INNOBLOG

Someone in India recently asked me what I thought about an innovation strategy featuring a heavy dose of "imitation." My response was, "Innovation isn't Olympic diving."

What did I mean? An individual diver's scores for an event are a factor of two things: how well they execute their dive, and the "degree of difficulty" of their selected dive. The more twists and turns you have, the more points you can earn.

You don't get points for degree of difficulty for innovation. You get points for producing profits. Sometimes you do have to take higher risk, more uncertain approaches to produce those profits. But the goal isn't making things any more difficult than they need to be. The goal is to find the quickest, cheapest path to profits. If that involves imitation, then so be it.

My diving quip was an homage to Michael Lewis's book on baseball, Moneyball. It describes how the Oakland Athletics exploited market inefficiencies to compete against baseball teams with more financial resources. Early in the book there was a discussion between A's general manager Billy Beane and his team of scouts. They were discussing a prospect, a University of Alabama catcher named Jeremy Brown. The scouts didn't like Brown, pointing to his "soft body" and "low energy." Beane's analytical team loved Brown, citing some of his performance statistics. A debate ensued. Beane shut discussion down with a succinct phrase that summarized his organizational philosophy: "We're not selling jeans here." Brown became the 35th overall selection in the amateur draft.

Beane's point was that he didn't care about a player's physical attributes; he cared about whether the player would perform. And his philosophy was that statistics provided a better way to identify high performers than a player's physique or mental makeup. In this case, the scouts might have had a point — Brown ended up with a grand total of 11 major league plate appearances (where he did bang out two doubles and a single). Nonetheless, Beane's admonition is a useful reminder that innovation leaders should make sure they are asking the right questions and focusing on the right variables.

I generally ask five questions to determine whether an innovator has the seeds of a transformational idea:

1.Is there an important problem that customers can't address because existing solutions are expensive or inconvenient? In Innosight's parlance, is there a high-potential "job to be done"?
2.Is there a disruptive way to solve the problem in a simpler, more convenient, or more affordable way?
3.Is there a plausible hypothesis about an economically attractive, scalable business model? I don't need a detailed financial model (because I know it's wrong anyway), but I need a sensible story that's at least conceivable — and a plan to turn that plan into reality.

Read the rest at Scott's Havard Business Review blog.

With two older sisters and two younger brothers, I am a true middle child. Like many middle children, my natural tendency is to be a peace maker. I seek compromise and harmony between conflicting demands.

Reading through some of the ongoing dialogues around strategy and innovation makes me appreciate these tendencies. So many arguments are framed as either do this or do that. One example is an emerging "battle" between "East Coast" strategic thinkers and "West Coast" design thinkers. Another "either/or" is well summed up by this great blog post by Eric Paley (a Dartmouth classmate of mine who has had entrepreneurial success and writes a great blog).

Paley's post discussed a debate he had with the co-founder of his successful startup Brontes Technologies about the best way to approach innovation. Paley favored a more analytical approach, which he dubbed "Moneyball" after the Michael Lewis book describing the statistical approach favored by Oakland A's general manager Billy Beane. His co-founder was more of a believer in "Blink," after the Malcolm Gladwell book describing the merits of instinctive judgment.

The middle child in me responds to these kinds of discussions with, "Why can't we be both?"

I generally think the best entrepreneurs blend these two characteristics. Their instincts might point them to an opportunity, or tell them it is time to focus resources on developing a particular feature or serving a particular customer segment. But analysis helps them determine which opportunity to pursue, or how they will actually go about the important task of, you know, actually making money.

A well known example is Jeff Bezos.

Read the rest at Scott's Havard Business Review blog.

How would you identify the up-and-coming leaders in a company about which you knew nothing? You'd likely start by pinpointing the executives who control the most employees or revenues. You might give bonus points to relatively young mangers. If you had consulting DNA you might create a sophisticated ratio combining the span of control and age to identify the leader in the horse race to be the next big boss.

You are working off a simple hypothesis that's right in almost every company — that size matters. Power flows from financial contributions and legions of employees. You groom leaders by giving them progressively larger, more challenging opportunities.

This approach seems logical. The bigger the business, the more it matters to a company's near-term performance. And certainly, larger businesses tend to be more complex. Tomorrow's leaders surely need to be able to deal with complexity!

But I wonder if companies might be approaching leadership development the wrong way. It's pretty clear that tomorrow's leaders are going to face the "new normal" of constant change. It is no longer enough to be an operator that can master today's complexity. You have to be prepared to deal with tomorrow's complexity, "black swan" events, sudden shifts in the basis of competition in your industry, competitors springing up around the globe, and more.

I've never run a multi-billion dollar company, but I'm willing to bet the difference in complexity between managing $1 billion and $10 billion in revenues, or 1,000 versus 10,000 employees isn't that great. In other words, giving up-and-comers more responsibility helps them to refine skills they already have, when what they need to do is to develop the capability to flexibly respond to unanticipated challenges.

A related challenge is that size-matters-grooming companies can find it hard to convince talented managers to work on new growth initiatives. After all, those initiatives typically start small, both in terms of headcount and revenue. Managers with their eye on their next assignment naturally want to work on projects that will "look good" on their internal resume.

Perhaps it is time to rethink this approach.

Read the rest at Scott's Havard Business Review blog.

"The Odds Are Increasing That Microsoft's Business Will Collapse"

That's a pretty good title if you (like Henry Blodget from Silicon Alley Insider, the writer of the article) are trying to grab eyeballs. It also provides a useful introduction to what I call the "Innovator's Paradox."

Blodget's article was provocative. He argued that Microsoft is in a no-win situation. It isn't sitting on any idea that is on the cusp of turning into a multi-billion dollar business. The personal computer is losing its dominance to mobile devices and tablets. The company's core profit drivers (Windows and Office) are under disruptive assault from Google's freely available applications and operating system. At best, Microsoft will respond with its own free products and erode its profit margin.

The most telling thing in Blodget's post was a chart that showed the sources of Microsoft's profits over the past few years. Microsoft's core business has continued — despite continued proclamations of the company's coming demise — to throw off cash and to grow. But new growth businesses that were specks in 2006 (entertainment and devices and online services) remain tiny, and Microsoft hasn't created any material new businesses over the past few years.

So the real problem isn't what Microsoft is doing today. It's what Microsoft did, or didn't do, five, or even 10 years ago. At the time, its base business was a bastion of strength. Today's threats were in their infancies. It would have been the perfect time to plant seeds that today would be blooming profit generators.

Why didn't it? It's The Innovator's Paradox: When you don't need the growth, you act in ways that lead to you not getting the growth you will need. And when you do need the growth, you can't act in ways that deliver it.

Read the rest at Scott's Havard Business Review blog.

My colleague Alex Slawsby made an observation while we sat in the office of one of our clients the other day. "Look around," he said. "The room is full of products made by the company."

Doesn't seem so fascinating, does it? After all, any member of a "tribe" has markers to demonstrate their allegiance to the tribe. But Alex continued. "Don't you think instead this room should be bursting with products made by competitors? Or other solutions consumers turn to instead of the company's products?"

It was a thought provoking point. At most companies, it is a mark of shame to use anything other than the company's product. I doubt that you would see many tubes of Crest at Colgate-Palmolive. Try bringing a Coke product into Pepsi. Steve Ballmer from Microsoft famously berated an employee last year for using an iPhone at a company event. I remember a few years ago when we were working for DHL and we committed a cardinal sin. Not only did we send the company something via FedEx. It was an invoice. (Fortunately a friendly client interceded and saved us from trouble).

It's kind of silly, isn't it? An innovation-focused company shouldn't have an avoid-the-competition-at-all-costs mindset. Instead, the company should always be wondering:

•What is the competition up to?
•Why might people prefer their products to ours?
•How does the customer think through purchase-and-use decisions?

Some companies have people who focus solely on competitive intelligence, but the simplest form of competitive intelligence is to encourage employees to act like "regular" customers. Pick whatever solution gets the job done better than anyone else.

Read the rest at Scott's Havard Business Review blog.

The other day I was meeting with the leadership team of a startup company brimming with transformational potential. The team had made tremendous progress in a year, going from an idea on a piece of paper to a fully functioning business earning real revenue.

Of course, any new venture is fragile. While revenues are growing, the company hasn't yet hit breakeven. Its current projections suggest that point is still at least six months away. The company has some cash in the bank, but recently began looking for further external investment to help ensure it remains solvent.

Our discussion went something like this:

Me: "So, how important is it that you get external funding?"

Team: "It's important, but not critical because we have cash in the bank."

Scott: "How much?"

Team: "A few hundred thousand dollars"

Scott: "What are your current spending projections?"
(I hear a shuffling of paper...)

Team: "30 to 50 thousand a month."

Scott: "Well, that seems pretty urgent to me. You have about six months of life left."

One of the first lessons taught to me by my Harvard Business School finance professor sticks with me to this day: The only reason a business fails is that it runs out of cash. As such, the first question every entrepreneur should be able to answer in a second is, "How many days do I have to live?" That helps the entrepreneur think about how to manage their costs and their funding strategy.

The second question I look for an immediate response to is, "Why are you doing this?" Starting up new businesses is incredibly hard. Most fail. The ones that succeed require hard work and constant attention. An entrepreneur who doesn't have a good answer to this question is unlikely to succeed — and is certainly unlikely to raise external capital.

Fortunately, the team I was guiding could answer this question easily. They believed their approach could fundamentally change the category and dramatically improve the lives of their consumers. The early data supported their view.

Finally, I always want an entrepreneur to tell me the two critical things they are working on at any given time. Of course, any new venture will have dozens of areas that need attention on a daily basis. But a good entrepreneur can step back and highlight the two things they are really hoping to learn during a set time period. These aren't always the fires burning brightest. Ideally, they relate to the biggest unknowns in the hypothesized business model.

Time will tell if the team I was working with will succeed. But by focusing on how long they have to live, why the hard work is worth it, and what the most critical issues are, I know they will maximize their odds of success.

Read the rest at Scott's Havard Management blog, Innovation Insights.

For what seems like forever, Twitter has been the white-hot startup staring at a critical, unanswered question: How will it translate hype, and seemingly never-ending traffic growth, into profits?

Yesterday the company announced its intentions to offer corporations the opportunity to sponsor Tweets. So-called "Promoted Tweets" will appear when people search for particular terms. Only a single sponsored Tweet will appear alongside search results. The Tweet will appear as long as it demonstrates "resonance" with the audience by being clicked or re-Tweeted. Twitter doesn't plan to charge companies whose sponsored Tweets don't generate high resonance. Presumably Tweets with high resonance scores will pay price premiums.

What's to like about this move? While it's easy to dismiss "Promoted Tweets" as just another advertising play, Twitter's attempt to measure resonance is intriguing. Remember, companies don't advertise for advertising sake. Rather, they advertise to help them achieve other business objectives, such as attracting new customers, or further enhancing brand loyalty. Finding novel ways to track the impact of advertising — and pricing that advertising accordingly — carries interesting potential.

Also, Twitter recognizes that its quest to develop its business model is just beginning.

Read the rest at Scott's Havard Management blog, Innovation Insights.

I’m taking part in a Post2Post Virtual Book Tour for Switch: How to Change Things When Change Is Hard, the new book by Made to Stick authors Chip Heath and Dan Heath about how to make change happen. The topic is of great importance to innovators, since change is at the heart of innovation.

At the heart of Switch is this framework that sets out three ways change happens:

1. Direct the Rider (the conscious mind), eliminating what looks like resistance but is more often a lack of clarity by providing crystal-clear direction.
2. Motivate the Elephant (the subconscious), eliminating what looks like laziness but is more often exhaustion by engaging emotions to get them on the same path as you.
3. Shape the Path (the situation), eliminating what looks like a people problem but is more often a situation problem, by making the environment more conducive to the change you seek.

Switch co-author Dan Heath answered questions I sent him about how Switch works from the perspective of an innovator:

Q. What are Switch’s main takeaways for innovators?

A. Switch discusses a simple framework for changing behavior. Innovators will need this skill more than most people, since they need to convince their colleagues to adopt new practices and their customers to embrace new products. One core principle of behavior change, which is particularly relevant to innovators, is that people rarely change because they are provided with information. Change comes from feeling, and the feeling provides us the motivation we need to overcome the nuisance of making changes.

So if you’re leading change, you should ask yourself, “What can I get my colleagues or customers to feel?” As an example, consider Robyn Waters, who helped transform Target into the design powerhouse it is today. In convincing Target’s merchants to take a chance on new designs or new colors, she’d constantly show them things. See, look how using the bright blue Polo shirt makes your display “pop.” And they’d get inspired by what they saw and give her a chance. She never could have convinced them with a memo or a PowerPoint.

Q. What are the ways the relatively simple behavioral change of using checklists can drive more creative and innovative behavior (or outcomes)?

A. Checklists are basically insurance against overconfidence. A checklist will never generate an innovation — that’s not the point. What checklists can do is train your innovative mind on the right issues. Let me give you an example. There’s a classic study in psychology that asked students to come up with a solution for their university’s chronic parking problem. Ideas ranged from raising parking fees to creating more “Compact Only” parking spaces. After the ideas were collected, a panel of experts assessed them — eliminating wacky or impractical options — and identified a set of “best solutions”. The average individual brainstormer came up with 30 percent of the best solutions, which is pretty good for a solo effort. Here’s what’s not so good: The brainstormers confidently predicted that they’d identified 75 percent of the best ideas. Whoops.

So imagine if we’d provided those students with a checklist of “solution categories” to guide their thinking about the parking solution. We’d remind them to think about things like “solutions that raise the cost of parking” and “solutions that help more cars park in the same amount of space” and so on. It would have sparked their thinking and kept them from forgetting key areas of consideration.

Q. If a company’s goal is to help its employees become more innovative, which is the best approach? Direct the Rider, Motivate the Elephant, or Shape the Path? Is there a desired combination for increasing more creative, innovative behavior? Or would the solution be very situation-specific?

The solutions will be situation-specific, but the strategy won’t be. If you want your employees to be more innovative and creative, think in terms of a three-front campaign:

1. Provide crystal-clear direction. In a change effort, what looks like resistance is often a lack of clarity. For instance, what does it mean to be more “creative” or “innovative”? Different organizations would interpret those terms very differently. Do you want people to submit ideas for new products or processes? Do you want them to spend more hours in the field shadowing customers? Do you want them to build prototypes of their designs more rapidly? A leader needs to translate aspirations into actions — so think in terms of the behaviors that you want to encourage.
2. Find the motivation. As mentioned earlier, change comes from feeling. Why should people bother to act differently? After all, they’ve been practicing the “old ways” of behaving for months or years. It will take enormous effort for them to retrain themselves. Why should they bother? The motivation might come from the desire to correct mistakes — imagine screening a video of a customer who experienced a lot of hassle because of your team’s failure. Or you could imagine appealing to their desire to be the best — painting a picture of an innovation that, if executed correctly, would blow people’s minds.
3. Clear the path. If you want your team to be more creative and innovative, how many obstacles can you clear from their path? Can you create better IT systems to automate some of the bureaucratic duties that crowd out their creative time? Will you create PDA-free “quiet hours” so they can focus? Will you pay for offsite meetings so they can collaborate more easily? If you reflect on your own experiences, you’ll surely realize that there were some environments in which you found it easy to be creative and others where it was impossible. How can you create an environment that makes it easy on your team?

Q. Driving innovation within a company often requires people to embrace contradiction – think analytically yet also think metaphorically; focus on the near-term result yet also think out to the future; drive incremental innovation to keep the near-term bottom line growing yet also drive breakthrough innovation to keep the company growing into the future. Obviously it’s important to know when to switch focus. But how do you change into someone who has this capacity, when hardly anyone has it naturally? What do you change about yourself to be able to do this?

I see these more as balancing acts rather than contradictions. E.g., you need a balance of short-term focus and long-term focus. And I disagree with you — I think we all have this capacity to balance. But sometimes we’ll end up out of balance — say, too focused on short-term results — and then we’ll need to correct the situation. And that’s when the strategy discussed above — clear direction, emotional motivation, and a clear path — can be employed.

People tend to moan and groan about change, but the fact is, we’re all pretty good at it. People get married, they have kids, they switch jobs, they move cities, they embrace new technologies, they eat new foods and wear new clothes. Of course, that doesn’t mean your change at work will be easy, but it does mean there’s no one on your team who lacks the capacity for change.

I had an epiphany recently. The setting: a multi-billion dollar global giant. The topic of discussion: innovation. My epiphany: A simple two-word phrase that can hamstring innovation.

What about...

I was helping a cross-functional group review a few ideas to create new growth businesses. Like many early-stage propositions, the ideas blended intriguing potential with high degrees of uncertainty.

About 15 minutes into the review, the questions began to come in.

What about the competitive landscape? Can we model the impact of someone entering the space early?

What about the market size? Are we sure these numbers are right?" another wondered.

What about the regulatory regime. Are these timelines really realistic?

They were important questions, and robust answers would help bring each opportunity into sharper focus. And the group's intentions were good — figure out which opportunity was the most attractive so that the company could direct its resources appropriately.

The problem, though, is what follows "What about..." questions. The next step from almost any discussion like this one is to conduct further research. And, "What about..." questions never stop. Each answer generates questions whose answers lead to further questions. It could become infinite.

Even if you do analyze your questions, frequently the analytical work, no matter how robust, proves wrong because of something that can't be anticipated. To borrow a phrase from the great military strategist Helmuth von Moltke: "No business plan ever survived its first encounter with the market."

Further, the greater the demands for comprehensive answers to "What about..." questions, the greater the pull of existing markets populated by powerful incumbents. After all, it's difficult to question the size of the market that already exists — even if history shows that those markets aren't the best targets for growth-seeking companies.

It's just hard to have robust answers about an unknown future state. Too frequently, taking the time to answer "What about..." questions doesn't bring you any closer to achieving the goal of creating booming growth businesses.

This is part of a category of "abundance" problems that makes it paradoxically hard for resource-rich companies to "pave the first mile" of growth (a broader theme I'll be exploring more deeply in future posts).

Resource-rich companies have the "luxury" of researching and researching problems. That can be a huge benefit in known markets where precision matters. But it can be a huge deficit in unknown markets where precision is impossible and attempts to create it through analysis are quixotic. Entrepreneurs don't have the luxury of asking "What about..." questions, and in disruptive circumstances that works in their favor.

So what's the alternative? Substitute early action for never-ending analysis. Figure out the quickest, cheapest way to do something market-facing to start the iterative process that so frequently typifies innovation. Be prepared to make quick decisions, but have the driver of the decision be in-market data, not conceptual analysis. In other words, go small and learn. Pitch (or even sell) your idea to colleagues. Open up a kiosk in a shopping mall for a week. Create a quick-and-dirty website describing your idea. Be prepared to make quick decisions.

The future can't be analytically derived. Of course it's almost always valuable to think comprehensively about a new idea. But maintain a healthy balance between analysis and action. If you get stuck in "What about..." loops, you'll never get the results you seek.

You have to give it to Apple. The company has an uncanny knack for seizing the moment and whipping journalists and consumers into a frenzy. The latest wave comes from today's launch of the iPad tablet with iBookstore content store. 

As always, there's a lot to like about Apple's device. The user interface looks great, the bookstore seems intuitive, and Apple set a price point (at least for the entry level iPad) that positions the device well in the marketplace. The hype bar was set so high that inevitably some people were disappointed - Dan Frommer from Silicon Alley Insider called it a big "yawn" that won't define publishing the way many experts projected.

Are there reasons to suggest that the iPad won't be Apple's third game-changer in a decade, following the iPod family of products and the phenomenal iPhone, which has turned into a mutli-billion dollar business in less than three years?

There are at least three things that give me pause.

First, I wonder if Apple hasn't actually created too good an interface for content providers. One of the things I love about my Kindle is it has just the right sets of features for reading books and many magazines. It is basic content delivered easily at reasonable prices.

Apple's device allows textbook publishers and others to pour on multimedia features like pictures and videos. Publishers love that option because it seemingly gives them options to charge higher prices. But is it possible that many customers don't actually want the extra bells and whistles? They just want the basic content at affordable prices.

Of course, that's not true for all customers, some surely want as many features as they can get, but it is possible that content providers jumping onto the iPad platform will overshoot the market's mainstream, providing more room for Amazon's Kindle and other simpler readers (of course, Amazon is trying to figure out how to get third-party applications onto the Kindle so it can compete with Apple).

Also, the iPad is entering a pretty crowded space. Not only are there are growing number of e-readers, multifunctional netbooks share many of the same features as the iPad (without the slick design, of course), and other major manufacturers are coming up with their own tablets as well. I'm sure there are a class of consumers who will look at Apple's device and not see a place for it in their arsenal of gadgets.

And that leads to my third concern. I wonder whether Apple is beginning to get into uncomfortable territory where it will face hard choices about the degree to which it cannibalizes itself. One of the great things about the iPod is that it was all new growth for the company. The iPhone might have cannibalized the iPod a bit, but for the most part it was all new growth for the company. Apple surely hopes the iPad slots in nicely between its phones and its computer lines, but if it doesn't, Apple might have a difficult balancing act on its hands.

It's hard to bet against Apple. The two things I admire most about the company are its ability to think holistically about business models (iPod + iTues, iPhone + the App store, iPad + iBookstore) and its willingness to keep innovating. Imagine how different it would have been if Apple stopped at the first generation iPod, or just rode the iPod for as long as it could. Its willingness to step out and enter into new categories is an important lesson for all companies.

Even non-football fans probably heard about Bill Belichick's "blunder" of a call on Sunday night. Believe it or not, the call — and the firestorm that followed — has important lessons for innovation managers.

A quick recap. The New England Patriots led the Indianapolis Colts by six points with two minutes to go. It was fourth down, the ball was on the New England 28 yard line, and the Patriots needed just two yards for a first down that would almost certainly have sealed a victory. Conventional wisdom called for a punt, but Coach Belichick decided to go for it. After the Patriots fell just short of the first down, the Colts marched into the end zone and won the game.

Reaction was swift and almost universally negative.

But there's statistical evidence that Belichick followed the right approach, that his move marginally increased the odds that the Patriots would win the game. Of course, the Patriots didn't win the game, but had the situation played out hundreds of times, a coach using Belichick's tactics would win more frequently than one who didn't.

What does this have to do with innovation?

First, the "Belichick incident" highlights the challenges facing a leader who makes the hard, right choices.

If Belichick had punted and the Patriots lost, no one would have complained. Following a seemingly non-conventional approach opened Belichick up to criticism. Successful innovation requires similar bravery. It isn't easy to go after non-existent markets or follow non-obvious approaches when analysts and investors are grilling you over minute-by-minute results. After all, naysayers tend not to criticize risks you don't take.

The other important implication relates to rewards. People moaned about Belichick's decision because the result was negative. Just like companies reward people who hit their numbers and penalize those who don't.

Read the rest at Scott's Havard Management blog, Innovation Insights.

Clayton Christensen is a wise man. Back in 2002, Erik Roth and I were having a discussion with Christensen about how we should approach the writing of what became Seeing What’s Next.

“Don’t start by writing,” Christensen advised. “Instead give a bunch of talks. That’s the only way you’ll learn the best way to communicate your ideas.”

Six months after Seeing What’s Next came out and I gave about my 10th speech on the topics in the book, I realized how right Christensen was. Condensing a complicated argument in a compelling way provided vital (and, sadly, unusable) guidance on how to write the book.

It’s no surprise then that I learned this lesson again the other week when I gave about my tenth speech on the topics in The Silver Lining and the gears in my brain finally clicked.
The book’s core argument is that innovation is possible no matter how dark the times, innovation has moved from a strategic nicety to a strategic necessity, and innovation can be mastered. To drive the transformation that today’s times require, companies need to do six things:

1. Prudently prune your portfolio based on potential, not performance. In his 2001 book Creative DestructionInnosight Director Dick Foster noted that sometimes you have to destroy before you create. Companies need to make sure they stop some ongoing efforts to ensure their innovation efforts are focused in the right places. Future potential, not past performance, should drive pruning efforts.
    
2. Take an outside-in view to inform cost cutting and opportunity creation. When times get tough, the “more with less” drumbeat starts. But you can’t deliver more with less unless you know what more means. And you can’t know what more means unless you invest in deep market understanding. That same outside-in bias helps companies to identify the highest-potential opportunities and to develop the instinct to share the innovation load with third parties that are all too happy to help.
    
3. Build a minor-league system for innovation. My article in this month’s Harvard Business Review noted how major league baseball teams rarely bring highly touted prospects straight to the major leagues. Instead prospects start in the minors where competition is less intense, teams can provide more hands-on coaching, and gather data to determine which prospects really have it and which ones don’t. Companies need to create an innovation minor league to address the critical strategic issues behind their innovation efforts.
    
4. Create an innovation factory. Today’s leaders face a conundrum. The increasingly transitory nature of competitive advantage demands increased innovation. But a popular perception that innovation is risky and expensive makes innovation investments difficult to justify. An “Innovation Factory” that more reliably churns out new growth businesses breaks this conundrum. Companies that craft an innovation strategy, implement an innovation process, create innovation structures, and invest in innovation systems can dramatically increase the returns on their innovation efforts.
    
5. Learn to love the low end. In the dark days of October 2008, shining corporate stars included noted low-end lovers like McDonald’s, Southwest, and Wal-Mart. Companies have to figure out how to connect with value-conscious customers in existing markets and still elusive customers in emerging markets. Doing so requires mastering business model innovation.
    
6. Help drive personal reinvention. The current generation of business leaders is largely unprepared for the challenges it now faces. Leaders need to master paradoxical demands, such as pushing for precision in core businesses and embracing uncertainty in emerging businesses. Leaders have to go back to innovation school to build the muscles required for today’s times.

It only took 340 days since I pitched the idea of The Silver Lining to Harvard Business Publishing for these ideas to crystallize to the degree that I could describe them in fewer than 700 words (and don’t get me wrong, I’m plenty happy with The Silver Lining, particularly since the book was written in less than 90 days to make sure it hit shelves while it was still necessary!).

As long as the next book – whatever it is – doesn’t involve responding to a crisis I swear I’ll heed Christensen’s advice.

Earlier this week, Netflix announced a winner in a $1 million contest designed to help the company improve its recommendation engine. While other companies shouldn't blindly mimic Netflix's specific program, they ought to step up efforts to share the innovation load as widely as possible.

Netflix announced its contest in 2006. Teams had to develop a technological solution that provided 10 percent more accurate movie recommendations than Netflix's internal engine. The challenge literally came down to the wire — as two teams provided indistinguishable results, the prize went to the team that submitted its final algorithm mere minutes before the runner-up.

There's a lot to like about Netflix's approach. It focused on a "modular" problem (that individual teams could solve independently) with "measurable" results. It provided 100 million anonymous movie ratings to contestants to help them crack the problem. Thousands of teams from around the world tried to crack the problem, with the winning team ultimately constituting a merger of two other teams.

Netflix now plans to replicate the contest approach, creating a $500,000 prize for a team that develops the best algorithm to turn demographic and behavioral data into a "taste profile."

The seemingly low success rate of Netflix's first contest — less than 0.2% of teams hit Netflix's goal — carries a hidden lesson. If you are inside a company, and you have a single team working on a tough problem, what are the odds that you can beat the dozens or hundreds of groups working on related problems outside your company?

Many companies will tell me they just don't have sufficient resources for innovation. My first reaction to this statement is to ask the company to carefully assess how it currently is allocating its results. Further investigation often highlights that a scarily high number of resources are working on "zombie projects" that really have no hopes of succeeding in any meaningful way. Reallocating those resources can dramatically increase a company's innovation capacity.

Read the rest at Scott's Havard Management blog, Innovation Insights.

"College and high school have long been the Petri dishes of football innovation," wrote Charles Seibert last week in the Wall Street Journal. I made note of this last December in this post about the innovative nature of the spread offense in college football.  Innovation in football is a classic case of constraint-driven innovation. Colleges have smaller budgets than pros and make less money, so there's less to lose and more to gain from doing something radical. High schools have even fewer financial resources and even less to lose.

Besides financial resources, there are two main constraints driving innovation in football.  One is talent. High school coaches have the least amount of choice over their players. They don't draft players as the pros do, and they don't generally recruit as colleges do. The play with who they have. And many of the wackiest and most creative offensive schemes in football are designed to level the playing field, so to speak, to make a team that has fewer talented players competitive with teams that do.

The second major constraint driving football innovation is the set of rules that governs the game. If you can come up with something that exploits a loophole, it has the added advantage of initial surprise, until other teams begin to adjust for it. Over the off-season I came across a mention of the A-11 offense being practiced since 2007 in some California high schools. A-11 exploits a couple of loopholes: in scrimmage-kick formation, every player on the offense is eligible to catch the ball. And if you have no offensive players wearing numbers 50 to 79, there can be no ineligible receivers on the offense. After last season, in an effort to take some of the sting out of the A-11, the National Federation of State High School Associations added a rule mandating at least four players on the line of scrimmage wearing numbers 50 to 79.

But the A-11's creators simply tweaked the offense, noted the Oakland Tribune last week: "True innovators don't concede to roadblocks. Not surprisingly, they're still going around, through and over them at Piedmont, executing wacky double-reverse flea-flickers with two quarterbacks in the backfield, three men up front and six players split wide." The A-11's creators suit up those "ineligible" receivers, but just push right out to the edge of what they are elegible to do: they can still carry the ball, throw it, catch screens, and block. They just can't go downfield to catch passes.

In other words, these players can still mess with the minds of the defense, which was a big part of the original point of the A-11 and part of the point of all innovations that push at rules. Noted the Washington Post, "Throughout football's history, offensive innovation has been based on misdirection and deception, from Knute Rockne's box shift at Notre Dame in the 1920s to the spread option of today. But [the A-11] spurred a debate about the sport's tradition and rules of play."

The other main point of A-11 is to add randomness to the offense that results in many more scoring opportunities, as Scientific American pointed out: "In a standard formation with five fixed linemen, a play can unfold with 36 different scenarios for who receives the snap and who ends up with the ball — including a quarterback sneak. In the A-11 offense, because the receivers and linemen (and even quarterbacks) are interchangeable, the number of different possibilities for what can happen on a given play skyrockets to 16,632."

Innovation in the offense hasn't completely sidestepped the pros. Seibert's article discusses the rise of the Wildcat offense in pro football, noting that "Even the biggest and most heavily favored juggernauts can on any given day be suddenly undone by a group of scrappy upstarts with a wealth of passion and a well-wrought stratagem: some riotous, rhythm-ruining array of timely defensive blitzing packages, or a stunningly inventive attack formation such as the new Wildcat offense."

Image from Chicago Sun-Times Sports Pros(e) blog

Last week, I wrote about the dangers of overly relying on quantitative market research when developing innovation opportunities. A tendency to seek "safety in numbers" causes a similar problem in another part of the innovation process: managing the creation of intellectual property.

Harvard Business Review Senior Editor Julia Kirby forwarded me a survey of intellectual property managers in firms. How do these managers measure their program's effectiveness? They look at the numbers.

Close to 80 percent of respondents said they measure effectiveness by looking at the number of patent applications filed. Other measures include the number of patents granted and invention disclosures reviewed.

It's no surprise that intellectual property managers chose these metrics. Patent activity is easy to track and facilitates industry benchmarking.

But as Albert Einstein said, "Not everything that can be counted counts, and not everything that counts can be counted."

Patents can be a source of competitive advantage. They can indicate that a technological community is on top of its game. But patents for patents' sake can be a waste of time. Remember, there is a marked difference between invention and innovation. The output always matters.

Read the rest at Scott's Havard Management blog, Innovation Insights.

• Tips on Innovation & Entrepreneurship From Jeff Bezos by Om Malik | GigaOm blog

  Comments from on innovation an entrepreurship from Amazon's founder during a recent interview, such as "The trick to being an entrepreneur is to know when to be stubborn and when to be flexible: Be stubborn about the vision, but flexible about tactics."

• Innovation Perspectives for August, by multiple authors | Blogging Innovation

  Roundup of blog posts by six authors answering the question, "please describe the importance of innovation strategy to the success of an organization's innovation efforts."

• The 21 Heroes of Data Visualization by Maria Popova | BusinessWeek

  Slide show of interesting and inspiring visualizations of data sets by top designers illustrates the value of pattern-seeking.

• The New, Faster Face of Innovation by By Erik Brynjolfsson and Michael Schrage | MIT Sloan Management Review via Wall Street Journal

  Article on the ramifications of technology that makes innovation initiatives both speedier and cheaper to produce. Will this result in more disruptive innovation or will companies still be tempted to speed up incremental innovations?

   

Most observers agree that large companies aren't optimally organized to innovate. What's less clear is a better alternative to current organizational designs.

An article in the Wall Street Journal last week about a radical organizational experiment at Cisco Systems kicked off a fierce debate on this topic. The article described how Cisco has moved from a traditional top-down hierarchical structure to a more amorphous structure build around close to 60 different committees.

At the top of the organization sits an "Operating Committee" of 16 top executives, including Chief Executive Officer John Chambers. Twelve "Councils" with an average of 14 senior leaders report to that committee. Close to 50 "Boards" with an average of 14 less senior leaders report to the Councils (except for four Boards that report directly to the Operating Committee).

The more amorphous structure allows Cisco to bring together leaders from across its business to tackle critical problems, such as selling to small businesses. Of course, all these committees take time — estimates suggest that some senior leaders spend 30 percent of their time dealing with issues raised in committees.

It's certainly different, but is it good for innovation? Most pundits don't think so. For example, Silicon Alley Insider's Henry Blodget sprinkled an article titled "Has John Chambers Lost His Mind?" with words like "nutbag," "insane," and "awful." Author and consultant Geoffrey Moore told the Journal, "Right now it's chaos because there's so much on everybody's plate."

Generally speaking, I look for a structure that addresses five inter-related problems.

Read the rest at Scott's Havard Management blog, Innovation Insights.

Change, recession, failure, silver linings. All of these and more were touched on by the major speakers at Day 1 of the World Innovation Forum. The day kicked off with futurist and Stanford professor Paul Saffo, who shared a framework for thinking about the context in which innovation is going to happen over the next decade.

The key to this moment in time, he said, is appreciating how profound the uncertainty is and not allowing our anxieties to arbitrarily narrow possibilities. Uncertainty is also opportunity. Step back and get context, and things start to make sense. At Innosight we often say that innovators should look for patterns when looking for where new innovationsmight come from. Saffo quoted Mark Twain in saying we should “look for things that ‘rhyme.’ ”

Echoing some of Scott Anthony’s thinking from The Silver Lining, Saffo told us that we should cherish failure because of its silver lining — the fact that progress is built on previous failures. Take a look at the S curve that describes innovation adoption, he said. The flat spot in the S curve is paved with the corpses of early innovation failures. “You’ll stand at the start of the curve and be convinced that takeoff is just around the corner,” but you should “never mistake a clear view for a short distance.”

So, if you are looking for success, he said, find something that’s been failing for 20 years. The first web companies were founded by refugees from failed interactive TV companies. We must not be afraid to fail.

Economies are done in by their successes, he said. They do themselves in because they do things so well. We moved from a producing economy to a consuming economy in the 1950s, when the time clock was surpassed by the credit card. The Consumer Economy ended on Sept. 14, 2008, with the bankruptcy of Lehmann Brothers.

Saffo called our current economy the Creator Economy, whose participants consume and create simultaneously. This is not a new thought, but he took it some interesting places. Google is the real indicator of the Creator Economy, he said, because it taps the smallest unit of a creator act: the search string.

Don’t fear change, embrace it, he urged. The new thing will not support the weight of the old thing. Better to start a lightweight small thing and build on it.

We've all heard companies give lip service to the idea that failures — course corrections — must be tolerated in order for innovation to happen. Our feature story this issue highlights the work of Rita Gunther McGrath, co-author of the newly released Discovery-Driven Growth, who asserts that failure must be more than tolerated — it must be welcomed and planned for. McGrath cites Procter & Gamble's A.G. Lafley, who famously has said that unless P&G experiences a certain failure rate from innovation efforts, not enough of innovation is happening, as an example of a good approach to failure. McGrath talks more about how to plan for and manage course corrections in this issue's feature story. Here's an excerpt (full story is here; book excerpt is here):

Q. My understanding from having read the book is that we seem to be synched up in this area of what we're calling “emergent strategy.” We've covered this in Chapter 6 of The Innovator's Guide to Growth, among other places, yet we don't often go into as much detail about how this works as you do. You've taken that one concept and detailed it.

A. Yes, I call that “strategy dynamics” — this idea that when the data doesn't exist, you need to be taking action before you can begin to understand what's going on. The whole strategic planning idea, where you're going to sit there and project out five years — in a lot of today's markets, it's not practical and it's not really going to get you anywhere. So it's the whole concept of you just realizing the right strategy as you go. We call it “discovery-driven” mainly to get the idea across quickly that this isn't about planning, it's about discovering.

Q. Can you give me the capsule description of what discovery-driven growth is?

A. Sure. Discovery-driven growth had its genesis in the recognition that existing planning systems make a lot of assumptions that are just not borne out in highly uncertain situations. So the book is really about ways that you can take strategic action, minimize your risk, and move forward, even without all the data that conventional planning systems assume you have.

Also in this issue is our monthly Disrupt-O-Meter, this one a look at the new OnLive gaming service (full story is here):

The brand-new gaming service OnLive has been surprising and delighting consumers and pundits since it was announced about a month ago. The service proposes a very different and novel way of delivering games — users stream the games over the Internet instead of running them on physically local hardware. In so doing, OnLive challenges the conventional wisdom that the Internet just isn't good enough to stream content like graphically intensive games at high resolutions without perceptible lag. If OnLive can deliver against this ambitious goal it may have substantial disruptive potential.

As always, thanks for reading Strategy & Innovation! Archives are free with registration here.

We often hear it: "Our innovation strategy is to be a fast follower." Too frequently, the person saying the phrase shakes her head as the words come out, oozing irony. The fast-follower approach has ended up pushing the company in many directions, with little strategic coherence. Worse, it has led the firm into competing head-on with entrenched incumbents rather than creating new markets.

Strategies like "fast follower" usually become popular for good reason. Oftentimes, however, they are transplanted from the industries where they emerged into settings where they are inappropriate. The challenge for firms is to distinguish which strategies fit their particular circumstances. We would suggest three settings in which a fast-follower approach makes good sense:

1. Local market power – Businesses with strong local economies of scale, such as grocery stores or newspapers, can easily look outside their home markets at how other firms are innovating for similar customers. The Philadelphia Inquirer may have much to learn from the Detroit Free Press, for example. Oftentimes companies in these industries will eagerly collaborate to share discoveries, and quickly copying successful experiments is sensible business practice.
2. Asymmetric capabilities – Big pharmaceutical companies have made excellent returns by being fast followers in drug categories, leveraging their sales capabilities to win market share even if their drugs’ effectiveness is no better than that of the firms who were first to market. By being somewhat later to launch, they can learn from the pioneers’ clinical trial results and avoid expensive failures. Yet this approach may have a limited shelf-life. In pharmaceuticals, insurers are increasingly pushing for cost-effective solutions, and they are not keen to subsidize large salesforces that may add little in terms of medical outcomes.
3. Ability to create new offerings based on synthesized learnings – Real-world experience is vastly preferable to countless hours spent brainstorming on a conference room whiteboard. The trick is to synthesize among a large number of experiments in-market, and to create a unique offering that draws from these lessons. Rising mobile phone manufacturers such as LG have done this well; they have closely observed how users interact with models currently in the marketplace, and they incorporate key features while adding new ones, such as a mirror to help with applying make-up.

Unfortunately, the fast-follower approach tends to be adopted in a fourth circumstance: as the lowest common denominator on which everyone in a company can agree. After all, few firms will state that their innovation strategy is to be a distant laggard. The result is a fractured portfolio in direct competition with motivated market leaders.

This week at the Business of Community Networking conference I listened to a number of speakers talk about the nuts and bolts of running customer communities. My interest in this topic has to do with the customer focus. Innosight’s approach to innovation starts with customers’ jobs-to-be-done. Social media and the rise of community-based marketing has resulted in a proliferation of information about customers. Indeed, a theme running through the conference was, what are companies doing with all this information?

I wonder whether the marketers (and they are usually marketers) running these online communities are maximizing their communities to gather more insights about their customers, including clues about jobs-to-be-done and even ideas for products, services, and customer service. And if they are doing those things, how are they calculating ROI on these kinds of qualitative results?

That question never really got answered, although speaker Chris Carfi of Cerado illuminated it further by pointing out that marketers have vocabulary and measurement units to allow them to quantify monetary value — but they don’t even have the words, let alone units of measurement, that allow them to quantify and measure more qualitative aspects like how strong the community itself is and how much value as an information source it may have.

To be fair, "community" can be created for many different reasons. I sensed at the conference a move away from the early days of community when a company built a community and then tried to make that commnity do everything. Nowadays companies might have idea-generation communities, customer-support communiites, and customer-evangelist communities, to name a few. However, an observer with a skill for sophisiticated pattern-matching analysis could likely spot innovation opportunities within the customer chatter in any type of community. It would behoove companies to make sure they are paying close attention to the stream of insights coming from their communities, regardless of the nature of the community.

Chris Carfi offered an interesting perspective in his conference talk. He proposed putting the power and the impetus on the customer to pass along their insights to a company. His question – how do we let vendors know about us? How do we let them know what we we’d like them to do? His answer – what if customers had a “terms of service” like software does, that spells out these things.

If such a thing were possible, I think such a terms-of-service document would be where we as customers would spell out our jobs-to-be-done – if we knew what they were, explicitly (and that is a very big “if”).

Any time a barrier prevents consumers from satisfying an important job, the market is ripe for disruption. Consider the significant barriers keeping physicians from adopting electronic medical record (EMR) systems, or expanding on those systems they do have. In a study published in the New England Journal of Medicine, 88 percent of physicians without electronic medical record (EMR) systems and 80 percent of physicians who already have EMR systems cite “cost of capital” as a barrier to adoption or expansion.

Who can blame them? Widely published estimates cite the costs of electronic medical record (EMR) systems as ranging from $15,000 - $50,000. However, this does not take into account the costs of hardware, implementation, training, and ongoing support, which can easily take the full costs of an EMR system to $250,000 - $300,000 for the first year.

So who will enable the disruption for which this market is ripe? Enter WalMart. Long known as a purveyor of cheap toothpaste, toilet paper, and televisions, WalMart announced this week that it has partnered with Dell and EClinicalWorks to offer physicians a package of hardware, software, installation, maintenance, and training for the everyday low price of $25,000 for the first physician and $10,000 for each additional physician in the first year.  While WalMart’s announcement is significant (especially to incumbents in the healthcare IT space), it is also significant, and important, to note that they are entering healthcare IT in a classically disruptive manner: 

1. Understand the important and unsatisfied jobs of key stakeholders: Physicians today are not just caregivers, they are businesspeople forced to deal with the bureaucracy of managed care and the headaches of managing an office. Any solution that enables them to spend more time with clients and less time on paperwork without a significant impact on the bottom line will be quickly embraced.
2. Create an innovative business model: With its understanding of physicians’ important and unsatisfied jobs, it was likely easy for WalMart to create a solution with an appealing value proposition. However, they likely realized that additional resources would be needed (or at least helpful) to execute the strategy. Enter Dell and EClinicalWorks. Each brings its unique experience and reputation to the solution creating something greater than the sum of its parts: 
   • WalMart claims that its role is one of an integrator. While this is true, largely because of their purchasing scale, it does offer three other key resources: widely recognized expertise in logistics and coordination, an existing physician customer base of approximately 200,000 physicians, and an existing distribution network through its 600 Sam’s Club stores. 
   • Dell supplies the hardware – either a desktop or tablet PC – and the installation services. While WalMart could likely have partnered with another hardware vendor, Dell’s experience in supply chain management and reputation for good customer service likely gave it an edge over cheaper but less well-known hardware companies.
   • EClinicalWorks supplies the Internet-based electronic medical record and practice management software, training, and maintenance. Already used by 25,000 physicians, EClinicalWork brings credibility in the healthcare IT space.
3. Use an emergent strategy: This is neither the beginning nor likely the end of WalMart’s foray into healthcare. In 2007, it partnered with the University of Arkansas and Blue Cross Blue Shield to conduct research on how to improve healthcare IT in the US.  In February 2008, it opened co-branded clinics with a common EMR platform operated by EClinicalWorks (surprised? You shouldn’t be), and in September it promised to provide all employees with access to electronic health records. It’s reasonable to assume that each of these activities were small steps to resolve assumptions related to IF and HOW WalMart should enter the EMR space. 

Supported by the Obama administration’s $19 billion investment in healthcare IT via the Recovery Act, WalMart’s foray into EMR is likely to be yet another successful step in its journey into the healthcare space. In the short term, WalMart is likely to benefit from sales of the system and the ability to influence patients and physicians to fill their prescriptions at WalMart’s pharmacies or to buy medical supplies and durable medical equipment at Sam’s Club. In the long term, its savvy use of the principles of disruptive innovation positions it well to successfully disrupt incumbents.

• Game-Changing Management Ideas - BusinessWeek

  Package of stories highlighting ways businesses are seeking breakthrough management ideas to spark growth during the recession; includes a story about innovations that are now trickling up from emerging markets instead aof the more traditional trickle-down effect innovation has had in the past.

• Attacking_Recession: How Innovation Can Fight the Downturn

  Report from UK-based NESTA puts forward a "total innovation strategy" the UK should use to fight the recession.

• Local Economies Seek Own Revival - WSJ.com

  Some cities are putting together their own "stimulus packages" to help their own economies.

• Pushing the Limits of Crowdsourcing - BusinessWeek

  Crowdsourcing continues to grow as social networking grows.

Here's a seemingly career-killing sales tactic: tell your customers they waste a lot of money on the product that forms the core of your company's business. Good way to land on the next cost-cutting list? For Xerox, this approach has actually created a powerful growth strategy.

The core of the strategy is Xerox's innovative shift from selling products to selling solutions. Instead of pushing copiers, printers, and related parts and services, Xerox is increasingly helping customers manage their end-to-end printing processes.

Xerox (and other vendors like Hewlett-Packard) offers customers the long-term ability to keep costs under control by providing consulting services to help them better managing their existing equipment. An article in today's Wall Street Journal suggested that such efforts can reduce printing costs by up to 30 percent.

That's a strong sales proposition in today's tough economy. While Xerox might miss short-term printer and copier sales, it is building long-term, potentially lucrative relationships -- and a base to move into additional productivity-related services. ...

Read the rest at Scott's Innovation Insights blog.

'Overconfidence, Bad Assumptions Can Cause Management Veterans to Underperform Less-Experienced Colleagues' read the subhead in today's Wall Street Journal. The story pointed out that experience can often blind us to new ideas and new solutions, make us unable to cope with new situations, and cause overconfidence.

Now where have we heard that before? Oh yes - in the theories of disruptive innovation. However, the Journal article isn't talking about a new start-up disrupting an incumbent company -- it's talking about newer, younger employees disrupting experienced managers. As Vijay Govindarajan, a professor at Dartmouth College's Tuck School of Business, is quoted: "Companies overestimate the value of experience. Experience becomes a liability in times of change."

All is not lost for the experienced managers, however. Some companies are using computer simulations to train managers how to be more flexible. And although the article doesn't come right out and say it, the implication is that the recession will force that learning on those who have not already been laid off. One manager said, " 'I try to force myself to be nervous. Whenever I find myself falling back on what I did last time, or think I'm doing well, I try to unsettle myself.' " Reading the business news pretty much does that for me these days. It's good to know there's some value to that!

Last week Harvard Business Publishing hosted an audio conference on my forthcoming book, The Silver Lining. The 90-minute discussion included some great dialogue with moderator Angelia Herrin and the audience. There were a handful of questions that I didn't get a chance to answer during the course of the discussion that I thought would be generally interesting to readers here.

Q: Why are "defined processes" considered "innovation killers"?

This question refers to a slide that made the case that many of the perceived advantages of big companies are actually quiet innovation killers. As such, a silver linings of today's tough ties is it scarcity will force companies to do what they should have been doing already.

The basic problem is that sharply defined processes can stymie innovation. ...

Read the rest at Scott's Harvard Management blog.

• Cisco Plans Big Push Into Server Market - NYTimes.com

  Cisco plans to release a server equipped with virtualization software, a product that "threatens to shake up the technology industry and put the company on a collision course with traditional partners like Hewlett-Packard and I.B.M. ... [this] is a bold but risky move by Cisco into an unfamiliar, intensely competitive market that typically produces far lower profits than Cisco makes from network gear. ... Cisco’s push into the server market...could cause an all-out war among the tech titans for one another’s customers."

  
  

• Asleep at the Wheel of Creative Destruction - Umair Haque - HarvardBusiness.org

  "Wall Street's moral hazard has a mirror image.. The perverse irony of the collapse of industrial-era capitalism isn't just that Wall St ended up being massively risk seeking, taking bets it never should have. It's also that venture capitalists ended up being risk averse - never making the bets they should have. ... Venture investors have been free to take hidden action that maximizes their own near-term returns - underinvesting in radical innovation."

  
  

• The New Reality: Constant Disruption - The Big Shift - HarvardBusiness.org

  John Hagel, John Seely Brown, and Lang Davison argue that "equilibrium is a thing of the past" because "Today's core technologies--computing, storage, and bandwidth -- are not stabilizing. They continue to evolve at an exponential rate. And because the underlying technologies don't stabilize, the social and business practices that coalesce into our new digital infrastructure aren't stabilizing either. Businesses and, more broadly, social, educational, and economic institutions, are left racing to catch up with the steadily improving performance of the foundational technologies."

  
  

In the January 14 issue of Strategy & Innovation, we offer up our annual Year in Preview story (free reg. reqd.) by Scott D. Anthony. This year we've added a new feature to this feature — we asked Innosight partners to write short industry specific predictions of the industries in which they have expertise.

Some overall themes:

• The darkening economic climate is good news for innovation — after all, abundance is at the root of many corporate struggles with innovation.
• It has never been easier to develop and scale an idea. Innovators can draw on high-quality, low-cost tools to develop, test, and begin to commercialize ideas without tens of millions of dollars of investment.
• Innovation has never been more important. Success in what we are calling the Great Disruption requires mastering perpetual transformation.
• Companies that are partially disrupted (such as print media) and those that are innovation novices will have a tougher go of it, as the current economic climate isn't favorable for their challenges.
• On-the-brink disruptive attackers and companies that have progressed in their efforts to make innovation systematic will be more likely to find their efforts paying off.
• Companies that demonstrate an ability to love the low end will find that strategy effective if they are able to master business model innovation and gain a deep understanding of how the low-end consumer measures value and develop unique offerings tailored to key value drivers.

Those industries for which uncertainty in the markets and uncertainty regarding potential governmental policy and regulations changes will struggle this year until the economy settles down and the policies of the new U.S. presidential administration begin to take shape. Finance and healthcare are two such industries.

Here are some of our partners' industry-specific predictions:

• Media: A strong likelihood of continued bankruptcies among media companies.
• Defense: A push toward decentralization and away from aircraft- and ship-specific platforms.
• Manufacturing: A shift toward innovation and away from strict reliance upon Six Sigma and cost-cutting.
• Automotive: No automakers will fold, but we will see consolidation of vehicle models in the saturated marketplace as a better linkage develops between customer requirements and available models.
• Retail: Growth among retailers targeting the low-end as well as those that can add high-level services that high-end consumers will pay for.
• Consumer products: CPG companies that do well will be those that strive to push the boundaries of their innovations, looking beyond just new products to new categories, new business models, and new channels.
• Finance: Reduced scope and size among financial global financial services firms, and an opportunity for low-cost tools and data providers.
• Healthcare: Widespread implementation of Electronic Medical Records, as proposed in the forthcoming economic stimulus package, could radically shift the balance of power between physicians, healthcare provider organizations, and insurers. 

Kevin Bolen co-authored this post.

It seems that everyone wants to know what the automakers will do differently in the increasingly unlikely event that they receive a massive Congressional bailout. Leaders suggest they'd like automakers to "be more innovative" and "reinvent their business model." But what exactly does that mean? And how would government officials monitor progress against these goals to see if the bailout is being well spent?

First, let's look at what it would take to "be more innovative." Our research and field work suggests watching whether automakers:

1. Place the customer at the heart of the innovation process: Firms that succeed in innovation are obsessed with learning more about the customer and, more specifically, the jobs they need to get done. Clayton Christensen likes to describe how millions of people use their car as an office, but no auto manufacturer has designed a car with desk space, power options for laptops and phones, Wi-Fi connectivity, and other features that would help get this job done. Looking for important, unsatisfied jobs-to-be-done could help auto manufacturers identify attractive growth segments and avoid commoditization. One sign that auto manufacturers have appropriately shifted their attention: an increase in the ratio of market research spending to advertising spending.

 

2. Have senior leaders actively engage in innovation: Leaders in many of the firms we work with and admire participate daily in innovation efforts. And this is not passive involvement. They join focus groups, observe behaviors, review project plans, help set prioritization parameters, evaluate funding requests, and develop and oversee unique organizational models to incubate the best concepts. Innovation is not simply a budget item for these leaders; it is second only to talent development on their personal to-do lists.

 

3. Create a diversified portfolio of ideas: No one can accurately predict what market demands will be five to 10 years from now. No one knows what the energy situation will look like. No one can predict the economic climate. No one knows precisely which early-stage ideas will take off and which will stagnate. Pinning a firm's future on a single breakthrough is unrealistic. A broad, diversified innovation portfolio can help companies withstand shocks and respond to market shifts. The freedom to fail in one area because of emerging opportunities in another is the hallmark of an effective innovation program.

Second, what would it really mean for the U.S. automakers to "reinvent their business model"? Our colleagues Mark Johnson and Clayton Christensen have an article with this very title in the latest Harvard Business Review.

One of the fundamental problems the article highlights is that many companies are held captive by their capabilities....

Read the rest at Scott's Harvard management blog.

In conjunction with Chuck Frey from InnovationTools.com, I am compiling a report on how and why to keep innovating during the economic crisis. We would love to hear from practicing innovators.

In essence, we would like to know how would you answer this question: What strategies should organizations use to maintain or expand their innovation initiatives, despite the current global economic downturn?

Please post your thoughts in the comments or email to me at rcinnosight -at- gmail.com. Replies will be compiled into a report and posted on innosight.com and on innovationtools.com. We'd like to get replies by Wednesday, November 19.

The Oct. 29 edition of Strategy & Innovation features a must-read for the current times: the Innovator's Survival Guide, which offers insight into what innovators should and should not do as they attempt to adapt to difficult economic times for their companies.  The long version of the story is at the link above (free registration required), and a shorter version is at Scott Anthony's Harvard Management blog here.  Here's an excerpt:

Innovators, are you feeling a bit lonely at the moment? Don’t take it personally. During turbulent economic times, companies naturally tend to focus on what’s familiar. Talking about the core business is like eating comfort food. Friendly discussions with loyal clients ease the anxiety generated by the media about the state of the broader market. Releasing incremental enhancements to existing offerings provides low-risk reasons to celebrate accomplishments at a time when so much seems out of control.

These prevailing sentiments have the effect of alienating those focused on the “new and different.” Whereas just a few short months ago, your programs were the lifeblood of the corporate strategy, suddenly you find yourself on the outside looking in. This is a lonely place, and prolonged isolation can lead to rash, unproductive behavior. However, a more thoughtful response during such times can actually accelerate and expand returns on innovation initiatives.

To help you make the right decisions, we offer a brief list of actions that innovators should and should not be taking in today’s skittish climate. We focus on the two main areas most likely to provoke the wrong behavior: your relationship with an increasingly nervous core business and the efficient allocation of scarce funds.

In terms of working with colleagues and leaders in the core business, Innovators SHOULD accept the realities of the marketplace and lend their help to the cause. Innosight’s research has shown that innovation can only succeed when the core business is stable. Without this foundation, management’s time and attention will be overwhelmed by the need to appease stakeholders such as clients and partners. Their ability to think constructively about any concept more than three months out will be impaired.

Innovators SHOULD NOT react to leadership’s focus on core offerings by trying to cram their new offerings into the core. There are reasons why new concepts are kept outside the core — it was the right choice in a booming economy and it is still the right choice. Trying to push new technology or service offerings through the traditional business model will fail.

There's much more — the whole article can be found here (free registration required).

No matter what phrase you use to describe it — nature abhors a vacuum, necessity is the mother of invention, every cloud has a silver lining — common wisdom suggests that every crisis presents opportunities.

The current economic turbulence is no exception. I'm no expert economist, but I think it's pretty safe to say we're not done with markets vacillating from dizzying highs to plummeting falls, and that there's plenty more pain to feel in the U.S. and World economies.

Does that mean that would-be innovators should go into deep hibernation? Instead of thinking of the next great thing, should they find the safest operating role they can find until the current storm passes? Certainly not.

Perhaps the good times are in fact dead. And certainly someone thinking of forming the umpteenth "Web 2.0-widget-to-grab-audience-and-find-advertisers" ought to pause to think whether they really have some kind of defined competitive advantage that can translate into a sustainable business.

But real customers continue to face real problems. And as always, innovators who figure out different ways to solve those problems — and make money doing so — will have opportunities to create new growth businesses. In fact, the creative destruction unleashed by a crisis always opens up opportunities for innovation.

Read more at Scott's Harvard Management blog.

Want a good way to get a group of executives to pause before making a decision about an innovation project? Ask them which of the following innovations they would prefer:

Innovation A: This innovation came out of the gates like a bullet, racking up first-year sales of more than $200 million. A clear value proposition, clever positioning, and a strong distribution network led to market success.

Innovation B: This innovation had first-year revenues of a mere $220,000. The innovation had proprietary technology, but the customer and the business model were very unclear.

It's obvious, right? Innovation A is the winning proposition.

Let's reveal more information. Innovation A was Vanilla Coke. It was a line extension that largely cannibalized sales of Coke's other products. Three years after launch, fizzling demand led Coke to pull the product from the market.

Innovation B was Google. In Google's early days, it had a technology and not much else. After a couple of iterations, though, it came up with its advertising-based business model, setting the stage for one of the greatest economic success stories of current times.

Far too many companies make decisions about which projects to fund based on a single set of metrics, with an overwhelming focus — particularly in today's challenging economic climate — on near-term sales. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

Innovation is tough in the best of times. What do you do when times are tough and your industry's very survival is in question?

A newspaper executive asked me that question during a discussion this past Monday. While just about every organization is feeling some economic pinch these days, few have it as tough as newspaper companies. Print circulation continues to slide. Advertisers are fleeing to the Internet, where newspapers continue to lose ground to Google, Yahoo!, and countless others.

Newspaper companies are experimenting with new approaches to disseminating content, but those ventures aren't getting big enough quickly enough to offset declines in the core business.

To their credit, most newspaper executives with whom I've spoken recognize that they have to keep pushing. They know they have little hope of maintaining their relevance if they don't innovate. Yet, the pressure to staunch the bleeding in the core business makes it incredibly difficult to do things differently, to commit to innovating.

It's a tough challenge, and it highlights for other businesses that maybe aren't in the dire situation that newspapers are just how important it is to start innovation efforts when times are good, when you have the time and resources to allow your efforts to reach escape velocity. Had the newspaper industry really pushed the innovation agenda in the mid 1990s, we would be having a very different conversation today.

Read the rest on Scott's Harvard Management blog.

Companies just starting innovation efforts often begin by getting a group of people together and telling them "It's innovation time!" I've never seen efforts like this succeed in meaningful ways.

Instead, we suggest that companies begin innovation efforts by creating an innovation strategy that details clear targets and tactics.

Clear targets help internal innovators know what they're shooting for. A reasonable starting place is to imagine what success looks like five years in the future. Are you seeking to double your business? Hold it steady? Something else? Setting a target that is several years in the future can help to de-politicize a potentially charged discussion.

Then think about the sources of growth. How much can you reasonably expect your core business to contribute? In some industries your five-year contribution might be below today's contribution, and that's okay.

Next, look at what's already in your development pipeline. What can you reasonably expect that pipeline to contribute in the future? One tip here: make sure to risk-adjust your pipeline. If you assume all of your projects will succeed, you are being wildly optimistic....

Read the rest at Scott's Harvard Management blog, Innovation Insights.

This article was co-authored by Michael Putz, a Business Development and Strategy Director at Cisco Systems. Putz was an integral contributor to the ideas presented in Seeing What’s Next through collaboration between Cisco and Clayton Christensen on the future of the telecommunications industry. The post reflects the personal views of the authors, not of Cisco Systems.

Click here to read Cuil's Dangerous Strategy Part I.

New-search-kid-on-the-block Cuil Inc. has its work cut out for itself. First, it has to fix embarrassing bugs that plagued its hotly hyped launch this week. Then, it has to figure out how to break from the pattern showing that companies that try to leap over market leaders with a better-performing product typically fail.

Cuil could look to Apple for signs of hope. Apple was far from the first mover in the digital music space when it introduced its first-generation iPod in 2001. That player was superior, and more expensive, than devices offered by Rio, Cabo, Archos, and others. Apple’s iPhone was a late entrant to the smartphone industry. Research in Motion, Motorola, Nokia, and Samsung are still struggling to match Apple’s intuitive interface and powerful computing platform.

In both cases Apple entered an established market with products that were functionally superior to established products.

Harvard Business School Professor and Innosight founder Clayton Christensen’s research found this approach — which he termed a sustaining strategy — tends to not work because it entices devastating response from motivated incumbents who have the right skills to fight back.

In fact, in 2007 Christensen publicly predicted the iPhone’s failure, telling BusinessWeek: “The iPhone is a sustaining technology relative to Nokia ... History speaks pretty loudly on that, that the probability of success is going to be limited.”

Yet, Apple’s digital music strategy has been an unqualified success and its mobile phone strategy appears on its way to similarly rarefied heights. Why has Apple been able to buck the trend? In both cases it recognized that it had to create a completely different value system to disrupt an entrenched incumbent value system.

Read the rest on Scott Anthony's Harvard Business blog, Innovation Insights.

I love accountants. Heck, my grandfather is in the Accounting Hall of Fame (I’m not kidding, check out the Web site). But when I see an article pairing an acquisition of a company with a widely lauded culture with plans to achieve substantial cost savings, my blood runs cold.

The article in question described Roche Holding AG’s $44 billion bid for full ownership of Genentech. For close to 20 years, Roche has masterfully managed a controlling economic interest in the biotech pioneer. One key to success has been allowing Genentech to follow its own course and reaping the benefits of products that would never have come out of Roche’s labs.

Today, Roche hopes that tighter integration will help to spur its own development process. And, of course, it hopes to achieve substantial cost savings “by combining the two companies ‘ clinical research teams and sales, manufacturing, and administrative departments in the U.S.”

So-called cost synergies make perfect sense — on paper. Through an accountant’s eyes it appears wasteful to duplicate functions that perform the same basic task.

What’s hidden however is how combining functions can destroy what’s unique about a company.
 

Read the rest on Scott's Harvard Business blog, Innovation Insights.

A front-page article in yesterday’s Wall Street Journal illustrated how important it is to periodically revisit the assumptions behind an idea.

The article described how several years ago, the head of Sacramento’s regional planning agency started to push developers to concentrate growth in defined areas rather than furthering suburban sprawl. The argument hinged on lowering pollution and fostering economic development.

Of course, with the price of oil shooting up, today the idea looks remarkably prescient.

I wonder, however, how many planners rejected similar ideas because they couldn’t imagine people making living decisions based on the cost of commuting, and how many now wish they started dusting off those rejected plans when signals emerged suggesting that circumstances had changed.

On the other hand, sometimes circumstances change in ways that undermine ideas that once seemed credible. Consider Motorola’s daring, and ultimately doomed, venture to provide satellite-driven mobile telephony.

Read the rest on Scott's Harvard Business blog, Innovation Insights.

This post is coauthored by Innosight Managing Director Matt Eyring.

Seeing coverage of this week’s baseball draft made us realize how much companies can learn about innovation from watching how great baseball teams manage their early portfolio of talent.

Baseball teams have to assemble the best talent possible, just like companies have to bet on the best innovation opportunities. A baseball team chooses between acquiring talent on the free agent market or drafting and building talent. A company chooses between acquisitions or organic growth.

Acquisitions are expensive, but perceived to be lower risk, because the talent (or idea) has proven itself demonstrably in the marketplace (for baseball, that means success on a major-league diamond). Organic growth is typically cheaper, but perceived to be risky because many times highly touted initiatives or prospects don’t pan out.

Baseball teams know that talent follows a power-law pattern, where for every 1,000 players there are 100 players that are capable of playing at major league levels, 10 of whom are legitimately good players, and 1 of whom is a true superstar. The same is true for innovation.

The challenge is: Which project or which player? Just as a baseball team doesn’t have complete information about what a player’s true level of ability is on draft day, you don’t know the real potential of any one innovation project.

Both of you are forced to deal with incomplete data. A team has to rely on a mix of limited performance data at the high school and college level and an assessment of a player’s inherent skills. Good teams collect as much data as possible. They have sophisticated models to project how rough performance can project to the major league level. Good teams also let past patterns inform their decisions. High school pitchers? Very risky. College hitters? Much less risky.

With a well-organized scouting team, you should gather multiple data points in preparation to “draft” innovation opportunities. Get the very best market data you can, look at past successes and failures to see what lessons you can glean, and use qualitative metrics or patterns to guide decisions. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

"What’s best practice?” Just about any manager seeking to improve corporate performance has fielded this question from leadership. The theory is that the manager should find a successful company, find out what practices have made them successful, mimic those practices, and expect success.

However, blindly worshiping at the altar of best practices is dangerous. The problem is that practices that work incredibly well in one circumstance can be ill-suited for another circumstance. Even if your company has successfully overcome a problem in the past, it is always worth asking if the circumstances have changed in a way that means your approach needs to change as well.

Read the rest at Scott's Harvard Management blog, Innovation Insights.