Reengineering the Incubation Zone—For a Downturn

By?Geoffrey Moore

Author –?The Infinite Staircase: What the Universe Tells Us About Life, Ethics, and Mortality

In a prior post, written during the tech boom, I outlined how established enterprises could reengineer their approach to managing innovation in order to catch the next wave before it caught them.?Now we are in a different time, where capital is more expensive, and near-term profitability more necessary.?We still need to innovate our way through the challenges ahead, and the management playbook is fundamentally the same, but there are enough nuances to attend to that it is worth revisiting the topic end to end.?

The guiding principle is unchanged.?Publicly-held enterprises routinely mismanage incubation to such an extent that, when they are successful, the market is actually surprised.?Their approach is based on a process model, typically involving crowd-sourcing a large funnel of potential ideas from the workforce, taking those ideas through a well-structured qualification process with clear benchmarks for progressing to the next stage, and funding a handful of the best ideas to get through to a minimum viable product (MVP) and market validation.?The problem is that this is a Productivity Zone operating model, not an Incubation Zone model.?That is, these enterprises are treating the Incubation Zone as if it were another cost center.?Needless to say, no venture capitalist operates in this manner.?

Meanwhile, the venture capital industry is routinely successful at managing incubations, be they to successful exits or timely shut-downs.?Their operating model has over forty years of established success—and yet it is a rare public enterprise indeed that even tries to implement it.?Some of this is due to confusing the venture industry’s business model, which is not appropriate for a publicly held firm, with its operating model, which is perfectly suitable to emulate.?It is that model that I want to describe here.

Anchor Tenets

There are at least five key principles that successful VCs keep close to their hearts.?They are:

1. Trapped value.?VCs are nothing if not coin-operated, and in that context, the first thing to do is find the coins.?In B2B markets, this typically equates to identifying where there is trapped value in the current way of doing business.?The value may be trapped in the infrastructure model (think cloud computing over data centers), the operating model (think self-organizing ride dispatching from Uber over the standard call center dispatcher), or the business model (think software subscription over license and maintenance).?The point is, if you can release the trapped value, customers will enjoy dramatic returns, enough to warrant taking on the challenge of a Technology Adoption Life Cycle, even in a downturn.?This is key because in a downturn, absent a compelling reason to act immediately, pragmatic customers will defer their buying decisions as long as possible.?So, innovation for innovation’s sake is not the play for today’s market.?You should be looking for disease-preventing vaccines, not life-extending vitamins.
2. 10X technology.?VCs are fully aware that there are very good reasons why trapped value stays trapped.?Normally, it is because the current paradigm has substantial inertial momentum, meaning it delivers value reliably, even though far from optimally.?To break through this barrier requires what Andy Grove taught us to call a 10X effect.?Something has to be an order of magnitude better than the status quo to kick off a new Technology Adoption Life Cycle.?Incremental improvements are great for reinforcing the status quo, as well as for defending it against the threat of disruption, but they do not have the horsepower to change the game.?So, do not let your Incubation Zone “major in minors.”?If there is not something truly disruptive on your plate, wait for it, and keep your powder dry.
3. Technology genius.?10X innovations do not fall out of trees.?Nor are they normally achieved through sheer persistence.?Brilliance is what we are looking for here, and here publicly held enterprises face a recruiting challenge.?They simply cannot offer the clean slate, venture funding, and equity reward possibilities that private capital can.?What they can do, however, is pick up talent on the rebound and integrate it into their own playbook (see more on this below).?The point is, top technology talent is a must-have.?This puts pressure both on the general manager of any Incubation Zone operating unit and on the Incubation Zone board to do whatever it takes to put an A Team together.?That said, there is a loophole here one can exploit in a downturn.?If your enterprise needs to catch up to a disruptive innovation, that is, if it needs to neutralize a competitive threat as opposed to instigating a new adoption life cycle, then a “fast follower” leader is just the ticket.?This person does not think outside the box.?This person catches the box and jumps on it.?Microsoft has been the premier example of this playbook from its very inception, so there is definitely money to be made here!
4. New design rules.?The path for breakthrough technology to release trapped value involves capitalizing on next-generation design rules.?The key principle here is that something that used to be expensive, complex, and scarce, has by virtue of the ever-shifting technology landscape, now become cheap, simple, and plentiful.?Think of DRAM in the 1990s, Wi-Fi in the first decade of this century, and compute cycles in the current decade.?Prior to these inflection points, solution designers had to work around these factors as constraints, be that in constricting code to run in 64KB, limiting streaming to run over dial-up modems, or operating their own data center when all they wanted to do was to run a program.?Inertia holds these constraints in place because they are embedded in so many interoperating systems, they are hard to change.?Technology Adoption Life Cycles blow them apart—but only when led by entrepreneurs who have the insight to reconceive these assets as essentially free.
5. Entrepreneurial general manager.?And that brings us to the fifth and final key ingredient in the VC formula: entrepreneurial GMs.?They are the ones with a nose for trapped value, able to sell the next new thing on its potential to create massive returns.?They are the ones who can evangelize the new technology, celebrate its game-changing possibilities, and close their first visionary customers.?They must recruit and stay close to their top technology genius.?They must intuit the new design rules and use them as a competitive wedge to break into a market that is stacked against them.?Finally, they must stay focused on their mission, vision, and values while course-correcting repeatedly, and occasionally pivoting, along the way.?It is not a job description for the faint of heart.?One last thing—in a downturn, instead of starting with visionaries in the Early Market, a far better play is to focus on a beachhead, chasm-crossing market segment from Day One.?The TAM is smaller, but the time to close is much shorter, and this gets you traction early, a critical success factor when capital is costly and funders are impatient.

Now, assuming we can embrace these anchor tenets from the VC playbook, the key question becomes, How can a public enterprise, which does not have the freedom or flexibility of a venture capital firm, construct an Incubation Zone operating model that incorporates these principles in a way that plays to its strengths and protects itself against its weaknesses?

An Enterprise Playbook for the Incubation Zone

We should acknowledge at the outset that every enterprise has its own culture, its own crown jewels, its own claim to fame.?So, any generic playbook has to adapt to local circumstances.?That said, it is always good to start with a framework, and here in outline form is the action plan I propose:

• Create an Incubation Board first, and charter it appropriately.?Its number one responsibility is not to become the next disrupter—the enterprise already has a franchise, it doesn’t need to create one.?Instead, it needs to protect the existing franchise against the next technology disruption by getting in position to ride the next wave as opposed to getting swamped by it.
• In this role, the board’s mission is to identify any intersections between trapped value and disruptive technologies that would impact, positively or negatively, the enterprise’s current book of business.?We are in the realm of SWOT threats and opportunities, where the threats take precedence because addressing them is not optional.?Another way to phrase this is that we are playing defense first, offense second.?This is particularly critical in a downturn because that is a time when visionaries lose power and pragmatists in pain gain power.?
• Given a chasm-crossing mentality, the first piece of business is to identify potential use cases that emerge at the intersection of trapped value and breakthrough technology, to prioritize the list in terms of import and impact, and to recruit a small team to build a BEFORE/AFTER demo that highlights the game-changing possibilities of the highest priority case.?This team is built around a technology leader and an entrepreneur.?The technology leader ideally would come from the outside, thereby being less prone to fall back on obsolete design rules.?The entrepreneur should come from the inside, perhaps an executive from a prior acquisition who has been down this path before, thereby better able to negotiate the dynamics of the culture.
• The next step is to socialize the demo, first with technology experts to pressure test the assumptions and make improvements to the design, and then with domain experts in the target use case, whether from the customer base or the enterprise’s own go-to-market team, who have a clear view of the trapped value and a good sense of what it would take to release it.
• The next step is to pitch the Incubation Zone board for funding.?

a) This is not an exercise in TAM or SAM or anything else of the sort.?Those are tools for determining ROI in established sectors, where category boundaries are more or less in place.?Disruptive innovation creates whole new boundaries, or fails altogether in the process, neither of which outcomes are properly modeled in the normal market opportunity analysis frameworks.?

b) Instead, focus on beachhead market potential.?Could this use case gain sufficient market adoption within a single target segment to become a viable franchise??If so, it will give the enterprise a real option on an array of possible value-creating futures.?That is the primary goal of the Incubation Zone.

Whether the effort succeeds or fails, the enterprise will gain something of real value.?That is, success will give it a viable path forward, and failure will suggest it need not spend a lot of resources protecting against this flank.?The job of the board is to determine if the proposal being pitched is worth prioritizing on this basis.

• To pursue the opportunity, you want to create an independent operating unit that looks like a seed-stage start-up.?Once funded, it should target a specific, value-trapping process in a single industry, ideally managed by a single department, and apply breakthrough technology and laser focus to reengineering the process to a much better outcome.?This will require developing a whole product, defined as the complete solution to the customer’s problem, organized around a core product plus ancillary supporting products and services.?The latter can be supplied by third parties, but the effort has to be orchestrated by you.
• With this problem-specific solution in hand, the final step is to bring it to market via restricted distribution, not general availability.?Your goal is to target a beachhead market with a single use case—just the opposite of what general distribution is designed to accomplish.?Thus, the entire go-to-market effort, from product launch to pipeline generation, to sales, post-sales implementation, and customer success needs to be under the direct management of the GM of the Incubation Zone operating unit.?Success here is measured by classic chasm-crossing metrics, focused on winning a dominant share of the top 30 accounts in the target market segment.?

In a downturn, crossing the chasm—not winning inside the tornado—represents the fulfillment of the Incubation Zone’s real option mandate.?You want to create a cash-flow-positive entity that protects your franchise from disruption by coopting an emerging technology while at the same time solving a mission-critical problem for a customer who needs immediate help.?That is value, in and of itself, over and above the optionality it creates for future category creation.

That’s what I think.?What do you think?

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