Focus on Uncertainty, not on Horizons

Guest Post by Ben Schmuck, Lean Innovation Manager, Caterpillar Inc.

Dear Fellow Corporate Innovators,

We’ve all heard of the “Core, Adjacent, Transformational” or “Three Horizons” innovation framework. Core innovation means making incremental changes to existing products in existing markets; transformational means the creation of brand new products and markets, and adjacent falls somewhere in the middle. Although this framework has led to many successful corporate innovations, I believe that focusing on types of products and markets matters far less than another factor: the level of uncertainty. Let me say that again: it doesn’t matter whether innovation is core, adjacent, or transformational. What does matter is the context it’s happening in.

What if your industry is being disrupted, threatening your core business, and you don’t know how to respond? How many companies’ core business model was threatened due to Covid? A year and a half into Covid, I noticed a restaurant that I liked was still open in the Chicago loop despite having very few people working downtown. I told them, “I’m so glad you are still open! How did you do it?“ They told me they were staying alive by providing to-go lunches to the local hospitals and feeding that incredibly hard-working healthcare staff.  Because of the deep uncertainty, they innovated multiple elements of the core business model including customer segments, channels, and marketing to get this done.

The point of this story is simple: “If your core business is being threatened, and you don’t know how to fix it, that’s where you should spend all of your innovation effort.”

Moreover, focusing the majority of your portfolio on transformational ideas runs a very high risk of drifting away from true business growth. Instead, asking your leaders what they are most concerned about or most uncertain about will lead you to projects that can be directly tied to growing sales or improving profitability.

Once you’ve done that, balancing your innovation portfolio around 3 levels of uncertainty gives you a better mix of short term small wins and longer term major successes. Let’s take a look at them one by one.

Uncertainty Level 1 (U1): A few business model assumptions

A company planning a launch of a new premium product came to me after most of their business validation was already complete. They had purchased IP from a startup with customers already using the product. Because of this, we were confident the solution solved a critical need for customers. There was one final piece to innovate, which was where my team came in.

Eight out of nine boxes in the business model canvas were validated and the client was excited to have the innovation team help with the last box: pricing and the revenue model. Talk about a slam dunk! We could provide tremendous value to the client in a very low risk innovation environment.

Uncertainty Level 2 (U2): A clear problem with no solution.

Does your company keep an unmet customer needs list? Does your observational research lead you to an area where customers have “always done it this way,” but you know there’s got to be a better way?

Find the areas where there’s a clear problem and lots of uncertainty about how to best solve it.  You will know there’s a need because customers have been complaining about it for ages or because you’ve seen many different customers getting their jobs done with a work-around solution.

You know there’s uncertainty around the solution when you see an argument amongst team members about the best way to design a solution, or a wide range of solution ideas presented to you at various price points.

The next step is to brainstorm and test solutions. You won’t know whether the idea is profitable or sustainable yet and that’s ok! You need to validate the solution first and then worry about business model validation.

Uncertainty Level 3 (U3): “I want to grow the business in this area, but I don’t know how.”

It’s often said that if you only focus on what your company sees as the next innovation, you’ll never think of the next big idea. This is true and U3 innovation solves it.

U3 is about doing customer discovery with no solution in mind. Pure customer discovery is talking to existing or potential new customers, asking them about and observing them completing jobs today, and identifying problems and needs to solve next.

Staying grounded in real customer problems and needs will protect you from the “hammer looking for a nail” scenario that is more likely with a transformational portfolio mindset.

And best yet, you will have compelling stories about customer needs to tell your leaders, helping them build empathy with customers and build support to carry projects into the solution and business model validation phases.

Before we wrap up, I’d like to introduce you to one more uncertainty level: none. Where does this belong in your portfolio?

Trick question. It doesn’t! If your leaders are certain (or even think they’re certain) about how to grow the business, don’t run an innovation project!

The innovation process will likely shape and change the idea into what customers really want. In this scenario, you run a tremendous risk of leaders saying (or thinking), “This is a lot of great work, but we’re going to do what we wanted to do anyway.” Then your project was a huge waste of time and energy.

So the next time someone asks you whether your idea is an H1, H2, or H3 idea, you can confidently say, “It doesn’t matter.”  What matters is that you’ve got the right mix of uncertainty levels (U1, U2, & U3) in your portfolio, leading you to solve real needs for your business, and your customers.