Zone to win
The one book to read if you are on the management team of a large corporation is “Zone to Win: Organising to Compete in an Age of Disruption” by Geoffrey A. Moore. Intrapreneurship and innovation are hard for large corporations. As CEO you are constantly facing a crisis of prioritisation and organisation.
- How do you segregate disruptive innovation incubating or scaling new products or business opportunities from sustaining innovation, making improvements to existing entities?
- How do you t separate revenue performance and financial commitments from the more established parts of the business that are funding and resourcing new product and businesses opportunities?
You do not have a choice. If you are in high tech, or for that matter in any other sector characterised by recurrent disruption, you can’t sit still. You simply have to be a growth company. If all you are doing is optimising your current market positions, you are a sitting duck.
You need to find a rising tide to float your boat
Investors were rewarding Apple for catching three new category waves (digital music, smartphones, and tablets), Salesforce for catching two (cloud platform as a service and cloud marketing automation), and Amazon for catching a single whopper (cloud computing as a service). The key takeaway here from a growth investor’s perspective is that when it comes to generating serious upside returns, catching the next wave is all that really matters.
Here is a list of some of the companies that have missed the next wave. Burroughs • Sperry Univac • Honeywell • Control Data • MSA • McCormack & Dodge • Cullinet • Cincom • ADR • CA • DEC • Data General • Wang • Prime • Tandem • Daisy • Calma • Valid • Apollo • Silicon Graphics • Sun • Atari • Osborne • Commodore • Casio Palm • Sega • WordPerfect • Lotus • Ashton Tate • Borland • Informix • Ingres • Sybase • BEA • Seibel • PowerSoft • Nortel • Lucent • 3Com • Banyan • Novell • Pacific Bell • Qwest • America West • Nynex • Bell South • Netscape • MySpace • Inktomi • Ask Jeeves • AOL • Blackberry • Motorola • Nokia • Sony
Crisis of prioritisation
Catching a wave or adding a new line of business to an existing portfolio creates a crisis of prioritisation. Such efforts are easy to get started, but as momentum begins to build it becomes increasingly clear that there are not going to be enough resources to go around, so how are they going to get allocated? Marketing, selling, servicing, and partnering in any emerging category are radically inefficient processes, especially when compared to established lines of business. Scaling a single disruptive innovation can easily absorb 10 per cent or more of your total go-to-market envelope before adoption reaches the tipping point.
The standard playbook for strategic portfolio management calls for you not to put all your eggs in one basket! That may sound like good advice until you realise it brought all fifty-six of the companies we listed to their knees. When a go-to-market organisation is charged to scale two or more new franchises while at the same time being expected to make the numbers in the established lines of business, anyone with experience knows this is simply not going to happen. When it comes to making a big bet on your next big thing, pick one.
This brings us to the heart of the crisis of prioritisation: At the core, you must deliver on two conflicting objectives. On the one hand, you must maintain your established franchises for the life of their respective business models, adjusting to declining revenue growth by optimising for increasing earnings growth. At the same time, every decade or so you must get your company into one net new line of business that has exceptionally high revenue growth.
He gives a fantastic framework to structure intrapreneurship. Defence and offence, time horizons and four principal zones. The zones are performance, productivity, incubation and transformation. It is not that different from solid, fluid and superfluid in “The day after tomorrow”.
The question you want to answer at the outset, therefore, is whether you are being disrupted at the level of your infrastructure model, your operating model, or your business model. Business model disruptions are where all the train wrecks happen. No established enterprise can reasonably expect to change its core business model, ever. All that stuff about how you have to learn to disrupt yourself—it’s baloney. It can’t be done. So what must you do instead to prevent the next wave from catching you?
You must race to modernise your existing operating model as best you can, incorporating enough of the next-generation technology to at least blunt the impact of the disruptor in the short term. Second, in parallel, you must turn to your own portfolio of next-generation opportunities to accelerate your progress toward catching some other wave of disruption emerging.
Use your assets
The good news is that you have massively impactful assets such as global distribution, worldwide support systems, brand recognition, extensive ecosystems, strong balance sheets, predictable cash flow, etc. Your number-one asset is the inertial momentum of your installed customer base. Your number-two asset is an ecosystem of partners that makes its living adding value to your established offerings.
The three time horizons
Horizon 1: In the coming fiscal year, making it accretive to the operating plan.
Horizon 2: In two to three years, following significant negative cash flow in the intervening period, making it dilutive to the operating plan.
Horizon 3: In three to five years, consisting primarily of research and development that is funded so as not to be dilutive to the operating plan.
The Performance Zone
This zone is the engine room for operating established franchises on proven business models. The focus is on material revenue performance derived from established businesses that are sustaining to the status quo. These are people who pride themselves on delivering the goods—on time, on spec, and on a budget—and making the number—quarter after quarter after quarter. The importance of maintaining the viability of the performance zone can hardly be overstated. It is the source of more than 90 per cent of the enterprise’s revenues and well north of 100 per cent of its profits.
The Productivity Zone
The productivity zone is home to a host of enabling investments in shared services. All managed as cost centres. These include marketing, central engineering, technical support, manufacturing, supply chain, customer service, human resources, IT, legal, finance, and administration. Simply put, any function in the corporation that does not have direct accountability for a material revenue number goes here. The focus is on applying sustaining innovation to productivity-enabling initiatives targeted primarily at the performance zone
The Incubation Zone
The incubation zone hosts the fast-growing offers in emerging categories and markets that are not yet producing a material amount of revenue. Its focus is to catch the next big wave. Where any significant return on investment is several years out, and revenues for this zone’s portfolio are in aggregate no more than a per cent or two. It is a staging area for substantial businesses, a base camp within which one can scale to $100M or more in revenues (the 1 per cent threshold for a $10B enterprise) without leaving the zone. One of its first moves is to scour the incubation zone for any technology that can help it modernise its operating model to fend off the disruptive attack. In this context, a technology that was once envisioned as a platform for proactively disrupting someone else’s business model is now converted into a tool for reactively propping up one’s own. The incubation zone represents precious real estate that should not be confused with experimentation with next-generation technologies and business models.
The Transformation Zone
The transformation zone is the place in an established disruptive business model goes to be scaled to material size. The goal is to scale rapidly to a stable, material, new line of business, one that constitutes 10 per cent or more of the enterprise’s current revenues, on a growth trajectory that promises both increased size and superior profitability. Transformation is a time when any principle of conventional management wisdom may not be just wrong but fatal. Force-feeding a new business model into the performance zone or re-engineering an existing operating model to give a legacy business a new lease on life are both fundamentally unnatural acts.
Each zone has its own distinctive dynamics—one for revenue performance in the current year, one for productivity initiatives to foster and fuel that performance, one for incubating future innovations, and one for taking such innovations to scale.
Each zone follows its own local playbook. None of these four local playbooks is likely to be unfamiliar to you. There are no radical prescriptions in zone management. Rather, what is radical is, first, for executive management to explicitly distribute operations across the four zones and to seek different outcomes within each one, and second, for operational leaders to play within their assigned zones, following the playbook appropriate to each one and collaborating respectfully with other members of the enterprise who are executing different playbooks. Once an initiative is “zoned,” that establishes the nature of its activity and the metrics upon which it will be evaluated. At its core is a simple idea based on the observation that startups routinely outperform incumbents in disrupted markets. How come? Because they are not conflicted. All their enemies are outside them.
- The performance zone is the primary focus of the senior operating team, with an emphasis on steady management as opposed to bold leadership. This is your revenue engine.
- The productivity zone spends most of its time targeting efficiencies to be gained by improving operations in the performance zone. Its primary goal is to extract resources from non-core work—what we call context—in order to either invest more in core tasks or take the savings to the bottom line.
- The incubation zone will have a number of things cooking at any given point in time.
- Because transformations are expensive, risky, and exhausting, in most years the transformation zone is likely to be empty. You only need one every decade. That transformation is likely to take three years and be brutally painful, so you will want plenty of time both to reap its rewards and recover from the experience. This is the time for bold leadership, with prudent management just having to hold on for dear life. You have put a single opportunity into the chute. All other potential disruptions have been put on hold.
- Overall, the four zones should always be operating in harmony.
Executive teams typically commit the following kinds of errors:
- Overrotating to the performance zone.
- Coasting in the productivity zone.
- Mistaking the incubation zone for the transformation zone.
- Failing to implement a transformation zone.
- The strategy of maintaining multiple options leads inevitably to undertaking more than one transformation at a time. The ensuing scramble for resources results in no transformational initiative getting anything like the prioritisation it needs to succeed. The end result is a discouraging sequence of marginalised initiatives, each too small to make any difference to investors, each too big to just shut down and walk away from.
- Install a governance model that segregates the four zones from one another.
- Do not let the methods, metrics, or culture of the performance zone infiltrate the governance of either the incubation or the transformation zone.
- Establish and implement best practices in each zone independently (including how it interfaces with the other three).
- Overlay a lightweight corporate system to oversee all four zones in parallel. All the real work is done within each of the four zones, but annual planning, resource allocation, and the quarterly business reviews need to be managed across all four while keeping each distinct from the other three.
Incubation as the engine
The incubation zone is the most critical as it is the pump for the new opportunities:
- Each entity in the incubation zone operates as an Independent Operating Unit (IOU) with its own general manager and dedicated resources for product development, product delivery, sales, and marketing.
- The IOUs themselves are funded outboard of the annual planning calendar, based on milestone target dates that are not expected to align with the fiscal
- The incubation zone as a whole is governed by a venture board.
- The entire portfolio of IOUs in the incubation zone is supported by a small team of liaisons to the various shared services in the productivity zone.
- Each IOU is subject to a venture-funding discipline that requires meeting specific milestones to secure the next round.
- When IOUs fail to reach a milestone, they will often warrant getting a second chance. They normally will not deserve a third.
- The incubation zone is directly comparable to running a venture-backed startup.
- You need an entrepreneur, a single point of accountability for delivering the sum of all future outcomes. Remember, you are not funding a research project—you are funding a company.
- The leader needs to be exceptional—able to conceptualise the customer’s challenge, master the principles of the disruptive innovation, and forge from these endpoints a bridge between the two, one that can operate in the real world and deliver to the customer a 10X improvement on a key performance metric. The motto for this stage of the entrepreneurial journey is, “Sell yourself into trouble, work your way out.” It is not for the faint of heart.
The key takeaway overall is that openings in the incubation zone should be treated as a scarce resource and not wasted on second-tier opportunities or teams. Particularly when a sector is undergoing widespread disruption, the cost of missing the next wave can be catastrophic.
When an IOU has not been selected for the transformation zone, it must embrace one of the following remaining alternative routes to exit:
- Assimilate into an existing line of business already established in the performance matrix, reconfiguring itself to be a sustaining innovation rather than a disruptive one.
- Postpone its deployment and keep its place in the incubation zone, taking the extra time to be even more ready to scale when its turn comes.
- Spinout the business with the help of external private capital, the parent company retaining a modest equity stake and favourable IP rights.
- Sell the business to a company that can better capitalise on its opportunities.
The book gives a playbook for every zone, against time horizons and a defensive or offensive context. Highly recommended for every CEO interested in innovation.