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Focus: Maximize Upside Potential

About Scaling Edges: Key design principles

When companies speak of pursuing growth, most are speaking of product- or service-level innovations produced in the core of their organization. Introducing new products or improving existing services may offer companies short-term gains; however, we believe this strategy alone will not yield sustainable returns in the long-run. As reported in the 2011 Shift Index, competitive intensity has more than doubled since 1965, and brand disloyalty is on the rise. Given these conditions, companies cannot simply rely on tweaking core products to create sustainable growth.

Instead, companies should focus on edges that have the potential to scale aggressively. An edge can be a new product, customer, or market opportunity, but must be aligned with the underlying forces at work in a given industry. Distinct from a new core product or service offering, an edge requires a very different set of capabilities from current operations and has the potential to transform the core business entirely. In recent times, many of these edge opportunities have emerged as the result of disruptive technologies (social software, cloud computing, mobility, and big data analytics) and from expanding into new geographies. Rather than pursuing the marginal returns of product innovation, firms should focus on edges as a means to achieving institutional innovation. Edges have the potential to drive significant, sustainable returns, and if chosen correctly, should eventually assume the role of the core, transforming the structure of the institution.

Q: How do you start?
A: Focus on edges, and not the core

In order to begin searching for edges, companies must have a rigorous definition of what an edge is. To differentiate whether an opportunity constitutes an edge, leadership should consider an edge’s key characteristics:

Short term

• An edge has the ability to grow the pie

During the early growth stages, it is important that the core does not feel threatened by an edge. In particular, if the core believes the edge is cannibalizing revenues, then it will fight back and prevent the edge from growth. In the short-term then, it behooves the edge to create revenues that do not create a “zero-sum” game mentality by challenging the core’s business.

• An edge requires minimal investment to initiate

When an initiative has high growth potential, it seems logical to invest significant resources and dollars into it. However, if an edge requires substantive investment, it will likely raise red flags and “institutional antibodies” to change from within the core. An edge is intrinsically different from the sort of project that the core is comfortable with, and this DNA incompatibility tends to heighten scrutiny and oversight of resources allocated to the edge. By contrast, if the edge requires only a small investment, it can remain relatively undetected and can likely operate and grow without significant intervention from the core.

Long term

• An edge aligns with long-term disruptive shifts in the marketplace

“Disruptive market forces” are the underlying changes at work within a given industry. These forces include technological innovation, changing customer needs, and changes to public policy. While different for every industry, these forces are creating change at an increasingly rapid rate and have drastically altered the economics of many industries. Companies that fail to understand these forces may fall victim, while those that invest in opportunities aligned with these forces stand to benefit. By definition, an edge must align with these forces if it is to scale in the long-term and ultimately transform the structure of the organization.

• …and an edge has the potential to transform the core

An edge requires new organizational practices and capabilities from the core. As the edge scales and becomes more integral to the organization as a whole, the old core must eventually transform to continue capitalizing on the opportunity. Ultimately, a “new core” will supersede the old with distinct practices and capabilities to maximize the upside potential of the edge.

These considerations can help a company understand what to look for in an edge. The next step, however, is to help a company determine where to look. This selection process begins internally. A company should start by reviewing existing initiatives piloted internally and determine if they have potential based on the five edge criteria. There may already be business units or individuals within the organization that are testing new ideas that fit the edge criteria.

If there is a shortage of edge ideas internally, a company may then look externally for additional opportunities. If a company relies on external input, however, it should consider the scale of any acquisition, keeping in mind that large investments can raise significant antibodies within the core. This approach goes against the third principle of starting with a small investment.

Q: How do you mobilize the right resources and participants?
A: Staff for passion before skills

Traditional core projects are staffed based on who has the right skills and experience for the job. On the edge, however, the team may be faced with ambiguity or challenges that test these traditional staffing requirements. Employees that are passionate about the edge or opportunity are more likely to be excited by and successfully tackle the unique challenges that come with working on the project. It is important that when staffing the edge, leadership staff first for passion before looking for a specific skillset.

In addition to finding the correct team, it is important to have a senior sponsor at the executive level. This leader will serve as a “change agent” within the firm, and must have the courage and conviction to challenge status quos and the desire to fundamentally alter the future of the organization.

Collectively, this team must be passionate individuals who are seeking new challenges and have a desire to learn. There are a few characteristics of passionate workers that can help distinguish them:

• Questing disposition

Workers with a questing disposition continually seek out new challenges to test and advance their capabilities. They need continuing stimulation. But it is stimulation of a certain type – the kind that comes from going beyond one’s comfort zone, addressing new challenges, engaging in creative problem-solving and developing new skills to make progress in a challenging environment.

• Connecting disposition

A connecting disposition seeks to connect with others and form deep, trust-based relationships. For a passionate person, this is about continually reaching out to find people who share their passion or who might have some insights that can be helpful in pursuing their passion. It is ultimately about a desire to learn from each other and to get better faster by working together.

• Comfort with failure and restart

Edge opportunities venture into areas of unknown or untapped growth. This pursuit requires a “whitewater” mentality – a willingness to accept that the short-term direction for the edge will frequently change along the way as the opportunity is explored and tested in the marketplace. Workers with a history of taking risks, dealing with ambiguity, and comfortable with failure are a good fit for an edge.

Q: How do you use disruptive technologies to grow?
A: Break dependency on core IT

Using core IT systems or shared services creates additional dependencies to the core, which can cause unintended consequences such as greater scrutiny and oversight. To combat this, edges can harness technologies outside of those offered by the core. Specifically, new disruptive technologies such as cloud computing, social software, and big data analytics are often more economical than core resources and evade the clasp of the core.

In nascent stages, there are several important applications of these tools. First, disruptive technologies, and in particular social software, are useful means to identify and connect with passionate people in and outside of the firm. These people may engage with the edge informally or contribute their free time to help the edge develop.

Once an ecosystem has been identified, tools such as data analytics and cloud computing are useful for breaking up and tackling problems that may have previously been too complex to leverage external support on. These technologies can not only be effective; they are often inexpensive and easy to use. Price performance advancements and increased competition in these markets have made these tools even more viable.

Q: How do you measure success to drive improvement?
A: Embrace double standards

Measuring the performance of an edge is important both to evaluate its own success and also to justify its existence to core detractors. In order to accomplish these missions, there are three sets of metrics the team should focus on:

• Short-term metrics

It is important to establish short-term milestones by which to measure progress in the market. For example, short-term milestones could measure aspects such as market penetration (e.g. user-base) or participant activity (e.g. use of disruptive platforms). These metrics should be easily measured and closely aligned with the long-term objectives of the edge.

• Long-term metrics

In addition to tracking short-term performance information, it is important to maintain a set of long-term metrics. These should measure aspects such as growth trajectory and correlation with fundamental industry shifts. Though perhaps more difficult to measure, these metrics help to provide a more holistic view of performance.

• Metrics that matter to the core

While an edge initially avoids confrontation with the core, it is valuable to keep some measures of how it may support core operations. These metrics could consist of financial or operating metrics important to the core and measure the edge’s role in that performance. By tracking metrics that matter to the core (calls deflected from customer support centers, for example), an edge can better justify its existence within the larger organization.

Case studies

A new breed of leadership
Staff for passion before skills.
 
SDN measures up for SAP
Embrace double standards.

A New Breed of Leadership

Case study

 

When Wired Magazine Editor-in-Chief Chris Anderson had to find a president for his fledgling unmanned aerial vehicle business, commonly referred to as UAVs or Drones, it was not a litany of Stanford degrees, but an online video of a helicopter operated by Wii controller that moved Jordi Muñoz’s resume to the top of the stack. Relatively untrained (Muñoz attended one year of University in Mexico before moving to San Diego with his wife), and completely untested in the world of business, it was Muñoz’s passion for Drones and prominence in amateur Drone communities that won him the job.

In 2009, Anderson and Muñoz co-founded 3D Robotics – a robot manufacturing company with factories in San Diego, California and Bangkok, Thailand. In short order, the firm had grown to 11 staffers, and in March 2011, revenues hit over one hundred and sixty thousand dollars, up from a modest five thousand their first month. Still a small player in the space, 3D Robotics is generating buzz among large clients. 3D Robotics is able to innovate so quickly in large part because of its rich participation in knowledge flows, including a 15,000-member community of enthusiasts at DIY Drones centered on the open source coding to operate UAVs.

Though Muñoz did not have the traditional credentials to lead such a fast-growing venture, his passion for the work and access to rich flows of information made him the strongest candidate. This passion has carried over into his tenure at 3D Robotics. He and Anderson share a vision of a world where drones are household entities: “Our approach,” he said in one interview, “is the personal computer.” To achieve this, Muñoz has retained the questing and connecting dispositions that helped cultivate his boyhood fascination into a deep expertise.

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SDN Measures Up For SAP

Case study

 

In 1996, Germany’s SAP AG had more than 9,000 of its enterprise software systems installed at companies worldwide. As the number of applications grew, however, it was increasingly difficult to search for information and communicate across systems. To overcome this challenge, SAP developed an application called NetWeaver, which layered its existing enterprise applications on top of each other, enabling the applications to “communicate” more easily.

When SAP’s product development team began selling NetWeaver, it became apparent that it’s value in part depended on having a network of individuals that engaged with NetWeaver on an ongoing basis. SAP launched the SAP Developer Network (SDN) in 2005, which served as a platform for forums, wikis, videos, and blogs to enable developers to share knowledge about platforms and SAP products.

Since the success of SDN was so closely linked to the success of NetWeaver, it was imperative that leadership choose the correct metrics by which to evaluate SDN’s impact. Leadership began looking at items such as collaboration activity, membership, forum posts, and average response time to questions on the forum. It was clear, by the average response time of 17 minutes and that 85% of all discussions were closed, that SDN had an impact within the community.

While important to SDN leadership, these metrics did not easily translate to show impact on SAP’s core operations. To address this, SDN leaders also tracked metrics significant to the broader organization. For example, SDN demonstrated it could improve SAP’s traditional customer service needs, decreasing the number of troubleshooting complaints to service centers. Tracking these metrics helped demonstrate the success of SDN and the NetWeaver platform to project and executive leadership.

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