Innovation, Startup, Transformation

Connecting the dots of Strategy theories. Horizons of Growth, Types of Innovations, the Chasm, Zone to Win and Traction Gap

The current story is about the evolution of businesses. About the quantum leap changes from idea to successful startup, or even to unicorn. About the evolution of mature businesses from one competitive advantage to the next, in a caterpillar-to-butterfly transformative lifecycle.

Three Horizons of Growth

A decade ago, I have discovered McKinsey’s Three Horizons of Growth, one of their most enduring models about Strategy. It then dawned on me that the evolution of any business cannot be simply incremental. Some inflection points and quantum leaps are inevitable and even mandatory, for long-term survival. This is how the illustration of this model looks like:

Source: McKinsey & Company

The Y-axis says profit, but the reality is that company’s profitability might not differ significantly from one horizon to the other. In fact, it might be lower in Horizon 2 and even lower, or negative, in Horizon 3. That is why it might be better to read the Y-axis as growth. The core idea seems clear: the foundation of each horizon is different and one of Marshall Goldsmith’s book titles comes to my mind: “What got you here, won’t get you there”.

The most relevant ingredient of such foundation is the innovation, which is the fuel that will propel us onto the next horizon. But it turns out that the innovation in business can take a variety of shapes.

Three Types of Innovations

It was Clayton Christensen who enlightened me about the different types of innovation with his theory about the Three Types of Innovations:

• Sustaining Innovations — required to grow the business incrementally, by improving and extending the existing business portfolio and market reach.
• Efficiency Innovations — that free-up capital by reducing the operational costs and increasing the productivity of the current business line(s).
• Disruptive Innovations — that create simpler, more accessible and easier to use products that free the market potential of non-consumers or marginal customers, who were uninterested by incumbents’ products.

It all started with an idea presented in Clay’s book The Innovator’s Solution, co-authored with Michael Raynor. Then it morphed into a full solution to Innovator’s Dilemma that can be illustrated like this:

Source: The Christensen Institute

Four Zones to Win

I was fully aware about these two Strategy-related models, originated from McKinsey and Clayton Christensen, when I have encountered Geoffrey Moore’s Zone to Win theory, introduced in his book with the same title, which turned both concepts on their heads. How did he do this?

First, Moore placed Christensen’s Sustaining and Efficiency Innovations into McKinsey’s Horizon 1. He created for them the Performance Zone and the Productivity Zone of the business, respectively. Pretty straightforward. Then he placed the Disruptive Innovations into McKinsey’s Horizon 3, creating for it the Incubation Zone. What about the Horizon 2? This where Moore has added some significant insight, and a forth zone: the Transformation Zone. The story goes like this:

The Sustaining and Efficiency Innovations develop and defend the current Competitive Advantage, as much and as long as possible. But, at the same time, their corresponding Performance and Productivity Zones must share around 10% of their resources and operational functions processes with the Incubation Zone, where the Disruptive Innovation happens and new disruptive Minimum Viable Products are created. It is advisable that this zone should act as one or more independently-managed business units or subsidiaries. When one of those products breaks through and proves that it can cross the chasm in Everett Roger’s Diffusion of Innovations curve, it is promoted into a separate Transformation Zone, where it is prepared to become a core product, with an expected contribution of at least 10% of Horizon’s 1 economic results. This is how a new Competitive Advantage is created for replacing the current one, which is inevitably eroded by competition and my market’s quest for novelty and better serving of Jobs to Be Done.

So what would be the right sequence for going through McKinsey’s three horizons. It is not the intuitive 1–2–3. This is how we would illustrate this, in the context of the Zone to Win theory:

Geoffrey Moore’s Integrative Insight

Geoffrey Moore’s books and public presentations are a treasure trove of integrative Strategy insight that should be required knowledge for anybody interested in how Strategy is managed in successful organizations. If you can not make your mind about where to start in exploring his work, the following video presentation might help. I’m sure it will open your appetite for the rest.

Take the time to watch some of Moore’s other video presentations and read the books that he has published:

The thought provoking fact is that Moore’s concepts often transcend the boundary between formal Corporate Strategy and Business Strategy. For instance, his Zone to Win framework is Corporate Strategy on Steroids, built at the intersection of McKinsey’s Three Horizons of Growth and Christensen’s Three Types of Innovation theory.

There are a lot of reference books on Corporate Strategy, some of them business school textbooks \*, but none of them will approach Corporate Strategy in such a direct, insightful and practical way. A treasure trove of strategic thinking! Watch this video presentation that is more focused on the Zone to Win theory, because it highlights the challenges of managing a sustainable business within a mature company.

Zone to Win within Strategy Formulation

How can we integrate Geoffrey Moore’s Zone to Win model with Strategy Clockwork’s cycle of Strategy Formulation?

The diagram below is a first attempt of such integration. The workflow path goes from Stage 1 (Winning Aspirations) through Stages 2 (Strategic Choices), 3 (Required Capabilities) and 4 (Strategic Gaps), then straight to the execution Stages 6 (Strategic Planning) and 7 (Strategic Alignment), assuming that we’ve succeeded to pass through the Stage 5 of Validating the Feasibility & Viability of our Strategy.

A few first thoughts …
(1) The Winning Aspirations are aggregated from our expectations (a) to grow in the Performance Zone and Productivity Zone of our current Competitive Advantage (within McKinsey’s Horizon 1, based on Clayton Christensen’s sustaining & efficiency innovations), (b) to succeed in producing promising disruptive innovations in the Incubation Zone (Horizon 3), and (c) to pull one breakthrough viable Value Proposition through the Transformation Zone (Horizon 2) and push it over the chasm, preparing our next Competitive Advantage, based on expected mainstream adoption.

(2) Geoffrey Moore explained the principle of separate & independent Incubation Zone business units required to work on generating viable disruptive Value Propositions, out of which the best one may breakthrough into the Transformation Zone. We can play with the idea that (a) we might also need dedicated business units handling the transformation job, or (b) such job might be handled within business units focused on Horizon 1 and capable to slide into the Horizon 2. I would lean more towards (a).

(3) The pool of common Corporate Strategic Gaps still holds water, as we might be surprised to find out that the four zones may share some of the Strategic Gaps that are then morphed into their Strategic Objectives. In consequence, we may find people from business units focused on different zones working within common Strategic Initiatives project teams.

(4) It would make sense that the Strategy Map at the Corporate level \** should have four Strategic Themes defined according to the Zone to Win model, then get vertically aligned to the corresponding business units. Then, the horizontal alignment will take care of completing the integration between the units, at Strategic Objectives level.

The Traction Gap

There are three conceptually interconnected books that talk about how to succeed in getting a product adopted by the market, but also about how to convince investors to fund that process, and how to integrate McKinsey’s Three Horizons of Growth:
‣ Crossing the Chasm, by Geoffrey Moore
‣ Traversing the Traction Gap, by Bruce Cleveland
‣ Zone to Win, by Geoffrey Moore

If you are a startup entrepreneur, stop at the second book. But if you consider a company beyond the startup phase, read all three books and focus on the Incubation and Transformation Zones sections of the last one. As Geoffrey Moore observed, Crossing the Chasm is about a product journey into the market, whilst the Traction Gap is more about a company-investor journey, which focuses on the investor perspective.

Furthermore, there is a fine line between startups and incubation business units or subsidiaries of a mature company. On one hand, the MVPs (Minimum Viable Product) that the latter ones are creating are aligned with company’s current portfolio, allowing an adjacent evolution, in regard to the present.

Then, the operational resources diverged from the current business line(s) are essential for facilitating the incubation processes (Geoffrey Moore suggests a 10% rule of thumb). It’s not only money or people that are required, it is also functional sponsoring/hosting for Marketing, Sales, Logistics, etc.

Lastly, all but one of those incubated MVPs are expected to take another exit, as described in Zone to Win, once the most promising MVP is upgraded to the Transformation Zone. It’s a real natural selection process going on inside the Incubation Zone, and the ‘failure rate’ is somehow built-in, because we can’t afford more than one Incubation Zone campion at a time.

By the way, what kind of exit alternatives do we have for an Incubation Zone product that did not make it to the Transformation Zone? We can …

• Use it for enhancing the Performance Zone outcomes
• Use it to increase the efficiency in the Productivity Zone
• Spinoff the incubation unit, allowing it to get external resources
• Sell it
• Shut it down

The parallel Product-Market and the Company-Investor lifecycles are depicted in the diagram below. For more details, visit the Traverse the Traction Gap book’s website and read The Traction Gap Meets Crossing the Chasm article, published by Wildcat Venture Partners.

Source: Wildcat Venture Partners

Related to this diagram, here are several questions answered by Geoffrey Moore about the integration between Crossing the Chasm and Traversing the Traction Gap.

Startup’s Quantum Risks and Value Creation

A startup with no financing is a turtle on its back. It’s alive, but not for long. A 2021 CB Insight research \*** based on the analysis of 111 startup post-mortems since 2018 has shown that the top two failure reasons, in 35%-40% of the cases, have been “Ran out of cash / Failed to raise new capital” and “No market need”. The latter is a clear mistake of placing the cart in front of the horses, but the former cause is a typical risk mitigation error. Which risk?

Quantum Risks

The whole picture of the risks that a startup must mitigate is based on its evolution, which tends to be marked by quantum inflection stages, rather than by incremental continuity, where each inflection stage succeeds to take one more risk off the table … there are six of them:

• Technology risk — related to the Initial Product Release
• Product risk — related to the Minimum Viable Product and Early Adopters
• Market risk — related to MVP’s success in Crossing the Chasm
• Team risk — related to the required Leadership Drive
• Financing and systems risk — related to achieving Escape Velocity
• Execution risk — related to IPO-ready & the Quarter-by-quarter results

Quantum value Creation

Here are the five inflection points of the Traction Gap model, which are defining the five quantum leaps of value creation in a startup’s evolution:

• Minimum Viable Category
• Initial Product Release
• Minimum Viable Product
• Minimum Viable Repeatability
• Minimum Viable Traction

Value creation in venture capital is not a gradient. Companies do not become a little more valuable every day. Instead they transition between valuation states. The purpose of a round of venture funding is to get your company from one valuation state to the next. If you only get part way there, even if you manage to get most of the way there, that doesn’t cut it. It is like an interview candidate whose resume reads “some college” — until you actually complete the degree, you don’t get any of the credit. Same holds for state changes in venture.

— Geoffrey Moore.

For more details, read A Quantum Theory of Venture Capital Valuations, an article by Geoffrey Moore (2017).

\* Reference Corporate Strategy books:

Here are the most relevant Corporate Strategy authors and their reference titles, if you want to explore this subject in more details:

• Prof. Andrew Campbell — Corporate-Level Strategy (1994), with Prof. Marcus Alexander and Michael Goold, Strategy for the Corporate Level (2014, second edition of Corporate-Level Strategy), also with Jo Whitehead
• Prof. Richard Lynch — Corporate Strategy (1997)
• Prof. Gerry Johnson, Prof. Richard Whittington — Exploring Corporate Strategy (1998), with Kevan Scholes
• Prof. Phanish Puranam, Prof. Bart Vanneste — Corporate Strategy (2016)
• Prof. Olivier Furrer — Corporate Level Strategy (2016)
• Prof. Prof. Dr. Ulrich Pidun — Corporate Strategy (2019)
• Prof. Ruth Bender — Corporate Financial Strategy (2014)

\** Alignment, by Robert Kaplan and David Norton, Figure 1–2, page 8

\*** CB Insight: The Top 12 Reasons Startups Fail

This is my first story on Medium. There is a reason why I am doing this. I have published more than two dozen articles on LinkedIn Pulse and they have almost the same format as Medium stories. That is why I have not used Medium until now. LinkedIn Pulse was sufficient for me. But I have also discovered the sweet-spot of LinkedIn, which is the same as for almost any social networks, including Facebook or Twitter: the occasional posts. They are short pieces of text that may include images, videos and links, and — most importantly — they get into the feeds of all the followers. That is why I have published hundreds of such posts. But there is a caveat, at least on LinkedIn: volatility. They go away, together with their content, several months after they are published. LinkedIn doesn’t store them indefinitely.

So, this is the reason. I want to get into each Medium story, clusters of my posts that have vanished from LinkedIn, or will do so soon, and assemble them consistently, based on subject affinity. We’ll see how this goes.