Lessons from Apple
Jun 7th 2007
From The Economist print edition

What other companies can learn from California's master of innovation

This is a great summary of the innovation corporate climate at Apple with four critical lessons:

FOR a company that looked doomed a decade ago, it has been quite a comeback. Today Apple is literally an iconic company. Look at your iPod: the company name appears only in the small print. Some of the power of its brand comes from the extraordinary story of a computer company rescued from near-collapse by its co-founder, Steve Jobs, who returned to Apple in 1997 after years of exile, reinvented it as a consumer-electronics firm and is now taking it into the billion-unit-a-year mobile-phone industry (see article). But mostly Apple's zest comes from its reputation for inventiveness. In polls of the world's most innovative firms it consistently ranks first. From its first computer in 1977 to the mouse-driven Macintosh in 1984, the iPod music-player in 2001 and now the iPhone, which goes on sale in America this month, Apple has prospered by keeping just ahead of the times. ......

Apple is hardly alone in the high-tech industry when it comes to duff gadgets and unhelpful call centres, but in other respects it is highly unusual. In particular, it inspires an almost religious fervour among its customers. That is no doubt helped by the fact that its corporate biography is so closely bound up with the mercurial Mr Jobs, a rare showman in his industry. Yet for all its flaws and quirks, Apple has at least four important wider lessons to teach other companies.

Not invented here, and very welcome

LESSON 1: The first is that innovation can come from without as well as within. Apple is widely assumed to be an innovator in the tradition of Thomas Edison or Bell Laboratories, locking its engineers away to cook up new ideas and basing products on their moments of inspiration. In fact, its real skill lies in stitching together its own ideas with technologies from outside and then wrapping the results in elegant software and stylish design. The idea for the iPod, for example, was originally dreamt up by a consultant whom Apple hired to run the project. It was assembled by combining off-the-shelf parts with in-house ingredients such as its distinctive, easily used system of controls. And it was designed to work closely with Apple's iTunes jukebox software, which was also bought in and then overhauled and improved. Apple is, in short, an orchestrator and integrator of technologies, unafraid to bring in ideas from outside but always adding its own twists.

This approach, known as “network innovation”, is not limited to electronics. It has also been embraced by companies such as Procter & Gamble, BT and several drugs giants, all of which have realised the power of admitting that not all good ideas start at home. Making network innovation work involves cultivating contacts with start-ups and academic researchers, constantly scouting for new ideas and ensuring that engineers do not fall prey to “not invented here” syndrome, which always values in-house ideas over those from outside.

LESSON 2: Apple illustrates the importance of designing new products around the needs of the user, not the demands of the technology. Too many technology firms think that clever innards are enough to sell their products, resulting in gizmos designed by engineers for engineers. Apple has consistently combined clever technology with simplicity and ease of use. (as we teach, this approach leads to fundmental market discontinuities) The iPod was not the first digital-music player, but it was the first to make transferring and organising music, and buying it online, easy enough for almost anyone to have a go. Similarly, the iPhone is not the first mobile phone to incorporate a music-player, web browser or e-mail software. But most existing “smartphones” require you to be pretty smart to use them.

Apple is not alone in its pursuit of simplicity. Philips, a Dutch electronics giant, is trying a similar approach. Niklas Zennström and Janus Friis, perhaps the most Jobsian of Europe's geeks, took an existing but fiddly technology, internet telephony, to a mass audience by making it simple, with Skype; they hope to do the same for internet television. But too few technology firms see “ease of use” as an end in itself.

Stay hungry, stay foolish

Listening to customers is generally a good idea, but it is not the whole story. For all the talk of “user-centric innovation” and allowing feedback from customers to dictate new product designs, a (LESSON 3) third lesson from Apple is that smart companies should sometimes ignore what the market says it wants today. The iPod was ridiculed when it was launched in 2001, but Mr Jobs stuck by his instinct. Nintendo has done something similar with its popular motion-controlled video-game console, the Wii. Rather than designing a machine for existing gamers, it gambled that non-gamers represented an untapped market and devised a machine with far broader appeal.

LESSON 4 from Apple is to “fail wisely”. The Macintosh was born from the wreckage of the Lisa, an earlier product that flopped; the iPhone is a response to the failure of Apple's original music phone, produced in conjunction with Motorola. Both times, Apple learned from its mistakes and tried again. Its recent computers have been based on technology developed at NeXT, a company Mr Jobs set up in the 1980s that appeared to have failed and was then acquired by Apple. The wider lesson is not to stigmatise failure but to tolerate it and learn from it: Europe's inability to create a rival to Silicon Valley owes much to its tougher bankruptcy laws.

None of these things, of course, guarantees success: you can buy in clever ideas, pursue simplicity, ignore focus groups and fail wisely—and still go bust. Apple very nearly did so itself. No doubt the bumptious Mr Jobs will overreach himself again: the iPhone's success is not guaranteed. But for the moment at least it is hard to think of a large company that better epitomises the art of innovation than Apple.

The Innovation - through - Acquisition Strategy: Why the Pay-off Isn't Always There
Published: November 16, 2005 in Knowledge@Wharton

Very informative article......

That was the mantra of leading technology companies in the tech boom days of the 1990s, when innovation was moving at such a frantic forward pace that even industry leaders like Cisco couldn’t keep up with the latest advances. Faced with the prospect of falling behind the competition, top companies began buying up smaller firms -- and their promising, if untested, technologies -- to stay on the cutting edge.

For a while, the strategy seemed to be a good one, or at the very least, a popular one. Companies spent $3.5 trillion on acquisitions between 1992 and 2000, making those eight years the most active M&A period in history. Then the tech bubble burst and M&A activity came to a screeching halt. Acquisition leader Cisco, which purchased 70 companies between 1992 and 2000, bought just two in 2001. It became evident that while some purchases helped acquirers reap benefits, many failed to create the intended value. Wharton management professor Saikat Chaudhuri believes he knows why. His research is especially timely given the recent growth in M&A activity in the tech sector and other innovation-driven industries……..

Four Major Challenges

By examining the challenges of the innovation-through-acquisition strategy in detail, Chaudhuri’s work offers suggestions to managers on what kinds of target companies are worth pursuing and what strategies should be used to integrate those companies once they have been bought.

Innovation acquisitions, according to Chaudhuri, present four major challenges at the product, organization, and market levels: integrative complexity due to technological incompatibilities, integrative complexity due to the “maturity” of a target company, the unpredictability of a product’s performance trajectory (“technical uncertainty”) and the unpredictability of that product’s market (“market uncertainty”). Different target companies present different degrees of these variables, he says, and so each acquisition presents its own benefits and drawbacks.

For instance, by buying a company whose products are based on a different technological platform, a purchasing company can gain new technological functionalities and capabilities. But such a deal would also pose a significant integration challenge because the platform disparity would have to be resolved. Chaudhuri points to Microsoft’s purchase of Hotmail as an example. At the time of the deal, Microsoft was based on Windows, Hotmail on UNIX. “It took a few years to integrate those functionalities seamlessly,” he says.

Similarly, acquiring an older, more mature firm can offer stocks of proven competencies as well as optimized processes, but poses greater integration challenges due to entrenched work routines and cultures and more cumbersome task reallocations…….

While “complexity” challenges in innovation acquisitions are real, visible and significant, it is the “uncertainty” variables -- the unpredictability of markets and product success -- that present the larger challenge for purchasing firms. According to Chaudhuri’s research, technical incompatibilities between two merging companies slowed the time it takes to get a product on the market, but did not hurt financial performance; target maturity was positively correlated with performance. Technical and market uncertainty, however, were shown to both slow the time to market and result in diminished financial returns.

In one of two papers that resulted from his research project -- ”The Multilevel Impact of Complexity and Uncertainty on the Performance of Innovation-Motivated Acquisitions” -- Chaudhuri says that while “companies have been able to recognize, and have learned how to manage and even exploit, integrative complexity,” they have been unable “to cope with product and environmental uncertainty in these innovation acquisitions.... The findings suggest that companies tend to give attention to those innovation acquisitions which are complex, but underestimate, or are unsure how to handle, those deals surrounded by uncertainty. Existing acquisition processes appear to be geared towards managing complexity rather than uncertainty.”

When a company buys a target with unfinished products, it brings the possibility of securing promising technologies and the ability to influence their progress, he says. “But there’s also the risk that the technologies just won’t develop as expected, and less knowledge about the technology means that less focused planning can be done upfront in resource allocation and integration.”…..

Flawed Strategy

Among his more important findings is Chaudhuri’s contention that “buying companies with early-stage products and entering uncertain markets had substantially adverse effects.” That’s significant, because it flies in the face of the notion that buying these “uncertain” products and companies is a good strategy simply because it might pay off down the road…….

That’s because “complexity is intrinsically predictable,” Chaudhuri notes. “If one places sufficient resources and project management strategies in the right places, it’s possible to manage the complexity. You can learn how to do it. But uncertainty, by its very nature, requires constant adjustment. This type of flexibility is tough to achieve, especially in the middle of integration activity.”

When It Comes to Innovation, Geography Is Destiny

NYT, 2/11/07 G. Pascal Zachary

An interesting twist!

IN our celebrity-studded world, where we make a cult of genius and individual achievement, the mind rebels at the notion that geography trumps personality. Yet the inescapable lesson of the iPod, Google, eBay, Netflix and Silicon Valley in general is that where you live often trumps who you are.

Just ask Sim Wong Hoo. About seven years ago, I met Mr. Sim in Singapore, where he was born and was then living. He talked about the rising creativity of Singaporeans and with a flourish, as if to dramatically make his point, he pulled out a prototype of a hand-held music player that he insisted would replace Sony’s famous Walkman.

Mr. Sim’s device was breathtaking, possessing all the elements of what we now know as the MP3 player. Yet today, a Silicon Valley icon, Apple, dominates the market for MP3 players with the iPod. In recognition of its emergence as a music powerhouse, last month Apple dropped the word “computer” from its name.

Some months after my Singapore encounter, I visited the thriving code-writing communities in Tallinn, Estonia; Reykjavik, Iceland; and Helsinki, Finland, three Nordic cities that were being transformed by advances in cellphones, mobile computing and the Internet. Their tight-knit network of engineers seemed poised to create the tools required to make good on a much-hyped prediction: the death of distance. After all, if necessity is the mother of invention, no one had more need than the hardy Estonians, Icelanders and Finns, living on the frozen edge of Europe, when it came to killing distance as a barrier.

Yet these Nordic innovators were blindsided by two Silicon Valley engineers whose tools we experience whenever we “Google” the Web. Their company, Google Inc., posted a quarterly profit of $1 billion on Jan. 31.

Google’s astonishing rise and Apple’s reinvention are reminders that, when it comes to great ideas, location is crucial. “Face-to-face is still very important for exchange of ideas, and nowhere is this exchange more valuable than in Silicon Valley,” says Paul M. Romer, a professor in the Graduate School of Business at Stanford who is known for studying the economics of ideas.

In short, “geography matters,” Professor Romer said. Give birth to an information-technology idea in Silicon Valley and the chances of success seem vastly higher than when it is done in another ZIP code.

No wonder venture capitalists, who finance bright ideas, remain obsessed with finding the next big thing in the 50-mile corridor between San Jose and San Francisco. About one-quarter of all venture investment in the United States goes to Silicon Valley enterprises. And, according to a new report from Joint Venture: Silicon Valley Network, a regional business group, the percentage has risen, to 27 percent in 2005 from 21 percent in 2000.

Many times in the past, pundits have declared an end to Silicon Valley’s hegemony, and even today there are prognosticators who see growing threats from innovation centers in India and China. Certainly, great technology ideas can come from anywhere, but they keep coming from Silicon Valley because of two related factors: increasing returns and first-mover advantage.
These twin principles, debated in head-scratching terms by professional economists, essentially explain why Intel maintains a lead in high-performance chips, why Apple sustains a large lead in music players and why Google’s search engine remains a crowd pleaser.

On a gut level, we all can understand how these two factors work. Who wouldn’t want to play for a perennial contender? For the same reason that Andy Pettitte signs with the Yankees, the best and the brightest technologists from around the world make their way to northern California.
“All that venture capital attracts a lot of ideas — and the people who are having those ideas,” said Stephen B. Adams, an assistant professor of management at the Franklin P. Perdue School of Business at Salisbury University in Maryland who has studied the rise of Silicon Valley.
Newcomers plug into an existing network of seasoned pros that “isn’t matched anywhere else in the world,” says AnnaLee Saxenian, dean of the School of Information at the University of California, Berkeley, and author of “Regional Advantage,” a book about the competitive edge held by tech centers like Silicon Valley and the Route 128 suburbs near Boston. “That allows people to recombine technical ideas much more quickly here than anywhere else,” Professor Saxenian added.

“In terms of creativity, the Valley remains as far ahead of the rest of the world as ever,” she said. “People in the Valley generate new ideas and test them much more quickly than anywhere else. They aren’t a super race; it’s their environment.”

Silicon Valley is not invincible. The logic of increasing returns and the first-mover advantage can be overdrawn. Other clusters in the United States and around the world will commercialize great ideas, and the Valley will endure down cycles again, as it has in the past. Remember how the Japanese conquered memory-chip manufacturing in the 1980s, until then a staple of the Valley’s business? And, of course, the dot-com bust of five years ago remains a painful reminder of how success breeds hubris and humiliating failure.

Americans naturally harbor many fears about losing their edge, especially with the nation mired in war, the dollar’s value sliding and the health care system strained. Rivals, notably in India and China, see Silicon Valley’s pre-eminent position as a prize that they will inevitably take. Yet they face an elusive foe. Every time Silicon Valley recovers from failure, it seems to grow more durable, almost in the same way a person becomes “immune” to a disease after a brush with it.
Fifty years ago, chips were the engine of Silicon Valley. In the late 1970s came the personal computer and data-storage drives, then software, and more recently the dynamic vortex of the Web, new media and online commerce. (EBay, Netflix and, of course, Google and Yahoo are among the names that come to mind.)

Building a Growth Reference Desk

I would like our community to build a reference package across all media focusing on growth and innovation. I would like each one of you to highlight at least 3 of the most powerful books, articles, blogs, etc. that have impacted your thinking. Please supply enough information for the community to easily find/purchase the reference. Also, include a very brief description of why the reference was important.

As an example, my list would include:

The Entrepreneurial Mindset, McGrath and MacMillan, HBR press—the best how-to book on growth
The Alchemy of Growth, Coley, Persues Books – a great summary of McKinsey’s growth practice
The Kellogg Driving Market Driven Growth blog -- just brilliant (a little humor) http://marketdrivengrowth.blogspot.com/

Please respond to the blog. I will get the results and collate them for the community. We can update this on a continuing basis going forward.

Case Study: Philips' Norelco

How neck hairs led to the remaking of an icon
BW 6/11/07

This is a classic example of “customer forward” product innovation!

THE PROBLEM

How do you dare redesign an icon? When the Dutch company Royal Philips Electronics (PHG ) pioneered the rotating blade electric razor in 1939 and sold it in 1947 in America as the Norelco shaver, it designed a brand as much as a product. "Norelco" stood for modern, industrial, technological. In the early 1960s, Norelco launched the first fully cordless razor and had 18% of the electric shaver market. By 1978, it controlled 60%.

But in more recent years, electric shavers have been overshadowed by the blade wars of the wet-shaving world. Gillette (PG ) has captured the high-tech high ground with its multibladed razors. By 2004, though Philips held 50% of the electric market, only 18% of all men used solely electric shavers, according to the company's market research. Last year, Philips decided to talk to customers to figure out how to redesign the Norelco electric shaver to give as close a shave as possible.

THE RESEARCH (They studied their targte customers)

Philips interviewed 5,000 men in the U.S., Europe, and China. Its target customer was between the ages of 35 and 54, an experienced shaver who is likely to spend more for a premium razor that will last six to seven years. The company searched for some undiscovered consumer need that might be met with a dynamite product—and found an opportunity in an unlikely place. It learned that one of the most common frustrations of shaving has nothing to do with the face: it's those pesky few flat-lying hairs on the neck under the chin. The men interviewed by the company had to shave over those hairs six or seven times, often irritating their skin and leaving welts or spawning in-grown hairs. Philips decided to develop a razor that closely shaves those neck hairs the first time. To do so, it needed to design an electric razor with much greater maneuverability to navigate the tricky area around the jugular vein. Its research also led the company to a name for the new model: the "Arcitec," a combination of "the arch of the neck" and "technology."

PROTOTYPING

Philips' teams of engineers, designers, and business strategists, led by Nico Engelsman, a senior vice-president for business management, and senior design director Tammo de Ligny also studied consumer trends among potential customers. They learned from interviews that their customers wanted materials that radiated strength, like stainless steel in the razor head. The teams also looked in hundreds of magazines and ads showing cars, phones, and men's accessories. For color, they drew inspiration from the silver Motorola (MOT ) RAZR phone, the BMW Z4 Coupe, and the Volant silver series skis: They made the Arcitec models black, charcoal, and silver.The designers began working up rough pictures of solutions to tackle the neck-shaving. Then they began prototyping and testing plastic models with consumers, iterating very quickly. To make the electric shaver more flexible and maneuverable than previous models, they created a bigger separation between the shaving head and the handle that men grasp as they shave. That allowed the head to pivot 360 degrees. Their testing also made clear they had to miniaturize the moving parts to make the grip easier as men moved the shaver under their chins along their necks. In the final testing in October, 2006, the designers tried out the razors in four sessions with four different panels of 50 participants each. In the first, the blades didn't protrude enough to give a close shave. The designers raised the blades, but went too far. The blades were too high, irritating the skin. On the third try, they got it right. They also tested the razors' performance using what they call a "paintbrush test." They shaved paintbrush bristles made of the thickest synthetic hair possible to evaluate how the shaver would perform on the toughest whiskers.

MARKETING

Philips will start selling the Arcitec in the U.S. and Britain in July and in the rest of the world in September. Prices will range from $169 to $249, depending on the model. The company will not market it as aggressively in India or China yet. Why? In India people can get a shave at the corner stand for 20 rupees, or 50 cents, so that huge market is not yet primed for a premium product like the Arcitec, Philips learned.Chinese men, the company found in its research, generally have less hair, and Asian hair tends to be rounder in shape and thicker in diameter than Caucasian hair, making it stronger but slower-growing. So the Chinese don't necessarily need a razor with three rotating blades like the Arcitec. Electric shaving is growing in popularity with young men in China, however, so Philips will launch a double-headed razor there along with the Arcitec to give customers some options.

And what about female consumers? Philips' research shows nearly half of electric shaver purchases are gifts, and 75% of those are bought by women for men. Yet wives, girlfriends, and moms don't know much about men's razors and are terrified of choosing the wrong one, the company found. So Philips will create a specific marketing campaign for female shoppers, and will have video demos online through Amazon.com (AMZN ) showing typical male shaving dilemmas, like getting at those nasty little neck hairs.The Arcitec's packaging will represent Philips' broader attempt to unify all its products under one brand name worldwide. For decades, the company sold its products in the U.S. under many brands, including Norelco. The Philips logo will now appear above the Norelco logo on the packaging. And in the future, Philips plans to phase out the name "Norelco."

At 3M, A Struggle Between Efficiency And Creativity

How CEO George Buckley is managing the yin and yang of discipline and imagination
BW 6/11/07

Our last posting highlighted the need for companies to be ambidextrous – use the right process for the right thing. One danger I have found in my own experience is that often new processes or methodologies become a religion that tend to dominate all aspects of corporate life. When we first started deploying our Market Driven Growth process at DuPont, we ran smack into the Six Sigma culture that had been prevalent for about two years. When I tried to point out some of the limitations of Six Sigma in the context of innovation as discussed below, I got my hand severely slapped. I want to emphasize that Six Sigma helped a large part of DuPont but we ran into many of the issues highlighted below re growth. I decided to site the whole article because it is extremely powerful. As always, I highlighted some key thoughts……..

Not too many years ago, the temple of management was General Electric (GE ). Former CEO Jack Welch was the high priest, and his disciples spread the word to executive suites throughout the land. One of his most highly regarded followers, James McNerney, was quickly snatched up by 3M after falling short in the closely watched race to succeed Welch. 3M's board considered McNerney a huge prize, and the company's stock jumped nearly 20% in the days after Dec. 5, 2000, when his selection as CEO was announced. The mere mention of his name made everyone richer.

McNerney was the first outsider to lead the insular St. Paul (Minn.) company in its 100-year history. He had barely stepped off the plane before he announced he would change the DNA of the place. His playbook was vintage GE. McNerney axed 8,000 workers (about 11% of the workforce), intensified the performance-review process, and tightened the purse strings at a company that had become a profligate spender. He also imported GE's vaunted Six Sigma program—a series of management techniques designed to decrease production defects and increase efficiency. Thousands of staffers became trained as Six Sigma "black belts." The plan appeared to work: McNerney jolted 3M's moribund stock back to life and won accolades for bringing discipline to an organization that had become unwieldy, erratic, and sluggish.

Then, four and a half years after arriving, McNerney abruptly left for a bigger opportunity, the top job at Boeing (BA ). Now his successors face a challenging question: whether the relentless emphasis on efficiency had made 3M a less creative company. That's a vitally important issue for a company whose very identity is built on innovation. After all, 3M is the birthplace of masking tape, Thinsulate, and the Post-it note. It is the invention machine whose methods were consecrated in the influential 1994 best-seller Built to Last by Jim Collins and Jerry I. Porras. But those old hits have become distant memories. It has been a long time since the debut of 3M's last game-changing technology: the multilayered optical films that coat liquid-crystal display screens. At the company that has always prided itself on drawing at least one-third of sales from products released in the past five years, today that fraction has slipped to only one-quarter.

Those results are not coincidental. Efficiency programs such as Six Sigma are designed to identify problems in work processes—and then use rigorous measurement to reduce variation and eliminate defects. When these types of initiatives become ingrained in a company's culture, as they did at 3M, creativity can easily get squelched (this is the real danger of creating the "religion"). After all, a breakthrough innovation is something that challenges existing procedures and norms. "Invention is by its very nature a disorderly process," says current CEO George Buckley, who has dialed back many of McNerney's initiatives. "You can't put a Six Sigma process into that area and say, well, I'm getting behind on invention, so I'm going to schedule myself for three good ideas on Wednesday and two on Friday. That's not how creativity works." McNerney declined to comment for this story.

PROUD CREATIVE CULTURE

The tension that Buckley is trying to manage—between innovation and efficiency—is one that's bedeviling CEOs everywhere(the need to be ambidextrous--see below). There is no doubt that the application of lean and mean work processes at thousands of companies, often through programs with obscure-sounding names such as ISO 9000 and Total Quality Management, has been one of the most important business trends of past decades. But as once-bloated U.S. manufacturers have shaped up and become profitable global competitors, the onus shifts to growth and innovation, especially in today's idea-based, design-obsessed economy. While process excellence demands precision, consistency, and repetition, innovation calls for variation, failure, and serendipity (I disagree here. The issue is not process excellence, it is the process you apply. A rigouous application of Options Management deals with the issues of variatiojn and failure).

Indeed, the very factors that make Six Sigma effective in one context can make it ineffective in another. Traditionally, it uses rigorous statistical analysis to produce unambiguous data that help produce better quality, lower costs, and more efficiency. That all sounds great when you know what outcomes you'd like to control. But what about when there are few facts to go on—or you don't even know the nature of the problem you're trying to define? "New things look very bad on this scale," says MITSloan School of Management professor Eric von Hippel, who has worked with 3M on innovation projects that he says "took a backseat" once Six Sigma settled in. "The more you hardwire a company on total quality management, [the more] it is going to hurt breakthrough innovation," adds Vijay Govindarajan, a management professor at Dartmouth's Tuck School of Business. "The mindset that is needed, the capabilities that are needed, the metrics that are needed, the whole culture that is needed for discontinuous innovation, are fundamentally different.

"The exigencies of Wall Street are another matter. Investors liked McNerney's approach to boosting earnings, which may have sacrificed creativity but made up for it in consistency. Profits grew, on average, 22% a year (this is cost driven earnings growth which generally is not sustainable). In Buckley's first year, sales approached $23 billion and profits totaled $1.4 billion, but two quarterly earnings misses and a languishing stock made it a rocky ride. In 2007, Buckley seems to have satisfied many skeptics on the Street, convincing them he can ignite top-line growth without killing the McNerney-led productivity improvements. Shares are up 12% since January.

Buckley's Street cred was hard-won. He's nowhere near the management rock star his predecessor was. McNerney could play the President on TV. He's tall and athletic, with charisma to spare. Buckley is of average height, with a slight middle-age paunch, an informal demeanor, and a scientist's natural curiosity. In the office he prefers checked shirts and khakis to suits and ties. He's bookish and puckish, in the way of a tenured professor.

Buckley, in short, is just the kind of guy who has traditionally thrived at 3M. It was one of the pillars of the "3M Way" that workers could seek out funding from a number of company sources to get their pet projects off the ground. Official company policy allowed employees to use 15% of their time to pursue independent projects. The company explicitly encouraged risk and tolerated failure. 3M's creative culture foreshadowed the one that is currently celebrated unanimously at Google (GOOG ).

Perhaps all of that made it particularly painful for 3M's proud workforce to deal with the hard reality the company faced by the late '90s. Profit and sales growth were wildly erratic. It bungled operations in Asia amid the 1998 financial crisis there. The stock sat out the entire late '90s boom, budging less than 1% from September, 1997, to September, 2000. The flexibility and lack of structure, which had enabled the company's success, had also by then produced a bloated staff and inefficient workflow. So McNerney had plenty of cause to whip things into shape (there were problems).

GREEN-BELT TRAINING REGIMEN

One of his main tools was Six Sigma, which originated at Motorola (MOT ) in 1986 and became a staple of corporate life in the '90s after it was embraced by GE. The term is now so widely and divergently applied that it's hard to pin down what it actually means. At some companies, Six Sigma is plainly a euphemism for cost-cutting. Others explain it as a tool for analyzing a problem (high shipping costs, for instance) and then using data to solve each component of it. But on a basic level, Six Sigma seeks to remove variability from a process. In that way you avoid errors, or defects, and increase predictability (technically speaking, Six Sigma quality has come to be accepted as no more than 3.4 defects per million) (remember, we always say a company has to learn to manage uncertainty or variability in innovation, not eliminate it!!).

At 3M, McNerney introduced the two main Six Sigma tools. The first and more traditional version is an acronym known as DMAIC (pronounced "dee-may-ic"), which stands for: define, measure, analyze, improve, control. These five steps are the essence of the Six Sigma approach to problem solving. The other flavor is called Design for Six Sigma, or DFSS, which purports to systematize a new product development process so that something can be made to Six Sigma quality from the start (DFSS is the real danager when applied to projects that are Options or Horizon 2 or 3 projects).

Thousands of 3Mers were trained as black belts, an honorific awarded to experts who often act as internal consultants for their companies. Nearly every employee participated in a several-day "green-belt" training regimen, which explained DMAIC and DFSS, familiarized workers with statistics, and showed them how to track data and create charts and tables on a computer program called Minitab (the formation of the "religion". I took my training 3 months before I retired from DuPont). The black belts fanned out and led bigger-scale "black-belt projects," such as increasing production speed 40% by reducing variations and removing wasted steps from manufacturing. They also often oversaw smaller "green-belt projects," such as improving the order fulfillment process. This Six Sigma drive undoubtedly contributed to 3M's astronomical profitability improvements under McNerney; operating margins went from 17% in 2001 to 23% in 2005.

While Six Sigma was invented as a way to improve quality, its main value to corporations now clearly is its ability to save time and money. McNerney arrived at a company that had been criticized for throwing cash at problems. In his first full year, he slashed capital expenditures 22%, from $980 million to $763 million, and 11% more to a trough of $677 million in 2003. As a percentage of sales, capital expenditures dropped from 6.1% in 2001 to just 3.7% in 2003. McNerney also held research and development funding constant from 2001 to 2005, hovering over $1 billion a year. "If you take over a company that's been living on innovation, clearly you can squeeze costs out," says Charles O'Reilly, a Stanford Graduate School of Business management professor. "The question is, what's the long-term damage to the company?"

Under McNerney, the R&D function at 3M was systematized in ways that were unheard of and downright heretical in St. Paul, even though the guidelines would have looked familiar at many other conglomerates. Some employees found the constant analysis stifling. Steven Boyd, a PhD who had worked as a researcher at 3M for 32 years before his job was eliminated in 2004, was one of them. After a couple of months on a research project, he would have to fill in a "red book" with scores of pages worth of charts and tables, analyzing everything from the potential commercial application, to the size of the market, to possible manufacturing concerns.

Traditionally, 3M had been a place where researchers had been given wide latitude to pursue research down whatever alleys they wished. After the arrival of the new boss, the DMAIC process was laid over a phase-review process for innovations—a novelty at 3M. The goal was to speed up and systematize the progress of inventions into the new-product pipeline. The DMAIC questions "are all wonderful considerations, but are they appropriate for somebody who's just trying to...develop some ideas?" asks Boyd. The impact of the Six Sigma regime, according to Boyd and other former 3Mers, was that more predictable, incremental work took precedence over blue-sky research. "You're supposed to be having something that was going to be producing a profit, if not next quarter, it better be the quarter after that," Boyd says.

For a long time, 3M had allowed researchers to spend years testing products. Consider, for example, the Post-it note. Its inventor, Art Fry, a 3M scientist who's now retired, and others fiddled with the idea for several years before the product went into full production in 1980. Early during the Six Sigma effort, after a meeting at which technical employees were briefed on the new process, "we all came to the conclusion that there was no way in the world that anything like a Post-it note would ever emerge from this new system," says Michael Mucci, who worked at 3M for 27 years before his dismissal in 2004. (Mucci has alleged in a class action that 3M engaged in age discrimination; the company says the claims are without merit.)

There has been little formal research on whether the tension between Six Sigma and innovation is inevitable. But the most notable attempt yet, by Wharton School professor Mary Benner and Harvard Business School professor Michael L. Tushman, suggests that Six Sigma will lead to more incremental innovation at the expense of more blue-sky work (in our terms, this would be Extend and Defend or Horizon 1 projects). The two professors analyzed the types of patents granted to paint and photography companies over a 20-year period, before and after a quality improvement drive. Their work shows that, after the quality push, patents issued based primarily on prior work made up a dramatically larger share of the total, while those not based on prior work dwindled.

Defenders of Six Sigma at 3M claim that a more systematic new-product introduction process allows innovations to get to market faster. But Fry, the Post-it note inventor, disagrees. In fact, he places the blame for 3M's recent lack of innovative sizzle squarely on Six Sigma's application in 3M's research labs. Innovation, he says, is "a numbers game. You have to go through 5,000 to 6,000 raw ideas to find one successful business." Six Sigma would ask, why not eliminate all that waste and just come up with the right idea the first time? That way of thinking, says Fry, can have serious side effects. "What's remarkable is how fast a culture can be torn apart," says Fry, who lives in Maplewood, Minn., just a few minutes south of the corporate campus and pops into the office regularly to help with colleagues' projects. "[McNerney] didn't kill it, because he wasn't here long enough. But if he had been here much longer, I think he could have."

REINVIGORATED WORKFORCE

Buckley, a PhD chemical engineer by training, seems to recognize the cultural ramifications of a process-focused program on an organization whose fate and history is so bound up in inventing new stuff. "You cannot create in that atmosphere of confinement or sameness," Buckley says. "Perhaps one of the mistakes that we made as a company—it's one of the dangers of Six Sigma—is that when you value sameness more than you value creativity, I think you potentially undermine the heart and soul of a company like 3M."

In recent years, the company's reputation as an innovator has been sliding. In 2004, 3M was ranked No. 1 on Boston Consulting Group's Most Innovative Companies list (now the BusinessWeek/BCG list). It dropped to No. 2 in 2005, to No. 3 in 2006, and down to No. 7 this year. "People have kind of forgotten about these guys," says Dev Patnaik, managing associate of innovation consultancy Jump Associates. "When was the last time you saw something innovative or experimental coming out of there?"

Buckley has loosened the reins a bit by removing 3M research scientists' obligation to hew to Six Sigma objectives. There was perhaps a one-size-fits-all approach to the application of Six Sigma as the initial implementation got under way, says Dr. Larry Wendling, a vice-president who directs the "R" in 3M's R&D operation. "Since [McNerney] was driving it to the organization, you know, there were metrics established across the organization and quite frankly, some of them did not make as much sense for the lab as they did other parts of the organization," Wendling says. What sort of metrics? Keeping track of how many black-belt and green-belt projects were completed, for one.

In fact, it's not uncommon for Six Sigma to become an end unto itself. That may be appropriate in an operations context—at the end of the year, it's easy enough for a line manager to count up all the money he's saved by doing green-belt projects. But what 3Mers came to realize is that these financially definitive outcomes were much more elusive in the context of a research lab. "In some cases in the lab it made sense, but in other cases, people were going around dreaming up green-belt programs to fill their quota of green-belt programs for that time period," says Wendling. "We were letting, I think, the process get in the way of doing the actual invention."

To help get the creative juices flowing, Buckley is opening the money spigot—hiking spending on R&D, acquisitions, and capital expenditures. The overall R&D budget will grow 20% this year, to $1.5 billion. Even more significant than the increase in money is Buckley's reallocation of those funds. He's funneling cash into what he calls "core" areas of 3M technology, 45 in all, from abrasives to nanotechnology to flexible electronics. That is another departure from McNerney's priorities; he told BusinessWeek in 2004 that the 3M product with the most promise was skin-care cream Aldara, the centerpiece to a burgeoning pharmaceuticals business. In January, Buckley sold the pharma business for $2 billion.

Quietly, the McNerney legacy is being revised at 3M. While there is no doubt the former CEO brought some positive change to the company, many workers say they are reinvigorated now that the corporate emphasis has shifted from profitability and process discipline to growth and innovation. Timm Hammond, the director of strategic business development, says "[Buckley] has brought back a spark around creativity." Adds Bob Anderson, a business director in 3M's radio frequency identification division: "We feel like we can dream again."

Remember, we must be ambidextrous-- deploy Options Management to gain knowledge in a time and cost effective way; a process like Discovery Driven Planning for scaling; and, Six Sigma for optimization: