Innovation vs. Focus and Scale
Jack and I attended a lecture of sorts a few weeks back and the speaker spent a lot of his time on the topic of neuroplasticity. The overarching idea was that as we age, we get locked into mindsets, we get uncomfortable with unknowns and new ideas. The speaker argued that this provided an opportunity for those willing to put in the work. He encouraged us to seek new experiences and get exposure to new ideas often. Our return on this investment would be agility, speed, and innovation. Sexy stuff.
Following the lecture, Jack and I walked back to our cottage in silence. If you know us, you know that’s an atypical scene. We’re typically opinionated, overly confident, comfortable enough with each other that we’re usually talking OVER each other.
Once we got back to the cottage and got settled in, we launched into deep debate. Debating is our preferred method of working through ideas. He will take one side; I’ll take the other. We position, pivot, reposition until we’ve beaten the damn idea up so badly, we can walk out of the conversation feeling confident in a path. We have a bias for action, and this method proves faster than other approaches at working through the brain fog that accompanies learning new frameworks and ideas. This brain fog is like dust and dirt getting kicked up as new ideas collide with old beliefs and your brain tries to work towards some kind of reconciliation.
This time was a little different. It was harder for us to get clarity through debate. It was easier for both of us to take both sides of the argument. We walked away without clearing the dust or fog. We just got comfortable living in it.
Now that we’ve had a little while to think and process, we wanted to write a Ballast letter on it, hoping it would help me process the ideas further, maybe provide a little more clarity.
The dust-up: innovation vs focus & scale
The two competing ideas engaged in this dust up are: innovation versus focus & scale.
- Innovation is launching a new service line or product, testing a new pricing model, going after a new industry. It’s how we evolve. It’s the spark.
- Focus & scale is streamlining delivery, doubling down on what works, tightening the playbook. It’s how we drive margin, build repeatability, and create operational power. It’s the engine.
In a world of unlimited capital and resources, I suppose these two ideas don’t necessarily have to compete, but in our business (and in most of our clients’ businesses) these two ideas most certainly do compete. Every dollar and every hour we spend on one is a dollar and hour made unavailable for the other.
But it’s more than that isn’t it? The conflict between these two ideas or concepts is greater than the limited-resource argument. People and processes that desire innovation feel weighed down and held back by the people and processes built to focus, standardize, and scale.
On the other side of this metaphorical showdown are the scalers, the people and processes that desire focus and scale. These people feel distracted by those who are always pushing for innovation. The innovators come across as ‘seagulls’ just dropping in from time to time with their distractions.
At Ballast, we express this frustration by claiming that the innovative ideas are like throwing sand in the gears of this machine we’ve built. We make money as a firm, for our employees, for our growth, when the machine is humming. Can we please stop stopping the machine from spinning to tinker on this cog or that driveshaft?
And so I hold the two following thoughts in my head at the same time:
- Innovation in a business is needed and has tremendous value, yet
- Focus and standardization are a prerequisite for scale, and success requires some scale.
And these ideas are in tension, they are in friction. They fight. But I’m still holding both in my head and I haven’t gone entirely mad just yet.
Let’s dig into the two concepts and let this epic business scuffle play out.
Innovation
We all know the folksy business tropes about successful businesses that fail to innovate, that fail to adapt and change and, because of this failure, eventually decline. Growing up we learn about major declines – the Roman Empire, the British Empire, etc. As we dip our toes into the business world, we learn about Kodak, US Steel, and Blockbuster. We read Jim Collins’ How the Mighty Fall.
And that scares us. The idea of turning around one day and realizing that the business you built has been passed over and now holds little to no power or influence. Yikes. As entrepreneurs we’ve poured our hearts and souls into our businesses, so the idea of them withering away is upsetting.
And maybe this isn’t just an emotional reaction. Maybe it should scare us. These historical narratives are not wrong or untrue. And because of this, burned within our brains is the fundamental belief that innovation is good for business. It’s a must. It’s a requirement. Innovation results in wins and success. If you want to avoid that slow and embarrassing decline into nothingness, innovate. Without it, we atrophy. Without it, markets fail. And by god it’s incumbent on us to be the ones to innovate.
Focus and Scale
Scale has power and force and magnitude. Scale brings efficiency and higher quality. And in business we’ve all learned these lessons as well. We read Gladwell’s Outliers, we understand the idea of investing 10,000 hours into something with singular focus in order to become great. We’ve all read about Henry Ford’s assembly line and the intense focus on the production of a single vehicle. This focus allowed for extraordinary gains in efficiency, allowing Ford to reduce the sales price of a Model T by 60% over the 19 years of production.
Later in business school, or amongst our roundtables or forums, someone eventually recommends Liker’s ‘the Toyota Way’ and we learn the lessons of Toyota’s production system. Just look at numbers 6 and 8 of the 14 management principles outlined by Liker in his book:
- Standardized tasks and processes are the foundation for continuous improvement and employee empowerment, and
- Use only reliable, thoroughly tested technology that serves your people and processes.
And it’s not just automobile production where this lesson teaches us about focus. Look at Southwest Airlines’ dedication to a single aircraft, the Boeing 737. This focus allowed them to streamline all of their operations. Mechanics, interior repairs, pilots, and on and on.
Or I’m sure you’ve read all about this guy named Steve Jobs (joking of course), who returned to Apple after being ousted, and he turned the business around by cutting down the product line by 70% and focusing on only a few key products. I don’t think a week goes by where I don’t see some jabroni on LinkedIn post that interview with Jobs where he talks about the need for simplicity.
And why and how does focus produce success? Ask our colleague John Reed over breakfast and by dinner he might take a breath. Two immediate things come to mind on why focus produces success:
- Higher volumes allow for more investment in fixturing and tooling, allowing for improved efficiency in production and reduced costs over time. These reduced costs can either produce higher margins (yay!) or allow for price reductions to improve competitive positioning.
- Standardized production allows for easier quality inspection, and higher volumes allow for the incorporation of quality assurance into the entire production line.
So focus produces higher quality products, at lower costs and/or higher margins. What’s not to love? And so a part of our business brain is hardwired to respect, appreciate, and desire focus, and scale, and standardization, and all of the wonderful things that come with it.
So…can we have both? Is there a reconciliation?
So how do we reconcile these two concepts? I really do wish we had a silver bullet, but this isn’t that kind of Ballast letter. We admit that we struggle with the competition between these two ideas at our firm. Every week I come up with something new I want to do, every week the team tells me to calm down and focus on our core.
I truly do not know the answer to how best to manage this conflict, but during our debate Jack and I came up with a list of potential approaches:
1. Monogamous Approach
The idea behind this approach is that you choose either Focus OR Innovation, and you simply stay on your chosen path. The key here is to become exceptionally good at the path you’ve chosen, and become comfortable with or able to mitigate against the downside of NOT having the opportunity to engage with the other.
If you choose the path of Focus, you can’t simply be okay at it, you must become relentless in your pursuit of it. Standardization and process are key. You must become good at understanding how to invest in the fixturing and tooling of your processes and the idea of investing in something for the sole purpose of reducing time and improving quality, and recouping this investment as quickly as possible.
The path of focus is not a flashy path. If you choose this path you have to become comfortable not doing anything new. And strategically, this means that in order to deepen the moat around your business, to keep the competitors at bay, you have to focus on cost and quality. The cost comment here might surprise you, but consider if you use your scale and position to drive so much efficiency and you share this efficiency with your customers and clients via price reductions (a la early Ford) that new entrants simply cannot make the math work.
If you choose the path of innovation, you MUST learn to monetize innovation. If you get caught into the mindset of ‘we’ll make money on this later’ you’ll lose. If you’re on the path of innovation, you need to make money on the first unit, because you will not have the opportunity to make money on subsequent units. Getting stuck in the middle here is not an option. If you cannot make money on the first unit, then you need to learn to monetize by innovating for someone else. The idea is to innovate and pass the idea onto someone else so they can scale it. They pay for your innovation, they justify it with their forecasted returns at scale, and you move on.
I’ve met a few shops who took the innovation path. It’s a hard path. New ideas, new concepts, new things kept things fresh but it’s an intense and volatile path.
2. Sandbox Approach
The idea with this approach is to find a way of working both Focus and Innovation into your business, by cordoning off the innovation into its own sandbox of sorts. You establish a team or a division that focuses on the innovation (look up Lockheed Martin’s Skunk Works for a fun read), but you keep the innovation OUT of the operations team that is focused on scale and delivery of your core product or service.
It’s an attractive idea, to get the best of both, but taking this approach is considerably harder than it first appears and it’s riddled with risks.
One issue with this approach is that it requires serious scale in order for the operations and scaling team to produce sufficient profit and free cash flow to fund the R&D and innovation. Most of our clients simply do not have a large enough scale for this to work well.
In response to this, some of our clients try a shared resource model, which requires the sharing of resources and people across the innovation/R&D and operations/scale sides of the house. Again, an attractive idea, but in reality, it usually ends up just expanding the size of the sandbox into the yard, spreading sand thinly everywhere and creating a mess. In reality, we find that teammates are hardwired for innovation OR scale, but not usually both. So you end up sharing resources back and forth and resulting in subpar scaling/operations AND subpar innovation.
The next issue that arises is a murky financial picture. The administrative burden and efforts required for clean and accurate financial reporting of the two functions using the same resources is a mess. You can manage this a bit by using a robust time tracking system for ad-hoc reporting, but taking that data and incorporating it into the financials requires splitting payroll or allocating labor into various buckets, and trust us when we say it is not as easy as it sounds. Also, the temptation to ‘hide’ unproductive labor in the R&D buckets becomes very real and the reported R&D costs become overstated and bloated. At best you can handle the time tracking, accounting, and reporting, but your financials have an asterisk over them like Roger Maris’ 1961 homer record (the first and last sports reference you’ll hear from me this year) and any potential buyer questions the validity of the reporting.
The last issue with the Sandbox approach is managing the culture between the two teams, which at best is slightly awkward and at worst rears its head as resentment. The scalers resent the innovators because they suck up the profit and cash and the innovators resent the scalers for holding them back.
If you’re going to try this approach, despite these risks, put in place tight controls on WHO can play in both the sandbox and who focuses on the core of your business. Put in place the systems and processes to segment and account for costs appropriately. Resist and fight the temptation of hiding unproductive labor. And mitigate that asterisk over your financials by having a clean and clear narrative memorized.
3. Periodic or Seasonal Approaches
The idea behind this approach is to choose one path, say Focus, for a period of time, likely a few years, and then move towards a period of Innovation, probably a shorter time period, then transition out of the innovation period and focus again on scaling and building the innovation. This should look and feel a lot like how small innovations are made in manufacturing. You implement a change, it takes a while for the new process to be established, once it’s established, you drive the efficiency gains until the improvements decline, and you look for another change.
Again, at first glance this sounds like a great approach. You can have it all, just not all at once. Sounds reasonable. And frankly, this was probably the path that Jack and I liked the most. It had issues, but they were manageable. One issue was the same resource issue we mentioned above. Those that are hardwired for one path are likely not able to easily transition to the other. If you approach focus and innovation as seasons, you have to find a way to transition your resources during the seasonal shift. One way to mitigate this is to pull in the innovation-focused resources as supplemental, during the period of innovation. Those resources come in the form of ‘consultants’ or ‘advisors’ but that approach can work well and allows for a combination of the Periodic Approach with the Sandbox approach.
4. Acquisition Approach
One last approach to consider is the idea of using acquisitions for innovation. This approach requires that your business functions to scale, not innovate. Said another way, you’ve chosen for your firm the path of monogamy from an operational perspective, and you buy innovation in the form of an acquisition of IP, assets, or more likely an earlier stage operating business. Large pharmaceuticals and medtech firms have become very good at this approach. Big pharma has moved towards this model because of the risk profile of innovation. They found that it was cheaper to simply wait for others to innovate, prove efficacy, then scoop up the firms or IP at what look like ridiculously high valuations, because this approach is cheaper than failed R&D within the firm. The benefit of this approach is that it eliminates the high risk of failure on early-stage concepts. Additionally, this approach is faster at getting something spun up than starting from scratch, because you can buy a product or service after product-market fit has been established.
So what’s the downside with this approach? The first problem is that it is expensive. But this can be controlled for or rather explained/justified/rationalized via the purchase price and the return on the investment. Simply account for the transaction costs and ensure the acquisition still pencils.
A bigger issue, from my perspective, is integration and culture. If your firm is built for scaling, and you acquire firms built for innovation, the integration of the innovation-focused firm into your focus-based firm is not going to be easy. I’d go so far as to say it’s doomed from the start. The key here is to know this up front, and build within the investment profile the need to turn over large portions of the existing team to scale the innovative product or service from the target firm.
Another risk to consider, I’ve never seen a product or service that were as far along in the product-market fit as was advertised, meaning you need to be careful not to buy what you think is a product or service with an established product-market fit, only to find out that you’re still in the latter stages of development. Nothing will kill the return on an acquisition quite like purchasing what you think is a scalable product or service only to find out that you as the focused scaler now have to complete the innovation of the prior, now exited, firm. It’s a recipe for disaster.
Conclusion?
As much as we typically try to bring new levels of clarity in these letters, we have to admit this one’s just tough. We wish we had a playbook for you, but we don’t. There are no silver bullets or “goldilocks” solutions. Just self-knowledge and better-informed decisions.
Inside Ballast, we’re still figuring it out. Every time I get excited about a new idea, Jack reminds me to let the machine run. We’re both right, in different ways. If you are a business owner or leader you already know that it’s never a clean choice – it’s a balancing act. And most of the time, the best we can do is make the tradeoffs on purpose instead of tripping over them by accident.
So, all of this is to say, if you’re in this tension, you’re not doing it wrong.
See you out there in the dust up.