Business Harmony

Someone recently asked me the question, “What is [business] strategy?”  Given that I call myself a “business strategy consultant,” I was disappointed to find myself fumbling around for an answer. I only managed to cobble together some vague metaphors involving “horizons” and “guiding lights.”

So what is strategy?

I should have a much clearer and more concise answer to this question, if for no other reason than to keep a better response at the ready for dinner parties when inevitably someone wants to know, “What do you do?”

When Porter came up with the Five Forces, strategy described at a high level how your company contended with these forces and beat the competition in the war for profits.  The martial language is both intentional and appropriate since the concept of strategy originated in military theory.

But Porter’s Monitor Group is now defunct, acquired by Deloitte under duress.  In an age when the pace of change from technological advancement is ever increasing, no competitive advantage is truly sustainable, and customers are better informed than ever about their available options. Simply aspiring to beat the competition will not suffice.

Firms need a more meaningful reason for being.  Call it a mission, vision or something else, they need something with which both their customers and their employees can identify.  That’s where strategy for the new era needs to begin – with the impact your company is trying to have on the world, above and beyond beating your competition.

Nonetheless, the Miltonian mandate to make money must also be heeded.  Strategy doesn’t stop with impact alone (outside of the social sector).   Rather, good strategy also identifies valuable problems to be solved and customers to be served who are willing to pay for that value.

Of course, competitors cannot be disregarded entirely in all this, but it makes no more sense to let your competitors drive your strategy than it does to drive your car looking in your rear view mirrors.  You might glance in the rear view from time-to-time, but your gaze generally remains out front on the road ahead of you.

Shifting the focus away from competitors and over to impact and customers and their problems actually leads to a more robust and responsive strategy.  Firms can better anticipate threats from disruptive new entrants and are more likely to recognize attractive opportunities in market adjacencies.

As I’ve considered my answer to the question, “what is strategy,” my conclusions have become more consequential than merely offering a new definition.  The time has come to replace the notion of business strategy entirely.  Music seems a more fitting analogy now than does war.

Imagine if we changed the conversation to be instead about winning business harmonies; rather than tactics, we discussed melodies; and in place of command and control hierarchies and processes, we empowered employees to improvise like jazz musicians.

What is business harmony then?  The broad targeting of people (consumers) and problems in the market that in turn guides organizational decision making, coordinates disparate activities, and ensures a consonant impact from a collective effort.

Just call me a business harmony consultant.

Innovation is like a Chemical Reaction

Sometimes a picture is just better . . .

A powerful analogy for innovation.

Catalysts are problems in need of a solution.

Adding heat means tapping into the passion of the individuals working on the problem.

Increasing the surface area amounts to opening up your organization and exposing it to more ideas.

Motion comes from changing the context – just mentally re-framing things in a new way or even physically moving your location, as you might do with an offsite.

When they all come together, there’s a transformative reaction.

Stress is the enemy of creativity

It’s been a while. Did you miss me?

Since I started this blog as a creative outlet to complement my day job, I have always tried to keep up a cadence of roughly one post per month, but I always let inspiration be the real metronome. If I was feeling particularly contemplative, I might queue up a couple posts at once to help keep the pace over slower periods.

Until recently, I have been decidedly uninspired, hence the lack of posts. There were just no topic coming to mind that I wanted to explore further in written word. Although I was reading as many books and articles as ever, nothing was all that provocative. Even after SXSW in March, zip (ok, maybe a few notes on topics I wanted to revisit later).

Writers block. Where does it come from and how can it be dealt with?

Creativity in all its forms seems to be a matter of pattern formation, all the way down to the neuronal level. Recognizing patterns where none are readily apparent. Constructing patterns that are both nuanced and pleasing. So why is it the patterns seemed to have been escaping my attention recently? What’s changed?

When I looked back at the date of my last posts (including one I never published), the dates seemed to coincide with when I decided I was ready for a change of scenery and prepared to move from the Bay Area to Southern California. Maybe there was more than coincidence or correlation at play here; maybe there was a cause.

Influenced by some work I did recently on telematics and the Connected Car, I came to suspect writers block might have something to do with cognitive load. Turns out cognition is a scarce resource. It stands to reason, then, that preoccupation with one thing or another would have a crowding out effect.

I hypothesize that concerns about my move – clearing things with my employer, finding a new apartment, moving out of my old apartment, packing up and transporting my life from one city to another – left very little to get creative and write about.

At the risk of extrapolating personal experience out too far, this hypothesis would seem to be consistent with social and cultural evolution. The arts and sciences have flourished in societies and periods of relative stability. If you’re worried about where you’re going to get your next meal, there’s no point pontificating on your navel.

This would also support practices such as Google’s famous 80/20 rule. If you want your people to innovate, you need to leave enough slack in the line for them to (mentally) explore a bit.

Bottom line, stress is the enemy of creativity. A happier workforce is going to be a more innovative workforce.

Well I’m back and feeling much more inspired.

Mapping Partner Relationships

While spending some time recently in NYC, having gotten through all the reading I brought with me more quickly than expected, I decided to do a quick re-read of The Innovator’s Solution.  It is the first place I can recall seeing  ”value networks” used in place of “value chains,” and so I began reflecting on the notion of value networks further.

“Value networks” suggests new complexity to creating what Geoffrey Moore calls a whole offering.  Value isn’t created sequentially, in a chain similar to the assembly lines of the factory system.  Value comes from multiple partners working in parallel value chains that assemble together into a larger network of value for customers.  Think about the value of the iPhone that is derived from the phone itself, the infrastructure provided by mobile carriers, and the population of app developers.

Companies need to be comfortable operating in these sorts of large and complex value networks.  They need to know where they sit within a given value network, and understand the relative position of their competitors and partners in theirs and other value networks.

Partner network development and management has become a business critical capability, enabling companies to take advantage of both open innovation and outsourcing and alerting companies to emergent opportunities and threats in adjacent markets.

It occurred to me that relative to its importance, little is available to aid firms in developing this competency.  Managers and executives need tools and frameworks to help design strategically advantageous partner relationships and actively manage partner networks.  While originally intended to help companies craft an open innovation strategy, the strategic openness matrix I started working on a few weeks back could help solve this problem.

Replacing research areas with capabilities, managers and executives could use the matrix to determine the capabilities most important to differentiation and competitive advantage (the so-called core) and those that are necessary but undifferentiated (sometimes referred to as context or periphery).  Core would be targeted for internal investment while context might be outsourced to a more capable partner.  Should the focal firm already be a leader in a “context” capability, offering that capability as a service to others may present an opportunity to launch and grow a new business (e.g. think Amazon Web Services).

What about selecting partners and designing (yes, willfully designing) the dynamics between partners?  For that I have drawn inspiration from Osterwalder’s business model canvas and customer value map.  I created what I’m calling (for now) the partner relationship map (referred to as “the map” for the remainder of this post).  As with the strategic openness matrix, I am making this early version available under a creative commons license so that others might build off of and improve what I started.

The map is separated into three sections.  On either side of the map are the sections representing the focal firm and the partner firm (which side is which is an arbitrary decision really).  Each firm/partner is endowed with a unique set of resources and capabilities that it employs in the service of specific customers and according to identifiable business imperatives, all of which is reflected in the map.

The middle section represents the interface between the two firms.  The interface is characterized by the level of interdependence and integration between the two firms.  Two firms might be highly interdependent with a customized interface that approaches vertical integration.  Of course, tight integration does not require mutual dependence (is Apple really dependent on any one developer for its iOS platform?), and such asymmetries  create business risk that must be recognized and actively managed.

The inverse of a tightly integrated interface would be a modular interface, characterized by a high level of standardization that allows firms to easily swap out one partner for another (or be swapped out).  Returning to the example of iOS, its noteworthy that from the perspective of the app developer, the app it is creating will only run on iOS and must be modified for Android, implying tight integration between the app and the platform.  From the perspective of Apple, the interface is standardized so that any app developer can plug into the iOS platform.  At the interface, perspective and directionality matters.  To understand how, it helps next to consider the arrows going in either direction labeled value proposition.

Firms present a value proposition not just to customers but also to partners.  In a partner relationship, there is an exchange of value, as reflected by the reciprocal value propositions in the map.  The partner uses its resources and capabilities to offer some value in service to the focal firm’s business imperatives or in service of its customer segments.  In return, the firm offers the same, perhaps most commonly in the form of a payment that serves the partners imperative to grow revenues and make a profit.

The value proposition of the firm may be appealing to lots of partners of the same sort (e.g. SFDC, Wal-Mart, and Amazon all offer valuable platforms to their partners) or only a few.  The value proposition of the partner may, too, be appealing to lots of firms (think of outsourcers all the companies they serve) or only a few.

Let’s consider another case of a focal firm that has created a valuable platform which its partners can leverage to reach their customers.  Facebook is one such case, with its partner Zynga.  From Facebook’s perspective, it has created a modular interface, accessible to all sorts of partners, Zynga included.  Facebook offers access to a large population of users who frequent the site.  From Zynga’s perspective, the interface is highly customized; offerings have to be built or adapted in some way to plug into the Facebook platform specifically.  Zynga enriches the Facebook user experience with fun games, but lots of other companies could offer a similar value proposition.

The partner relationship map can be used to identify these sorts of power asymmetries.  They can also be used to come up with win-win partnerships that balance out the power and value propositions on both sides.  I’d invite anyone who has gotten to the end of this post to try out the map; draw out one of your partner relationships or the partner relationships of an example company and reply in the comments with your thoughts on how useful the map is and how it might be improved.

Mastery Feedback Loops and Performance Support Groups

I recently participated in another hackathon with the Management Innovation Exchange, and I decided to re-post what I came up with here because I’ve posted before on similar themes in the past, perhaps with a more complaintive tone.  My hope is that this blog can be more about solutions than just enumerating the problems.

The (unpleasant) experience of going through our performance review process at work this summer, primed by Dan Ariely’s book The Upside of Irrationality (even better than Predictably Irrational), left questioning a lot about how we management talent.  In particular, I began to wonder whether coupling performance feedback with compensation and promotion decisions really makes the most sense.

If we got back to first principles, would the two still be coupled?  Does the performance review actually better inform compensation or does compensation distract from providing and receiving valuable feedback?  Do raises and bonuses reinforce the feedback loop of performance reviews or frustrate intrinsic motivations?  Do the business needs to award raises on a fiscal calendar compromise the timeliness and relevance of the associated performance feedback?

The hypotheses I came up with to answer these questions all went into the system of mastery feedback loops described below and the performance support groups I suggested as a near term way of realizing some of the benefits.

The name “Mastery Feedback Loops” is derived from Daniel Pinks’ Drive.  In it, he identifies three intrinsic motivations in the workplace: purpose, autonomy and mastery (to which I would also add identity, to account for the social nature of the human animal, but that’s another discussion).  The practice formerly known as performance management needs to be better aligned with these intrinsic motivations.  For that reason, mastery feedback loops would differ in three important ways:

1. The focus would be on mastery of capabilities - Instead of obsessing on backward looking metrics, the goal would be to constantly improve and make appropriate investments in a firm’s talent (even when that means “reallocating resources” away from underperforming talent).  Coaches, rather than managers, would help individuals identify the capabilities that are important to the success of the business (collective, purpose-driven goals) as well as the individuals ongoing professional development (autonomous goals).  Metrics would then be set to monitor progress toward the ideal mastery of those capabilities.
2. The process would be decoupled from compensation and promotions - Tying feedback to promotions and raises only increases the stress and negative emotion from both receiving and giving constructive criticism.  Taking that out of the equation returns the focus to where it should be – continuous improvement, kaizen for the individual.  Concerns about that next bump up create a distraction and can poison the employee/manager relationship.  Money may also not be the best way to motivate the desired behaviors.
3. Feedback would be social and continuous - Freed from the strictures of the fiscal calendar, feedback could be delivered with more frequency so individuals can monitor their progress on an ongoing basis, helping to set the stage for flow in the workplace.  Brining in a greater variety of perspectives will improve the quality of feedback and incentives for improving, helping individuals understand how they are perceived by all parts of the organization (social esteem being important to human happiness).

An interesting area for further investigation might also be how to align performance management better to the intrinsic motivations of groups as well as individuals.  As the social behavior of hives and swarms suggest, it cannot just be assumed that the same intrinsic motivations will dominate in a group.

The management hack “Just-in-time Teams” suggests some ideas for how mastery feedback loops might be implemented, bottoms up.

• Organize into groups of 7-13 individuals, ideally around specific capabilities or competencies that the constituents are looking to develop or that are important to their roles at the company
• Meet regularly (weekly if possible) for an hour or so over coffee (or other refreshments) in something like a performance support group (hmmm, maybe that’s what we should call this hack)
• Working together without any nominated leader, set mastery goals for each person in the group; maybe assign some at home individual pre-work so the process moves quickly while meeting
• Help “coffee chat” members set specific metrics to monitor their progress toward mastery and figure out how to take the necessary measurements
• Each week (two weeks or month), discuss where each person is at and provide advice on how to improve
• Use an online tool (e.g. wiki, Google Site, etc.) to post metrics of progress and to solicit and provide feedback asynchronously
• At the end of the year and start of the formal performance review, prepare documentation on each group member, signed collectively by the group, recording how that person’s performance has changed over the course of the year; this document can be brought into conversations with management as an additional data point in the review/evaluation/appraisal and help make the case for promotions and raises where appropriate

Visit http://www.mixhackathon.org/hackathon/getting-performance-without-performance-management to read the original post as well as other hacks of the same sort.

Strategic Openness Matrix

In my last post I discussed aspects of the execution gap at most companies when it comes to innovation.  At the end, I posed a couple thought questions because these were questions I myself have been thinking about for some time, albeit in other contexts.  In particular, I’ve wondered a lot about how companies can better define an open innovation strategy.

Open Innovation Fallacies

I’ve noticed a lot of confusion around the topic and meaning of open innovation.  The term has become misconstrued over time, often mistaken as being simply synonymous with crowdsourcing.  Open innovation is actually a two way street, with ideas flowing into and out from a firm’s boundaries.  Open innovation is characterized by that permeability, no the directionality.

Another mistake is to conclude the increased flow of ideas implies a loss of strategic focus.  To the contrary, open innovation should allow for greater focus.  Rather than waste resources trying to squeeze a square peg into a round hole, innovative ideas that do not fit well with a firm’s strategy and/or business model can be made available to others to monetize.  Similarly, firms can also focus limited resources on the most important, differentiating R&D and open themselves up to outside ideas in areas further from their core competitive advantage.

Most importantly, open innovation is not an innovation panacea.  It should not entirely supplant other sources of innovation – specifically, innovation driven by traditional R&D.  Open innovation, in all its various forms (e.g. crowdsourcing, M&A, joint ventures, innovation contests, etc.), should be used in combination with R&D investing to reach a firm’s innovation objectives.

Each of these fallacies leads to a misapplication of the principles of open innovation.  So how do you know what innovation projects you should be opening up to others outside your firm and what you should continue to protect and incubate inside a walled garden?

The Strategic Openness Matrix

That is the essential questions I have tried to answer with an initial version (call this v0.1) of what I am referring to as the Strategic Openness Matrix (please, help me come up with a better name!).  I’ve really just repurposed the House of Quality (HOQ) matrix from Quality Function Deployment (QFD) to build a tool that will help companies craft an open innovation strategy.  (Note: I’ll assume some basic familiarity with the HOQ matrix in the explanation that follows.  A good primer can be found here.)

To build this matrix, I’ve started with a strategy canvas from Blue Ocean Strategy rather than the voice-of-the-customer as I would with the HOQ matrix (go here to learn more about the strategy canvas itself).  For expediency, I used a canvas that I created for a previous discussion of online music services as an illustrative example.  Each of the competitive factors in the canvas along with its corresponding value are listed on the left hand side on the y-axis.  For reference, I’ve also included some generic competitive benchmarks of the same (don’t get hung up on the values; it’s all just illustrative).

Relationships between Competitive Factors and Research

At the top, along the x-axis, are all the top level areas of research – what I’m calling L1 or Level 1 research areas.  As you’ll see in a bit, each top level area of research can be broken down into a number of more specific, component research areas – Level 2 and then potentially further into Level 3 and so on to the desired level of granularity.  If the competitive factors are the “what’s” from the HOQ matrix, these are the “how’s” from the HOQ.

I’ve also indicated at the top an estimate of the firms current research capabilities in a given area.  This could be a somewhat objective estimate – based on access to specialized lab equipment for instance – or highly subjective.  With only three possible values – leading, lagging, and pacing – even a guesstimate will suffice.

For each competitive factor, we rate the relationship to each research area on a scale of 1-10, to be consistent with the scale used in the strategy canvas.  Really the scale is somewhat arbitrary since what will ultimately matter are the relative scores calculated from these numbers, not the absolute scores.  In any event, these relationship values are entered at the intersection of the rows and columns, with 1 being a weak relationship and 10 being  strong.

The Research Importance Score

For each research area I calculated a research important score by first multiplying the strategic importance rating of each competitive factor with the relationship rating for that same factor (so 8, the strategic importance rating for Undirected Listening, multiplied by 10, the relationship score with Automated Song Selection Algorithm). I then summed up all those values and divided by 10 to get my research importance score (dividing by 10 is, again, because scale is arbitrary here).  This follows the same procedure as the HOQ matrix.

To illustrate with an example, for the first L1 Research Area on the left, Automated Song Selection Algorithm, the math comes out to (8×10 + 3×3 + 6×0 + 5×6 + 3×6 + 9×6 + 7×8)/10 = 24.7.  In the beginning of the polynomial equation, 8 is the strategic importance rating for Undirected Listening and 10 is the relationship score with Automated Song Selection Algorithm.  24.7 is the total research importance score.

If the math is confusing, try looking at the spreadsheet by clicking on the image and downloading it from Box.  The used logic is that the more important the competitive factor and the stronger the relationship, the higher the research importance score should be.  The more relationships to the various competitive factors, the higher the score should be as well.  I’ll explain how to the score is used shortly, but for now, just think of it as a proxy for the strategic importance an area of research, as the name implies.

Synergies and Trade-offs

There is another relationship to be considered also which I haven’t mentioned yet, the relationship between research areas.  This is the “roof” in the HOQ matrix.  The correlation adjustment is intended to increase or decrease the research importance score to account for synergies and trade-offs.

The math may get confusing again here.  For a given research area, I assigned a correlation coefficient with each of the other research areas (this appear in a separate table on a different tab, “L1 Research Correlations”) and multiplied those correlation coefficients by the corresponding research importance score for each research area.

Confused?  Here’s the logic.  The higher the positive correlation a research area has with other research areas, the higher the adjustment should be.  If a research area creates a lot of good synergies, it’s going to be more important to a firm.  If there’s a negative correlation – a trade-off with another research area – that is a negative adjustment.  There is an opportunity cost to consider from the trade-off.

Adding the strategic importance score and the correlation adjustment, I can now calculate a net score for each research area.  Next, I stack rank these net scores – the higher the score, the higher the ranking, and I identify the top, 2nd, 3rd and bottom quartiles (these cells are hidden in the spreadsheet I created).

The Strategic Recommendations

The final step is to apply some logic to recommend how the firm should handle a given area of research.  The logic I’ve used probably needs to be more finely tuned but works fine for a proof of concept.  The logic looks at the relative strategic importance score (specifically where in the stack ranking and quartiles it falls) and where the firm’s current research capabilities are.  Here it is laid out in plain-ish English:

• Lagging and relatively unimportant, Partner Openly to innovate
• Lagging and relatively important, Over Invest (internally) or Acquire to close the gap
• Pacing and relatively unimportant, Partner Strategically to amplify minimal internal investments
• Pacing and relatively important, continue to Invest internally to keep from falling behind but don’t share too much, allowing others who are “drafting” behind your research to actually jump ahead
• Leading and relatively unimportant, consider additional ways to Monetize the research externally (generating more funds for internal innovation) or Reallocate some fund away to more important areas
• Leading and relatively important, Protect the R&D investments supporting your competitive advantage

These recommended actions are not strict rules but rather suggestive indicators, guidance for management and additional perspectives to consider.  I was pleasantly surprise by some of the recommendations the logic actually makes.  For instance, in this example, I have placed a high priority on Sociality (see the original blog post to understand more about what Sociality means).  The research most strongly related to Sociality is Synchronous Sharing and Communication.  You might think this would be an area to Protect if the firm is Leading or an area to Over Invest/Acquire if it is Lagging, but that’s not the recommendation the logic produces when you consider all the other competitive factors and research areas.

Synchronous Sharing and Communication gets a relatively lower importance score because it has a weaker relationship to the other competitive factors and only modest correlation with the other research.  If the firm is leading, it might consider alternate monetization options (firms not in music that could use technology for adding communications features to their products) or reallocate resources away to other deserving areas.  If the firm is lagging, it should consider partnering openly, perhaps integrating with instant messenger or VOIP partners rather than going it alone because closing the R&D capabilities gap would be to large a drain on resources.

This is precisely the kind of thought provoking results a tool or framework should produce, overriding our mental biases and forcing us to think different!  Another interesting result from the tool is that if everything is lagging, the resulting recommendations are a very focused innovation strategy.  Put everything into the few most important research areas, partner openly with others to close the gap for all the rest.

Getting Granular

I’ve begun to build out the L2 section of the tool as well.  It normalizes the net research importance score to get back to a value between 1 and 10.  From there, it is more of the same except starting with the L1 research areas on the left hand y-axis.  The resulting importance scores will allow the higher level recommendations to be overridden for a more precise handling of the lower level innovation projects.

I am really excited about this tool  (or does this qualify as a framework?), but it is still just v0.1.  It can only get better with feedback from others so following the example of Alex Osterwalder and the business model canvas, I’m making it available here under a Creative Commons license.  Please cite this blog if you use it and make any derivative works available under an equivalent Creative Commons license.  Share this post on Twitter or Facebook, and please post comments for ways you think it might be improved.

Strategic Openness Matrix by openopine.wordpress.com is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.

Managing Innovation

There is no shortage of books and consultancies purporting to help companies be more innovative, but I have found a great deal of the focus is on generating ideas.  There still seems to be unmet demand for help selecting ideas, turning those ideas into a portfolio of strategically aligned projects, and managing that portfolio of projects overtime – particularly as it relates to incorporating new learnings back into the portfolio, reallocating resources across the portfolio when appropriate, and understanding when and how to scale good ideas to transform the business.

I find this “job-to-be-done” particularly interesting because (relatively) recent research from Jim Collins suggests that being innovative, while important, is not the most important factor to the overall competitiveness and success of a company.  As PARC Chief Business Officer Tamara St. Claire put it in an MIT Technology Review article, “You learn early on that execution is often the hard part—execution and timing . . . You almost have to be as innovative in the commercialization—especially when you have game-changing technologies—as on the technology side.”

A number of technology solutions have emerged to help manage the innovation process, such as Spigit and Brightidea, and other social enterprise solutions are sure to add more innovation management feature sets (indeed Jive already has).  These software companies are also staffing consulting teams to drive adoption  within client teams and teach  clients how to get the most value from their solutions because the technology, in essence, has outpaced the development of people and processes to use it.

Letting technology drive the development of people and processes reverses the normal order.  I firmly believe whenever possible technology should be fit to behavior and not the other way around; otherwise, disappointing adoption could completely undermine the value of the new tool.

That’s why relying on captive consulting teams at software providers to develop your innovation management capabilities is so misguided.  Firms need a more objective third party to drive the necessary changes in people and processes first, then recommend the technology solution that fits best.

It seems to me this would be an excellent opportunity for management consultancies to partner with design and innovation consultancies to combine their complementary domain expertise and go after this market opportunity.  What if Six Sigma frameworks could be re-purposed to help companies understand not where they need to improve quality but where to innovate?  How might the PMI body of knowledge look different when applied specifically to innovation projects, valuing validated learnings over vanity metrics and immediate financial return?