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I recently had the privilege of hosting a remarkable event in Dallas, TX along with my amazing co-chair, Kim Keating, VP of Big Data for AT&T. This event was particularly powerful because it brought together leaders from all over the country, including Salesforce VP of Strategic Research Peter Coffee, to discuss strategies for competing in the age of digital disruption.

At the event, famous author and executive business advisor, Geoffrey Moore, joined us to talk about his new book, “Zone to Win.” In his book, Moore contends, “Established enterprises struggle with internal dynamics that startups simply do not face.” For the enterprise, resource allocation causes a prioritization crisis.

“Most companies fail at this moment,” he added. “And that's what we need to stop.” In order to stem this epidemic, Moore created a simple framework called “Zone Management” to address the challenges large enterprises face when they try to drive innovation.

When Marginal Cost Goes to Zero

“Disruptive technology becomes actionable when it takes the marginal cost of out of something that for you [the established enterprise], in your history, was very expensive--and drives that cost to zero,” Moore said. “Now consider what this means for your industry, because this and other innovative disruptions can change the design rules and effectively lowers the barrier to entry.”

For example, Moore points out, Smartphones opened up the flood gates to innovation and disruption. The pervasiveness of these devices, Moore says, “Enabled Uber to become the largest transportation organization in the world and Airbnb to quickly become the largest hospitality company on our planet. Both of these companies essentially entered the market for free and took it by storm.”

“When the cost goes to zero, all hell breaks loose,” Moore added. Not for every industry of course. Oil & Gas has yet to be impacted, for example. But look ahead and you will see that many of the Big Data use cases being monetized today will likely be free once machine learning becomes a true enabler. And the enterprise will need to be prepared for how that changes the design rules and drives margins to zero.

Catching the Next Wave

The trick to catching the next wave, Moore says, is making sure you analyze the problem through the right lens. Enterprise companies are measured by profitable growth and business decisions are made based on payback periods like those used in McKinsey's Three Horizon Model. Horizon 1 Payback = a 1 year Horizon, Horizon 2 Payback = 2-3 years, and Horizon 3 Payback = not sure when/if payback will occur.

In this model, the successful enterprise organizations say, give me more sales people and I'll give you more revenue. But that's not how disruptive innovations are born. In order to scale a disruptive innovation, you have to invent it in Horizon 3 (here established enterprises do a lot better than they get credit for) and then scale it in Horizon 2 (this is the show-stopper). Getting through the Horizon 2 bottleneck is the key to catching the next wave. Zone management is the way to do it.

“Not everyone wins at this game,” Moore said. “In fact, a lot of people don't. But in a startup environment, the advantage is no one is conflicted.” In an enterprise environment, where funding is coming from working capital, everyone is resistant because you are going against the grain. Investors say, “No way! We want cash flow.” The sales team thinks it's cool. But they know they will have to create budget for the new solution, which makes it a much harder sell. Sales managers are right behind them pressuring leadership and saying, “You want me to make my number, don't you?” Partners don't know how to support the new product. And most customers aren't early adopters, so they just want you to deliver on the promises you made in the last release.

“Bringing a disruptive innovation to scale is not a natural act,” says Moore. The key is in sorting them out using four Zones in conjunction with the Three Horizons model developed by McKinsey.

  • Horizon 1 - Performance Zone: This is your core business. It's where you make the numbers. If you fail here, you fail your company's mission.
  • Horizon 1- Productivity Zone: If you don't make it or sell it, you fall into the performance zone: HR, IT, legal, marketing, etc.
  • Horizon 3: Incubation Zone: The area of the company charged with inventing the future. These people are sent out ahead to go off and be effectively brilliant.
  • Horizon 2: Transformation Zone: It doesn't really exist. It's a temporary construct you bring in to drive the disruptive innovation at scale.

Now think of these zones within the budgeting process. The Performance Zone gets priority during the budgeting process because they need enough sales and delivery people to make the number. Next, the company will prioritize the projects in the Productivity Zone based on priorities in the Performance Zone's mission. And then, the company will put some money into the Incubation Zone to ensure they are not caught flat footed.

Zone Offense

Moore says organizations are considered a world class if they are successful with one transformation per decade. As a general rule, Moore says you want to get as much mileage out of the same opportunity for 7 of the 10 years. Silos are put in place to support you those 7 of 10 years, and that's a good thing. In the other 3 years, you should be playing Zone Offense. But he warns that Zone Offense requires you to voluntarily puts the company at risk. You have to be “all in” in to make it work.

Zone Offense requires you to take something you either built or acquired to scale (10 percent of total market revenue). When you do that, investors are in awe.

Zone Defense

A more common transformational disruption is what we call Zone defense. This is where a company sees an existential threat from the competition. You can't fix a business under existential threat if you leave it in the Performance Zone. In this case, you have to take one of your revenue workhorse engines offline, go into the incubation zone and modernize your technology. The goal is to get back to single digit growth.

How to Win - Whether You're Playing Zone Offense or Defense

In Zone Offense, you have to get 10% more total revenue attainment. You can't take your foot off the gas until you reach the tipping point toward that goal. If you are in Zone Defense, you have to get back to single digit growth that is reliable and that requires prioritization. Geoffrey said, “There is an old adage that says don't put your eggs all in one basket. But if you don't lay those eggs one at a time, it is bad for the chicken and bad for the egg.” So, if you embark on a transformation, you cannot withdraw support or even flinch before the tipping point is reached. You cannot let anyone opt out of responsibility for the outcome. If you don't have authority and absolute alignment on the mission, don't embark on the transformation.

Whatever you think the disruptive innovation in your industry, bring it into the incubation zone now. Get someone you trust to give you a perspective and get an inside executive to lead a transition. If you do that, you'll increase your odds of catching the next wave.

To learn more about disruptive innovation and zoning to win, check out Geoffrey's video here.