Trending Assets
Top investors this month
Trending Assets
Top investors this month
Introduction
Since reading Chris Mayers book 100 baggers, I’ve been inspired to look for factors contributing to innovation and above-average growth.
There will never be a set formula because the world is dynamic; said another way, factors
and environments that work in favour of a particular company or disruptor may not apply to another company. That is the crux of investing; Figuring out as much as we can to paint a model of reality that directs our prediction. The future is the judge at the behest of our ignorance.
I came across a white paper breaking down the processes of Disruptive Innovation. I don’t heed everything in these reports, but they contain some insight; however, you need to extract the information selectively.
The six breakdowns
(1) Innovation Zoo: Too many unfocused areas
Essentially, you should be continuously innovating and out-innovating your competitors. The key is figuring out what will work and aligns with the company’s overarching strategy and goals Vs distractions and digressions.
Amazon $AMZN is a beast when it comes to incepting innovative ideas and making them successful and killing bad ideas likely to flop or that have flopped already.
Me neither, but I bet you know what AWS is! You most likely have an Alexa at home. Perhaps, you’re a member of Amazon prime.
Companies should not be scared to cultivate and explore new ideas, but they must be impeccable at killing bad ideas and sustaining good ones.
Excerpt from the report ...
“If you are investing a little bit in everything, you likely are not investing enough in anything, forfeiting the opportunity to support your best bets. Ideas may demonstrate promise, without the executive sponsorship needed to incubate and scale….The fix is simple: put boundaries
around employee ideation so that it is more tightly aligned with the firm’s strategic intent, resources, and core competencies.”
(2) Inside-Out: Failing to test your ideas with customers
It’s about taking ideas and validating them with customers before doubling down and going full steam ahead. The caveat – Customers and consumers don’t always know what they want.
The best example of consumers not knowing what they want is Apple $AAPL and the original iPhone. Before the iPhone launch, many surveys and consumer feedback indicated a low appetite for this type of smartphone.
This may astound some people because we are used to the multi-capable phones of today, but do not underestimate the incredulity of human behaviour. The term Luddites didn’t arise from fiction.
Apple pulled off the same thing twice, this time under Tim Cook’s leadership. The Apple Watch was not received well, with over 80% of people stating they would be ‘Not so likely’ and “Not at all likely to purchase the product, according to one survey.
Palantir $PLTR had developed software that they often tout as being developed for tomorrow, made before organizations realize they require it. When the pandemic came around, they deployed their software in the UK & USA in record time and rolled out one of the quickest and most efficient PPE & vaccination programs.
Looking at the other side of this, listening to customers and figuring out the value proposition can pay off.
Excerpt from the report ...
“Engaging customers directly helps you learn which of your assumptions are true and which are self-serving. Innovators that know what delights customers are better placed to create an emotional connection that excites end-users and generates competitive advantage.”
(3) Pilot Purgatory - business experiments get stuck in limbo, neither approved nor cancelled
This one sounds like a combination of the movies Top Gun’ and ‘The Purge’. I can assure you no pilots were killed in the summation of this business concept. In all seriousness, this is when a business comes up with a new way to enhance its value proposition or improve the business, but the idea never makes it out of ‘pilot’ mode.
It tends to occur when businesses are doing well, and management uses excess resources and cash towards proof-of-concept ideas or technology proof points. I’ve always opined that it’s a way for CEOs and management to impress shareholders and investors by exploring and experimenting with the current ‘hot’ technology and masquerading as being innovative when in reality, there is no real intention to see the idea come to deployment or no defined route as to how it will deliver ROI; Vanity over reality.
The reasons for failure can include
- The internal ecosystem doesn’t support it.
- Unable to obtain approval from external vendors.
- Company policy roadblocks the idea.
Do you remember the IoT hype? Many companies trialled sensors and other IoT devices, but only a few had seen it through to full deployment.
But not all companies and organizations suffer from the purge. Some are master deployers of pilot programs.
Starbucks’ $SBUX and its “In-App Order-Ahead” program. The chain began pilot testing pre-ordering back in 2014 when the concept still required explanation. Now, the ordering method is a staple for most stores and has elevated consumers' expectations for convenience and immediacy. It rolled out from pilot test to nationwide deployment in record time.
Excerpt from the report ...
“Projects that start with the problem statement of how we can apply this technology are doomed to Pilot Purgatory. Start instead by defining a measurable opportunity gap. Unless you have a sense of the magnitude of the problem you are solving and the breadth of the opportunity, there is no motivation for continuing, even after a successful pilot.”
(4) Investing ahead of learning: Graduating a new venture too soon
It’s about exploring and substantiating innovation and ensuring it’s informed rather than implementing a new product or setting up manufacturing without knowing if it will work, who the end customers are going to be, or if it’s a good idea.
Executives and managers succumb to operational performance where they are expected to know what the solutions are, but if you act and think like a start-up, then you need to be driven by agility, not speed.
The perfect example of this is the report about General Electric $GE and its failed plan of becoming a ‘Top Ten’ software company.
Excerpt from the report ...
“In 2014, GE’s digital transformation vision was bold. It saw the possibility for the ‘Industrial Internet of Things’ and set itself the goal of being a ‘top ten’ software company. They anticipated sensors gathering data about every aspect of a manufacturing plant’s operation being fed back and analyzed in the Cloud in real-time. These ‘smart machines’ would radically improve effectiveness and efficiency for thousands of companies world-wide. They forecast a market worth $500 billion by 2020 and committed to create a first-mover advantage. GE tripled its R&D budget, built a 1,000-person software division, and launched its own big data platform called 'Predix'. Five years later it had failed. They built a universal big data platform, when the market wanted a way to process existing data for specific applications. They invested without confirming the customer problem and the customer’s willingness to pay for it. A new CEO closed down the strategy, the legacy business reasserted control, and GE’s ambition to be a software firm folded.”
General Electric $GE failed miserably in doing its homework and understanding the marketplace.
Excerpt from the report ...
“We talk a lot of talk about creating ‘fail fast culture. However, the goal is not failure, it is rapid learning. When you learn, you can make faster, more informed decisions… It is not speed, it is
agility... Impatience drives decisions that are not based on evidence, leaving the company vulnerable to committing to a business model that may not work. ”
(5) Crossing wires: Failing to separate exploration from the core business
If you want to explore a new business avenue that is materially different from the core business, it may be easier and less of a distraction to completely separate it. That way, you can enjoy all the advantages of being a start-up whilst still having access to resources and assets, giving it the best chance to survive and thrive.
The reasons for exploration could be many such as
- A risky but obtainable new business avenue
- To mitigate the contagion effects of failure as a result of exploring new business opportunities.
- Satisfy shareholders and investors
- Derisk the chance of being completely disrupted
An excellent example of this is Volvo $VLVLY, and its subsidiary Polestar $PSNY. Whilst not organically incepted from within the organization, management’s decision to operate it separately, affording it autonomy and an exploratory business model whilst allowing access to
Volvo’s core assets.
They are now public under the ticker $PSNY and delivered $1.34 Billion of revenue in 2021. Volvo owns 49.5% of the company.
Excerpt from the report ...
“An Explore business unit has a different rhythm. It lives with high uncertainty… Core businesses drive to short-term results so that they can meet performance expectations… The solution is an ambidextrous organization that separates Explore business out from the Core… Explore needs autonomy to operate…”
(6) Capacity to act: Not committing resources to a new venture
This aspect is far too similar to number (3) Pilot Purgatory and (5) Crossing Wires with highlights of (1) Innovation Zoo.
Having said that, the fundamental lesson here is aimed at management and executives wrestling with a new idea that may cannibalise the current business.
Concluding thoughts
As I intimated in the introduction, I'm not a massive fan of following all studies, MBA-related strategies or white papers, but there is merit and information that can be salvaged to help you as an investor view companies through a different lens.
Ask yourself the following questions when researching companies:
- Are they continuing to innovate, or are they standing still?
- How quickly and efficiently can they incubate good ideas and kill off bad ideas?
- Have they tested the idea and validated it with customers, or are they hoping it will work like $GE?
- Is the core business at risk of being damaged by new ventures that should be separated?
- Are they listening to customers and quickly iterating?
- Are management and executives engaging in vanity projects to appease shareholders and investors? Wasting resources?
Businesses are dynamic, as is the world they operate in. Apply different perspectives that allow you to view the business from different lenses.
In the coming days, I will post an extended version with more detail and examples on my substack.
Change Logic
INNOVATION BREAKDOWN - Change Logic
Get answers to questions like what is an innovation breakdown and why are innovation breakdowns important to understand?
Already have an account?