Balancing Innovation and Exploitation Is Product Management

The Importance of Innovation

The key to a start-up’s success is by generating multiple revenue streams, this can be done by expanding to new business models for future possible sources of revenue. To keep acquiring the market share, a scalable business should do continuous processes of new product innovation, partnership, merge, or even acquire the younger startups.

Figure 1: Company Lifespan on S&P Index

Figure 1 illustrates how the survival of businesses in the S&P Index on the average has been shortened since almost the past 100 years. In 1960, the average lifespan of companies was over 60 years, whereas, in the year 1980, it reduced to just about 35 years on seven rolling year averages. By 2011, the average is dramatically halved to just 18 years. There is an overall conclusion that the turnover in S&P index has been accelerating over time. The projection based on current data extrapolates that the average will continue to decrement for the next ten years. It has been assumed that 50% of the S&P corporates in the year of 2016 will be outperformed by new firms who just recently entered the index in the year of 2026.

Creative destruction undeniably became the underlying concept of this phenomenon, which was analyzed by Schumpeter (Schumpeter, 2013).

There are three things which determine the company’s lifespan: Building a business that suits the customers’ need, running operations effectively, and the ability to drop its core business when it no longer meets the company’s metrics (Foster & Kaplan, 2011). The other framework which was made by Aetna’s founders explains similar things to consider, along customer needs, it includes performance metrics, industry position, the health of the business model, and also talent and capabilities (Bertolini et al., 2015). These are called fault lines to measure the firm’s present state and its aim in the future. Both metrics highlight the same meaning, especially about constantly innovating or seeking customers’ need to stay relevant in the market. This is the job of the Product Manager.

In other words, continuously reinventing the company, specifically the product becomes the key to survive in the long term. This general idea gives an insight to firms as they need to be aware of today and tomorrow’s competition (Wang et al., 2016).

The Difficulty of Doing Innovation

Figure 2: The 4 Step-up Ladder of Doing Innovation, by Author

The Unconsciously Unable

The first ladder as shown in Figure 2 is the unconsciously unable, where the Product Managers just simply do not know the importance of innovation, either because of their non-innovative culture or naturally some old-fashioned companies. PMs in this company who are in this position need a lot of homework to innovate in the right path eventually . The example of this is the company Kodak, where in the beginning they tried to ignore the digital camera, a newer technology, in denial, hoping that it would go away, and unable to adapt to the evolving market (Munir, 2012).

The Ignorant

The second ladder is the ignorant, who know the importance of innovation but do not want to innovate. This state is divided into two segments, either fundamentally too in love with the product (one of the biggest sin of product managers), or they are big companies who are using the wrong metrics to their enterprises.

For the first segment, the cannibalism theory, becomes the most important aspect, as it is considerably hard for a company to introduce a new product which will compete with its current product. Nevertheless, if the company does not do it while believing that no one else will either, the company will operate under the delusion until a newcomer performs an offense and consistently gains market share as explained in the Attacker’s Advantage book (Christensen & Rosenbloom, 1995). The solution to this is simply the company should not be in love with the product, instead, in love with the problem and always seeking customers’ need and create value out of it.

For the second segment, it is common for large enterprises, where the product managers put ‘present-oriented’ metrics, such as only aiming to maximize shareholders’ value, like “keeping the company’s stock price high”. At a glance, this parameter seems real and straightforward, but that perspective is actually jeopardizing the company slowly. The reason is that metrics such as return on investment (ROI) and the internal rate of return (IRR) focus on something that is profitable and fast, while the real innovation, the long-term investment, is not on their priority. Management position obviously plays a significant role in choosing those metrics where the managers of these firms tended to be people who are expert at finance and accounting, supply chain, or production.

The example of this stage is Intel, who decided not to cannibalize its own product, x86 processor when the market trend was changing from desktop to mobile devices. The result was their competitor, ARM, dominated the market. Furthermore, as the head of the company chose ‘present-oriented’ metrics, they had an astounding profitable business model, but the result was the company’s leading days were over (Blank, 2016).

The Frustrated

The frustrated are the Product Managers who want to innovate but use the wrong strategy. Lack of innovation knowledge and practice are the main reasons for this. The other thing to consider is the natural form of big sized companies who are better in dominating the existing product, but worse in finding disruption opportunities if compared with start-ups. They need to continuously reinvent the products while maintaining their innovation culture and implementing innovation frameworks such as lean stack and three horizons of growth. The example of this will be Yahoo, when they knew the importance of merger and acquisitions, but missed to acquire useful innovations such as Facebook. Yahoo got a deal to buy the company for 1 billion dollars, but they lowered the price and Mark declined it (Carlson, 2011).

The Successful

PMs of the last ladder are the ones who want to innovate and use the right strategy. To unravel the requirements which determine the company’s lifespan, a table that explains the relationship between an element and an innovation framework is made. As illustrated in a comparison Table 5 below, every single point is covered by Ash Maurya’s lean stack model (Maurya, 2016). Therefore, it is highly advised that innovative companies should follow the details on the lean stack, as it will ensure them to stay on the track. An example of this is LEGO, who is not only good at managing innovation portfolios but also utilizing the open innovation concept that links both business and creativity. In the LEGO Ideas program, their consumers can create their own LEGO, and by the time the design reaches some votes, LEGO will build it and share the revenue with the creator (LEGO, 2016).

Table 1: Relation Between A Requirement Which Determines The Lifespan of A Company and An Innovation Framework

However, utilizing this innovation framework only, will not be perfect without an understanding of an ambidextrous company concept. That is where the importance of a balanced portfolio of innovation rises. If they do so, fortunately, the company will be able to win in the present as well as in the future.

The Importance of Balanced Portfolio of Innovation

Figure 3: Technology Life Cycle: S-Curve (Rogers, 2003) and Technology VS Globalization (Masters & Thiel, 2014)

The technology life cycle and technology versus globalization graph in Figure 3 explains that at first, there will be a novel technology or innovation that makes progress from zero to one, and thus adopted by the people from early adopters. As the time goes by, the market changes into the late majority and becomes more mature as the technology is globalized, moving from 1 to 2 or 3. After this point, the competition becomes entirely based on incremental innovation and the extensive horizontal progress moves from a number to ‘n,’ and the discontinuity phase occurs. The understanding of these graphs comes into a conclusion that continuously innovating is not an option. Instead, it is obligatory, since such innovation will be outdated and replaced with something newer. A company has to ensure that they are not only successful in one s-curve cycle but also further s-curve cycles and other zero to one progress. One of the ways to do that is to implement the organizational ambidexterity.

Figure 4: Organizational Ambidexterity (O’Reilly & Tushman, 2004)

Organizational ambidexterity, as illustrated in Figure 4, determines the ability of a company to balance between the current business, and creating a new business. Product Managers are the ones who in charge for this. The keyword for the core business is exploitation, while for the new business is exploration. The exploiting effort focuses on incremental innovation and making some minor improvements on products. This is a considerably low risk as it aims the existing business model and the one which is profitable and targeting the present market. On the other hand, the exploring effort focuses on breakthrough innovation and discovery of ‘a secret’ to grow from zero to one. This endeavor might not look right in the cash flow, but it is pretty essential for surviving in the future.

Figure 5: The Three Horizons of Growth (Baghai et al., 2000) and Innovation Ambition Matrix (Nagji & Tuff, 2012)

The extended version of the S-curve and organizational ambidexterity would be the three horizons of growth, where the company’s survival in the long term is ensured, as shown in Figure 5. The innovation ambition matrix shares the same idea with the three horizons of growth. Those frameworks illustrate there are three business systems with differences in terms of risk level and expected return. The first horizon or ‘the core’ focus on defending and extending the company’s core businesses. The second horizon or ‘adjacent’ focus on building emerging businesses or developing new opportunities. Lastly, the third horizon or ‘the transformational’ creates viable options in the future that can cannibalize the current core product. The best flow to plan this framework is going from horizon 1, to horizon 3, to horizon 2. The reason is, the third horizon is the desirable and ideal future state, which the current aspects can be identified. This makes the company stay open to revolutionary product options. On the other hand, Horizon 2, which is executed the last, is the transition phase from the current state to horizon three that requires continuous revisions and experiments. The other thing to be highlighted is, since three horizons of growth’s x axis are time, undeniably, timing, or following the trend, is the most important thing for a company. Often, it determines which companies are going to be successful, and some who will no.

Conclusion

Taking everything into consideration, product managers are the key people in maintaining organizational ambidexterity, which is the firm’s ability to balance between exploits the current business and explores new business. That is why in this modern era, innovation definitely plays a huge role in terms of making endure products. Product Managers need to be able to think outside of the box to continuously reinvent and innovate, in order to stay relevant in the market. Even, in some cases they should have the courage to kill their own products. As the saying goes, the only constant in this world is change.