Misstep: The Over
Swing/Under Swing
We have also observed that, in the absence of an H1-2-3-like initiative portfolio management system, decisions about growth ideas are many times made for the wrong reasons. Think of this as a variable maturation process. Each H3 idea will have its own unique investment characteristics, such as size of opportunity; complexity of development, capital, and time required; and data (or evidence) that there is sufficient market validation that warrants bigger investments to scale the idea in the market.

The challenge for leadership is to be thinking and deciding about the potential and merits of an opportunity compared to other opportunities, all while trying to meet quarterly targets. The pressure is on to decide quickly whether to invest further in or cut the idea. Decisions are often made not because of evidence but because “leadership loves the idea.” We call this the over swing: investing too quickly. We also observe the opposite when leadership is quick to end an initiative because it is not performing well without fully exploring ways to learn, adapt, and try again. We call this the under swing: when substantial investments are flushed because of impatience or inappropriate expectations that a new idea will “get it right” in its initial market test or pilot. Knowing when to cut and when to adapt is both art and science; we have seen millions of investment dollars fall to this fate without the adapt approach ever being seriously considered.

The organization psychology of the over swing/under swing phenomenon is also interesting. Organizations thrive when there are predictable patterns of thinking, assessment, and decision making. Without the rigor of an H1-2-3 approach to managing growth, decisions often feel inconsistent to an organization and political interference occurs. This is when people are more prone to over-rely on relationships to make decisions happen or, alternatively, to avoid the risks inherent in pilots because the merits of the decision making are too unpredictable.

Make no mistake: these judgment calls, especially with the ideas that are having mixed results, are difficult to make. However, if leadership doesn’t figure out the better way to make decisions, then the consequence can be incremental product change with an inappropriately engaged organization, usually leading to an insufficient rate of growth.

Misstep: Missing
Business Model Challenges
To develop a robust H1-2-3 growth pipeline, leaders must recognize and successfully manage the differences in leadership requirements, investment criteria, and operational norms among H1, 2, and 3. Leaders must also understand the nature of the innovation coming out of H3. Some product innovation from the H3 pipeline may add to and complement existing H1 core business products. While these innovations may require growth and development as well as investment in H2 to survive the modifications and experimentations, their underlying economic logic may not require a different business model. Others, however, do. The closer innovation comes to being truly breakthrough (as opposed to incremental), the higher the likelihood of threatening the existing internal business model of the H1 core.

In our experience, H3 itself does not require a different business model, as the early stage discoveries and inventions are not intended to run on their own as a business. In the transition to H2, however, the underlying business model decision must be made. It is not just that the nature of H2 activity (e.g., economic objectives, leadership orientation, skill set) is fundamentally different from the nature of H1 activity. But there is also an underlying business model and economic logic implied by the H3 innovation idea now being driven through H2 development that may actually be at odds with the core businesses, even when they appear to be in the same markets with the same customers. All too frequently product innovation, however sound, meets subtle but deeply rooted resistance within the prevailing internal business models.

Nowhere do we see this more than in financial services where the transparency of product features makes their design all too easily copied, all too quickly, erasing the competitive advantages to be gained by product innovation alone. So the focus of H3 innovation development for many established market leaders is around the processes and services that create a total customer experience over multiple life stages – creating a sustainable platform onto which individual products can be added and removed as needed. This requires financial service companies to develop and test new technologies and processes (H3) that cut across the established core business lines (H1), typically with a siloed product structure. Furthermore, the short term success of the H1 core businesses is dependent upon go-to-market product-centric models deeply entrenched in intermediary distribution channels that are themselves resistant to change.

Today all the buzz circles around “disruptive innovation” because it is by nature so distinct that it creates the differentiation that the marketplace values and that competitors find difficult to copy. Competitive advantage from innovation disrupts the marketplace, at least temporarily, creating a new order of market leaders and followers, all of which carries real economic impact. But larger corporations are the market (riding the backs of market leading H1 core businesses) and what they often fail to realize is that breakthrough H3 innovation is likely to disrupt their own business model no matter where it comes from – from outside competitors or inside their own H3 R&D shops.

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