Point: The customers of your customers are your customers, too.

Story: Cisco Systems makes networking gear for a wide range of customers, from massive data centers to home-office networking routers. Anyone who wants to build an internet-based network is a potential customer of Cisco. But, the bulk of Cisco’s sales go to corporate customers. So when you think of Cisco Systems, you don’t think “cheap video cameras.”

So why did Cisco pay over half a billion dollars to acquire Pure Digital, makers of compact inexpensive digital video cameras? Pure’s consumer-friendly little Flip Video products seem far removed from Cisco’s corporate industrial-grade networking technology.

Here’s Cisco’s logic: Consumer video cameras connect to the networks of Cisco’s corporate customers. Digital video consumes a lot of network bandwidth. Just 5 minutes of decent quality digital video requires over 4,000,000 bits per second for streaming and consumes 167 MB of total volume of transfered data. Multiply that by more the 100 million downloads a month at video-sharing sites like YouTube, and the result is prodigious demand on networking performance at data centers, internet backbones, and broadband internet providers. Thus, the buyers of these digital video cameras are important customers that drive the behavior of Cisco’s big corporate customers.

If Cisco can increase the sales of low-margin $100 digital video cameras, then it can increase the sales of high-margin $1 million high-performance networking equipment.

Action:

• Look at the customers of your customers: their behavior drives your customers’ demand
• Examine how and why your customers use your product to support their own customers
• Consider new or expanded applications that would boost your customers’ customers’ usage and thus boost demand for your product
• Invest in technologies that directly increase that customers’ customers’ demand or that help support the demand.

Point: Organizing innovation investments into broad themes focuses energy and enables collaboration

Story: Until 2008, Hewlett-Packard Company (HP) Labs ran hundreds of research projects. Then new HP Labs’ director Prith Banerjee reduced the total number of projects and organized research into eight cross-cutting themes: Analytics, Cloud, Content transformation, Digital commercial print, Immersive interaction, Information management, Intelligent infrastructure and Sustainability. They then invited universities to submit research proposals within these core themes. In 2008, HP selected 45 projects at 35 institutions to receive HP Labs Innovation Awards. Winners in 2009 will be announced on March 16.

Similarly, Boulder venture capital firm Foundry Group invests in five themes: Human Computer Interaction, Implicit Web, Email, Glue, and Digital Life. The commonality among these five themes, besides the tie to software/internet/IT, is that the themes are horizontal rather than vertical. The themes cut across industries, just as HP’s the areas do. The Foundry Group’s goal is to identify underlying technology protocols and standards that have the potential to win big. When evaluating whether to invest in a new company, “our first question is, does it fit our investment themes?” said managing director Brad Feld. “We focus on broad horizontal themes where we can create market-leading companies.” For example, the Foundry Group invests in Lijit Networks, Inc. because Lijit’s search infrastructure services apply to any online publisher and because the search methodology uses people, their content, and their network connections to produce search results with unprecedented relevance.

Both HP and Foundry Group seek and invest in “big ideas” that have the potential to transform the marketplace. Investing horizontally means looking at transformational ideas that can lead to opportunities in many industries. For high-risk research and venture investments, choosing horizontal areas is a better risk management strategy for three reasons. First, it makes success less dependent on adoption of the idea within a given industry. Second, you avoid running into a major stumbling block, such as regulation or a big competitor, that could derail your success in a single industry. Third, it helps create agility by creating core innovations that can be adapted to a range of verticals, as needed. A horizontal approach lets you have more “irons in the fire” without being scattered. The grouping gives you a diversity of opportunity without the burden of a scattered approach.

Action:
* Aggregate and focus your R&D or project investment efforts into horizontal thematic areas
* Become an expert in those themes to seek out and nurture the big ideas
* Look for opportunities that cut across industries
* Avoid the temptation to be pulled in different directions that would dilute expertise or investment

For more information: HP Labs reports on its restructuring and open initiatives by Dean Takahashi

HP Labs’ eight theme areas

Foundry Group Theme Investing by Brad Feld

Silicon Flatirons Interview Series

Point: Use a constraint to convert complexity into simplicity

Story: In 1954, Life magazine published an article on illiteracy among schoolchildren, reporting that children were not learning to read because their books were boring. “Pallid primers” featuring girls and boys who were “uniform, bland, idealized and terribly literal,” its author, John Hersey, contended. Publisher William Spaulding of Houghton Mifflin wanted to change that. He approached his friend Theodore Geisel (later known as Dr. Seuss) to write a much more lively primer. But he gave Geisel a challenge: the book could only use a vocabulary of 225 words, so that beginning readers could read it. Geisel took up the challenge. The result? The Cat in the Hat. Dr. Seuss used clever combinations of the 225 words and fanciful illustrations to create a playful story.

Action: A constraint limits the creative choices you have. Instead of viewing the constraint as merely negative and frustrating, consider the positive side: you can ignore those choices. Strip your problem to its basic elements. Then generate unusual combinations of those bare building blocks to look for a creative solution. This technique can be used in marketing, product development and strategy.

For more: Dr. Seuss & Mr. Geisel by Judith Morgan, Neil Morgan, Neil Bowen Morgan