Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things
by Clayton M. Christensen, Stephen P. Kaufman, and Willy C. Shih

This is a great article in the January 2008 edition of HBR (reprint R0801F) on the critical traps in deploying classic financial tools to innovation. One of the more provocative issues discussed is the assumption that if the business does nothing the current cash flows will remain. The flaw in this logic is the concept of “the fade” – if a business does nothing to support its position, the business quality will fade ~10% per year due to stronger competitors and/or stronger customers. Clayton Christensen relates this to classic DCF analyses in the following graph. I highly recommend ordering the reprint for the full article....


The DCF Trap
Most executives compare the cash flows from innovation against the default scenario of doing nothing, assuming—incorrectly—that the present health of the company will persist indefinitely if the investment is not made. For a better assessment of the innovation’s value, the comparison should be between its projected discounted cash flow and the more likely scenario of a decline in performance in the absence of innovation investment.

The Six Keys to Organic Growth

In THE ROAD TO ORGANIC GROWTH, Edward Hess takes a Jim Collins-like approach to find 22 businesses that epitomize the organic growth model. With research backed by a comprehensive study, Hess set forth to explain the underlying qualities these 22 businesses have in common. Hess whittled his findings into a list of Six Keys to Organic Growth.

.

The Six Keys to Organic Growth
“Growth achieved through a commitment to customer satisfaction, employee engagement, and core profitability—organic growth—is a smart long-term strategy for any company. Organic growth represents the underlying strength and vitality of the core business.” (p. 1)
“Our investigation found that [high-organic growth] companies generally possessed the six keys discussed below.” (p. 20)

1. An Elevator Pitch Model“High growth companies have a simple, understandable business model that their employees can understand and execute—none has a complex or sophisticated strategy.” (p. 70)

2. Instill a “Small Company Soul” into a “Big Company Body”“High organic growth performers have a small-company soul housed in a big-company body. A small company soul is entrepreneurial, with employees having ownership of the customer, being held accountable for results, and sharing in the rewards of those results.” (p. 81) (we have talked a lot about this)

3. Measure Everything“One of the six keys to building a consistent high organic growth company is measurement—of everything. The 22 companies on the organic growth index (OGI) list track a variety of metrics—financial, operational, behavioral—to understand which areas of their business are not performing as efficiently as possible, and then they take action to shore up those numbers.” (p. 97)

4. Build a People Pipeline“All the high-growth companies have a high management and employee retention, high employee loyalty, and high employee productivity as compared with their competition. Employees in these companies ‘own’ their results and their careers, and most even own part of the company. These companies’ management teams are frequently home grown, with long company tenures.” (pgs. 22, 117)

5. Leaders: Humble, Passionate, Focused Operators“Rather than being overly confident about their success, at high organic growth companies, leaders are frequently paranoid about complacency, arrogance, and hubris. Although many leaders are very wealthy, for the most part, you would not know this from their dress, their office, their demeanor, their attitude, or any outward appearance. Few of the leaders, if any, take credit themselves. There is a sincere respect for line workers, where many had begun their careers.” (pgs. 139, 140)

6. Be an Execution and Technology Champion“The high-organic companies generally do not have unique strategies, products, or services, nor are they market-leading innovators. But they are execution champions—day after day, they have figured out how to get consistent high-quality performance from their people. These companies use technology to drive efficiencies across their value chain. To them, technology is not a service function; it is an operational function.” (pgs. 23, 161)

source: THE ROAD TO ORGANIC GROWTH (Edward D. Hess)

Another view of Six Sigma and Innovation: Starwood Hotels: Rubbing Customers The Right Way
Massages and other unlikely Six Sigma ventures are winners at Starwood Hotels


Business Week OCTOBER 8, 2007




We discussed the choice of the right process to drive innovation in the following positings. I came down pretty hard on Six Sigma. Here is an example where Six Sigma played an important role in innovation.


At 3M, A Struggle Between Efficiency And Creativity -July 2, 2007
http://marketdrivengrowth.blogspot.com/2007/07/at-3m-struggle-between-efficiency-and.html

Have It Both Ways –June 18, 2007
"Ambidextrous" companies can handle incremental change and bold initiatives
http://marketdrivengrowth.blogspot.com/2007/06/have-it-both-ways-ambidextrous.html





In January, 2006, the Westin Chicago River North hotel was picked to pilot a project, dubbed Unwind, for the upscale hotel chain. The purpose: to think up a set of nightly activities that would draw guests out of their rooms and into the lobby where they could mingle, develop a greater loyalty to the hotel group, and maybe spend a little more money. Westin spied an opportunity after a study found that 34% of frequent travelers feel lonely away from home. The Unwind project led the Westin to develop dozens of activities, including massages, at the Chicago hotel.



Instead of hiring the usual ethnographers or consultants, Westin owner Starwood Hotels & Resorts Worldwide Inc. (HOT ) turned to Six Sigma, a management process known for reducing defects and increasing efficiency. It was a surprising move given Six Sigma's rap as a creativity killer. But under Geoffrey A. Ballotti, president of Starwood's North America Div., the company is using Six Sigma's strengths to promote innovation--and generate tens of millions in new revenue. Combining creativity and efficiency is a delicate managerial maneuver that few service companies can pull off.

Starwood succeeded, in large part, because it began with a culture of creativity before introducing the management tool. (Critical!!!) Design has long played a major role in the company, with noted architect David Rockwell designing its hip W Hotels brand back in the '90s.

Starwood gets a boost out of Six Sigma by using its techniques to dream up projects across the company. Massage is just one of hundreds of ventures done this way. This year's food and beverage engineering program, which rejiggers the choices on room-service and catering menus based on their popularity, has generated $20 million in extra revenue.

In 2006, programs developed under Six Sigma delivered more than $100 million in profit to its bottom line. As a result, the White Plains (N.Y.) company is one of the world's most profitable hotel operators: Its net margin is nearly 15%, higher than those of rivals Hilton Hotels Corp. (HLT ) and Marriott International Inc. (MAR ) "We have been driving our margin growth faster than our competitors," says Ballotti. "When people ask why, I point to Six Sigma."

The group that runs the effort is headed by Brian Mayer, who claims the quirky title of vice-president for Six Sigma, operation innovation, and room support. "I grew up in the hospitality industry," says Mayer, whose grandfather and father ran catering businesses. "The joke is that I was born in a chafing dish."

Since the program launched in 2001, Mayer's crew has trained 150 employees as "black belts" and more than 2,700 as "green belts" in the arts of Six Sigma. Based mostly at the hotels, black belts oversee the projects while green belts hammer out the details. The key to their success, says Mayer, is that instead of acting like "suits" imposing their will from "corporate," the Six Sigma specialists operate more like partners who help local hotels meet their own objectives. Indeed, almost 100% of the creative concepts come from in-house staff. And every project must be overseen by a hotel employee. "By focusing on their goals and budgets it enables us to become a partner in the operation," says Mayer.



SWAT TEAMS

The innovation process begins when hotel teams pitch Mayer's group on a new idea. "They fight for our resources," says Mayer. A Six Sigma Council composed of Ballotti and his 13 direct reports, including his senior vice-president for sales and marketing, then evaluates an idea's merit based on the division's priorities and the project's expected payoff. If the council approves a project, black belts and green belts are deployed like SWAT teams to the hotels to carry it out.

In the case of Unwind, a Six Sigma team in January, 2005, brainstormed with a group from the Westin Chicago River North Hotel that included the directors of rooms, food and beverages, and sales. In that meeting, the hotel's fitness director "came up and said: 'Why don't we do massage?'" says Peter Simoncelli, the hotel's general manager.

The team liked the idea and started to design the experience. First up was figuring out the logistics: getting the massage chairs, choosing the uniform of the masseuse, determining the best location for the table. In October, 2005, the hotel staged a dry run. The team quickly learned they had a problem: The guests wanted the complimentary massage to last longer than the hotel anticipated. "We had to come up with a diplomatic way of saying there is a limited amount of time in the massage chair," says Simoncelli. After completing the pilot in a few weeks, the Six Sigma team turned over the project to its hotel sponsor, in this case the rooms director. Last year the hotel introduced massage and found a nice surprise: Later on, the revenues from paid massages in the hotel spa hit an all-time high, rising 30% over the previous year.

After a prototype rolls out, green belts shift into analytics mode. (In the language of our Market Driven Growth process, testing the prototype is the inductive part of our analysis while the green belt work is the deductive component) They spend a lot of time with the E-Tool, a proprietary Web-based system that allows Starwood to monitor a slew of performance metrics to gauge the success or failure of a new project. E-Tool lets hotel managers rapidly spread and drive consistent execution of each project. That's no easy task at Starwood, which owns, manages, or franchises 800 hotels, and rolls out new projects to them every two weeks. Green belts enter every project into the E-Tool, which currently contains 3,000 to 4,000 items. The entries are detailed and include photographs and project descriptions as well as how-to instructions. The Unwind program alone produced 120 new activities--one for each Westin hotel, including traditional fire dancing in Fiji and Chinese watercolor painting in Beijing. "I probably will make 50% fewer mistakes than if I had rolled out a project myself," says Simoncelli.

Some projects lead to big cost savings and a healthier workplace. Consider a hotel safety effort that was made mandatory for all North American hotels. Starwood launched the initiative in early 2004 after executives noticed that workers' compensation claims were skyrocketing. A Six Sigma team researched the problem and discovered the biggest cause of accidents were slips and falls, and housekeepers often suffered from back strains. The team developed new work processes, including a stretching routine required for all housekeepers and new cleaning tools with longer handles. In the past three years, Starwood has slashed the number of workers' claims in half, and their cost has fallen 69%. (Classic 6 Sigma type project)

The latest effort is an initiative to drive down the company's energy costs. Thanks to a program that offers energy consumption tips, such as shutting off computers, Starwood estimates it will cut its power bill this year by about $11 million. Part of the program requires hotels to replace incandescent lights with compact fluorescent bulbs in 75% of their rooms. There was a lot of pushback from hotel staff who felt the new bulbs would not throw off such a pleasing light. But a Six Sigma group allayed those concerns by setting up a dozen rooms with different bulbs. "We had top leaders figuring out which one was best," says Ballotti. "The collective power of getting these folks together is just amazing." (Classic 6 Sigma type project)

McDonald's Takes On A Weakened Starbucks
Food Giant to Install Specialty Coffee Bars, Sees $1 Billion Business
By JANET ADAMYJanuary 7, 2008; WSJ Page A1

WOW….the war continues! Go back to these postings to refresh your memory. This is a classic battle for competitive separation and supremacy that is germane no matter what your business is. Remember, you read it here first!!

Starbucks Chairman Says Trouble May Be Brewing- February 26, 2007 posting discusses Sawbuck’s’ challenge of going global challenges
http://marketdrivengrowth.blogspot.com/2007/02/starbucks-chairman-says-trouble-may-be.html
McDonald's Is Poised For Lattes – March 5, 2007 Posting talks about the atart of the latte war
http://marketdrivengrowth.blogspot.com/2007/03/mcdonalds-is-poised-for-lattes-by-janet.html
The Breakfast Wars –June 7, 2007 posting discusses Value Mapping and competitive separation
http://marketdrivengrowth.blogspot.com/2007/06/breakfast-wars-by-julia-moskin.html

OLATHE, Kan. -- This fall, a McDonald's here added a position to its crew: barista.

McDonald's is setting out to poach Starbucks customers with the biggest addition to its menu in 30 years. Starting this year, the company's nearly 14,000 U.S. locations will install coffee bars with "baristas" serving cappuccinos, lattes, mochas and the Frappe, similar to Starbucks' ice-blended Frappuccino.

Internal documents from 2007 say the program, which also will add smoothies and bottled beverages, will add $1 billion to McDonald's annual sales of $21.6 billion.

The confrontation between Starbucks Corp. and McDonald's Corp. once seemed improbable. Hailing from very different corners of the restaurant world, the two chains have gradually encroached on each other's turf. McDonald's upgraded its drip coffee and its interiors, while Starbucks added drive-through windows and hot breakfast sandwiches (Classic Value mapping moves)

The growing overlap between the chains shows how convenience has become the dominant force shaping the food-service industry. Consumers who are unwilling to cross the street to get coffee or make a left turn to grab lunch have pushed all food purveyors to adapt the strategies of fast-food chains.
It also shows how the chains' efforts to adapt to a changing market have had drastically different results on their bottom lines. McDonald's is entering the sixth year of a successful turnaround, while Starbucks has begun struggling after years of strong earnings and stock growth.

Still, the new coffee program is a risky bet for McDonald's. It could slow down operations and alienate customers who come to McDonald's for cheap, simple fare rather than theatrics. Franchisees say that many of their customers don't know what a latte is. (Huge issues for McDonald’s)

The program attempts to replicate the Starbucks experience in many ways -- starting with borrowing the barista moniker. Espresso machines will be displayed at the front counters, a big shift for a company that has always hidden its food assembly from customers. McDonald's says it wants customers to see the coffee beans being ground and baristas topping the mochas and Frappes with whipped cream.
"You create a little bit more of a theater there," says John Betts, McDonald's vice president of national beverage strategy.

Ads for the espresso drinks running in the Kansas City area, where the concept is already being tested, say you don't get a "condescending look" for mispronouncing the size of the drink at McDonald's -- a jab at the "grande" and "venti" sizes at Starbucks. (At McDonald's, you just ask for small, medium or large.)

Starbucks Chairman Howard Schultz popularized lattes and cappuccinos in the U.S. after borrowing the idea from espresso bars he visited in Italy. When he began expanding Starbucks beyond Seattle in the late 1980s, he said he wanted the cafes to serve as a "third place" where people gather between home and work and feel some of the romance of the European cafe.

But the coffee chain has evolved into more of a filling station. It is now battling fast-food outlets for some of the same customers and meal dollars. Today, about 80% of the orders purchas(Huge issue for Starbucks and their current business model)ed at U.S. Starbucks are consumed outside the store. The average income and education levels of Starbucks customers have gone down, the company has said. As part of a big push into food, Starbucks sells lunch at more than two-thirds of its company-owned locations in the U.S.

Google and the Wisdom of Clouds
A lofty new strategy aims to put incredible computing power in the hands of many
Business week, 12/13/07 issues
http://www.businessweek.com/magazine/content/07_52/b4064048925836.htm?chan=magazine+channel_top+stories
by Stephen Baker

The topic discussed in the last posting on Google's “cloud” is really catching on. This is a great article that I strongly suggest you read for more insight into this future trend. The following figure from the article summarizes the players and reinforces the dilemma faced by Microsoft

HAPPY NEW YEAR