An industry in dire need of innovation

Talking today with a colleague in the innovation space, we were discussing industries that are more or less capable and prepared for change. Many industries have a history of research and development or new product development, and so may be more culturally and systemically prepared for innovation. Some industries, however, have had little change in many years and are less able to consider the tasks necessary for innovation. The industry we spent some time talking about most specifically is the newspaper industry.

Tom Brokaw made news recently by stating that he felt the Washington Post would not be published on paper in the next few years. That's because there are two significant trends impacting the news business. First, demographically, younger people get their news from a range of sources, including the internet, radio and television, rather than the newspaper. Reading seems a bit old fashioned. The older generations who were faithful newspaper readers are dying off. Second, the availability of information has exploded. You can get real time news and insights on any topic, from a wide range of sources online. Many times a story in the daily paper will seem like yesterday's news, if not older. The relevancy of the information and its currency are at risk.

Newspapers face dwindling subscriber bases and make money on advertising, especially local advertising like car dealers, real estate and local merchants. They make no money and place little value on the content they generate. Newspapers also are still a very "local" phenomenon, a reminder of the past when stores, restaurants and businesses competed locally but not geographically or nationally. What Ted Turner did to broadcast television with TBS was to create a "national" channel. Other than the USA Today, there's not a "national" newspaper.

All of these factors mean that newspapers and the media companies that own them need to rapidly change, yet they face significant hurdles. Most newspapers are still small, family-owned businesses with little cross-fertilization in the management ranks. Culturally, newspapers are fairly independent and not willing to adopt lessons that other businesses have learned. There are a number of cultural factors that will make innovation difficult, at a time when radical innovation is required.

I can see at least three alternatives for newspapers: one, fulfill the "last mile", two, sell content not advertising and three, build a national presence. In the first case, the "last mile" is where all the difficulties lie and all the value is hidden. There are still very important needs for very local news, commentary and information, but the newspapers need to become information brokers for the local community rather than simply news providers. Second, many newspapers have extensive contacts in wide geographic areas and deep experience reflected in their reporters. Why not publish the stories and allow individuals to aggregate the papers online? Then, the newspapers would compete on the best content rather than assume a captive local audience. Finally, newspapers could create a more national newspaper by aggregating information from a broad array of sources and publishing the newspaper online for a national audience.

These are a few ideas for the newspaper industry - I'm sure there are more. But this industry faces a number of challenges from the web, from the steady stream of content and information, and the existing demographics. Anyone watching the trends carefully could see this coming. Think about a world with no tactile Washington Post or New York Times. It could happen, sooner than they think.

Does Innovation add value?

Over the last five to ten years, innovation has become something of a mantra for many organizations, something like sustainable or green or a number of other concepts. Easy to say, welcomed in the marketplace, exceptionally difficult to measure. So, a firm gains a lot of goodwill by claiming to be innovative, or green, without necessarily proving it.

The question becomes, does innovation really add value for a firm? Is there an ROI - a return on innovation? Can that return be achieved through random fits and starts to become more innovative? Is there demonstrable evidence that consistent, sustainable innovation pays dividends to the corporation and more importantly the shareholders?

Let's look first at Sanjay Dalal's innovation index. Sanjay asked this same question and decided to build an innovation portfolio. Sanjay selected a number of firms that are known as innovators and started tracking these stocks against a number of index averages and benchmarks. While the approach is a bit crude, since these handful of firms is tracked against an entire market, Sanjay's index demonstrates that innovative firms drive significantly more value in terms of market value and shareholder value than other firms in the same industries.

Where does that value come from? Well, most firms in this index are generating new products or services, and can command a higher price point and more margin from those innovative products and services. Apple makes MP-3 players that generate significantly more margin per player than other MP-3 players, for example. Another point of value that drives shareholder wealth, however, is the intellectual property and capital that these firms are building.

In a study from 2005, two economists in the US, Hassett and Shapiro, found that the US economy generates $5 trillion a year in GDP based on its intellectual property - almost 42 percent of the total GDP of the US. Where is that value being generated? In innovative companies that create new intellectual property like new ideas, new patents, new content and other valuable intellectual content. Increasingly, the US and other "post modern" economies are creating value by creating ideas.

So, if the US shows a surplus of intellectual property, can that translate to value for a corporate or shareholder? Absolutely. Increasing the value of a company's assets, whether those assets are buildings and machines or ideas, patents and content, drives value for the firm and value for the shareholder.

Managing for Innovation

A friend and colleague sent me some comments on a white paper that I'm working on about innovation. In his comments he suggested that what many firms need is to understand how to manage innovation. So far, not revolutionary. Then, he went on to note that what his firm needed was to learn to manage FOR innovation. Now that comment hit me like a punch in the nose.

As the focus in many firms turns to innovation, I suspect there will be many people who will argue that they have the experience and insights necessary to manage innovation initiatives and projects. What this assumes is that there are great ideas and "all" we need to do is manage those ideas effectively to create new products, services or business models. There's a presumption in that thinking about the culture of the organization and the simplicity of moving an idea from a nascent state to a fully developed offering or solution.

In our firms we've created the mythos of the "management" skill - a person or team that can manage anything - a plan, some people, a project. But what we've lost is the ability to get out of our own way. We can be so focused on creating the Microsoft Project that we've lost sight of the ability to create and explore ideas. Do you manage for production or efficiency - or do you manage for innovation?

What would it look like to manage for innovation? I think it would entail asking your team to create new ideas and explore them fully. It would mean allowing people to chase ideas down a path that may very well end in proving the idea wrong. It would mean divergent rather than convergent thinking. It would mean allowing cross-functional team development and interaction. It would mean additional risk, and would increase the difficulty of measuring your team's activities.

Managing for innovation would be more interesting and more powerful than managing innovation. The second one implies there's one idea to ride herd on, and the first idea implies that anyone can create and generate ideas, so the innovation spectrum and opportunities should be enhanced.

New and Improved

I was driving to work today listening to NPR, when a local reporter's story on a military conference caught my attention. It seems there's a large confab happening on a nearby military base to demonstrate new products and technologies. The one conversation that really caught my attention was a new, portable xray device that medics could carry on the battlefield.

Well, it turned out that the xray device was actually "new and improved". The older device by the same company is currently used by many medics to provide a quick and dirty xray in the field to determine the extent of a wound. The upgrade provides an even more detailed xray. However, according to the soldier who was interviewed, most of them had no interest in the upgrade. It turns out that while the new product is more precise, it also weighs 10 pounds more than the previous version, and in the quick and dirty world of field surgery, the extra detail isn't really valuable.

This is a classic case of unmet and overmet product features in which the firm developing the xray paid more attention to the capabilities of the technology than the needs of the user. The users of the xray device want some clarity in an xray, but for the work they are doing they don't need perfection. The manufacturer of the device did not understand, or did not care to learn, that there was really no need to improve the capability of the device in this regard, as far as this target segment was concerned. However, what they did care about was the weight of the unit, since portable means someone is carrying it. So, they improved a feature that no one needed improved, and damaged a feature that the user really cared about.

Seems like a classic case of letting the technology lead the product development, rather than the needs of the customer. You could argue that the company believed it understood the needs of the customer and was trying to provide an even more detailed xray, but that's not what the users needed. It seems to me that they needed the same level of detail, but a lighter, more portable device, perhaps one that could be run on a number of different power sources.

Product development teams are often innovative, and I suspect the team did some great work developing an even finer grain portable xray. Over time, the value of their work may be recognized in some other market. However, without interacting with the customer and being driven by the unmet or partially met needs, and being too focused on the technology and the needs that are already fully met, this manufacturer missed the mark.

Innovation is rarely an inside out proposition. Innovation that adds value always considers the customer - perhaps not their current needs but anticipates needs they are likely to have in the near future. In this case innovation was led by the technology of the xray, rather than the true needs of the user.

Innovation: It takes a village

Ok - I'll step back from the edge just a bit. When I start quoting Hillary Clinton, you know the oxygen in the room is a bit thin. But, in this case, the metaphor is right. Let's look at why innovation may require a "village" for success, starting by looking at the reasons innovation often struggles in organizations:

Innovation fails in many firms for the following reasons:

- No one can commit enough time and energy to innovation since they have "day" jobs
- There's no clarity about what innovation is or what returns the executives expect - not
every firm or industry has an "iPod" opportunity
- There's no passion or excitement about the possibilities of innovation
- Communities of interest are blocked by vertical stovepipes
- Communication and collaboration is difficult or non-existent
- Rewards and disciplinary actions are remote from the team

Really, what innovation requires for success is the ability for people with passion and interest to volunteer their time, knowledge and energy to create a team, community or "village" to create a sustainable capability.

OK, so if that's what's necessary, where are we failing currently?

- In most firms innovation is a top-down edict (this isn't all bad as we'll see later)
- People are assigned to innovation rather than drawn to it or volunteered
- Risks are high, rewards uncertain, failure punished
- We ask people to do something new with the old processes, communication systems, tools
and reward structures

Reading the new book The Future of Management (reviewed here on my "other" blog), many of these topics are addressed as well. Without getting too mystical about it, innovation provokes, and in some cases requires, an esprit d'corps that isn't necessary for most other work in a business. Passionate, interested volunteers are necessary because the work is difficult and possibly dangerous. We need volunteers, not draftees.

Next, we need to tell these folks what we want, but not how to create it. Painting the picture of a potential future is important, but we need to then get out of the way and let the teams decide how to get there, and perhaps even suggest other future outcomes. We need management's direction and involvement to direct the innovation teams, but then the teams need the ability to determine the methods and outcomes.

The compensation and motivations are different as well. Volunteers, and people drawn to a cause, will work together and motivate each other for the sake of the opportunity. We need to reduce the risk of failure and encourage and motivate these teams. Also, we need to allow these teams to form across functional or organizational boundaries. Too often the concept of innovation starts and ends within one function, but the capabilities to generate, evaluate and launch a new product or service are not housed within one function or process.

Finally, provide new tools, new methods, new perspectives so that the team doesn't try to do new things with old methods and approaches. Why do we starve the people most likely to create the next new thing?

If it takes a village to raise a child, because no one person or couple can do it effectively alone, then doesn't the logic of creating and launching a innovative product or service require a broadly supportive organization - a village or community within your organization?

How to manage an innovator

Let's turn the tables a bit shall we? Usually it's the innovators complaining that "management" doesn't really understand innovation and it's importance. Well, here's an interesting question - how does a more traditional executive manage an innovator on her team?

I guess the answer is - that depends. True innovators - people who are totally sold out to new ideas and new concepts - are hard to manage unless they are creating new and interesting things. They can be directed and guided, but the work they want to do will open up the team to a lot of change and risk, and these folks see through make work pretty quickly. So, if you need to manage an innovator, there are probably a few tacks to take:

First, you can decide to put that person's skills and interest to work. This will mean that you need to get comfortable, or at least be willing to bear some risk and some change. It is important to carefully define what you want an innovator to do - incremental or disruptive? Cannibalize existing products and services or create entirely new ones? Product, service or business model innovation? Defining the breadth and scope of the innovation initiative gives the innovator some room but also sets clear boundaries and guidelines - it lets the innovator work but bounds the risks and change to some degree. You'll need to change how the innovator is compensated and motivated, and you'll need to be sure there's some downstream outlet for his or her ideas as new products and services. Believe me, these folks won't be happy just generating ideas.

Another tack you can take is to ignore the innovator and hope he'll go away. Most traditional organizations end up with a misfit who believes in innovation over process excellence, and the best way to manage the risk and change of the innovator is to give them make work and ignore their ideas. They will get the hint and leave fairly quickly, since most innovators are fairly driven folks. Luckily, most true innovators have a fairly positive outlook and won't create a lot of negative havoc along the way.

A third approach is to link your "innovator" - we speak of this person as if he had a disease - with other innovators in the business across functional lines or business units. Creating a network of innovators who can identify trends and connect important dots across the business will create value on an even broader scale, and may bring some new insights and opportunities back into your team or function.

A final approach is to make the innovator the equivalent of the court jester. In ancient times, the jester was the one who questioned the reasoning and thinking of the "wise men" and the king. He could do it because it was his specific role. Some teams and business units keep innovators around to constantly question the product development paths, the new requirements and ideas to ensure the teams aren't being too careful.

Unlike a lot of other employees, innovators don't need a lot of motivation or encouragement, and given opportunity are exceptionally hard-working, creative and insightful. Within the right position and organizational context, you can't find a better team member. Fortunately, most are relatively open to change and very mobile, as they are usually good at making connections within and outside the firm, and are not afraid to move to positions that value their abilities.

You face a challenge when working with an innovator - he or she is more interested in changing the organization and how it works than accepting something they consider second best. If they can't change the team, they'll change teams, or eventually change to another organization. Don't attempt to change or manage an innovator - find the right spot in the organization and turn them loose.

There's another thing to think about if you are managing an innovator - they usually run in packs. It's rare to have only one "innovator" - you probably have several within the team or at least within the company. You may relieve concerns within your team by removing or tightly managing an innovator who is on your team, but believe me there are others within the organization. Perhaps what you need is more corporate direction about the state and importance of innovation and how the management team believes innovators should be motivated, compensated and managed. After all, this isn't an isolated challenge and may be crucial to the survival of your company. Once a firm develops a reputation for "not invented here" thinking, it is exceptionally difficult to shake.

Are Pharmaceutical Firms Innovative?

As a big fan of the Economist - probably the only magazine you need for news about what's happening in the world - I read it cover to cover each week. The insights and information are usually top notch. I was a little surprised at the article on the pharmaceutical industry in a recent issue (October 25) - article here.

The premise of the article isn't surprising - the pharmaceutical industry is at an inflection point. The old models that built the industry aren't as relevant any more. Developing new blockbuster drugs is exceptionally difficult, as a lot of the "low hanging" fruit is gone. However, the author of the article postulates that pharmaceutical firms are, or were, innovative. Well, I guess I disagree. This may be simply a matter of semantics, but pharmaceutical firms are, and were, relatively good at research and development, and are increasingly good at partnering and business development, but on the whole were exceptionally cautious and avoided risk. The firms created a tremendous amount of intellectual property, but have failed to create network effects that stimulate a larger market.

Compare and contrast the business models of software and pharmaceuticals. Microsoft and Big Pharma have both created a tremendous amount of intellectual property and value, and both are very protective of their rights. However, even though Microsoft is a relatively closed system, there's enough of an infrastructure created by them that other firms can develop on top of and extend the value proposition - sponsoring and creating even more innovation. Let's not even get into open source or more open operating models in software. The point is that the intellectual capital of many innovative industries creates additional value and innovation opportunities for secondary and tertiary industries. In pharma, it's going the other way. Most innovation now is done by smaller firms that feed the pharma firms or are acquired by pharma firms.

Beyond product innovation, research and development, what other innovations are possible in the pharma space? Pharma firms use relatively old fashioned methods to inform doctors and sell their products to physicians, relying on a very large population of detailers to explain the drugs and convince physicians to write scripts. There's been some advance in these methods, but there's still a very heavy reliance on what amounts to door to door sales. Pharma firms are locked into a fairly poor business model, in which all of their products almost by definition have to be blockbusters or the firm can't pursue them. Pharma firms are also one of the largest direct marketing and advertising industries, using television and print advertisements to drive demand. There's not a significant advance in sales, in marketing, in distribution or in advertising from the pharma industry.

Now comes the news in the Economist article that some firms are considering outsourcing their manufacturing. Now, pharma manufacturing isn't complex, just heavily regulated, and no pharma firm wants to manage a recall of its drugs, so trusting a third party to do manufacturing has taken some time. However, doesn't the fact that you can outsource the manufacturing indicate that that skill is a commodity?

The article suggests that the pharma industry may begin to experiment with different kinds of integration - horizontal or vertical. Actually, that's old news. Pfizer did that years ago, acquiring firms for animal health, human health, medical products and so forth. About ten years ago it spun off its Animal Health and Medical devices divisions.

I think there's a range of innovation options open to the pharma firms, but it will require a rethink of the business model. Certainly there are markets for useful drugs that aren't blockbusters. Teva Pharma in Israel has made a good living on generics, so there's got to be a business model that creates value from smaller market drugs. It would seem likely that there's a lot of room for innovation in the product offerings starting at food supplements moving to over the counter medication and eventually into pharmaceuticals. I know the medical industry needs more options rather than simply writing more scripts. It would seem likely that partnerships between large health insurers and pharma companies to target specific conditions and new solutions is possible.

The pharma firms historically have done well by creating a tremendous amount of IP, protecting it well and charging a lot for that IP. The model may have run its course. Now we'll see which firms are really innovative and which were riding the wave.