Rule Of Three ICMM Dynamics
Editor | On 06, Jan 2019
Is anyone else puzzled by the apparent lack of innovation these days? This is supposed to be a time of enormous innovation, and yet, when we look at the big organisations they all seem to be busy stockpiling money, battening down the hatches, squashing small upstarts, or – most puzzling of all – spending their hard-earned profits on fantasies (insert image of Level 3 autonomous vehicles here) that have absolutely no chance of being successful in the foreseeable future. Next month I’m hoping to be able to reveal our TRIZ-based plan to do something about the problem. This month, I thought it was worth spending a little time trying to understand why the world is the way it is at the moment.
As with a lot of big strategic questions, it doesn’t usually take long before I’m thinking about Jagdish Sheth’s classic tome, The Rule Of Three’ (Reference 1). Regular readers will see it featured quite regularly in past articles and papers, most notably back in Issue 130 (Reference 2), where, relating to the characteristics of the top three companies that come to dominate a market, I said this:
The No. 1 company (The ‘Biggest’) likely has 40-80% of the total market share. It is usually the least innovative, though it may have the largest R&D budget. Such companies tend to adopt a “fast follower” strategic posture when it comes to innovation. They tend to have the best business innovation and execution strategies of the three, but to a very large extent the majority of innovation-related activities are viewed first and foremost as insurance policies. That’s insurance as in protection against the potential threat of innovation from other players. Insurance in this sense should not be taken to imply that innovation activities have any intention at all to result in actual innovation. The number one company is usually best able to protect its leading position by making sure innovation doesn’t happen. If the R&D function can patent lots of solutions and maybe even purchase any outsiders that come up with something potentially threatening to the status quo in order to ensure those solutions don’t come to market, then the senior management team will consider that they have done a good job. Creative scientists and engineers tend to become quite frustrated in the No. 1 player – they’re allowed to do some cool stuff, just so long as it doesn’t get so far along the development pipeline that it threatens the company’s business. Which is making the best possible margins from doing what it currently does.
The No. 2 company (The ‘Best’) typically holds 20-40% of the total market share. This company is usually the one to play the ‘best’ card, often playing the ‘smart underdog’ or ‘cool’ or simply ‘we try harder’ angle with customers: we might not be as big as the biggest player, but the solutions we offer are ‘better’ than theirs. Innovation-wise, the No. 2 player tends to best succeed by emphasising ‘better’ differences to the No. 1 player. In other words, ‘me too’ doesn’t work. If ‘effective’, ‘efficient’ and ‘resilient’ are the big three success drivers, whichever one the No. 1 player presents as core strength, the No. 2 will best succeed by focusing on one or both of the other two.
This player also tends to focus their innovation activities on either executing better or insurance against innovation from smaller players. If they can make a step-change that looks like it might give them a significant advantage over the number one player, it might be allowed to happen, but as with the biggest player, the primary strategy is about protecting the current position of strength rather than rocking too many boats, and potentially capsizing everything.
CEOs operating in both No.1 and No.2 companies are very likely to adopt a defensive strategy. We often describe it as the ‘not on my watch’ strategy. Which works something like this: If an incoming CEO sees they might be in position for 2-3 years (the current average tenure for a Fortune 500 company in the US), one of their first questions will be ‘is something bad going to happen during my period at the helm?’ If the answer to that question is ‘no’, they are very unlikely to be pressuring the innovators inside the company to do anything other than lie low.
Which brings us to the No. 3 company (‘The Innovator’). Typically hovering around the 5-10% market share position, the third biggest player generally has to play the role of the most innovative. It needs to create and commercialise new solutions in order, a) try and catch up with the big two, but also, because they can see how difficult life is in the low margin trap that is the ‘ditch’, and need to do all they can to stay out of it. Sadly, however, its innovations are usually ‘stolen’ by the No. 1 and 2 companies unless it can protect them in a bulletproof manner (the big 2 tend to be good at finding loop-holes in patents!). The extent to which the third-ranked player is comfortable or precarious depends on how far away that player is from the ‘ditch’. Which in turn is often transiently dictated by the state of the economy. Lots of No. 3 players – in the West in particular – presently find themselves in an innovation frenzy simply to generate or recover sufficient margins to stay afloat.
What I want to do here is integrate this story with our Innovation Capability Maturity Model (ICMM) work, and to home in on some of the implications for the ‘innovators’ working within one of the Big Three organisations.
In order to do this meaningfully, we need to distinguish between innovation and ‘R&D’. Innovation, per our usual definition, is all about successful step-change. For commercial organisations, ‘success’ is typically measured in financial terms: ‘a net positive ROI’ for example, or ‘incremental profit’, or ‘net positive value’. R&D is all about the outgoings side of whatever our success equation is. In some of the big organisations I know, the success equation gets muddied somewhat by attributing value to R&D that successfully impedes the progress of a competitor. In one case, the IP Function is operated as a profit centre whereby, if they’re able to slow or stop an outside patent from being granted, or can build a fence around a patent to block its advance, the financial value of that activity is counted as ‘profit’. Morally and ethically dubious as such actions might be, to the accountants, they count as ‘successful’ and could, therefore, be said to meet our innovation definition criteria.
Taken together, it becomes necessary to identify two forms of innovation, the first being the pro-active, ‘let’s get something new into the market’ version, and the second being the defensive, ‘let’s stop others from getting something new into the market’ version.
Now, let’s imagine we work within one of the two biggest players in our industry. The big companies for the most part do not like innovation, and have every incentive to maintain status quos wherever they can. ‘Innovation’ in such organisations is a ‘necessary evil’ rather than a business strategy. As a consequence of that, from a pro-active perspective, there is little if any imperative to build an Innovation Capability higher than Level 2. On the other hand, when it comes to defensive-innovation, the skills of a Level 4 organisation are needed. At least for the early ‘creative’ parts of the innovation journey. What I mean by this is that as soon as the innovators have spotted a potential threat and have designed a strategy to neutralize that threat, there is no need to do all the hard work associated with actually putting anything new into the market place. The reason for needing Level 4 (‘Strategising’) is that the organization needs to be able to defend itself against threat from outside the current industry and this outward-view capability is one of the key differences between a Level 3 and a Level 4 organisation.
Consequently, a ‘good’ Big Two Innovation Capability position is to have a small pocket of Level 4 innovators working in a defence-oriented ‘observatory’, and then a larger cohort of Level 2 trained people that can blunder their way through any product/service changes that ‘have’ to be taken all the way to market. This latter group don’t need to be particularly efficient, and may well find themselves devoting their time to initiatives that no-one above them in the hierarchy cares or not whether they are successful. Some, indeed, may purely be the sort of activity you see the military embarking on to keep their troops awake: war-games. The CEO needs to be able to stand up and declare to shareholders how much money is being spent on R&D, and whatever number they declare needs to sound good, but the CEO, frankly, will be happiest if none of that spend does anything to detract from the serious business of making money from the already existing products and services. Whether you’re in the Level 2, ‘pro-active’ group, or the Level 4 ‘defensive’ group, life as in innovator in the Big Two organisations is most likely to be characterized by the word ‘frustrating’. Anyone with big ambitions to change the world, figuring they’re going to do I from within one of these large organisations, are likely to become dis-illusioned very quickly.
In theory, the better place for the innovator to base themselves is the Number 3 player. Because of their smaller size relative to the Big Two, the third biggest player in an industry has the biggest challenge earning satisfactory profit margins since they don’t have the same economies of scale advantage. The primary job of the Number Three company is to catch up and eventually beat the Number One and Number Two. Which means that they need to achieve Level 3 (‘managed’) Innovation Capability. Their focus very much needs to be about beating the current Big Two offerings. It’s not typically about disrupting the market by switching to a higher level function. If you’re the third biggest car manufacturer, for example, your ambition is to sell more cars more profitably than the second biggest player. It’s not to start offering higher-level and profoundly more difficult to achieve ‘mobility’ solutions. The organization needs innovation processes that are efficient, which means that timing has to be meaningfully calculated, and there need to be processes in place to competently transition R&D into production. This is the very definition of Level 3 ICMM. Because the Number Three player has to be so focused on catching up with and beating the Top Two, there is far less need (or spare resource) to have any kind of outward-looking defensive observatory. The large majority of Number Three players we see and work with (in many ways they are our sweetspot!) actively do not want outward, cross-industry-focused innovators.
Taken all together, here’s what the Big Three players in their industry are most likely to require in terms of Innovation Capability:
Figure 1: ICMM Level Versus Big Three Company Position
Now, if this all sounds fairly depressing to you as an ‘innovator’ reading this, I’d tend to agree with you. Particularly if you’ve ‘seen the (TRIZ) light’ and have expectations of doing big exciting things. The TRIZ ‘Ideal Final Result’ tool, clearly tells you what the future is going to look like, and once you’ve seen it, its very difficult to know that you’re powerless to do anything about it. The IFR tool is conceptually very simple, but it is only really useful for Level 4 organisations. Of which there aren’t many. Which only then leaves Level 0 start-ups. They might benefit from some IFR thinking at the beginning of their work, but honestly their focus needs to be on mastering Level 1 Operational Excellence not being Level 4 innovators. Operational Excellence and the mundane day-to-day grind is what brings the money in to pay for the innovators to do their job.
TRIZ, in this regard, massively over-shoots the need of the vast majority of organisations on the planet. It doesn’t feel good writing those words, so I’m sure it definitely doesn’t feel good reading them. Unless, of course, you’re a real innovator. In which case you know that within every threat, bearing in mind the need to observe the von Clausewitz ‘critical mass at the critical point’ rule, there is an opportunity. The big ‘critical mass’ issue in most Big Three organisations is there is no-one at or close to the top of the hierarchy that has even the vaguest notion of what innovation is, or what I’m talking about here. That’s a big problem for anyone working as an innovator in one of these organisations. Fortunately, I don’t anymore. My ‘critical mass’ problem is somewhat different. I’ll show you how we’re thinking of solving the problem this place next month.
- Sheth, J., Sisodia, R., ‘The Rule Of Three: Surviving AndThriving In Competitive Markets’, Free Press, 2002.
- Systematic Innovation ezine, ‘The Rule Of Three And Do I Need To Innovate?’, Issue 130, January 2013.