How To Organize Corporations To Be More Innovative

An interview with Geoffrey Moore, the “Zone to Win” & “Crossing the Chasm” author

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Geoffrey Moore is a world-renowned author, speaker, and advisor who splits his consulting time between venture capital startups and established high-tech enterprises, like Salesforce, Microsoft, Autodesk, and Google. His first book, Crossing the Chasm, focuses on the challenges startup companies face transitioning from early adopters to mainstream customers. I spoke with Geoff to discuss his latest book, Zone to Win, which addresses the challenges large enterprises face when embracing disruptive innovations, exploring how corporations can make offensive and defensive transformations. In the process of laying out this framework, Geoff explains why the conventional wisdom that corporations should try to “disrupt themselves” is unrealistic.

Image: Forbes

Scott: What should incumbents look for to determine whether a disruptor has made enough progress that an existing, mature business requires defending?

Geoff: Well, your customers and your sales team are definitely going to tell you. When you start hearing requests for features and stories about lost sales, it’s a signal from the market. Truthfully, I think it’s better to be a year too late than a year too early when reacting defensively to these types of threats, because a transformation requires a lot of sacrifice. And you can always inoculate yourself by preparing responses in what I call the incubation zone, where new ideas come from whether they are internal or external.

Scott: Zone to Win talks about external and internal innovation, and applying some of the playbook of institutional VC against R&D efforts. How do you think about the balance of external to internal innovation?

Geoff: This is the heart of the nut. You have to recognize that in the incubation zone, there is no near-term payoff. At this stage, the entrepreneurs running the effort are still looking for product-market fit and the activity is not that expensive. But scale is what matters to big companies, and this requires real investment in the transformation zone, where the idea can be grown to 10% of the revenue line. So if the organization is going to use M&A to jump start a transformation, it shouldn’t be a dumb acquirer and that requires learning first. I like to see companies incubate a new business by driving it to $10–15 million in revenue, and this can be done via internal innovation, venture capital investing, and so on.

Scott: In the book you you mention the goal of zone offense is to add a new business at scale from the transformation zone — what happens to ideas that don’t prove to have that much potential?

Geoff: There are other choices for ideas that don’t deserve to go from the incubation zone to the transformation zone. You can send them to the performance zone where revenue is the top concern. Novel technologies can become a “mid-life kicker” for mature products, providing a vaccination against possible disruptive innovations. You can also bring ideas to the productivity zone where the focus is on the bottom line. Here they can be added to the tech stack and improve overall enterprise performance.

Scott: Salesforce is an example in the book, and they are an unusually agile company with a charismatic founder who is still running the business. I don’t know too many companies that have multiple corporate VC funds, for example, but Salesforce does. How do you recommend organizations with more inertia get started on offensive transformations?

Geoff: I came to realize after writing the book that shareholders of public companies understand defense much better than offense. There are probably about 20 examples of great zone offense transformations in our lifetime, but there are tons of examples of successful defensive transformations. For offense, it really takes a visionary founder to call that play, and rally the entire company around the effort. You need to control the narrative about why the transformation has to happen, and there can be no compromise or half-hearted efforts. Once you start, you must finish. You may need to fire executives who aren’t getting it done. Offense is not for everyone.

Scott: All of these large corporations managed to grow aggressively to become what they are today, so why do you think these transformations are so difficult? Did they forget how to do it?

Geoff: They didn’t forget, but the company state presents counter-incentives to doing it again. Being a public company is about predictability and stability, and rapid growth is awkward. It’s like having an adolescent, when your kids will eat like an adult, but earn like a toddler. You’re molting.

Scott: What about corporate politics? I like your notion that startups have an advantage because “all their enemies are outside them.” How should corporations communicate, even while they are separating autonomy and responsibility for the zone functions you articulate?

Geoff: In the book I talk about systems versus programs and the role played by each in running the various zones in the corporation. The biggest issue is that each zone needs to honor the roles of the other leaders. For example, ventures in the incubation zone should be funded based on milestones, not based on an annual budget cycle, just like a venture fund would do. They should have a sponsor, just like a venture fund would require. In contrast, the “productivity zone” is all about functions like legal, finance, HR, etc. that keep the company in compliance and also deliver profit to the bottom line. But this is the most dangerous place for startups, which can’t handle all the overhead created by these teams. It’s death to the startup. So they need to keep their distance from each other.

Scott: You mention rooting out corruption as part of the job in the performance zone, which is responsible for top line revenue. Tell me more about that because it’s not the type of advice we usually hear in business books.

Geoff: Well, I’m really talking about corruption of the business practices and goals as part of the performance zone. This is where top line revenue is delivered and mature businesses provide stability.

Scott: I was wondering if there were any other implications given the unusual times we’re living in.

Geoff: [laughs]

Scott: The book also made me think of Apple’s AirPods, which grew to $6 billion in revenue last year. Apple made and sold headphones with much less than a 10% revenue contribution. Then they did pretty much what you recommend in the book: a big M&A in acquiring Beats and then launching AirPods with what seemed like a strong commitment. How would you look at this?

Geoff: I would say that the AirPods are really still a non-disruptive accessory. Apple’s done this several times, though, with the iPhone, and people forget, with the iPod, too. Netflix is another example in the media industry, moving from DVDs to streaming and now effectively becoming a publisher. It’s interesting how the traditional publishers and studios react to what these two companies have done.

Scott: That’s interesting because you also talk about “Horizon 0” in the book and the idea of creating a team that can bring a product line to its end of life. Apple has done this very effectively with its iPods. Why do you think more companies don’t take this approach?

Geoff: You really need to create a hit squad or hospice team, or whatever you want to call it. In music, where Jobs was the only one who could deliver the four major catalogs because of his entertainment industry relationships, ultimately the publishers decided that 99 cents was better than zero. And I think that most public companies take a “steady as she goes” approach and decide that a little money is better than no money. Personal relationships come into play, too. At Kodak, making difficult decisions was harder because the management team ultimately said “these are my friends” and in the end it was Kodak that suffered. So it needs to a separate team that will be less emotional about the sacrifices required.

Scott: You note that shareholders scrutinize financials, but that they do care about more than just quarterly performance. How can leaders test the acceptance of short vs. long term goals in their own companies, to assess how aggressive to be about transformation opportunities?

Geoff: Transformation is a daring bet, you probably can’t assess it beforehand. If your organization is a “measure twice, cut once” kind of company, you probably should continually vaccinate against disruption so that you don’t put yourself in the position of needing a transformation in the first place.

Scott: I always return to Crossing the Chasm, which is one of the first books I read that was relevant to venture capital when I started my investing career in the early 1990s. I can’t tell you how many entrepreneurs have told me, “we just crossed the chasm” and I look at their customer base and think, “no, you are about to fall into the chasm.” Why do you think so many startups miss the point here? My experience is that entrepreneurs really struggle to tell where they are in relation to the chasm.

Geoff: That’s how it goes, isn’t it? I think that with the rise of some high-profile consumer startups, the entrepreneurial world started to accept the illusion that maybe there wasn’t even a chasm at all. The chasm concept is really a business-to-business or business-to-business-consumer model in which the buyer is worried about taking risk when adopting a new product, and that might be less applicable to certain types of consumer businesses.

Scott: Any thoughts on Clayton Christensen’s legacy? The two of you are often mentioned in the same breath and you reference him in your book.

Geoff: Yes, we were friends and he was such an iconic thinker. I think his greatest legacy is really his personal integrity. In business, obviously we have to keep score, but Clay always followed the rule that if you pay attention to your game and do the right thing, the score will take care of itself.

Scott: There is so much talk about offense and defense in the book that I have to ask, which team do you like to win the Super Bowl?

Geoff: I am 100% a 49er fan but I believe it is going to be a great matchup. I think people underestimate how explosive Pat Mahomes is, but if the 49ers’ defense can limit the damage, they should have a good chance!

This article originally appeared on Forbes.

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Scott Lenet is President of Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help corporations launch and manage their investment programs.

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