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Bill Gates has said “Success is a lousy teacher. It seduces smart people into thinking they can’t lose”. The sweet afterglow of success has a way of redefining as brilliant decisions all of the ways you got lucky, and glossing over a lot of little things that never were quite right along the way. It can also blind you to a shifting landscape and emerging threats and opportunities. The skills, strategies, and activities that got you to this point may not be the same ones that that can take you to the next level.

Blockbuster has become an easy punchline for those looking to describe the very public failures of a fallen giant, but the company was a giant. They were tremendously successful for nearly two decades, becoming the largest video rental store chain in the world, at one point controlling nearly a third of the home rental video market.

It’s hard to imagine from today’s digital perspective the pain points that consumers endured for a couple of hours of video entertainment, but it was a sorry state of affairs before Blockbuster came along. (Check out this time capsule of a guide for new video store entrepreneurs at the time.)

In 1985 Blockbuster founder David Cook pioneered the use of a customer database to better match supply and demand to the demographics of his stores, and the use of barcodes to manage a huge inventory of 10,000 movies per store, versus a few hundred in the average local store.

Suddenly customers had a much better chance of finding that new hit movie in stock, and the second and third choice options were now considerably better too. If you were in the mood for something different, you could browse rows and rows of movies, and now video games too, or get recommendations from a large and well trained staff. Gone were the pesky upfront membership fees.

Within a couple of years, Cook had sold the fast growing company to successful entrepreneur Wayne Huizenga, and it was soon opening a new store every 24 hours. The home video market was growing rapidly as the cost of VCRs came down, and the growth accelerated as videotapes gave way to DVDs. Over the next decade the company would continue to expand rapidly, eventually growing to 8,000 stores at its peak. The local video stores closed or were bought by regional chains, most of which were eventually acquired by Blockbuster.

Your strategy works until it doesn’t

The apocryphal story of the beginning of the end for Blockbuster takes place in 1997 when a California software engineer returned a rented copy of Apollo 13 back late and had to pay $40 in late fees. That engineer was Reed Hastings, and he started Netflix in August of that year.

Imagine what the first Blockbuster board meeting must have been like when they first heard of this new so-called “competitor”.

“They what? Mail you a DVD, then when you mail it back, they send you the next one on your list?  I couldn’t imagine any of our customers wanting that. We have a store in every neighborhood, filled with thousands of movies with friendly and knowledgable staff. What’s next on the agenda?”

At the time, nobody was better at the business of renting out movies through physical stores than Blockbuster, and the company was busy leveraging its superior operating leverage to acquire just about all of its major competitors. The company was unquestionably successful at executing the industry’s dominant business model, but success was a poor teacher for helping them see the potential vulnerabilities of that business model, how the landscape was beginning to change, and how new competitors with new business models might challenge the status quo.

It was expensive to build and maintain all of those brick and mortar locations and to stock and staff them. Netflix had no physical locations to build and maintain and stock and staff, and they were able to create convenience advantages of their own. Renters no longer had to endure the weather and traffic to visit a store to find something to watch, they now could build their own queue of entertainment choices in the comfort of their own homes.

Netflix maintained one inventory that could serve the whole country. This larger market also meant they could profitably stock more rare, unique, and special interest programming, creating what Wired Magazine editor Chris Anderson would later call “the long tail”. This advantage was further expanded as Netflix was able to reinvest its profits into developing their digital streaming service that would completely change the game and eventually come to dominate home entertainment.

In other words, Netflix didn’t beat Blockbuster at their own game, they changed the game.

Your business model works until it doesn’t, and your success in the past is a poor teacher for what it will take to be successful in the future, particularly in this era of rapid and dynamic change. Delivering this quarter’s results today is important, but don’t forget to set aside a little time to work on how you’re going to deliver even better results a few quarters from now.

Postscript: In 2000, Hastings offered to sell Netflix to Blockbuster for $50 million. Blockbuster declined the offer.

Managers have this bad habit of looking for a silver bullet. That magical holy grail that will make all of their problems go away quickly, and preferably painlessly. Those expensive consultants. That fancy new CRM system. This flashy acquisition. That confusing and demoralizing internal reorganization. Not the last one, this one.

Many have this same unrealistic expectation about innovation.

“We launched this innovation team last quarter, why haven’t we seen results yet?”

Not long ago we met with one of our clients to discuss the test and learn approach, and to encourage that they run many small experiments to maximize the learning and increase the probability and speed of success. We used an analogy that it was like planting a lot of seeds at once, since not all of them would bloom into something big and beautiful. The client, the COO of a midsize U.S. financial institution, replied that he understood, but warned that we had better make damn sure that the very first experiment was successful.

Innovation is Like Weight Loss

In some ways innovation is like weight loss. The process is simple; move more and eat less. So why are so many people overweight? Because achieving lasting results takes consistent application of the process over time.

We are now 7 weeks into 2017, and most well-intentioned new year’s resolutions have been overpowered by old habits. The gym is noticeably less crowded and Frappucino sales are booming again. Those first few pounds shed have returned, and the alarm clocks have been rolled back to less ambitious hours.

Likewise, with the innovation process. Managers get excited to chart a new course and to boost their flagging performance by implementing new ideas. The first few come out pretty easily because they were the proverbial low hanging fruit; quick wins to show success and build confidence. But they probably didn’t show up in the financial results because they were small improvements. More than likely, they really didn’t create any competitive advantage at all, they probably just helped close your lagging gap a little bit.

Throwing in the Towel

This is the time when the short-sighted silver bullet seekers want to pull the plug.

“This wasn’t the right program, we got bad advice, involved the wrong people, tackled the wrong opportunities, the timing was bad.” 

Any or all of that is possible of course. But the more likely explanation is that you hit your first plateau, and you need to power through it. Consistent application of the process is what drives results.

Your competitors that are sticking to their program are starting to create their own competitive advantages. Partly through the accumulation of a lot of small wins, and partly by getting better at successive experiments because they’re learning more quickly what works and what doesn’t. Tighter iteration loops.

As you go back to the drawing board and try something else, they’re really starting to benefit because some of the bigger bets that took longer to figure out are starting to pay off. Now they are in position to make even bigger improvements and the gap between them and you is about to get a lot bigger

You’re really going to need a silver bullet to catch up now.

Six Sigma is a quality improvement program that gets its name from the concept of 99.9997% quality. In statistics, each sigma represents the statistical measure of 1 standard deviation from the mean in a range of outcomes in a normal distribution. Six sigma translates into no more than 3.4 defects per million opportunities.

It is often related to (and sometimes conflated with) the concept of “Lean”, which was coined to describe Toyota’s manufacturing practices during the late 1980s, when their level of consistent quality was noticeably superior to much of what was coming out of Detroit at the time. Lean focuses on improving efficiencies by reducing waste through standardization and elimination of non-value-added efforts. Six Sigma, developed by Motorola and widely popularized by GE and others, focuses on improving quality by reducing process variation and using detailed measurement and statistical analysis. The two are often used in tandem in Lean Six Sigma programs.

Striving for this kind of consistent quality can save lives in healthcare procedures and plant safety. It is what we have come to expect today from our personal electronic devices and even from lower priced automobiles, and this is the kind of uptime we expect from computer and communications networks.

In financial services, it’s what we strive for in our transaction processing, statement production, compliance programs, and reliability of our ATMs and core systems.

What’s not to like?

Quality, consistency, efficiency, defect reduction, what’s not to like?

Lean and Six Sigma programs work well when there are identical operations and repeatable processes in large volumes, particularly when those operations can generate a lot of accurately measured data. When administered properly, they also focus on creating real value by improving quality, cost and customer satisfaction.

But what happens when you perfectly execute the wrong priorities?

Kodak was arguably the best manufacturer of celluloid film in the world (although Fuji Film might argue that one). Nokia was the world’s leading maker of mobile phones, with 48.7% market share in 2007. Sony’s Walkman was the leader in portable music for a decade. The quality of their operations was admirable, and not what turned out to be the achilles heel for those companies.

New technologies and new business models regularly disrupt the status quo. Blockbuster beat all comers in the business of operating video rental stores. They executed the standard business model of their industry better than anyone else. Netflix didn’t beat them at their own game, they changed the game.

Blockbuster is an especially good example for financial services. For most of the industry’s history, success has been about executing the same business model better than largely similar competitors. The winners of the consolidation wars over the past three decades have been those who executed with the efficiency that created operating leverage.

“There is nothing so useless as doing efficiently that which should not be done at all” – Peter Drucker

Efficiency and positive operating leverage are important ways to win the standard game in financial services, but they aren’t necessarily enough to counteract the new technologies and new business models that are changing the game now and in coming years. Nor will simply blindly going all-in on the latest in fintech hype. How can we balance operational excellence and efficiency with flexibility and innovation?

The power of One Sigma

One of the drivers of the dot com boom and bust of late 1990s was the notion of ‘build it and they will come’. Billions of dollars of equity was invested in new technologies that were promising, yet unproven in the marketplace. Valuations got unreasonably optimistic, money flowed too freely, and millions of dollars of advertising was spent hawking products that not enough people wanted.

Eventually reality set in, valuations came back to earth, and the weakest value propositions died off. New wisdom prevailed from Geoffrey Moore, Steve Blank, and others, including Eric Ries who offered a better formula for testing ideas before making big bets. This process of Build, Measure, and Learn is a twist on “lean” methodologies that Ries detailed in his bestselling book The Lean Startup. But this ‘nail it then scale it’ approach is not just for startups.

In financial services we tend to think that if we can just get all of our smartest people in a conference room, perhaps supplemented with the best consulting minds we can rent from the outside, we can perfectly plan out all of our strategies and “roadmaps” down to the last detail. Then, all we need to do is execute them perfectly. Plan your work and work your plan. Simple, right?

But the marketplace has a way of making us look stupid when we make think we can plan for every contingency up front. Market conditions change, customer preferences evolve, and the competitive landscape shifts, so our plans have to be flexible and responsive to these changing conditions.

One Sigma in a normal distribution covers more than two-thirds (68.27% to be exact) of the outcomes. That’s not nearly good enough for heart surgery or network reliability, but it’s a pretty good indication that you’re on to something worth testing further.

The answers are outside the building, not inside the boardroom. The sooner we can test our ideas, the sooner we’ll know whether we should increase our bets or iterate to something better. That’s stacking the odds in your favor in the strategic planning process.

By all means keep those Lean and Six Sigma programs going where they’re working, but navigating these uncharted waters in our rapidly changing industry takes a new approach. It’s time to embrace the power of One Sigma.

Innovation is all about value creation.

Or at least it should be.

It’s easy to get caught up in the front end of the process. Brainstorming new ideas, drawing on whiteboards, and moving different colored sticky notes around the wall is fun. But all of that should be a means to an end. That end should be about creating value; whether it’s improving the customer experience, taking the cost out of a process, or creating a new feature or a completely new product category.

Most of the work I do is centered in financial services, which is not exactly known as an industry that excitedly embraces change. I spend a lot of time trying to convince leaders that they need to innovate, and that maintaining the status quo is a slow train to irrelevancy (and that the train is heading down a steep grade and picking up speed).

Over the past ten years (most of) the industry has gotten the message, helped more than a little bit by the perceived threats and opportunities of FinTech. A recent PWC survey showed that 83% of bankers said that at least part of their current business is at risk of being lost to standalone FinTech companies.

In 2013 I said that the innovation maturity of the financial services industry is best represented by a power curve, with a very small group of Leaders, followed by a small but growing group of Learners, and a long tail of Laggards. As we enter 2017 all three groups are still represented, but there has been some fattening in the middle as more and more Laggards have entered the status of Learners.

Learners get that just doing the same old same old is a sinking proposition within a rising tide, even if they’re not sure exactly what to do or how to get started. Naturally, they are often inspired by the cool and interesting things that the Leaders are doing.

Tempering Inspiration with Reality

This inspiration should be tempered with a strong chaser of reality. Some of the flashier things are simply what I like to call “Innovation Theatre”. Sometimes that’s intentional, part branding exercise to position the company as a thought leader in the minds of its customers (and/or competitors). Other times it’s unintended, a result of losing track of the whole purpose of innovation.

Shiny new objects can be compelling, especially to those people whose job description contains the word “innovation”. Don’t get me wrong, innovation labs that look like Silicon Valley startups, hackathons, and teams of bearded hipsters in hoodies leading design workshops are a few of my favorite things. But they too are just means to an end. (The great Steve Blank has his own deep thoughts on this. Read this if you’re thinking of standing up an innovation outpost. )

Innovation Is Implementing New Ideas That Create Value

If you ask a group of people in a room their definitions (which we have done on many occasions), you often get back nearly as many definitions as there are people in the room. Some people cite examples of innovative companies or products, other mention technology, most people say something about “new ideas”.

So let’s level-set right here, our working definition for innovation at the highest level is this: Innovation is Implementing New Ideas That Create Value. We agree about the “new ideas” part, but everyone has new ideas. In order to count as innovation in our book, they have to be implemented, and they need to create value.

If you don’t implement the new ideas, or if they don’t create value, why did you waste organizational time and resources on them?

That value can be defined in a lot of different ways- new products or services, reduced costs, better customer experiences, extending the life of mature products, etc. – so organizations (and managers) will have differing views on value creation. More on that in future posts.

The Real Work of Innovation

With that as a working definition of innovation in the broadest sense, most innovation work— at least that which is truly about value creation, not just branding—  is usually much more bland and quotidian than the flashy activities of Innovation Theatre. “Blue Collar innovation” is how one innovation leader of a top 10 U.S. Bank recently described it to us. With one eye firmly fixed on a few key questions:

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  What value are we creating for whom?

  
  
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  What job does our customer need us to do here?

  
  
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  How do we know when we get there?

  
  

Clayton Christensen’s book The Innovator’s Dilemma will turn 20 years old this year. The lessons of how new technologies disrupt mature industries are still being played out today in financial services, media, transportation, and just about any other industry you can name.

In his new book Competing Against Luck: The Story of Innovation and Customer Choice, he focuses on making innovation a reliable engine for growth, and it is centered on the Theory of Jobs to Be Done— “What exactly did you hire this product to do?”

Christensen points out that a primary reason why some new innovations don’t reach wide market adoption is because the new offering does not do a better job than the existing thing that the customer “hired” to get a specific job done (let alone overcoming the cost and pain of making a change).

Knowing that you are being disrupted and committing to doing something about it is an important first step. Focusing on the Jobs to be Done ensures that you’re solving the right problems for the right people in the right way at the right time.

That is value creation.

Anything less is just Innovation Theatre. 

This week at Money20/20 in Las Vegas I spent some time behind the scenes at Capital One to see how they are using technology, innovation, and design to create a better banking experience.

I sat down with Scott Zimmer, Capital One’s Global Head of Design, to focus on how design is taking on a growing role in banking. He describes himself as a “Disney-bred creative, someone who’s driven to create”. Not exactly a common bio quote for most bankers, but one that may grow more familiar as design takes an increasingly important role in the industry.

“There’s a pretty compelling story in banking, and the things we do for people matter to people on a human level,” says Zimmer, “and in the design community, that’s what designers were born to do.”

Listen to the interview here:

Design is about a lot more than making things look pretty. It’s about making things work better. Technology has been a democratizing force across so many industries, and banking is no exception. Customers have more choices than ever, and those choices now include products, services and experiences that are often far superior than the you’ll-take-what-we-make era that prevailed for so long.

I have heard a lot of bankers proclaim their desire to make their branches more like Apple stores, but for too many of them that desire begins and ends with the clean visual aesthetic. The effectiveness of the design of the Apple store that makes it so successful goes far deeper than that. Zimmer agrees, “Steve (Jobs) was famous for saying ‘design is really how something works’, and what’s interesting about the Apple store in all its starkness, is they simplified it, to make it work better.”

The business case for beautiful products and compelling customer experiences is a tough one for most boards and executives to get their hands around. I know this firsthand from my work helping some of them with their strategic planning, as they fret about making big bets that might not payoff. A good design process involves a ‘test and learn’ approach that is well known to any fintech entrepreneurs following lean startup principles. It’s an approach that banks should be using in more of their business decisions.

As Zimmer puts it: “We try to avoid failing at scale”

 

Las Vegas is an appropriate setting for using a poker analogy to describe the advantages of this approach (blackjack works too). Rather than pushing all of their chips to the center of the table and declaring “all in” as the first cards are dealt, the savvy player makes small bets and only increases them until the cards are in their favor.

“It’s the thing that has transitioned product development dramatically”, says Zimmer, “in days past you might have made two, three big bets a year, and now, any team that’s working in this collaborative, iterative fashion can be making sixty, seventy bets at one time, but with minimal investment.”

Zimmer and his team have brought this iterative test and learn approach inside the organization too. They’ve built user labs to test ideas with customers much earlier, and this gives them better insights into what’s working and what’s not much sooner. He contrasts that approach with the typical big meeting going over a PowerPoint presentation that someone has worked on internally for weeks. That approach can cause teams to be defensive about their hard work instead of working through the options more collaboratively with more early contact with customers.

The future of design is evolving beyond spaces, products and services. Zimmer also talked about the challenge of designing for voice with the Capital One skill for Amazon Echo, with a team focused on conversation design “obsessing around the humanity that has to come through in an interaction and what the word choices are”. That work is continuing with the release of an update to the skill called “How Much Did I Spend?” that was built with a natural language query, “as though you are talking with your money”.

Zimmer sees parallels between financial health and physical health, and he thinks software and good design can help us to set goals and achieve them. “The ability to leverage software’s capability to do that is this new era that’s upon us of creating new products and services. I think design plays a huge role, and there’s a bright future ahead.”

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Thanks to Capital One for sponsoring these posts and podcasts and for providing access to their team, but all of the opinions expressed are still mine, all mine. For more information about Capital One, visit www.CapitalOne.com