V29d FORMAT SME INNOVATION - Innovation Labs

The Innovation Formula

the innovation formula: the guidebook to innovation for small business leaders and entrepreneurs Preliminary Draft Version

langdon morris

INNOVATION

ACADEMY

2


Copyright © 2015 by Langdon Morris.

Cover Photo by the author The cover photo shows a main street lined with small businesses, perhaps like yours. Taichung, Taiwan.

All rights reserved. No part of this work may be reproduced or used in any form or by any means – graphic, electronic, or mechanical – without the written permission of the publisher.

ISBN-13: 978-1511531634

For more information please contact:

Innovation Academy LLC 257 Castle Glen Rd. Walnut Creek, CA 94595 www.innovationlabs.com


3

About this Book Innovation is as important for small business as for large ones, but most of the books and other writings available focus on the big firms, so the purpose of this book is to provide insights to the small business leader or entrepreneur about how to be fantastically successful at innovation even with very limited time and capital to invest. This book is part of a growing family. It has three companion volumes, Permanent Innovation, The Innovation Master Plan, and The Chief Innovation Officer. All three of them deal with the challenges of managing innovation, and focus on how to achieve an exemplary innovation effort in the face of accelerating change and massive external complexity. These books also have two cousins, Agile Innovation, coauthored with Moses Ma and Dr. Po Chi Wu, and Soulful Branding, coauthored with Jerome Conlon and Moses Ma. Innovation is a vitally important, wickedly interesting, and engagingly complex topic, one that I dearly love. I hope that the ideas I wish to share with you here are helpful as you hone your innovation management skills and lead your business forward into the complex, challenging, and opportunity-filled future.

Please note: This is a preliminary draft version. You may find some errors, and we’ll be working to refine the text over the coming months prior to final publication in the 3rd quarter of 2015.

For more information: www.innovationlabs.com/formula

4


Also by Langdon Morris Managing the Evolving Corporation The Knowledge Channel

Corporate Strategies for the Internet

Fourth Generation R&D

Managing Knowledge, Technology, and Innovation Co-authored with William L. Miller

Permanent Innovation Proven Strategies and Methods of Successful Innovators

The Innovation Master Plan The CEO’s Guide to Innovation

The Chief Innovation Officer Agile Innovation

Managing Knowledge, Technology, and Innovation Co-authored with Moses Ma and Po Chi Wu

Soulful Branding

Co-authored with Jerome Conlon and Moses Ma

The Aerospace Technology Working Group Innovation Series Editor and Co-author

Beyond Earth

The Future of Humans in Space

Living in Space

Cultural and Social Dynamics, Opportunities, and Challenges in Permanent Space Habitats

Space Commerce The Inside Story by the People Who Are Making it Happen

International Cooperation for the Development of Space Sustain the Effort in Space (Forthcoming)


5

About the Author

Langdon Morris Langdon Morris is a co-founder of FutureLab and senior partner of InnovationLabs LLC, two of the world’s foremost innovation consultancies. He works with organizations around the world to help them improve their proficiency in innovation. He is Associate Editor of the International Journal of Innovation Science and a member of the Board of Directors of the International Association of Innovation Professionals (IAOIP). He is also editor of the Aerospace Technology Working Group Innovation Series, and a member of the Scientific Committee of Business Digest, Paris. He is formerly Senior Fellow of the Economic Opportunities Program of the Aspen Institute, a Contributing Editor and Writer of Innovation Management Magazine, Senior Practice Scholar of the Ackoff Center of the University of Pennsylvania and Contributing Editor of Knowledge Management magazine. He is author, co-author, or editor of fourteen books on innovation and strategy, various of which have been translated into six languages, author of many articles and white papers, and a frequent speaker at workshops and conferences worldwide. He has taught or lectured at universities in the US, France, Portugal, Taiwan, and Argentina, including Stanford University, the Ecole Nationale des Ponts et Chaussées and the Conservatoire National des Arts et Métiers, Paris, the University of Belgrano, Buenos Aires, and Chaoyang University of Technology, Taiwan. And he really likes innovation!

6


Dedication This book has been an intensely collaborative effort among a very large group of people, and although most of them had no idea that they were indeed helping to write a book, the fact of their participation is undeniable. I mention that because I’ve been working in the field of innovation for nearly 40 years, and it’s only due to the countless lessons, discussions, guidance, efforts, and support of hundreds upon hundreds of colleagues and clients that the ideas and concepts in this book could be written down. As such, the book is dedicated to all of them, with my deep and profound appreciation.


7

Contents 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Introduction: Innovation in the SME and Entrepreneurial Context The Innovation Formula Complexity and Change Risk, Great Ideas, and Your Business Model Risk and Your Innovation Portfolio Speed Engagement Leadership Tools The Innovation Master Plan Your Action Plan

41 87 113 137 151 179 197 225

Notes

243

11 17 25

8



the innovation formula

9

10



11

Chapter 1 Innovation in the SME and Entrepreneurial Context

There are lots of very good books about innovation, but most of them are written for big enterprises, global corporations and multinationals, and they focus on how to help them deal with big global trends and problems. There are also lots of great books by and about start-ups, especially in the how-to genre. But to date there haven’t been very many books about innovation and strategy for small businesses, which is why we wrote this one, and we certainly hope you find it useful! ••• We all know that no business can remain stagnant and expect to survive for very long in today’s competitive economy. Technologies, market structures and customer preferences are rapidly changing as new trends emerge, and leaders know that every business must respond by adapting and changing, by innovating.

12


But innovation is difficult to achieve, as much art as would-be science, a domain that is inherently filled with a double dose of uncertainty. For the external forces are themselves uncertain – things are changing, for sure, but not in ways that we can readily predict; hence, we must prepare for the unknown future by readying a wide range of future options, not knowing until even the last minute what we’ll be required to do, or stop doing, as change unfolds and as the future arrives day by day. The second domain of uncertainty is inherent in the nature of the innovation process, where we’re doing something that we’ve not done before in order to create something that has not existed before. Slightly tongue in cheek, Einstein is reported to have said, “It’s called ‘research’ because we don’t know what we doing,” and this definitely captures to spirit of the innovation endeavor. And as much as business leaders dislike uncertainty, and they generally loathe it, they also know that when it comes to innovation, they’re stuck with it. So this is the critical background against which you’re now embarking on the innovation journey. As your guides in this book, our mission is to show you how to live with these inescapable uncertainties, how to reduce the associated risks, and even how to profit from them. ••• It’s a lot easier for the CEOs of Toyota or General Motors or Tesla to allocate the people, the time, and the capital to explore and create innovatively than it is for the owners or managers of Jane’s Garage or José’s Sandwich Shop, The big firms usually have massive R&D budgets that fund


13

hundreds or even thousands of people to peer into the future, to do the science and technology work to develop new products and services, and to think through the critical details around innovation and strategy. Their staff and consultants have MBAs and economics degrees that trained them to think about the future and come up with lots of new ideas. But who do José or Jane have to support their innovation and strategy initiatives? They probably just have … José and Jane themselves. And maybe a few key employees, advisors, or friends. So in addition to changing the oil and changing the tires and making the sandwiches, and probably even washing the dishes now and then, José and Jane also do most of the strategic thinking between managing the major accounts, hiring and firing the staff, counting the inventory, opening in the morning, closing at night, and a hundred other tasks that are essential to keeping the business going. So when do they do the strategic planning? When do they find time to innovate, to develop new products and services, do the clever R&D, create smart new strategic partnerships, and all of the deep thinking that’s needed to assure that their businesses remain viable in these changing times? When, in other words, do they innovate? A lot of Josés and Janes don’t strategize at all, and they don’t innovate much either, because they just don’t have time, or they aren’t interested. But of course this contributes to the high mortality rate that businesses like theirs suffer from. Most of them know they should innovate, or innovate more, and it often grieves them that they don’t find enough time to build their future because they’re so deeply focused on surviving today, on the urgent tasks that are, alas, not so important. If you are like José or Jane, a small business owner or leader, this book is written to help you innovate. The way we go about it is by

14


guiding you through a straightforward and yet entirely proven process of creating the innovations that will, hopefully, help your business adapt to the changing world and the changing market, to survive, and even to become significantly more successful.

Leverage the Power of Questions and Maps You know intimately about the big challenges your business faces, challenges including competition, new technology, and perhaps even globalization is affecting you as well. And since you already know about these issues the approach we take here is not to go into a lot of detail about the forces change, but instead to engage you to think differently, and productively, about how to respond to them, and hopefully even inspire you to take action. Our way of doing this begins with a simple but yet long-proven way of proceeding, namely by asking questions. We approach it this way because it’s been the case that since the very beginnings of history people have found that the right questions, posed at the right time, can unlock deep and compelling insights. And we believe that this is every bit as relevant today to help you lead your business as it was during the times of Socrates and Plato, Confucius and Lao Tsu, Adam Smith and Karl Marx. Questions do in fact drive useful thinking and learning for adults and business leaders as much as they do children and college students. Consequently, we’ll ask you to consider a lot of questions throughout this book, and to think deeply about them. To make this easier we also offer structured worksheets and templates which may facilitate your own thinking process. These are really just questions in a bit more structured format, which may enable you to lead a process of dialog with your colleagues and partners who may have their own awarenesses, insights, and


15

discoveries to develop and share. In addition to these questions, the other key tool we rely on is maps. We love them, whether they’re the GPS-enabled on your phone or the tools built into your car, or perhaps one pinned to the wall, we all rely on maps to make complex situations and realities understandable, clear, and actionable. Maps simplify the complex and enable us to access huge amounts of information at a glance, helping to orient and organize ourselves in space and time. The maps we use here, of course, are not geographic ones, but conceptual ones intended to help you recognize the critical relationships that will enable you navigate your way not from here to your next business meeting, but from today to tomorrow and beyond. For these are maps that describe competition, change and the future, maps of innovation and strategy that are intended to help you understand the significant forces that are shaping business today, and to harness the ones that are already shaping tomorrow.

16



17

Chapter 2 The Innovation Formula

In addition to questions and maps, there’s a third core element that this book is organized around, which is the innovation formula. Yes, we do believe that there is a formula for success at innovation, and we have found over the years that it doesn’t matter whether you’re running a garage, a sandwich shop, or a multinational auto manufacturer, success in each case relies on your performance in the same five areas. Whether you’re the CEO of GM or the chief cook and bottle washer, you have think about the same problems, study, learn, research, experiment, engage in some risk, and manage it closely. How you do these, of course, is entirely different depending on the size of your business, but nevertheless the actual elements seem to be consistent across all businesses. The formula consists of the six major topics that also constitute the table of contents: complexity and change, risk, speed, engagement, leadership, and tools. Here is a quick summary of the key ideas and the reasoning that

18


you’ll find throughout the rest of the book:

Complexity and Change The external environment is an unyielding and unceasing source of change, and your organization must adapt to it if it’s going to survive. Hence, complexity and change literally define the context in which innovation and its close cousin, strategy, are relevant. It is to external change that drives market needs and preferences, and hence it is a critical role of leadership to be attuned to the rhythm, character, and specifics of what is happening out there in the increasingly wild world. The other critical role is of course leading the process of responding to those changes.

Risk When we understand what’s happening in the external environment we can organize the pursuit of innovation, correctly targeted, so that we produce the right innovations to meet current and future market needs. But if only it were so easy. In fact, it is intellectually and operationally challenging to figure out what’s the right thing to do, the right products and services to create. Furthermore, having a clear vision of the future products and services is not at all the same as actually having them in hand. Hence, there is a double risk. First, anticipating future needs correctly is by no means an easy task. What if, for example, you see clearly what the needs of the future will be, but in the end it turns out that you’re wrong? This, of course, is the story of countless failed companies, which aimed for a target in the future market that the actual market itself never selected?


19

Second, even if you do get it right, there’s still the many problems associated with developing the right products and services to meet the anticipated needs. Can your designs and plans actually work? Can you complete the development work in a timely way? Does your organization have the internal talent and the right external partners to master the many challenges? Risk, then, is inherent in the innovation problem, and it is inescapable. So the right amount of risk is essentially the least possible risk. “Least possible,” however, is trickier than it may at first sound. Least, after all, is really none, but of course the point of competition and change and all that is that taking no risk means making no innovations at all, which is actually a very risky approach, because it leaves you entirely vulnerable to those very changes. Consequently, “least possible” really means the least you can take on while still remaining viable, but even knowing exactly how much risk that is, is actually unknowable. And so the problem now becomes one of information, because you probably don’t know what innovations your competitors are working on, nor everything about the new and innovative technologies that may be coming, etc., etc., which means that while you cannot afford to do nothing, to just wait for the future to bury your business, you are obliged to act, compelled to act, to act proactively yet with incomplete information. This is the character of the risks you must take. Taking them well, thoughtfully, strategically is what’s necessary. Achieving this, navigating through this difficult but fascinating landscape will take some thought and a lot of effort.

20


Speed So despite the many risks you plunge ahead, thoughtfully, to create your organization’s future. You are now engaged in the depths of the innovation process itself. That process is not such an easy one, as it must be thorough and thoughtful, of course, but above all it must be fast. Again, the premise here is that your information is incomplete, and you just don’t know how fast your competitors will move, nor do you know exactly how the market will respond to their new ideas, nor to yours. So the best way to deal with the compounding of uncertainty is to go fast, to learn fast, to learn what works and what doesn’t work through techniques such as agile sprints, rapid prototyping, minimum viable products, a-b testing, and related techniques (which we will discuss in chapter 5). We express this in the innovation formula as speed, and of course there is a lot of value in getting solid results fast, faster than your competitors.

Engagement The next element of the formula relates to the culture of your organization, for you and your partner are the ones who are going to develop ideas, figure out which ones are great, and turn them into something useful, test them, and bring the very best to the market. Theoretically, you could find the smartest person in your organization, set them to the innovation task, and achieve good or even great results. Practically, though, the issues that have to be dealt with are probably deeper and broader than a single individual can master, because today’s innovation projects integrate knowledge across multiple domains, each of which itself runs quite deep. Hence, we know that innovation is not an individual activity, but a


21

team sport. The optimal innovation process is one in which your organization is engaged, one in which all of the strengths, thoughts, and talents of everyone, and also those of the broader ecosystem in which your organization participates, are fully engaged.

Leadership It’s also true of organizations that deep and thorough engagement comes about only when there is superbly focused leadership. We know that innovation can happen in organizations where the risks are understood, and where the ambiguities and uncertainties that are inherent in the process are known and acknowledged, and where there is willingness to engage in the necessary levels of risk taking. We also know that in organizations where people are punished for making intelligent mistakes, for thoughtfully trying new things that fail, for thinking about how to do things better, and differently, the spirit of innovation is swiftly and decisively stifled. Hence, leaders must embrace and promote the critical elements which enable an innovation culture to emerge, or it will not emerge.

Tools The last clause of the formula concerns the tools and methods that we use to manage the entire innovation effort. All other things being equal, better tools and methods are likely to support better results, and while this does not necessarily mean that you have to invest a lot of money in new technology, you do need to think through carefully and invest appropriately in methods, processes, and organizational structures that enable and promote innovation efforts, and which set the tone and context in which innovation can thrive.

22


So these are the six elements in the innovation formula; here they are expressed in pseudo math: (Complexity and Change) > Innovation Innovation = f (Risk) (Speed) (Engagement) (Leadership) + (Tools)

Or in English, Complexity and change means that Innovation is essential for survival. Achieving innovation a function of Risk, times Speed, times Engagement, times Leadership, plus Tools.

••• In previous books, I and co-authors have examined many aspects and facets of this formula in considerable detail, and in our work with enterprises large and small all around the world we’ve worked with them to implement it, to make innovation real, important, and effective for their organizations. And as I mentioned above, we believe that exactly the same innovation formula works for GM and Toyota as it does for the local restaurant and the auto garage, and that it will probably work for your small business too. So while nearly all of the nuances and details or its implementation will certainly be different from the Fortune 500 firm to the local business in Peru, China, New York, or Auckland, we are convinced based on many years of practice that the actual thinking process, that the critical questions and the guiding maps, will be nearly the same. This book is the fifth one in a series that explores all of this in a lot detail. It was preceded by Permanent Innovation, The Innovation Master Plan, The Chief Innovation Officer, and Agile Innovation,


23

and you may be interested in checking these out if you’re the sort of person who likes to absorb a lot of detail and wants to study the deeper reasoning. If you’re not the person who wants to read a lot of detail, then hopefully the concise contents of this book will help you to understand the challenges, and design the right responses. In each subsequent chapter we will explore the formula one element at a time, beginning with a quick look at the broader context of complexity and change, followed by the remaining five elements, with a particular focus on what they mean for you, the small and medium sized business leader or entrepreneur, and also with focus on action and implementation. This is not intended as theoretical exercise, but rather an entirely practical guidebook. We hope it helps you to arrive at the right destination, namely an innovative and thereby successful firm.

24



25

Chapter 3 Complexity and Change

Change is occurring fast today, and it’s getting faster. This is not news; you’ve heard it before, and doubtless you will hear it again. You also know it from your own experience. So while we recognize that it’s not going to be particularly useful in this book to get into an exhaustive discussion of how change is happening or why its happening, we also think it would be a mistake to skip the topic entirely. Because the bare and inescapable facts of increasing complexity and accelerating change in the external market are the major forces that define the absolute necessity for innovation in your business, and in every business. Therefore, it’s a critical issue to think about change as we set out to design your organization’s innovation process and program. Of course if change wasn’t occurring, or if it wasn’t occurring so fast as it is, then it’s possible that you could avoid or evade the innovation imperative. But it is occurring, and it’s doing so at a tremendous pace, and so your organization is required to innovate in

26


order to survive. Hence, it’s not enough to wave your hands vaguely and say, “Change is coming.” Instead, it’s entirely necessary to be quite precise about what’s changing, and also why it’s changing. Therefore, the following few pages constitute a summary is intended as a necessary overview of what’s happening, as this is the essential context in which your innovation work will proceed. [footnote: Tomorrow and the Day After: Your Guide to the Tumultuous 21st Century] Of course there are a multitude of ways to explain what’s changing, and we make no pretense that what we offer here is entirely definitive. Instead, our intent is to provide you with a quick description and perhaps even inspire you to see possibilities, both good and bad, that may lie in your own organization’s future. To bring the vastness of this topic down to manageable size we’re focused on describing at a high level the five major trends that we believe are essential to understanding what is occurring today, and more importantly what will be occurring still tomorrow. The five trends are technology, science, culture, the human population, and climate change. These are certainly very big topics, but even a quick review of the big ideas behind them will help to set the framework for the choices you will have to make, and the processes you will implement in order to create and implement your own organization’s innovation process, through which you’ll be able to respond effectively to these global trends as well as the specific local challenges that arise for your own business.

Technology The first major theme, technology is an urgent, day to day or even


27

hour to hour issue for today’s firms, and no matter in what industry you compete, for your firm as well. Digital technology is taking over the economy, industry by industry, and the entire global economy is in the process of becoming digitized. This matters because digitization has equaled disruption for every industry that it has touched, and before the trends are fully resolved, no part of the economy will remain untouched. One of the significant consequences of this trend is that digital markets have a unique and brutal characteristic, the tendency of leading firms to consolidate their power and to gradually vanquish their competitors, sector by sector. In digital markets there is often little to zero market share left for laggards, and so these markets are more and more coming to be understood as “winner take all” markets, where there is only first place and there is no second. This dynamic is becoming more prevalent, and thus the number of winner-takes-all markets is increasing, because technology advantages often create massive barriers to competition. Whereas in the past, for example, a wide variety of local stores usually competed within a given geographic region, today due to better transportation, logistics, telecommunications and information technology systems the leading firms are extending their lead and effectively locking out the local players. This might be called the “Wal-Mart effect,” for the giant retailer has had a devastating impact on small business in many of the towns and regions where its stores are located. Wal-Mart’s size, pricing advantages, and enormous selection have put thousands of local merchants out of business. Wal-Mart’s massive scale gives it significant advantages over local competitors. With volume purchasing it negotiates better prices from suppliers, and puts in place even better technology that smaller firms simply cannot afford. This becomes a self-reinforcing spiral, and only a

28


fundamental shift will dislodge them. And what is the core driver of their ability to reach scale? Digital technology, which is essential for managing the supply chain, product design, manufacturing, logistics, finance, treasury, human resources, and operations. Similarly, the retail market for books has transitioned from one led by local bookshops and a couple of national chains, to one dominant digital player, Amazon. Thousands of local shops have closed, unable to compete with Amazon’s prices, selection, and delivery. The company then extended its advantage by creating the Kindle, which then become the dominant winner in the e reader market. This is relevant to small business leaders in two ways. First, the scale of the global digital market means that any of the big players can look and act local. Geography isn’t much protection, and it may not be any protection, if a big firm wants to compete for your customers. Secondly, as the entire world continues the transition to becoming a single massive digital marketplace, and as every industry feels more and more the impact of digitization, the consequences are that, as I mentioned above, you have to think of your business not as whatever it used to be, but as it will be, which is a digital business. Consequently, while you may glance over at that neighboring firms that are in some way or other competing in the digital marketplace and feel sorry for the intense speed and complex global dynamics that they have to deal with, you ought to be paying close attention to the strategies they use to be successful, because sooner or later, and probably sooner, every business, including yours, is a digital business. Wal-Mart, in other words, is a digital business every bit as much as Amazon is, and every bit as much as your business is also. And since technology has shifted many market structures to the winnertake-all modality, the biting words of journalist Dana Blankenhorn


29

make the point pretty well: at that point “there is one winner and everyone else needs to find something else to do.” Until, that is, a new generation of technology is invented, and then we start all over again with a new generation of competitors who will offer something that Amazon or Wal-Mart do not offer. Another dimension of advancing technology is its impact and application in many markets beyond the retail space in which Amazon and Wal-Mart compete. In the energy industry, for example, the shift to new sources is facilitated by the development and application of digital technology that used for collecting and managing solar and wind devices. Technologies like the “smart grid” that manages the large scale distribution of energy, and the smart thermostat, which manages the energy usage in your home, are all digital. If your firm is in printing, then you already know how much digitization has affected the economy; in the US, the overall amount spent on printing services dropped from $120 billion to $80 billion between 2002 and 2010; at one point nearly three print shops were going out of business each day as the entire industry was downsized. And why did this occur? Because digital documents sent over email don’t have to be printed. The advertising industry went through a radical transformation as Google went from a search engine company to the world’s largest ad agency, and diverted billions from the ad firms to itself over the course of the first decade of this century. The music business was similarly transformed as listeners shifted from tapes to CDs, and the MP3. The iPod and iTunes changed the way people collect and listen, and global revenues for the music industry dropped by two-thirds. One last example is the growth of the Chinese economy, which

30


from 1990 to 2010 expanded from x to y as the country transformed itself into the world’s most concentrated center for manufacturing of all products from furniture to phones to clothing and toys. None of this could have happened were it not for the digitization of the global supply chain, simply because the coordination and management of the massive complex logistics could never have been accomplished without ubiquitous digitization, from the design on digital CAD software to the manufacturing in digital factories to the storage, shipping, and distribution through digitized inventory tracking and control. These examples – retail, energy, printing, advertising, music, and manufacturing – are but six among hundreds. In fact, during the last two decades literally every industry has been transformed by digital technology, and many have been severely disrupted. And the point for us is that we are still in the early stages of the digital transformation, so we can expect significant new disruptions are still in our future. Conceptually this makes intuitive sense, but we can got beyond intuition as there is hard data to support this forecast. A key data point is the cost of computer technology, which continues to plummet. For example, the smart phone you’re likely to be carrying around is a sleek and sophisticated device that obviously provides a lot of computing power into a convenient little package, but suppose it was the mid-1970s and you were going to buy the equivalent amount of computing in terms of the processing and storage. How much would you have paid for it? Four decades of continual progress in miniaturization and constant expansion of the market size have resulted in devices that sell for around $500 today, but which pack the processing power equivalent to tens of millions of dollars worth of 1974 computing in a package that is a tiny fraction of the size. This process of improvement is


31

unique in human history, as no other industry has been able to achieve such improvement in performance simultaneously with a concurrent reduction in cost. So of course it has been a process of positive feedback – the more computers can do, the more uses we find for them; and the most we buy them, the more is invested in improving them. Today, every human activity that has anything to do with the exchange of information is digitized, which happens to include every form of economic activity. The question that needs to be asked, then, is What will be disrupted tomorrow?

Science The stunning advances of digital technology are of course based on equally stunning advances in science. Today’s scientists are deeply engaged in the study of everything, from the tiniest particles to the enormity of the entire cosmos, and every day new findings and discoveries are announced in a gigantic array of fields and disciplines that are themselves proliferating as knowledge becomes ever more refined and precise and focused. And as with technology, the rapid advance of scientific knowledge are also accelerating as it has become universally understood that a rigorous scientific foundation is mandatory for a modern nation. Consequently, tens of thousands of scientists and many more times that number of science students are rapidly pushing back the boundaries of ignorance, discovering new laws of nature, new realities that explain the micro and macrostructures and dynamics of matter and energy, and the patterns and processes of the economy and society.

32


Because success at science is so essential to the success and indeed the survival of every nation, and advances in science are central to the competitive dynamic between nations and regional alliances, science will remain a top priority for national investment throughout the coming years and decades. It will thus be a continuing source of new knowledge that will in turn be a continuing driver of change for the decades to come.

Culture As we all know so well, technology and science advance together, and together create powerful momentum for change that is amplified by a reinforcing and compounding effect whereby change in one area adds momentum to changes in another, producing a much greater overall impact. Nothing in the modern world exists in isolation, and so many of the forces and impacts are connected and interrelated that the entire system of modern life is in fact caught in a whirlwind of acceleration. The social and cultural consequences of this are of course as significant as the economic ones. From the 1970s, when Alvin Toffler coined the term “future shock” until now, when future shock has been replaced by “now shock,” the developed world has become a much different place, and the less developed economies of the world have been rapidly catching up. Many of us, however, are struggling to adapt to the modern world. This is evidenced by the rapid increase in mental illness worldwide, as many of the psychological and learning challenges we face are new ones, and not everyone is becoming adept at the new ways. The wisdom of elders is unrecognized in the crush of the new, and at the extreme these social and cultural changes and the concurrent economic ones provoke an intense reaction that in extreme cases


33

provides an explanation for the marked rise in fundamentalism and violent extremism. We should not expect life to get simpler or easier in the coming years and decades. If anything happens it will be the opposite, and most of us will endure or perhaps master wave after wave of lifestyle-altering technology, and we will incorporate new tools into our ways of doing the most basic functions of social and economic life. But some, perhaps in increasing numbers, will not master these new ways.

Population Underlying the size and vitality of the economy is the size and dynamic of the population, and there a direct linkage between economic success of a city, a region, or a nation, and the total number of people, the rate of population growth, and to the overall age distribution. Interestingly, in workshops and speeches over the past five years I’ve often asked people to share their own predictions for the future of the population, and what I’ve found is that about 98% of people (i.e., almost everyone) have very little idea what’s actually going on with the global population trends. In fact, what’s actually occurring is quite different from the popular image of what’s happening, and the difference is critically important. As you well understand, population trends evolve over long spans time, decades and centuries, and even millennia. Looking back across one hundred millennia or more, the human population grew fairly steadily throughout prehistory and human prehistory, and as the era of the great early civilizations emerged, despite the constant threat of famine, climate changes, and local events, by about 1800 the human population had a reached about a total of about one

34


billion worldwide. Everything changed, of course, with the beginning of the Industrial Revolution around 1800, when the human population explosion began in conjunction with the invention of the steam engine and a great convergence of related advances in a huge range of scientific and technical fields including metallurgy, transportation, agriculture, economics, commerce, medicine, and management. Thus, it took a few hundred thousand years of humanity’s progress to reach a population of one billion, but only a century and a quarter more for the population to double, as between 1800 and 1925 the human population ballooned from 1 to almost 2 billion, as lifespans increased significantly, the mortality rate declined precipitously, and we were able to feed ourselves better than ever before. Humanity built vast cities and enormous national and commercial empires as the modern era dawned. The population explosion continued unchecked throughout most of the 20th century even with the setbacks of two world wars, the Holocaust, and a couple of major but localized famines, and so adding the third billion to the human total required only about 30 more years. Population, Billions Year Interval

1

2

3

4

5

6

7

8

9

1804

1927

1959

1974

1987

1999

2011

2026

2042

-

123

32

15

13

12

12

15

16

Figure 1: Growth of the Human Population

The interval from one billion to the next thus followed a startling progression, and with the arrival of the fourth billion by the mid1970s the dangers that Malthus had envisioned a century earlier seemed to be coming true. We were warned in dire terms of the


35

environmental and social disasters that were immanent, and the alarm bell ringers had a good point. The world’s leaders responded in a variety of ways. Environmentalism became an accepted movement, and most nations adopted policies to control or counteract pollution, to support public health, and of course China adopted the “one child” policy as a direct attempt to counteract an anticipated population growth that could have been economically and socially disastrous. Although many people are not aware of it, by the end of the century the rate of population growth has slowed significantly, as the table shows that the interval between the additional billions is now increasing at the rate of growth slows. This is of course localized, and while some nations continue to expand their populations, in many nations the population is actually declining. In a few the decline is occurring very quickly, and it seems to be bringing with it tremendous social upheaval. Japan, for example, is forecast to decline from a population of about 125 million in 2000 to a population in 2100 of about 65 million, and if this occurs, it will be a vastly different nation, culture, and society as a result. Japan is definitely not alone in its predicament, as there are now about 60 nations in which population decline has become pronounced, and thus a significant social, cultural, and economic issue. But who makes those forecasts, and based on what data? The forecasters are demographers, and they study birth and death rates and the other forces and factors that influence how many children people have, the rates of disease and death, and how social trends and public health issues impact on entire populations. They can tell us quite reliably, for example, that nearly ½ billion people will die

36


in the 21st century as a result of cigarettes, and while their forecasts are not precise to the last decimal, their insights provide essential guidance for economists, policy makers, and business leaders. There’s a lot of detail behind this that we’re going to skip in order to get to the point, which is that within the next 20 – 30 years the human population will probably peak, and by the end of this century the total population will be about the same or less than it is today. The consequences will be momentous, and thus in addition to the immediate and deep impacts of advancing science and technology, the longer term trends related to population will start to have broadening impact in the coming years and decades. For example, one way to interpret Japan’s economic struggles of the last two decades is that the future is not reassuring for nations whose populations are in decline. While no one knows for sure, it is theoretically possible that Japan’s prolonged economic malaise is an early expression of what will only get worse in the forthcoming population decline. The underlying logic suggests that whereas a dynamically growing, economically successful nation must consume a lot to sustain its very growth, consumption patterns in one that is stable or declining in population are quite different, but as this has not occurred on a large scale any where in the modern world, no one is entirely sure. But suppose that population decline and economic stagnation are in fact related. This would suggest that what Japan is experiencing now is a prelude to what many nations will be experiencing with a decade or two, and what even the global economy may be experiencing a few decades after that. There are a lot of reasons why this may not be a bad things, but it certainly will be a different thing, and the resulting economic disruptions will be fundamental. Hence, we will likely come to call this the “demographic revolution.”


37

Climate and Energy Another major trend, the last one of the big five we will discuss here, is one that makes the news nearly every day now. As I write this, a huge storm has just devastated the island nation of Vanuatu, and it has been called “one of the most powerful storms ever to make landfall.” In and of itself this may not be a decisive bit of news, but the fact that ten of the ten most powerful storms of the last century have occurred in the last decade tells us that we will have to contend with a process of fundamental change in the natural world upon which we depend. According to the US National Oceanic and Atmospheric Agency (NOAA), the frequency of billion dollar storms affecting the US has increased significantly during the last ten years, even when adjusting for inflation. There were 15 such storms in 2011, the most ever. The key questions are thus “how fast will the climate change,” and “how fundamentally will it change,” and then “what impacts will that have on our organization.” For there certainly will be impacts. For example, if it becomes inescapably clear that carbon dioxide concentrations are indeed the central driver of this change, as more than 90% of climate scientists now believe to be the case, then the regulation of carbon content throughout the energy industry will also become inevitable, and the shift of the global energy supply away from oil, gas, and coal and toward wind, sun, and water will accelerate. To put this in perspective, today the global energy market achieves annual revenues of nearly $6 trillion, making it the largest of all economic sectors. (The next five are agriculture, telecom, auto, chemicals, packaged foods, and pharmaceuticals; total world GDP is hard to estimate, but it’s around $80 trillion.) Since about 85% of

38


the total world’s energy supply comes from fossil fuels, the transformation of the sector of the economy upon which nearly everything else relies will affect everything. And this is already occurring. For example, the price per watt of solar-generated electricity shows a very interesting progression, a spectacular improvement from nearly $80 per watt in 1980, to a few dollars per watt in 2010, to about .20 today. Behind this, of course, are huge investments in science and technology, substantial government subsidies in many countries, including China, Germany, and the US. Silicon Photovoltaic Cells, $ per watt $80

$76.67

$70 $60 $50 $40 $30 $20 $10 ~ $00.25 1977

1980

1985

1990

1995

2000

2005

2010

2015

Figure 2: The Cost of Silicon Photovoltaic Cells, in $ per watt

If the trend continues, and there are a lot of reasons to think that it h"p://en.wikipedia.org/wiki/ will, then soon the price of solar will drop below the price of oil, Timeline_of_solar_cells8 and then it may become significantly less, which will give commercial momentum to the environmental or ecological imperative. Transitioning the entire economy will be a massive and long-lived process, one that takes decades, but conversely to assume that things


39

will remain as they are today is risky at best as a business strategy, and potentially suicidal at worst. The scale and scope of both the threats and the opportunities are profound, and it is not an exaggeration to call it “the climate revolution.” Still, for most businesses, other than those directly in the energy sector today, it’s probably a longer term issue rather than an immanent crisis.

Changing Change The convergence of these five forces of change largely defines the modern world, shapes our experiences and our attitudes about it, and also defines the market environment to which we must adapt and respond. We turn our attention now to the serious challenge that you face, creating innovations to meet the future needs and expectations of the market without taking unnecessary risks.

Taking Action Each chapter from here forward closes with a few actions items that are intended to help you think about how to apply the ideas and concepts that you’ve just read about. List the changes; prioritize the top 3. Think about how the changes could impact your business in each of these, prioritize the ones that you think will be most impactful, and devise a quick strategic response. Another task: identify one of the themes that’s vital to the future of your business, and make it your mission to learn more about it.

40



41

Chapter 4 Risk, Great Ideas, and Your Business Model

Most of the forces of change that we described in the previous chapter are probably working against your business, in the sense that in their brutally evil and mercilessly conspiratorial way, they are plotting to bring deep and enduring change to the market, to your market, and to make your current products and services obsolete. They do so without regret or remorse. In response, you are obliged to innovate. And in the pursuit of innovation, of course, you will be obliged to engage in taking risk. Yes, one of the most significant challenges that every small business leader faces is that even when you’re ready and willing to innovate you are immediately confronted with the enormous, elephant-sized issue of figuring out where to invest your precious time and resources. If you’re not hanging around Stanford where hoards of

42


super-smart grad students are cooking up the next HP, Yahoo, Google, or Cisco, where do you find the really great ideas? Developing or finding the ideas, choosing the best ones, and managing their growth and development through to completion are vital innovation management tasks that we’ll explore in this chapter and the next one. The goal, of course, is to find the very best highreward, low-risk ideas that will change the market, amplify your profits, increase your relevance, and sustain your organization’s viability over the long term. In broad terms, we know that great ideas often come from one of these four sources, and from combinations of them: customers; suppliers and partners; your own organization; and new technology. Shortly we’ll look critically at each of these four areas, but first we need to frame the problem more precisely by looking at your business as a whole, its strengths and weaknesses, and its position in the marketplace relative to the competitors.

Mapping Your Place in the Market The first perspective we want to develop to assess your business is to look at its business model. A business model is a description of how a business makes money, which means it might be a very simple thing: We make a product; then someone buys it. We offer a service; then someone buys it. Chances are, though, that it’s not really that simple at all. Why do people choose to buy? What’s the value proposition that attracts them? What are the best features that make a difference? What are the strengths and weaknesses in comparison with competitors? What goes into determining the price of the product or service, and


43

in which directions are market prices trending? Our goal here is to locate your business in the market, to see clearly how it compares with the competition, and then to use this assessment to chart a future path toward success. Hence, we want to address these questions: •

Where are we today, where are our competitors, and in which direction lies the future of our industry?

•

Which business models will be successful in the future?

•

And thus in which direction(s) should we target our innovation efforts?

Rather than just using descriptive language to explain this it’s very helpful to visualize the market, to map it.

customization

more

We’ll start with a matrix. Label the horizontal axis “market size.” Moving from left to right means reaching more customers, which thus implies the possibility of decreasing prices as volume increases.

the market

market size

bigger

Figure 3: The Business Model Matrix

44


Hence, the business model intent of all large scale retailers is to move progressively to the right, toward ever larger chunks of the market. “Lower prices every day” is not a Wal-Mart advertising slogan by accident, but a central element of the company’s branding and value proposition. Hence, the lower right hand corner of the matrix designates the largest mass market, the one with the lowest prices and the most standardization. This is high volume market, the mass of the mass market. In the USA there’s a company called “The Dollar Store” that occupies that spot. Everything in the store costs, predictably, $1, and the lure is the pricing, as it’s obvious to everyone that this is not the place to be looking for high quality. In fact, the dollar store business model can exist only because of super-high volume manufacturing in massive, highly automated, digitally-controlled factories that crank out impressive (or appalling) volumes of plastics. The vertical axis is labeled “customization” (or if you prefer, “differentiation”). Moving from bottom toward the top means that the customization and differentiation of the product or service is increasing, which is of course precisely the opposite of the Dollar Store. Therefore, the upper left corner is where you’ll find the exclusive products that only the richest people in the world can buy. Private yachts and jets, Picasso and Van Gogh paintings, mountaintop estates, and private islands. Conversely, the lower left corner of the matrix would have to be considered as the ultimate Dead Zone. This is the place you don’t want to be, because if there were such a possibility as high prices with no customization, this is where you would find it. (figure 2) No business leader would intentionally choose for their firm to occupy this spot.


45

customization

luxuries; differentiated markets

non-customized

the market

dead commodities; mass market

zone small

market size

Figure 4: The Business Model Matrix; the Dead Zone

What we’ve done is that by defining these two axes and thinking about the position of any individual firm, we’ve created a map that enables us to determine our relative place in the market and to think productively the behavior of our competition, which will of course then to help us plot our future course, and then to target the innovations that are likely to be the most strategically valuable. As an example of how we can use the model, let’s take the hypothetical example of Sears, the formerly huge American retail company, which was at one time the single most dominant American retailer and a tremendously innovative company that grew to enormous size and exceptional influence. The company’s massive catalog was a treasured item, a compendium of everything that was great about capitalism. The company prospered by offering great value, and its offers were very specifically targeted at the core of the market, and very large numbers of customers found it very appealing to shop at Sears.

46


Both as a matter of its business design and its marketing, it strived to be the iconic American retailer. Headquartered in the center of the country, in Chicago, the company exuded confidence and reliably produced handsome profits for many years. Figure 5 shows Sears happily at the center of the market as of about 1980.

customization


the market 1980

non-customized

sears 1980


zone small

market size

Figure 5: Sears, sitting happily in the center of the market.

At that time Sears had a much smaller rival, but within 20 years their roles had reversed and the rival, Wal-Mart, had far surpassed Sears. Wal-Mart’s approach was to out-innovate Sears, and while Sears suffered significant declines in its business Wal-Mart grew very fast, both in the US and then throughout the world. The market map of 2000 shows that the overall size of the market has grown significantly, which reflects a normal process of economic growth. The map also mentions a key factor, which is that overall customer expectations changed from 1980, and parts of the market that were quite viable in 1980 have been overtaken by the dead zone by 2000. Sears, which stayed resolutely where it was in its core, and did not appear to even be trying to innovate its


47

business, was simply swallowed up by the staying the same. Changing customer expectations put it solidly in the expanding Dead Zone.

customization


non-customized

sears 2000


zone small

market size

Figure 6: Increasing Customer Expectation Swallow Sears

Wal-Mart, in contrast, has consistently demonstrated the qualities necessary for continued success. By developing new innovations in its supply chain, product designs, and in fact across the entire scope of its business model, it succeeded in moving its business model both upward, with higher quality products, and to the right, with progressively lower prices. (It should be noted that Wal-mart’s employment policies remain controversial, and one can argue that its success is based in part on a practice of under-paying its employees by manipulating the labor laws of the US. For the purposes of this discussion we leave this important issue aside, but it’s important to recognize the ethical problems associated with this practice, and to notice the likelihood

48


that future changes in its business model may be forthcoming in the near future as a result.)

customization


sears 2000

wal-mart 2000

non-customized

1980


zone small

market size

Figure 7: Wal-Mart Evolves its Business Model to Reflect Increasing Customer Expectation

Wal-Mart, and another successful business model innovator Ikea, both continue to aspire to move both up, toward more customization, and to the right, toward ever lower prices. And so do all of their competitors. Including, of course, Amazon. The way things are going it’s not hard to imagine that by 2020 Sears will have been buried in the Dead Zone, bankrupt and gone. A massive infusion of innovation will be utterly necessary for Sears to survive, while Wal-Mart will probably continue to move up and to the right on the business model map, even as the Dead Zone chases it up and outward. Hence, the Wal-Mart of 2020 will be the same as the Wal-Mart of 1980 in name only, as the economy’s innovation process of creative destruction chases it ever forward.



49

customization

the market 2020

wal-mart 2020? sears 2020?

2000

non-customized

1980


zone small

market size

Figure 8: Wal-Mart in 2020? You have to keep moving…

Wal-Mart’s leaders, and the leaders of all retailers (including Sears, if it’s still around then), will ask themselves how they can customize the experience of shopping; Amazon does so through its delivery services, and its offer to get your purchase to you within two days, or a day, or even hours. It also offers recommendations customized to your interests, based on statistical analysis of the behavior of you plus millions of other customers. How will Wal-Mart do that for instore shoppers? It’s quite likely that many of its initiatives will involve digital technology, for as we noted in the previous chapter, every company, even those that are not specifically technology companies, should think of themselves as technology companies, and it’s become an imperative to sort out how the digital world can enhance or even transform your existing, non-digital business model.

50


Netflix is a digital entertainment business, and because viewer recommendations are so important to its success, in 2009 the company sponsored a contest in which it paid a prize of $1 million to the programmers who best improved the accuracy of its user recommendations. It’s quite obvious that the goal of the prize is also to move Netflix upward on the map, toward still better customization. The point, obviously is that you may also be able to use the business model map to help you think about the future of your business, to compare your own company’s performance to your competitors, and to conceive of the initiatives that will take you in the direction you want to go. For another example let’s look at auto markets, where a $45,000 Lexus competes successfully with a $65,000 Mercedes. The $25,000 Chevrolet is situated quite purposefully in the center of the market, similar in brand identity and corporate culture to Sears. For decades the center this was a profitable spot, but no more, and like Sears, Chevrolet was left behind due to growing customer expectations. The failure of Chevrolet to innovate was indeed a big part of the problems that GM CEO Rick Wagoner did not fix, and a significant contributor to the drastic decline of GM between 1995 and 2008. So as you think about your own business you will seek to identify where customization can be offered to enhance the attractiveness of your products and services, and where perhaps the market can enlarged by lowering prices, thereby moving your entire business model continually upward and to the right. This may not be optional, and indeed, when we look at the companies that have failed, we often see that their competitors offered either lower prices, or more customized solutions, or both. For example, you may remember that in its early days, Google had a


51

lot of search engine competitors, but over time they have all fallen away simply because the search results that Google provided were simply better, i.e., more customized to the specific requirements of searchers. This is a great example, by the way, of the winner-takeall dynamics of technology markets. Remember, though, that this does not mean that Google will forever be entrenched as the exemplary search company, because there’s no reason to expect Google to retain its dominance forever. There’s no limit to the business factors that could become important in future markets, and which some firm other than Google may master. Indeed, as noted above it’s very often when the key drivers of competition change that old companies are pushed aside, and new ones take their places as leaders. And this happens precisely because it is so often the new firms that master new competitive factors first. We saw this with Nokia, and now we may be looking the same process right now with Microsoft. The tech colossus is still dominant in many fields, but is struggling to adapt to markets that are rapidly changing. Sales of the PC are declining worldwide, down 10% from 2012 to 2013, while sales of tablets are increasing, but Microsoft is not benefitting much from this because it did not foresee the tablet market, and came quite late with its Surface. This is quite consistent with the company’s history as a follower rather than a leader. How many of Microsoft’s products are copies of innovations from others? It’s a long list, beginning with DOS, Windows, and Office, which were copies of CP-M, the Mac OS, and Word Perfect / Lotus 123, and then Explorer which copied Netscape Navigator, Bing which is a copy of Google, etc. This shows that a company can be hugely successful as a clever copiest, and even as Microsoft Office and Windows remain dominant software products for PCs, the continuing decline of PC sales

52


requires the company to fight a rear guard action to preserve the past, rather than a proactive one to create the future. We can well foresee that when PC sales drop below some currently-undefined threshold, then Microsoft itself may follow in the footsteps of Nokia and Kodak, falling below the threshold of non-sustainability at which point the company implodes, most likely to be sold off in pieces for its assets. But the leaders of Microsoft are obviously very smart, and they see what’s happening as well or better than us outsiders. So will they lead their company to create the next generations of products and services and business models to sustain the company in the years ahead? Will they be able to create better business model and new products and services that move up and to the right on the matrix, faster and better than their competitors? The hypothesis here, and the logic of business model warfare, suggests that this should be one of their overriding objectives, and perhaps a convenient (although certainly quite simplified) way to assess any given decision or proposed initiative. The upper right corner, meanwhile, remains an interesting sort of business Xanadu. Here you might find an entirely customized product, which is affordable by literally everyone, because instead of having to pay for it, it’s free. Air, for example, is such a product, essential, free, and (in most places) abundant. But surely the upper right could not be the location of any company, for how would it survive? In fact, however, there are currently two companies occupying the super desirable corner, and their astounding success has been achieved precisely because their products (well, services really) are utterly free and yet totally customized to the uniqueness of each “buyer’s” specific requirements.


53

One of these companies is Google, which is happy to provide you with a fully customized web search at any time, day or night. It takes only milliseconds, and the company performed this hugely valuable service approximately 2 trillion times in 2013, creating 2 trillion generally satisfied customer experiences. Breaking down this huge number, we see that searches were performed on average 6 billion times per day, or 4 million per minute, or thus about 70,000 per second. (I found out the total number by doing a Google search, of course.) An additional interesting result comes when we divide 2 trillion searches by the approximately 7 billions humans, which tells us that on average, each of us searched Google about 300 times in 2013, or about once a day. (On some days I myself search Google 20 or 30 times, and most newborn babies don’t use Google at all, so the average just gives a general idea of how well used this service is.) luxuries; differentiated markets

customized search results

The Sweet Spot: Google (g-spot)

non-customized

customization

market size: everyone


zone small

market size

Figure 9: Where is Google? The “g-spot.”

54


Overall it’s quite remarkable what the company has achieved, and how important its services have become, and still even more remarkable that all these services are free. Hence, it is in honor of Google that the name of the super sweet spot in the upper right corner of the value matrix is the “g-spot.” Google’s magnificent business model has created a goodly number of billionaires from among the founding team precisely because the company is so well and uniquely positioned, because they do indeed seem to fully understand the extraordinary position it occupies, and because the firm is so amazingly well managed to exploit and extend its significant advantage. (figure 7) Microsoft’s Bing, meanwhile, plays follower, a position we are accustomed to seeing a Microsoft product occupy. There is other company also now occupying the g-spot, sitting beside Google with a complementary competing business model. This is Facebook (should we call it the “f-spot”?), which is also an entirely free service, one also utilized by millions. Interestingly, while Google’s success is based on its 100% customization of search results, Facebook’s is also built entirely on total customization, but in Facebook’s case the customization is provided by you, the user, because you’re the one who creates your Facebook page, and nearly a billion of us are happy to participate. Facebook has also created billionaire owners, and they also seem to understand their unique situation. And actually Google also relies on us to do the customization, as we’re the one who are creating the 180 million + web sites that Google searches for us. This is a profound partnership between content creators, us, platform creators such as Facebook, and content locators such as Google and Bing.


55

Content Creators

Content Locators

Platform Creators

Figure 10: The Digital Economy Synergy

This triad constitutes a hugely significant phenomenon for all future businesses and business model innovators. Study it deeply to understand, exploit, and further develop what the internet age now has made possible, because it is here that we can anticipate many innovations and surprises in the future, particularly as computers become faster, more powerful, less expensive, and still more ubiquitous. Along these lines, there’s another example that suggests the validity of the model, the PC itself. As s device, the PC has gotten considerably less expensive, exceptionally more powerful, and profoundly more customizable over the last 30 years. The entire PC industry has moved significantly up and to the right, especially if you consider your smart phone to be a PC, which would be accurate. But it’s evne more accurate to think of a smart phone as a supercomputer, as today’s iPhone has roughly the same computing power as a supercomputer of three decades ago. If the folks at Nokia had been thinking about their product in these terms, rather than as “cell phone,” then perhaps they would have been better prepared for the destruction that the iPhone did to their business model.

56


You get the point, which is that for the majority of firms that compete in the physical world of products and services for which they must charge money to survive, which is nearly every company, the g-spot is an incredibly enticing destination, but one that they will never actually attain. Still, this is direction toward which you are always compelled to strive through your innovation efforts. Further, just about every type of competitive advantage can be represented on the map, so whether you’re selling products or services doesn’t seem to matter, as these two basic variables encompass nearly all business concerns, nor does it matter it you’re selling to consumers or to other businesses, or if you’re in government or the non-profit sector; the basic issues and concerns are more or less the same which can be expressed as … How to achieve more customization, and how to reach more customers. As a practical exercise, please locate your business and the businesses of your competitors on the map. What’s different between your business and theirs? Do they target higher prices and a more selective clientele? Then they would be perhaps up and to the left of yours. Do they offer steep discounts and seek a larger market share? Then they would be down and to the right. The important issue to consider is the direction in which things are headed. In your ideal situation, which spot on the map would you prefer to occupy? Can you define a pathway from where you are now to where you’d like to be? That could well be your innovation pathway, and in the quest to target the right innovations to be working on, you can use this possibility as one key aspect to address: Does this innovation help our organization move to a better spot on the map? Similarly, you should also consider what spot your competitors would like to occupy, and think about how they might they get there.


57

If you mark these targets also, and draw an arrow from the current location to the future preferred location, what do you learn? Is everyone in the market trying to get to the same location? If so, how do customers distinguish between the players? Do any companies in the market have a distinctive brand identity that confers a branding or positioning advantage? Or are all the competitors just trying to lower their prices to attract more market share, leading to a price war? Or perhaps they’re trying to gain market share by adding services without raising prices. We recognize that these questions, and the way we’re asking them, are oversimplified, but despite this drawback the questions themselves are nevertheless quite important to ask, and hopefully they will provoke some useful thinking for you and productive dialog among your team. The right questions, even simplified ones, can lead to answers that may be quite important because they may help us to identify the patterns that lead us to make the right choices, choices that result in strategic advantage. And since we’re inevitably dealing with situations of incomplete information, then we look for the patterns that can lead us to useful answers. As we have already mentioned at the beginning of the book, questions are critically important strategic allies for us in this journey. Since there is inevitably a series of questions that pertain to each of the phrases in the formula (including the complexity and competition phrase), we’ve prepared an interactive workbook containing those questions that is presented as a companion volume to this book. As you read through the rest of the book you’ll see graphics that represent those worksheets, but it will probably be much easier for

58


you if you download a copy of the entire workbook so you have bigger pages to work from. You can download it here: www.innovationlabs.com/formula

Great Ideas Where do great ideas come from? Obviously they come from many sources, which means that your systematic innovation process has to support and sustain multiple efforts at ideation in parallel. In large organizations, exploratory work is happening all the time through the development of new technology in R&D labs as well as the evaluation of new technology coming from external sources. There are ongoing efforts to develop new practices, methods, and approaches that may also lead to new ideas. And the evolution of the innovation spirit throughout the organization, and in its broader ecosystem of partners, customers, and suppliers, constitute vastly rich sources of ideas, so insiders and outsiders will be providing a steady flow of interesting and worthwhile possibilities. In the following sections we will explore some promising ways that you may be able to find ideas that will take your own business forward.

Researching Your Own Business Model One of the most important purposes of the business model map is to help you understand your own business model, which focuses your thinking on how your firm is organized to make money, and the value proposition you’ve created which results in customers paying you for the products and services you sell. To dig into your model more deeply, begin by making a list of 5 to


59

10 reasons that your customers are your customers. For example, do customers come because of your business’s location? Or is it the distinctive quality of your products? Or perhaps their designs? Or maybe you have a strong or particularly efficient distribution system? Are your prices lower? Is your branding better? Of course you have impressions and insights about this, perhaps a great deal of insights. But an even better source of the important information probably isn’t your own ideas, it’s what they think, what the customers themselves believe, so we’re going to spend the next few pages thinking through some techniques you can use to gain insight about your customers directly from them through a focused process of researching. And in addition to talking with customers, it may also be quite useful to consider non-customers, the ones who don’t buy from you, but could. The question, of course, is Why don’t they? Does your offer lack something they want? Does your brand lack appeal for them? Why are competing offers more attractive? It’s also useful to find out the views of your partners, as well suppliers and even community members, for their perspectives on your business may offer useful insights that could lead you to discover new innovation opportunities.

Customer Needs, Known and Unknown To find out what customers want today and may want in the future, you need to go out and talk with them. It’s not a phone call, it’s a face to face dialog, preferably in their own workplaces. Ask them straight out what they want and what they like, and what they don’t like, and you’re likely to gain some interesting insights once you get past the “everything’s fine” talk. Probe deeply by asking openended questions that they have to think about, explore what they’re

60


expecting for their own futures and what their needs will mean for what you can provide to them. You want them to be fully open, so take it as a gift when they complain about your firms’ work, or criticize your staff and don’t try to explain or defend even though it may be very tempting to do that. •

When are things difficult? simpler?

How can you make them

•

When are things awkward? How you make them smoother?

•

When are things unsatisfying? How you can make them satisfying?

•

What causes worry? How can you alleviate it?

•

What causes confusion? How you make things clearer?

•

What causes waste? How can you eliminate it?

All of these themes may lead to opportunities for improvement of their experience, and when you improve their experience you create brand loyalty. We call these types of opportunities “unmet needs,” and they’re exactly what you need to find since every unmet need is also an innovation opportunity. In the words of innovation teacher Clayton Christensen, your task is to understand the job that the user/customer wants to do, and then to figure out how to do it more simply, more efficiently, with less waste, and with more fun. When you discover experiences that are difficult, awkward, unsatisfying, etc. you know that a task or job is being done inefficiently, and hence you’ve also found the opportunity to remove inefficiency and replace it with the opposite, simplicity, ease, or fun, and get paid for doing it. In addition to your customers, you’re likely to also learn a lot from non-customers. If you can find out why they choose products or services offered by your competitors instead of yours you’ll


61

probably be gaining a lot of insights into your brand and your organization. In addition to talking, it may also be worthwhile to simply observe how they work, or what they do. There’s a discipline behind this sort of observation, and one of its insights is that the way people behave is not necessarily exactly how they say they behave; what they do, that is, is often different from what they say they do. In fact, what they do is quite often significantly different from what they tell you, and you may not find this out unless you observe them. For example, during a research project for a food company we interviewed many families who fit into their target market group, and these consumers were happy to describe for us their very healthy eating habits. A look into their storage closets and pantries revealed a rather different view, though, as all the snacks and sugary treats were there on full view. So what did we learn? If we had talked to them at the store, or at our offices, we never would have discovered what they really eat; we had to actually go to their homes, talk with them, and observe their own living environments. A team of researchers at Wells Fargo bank practices the same techniques and learned so much about their clients, and found so many new ways to help them as a result, that they trained hundreds of their sales people in these observation techniques, and they count the additional sales that they’ve achieved in the tens of millions of dollars.1 So meet with people not in your office or in some neutral (sterile) focus group meeting room, but in their own homes, offices, factories, distribution sites, and in their cars, airports, hotels, stores, and wherever else they’re engaged in doing whatever it is that you

62


need to learn about. These are probably not going to be 10 minute conversations or 10 minute observations, but dialogs of an hour or more. Delve behind the attitudes and reasons behind the choices to expose hidden values, beliefs, and expectations. Find out why they make the choices they make. Learn what works for them; learn what doesn’t. The science behind this is called ethnography, and it’s derived from a branch of anthropology that’s focused on the study of human culture. One hundred years ago when ethnography was developed, the practitioners were Margaret Mead and Claude Levi-Strauss and dozens of others, mostly academics, and their research subjects were human cultural groups, tribes and societies who lived in exotic places. Many of today’s ethnographers are working for companies to help sort out the complexities of human choices and human behavior in the marketplace. Intel has teams of ethnographers who study computer usage around the world; ATT has teams that study how people use phones; and every other type of company has conducted ethnographic studies, in food, paper, metals, appliances, cars, banking, energy, health care, and on and on. Kimberly Clark used ethnography and discovered a new market that was quickly worth $1 billion in annual sales, as did Alcoa. And you can do the same thing, by observing closely, withholding judgment, asking open ended questions, and being open to and indeed interested in learning what’s not working, and how it can be fixed.

Discovering What’s “Less Than Ideal” One of the reasons that it’s not enough to ask people about their own experiences is that in many situations they can’t tell you much


63

of use. This is because many of us are deeply conditioned from a young age to accept things as they are, even when they’re less than ideal or even pretty bad. Someone, someone else, probably an authority figure (often a selfappointed one) has taught us that whatever’s not working for us is our problem, not theirs, and we have to endure it, and this pattern is so common that we often fail to notice how bad things really are. Until there is a better alternative. And then given a choice, people rush to use it, and readily abandon whatever wasn’t working. This is true whether we’re talking about people rushing out of East Berlin upon the fall of the Berlin Wall and the collapse of the USSR, or if the subject is the mass migration from cell phones to smart phones. At the exact moment that people become aware of a better option, the contrast between the old, worse way and the new, better way becomes abruptly crystal clear, and they switch. Waiting in line at the post office was accepted as normal until Fedex showed that it was unnecessary. And … •

Drinking “coffee” was normal until Starbucks offered higher quality beverages and a much more pleasant experience.

•

Using DOS was fine until there was Macintosh.

•

A corded phone was great until there were cordless ones.

•

Cell phones were good; smart phones much better.

•

Sears was fine until Wal-Mart was better.

•

Taxis were ok; Uber is better.

Many innovations transform experiences that are accepted as normal and natural without question, into those that are better, or even much better. So your task as an innovation hunter is to identify how, where, and why your current customers, non-customers, and future customers, aren’t (or won’t be) getting what they would

64


prefer to have, what they really want, or even what they need. And when you figure out how to do that at a price they like, your business moves into the category called “innovative.”

Outside-In You’re learning to think in a new way, because you’re becoming a problem-seeker. You learn to see as “not acceptable” what many others just accept as “normal,” and your senses become attuned to the gap. Many people are pretty good at this, but it’s not merely an innate talent because anyone can learn how to do it, including you. What’s needed is intention, practice, and the willingness to find new perspectives. And this last part, perspective, is a really interesting one. In general terms we can learn about perspective by making a very useful distinction between “insiders” and “outsiders.” Insiders are the ones who live and work inside a system, inside a paradigm or viewpoint. They know it intimately; it is their skin, their air. These are employees in a company who know how it gets work done because they do it that way every day, and frequent users of a product or service who depend on it. They know the rules, the tricks, they’re insiders. Being an insider by definition shapes ones viewpoint and experience, it provides a context and perspective. For example, a French person knows intimately the French society, knows the laws, and the big ideas that shape French culture, knows the hidden or unspoken rules, knows how to get around Paris, and can communicate naturally with other French people. An Iranian knows the same about Iran, a Russian about Russia, an American about America, and so on, for each and every one of the thousands


65

of distinct cultural groups around the world. But then it goes deeper than that. A person from Brittany, in the far northwest of France, knows a different version of French culture from a Provençal of the south, or a person from French Polynesia or French Africa. Each of these is also a culture, possibly a subculture, and each has its own rules, its own standards, mores and styles. And each has its own assumptions, both overt ones that people discuss, and hidden ones that are deeply important part of everyone’s lives, but which are often not spoken of at all. Outsiders are different. They’re the ones who are familiar with none of those things. They are the ones who ask the stupid questions that all the insiders already know the answers to. They’re the ones who, when they ask why, get the response, “Because that’s how we’ve always done it!” Often this response comes with some sense of indignity, as if it is impolite or inappropriate to not know how we do it. By the very act of asking, the outsider has branded him or herself precisely as an outsider, as someone “other,” and this is a matter of derision or even condemnation. In extreme contexts it is wrong to be different. “Our” ideas and texts are sacred; “yours” are profane, and over such issues wars are sometimes fought, and people die. These viewpoints, the distinctions between “us” and “them” are characteristic of human culture, and this is precisely the domain that we must explore, though perhaps not as theologists, but as practical people looking for a better way to accomplish the tasks of living. And in this way we searchers and researchers should take on the perspective of outsiders, for outsiders are often the ones who usually see more clearly what’s not working, or where deeply held

66


assumptions have so conditioned peoples’ minds that they readily accept less than ideal circumstances, products, or services. In the history of entrepreneurship it has frequently been the outsiders who have seen what’s not been working, and who then created many of the great leaps forward. Many of the most successful, however, have combined deep insider knowledge of a market or an industry with the outsider’s ability to see what’s not working, and to see how solutions introduced laterally from other industries may solve problems that the insiders may not have even recognized at all. Fred Smith was an outsider-insider who revolutionized package delivery business; he founded Fedex. Dee Hock was an outsider-insider who transformed personal finance; he led the team that created the Visa credit card, which revolutionized personal finance. Howard Schultz was an outsider-insider who changed the world’s beverage habits; he made Starbucks into a global brand. Herb Kelleher was an outsider-insider who transformed air travel; he co-founded Southwest Airlines, the first discount airline, and the one that changed air travel forever. There are plenty of other examples, and they all tell the story of someone who saw a better way, and knew enough about the inside of an industry to see how it could become much better. And what about you? You know your company, your sector, your industry, and you know it intimately. And as you develop the capacity to look at it as an outsider you’re likely to find many opportunities to innovate, to grow, to meet new needs in new ways.


67

Study Business Model Innovators What is the most important quality that successful business model entrepreneurs have in common? You might say that it’s their persistence or perseverance, tenacity, determination, or perhaps cleverness. These are all important, of course, but in our view there’s another factor that’s not so well recognized, but it may be the most significant ingredient that successful business founders have in common: they combined the attributes of insiders and outsiders.

Inside Knowledge

Innovation Zone

Outside Knowledge

Figure 11: Inside + Outside Knowledge Creates Innovation

They understood their business domains from the inside, and knew well the deep intricacies and the qualities and characteristics necessary to be successful. But they were not content to operate a business in the conventional way. Instead, they also brought to it the outsider’s perspective on what could or should be done differently. Both types of knowledge were essential to their successes, and it was largely their capacity to combine them, to find new and better ways to do well-know jobs, that became the foundation of their super -successful ventures. This, then, is your challenge as well: to see from the inside what is, and from the outside what could be. It is your powers as an observer that are most likely to disclose to you where the opportunities lie.

68


Hence, in the outsider role you must set aside what you know about the business or the company, and see through new eyes, to discover the insights and possibilities that your insider knowledge and experiences have blinded you to. The question, then, is what companies in your business have done what these business model innovators have done? Who has shifted the dynamics of business in your own field? And from what, to what, did they provoke the change? Understanding their accomplishments and especially the thinking behind it can lead to a much deeper appreciation for the structure of your business or industry, and that in turn can sensitize you to new possibilities and opportunities. This then relates in a very important way to the definition of luck, and to the role of luck in innovation. In fact, luck almost always plays a part in the conception and creation of any innovation, a part that is nicely explained by the famous comment of the great French chemist Louis Pasteur, who commented that “luck favors the prepared mind,” meaning, of course that the lucky accident comes about not so much by change, but as a direct consequence of the preparation which preceded it. This concept of luck removes the notion of randomness, which is generally part of how most of us imagine luck happens, and instead replaces it with the idea that we may seize upon opportunities that life, fate, or chance put before us if and only if we are able to recognize exactly those very same opportunities when they are presented. By contrast, by its very inpreparation, the unprepared mind is not capable of seeing what the prepared mind recognizes. This tells that preparation is entirely required for luck to become present, at least as far as innovation is concerned.


69

The great golfer Gary Player expressed much the same sentiment in his comment that “the more I practice, the luckier I get.” So your studies of past innovators and their work, in your field and outside of it, are an essential part of your own quest for innovation, and cannot be overlooked. Knowledge of history is a great friend of the would-be innovator, and most successful innovators are more than casual students of history; many are quite rigorous about it.

Engage Your Community Another useful perspective to consider is based on the awareness that no business exists in and unto itself. There are always suppliers and partners and of course customers, both upstream who providing you business with critical inputs, and downstream, taking your outputs for their own purposes. Taken together, this group constitutes a community, or ecosystem, and your business occupies one niche of it. Do you intend to grow your business? Then one way to do so is to expand your role in that ecosystem, to find new ways to add value to the overall process chain of which your organization is one part. Hence, you have to figure out where there are opportunities, and course a great way to do that is simply to engage with other players, individually and in groups, and through those interactions to find out what’s not working, or what could be working better. Meetings, formal and informal, conferences, brainstorming sessions and workshops are all tools you can use to expose new needs, uncover old but unrecognized problems, and collaboratively design win-win approaches and solutions.

70


Improve Your Supply Chain Most products and services reach the customer at the end of what can be a quite long series of transactions, handoffs, and exchanges that is sometimes called the supply chain. At each junction in the chain there is an exchange not only of products, but also of information. And each participant in the chain has to make decisions about what they’re going to do, and to buy, and what they’re not. Hence, if your product or service is part of a supply chain, then studying that chain in depth may reveal significant opportunities for improvement. Go and talk to your supply chain partners, and find out how it’s going. What’s not working? What should work better? Where are the bottlenecks, and breakdowns, and gaps? How can the process be more efficient? Are there customer needs that are not being addressed? Are there new competitors coming that we should prepare for?

Apply New Technology The rapid acceleration of new technology presents enormous opportunities to meet the needs of existing and new customers in new ways, but also of course it presents significant potential threats, because it enables new competitors to enter your market in new ways. And as we surround ourselves with more and more technology, we also create new ways to use technology to connect and to act, and this changes the structure of the market. For example, the world’s advertising agencies used to have a wonderfully protected position in the ad market because they were the ultra-knowledgeable specialists, but then Google arrived and


71

made it possible for all types of organizations to reach directly to the customers they really wanted, namely the ones who were already looking for them. Within a decade the share of the advertising market that the agencies controlled dropped from x% to y%, and Google became the number one ad agency in the world by a wide margin. In hindsight it’s easy to blame the ad agencies for their lack of foresight, but in fairness Google’s leaders didn’t see it either. It took some years for Page and Brin and Schmidt to recognize that “ad words” and “auctions” were the money machines that would make the search engine into a world-leading business, and even then it happened only because one of their competitors did it first. This is but one tiny example among thousands that show not only how technology brings change, but also how hard it is to predict what the impact will be. Like computers have certainly done, every foundational technology that has ever been introduced caused fundamental change, and the last two hundred years of economic growth and development is essentially a steady parade of new tools that changed how we live. Steam engines, new metals, railroads, autos, electricity, refrigeration, vaccines, highways, elevators, airplanes, telephones, rockets, satellites, computers … each brought momentous change. And yet in most instances, few people who happened to be around at the time that these revolutions were introduced actually had a clear picture of what the outcomes would be. Just as the founders of Google took years to figure out how to make money with the stupendous innovation, many others did as well. Hence, while the entire economy has been transformed from stage to stage, from agriculture to industry to information and services, at each step it’s been a process of discovery and invention rather than any progression guided by a grand plan. Some of the scientists,

72


entrepreneurs, and technologists involved in all of these advances may have had a sense of what was possible, but only a sense. But what they all saw, each of them, was a better way to accomplish some immediate objectives, and this set them on the path that led to economic transformation.

Anticipate Customer Needs Technology changes the structure of the market by providing new capabilities, and it also introduces new needs and new desires. In fact, in the modern world our needs and desires are entirely confused with one another, and many of us have a hard time distinguishing the one from the other. We need food, of course, and water and other necessities of life, but the need for technology is more ambiguous. Do we need cell phones and smart phones, or do we just like them a lot? Do we need apps and tunes and videos? But we do adore them, oh yes we do! Consumer demand for cell phones, and then smart phones has exploded worldwide; during the last half of a single year, 2010, more than 350 million people became cell phone subscribers. It’s a big, impressive number, even more impressive when we break it down in smaller time increments: 60 million per month, 2 million per day, or nearly 1,350 per minute. In 2010, in other words, cell and smart phone makers, providers and service companies were basically printing money, and as a result many of today’s richest people are those who own or owned cell phone companies, including Carlos Slim of Mexico and Mukesh Ambani of India. New phones with new capabilities then bred new services, which in turn disrupted every consumer market and many B2B markets.


73

Mobile banking, retail, distribution, publishing, printing, to name just four, are all much different businesses than they were before the smart phone. The questions that our adoration of technology must lead you to ask yourself and your colleagues pertain to what it means. With each new generation of technology new things become possible, desires become needs, needs become standards of use, and thus new behaviors emerge. Your job as a small business leader and aspiring innovator is to figure out what this means for your own company, and your own industry. Did taxi drivers see smart phones as a fundamental threat to their business? Probably not. Yet this is exactly what they’ve become, and for very good reasons. The transportation services that smart phones enable are just better. But it wasn’t so obvious until someone put the pieces together – felt the need, designed the apps, built the platform, recruited the drivers, and then convinced the customers. And how did that happen? What was the triggering event? The founders of what became Uber were trying to get a taxi, and there were none to be found. Angry, frustrated, and wet (it was raining), they saw how to connect the pieces of technology into a solution, and they set about to build it. Now Uber is a company worth billions, and taxi companies are fighting back in the courts to stop them, but they’re also developing their own apps and platforms, and it won’t be long before all the taxi companies operate just like Uber does. Or perhaps they won’t survive. It’s worth taking a deeper look at how Uber has changed the experience of “hired transportation,” because it reveals a lot about how technology can change the market. While this is not always so,

74


in general it’s reasonable to say that a lot of taxis aren’t very clean, that a lot of taxi drivers are rude, and that standing on a corner for five or ten minutes, or half an hour, and waving at cars going by, hoping that one of them is an empty taxi that will stop for you, creates all in all a not very pleasant experience. So let’s say you want to improve that experience – what would you do? Well, what if you could request a taxi via your phone? And what if the phone had a map that showed you where all the taxis are, and especially the one that’s coming to pick you up? Then you wouldn’t have to stand on the corner, in the cold and the dark, waving at cars whizzing by. You could instead wait inside where it’s safe and warm until the taxi arrives. And you’d know the name of the driver and the type of car. And you’d know immediately the cost to get to your destination. In the conventional taxi model you have none of those benefits, but in the Uber model you have all of them. And all of them are based on the principle that providing more information and more choice to customers makes for a better experience. This is what smart phones enable, and why Uber, as a company, has a huge market valuation while the taxi companies are complaining bitterly about the new competition that they are facing. The smart phone, then, is itself a powerful driver of change, because it makes things possible that were formerly impossible. This is the essence of innovation – doing something that you previously couldn’t – and what’s happening is that smart phones enabled with and connected to a lot of other complementary technologies have changed how people think about a wide range of issues that are central to our lives. Our phones tell us where we are and a lot about where we want to


75

go – through maps, traffic time estimates, transit maps, transit schedules, flight schedules, train schedules, etc. This is information that didn’t used to be available to us, but now it is. Our phones are also financial instruments, as we use them to buy things, from food to goods and services of all kinds. We also use them to manage our money, to access information about bank accounts, and to enable money transfers, payments, etc. And many vendors now use them as ways to receive payments, through apps like Square. Phones are also medical devices, monitoring our heart rates, blood sugar, and in rural India, they’re connected to probes that do what EKG machines do, except EKG machines aren’t portable and they cost thousands of dollars. Our phone are also entertaining us, with movies, games, TV shows, videos, sports, and music. What else do you use a phone for? Email keeps you connected, along with Facebook and a slew of other apps that facilitate social connection and communication. Plus, it’s a phone. It’s also a camera, a calculator, a thermometer, a drone controller, a clock, an alarm clock, a calendar, a to-do list, a notebook, a health care device, and, and, and… If you add up the cost of all the devices that the smart phone has replaced, it’s quite significant. So the impact throughout the consumer electronics industry has also been pretty large. And the point for you as an innovator is that this is probably just the beginning. What you want to know is what’s coming next, and for this you will require insight, hard work, research, and your imagination. To help you, let’s see if we can identify some patterns by looking at

76


what various apps do, and the underlying themes and utilities. •

Matching: Smart phones enable people with “needs” to be matched with others who can meet those needs. This is what Uber does, and it’s also what

•

Transacting: Smart phones enable people to buy, sell, trade, track bank balances, and all things related to money, counting, and calculating.

•

Locating: Smart phone enable you to identify where you are, discover how to get where you want to go, to find what’s near by, find your friends, find out when the next subway train is arriving, and find out where Latvia, Lithuania, and Estonia are too.

•

Entertaining: Smart phones bring you all forms of entertainment; they also enable you to create entertainment through photography and video.

•

Informing: Smart phones bring you access to information no matter where you are.

These are just five of their more general functions, but you get the point. Next, expand on this simple list to explore how they may impact your business in the future. Some questions to consider are … •

What new forms of information will new technology create and deliver to us?

•

What new services will the new information and the new technologies enable?

•

How will providers and consumers use that information to change their environments, their lifestyles, or their own behaviors?

•

What might this do to the structure of the market?


77

The Cone of Uncertainty and the Power of Prediction These are not easy questions to answer, but they’re important ones to ask, to think deeply about, to discuss with colleagues, and to come to some conclusions about. Interestingly, it’s not entirely necessary that your conclusions are actually proven correct, in the sense that your predictions and expectations have to be accurate to be useful. What they do need to be is specific, and they need to frame your views, right or wrong. The reason that it’s more important to make predictions than for those predictions to be correct relates to the nature of change, the challenges of making predictions, and the need to take action now, long before the current trends and patterns become clear. The underlying issue here is that the farther into the future we think, the less likely we are to see accurately, but most of us have a pretty good idea about what we’re expecting for tomorrow. Aside from any big unexpected events that are entirely unpredictable, things like car accidents and terrorist attacks and earthquakes, we pretty much know how we expect the next day to unfold. When we think a year into the future, however, things get considerably fuzzier. We may have some ideas, but it’s not all that clear. And five or ten years into the future things generally get entirely blurry. Most of us only have the vaguest outlines of what will be happening by then; where we’ll be, what we’ll be doing, and what the world will be like, well, we can only guess. We describe the progressively less knowable future as a “cone of uncertainty” that begins with today. We know what’s happening now, but the further out in time we go, the wider the possibilities become, and the less predictable it all is. The spread at the open end of the cone to the right connotes the progressively higher levels of

78


uncertainty that we face the further we get from today.

today8

near certainty8

the future • extreme uncertainty8

Figure 12: The Cone of Uncertainty

Of course the unpredictability of the future is a big problem for business leaders. The more they know about the future the better are the decisions they’re able to make today, so if, for example, we knew a particular key product or service is going to become obsolete by a particular date then we can focus our innovation investments on meeting that target. But for the most part we have uncertainty. We don’t know, and so we have to guess, and it’s precisely because of this innovation becomes so tricky, so risky, so unsure. Should we invest in product A or product B? Is service Y going to be disrupted by new technology, or service Z? The further into the future we’re thinking, the more we’re forced to guess, and when we don’t have much confidence in our guesses, we typically wait and see rather than acting. As a result of this progressive uncertainty, most firms focus their innovation efforts on short term needs and issues about which they have greater clarity. This circumstance leads them to create incremental innovations, small adjustments to


79

existing product and service lines, but to defer or eliminate entirely the investment in big ideas for the future. An excess of uncertainty causes investment to stop, and the net result of this pattern is that there isn’t enough investment in big ideas even by the big firms that will be most severely threatened by their own inability to change. Most of their current competitors follow the same pattern, watching and waiting. The firms that do invest in the big, new ideas are often the ones that see how existing or new needs can be met with new technologies, and when they come into the market it is in an entirely disruptive way. These are often entrepreneurial companies and start-ups. This pattern explains exactly why the taxi companies didn’t come up with the new approach to their business, but Uber and Lyft did. The established companies were busy running their day to day affairs, and they failed entirely to see that (a) people hate rude cab drivers, dirty cabs, and standing on the corner waving at the cars going by, and that (b) smart phone apps can link drivers, passengers, current locations, desired destinations, and the means to pay in a seamless, predictable, and mutually beneficial way. It’s a huge win for everyone. Except the taxi companies, for which it is a huge threat. If they had even bothered to draw a cone of uncertainty about their own businesses, chances are pretty good that the taxi companies would have made one that was quite narrow. There just didn’t seem to be much change in their futures. But the actual cone as revealed in hindsight was a quite heavily impacted one. The first point is that this same error is the one made by the majority of business leaders, whether their companies are large ones or small ones. Focusing only on the short term needs that have clarity about

80


almost always drives them to make choices that are self-defeating over the long run, because this pattern renders themselves exposed and vulnerable to the big changes. The second point relates back to the importance of making predictions, regardless of how accurate they are. A prediction about the future becomes a benchmark, and when you make a set of predictions about change and how it is occurring, and then track what actually happens, you create the capacity to improve your predictions, and if you do this diligently over some months and then years, your predictions will gradually get better and better. In addition, your predictions will serve as landmarks along the road of progress. If the landmarks arrive more quickly than you had anticipated, then you’ll know that things are going faster. Conversely, if the landmarks don't arrive as fast as you expect them to, then you’ll know that things are changing more slowly. Either bit of knowledge will have significant impact on the pace and intensity of your investment in innovation. To go back to the original point, if you do not make the initial prediction then you will have no basis for tracking the rate, nor for tracking the specific events, and thus you’ll be driving at night, in the fog, without headlights and without instruments, and you know that this scenario is not likely to have a happy outcome. Uber is a good example of the broader pattern of change because the advent of mobile technologies accessed through smart phones has impacted every consumer-facing company in a decisive way, and most of them were indeed driving in the dark, in the fog, without much if any foresight, and they’ve been hammered as a result. As an aside, it’s worth noting that many of the companies that do handle change well, particularly those in technology, use what they call a “technology roadmap” to help them anticipate what’s coming,


81

and to design how they expect to respond. These maps look five, ten, or even twenty years into the future, and chart the emergence of new science and new technologies, the obsolescence of old ones, the progressive transitions of products and services from old to new, and the associated marketing and sales efforts that help customers migrate as well. These are also used as tracking benchmarks in addition to planning tools, and help to calibrate the anticipated rate of change with the actual rate. A technology roadmap is thus a giant prediction (giant, because they’re often poster-sized charts) that in and of itself poses a series of very significant and influential questions. As a small business leader, if you’re not asking yourself on a regular basis what the potential impacts of changing technologies are likely to be for your own firm, then you’re taking enormous risks that you may not recognize that you’re taking. From the questions come answers, which, again, don’t have to be correct to be useful, because they will cause you to take action, and that action will generate learning. And that learning will generate adaptation, and will sow the seeds what should sooner or later be the right innovations at the right time. In today’s environment of accelerating change, it’s clear, then, that not innovating is by far the greater risk than innovating and being wrong. Facebook founder and CEO Mark Zuckerberg expressed this pretty well: “The biggest risk is not taking any risk. In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” The concept of the cone helps us to see that we have to prepare for a much broader range of possibilities than most of us generally consider. And it is precisely because most people envision a cone that is in fact much narrower than the possibilities they ought to be preparing for that so many businesses falter, and then are entirely

82


overtaken by changing conditions, and made obsolete by new technologies or better business models. In effect, the competition has figured out how to move the accepted value proposition upward and to the right, and customers naturally migrate in that direction. Hence the mental model which tells us that change is slow and manageable is a flawed model. We have to change our thinking because the consequences of this deficiency may be critically important to the future of the enterprise. Who do so many people get fooled? In general, we can point to three causes. The first is that change literally is accelerating; things are simply moving faster today than they did in the past, and while most of us generally recognize that it’s different now than it used to be, many haven’t thought through the consequences in a thorough way. It’s time now to think about this quite deeply, especially if you’re a business leader. Secondly, most people don’t quite grasp the underlying pattern of how change unfolds, as noted in a comment by Bill Gates, who once wrote that people over-estimate change in over the short term but they under estimate it over the longer term. We expect more from tomorrow than we get, but we get much more ten years in the future that we expected: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.”2 “Lulled into inaction” is indeed an evocative phrase, as it captures precisely the nuance that’s so important. And of course the point of this book is to help you, as a small business leader, to define the best and most effective ways to take that very action. It’s our antilull campaign! The third cause is the topic that we explored in detail above, which is the age of digital disruption that we are in the midst of. It’s a


83

dynamic vortex of change where the scale and scope of disruption is unprecedented, and it’s going to get significantly more intense in the next coming years. What all of this tells us that the necessary and appropriate responses to this situation should include the following: 1. First, please rethink the cone of uncertainty as it pertains to your own business. To get a clearer sense of the rate of change, ask yourself how things have changed over the last five years and then invert that thinking to consider how things may change in the coming five. Make a list of the changes from the past, and anticipate changes that could be coming in the future. last 5 years

next 5 years

c2

c2 = 5 x c1

c1 t1

t2 t1 = t2

Figure 13: Change during the Next Five Years … will probably be about 5 times greater than change in the last 5

The next step is to assume that change in the coming five will be twice to five times greater than what we experienced during the past five. That could well be frightening, which

84


is exactly the point. It will also probably be more a accurate representation of what’s coming. Look at new and emerging technologies that could impact your customers and how they think about the world, or could impact on how you create and deliver the products and services you provide to them. Will technology enable your customers to get better information? Almost certainly it will. How will that information impact on their purchasing decisions? 2. Second, invest in preparing for a wide variety of degrees of uncertainty. On this issue you need to create an innovation portfolio, which we discuss in detail in the next chapter. 3. Third, you need not only to invest, but to invest well. This means that you need to use a disciplined innovation process to reduce uncertainty, target future opportunities better, and increase the success ratio related to your investments. This will be our topic in Chapter 4, focusing on how to do this at maximum speed.

Disruption Earlier we talked about five revolutions that are driving major change throughout the global economy, the technology revolution, the science revolution, the culture revolution, the demographic revolution, and the climate revolution. Each of these is a potent change maker of change by itself, but because they are so thoroughly interconnected and combined and intertwined, they compose an unprecedented market situation of monumental complexity and happily, immense opportunity. Now let’s return to that list and think through in more detail about


85

how these revolutions may impact your own business. What we’re particularly interested in are the ways in which these forces may disrupt the market by enabling or even creating new forms of competition, and also by altering the needs and perceptions of customers. Please take some time now to consider specifically how these trends may disrupt your business. As a thought exercise, and without judging how likely or unlikely your ideas may be, list three potential disruptions in each of the five categories, which will give you fifteen total disruptors. Next use the cone of uncertainty map to estimate how soon each one could possibly appear in the market. Are they short, medium, or long term disruptions? It’s obvious that most of these estimates will really be guesses, but that’s OK. The point here is not necessarily to be correct, although it’s fine to be right, of course. But what we’re really interested in is establishing benchmarks, some reference points that you can then use to chart the actual rate of change. Because without some reference points it’s impossible to know how fast change is actually occurring, and thus it’s impossible to estimate how soon you’ll actually need to be ready to introduce the next generations of products and services that will enable your business to remain viable. And once you’ve thought about the cone and you have a sense of what coming sooner as opposed to what may be later, you can then begin to think about how your business might respond in each case. Each of these disruptions also gives you a great opportunity to engage in some what-if thinking. What would you need to do to remain relevant as a company in the face of each of the disruptions that you’ve just identified?

86


Taking Action There’s been a lot to think about in this chapter, and we’ve already made a lot of suggestions about what you can or should do to being implementing these ideas. As noted just above, make a list of possible disruptions pertaining to each of the major driving forces of change. Assess the short, medium, and long term impact, and think about the early warning signs that you might receive to indicate that a possibility is turning into a reality. The exercise to list changes in the last five years, and your anticipated changes in the next five can also be a powerful way to see more clearly hoe change is occurring, and to prepare for the big changes that are certainly coming.


87

Chapter 5 Managing Risk with Your Innovation Portfolio3

By definition, business involves risk, and managing that risk well requires that you understand it. And one of the key nuances to understand is that there is not just one type of risk, but many. This is articulated nicely in a recent report from Linda Martinson, Chairman and President of Baron Funds, the investment management firm.4 She noted that in managing their investments they track not only business risk, the possibility that things may go wrong with a company, but also what she refers to as “system risk,” the broader perspective of macroeconomic change, which we have described in Chapter 2 as the driving forces of change, among which we highlighted technology, science, culture, population, and climate. The third type of risk that Martinson discusses is “portfolio risk,” which refers to the need for an investment firm such as Baron to diversify its investments so that the poor performance of any single investment cannot drag the entire portfolio too far down.

88


This is probably the single greatest threat to most small businesses. It is also technically known “as concentration risk,” and is perhaps more easily understood as “keeping all your eggs in one basket.” (In case you’re not familiar with the metaphor, the point is that if you have all of your eggs in one basket, and you then drop the basket, you probably lose all of the eggs.) Concentration risk has been a subject of focused and eventually quite sophisticated research by economists and finance experts since the mid-twentieth century, when investing became professionalized, and investment managers began to grapple with the problems of investment risk that would affect middle class investors who were accumulating modest life savings.5 The new class of professional managers needed systematic ways to assess the risks of various types of investments so that they could create investment portfolios that would achieve targeted investment returns at well-understood risk levels for their clients. We know this today as the work of balancing our retirement portfolios by selecting a mixture among various sectors and types of investments, mostly stocks, mutual funds, and bonds, so that when we’re ready to retire we actually have enough money to live decently for a few decades. The design intent of any investment portfolio, whether it’s your retirement portfolio, the company’s treasury portfolio, a venture capital portfolio, or your innovation project portfolio, is identical: to manage risk strategically by choosing a variety of investments from across different marketplaces which have a variety of performance characteristics, such that you attain the appropriate level of overall risk while attaining the necessary level of return. Those who worked for Enron (to take one very sad example) know how dangerous concentration risk can be, for the company had unwisely invested much of its employees retirement funds in its


89

own stock, so when the firm’s frauds led to its collapse, the retirement savings of a great many employees were lost along with it. Most small businesses face the same sort of risk, because by definition they’re usually only in one or a few businesses, and if things were to go bad they might not have much, or anything, to fall back on. Concentration risk is one of the major reasons why the mortality rate for small business is so high (the other being just generally poor management). It’s worth noting in passing that the mortality rate for big business is pretty high also, and it’s climbing precisely because the big firms are also struggling to adapt to change, just as small business are. All the statistics indicate that big firms going out of business at a record and accelerating rate. Consequently, one of your missions as an entrepreneur/innovator is to create future product and service options that reduce your concentration risk. The actions we discussed in the previous chapter concerning the various ways that you can search for innovation opportunities explains the process of identifying what those very options may be. But that’s not the only thing you have to do as an innovator, because you also have to protect your existing market domain, which means that you have to organize yourself to innovate in your core business at the same time that you explore new or adjacent business opportunities. This is a complex problem, and one of your primary tools for managing it is your innovation portfolio, the subject of this chapter. We already discussed this earlier when we explored the cone of uncertainty and the three different types of innovations, those relevant in the short term from now to about two years out, those relevant from two to about four years, and those beyond four years. These three categories constitute an innovation portfolio, but there

90


are also other ways to organize or structure an innovation portfolio, so if the cone of uncertainty approach to sorting concepts into three time horizons doesn’t fit well with the rhythm or structure of your business or your market, then you should of course feel free to find a different organizing scheme. For example, in other writings in which we focused on large firms we’ve suggested that they must create and manage four portfolios: incremental innovations to protect market share for the short term, breakthroughs to prepare long term disruptions, new business models to leverage new technology, and new ventures to extend the enterprise laterally and broadly into the future. Each of these portfolios has of course a different risk profile and a different reward profile, and this way of thinking about it may also be relevant for you.

Four Types of Innovation Incremental innovations are generally small changes to existing products and services. Companies typically invest in incremental innovation in order to preserve or sustain existing market share, or perhaps to make modest gains in market share. In fact, most companies invest the majority of their innovation efforts in incremental projects to preserve their position. Breakthrough innovations are higher risk, and much like venture capital investing, when successful they result in much higher rewards. The distinctive character of successful breakthroughs is that they change the entire structure of the marketplace, which is, after all, the very definition of a breakthrough. Breakthroughs therefore create significant competitive advantage for the organization that creates them. In the absence of a rigorous portfolio management process, the logic


91

of business decision making will tend to drive a company’s investments toward safer incremental innovation, and may entirely choke out the search for riskier breakthroughs. The third type of innovation is business model innovation. In this case the objective is not specifically to develop or sell new products or services, but rather to provide a different and better sort of experience to customers. Business model innovations are important because so many of today’s new technologies are creating business model innovation opportunities that are being used to improve the customer’s experience by changing how people access new information, how they shop, how they communicate with one another, and also by altering the nature of communication between customers and companies. On the business model matrix that we discussed in the previous chapter, the leaps that enable you to move up and to the right are often business model innovations. For example, the world’s discount air carriers, led by America’s Southwest Airlines and Europe’s Easyjet and RyanAir, have entirely changed the economic equation of air travel by designing a fundamentally lower cost operating model Wal-Mart became the world’s largest retailer by applying new technologies in supply chain management and distribution to create a chain of retail stores that are continuing to lower prices. The company then exploited digital communications technology to communicate in near real time with manufacturers in China and elsewhere in the Far East that now make the majority of the company’s products. Apple’s iPod MP3 player was only a modest success until the company introduced the iTunes store, which created an entirely new business model to distribution digital content. The fourth type of innovation is new venture innovations, which

92


comes about when an entirely new market needs to be explored and developed, and the best way to do that is through a new brand and perhaps even a new company. New venture innovations are of course long-term oriented. Each of these types of innovation is managed a different way, as each requires a different approach to project selection, capital allocation, ongoing monitoring, and the actual staffing of the innovation design effort. Consequently, each of these four is also managed through a different innovation portfolio. There are other ways to think about innovation portfolios, and authors whom we admire, including Clayton Christensen,6 Larry Keeley,7 and Rob Shelton,8 have proposed creating portfolios consisting of sustaining innovations that protect the existing business, disruptive ones that alter market structure, and internallydirected process improvements, or innovation across ten different types across finance, business process, product and service offering, and delivery. What’s most important, in our view, is that you find the structure or model that works best for your organization, and that you use it as a rigorous guideline to give shape to your innovation investment efforts. As with the necessity to develop a clear point of view about the future and about how you expect the major drivers of change to impact on your business, clearly defining your expectations about your innovation portfolio is the only way to move beyond sheer blind luck opportunism and toward a rigorous innovation process. Such a structure enables you to manage tightly to what you’ve selected so that you can reap the both the learning benefits and the equally important benefits of the innovations themselves. Whichever model you choose, the design of your innovation portfolio translates the goals and intents of your aims and strategy into a set of risk-managed innovation projects. This tells you, in


93

effect, what you’re going to do at a much more detailed level than a strategy document can, for identifies specifically the types of projects you want to engage in, the time horizon in which you expect results to emerge, and the scale and scope of the financial and human resource investments you intend to make. As the leader of the business and of the innovation investment process, you might consider that in this role you are now not only owner or leader, but also the chief innovation targeting officer, or the chief risk design officer.

Overcome Concentration Risk The principle of an innovation portfolio is consistent with any sort of investment portfolio, whether it’s stocks and bonds for your retirement account, or a portfolio of any investments that the treasury group in a big company’s finance department uses to get the best return from the available cash flow. Venture capitalists design yet a third type of portfolio, typically investing in 10 or 20 high-risk companies in the expectation that a least a couple of them will break through to produce significant returns within a few years. The underlying premise of this type of investing is that investors must anticipate the future direction and needs of the market, and then seek investment opportunities that match this future vision, recognizing that while failure is common because of the high risks, the right combination of qualities and characteristics can also lead to huge successes. As we noted above, there is certainly virtue and value in being right, but it’s not entirely necessary to be right as long as you’re paying close attention to what’s happening. There is also great power in in

94


taking an explicit position about the anticipated future of the market and identifying the specific reasons that support that position, because by its very explicitness it provides a foundation, a point of comparison. As events unfold you can then compare your expectations with what actually occurs, and this is tremendously valuable because you can then course correct and fine tune your actions to move into accordance with emerging realities. Your own predictions, in other words, give you a quite precise way to match expectations with reality and to adjust if and as they diverge. And the likelihood that expectations and actual events will diverge is quite high. Some years ago a venture capitalist was relating an interesting story about an investment portfolio he had created, which consisted of twenty companies, and he talked about the successes and failures that had occurred. He noted that ten of the companies had failed, which in this line of work is pretty much to be expected. He went on to explain that they had followed their original business model, but events had proven that the models themselves were not fitting to the markets that emerged. This was a fair and honest assessment of ten worthwhile attempts. But then he talked about the other ten, the firms that had been successful in varying degrees, and this is the key. He noted that while each of them had had a business plan and a distinct business model from the outset, in each of these ventures the initial model had proven nonviable, and the leaders had then created and followed a revised business model based on the conditions which they had encountered in the market. They had changed course, in other words, in response to events and trends. They had adapted. The point for us is of course that you can only adapt if two conditions are present. First, you have to willing to change. If you stick the plan even when the plan is going bad or when the plan is


95

definitively a bad fit for market realities, then the result is foretold by the very fact of your stubbornness. The military has a way to explain this: “No battle plan survives contact with the enemy.” The underlying challenge is that in many situations stubbornness is a virtue; you have to use heightened discrimination, and a rigorous process to discern when it’s good, and when it’s the short route to failure. The second condition is that you have a clear picture of what you’re intending to do and what you’re expecting to result from it so that you can tell if and when your expectations are being met or not met. The ability to respond quickly to exploit the alignment between expectations and reality, or to adjust to the lack of alignment, is perhaps the single most critical characteristic of strong leaders. Changing the plan, in other words, requires that you a plan in the first place. And hence one of the essential characteristics of any management team that leads a startup organization is perceptiveness, the capacity to recognize the truth of a situation and to respond appropriately. Venture investors, experienced ones, know that the likelihood that the initial business plan or model is correct is often much less than 50%; they also know that the best entrepreneurs are the ones who will recognize when the plan is wrong and change course. Conversely, the weaker ones will remain attached to their original ideas and drive their businesses right up to and even over the edge of the cliff, and many will do so without sensing that the edge is there because they’re so focused on executing to the plan that they fail to realize that it’s a bad plan. Here we have, metaphorically, another powerful argument for maps. For good maps will indeed identify where the cliff edges are, or are likely to be.

96


Astute managers of young companies are those who are fully prepared to adapt to changing market conditions. Hence, the successful young company evolves in conjunction with an emerging market, intending to position itself as the preferred solution provider as the market expands. Its leaders listen closely to whatever information they can gather in order to find out where the cliff edge is, and where the sweet spots in the market are. They also search actively for new information (again, this was the topic of the previous chapter). So the relationship between the venture investor and the entrepreneur is one in which the investor provides capital and guidance, and it’s up to the entrepreneur to apply that capital not in blind pursuit of the plan, but in a measured process of acting and responding, probing and listening. As a small business leader you probably don’t have venture capital backing, though. You may have put in your own money, or perhaps your capital comes from ongoing operations. But no matter where it comes from it’s precious, and the best way to use it for innovation is to set up a learning system so that you can probe, explore, experiment, and find out where the best future opportunities will be, and then get there before your competitors do. This calls for a rigorous process of portfolio design.

Portfolio Design The process of designing and developing your own innovation portfolios occurs as a series of steps that are described in a sequence because the output of one step will help you to think about the subsequent ones. The process builds towards design conclusions and decisions about the choices you’ll have to make, and then the investments that will back them up.


97

Small businesses and large firms will often have different types of projects in their portfolios, and the big ones will be investing much more overall, but the actual process of portfolio design isn’t all that different – what’s most important is that it’s a thinking process and a managerial discipline, and that’s the same whether the firm is large or small. For the purposes of this description we’re assuming that you will be preparing one overall portfolio that consists of three sub-portfolios. This reflects the three time frames that we discussed in relation to the cone of uncertainty: short term efforts (now to two years), medium term (two years to four years), and long term (five years and beyond).

Step 1: The Rate of Change The process of designing the ideal innovation portfolio begins by thinking about how change is occurring in the external environment, and what the consequences of this are today, and are likely to be tomorrow for your enterprise. We’ve already explored this in detail in the previous chapter. Very broadly it’s obvious that external change is defining what we might call “the strategic terrain,” the overall economic and market landscape in which your business competes. Change will of course mean impact on your existing revenue and profit flows, which thus suggests that there is a rate at which current products and services are becoming obsolete, and therefore the rate at which future revenues can be expected to decline. This will impact not only the future marketability of your existing products and services, but will also affect the evolving competition in the marketplace and the plans and actions of your competitors. Understanding this rate will also enable you to forecast how much

98


revenue has to be achieved or made up through the innovation process in order to maintain the current level of revenues and profits. While you probably can’t predict this with great precision, you can certainly develop a sense of how fast change is occurring, and the impact this is likely to have. Again, as with the predictions we discussed above concerning the cone of uncertainty and the impact of the major forces of change, this thought exercise has a dual purpose, as the actual predictions are planning tools and you’ll probably make decisions based on what you predict, and the very act of making a prediction sets up a mental exercise through which you can compare your expectations with emerging realities, and thus gain invaluable insight into what’s happening. Is change faster or slower than you had anticipated? You can adjust your rate of investment and the sense of urgency accordingly. Is change happening in the ways you expected? If not, you can adjust your innovation development targets. In some markets like cell phones the rate of change is very fast; devices are marketable for about 6 months, so a steady parade of new ones are constantly in the development pipeline. In other industries the rate of change is much slower, but regardless of the industry or industries that your company competes in, the rate of change is a factor that you must have a clear understanding of. Without the predictions you’re only able to surf on the waves of change, whereas the fact of making a prediction creates a learning opportunity that enables you not only to surf, but to steer more purposefully. Your action step is to write down a set of predictions if you have not already done so.


99

Step 2. Performance Goals The next step in designing your ideal innovation portfolio is to identify the growth goals for your organization, both in terms of revenues and profits. Adding together the impact of the rate of change as a process that may reduce your future revenues and the growth goals you’ve set tells you something of great importance, as it indicates how much growth the innovation process must achieve both in terms of overall revenues and profits going forward into the future. In this way the overall mix of your portfolio is very much a topic of design, and cannot be taken as an assumption; it must be worked out as a consequence of the performance that you’ll need to achieve across your business, whether it’s one type of product or service, or many of them. Your action step is to chart your goals so that you have a clear visual model of what you’re expecting your innovation investments to achieve in each of the three time increments.

Step 3: Design the Selection Process A key goal of the innovation process is to gather new ideas, any of which may turn out to become vitally important new innovation projects. To select the right ones without letting your own biases exert too much influence, you need a systematic and orderly method of evaluating ideas and deciding which ones you’re going to invest in, and why. Now that you’ve modeled the external environment and you know what your strategic goals are, you next develop a list of the specific evaluation criteria that you’re going to use to assess each of the innovation projects that are already under way, as well as all new

100


ideas that are proposed. The existing projects need to be evaluated because at the time that they were initiated and funds committed, the decision criteria may have been different than the criteria that are most appropriate today. Developing the set of criteria you’ll use to evaluate all of the ideas gives you a systematic way to do this. Of course the criteria may be different for each of the three portfolios (short, medium, and long term) because the factors you need to use when evaluating incremental innovations that are relevant in one to two years are probably different from those you’ll use to evaluate potential long term breakthroughs. The criteria are grouped into two lists, benefit or reward outcomes, and risks. Among the benefits that you may want to include on your list are: •

Benefit to customers.

•

Revenue potential.

•

Competitive advantage.

•

Fit with digitization.

•

Enhances our brand value proposition.

Other criteria to consider may include “fit with existing products and services,” “fit with existing organizational capabilities,” addressing key customer pain points, accomplishes an important “job” for the customers, or helps the company adapt to accelerating change, etc.

Selection and Targeting: The Customer Value Proposition9 Another way to think about the benefits of any particular idea is by


101

exploring the options that customers have. When buying just about any product or service there are choices that may solve the problem at a variety of prices. If we’re talking about cars, then there’s basic transportation at one extreme, as simple and inexpensive as possible, and there’s complete luxury at the other end. If basic is your goal, you may choose to buy your friend’s twenty year old clunker since he’ll take $500 for it, and it runs. Or if things have been going really well, perhaps you’ll choose the high end Lexus, Telsa, or Mercedes. At both two ends of the spectrum you’ll be driving (as long as the clunker keeps running), but your two experiences would be quite different. Everything you can buy comes with more or less the same options, so we can generalize and say that at one extreme you have a basic commodity, no frills, and at the other you have such a magnificent experience that you become a dedicated customer, loyal for life, and in fact a friend and advocate. You proudly wear the Tesla t-shirt, and you gladly take your friends for a ride and tell them how great the car is.

Value Provided:

CUSTOMER s POINT OF VIEW

differentiation

Transformed Value: Loyal Partner

Differentiated Value: Advocate minimum

Improved Value: Friend

Basic Value: Customer

commodity

Figure 14: The Customer Value Matrix

102


This of course relates closely to the business model matrix we discussed above; as we move up on the matrix, towards more customization and luxury we experience differentiation, whereas when we move down towards the mass market we are purchasing commodities. The figure shows this as a ladder, from a basic value as a customer at one end, to differentiated value as a loyal partner at the other. If we overlay this concept onto the business model map, we can see that the closer to the upper right corner we get, the more the experience is differentiated, and the more intimate and aligned the relationship is likely to be.

non-customized

customization



zone small market

market size

Figure 15: Customer Value and the Business Model Matrix


103

Risk Innovation projects have another side to them of course, the side related to uncertainty and therefore to risk. Five potential risks to consider include these: •

Financial risk, relating to the cost to develop the innovation.

•

Risk of not succeeding, i.e., that the idea simply doesn’t work out.

•

Technology risk, meaning that needed component technologies are not available, or not available at a price that fits the intended scope or market for the innovation.

•

Distribution risk, that your downstream distributors choose not to handle the product (if it is a product), or that your internal distribution system cannot readily cope with the specific requirements related to the innovation. This implies either a potential failure, or at least higher distribution costs that you may be accustomed to.

•

Market risk, meaning that customers simply may not want to buy.

Pause here and make a list of the reward and risk criteria that make the most sense for your organization in each of the three time segments. Once you’ve identified the criteria you wish to use, it’s helpful to format this in a template that can be used digitally or in print formats during the actual process you adopt. You’ll notice in the sample template shown here that in addition to the list of criteria there is a column indicating weighting. Since not all of your criteria will be equally important, assigning a weight to each enables you to reflect important nuances in your evaluation

104


process. Those that are more important will have a higher weighting score, while the less critical factors will get a lower score.

126! Reward8Factors888

Project #!

Innovation Portfolio Evaluation Reward Factors:

Idea or Project Name:

Big Idea Project! Weight

Rating

Score

(1, 2, 3, 5, 8)

(1, 2, 3, 5, 8)

(Weight x Rating)

1. Benefit to Customers

8

5

40

2. Revenue Potential

5

8

40

3. Competitive Advantage

3

2

6

4. Enhances our Digital Presence

5

3

15

5. Enhances our Brand

3

5

15

What are the key external, strategic benefits affecting our business?

6. 7.

116

Total

Risk Factors:

Weight

Rating (12, 3, 5, 8)

(Weight x Rating)

1. Financial Risk

5

5

25

2. Failure Risk

2

1

2

3. Technology Risk

5

8

40

4. Distribution Risk

1

2

2

5. Market Risk

3

5

15

What are the key risks with this idea?

Risk8Factors888

Reward!

(1, 2, 3 , 5, 8)

Score

6. 7.

Total

84 Risk!

Figure 16: The Idea Evaluation Form

Depending on the type of innovation and the specific internal and external context at the time you do the evaluation, the weighting can be adjusted. Significant external changes such as competitors’ initiatives, new technologies, or regulatory changes could alter the overall context and lead you to adjust the weighting, or even to


105

change some or all of the criteria altogether. Note, however, that when you change the criteria you may need to go back and reevaluate all of the existing innovation projects to see how well they core in the new environment. Some projects that used to look very attractive may have become entirely unnecessary, while others that were marginal or even rejected previously may now be essential. We refer to this as “pivoting the portfolio,” and it’s an important task to do when external conditions change. As a detail, note that we recommend that weighting be done using a scale of 1, 2, 3, 5, 8. The purpose of this is to accentuate the more highly weighted criteria, bringing your best (and worst) options into clearer focus. Later, when you conduct evaluations we recommend that you use the same scale (technically, it’s called a Fibonacci scale, named after the Italian mathematician; each subsequent number is the sum of the previous 2).

Step 4: Build the Portfolio Now I’ll describe the process we use to conduct the assessment of risk and reward. The assumption behind this description is that you’re engaged in a process of evaluating a set of ideas, perhaps 10 of them, to decide which ones are worth pursuing at this time. You’re undertaking this evaluation with a group of people in a meeting that could last 2 – 4 hours, depending on the number of ideas that are being evaluated. It’s probably obvious to you why multiple people are involved – you’re looking for a variety of perspectives on these ideas and since each of us brings our own unique perspective and we each have our own blind spots, we want to engage in an open and creative conversation with a lot of

106


viewpoints and possibilities so we don’t miss something important. You may have a standing innovation committee as participants in the meeting, but perhaps you’ve also invited some additional people from your organization who are experts in topics that relate to the specific ideas that are going to be evaluated today. We’ve done this with as few as a handful of ideas and four people, and as many as 100 ideas and 80 people at the same time, and we’ve found that the basic format is flexible enough to work well in a wide variety of settings. To begin, the participants must of course learn about each idea, so each one is presented briefly, followed by discussion until everyone understands it thoroughly. Someone should lead the meeting and facilitate the discussion to assure that the conversation stays on track and the conversation is fruitful. Next, each person does their own, individual scoring for each idea. Each uses a single form to evaluate each idea, so if there are 5 people and 10 ideas, they’ll be 50 pages of data, or 50 electronic forms created. While this isn’t rocket science it is important that the process be followed with discipline, because if you don’t follow a process with rigor then it becomes likely that the process of selecting the ideas to invest in will become skewed by personal bias or preferences, forceful talkers, bullying, pet peeves, or personality differences, and that would lead to less than optimal results. And while it may be tempting to determine the scores for each idea in a conversational setting, rather than having each individual participant determine the score for each idea on their own, we don’t recommend that. (In other words, don’t do it.) Doing the scoring in a conversational setting is likely to cause a lot of information to be lost, and the variety of individual perspectives is likely to be


107

clouded under the social pressure that arises in any group when there is bias toward agreeable dialog that leads to a general consensus. You’ll get much better results, and more genuine reflection of individual opinions, if each individual does their own thinking, and then you compile and discuss their individual scores as the next step. So let’s say you have 10 ideas under consideration, and each person has completed the scoring for each idea. Now it’s useful to have a conversation to explore why people have scored various ideas differently on any particular criteria. These are extremely valuable discussion because they expose differing assumptions. When there’s a difference of opinion, this presents an opportunity for both people to discover something new about their views, and perhaps change their evaluation based on new information they learn in the dialog itself. This is important learning not only as it pertains to the specific ideas under discussion, but also for each individual’s broader perspective on management and change, because of course the underlying context for the discussion is each one’s views on what new products and services will be most successful in the future marketplace. This conversation, then, becomes part of the ongoing dialog about change, and how change is occurring, and the impact it will have on your firm. What you’re discussing are the benchmarks and milestones that you’ve already established, and you’re calibrating the rate of change and assessing its emerging impact, enabling you to track how it is unfolding. Hence, the innovation portfolio design process, and the dialogs that you’ll have in the process of designing and managing the portfolio, become the setting in which your efforts to track change become focused. Here’s where you engage in those critical conversations on

108


a regular basis using a rigorous structure; here is where you will track the cone of uncertainty as the present catches up with the future, and you can see how accurate your predictions have been. Total up the scores for each idea and you’ll most likely see a range of scores, with some clustering. In aggregate, the higher scoring ideas are, in the judgment of this group, the better ones, the ones in which you ought to be investing. But not necessarily. It’s also quite possible that a low scoring idea is the most strategically important for some reason that is not reflected in the scores (it can and does happen), or conversely that a high scoring project isn’t really as attractive as its score may suggest. So while the scores should help enormously with the decision making, a high or low score in and of itself is not the deciding factor.

Score Comparison Matrix 320 T2 F1

256 R1 O3

T4 R2

192

reward rating

R3

C2

C3

C1

T3 128

T5

O1

O2

Big Idea Project 64

0

?

320

T6

F3

256

192

O4

128

64

risk rating

Figure 17: The Score Comparison Matrix

0


109

Once you’ve gotten the set of individual scores worked out and averaged, take the information you just created and plot all the ideas on a single matrix. Label the horizontal axis “risk,” and on the vertical axis “reward.” Each idea is shown as a single point on the matrix at the intersection point of its specific risk and reward scores. High reward and low risk ideas are of course the most desirable, and conversely high risk and low reward are not attractive. Note, however, that as with the scores, the matrix should be viewed as a useful input to the decision making process, but it is never a substitute for managerial judgment. The conclusions you’ve reach here are not definitive decisions about which projects to invest in, but a robust way to get sound input and guidance from a group of people who are qualified to have legitimate opinions, as of today, about the ideas themselves, the future market they would be sold into, and the best investment options for your organization. By tomorrow things could change, and the assessment scores might be different, but you must make decisions each day based on the knowledge you have that day, so using this process enabled you to compare the relative merits of a set of ideas which could even be quite different from one another, and yet to do so in a rational way. As a result of the evaluation process, you’re now looking a matrix that shows how the ten ideas compare to one another in terms of risk and reward. Are any of them so inspiring that you feel compelled to initiate any of the right now? Are there any that address immediate issues or concerns that you already have? How do these ideas compare with the ideas or projects you’ve already been working on? Now your managerial judgment comes into play, as you need to select which, if any, you’re going to move forward with. The specific process we propose for doing that is the subject of the next

110


chapter, Speed, so for this discussion the point it to know which you’re now prepared to invest in and which you’re not.

Portfolio Design Discussion Questions As you work through the innovation portfolio process, here are some general discussion questions to consider bringing up that will help to broaden the conversation and maintain the strategic focus. What are the right innovation targets for our organization? How can we align our innovation portfolio with our organizational strategy? What we should be prepared for in the future that we are not prepared for now? How is the world is changing, how is the market changing, how technology is evolving, and what will the consequences of these changes be for our organization? What capabilities and techniques are our competitors developing that we also need to develop and implement?

Step 5: Success Factors for Ongoing Improvement Managing the portfolio is an ongoing process, and now we’ll discuss some of the critical factors that will help assure its success. The first is to realize that in an innovation portfolio, just as in any other portfolio, some projects will be more successful than others. Some projects, in fact, may fail, and you may need to remind yourself, or others, that in the right context this is both inevitable and positive as long as it’s not a consequence of carelessness or


111

neglect. Unlike most other parts of your business, where failure is considered entirely negative and stridently avoided, failing in order to learn is common in the innovation process. Despite this awareness at the conceptual level, it’s still often difficult for managers, even innovation managers, to recognize that the logic of innovation portfolio management calls for the possibility of failure, and indeed the likelihood of failure, and that this can be very positive when it enables you to discover new opportunities, to identify opportunities that you hadn’t recognized before. As a small business leader this will definitely have a different tone that it does in larger firms because your capital is so scarce, but even so it’s important for leaders to be advocates for portfolio thinking, and to help the others understand the role that failure plays in the overall process of innovation development. Another key factor to recognize is that investment in innovation almost always represents a short-term cost with benefits that (crisis management aside) are likely to be attained only in the longer term. This is directly opposite of how most profit and loss managers are incented, and consequently if you have operational managers, it’s important to separate innovation investment from their profit and loss performance assessments. They probably shouldn’t be expected to invest in innovation projects because it will be a detriment to their performance evaluations, but their input into the process of selecting the right projects to invest in, and helping to guide those projects, should be immensely helpful. Lastly, remember that your innovation investments should be staged and aligned with project milestones. Assume that each innovation project will be funded in small chunks, and each as goal is met you’ll have the opportunity to make a renewed assessment of the quality of the work, and the overall relevance of the idea, before you

112


decide to fund it further. This will also support your agility, and reflect that innovation is a learning process.

Taking Action It should be obvious that you need to engage in a detailed exercise to design and build your innovation portfolio. This will perhaps involve a number of other people, including leaders, managers, and thoughtful people from throughout the organization, and from outside as well. And remember that building and then managing your innovation portfolio is a process at which you’ll improve over time. The first efforts, no matter how unsure, will inevitably lead you in the right direction as your learn how to make the process work for your culture and the specific challenges that your organization faces. Give this time regularly, once each month or two, and allow the learning that will occur to bring its benefits.


113

Chapter 6 Speed

Since we’re obliged to pursue innovation in a competitive marketplace, speed matters.10 In fact, it matters a great deal, for your competitors aren’t waiting, and you cannot afford to allow them to get too far ahead. The faster you recognize new trends, threats, and opportunities, the faster great ideas get discovered and created, the faster they get to market, the faster you earn money, build brand, and extend the relevance and reach of your firm into the future. Weeks or months of delay can be hugely costly, and longer delays can even be fatal. The market is changing, and while the firms that get the right products and services to market most quickly are usually in the best position to gain significant advantage, the ones that wait may find no market space remaining, especially when we account for the compounding of advantages that winner-take-all technology dynamics enable. The issue for you, then, is knowing how to speed things up.

114


You’ve already thought through the dynamics of change as it pertains specifically to your markets, and you’ve come up with lots of ides and figured out which ones are the great ones, and by following rigorous steps to build your portfolio you’ve identified the ideal mix of future products and services for the immediate term, mid term, and long term. Now all you have to is develop them! So in this chapter we will explore a set of specific practices and techniques that should help. Here we describe approaches for fast and efficient teaming, innovation networks, collaborative design, rapid prototyping, the concept of the “minimum viable product,” a-b testing, and agility. Behind all of these techniques it’s worth noting that while you may think that you have to balance between moving too fast and moving too slow, in fact that’s rarely the case. There are precious few examples of innovation too fast, while the vast majority of business failures, the giant mountain of irrelevance and collapse, should properly be understood as a monument to slowness. The trick, of course, is to go super fast without taking the wrong kinds of risk. We will elaborate here.

Fast and Efficient Teaming Teams are the essential motive force of most innovation projects. Innovation almost always involves people working together, integrating disparate sets of knowledge from across the entire range of the firm’s operations, including product, finance, marketing, sales, service, and/or delivery, so you’ll need to have people with knowledge of all these facets involved. However, assigning a group of people to a task and then assigning


115

them a meeting room to get the work done, does not an effective team make. Many teams are entirely dysfunctional, and the reasons for this are many: interpersonal issues, bias, agendas, personalities, unclarity of goals, lack of time, and lack of focus all inhibit their performance and the results. When they work well, teams are well suited to the fascinating intellectual challenges of exploration work, because self-organized team members are likely to be fully engaged and self-motivated and willing to take on and do a brilliant job with the many complex and challenging tasks that are required to achieve innovation success. This is why Steve Jobs said, “My model for business is The Beatles. They were four guys who kept each other's kind of negative tendencies in check. They balanced each other and the total was greater than the sum of the parts. That's how I see business: great things in business are never done by one person, they're done by a team of people.”11 This is of in direct contrast to the unwieldy beast we call “the committee.” Committees are often innovation inhibitors because they represent a form of centralized authority whose deliberations are typically slower - much slower - than the changing markets they are set up to address. For example, during the 1980s when HP was making the transition from being a maker of electronic instruments to a computer company, managers throughout the company saw opportunities to develop new computer products. Soon, however, HP’s name was on a confusing array of different and incompatible machines, so committees were set up to ensure sufficient coordination. What happened then was unexpected, as the committee process brought the pace of new product development to a crawl, and HP quickly fell behind the market. In the words of HP co-founder David Packard, “By 1990, we faced a crisis. Committees had taken over

116


the decision-making process at HP, and decision cycle times had ballooned. For example, one central committee, the Computer Business Executive Committee, was intended to achieve better focus and coordination for computer activities. Instead, it was slowing vital decisions just as our company entered the lightningfast competitive world of computers in the 1990s. In fact, the paralysis was spreading to areas of the company that had nothing to do with computers.”12 The committees were scrapped, and the divisions were freed once again to innovate and compete on the merits of the value they could create. So what’s the difference between a committee and a team? Give the team a goal. And make it ambitious. Give them a deadline, and make it an aggressive one. And make sure to give them the time and resources to succeed. Hence, instead of relying on conventional practice and hoping that people will interact effectively, a team is specifically charged, thus avoiding the common problem that “if everybody is responsible, then nobody is responsible.” An effective team consists of those with the skills necessary to analyze the idea, design usage vignettes, develop early prototypes, interact with the client participants to solicit their input, and promote the idea across the organization to solicit interest, feedback, and participation. These tasks are accomplished through iterative work, each layer of which progresses an idea from its initial state of fuzziness through advancing levels of refinement. Overall, success at innovation requires organizations to develop very high levels of proficiency in forming and managing teams, as these intentional groups may require focused leadership and careful facilitation to work effectively, and it may be up to you to provide it.


117

The Right People One of the downfalls of the business process reengineering (BPR) movement from the 1990s was the expectation that good processes could compensate for less capable staff. Getting the right people wasn’t considered to be as critical to success as getting the right process. Approaches oriented to speed, are nearly the opposite. While some structure and process is certainly needed, attaining speed requires a perspective similar to Steve Jobs, who had no tolerance for anyone less than world-class talent. Either you were A Team material or you were entirely unqualified, although his language was often quite a bit more colorful, replete with terms like “complete bozo” to express his disdain for those who were less than excellent. Jobs had a very clear focus on eliminating bozos and working only with the A players. This is how Jobs expressed it to Walter Isaacson: “For most things in life, the range between best and average is 30% or so. The best airplane flight, the best meal, they may be 30% better than your average one. What I saw with Woz was somebody who was 50 times better than the average engineer. He could have meetings in his head. The Mac team was an attempt to build a whole team like that, A players. People said that they wouldn’t get along, they’d hate working with each other. But I realized that A players like to work with A players, they just didn’t like working with C players. At Pixar, it was a whole company of A players. When I got back to Apple, that’s what I decided to try to do. You need to have a collaborative hiring process. When we hire someone, even if they’re going to be in marketing, I will have them talk to the design folks and the engineers. My role model was J. Robert Oppenheimer. I read about the type of people he sought for the atom bomb project. I wasn’t nearly as good as he was, but that’s

118


what I aspired to do.”13 Allowing C players into the organization was like opening a crack in a dam. Soon, the whole place would be flooded with mediocrity, and great work would become marginalized if not utterly impossible. The whole process slows to a crawl. Without the right people nothing great gets built; without a laser focus on speed, extraneous activities creep in that detract from both quality and timing; and without a useful (but minimal) process framework you’ll inevitably see the inefficiencies balloon, and the level of bureaucracy may soon get out of hand. Getting the right people implies, of course, that you must also get rid of the wrong ones. At a more subtle level, it also means that you need to recruit people with the highly desirable (and therefore elusive) combination of the right technical skills, the innovation mindset, and an additional set of innovation-specific skills which are not so widely understood.

The Right Skills You already know what the technical business skills are: finance, marketing, sales, programming, operations, supply chain, etc., and to attain high speed it’s also wise to engage with people who have innovation skills, like interface design, product design, all of the engineering disciplines, human factors design, and many others. But engagement and speed are not only a matter of attitude and vision. Effective innovation teams also require the right requisite technical skills, a set of talents and aptitudes that are particular to the innovation process, including empathy, listening, observing, modeling, ideating, and acceptance of or tolerance for risk. It’s likely that in the future people will include innovation aptitudes


119

on their resumes, but at present they fall outside of business norms, so you may have to probe carefully when you’re hiring to find people who are proficient in these skills: • Empathy. Success at innovation requires people who see and listen very deeply, a skill known as empathy. Those with high empathy and great observational skills are essential participants in the innovation process. • Listening and Observing. In Chapter 4 we explored the importance of observing how people think and interact, as it enables us to recognize the emotional connections they have with other people, ideas, products, services, and brands. • Modeling. Innovation teams require people who can take a set of observations and extract the essential learnings, the process we call modeling. These are abstract, conceptual skills. • Ideating. People who are come up with ideas, great ideas, creative people, wild thinkers, and people who make surprising connections are all key contributors to innovation. • Risk tolerance. Exploration and experimentation, the foundations of most innovation activities, involve the risk of making mistakes – of failing – and then learning from those mistakes. Those who are not comfortable in this mode of work may not be such a good fit for the innovation effort. These skills are essential, but as they are not the norm in most organizations, it’s important that they be protected so that they can indeed thrive. As Rob Austin and Lee Devin have noted, “Artful managers must also do their part; they must create conditions in which makers can work at risk. Willingness to work at risk is vital in artful making, in part because exploration is uncomfortable.”14 It’s not realistic to expect to find all of these skills in one person, but talented innovation team members may possess two or three of

120


them, and the most successful innovation teams have all of these skills. Once we recognize the importance of these roles, it’s easier to grasp why most large organizations aren’t very good at innovation: most rarely (never?) recruit for these skills, and few compose innovation teams with these in mind. Not surprisingly, venture capital backed start-ups that are more sensitized to the critical importance of innovation often do recruit for these specific talents, and one of the most prestigious training grounds for these skills is in the heart of Silicon Valley at the Stanford University graduate program called the “d school.” “D” stands for design, and the method they teach is called “design thinking,” which emphasizes, naturally enough, empathy, ideation, and prototyping. The lovely book by Idris Mootee explains this quite eloquently. “Design thinking is the search for a magical balance between business and art; structure and chaos; intuition and logic; concept and execution; playfulness and formality; and control and empowerment.”15 Program graduates are highly sought after, and generally have no problem finding great positions in outstanding companies throughout Silicon Valley and beyond.16

Rapid Prototyping17 In the disciplined and structured process of innovation we search for unmet needs and unfulfilled desires, and when we think we find them we have to construct a sort of a mental map that defines why our proposed solution will be better than whatever currently exists. We may use the business model map to show how we’re using this


121

innovation to move up and to the right, or we may use the customer value ladder to show how this innovation provides differentiated value. And once we’re convinced that our idea is a really good one, the next step is often prototyping. Those who can sketch, build, create maquettes, and quickly create elegant prototypes are also essential in helping us transform ideas into possibilities and then into testable artifacts. Prototypers are people who like to make things, and prototyping well is an essential contributor to the speed of your innovation efforts This is where we translate product and service ideas into tangibles that we can see, touch, taste and smell (especially if it’s food), and certainly use. This step is critical to transforming concepts into a workable form that can be evaluated not only for fit with the needs and desires of customers, but also for manufacturability and packaging, or service delivery, as well as for design refinement and cost modeling. A prototype is in fact an experiment, the purpose of which is to determine what works and doesn’t work. The principles of experimentation in the sciences is defined by the scientific method. It’s an activity done to “try something,” and in a rigorous setting every attempt is made in relation to a specific hypothesis about what the outcome will be. The scientist explicitly predicts the result before conducting the experiment, and then compares the results with expectations to discern the validity of the hypothesis. The progress of science therefore comes as a result of failures and successes, where outcomes are compared with expectations, and an explanation for the causal connection is provided in the form of an underlying theory, and then validated through subsequent testing. The predictions you make in relation to the driving forces of change

122


thus constitute the hypothesis; the actual outcomes are the experiment, and the accuracy or inaccuracy is the evidence of reality. The quality of the learning outcome is defined by the prediction > test > result cycle because it forces each person to make their assumptions explicit, and therefore discussable. Edison’s famous experience with the light bulb illustrates the necessity of systematic failure, and also the social myths that grow around it. In looking for the best material for the light bulb filament Edison’s team tested a lot of materials; most of them, of course, didn’t work, or didn’t work well. When he was interviewed later, he was how he felt about “failing so many times.” The journalist was of course expressing the common attitude that an unsuccessful experiment must equate with a failure, and therefore with disappointment, a value-laden viewpoint about the stigma failure and the joy (and necessity) of success. But Edison interpreted the process much differently. They were not failures in his mind, because with each one the research team had learned something specific. Identifying such a difference of perspective, and exploring the underlying values and experiences that would lead anyone to one or the other attitude about experimentation, success, and failure, is exactly the sort of thing that would interest an ethnographer; it is definitely tacit.

Collaborative Design Another way to help a team is to structure its work as a disciplined process of inquiry. To innovate together, people have to work together to apply their intellectual abilities to situations of novelty. Collaborative design occurs when people work together so that their different points of view, bases of experience, and knowledge of the


123

problem and its context can be blended together to yield actionable solutions. Collaboration can involve two people, ten, one hundred, or an entire organization, and it can occur in many settings, and carefully designed and facilitated collaborative processes can lead to comprehensive solutions, in much less time, compressing months down to days or weeks. The goal is to enable 100% of the people to be idea generators and promoters, and to leverage the critical insights of even people who are idea killers by using their healthy skepticism and constructive criticism as creative inputs rather than allowing them to suck all the energy out of the creative process through their negativity. Sometimes it’s also necessary for a team to put a problem aside for a while, giving potential solutions time to incubate. Former Nissan USA design chief Jerry Hirshberg notes, “Disengaging from an involving task, one with which we are not yet finished, does not amount to abandoning it. Quite the contrary. While conscious focus shifts elsewhere, the subconscious continues grinding away, considering anything that comes its away as grist for the mill. And that grist, defined as anything that that can be turned to an advantage, might be found anywhere. Our preoccupied minds will mine any new activity, sifting continually through it for previously unseen connection, for bits and parts to fill the nagging void of an unfinished, unresolved question.” It’s also important to overcome the tendency of people to avoid controversy in group settings, which Irving Janis labeled “groupthink.” Controversy is important in creativity, but group dynamics normally suppress it in favor of congenial interactions because there is strong group pressure not to “rock the boat.” When you’re dealing with complexity, however, rocking the boat is often absolutely necessary, so skillful facilitation can stir things up sufficiently to actually prevent a group from settling for easy

124


solutions that … don’t work. In fact, one study of the group process in a complex problemsolving situation showed that while the group came to a solution very quickly, they almost immediately discovered that it wasn’t really a solution at all, so had to keep working. In total, they oscillated between dialoging about the problem and considering alternative solutions for some time, and along the way they eventually had considered eight possible options before finally deciding that the ninth would actually work.

Innovation Networks18 Most effective organizations function as a combination of centralized hierarchies and distributed networks of semiindependent but connected nodes. Hierarchies are effective for top down, large scale, piloting and implementation programs, but networks are good for innovation because they proliferate multitudes of experiments, testing them in ad-hoc fashion, and distributing the best in self-organizing cascades. A culture of innovation works more like a network, composed of many people from throughout an organization and quite a few from outside of traditional boundaries, including customers, students, suppliers, community members, and even competitors. In successful and vibrant innovation cultures, the number of members from outside is likely to be greater than from inside. Like Amazon, some aspects of an innovation network should come from the center and pervade outwardly. Like eBay, networks allow individuals to interact directly with one another and exchange ideas.


125

Like Wikipedia, networks allow everyone, insiders and outsiders alike, to contribute as peers in an asynchronous way to the creation of something larger, and results in a product is something that all of the users can examine and gain value from. And the network enables subsets of users to form sub-networks to focus for various durations of time on specific projects, so it takes on some of the characteristics of a project management intranet. Creating innovation networks that don’t exist but should, and facilitating existing networks to become more effective, are two key roles for organizational leaders. Networks coalesce around the exchange of something of value, and while trust and self-reliance are the foundations of the innovation culture, the results are produced as a result of exchange. To be effective, network users apply tools to evaluate ideas and idea makers. On eBay, any buyer or seller can see how other buyers and sellers rank – whether they’re trustworthy or not. The community thus evaluates its own members, and the quality of the services and products that they each provide to one another. Amazon enables shoppers to rate products and to rate the value of each other’s reviews. With tools like these it’s easier to find popular ideas based on their interest rating. But popular ideas then become more popular, so to allow backwater ideas a chance in the spotlight, innovation networks also need to employ a capability for randomness. As users browse through idea lists and user profiles, they should find not only with the most popular ones, but also with a random selection of new or not-so-popular ones as well, to bring forth obscure ideas that may have merit. This is because the most useful information in a network is densely interconnected, so if someone comes up with an idea for an

126


innovation, others must be able to see how this idea connects to other ideas and other people. In large networks, individual users are thus not only posting ideas for other people to try out, but also sharing ideas that they intend to experiment with themselves, or ideas they’ve experimented with already. The network isn’t some big suggestion box, but a living, learning record. And the final destination for ideas is at not the feet of senior management, but other members of the network, which includes senior managers not as spectators or judges, but as users and participants.

The Minimum Viable Product In Silicon Valley, and elsewhere of course, new approaches to starting and growing companies are always being tried, and recently a set of principles has been defined by Eric Ries and documented in his fine book The Lean Startup.19 One of those principles is the notion of the “minimum viable product.” That is, what’s the fastest, quickest thing you can put out in the market that would indeed be viable as a product, and which will enable you to learn how potential customers and actual customers feel. Minimum means that you don’t have to load it up with features that aren’t essential, even with features that you know may be needed later on. Viable means that you don’t just trust the judgment of the product design team; you actually put the product out there in the market and see how people really respond to it.


127

A-B Testing Ries also describes the process of split testing, or A-B testing, which simply means creating two versions of a product and testing both in the market to see which is more attractive. A structured series of AB tests can yield tremendous insights, eliminate a lot of guesswork, and neutralize a lot of ungrounded opinions.

Agile: The Scrum and the Sprint In our book Agile Innovation, Moses Ma, Po Chi Wu and I defined an approach to business management and innovation based on the core principle that speed very often wins, that the innovation process must therefore speed up, and that a very fine model for how to do this has emerged in the software development field through a management technique called “agile.”20 Agile is a software development process that was developed by a small team of programmers who justifiably became quite frustrated with the chronic failures of small, medium, and huge software development projects. Indeed, as programs and projects have become more and more complex and ambitious, the failure rate has grown to epidemic proportions. It is a popular sport among technology writers to lampoon the massive and highly visible failures, such as the state of Oregon, which spent $134 million on a health care insurance exchange before giving up on it, the US Internal Revenue Agency that spent $8 billion on a project that was abandoned, and a $600 million baggage handling system that was built for a new Denver airport that never worked. While the creators of agile technique may not themselves have been directly involved in those specific disasters, they certainly had experienced the deeply frustrating techniques used to manage big

128


projects that so often led these projects astray. This is a profoundly important insight that must be emphasized – traditional project so often fail because of how they are managed. Hence, it’s not a failure of the people, it may not even be a failure of the underlying idea, or the goal, nor is it even a misperception of the customer need. It’s the very way that the work was organized that causes the projects to fail. Their obvious conclusion was that work must be organized in a different manner. Simple, actionable, and profound. But how? Aha, the multi-million dollar question! The inventors of agile came up with a powerful set of tools, a compelling how, and one that works. They realized that it was the traditional techniques themselves that resulted in the failures: the very methods for managing software development were just plain wrong, and were creating the opposite of the intended results. Instead of great work, traditional management produced boondoggles. Instead of on-time deliveries, they got massive delays. Instead of reliable budgets they got huge cost overruns. Instead of success they got failure. And it was not just an isolated few projects that went bad; it was a trend across the entire industry that extended across every geography where code was being written, and which endured for decades, only getting worse and worse as projects became more critical and more massive. Huge, essential infrastructure project collapsed – health care, infrastructure management, public administration, etc. etc. And so they set about to create a better way. The solution they


129

invented they called agile, because they knew it had to be fast and efficient, and now it’s being used more and more widely for the very obvious reason that it works stunningly well. However (and there has to be a however in a story like this), implementing agile requires some tradeoffs that are operationally and conceptually challenging for those who manage software development projects. Specifically, in order to make agile work, managers have to give up the usual techniques they use to control these types of projects, and instead to trust a process that is largely self-organizing and self-managed. Of course this is exactly what programmers want – to be left alone to write great code. But it’s definitely not how managers are accustomed to working. After all, what job do they have if every project largely runs itself? Nevertheless, the bold and the brave have proven how well agile works, through indices like development times cut by half or more, and quality double or better, and failure rates negligible, not on every project, of course, but on a significant and impressive majority. The underlying discovery, of course, is that need for management oversight is precisely the factor which leads to the failures. The instinct to control, that is, becomes the fatal attraction. The essential work of agile is done by a team of people called a scrum who work in a process called a sprint. These are the two core elements necessary to organize people to achieve goals that require highly coordinated team work in complex problems where there is value in speed (and there is always value in speed). So of course this is relevant for you, the small business leader who is setting out on the innovation journey, because you can easily and very successfully create innovation scrum teams and organize their

130


work into innovation sprints to bring impressive speed to your own innovation process. In case it’s not obvious, I should mention that agile borrows the notion of the scrum from rugby, where it refers to an ordered formation of players who lock arms, put their heads down, and push forward against players from the other team who are doing the same thing. Scrums occur frequently during a rugby game, as they are one of the main elements of a typical contest. Teams are considered superior because of their strength in the scrum and thus their capacity to push forward against enormous obstacles, i.e., the other team that is pushing back nearly as hard. Similarly, the word “scrimmage”, derived from the word scrum, describes a basic concept of American football, where the meaning is the same. In American football, the starting point of every play is the “line of scrimmage.” Scrum is a useful metaphor for software development teams who “puts their heads down” and blast their way through writing a given module or section of code, all the while striving toward a final product which may be larger and much more complex, but which has been broken into addressable increments. As you look to design your innovation process, you’ll naturally give a lot of though to who ought to be on the scrum team. Please pay attention, then, to a key element of the agile process, for they’ve done something profoundly smart here – they include the customer in the scrum. Brilliant thinking, that, because what the customer brings, of course, is the intimate knowledge of their own needs, the deeper context in which an innovation must become relevant. Any product specification, or software specification for that matter, no matter how detailed, can never capture the full scope and extent of that context, largely because so much of the necessary


131

information is hidden, unarticulated, unrecognized. The customer, however, lives inside that context and knows it not as an external, intellectual concept, but rather as a fundamental aspect of their own existence. Consequently, a customer knows instantly and intuitively when a given function or feature or element is essential, and when it is extraneous. So including the customer as a member of the scrum team is a clever way to assure that this essential knowledge is constantly and immediately present throughout the process. Another of the key features that distinguishes agile from traditional long-cycle, large scale software development projects is that scrum teams organize their work into short segments that generally last two to four weeks each. These segments are short enough to be termed a “sprint,” a short foot race that is a contest of speed, as compared with a longer race such as a 10,000 kilometers (10k) run or a marathon (26.2 miles), which is a test of endurance. The sprint is thus one short portion of a much longer process, a single play in the midst of a longer contest. A sprint is long enough to make meaningful progress, but short enough to sustain clear accountability, maintain focus, and identify and achieve specific deliverables that are already meaningful. While mega-software projects are very much like marathons, or even 100-mile long ultra-marathons, agile sprints consist of small, digestible portions. And since agile projects are broken into sprint increments, a typical large project may require dozens of sprints to reach completion. Hence, instead of running the marathon in one continuous race, it’s like a marathon composed of 26, one-mile long races, or 104 quarter-mile sprints. What are the advantages of that? First, because a given chunk of work is expected to be completed in

132


a series of sprints, the work process can more readily be controlled. At the end of each week progress is assessed, and plans are adjusted based on whether the scrum team did, or did not, get to their goal for that period. This ensures constant feedback, which allows the opportunity to fine-tune the process from sprint to sprint. Is someone on the team doing exceptionally great work? What are secrets that the rest of us can learn from that person? Conversely, is one team member lagging consistently behind? In that case, what do we need to do to improve their proficiency? When the results of each sprint are there for the entire scrum team to see, fully evident, fully documented, and fully transparent, procrastination is not tolerated. Second, teams can track their progress sprint by sprint, and readily assess incremental progress toward the final goal. This is important because, in classic (and failed) software projects, programming teams often fall into the trap of telling themselves that “they’ll make up the lost time later in the year (or next year).” In reality, these projects tend to fall farther and farther behind. Ironically, the underlying complexity and massive project management overhead obscure these realities, reducing accountability. The concepts of the minimum viable product and A-B testing are relevant here, as they provide guidance for what each sprint may be designed to achieve. It’s makes a lot of sense to design a work process to get to the MVP as fast as possible, knowing that other layers of detail and functionality will be required if the MVP is indeed viable, that is, if customers like it. And if they don’t like it, it’s easier to shift directions, or abandon it entirely, and thereby save precious resources. Third, since each unit of completed work is done in collaboration


133

with clients or customers, the scrum team receives valuable feedback directly from actual end users while working collaboratively with them. This process optimizes learning about the value proposition and thus enhances the pursuit of viability, while unpleasant surprises are reduced or eliminated altogether. No client of an agile project was ever “shocked and dismayed” by the final results, because they were right there with the team, step by step. Doesn't this sound like the way innovation projects should be pursued? Exactly! So while the variety of activities in a typical innovation project will likely be far greater than in an agile programming effort, the principles and the practices are entirely consistent. Innovation projects can be organized into multi-week sprints, during which specific deliverables are planned and expected to be accomplished, and the work is managed accordingly.

Uncertainty Given the high degree of uncertainty inherent in innovation projects, at any point in the process three possible outcomes could result: •

The completed ideas-become-innovations will be brought to market, if the feedback shows that they constitute compelling value propositions in the market.

•

Some ideas will be discovered to be lacking in some fundamental aspect, such as insufficient market need or demand, or insufficient functionality. These will be set aside, archived, and we’ll move on to other ideas, having learned all we can from this experience.

•

Some ideas will remain promising, but the timing for their

134


introduction seems to be poor. These we will set aside for consideration another day. There are only three possible outcomes: success, abandonment, or postponement. The problem, of course, is that at the outset, we don’t know what the fate of a given idea will be. Those we consider at the outset to be “best” will get resources, time and effort precisely to figure out what we do in fact have. Further, a key principle embedded in agile and in innovation is that the problem being addressed may not at any time in the process be fully understood or defined. Innovation projects constantly deal with this exact form of uncertainty, and the more ambitious and farreaching the goal, the more likely it is that the problem itself may remain undefined, and sometimes undefinable, even as progress is being made. Consequently, innovation teams must create a learning system much like the agile sprint, an iterative process through which problems can be defined in progressive levels of detail through multiple iterations of work. Technically, however, each problem is not being “defined,” but rather it evolves into creation. And thus in our experience, the first major act of any significant creative process is precisely the creation of the problem. The process of solving problems through the act of design begins with vision. “A compelling vision, well expressed, is one of the most powerful of forces in human society. It sets up the contrast between what is and what could be, and in this contrast emerges a driving force, a compelling motive. This contrast is the source of creative tension, the energy that drives visionaries, whether they are artists or scientists or entrepreneurs or educators; missionaries or


135

presidents or revolutionaries or parents. … If you do not somehow take action to fulfill the vision, it will remain in the vague and distant future, inconsequential. But once the quest for fulfillment is begun, this vague future is given distinct shape and form in the present and offers possibilities that once were only dreamed of. In this regard the fulfillment of a vision transcends time. The vision and its contrast with the current condition has, in effect, created a problem.”21 Because customers are essential participants in both the Agile Software and the Agile Innovation processes, the results of sprint efforts are tested rigorously and repeatedly in real world environments where customers experience what we offer and evaluate and give feedback. Hence, uncertainty is gradually replaced by awareness and knowledge of what works, as well as what does not work. Both types of knowledge are highly valuable. The intent of the innovation process is to transform ideas into working prototypes and their associated business models, and to do as fast as possible.

Taking Action Once you’ve identified some promising projects, put a team together and set an ambitious goal. Then give them a lot of support and coaching so that they can begin working productively. Encourage speed, which means that you may have to remove obstacles that impede them. Remain open to feedback and suggestions, and make sure that everyone knows that learning is essential and that fast failures are preferable to slow ones.

136



137

Chapter 7 Engagement

The possibility of innovation is born when people transcend the beliefs that limit their thinking, and engage in the search for new and better ways. When people are doing this consistently and throughout your organization, you will see a pattern begin to emerge which you will discover is the dawning of the innovation culture.22 This will happen when there is a commitment to the view that everyone in your organization can make real and meaningful contributions to the innovation process. And everyone can, in fact, be an innovator, and part of your job may be to make them believe so, because in company after company it has become conclusively apparent that strong and focused leadership is absolutely required to bring forth and develop innovation on a consistent basis. And rarely, if ever, has a great company emerged from indifferent leadership. However, the notion “culture” as a quality that describes an organization is experiential and emergent, meaning the emerges

138


through action and behavior, but it’s not a quality that comes to life due to a decision that it ought to. Indeed, no one can mandate a particular type of organizational culture (“the beatings will continue until morale improves”), leaders do create the conditions in which it may emerge, and thus it is in creating such conditions that the role of leadership is defined. As Lou Gerstner wrote about the transformation of IBM, “Management doesn’t change culture. Management invites the workforce itself to change the culture.”23 Culture change comes about when the beliefs and behaviors of many people, including the leaders as well as many others, become aligned around intent, values, and action. All three matter, and deeply: without intent there will certainly not be innovation; without the contributing values there will not be innovation, and of course without the requisite actions there won’t be innovation either. Hence, the existence of an innovation culture is not something that leaders can insist upon, but rather a sensibility that you must evoke and nurture. Begin by setting the example of your own behavior, by consistently sharing your views on the importance of innovation, by constantly promoting the value of innovation, and especially by making business choices that favor innovation, even when those choices are difficult ones. One of the key choices that leaders must make is to set aside their own egos and to adopt instead an attitude of support. Egotism and behaviors that often accompany it, bullying and manipulation, will squash the spirit of innovation, and will in fact lead to the opposite kind of culture, anti-innovation.


139

People Are the Core People are naturally at the very core of everything involving innovation. People (not computers), have ideas and visions about how the future could or should be different. People choose the best ones to invest in. People develop them, transforming rough concepts into precise objects, processes, practices, and ultimately into products and services that other people, as customers, are the ones who buy (or not). As we saw in the previous chapter, most aspects of the innovation process involve the work of people organized into teams, and while we must not discount the role of individuals and their creative thoughts and inspirations, the bulk of the work is teamwork because innovation is inherently complex in its nature, and multidisciplinary in its realization. But as we as also noted, even self-organizing teams are not leaderless. A crew needs the helmsman to steer the ship in the right direction; a symphony, and even a quartet, needs a conductor or a leader; a basketball team needs a point guard, all for the same reasons. Hence, fully engaged and self-organizing teams aren't characterized by a lack of leadership, but rather by a certain style of leadership. The right style for your organization depends on who you are and who the team members are, there are consistent themes that recur across many different types of personalities. You can probably make your own list based on your own observations of innovators you’ve met and worked with in the past; our list includes openness, honesty, and sincerity, of course, as well as curiosity, patience for results to emerge, as well as the impatience that drives the process forward.

140


No matter which specific qualities you feel are most important, the innovation culture as a whole emerges, again when people see their company as an innovator, when this is how they identify themselves, and when they feel that preserving, protecting, and practicing innovation is an essential part of their own selfexpectations and of their behaviors. Once achieved, success at innovation is thereby reinforced, and becomes a self-sustaining cycle of attitude, action, and result.

Full Engagement in the Innovation Culture While senior leaders cannot dictate any particular sort of organizational culture into existence, by putting the following key elements in place they can help significantly to bring forth the depth of engagement that characterizes the innovation culture. These actions focus on getting the right people and developing the necessary innovation-related skills, which we discussed in the previous chapter, and by engaging them in the right roles. We’ll discuss these roles here. Over the course of many years of focused work on innovation, we’ve come to recognize that effective and consistent innovation accomplishments (meaning not just a happy, one-time accident, but consistent performance over the long term) occur where a corporate culture exists in which three specific roles are well understood and well expressed. Hence, in addition to the agile processes related to portfolio management and speed, and in addition to creating teams with the right mix of technical expertise and innovation skills, there’s also a third dimension through innovation must be proactively managed, and this is in the way you define the major roles in the innovation process.


141

The three essential roles are: •

The creative genius, who displays the technical and innovation skills mentioned above, including empathy, observing, modeling, and rapid prototyping.

•

The innovation manager, who can also be thought of as a facilitator, coach, or champion, and who keeps the innovation effort moving forward from day to day.

•

The innovation leader, the senior leader’s responsibility to provide vision, a sense of urgency, resources, and policies that support and enable innovators.24

This definitely does not mean that each individual can play only one of these roles; in fact everyone in the organization may be a genius, and a manager, as well as a leader. However, the three roles are fundamentally different, and while any individual can indeed play all three, they shouldn’t try to do all three at the same time. When you’re actively engaged in the creative process you may be participating as a creative genius, but during other phases you may be functioning as an innovation leader or manager. Confusing the three leads to dysfunction, and diminishes the quality of the results.

Creative Genius The essential distinguishing characteristic of a creative genius is the capacity to see what others do not see, to uncover secrets through empathy, observation, and ideation that no one else has found. Examples certainly include iconic geniuses throughout history, such as Leonardo da Vinci and Thomas Edison, who saw the world in new ways and discovered concepts, facts, and principles that others had not seen. Creative geniuses explore incessantly, ask questions constantly, and

142


are driven by their curiosity to understand the world more deeply. This curiosity often leads them to recognize issues and problems that others have ignored or passively accepted, and then to envision how the world could be better. The difference thus created between their visions of future possibilities and what they experience in reality is the source of creative tension that then drives them forward in pursuit of the vision. Thus, creative geniuses commonly ask questions like “why?” and “what if?” and take creative risk in the quest for satisfying answers. Many are fearless and inexhaustible in the pursuit of solutions to the complex problems that they’re curious about. They may also be quite disciplined about this, gathering research, rigorously developing models that explain complex realities, and endlessly exploring new ideas and possibilities. This innate creative process matches very well with the process of conducting research, and of course it’s invaluable during the pursuit of innovation. However, we’ve also noticed that some creative geniuses can be difficult to deal with. Perhaps this is because they’re so focused on their own curiosity, their own ideas, and on the questions that particularly interest them, and as result they sometimes neglect polite conversation or social convention. This is one of the dynamics that can creep into innovation teams, and it must be closely managed, as creative individuals can be tremendously valuable but sometimes annoying, and it’s critical to prevent annoyance from ballooning into polarizing anger. Since creative genius is so tremendously valuable to organizations precisely because the qualities and characteristics that make the work of creative geniuses so important, they may need to be supported in a unique and specific way so that they can remain as contributing members while avoid creating extra frustration for themselves or for others.


143

Another great characteristic of creative geniuses is that they’re also quite willing to fail at any given time as long as they feel as they’re on the road to success. We remember Thomas Edison’s experience developing the light bulb, which required perhaps 10,000 attempts to find a filament before success was achieved. Edison himself didn’t experience those as failures, and own comment about that process was very revealing. He supposedly said, simply, “We learned 9,999 ways not to make a light bulb.”25 For Edison, this process of “learning with certainty” was a necessary and satisfying result, where others may have seen egodamaging failure. Such persistence is also characteristic of the creative genius, and is a highly desirable attribute for the people on your team to have on when you’re grappling with difficult problems. Hence, you’ll want to recruit many creative geniuses to your organization, and you’ll also have to guide and support them. Those are key roles for innovation champions.

Innovation Champions The second key role to support the innovation culture is that of innovation manager or champion. We’ve also called this person the coach or facilitator; all of these titles are valid. Champions play the role of conductor, captain, and scrum leader, which they do by opening the way for others, by organizing and supporting the innovation process, and by providing the right tools and infrastructure so that others can be successful. This is not, however, a champion in the sense of an Olympic recordholder, the one and only best athlete, but the older and less selfcentered concept of one who selflessly serves and represents others,

144


such as the way a Medieval knight or champion was expected to do service to his king, lord, or lady. Champions in contemporary organizations are often are middle managers who serve as the bridge between senior managers working at the strategic level, and others who work close to or directly with customers. Their job in this situation is to understand the realities of the marketplace, the specific needs and desires of customers, as well as the organization’s overall strategic direction, and to serve as a conduit of information and guidance in both directions. And a great thing about being an innovation champion is precisely because they have both the strategic and the operations perspectives, they can work around or eliminate entirely the constraints that limit the performance of the organization. Hence, they know when and how to modify the rules in order to pursue and achieve innovation goals that are so important and so valuable that rule-breaking in the pursuit of the right goals is justified, especially when we recognize that the point of the rules it to facilitate the work (the innovative intent), not the other way around (the bureaucratic imperative). In a project focused role, innovation champions contribute to success in these essential ways: •

• •

Keeping innovation teams fully engaged in their commitment to speed and results. Focusing teams on accountability and delivering results Supporting groups of individuals to function well as a team Helping all individuals develop their own capabilities Providing teams with needed resources while removing roadblocks Coaching teams and customers Orchestrating a team’s rhythm

•

Helping teams connect their work with organizational

• • • •


145

priorities and strategies Hence, the essence of a champion’s role lies not creating Gantt charts or status reports (although those are still needed); it is being focused on creating and facilitating high-performance. After assembling a great team of people with the right combination of experience, talent, and aptitude, you may also have to spend some time managing team alignment. As we mentioned in Chapter 5, even if every member of the team is a bona fide genius, or especially if they are, then the potential for conflict due to clashing egos and complex, “team-destroying” interpersonal issues remains. Acknowledging this possibility is a first and perhaps most important step in avoiding it. Dealing proactively with it is the next. In fact, this role is so important to success that it deserves an entire chapter, which will follow after we describe the third critical role in the innovation culture, the innovation Leader. A very useful skill for the successful innovation champion to possess is a systems thinking perspective. The most successful champions are capable of making the critical links between the purpose of innovation and the process of achieving innovation in a comprehensive way, connections that are critical to obtaining support and to ultimately creating value. Hence, the innovator is often a generalist with experience across many fields and disciplines, rather than a specialist with a deep expertise in only one.

Innovation Leaders The third essential role is that of innovation leader, which is probably you. This person looks to the future and engages the entire organization in the quest to achieve the goals, the vision, and the

146


better ways that are defined by the organization’s strategic objectives. Leaders are those who set policies, who determine, for example, how much capital is going to be invested in the innovation effort overall. They provide guidance, and may be the final decision makers who decide the right balance between investment in incremental innovation and investment in breakthroughs and new business models. They also set goals, establish the innovation targets, and define many of the specific accomplishments that the organization should achieve. And like champions, they constantly work to keep people fully engaged in the commitment to and effort to create innovation, as they know that without full engagement, innovation just does not happen. Leaders will also articulate their expectations for the innovation process and for the broad participation of people throughout the organization in its long and fascinating journey. However, one of the most important roles for innovation leaders, if not the most important, is to set the tone by their own example, demonstrating their commitment to the innovation journey by passionately inspiring and encouraging, sometimes requiring other people participate in the process. Many innovation leaders have also found that celebrating notable failures and the learning that results is a very positive message for the organization to receive. At Tata Group, for example, which is one India’s greatest corporations, the annual worldwide innovation contest attracts dozens of teams from all the company’s dozens of business units to share their successes and to compete for acknowledgment. In recent years, the company added another category to the innovation awards program, a category called “Dare to Try,” which acknowledges and celebrates notable ideas that were not successful - failures, in other words. When Tata Chairman Mr.


147

Ratan Tata stands up in front of the annual ceremony and announces the winners in the Dare to Try category, he sends a powerful message throughout the organization, reaffirming that intelligent failure is necessary, appreciated, and valued. From such actions, and in such a culture, it is quite easy to see the seeds of greatness emerge. Support for the innovation process thus requires leaders to accept and acknowledge the value of intelligent failure in innovation. A culture in which it’s safe to fail, both as a matter of policy and as a reality of daily life and work, allows and encourages people to explore their own ideas, and to follow these ideas wherever they may lead. Any sincerely achieved outcome, whether initially labeled as success or failure, is recognized as valuable since what is learned from all thoughtful efforts achieves the growth of knowledge that leads to success. Together, the three roles played well compose an effective organizational approach upon which the right people with the right skills can set on an engaged course to discover and to create the future. In its fullest expression, the innovation culture is a profound accomplishment and the basis upon which future successes can be built.

Innovation Culture Metrics As you work to develop the innovation culture in your organization, and to evaluate its performance, one of the most important metrics to consider is the one we already explored: speed. Applying the principles and practices described here should lead to a significant acceleration of innovation project completion, steadily faster year after year.

148


Your organization can also get faster and better at turning ideas into completed innovations that deliver value in the marketplace, and over time you should expect to see an increasing number of people who are participating in the innovation process across all phases, from research to idea gathering throughout development. In engaged organizations, innovation is the cool, exciting place to be, the enthusiastic hope for the future, and eventually everyone will want to join in on the fun and the satisfaction that comes from it. That spirit will contribute enormously to achieving your end goal, which of course is innovations that generate stunning revenues and handsome profits and organizational vitality and longeivity. You should also expect the quality of the innovation contributions of each person to rise. The capability of individuals, teams, departments and entire business units will improve, and as the ongoing performance of the organization and its innovation efforts thrive at the same time, the much sought-after virtuous cycle will result. The quality of the ideas that are being shared should also improve. As people learn, they naturally recognize business opportunities that are less obvious, and they can propose better opportunities for both incremental and for breakthrough innovation possibilities. Overall, the goal is constant improvement, continuous and valuable learning that is applied and transformed into positive business outcomes. While the focus is on the actions needed to meet the challenges of external change, the larger goal is to perceive change as an ally, to embrace new mindsets that will yield increasing value for the company. This is the ultimate benefit of developing an innovation culture in your organization and is potentially a massive return on the significant investment of time and effort.


149

Taking Action In general, it’s really easy to see the strengths and weaknesses of others, but difficult to get a clear view of your won. To gain a deeper understanding of the culture of your own organization you’ll therefore need to step outside of it and look back to see what’s really going on, how people are relating to one another, where the tensions and dysfunctions are hidden, and what’s working really well. Such an assessment can then help you to target the improvements that will result in strong performance across all three of the critical roles.

150



151

Chapter 8 Leadership

As you, the leader/entrepreneur, embark on the pursuit of innovation, there are a handful of your personal skills and talents that will contribute enormously to the success and joyfulness of your journey. These skills are of course not just specific to innovation, and as a successful business person you probably already have well-developed capabilities in many of these areas. Nevertheless, it’s well worth spending a few minutes to review the key abilities where your refined skill set will result in enormous benefits. We will look not only at the critical skills you’ll need to be successful as an entrepreneur/innovator, but also at the team of people who will work side by side with you to transform the promise of innovation into the reality or revenue and profit growth. Perhaps it’s not a surprise that these skills are the ones that we also recommend for anyone who has the role of Chief Innovation Officer, an emerging job category that has become common among larger companies that also recognize the importance of the commitment to and pursuit of innovation. Hence, the following

152


overview is adapted from our book The Chief Innovation Officer.26

Generalist Creating innovation is a complex process, and managing it effectively is therefore also complex. An effective leader works across many disciplines, consequently requiring knowledge and the capacity to dialog across a range of technical and interpersonal topics. Hence, as I noted above, you may well come to this work not as a specialist in any one discipline, but as a generalist who is competent, but not necessarily expert, in any one of them. Because you’ll be working closely with people from many different parts of your organization, and with more who are outside the organization and who will contribute their thoughts and ideas to the work of creating innovation, their expertise and their questions and their opinions all have to converge and align to make innovation happen, and consequently you’ll often find yourself in the role of communications bridge, translator, integrator, and occasionally peacemaker. Here, therefore, are some of the skills you’ll probably need to develop and utilize along this fascinating journey.

Leader What is your leadership style? It’s an important question, as your leadership is essential to the success of your firm’s innovation efforts. Through your leadership you’re helping to define and institute the language of innovation that’s used throughout your organization, and to develop the culture as well. You’re actively involved in teaching the language so that everyone shares the same understanding of what innovation means. Shared language is a critical element in the development of


153

organizational culture, and since the effective innovation process consists of more than a few principles and practices that may be contrary to what some have long believed and practiced, taking an active role in spreading knowledge of the right methods is a necessary and ongoing investment. For example, let’s talk about a dramatically powerful little word that often has huge impact on the individuals, teams, and departments throughout your organization: failure. Is failure a stigma in your company? It certainly is in many. Failure is bad for business, bad for profits, bad for brand image, and really bad for careers. But as nearly everyone recognizes, failure is not only good for innovation, it’s necessary. Sound innovation management calls for aspiring innovators to embrace failure, intelligent failure, that is, because they can learn so much from it. The objective is to fail in the right ways, in learning situations that don’t the brand or the bottom line, which are failures in labs, in prototypes, in mock-ups, in concepts, where they tell you so much about what works and doesn’t work. In the innovation process, in fact, it’s entirely the case that the faster you fail the faster you succeed. Hence, there are some language issues to address around innovation, and in addition to “failure” there’s a long list of words and concepts and practices to become conversant in. Terms such as “innovation” and “creativity” need precise definitions, as do “innovation portfolio,” “empathy,” “observation,” and “business model,” to name but a few that we will have mentioned already. Additional dimensions of your leadership role will include your key efforts as a communicator about the purpose of innovation and about the process itself, a point that we’ve elaborated on throughout

154


this book. In addition, there are roles and skills related to factors as diverse as learning, curiosity, asking questions, and analyzing, as we will explore below.

Learner A leader’s job perhaps above all is a learning job, so a great interest in and love for learning is one of your most important qualities. This may sound simple, or obvious, or trite, but in fact learning is a complex undertaking, and not everyone is good at it; to succeed you’ll need to be very good at it. The learning that you’re responsible for is not yours alone, but rather the learning of the entire organization as it pertains to innovation, and this is neither a simple issue to define nor a simple one to accomplish. So what, exactly, is learning? In our brains, learning means that change is occurring, because the brain is literally wired together as a collection of connected neurons. The connections are not random of course, they’re purposeful, and new connections are made when learning occurs, while old connections may simultaneously be severed. We can say, then, that learning occurs only when the existing structure of the brain’s neural connections are not adequate to meet the situation, and an investment (a physiological investment that is) is required to create new neural structure, new connections. Conversely, when non-learning happens (that is, when a repetitive action has occurred that did not require learning), it tells us that the situation at hand required knowledge or skills you already had, and the existing wiring of the brain was sufficient to the situation. While this is literally what’s happening, it seems also to be a powerfully apt metaphor for the way that organizations also seem to be wired for repetition, for doing the same thing over and over.


155

They too commonly resist making the necessary investments in new connections because this appears to be an unnecessary cost. Too frequently, however, such a decision is revealed to be an error; the world has changed, and we needed to learn how to do something new, but we didn’t. Business failure is the common result after too many of these wrong choices In more common language we would call it a failure to innovate. Here we list some companies that have been afflicted with this malady in recent times: Kodak (bankrupt) Nokia (devastated by the smart phone; sold off to Microsoft), RIM (barely hanging on), Sears (didn’t keep up with Wal-Mart), GM (bankrupt a couple years ago, following which a massive and very fast learning phase ensued), Circuit City (didn’t keep up with Best Buy’s changes), etc., etc. These were all learning failures writ large. Learning at a more modest scale for the individual and for the organization requires that the brain, the people, and the organization do things differently, that they consider new information, develop new patterns, understand new experiences and new processes. This is work, and in the interest of physiological efficiency your brain avoids it when possible, as it requires the investment of precious energy and attention. In the interest of operational efficiency your organization may also wish to avoid it, which it does at its own peril. In contrast to this pattern, admittedly oversimplified, the learning brain is constantly changing, constantly adapting itself and its structure to integrate new information and new experiences into the old worldview, into the old perspective. Some people, naturally creative people often, view this investment not as a burden, but largely as a pleasure; they like to think hard, and for a long time, about interesting and tough problems.

156


Here’s an example: it was reported that Bill Gates once took a vacation with his girlfriend in the days before he was married, and they supposedly watched videos about biotech and genetic engineering for an entire weekend, more or less nonstop. It takes a unique sort of person to consider such a weekend, “a vacation,” not to mention the sheer intellectual stamina that must have been needed. Then again, what did Gates achieve in his life? A penchant for learning indeed! And the willingness to engage in absorbing new information, rewiring his own brain. You’ll have some of that skill as a successful leader. A whole weekend of science videos? Maybe not. But maybe. Possibly. Yeah, go for it. As a business leader, your learning responsibility isn’t just about yourself, for in fact you have to inspire and help the entire organization to be a learning organization, to make that investment in seeing what is already different, what may or will be different in the future, and what else can and should be different as a result of your own efforts. There’s an aspect of this conversation about learning that’s important to be aware of because it may have some significant impact on your relationship with other members of the executive team, particularly if they’re in their fifties or sixties. Consider the following comments from psychiatrist Norman Doidge: In childhood, our brains readily shape themselves in response to the world, developing neuropsychological structures, which include our pictures and representations of the world. These structures form the neuronal basis for our perceptual habits and beliefs, all the way up to complex ideologies. ... these structures tend to get reinforced early on, if repeated, and become self-sustaining. As we age ... it becomes increasingly difficult for us to change in response to the world, even if we want to. We find familiar types of stimulation


157

pleasurable; we seek out like-minded individuals to associate with, and research shows we tend to ignore, or forget, or attempt to discredit, information that does not match our beliefs, or perception of the world, because it is very distressing and difficult to think and perceive in unfamiliar ways. Increasingly, the aging individual acts to preserve the structures within, and when there is a mismatch between his internal neurocognitive structures and the world.27 Doidge’s very fine book The Brain that Changes Itself examines the ways in which the brain changes and adapts to new demands and circumstances. In the passage quoted here, Doidge refers to the work of Bruce Wexler in his book, Brain and Culture.28 Both books are invaluable resources for the innovation practitioner, for reasons that the above quote should make entirely obvious. Here you are, deep in the pursuit of innovation, fending off the naysayers and the opponents of change, and there they are, dismissing your great work because it does not match their beliefs. How many examples of corporate suicide can this neurocognitive pattern explain? Can it explain why Kodak, which invented the digital camera, was also destroyed by it? Can it explain why Nokia, masters of the world cell phone market, was brought down by the smart phone? Can it explain why Sears, the greatest global retailer in its prime, is now an also-also ran sucking Wal-Mart’s exhaust fumes? We cannot know for sure, but I believe that in fact the neurolimitations of senior managers may indeed be responsible for a great many of the corporate failures of the modern world. The inability to come to grips with change, the incapacity to adequately support innovation, and the resulting crash of creative destruction, it is entirely plausible that these can be explained by the cognitive limitations of senior managers. So what does this mean? Our theme in this section is learning, and

158


the ideal innovative organization is constantly engaged in the learning process in direct contrast with the learning-disabled. Leaders of innovative organizations are constantly engaged in seeking and finding new information and new experiences, and integrating them into ongoing operations, which activities are also central to the search for innovation. There’s a paradox here, for although you, as leader, do indeed have a responsibility to learn for the organization as a whole, it’s also true that you literally cannot learn for someone else; everyone, each individual, must have their own learning experiences. So part of your role is to define, create, and structure opportunities for people to engage with new information, to understand the meanings, consequences, and the implications of that information for their roles and for the organization as a whole. Based on Doidge’s work, we see that it is especially important for you to create and deploy such learning experiences for your colleagues on the senior management team. In the language of the pertinent and powerful discipline called “accelerated learning,” which is focused on understanding how people learn, and how to help them learn more efficiently, we refer to a concept called “experience first, label second.” What this means is that each individual must have their own experiences, and based on these experiences we can then help them to organize and structure their own personal library of knowledge. We do this by providing labels or patterns or models that explain what their learning could mean, and how those experiences fit into a larger whole, into a larger framework. The point of “experience first, label second” is that learning occurs most readily when we enable or allow people to have the experience first, and only afterwards provide them with the label which pertains to it. In this way, they actually do learn. In contrast, label-first – experience second often truncates the learning process as it is a great temptation to just


159

memorize the label and forego the experience entirely. The common school room question, “Is this going to be on the test?” is an artifact of the label-first teaching model, in that the experience itself is devalued and the focus of the effort is entirely on meeting an external validation requirement rather than on the intrinsic value of the concepts that are the ostensible purpose of the entire activity. In the brain that has been “taught to the test,” any real or enduring capability has been sacrificed to conformity, leaving the individual lacking depth, comprehension, and true understanding. Learning has thus not occurred. This all explains why in chemistry class you actually have to do the experiments, and not just read about them; and why it’s different to walk along the Seine in Paris than it is to read about it in a book, or even see it in a movie. Experience has a great many more dimensions than memorization or rote learning, it has a quality and depth that cannot be substituted, because the impact cannot be achieved any other way than actually doing it; only in genuine learning does the brain rewire itself. Hence, your role is to embody the spirit of learning, to set up genuine, open-ended, experience-first, label-second learning opportunities for others (and for yourself, for that matter) whereby meaningful and important learning does indeed occur. How will you do that? You will find many different ways to bring new information and experiences to your organization, and for them to engage with it in the process of assimilating its meaning and assessing its consequences. The information I’m referring to will have many qualities; it will be challenging, interesting, surprising, confusing, perhaps difficult, or even unpleasant. And it will inevitably be important, necessary, and provocative.

160


It will not all be written, printed, or on a screen; it may also come in the form of a trip, or a visit, or a trade show, or a conversation, or a workshop. It may be open-ended, in that you will create a learning opportunity without knowing what the outcome will be, a journey into the unknown. This is a journey that will be fueled by a unique and uniquely human quality, one that has been a core driver in the remarkable advance of human civilization across thousands and hundreds of thousands of years. That fuel is curiosity.

Curiosity As a learner and an innovator, you’re naturally a person who’s curious to discover new things, and you exemplify the personality characteristics that embody learning. You’re always interested in surprises, because surprises indicate that something that you used to believe is perhaps not so, and such a discovery can be enormously helpful to the cause of innovation, as we seek to overturn facts that are actually not facts at all, but were merely mistaken assumptions. Oh, how wonderful it is to get rid of an assumption that is discovered to be untrue, and replace with a better explanation of reality, for in this lies the very genius of innovation, the genius that spots something that everyone else overlooked, or misunderstood, the genius that becomes new insight, new possibility, and new reality! And you’re always interested in understanding what has caused past successes and especially past failures, for while the successes showed how and where your reasoning and expectations were justified, your failures are, like surprises, learning opportunities to confront mistaken assumptions that deserve to be overturned, and the overturning of which will open up new possibilities, new doorways to innovation.


161

You will seek to discover whatever it is that can be learned from less than perfect results, because all of these occurrences – surprises, successes, failures, and disappointments – provide significant learning opportunities for you and for the organization. Another word to use to describe the cognitive impact of surprises and of overturned assumptions is … unlearning. Yes, that’s right, unlearning is the process of having discovered that what we thought we knew just isn’t so, and we have to start afresh. How close to innovation is that? Same exact thing, don’t you think... As a leader, it’s not your job to be the most creative person in the organization, nor to be the most innovative person in the organization. Your job is to structure and organize the entire process, to support, guide, manage, and coach others, and to assure that rigorous discipline is being followed throughout the innovation process, and to measure the results and correct the system such that all this widespread effort leads to the desired sort of innovation results, which in turn leads to success and sustainability for the organization. Your own curiosity will lead you into the many corners and hidden places where learning may occur across the scope of the organization’s performance, not only with respect to new products and services, but also throughout the ongoing and existing operations. As you’re probably taking the lead in determining which projects to invest in and which not to invest in, you must be seen as a fair person, open minded and willing to consider many different possibilities, willing to discuss openly with others about the projects and the ideas that they’re working on, both to help them improve their ideas, and also to help them recognize ideas that simply may not be ready.

162


Through all of these activities you will, most importantly, incite learning, genuine learning, to occur, both for yourself, and for a great many other people who are engaged in various ways in the innovation journey with you. One of the most direct and yet effective methods you may apply to get people engaged in learning is to ask them questions, not only when you suspect that they know the answers, but because questions themselves open doors, and can quite readily lead people to discover new and unexpected knowledge that will also carry them forward in their own quests for information and solutions.

Question Asker In Chapter 1 we mentioned two of the key drivers of innovation, maps and questions. As an innovation leader you should be in the habit of asking questions, as it is a form of interaction that can provoke profound learning. You’ll ask questions of your colleagues throughout the management team, and of people throughout the entire organization, and far beyond. But what can a question really do? And why are questions so important? We have found with amazing consistency that the right question, asked in the right way (i.e., helpfully, as opposed to a “gotcha” question), and asked at the right time, can abruptly open a door in a person’s mind, enabling them to see things differently, to see things that they had never seen or understood before. Questions are tremendously powerful instigators of innovative thought, and the capacity to frame and ask great questions is one of the most important skills that leaders can develop. Enabling a person to have this sort of experience may help to


163

change their perspective just enough to illuminate a difficult problem, or lead to an insight that unlocks a mystery. Here are some examples. The Polaroid camera was invented by chemist Edwin Land, and he was inspired to make that invention by a simple question. The story goes something like this (I am paraphrasing). Land enjoyed photography as a hobby, so of course he took lots of pictures of his family. He had a young daughter, and one day he asked his daughter if she would pose for him. The 7 year old posed glamorously, like movie star, and after he had taken the picture she ran over to him and practically shouted at him, “Daddy, Daddy! Show me the picture!” And he replied, “Of course, dear. We’ll just go in the house and we’ll develop the film, and then we’ll print the film, and then you’ll be able to see the picture.” This, obviously, was going to take a long time, which was not at all satisfying to her. “No, Daddy. I have to see the picture now! Why can’t I see it now?!” Now, as in right now, this minute! Of course Land didn’t have the knowledge to make the picture visible immediately, but her question inspired him to think about why they couldn’t see it now, and what would be necessary for photography to be, in the phrase that was chosen later, instant. And so her simple question led him on the journey that eventually resulted in the Polaroid camera, the instant camera that we know and love today. Speaking of the questions that children ask, and the role that plays in their learning, why do you suppose that we have a widely shared belief that smaller class sizes are more effective learning environments for children than larger classes? Aside from the general level of noise and chaos of a big classroom filled with 30 or more active, young minds, we know that smaller classes are better because each child in a smaller class has more opportunities to

164


interact directly with the teacher, more chances, that is, to ask questions. Because asking questions is fundamental to learning. The story of Land and the Polaroid camera is also important because it describes a pattern that occurs repeatedly, the power of the right question to lead in a fruitful direction. This occurs because a question itself may change how someone looks at a problem, that is, the topic of the question moves from the domain of “We know that already,” i.e., applying an existing solution that has already been mapped to current reality, to the domain of “What if …?” and “Suppose that …,” and these are domains in which visionaries and innovators, and leaders spend a great deal of their time. In fact, great leaders and visionaries of history have always recognized and utilized the power of questions to further their goals. The history of innovation is the history of questions, because great questions embody and also may provoke insight into every aspect of knowledge, from physics to psychology, from to biology to business. Access to all realms of knowledge is unlocked by asking the right questions. So when you read about great leaders, scientists, or statesmen, consider what questions they may have been asking, and what answers they may have gotten from their questions. And then imagine what they then did with the answers that they got, how they transformed questions and answers into insight and action that altered the course of history. Questions can indeed do that. Leonardo da Vinci, for example, was known for his relentless curiosity. He asked questions of things that he observed in nature, and that he saw in the human world around him, and this inspired him to design visionary machines and also to become one of the greatest painters in history, all because of his curiosity, which was at root his simple habit of asking questions, and seeking the answers in his sketchbooks and inventions.


165

A more contemporary example is Lou Gerstner, the former CEO of IBM, who was hired specifically to extract IBM from the greatest crisis in its history. At the time, 1991, IBM was losing money by the billions, and there was an active debate among the company’s leaders, board members, and many outside observers about whether it would be best to break the company up into pieces, or whether it would be possible to somehow recreate it for a new life. In approaching his assignment Gerstner therefore asked himself, “What is the right thing to do with the asset called IBM?” Through a systematic process of investigation he realized that IBM needed a new business model, and then set about to design it. The results he achieved, of course, were outstanding, and today, twenty years later, IBM remains one of the most successful and important American corporations. Einstein also asked a lot questions. One of them, simple enough, was: What would it be like to ride on a wave of light as it moves through the universe? That question inspired him to see reality in a way that was different than how others saw it, and led him to formulate the framework in a way that we know today as the special and general theories of relatively. Napoleon, one of the greatest military leaders of all time, also asked questions. His simple question was “What can I do to overwhelm my opponent?” His answers led him to reinvent how wars were fought, and to dozens of victories over much larger armies led by much less innovative opponents. Edwin Land, Leonardo, Gerstner, Einstein, Napoleon. And you. Here are two questions that you, the leader/entrepreneur/innovator, might ask. •

What are the right questions that will provide the necessary leadership for this organization?

166


•

What is the most powerful or compelling question that will lead us to or toward where we want to be in the marketplace?

As I mentioned, your job is not necessarily to know the answers, but to identify the right questions, and then to seek answers to them rigorously, to discover robust insights with discipline, within a system, within a framework for the innovation process.

You might also ask: •

What is the future of our industry?

•

And what is the future of our company?

•

What’s driving change in our world?

•

What are the forces and factors that are shaping the future of the markets in which we compete?

•

And what should our place be in those future markets?

You may also want to know: •

What is the right mix of products, services, business models, and new innovation ventures to assure the success of our organization in the future?

•

And what are the right innovation targets for our organization to pursue?

•

In the process of asking these questions you’ll be shaping your thoughts about your organization’s innovation portfolio.

•

You may ask about customers and what they need and want, and what they may require of your organization today, and what they will in the future.

•

And how will we meet these requirements?


•

167

What is our process is going to be for developing ideas and translating those ideas into innovative products and services that we offer in the marketplace?

You will also be asking questions to help you to think about how to inspire everyone in the organization, and in fact, everyone outside of the organization who are part of your organizational ecosystem as well. •

How can we engage the broadest group to contribute their best ideas and questions to our innovation process?

•

What types of research should we be doing?

•

How can we turn our research into valuable products and services?

•

What are the new technologies that will become part of our future products and services?

•

What technology development capabilities do we need that we don’t have today?

And you will ask about the best ways to support all of these efforts. •

What is the best support structure for innovation throughout our organization?

•

What tools do we need?

•

What software and hardware might enable us to work more effectively?

To summarize, then, questions are tremendously powerful instigators of innovative thought, and the capacity to frame and ask great questions is one of the most important skills that the leader can develop. And as you ask these questions, and the dozens and

168


hundreds of others that will emerge through time, you’ll discover that improvement to the quality and effectiveness of the questions you ask will occur naturally, because conceiving of great questions is a skill that improves as a result of your dedicated practice.

Root Cause Analyst In the business methodology known as TQM, or Total Quality, the principle of asking questions is embedded in a tool called simply, “5 Whys,” which is applied in situations when an issue or problem has arisen, and the individual or team in charge of solving it begins to address the situation. The context of this scenario is generally some sort of a failure, such a machine breakdown on an assembly line, which is one of the domains – the manufacturing environment – where Total Quality has proven itself to be so amazingly effective. The underlying goal in a Total Quality context is not only to address the immediate problem, but to search for, diagnose, and address the root cause as well, and hence the “5 Whys” is also know as Root Cause Analysis. The technique suggests that when looking at a problem, one would ask why it has occurred, which might lead deeper into the issue to identify an underlying problem. Ask “why” again, to get still deeper. The inference in Root Cause Analysis is that by the time you have asked the fifth why, you’ve probably arrived at or close to a real root cause, and if you then address the root cause, all of the other resulting layers of problems will resolve themselves and not recur. The inverse logic, of course, is that if you just fix the obvious manifestation of the problem, but do not address the underlying cause or causes, then the problem will likely recur, which will multiply cost and further problems in the future.


169

Root cause analysis, pursued with rigor, has enabled companies such as Toyota, Honda, and Samsung to become world leaders in designing and manufacturing products of amazing quality and durability. A 2012 Honda car, for example, could well be expected to last for 300,000 miles of good service to its owner as long as it’s properly maintained, whereas twenty years ago, a good car was one that made it to 100,000 miles. The point of this, of course, is that Root Cause Analysis is really just a persistent habit of asking thoughtful and pertinent questions, and your job as a leader is largely to become, therefore, the Chief Question-Asker of your organization, or perhaps you might say the Chief of Curiosity. (And if your company happens to have an executive in charge of total quality, this person will likely become a close supporter and ally of yours, which have the additional benefit of linking the innovation effort with the quality process, the two being, of course, really two sides of a single coin.) The act and spirit of asking questions can provide important leadership, which may help people throughout your organization to better understand the future, and to understand the vision that the organization is aspiring to achieve. Questions can also inspire people to seek new knowledge, to seek new insights and new possibilities. Questions can inspire people to learn, and can organize the search and research processes. However, as I noted above, questions can also be used as a gotcha, as a way to demonstrate the superior knowledge and intelligence of the person asking the question. And this, of course, is not at all what we mean by the spirit of asking questions, for these questions are destructive and detrimental. They will not inspire the innovation culture, but rather they will stifle it. It’s important, therefore, that questions are used as positive inducements, not negative put-downs.

170


Manager So here we are back where you probably started, at management. You’ve managed your company successfully to get to your current level of success, and now you’re considering how to make a renewed effort, to develop a new set of management skills that will lead the innovation, with the goal to transformation your firm into one that is more broadly protected from external changes, and perhaps a more prominent player in current and future markets. Your skills in management will be applied as you develop the whole system of innovation in your organization, and at the same time you’ll also be putting efforts into the specific innovation projects, balancing the whole system with the high potential targets that you’re pursing. In this role you’ll balance other factors including short term and long-term perspectives, as well as risk and reward, and the differing thinking processes related to incremental thinking and breakthrough thinking. And you’ll be managing the overall innovation budget and budgets specific to individual projects, as well as the performance of the overall innovation portfolio. As you see, there will be abundant opportunities to exercise your managerial savoir-faire.

Facilitator As an innovation leader you may also find that you are spending quite a bit of time as a facilitator, and as we saw in the prior chapter, in this role your job is to help individuals and teams find the best solutions to the complex problems that they’re engaged with.


171

Coach Another important role for you is as a coach. Here you’ll both push and pull. By pushing I mean that there are times when a coach has to expect great things, and has to demand that individuals and teams raise the level of their performance to meet those expectations. There are other times, however, when pushing probably isn’t going to be helpful, when the right thing to do is to patiently encourage and inspire people to search for great questions and great solutions to very difficult issues and challenges that they’re grappling with. The qualities and knowledge that contribute to the success of a coach, whether you’re coaching a team of very young children, or high school athletes, or elite professionals, are the same. First and most important is empathy, the capacity to understand what others are feeling and thinking and to engage them with the right response that helps them to transcend their limitations. This is the same skill that, when turned toward customers, enables you to recognize needs and opportunities in the marketplace. Directly internally, this ability to listen effectively, and to set aside one’s own judgment in order to understand what’s going on in the mind of the other person is a particularly important skill because so much of the innovation process is driven by the need to understand exactly what others are thinking and feeling, whether “they” are colleagues among the executive team, your own innovation team members, innovation project participants, or customers, partners, and even competitors. High empathy skill will also enable you to find the best ways of communicating, also a key leadership skill. Effective leaders balance a capacity for high empathy with a forward-looking vision of what ought to be and the drive to achieve the vision. Merging these three, empathy, vision, and drive enables

172


you to communicate with people effectively, in ways that will indeed inspire and motivate them to effective action, and through this process they will be more likely to and more capable of helping you to achieve your vision, while also making progress in achieving their own visions. (Their visions may be as important to them, as yours are to you.) You’re likely to be the person who defines the vision for the organization as a whole, and it’s also certainly your responsibility to articulate the vision for the innovation process, and for everyone who’s engaged in working on innovation throughout the organization. Likewise, it’s definitely your job to get as many people as possible engaged in the work of attaining that vision, and your coaching skills will help significantly in doing so. Enthusiasm is important, as well, as a good coach both embodies and conveys a positive attitude and enthusiasm for the work and accomplishments achieved throughout the organization. A prospective athlete, someone in training who is learning to be a high performing team member and who has the capacity to achieve such a goal, is likely to have moments of great accomplishment, personal triumphs and breakthroughs in understanding, capability, and performance. But there will also be times where nothing seems to be working at all. A major part of the coach’s job is to reinforce the long term vision, to help overcome the bad days, to help the aspiring performer see the progress, and to know that there are inevitably better days and worse days on the long journey toward success. Coaches work to bring out the best in each of the players on the team, and prepares each one to succeed by helping them prepare for and accomplish everything that’s necessary to overcome the obstacles and challenges along the way.


173

Hence, the coach’s job is to create a learning atmosphere in which people understand the significance of the goals that they’re pursuing, and where each is clear about their own goals, and in which they understand what is required to remain on a path toward success. Each athlete, and each innovator, each member of the team will have their own experiences; each will bring a unique level of skill and their own degree of commitment to the sport, and each will have unique physical and mental attributes; some will be taller, some will be faster, some will be stronger. It is the coach’s job to blend all of the different individuals and bring forth their best efforts in molding a successful team.

Designer Another important skill for the innovation leader is the capacity to design. The process of design is a matter of searching for elegant solutions to complex problems, by mastering the principles and practices of transforming observations and insights into useful concepts and objects. Does that definition sound rather similar to the definition of innovation? Of course it does; it is in fact the same thing. As a matter of culture we use the word “design” to describe what architects do, and what business leaders do when addressing complex problems, seeking (and creating) elegant solutions to intricate and engaging challenges. We design organizations and business models, advertisements and packages, houses and cars and kitchen sinks. The discipline of design is the process of thinking through options and possibilities, arriving at the best solution, and making it real. Just like innovation. It is an essential skill for leaders.

174


The Open Door If you have the good fortune to be an open and generally optimistic person these qualities will contribute a great deal to your success. You’ll be highly visible throughout the organization, and you will want people to feel comfortable approaching you to share their ideas, asking for help in nudging the bureaucracy, or just seeking guidance. You welcome these conversations, and they’re a constant activity for you, because so much of what you want and need to accomplish is not a matter of what you can do on your own, but rather a result of what others will contribute through their own participation in the innovation dialog and the innovation process. Therefore, this part of your job is a networking job, and the larger and more effectively you’re connected to people throughout your organization and beyond, the easier it will for you to gather the talent and engage the commitments that you need. Your network of contacts will help you to assess the many ideas that arrive into the innovation domain, and to understand the many problems that will beset the innovation projects that are under way, and of course to help solve them, too. So it will be very useful if you’re available and happy to talk to anyone nearly any time. And it will help if people – especially people you don’t already know – are aware of your openness, know how to find you, and feel comfortable reaching out to you. In this regard, by the way, where is your office? Is it hidden away in some inaccessible corner far out of sight? Or it is on the executives’ floor, locked away in the quiet leadership spaces where few others venture to go. You wish to be accessible to people, so these are probably not the best locations for you. Instead, perhaps you should be located close to the middle of the busiest


175

crossroads of the organization, in a spot where people will be passing by, and where, on the spur of the moment, they can stick their head in your office – which they know that they’re welcome to do – and say, “By the way, you know that innovation do-dad we were talking about last week? Well I had a call with so-and-so over at such-and-such, and she said that they’d seen a problem like that last year …” These are the conversations that do much to move innovation forward. Where is that crossroads? Chances are, it may have something to do with coffee. Yes, if it happens that you’re known for the very good coffee that happens to be right near the door of your office, well, that’s just how it works out sometimes … To make this work, one leader we admired kept two offices. One was his obligatory space with the other executives, where he could interact easily with the team; the other was in a very obvious, front and center spot in the innovation team space, which he had chosen precisely because sooner or later just about everyone in the organization would happen by.

Your Self-Assessment Did you get all that? It’s taken a lot, more than twenty pages to describe the qualities, skills, and characteristics that you may need to develop to become a successful innovation leader, to achieve world-class capability in this highly complex domain. It’s a lot. You should expect that your capabilities are stronger in some of these than others, so you need a development plan, which will inevitably begin with an honest assessment of your own strengths and weaknesses, your own capabilities, so that you will know very clearly areas in which you need extra support or help. A detailed and honest self-assessment will also tell you a great deal about your

176


style of leadership and of communication, and will thus help you to structure highly effective interactions with others so that you achieve successful outcomes. Your personal action plan is your designed pathway to augment the areas where your skill level is insufficient.

Skills and Personality Assessment Here’s the list of skills we’ve just discussed. In the accompanying workbook there are some sheets you can use to develop a more refined self-assessment. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Leader Learner Curiosity Question asker Manager Facilitator Coach Designer The Open Door

Take time not only to answer the self assessment questions, and also to think deeply about what you learn from it. Where are you strongest? Weakest? What are the priority actions that you should engage in to improve in the weak areas?

Taking Action This is a chapter on leadership, so it’s fairly obvious that you need to make a careful and honest assessment of your own leadership style. What’s working? What’s not working?


177

Then move on to the other items for your more complete selfassessment. Set aside some focused, quiet time to think about your own strengths and weaknesses, and then decide on a couple that you feel are critical to the future success of your organization, and put together a study plan to learn how your desire for personal change can become a reality. It may be very helpful to discuss these issues with your peers, other business leaders who have their own companies to run, and who are facing the same or similar challenges. Peer coaching like this can be very useful.

178



179

Chapter 9 Tools

The last element of the innovation formula is the tools that enable you, or support you, to produce better innovation outcomes more quickly. This is often a sensitive topic for small businesses, which generally don’t have the resources to provide innovation teams with big work spaces, generous travel budgets, and fancy prototyping tools. What you do have is a lot of ingenuity, the willingness to work hard and achieve solid results through insightful thinking and persistence, and so the focus here is on supporting and enhancing the skills and commitment you have without spending much money. And being able to spend a lot of money isn’t always such a good thing for innovation. We recently met with some of the leaders of a big, successful biotech company, and they toured us through their state-of-the-art lab facilities. The place was certainly gorgeous, shiny and bright and very new. Scientists in lab coats scurried around and the lab equipment were humming. We expressed our

180


admiration for the great architecture and the great reputation of the firm. As we were wrapping up the tour, however, one of the facilities leaders who had been our tour guide, and who had been with the company for decades, mentioned that while the new labs were certainly lovely, he noticed that something had been lost over the years. He remembered the early days of the company, which was started in left over Quonset huts from World War II.29 These old buildings were on the funky side, not fancy and really not even all that nice, but they had a great spirit to them, and he remembered the labs as crowded and joyful. The company had done great work in those days, which became the foundation of its present success; and with success had come the bright, new labs. And with the new labs had come a change in the culture, and the sense of teamwork, joy, and making do had been lost. He was worried that with this loss there was danger ahead. In the aerospace industry in Southern California there is a similar story often told, of ad-hoc teams that were created to solve difficult problems, to do impossible things, and these teams weren’t the ones in the shiny labs either, they were out back, in the old part of the plant, working in improvised spaces that are still to this day called “skunkworks,” because they’re often crowded, dirty, smelly, and by the way, stupendously productive. Your organization can create a bright and powerful future for itself in a Quonset hut or a skunkworks perhaps more readily in a neat, clean, “perfect” space. Our topic here is how to make that hut really hum. There are four different types of innovation tools that we’ll describe here, including the design of the work place itself, practices that encourage and even enable effective collaboration, open innovation


181

approach to connect inside innovation teams with outside partners and experts, and online tools that constitute the virtual work place. Separately and especially together, these can make a tremendous enhancement in the performance and the satisfaction of individuals, teams, and your entire organization.

The Work Place The qualities and characteristics that make Quonset huts and skunkworks so useful is that they’re open, flexible, and no one is inhibited about messing around in them and trying something new. The great qualities of this space are probably in dramatic contrast with the conference room in your office, the one that you’ve spent many hours in. And it’s probably very similar to conference rooms you’ve sat in at other companies, a rectangular room with a longish table surrounded by chairs. The physical environment has tremendous influence on our behavior, yet it’s an unspoken assumption that meeting rooms have to fit this traditional shape, size, and layout. Unfortunately, the architecture profession and office furniture manufacturers have standardized on this utterly drab and uninspiring concept of what “the physical space” ought to be. The prevailing style is derived from the corporate board room, which was in turn derived from the king’s chambers, and the single chair for the king, boss, CEO, or chairman at the head of the table conveys its primary social purpose, reinforcing hierarchical authority. Need I mention that this isn’t a very good environment for innovation or creativity? Yet in most organizations, it’s all there is. Consultant and author Michael J. Gelb has studied this topic, and he

182


makes the following observation. “For many years, psychologists have known that the quality of stimulation provided by the external environment is crucial to brain development in the early years of life. Recently, however, brain scientists have discovered that the quality of environmental stimulation affects the continuing development of the adult brain.” Gelb then goes on to lament the sterile office environments where most people work, and describes a project through which a team of people redesigned their own workplace. Among the changes that they made were removing photos of machines and replacing them with reproductions of favorite paintings, replacing fluorescent lights with full spectrum lights, bring in fresh flowers, and changing the coffee room into a “creative break room.” They also instituted the practice of a ten minute “brain break” every hour, and over the course of the following year their organization studied the work effectiveness of the people in the new environment. They found that productivity had improved by 90%.30 That’s an astounding difference, and it certainly affirms our experience that the work place is a pervasive influence, although its importance is often ignored. It’s the container. Tom Allen and Gunter Henn address this issue in their lively book about the design of offices: “Most managers will likely acknowledge the critical role played by organizational structure in the innovation process, but few understand that physical space is equally important. It has tremendous influence on how and where communication takes place, on the quality of that communication, and on the movements - and hence, all interactions - of people within an organization. In fact, some of the most prevalent design elements of buildings nearly shut down the opportunities for the organizations that work within their walls to thrive and innovate. Hence, the implications of physical space for the innovation process are profound.”31


183

Imagine what it would have been like to work in the coolest labs where amazing stuff was being invented - Thomas Edison’s Menlo Park lab where the light bulb was perfected, or Ford’s workshop where he created the Model T, or the Wright Brothers’ airplane workshop, or Douglas Aircraft when the first DC-3 was built, or at Xerox PARC when the PC was being invented. You’d be surrounded by lots of brilliant, creative people solving difficult problems with astonishing levels of insight and inventiveness. You’d be having rich and provocative conversations, making sketches and designing and making models, arguing, laughing, and building, testing, learning with great enthusiasm and dedication. This is exactly what a skunkworks is, and what that biotech company stumbled onto when they rented a bunch of old huts for their first office, because that was all they could afford. If you’re going to provide today’s innovators with the sort of work environment to help them succeed in today’s challenging world, this is exactly the kind of place you’ll create. In Silicon Valley, it’s called “a garage,” and it’s where companies like HP, Apple, and Google got started. There’s something about a not-very-nice garage that inspires people to try new things; they are tools sitting there, just begging to be used, and dirty old benches to work on and no one will care if you make a bit of a mess, or even a big mess. A few years ago we studied some great R&D labs about the US, and we found that the designers had focused on three main qualities that were most important: Designing for interaction, spaces intended to increase the frequency of person-to-person interaction. As Allen and Henn note, “If you maximize the potential that people in an organization can and will communicate, you will vastly increase the likelihood of knowledge transfer, inspiration, and hence innovation. Organizational structure

184


and physical space must be configured to encourage the very communication that spurs innovation. The success of the innovation process today depends on the employment of both tools.”32 Designing for flexibility, layouts and arrangements that enhance the flexibility of a building so that over time it’s easy to adapt it to changing requirements. Garages and skunkworks and Quonset huts do this automatically. They’re places where people bring their ideas, where they work to understand complex systems and create innovative solutions to problems. This is the sand box for grownups, and the best ones contain lots of large vertical white boards that make it easy to collaborate. Furniture is on wheels, making it easy to reconfigure to support lots of small teams that happen to be working at the same time, or one large one. The third common feature is designing for beauty and intrigue, making buildings beautiful to enhance the joy of work. Colors, plants, books, graphics, and light can all be designed thoughtfully and even at little to no cost to enhance the environment, promote creativity, and support innovation teams.

Effective Collaboration A lot of the important work that will be done in your innovation space is collaboration, which as we have already discussed, is essential to success at innovation. To creates innovation requires that people engage in exploring new topics, understanding, diagnosing, analyzing, modeling, creating, inventing, solving, communicating, and implementing concepts, ideas, insights, and projects. These attributes are all facets of “learning,” and any organization that thrives in a rapidly changing environment has surely encouraged its members to learn and to


185

apply active learning results to keep up with external changes. The link between learning and innovation is a strong one that has come up repeatedly in this book, and we also know that speed definitely matters. The faster people learn, the faster they can apply that learning to create the next generation of products, services, business models, and process improvements. By developing a positive and self-reinforcing feedback loop of accelerated learning to create innovation, organizations then obtain more learning, leading to more innovation. The benefits are multi-dimensional: shorter product life cycles, which leads to quicker learning; and then yet shorter product life cycles, better profits, etc., all contributing to competitive advantage. It is that supremely desirable, virtuous cycle that I described above. Involving more people in this process, and doing so very effectively, is one of the best ways to accelerate the pace and improve the quality at the same time. Alan Mulally, formerly a senior manager of Boeing and then CEO of Ford put it this way when he described the development of the company’s new 777 aircraft: “We can’t make a better airplane unless we can figure how to get everybody’s knowledge included in the design.”33 As a small business leader you may not be designing new aircraft, but we’ve already talked about the importance of engaging a wide range of people. Innovation is a collaborative process, and it’s inevitable and necessary for people to work together to create and solve the problems that always arise across a wide range of disciplines and areas of expertise on the road from idea to innovation. Ideas almost always get better as they are shared, discussed, and reworked, and then combined and recombined with other ideas on the way to becoming innovations. And this will be true regardless of the physical location where people are working, whether they’re

186


in the same room or thousands of miles apart. Most of the organizations that we admire for their innovation prowess are also noted for the quality of collaboration that they carefully and continuously promote. Toyota, for example, has developed a distinct environment where employees are not just welcome to put forth ideas, but expected to do so. Year after year, literally millions of ideas build on one another to add tremendous value for the company and its customers. In contrast, Toyota’s largest global competitor, GM, was well known not for the quality of collaboration that it evokes, but rather for the confrontational nature of its labor relations. Decades of conflict between labor and management resulted in a culture of discord, which made it perhaps inevitable that the company would have to go through the trauma of bankruptcy to restore its viability. A happier story is that of the 777. Through the early years of its history, Boeing Corporation developed a company culture that was at times very adversarial. Conflict characterized the relationships between the company and its suppliers, and the company and its unions. With the development of its new 777 aircraft during the late 1980s and early 1990s, Boeing’s leaders consciously chose to adopt a more collaborative approach. The goal was to enhance innovation to achieve a better result, and a milestone in commercial aviation. By reducing or eliminating the conflicts and choosing a win-win approach, Boeing achieved and perhaps even exceeded its goals, as the 777 team produced the new airplane in record time. Developing new insights, testing new ideas, and developing them into innovations of value to the market are inevitably collaborative processes that may involve tens, hundreds, or even thousands of people. The 777 development team consisted of 5000 Boeing engineers, and many thousands more who worked in Boeing’s


187

supplier companies. About their work together, Mulally commented, “The biggest problem with communication is the illusion that it has occurred. We think when we express ourselves that, because we generally understand what we think, the person that we’re expressing it to generally understands it in the same way. When you’re creating something, you have to recognize that it’s the interaction that will allow everybody to come to a fundamental understanding of what it’s supposed to do, how it’s going to be made. We should always be striving to have an environment that allows those interactions to happen.”34 Such interactions reveal important nuances of tone, inflection, timing, cadence, body language, attention, smell, and facial expression, all richly present in every face to face encounter, and these nuances can be critical to successful communication, design and problem solving activities when we depend on people to integrate their unique knowledge and diverse vantage points to address complex problems. The importance of these unspoken elements is one of the reasons that face to face interaction is so important for innovation, as the subtle nuances are captured only partially – if at all – in interactions via phones and computers. This does not mean that phones and computers don’t have important uses, but we all know that there’s something unique and irreplaceable about working together in the same room. So while we can’t always work face to face, it is often preferable. Tom Allen and architect Gunter Henn help us understand that complexity is the root cause: “Managers communicate by telephone far more than do engineers and scientists, and hence they tend to believe that the telephone (or

188


email) will work as well for the engineers as it does for them. ‘Why do they need to travel?” managers often ask about engineers and scientists. Managers must remember that, o average, they deal with less complex information than do the engineers and scientists reporting to them. Compared with technical information, a much greater proportion of management information can be communicated by telephone. Notably, when managers face a complex issue, they too recognize the need to meet with the other parties in the same room.”35 And what about the very common experience, that interaction leads to new insights? As I’ve already mentioned, physiology and cognitive science tell us that the brain and the memory work by association,36 and that interactions between people stimulate new associations and new connections that can lead to breakthroughs. Face to face interactions also enable people to share experiences, through which they connect as they share tacit and explicit knowledge, and in the process create new knowledge. From this process we get the title of James Burke's engaging study of innovation called Connections, which we also call “creativity.”37 We can summarize the subtle dimension of collaboration with a comment from Glaxo Wellcome chemist Dan Sternbach, who noted that, “Nothing replaces two people standing at the board and drawing things, which is the way we communicate a lot. It's an interactive situation where, when somebody's drawing something the other guy says, ‘Well that reminds me of this thing.’ As soon as you try to do that by email it takes more time. You can do some of it that way, but the same conversation would probably happen in a day versus 20 minutes because of the give and take that goes on.”38 Face to face interaction, that is, stimulates the associative powers of the mind that are essential to innovation. In many situations, the effectiveness of collaborative efforts can be


189

greatly improved through active facilitation, not only for small teams but also for groups. We discussed your role as a facilitator in the Leadership chapter, and new we will visit it again. Facilitators, who are often innovation leaders or champions, guide groups of people through the creative process using a deep understanding of the creative process itself, as well as psychology, which helps them anticipate how individuals will participate throughout the process, group psychology which helps them understand and support the needs of large groups, and business knowledge, which of course provides the context in which many problems are to be solved. There are many different collaboration techniques, ranging from tightly scripted and facilitated design sessions that are often used to address complex technical challenges, to more loosely structured or self-organizing processes.

Social Tools Sometimes you don’t even have to be present to provide outstanding facilitation. I learned this one day not too long ago when I met with a retired former employee of HP Labs, the company’s R&D department. He lamented the sad decline in the Labs’ output, and the lack of esprit de corps he noticed there. This bothered him a great deal, and he had thought deeply about why it happened. He attributed some of the decline to the departure of Bill Hewlett, who had been a very effective leader of R&D, but he also said that the decline was due to the invention of the small coffee maker, and the change in corporate culture that it caused. I was frankly a bit skeptical about the coffee maker part, but I listened politely. During the best days in the Labs, in the 1950s, 60s, and into the ‘70s, coffee was brewed in big pots in a basement kitchen. Twice a

190


day the kitchen staff would bring up the pots on a cart, and everyone would fill their cups and stand around for ten or fifteen minutes to chat while enjoying their coffee. What they’d chat about in addition to the weather, the favorite teams, or the news, was work. People often brought problems, asking for help where they were stuck, and sometimes their naturally-curious colleagues (this was an R&D group, after all) would help by brainstorming possible solutions to design and engineering problems right then and there. And if today’s ideas didn’t work out, tomorrow’s coffee breaks were another opportunity to get creative input from some very smart people who were by now aware of what you were doing, and might even be thinking about it for you. A lot of tough problems got unstuck at the coffee break. This is yet another version of the story we all know, the chance conversation that opens new insights that later proves to be important; HP Labs’ twice-a-day coffee break was an organizational tool that promoted this type of collaboration almost invisibly, and thus an elegant example of social design. But when coffee makers became small and cheap (another industry’s innovations), the kitchen staff no longer brought the big pots around on a cart because all over R&D there were personal little pots that simmered all day. No more structured coffee breaks, no more spontaneous brainstorming, and as far as our friend was concerned, the beginning of the end of the great days of HP Labs. As I mentioned, I was a bit skeptical about this, but a couple years later I happened to read Steve Wozniak’s autobiography, iWoz, and when I read the following comment about his days working at HP I found that my skepticism had been entirely misplaced: “Every day at 10:00 am and 2:00 pm they wheeled in donuts and


191

coffee. That was so nice. And smart, because the reason they did it was so everyone would gather in a common place and be able to talk, socialize and exchange ideas.”39 So there it was, confirmation that the structured coffee break is indeed a tool to promote effective collaboration, the exchange of ideas, useful at HP and nearly everywhere else. We subsequently applied this principle in the design of a new workplace for a team of 200 software engineers. In addition to giving them dynamic spaces for collaborative work, we included a café, and insisted that personal coffee makers be banned. This caused everyone to frequent the café, and thereby increased the frequency of the chance encounters that promote innovative thinking. The new lab / skunkworks / hut / garage is a flexible and inspiring place, not a boring one. There is a significant productivity increase to be gained by supporting the essential activities that constitute effective innovation: thinking, creating, problem-solving, and collaborating. And we know that the work place which best supports these activities is not a traditional conference room. In fact, conference rooms are proven creativity killers, deadly dull, inflexible, and made really just to support information exchange in a hierarchical setting. Avoid them at all costs if your goals have anything to do with innovation and creativity.

Open Innovation and the Innovation Ecosystem As you know, an ecosystem is an environment in which there are many organisms interacting in the course of their normal process of

192


living. They compete and cooperate to survive in a complex web of relationships, many of which are difficult to recognize or identify even though they’re critical to every creature’s and each plant’s survival. Similarly, innovation happens in a market ecosystem that has countless influences, as it consists of a firm and its customers, along with competitors, suppliers, and all manner of stakeholders who have something to say about what could be done, what should be done, what should not be done, and why. As complexity increases in society and in the marketplace, an important determinant of success is the capacity to actively engage with that ecosystem, to work effectively with people and organizations who are outside of our firm and to engage them in the innovation process that’s going on inside our firm. That’s what we mean by “open innovation.” While in the past many organizations kept the innovation process as a closely guarded domain that stayed entirely in house and was shrouded in secrecy, and some such as Apple still do, many companies have switched their viewpoint and found that openly seeking new ideas from outside, from customers and non-customers, suppliers, partners, experts, community members, and pretty much everyone else, and opening up the innovation process, significantly improves the flow and quality of new ideas. “Open innovation” is a name for this new style of working that taps into other people, perspectives, ideas, critical thoughts, and advice. An example of open innovation that is entirely transforming the telecommunications industry is Apple’s App Stores for iPhone, iPad, and Mac, through which Apple provides a semi-open platform, and individuals and organizations then develop applications for those devices using a standardized toolkit. Apps are sold or given away through the platform’s storefront, and as of


193

summer 2014 there were more than a million apps in the Apple store, and a million more for android, and a stunning cumulative total of more than 75 billion downloads since Apple first opened its store in July 2008. The applications themselves range from the frivolous, such as Crash Bandicoot Nitro Kart 3D, to Google Earth and Facebook, and even serious tools such as a step by step lesson in CPR that has been credited as helping save the life of a young athlete who suffered cardiac arrest during a basketball practice; his coach had downloaded the CPR app only the day before, and put it to good use…40 By harnessing the creativity of people around the world in an open development environment, Apple has created tremendous momentum for the iPhone, and a new source of economic growth for the ecosystem that consists of the company, app authors, and app users. The App Store is just one example of a new creative genre that’s become common to internet companies, all utilizing the principle that a company with a sufficiently large customer network can create a business platform that promotes an entire ecosystem so that other individuals and companies can then use it to create content and transact their own business. The term “crowdsourcing” describes this new way that many people can participate as contributors of content. The resulting breadth and depth of content is what makes many of the highly successful internet businesses so compelling. Wikipedia, eBay, YouTube, and Google are examples. Google is now the world’s largest advertising agency, but all the web sites that Google searches and indexes are created not by Google. In 2008 Google’s indexing system was sorting more than 1 trillion different URLs, all created not by Google, but by the crowd, namely, us. By 2014 that number had grown to about 30 trillion.

194


In Don Tapscott’s recent book Wikinomics, he makes a persuasive argument that these companies are examples of an emerging economic model that supports knowledge aggregation and social networking, which suggests that open innovation is not only a business practice, but a new style of economic activity.41 And it’s not just companies that have opened up their innovation thinking to the outside. New York City is looking for great ideas, too. “Have an Idea to Save NYC Money? The city is looking for innovative ways to save New York City money. If you have ideas for finding efficiencies in government, submit them today.” You can share yours through the city’s web site, nyc.gov There are also tools to augment and help accelerate the open innovation process including open innovation software platforms such as Innocentive, 9 Sigma and Innoget, and they’re are all defining new ways to collect knowledge and make it more useful, and also create new knowledge through open innovation collaboration. Most small companies will have modest open innovation efforts, but of course the point is to find ways to interact efficiently to gain important insights about the market, competition, and new technology that may inform or support ongoing or new innovation efforts.

Virtual Tools A lot of open innovation effort take places online, and as we spend more and more time working and collaborating via our computers, connecting with our colleagues and outside partners, customers, and vendors, the quality of our tools and our skill in using them can make a significant difference in the productivity of our innovation efforts, especially since the all of us are now tending now to address


195

issues via email that are more and more complex. The computer infrastructure needs of an organization tend to increase in complexity at a very high rate as the number of people in the organization increases, so even medium sized companies end up with dedicated IT staffs to help them keep the organization’s computing power operational. These firms will apply many different types of tools across a broad range of functions, including basic communications via email, chat, and conferencing applications, the servers that support them, plus the web services that manage the brand imaging on the internet, accounting and finance, operations and supply chain, sales, marketing, and distribution. The innovation effort, meanwhile, can also benefit from some specific tools, including social networking, project management, idea collection, and creativity tools. We are big advocates for the importance of visualizations, and you already know this because we started this book by talking about the importance of maps. We also think it’s important for you to visualize your innovation investments, and hence we recommend that even small organizations develop dashboards that track project selection and performance, and align the innovation portfolio with whatever is known about the driving forces that are most significant for your own organization. The innovation dashboard is an essential tool to help innovation champions, portfolio managers, and leaders to maintain a good overview of the process, the details, and the results. For the smallest companies a lot of great modeling work can be done in Excel. So whether you’re using a general tool like Excel or a innovation management tool, it’s essential to have tools tool can support major changes in the direction of focus of innovation efforts, which we referred to in Chapter 4 as the pivot, the act of

196


shift the focus of an entire portfolio to reflect changing external conditions which are proving to be significant for the firm. Without visibility of the portfolio, and the capacity to model it in real time, then pivots become difficult if not impossible to achieve.

Taking Action These four innovation tools can work together nicely to support creative and innovative people through the many phases and iterations of their work in the innovation process. When these methods are combined effectively they can make a tremendous difference by helping individuals and teams achieve much better and much faster results. So naturally you need to ask yourself if your organization should invest in these tools If you have offices, you already have. Are they as good as they can be? And if you have software tools, you also have. So given the productivity gains that can be achieved, it may be a very fruitful investment. Innovation managers are often the ones who shepherd these tools, methods, and environments into reality, and thereby support the quest for high performance for their own organizations.


197

Chapter 10 The Innovation Master Plan

The focus of this book is on the innovation process that makes sense for small businesses, where lean, simple, and fast are essential. You may also be interested in a view of the innovation process that’s suited to larger companies, so this chapter provides an overview of the Innovation Master Plan framework that we use when we’re working with larger organizations on innovation projects and initiatives. And while many of the issues and concerns of larger firms are similar or identical to smaller companies and start-ups, some are quite different. In particular, the challenges that large companies must deal with precisely as a consequence of their large size relate to innovation funding, the breadth of the innovation portfolios that they are obliged to develop, staffing for innovation as well as decision making about innovation projects, engaging very large numbers of people, and relationships with outside partners are generally different from the way that most small firms must handle these issues. But it is included here as it is often useful to see how

198


others deal with the same issues as you’re dealing with, and similarities and differences can be illuminating. The framework is documented in the first three books in this series, Permanent Innovation, The Innovation Master Plan, and The Chief Innovation Officer, and they’re widely read and used by leading companies, universities, and governments everywhere to help them organize the pursuit of innovation and its management as a structured, purposeful, and highly successful organizational process for business and government.

Overview Innovation is vitally important, as we all know that all organizations must innovate to survive in these times of rapid change. Nevertheless, it remains very difficult for most organizations to achieve innovation on a consistent basis. We only have to look at the recent history of global businesses to see the impact of innovation – new and innovative companies are achieving great success, while the companies and even nations that do not innovate often fail and fall behind. Hence, the purpose of this section is to document some key principles of innovation so you can work more effectively and productively as an innovator, and thereby contribute to a successful future for your organization. In practice, it’s obvious that a significant part of the innovation process depends upon the creative capacity of people to come up with new and compelling ideas, while another aspect of success at innovation has to do with how we organize and conduct the innovation process from a technical and managerial perspective. The intent of this summary is to address all of these aspects, with


199

particular focus on the principles, tools, and methods necessary to a systematic and rigorous business process that can achieve meaningful and long lasting innovation results. We call this an “innovation system,” and we have named it “the innovation master plan.” So to justify calling it a “system” it must be complete and comprehensive, providing valid solutions for senior leaders, middle managers, and front line workers who will work together to evoke, manage, and produce innovative results. Hence, this chapter presents an overview of a complete set of principles, concepts, methods, and tools. While innovation is a challenge for most organizations to achieve, it’s also fun, fascinating, and very rewarding. There are few accomplishments as satisfying as seeing new ideas and decisions making a positive difference in the organization you work for. As you learn the details of the Innovation Master Plan framework, we hope that you will develop a love for innovation, and that you will then share this love enthusiastically with others so that they, too, may experience the joys and benefits of success at innovation. The Innovation Master Plan System is based on the concept that a comprehensive or systems thinking approach to innovation must address all six of the critical questions: Why, What, How, Who, Where, and When. This diagram shows the complete Innovation Master Plan Framework. [insert figure] From the top, Strategy, Portfolio, and Process are the core processes, supported by Culture and Infrastructure below. From left to right, the stages 1 – 7 outline a common sequence for innovation activities and projects, beginning with Strategy and

200


culminating in Sales of innovative products and services. The curving arrows go in both feed-forward and feedback directions, and are meant to show that this is a learning system and that new insights and discoveries gained at any point in the process must be shared widely so that the organization as a whole can also benefit. On the right side we see a list of the executives typically responsible for each process.

Why Innovate: The Link Between Strategy And Innovation The “why” of innovation is simple: as we examined in Chapter 2, change is accelerating, and we don’t know what’s coming in the future, which means that we must innovate to both prepare for change, and to make change in order to improve our position in the market. As we already noted, if things didn’t change then your company could keep on doing what it’s always done, and there would be no need for innovation. If markets were stable, if customers were predictable, if competitors didn’t come up with new products and services, and if technology stayed constant, then we could all just keep going as we did yesterday. But all the evidence shows that change is racing at you faster and faster, which means many new types of vulnerabilities. Technology advances relentlessly, altering the rules of business in all the markets that it touches, which is of course every market. Markets are not stable, customers are completely fickle, and competitors are aggressively targeting your share of the pie. So please ask yourself, “Are we managing with the realities of change in mind? And are


201

we handing uncertainty?” Since the alternatives are either to “make change” or to “be changed,” and making change brings considerable advantages while being changed carries a huge load of negative consequences, then the choice isn’t really much of a choice at all. You’ve got to pursue innovation, and you’ve got to do it to obtain long lasting benefits. The decisions to be made focus on how best to prepare for future markets, and the actions relate to transforming the innovation mindset into meaningful work throughout the organization, work that results in the development of innovations that impact the market, and improve the position of the organization relative to its competitors. This means, finally, an organization-wide commitment to designing and implementing your version of the innovation master plan. So what we’re talking about here is the practice of innovation as a vital aspect of corporate or organizational strategy; the rest of this chapter explores how strategy and innovation are intimately linked and should be mutually reinforcing. A tight linkage between innovation and strategy will certainly be part of your master plan, as innovation by your competitors and by your own firm causes existing products, services, and business models, and indeed entire businesses, to become obsolete. Since innovation is the driver of change, and change is the most fundamentally important driver of business strategy, then it’s not an exaggeration to say that innovation is the means of achieving strategy, as we find in the story of Apple’s turnaround from the abyss. When Steve Jobs was asked to return to Apple as CEO in 1997 after an absence of more than ten years, the company was, to put it bluntly, a mess. If you thought that the PC market was a war

202


between Apple and Microsoft, it was clear that Microsoft had won big. Apple’s market share was about 5% and shrinking, and to many observers it seemed that the company was fading away. Its product line was an incoherent collection of 11 different computers, and there didn't seem to be a clear vision guiding the company forward. The board of directors was desperate. But did Jobs have a vision for the 21st century, as he had had in the 1970s? Did he still have the magic? We know today that he did, but imagine that it’s 1997 and you’re Steve Jobs, and you have to figure out how to turn Apple Computer around. What do you do? Today Apple’s share of the US PC market is growing, although it’s still less than 10%. But the iPod is the undisputed MP3 world leader, with 70% of the market, the iPhone became the world standard design for smart phones immediately upon its launch, and the iPad did the same in the tablet market. And now more than fifteen years after Jobs returned, Apple’s total market capitalization recently achieved an insider milestone when the company’s total stock value surpassed arch-rival Microsoft, and then another milestone when it became the world’s most valuable corporation. To summarize, without a focused and successful effort at innovation Apple surely would not have survived; the quality of its innovative efforts led not only to survival, but leadership. Innovation was thus essential to the company’s strategy, and it was in fact how the strategy was executed, so much so that we simply can’t imagine “Apple” without thinking about “innovation.” Innovation plays the same role for many firms. Do you admire Google? Then ask yourself what role innovation plays in Google’s strategy. It’s obvious that we wouldn’t admire


203

Google, and in fact we wouldn’t even know about Google if it weren’t for innovation. The very existence of the company is based on a single strategic insight and on two critical innovations that made the strategy real. The insight was that as the number of web pages grew, the internet’s potential as an information resource was surpassing all other resources for scale, speed, and convenience, but it was getting progressively more difficult for people to find the information they were looking for. People therefore came to value better search results, and Google’s first innovation to address that need was its PageRank system, developed in 1995, an algorithm for internet searches that returned better results than any other search engine at the time. The second innovation was a business model innovation, which turned the company into a financial success along with its technical search success. When Google’s leaders realized in 2000 that they could sell advertising space at auction in conjunction with key words that Google users searched for, they unleashed a multi-billion dollar profit machine. The integration of these two innovations provided a multiplicative advantage, and Google’s competitors are falling by the wayside as the company continues to dominate. As a result, in November 2010, Ask.com threw in the towel with only 2% of the market for internet search after trying for five years to compete with Google following its $1.85 billion acquisition by Barry Diller’s IAC/InterActiveCorp. Diller wrote, “We’ve realized in the last few years you can’t compete head on with Google.”42 Yahoo, a much bigger company than Ask, came to the same conclusion earlier in 2010 when it decided to position itself as a media company rather than a technology company, and outsourced its search function to Microsoft’s Bing. What other companies do you like? Do you also admire Starbucks?

204


Or Disney? Or Toyota? Or BMW? They’re certainly innovators, and many of us appreciate them precisely because of it. So the relationship between strategy and innovation is vital, and the important role that innovation plays in transforming the concepts of strategy into realities in the marketplace tells us that none of these companies could have succeeded without innovation. This is the “why” of innovation.

What To Innovate: Creating and Managing Innovation Portfolios Investors in all types of assets classes create portfolios to help them attain optimal returns while choosing the right level of risk, and innovation managers must do the same for the projects they’re working on. Innovation is inherently risky. You invest money and time, possibly a lot of both, to create, explore, and develop new ideas into innovations, but regardless of how good you are, many of the resulting outputs will never earn a dime. Is that failure or success? It could be both. The degree of failure or success will be determined not by the fate of individual ideas and projects, but by the overall success of all projects taken together. Hence, the best way to manage the risk is to create an “innovation portfolio.” So what do you do? You allocate capital across a range of investments to obtain the best return while reducing risk, and then you manage each project aggressively to make it work. The underlying principle of portfolio management is that the degree


205

of risk and the potential rewards have to be considered together. In a rapidly changing market, the nature of innovation risk is inherently different than in a slower-changing industry such as, say, road construction, because the faster the rate of change in a company’s markets, the bigger the strategic risks it faces. The faster the change, the more rapidly will existing products and services become obsolete, a factor we refer to as “the burn down rate.” The faster the burn down, the more urgent is the innovation requirement. This will necessarily affect the composition of an innovation portfolio by inducing a company to take greater risks in innovation its efforts. Hence, the ideal innovation portfolio of each organization will necessarily be different: Alibaba, Apple, NASA, Genentech, Toyota, Union Pacific, GE, and Starbucks are all innovative organizations, but when it comes to their innovation portfolios it’s obvious that they cannot be the same in content or style. A further key to the dynamics of a successful portfolio is described in portfolio theory, which tells us that the components of a portfolio must be non-correlated, meaning that various investments need to perform differently under a given set of economic or business conditions. In the case of innovation, “non-correlated” means that every firm needs to be working on potential innovations that address a wide range of future market possibilities in order to assure that the available options – and here is the key point – will be useful under a wide variety of possible future conditions. The need for broad diversity in the portfolio also reminds us we need to develop all four types of innovation, so what we’re really talking about are five different portfolios. There will be a different portfolio for each type of innovation, breakthroughs, incremental innovations, new business models, and new ventures, and there will be a fifth portfolio that is an aggregate of all four. There may also

206


be portfolios for different business units or products lines, so depending on the questions at hand, senior managers may have tens or dozens of relevant portfolio views to consider. We should also note that each different type of portfolio will be managed in a different process, by different people, who have different business goals, and who are measured and possibly rewarded differently. Hence metrics and rewards are inherent in the concept of the portfolio, and the master plan also calls for the design of the ideal metrics by which the portfolio should be measured. And because we’re preparing for a variety of future conditions, its obvious that some of the projects will never actually become relevant to the market, and they will therefore never return value in and of themselves. But this does not mean that they are failures; it means that we prepared for a wide range of eventualities, and some of those futures never appeared, but we were nevertheless wise to prepare in this way. This sort of “failure” is a positive enhancement of our likelihood of our survival and ultimate success, so it’s not failure in a negative sense at all. By analogy, I carry a spare tire in my car, but it’s not a failure if I never have occasion to use it. Therefore, the process of creating and managing innovation portfolios cannot be overseen by the CFO’s office as a purely financial matter. Instead, the finance office and innovation managers are partners in the process of innovation development. Hence, innovation portfolio management is like venture capital investing, early stage investing where it’s impossible to precisely predict the winners, but nevertheless a few great successes more than make up for the many failures. And the CFO will also have to accept the idea that the mandatory investments in innovation mean investments in learning, and that during the early stages of the development of an idea its future value is almost entirely a matter of speculation. As work is done to refine


207

ideas in pursuit of business value, the key to success is learning, as the learning shapes the myriad design decisions that are inevitably needed. The innovation process as a whole therefore seeks to optimize the learning that is achieved, and to capture what has been learned for the benefit of the overall innovation process as well as the portfolio management process. This costs money, which cannot and should not be avoided. As the projects that constitute an innovation portfolio mature and develop, they provide senior executives and board level directors with increasingly attractive new investment options. By managing their portfolios over time, a team of executives can significantly improve the portfolio’s performance; as they engage this type of thinking they get more in sync with the evolving market, and better at identifying and supporting the projects that have greatest potential. Still, many will fail. In fact, a healthy percentage of projects should fail, because failure is an indication that the organization and particularly the innovation teams are pushing the limits of current understanding hard enough to be sure that they are extracting every last bit of value from every situation, and at the same time preparing for a broad range of unanticipated futures. Or as TS Eliot said, “Only those who risk going too far can possibly find out how far one can go.”43

How To Innovate: The Innovation Process Many people assume that creating new ideas is the beginning of the innovation process, but actually that’s not true. Ideation generally occurs in the middle of the disciplined innovation process, as we

208


will explain here. While the purpose of innovation is “simply” to create business value (simply is in quotes because it’s obviously not so easy to do), the value itself can take many different forms. As we noted above, it can be incremental improvements to existing products, the creation of breakthroughs such as entirely new products and services, cost reductions, efficiency improvements, new business models, new ventures, and countless other forms as well. No matter what type of innovation we’re talking about, the method of creating innovation is to discover, create, and develop ideas, to refine them into useful forms, and to use them to earn profits, increase efficiency, and/or reduce costs. Here we focus on how to do that, the process of innovation itself. In the quest for innovation it’s obvious that many ideas at the input stage become a few completed, useful innovations at the output stage, so people readily visualize the innovation process as a funnel: lots of ideas come in the wide end on the left, and a few finished innovations come to market from the narrow end at the right. The trick to making it work is knowing what’s supposed happen inside the funnel. So naturally you want to start by creating a whole bunch of ideas, right? Actually, no. Ideas are indeed the seeds of innovation, just as ore taken from the ground is the raw material of steel, or waving fields of wheat provide the raw material for bread. But it takes a lot of work to mine the raw ore and transform it into steel, or to prepare the fields to grow the wheat long before it becomes bread. It’s the same with innovation; we don’t start by collecting raw ideas. Instead, we know that innovation is a core element of our organization’s strategy, so we have to start the innovation process itself with


209

strategic thinking to assure that the outputs of innovation are fully aligned with our strategic intent. Step 1 is therefore Strategic Thinking. The innovation process begins with the goal to create strategic advantage in the marketplace, so in this stage we think specifically about how innovation is going to add value to your strategic intents, and we target the areas where innovation has the greatest potential to provide strategic advantage. This was the topic of phase 1 described above, the “why” of innovation. Step 2 is Portfolio Management & Metrics. As we discovered in phase 2 on the “what,” one of the important underlying facts of innovation management is the necessity of failure. We are by definition trying to do something new, and as we proceed on the innovation journey we do not in fact know if we are going to succeed. We have confidence that we’ll succeed eventually, but along the way we know that there will be many wrong turns, and many attempts that will never come to fruition. So we manage innovation portfolios aggressively to balance the inherent risks of the unknown with the targeted rewards of success, and balancing our pursuit of the ideal with the realities of learning, risking, failing in order to ultimately succeed. Steps 1 and 2 together provide a platform and context for everything that follows, and so they constitute the ‘Input’ stages of the funnel, and so that the activities in the following stages have the best chance to achieve the best results. Step 3 is Research. An output of Stage 2 is the design of the ideal innovation portfolio, which is what we believe, as of today, is the right mixture of short and long term projects across all four types of innovation. Once we understand the ideal we can compare our current knowledge and discern the gaps. Filling these gaps, then, is the purpose of research. Through research we will master a wide

210


range of unknowns, including emerging technologies, societal change, and customer values, and in the process we will expose significant new opportunities for innovation. Strategic thinking has clarified for us how the world is changing and what our customers may value, and this stimulates new questions that our research has answered. Research findings provoke a broad range of new ideas across a wide range of internal and external topics. This is the abundant raw material, and it is already and automatically aligned with our strategic intent because it came about as a result of a direct connection between strategy, portfolio design, and research. Step 4 is Insight. In the course of our explorations, the light bulb occasionally illuminates very brightly, and we grasp the very best ways address a future possibility. Eureka! The innovation and the target and mutually clarified; we understand what the right value proposition is for the right customer. While many people think of this moment of insight as the beginning of the innovation process, as you can see, in the well managed innovation effort we expect insight to come about as the result of the preceding processes and activities, not at random. Hence, the innovation process described here is specifically contrasted with random idea generation; insight is the result of a dedicated process of examination and development. It doesn’t occur because someone had a good idea in the shower, but because individuals and teams of people were looking diligently and persistently for it. Step 5 is Innovation Development, the process of design, engineering, prototyping, and testing that results in finished product, service, and business designs. Manufacturing, distribution, branding, marketing, and sales are also designed in at this step, in an


211

integrated, multi-disciplinary process. Step 6 is Market Development, the universal business planning process that begins with brand identification and development, continues through the preparation of customers to understand and choose this innovation and leads to rapid sales growth. Step 7 is Selling, the where the real payoff is achieved. Now we earn the financial return by successfully selling the new products and services. In the case of process improvement innovations directed internally, we now reap the benefit of increased efficiency and productivity. Managing a process of this scope and complexity is of course a challenge for all organizations, but among the world’s companies we see that there are some that do this extraordinarily well. The knowledge that some do it very well, and that it’s certainly possible to be an exemplary innovative organization that can attain exceptional profits, should be a powerful source of motivation to develop and apply your own master plan.

Who Innovates: Creating The Innovation Culture Organizations that are successful at innovation naturally develop a strong innovation culture. But supposing an innovation culture doesn’t yet exist in your organization. Then how can you develop it? Such a culture is much appreciated by customers who say that the company is a genuine innovator, and it’s also known among the people inside the organization as a dynamic and innovation-friendly place to be. But supposing an innovation culture doesn’t yet exist in your

212


organization. Then how can you nurture it? How do organizations develop an innovation culture? Who should be involved in the innovation process? And what roles should they play? Every culture is an expression of behaviors and attitudes, and every organization’s culture reflects the beliefs and actions of its people, as well as the history that shaped them. The innovation culture, of course, is likewise an expression of people, their past, and their current beliefs, ideas, behaviors, and actions about innovation. We have found that the innovation culture comes into being when people throughout the organization actively engage in promoting and supporting innovation, implementing rigorous innovation methods, and filling three essential roles: Creative Geniuses, Innovation Champions, and Innovation Leaders. In this respect, the approaches that are suited for large companies are identical to those of small business: it’s all about defining the right roles, and getting the right people to fill them.

Innovation’s Creative Geniuses Who comes up with the critical ideas that are the beginnings of innovation, and then turns these ideas into insights, and insights into innovations? They are Creative Geniuses, and they work everywhere, inside and outside. If it seems like a stretch to label these people as “geniuses,” let me explain the rationale. No one can innovate if they accept things the way they are today, so making innovations requires that we are willing to see things differently. We have to overcome institutional and bureaucratic inertia that may burden our thinking process, and challenge ourselves to see beyond conventional viewpoints. This fits perfectly with the dictionary definition of genius, which is “exceptional natural capacity shown in creative and original work.”


213

Innovation Managers Innovation Managers (also referred to as “Innovation Champions”) are those who promote, encourage, prod, support, and drive innovation in their organizations. They do this in spontaneous moments of insight, in ad-hoc initiatives, as well as in highly structured innovation programs. Innovation manager/champions build the practical means for effective, systematic innovation. They take direct responsibility for finding creative thinkers and encouraging them to see and work in new ways; they help people seek new experiences that may spark new ideas; and they create a regular operations context in which sharing and developing new ideas is the norm. While they may work anywhere in the organization, including in senior management positions, line management roles, staff, or front line operations roles, the specific nature of the champion’s role is to function in the middle, to provide the bridge between the strategic decisions of senior managers and the day to day focus of front line workers.

Innovation Leaders An Innovation Leader is someone who shapes or influences the core structures and the basic operations of an organization, all with a clear focus on supporting innovation. Core structures include the design of the organization itself, as well as its policies and their underlying principles. Metrics and rewards can also be core structures. None of these factors are absolute givens, and all of them can be changed, and that’s the point: they are all subject to design, to thoughtful choice about what is best. It’s generally within the

214


power of senior managers to change them, and when they impede innovation they should be changed to favor it. The actions and attitudes of senior managers are based, ultimately, on their philosophies about management, on their mindset, which we explored earlier in this document. Innovation leaders set expectations, define priorities, celebrate and reward successes, and deal with failures, and all of these factors can be done in a way that makes innovation easier or more difficult, because each can be arranged to favor the status quo or to favor useful and effective change. Do leaders believe in a win-win model, or win-lose? Win-lose organizations usually are not trusting environments, and because trust is so important to innovation, when it’s missing innovation suffers. Leaders also set goals, and they don’t need to be modest; in fact they can be outright aggressive. By setting ambitious goals, managers emphasize the linkage between an organization’s strategy and the pursuit of innovation, elevating innovation to a strategic concern where it properly belongs. Conversely, if innovation is not expressed as a specific goal of top management then it probably won’t be a goal of anyone else, either; and if policies are restrictive and make it difficult to test new ideas, then there won’t be many new ideas. We refer to organizations that are focused on the present, rather than the future, as “status quo organizations.” The firm that’s obsessed with the status quo probably won’t last very long, but some managers still seem to believe in this model, and their domineering attitudes and behaviors reinforce it. Innovation doesn’t happen without leaders who embrace it, nor can it happen without people who have ideas and are willing to risk failure to experiment with them. Nor does it happen without


215

champions to bridge between the strategic and the operational questions, and the individuals who have ideas and want to explore them. And of course it happens best, and fastest, when all three roles are consciously implemented and mutually supporting. This does not mean that each individual can play only one of these roles; many people are geniuses, and leaders, and champions, and at various times we play all of these roles. So what is important is not that we classify people into the various categories; in fact, we should avoid doing that. We just need make sure that all three roles are being played, and played well, so that defining, developing, and implementing ideas that become innovations becomes the norm.

Where We Innovate: The Innovation Infrastructure What are the essential elements of infrastructure and tools to support the innovation process? There are four key parts of this infrastructure, the same ones we identified in the previous chapter. How large companies implement these tools will be different than small businesses simply because of the larger scale that they must address, but the core needs and intents are the same. Organizations that consistently deliver innovation do so because their employees have the skills to effectively explore, understand, diagnose, analyze, model, create, invent, solve, communicate, and implement concepts, ideas, and insights. These are all attributes that we might consider facets of “learning,” and naturally enough any organization that thrives in a rapidly changing environment necessarily has developed the capability to learn and to apply that

216


learning to keep up with external changes. Certainly the link between learning and innovation is a strong one, and clearly speed matters. The faster people in a company can learn, the faster they can apply that learning to create the next product, service and business model. By creating a positive and self-reinforcing feedback loop of accelerated learning to create innovation, organizations then obtain more learning, leading to more innovation. The results are manifold: shorter product life cycles, which leads to quicker learning, yet shorter product life cycles, better profits, etc., all contributing to competitive advantage. To support the acceleration of learning and innovation we have found that the proper infrastructure tools make a big difference. The four key infrastructure elements are open innovation, effective collaboration, the virtual workplace, and the design of the physical work place; here is a quick summary paragraph about each.

Open Innovation While in the past many organizations kept the innovation process closely guarded as an in house secret, these same companies have recently discovered that seeking new product ideas from outside can significantly improve the flow of new opportunities. Applying the principles of open innovation can significantly accelerate the pace of innovation, as well as its effectiveness. Open innovation means expanding the pool of participants in the innovation process to all types of outsiders, including customers, suppliers, partners, and community members, tapping into ideas, critical thinking, and advice.


217

Collaboration Everyone who works in the field of innovation agrees that collaboration is vital to success at innovation. Mastering and applying the principles of effective collaboration, not only for pairs and small groups, but also for groups of tens or even hundreds of people requires facilitation skills to help nurture new ideas and turn them into effective innovation, and the benefits can be significant.

The Virtual Work Place As we spend more and more time working and collaborating on line with our internal colleagues and with outside partners, customers, and vendors, the quality of our tools and our skill in using them can make a significant difference in the productivity of our innovation efforts. Active engagement in the selection and adoption of the right tools is a simple but fundamental rule to follow.

The Physical Work Place As MIT Professor Tom Allen puts it in the lively book he coauthored with architect Gunter Henn called The Organization and Architecture of Innovation, “Most managers will likely acknowledge the critical role played by organizational structure in the innovation process, but few understand that physical space is equally important. It has tremendous influence on how and where communication takes place, on the quality of that communication, and on the movements - and hence, all interactions - of people within an organization. In fact, some of the most prevalent design elements of buildings nearly shut down the opportunities for the organizations that work within their walls to thrive and innovate. Hence, the implications of physical space for the innovation process

218


are profound.” The essentials for effective innovation are thinking, creating, problem-solving, and collaborating, and we know that the work place that best supports them is not a traditional conference room, but a mush better work environment that is designed for innovation. These four elements, open innovation, collaboration, the virtual workplace, and the physical workplace constitute the critical elements of the innovation infrastructure, and it is by providing these tools to the innovative people in your organization that you can help them do their best to develop the innovations that will compose your organization’s future.

Summary of the Innovation Master Plan Your innovation master plan will cover each five of the major elements in great depth. To enable the development of your plan, it’s often helpful to conduct a comprehensive review of your organization’s performance as an innovator to clearly identify what’s working well and what's not working at all, and to design the corrections. (This is one reason why, by the way, we consider “designer” to be one of your essential skills.) We have found that there are seven technical factors that are critical to innovation performance, as well as seven additional factors that are cultural.

7 Technical Factors We refer to these as technical because they can be assessed in a relatively objective fashion, and according to specific technical


219

criteria. Alignment of Strategy and Innovation You’ll describe how you intend to align the innovation process with the strategy process. Innovation Portfolio Management You'll assess the contents of the existing innovation portfolios to see if they have the right balance of incremental and breakthrough projects, and to asses the projects that are underway to determine if they really are the right future products and services for the organization to make and sell. Research The purpose of assessing the research process is to determine how well it’s capturing the critical tacit knowledge that will feed the search for unknown and unmet needs. Innovation Development You’ll evaluate the development process as well, to make sure that innovation development and market development are proceeding effectively and in parallel, and providing the right guidance for the organization. Alignment with Sales You’ll make sure that the new products and services that are being introduced are effectively aligned with the sales organization so that the organization can in fact bring these products and services to market effectively.

220


Innovation Metrics and Rewards You’ll determine which innovation metrics should be used throughout each stage of the innovation process, and make sure that those innovation metrics are aligned with the rewards that are offered to individuals, teams, departments, and business units. Infrastructure And you’ll examine the infrastructure to determine whether the people who are working in the innovation process have sufficient information and support to complete their work as efficiently as possible. Wherever a stage of the process or a critical skill is not at the level it ought to be, or if it’s missing entirely, you’ll design an improvement plan or a process to implement it from scratch.

7 Cultural Factors Assessing these factors will perhaps lead you into a more subjective dialog than the assessment of the technical factors, but they are nevertheless critical to effective innovation performance as well, and you should conduct a robust study of them. Innovation Culture A critical issue, of course, is the character of the organization's culture. Does it favor innovation, or shun it? Do people feel safe in taking risks, or is this a career-threatening move, and something which is consistently avoided? Do people embrace the characteristics and qualities of the innovation culture, or is it an organization that seeks the status quo culture?


221

Creativity You'll assess the creativity of people throughout the organization to see if the new ideas that are under development are sufficiently creative. Trust You’ll examine the level of trust in the organization to see if people are comfortable in their working relationships to allow the ambiguities and uncertainties of the innovation process to follow a natural developmental flow, or if the lack of trust forces people to make innovation decisions too quickly because it’s not safe to allow ambiguity to resolve itself over time. Leadership You’ll assess the performance of leadership across the four delivery factors, including goal setting, expectation setting, and tone setting. Mindset You'll assess the mindset of the leadership team to see how well they understand the acceleration of change, and how much they're prepared to support the innovation process as the development of the future products and services for the company. Attitude You'll review the overall attitude that people have towards innovation to find out if innovation is sufficiently support, and if people are engaged in the innovation process.

222


Tone And of course, you'll look at the tone as defined as said by senior leadership to see that innovation is getting the proper support in both words and actions.

A thorough assessment involves talking with a lot of people, and not just people in top management, but people throughout the organization. You may also interview people who are outside, including customers, suppliers, and partners, to learn their views on the company’s innovation performance, strengths, and weaknesses. Interviews often last 30 to 60 minutes, although they could also be longer. Researching the external environment measures the rate of change in the market, and assesses the innovation capabilities and performance of major competitors. To learn the views and experiences of a larger group of people it’s helpful to do an online survey to reach hundreds more people. Ten to twenty minutes of questions and answers, answered anonymously and therefore candidly, provide tremendous depth of information about people's attitudes, feelings and experiences of the innovation process. By comparing findings across all three of these information sources we expect to gain a detailed understanding of current innovation performance, assess where performance is outstanding, where it's good, and where it needs to be improved, and where it should be targeted.


223

Taking Action: Your Innovation Master Plan You may choose to write up your findings in a plan, and it will certainly also be the subject of a briefing with your executive team to help them understand the organization’s current capabilities, prescriptions, and the role that each member of the executive team needs to play in developing and promoting the dramatically enhanced innovation capability that you envision, the transformation of your organization into a genuine innovator. As you prepare the innovation master plan you should expect to identify ten to twenty major improvement areas to focus on, and these may become the primary drivers of your innovation action plan for the first six months to one year. You can also expect that during the course of that work you'll be interacting with a great many people, and both coaching and encouraging them to participate in the innovation process, as well as for many insisting that they follow the rigorous innovation structure.

••• As you will certainly have noticed, a lot of this overlaps with your needs as a small business leader, but the scale of the ideation effort that a large firm has to engage in, and the scale of the infrastructure to support the financial, managerial, and coordination of all that is probably far more than you need. And in fact, the very idea of a Master Plan may be beyond the scale or scope of your requirements. But at the same time it’s necessary to plan thoughtfully and engage people effectively as you pursue innovations to support your own business’ future growth and development.

224


And of course the advantage that you’re likely to have over a larger firm is the capacity to act quickly. As the leader of a small company, when you want to move forward you can make a lot of great stuff happen very fast, while bigger firms may spend weeks, or months, or even years debating; that can yield you a significant head start. This means taking action, and in the next chapter we’ll look specifically at your own action plan.


225

Chapter 11 Your Action Plan

Revisiting the Formula Is it realistic to suggest that there’s actually a formula for innovation? Now that you’ve read this far, you certainly have an opinion about that question. Change and complexity, the external world that seems to be different nearly every day. Risk and the need to come up with great ideas, and to balance potential rewards with the risks that come with striving to attain them. Speed, the imperative to go fast because the external world isn’t waiting around for you or your organization, and your competitors would be happy to seize your market share and make it their own. Engagement, because it takes the observations, expertise, and insights of many people working effectively together to come up with great ideas, and then transform them into working solutions to

226


problems that your customers really do want to solve. Leadership, because no innovations happen without courage, commitment, support, and often resources, and these are elements that you, as leader, must provide in highly visible and emphatic ways. And then tools, which can make the path much easier and faster even if they’re not fancy. So the formula says that innovation success is a function of risk, times speed, times engagement, times leadership, plus tools. Has anything critical been omitted? If you think we have left something we’d love to hear your feedback, as our ongoing dialog with innovators around the world has been an essential part of our practice and our learning for more than 20 years, and many of the most important lessons have come this way. For the moment, though, let’s assume that the model is valid, and continue to explore how it could or should be implemented. Making this happen is not just all about you, of course. As you come to understand the scope of work that you’ll need to engage in to get innovation happening in the most effective way possible, you’ve realized that you may need a team to work with you, an innovation team.

Your Innovation Team This will be a dynamic group of people from many different backgrounds who have vital roles to play in support of your firm’s innovation objectives. Without knowing the specifics of your situation, your organization, and the unique challenges you’re facing, please consider the following as a suggestion and a general set of jobs or roles that are useful to the successful pursuit of


227

innovation in a small organization, that is, your company. The innovation formula addresses the very specific tasks that have to be accomplished for innovation to emerge from your organization not only as a matter of luck or at random, but through a concentrated effort that results in sustained innovation performance. Hence, the roles that we think are most important to your organization’s innovation performance line up with the elements of the formula: complexity and change, risk management, speed, engagement, leadership, and tools.

Complexity and Change: The Strategy Manager We began the discussion of your innovation needs, requirements, and opportunities by exploring the driving forces of change that are shaping the world of tomorrow. We talked about technology, science, culture, the population, and climate change, and these broad trends as well as some that may be specific to your industry or your organization present a continually changing panorama that you need to be paying close attention to, for there’s no telling when an external change will lead to a specific requirement or challenge for you. Thus, the innovation team needs someone to track the external trends, major and minor, that are pertinent to and important to your organization’s strategy, to its competitive position, and to its innovation possibilities. What is the news about your competitors, or technology, consumers, media, culture, and your suppliers that could influence the present or the future? What are the emerging trends? Who are the thought leaders? If your firm is very small then this manager is likely to be you, the owner/entrepreneur, or if it’s larger then perhaps someone else can play that role. It’s not a full time activity, but more a process of

228


diligently gathering data points and once in a while looking to see what patterns are evident. Perhaps you keep a bulletin board posted with news, a collection that everyone in the company can contribute to, as it’s very helpful when many people are involved in tracking change and helping to identify the trends and patterns. Some will turn out to be important, others not, but the point is to be engaged in the ongoing effort to pay attention to what’s going on, and figure out what the implications could be.

Risk Management: The Portfolio Manager The next major topic in the book was risk management, and we described the importance of an innovation portfolio as the right tool to help you find the right balance between risk and reward. Since you’re likely to have an innovation portfolio it will need to be managed, and thus it is a specific responsibility to track the innovation portfolio and monitor the progress of each of the projects that’s being worked on. If your firm only has one or two innovation projects then this role won’t exist, but if there are five or ten of them then it can be quite helpful to have someone monitoring the progress and making an update every week or two. This doesn’t have to be particularly time consuming to be helpful – even an hour now and then can make a difference.

Speed, Engagement, and Tools: The Project Manager Next we talked about speed, and the critical importance of getting innovation projects done quickly. This generally means that project management is needed, especially if you’re doing large projects. Someone, perhaps yourself and perhaps someone else, has to


229

oversee the specifics on a day-to-day or week-to-week basis, and keep the work moving along on time. And since speed is one of your major performance objectives, project management is largely about keeping people focused, defining slightly unreasonable deadlines, and then helping innovation project teams to meet those deadlines. Another facet of project management relates to the next theme we explored, engagement. It is often project managers who create the programs, projects, and initiatives that nurture and inspire broader levels of engagement, not only by the innovation teams themselves, but across the entire organization. The third role for project management in the context of the innovation formula is the engagement in defining and implementing the right tools. As we discussed, tools that facilitate high performance collaborative work, tools that help people engage effectively with the broader network or ecosystem, tools such as innovation or ideas rooms can all make a significant enhancement to your efforts, and it is often the project managers, who are paying close attention to the overall performance and always looking for opportunities to improve, who can best identify the right investments in tooling that will yield the desired improvements at the right cost.

Leadership: Peers, Partners, and Advisors Our next topic was leadership, and you should certainly spend time regularly honing your leadership skills. In addition, many small business leaders find it very helpful to work with the leaders of other firms in peer groups to discuss their issues and challenges, learn how others may have addressed the same ones, and also coach and consult with one another to help each grow their businesses.

230


Most small businesses operate as part of a local business community and many have local suppliers and local customers who understand the local business culture as well as the competitive environment, and it can be tremendously helpful to engage a few of them from to participate as advisors for the overall innovation effort, or to provide feedback on specific innovation projects and initiatives. For example, it may be helpful to create an advisory board consisting of a few outsiders who will give guidance and feedback to innovation activities. It’s a good idea to include a mix of people who are familiar with your industry, and also some who work in from different industries and therefore have different experiences and viewpoints on key trends, major issues, and who bring different ways to look at and solve problems. Advisory board members can be asked to respond to specific requests for information, and they may meet as a group a few times a year to provide a sounding board for new ideas and directions, and also to critique and advise on projects and portfolios.

Getting Started As you recruit the best people you can find to participate on your innovation team, and work to engage with them as your teammates, colleagues, and fellow travelers on the innovation journey, one of the most important things to remember is that innovation is driven by divergent thinking, which we also know as lateral thinking, and as a leader you must specifically encourage, promote, and indeed insist on the necessity of divergent thinking across all aspects of the work, from the design and management of your innovation efforts, to the conduct of the many ongoing innovation projects. Divergent thinking brings the possibility of seeing new ideas, of seeing possibilities that others have not seen, and this is a central


231

objective of all of this work. The outsiders and advisory board members will be particularly well-positioned to offer such insights, but you must constantly stress to the insiders you work with, including the members of your team, that divergent thinking is absolutely necessary to short and long term success. We contrast divergent thinking with its opposite, convergent or analytical thinking. Analytical thinking is the approach that is most typically used throughout the day-to-day affairs of a business, which relies on deduction and generally on linear thought processes. This is sound, logical, and essential for success, but it’s often an impediment to innovation. The first reason is that convergent thought tends to eliminate possibilities that are outside of the field of view, causing people to choose from the options that they see immediately before them, and not to even consider the possibly better options that are over the horizon. Second, convergent thought is based on existing knowledge, whereas it is a core principle of innovation that we must seek new knowledge. And as the comment from Norman Doidge makes utterly clear, the mind which is set in its ways is entirely willing to discount or entirely disregard information which does not conform to expectations. Such information is often the golden ore which innovators seek. Divergent thinking is much more likely to expose this hidden ore, while convergent thinking might never consider it as a possibility. To counteract an organization’s necessary obsession with somewhat narrow logic and to support the discovery of useful novelty, innovation teams do best when they encourage divergent thinking. This means that their way of thinking and working will be quite different from how most of the work is done throughout the rest of the organization. The innovation team must be a learning team, a

232


group of people who use divergent thinking to discover the future, and create it. To arrive at a worthwhile destination you have to know where you’re going, so in this chapter we’ve discussed your skills as an innovation and the roles that make innovation happen. You’re curious to discover new insights, you learn nimbly, you ask great questions, you lead, you manage, you coach, you design, and you’re honest. Further, you’ll rely on a great, dedicated, and skillful team that’s spinning along in the groove, getting outstanding work done, developing great ideas and turning them into profound value for your customers and for your organization. This is the organization in which innovation is clearly happening! We’ve covered some essential ground to help you prepare your innovation journey, and now it’s time to put these concepts into action. As you consider the decisions you need to make about the role of innovation in the future of your company, the Taking Action Steps listed at the end of each chapter have been intended to help you frame the themes and issues in a productive way. They’re copied here, along with 25 additional suggestions that we hope will help you to think and plan creatively and productively about how to make innovation a reality in your organization.


233

Taking Action: Chapters 3 – 10 Chapter 3: Complexity and Change List the changes you expect, and then prioritize the top 3. Think about how the changes could impact your business in each of these, prioritize the ones that you think will be most impactful, and devise a quick strategic response. Another task: identify one of the themes that’s vital to the future of your business, and make it your mission to learn more about it. Chapter 4: Risk, Great Ideas, and Your Business Model There’s been a lot to think about in this chapter, and we’ve already made a lot of suggestions about what you can or should do to being implementing these ideas. As noted just above, make a list of possible disruptions pertaining to each of the major driving forces of change. Assess the short, medium, and long term impact, and think about the early warning signs that you might receive to indicate that a possibility is turning into a reality. The exercise to list changes in the last five years, and your anticipated changes in the next five can also be a powerful way to see more clearly hoe change is occurring, and to prepare for the big changes that are certainly coming.

Chapter 5: Risk and Your Innovation Portfolio It should be obvious that you need to engage in a detailed exercise to design and build your innovation portfolio. This will perhaps involve a number of other people, including leaders, managers, and thoughtful people from throughout the organization, and from outside as well.

234


And remember that building and then managing your innovation portfolio is a process at which you’ll improve over time. The first efforts, no matter how unsure, will inevitably lead you in the right direction as your learn how to make the process work for your culture and the specific challenges that your organization faces. Give this time regularly, once each month or two, and allow the learning that will occur to bring its benefits. Chapter 6: Speed Once you’ve identified some promising projects, put a team together and set an ambitious goal. Then give them a lot of support and coaching so that they can begin working productively. Encourage speed, which means that you may have to remove obstacles that impede them. Remain open to feedback and suggestions, and make sure that everyone knows that learning is essential and that fast failures are preferable to slow ones.

Chapter 7: Engagement In general it’s really easy to see the strengths and weaknesses of others, but difficult to get a clear view of your won. To gain a deeper understanding of the culture of your own organization you’ll therefore need to step outside of it and look back to see what’s really going on, how people are relating to one another, where the tensions and dysfunctions are hidden, and what’s working really well. Such an assessment can then help you to target the improvements that will result in strong performance across all three of the critical roles.


235

Chapter 8: Leadership This is a chapter on leadership, so it’s fairly obvious that you need to make a careful and honest assessment of your own leadership style. What’s working? What’s not working? Then move on to the other items for your more complete selfassessment. Set aside some focused, quiet time to think about your own strengths and weaknesses, and then decide on a couple that you feel are critical to the future success of your organization, and put together a study plan to learn how your desire for personal change can become a reality. It may be very helpful to discuss these issues with your peers, other business leaders who have their own companies to run, and who are facing the same or similar challenges. Peer coaching like this can be very useful.

Chapter 9: Tools These four innovation tools can work together nicely to support creative and innovative people through the many phases and iterations of their work in the innovation process. When these methods are combined effectively they can make a tremendous difference by helping individuals and teams achieve much better and much faster results. So naturally you need to ask yourself if your organization should invest in these tools If you have offices, you already have. Are they as good as they can be? And if you have software tools, you also have. So given the productivity gains that can be achieved, it may be a very fruitful investment.

236


Innovation managers are often the ones who shepherd these tools, methods, and environments into reality, and thereby support the quest for high performance for their own organizations.

Chapter 10: Your Innovation Master Plan You may choose to write up your findings in a plan, and it will certainly also be the subject of a briefing with your executive team to help them understand the organization’s current capabilities, prescriptions, and the role that each member of the executive team needs to play in developing and promoting the dramatically enhanced innovation capability that you envision, the transformation of your organization into a genuine innovator. As you prepare the innovation master plan you should expect to identify ten to twenty major improvement areas to focus on, and these may become the primary drivers of your innovation action plan for the first six months to one year. You can also expect that during the course of that work you'll be interacting with a great many people, and both coaching and encouraging them to participate in the innovation process, as well as for many insisting that they follow the rigorous innovation structure. ••• As you will certainly have noticed, a lot of this overlaps with your needs as a small business leader, but the scale of the ideation effort that a large firm has to engage in, and the scale of the infrastructure to support the financial, managerial, and coordination of all that is probably far more than you need. And in fact, the very idea of a Master Plan may be beyond the scale or scope of your requirements. But at the same time it’s necessary to plan thoughtfully and engage people effectively as you pursue innovations to support your own business’ future growth and


237

development. And of course the advantage that you’re likely to have over a larger firm is the capacity to act quickly. As the leader of a small company, when you want to move forward you can make a lot of great stuff happen very fast, while bigger firms may spend weeks, or months, or even years debating; that can yield you a significant head start. This means taking action, and in the next chapter we’ll look specifically at your own action plan.

And then44 1. Study. Innovation is a vast topic with countless nuances and subtleties to master, and there are many sources of great information. If you’ve read this book, or any other good innovation materials recently, go back and look at the ideas you’ve highlighted. Make your own list of innovation initiatives and get working on them. 2. Evaluate your company’s innovation results over the last five years and compare them with your top competitors. In what areas have they done better, and in what areas has your firm done better? Which competitor has been the most innovative over the last five years? Initiate a competitor intelligence program to figure out how they’ve done it. 3. Conduct a detailed audit of your own firm’s innovation methodology. Assemble a diverse team of people and do the audit as a workshop. Solicit their ideas for improvements, and have them prepare three initiatives to address the most important shortcomings. 4. Think about the four different types of innovation and

238


evaluate the last five innovations your firm produced to see what categories they fall into. What does that tell you about your existing innovation process? 5. Start asking questions. Talk to five front-line people each day whom you wouldn’t normally encounter, and learn from their point of view what’s working, what’s not working, and where your products or services are falling short. 6. Assess the rate of change in your industry and determine the rate at which new companies emerge and old companies are displaced. Identify the key factors that caused formerly leading companies to decline, and then assess your own company’s performance on these same variables. 7. Develop your organization’s idea vault. Put it to use and invite users to make suggestions to improve the database and its interface so that it is optimally useful. 8. Create an Innovation Advisory Board and invite five outsiders who know your industry to give you their candid feedback about your firm and it’s innovation initiatives. 9. Assess your current business model by determining which elements of your business are most important to your customer’s experience, and then deciding how well you’re doing in each area and what you need to do to improve. 10. Assess the role of innovation in your organization’s strategy over the past five years, and then consider what will be needed over the next five. The next time you have a meeting on strategic planning spend half the time discussing innovation. 11. Identify some key themes that you think are very important to your relationships with your future customers, and


239

engage in detailed dialog to learn more about customer attitudes, values, beliefs, and motivations. 12. Set up or improve your systems to gather customer feedback. 13. Focus your next strategy meeting on innovation, and ask each person attending to propose three new ideas that have never been discussed before in such meetings. 14. Hold a business model innovation workshop and invite people from different parts of the organization to come together for a day to brainstorm new business model ideas in the morning, and then develop 3 or 4 of them into real proposals in the afternoon. 15. Go to a magazine stand and buy five magazines that you’ve never looked at before that are not ostensibly about your own field. See how many pieces of information you can find that are pertinent to your industry or your company. 16. Set aside a space at the crossroads of your office as an idea room. Invite everyone to prepare and post ideas, and structure it so that others can give feedback on any idea they find interesting. 17. Study the ten most important technological trends that will affect your industry over the next five years, and assess your firm’s capability in each area. Prepare a plan to develop competence in any area in which you have shortcomings. 18. Do an assessment of top management’s innovation leadership in your organization, and identify the top three weaknesses. Come up with a plan to overcome them, and implement it.

240


19. Institute innovation awards that recognize both successes and failures. The key criterion for winning a prize is the degree of learning that the effort provided to the organization. Consider presenting awards that are not monetary, but rather symbolic and which carry status within the organization. Hold a luncheon to celebrate ten great ideas that didn’t work, and ten that did. 20. Establish a linkage with a local university by funding an internship in a social or technical area that are important for your firm’s future. Ask them to prepare and present an analysis of your industry and an evaluation of your firm’s positioning, and to propose three research areas they could work in that would add significant value to your positioning over the next three years. 21. Conduct an anonymous survey in your firm to assess trust. Do employees trust management? Do they trust each other? What can be done to improve trust? 22. Study the risk profiles of the last ten innovations your industry developed. Determine the degree of risk associated with each one to find out if you’re taking too much innovation risk, or too little. 23. Identify a company that you admire that’s outside of your industry. Study that company in detail to learn why it’s so good, and figure out how to emulate its strengths in your own organization. Have each member of your team look at a different company, and compare your findings. 24. Send teams to meet with 25 of your customers to learn more about how they use your firm’s products and services. Have all the teams meet together afterwards to debrief and prepare an analysis of what they’ve learned, and what they


241

think ought to be done differently going forward. 25. Do an obstacles audit on your own firm and find out what’s blocking people from innovation. Then remove the obstacles. 26. That’s probably enough.

••• Hopefully this book has given you a lot to think about, and perhaps also some clarity about some of the next steps that you’ll take to achieve innovation in your own organization. Thus, I have two final recommendations:

First, take some quiet time to think.

And lastly, start your innovation journey now.

242



243

Notes 1

2 3

4

5

6

7 8

9

10

11

12 13 14

Langdon Morris, Moses Ma, and Po Chi Wu. Agile Innovation. Wiley, 2014. Bill Gates. The Road Ahead. Viking, 1995. Portions of this chapter have been adapted from Langdon Morris, The Chief Innovation Officer. Innovation Academy, 2013. Baron Funds, March 2014 Quarterly Report. http://www.baronfunds.com/BaronFunds/media/QuarterlyReports/Quarterly-Report-33114.pdf The original work was done by Harry Markowitz. Markowitz, H.M. (1959). Portfolio Selection: Efficient Diversification of Investments. New York: John Wiley & Sons. Clayton Christensen. The Innovator’s Dilemma, Harvard Business, 1998. Larry Keeley. Ten Types of Innovation. John Wiley & Sons, 2013. Tony Davila, Marc Epstein, and Robert Shelton. Making Innovation Work. Pearson Education, 2006, 2012. This section is adapted from Langdon Morris, Moses Ma, and Po Chi Wu. Agile Innovation. Wiley, 2014. Portions of this chapter have been adapted from Chapter 5 of Agile Innovation by Langdon Morris, Moses Ma, and Po Chi Wu. John Wiley, 2014. Brent Schlender, “The Lost Steve Jobs Tapes,” Fast Company Magazine, April 17, 2012. David Packard. The HP Way. HarperBusiness, 1995. Walter Isaacson. Steve Jobs. Simon & Schuster, 2011. Page 363. Rob Austin and Lee Devin, Artful Making: What Managers Need to Know About How Artists Work. Financial Times, 2003.

244

15


Idris Mootee. Design Thinking for Strategic Innovation. John Wiley & Sons, 2013. 16 We should also note that one of our most important innovation mentors, Professor Michael Barry, is on the d school faculty. 17 This section is adapted from Langdon Morris, The Innovation Master Plan, Innovation Academy, 2011. Chapter 5. 18 This section is adapted from Langdon Morris, Permanent Innovation, Innovation Academy 2011, Chapter 10. It is based on work by Bryan Coffman. 19 Eric Ries, The Lean Startup. Crown Business, 2011. 20 Langdon Morris, Moses Ma, and Po Chi Wu. Agile Innovation. John Wiley & Sons, 2014. 21 Langdon Morris. Managing the Evolving Corporation. John Wiley & Sons, page 195. 22 Portions of this chapter are adapted from Chapter 7, Langdon Morris, Moses Ma, and Po Chi Wu, Agile Innovation. John Wiley & Sons, 2014. 23 Louis V. Gerstner, Jr. Who Says Elephants Can’t Dance? HarperBusiness, 2002. P 187. 24 T he description of the three essential roles is adapted from Langdon Morris, The Innovation Master Plan: The CEO’s Guide to Innovation. Innovation Academy, 2011, Chapter 7. 25 This quote is a probably paraphrase, and the exact number remains a mystery. Literature searches disclose a range of numbers from hundreds to thousands, and comments attributed to Edison that vary in the specific wording, but carry the same basic message. 26 Langdon Morris. The Chief Innovation Officer. Innovation Academy, 2013. 27 Doidge, Norman, M.D. The Brain That Changes Itself. Penguin Books, 2007. P. 304. 28 Wexler, Bruce. Brain and Culture: Neurobiology, Ideology, and Social Change. MIT, 2006. 29 Quonset huts were produced in mass during World War II. They were designed to enclose the most space with the least material, and were generally made of steel frames covered with corrugated steel sheets. The US Navy used more than 150,000 during the war, and then sold most of them afterwards. Many are still in use 75 years later throughout the US and in the Pacific. 30 Michael J. Gelb. How to Think Like Leonardo da Vinci. Dell, 1998. P. 138.


245

Thomas J. Allen and Gunter W. Henn. The Organization and Architecture of Innovation: Managing the Flow of Technology. Elsevier, 2007. p. 14. 32 Thomas J. Allen and Gunter W. Henn. The Organization and Architecture of Innovation. Elsevier, 2008. P. 2. 33 Karl Sabbagh. Twenty-First-Century Jet: The Making and Marketing of the Boeing 777. Scribner, 1996. p. 70. 34 Karl Sabbagh. Twenty-First-Century Jet: The Making and Marketing of the Boeing 777. Scribner, 1996. p. 36. 35 Thomas J. Allen and Gunter W. Henn. The Organization and Architecture of Innovation. Elsevier, 2007. P. 63. 36 William H. Calvin. The River that Flows Uphill: A Journey from the Big Bang to Big Brain. New York, MacMillan, 1986. 37 James Burke. Connections. Simon & Schuster, 2007. 38 Langdon Morris. “Social Design: The Link Between Facility Design, Organization Design, and Corporate Strategy.” An InnovationLabs White Paper, 1999. Downloadable at www.innovationlabs.com/publications 39 Steve Wozniak & Gina Smith. iWoz: Computer Geek to Cult Icon. Norton, 2006. p 122. 40 http://rivals.yahoo.com/highschool/blog/prep_rally/post/Coach-usesiPhone-app-to-help-save-collapsed-pla?urn=highschool-291472 41 Don Tapscott, Wikinomics. Portfolio, 2010. 42 San Francisco Chronicle, “Ask.com layoffs spell surrender.” November 10, 2010 43 T.S. Eliot, Preface to Harry Crosby, Transit of Venus (1931), p. ix. 44 This list is adapted from Chapter 11 of Langdon Morris, Permanent Innovation. Second Revised Edition, Innovation Academy, 2011. The suggested action items have been modified to better fit the environment and needs of a small business, so while the general themes are similar to the original, the specifics are quite different. 31