In today's economy, risk is undesirable and growth has never been more necessary. Meanwhile, the long fingers of the economic slowdown have created even more obstacles to innovation-led growth than in more normal times. On the other hand, many companies botch growth and innovation. They treat untested assumptions as facts, get trapped into spending on big flops, and apply the same business-as-usual management style that works for their core business, but doesn't make sense for new venture.

Pioneered by Rita McGrath, an associate professor at Columbia University Graduate School of Business, Discovery-Driven Growth (DDG) re-invents the pursuit of growth and innovation from the ground up. The goal is to produce maximum results with minimum risk. This new approach allows executive management to convert assumptions into knowledge as a strategic venture unfolds. It also provides a roadmap for how organizations can create a more flexible business architecture. In fact, companies, such as amazon.com, DuPont, and Hewlett-Packard, have put DDG to the test time and time again. Graduate business schools, such as Columbia, Harvard, and Wharton, include DDG in their curriculum.

Enterpriseleadership.org sat down with Professor Gunther McGrath to discuss her new book, Discovery-Driven Growth (Harvard Business Press).

Bio

Rita Gunther McGrath is an associate professor at the Columbia University Graduate School of Business. Her consulting work focuses on executive teams of Global Fortune 500 organizations that struggle with growth and innovation. Her clients include Air Products and Chemicals, Microsoft, and Nokia. She has authored the following books: The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty, and MarketBusters: 40 Strategic Moves That Drive Exceptional Growth. Before pursuing an academic career, McGrath was a director of information technology. She is a director of the Strategic Management Society.

EL. Why do companies need DDG more now than ever?

RGM. Because existing approaches to corporate growth and planning don't work, especially in this market, DDG is an innovation idea whose time has come. Many companies have gotten themselves into risky, huge down-side situations. If these companies had checked their assumptions, they could've redirected their business to reflect the changing realities around them. They didn't do this. DDG forces you to undertake a much-disciplined process. You document your assumptions, contain your risks to know the factors in each step along the way, and then you plan and re-evaluate what you do as you go along.

EL. Can you go to the specific steps in the DDG process?

RGM. DDG comprises five different disciplines. First, you need to make sure you know what success would look like. Bad planning happens when people don't know what the outside looks like. Second, benchmarking can help you ensure that you don't fool yourself and you use the right metrics. Third, you need to figure out operationally what you'd have to do to make a business or an initiative work. Fourth, you must document your key assumptions so you can go back and check them. The last step, which is the most critical, focuses on planning around key checkpoints.

I like to use the metaphor of climbing a new mountain for the first time. You know you want to get to the top, but you don't know the entire route to the summit. To be safe, you can plan for the next bend in the road. DDG encourages people to think about the cost and the risk they're taking to get to the next step. When you get there, you stop, you look at your assumptions, and you decide if it's worth going forward. Is this journey the right one or should you redirect it? This process forces you to be very realistic and risk conscious as you go through your planning step. It doesn't constrain people too much.

EL. What are the challenges of DDG?

RGM. Because people don't remember assumptions, we have a hard time processing them. To this end, you can't go back and compare what you're thinking with what's actually happening. You don't have the memory to do that. You need to document your assumptions. Meanwhile, people have a tendency to accept information that confirms what they believe to be true. We reject information that we thought was true when someone questions it. People continue to go on with this thinking even though new information suggests things aren't working out very well at all. DDG helps people to stop and to think, and to be more objective about the assumptions they make.

EL. Given the economic downturn, are you seeing a push to adopt DDG?

RGM. Yes. My phone is ringing off the hook. People are saying they need to apply this thinking to their main business. They're realizing that their core businesses aren't as safe and predictable as they thought.

Can give me examples of companies that have successfully used DDG?

IDEO, the design firm, used DDG to create business models for experiences. It can show how a particular user experience, say in a shopping center, will generate certain kinds of financial outcomes. This helps IDEO model the business implications of its services.

DDG is guiding Sealed Air’s move into China. This manufacturer of bubble wrap takes one step, learns from it, and accepts its failures before it takes the next step. FieldAir is doing this very systematically.

Air Products and Chemicals developed remote technology to monitor its plants. The company used DDG to determine that it needed to embed its technology into communications systems or systems technologies. As a result, Air Products and Chemicals partnered with uninterruptible power supply vendors to create this routing. The product, which came out in August 2008, has been well received.

EL. What role does the chief information officer play in DDG?

RGM. If you want to get a new venture going, you usually have to write a business plan, which includes a net present value calculation. The plan has a set of tasks that you want to accomplish with their accompanying dates. If the venture gets approved, you get the money all at once. You're under pressure to continue with the project all the way through. Using DDG, you set the money aside, and release it on a timed basis as you meet major milestones. You function the same way a venture capture firm dispenses funds.

CIOs can allow a company to do these techniques, or they can actually get in the way. For example, using DDG, CIOs might require the applications development team to go through critical checkpoints with end users before any code gets written. This process creates a much tighter integration between IT and the users. It also allows CIOs to reorient their systems development. On the other hand, caretaker CIOs will have a hard time adopting DDG. These CIOs need to plan every detail of each project. Because these CIOs get stuck in the mud about procedures, they can't stop, and redirect their assumptions in high uncertainty situations. If you're products are based on technology, you don't want an inflexible CIO who refuses to redirect or reorient as the project unfolds. It can be huge barrier to learning.

EL. What changes do you need to make in your governance structure to move forward with for DDG?

RGM. It's a subtle change in assessment. In a typical governance structure, good managers meet their commitments and do what they promise. This scenario doesn't work in environments with huge amounts of uncertainty. In these situations, you need to be looking for criteria to support management decisions. Here's what you might say: 'I don't need you necessarily to be right. On the other hand if you're wrong, I need to know that you failed intelligently. I want to know that you really kept an eye on the risks all the way through.'

Boards often impose acceptance behavior for governance. In high uncertainty situation, boards can send companies down the wrong track, by insisting everything has to be rolled out as expected.

EL. Your book has a chapter on business architecture. Does DDG include other architectures, such as the strategic architecture or the technology architecture?

RGM. Yes, you have to include these other architecture. Let me comment on that. Many people feel unclear about what it actually means. A business needs to have two elements -- the unit of business, which you charge your customers for, and key drivers, which accompany processes that enable the company to deliver effectively that unit of business to paying customers. Your technology infrastructure enables you to support the delivery of the unit of business to a particular set of customers. DDG forces people to think very carefully about their unit of business and work backward into what the supporting architectures are.

EL. Can you give me an example of a company that has locked itself into a rigid business architecture and will have a hard time adopting a more flexible one?

RGM. SAP, for example, has locked itself to a business architecture that assumes customers will buy premises-based ERP software, not software as a service (SaaS). SAP customers pay an upfront technology licensing fee, and a yearly maintenance and upgrade fee. The latter fees are a percentage of the licensing fee. SAP currently sells to sophisticated, centralized procurement departments of large, global organizations. To broaden its customer base, SAP is now trying to sell a small business version of its product to CEOs of companies that have between 100 employees to 500 employees. These CEOs usually aren't technology savvy people, and don't understand the ins and outs of the SAP product.

EL. How does SAP's business model effect customers that have based their enterprise technology architecture on SAP?

RGM. SAP gets all of its profits upfront because its enterprise customers bear all of their costs for the software upfront. Meanwhile, because SAP is hard to change once its adopted, many companies make it their technology architecture. Today, companies need a technology architecture that enables them to get into new opportunities quickly, and to exit them immediately when they're no longer attractive. SAP might hinder companies that continually want to update and to adapt their business model. That's why many companies have started to move their key applications to the SaaS delivery model.

EL. Can you explain how SaaS might provide companies with more flexible business and technology architectures?

RGM. Pioneered by NetSuite, Peoplesoft, and Salesforce.com, SaaS changes the profit and cost flow between a company and its customers. It can offer SAP customers and potential SAP customers a better pricing model. This model doesn't lock customers into a rigid technology platform. Instead of the high, upfront licensing fee, SaaS has a monthly subscription fee, where customers dole out some cash each month. SaaS has a different business architecture behind it. You pay so much for each person who uses the system, not a big licensing fee for the entire enterprise. SAAS  is easier to communicate to potential customers. It demystifies what the product does, especially the key drivers behind it.

EL. If companies are locked into premises-based enterprise software, what steps can they take to move these applications to SaaS?

RGM. Going forward, large enterprise software companies might pressure their customers to pay higher maintenance fees. Meanwhile, customers probably will resist and will look for third parties that can maintain the software for less. If they don't pay for the upgrades, they just run the basic software. As a result, they can start to carve out pieces of that enterprise system. They can take those pieces to the cloud, making them object based so they have a different type of technology architecture. This gradual process makes it easier for organizations to adapt to the new architecture.

For example, if you don't pay those SAP maintenance fees for five years, you'll save the cost of your original installation. You can use the savings to convert to something that's less expensive, more flexible, and robust.

EL. Once you adopt DDG, what guidelines should you follow for investments in innovation?

RGM. When it comes to innovation, companies should invest in ventures that will take them into the future, or what I call strategic options. They also should look at major enhancements to their core businesses or new core businesses. They need to keep their core business healthy to the extent they can.

The first principle you want to follow includes looking across a portfolio of ventures with different uncertainty models, and managing those ventures proactively. Most companies don't have a good sense about what's in their portfolio. They have a big disconnect between their strategy process, their project process, and their people process. Going forward, you need to make sure your investments have a strategy for growth.

The second principle says you need to develop your own innovation style. A dozen different companies will have a dozen different innovation styles. You need to build systems that are consistent all the way through with your own style for innovation.

EL. Can you explain the different types of innovation styles?

RGM. There are four broad innovation styles: marketplace of ideas, the visionary leader, systematic innovation, and collaborative innovation.

google.com practices the market place of ideas style. Employees spend 10 percent of their time working on innovative things, even if they aren't consistent with the employee's job. Employees share their ideas with peers who provide feedback. The best ideas bubble up to the top. google.com launches the most powerful ideas in the marketplace.

The ideas presented by a visionary leader, such as Steve Jobs of Apple, drive the company's direction. Meanwhile, employees surround the visionary leader with good ideas related to the company's vision. The company operates in a mode of secrecy until the product nears its announcement date.

The systematic innovation style follows a definitive plan or a recipe for innovation initiatives. For example, Procter & Gamble takes an anthropological approach to innovation. P&G's Living It and Working It program sends employees out to study what's going out in customers' homes and offices and then to report on the findings.

The collaborative innovation approach involves growing by partnering with others firm that do similar synergistic things. For example, by leveraging the software Apple's partners brought to the table, Apple created demand for its Iphone.

Any of those approaches can work very well on its own. CEOs and CIOs, however, have to be careful how far they mixed these styles. For example, employees working collaboratively might have a hard time selling their ideas to a visionary leader. The marketplace of ideas style requires that employees have much autonomy and easy access to operational resources. These employees might feel stifled in a collaborative environment where they have to justify resources.

     Elizabeth M. Ferrarini - She is a free-lance writer and IT consultant from Boston, Massachusetts. Reach her at elizabethferrarini@yahoo.com.

aQuantive. Capture Software. Clear Commerce. Although all of these companies offer different types of technology products, they have several things in common. They all got a head start with funding from Voyager Capital, an early stage venture capital firm, based in Seattle, Washington. All of these companies also got acquired by more established IT organizations. For example, in 2007, Microsoft paid more than $6 billion for aQuantive. In fact, many of the emerging companies Voyager Capital funds get acquired.

With funding dollars getting tighter and tighter, Voyager Capital has focused on funding companies in three technology areas: wireless, digital media, and enterprise software, and in three geographic locations: California, Oregon, and Washington, Bill McAleer, the co-founder and managing director of Voyager Capital, say that its go-to-market strategy involvement helps its portfolio companies to become very successful. He adds that a good part of this process includes the active involvement of CIOs, CEOs, and investors.

Enterpriseleadership.org recently sat down with Bill McAleer to discuss what technology areas he likes, how he works with CIOs, and how he handled technology decisions as a business executive. He has about 30 years of business experience and 20 years of senior executive and equity financing experience in the IT industry. Here is what he had to say:

EL: Can you describe your investment portfolio?

BMA: As an early state VC firm, we provide the company's first round of venture funds. We also fund growth stage companies that have about $10 million to $15 million in revenues per year. We've been in business since 1997. We like to work with our portfolio companies at the board level by setting strategy. We also help these companies pursue the typical venture model.

Our current allocated fund runs around $110 million. We have less than a half billion under management in about three funds. We come across many innovative technologies and entrepreneurs. The Seattle market, in particular, has grown dramatically over the past 10 years. It's my top ranking portfolio sector. Catalysts for growth in the Seattle area include Microsoft, RealNetworks, Nintendo, and three of the major wireless companies. We rank third in VC-backed companies that have created the most jobs in the country. The technology growth in Seattle outpaced more traditional technology areas such as in New England.

EL: Do you use technology to look at your overall success or failure of the companies in your portfolio? Do you automate that process at all?

BMA: Not too much! That's more of an art than a science. We'll generate some data summaries. As far as evaluating the portfolio, we don't use much technology other than communicating with the companies. We aren't running highly sophisticated financial modeling or analysis. We'll track our investments and do some of our reporting with a product that does some of the limited partnership accounting. We don't deal with a lot of sophisticated portfolio analysis. We have mostly early stage companies. Growth stage companies tend to track their key data. We do have access to databases. We use the Web for searching out companies and looking for deal flow and deal history.

EL: Are there reasons other than technology for why you've selected companies in your portfolio?

BMA: We tend to look, from an investment perspective, at companies that have strong fundamental technologies. Ideally, we like something that is innovative or differentiated. Most of all the deals we invest in have some technology elements in them. We look for market factors.  We also look at places where the market might shift and if a company is taking advantage of a paradigm shift. For example, we did an investment in a Portland healthcare company called Kryptiq. The marketplace for this company concerned a regulatory requirement related to HIPPA compliance. The healthcare environment wanted to connect its patients with the providers and the physicians. This company provided a connectivity layer which enables its applications to run on top of that layer, and, therefore, to connect those three pieces of healthcare. They had a good core technology. In that example, we also looked for specific market trends that could benefit us.

EL: Do you look for disruptive innovation?

BMA: Yes, we've looked at several of those. We typically look at a combination of technology and market shift. For example, we backed a Seattle company called aQuantive.  It came about as a result of the Internet and Internet advertising. It captured analytics on Internet advertising. IT had   unique technology that allowed it to apply analytics to measure the effectiveness of Internet advertising. That was a big win. Microsoft bought the company after it went public. The company went for $6 billion. We have another company in the video market. It has an innovative technology for manipulating media with an ad. Most of our innovations we've funded have been more transformational than disruptive. In hot technology areas, we tend to see many slight variations of products. To this end, we have to watch this scenario carefully.

EL: Can you describe some of the technology areas that are on your radar screen?

BMA: The Web has created a great opportunity to connect the participants of a company's value chain. Now companies can have a better understanding of both their customers and their suppliers. We've looked at a number of Web-based software applications that enable you to connect the supply chain or the value chain with the company. Typically, the various parts of the supply chain have existed as independent silos that are hard to connect. Web-enabled applications provide the opportunity now to really collaborate as a company.

EL: Do you have any type of an external advisory board, such as a CIO board?

BMA: We do. It is comprised of three types of people: CIOs, CEOs, and investors. For example, we have the former CIO of Bell South and Lehman Brothers. Our advisory boards trends to have more former or current CEOs of well-known companies than CIOs or investors. We look for people who can represent the three geographic areas we serve. We try to infuse customer insight into our investment strategy, try to update our investment strategy annually with our advisory board members, and look at certain sectors in that investment strategy.

For example, we call upon our CIOs to help us plan our annual off site investment meeting with CIOs. Speaking with CIOs gives us a perspective on what our portfolio companies will do to connect effectively with their buyers. After all, these folks and their staff look at innovative technologies. We ask CIOs about what trends they see in the marketplace, and what current critical elements they have to deal with.

We try to get outside perspectives on where certain markets are going. For example, we've had George Gilder, a futurist and author, speak at some of our venues. We also bring in some investors and bankers to hear about the things on their hot plate.

If you look at the food chain, VC's reside at the front edge of the innovation curve. CIOs reside at the end of the curve, while investment folks reside off to the side of the curve where the potential is.

EL: Because you're dealing with many early stage companies, are you interested in growing these companies or seeing that they get acquired?

BMA: Most VC firms will tell you they invest in companies to fuel their growth to become larger companies. The majority of companies that we fund get acquired.  In the enterprise market, we're seeing large IT vendors needing to augment their solutions. Of course, these large companies want to acquire companies with innovative technologies. Over time as paradigm shifts occur, you can go back and spot the trends of how companies grew through acquisition. VMware is a good example of a virtualization company that grew through acquisition.  If we hit the market right, we can create a big company. However, out of our portfolio, we have several that will make it all of the way through to become a big public company.

EL: Besides the advisory board, how do you help your portfolio companies sell their product successfully in their key markets?

BMA: One of our venture partners and advisors is the Chasm Group, a premier marketing firm in the technology industry. We spend much time with our portfolio companies on their go-to-market strategies. Before early stage companies can develop a focus, the CEOs have to experiment with the target segments or the way the solution works. To this end, it's okay for the management team to go out, to speak with potential customers, and to see what sticks and what doesn't.  They need to do this especially if they intend to sell to the enterprise and ultimately to CIOs. Our CIOs involve themselves in the application of some of the solutions from our portfolio companies. The CIOs we've meet will take risks with innovative products.

On the other hand, we've come across CIOs who are adverse to risk and who will only buy from established vendors. On the other hand, we've seen some organizations that have reduced the number of vendors in order to sample more innovative technologies from smaller companies. If an early stage company wants to go after the enterprise, you have to point them to the right target sectors. For example, the financial services sector tends to be more innovative and takes more risk on innovative companies.

EL: Of the boards you've served on, have you gotten involved with the strategy and the technology investment decisions the company made?

BMA: That's an interesting question. As a board member, I haven't been heavily involved in any technology strategies, unless it related to the company's product strategy. In the latter case, the focus was on some of the priorities for system implementation or technology implementation within the enterprise. I got involved in these discussions through audit committee meetings. A couple of the boards I was on had periodic presentations about CIO priorities, but it was rare to have the CIO at a board meeting, expect once a year. As senior leader of a company, I gave presentations to the board about technology investments and strategies.

EL: What challenge did you face in handling technology investments when you were a company executive?

BMA: I got involved in the tech business when I became an executive at a major hotel. I worked with a strategy group to figure out what technology innovations we wanted to use for that particular company. At the time, technology was an afterthought in the hospitality industry.  It has changed now. Look at what's going on with customer relations management, and customer tracking. Technology became a big enabler of frequent traveler program, which is an important industry segment. You now can understand what customers buy and what they prefer at a hotel. Back when we tried to determine this information, we looked at the customer to see what physical characteristics we could discern. Today corporate management has a higher awareness technology as a strategic asset.

EL: As a former CFO of a company, how did you CIOs to make investment decisions?

BMA: I had a period where a CIO reported to me. I worked tightly with the CIO because the financial organization as to be a partner to the business. We worked closely with some of the operating units to move some of their technology initiatives forward. We implemented CRM technology for tracking customer support. Typically, we worked the operating units and the CIO to define a proposal. Most of the funding came out of the capital budget. As a result, we worked with CIO to do an ROI analysis on major projects. We had our annual review of IT priorities and the capital required to support those priorities.

The software as a service model has changed things a bit. In some cases, the operating units fund their IT expenditures out of their expense budgets as opposed to capital budgets.

Elizabeth M. Ferrarini - She is a free-lance writer and IT consultant from Boston, Massachusetts. Reach her at elizabethferrarini@yahoo.com