How Mercedes Benz innovates on three maxima

Peter Yaredis a smart guy. Since he started writing games and utilities at age ten, he’s founded and sold multiple tech companies. In fact, he just left his post as CTO of CBS Interactiveto launch another one.

A few days ago, Peterwrote about innovation on Techcrunch, specifically addressing the coming fight between upstart Tesla Motors and incumbent BMW around electric cars—which is, in his words, a real-life Innovator’s Dilemma. It’s a rebuttal of sorts to Jill Lepore’sclaim that disruptive innovation, an idea championed by Clay Christensen, is overrated, and perhaps a mirage.

If you saw the episode of the HBO sitcom “Silicon Valley” in which the characters attend a conference called TechCrunch Disrupt 2014 (which is a real thing), and a guy from the stage, a Paul Rudd look-alike, shouts, “Let me hear it, DISSS-RUPPTTT!,” you have heard the voice of Clay Christensen, echoing across the valley.

If you saw the episode of the HBO sitcom “Silicon Valley” in which the characters attend a conference called TechCrunch Disrupt 2014 (which is a real thing), and a guy from the stage, a Paul Rudd look-alike, shouts, “Let me hear it, DISSS-RUPPTTT!,” you have heard the voice of Clay Christensen, echoing across the valley.

Leopore has some very valid concerns, many of which I shared when I first read the Innovator’s Dilemma. Weren’t some of the ephemeral, fleeting companies Christensen mentioned still around, despite his claims that nobody survived innovation? As Leopore wryly observes, when Christensen says, “Nowhere in the history of business has there been an industry like disk drives,” that makes it a lousy tool for looking at how other industries grow and fail.

I don’t want to throw the innovation baby out with the hard drive bathwater, however. Innovation happens all the time, and some of it is dull, some clever, and some downright destructive. As Peter points out, “there are lots of great lessons for entrepreneurs to learn from watching the BMW versus Tesla battle since cars are so tangible and manufacturer sales tactics are so transparent.”

A three-maxima model

I’ve found several common threads among the large companies I’ve spoken with about innovation. Many of these are borrowed liberally from Christensen and Moore and Anseff and others. One of the most useful ideas to emerge from this is that of the three maxima:

There are three kinds of innovation: sustaining, adjacent, and disruptive. Generally, there are three groups tasked with these three forms of innovation, and they all have different metrics, personalities, and ways of working.

They’re maxima, because each group is striving to optimize their particular area of focus. Someone doing sustaining innovation is only going to improve things to a certain degree—their local maxima—without changing the rules of the game somehow and moving to a new, global maxima.

Sustaining (or core) is more of the same

Coke’s Sergio Zyman’s said, “selling more things to more people for more money more often more efficiently. This kind of innovation primarily an optimization activity, scored by traditional business metrics like TCO, ROI, and so on.

This isn’t innovation,per se; it’s doing your job. It’s giving the market more of the same, and doing so better. It assumes tomorrow will be like yesterday, only more so. Many of the Lean Startup methods—constant experimentation, close customer development, rapid prototyping—work well here, but this isn’t startup work.

Adjacent is changing one aspect of an offering

It’s experimentation along one axis: the product, the market, or the method. It is primarily a creative activity, and we measure its success by how many iterations we’ve undergone, how many assumptions we’ve tested, and how many solutions we’ve found.

Amazon first sold an existing product (books) to an existing market (readers) with a new method (centralized logistics and web ordering.) Then they launched a new product (e-reader) which eventually let them target a new market (legally blind, whose selection of large-print books was very limited.)

Astute readers will recognize Anseff’s matrix in this, but I like to add “method” as a clear reminder that it’s about not onlywhatyou sell andwhoyou sell it to, buthowyou sell it.

Disruptive (or transformative) cannibalizes a different, existing market

It is a destructive activity, because it aims to upset the current game and change the rules dramatically. We keep score by how many problems we’ve discovered, and what we’ve learned that surprised us.

Of course, most of the innovations we hear about today aren’t really disruptive; the word just sounds cool. But some things are: Google Maps is disruptive because London cabbies don’t need The Knowledge, paving the way for Uber. Skype undermined long-distance phone services. Amazon Web Services changed the server market forever.

Disruption often comes from reframing: Blockbuster was in the video rental business, while Netflix realized it was actually in the entertainment delivery business, which made it easier for the company to realize the US postal service could be turned into high-throughput, high-latency broadband by mailing DVDs. Mercedes has all three maximaAnyway, while Peter’s piece is excellent, I think Mercedes is a better example:

• A 2015 model Mercedes is sustaining innovation: more of the same.

• An electric Mercedes is adjacent (new product, sold to the same market in the same method.)

• Car2Go, the Mercedes/Smart venture, is disruptive. If it succeeds it destroys the dealership network.

With Mercedes, we have all three maxima happening at once.

To be really, really clear about this: The more people use Car2go, the fewer will buy cars through the dealer network. That’s why it’s disruptive—because it interrupts an existing model. It’s not just creative innovation, it’s destructive innovation. While electric cars might be good, they change very little about the rest of the company’s business.

Electric carscanbe disruptive. In Tesla’s case, because the product includes charging stations that destroy traditional gas stations, or over-the-air updates that reduce the need for maintenance and product recalls, it destroys other things. And Tesla is already trying to circumvent the role of the dealership, fighting entrenched legislators for the right to sell direct to consumers.

For another example, consider P&G. They continually change the color, fragrance, packaging, and marketing messages around their cleaning products—that’s sustaining innovation. At the same time, they introduce new products (such as the Mr. Clean Magic Eraser, which was originally aircraft insulation); and they enter new markets. That’s adjacency.

But what about disruption? There are plenty of upstart competitors using smartphones, ratings feedback, and digital payment to try and build new cleaning companies. If one of them succeeds in a significant way, it’ll change how cleaning products are bought and used. Should P&G launch a home cleaning service?Should it at least be trying?

Why disruption gets lip service but not funding

In my experience, while many companies pay lip service to disruptive innovation, very few of them invest in the third maxima. There are many reasons why this happens:

• By definition,it alwaysthreatens the existing business model,and those of potential partners and channel members. After all, if a startup is, as Steve Blank says, an organization designed to search for a sustainable, repeatable business model, then it follows that a big company is an organization designed to perpetuate one.

• Executivesexpect to see a business plan, which must stem from a business model, which in turn stems from a variety of assumptions about the market and what it will value. But launching a truly disruptive innovation project is a search, andasking disruptors for a business plan is like asking Magellan to draw a map of the world before he’s even set sail.

• Corporations haveastated business goal. It’s in their charter, and their board documents. If you’re running a garbage disposal company, it’s unlikely you can launch a streaming music service—it’s outside the scope of your operations. While sustaining and adjacent innovation require framing to guide where they look for improvement, disruption is generally unframed.

• Capital marketsdon’t let companies investmore than 10%of their time in disruption, and studies show that 95 to 99 percent of attempts to enter a new market will fail. So the math, historically, doesn’t work—even though current models of innovation and the rate of change of industries have probably adjusted these ratios in recent years.

A few companies do disruption well. Google is frequently cited, having introduced Glass, Maps, the self-driving car, balloon-based wifi, and so on. Part of this is the company’s culture, and its decision to let employees innovate on their own projects. Part of it is the hugely profitable advertising engine that generates cash with which to experiment and dabble. Part of it is the isolation Google is willing to give its disruptors.

But other companies need to recognize that it’s not just willpower, it’s also framing the problem. A significant factor in Google’s success is the company’s broad charter of organizing the world’s information, which gives it considerable latitude. Netflix is in entertainment delivery; Mercedes is in transporting things; P&G is in creating clean surfaces.

Ultimately, correctly framing the value your market gets from your business is the first step in figuring out how to disrupt yourself before someone else does.