Portfolio strategy and governance for innovation.
“It’s not about whether elephants can win out over ants. The question is whether a particular elephant can dance. If possible, the ants should leave the dance floor. —Louis V. Gerstner, Jr.
How is a company the size of Amazon constantly innovating? They don’t expect innovation, they have an innovation system. They focus on the inputs knowing that the outputs will come. How to make an elephant dance?
If you study Amazon like me, you’ll realize that there are a few tips and approaches that can help an elephant – or any business – innovate.
The most important decisions made by senior management are where to put their resources. The essence of strategy is deciding what to say yes to and what to say no to. As with any investment portfolio, there are likely to be low risk, low return, and higher risk and higher return investments. Here are a few tips.
INVEST AS A VENTURE CAPITAL FIRM AND CREATE AN INNOVATION PORTFOLIO
Many companies crush innovation and invention because they want predictable results – a predictable amount of time, predictable investments, predictable financial returns with moderate risk. This is how a private equity firm invests. There are times when it’s the right mindset.
For example, you need to understand the returns and risks when improving and automating an internal process, building a new distribution center, or implementing a marketing system.
These need to have a clear business case and understand what is required for success to occur. But when you create new innovative client features or develop new lines of business, your investments, risks and returns will be more difficult to predict. In this case, the job of a successful innovator is to act like a venture capital firm.
The key is to maintain a balanced investment portfolio and understand the differences between its segments. High risk investments should be small experiments to prove key aspects before scale up. Think big but act small.
DEDICATE A SENIOR DIRECTOR CAPABLE OF INITIATIVE
In many businesses, you can identify the cachet of a leader by the workforce and the expense budget they manage. This is not the case at Amazon, where seniors are often dedicated to making new big bets. It has a unique and smart name – one leader. This leader “obsesses” with leading the initiative towards success.
They need to be old enough to have reach and influence within the organization and know how to get things done. But what usually happens in companies – top executives aren’t ‘one-wire’ and the ‘big bet’ is just one goal on their list, and usually not the top priority. .
CREATE THE RIGHT METRICS AND OBJECTIVES
Spend a lot of time debating and designing the parameters and measures of the initiatives. The most important are customer experience metrics and adoption metrics. At Amazon, we spent as much time debating and designing the parameters of the initiative as we would on the actual design.
It’s fine to try to develop the overall business case, but from the start the real financial metric to understand is the unit economy – customer acquisition costs, order fulfillment cost, lifetime value. of a client. Predict where that unit economic data needs to evolve in order to have the right gross margins in the business – then these are the goals of scaling. Understanding the addressable market is essential from the start, but real business cases can be both impossible and misleading.
BUILD SMALL INTEGRATED MULTIDISCIPLINARY TEAMS
Amazon has two basic rules for building teams that think and act innovatively. The first is to create a team made up of people from various disciplines and backgrounds. Unique ideas and the ability to execute them usually come from teams that can think broadly.
The second golden rule is to focus on small teams. Amazon often quantifies this as a “team of two pizzas”. In other words, you should be able to feed your entire team with two pizzas. This means no more than 8-10 people. Two-Pizza teams don’t just have capacity. They are also responsible for everything from market definition and product roadmap to construction and operations. (See Idea 20, “Pizza for everyone!”)
CREATE AN INCREDIBLY BETTER PRODUCT OR SERVICE
Ultimately, the above ingredients cannot make a simple good product or service. It must be unbelievably good. Like the jaws on the ground, it’s good. This is not a marginal improvement. It is not a “completely new, but still average” product. Successful innovation translates into an incredible experience, at the right price. It surprises users and very quickly becomes essential to your customers. New products and features win in the market because they solve a customer problem, a pain point, and have “killer features”.
It should be at the center of your innovations – the customer and the problem you are going to solve for them. Before you build anything, try to clarify what this “customer superpower” is. At Amazon, we talked about “starting with the customer and working backwards”. By writing stories, future press releases, FAQs, and low-fidelity prototypes, we were working to better understand the customer, their job at hand, and how we were going to delight them.
These are just a few ideas to help get the big elephant moving. Successful strategies depend on strong leadership – the good approaches made possible by weak leadership will fail. Leaders need to be deeply involved, have great instincts, and be prepared to stick with it when the going is tough.
Written by John Rossman.