Agile Economics: a new approach to commercial strategy for innovation
By Geoff Gibbins, Director, ?What If! Innovation
Agile Economics is a new approach to commercial strategy that’s built for the uncertainty of innovation. Say goodbye to category analysis and fake-o-nomics, and hello to human-centric, real world analysis based on what you can learn from experiments.
It’s critical to bring commercial rigor to innovation — to focus investment, bulletproof solutions through development and be practical about what it will take to scale. But dropping traditional approaches to commercial strategy into innovation projects — like assessing category market share, profit pools and developing indepth P&Ls — can limit the vision of teams and make it hard to set the right expectations among stakeholders.
We see four pitfalls with inserting traditional commercial strategy approaches into innovation projects:
Traditional approaches to analysis are driven by existing category boundaries — which narrow thinking and are inherently backward-looking.
Teams are pushed to develop accurate multi-year forecasts when uncertainty is high — leading to false precision and poor expectation setting.
Lack of human focus
Approaches to opportunity selection are driven by existing solutions and business models, not untapped human problems — leading people to follow “today’s money” rather than “tomorrow’s money”.
Assets as destiny
Existing assets are seen as filters, rather than as springboards to solutions, or routes to new thinking.
So what to do?
We’ve developed a set of new tools and approaches that we call Agile Economics. It’s a cutting edge approach to commercial strategy that’s fits into an experimental approach to innovation. It’s based on the following principles:
A human-centric case for action
Create a clear story on what problem you’re trying to solve, why it’s important to your consumer or customer, and why your solution solves it better than what exists today.
To help you do this, you can use a tool called ‘Problem Valuation’ to demonstrate that incidence and intensity of the problem. You can present a human-centric view of your ‘true’ competition by looking at who and what else solve the problem you’re focusing on — we call this the ‘Problem Arena’, covering from other products and services to ‘hacks’ and DIY solutions that give you a deeper view of the competitive dynamics.
Rather than building a business case based on high levels of precision when so much is unknown, be really deliberate about what level of rigor is appropriate for the stage you’re at. It might be that you know enough just to get to a simple revenue projection or Value Sketch, or that you’ve learned enough to make unit economics assumptions by using a Skeleton P&L (a stripped down P&L with just a few simple assumptions). When you get further down the line, you can use the MVP&L format to provide a staged, agile alternative to a traditional P&L — enabling you to make a realistic investment ask for an uncertain venture based on real options theory, defined pivot points and ‘just rigorous enough’ economics.
Focusing on the right ‘Problem Pools’
Rather than making the case to invest based on the ‘profit pools’ of where money is made today, focus on assessing your investment options based on the ‘problem pools’ that point to tomorrow’s money — based on assessing the size, strategic fit with the organization’s assets, and the economic potential of solving different customer or consumer problems.
We’ve found the Problem Pools assessment tool useful to give leadership teams a clear sense of the strategic growth options they face — either within a project, or when it comes to setting overall growth strategy — and as a clear way to force choices about where to focus investment.
Showcasing humility, not certainty
When presenting to senior stakeholders, it’s tempting to focus on what you know, and why you’re certain of success. This might help you in the short term, but doesn’t help you in 6 months if it turns out there are things you didn’t know (…every project).
We see that many leaders find it refreshing when teams are open about what they don’t know, being humble and highlighting areas of uncertainty. Make this the focus of your funding ask — the resources you need to de-risk and improve your chances of success.
Using ‘red-teaming’ to bulletproof your pitch
Innovation teams, understandably, often want their projects to get funded. They get praise for it, they might get a raise, they might get to lead it into commercialization. This is great — they have skin in the game. But it also means that they’re incentivized to make the case for investing in developing an innovation even if it might not make the most sense for their organization. The thinking around the business case might not be as rigorous as it should be.
One approach we’ve found helpful is ‘red-teaming’ — an approach borrowed from the military and intelligence communities to stress-test a plan or strategy. It’s simple: divide the team in two, and have one team work on the case for investing in the solution (the ‘blue team’), and another work on the case for not investing in the solution (the ‘red team’). Then compare arguments. Even if the team ultimately recommends investing, they’ll have thought through the pros and cons that much more thoroughly.