Monday, June 18, 2007

Have It Both Ways

"Ambidextrous" companies can handle incremental change and bold initiatives

By Jeneanne Rae Viewpoint:
BW 6/11/07 The debate: Six Sigma vs. Innovation

The next few postings will deal with the critically important topic of creating the right corporate climate for innovation. Specifically, when to use tools like 6 Sigma and when not to when driving growth through innovation. I had many battle scars when I first introduced our Market Driven Growth (MDG) process at DuPont that was deep in the 6 Sigma culture; the 6 sigma black belts wanted to do everything with their methodologies.

The following visual really does it for me. We discuss this in our executive ed class at Kellogg and it is a critical component of implementing the MDG process at our clients.

The three distinct phases of an initiative must be recognized and managed differentially – the “ambidextrous” company. The work at the early stages of a new initiative is driving for strategic clarity. The metric is knowledge and the tool is Options Management. The next phase, the zone of highest business risk-- the combination of uncertainty and spend rate – is where you selected a single path and you must scale it in an environment of relatively high uncertainty (represented by the rapids). The metric is revenue growth and the tool is Discovery Driven Planning. The final stage – optimization – is the region of low uncertainty but execution is critical. The metric is earnings growth and the tool is 6 Sigma. Finally, note the different types of personal needed at each phase. It is critically important to match the DNA of individuals with the task.
Now for the article.

"I can't stand this," said a senior executive of a Standard & Poor's (MHP ) 500 company recently. "One minute the management team is telling us to innovate, and the next minute they are giving us our marching orders in deploying Six Sigma. It's crazy to tell people they should be focused on becoming more efficient while at the same time you want them to explore untapped growth potential. This is making me nuts."

The objectives of Six Sigma seem noble enough for any organization. So what's the rub with simultaneous efforts to innovate? By its nature, Six Sigma fosters a very low tolerance for risk because risk increases variation.

Innovation, on the other hand, seeks to brave undiscovered, uncertain territory. Such fledgling efforts are inherently inefficient. Innovation requires a tolerance for risk-taking and failure.

A corporate culture dominated by Six Sigma management theory will be inclined toward inwardly focused, continuous, incremental types of improvements in process, customer service, systems, operations. A culture that fosters disruptive innovation will be more entrepreneurial, outwardly focused on new markets, technologies, and business models. You explore big new growth platforms that add significant chunks of revenue and profit.

Given the huge management and cultural implications inherent in each approach, it would be difficult to launch both efforts at the same time. Most organizations, like General Electric (GE ), become grounded in one and then attempt the other. In GE's case, Six Sigma came first, and its new innovation initiative, Ecomagination, is now rolling out.

In a Harvard Business Review article, "The Ambidextrous Organization," Charles O'Reilly III and Michael Tushman, business school professors at Stanford and Harvard, respectively, acknowledge the paradox of exploitative vs. explorative efforts. They conclude that smart companies separate the more ambitious efforts at innovation from ongoing efforts at continuous improvement. That allows for different processes, structure, and cultures to emerge within the same company.

An "ambidextrous" organization, they write, has independent project teams integrated into the existing management hierarchy. A tightly integrated senior team makes sure the activities of the right hand don't work at cross-purposes with the goals of the left. Both the traditional business and the fledglings report to the same executive team but are managed under a very different set of rules, depending on where each is in its maturity cycle. Remarkably, in the professors' study of 35 attempts at breakthrough innovation, ambidextrous structures were successful 90% of the time. Other models, such as cross-functional teams and unsupported skunkworks-style groups, were successful less than 25% of the time. Jim Burnick, senior vice-president for quality and productivity at Bank of America (BAC ) and leader of the bank's innovation efforts, says that if managed properly Six Sigma and innovation can go hand in hand. Thanks to Six Sigma, "Paragraph it is now possible for us to think as one organization across fiefdoms and business units to improve every type of customer's experience. This ends up as business-model innovation, which in the banking business is very uncommon."

Here are three strategies for managing incremental and disruptive innovative initiatives simultaneously:

- Separate the efforts. Don't expect people running mature businesses to behave the same as those in charge of startups. Each type has its own incentives, organizations, and talent needs.

- Appoint an ambidextrous senior manager to oversee both efforts. A general manager with responsibility for both traditional and new businesses will foster efficiency by sharing such resources as HR, marketing, and finance, and by promoting integration of the initiatives when the time is right.

-Support both teams appropriately. Don't shortchange one over the other. It kills me to see so much investment in reengineering, training, and employee time being poured into Six Sigma initiatives in the name of cost savings when innovation gets starved for critical research requirements like white-space analysis, ethnographic research, or prototyping. It's as if leadership believes companies can shrink their way to greatness.

Innovation and Six Sigma are different methods that beget different results and require different management styles. They can coexist. Just recognize that each requires its own formula for success.

Thursday, June 07, 2007

The Breakfast Wars

Published: January 10, 2007, New York Times

A number of postings discussed the importance of competitive separation vs. advantage in sustaining growth. The March 14 posting discussed the Value Map tool and the consequence of not understanding the underlying dynamics it represents. The following excerpts highlight the on going battle in the food industry over the fast food breakfast market space. We may see history repeat itself. The Attribute Map discussed in the March 27 positng will also be a useful tool to establish competitive separation.

LAST Wednesday at a Starbucks in Times Square, Katie Voss, a nursing student, was drinking one of the chain's new coffee creations, a cinnamon-flavored low-fat latte. Ms. Voss, who was visiting from Maryland, said she visits Starbucks every day -- up to three times a day, in fact -- but rarely eats anything.

''I've been burned too many times by that pastry case,'' she said.
Neither of the whole-grain, trans-fat-free pastries -- a cinnamon loaf and a banana muffin -- that Starbucks introduced that day were sufficiently alluring to change her mind.
''I try to fill up on coffee here,'' she said, ''so I won't be tempted to get an Egg McMuffin before lunch.''

In the frenzy of grab-and-go breakfast that seizes the nation each morning, the trek from Starbucks (for coffee) to McDonald's or another destination (for food) has become a familiar one. Even as Starbucks has developed a mass following for its dark, super-roasted coffee and its iced, frothed, blended and flavored offspring, the company has struggled to get its food up to par.
''It's a good thing for Starbucks that coffee is a big part of the breakfast decision,'' said Tom Miner, a principal in Technomic, a food service industry research firm. ''But most Americans spend no more than three minutes shopping for breakfast, which doesn't leave time for two stops.''

Thus, the latest move by Starbucks is a big one: challenging McDonald's by introducing hot egg-and-cheese sandwiches on English muffins, just as McDonald's is promoting its new higher quality coffee.

The breakfast sandwiches, with upscale ingredients like peppered bacon and sun-dried tomatoes, are being gradually rolled out across the country as part of a concerted -- and some say long overdue -- effort by Starbucks to improve its food. ''We are going to be all about premium and upscale ingredients, bold and layered flavors,'' said Kathleen Kennedy, the chain's recently hired director for food research and development.

Until now, Starbucks has managed to maintain the fast-food industry's most consistent revenue growth per store -- at least 5 percent each year since 1991 -- partly by avoiding the messy and expensive business of cooking (current model is running out of steam as a growth engine), said Joe Buckley, a restaurant industry analyst at Bear Stearns. Although the company appeals to customers with talk of high-quality ingredients, carefully trained baristas and a European cafe ambience, the stores were built to make coffee, not food; they have about the same cooking facilities as a 7-Eleven.
In trying to elevate the quality of the food, Starbucks faces a particular challenge, Mr. Buckley said. ''Starbucks customers have a very high-quality perception of the coffee,'' he said. ''That pushes their expectations very high for everything in the store.'' ………………

When the chain began its rapid expansion in the 1990s, the food offerings varied widely in selection and quality, and Mr. Miner said that Starbucks may still be recovering from those initial impressions. Also, a Starbucks is not always a Starbucks: when it is in an airport or a Barnes & Noble bookstore, for example, the company may not control what food is sold there.
But even the food in ''company'' stores has been inconsistent. Pastries were long bought from regional bakeries; only recently has the company nailed down its own recipes and established a pumpkin muffin that tastes the same from San Diego to Boston, with minor variations. ……………………..

The bakery items are still produced at about 50 different bakeries, and shipped daily to the stores. Some items, especially seasonal ones like the wintry Cranberry Bliss bar and new ones like last week's Five Fruit Banana muffins, are made in one or two locations, shipped frozen, and simply thawed before serving (This is where the McDonald’s systems are a huge competitive advantage)…………..

To produce hot breakfast sandwiches without building a kitchen in every store, Starbucks has made a huge investment in new high-speed, high-heat ovens (playing catch up) …………………..

Ms. Kennedy's food research and development team is charged with fulfilling the new motto printed on the sandwich wrappers: ''Great Coffee Deserves Great Food.'' That means food that suits the Starbucks psychographic: warm chocolate croissants, tarragon chicken salad, possibly even the return of quiche. It also means nodding to nutrition trends with items like cheese-and-fruit boxes and whole-grain pastries.

''Because of the coffee, our customers look to us for culinary challenges,'' Mr. Barr said. ''They want flavor, but they also expect a certain kind of thoughtfulness.''
Although the Starbucks sandwiches are unmistakable McMuffin clones, re-engineered for the Starbucks demographic, ''thoughtfulness'' put Cheddar and fontina instead of American cheese on top of the egg. (attempting to maintain the Starbuck”s image)……….

The stakes get a little higher each morning in the fast-serve breakfast business. For the last two years, breakfast has been the fastest-growing sector of the fast food industry. In consumer research conducted last year, the research company Mintel found that more than a quarter of Americans who eat breakfast do so away from home -- i.e. in the car, at a desk or in a restaurant. That number has been going up steadily for 25 years, as American eating habits have incorporated longer work hours, longer commutes and drive-through windows .

Since the Egg McMuffin was first test marketed in 1971, McDonald's has held a solid lead over all its competitors. The McGriddle, introduced in 2003, was a howling success that consolidated the chain's position at the top of the breakfast heap. But now the sharks are circling, sensing opportunity. ''Everyone is watching the breakfast category,'' Mr. Miner said.

Taco Bell and Wendy's are also test marketing breakfast menus, and Burger King upgraded its coffee last year, introducing a fuller-bodied BK Joe, brewed from arabica beans (instead of the cheaper robusta that is most common) in both regular and extra-caffeine ''turbo'' strengths. (the stakes are high and the competition is intensifying).

This battle may find using the Attribute Map a useful tool for the critical customer segments each company is targeting:

We will continue to follow this growth saga!

Saturday, June 02, 2007

A Buyer’s Guide to the Innovation Bazaar
More and more companies are shopping outside their organizations for innovation, whether it’s raw ideas or market-ready businesses. Here’s how to choose what’s best for you from among the array of offerings.

by Satish Nambisan and Mohanbir Sawhney

Reprint: R0706H ...June 2007 edition HBR

This is one of those great articles that simplifies a very complex and evolving concept – Open Innovation. The models are simple and profound. They discuss in detail the different innovation intermediaries and how your company can chose its strategy. I highly recommend reading it in the June HBR edition or ordering its reprint. It will be a classic.

Acknowledgement: as broadcasters on business channels must acknowledge if they own the stock they are discussing, Mohan Sawhney has been my mentor at Kellogg and a good friend.

As companies discover the tremendous value to be gained from tapping into external sources of innovation, many seek to emulate the success of some particularly compelling and well-publicized initiative. It might be Procter & Gamble’s Connect + Develop, in which the company uses online R&D marketplaces and other intermediaries to identify and acquire ideas and technologies from independent inventors; or Intel Capital, through which the chip maker invests in technology start-ups and spurs innovation that enriches its business ecosystem overall; or Concept Lounge, an interactive forum set up by Nokia to find and acquire innovative and futuristic product concepts directly from independent designers.

But to seize upon one of these successful programs as a model is to misunderstand how to source innovation from outside your organization. There is no single best method for doing this. Numerous useful approaches—each with different attributes and benefits—are on offer in the global marketplace for new ideas, products, and technologies.

We call this marketplace the “innovation bazaar.” Like a traditional bazaar, it can be chaotic and bewildering. The dizzying array of wares ranges from raw ideas and patents to market-ready new products. And they are touted by all kinds of hawkers, from idea scouts to business incubators. Just contemplating a plunge into the hurly-burly of this space can be daunting.
Indeed, our conversations with senior managers at more than 30 major corporations suggest that although most companies have come to understand the importance of looking outside for innovation, they have serious misgivings about how to do it. The success stories notwithstanding, smart executives know that what works for a P&G or an Intel may not be appropriate for a DuPont or a Microsoft. But how should they shop for the innovation offerings that will work for them?

We offer here a conceptual guide to navigating the innovation bazaar and making wise selections from the various vendors. With this guide in hand, companies can meet their particular needs by putting together a balanced mix of offerings based on the external market context and their internal capabilities. We also introduce a new kind of intermediary that can help companies improve the effectiveness of their innovation sourcing efforts.

To stimulate your interest, the following is the continuum they defined

Companies can shop for innovation in various stages of development—from raw ideas to market-ready products—with the help of a variety of intermediaries. At the two ends of the continuum, however, there are trade-offs: Sourcing raw ideas costs less and allows a company to increase its reach (the number of options it is able to consider) but involves higher risk and a longer time to market. The reverse is true for acquiring market-ready products. The middle of the continuum offers balance among the four factor.