A formula for invention

There is a clear pattern behind business growth.

Back in the day when I was a doctoral student, my research group won a grant from Citigroup to study its internal corporate ventures. Some of its ventures were spectacular winners – the world’s first truly global cash-management business, for example. Others… well, not so much.

During my research, I unearthed a pattern of development for projects that could grow into new capabilities for firms. I tested the model on dozens of businesses over time. It was strikingly consistent; so much so that the process below found its way into many scholarly texts.

1 Understanding business drivers

New opportunities demand a huge level of starting assumptions. Thus, learning and converting assumptions into facts is imperative. To study this process, I developed an instrument that quizzes a project team on what drives what in the business – for instance, who key customer sets are – with scores ranging from “I have no idea” to “We know exactly”.

2 Team effectiveness

New teams are notoriously poor at teamwork. It takes time to learn to work together effectively. My research revealed a key additional dimension to typical measures of team functioning: the relationship between understanding business drivers and how well the team can coordinate its activities. It transpired that unless you understand the drivers, it is nearly impossible to work together.

3 Emerging competence

As the team learns about the business and working together, it gradually develops new competences – the organizational equivalents of skills. Just as learning to do anything requires practice, teams build competence over time. To ascertain this, I ask them how well they can accomplish their goals. The results typically improve as the project matures.

4 Distinctive competence

Nobody pays extra for tools that fit a predetermined specification, or food that is safe to eat – we assume those things exist. But a new team may still have to learn to deliver these ‘assumed’ outcomes reliably. Yet one would hope that some of what you are creating, as your team competence builds, is distinctive to your organization – making it a potential competitive differentiator.

5 Competitive advantage

Finally, we’re getting to the thing we wanted to build when we started the innovation journey! This is competitive advantage, which is often quite slippery to define. I look at it through three lenses:

i Market value

You build market value when a target customer is willing to pay for something you’ve created in your competence building journey. You’d think that would be enough, right? Not so fast.

ii Firm value

You have firm value when your parent organization supports your venture as it grows. Here’s the tricky part: it is entirely possible for a customer group to love what you’re doing while your parent organization doesn’t. Witness the launch of CNN+: a new owner arrived and declined to support the new service.

iii Competitive insulation

If there are no barriers to entry, copycats will come flooding into your space. Unless you have some way of keeping them at bay, imitators will rapidly erode your margins. Insulation can come from many things: patents and trademarks, of course, but company culture and happy employees can give you an edge too.

Different combinations of these factors often lead to different outcomes. High market worth businesses with low firm value and little insulation are often loss leaders or necessary evils. Many financial service products fall into this category. High market worth, high firm value and low insulation businesses become commodities quickly – look at most offerings in the social media space.

What is clear is that capability-building follows a common pattern. Armed with this insight, you can determine where the teams charged with creating your organization’s future are in their journeys.

Rita Gunther McGrath is professor of management at Columbia Business School.