BARRIERS TO INNOVATION

A recent IBM Consulting survey of 765 CEOs that found that "Without a supportive corporate culture, proper funding for investment, and a cooperative workforce, even the best plans for innovation will falter" . The study quantifies much of what we have been discussing in our blog as well as our Exec Ed class -- Driving Organic Growth.

The first chart highlights the major barriers we found repeatedly:

The inability of companies to resource their critical growth initiatives to win is perhaps the most important reason for lackluster results. The underpinning cause is usually an ineffectual portfolio process. All businesses must meet their short term financial goals; they only have so much budgetary headroom. The inability or lack of desire to kill projects that we call "the walking dead" takes valuable resources away from the growth initiatives. More often than not, these "walking dead" projects are favorites of those in power. What is needed is a transparent and rigorous decision process.

The second issue highlighted in the IBM study is Corporate Climate. Our experience suggests that managing business risk is critical to driving organic growth -- how do you execute in highly uncertain business/technology environments? We talked about this earlier (8/22/056 post) in relation to the need to "manage the cost, not the rate of failure" (MacMillan and McGrath). This is more than changing a process; it is about culture and it starts with the top!

Managing business risk is growing in importance as IBM found that more and more of innovation is occurring around business models which, by definition, requires fundamental change and an inherent increase in uncertainty and exposure to business risk -- ~40% of innovation efforts are on product or services but a full 30% is on new business models which must be lead from the top (see 8/27/06 blog); the remaining innovation is on operations.

FIVE KEY STRATEGIES FOR MAKING METRICS
Business Week On-line, 8/10/06
Dev Patnaik

A question I always get when working with companies is: What are the right metrics to drive growth? The following article sheds light on this subject. Two key points are: leaders must thoroughly discuss these issues and reach alignment on the metrics they want to drive their company; and, everything is not vanilla—differential management (in this case metrics) is essential for sustainable growth.

Corporate leaders often struggle to create meaningful innovation metrics. The same questions keep arising. How innovative are we? What initiatives are giving us the biggest bang for our buck? And what does a good idea look like anyway?

In my experience consulting with a range of companies, I've found five key strategies for developing useful metrics:

Use people, product, and process metrics. Many companies develop metrics systems that focus only on the process. Their intention is to evaluate the effectiveness of various innovation activities. Yet process metrics are just one part of the solution, and they're usually the last part.Start by measuring your people. What traits are you looking for in your team? What behaviors do you want to reward? Next, move to product metrics. How are you measuring the ideas you come up with? Do you have meaningful ways to evaluate new products, as well as new services and business models? Only when people and process metrics are in place does it make sense to evaluate how well the overall process is performing.

Connect the metric to the rhetoric. Some business leaders hope to inspire their organizations by spending hundreds of thousands of dollars on management retreats, pep rallies, and innovation seminars. While those gatherings can be exciting, most companies discover that their employees ultimately prioritize the activities that they're measured on.Marketing managers won't spend time thinking about long-term growth if they're being evaluated solely on this quarter's performance. The most successful companies realize that innovation, like any objective, happens when companies ensure that there's a close alignment between stated goals and individual performance measures.

Start with incentives instead of controls. Metrics systems within companies act as both drivers to ensure constant improvement, and control systems to prevent failure. That can be incredibly helpful when everyone has a general sense of what "good" looks like, and how to achieve it. However, that basic notion of what's good is sometimes missing at the outset. In that case, it's more important to create metrics that reward positive results, rather than protect against adverse outcomes. The goal is to get people to start trying a variety of approaches, so you can figure out what works. If you're in the early stage of building an innovation system, definitely focus on carrots.

Set up multiple tracks. One of the best ways to encourage innovation is to stop discouraging it. That can happen when every new product or service idea has to meet the same performance metrics. Invariably those metrics are designed to evaluate base hits, not home runs. This can lead companies to inadvertently kill the best ideas because they don't fit the metrics. Teams pick up on the pattern quickly, and lower their sights to more tried-and-true projects that can get through the system.If you really want have both incremental and game-changing ideas come to market, develop different sets of metrics for evaluating and managing each idea.

Beware of false precision.Metrics that measure existing systems in current businesses often have a lot of data to draw upon. That's often not the case when a company is trying to do something new or innovative. Still, old habits die hard. Managers can end up trying to evaluate a completely new idea with the same level of precision they had when measuring established businesses. The data that they create may then give a misleading picture of certainty.Instead of detailed projections, try using round numbers, simple scales of 1 to 5, or "Harvey balls," that system of empty or filled-in circles used by Consumer Reports. Highly detailed metrics make sense for incremental improvements on established businesses, but they can be wildly misleading when evaluating greenfield opportunities.

Patnaik is a principal of Jump Associates, a firm that specializes in discovering new opportunities for growth

How to Be a Smart Innovator

Nicholas Carr talks about the right way to be creative -- and the wrong way WSJ, September 11, 2006; Page R7

I generally do not reproduce an entire article but this is fantastic. Mr. Carr describes how corporations should view innovation. This article illustrates our position that the goal of investing in innovation should lead to competitive separation (the outcome of competitive differentiation) at your target customers. I put this under the PROCESS category because it is my experience that the type of process you deploy will deal with the issues raised by Mr. Carr. I highlighted those areas I feel are most important. Enjoy!

Challenging the conventional wisdom seems to delight Nicholas Carr. Mr. Carr, 47 years old, also has turned a skeptical eye on another popular notion (he appears regularly in HBR) : If innovation is a good that companies should pursue, more innovation is even better, and the best innovations are those that upset existing markets or industries. Instead, Mr. Carr says, companies need to be prudent -- even conservative -- in where and how much they encourage innovation.

Wall Street Journal news editor Michael Totty and columnist Lee Gomes recently spoke with Mr. Carr about the best ways that companies can pursue novel thinking. Here are excerpts of that conversation.

The Price of Innovation

THE WALL STREET JOURNAL: What's wrong with unfettered innovation?

MR. CARR: American companies are in love with the idea of innovation, and that's great and it's necessary and it's one of the great strengths of businesses and American businesses in particular. But the danger is that companies can come to believe that innovation is a universal good and that they should be innovating everywhere in their company.
They lose sight of the fact that innovation isn't free, that innovation actually is quite expensive and quite risky. You need to bring the same kind of discipline to deciding where you innovate as you'd bring to any other kind of management question. You want to make sure that you innovate in those few areas where innovation can really pay off and create a competitive advantage and not innovate in other areas where it won't pay off.

WSJ: How does a company decide where and how to pursue innovation?

MR. CARR: You have to connect your innovation initiatives and your innovation investments to your broader business strategy, and look at those areas where you are going to get, or think you can get, a competitive advantage. For some companies, the highest potential areas for innovation may be in its manufacturing processes or in the way it manages its supply chain. For other companies, it may be in their products themselves. For still other companies, it could be in their branding and marketing areas.

Dell and Apple vs. Gateway

WSJ: Why did you start thinking or writing about this? Were there companies that you saw doing it badly, that evidenced an inappropriate enthusiasm for innovation?

MR. CARR: I'd seen -- particularly in a lot of business writings -- a kind of cult of innovation emerging that said innovation is an unalloyed good and you should be innovating everywhere in your company. And so that struck me as being too simplistic. One good example is if you look in the personal-computer industry at Dell and Apple. Dell's having some problems now, but it's still the most profitable PC maker and has been for some time. Apple is doing very well with a different strategy. You look at those two companies and you see that Dell has been very aggressive as an innovator in its basic processes, and particularly [in] finding ways to reduce costs as low as possible. But it hasn't been an innovator in the product itself. It's in fact very much gone the commodity route, which up until now was a very powerful strategy for it.
Apple is almost the mirror image of Dell in that it has been very good at copying the process side [by] looking at what companies like Dell have been doing, and then being a very aggressive innovator on the product side, trying to get distinctive products out there. Both have been successful by being very focused in the way they innovate.
A company like Gateway tried to do both. It tried to innovate in its products and get differentiated products, and it also tried to innovate in its processes. It even tried to innovate in its retailing strategy and tried to roll out a bunch of services as well. By innovating so broadly it didn't actually create any competitive advantage and ultimately struggled enormously and fell behind those more disciplined innovators.

Another of the dangers of the cult of innovation is the belief that you need to go for home runs in innovation and that you need to be a leader in figuring out the innovations that are going to be disruptive of your entire industry.

When you look at the type of innovations that pay off, they are often much more modest innovations that, instead of causing disruptions, mend those disruptions or help regular customers adapt to new technologies or new innovations.

Building Bridges

WSJ: In that context, you have written about "bridging" technologies. Explain what you mean by that.

MR. CARR: For a lot of companies, the people who are in charge of innovation, whether it's the R&D folks or product developers or entrepreneurs in small companies, are the people who are the most passionate about the particular new technologies. They tend to be the early adopters, and that can give them a distorted view of the market. Because most normal people are actually quite conservative: They'll adopt a new technology, but they tend to do it quite slowly. That opens up a big opportunity for companies that are smart in figuring out how to help normal, everyday customers create a bridge between an old, established technology or way of doing things and a new one.

New technologies tend to be difficult to use. They tend to be buggy and not work perfectly. They tend to be expensive. All of those things mean that they tend to be limited to a small, early-adopter customer base for quite a long time. If you can figure out a way to move with the market toward the new technology, I think you can do a lot better than jumping ahead.
Back in the dot-com era in the late 1990s, you had all sorts of new-media companies being organized to try to deliver video online. And almost all of them went bust for a very simple reason: Very few U.S. consumers actually had broadband access. The companies were way out ahead of the market in innovation. Even today, fewer than half of American households have broadband Internet access.

In contrast, you have a company like Netflix that was able to bridge between the new technology -- the Internet -- and the old technology, which is the delivery of video in physical form, by using the U.S. mail to deliver DVDs, yet having a very sophisticated ordering system online that didn't require broadband access to use.

WSJ: Is it ever better to be the first mover?

MR. CARR: The studies that I've seen indicate that it's rarely the very first mover into a market who ends up winning that market. Today we think of the iPod as being an enormous innovation, and in one way it was. But in fact, when the iPod came along there were already MP3 players and there were already lots of digital jukeboxes.

WSJ: Managed innovation seems really difficult to pull off. You manage it too tightly and you squelch it, or you let it go too far and it runs amok. How does a company create a balance so that people are coming up with new ideas but they're not tearing apart the company?

MR. CARR: You can manage where you innovate and pick and choose your targets. But once you've chosen your targets, trying to micromanage the actual innovation process can backfire by undermining the creativity of your best people.

My argument isn't that you should try to impose overly formal rules and regulations and practices on your innovators or on your innovation teams. It's just that you should make sure that those teams and those people are focused on the right areas of your business that require innovation.

That's not always the product. It's not always something that the customer sees. It might be in a very nitty-gritty process, even back-office processing if that's where you're going to have the most opportunity to distinguish yourself from the competition. The greatest innovations aren't necessarily the ones that translate into superior products. Equally powerful are innovations that let you reduce your costs. Just because an innovation isn't visible to your customers doesn't mean that it can't be extremely powerful for your company.

One other thing that I think is important. Very strong innovation can translate into a message to an organization that being a copycat or an imitator is bad. If you look in most companies -- even very successful ones -- in most areas of their business they're actually very effective copycats or imitators. They're looking for the best practices that are out there among their competitors and other companies, and they're copying them in getting their processes and components to the best possible level and then innovating in more focused ways. The ability to be a good copycat is extremely important for companies and probably as important as being a good innovator.

The second organizational danger of pushing everybody to innovate, and of sending out a message -- as a lot of companies do -- that we need to innovate everywhere, is that you begin to devalue competence among your staff. There are some people who are not going to be good innovators but might be extremely competent in what they do. It's important that those people feel valued in that they're rewarded for their competence.

Creative people are great, but creativity tends to be a messy process. There are going to be areas of your business where that's OK, and there are going to be areas where the last thing you want is messiness. In those areas you should value and reward competent people who can do routine tasks very, very well. That's just as important as having brilliant, breakthrough thinkers.

OPEN INNOVATION

Kimberly-Clark turns to outsiders on R&D
Company opens up its operations for fast innovation
11:17 PM CDT on Tuesday, August 8, 2006
By KATHERINE YUNG / The Dallas Morning News

Open Innovation offers a huge potential to leverage the knowledge outside you company. It is at its infancy and we will keep you abreast of developments as more and more companies experiment with it.

NEENAH, Wis. – Since its inception 134 years ago in this town along the Fox River, Kimberly-Clark Corp. has relied on its own scientists and engineers to create products.

But this spring, the Irving-based consumer products giant known for Huggies diapers and Kleenex tissues made a radical change, looking outside its research labs for innovation.

A Florida company, SunHealth Solutions LLC, helped Kimberly-Clark roll out SunSignals, self-adhesive, water-resistant sensors that change color when the wearer is in danger of sunburn.
The promotional items, distributed inside packages of Huggies Little Swimmers disposable swim pants, proved to be such a hit that Kimberly-Clark is looking at selling the sensors as a stand-alone product.

Developed in just six months, SunSignals represents one of a growing number of agreements that Kimberly-Clark is forming in a dramatic overhaul of its research and development operations.

The effort is part of a broader business movement called "open innovation," which seeks to do away with the vertically integrated model of product development that's existed for decades.

Faster development

By turning to outsiders and giving them key roles in bringing concepts to market, companies from Kraft Foods Inc. to International Business Machines Corp. hope to debut more hits faster, boosting sales and profits.

The movement is made possible in part by improved tools for communication, including the Internet, which make long-distance collaboration much easier. Last year, Kimberly-Clark slashed the time it takes to bring out new products by 30 percent, largely through open innovation. "It saves us so much time," said Cheryl Perkins, Kimberly-Clark's senior vice president and chief innovation officer.

Relying on outsiders can also be cheaper, said Henry Chesbrough, executive director of the Center for Open Innovation at the University of California at Berkeley's Haas School of Business.
"Innovation is becoming expensive," he said.
"Developing new technology is taking more and more money."

Open innovation is also growing in popularity because shorter product life cycles make it harder to recoup R&D investments.

Open innovation helped Kimberly-Clark develop new products faster last year, said chief innovation officer Cheryl Perkins.

For all of its benefits, open innovation presents challenges, said Walter Herbst, director of a product development program at Northwestern University and chairman of Herbst LaZar Bell Inc., a product design firm. "It's tricky, it's hard, and most company cultures can't deal with it," he said. Though he supports open innovation, Mr. Herbst said only a few companies, such as Procter & Gamble Co., have much to show for it.

At P&G, a major Kimberly-Clark rival in personal care products, open innovation has led to such hits as Mr. Clean Magic Eraser and Pringles Prints. A year ago, the consumer products behemoth estimated that 35 percent of its products, designs, technologies and processes were not invented at the company. Its goal: 50 percent.
"We've been very pleased with it," P&G spokesman Jeff LeRoy said.

Calling in help

A quarter of current R&D spending is devoted to new businesses, compared with just 10 percent in 2003.

Kimberly-Clark says that to reach its goals, the company will have to engage outside parties in the development and launch of products.

Last year, Kimberly-Clark formed more than 30 partnerships with firms big and small. They took the form of joint-development agreements, joint ventures, co-distribution and supply agreements, and licensing deals. Today, a few results of these changes are starting to appear.
Huggies Cleanteam, a line of toddler toiletries, took only 12 months to hit store shelves, not the typical two to three years, thanks in large part to partnerships with other firms.