To do well at innovation, companies need to design their internal processes to engage in three activities: (1) facilitating serendipity to create sparks of creative ideation among the employees, (2) capturing and testing the outputs of this creative ideation, and (3) transforming new ideas into successful products and services. It was John Seely Brown who first created the notion of finding the Architecture of Revenues that lie at the heart of what turns R&D labs from hotbeds of creativity and invention into hubs of innovation. Business models are the connector between new technologies and commercial success.
The Stage and Gate Model has many benefits but fundamentally it utilizes the processes shown in the “Waterfall Model” figure. The stage and gate model also tends to reside within organizations that are quite siloed. The siloed specialist departments are sales, finance, marketing, operations, and technology. The people who work in these departments collaborate via memos, handoffs and an annual budgeting cycle. New projects within such companies require a business case with five-year projections of profits and ROI.
The problem with ideation in such companies is that upon coming up with an idea, inventors are immediately confronted with business planning. Anyone with an innovative idea has to make a financial case as to why the idea might succeed. Horizon 2 and Horizon 3 innovation is about imagining the future. The proposed business models are often very different from the company’s current models. As such senior management will not have seen the projected financials play out before and their unfamiliarity makes them critical judges of new projects.
The agile method differs and is built upon the concept of “Ba”. This is a Japanese concept in which knowledge is converted from tacit to explicit and back again, in a cycle that has four parts as shown in the “Spiral Evolution of Knowledge Conversion” figure. In this model an individual usually starts in the Internalization Quadrant of the lower left. In this quadrant the person is takes explicit knowledge that he or she knows and by thinking about it converts it into an ill formed idea of what might be (tacit knowledge). The cycle typically continues by a two people working together and talking about the idea, building and expanding upon their tacit knowledge. When a number of individuals get together and propose a project to do, the thought process moves into the upper right quadrant where Externalization occurs. The knowledge they have is converted into a business and/or project plan to try out their idea. In the lower right quadrant the project plan is executed, market feedback is received, and the resulting explicit knowledge is looked at again by an individual thinking about what was learned and what might be done differently. This cycle repeats itself over and over. From studying this knowledge transformation model Agile product development processes were developed. Business and product development does in fact follow a similar cycle of cycles. The waterfall model has the deficiency of not taking into account these cyclic tendencies.
To solve this problem it is important that management use different tools to inform their decision making, such as shown in the “Business Model Canvas” figure. The advent of agile and lean startup management practices provides a set of methods to treat innovation as management building on this canvas framework. What is captured on the canvas is the innovator’s vision as a set of assumptions to be tested.
As is noted in the “Business Model vs Lean Start-Up Canvas Elements” figure there is a slight distinction in the canvas used for business development projects within a Corporation versus a true startup. This is because in the former relationships already exist between partners and customers. Clarity about the basis of these relationships is important for project teams to understand when they take on innovation projects. In contrast, startups are more focused on generalized problems and solutions, and need to have much better clarity around why their product or service will offer an unfair advantage. This is because startups are entering the market without a brand upon which consumers can judge them. They need a truly unfair advantage in their product or service so consumers will take the risk to do business with an unknown entity.
The the inventor’s vision is tested with customers using experiments. This is done with the “Spiral or ‘Create-Test-Learn’ Development Process” as shown in the figure. By putting together a prototype and going out and learning from real customers whether or not the new product will help them do a job they need done, allows a team to either move onto scale up if it gets it right, or iterate again with another variation to test. As a project iterates toward success, the role of management is to track how well the teams are doing at aligning the innovator’s vision with a profitable business model.
Thus innovators have to solve for both technical and market risk. Within Stage and Gate R&D labs, companies are traditionally focused on technical risk. However market risk questions are just as important. Eric Ries makes a distinction between value hypothesis and growth hypothesis. In the former inventors are testing whether the products are genuine consumer needs. In contrast in the growth hypothesis the focus on how customers will find and buy the product, and also how the product will grow market share profits. Resolving these two hypotheses is key to successful innovation. The “Spiral Development Steps” figure shows the need to create prototype products that will help validate or improve the assumptions by getting out of the building.
Another attribute that is much better defined in spiral versus waterfall models is the need to identify and prioritize risky assumptions throughout the development process. In the “Identifying Risky Assumptions” figure each of the elements in the business model canvas are categorized as assumptions. Some of these are well supported by known facts, either in the technology or the marketplace. However there are also ideas that are merely assumptions. They are those that have no knowledge or evidence of their correctness. Using the business model canvas, the distinction between assumptions and knowledge should be identified. Typically this is done by marking each of the sticky notes with untested assumptions with a red sticker or “X”. Further within the identified assumptions will be ideas that are critical for the success of the business model. Other assumptions may not be as critical for success. Assumptions that are critical to success should be clearly identified on the canvas using blue stickers or “Y”. Risky assumptions are those assumptions that have both “X” and “Y” associated with them. These are the ones that need to be tested first by the team. This prioritization on the basis of critical for success and uncertainty allows the spiral model to succeed or pivot much more rapidly than is done in the waterfall model.
The next element that is typically done better in the spiral versus waterfall model is that of setting minimum fail criteria ahead of time. Stage and gate models often rely on soft criteria from voting at the gate review to determine whether a project succeeds or fails. Spiral model rely on the decision to proceed or iterate based upon predetermined “Minimum Failure Criteria” as shown in the figure.
As the team moves towards testing assumptions, what it does is take that top 1 to 3 most risky assumptions in each part of the business model canvas, and tracks testing progress of each risky assumption by filling in the “Tested Assumptions Map” as shown in the figure. By laying out the work to be done, and the results obtained, on a single large-scale map, allows a team to see at the conclusion of the testing whether or not the project will move on or whether it needs to pivot. If pivot is the answer, the map also reveals the background needed for the next generation of ideation.
As shown in the “Innovation Life-cycle” figure developed by Maurya, three tools are used to answer three sets of important questions: (1) The Problem and Solution Fit. Do we have a problem worth solving? Do customers have a real need for the product? Are we working on the solution that meets customer’s needs? Will customers play for the solution? (2) The Product Market Fit. Have we built something people want? Are we achieving traction in the market? Have we found the right channels to reach customers and deliver value? How well are we signing up customers and retaining them? Can we create and deliver the product with the right costs and margins? Are customers paying for the product? And is a revenue model sustainable? (3) Scale. How do we accelerate growth? Have we found the right growth engines? How fast are we growing beyond the early adopters of our product? How quickly are we adding and retaining new customers? How fast are we growing revenues? Have we reached breakeven or profitability?
Note that in the “Innovation Lifecycle” figure, various parts of the business model canvas are focused upon as the project moves through the three phases of the innovation lifecycle.
Looking at the business model canvas after brainstorming sessions or idea competitions, the issue becomes how to spend the money the team has to work on the best projects. To help make these decisions, projects can be compared by focusing on two main questions. (1) Is the project aligned with our company’s strategic goals and innovation thesis? (2) Does the business project help us meet our goals for achieving a balanced portfolio?
To prioritize the project, projects are segmented as shown in the “Project Selection Matrix” figure. To use this matrix, three activities are done. First, all the projects are put on sticky notes. Second, projects are placed vertically on the “Project Selection Matrix” figure using a pairwise comparison method. Third, without changing the vertical ranking, each project is moved horizontally via a pairwise comparison based upon how much the project helps balance the company’s portfolio. Note that to do this effectively, a good idea of the company’s business needs to fill future revenue and profit gaps are needed. Projects in the in the top right quadrant of the Matrix represent ideas that should be considered first for further development.
The “Comparison of Lean Project Life-cycle Attributes” figure makes the contrast between the Stage and Gate methods and Agile / Lean methods stark. The agile and lean methods focus on speed early on to develop both the technology and business model. They also utilize very different success metrics. Only after the project reaches the Executing stage do the Agile / Lean attributes resemble those of the Stage and Gate process.
Introduction of the agile or lean development model occurred primarily in the software industry. In this industry business models and technical developments are rapid because of the nature of the technology involved. It is more difficult for more traditional brick-and-mortar corporations to adopt such processes. As such modifications of the stage and gate model to include business model development and conduct iterative consumer testing with prototypes has been developed.
The integration occurred because a structured gating process for product innovation has clear benefits. It reduces the risk and costs of project failure and increases the chance of new products success. However, combining the principles and methods of Agile project management with the tried-and-proven Stage-Gate method for the development of new services and physical products has merit. Evidence shows that this new hybrid approach speeds up the innovation process, makes it more flexible and iterative, and ensures a measurable output early in the process. Choosing which development models to use as templates can be done by referring to the industry segment R&D Games Models described earlier as well as looking at the “Elements of Agile and Stage-Gate Methods” figure .