do so that led to the eventual decision to include music playing in the iPhone. Thus, eventually a decision was made to sacrifice the revenue stream from the iPod in favor of the larger potential gains from the iPhone. Such a decision is never easy and typically it has to be taken at the highest levels of the organization.
Fourth, work on improving existing features can be suitable for low-investment market-creation, as at Uber and Airbnb. But it’s rarely a solution for innovation that requires substantial technical innovation or financial investment. When the firm is imbued with lean-startup thinking, the firm often ends up pursuing a series of “small bets”, to the neglect of “big bets.”
Fifth, if corporate incentives flow to people who can “move the needle” by showing immediate results from improving an existing product for existing customers, then any slow-moving “big bets” under consideration will tend to morph into “small bets” that generate quick wins. The pressure to “get results now” will make it harder to attract top talent to work on expensive slow-gestating investments that could have huge gains if they were to be pursued. And those who are working on developing something completely new may become discouraged as they will have no immediate results to show for their efforts. To overcome these pressures, top management must delineate the importance of winning “big bets,” even if their gestation is slow, and create specific incentives to accomplish them.
Finally, lean-startup thinking is not well-suited to deal with decisions on market-creating innovations involving large investments in a new product, when no one knows in advance whether the idea will work or not. Often, it isn’t possible initially to put a prototype in front of potential users and see whether they will use it and be thrilled by it. In most cases, there will be no “hard data” on which to base a decision.
In the absence of an explicit playbook to foster market-creating innovation, decisions on such large investments will tend to be based on corporate politics: the loudest voice having the most hierarchical clout will end up making the call. In the absence of hard numbers, proceeding with the investment will often be perceived as presenting too great a risk and the investment will be abandoned. If a decision is finally made to go ahead with investing in a capital-intensive innovation after a bruising battle at the top, it can be hard for the organization to change course even if actual data starts to show that the firm is on the wrong track. In such situations, the firm may continue to invest in a losing proposition, until it turns into a disaster that is too obvious to ignore.
Yet it doesn’t have to be this way if there is a playbook for generating market-creating innovations. There are well-established principles that can lead to sustained success with market-creating innovations. They involve understanding the art and science of Strategic Agility.
B. A Playbook For Market-Creating Value Propositions
A playbook for Strategic Agility provides the basis for generating market-creating value propositions that systematically create new markets for products or services that will enjoy strong demand and growth from both customers and non-customers. The aim is to create products or services that enjoy little competition, precisely because they meet a need in the marketplace that is currently not being met — the so-called “blue oceans” of profitability.
Market-creating value propositions involve a shift in thinking from the known to the unknown — from existing products to unknown products, and from users to non-users of the firm’s products. This in turn means redefining how needs are being met and in the process, discovering value for customers and non-customers from elements that lie outside current thinking, within both the firm and the industry.
It also means a shift from thinking of outputs of the organization to considering outcomes for the customer or end user. “Instead of thinking of your company as providing a particular type of product or service — electric power, health records management, or automobile components,” writes consultant Norbert Schwieters, “think of it as a producer of outcomes. The customer needs to get somewhere, so you’re not a car company; you’re a facilitator of that outcome. The house is cold, so you help make it warm, possibly without supplying the necessary fuel… Customers, in turn, are making fewer purchases to accumulate physical things and more purchases to achieve outcomes, convenience, and value.”
Thus Christensen and colleagues argue in their book, Competing Against Luck, against “defining customer needs through typical market research and then delivering against them.” This can lead to a focus on “functional needs without taking into account the broader social and emotional dimensions of a customer’s struggle… And in many cases emotional and social could be on the same plane as functional needs — and maybe even be a driver.” For example, the Rolex watch is a status symbol, and most of its value is based on the intangible deliverables.
As discussed in Part 1 of this article, outcome-oriented decision-making also means a shift in thinking from looking at the industry as currently conceived. Sector boundaries as we knew them in the 20th Century are collapsing.
Four Keys To Creating Market-Creating Value Propositions
A helpful playbook for developing a market-creating value proposition was pioneered by Curt Carlson and his colleagues at the Silicon Valley icon, SRI International, where Carlson was president and CEO from 1999 to 2014. It is described in his book, Innovation: The Five Disciplines for Creating What Customers Want. (Crown Business, 2006) and summarized by an illuminating article by Anand Venkataraman, who worked with Carlson at SRI: “Can innovation be learned or taught?”
Curt Carlson, former CEO of SRI International: Photo: Julia Weckman
Photo by Julia Weckman.The playbook is called the Innovation-for-Impact Playbook (i4i Playbook) and describes an organizational design and value-creation process for creating major breakthroughs, like SRI did with HDTV, Intuitive Surgical, and Siri, among many others.
Among the i4i Playbook components is a concise but complete definition for a value proposition. It has four parts — Need, Approach, Benefits per costs and Competition — that are summarized in the mnemonic, NABC. “They are the fundamentals,” says Carlson. “It doesn’t make sense to write up a big report until you can first explain the new innovation’s value proposition in simple language to a knowledgeable person. Once those fundamentals are in place, the full business plan is much more efficiently developed.”
1. Identify The Need
It begins with a focus on outcomes and the potential customer’s need, not the firm’s need as an innovator, or a shareholder’s need for financial returns. “Does the customer have a need for something?” writes Venkataraman. “How acute is this need? Would a solution be a lifesaver, a painkiller or a supplement? Furthermore, how can you quantify the need? Is the need relevant to one person, a few people, or an entire demographic? ... The first thing you do is to record the need as you see it and determine just how big the scope is. If it’s not large enough (doesn’t impact a significant number of people) can it be made to? These questions can’t be answered and refined until after you’ve quantified the need. So as a first step, write down a tentative number on how big you think this need is.”
Understand non-customers: “Obviously, the first port of call should be the customers,” write the authors of Blue Ocean Strategy. “But you should not stop there. You should also go after non-customers. And when the customer is not the same as the user, you need to extend your observations to the users…. You should not only talk to these people but also watch them in action. Identifying the array of complementary products and services that are consumed alongside your own may give you insight into bundling opportunities. Finally, you need to look at how customers might find alternative ways of fulfilling the need that your product or service satisfies.”
Study markets: Although there is a lot of attention on global markets, for example in smart phones, most markets are fragmented in narrow segments. It can be a mistake to chase a single narrow market niche. What you need is a product or service that addresses a collection of narrower market segments. Market-creating innovation implies moving into markets that are bigger than the firm’s current market.
Operating at scale: A firm also needs to have the capabilities to operate at scale. When Apple made its move into mobile phones, suddenly they had to have an enormous transaction engine capable of dealing with billions of transactions in a year. These organizations have to make an organizational transformation and execute on it, not just talk about it as organizational change.
Think big: Innovation pioneer Peter Thiel in his book, Zero to One, sees the principal task of business as essentially one of creating an enduring monopoly through breakthrough technology. The technology has the capacity to generate a very large future cash flow. LinkedIn and Twitter are valued highly, not because of any profits today, but because they are perceived as having the capacity to generate massive cash flow over the coming decades. “The overwhelming importance of future profits is counter-intuitive even in Silicon Valley. For a company to be valuable it must grow and endure, but many entrepreneurs focus only on short-term growth. They have an excuse: growth is easy to measure, but durability isn’t.”
Think big but proceed incrementally: “Don’t worry if you don’t have an approach completely nailed down at the outset,” counsels Venkataraman, because “by the time you’re done with this process, you will have one, sure as day follows night.”
2. Clarify The Approach
“It’s all about how you solve this particular need of the customer,” writes Venkataraman. “Here is where you’ll ask yourself what your secret sauce is. It’s important to have a secret sauce because that’s what tells you how innovative your original idea is. Besides, a secret sauce is your entry barrier. A successful company needs an entry barrier to give it an opportunity and a kind of monopoly and incentive to develop its idea to its fullest. Without an entry barrier, rather than focus on refining the core of the idea at a time when it’s needed most, you would be expending all your energy on deterring others from eating your lunch. Instead of simplifying your idea, which is the key to success, you’ll end up making it more complex which spells certain doom.” Carlson notes that the approach must also contain a working hypothesis for the new innovation’s business model -- how it will generate revenue and make a profit. Many companies fail because they don’t have one and disruptive innovations often have disruptive ones (e.g., Uber, Amazon, Space-X, etc.)
Think platforms: “What happens with companies that have successfully externalized,” says Haydn Shaughnessy, “is that they manage to lay off a lot of the burden of change onto their ecosystem. That frees management to make decisions without having to think about all the issues of scaling the base. If you think about Apple, they were able to grow an ecosystem of somewhere in the order of 500,000 developers. This meant that management wasn’t faced with the administrative burden of investing in growing an army of internal developers that made Apps. This kind of externalization relieves the burden of managing scale and enables very rapid scaling.”
“The race is now on to develop and expand the platform ecosystems to deliver such outcomes for many different sectors,” writes Schwieters, “Amazon already provides a platform for sellers to use. Leading companies are strengthening their positions as platform providers in a wide range of industries. GE and Siemens, for example, have each developed a cloud-based system for connecting machines and devices from a variety of companies, facilitating transactions, operations and logistics, and collecting and analyzing data. GE lists no fewer than the different industrial sectors that it is targeting with its Predix industrial operation system.”
Acquire digital competency: Traditionally, adjacent moves were perceived as risky and firms were advised to stick to their core business. Once firms acquire competency in handling very large amounts of data, and operate in a network fashion, they become able to make quite radical adjacency moves, as at Amazon. As a result, the idea of a core business itself is no longer static and fixed. Instead, a fluid core enables moves into new sectors, growing competency very quickly.
A bias for action: “I used to attend conferences in Europe where Nokia people would talk about the digitization of everyday life,” says Shaughnessy. “It was fascinating because this was 2005. They were talking about how we would end up digitizing absolutely everything. The problem is that it was Facebook that captured that. It was Google who sold the ads on the Web and Apple that sold the smart phone. So for all its knowledge about the future, Nokia didn’t execute. It comes back to the business of managing adjacencies. What Nokia needed to do in 2005 was to launch something like Facebook and the smart-phone and really commit to its vision of the world. It had a fabulous vision. But all it did with its vision was to carry on making phones with keyboards.”
The indirect approach: Separating customers and end-users is often key. Thus Google search is free to end-users, yet huge financial gains accrue to Google from data-focused advertising. The search service provided to users feels costless. And having the monetization happening in the background creates a seemingly frictionless experience for the user.
Create the secret sauce from an existing strength: John Hagel, Director of Deloitte's Center for the Edge, gives the example of State Street Bank. It “started as a very conventional retail bank. It was founded in 1793. In the 1970s, it faced increasing pressure in its core business. A C-suite executive realized that they needed to find a different way of doing business and came up with the idea of renting out some of their transaction processing capabilities to other banks, who were facing similar pressure. It met a need in the marketplace and they scaled that very rapidly. Over time, they walked away from their traditional core business. It gave them a new way to define their business, their processes and operations, their approaches, and their culture. It served them well.”
3. The Benefits Per Costs (for both the customer and the producer)
The Benefit per Costs part of the value proposition “tells you not only what a difference for the better your solution will make in the life of the customer,” says Venkataraman, “but also how much of a difference. It’s important to understand that almost every significant benefit can be quantified, even if only by proxy. Sometimes we may consider benefits that seem vague and think that it’s impossible to quantify them, but that’s only because we haven’t yet got the discipline to look at them closely enough - We give in to the euphoria of having identified a need and run with it without critically examining it. Or we give in to the fear that if we looked at it too closely it might turn out there wasn’t really a need after all. Discipline gives us the courage to transcend the fear and the willpower to resist this premature euphoria.”
“With patience, perseverance and practice we will learn to identify things in a customer’s life that are inherently valuable. It doesn’t always (rarely, in fact) boil down to the number of dollars a person would save by using an invention. Often the quantification of a benefit may be in terms of intangible but yet quantifiable things - for example, increasing the number of hours of their free time that they would spend with family and friends or on their hobbies, the number of words they have to use to communicate a particular idea, the amount of effort expended (in footsteps or calories, for instance) to get to a certain place, or the number of minutes one could be continuously immersed and engaged in an entertaining or other valuable experience. It may even be some combination or collection of multiple benefits, each of which has its own quantification cell. The important thing is to get this down, and not worry about putting down something incorrect because you will get numerous chances to go back and revise it. Remember that NABC is an iterative framework.”
4. Identifying The Competition and Alternatives
The final section of the Value Proposition — Competition — concerns “what others are and could be doing to address the same need you have identified,” says Venkataraman. “Many times young innovators are bound to think that their idea is so radical that there exists no competition. But that’s a mistake. Every idea and proposal has competition if we look at it closely enough. I appreciate that an empty slate is hard to get started on, so here’s at least one source of competition you can write down for any possible idea… your first competitor is the prospect that users would simply continue to do whatever they’ve been doing in the past to address that need. The number one competitor to your invention is the alternative of not having it.”
“Netflix CEO Reed Hastings made this clear when recently asked by legendary venture capitalist John Doerr who Netflix was competing against. “Really we compete with everything you do to relax,” was his reply according to Christensen in Competing Against Luck. “We compete with video games. We compete with drinking a bottle of wine. That’s a particularly tough one! We compete with other video networks. Playing board games.”
“The source of the difficulty that most people have in identifying competition,” says Venkataraman, “is that they always think of their approach and not the need when trying to find competitors. It’s understandable that the approach takes center stage, of course, because that’s where your secret sauce is—the thing of value you bring to the table, and naturally the thing you feel the greatest affinity for. But to really understand your competition, the NABC framework teaches you to step back and give up being intoxicated by the coolness of your approach for a bit. Think of the need and try to make a list of everything anyone is or could be doing to address the need. Don’t think “Who else is using the same or similar approach as mine to meet that need?” but think “What have people done or could do to meet this need.” If you came up with the idea of sticky tape as a way to fix notices to doors, don’t only think of glue as your competitor. Think of thumbtacks, chalk, email, Facebook, Twitter, Trump and why, even gossip, fake news, and word-of-mouth propagandization as competition."
“Once you identify and make a list of the competitive approaches as exhaustively as you can, you’ll find it to be a list of approaches to solve the original need. Your own approach will now be one of those in the long list. You can now start enumerating the pros and cons of each approach quantitatively. Does a particular competitor reach the same users (market) as your idea will? Does it offer the same benefits? Is it cheaper or more expensive to make? And so on. If the answer to any of these is questions is unfavorable, this is your chance to go back and see if either the need or the approach can be adjusted to accommodate this shortcoming. Feel fortunate that you found this issue now, before investing thousands, if not millions, of dollars into productizing your originally short-sighted idea.”
The Need To Continue To Iterate
“When you’ve looked at all four components of the NABC once,” says Venkataraman, “you get to go back and revisit the Need again, repeating the whole process as many times as needed. Chances are that your original thoughts on what you believed to be the need has changed. So you revise it. Just like a Scientific Theory… you start with the original need, and after having gone through one cycle of analysis, you come back and augment it to account for its shortcomings. You may patch it up here and there, or make fundamental changes. But the bottom line is that as long as the customer’s need is genuine… it would have survived numerous attempts at falsification. Every failed attempt to take it down would only have made it stronger by fortifying it at all its weak spots. So even if nothing else, the NABC practice promises to at least strengthen your value proposition thus.”
Siri on the iPhone exemplified these development steps. It was a spin-out company developed by SRI and then almost immediately bought by Steve Jobs at Apple. An early version of Siri’s NABC value proposition is given here along with a short history of its development.
For most organizations, implementing NABC propositions will be an important shift in the organizational culture. As Carlson notes, “NABC value propositions apply to every position in a company. The framework is simple and fundamental. Just having every conversation in the company start with the customer’s needs is transformational.” To get an idea of what this involves, you can read Curt Carlson’s account of his sixteen-year stint as president and CEO of the SRI and the culture change that he led.
Some of the material in this article will appear in a different form in my forthcoming book, The Age of Agile (Amacom: February 2018).
And read also:
Beyond Agile Operations: How To Achieve The Holy Grail Of Strategic Agility
How To Make The Whole Organization Agile
Fresh Insights in Disruptive Innovation
Follow Steve Denning on Twitter @stevedennning.
