This is the third and final post in a series posts about the limitations of using business planning to manage innovation. My first post argued that most large companies have processes that deny investment in ideas that are presented without a business plan. The argument I was trying to make was that the requirement of business plans hinders innovation, even as the company is trying to promote the development of new ideas. This post raised two important questions:
- What is wrong with business planning anyway? Large companies have used business plans successfully for decades. Why should they stop now?
- If we stop using business plans, whatever shall we do? How will the company manage its investments in innovation?
The post I wrote last week topic answered the first question by describing five reasons why business plans don’t work for innovation. The current post attempts to answer the second question. This question is of great concern to a lot of managers. A few of them have been burnt by innovation teams who convinced them that there was no need for business plans. These innovation teams then got investment; bought foosball tables, post-it notes and bean bags; but produced not a single successful product. So now, these managers want a method that allows them to have some control over their innovation process and business planning is the only way they know how.
Even though they think so, business planning will not give them the control they need. They will just be creating a framework for getting lied to. The fabrications in business plans hardly ever come true, especially for innovative products. There is a third way. When most people see business plans getting criticized, they assume that innovation enthusiasts think that innovation should not be managed. It is creativity after all. This is wrong. Innovation is NOT just creativity. Innovation is management.
The best way to describe how you manage innovation is to start with Steve Blank’s distinction between searching and executing. Blank argues that while established businesses execute on known business models, startups and innovators search for business models. What we are searching for are not just any business models, but sustainable business models. A sustainable business model is made up of two parts :- making stuff people want and sustainable profitability.
Your innovation process has to solve for both parts. The job of management is to track how well an innovation team is doing in terms of answering the following questions with data:
Making Stuff People Want
- Who cares? What problems or needs do they have? What do they care about? How much do they care? How are they currently solving their problems?
- Are we able to make the solution? Are we making a solution that delivers value? Is the value we are delivering something people they care about?
- How well are solving for what they care about? How easy are our products to use?
- Are customers willing to use our products? Are they willing to pay for our products?
Making Sustainable Profits?
- What are the cost of creating the solution? Do we have a consistent and repeatable process for creating the product or service?
- What are the cost of delivering value? Do we have a consistent and repeatable process for reaching our customers?
- Are we growing as expected? What are our customer churn rates? if growth is viral, what is our viral co-efficient?
- How much revenue are we generating? What is the customer lifetime value? Is it less than the cost of acquisition?
There are more questions you can ask, the above are just a sample. Nevertheless, a business plan will not give you definitive answers to these questions is advance. The answers have to be discovered through trial and error, using the build-measure-learn loop to run experiments and iterations. The main difference here is that management now know what to expect from innovators. Innovation is not simply putting creative people in a room and asking them to innovate something. Using the above questions, management can set goals for teams and then measure how well they are progressing towards those goals. The job of innovators is to produce sustainable business models!
Moneyball for Innovation
From an investment management perspective, every organization needs a framework through which they manage investments in innovation. The point of this investment process is to make sure that product teams are doing the right things at the right time. Steve Blank refers to this as a product’s the investment readiness level. At Adobe, they have the Kickbox process through which they provide investment in early stage ideas, and also provide innovators with a process guide on how to do the work. At Pearson, where I work, we have created a Lean Product Lifecycle with six investment stages. There is expectation at every stage that the investment is used to answer particular questions as shown above.
Most of these frameworks are developed from the same innovation principles. They also use a similar model to the used in startup funding (e.g. Seed Funding, Angel Investment, Series A, Series B). This process can be referred to as incremental funding or moneyball for innovators. The point is that innovators don’t get their full request of funds on the basis of a business plan. Instead funding is given incrementally as the team shows progress via key metrics.
First, we invest in Problem-Solution Fit. With this investment the teams are expected to answer key questions around customer problems/needs and whether their proposed solution meets those needs. The next series of funding is an investment in Product Market Fit. With this investment teams are expected to develop the product, starting with a minimum viable version. The teams are also expected to test the other aspects of their business model (including revenues, costs and channels). If the signs remain positive, the largest investment will then follow to help the teams take their product to scale. As Dave McClure says “…invest before product-market fit, then double down after”.
At each stage incremental investment stage, managers ensure that they are asking the right questions depending on the team’s investment readiness level. It makes no sense to invest in scaling for a team that still doesn’t have problem-solution fit. If this team goes to scale, it will premature and premature scaling is the number one cause of innovation failure. Innovation managers simply need a way to see and track how well a team is doing with testing its assumptions. As managers, there is often no need to go the granular level of actually managing the experiment themselves.
So the investment process gives your teams the runway they need. They know for certain how much money they have. At the end of the runway, all you want to know as an investment board are answers to the questions concerning whether customers have real needs; whether your team can create a solution to meet those needs, whether there is profitable business model in the creation and selling of the solution and whether the business model can be taken to scale.
There are great tools for this process, including Launchpad Central (developed by Steve Blank and colleagues). The point is that, none of these processes require a business plan to succeed. All that is needed is a clear definition of what is expected from innovation. Managers can then track whether innovators are making stuff people want and also whether there is a profitable business model attached to that.
What other tools and methods are you using for innovation in your company? Please share in the comments section below.
Read part one and part two of this series by clicking on the links below:
The Fallacy of Planning (Part One) :- You Have NO Business Plan: How Could We Possibly Invest In Your Idea?
The Fallacy of Planning (Part Two) :- Five Reasons Why Business Plans Don’t Work for Innovation