Practice of Innovation

Your Value-Creation Playbook Is Core to Your Strategy

Executive summary:  Creating sustainable customer and enterprise value is the purpose of a company, and all company functions must support those objectives. Each functional area in a company has a unique “playbook” that defines its goals and operating processes. Perhaps it is surprising, but remarkably few companies include a value-creation playbook as part of their strategy to assure success.  Even fewer have a value-creation playbook at the strategic level to establish shared value-creation concepts and processes across all functions.  The benefits from having a comprehensive, company-wide value-creation playbook can be transformative, as illustrated by SRI International.

Disruption:  Established companies, when confronted with a disruptive change to their business model, almost all go away.  The odds of adapting are likely less than 5%. Today we are seeing this play out in retail, transportation, and finance. Geoffrey Moore has written a valuable new book called Zone to Win, which outlines four distinct activities, or zones, that must perform in a company experiencing disruptive change: performance (ongoing business), productivity (operations), incubation (transformative opportunities), and transformation (scaling to at or bigger than the current business).  The four zones are described more under heading A, below. 

Zones: As he describes, the odds of an established company successfully capturing a major new market with a different business model are daunting.  Steve Jobs was a master.  But among the many failures are Kodak, Xerox, RCA, Nokia, and dozens more.  Nevertheless, Moore provides a framework to evaluate and improve a company’s odds.  Specifically, he emphasizes why a company must add two separate functions, the “incubation zone” devoted to identifying the next big opportunity and a “transformation zone” to scale it up. SRI International is an example of a company that has done this successfully.  

In discussing his book recently, we shared ideas that can help companies better understand and address their challenges.  I strongly recommend you read his book.  After our meeting I applied his framework to the transformation we went through at SRI while I was CEO from 1998 to 2014. 

A Power Tool: A primary reason we were able to transform SRI and its business model was by applying a powerful “tool.”  The tool was the “value-creation playbook” we had developed and used successfully at the Sarnoff Corporation, where I worked before coming to SRI. The playbook, which we now call the I4I Playbook (i.e., the Innovation-for Impact Value-Creation Playbook), includes fundamental concepts and processes for accelerating value creation.  A talk describing the playbook and its motivation can be found here and the book we wrote about its development and properties is here.

Zone Playbooks: Moore’s formulation makes clear that each zone has its own operating playbook, which includes performance metrics, investments and reviews, and how staff are to perform their daily work.  Whether it is formally or informally taught to staff, there is always one.  That doesn’t mean it is good or effective, however.  In general, they are not. Important elements are too often missing – the customer and how to create value for them. 

The playbook in each zone must assure that everyone is an effective value creator, identifying and addressing their customer’s most important needs.  Value-creation is an imperative across all four zones, whether the goal is making incremental product improvements in zone 1; creating a new enterprise supply chain in zone 2; developing a new innovation to catch the next major opportunity in zone 3; or then scaling it up to a multibillion-dollar business in zone 4. 

Value-Creation Playbooks: At SRI, we had unique value-creation playbooks for each zone, which we taught to staff in those functions.  For example, our “performance zone” was winning and delivering on research contracts from government agencies and global companies. That requires specialized skills and business development activities.  Nevertheless, the return on contracts was modest and not sufficient for SRI to be sustainable.  

The new business model we proposed was to monetize the intellectual property from our research by forming high-value licenses and new ventures through the development of an “incubation zone.”  It is an understatement to say that the playbooks for winning research contracts and creating Silicon Valley ventures are profoundly different. In addition, just like in Moore’s case of an established company being disrupted, our ventures had to be at global scale to have any meaningful impact on SRI.  We were after disruptive innovations, like Siri (bought by Steve Jobs).   But over time we mastered both, as described here.  

The Meta Playbook: One other value-creation initiative made SRI’s transformation possible. Because everyone has a customer, all SRI staff were taught a small number of value creation principles – assistants, researchers, operating staff, managers, and CEOs for our new ventures.  For example, one of the most basic value-creation concepts is the definition for a value proposition.  Our definition is called NABC, for the important customer Need, the Approach for the offering and business model to address that need, the Benefits/costs (i.e., value) from that approach, and why the proposed customer value is 2-10X better than the Competition and alternatives.  Every professional should be able to answer these four questions for their project.  If they can’t, they are inevitably wasting resources, which is what we have found in every organization we have worked with.  

Alignment:  NABC value-propositions and other core concepts were used across all SRI functions, which increased effectiveness, simplified and improved decision making, and allowed everyone to work more productively together.  Having a common basis for focusing on customer needs and understanding the process of value creation helped tie together the different SRI functions, or zones, and minimized much of the friction Moore describes, which often destroys major innovation programs in companies.  

No Playbook: Hasta la Vista:  SRI’s different playbooks, in each of Moore’s zones, were all based on that small core of fundamental, shared value-creation concepts and processes.  Without that common value-creation understanding across the company, SRI would not have survived. 

A Bit of History: Under heading B, below, is an outline of SRI’s challenges when I arrived; under heading C, using Moore’s framework, actions are described that we implemented; and finally, under heading D, are some reflections I added on SRI’s turn around.  Moore’s framework is an excellent template, which I wish we had when I started at SRI.  Fortunately, through our process of continuous improvement, over time we invented a structure almost identical to Moore’s for addressing the challenges we had and that he describes.  They are common to all companies working to innovate and stay ahead of today’s intense competition.   

A.  Below are the four elements in Zone to Win.  

1. The Performance Zone

“This 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. It is home to the organizations that make the offers you sell and sell the offers you make. These are people who pride themselves on delivering the goods— on time, on spec, and on budget— and making the number— quarter after quarter after quarter. They are all about the operating model, and they are all about performance.”

2. The Productivity Zone

“The productivity zone is home to a host of enabling investments in shared services, all managed as cost centers. 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.”

3. The Incubation Zone

“The incubation zone plays enabling host to fast-growing offers in emerging categories and markets that are not yet producing a material amount of revenue. Its charter is a simple one: Position the enterprise to catch the next wave.  Any significant return on investment is several years out, and revenues for this zone’s portfolio are in aggregate no more than a percent or two of the enterprise’s total top line. We should not think of these as just skunkworks. Rather, they are simply an order of magnitude or more too small to participate productively in the operating model of the performance zone. That’s why the two zones need to be isolated from one another.”

4. The Transformation Zone

“The transformation zone is the place in an established enterprise where a disruptive business model goes to be scaled to material size. It is primarily a tool for offense, the goal being to scale rapidly to a stable, material, net new line of business, one that constitutes 10 percent or more of the enterprise’s current revenues, on a growth trajectory that promises both increased size and superior profitability. To win you must catch a wave of next-generation technology just as it is entering its secular growth phase and then put the full force of your global go-to-market capability behind it. The challenge here is that the both the category and the business itself are immature and subscale, so when you put the full power of the performance zone to work, the early results are not encouraging. Indeed, until you are clearly past the tipping point, virtually every force inside and outside your company will be working against you. Nonetheless, this is the course you have chosen, and you must not abandon it.”

B.  This section provides background on SRI and its economic and business model issues when I arrived in 1998:

• Going out of business:
  • SRI had a historic legacy of invention (mouse, ARPA net, etc.) but it had been slowly but unrelentingly shrinking for 20 years. It was deeply in debt and the facilities were in disrepair.  More losses would have tripped the bank covenants and likely lead to total collapse.
  • Many staff hated management and most groups blamed other groups for SRI’s plight (“It is not us; it is them.”). It was not a happy place even though individually and in small teams they loved SRI.  When it came together to do great work, it was magical.  But there was no alignment in vision, strategy, or tactics at any level of the enterprise.
  • The individual researcher model used at SRI, which had been successful for decades in the 60s and 70s, was no longer viable. The business model was fees on R&D contracts, which varied from only 0-5%. 
  • Competition was increasing from universities and others and SRI had a high cost structure.
  • SRI teams with a new technology would often, independent of SRI, form new companies and walk out the door, with all the losses and none of the gains for SRI.
  • SRI had to transform its business model or go away. It had to go through the steps described in Zone to Win — what Moore calls the three 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.”
  • Our first BHAG at SRI was to “make a buck,” i.e., one dollar of profit, so we didn’t break our bank covenants. Failure had become so accepted that few staff thought even that goal was possible.  We did a lot better than that but critically we had gotten past the “neutralize” stage and could get on with transforming the business model. 

• During the first few years we put together our new vision and operating plan:
  • Vision: be the premier independent source of high-value innovations
  • Strategy: leverage SRI’s uniquely strong multi-disciplinary R&D teams to 1) identify and address major market opportunities, 2) use the IP generated to create and incubate transformative innovations, and 3) monetize them through licenses and new ventures.
  • Tactics: achieve our vision and strategy by developing and implementing throughout the enterprise the world’s most efficient and productive value-creation methodology. The value creation methodology was captured in a “value-creation playbook” that was taught, at different levels, to all staff.
• A few ideas were implemented across all SRI activities and functions
  • All initiatives have a value proposition that starts with the most basic definition: i.e., “NABC” –Need, Approach (offering and business model), Benefits/costs, and Competition. All initiatives start with the “customer’s needs,” by itself a major competitive advantage that occurs in very few other enterprises.
  • All initiatives, outside and inside, focus on “important customer and market needs,” not just “interesting ones,” as defined by quantitative metrics for each “zone.”
  • All initiatives are incubated in recurring “value-creation forums” where teams provide feedback.
  • Specific versions of the SRI value-creation playbook were used at each zone level: core, operations, incubation, and transformation.
  • All zones were incentivized through a unique royalty and equity sharing plan.
  • Management: I, as CEO, championed the overall vision, strategy, and implementation of our value-creation methodology. Leadership of each zone supported and used our fundamental value-creation concepts and adapted them appropriately for their function.

C.  The next four sections are organized according to Zone to Win with thoughts about how they applied to SRI during its transformation:

• Performance Zone
  • This was ~90% of ongoing SRI activities and business: it was called the “core” business
    • It mostly consisted of R&D contracts from many government agencies.
    • Management of these activities was mostly at the lower levels of the enterprise. They were “owned” by the operating division presidents (at the time called VPs).
  • Changes in operations and business model were required, including:
    • Focusing activities and investments on larger, multi-disciplinary R&D programs.
    • Preserving IP and more proactively developing, controlling, and exploiting it.
    • Developing new models for engaging industry partnerships, such as offering workshops on value creation.
    • Expansion in new R&D areas using OPM.
    • Rolling out of the SRI value-creation methodology, first with early adopters and then comprehensively.
  • Management for these activities came mostly from middle and senior operating executives with CEO help as needed.
• Productivity Zone
  • SRI had been declining for over 20 years, so much of the infrastructure needed to be rebuilt.
  • Many of the systems were division specific: we began the process of creating common systems across the enterprise.
    • Implementing the SRI value-creation playbook.
    • Contracts and IP staffing.
    • Financial systems and reporting.
    • Business development, staff value-creation training, marketing, and PR.
    • IT security and facilities.
  • Management: was mostly by middle and senior enterprise executives.
• Incubation Zone
  • An incubator was formed called “nVention.”
    • It had separate venture and advisory boards that included senior SRI executives and outside experts.
    • Each year 3-6 potential high value opportunities ($100M to 1,000M in market cap) were identified in white spaces, with beachheads, and 2-10X sustainable advantages.
      • nVention was focused on business formation, not technology. Little money was spent on building products until there was a good business case: solution and business model.
      • Goal: every 3-5 years create a billion-dollar market-value company.
    • Investments: seed, A, and B rounds (as increasing SRI resources allowed).
    • Team: included inside SRI staff for essential R&D and new hires for the ventures with qualified CEOs.
    • Rewards: Silicon Valley start-up criteria were used for the venture team with significant success incentives for SRI staff helping transfer the R&D and developing the opportunity.
    • Exits: stop, continue against milestones, license, or form a new venture.
  • Management: proven senior venture executives and a small knowledgeable team, independent funding, and outside venture partners and market experts.
• Transformation Zone
  • Mostly through outside funding and partnerships, e.g., Siri with Apple
  • Resources were being accumulated over time to take ventures beyond the seed, A, B, and C rounds with the ultimate goal of SRI holding major shares or control.
  • That is, when I left, we had still not achieved a fully mature transformation zone.

D.  Additional thoughts about SRI’s journey:

• The excellent SRI board supported our transformation plan. They were excited about its potential and patient about its execution.
• It was a slow, bootstrapping operation because we started with a huge debt and other liabilities. It also meant that profit was sacrificed as we built our new business model.
• New staff, skills, and attitudes were required in each zone. Fortunately, most of the staff were superb and they eventually adopted and supported our strategy.  We have found, working with companies all over the world, that failure is seldom the staff’s fault; it is almost always poor management. 
• In each zone, continuous staff development was required to understand and use our “playbooks.” One workshop does nothing.  Our playbook was based on continuous experiential learning.
• It took time to build our different playbooks and successfully implement them. Obviously, winning government R&D contracts is profoundly different than forming viable Silicon Valley ventures.
• Like Moore’s other examples, SRI’s transformation was incredibly hard and took many years. We were handicapped at the start by having few financial resources, major liabilities, and debt, which had to be paid off.  But even under more positive conditions, this type of transformation is not for the faint of heart.
• The initial SRI value-creation playbook was developed with Norman Winarsky at the Sarnoff Corporation in Princeton, N.J., before I came to SRI.  Norman became president of the SRI ventures division. 
• If we did not have a proven playbook when I first came to SRI, there is absolutely no chance we would have been successful.
• One abiding belief, which gave us courage to follow this path, was the horrible performance we saw in almost all the companies and innovation laboratories we worked with. Our moto became, “The way we work is our most important innovation.”  It was clear we could not win by out-spending others, out-staffing them, or out-working them.  Everyone was already working as hard as possible.  We had to work smarter – much smarter.  We saw that as the “white space” for SRI where there was great opportunity and little competition.
• Also note that a transformation like this is not about perfection. In truth, it is always messy.  Some people get it, some people don’t or don’t want to get it, people have their own problems, new people must be trained, and people move on to different jobs.  We are dealing with people, not machines.  But even small improvements have great leverage because the base performance in most companies is so low.  It is a powerful tool to use as part of one’s strategy, with or without confronting a disruption.  In many ways, it is like what TQM achieved previously.  Steady, consistent progress wins the day and, in the case of SRI with its partners, created one major business after another.  

1.  We had lunch with Geoffrey Moore, Paul Witkay, and Cal Lai on July 21, 2017.