Why the Navy Needs Disruption Now (part 2 of 2)

The future is here it’s just distributed unevenly – Silicon Valley view of tech adoption

The threat is here it’s just distributed unevenly – A2/AD and the aircraft carrier

This is the second of a two-part post following my stay on the aircraft carrier USS Carl Vinson. Part 1 talked about what I saw and learned – the layout of a carrier, how the air crew operates and how the carrier functions in context of the other ships around it (the strike group.) But the biggest learning was the realization that disruption is not just happening to companies, it’s also happening to the Navy. And that the Lean Innovation tools we’ve built to deal with disruption and create continuous innovation for large commercial organizations were equally relevant here.

This post offers a few days’ worth of thinking about what I saw. (If you haven’t, read part 1 first.)


The threat is here; it’s just distributed unevenly – A2/AD and the aircraft carrier
Both of the following statements are true:

  • The aircraft carrier is viable for another 30 years.
  • The aircraft carrier is obsolete.

Well-defended targets
Think of an aircraft carrier as a $11 billion dollar portable air force base manned by 5,000 people delivering 44 F/A-18 strike fighters anywhere in the world.

The primary roles of the 44 F/A-18 strike fighters that form the core of the carrier’s air wing is to control the air and drop bombs on enemy targets. For targets over uncontested airspace (Iraq, Afghanistan, Syria, Somalia, Yemen, Libya, etc.) that’s pretty easy. The problem is that First World countries have developed formidable surface-to-air missiles – the Russian S–300 and S-400 and the Chinese HQ-9 – which have become extremely effective at shooting down aircraft. And they have been selling these systems to other countries (Iran, Syria, Egypt, etc.). While the role of an aircraft carrier’s EA-18G Growlers is to jam/confuse the radar of these missiles, the sophistication and range of these surface-to-air missiles have been evolving faster than the jamming countermeasures on the EA-18G Growlers (and the cyber hacks to shut the radars down).

Hq9

This means that the odds of a carrier-based F/A-18 strike fighter successfully reaching a target defended by these modern surface-to-air missiles is diminishing yearly. Unless the U.S. military can take these air defense systems out with drones, cruise missiles or cyber attack, brave and skilled pilots may not be enough. Given the F/A-18’s are manned aircraft (versus drones), high losses of pilots may be (politically) unacceptable.

Vulnerable carriers
If you want to kill a carrier, first you must find it and then you have to track it. In WWII knowing where the enemy fleet located was a big – and critical – question. Today, photo imaging satellites, satellites that track electronic emissions (radio, radar, etc.) and satellites with synthetic aperture radar that can see through clouds and at night are able to pinpoint the strike group and carrier 24/7. In the 20th century only the Soviet Union had this capability. Today, China can do this in the Pacific and to a limited extent, Iran has this capability in the Persian Gulf. Soon there will be enough commercial satellite coverage of the Earth using the same sensors, that virtually anyone able to pay for the data will be able to track the ships.

During the Cold War the primary threat to carriers was from the air – from strike/fighters dropping bombs/torpedoes or from cruise missiles (launched from ships and planes). While the Soviets had attack submarines, our anti-Submarine Warfare (ASW) capabilities (along with very noisy Soviet subs pre-Walker spy ring) made subs a secondary threat to carriers.

In the 20th century the war plan for a carrier strike group used its fighter and attack aircraft and Tomahawk cruise missiles launched from the cruisers to destroy enemy radar, surface-to-air missiles, aircraft and communications (including satellite downlinks). As those threats are eliminated, the carrier strike can move closer to land without fear of attack. This allowed the attack aircraft to loiter longer over targets or extend their reach over enemy territory.

Carriers were designed to be most effective launching a high number of sorties (number of flights) from ~225 miles from the target. For example, we can cruise offshore of potential adversaries (Iraq and Syria) who can’t get to our carriers. (Carriers can standoff farther or can reach further inland, but they have to launch F-18’s as refueling tankers to extend the mission range. For example, missions into Afghanistan are 6-8 hours versus normal mission times of 2-3 hours.)

In the 21st century carrier strike groups are confronting better equipped adversaries, and today carriers face multiple threats before they can launch an initial strike. These threats include much quieter submarines, long-range, sea-skimming cruise missiles, and in the Pacific, a potential disruptive game changer – ballistic missiles armed with non-nuclear maneuverable warheads that can hit a carrier deck as it maneuvers at speed (DF-21d and the longer range DF-26).d21d range

In the Persian Gulf the carriers face another threat – Fast Inshore Attack Craft (FIAC) and speedboats with anti-ship cruise missiles that can be launched from shore.

The sum of all these threats – to the carrier-based aircraft and the carriers themselves –  are called anti-access/area denial (A2/AD) capabilities.

Eventually the cost and probability of defending the carrier as a manned aircraft platform becomes untenable in highly defended A2/AD environments like the western Pacific or the Persian Gulf. (This seems to be exactly the problem the manned bomber folks are facing in multiple regions.) But if not a carrier, what will they use to project power?  While the carrier might become obsolete, the mission certainly has not.

So how does/should the Navy solve these problems?

Three Horizons of Innovation
One useful way to think about in innovation in the face of increasing disruption / competition is called the “Three Horizons of Innovation.” It suggests that an organization should think about innovation across three categories called “Horizons.”

  • Horizon 1 activities support executing the existing mission with ever increasing efficiency
  • Horizon 2 is focused on extending the core mission
  • Horizon 3 is focused on searching for and creating brand new missions
    (see here for background on the Three Horizons.)

Horizon 1 is the Navy’s core mission. Here the Navy executes against a set of known mission requirements (known beneficiaries, known ships and planes, known adversaries, deployment, supply chain, etc.) It uses existing capabilities and has comparatively low risk to get the next improvement out the door.

In a well-run organization like the Navy, innovation and improvement occurs continuously in Horizon 1. Branches of the Navy innovate on new equipment, new tactics, new procurement processes, more sorties on newer carriers, etc. As fighter pilots want more capable manned aircraft and carrier captains want better carriers, it’s not a surprise that Horizon 1 innovations are upgrades – the next generation of carriers – Ford Class; and next generation of navy aircraft – the F-35C. As a failure here can impact the Navy’s current mission, Horizon 1 uses traditional product management tools to minimize risk and assure execution. (And yes, like any complex project they still manage to be over budget and miss their delivery schedule.)

Because failure here is unacceptable, Navy Horizon 1 programs and people are managed by building repeatable and scalable processes, procedures, incentives and promotions to execute and the mission.

In Horizon 2, the Navy extends its core mission. Here it looks for new opportunities within its existing mission (trying new technology on the same platform, using the same technology with new missions, etc.) Horizon 2 uses mostly existing capabilities (the carrier as an aircraft platform, aircraft to deliver munitions) and has moderate risk in building or securing new capabilities to get the product out the door.

An example of potential Naval Horizon 2 innovations is unmanned drones flying off carriers to do the jobs fighter pilots hate such as serving as airborne tankers (who wants to fly a gas tank around for 6 hours?) and ISR (Intelligence, Surveillance and Reconnaissance), another tedious mission flying around for hours that could be better solved with a drone downlinking ISR data for processing on board a ship.

However, getting the tanker and ISR functions onto drones only delays the inevitable shift to drones for strike, and then for fighters. The problem of strike fighters’ increasing difficulty in penetrating heavily defended targets isn’t going to get better with the new F-35C (the replacement for the F/A-18). In fact, it will get worse. Regardless of the bravery and skill of the pilots, they will face air defense systems evolving at a faster rate than the defensive systems on the aircraft. It’s not at all clear in a low-intensity conflict (think Bosnia or Syria) that civilian leadership will want to risk captured or killed pilots and losing planes like the F-35C that cost several hundred million dollars each.

Management in Horizon 2 works by pattern recognition and experimentation inside the current mission model. Ironically, institutional inertia keeps the Navy from deploying unmanned assets on carriers. In a perfect world, drones in carrier tanker and ISR roles should have been deployed by the beginning of this decade. And by now experience with them on a carrier deck could have led to first, autonomous wingmen and eventually autonomous missions. Instead the system appears to have fallen into the “real men fly planes and command Air Wings and get promoted by others who do” mindset.

The Navy does not lack drone demos and prototypes, but it has failed to deploy Horizon 2 innovations with speed and urgency. Failure to act aggressively here will impact the Navy’s ability to carry out its mission of sea control and power projection. (The Hudson Institute report on the future of the carrier is worth a read, and a RAND report on the same topic comes out in October.)

If you think Horizon 2 innovation is hard in the Navy, wait until you get to Horizon 3. This is where disruption happens. It’s how the aircraft carrier disrupted the battleship. How nuclear-powered ballistic missile submarines changed the nature of strategic deterrence, and how the DF-21/26 and artificial islands in the South China sea changed decades of assumptions.  And it’s why, in most organizations, innovation dies.

For the Navy, a Horizon 3 conversation would not be about better carriers and aircraft. Instead it would focus on the core reasons the Navy deploys a carrier strike group: to show the flag for deterrence, or to control part of the sea to protect shipping, or to protect a Marine amphibious force, or to project offensive power against any adversary in well-defended areas.

A Horizon 3 solution for the Navy would start with basic need of these missions (sea control, offensive power projection – sortie generation) the logistic requirements that come with them, and the barriers to their success like A2/AD threats. Lots of people have been talking and writing about this and lots of Horizon 3 concepts have been proposed such as Distributed LethalityArsenal Ships, underwater drone platforms, etc.

Focussing on these goals – not building or commanding carriers, or building and flying planes – is really, really hard.  It’s hard to get existing operational organizations to think about disruption because it means they have to be thinking about obsoleting a job, function or skill they’ve spent their lives perfecting. It’s hard because any large organization is led by people who succeeded as Horizon 1 and 2 managers and operators (not researchers). Their whole focus, career, incentives, etc. has been about building and make the current platforms work. And the Navy has excelled in doing so.

The problem is that Horizon 3 solutions take different people, different portfolio, different process and different politics.

People: In Horizon 1 and 2 programs people who fail don’t get promoted because in a known process failure to execute is a failure of individual performance. However, applying the same rules to Horizon 3 programs – no failures tolerated – means we’ll have no learning and no disruptive innovations. What spooks leadership is that in Horizon 3 most of the projects will fail. But using Lean Innovation they’ll fail quickly and cheaply.

In Horizon 3 the initial program is run by mavericks – the crazy innovators. In the Navy, these are the people you want to court martial or pass over for promotion for not getting with current program. (In a startup they’d be the founding CEO.) These are the fearless innovators you want to create new and potentially disruptive mission models. Failure to support their potential disruptive talent means it will go elsewhere.

Portfolio: In Horizon 3, the Navy is essentially incubating a startup. And not just one. The Navy needs a portfolio of Horizon 3 bets, for the same reason venture capital and large companies have a portfolio of Horizon 3 bets – most of these bets will fail – but the ones that succeed are game changers.

Process: A critical difference between a Horizon 3 bet and a Horizon 1 or 2 bet is that you don’t build large, expensive, multi-year programs to test radically new concepts (think of the Zumwalt class destroyers). You use “Lean” techniques to build Minimal Viable Products (MVPs). MVPs are whatever it takes to get you the most learning in the shortest period of time.

Horizon 3 groups operate with speed and urgency – the goal is rapid learning. They need to be physically separate from operating divisions in an incubator, or their own facility. And they need their own plans, procedures, policies, incentives and Key Performance Indicators (KPIs) different from those in Horizon 1.  

The watchwords in Horizon 3 are “If everything seems under control, you’re just not going fast enough.”

Politics: In Silicon Valley most startups fail. That’s why we invest in a portfolio of new ideas, not just one. We embrace failure as an integral part of learning. We do so by realizing that in Horizon 3 we are testing hypotheses – a series of unknowns – not executing knowns. Yet failure/learning is a dirty word in the world of promotions and the “gotcha game” of politics. To survive in this environment Horizon 3 leaders must learn how to communicate up/down and sideways that they are not running Horizon 1 and 2 projects.

Meanwhile, Navy and DOD leadership has to invest in, and clearly communicate their innovation strategy across all three Horizons.

Failure to manage innovation across all three Horizons and failure to make a portfolio of Horizon 3 bets means that the Navy is exposed to disruption by new entrants. Entrants unencumbered by decades of success, fueled by their own version of manifest destiny.

Lessons Learned

  • Our carriers are a work of art run and manned by professionals
    • Threats that can degrade or negate a carrier strike group exist in multiple areas
    • However, carriers are still a significant asset in almost all other combat scenarios
  • Speed and urgency rather than institutional inertia should be the watchwords for Horizon 2 innovation
  • Horizon 3 innovation is about a clean sheet of paper thinking
    • It’s what Silicon Valley calls disruption
    • It requires different people, portfolio, process and politics
  • The Navy (and DOD) must manage innovation across all three Horizons
    • Allocating dollars and resources for each
  • Remembering that todays Horizon 3 crazy idea is tomorrow Horizon 1 platform

Thanks to the crew of the U.S.S. Vinson, and Commander Todd Cimicata and Stanford for a real education about the Navy.

Why the Navy Needs Disruption Now (part 1 of 2)

The future is here it’s just distributed unevenly – Silicon Valley view of tech adoption

The threat is here it’s just distributed unevenly – A2/AD and the aircraft carrier

Sitting backwards in a plane with no windows, strapped in a 4-point harness, wearing a life preserver, head encased in a helmet, eyes covered by googles, your brain can’t process the acceleration. As the C-2 A Greyhound is hurled off an aircraft carrier into the air via a catapult, your body thrown forward in the air, until a few seconds later, hundreds of feet above the carrier now at 150 miles per hour you yell, “Holy Shxt.” And no one can hear you through the noise, helmet and ear protectors.


I just spent two days a hundred miles off the coast of Mexico aboard the U.S.S. Carl Vinson landing and taking off on the carrier deck via a small cargo plane.nimitz class carrier

Taking off and landing is a great metaphor for the carrier. It’s designed to project power – and when needed, violence.

It’s hard to spend time on a carrier and not be impressed with the Navy, and the dedicated people who man the carrier and serve their country. And of course that’s the purpose of the two-day tour. The Navy calls its program Outreach: Americas Navy. Targeting key influencers (who they call Distinguished Visitors,) the Navy hosts 900/year out to carriers off the West Coast and 500/year to carriers on the East Coast. These tours are scheduled when the carriers are offshore training, not when they are deployed on missions. I joined Pete Newell (my fellow instructor in the Hacking for Defense class) and 11 other Stanford faculty from CISAC and the Hoover Institution.

I learned quite a bit about the physical layout of a carrier, how the air crew operates and how the carrier functions in context of the other ships around it (the strike group.) But the biggest learning was the realization that disruption is not just happening to companies, it’s also happening to the Navy. And that the Lean Innovation tools we’ve built to deal with disruption and create continuous innovation for large commercial organizations were equally relevant here.

The Carrier
U.S. aircraft carriers like the Vinson (there are 9 others) are designed to put the equivalent of an Air Force base anywhere on any ocean anywhere in the world. This means the U.S. can show the flag for deterrence (don’t do this or it will be a bad day) or to control some part of the sea (to protect commercial and/or military shipping, or protect a Marine amphibious force – on the way or at a place they will land); and project power (a euphemism for striking targets with bombs and cruise missiles far from home).

On an aircraft carrier there are two groups of people – the crew needed to run the carrier, called the ship’s company, and the people who fly and support the aircraft they carry, called the Air Wing. The Vinson carries ~2,800 people in the ship’s company, ~2,000 in the Air Wing and ~150 staff.

Without the Air Wing the carrier would just be another big cruise ship. The Air Wing has 72 aircraft made up of jet and propeller planes. The core of the Air Wing are the 44 F/A-18 strike fighters.

The F/A-18 strike fighters are designed to do two jobs: gain air superiority by engaging other fighter planes in the air or attack targets on the ground with bombs (that’s why they have the F/A designation). Flying on missions with these strike fighters are specially modified F/A-18’s – EA-18G Growlers that carry electronic warfare jammers which electronically shut down enemy radars and surface-to-air missiles to ensure that the F/A-18s get to the target without being shot down.

Another type of plane on the carrier is the propeller-driven E-2C Hawkeyes, which is an airborne early warning plane. Think of the Hawkeyes as airborne air traffic control. Hawkeyes carry a long-range radar in a dome above the fuselage, and keep the strike group and the fighters constantly aware of incoming air threats. They can send data to the fighters and to other ships in the battle group which identifies the location of potential threats. They can also detect other ships at sea.

The other planes in the carrier’s Air Wing are 16 helicopters: 8 MH-60S Nighthawk helicopters for logistics support, search and rescue and special warfare support; and 8 MH-60R Seahawks to locate and attack submarines and to attack Surface targets. seahawk helicopterThey carry sonobuoys, dipping sonar and anti-submarine torpedoes. And last but not least, there is the plane that got us on the carrier, the C2-A Greyhound – the delivery truck for the carrier.

You’re not alone
Carriers like the Vinson don’t go to sea by themselves. They’re part of a group of ships called the “carrier strike group.”  A strike group consists of a carrier, two cruisers with Tomahawk cruise missiles which can attack land targets, and two destroyers and/or frigates with Aegis surface to air missiles to defend the carrier from air attack. (In the past, the strike group was assigned an attack submarine to hunt for subs trying to kill the carrier. Today the attack subs are in such demand they are assigned by national authorities on an as-needed basis.) The strike group also includes replenishment ships that carry spare ammunition, fuel, etc. (The 150 staff on the carrier include separate staff for the strike group, Air Wing, carrier, surface warfare (cruisers with tomahawk missiles) and air defense (Aegis-armed destroyers.)

strike groupThe strike group also receives antisubmarine intelligence from P-3/P-8 anti-submarine aircraft and towed arrays on the destroyers, and additional situational awareness from imaging, Electronic Intelligence (ELINT) and radar sensors and satellites.

Before our group flew out to the carrier, we were briefed by Vice-Admiral Mike Shoemaker. His job is aviation Type Commander (TYCOM) for all United States Navy naval aviation units (responsible for aircrew training, supply, readiness, etc.) He also wears another hat as the commander of all the Navy planes in the Pacific. It was interesting to hear that the biggest issue in keeping the airplanes ready to fight are sequestration and budget cuts. These cuts have impacted maintenance, and made spare parts hard to get. And no pay raises make it hard to retain qualified people.

Then it was time to climb into our C-2 Greyhound for the flight out to the aircraft carrier. Just like a regular passenger plane, except you put on a life vest, goggles, ear plugs, and over all that a half helmet protecting the top and back of your head while enclosing your ears in large plastic ear muffs. Then you and 25 other passengers load the plane via the rear ramp, sit facing backwards in a plane with no windows and wait to land.

On the U.S.S. Vinson
Landing on an aircraft carrier is an equally violent act. When you make an arrested landing, a tail hook on the plane traps one of the four arresting cables stretched across the deck, and you decelerate from 105 mph to zero in two seconds. When the plane hit the arresting wire on the carrier deck, it came to a dead stop in 250 feet. There was absolutely no doubt that we had landed (and a great lesson on why you were wearing head protection, goggles and strapped into your non-reclining seat with a four-point harness). As the rear ramp lowered, we were assaulted with the visual and audio cacophony of crewmen in seven different colored shirts on the deck swarming on and around F-18s, E2Cs, helicopters, etc., all with their engines running.

flight deck shirts

Captain Doug Verissimo and his executive officer Captain Eric Anduze, welcomed us to the carrier. (One of my first problems onboard was translating Navy ranks into their Army/Air Force equivalents. For example, a navy captain equals an Air Force/Army Colonel, and a rear admiral is a brigadier general, etc.)

flight deckThen for the next two days the carrier’s public affairs officer led us on the “shock and awe” tour. In four years in the Air Force I had been stationed on four fighter bases, three of them in war zones, some with over 150 planes generating lots of sorties. But I had to grudgingly admit that watching F­-18s landing on a 300-foot runway 60 feet above the water, on a pitching deck moving 30 mph at sea – one a minute – at night – was pretty impressive.  And having us stand on the deck less than 50 feet away from these planes as they landed trapping the arrestor wires, and launched via a catapult was a testament to the Navy’s PR acumen. Most of crew on the flight deck are in their late teens and maybe early 20s. (And for me, hard to believe 4 decades ago in some other life I was doing that job.) Standing on the deck on a Navy carrier, it’s impossible not to be impressed with the precision choreography of the crew and the skill of their pilots.

Our group climbed the ladders (inclined at a 68-degree angle – there are no stairs) up and down the 18 decks (floors) of the ship. We saw the hangar deck where planes were repaired, the jet engine shop, jet engine test cell, arresting cable engine room, the bridge where they steer the ship, the flag bridge (the command center for the admiral), the flight deck control and launch operations room (where the aircraft handler keeps track of all the aircraft on the flight deck and in the hangar), and the carrier air traffic control center (CATCC).LPO

At each stop an officer or enlisted man gave us an articulate description of what equipment we were looking at and how it fit into the rest of the carrier.

(What got left out of the tour was the combat direction center (CDC), the munitions elevators, ships engines and any of the avionics maintenance shops and of course, the nuclear reactor spaces.)

During lunch and dinners, we had a chance to talk at length to the officers and enlisted men. They were smart, dedicated and proud of what they do, and frank about the obstacles they face getting their jobs done. Interestingly they all echoed Vice-Admiral Shoemaker’s observation that the biggest obstacles they face are political –  sequestration and budget cuts.

Just before we left we got a briefing from the head of the Carrier Strike Group, Rear Admiral James T. Loeblein about the threats the carrier and the strike group face.

Then it was off to be catapulted back home.IMG_8187

It’s clear that the public affairs office has a finely tuned PR machine. So if the goal was to impress me that the Navy and carriers are well run and manned – consider it done.

However, it got me thinking… new aircraft carrier’s cost $11 billion. And we have a lot of them on order. Given the threats they are facing are they going to be viable for another 30 years? Or is the aircraft carrier obsolete?

Tomorrow’s post will offer a few days’ worth of thoughts about carriers, strike groups and how the Navy can continue to innovate with carriers and beyond.

Lessons Learned – part 1 of 2

  • Our carriers are a work of art run and manned by professionals
  • Lots more in part 2, in the next post…

Thanks to the crew of the U.S.S. Vinson, and Commander Todd Cimicata and Stanford for a real education about the Navy.

The Mission Model Canvas – An Adapted Business Model Canvas for Mission-Driven Organizations

As we prepared for the new Hacking for Defense class at Stanford, we had to stop and ask ourselves: How do we use the Business Model Canvas if the primary goal is not to earn money, but to fulfill a mission? In other words, how can we adapt the Business Model Canvas when the metrics of success for an organization is not revenue?

H4D screen top

Alexander Osterwalder and I think we have the answer – the new Mission Model Canvas.

Here are our collective thoughts.

—-

The Lean Startup is the way most innovators build startups and innovate inside of existing companies. As a formal method, the Lean Startup consists of three parts:

The Business Model Canvas has been a great invention for everyone from startups to large companies. Unlike an org chart, which describes how a company executes to deliver known products to known customers, the Business Model Canvas illustrates the search for the unknowns that most new ventures face. The 9 boxes of the canvas let you visualize all the components needed to turn customer needs/problems into a profitable company.

From Revenue Streams to Mission Achievement
The Business Model Canvas has served all of us well in thinking about building businesses – and therein lies the problem. In a business the aim is to earn more money than you spend. What if you’re a government or a military organization or part of the intelligence community? In these cases you don’t earn money, but you mobilize resources and a budget to solve a particular problem and create value for a set of beneficiaries (customers, support organizations, warfighters, Congress, the country, etc.)

For these organizations, the canvas box labeled Revenue Streams doesn’t make sense.Business Model Canvas no revenue In a mission-driven organization such as the defense and intelligence community, there is no revenue to measure. So the first step in building a canvas for mission-driven organizations is to change the Revenue Stream box in the canvas and come up with a counterpart that would provide a measure of success.

We’re calling this alternative Mission Achievement. Later in this post I’ll explain how we’ll measure and describe Mission Achievement, but first our Mission Model Canvas needs four more tweaks.

  • Customer Segments is changed to Beneficiaries
  • Cost Structure is changed to Mission Cost/Budget
  • Channel is changed to Deployment
  • Customer Relationships is changed to Buy-in/Support

Mission_Model_CanvasThe rest of this blog post explains the how and why of these changes to the canvas.

Customer Segments Change to Beneficiaries
At first glance, when developing a new technology for use in the defense and intelligence community, the customer appears obvious – it’s the ultimate war fighter. They will articulate pains in terms of size, weight, form fit, complexity and durability. But there are other key players involved.  Requirement writers and acquisition folks look at systems integration across the battlefield system, while contracting officers, yet another segment, will count beans, measure the degree of competition and assess the quality of market research involved. The support organizations need to worry about maintainability of code or hardware. Does legal need to sign off for cyber operations?  So yes, war fighters are one customer segment, but others need to be involved before the war fighter can ever see the product.

So the first insight is that in the defense and intelligence community mission models are always multi-sided markets with the goal of not just building a great demo but getting the product adopted and deployed.

Second, in the defense and intelligence communities almost all of the mission models look like that of an OEM supplier – meaning there are multiple layers of customers in the value chain. Your product/service is just part of someone else’s larger system.

So to differentiate “customers” from the standard business model canvas we’ll call all the different customer segments and the layers in the defense and intelligence value chain beneficiaries.

The Value Proposition Canvas
Of all the nine boxes of the canvas, two important parts of the model are the relationship between the Value Proposition (what you’re building) and the beneficiaries. These two components of the business model are so important we give them their own name, Product/Market Fit.osterwalder books

Because of the complexity of multiple beneficiaries and to get more detail about their gains and pains, Osterwalder added an additional canvas called the Value Proposition Canvas.  This functions like a plug-in to the Mission Model Canvas, zooming in to the value proposition to describe the interactions among these beneficiaries, war fighters, etc. and the product/service in more detail. Using the Value Proposition Canvas with the Mission Model Canvas lets you see both the big picture at the mission model level and the detailed picture of each beneficiary at the “product/market fit” level.

Value prop zoom bus modelIn the defense and intelligence community mission models, there will always be multiple beneficiaries.  It’s important that each beneficiary gets its own separate Value Proposition Canvas.

value_proposition_canvas

Distribution Channel changes to Deployment
In the commercial world we ask, “What type of distribution channel (direct sales, app store, system integrator, etc.) do we use to get the product/service from our company to the customer segments?”  For the Department of Defense or Intelligence organizations, we ask instead:

  • “What will it take to deploy the product/service from our current Minimum Viable Product to widespread use among people who need it?” (What architecture components can they innovate on and what can’t they?)
  • “What constitutes a successful deployment? (number of users, units in the field, time to get it into the field, success in the field, etc.)”
  • “How do we turn a Horizon 3 innovation into something that gets adopted by a Horizon 1 organization?”

Customer Relationships changes to Buy-In/Support
In an existing business, Customer Relationships is defined as establishing and maintaining a relationship to support existing customers. In a startup we redefined Customer Relationships to answer the question:  How does a company get, keep and grow customers?

For the defense and intelligence communities, we have modified Customer Relationships to mean, “For each beneficiary (customer segment), how does the team get “Buy-In” from all the beneficiaries?”

Customer discovery helps you understand whose buy-in is needed in order to deploy the product/service (legal, policy, procurement, etc.) and how to get those beneficiaries to buy-in? (Funding? Mandates? User requested? etc.) In addition, the long-term support and maintenance of new projects need to be articulated, understood and bought-into by the support organizations.

At the Pentagon a favorite way to kill something is to coordinate it to death by requiring buy-in from too many people too early. How to determine who are the small group of critical people to get buy-in from – and how to determine who are the next set required to sustain the iterative development of future MVP’s – is one of the arts of entrepreneurship in the defense and intelligence community.

Revenue Streams changes to Mission Achievement
Mission Achievement is the value you are creating for the sum of all of the beneficiaries / the greater good.

It’s important to distinguish between the value for individual beneficiaries (on the Value Proposition Canvas) and overall Mission Achievement. For example, Mission Achievement could be measured in a variety of ways: the number of refugees housed and fed, the number of soldiers saved from roadside bombs, the number of cyberattacks prevented, the increased target surveillance of sensor fusion, etc.  None of these are measured in dollars and cents. Keep in mind, there is only mission achievement if it delivers value to the end beneficiary.

Lessons Learned

  • In the defense and intelligence community the metrics of success are not revenue but mission achievement
    • We’ve modified the Business Model Canvas into a Mission Model Canvas
    • Changed Revenue Streams to Mission Achievement
    • Changed Customer Segments to Beneficiaries
    • Changed Cost Structure to Mission Cost/Budget
    • Changed Channel to Deployment
    • Changed Customer Relationships to Buy-in/Support
  • Organizations without specific revenue goals can now use a version of the Business Model Canvas

Hacking for Defense @ Stanford – Making the World a Safer Place

Introducing Hacking for Defense – Connecting Silicon Valley Innovation Culture and Mindset to the Department of Defense and the Intelligence Community
Hacking for Defense is a new course at Stanford’s Engineering School in the Spring of 2016. It is being taught by Tom Byers, Steve Blank, Joe Felter and Pete Newell and is advised by former Secretary of Defense Bill PerryJoin a select cross-disciplinary class that will put you hands-on with the masters of lean innovation to help bring rapid-fire innovative solutions to address threats to our national security. Why? Hacking for Defense poster

Army, Navy, Air Force, Marines, CIA, NSA
What do all these groups in the Department of Defense and Intelligence Community (DOD/IC) have in common? Up until the dawn of the 21st century, they defined military technology superiority. Our defense and intelligence community owned and/or could buy and deploy the most advanced technology in the world. Their R&D groups and contractors had the smartest domain experts who could design and manufacture the best systems. Not only were they insulated from technological disruption, they were often also the disrupters. (During the Cold War we used asymmetric technologies in silicon and software to disrupt the Soviet Union’s lead in conventional weapons.) Yet in the last decade the U.S. Department of Defense and Intelligence Community are now facing their own disruption from ISIS. al-Qaeda. North Korea. Crimea. Ukraine. DF-21 and Islands in the South China Sea.

Today these potential adversaries are able to harness the power of social networks, encryption, GPS, low-cost drones, 3D printers, simpler design and manufacturing processes, agile and lean methodologies, ubiquitous Internet and smartphones. Our once closely held expertise in people, processes and systems that we once had has evolved to become commercial off-the-shelf technologies. U.S. agencies that historically owned technology superiority and fielded cutting-edge technologies now find that off-the-shelf solutions may be more advanced than the solutions they are working on, or that adversaries can rapidly create asymmetric responses using these readily available technologies.

Its Not Just the Technology
Perhaps more important than the technologies, these new adversaries can acquire and deploy disruptive technology at a speed that to us looks like a blur. They can do so because most have little legacy organizational baggage, no government overhead, some of the best software talent in the world, cheap manpower costs, no career risk when attempting new unproven feats and ultimately no fear of failure.

organizational capabilitiesTerrorists today live on the ‘net and they are all early adopters. They don’t need an office in Silicon Valley to figure out what’s out there. They are experts in leveraging Web 2.0 and 3.0. They are able to collaborate using Telegram, Instagram, Facebook, Skype, FaceTime, YouTube, wiki’s, IM/chat. Targeting, assessments, technology, recipes, and tactics all flow at the speed of a Lean Startup.  They can crowd-source designs, find components through eBay, fund through PayPal, train using virtual worlds and refine tactics, techniques and procedures using massive on-line gaming. All while we’re still writing a Request for a Proposal from within the US Government procurement and acquisition channels.

technology capabilities

We’re Our Own Worst Enemy
In contrast to the agility of many of our adversaries, the Department of Defense and the Intelligence Community have huge investments in existing systems (aircraft carriers, manned fighters and bombers, large satellites, etc.), an incentive system (promotions) that supports the status quo, an existing contractor base with major political influence over procurement and acquisition, and the talent to deliver complex systems that are the answer to past problems.

Efficiently Being Inefficient
Our drive for ultimate efficiency in buying military systems (procurement) has made us our own worst enemy. These acquisition and procurement “silos” of excellence are virtually impenetrable by new ideas and requirements. Even in the rare moments of crisis and need, when they do show some flexibility, their reaction is often so slow and cumbersome that by the time the solutions reach the field, the problem they intended to solve has changed so dramatically the solutions are useless.

The incentives for acquiring and deploying innovation in the DOD/IC with speed and urgency are not currently aligned with the government acquisition, budgeting, and requirements processes, all of which have remained unchanged for decades or even centuries.

The Offset Dilemma – Technology is the not Silver Bullet
Today, many in the Department of Defense and Intelligence Community are searching for a magic technology bullet – the next Offset Strategyconvinced that if they could only get close to Silicon Valley, they will find the right technology advantage.

It turns out that’s a massive mistake. What Silicon Valley delivers is not just new technology but – perhaps even more importantly – an innovation culture and mindset. We will not lose because we had the wrong technology.  We will lose because we couldn’t adopt, adapt and deploy technology at speed and in sufficient quantities to overcome our enemies.

Ultimately the solution isn’t reforming the acquisition process (incumbents will delay/kill it) or buying a new technology and embedding it in a decade-long procurement process (determined adversaries will find asymmetric responses).

The solution requires new ways to think about, organize, and build and deploy national security people, organizations and solutions.

Stanford’s new Hacking for Defense class is a part of the solution.

Hacking for Defense (H4D) @ Stanford
In Hacking for Defense a new class at Stanford’s School Engineering this spring, students will learn about the nation’s emerging threats and security challenges while working with innovators inside the Department of Defense (DoD) and Intelligence Community. The class teaches students entrepreneurship while they engage in what amounts to national public service.

Hacking for Defense uses the same Lean LaunchPad Methodology adopted by the National Science Foundation and the National Institutes of Health and proven successful in Lean LaunchPad and I-Corps classes with 1,000’s of teams worldwide. Students apply as a 4-person team and select from an existing set of problems provided by the DoD/IC community or introduce their own ideas for DoD/IC problems that need to be solved.

Student teams will take actual national security problems and learn how to apply Lean Startup principles to discover and validate customer needs and to continually build iterative prototypes to test whether they understood the problem and solution.

Most discussion about innovation of defense systems acquisition using an agile process starts with writing a requirements document. Instead, in this class the student teams and their DOD/IC sponsors will work together to discover the real problems in the field and only then articulate the requirements to solve them and deploy the solutions.

Each week, teams will use the Mission Model Canvas (a DOD/IC variant of the Business Model Canvas) to develop a set of initial hypotheses about a solution to the problem and will get out of the building and talk to all Requirement Writers, Buyers (Acquisition project managers) and Users (the tactical folks). As they learn, they’ll iterate and pivot on these hypotheses through customer discovery and build minimal viable prototypes (MVPs). Each team will be guided by two mentors, one from the agency that proposed the problem and a second from the local community. In addition to these mentors, each H4D student team will be supported by a an active duty military liaison officer drawn from Stanford’s Senior Service College Fellows to facilitate effective communication and interaction with the problem sponsors.

Today if college students want to give back to their country they think of Teach for America, the Peace Corps, or Americorps. Few consider opportunities to make the world safer with the Department of Defense, Intelligence Community and other government agencies. The Hacking for Defense class will promote engagement between students and the military and provide a hands-on opportunity to solve real national security problems.

Our goal is to open-source this class to other universities and create the 21st Century version of Tech ROTC. By creating a national network of colleges and universities, the Hacking for Defense program can scale to provide hundreds of solutions to critical national security problems every year.

We’re going to create a network of entrepreneurial students who understand the security threats facing the country and getting them engaged in partnership with islands of innovation in the DOD/IC. This is a first step to a more agile, responsive and resilient, approach to national security in the 21st century.

Lessons Learned

 Hacking for Defense is a new class that teaches students how to:

  • Use the Lean LaunchPad methodology to deeply understand the problems/needs of government customers
  • Rapidly iterate technology to produce solutions while searching for product-market fit
  • Deliver minimum viable products that match DOD/IC customer needs in an extremely short time

The class will also teach the islands of innovation in the Department of Defense and Intelligence Community:

  • how the innovation culture and mindset operate at speed
  • advanced technologies that exist outside their agencies and contractors (and are in university labs, and commercial off-the-shelf solutions)
  • how to use an entrepreneurial mindset and Lean Methodologies to solve national security problems


Sign up here.

Blank’s Rule – To predict the future 1/3 of you need to be crazy

In a rapidly changing world those who copy the past have doomed their future.

When companies or agencies search for disruptive and innovative strategies they often assemble a panel of experts to advise them. Ironically the panel is often made up of people whose ideas about innovation were relevant in the past.

I’ve seen this scenario play out in almost every large company and government agency trying to grapple with disruption and innovation. They gather up all the “brand-name wisdom” in an advisory board, task force, panel, study group, etc.  All of these people – insiders and outsiders – have great resumes, fancy titles, and in the past brilliant insights. But unintentionally, by gathering the innovators from the past, the past is what’s being asked for – while it’s the future that’s needed.

You can’t create a blueprint for the future. But we know one thing for sure. The future will be different from the past. A better approach is to look for people who are the contrarians, whose ideas, while they sound crazy, are focused on the future. Most often these are not the safe brand names.

If your gathered advisory board, task force, panel, study group, etc., tasked with predicting the future doesn’t have 1/3 contrarians, all you’re going to do is predict the past.

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In the 1950’s and 60’s with the U.S and the Soviet Union engaged in a full-blown propaganda war, the race to put men in space was a race for prestige –  and a proxy for the superiority of one system of government over the other.

In 1961 the U.S. was losing the “space race.” The Soviets had just put a man in orbit and their larger rockets allowed them to launch larger payloads and perform more space spectaculars than the U.S. The new President, John Kennedy looked for a goal where the U.S. could beat the Soviet Union. He decided to raise the stakes by declaring that we would land a man on the moon “before the decade is out” (brave talk before we even got someone into orbit.) This meant that NASA had to move quickly to find the best method to accomplish the journey.

NASA had panels of experts arguing about which of two options to use to get to the moon: first they considered, direct ascent; then moved to another idea, Earth-orbit rendezvous (EOR).

Direct ascent was basically the method that had been pictured in science fiction novels and Hollywood movies for a decade. moon rocketA giant rocket would be launched directly to the moon, land and then blast off for home. But there were three problems:

  • direct ascent was the least efficient way to get to the moon and would require a giant rocket (the Nova) and
  • the part that landed on the moon would be 65 feet tall (requiring one heck of a ladder to the surface of the moon.)
  • it wasn’t clear that a rocket this big could be ready by the end of the decade.

So NASA settled on the second option: Earth-orbit rendezvous. Instead of launching a whole rocket to the moon directly, Earth-orbit rendezvous would to launch two pieces of the spacecraft – one at a time – using Saturn rockets that were then in development. These pieces would meet up in earth orbit and send a ship, (still 65 feet tall as in the direct flight mode), to the moon and back to Earth. This idea was also a decade old – it was how they proposed building a space station. The advantage of Earth-orbit rendezvous to go to the moon was that it required a pair of less powerful Saturn rockets that were already under development.

If you can’t see the movie click here

All the smartest people at NASA (Wernher Von Braun, Max Faget,) were in favor of Earth-orbit rendezvous and they convinced NASA leadership this was the way to go.

But one tenacious NASA engineer, John Houbolt believed that we wouldn’t get to the moon by the end of the decade and maybe not at all if we went with Earth-orbit rendezvous.

Houbolt was pushing a truly crazy idea, Lunar-orbit rendezvous (LOR). This plan would launch two spaceships into Earth orbit on top of a single Saturn rocket. Once in Earth orbit, the rocket would fire again, boosting both spacecraft to the moon. Reaching orbit around the moon, two of the crew members would climb into a separate landing ship they carried with them – the lunar excursion module (LEM). The LEM would detach from the mother ship (called the command module), and land on the moon.landers The third crew member would remain alone orbiting the moon in the command module. When the two astronauts were done exploring the moon they would take off using the top half of the LEM, and re-dock with the command module (leaving the landing stage of the LEM on the moon.) The three astronauts in their command ship would head for home.
The benefits of Lunar-orbit rendezvous (LOR) were inescapable.

  1. You’d only need one rocket, already under development, to get to the moon
  2. The part that landed on the moon would only be 14′ tall. Getting down to the surface was easy

Yet in 1961 LOR was a completely insane idea. We hadn’t even put a man into orbit, let alone figured out how to rendezvous and dock in earth orbit and some crazy guy was suggesting we do this around the moon. If it didn’t succeed the astronauts might die orbiting the moon. However, Houbolt wasn’t some crank, he was a member of the Lunar Mission Steering Group studying space rendezvous. Since he was only a mid-level manager he presented his findings to the internal task forces and the experts dismissed this idea the first time they heard it. Then they dismissed it the 2nd, 5th and 20th time.John Houbolt

Houbolt bet his job, went around five levels of NASA management and sent a letter to deputy director of NASA arguing that by insisting on ground rules to only consider direct ascent or earth orbit rendezvous meant that NASA shut down any out-of-box thinking about how to best get to the moon.
Luckily Houbolt got to make his case, and when Wernher Von Braun changed his mind and endorsed this truly insane idea, the rest of NASA followed.

We landed on the moon on July 20th 1969.

——-

I recently got to watch just such a panel. It was an awesome list of people. Their accomplishments were legendary, heck, every one of them was legendary. They told great stories, had changed industries, invented new innovation platforms, had advised presidents, had won wars, etc. But almost none of them had a new idea about innovation in a decade. Their recommendations were ones you could have written five years ago.

In a static world that would be just fine. But in a corporate world of continuous disruption and in a national security world of continuously evolving asymmetric threats you need to have crazy people being heard.

Or you’ll never get to the moon.

Lessons Learned

  • Most companies and agencies have their own John Houbolts. But most never get heard. Therefore, “Blank’s rules for an innovation task force”:
  • 1/3 insiders who know the processes and politics
  • 1/3 outsiders who represent “brand-name wisdom”
    • They provide cover and historical context
  • 1/6 crazy insiders – the rebels at work
    • They’ve been trying to be heard
    • Poll senior and mid-level managers and have them nominate their most innovative/creative rebels
    • (Be sure they read this before they come to the meeting.)
  • 1/6 crazy outsiders
    • They’ve had new, unique insights in the last two years
    • They’re in sync with the crazy insiders and can provide the insiders with “cover”

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Innovation Outposts in Silicon Valley – Going to Where the Action Is

This is the second in a series about the changing models of corporate innovation co-authored with Evangelos Simoudis. Evangelos and I are working on what we hope will become a book about the new model for corporate entrepreneurship. Read part one on the Evolution of Corporate R&D.

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Innovation and R&D Outposts
For decades large companies have set up R&D labs outside their corporate headquarters, often in foreign countries, in spite of having a large home market with lots local R&D talent. IBM’s research center in Zurich, GM’s research center in Israel, Toyota in the U.S are examples.

These remote R&D labs offered companies four benefits.

  • They enabled companies to comply with local government laws – for example to allow foreign subsidiaries to transfer manufacturing technology from the U.S. parent company while providing technical services for foreign customers
  • They improved their penetration of local and regional markets by adapting their products to the country or region
  • They helped to globalize their innovation cycle and tap foreign expertise and resources
  • They let companies develop products to launch in world markets simultaneously

Other companies operating in small markets with little R&D resources in their home country (ABB, Novartis and Hoffmann-La Roche in Switzerland, Philips in the Netherlands and Ericsson in Sweden) pursued R&D outside their home country by necessity.

Internationalization of R&D

source: Market versus technology drive in R&D internationalization: M von Zedtwitz, Oliver Gassmann

Innovation Outposts Are Moving To Innovation Clusters
Today, large companies are taking on a decidedly 21st-century twist. They are putting Innovation Outposts into Innovation Clusters -in particular Silicon Valley – to tap into the clusters’ innovation ecosystems.

(An Innovation Cluster is a concentration of interconnected companies that both compete and collaborate. Silicon Valley, Herzliya in Israel, Zhongguancun for software and Shenzen for hardware in China are examples of technology clusters, but so was Detroit for cars, Hollywood for movies, Milan for fashion.)

In the last five years, hundreds of large companies have established Innovation Outposts (and here) in Silicon Valley. The charter of these Innovation Outposts is to monitor Silicon Valley for new innovative technologies and/or companies (as emerging threats or potential tools for disruption) and then to take advantage of these innovations by creating new products or investing in startups.

While that’s the theory, the reality is that to date, most of these Innovation Outposts are at best another form of innovation theater – they make a large company feel like they’re innovating, but very few of these outposts change a company’s product direction and fewer impact their bottom line.

Companies who want their investments in Silicon Valley to be more than just press releases need to think through an end-to-end corporate outpost strategy.

This series of posts offers companies the tools to develop an Innovation Outpost strategy:

  • Determining whether a Corporate Innovation Outpost is necessary
  • Planning how to establish an Innovation Outpost
  • Deciding how to expand the Outpost

Sense and Respond

The first objective of an Innovation Outpost is to sense, i.e., look for or monitor the development of potential innovations that:

  1. Can become threats that could lead to the disruption of the corporate parent. For example, American Express’s Silicon Valley Innovation Outpost is monitoring innovations in financial technologies that are created by companies such as Square. Evangelos and I are in the process of developing a tool for diagnosing corporate disruption through innovations pursued by startups.
  1. Would allow the corporation itself to be disruptive by entering adjacent markets to the ones it currently serves or creating and introducing novel and disruptive offerings for new markets. For example, USAA is looking for software innovations that will enable it to introduce Usage-Based Insurance products to disrupt the car insurance market.

The second objective of the corporate Innovation Outpost is to respond to identified threats and potential opportunities. Companies tend to set up their outposts to respond in one of five ways:

  1. Invent: They establish project-specific advanced development efforts like Delphi Automotive’s autonomous car navigation project or broader Horizon 3 basic research efforts that take advantage of, or investigate, technologies and business models the innovation ecosystem is known for in order to create new products and services. For example, Verizon’s Silicon Valley R&D center focuses on big data and software technologies, as well as online advertising-based business models. Sometimes these Horizon 3 research efforts may be associated with a moonshot the corporation would like to pursue as is the case with Google (Google Car), Apple (iPhone) and IBM (Watson).
  1. Invest: They allocate a corporate venture fund that invests in startups working on technology and/or business model innovations of interest. For example, UPS recently invested in Ally Commerce in order to understand the logistics opportunities arising from manufacturers selling directly to consumers rather than through distributors.
  1. Incubate: They support the efforts of very early stage teams and companies that want to develop solutions in areas of interest–for example, Samsung’s incubator focuses on startups working on the Internet of Things—or they experiment with new corporate cultures and work environments –for example, Standard Chartered Bank’s startup studio.
  1. Acquire: Companies buy startups in order to access both the innovations the startups are developing and their employees, and in the process inhibit competitors from getting them. For example, Google acquired several of the robotics startups that had what was considered the best intellectual property.
  1. Partner: Collaborate with startups in order to develop a disruptive new solution using their innovations along with the corporations or to distribute innovative solutions the start up has developed. For example, a few years ago Mercedes partnered with Tesla in batteries for electric vehicles.

After working with over 100 companies, Evangelos and I clearly see that some of these five responses are more effective than others. Moreover, the speed of the response is as important as the ability to respond.  Corporations that establish Innovation Outposts often lose on speed, not on their ability to sense. What makes an outpost an effective contributor versus one that’s simply an expense item starts back at corporate headquarters with a company’s overall innovation strategy. So before we talk about the tactics of establishing an outpost, lets think about what types of discussions and decisions should first happen at the “C-level” before anyone leaves the building.

Lessons Learned

  • Companies are establishing Innovation Outposts in Silicon Valley
  • They do this to sense and/or respond to technology shifts
    • Sense means monitor the development of potential innovations that can become threats or would allow the corporation to be disruptive
    • Respond means, Invent, Invest, Incubate, Acquire or Partner
  • Most of these Innovation Outposts will become Innovation Theater and fail to add to the company

The next post will describe The Six Critical Decisions to Make Before Establishing an Innovation Outpost.

Innovation Outposts and The Evolution of Corporate R&D

I first met Evangelos Simoudis when he ran IBM’s Business Intelligence Solutions Division and then as CEO of his first startup Customer Analytics. Evangelos has spent the last 15 years as a Venture Capitalist, first at Apax Partners and later at Trident Capital. During the last three years he’s worked with over 100 companies, many of which established Innovation Outposts in Silicon Valley. He’s now helping companies get the most out of their relationships with Silicon Valley.

Evangelos writes extensively about the future of corporate innovation on his blog.

Evangelos and I are working on what we hope will become a book about the new model for corporate entrepreneurship. His insights about how large companies are using the Valley is the core of this series of four co-authored blog posts.

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The last 40 years have seen an explosive adoption of new technologies (social media, telecom, life sciences, etc.) and the emergence of new industries, markets and customers. Not only are the number of new technologies and entrants growing, but also increasing is the rate at which technology is disrupting existing companies. As a result, while companies are facing continuous disruption, current corporate organizational strategies and structures have failed to keep pace with the rapid pace of innovation.

This burst of technology innovation and attendant disruption to corporate strategies and organizational structures is nothing new. As Carlota Perez points out, (see Figure 1) technology revolutions happen every half-century or so. According to Perez, there have been five of these technology revolutions in the last 240 years.

carlota perez 5 tech cycles

Figure 1: Five technology revolutions   source: Carlota Perez

Perez divides technology revolutions into two periods (Figure 2): The Installation Period and the Deployment Period.  In the Installation Period, a great surge of technology development (Perez calls this Irruption) is followed by an explosion of investment (called the Frenzy.) This is followed by a financial crash and then the Deployment period when the technology becomes widely adopted. In between the Installation and Deployment periods lies a turning point called Institutional Adjustment when institutions (companies, society, et al) adjust to the new technologies.

life cycle of tech

Figure 2: The two periods characterizing technology revolutions   source: Carlota Perez

Historically during this Institutional Adjustment period companies have to adjust their corporate strategies to deal with these technology shifts. The change in corporate strategy forces a change in the structure of how a company is organized. In the U.S. we’ve gone through three of these structural shifts. We’re now in the middle of the fourth. Lets quickly review them and see what these past shifts can tell us about the future of corporate R&D.

Institutional Adjustments
In the first 50 years of commerce in the then-new United States, most businesses were general merchants, buying and selling all types of products as exporters, wholesaler, importers, etc. By 1840 companies began to specialize in a single type of goods like cotton, wheat or drugs, etc. and concentrated on a single part of the supply chain – importing, distribution, wholesale, retail. This shift from general merchants to specialists was the first structural shift in American commerce.

These specialist companies were still small local businesses. Ownership and management were one and the same – the owners managed, and there were no salaried middle managers or administrators.

In the 1850’s and 60’s, the railroads changed all that. The railroads initially served a region of the country, but very quickly grew into nationwide companies. The last quarter of the 19th century, what Perez calls the Age of Steel and Heavy Engineering, saw the growth of America’s first national corporations in railroads, steel, telegraph, meatpacking, and industrial equipment. These growing national companies were challenged to figure out how to organize an organization of increased complexity that resulted from their large size, and geographic scale as well as their horizontal and vertical integration.  For example, US Steel had integrated vertically and was involved in the mining of the iron ore all the way to the production of various steel products, e.g., nails. These new corporate strategies drove companies to build structures around functions (manufacturing, purchasing, sales, etc.) and to develop professional managers and management hierarchies to run them. Less than 50 years later, by the beginning of the 20th century, the modern form of the corporation had emerged. (For the best explanation of this see Chandler’s The Visible Hand.) This shift from small businesses to corporations organized by function was the second structural shift in American commerce.

By the 1920’s, in Perez’s Age of the Automobile and Oil, companies once again faced new strategic pressures as physical distances in the United States limited the reach of day-to-day hands-on management. In addition, firms found themselves now managing diverse product lines. In response, another structural shift in corporate organization occurred. In the 1920’s companies moved from monolithic functional organizations (sales, marketing, manufacturing, purchasing, etc.) and reorganized into operating divisions (by product, territory, brand, etc.), each with its own profit and loss responsibility. This strategy-to-structure shift from functional organizations to operating divisions was led by DuPont and popularized by General Motors and quickly followed by Standard Oil and Sears. This was the third structural shift in American commerce.

The 1970’s marked the beginning of our current technology revolution: The Age of Information Technologies, Telecommunications and Biotech. This revolution is not only creating new industries but also affecting existing ones – from retail to manufacturing, and from transportation to financial services. We are now somewhere between the end of Installation and the beginning Deployment – that confusing period between the end of the Frenzy and the beginning of the Turning Point, during which time institutional adjustments are necessary. Existing companies are starting to feel the pressures of new technologies and the massive wave of new entrants fueled by the explosion of investment from a recent form of financing – venture capital. (Venture capital firms, as we know them only date back to the 1970s.)  Companies facing continuous disruption need to find new corporate strategies and structures. This fourth structural shift in American commerce is the focus of this series of blog posts. In particular, we are going to focus on how each of these shifts has changed the organization and role of Corporate R&D.

Corporate R&D Evolves With Each New Structural Shift
Each institutional adjustment also changed how companies innovated and built new products. During the Age of Steel and Heavy Engineering in the 1870’s to 1920’s, innovation occurred outside the corporation via independent inventors and small companies. Inventors such as Thomas Edison, Alexander Graham Bell and Samuel Colt come to mind. Patents, inventions and small companies were sold to larger corporations. By the 1920’s, in the Age of the Automobile and Oil, large companies sought to control the new product development process. To do so they brought innovation and invention into the company by setting up storied Corporate R&D Labs such as GE Labs, DuPont Labs, Bell Labs, IBM Research, 3M, Xerox PARC, and Kodak Labs. By the 1950’s Shumpeter observed that in-house R&D had replaced the inventor-entrepreneur. The technology cycle was in the Synergy and Maturity phase, and little innovation was happening outside of companies. It was corporate R&D labs that set the pace of innovation in each industry.

Corporate R&D Labs

As the Age of Information Technologies and Telecommunications gained momentum in the 1970’s, the Irruption phase of this new technology cycle created an onslaught of new startups funded by venture capital. Think of companies like Apple, Digital Equipment Corporation, Sun Microsystems and Genentech.  The beginning of a new technology cycle didn’t come with a memo or a formal announcement. Corporate R&D and Strategy groups that had been successful for the past 70 years were finding their traditional methods no longer worked.

Historically Corporate Strategy and R&D groups worked hand-in-hand to keep companies competitive. They were adept at analyzing competitors, trends, new technologies and potential disruptors to the corporation’s business. Corporate Strategy would develop plans for new products, and R&D would then create and patent the disruptive innovations. Tasked with “looking over the horizon,” Corporate R&D and Strategy organizations looked at the last technology cycle and the existing incumbents instead of seeing the new technology cycle and the new wave of startups.

Corporate R&D in the Age of the CEO as Chief Execution Officer
Ironically as the new technology cycle went from Irruption to Frenzy (remember Perez’s stages of technology revolutions), existing corporations headed in the other direction. Over the past 15-20 years as startups were funded with ever-increasing waves of investment, companies have cut back their investment in innovation. Corporations focused on financial metrics like Return On Net Assets and Internal Rate of Return to reap the benefits of the last technology cycle. This meant R&D organizations have been pushed to work more on D (development) and less on R (research.) Researchers addressed short-term, Horizon 1 problems (existing business models, last technology cycle) rather than working on potentially disruptive Horizon 3 ideas from the next technology cycle. (See here for background on horizons.)

As a result, corporate R&D organizations have been producing sustaining innovations that protect and prolong the life of existing business models and their products and revenue streams. While this optimizes short-term Return On Net Assets and Internal Rate of Return, it destroys long-term innovation and investment in the next technology cycle.

While that’s the good news for short to mid-term revenue growth, the bad news is that corporate R&D’s is investing much less on disruptive new ideas and the next technology cycle and instead focusing on the development of incremental technologies. The result is a brain-drain of researchers who want to do the next big thing. Corporate researchers are voting with their feet, leaving to join startups or to start companies themselves, further hampering corporate innovation efforts. Ironically as the general pace of innovation accelerates outside companies, internal R&D organizations no longer have the capability to disrupt or anticipate disruptions.

Because of declining corporate investment in disruptive research and business model innovation, the typical corporate R&D organization can’t:

  • Keep up with technology innovations: Even corporations with high R&D spending are concluding that their existing R&D model cannot keep pace with exponential technologies and the accelerating pace of information technologies, biotechnologies, and materials
  • Address the global creation of innovation: Disruptive innovation is now created around the world by companies of any size, many of them startups. These companies are funded by abundant capital from institutional venture investors, private investors, and other sources. Our hyperconnected world is amplifying the effects of these companies and enabling them to have global impact, as seen with companies from Israel, India, China, and Brazil
  • Properly align technology with other types of innovation: Corporate R&D remains focused on technology innovation. Certainly these organizations have little, or no, ability to appreciate and create other forms of innovation

By the 1990’s corporate innovation strategies changed to a focus on startups—investing in, partnering with or buying them.  Companies built corporate venture capital and business development groups.

But by 2010, this technology cycle moved into the Frenzy phase of innovation investment. Corporate R&D Labs could not keep up with the pace of external invention.  Increasingly corporate venture capital involved too long of a lead-time for corporate technology investments to pay off.

To adapt to the current frenetic pace of innovation, corporations have created a new organizational structure called the Innovation Outpost. They are placing these outposts at the center of the source of innovation: startup ecosystems.

The next 3 posts will explore the rise of Innovation Outposts, Six Critical Decisions Before Establishing an Innovation Outpost and How to Set Up a Corporate Innovation Outpost for Success.

Be sure to check out about the future of corporate innovation on Evangelos Simoudis blog.

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