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Innovation Insights
by Stephen Shapiro

Innovate Where You Differentiate

This article originally appeared on the American Express OPEN Forum site, and is today’s Wednesday Work Wisdom

I subscribe to the 20/80/80 principle. The idea behind this concept is to focus your energies on the 20 percent of those activities that create 80 percent of the value. This can mean concentrating on the customers that create the highest revenue potential or on the products that provide the greatest leverage return. Once mastered, you can spend your 80 percent on other activities that produce even more long-term value. But how do you know what those activities are?

In my book Best Practices Are Stupid, I describe a model called “The Innovation Targeting Matrix,” which helps business owners evaluate their business activities and put each into one of three categories: support, core and differentiating. Doing this helps them determine which areas are worth focusing their 80 percent on.

Innovate Targeting Matrix

Activities that fall into this category are those that help you run your business, but are not the business itself. Although many assume that human resources and finance fall into this area, the reality is that there are parts of every function that are “support” in nature. What distinguishes these activities is that customers don’t pay for or value them, and they don’t create direct value for your business either. Therefore, your strategy should be to outsource these activities to a low-cost provider. Or, if they are truly low value, eliminate them altogether where possible. For example, I hire someone overseas to handle my audio transcriptions. Although I could eliminate this activity, I have deemed enough value to continue with it.

The next level represents your “core” activities, which are any activities that create direct customer value. They typically range from shipping and customer service, to sales and new product development. For core activities, consider simplifying, automating, improving (e.g., Six Sigma) or, in some cases, outsourcing to a strategic partner. If outsourcing, look to hire organizations or individuals for whom this work is a differentiator. For example, I’m not a marketing expert and my clients don’t pay me for my marketing expertise, so I retained an Internet marketing company because its results set it apart in the marketplace. In this case, strategic outsourcing makes the most sense. It’s important to note that just because something is a core function—like sales—does not mean that everything a salesperson does is core. Related administrative work may be a support function, while other aspects of sales may be differentiators.

At the highest level are your “differentiating” activities. These are what separate you from the competition, and they represent the unique reasons why customers buy from you and not someone else. What makes you different? Is it some particular aspect of your service? Do you have a unique pricing model? Are you able to give customers access to something they can’t get elsewhere? Do you provide a feature no one else can offer? Any activity can be differentiating. There are aspects of HR, for example, that enable your organization to stand out. Identify these activities in every department. Spend your time on those activities that set you apart from your competition, and innovate where you differentiate.

In addition to using the Innovation Targeting Matrix, entrepreneurs should ask themselves the following questions to help focus their energies on the most important tasks:

  • Am I the best person to execute this activity? If not, get someone else to do it. When possible, only engage in activities that you deem to be your strengths. I hired a branding company because branding is their strength, not mine.
  • Is this activity something I enjoy doing? If not, consider having someone else to do the work. Creating strategic partnerships is essential to my business, but I find the work exhausting, so someone else handles this responsibility on my behalf.
  • Is this activity something I need to do? This is often a tough question. From my experience, much of the work we do provides negligible value; however, we convince ourselves it is necessary. Surfing the Internet, being sidetracked by emails all day long and other distractions disguised as opportunities should be eliminated.
  • Does this activity give me leverage? This is a critical question. Think about it this way. For some activities, an hour of work rears an hour of value. When my income is based solely on speaking to groups, there isn’t a lot of leverage. I’m limited by the number of hours in the day. Personal/executive coaching often has even less leverage because you’re having an impact on only one person at a time. When I license my work to others, there is greater impact as they do the work and I make the money with minimal effort. In this case, one hour of work on my part can lead to hundreds of hours of value. Selling can be leveraged too. Instead of selling once and making one sale, find a channel whereby they can create dozens or even hundreds of sales for you.

Why invest in activities that don’t yield the greatest return? There are only so many hours in a day, so focus your energies on activities that you enjoy, that are differentiating and that create leverage. Using these strategies will help you stay one step ahead of the competition.