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How great companies innovate

In today's interconnected global marketplace, business innovation is sometimes all that separates a successful company from a failure. But what does innovation really mean for a company, and how can it be applied to achieve tangible benefits? Geoffrey Moore, a high-tech consultant, venture partner and author of Crossing the Chasm and Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution, has spent much of his career asking these very questions. Moore says innovation is about more than just the latest and greatest product to come out of the lab. True innovation, he argues, can have many faces within an organization or industry.

Read excerpts from the interview below and listen to the podcast for the full interview.

ForwardView: Let's begin with your general take on innovation. What does it mean?

Geoffrey Moore: We've always thought of innovation as only being the massively disruptive, total game changer. It's a personal computer instead of a mainframe; it's a cell phone instead of a wired phone. Those are certainly the most dramatic innovations and the ones that people tell the stories about, but most money is actually made by innovation in a much more modest way. The big mistake we see with innovation is that people innovate, but they don't innovate boldly enough. Companies put an enormous amount of R&D into their products, but they didn't get any bargaining power with the consumer coming out the other end. The key lesson of innovation in the last decade has been you either innovate to be just good enough, or innovate far beyond your competitors. To do something in between those two states, which is what most companies do, means you spend a lot of money and you don't get much bargaining power back in return.

ForwardView: And how has your understanding of innovation changed over time?

Geoffrey Moore: The marketplace has become so much more globalized and the competition has become so much more fierce. In the past, we had sort of semi-protected markets. What's happened in the last 20 years, with the Internet changing the entire economy to a global economy, is that you're now competing not only against American car companies and Japanese car companies, for example, but also Korean car companies and German car companies. It's a very rough game, and if you don't take up your innovation skills a notch you're going to be the road kill. Back in the 1970s, I think the vision of innovation was that it centered in labs, and it was sort of an inside-out vision where deep scientific research would be done over a considerable period of time and then it would be monetized through trickle-down innovations. The most highly-funded government agencies or big businesses would fund the innovation, and then gradually it would become more commercial and it would kind of go down the pyramid. I think we've turned that 100 percent on its head in the current economy.

ForwardView: Given this new competitive reality, what approaches to innovation should companies be taking today?

Geoffrey Moore: Now when we talk about innovation, we talk about working from the customer back, not from the lab out. Start by putting yourself in the shoes of the end-user of the product or service, spend time with them, figure out what's unsatisfactory or unattractive about the current experience, and then design backward from there to create new innovations. So you actually design back from the market, which means you reduce market risk considerably and you can get things that are more relevant to market faster. The critical idea here, whether you're in entertainment, whether you're in education, whether you're in healthcare, whether you're in financial services, any business that's a service business, is it's not about you. It's really first and foremost about the customer and then really genuinely thinking through the value proposition with the customer. So I think being really aggressive about getting back to the mission of your service organization can be hugely innovative.

ForwardView: The innovation we've discussed so far is about products and services, but are there other ways companies can innovate?

Geoffrey Moore: If you look at what people care about in very mature categories, it's no longer the features and functions of the product. Basically, a glass is a glass, a cup is a cup. So you start caring about things like the styling of the product, or you care about the buying experience of the product, or if it's an expensive product, you might care about the financial terms of the sale. All of a sudden, the other organizations in the company—be it the sales or marketing organizations or the professional services—are getting a big innovation push in their world. When you bring that back into the company, it starts impacting design decisions and those decisions start impacting manufacturing decisions. Innovation ends up touching every part of the company eventually. And what this Darwinian push is doing to us is it's saying, 'Well, you might not want to change but the world's kind of insisting on it, and if you don't change, there's probably somebody who will and that will put you at risk.'

ForwardView: Innovation is also changing the systems and processes that make the world work—from cars and appliances to power grids. As these systems become more instrumented, intelligent and interconnected, it's making the planet smarter, driving change, growth and even more innovation. From your perspective, what does it mean to do business on a smarter planet?

Geoffrey Moore: This is one of the forces that I think will cause massive investment in the next generation of what I would call "enterprise IT" as opposed to "consumer IT," and basically it's a two-part thing. The first part is people are instrumenting the planet in order to make things work more efficiently. So if you have a smarter grid, or if you have a smart car, or if you have a smart road, or you have a smart water meter, you're doing that in order to get better gas efficiency or better water efficiency or better traffic throughput. But what's amazing is this next level, because the next level is that all these systems create metadata, data about the history of all these operations. All that is innovation based on top of primary systems where the secondary innovation is to find the pattern in the primary and act on it. I think it's going to be a big piece of the business-to-business-to-consumer world, where basically businesses are going to invest heavily in these systems in order to connect with consumers more directly and more effectively.

ForwardView: Your recent book, Dealing with Darwin, talks about disruptive innovation versus continuous innovation. What's the difference?

Geoffrey Moore: An electric car is a disruptive innovation but a hybrid engine is a continuous innovation. I think the issue with innovation in general is, 'Are you getting a return on it?' Are you getting the kind of differentiation you need to get bargaining power? If so, that's certainly one return. Or the other return that we talk a lot about is, 'Are you catching up quickly to somebody else's innovation?' One great example is in the encyclopedia world. Microsoft Encarta was a continuous innovation and an improvement on the Encyclopedia Britannica. But then Wikipedia came along and completely disrupted the entire industry. And so all of a sudden it's like there's no point in trying to assemble the traditional encyclopedia anymore. It's always hard for the incumbents to play it back because the incumbents inevitably are cannibalizing some portion of their own business whereas the challenger is not. So it's so much easier for the challenger to be agile and the trick, as an incumbent, is to take your medicine and try to take it fairly quickly.

ForwardView: What's your advice for midsize companies that are trying to drive innovation?

Geoffrey Moore: You've got to be very market-alert. What you can't do is fall asleep at the wheel. You can't just put it on auto pilot, because at your size your advantage is your ability to change quickly and adapt quickly. Now you don't have to change radically. Again, it depends on what your customers' signals are giving you. But what you must do is invest personally as a leader in those companies in staying in touch with customers and just listening to them. And it's challenging because customers usually don't say exactly what you wanted to hear, but those disconnects are the opportunities for the next successful product or service that you bring to market. Finally, you've got to be really crisp about what it is that you do that's core to you, that's differentiating for you, that you should spend your resources on, and you've got to get very creative about getting everything else off your plate.

ForwardView: What are some of the biggest obstacles to innovation, and what can companies do to overcome them?

Geoffrey Moore: I've actually got a new book coming out this fall about this topic. It's called Escape Velocity: Free Your Company's Future from the Pull of the Past. The pull of the past is essentially the gravitational force of your existing business models and your existing successes. And any time an innovation comes into that ecosystem when it's being invented, when it's kind of off in the far distant future, it actually happily coexists with the current business. But when it starts to come in and compete for sales resources and marketing resources and professional services resources, the existing businesses start saying, 'Well wait a minute, I don't have enough of those to go around already. I'm not going to share those with you.' So it's not hard for the innovator to invent something new; it's hard to get that thing in the marketplace through the same sales and marketing channels that are serving the existing business. Part of the problem is that those channels are being monitored and measured and compensated for their performance in the current fiscal year, and you're not going to get a bigger return from something new than from something established in the current fiscal year. I think we've had too much orientation toward performance and not enough orientation toward building future performance through increasing power in this year. I think we've got to make an adjustment to all of our market-facing capabilities to say, 'Look, there needs to be a better balance here.' You still have to make your performance in the current year, but it can't be 100 percent about that. We have to see some accountability toward creating future positions of power, or else all you're going to do is liquidate the company.

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