By Noel Sobelman

Examining the difference between core business and transformative innovation

Back in 1999, both Apple and Iomega were struggling companies. Apple’s history is well documented. Its market share in the computer market that year was below 5 percent, and its market cap was hovering around $5 billion (vs. $580 billion today). Iomega, the removable storage company known for the Zip drive, once a $3 billion market cap industry darling (Remember Motley Fool’s love affair with the company?), was already trending downward.

Another similarity from that timeframe is that both companies had sights set on the MP3 player market. For Apple, the iPod helped turn the company around. For Iomega, the HipZip, despite winning multiple design awards, experienced a quick death shortly after its launch. Iomega struggled to repeat the breakout success of Zip and ended up being sold to EMC a few years later for a fraction of its peak value.

Could things have turned out differently for Iomega had its entry into the MP3 player market been a success? Most likely no, but the company certainly might have had a better chance. This article discusses:

• Where Iomega went wrong with its MP3 player development
• How its approach to innovation contributed to the product’s failure
• How a different approach may have improved the company’s chances of success 

Clik! And Iomega’s HipZip Development

In the late 1990’s, Iomega developed Clik!, a miniature version of its popular Zip Drive. The strategy for Clik! was to embed this small, high capacity removable storage medium inside digital consumer electronics. Clik! would become the “digital film” standard for the growing digital camera market. When digital camera manufacturers balked at Click’s size, power consumption, and cost, Iomega turned to the nascent digital audio player market in an attempt get consumer electronic device manufacturers to take notice.

In 1999, there were more than 20 MP3 players on the market, including products from Sony, RCA, Pioneer, Sharp, Samsung and lesser known brands like Diamond Rio, Sensory Science, and Creative Labs. The market was projected to grow from under 500,000 units to more than 8 million within the next four years. The market was being fueled by:

• Increased internet bandwidth
• Improved software for file sharing
• Increased access to popular digital music content

A digital audio ecosystem was starting to take shape.

It was in this environment that Iomega decided to invest in developing an Iomega-branded MP3 player using its Clik! platform to store and share digital music files. The product value proposition hinged on the low cost of the Clik! disks, which cost 25 cents per megabyte versus more than $3 per megabyte for flash media, the de facto standard for competing music players. That cost differential translated to four hours of music for $60 versus $600 using flash. Iomega was so confident it had made a hitthat it based the product’s entire marketing campaign around this cost advantage.

Where Did Iomega Go Wrong?

Iomega used its traditional gated development process to develop HipZip, a process that served them well in optimizing derivatives of its Zip drive platform. The company was able to successfully develop and launch Zip drives and disks into the computer storage market through its vast computer peripherals distribution channel, a market and channel familiar to the company. HipZip, however, was new territory for the company. The proposed product had new digital audio technologies unfamiliar to Iomega engineers and targeted a new consumer electronics category, digital music. In other words, it was a transformative innovation (See Horizon 3 in Figure 3).

Figure 3. The Three Horizons Framework

(Adapted from the book The Alchemy of Growth)

Transformative innovations are, by definition, paving new ground, and, therefore, have higher uncertainty and risk associated with development. Unlike core business innovation, which is relatively predictable and can be planned using traditional linear development approaches, transformative innovation approaches are characterized by controlled early-stage experiments to learn quickly, reduce uncertainty, and iterate toward solutions.

Core vs. Transformative Innovation Approach

Iomega’s challenges extended across several key innovation elements, including governance, investment decision making, consumer discovery, product definition, process, project team organization, incentives, and reward systems.

Governance & Investment Decision Making

Core

Using its phase gate approach, Iomega’s leadership team made the decision to fund the MP3 player project applying traditional project evaluation criteria, such as:

• Market size
• Strategic fit
• ROI-based financial measures

These criteria work well for the core business where markets and customer desires are familiar and market data for existing products can be used to extrapolate next-generation product projections with reasonable accuracy.

Transformative

The role of the governance team for transformative new products and business models is not only to select and fund, but also to nurture and support these higher-risk opportunities that otherwise would be the first to get cut during tough times. Unlike phase-gate governance, funding decisions for transformative innovations are based on discovery-driven learning plans and objectives.

In Iomega’s case, the governance team missed out on the opportunity to surface and prioritize the major MP3 player product unknowns and business model assumptions that could have been tested with consumers prior to full-scale development– fundamental questions that could make or break the business model, such as:

• How do consumers want to store their digital music?
• Where do consumers go to download their digital music and how do they prefer getting the MP3 files onto their portable device?
• Where do the target consumers go to purchase their music players?

Consumer Discovery & Product Definition

Core

Iomega’s MP3 player project team used traditional market research techniques to gain insight into customer wants and needs, such as:

• Focus groups
• Customer surveys
• Conjoint studies

However, the focus was on feature/function benefits to help them define the product (e.g., battery life, form factor, computer interface, and display functions). Once the MP3 player was defined, requirements were “locked” and the team-initiated design, test, and launch activities.

Transformative

For transformative innovation, where there is a high degree of unknowns, consumer engagement is an ongoing process with frequent customer touch points. It evolves from an initial focus on validating the consumer and their problems and progresses in an iterative manner toward solutions. Consumer discovery often continues all the way through market communications and launch.

This discovery-driven approach also applies to the business model. For example, Iomega had a strong presence in consumer electronics retail, where it built a strong distribution channel for its core Zip product line. However, Zip, being a computer peripheral, was sold in the computer section of the store. Uncertain channel dynamics needed to be explored:

• Would MP3 players be sold in the computer section of the store or in the audio section?
• Would the early adopters of these devices even shop for their consumer electronics in brick and mortar retail?
• Would consumers buy these devices online?

Just like product design, these business model questions can be tested early, with time to adjust or pivot as necessary before scaling up.

Process Structure

Core

Iomega had a fully-defined phased development process which worked well for its core Zip product lines. In fact, the MP3 player project team developed the product in record time, progressing through definition, design, test, and launch phases in just over eight months. The team received many accolades and awards for the execution of the program, including USA Today’s prestigious Quality Cup. While it made it to market quickly, it got there with the wrong product. The first time the consumer got a demonstrable product in their hands was after it was fully developed.

Transformative

Transformative innovation approaches incorporate iterative build-test-learn cycles using minimum viable product (MVPs) to get early and frequent feedback from consumers, well before expensive tooling and market introduction tasks take place.

Project Team Structure and Staffing

Core

Iomega used the same project team staffing model for the MP3 Player project that it used for its Zip projects–a cross-functional core team structure staffed with decision-makers representing each function. These teams were staffed with available resources from the existing core business.

The cross-functional core team structure works well for both core and transformative innovation projects. However, asking a transformative project to share resources with the core business can be tricky. Team members are not shielded from the corporate antibodies that can kill breakthrough innovation projects. If not protected with top-down support and clear separation, short-term core business needs are usually given priority by functional managers incentivized to meet today’s objectives.

Further, the MP3 player team was staffed with experts in computer storage. Their expertise had been built through years of experience optimizing the Zip business. Many lacked sufficient knowledge of digital audio technology and struggled in a role that required comfort with ambiguity, lean experimentation, and iterative learning.

Transformative

New business efforts need to strike the right balance between integration with the base business and team autonomy. While there is no “one-size-fits-all” approach, an effective model is to create a dedicated, autonomous team with mechanisms that encourage alignment with select core business support functions, especially on the back-end, when the new business is ready to scale.

Leading companies are learning to work with a network of entrepreneurial start-ups, academia, and other partners to co-create new businesses. Iomega missed out on an opportunity to collaborate outside its four walls with digital audio experts– not only to fill technical knowledge gaps, but also to bring insight into technology trends, market timing and direction.

Incentives & Reward Systems

Core

The Iomega MP3 player project team was rewarded for meeting the same project performance parameters as any other project being developed in the Zip side of the business. These included metrics like time-to-market, product cost, development spend, quality, and in-market revenue and profitability.

Transformative

The incentives and reward systems of the core business do not lend themselves to transformative innovation, where the goal is to de-risk big ideas through experimentation. With transformative innovation, it is important to track learning metrics, especially in the early stages when you are trying to validate unknowns and remove uncertainty. Learning metrics encourage experimentation and allow changes in direction or pivots. Teams execute to staged investment readiness or confidence levels instead of rigid, financial-based evaluation criteria more appropriate for the core phase gate approach.

Recognition and shared rewards for success in-market are also important motivators for the entrepreneurial-minded team members who thrive in the uncertain, high risk/reward environment that defines transformative innovation.

The following table summarizes the differences between core and transformative innovation approaches across key innovation capability areas:

The Result

Sales of the Iomega MP3 player fell far short of projections, and the product was discontinued within a year of its launch. The key value proposition, low-cost removable storage, was not compelling enough for consumers to make the switch from incumbent flash-based players. To make matters worse for Iomega, flash memory prices dropped quickly, eventually falling from 3 dollars per megabyte to pennies (Moore’s law at work). The Iomega value proposition vanished. Less than a year later, Apple came out with its hard drive-based iPod. Steve Jobs famously proclaimed, “Over 1000 songs in your pocket” at the iPod unveiling, struck a deal with record labels enabling iTunes, launched a multi-media promotional campaign, and the rest is history.

Would things have turned out differently for Iomega’s MP3 player program had they used a more suitable development methodology for a product aimed at a new market with new-to-the-company technology and a high degree of unknowns? Would iterative experiments with consumers have uncovered incorrect assumptions or flaws in the business model in time for Iomega to pivot or kill the program? We will never know for sure. What we do know: The Iomega MP3 player project is typical of what happens when companies try to run transformative innovations with a high degree of unknowns through their standard core development process.

In today’s economy, optimizing your core business is not enough. Success comes from executing your core business and creating whole new sources of growth. To successfully manage this paradox, companies must build the capabilities and apply the appropriate approaches to simultaneously manage both. If not, your company might become the next Iomega.

About the Author

Noel Sobelman is a researcher, writer, and corporate advisor on innovation effectiveness. His experience includes senior-level corporate roles, new venture creation, and executive advisory. He is widely recognized for bringing a practical and applicable approach to companies looking to accelerate growth from innovation.