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.
