Dealing with Darwin

1. Innovation is essential for competitive advantage in commoditizing markets

Innovation and inertia are so deeply intertwined that both must be engaged concurrently for any progress to occur.

Innovation creates differentiation. In commoditizing markets, companies must innovate dramatically to create definitive separation between their offers and those of low-cost competitors. This requires selecting a vector of innovation that sets them apart and investing intensely along that vector, to a level that competitors cannot or will not match.

Overcoming inertia is crucial. Inertia, the resistance to change within an organization, must be addressed alongside innovation efforts. This often involves reallocating resources from established but commoditizing areas (context) to new, differentiating initiatives (core).

Continuous innovation is necessary. The pressure to innovate is constant in free-market economies, which operate by the same rules as organic systems in nature. Companies must continually refresh their competitive advantage to survive and thrive in an ever-evolving marketplace.

2. Different types of innovation are suited to different market stages

Each of these innovation types entail heavy R&D expense and significant market risk. This sets the product leadership zone apart from the other zones and is the reason it is most appropriately used in growth markets.

Growth markets favor product leadership. In growth markets, companies should focus on innovation types that leverage product leadership:

• Disruptive innovation
• Application innovation
• Product innovation
• Platform innovation

Mature markets require different approaches. As markets mature, innovation shifts towards:

• Customer intimacy: Line-extension, enhancement, marketing, and experiential innovation
• Operational excellence: Value-engineering, integration, process, and value migration innovation

Matching innovation to market stage is crucial. Companies must align their innovation strategy with the current stage of their market to maximize effectiveness and return on investment.

3. Core/context analysis helps prioritize innovation efforts

Core is defined as any aspect of a company's operations that creates differentiation leading to customer preference during a purchase decision. It is innovation in service to competitive advantage. Context, by contrast, represents everything else, all other work performed by the enterprise.

Identify core activities. Core activities are those that directly contribute to competitive differentiation and should be the focus of innovation efforts.

Manage context efficiently. Context activities, while necessary, do not differentiate the company and should be optimized for efficiency or potentially outsourced.

Allocate resources strategically. By clearly distinguishing between core and context, companies can more effectively allocate their resources, focusing on areas that will drive future growth and competitive advantage.

4. Product leadership drives growth markets, customer intimacy and operational excellence drive mature markets

To win their business, you must wrap your discontinuous technology in a blanket of services that will fulfill the promise of delivering dramatic competitive advantage.

Growth markets demand product innovation. In rapidly expanding markets, companies should focus on creating breakthrough products or services that can capture significant market share.

Mature markets require different strategies:

• Customer intimacy: Focus on tailoring offerings to specific customer needs and enhancing the overall customer experience
• Operational excellence: Emphasize efficiency, reliability, and cost-effectiveness in delivering products or services

Adapt innovation focus as markets evolve. Companies must be prepared to shift their innovation strategies as their markets transition from growth to maturity, ensuring they maintain competitive advantage throughout the market lifecycle.

5. Renewal innovation is crucial for declining markets

Renewal represents a category shift, meaning new target customers, new market needs, new products, and a new value chain, potentially a new sales channel, new pricing, new competitors.

Recognize market decline. Companies must be alert to signs that their core markets are declining and be prepared to take action.

Choose between organic and acquisition renewal:

• Organic renewal: Develop new offerings internally to enter growth markets
• Acquisition renewal: Enter new markets through mergers and acquisitions

Execute decisively. Renewal efforts require strong leadership and a willingness to make significant changes to the business model, product portfolio, and target markets.

6. Extracting resources from context to repurpose for core is key to sustainable innovation

Extract resources from context to repurpose for core.

Identify context activities. Regularly assess which activities are no longer contributing to competitive differentiation and have become context.

Optimize context processes. Use techniques like the five-levers model to streamline and de-risk context activities, freeing up resources.

Reallocate to core. Systematically shift resources from optimized context activities to core innovation efforts, ensuring a continuous cycle of renewal and competitive advantage.

7. Resource recycling enables continuous workforce development and innovation

Companies who follow this approach to resource recycling are able to embrace outsourcing without jeopardizing the security of their workforces.

Implement a three-zone model:

1. Invention zone: Focus on creating new core offerings
2. Deployment zone: Scale and harden new innovations
3. Optimization zone: Continuously improve efficiency of established processes

Facilitate movement between zones. Encourage and enable employees to move between zones, developing new skills and contributing to different aspects of the innovation cycle.

Foster a culture of continuous learning. By recycling resources through different zones, companies can maintain a workforce that is adaptable and capable of driving ongoing innovation.

8. Outsourcing can be leveraged effectively within a resource recycling framework

Outsourcing is like nuclear power. It can be used for good or bad, and it has a reputation to match.

Use outsourcing strategically. Outsource context activities that have been fully optimized and de-risked, freeing up internal resources for core innovation.

Benefits of effective outsourcing:

• Labor cost reduction
• Improved returns on invested capital
• Minimization of fixed costs
• Absorption of risk
• Reduction in inertial mass
• Increased focus on core activities

Integrate outsourcing with resource recycling. By combining outsourcing with a resource recycling approach, companies can maintain workforce stability while still benefiting from the efficiency gains of outsourcing.

9. Cisco's approach to innovation and resource management exemplifies best practices

Cisco is clear about two long-term market-redefining trends—data center virtualization and the networked home. Both of these are core as each puts an entire sector of the marketplace in play.

Focus on core innovation areas. Cisco prioritizes product innovation in advanced technologies and integration innovation in established product platforms.

Apply core/context analysis to markets and products. Cisco regularly assesses its markets and product lines to determine which are core (in play) and which are context (established).

Implement resource recycling in key functions. Cisco's services organization demonstrates effective resource recycling, moving from high-value, core activities to more standardized, context activities as markets mature.

Adapt organizational structure. Cisco reorganizes its field operations to better align with core/context analysis, ensuring appropriate focus on different market types.

Last updated: August 9, 2024