Innovation as a competitive advantage

Over the last six or seven years, definitely since about 2003 or 2004, there has been an increased focus on innovation in many businesses. I think much of this was driven by several factors, including an increased rate of change in competition, especially the growing capabilities of India and China. I also think that information costs have fallen as the web has become more fully adopted, and consumers are demanding more. Finally, I think the focus on cost-cutting and outsourcing is reaching it's logical conclusion. Most of the things that could be cut, trimmed or outsourced have been. Many businesses in the US are relatively lean, and need to return to growth and differentiation.

All of these factors contribute to the need for innovation. However, there are a lot of trends that suggest innovation is important in the near future as well. The focus on global warming means new technologies are required to reduce emissions. In the US, health care reform will mean new demands on an antiquated health care system. The US Government is straining to provide services that the population expects and demands. The banking sector is ripe for change and disruption. All of these factors suggest a significant amount of change is in store for our government and for major businesses.

None of this is going unnoticed in the hallowed halls of major corporations. Booz and Company has just released its yearly Innovation survey, and more than ever, innovation is moving from an interesting sideshow in most organizations. Now, innovation is being recognized as offering a competitive advantage, perhaps one of the few sustainable advantages, and CEOs and executives are taking note. The survey points out that over 90% of the executives surveyed said innovation was critical to the success of their firms as they prepared for the market and economy to improve. One executive went so far as to say "the recession was a catalyst for increased innovation".

Booz listed three reasons why they felt companies have continued to invest in innovation during the economic downturn:

1. Innovation is becoming a core component of overall corporate strategy.
2. Recognition that product development cycles are longer than recessionary periods
3. Many see the recession as an opportunity to build advantages over their
competitors

One of the biggest impediments to innovation continues to be the "constraints of the product development lifecycle". The product development life cycle in many industries is simply too long and too cumbersome, and any opportunity to shorten the development life cycle could mean real rewards. Conversely, any slacking off could mean falling behind the competition.

My take: Innovation is gradually moving from an occasionally interesting sideshow that is not focused and not strategic, to becoming a key focus of senior executives as they realize that only innovation can help the firm continually grow and differentiate. Innovation is rapidly becoming a capability or enabler that strengthens and focuses the corporate strategies, and should over time become a key enabler to many corporate goals and strategies. Once more firms create a continuous capability for innovation and modify their cultures to embrace innovation, then we'll see the real transition occur. It is heartening to see that more and more firms are placing more emphasis on innovation at a strategic level.

Reversing the Hippocratic Oath

When I visit the doctor, I like to repeat to myself the Hippocratic Oath - "First, do no harm". I like to remind myself that no matter how much the doctor may poke and prod, he or she has committed themselves to not harm the patient, no matter how sick. This means that most doctors proceed to investigate any illness with an abundance of caution, and carefully understand the symptoms before prescribing treatment or medication.

Sometimes I think that many managers feel the same way about their businesses. Their approach to every issue is first - do no harm. Don't do anything to damage the status quo. Don't challenge the existing orthodoxy. Don't do anything that will damage my reputation. Whatever happens, don't do anything to disrupt the existing products or processes. In fact, in fairness, this is how most businesses are structured, so to say that managers reinforce this thinking is like saying that Frenchmen like wine. It goes without saying. Few businesses would exist if all they focused on was destroying their own products and services.

An innovator has to take on a different motto however. I don't think it's "First, do lots of harm" but I do think that an innovator must first decide what kind of change to introduce, and the volume and magnitude of the change. Then, he or she must decide where to focus that change. The new idea or change could be a radical new product or service that forces significant change or cannibalization on existing products or services. The new idea could disrupt an adjacent market space. The new idea could literally birth a new market or new space. Any of these concepts are valid. Looking back now at the corporate manager who is stuck on "doing no harm" but needs to create something innovative, his or her most comfortable choice is to disrupt someone else's market or product, since the first law of equilibrium is to not disrupt or cannibalize your own firm's products or services. This leaves only a radical or disruptive innovation that significantly disrupts a market or product where the firm has little insight or knowledge.

Perhaps, instead, the innovator should begin by asking "What are our sacred cows, and who is seeking to gorge them?" Or, "What product or service should we cannibalize to enable greater growth and differentiation". Start by disrupting the markets or products you understand and influence, then work outward to disrupt the adjacent and secondary or tertiary markets. This logically leads us to the concept that a true innovator working within a large company should usually cannibalize first, then attack other adjacent markets second. This makes sense, because it's easier to disrupt something that exists than to create an entirely new product or market.

With that in mind, the innovator's oath should probably be something like "Attack ourselves before someone else does" or "No Sacred Cow left unmolested". Perhaps you can suggest a better one?

R&D for the rest of us

Something happens when you put on a lab coat and safety glasses. You have the immediate ability to explore concepts and ideas that may, or may not, become new products. And your time horizon shifts dramatically. Many people in primary R&D are examining technologies or molecules that won't become products for many years.

The question we as innovators should ask ourselves, and our companies, is: why is this kind of thinking and investment committed solely in technology R&D? Why, in a pharmaceutical company, is there a team that is actively investigating new compounds and molecules that may become new drugs, but no one that is actively investigating new business strategies, new organizational hierarchies, new management philosophies? Why is innovation confined to the "R&D" wing of the business, and walled off from all the other things we do to add value to a business?

Certainly, R&D in a pharmaceutical firm is very important. It offers the chance for the discovery of a "blockbuster" new drug that could cure diseases or extend the life of seriously ill individuals. But I think we can all agree that a pharmaceutical firm (and by extension, any firm) adds tremendous value beyond primary product or service research. There are opportunities to dramatically innovate the business model (which health care reform may require), process or service delivery, customer experience and so many other factors or functions of the business. It's as if all critical, exploratory thinking is confined to R&D, while the rest of the business is restricted to cost-efficient, process-oriented, short term thinking.

Where are the guys and gals in lab coats who are researching the long term disruptions of their business model, or service delivery model? Who is responsible for thinking about and generating new ideas about the relationships a pharmaceutical firm has with physicians and hospitals? Don't you think these relationships and experiences are likely to change over time? Can we safely assume that these functions will remain the same over time, and all we have to do is find ways to cut costs? Just as Travelocity and Expedia decimated the travel agent industry, could other similar offerings radically change the interaction between a pharmaceutical company and its customers?

Gary Hamel points out in The Future of Management that most firms have some measure of product innovation underway at any point in time, and may have some inkling about service innovation or customer experience. Few, if any are innovating around business models or organizational structure, yet these are the places where competitive advantage is sustained over the long run. It's time to assign a few more people to lab coats and safety glasses, and have an R&D team investigate all the aspects of the business where we believe we can add value. Just like Festivus, innovation is R&D for the rest of us.

Empathy for the devil

I couldn't pass this up, it was just too perfect. For those of you old enough, or forced to listen to enough "classic" rock, you are familiar with the Stones Sympathy for the Devil. If you aren't familiar with this particular piece of sonic candy, get yourself off to iTunes or your favorite MP-3 site and download it.

So, what's puzzling you is the nature of my post.

I've been reading a new book that describes some of the trials and tribulations of innovative types in non-innovative companies. One of the points the author makes is that innovative types have to work with the "tried and true" people who want six decimal place proof of everything. Clearly for most innovative concepts that's nearly impossible. Another point is made that ultimately, the only way to create something compelling and new is to radically understand the customer or user. This, naturally, lead me to the concept of empathy for the user, which led me, in some dark workings of my mind, to Empathy for the devil, since most of us consider customers or users as particularly distasteful people we have to deal with because they purchased our products or services, rather than the drivers and predictors of the next big things.

Since many firms often treat their customers as the devil, they don't have much empathy or understanding of their needs. If, on the other hand, we treat our customers and users as partners, or even friends and colleagues, it may become easier to have empathy and understanding for their needs. It's only when we truly seek to understand customer needs, wants, frustrations and challenges that we can discover and create new products and services. The book goes on to state that:

It's almost impossible to design something compelling for someone you don't respect or wish to understand.

So we need to decide to have some empathy for the devil (our prospects and customers) before we can truly understand his or her needs, and only when we respect our customers enough to engage them in real discussions and interactions can we create some interesting new products and services. Otherwise, we'll ignore our customers, give them what we think they want, and explain away the failures as a "lack of understanding" or "lack of knowledge" or "lack of vision" on the part of our customers. And eventually, those customers will leave us, since we don't respect them and don't create anything relevant and new.

Who is responsible for customer empathy at your firm? Shouldn't this be one of the most important roles - engaging customers and trying to understand their needs and challenges? Instead, most senior executives NEVER meet a customer. How can you empathize with someone you never meet? Perhaps we as customers need a spokesperson to reach out to the firms who offer us products and services, to act on our behalf and draw attention to our wants and needs. It's fairly clear that most firms don't know how to interact with consumers in any meaningful way. Perhaps it's time to turn the tables, and take the mountain to Mohammed.

Innovation relies on synthesis

I've read several books about innovation, and am reading another which I'll review shortly here on the blog, which talk about the importance of combining disparate skills or capabilities when innovating, or holding two diametrically opposing ideas and finding the happy medium. What should be obvious is that one of the most important skills from an innovation perspective is the act and insight of synthesis.

This is a real challenge, because most people are taught to break down problems into smaller, finite pieces and solve the smaller problems. We also work as specialists, with deep understanding of our core capabilities and knowledge, but often with little insights or knowledge beyond our education or jobs. So most people don't use synthesis skills on a regular basis, and are probably prone to avoiding synthesis since synthesis requires introducing a number of new and possibly unknown factors which may simply make the problem larger and more difficult.

Well, to a certain extent that true. However, innovation often happens when we take a step back, look at the bigger picture and combine two concepts or technologies or ideas that are seemingly unrelated and create something completely new. And when you boil it all down, that is what synthesis is all about.

Synthesis happens in all phases of innovation, starting from the very beginning. We usually like to start a project by collecting trends and synthesizing or combining them to create new, alternative futures (or scenarios). Rather than simply focus on one trend, it is more interesting (and a bit more difficult) to combine three or four active trends and project them into a 7 to 10 year future. The synthesis, or combination of these trends helps create a view of the future which we can use to identify new opportunities or emerging threats.

Synthesis happens in customer research. We often will engage ethnography or voice of the customer work to discover customer needs and wants. Talking with a number of customers or observing behavior can lead to a range of insights. Synthesizing or combining these insights and seeking the common themes or threads is what is really valuable. Insights or needs from one customer is interesting, aggregating insights and understanding them from a range of customers is valuable.

It's not at all unusual to use synthesis as a method to generate ideas. We can ask ourselves what would happen if we combined several capabilities or technologies, and what that combination would create. Clearly synthesis is a powerful tool in almost any phase of the innovation effort.

The way we generally use synthesis is almost always the same, however. Using synthesis requires a team to slow down, step back and look at a bigger picture - to gather more data and more disparate information or insights than may seem necessary. In many ways this may cloud the picture, but if your team is willing to do the extra work synthesizing the materials, or insights, then the results will be even better. Good innovators are synthesizers, and use synthesis techniques in all phases and stages of innovation. This fact is also one reason that many firms struggle to identify innovators - there are simply too few people who are good at synthesis and who use the tool regularly. As with any capability, misuse or lack of use causes the skill to atrophy. Perhaps one of the most important things you can do as an innovation leader is to find people who are comfortable with the approach or skill, or introduce it as a technique and train your teams on the approach.

"Fools rush in where angels fear to tread"

In my experience, one quote from Alexander Pope sums it up nicely. Where innovation is concerned, people often rush in to try to create new ideas without any investment in training or any notion of the desired outcomes. Typically the first question someone asks me when we kick off an innovation project is: "When do we start generating ideas?" That's the "rushing in" part.

While it seems obvious that in other projects we'd carefully consider strategic goals, and identify what we "know" in terms of market research and customer needs, and think through industry trends and possible scenarios, that work is rarely considered in an innovation effort. For some reason many teams believe they can simply skip over the prep work and go right to the idea generation step. Perhaps that's because the idea generation is a visible sign of action, whereas much of the prep work seems to be team building and development. Or perhaps idea generation just seems more "fun". At any rate, rushing in to idea generation will only lead to frustration, less than successful ideas and a project that is considered a failure in many cases.

Why? In any other effort or project that your teams undertake in your organization there are precedents. The work is reasonably familiar and the people who are involved understand the goals and the scope of the work. When the project is related to innovation, virtually none of these things are true, and when people are uncertain about their scope, they usually place limits on themselves that the executives didn't intend to be there. Additionally, if the scope is unclear the team will spend a lot of time spinning its wheels trying to define the scope of the project, the needs and wants of consumers and the ultimate goal for the project. All of this will happen simultaneously as part of the idea generation, creating even more frustration when everyone suddenly realizes that every team member has a different perspective about the goal of the project, the scope of the project and the intended outcomes.

If you want to be successful in an innovation project, recognize that the preparation work is at least as important as the idea generation work, perhaps more so. Rather than rushing in to generate ideas, take the time to set the stage effectively, plan the work, engage the team and set clear goals and expectations. Understand the opportunities and customer needs and wants. Then, do the ideation work. Yes, it will take longer to do it the way I am suggesting. But you'll be far more successful, and generate far more valuable and pertinent ideas.

Innovating in a recession

I've written about this topic previously, but felt it was important to return to the idea of innovating in a downturn or a recession. Admittedly, it is somewhat counter intuitive to think about investing, especially in a risky proposition like innovation, when the economy sours and wages and incomes decline. On the other hand, time marches on and as the economy improves, and new jobs are created and incomes increase, consumers will expect new products and new services that meet unfolding needs or emerging opportunities. We can't simply offer them the same for less, when they want new, or different, products or have new or different needs.

In the October 3rd issue of The Economist, probably the only "dead tree" magazine you really ought to read, the Schumpeter column is entitled Thriving on adversity. In the article, the author points out several ways to thrive during a recession. One group of consistent winners is identified as those with a "record of innovation". The article goes on to quote Craig Barrett, the former CEO of Intel, as saying "You can't save your way out of a recession; you have to invest your way out." The article goes on to point out that P&G is opening a number of new factories and investing heavily in new ideas right now, and IBM is holding a number of innovation jams to squeeze ideas out of employees. Note that these leaders are actively involved in innovation during the recession.

Take special note of Craig Barrett's statement - "You can't save your way out of a recession; you have to invest.." Barrett is acknowledging what innovators already know. Even in a time of reduced spending and tightened budgets, consumers expect the market to change and present them with new ideas. Those ideas and products may meet immediate needs (lower costs with the same quality) or longer term needs (new products and services that meet unexpected needs). What the consumer does not expect is that product and service development will sit still. Those that fail to innovate and invest during the downturn will have last year's models that don't meet consumers needs and expectations.

The article goes on to make one other point - there ought to be a huge range of skills available in this market at very inexpensive prices. During the Great Depression, Dupont invested heavily in R&D and hired unemployed scientists. In just a few years over 40% of their sales were from products less than 10 years old. In this market, there are hundreds of people available with the skills you need to innovate and increase the pace of change in your company. Furthermore, if you aren't innovating during this period, you can bet that the folks who don't have jobs and don't see a future in a larger organization will create new, smaller companies to create new products and services aimed at some segment of your customers. So, you can choose to take on some of this talent and speed your own development, or watch as that talent forms new companies to compete with you.

When all bets are off, most individuals and firms will consider anything to succeed. In a downturn, where the future is relatively uncertain and consumers are hesitant and skills are plentiful, now is the time to act. There's no better time to innovate than right now, anticipating the eventual upturn in the economy and laying the intellectual foundation for new products and services.

Engineers, Marketers and Innovation

Braden Kelley has posed another question for us, which is: what roles do engineers and marketers play in an innovation setting, and what conflicts can arise based on their perspectives and approaches?

First, let me say that I am ably suited to answer this question, since I am both an engineer (undergraduate) and a marketer (graduate degree). I've worked in the technical trenches and, frankly, left them as quickly as possible, and worked in a number of marketing roles since my MBA. I left the engineering world because it necessarily demands a level of specificity and exactness that I find boring and tedious, and demands attention to detail that I sometimes lack.

So, let's talk about engineers first. What traits are associated with engineers, and does their education, focus, attitudes and skills position them well for innovation? Most engineers I know are very interested in solving problems, which suggests they have a proclivity for innovation. However, the focus on getting to a solution quickly, and detailing a solution exactly, often hampers them from bigger picture or disruptive innovation. Engineers and accountants like things in black and white - no shades of gray. Innovation often happens and requires some ambiguity for success. Engineers like to build things, which again indicates a proclivity for innovation, especially prototyping. However, they are often more entranced by once concept or idea than they are the process, which narrows their thinking and focus too early. Good engineers can be excellent problem solvers, but don't often think of themselves as "creative" and too often don't have good understanding of market needs and trends.

The market needs, trends and opportunities should come from marketing, if the marketers are doing their job well. Unfortunately, as narrowly defined as many engineering jobs are, marketing suffers from the reverse - a too broad definition. Today marketing can mean public relations or PR, Marketing communications, trade show management, conferences and events, product management, social media and a host of other capabilities. Marketing has become too far flung, and to a certain extent has lost sight of the base purpose of marketing - to identify segments and customers who have needs, and understand how to fill those needs effectively. If marketers fill that function, then they are innovative in nature, because they want to know and understand customer needs. Too often marketers are more worried about the copy on a new ad, or who will be at a tradeshow, and they fail to understand customer needs and develop scenarios about the market of the future.

So, what often happens is that marketing is too distracted to do what should be it's primary job - understand customers and develop potential product and service ideas. Engineering and product development shows up and doesn't get much insight into actual customer needs, so the engineers go off to explore interesting new technologies that may, or may not, be important to customers. Neither, and both, are at fault.

Engineers should demand that marketers do a better job of defining near term customer needs and emerging customer requirements or markets. Without that insight, it is difficult to build interesting new products. Engineers on the other hand need to be more ready to engage the market with rough, fast prototypes, and work to an iterative model. If there is an issue in most firms, it's that we all have become too far removed from the customer, and fail to understand their wants and needs.

In my mind, that's marketing's job, to discover the needs and translate them into specific opportunities for engineers to build.

Wanted: Market and Product Explorers

Ok, after a number of years and a range of clients, I've seen a lot of titles. Product Manager, Product Developer, Product Development Manager, etc. I've even seen titles like Innovation Manager and Ideator and some other more fanciful titles. These are all valid and important roles. But what is evident to me is that while we place great emphasis on maintaining the existing product and service lines, there's almost never a person whose job it is to devise entirely new products and services. It's as if we believe that all future growth will spring from existing products and services, and we won't have to address new markets or new competitive threats, leave alone the opportunity to create a new "blue ocean".

Run down the list of titles in your firm that have to do with product or service management or development. There will be a host of people who "manage" products or services. These individuals have a vital job to maintain the existing product or service line. They have detailed plans for several years out about product enhancements and new features. They keep the lights on and ensure the existing products and their incremental improvements are planned and released. Additionally there will be people with the title of Product Developer or Service Developer. Their job is to work with the product managers to ensure the product or service is built according to the identified needs and specifications. Again, a vital job focused on very near term opportunities.

Occasionally we'll find a "New Product Development" or New Product Manager title in an organization. That role is probably closer to what we are advocating, but is still rooted in the near term. A new product or service developer or manager is still working under the constraints of the product or service mantra within the firm.

What most firms need, and sorely lack, are people whose full time job it is to identify new opportunities or markets and start shaping those opportunities into new products, services or business models that the firm can deliver. Existing and near term opportunities are important. They keep the lights on and the beast fed. But only rarely are they going to produce new, dramatic growth or differentiation. Innovation will spring from people who have longer term vision and are less tied to the day to day product or service delivery, and who are more interested in emerging opportunities or threats. In my experience, most product managers rarely read or interact outside of their own area of expertise, so the firm is constantly surprised when new products enter the market from unexpected quarters.

According to most CEOs, there's little that's more important than innovation, yet there are few if any defined roles in the organization who "own" it. It would do my heart good to see a few people with permanent responsibility to explore new markets and new opportunities. Perhaps we could call these individuals market or opportunity explorers. Naming them explorers gives them the right to investigate, explore and identify really dramatic new things and introduce them to the organization, which can then convert new opportunities into products and services. Most organizations have programs like Stage-Gate that do that part well. What's missing is an intentional focus, and an assignment and role(s) that focus solely on the longer term innovation.

Yes, I know that Product Managers and Product Developers consider this work part of their job, but given the demands of the job and the relentless quarterly reporting, longer term, disruptive work gets pushed out constantly. Let's have one or two people whose job it is - full time - to uncover and explore new opportunities and markets. You can't manage a task without assigning someone to do it and measuring them and their results. You certainly can't be successful over the long term when no one is actively responsible for this important work.

How to identify the innovators in your firm

Thanks to Twitter, much of my research is done for me. I found a story linked on Twitter about the key innovation characteristics of leaders in innovative firms. That article was published by HBR.

The five attributes the authors identified as relevant for innovation are: associating (making connections across unrelated ideas or problems), questioning (especially focused on "what if" or "why not"), observation (especially observing behavior), experimentation (new experiences or exploration) and networking (especially with people from different industries or perspectives). Let's assume these factors are correct - from my experience they appear to be. Then, let's compare to what happens in many firms today.

First, there's little association in most firms today. Most organizations aren't interested in making connections across disparate fields of study; they are focused on maximizing the best practices within their industry. Rarely do we see ideas introduced from outside an industry unless it is introduced by an outsider.

Second, while there's plenty of questioning, it is most often used to belittle or denigrate ideas, rather than build them up. The knee jerk reaction in most firms when a new idea is generated is to seek what's wrong with the idea, rather than to build the idea or support it.

Third, the concept of observing customers or clients has been completely outsourced. Too few people spend time watching and observing customer behavior and trying to understand it. We've insulated ourselves from interaction and rely on cold, quantitative surveys. We often don't understand our customers' behavior or what that behavior means.

Fourth, there's limited experimentation outside of an R&D lab. Gary Hamel pointed out in his book The Future of Management that most firms have some product or service experimentation, but never experiment with management practices. More to the point, the authors define experimentation as new experiences or exploration. For the vast majority of firms, management is content to stick to its knitting.

Fifth, the first line item cut in any downturn is travel and conferences, so we by definition limit the amount of networking that is possible. In fact, in many firms there is little interaction with competitors, and even less interaction with firms in adjacent industries or markets. Innovation often happens at the intersection of two seemingly disparate markets or businesses, yet we've managed to wall ourselves off from any interaction with others.

The point here is that most organizations actively work against many of the attributes that would define good innovators.

So, if you are seeking to build an innovation team, or hire people with a greater proclivity for innovation, perhaps you should ask the following questions:

1. Give us examples from your experience where you combined two concepts or capabilities from diverse situations or markets and created something completely new. Or, here's a (lego block, lincoln log) and a (band-aid, scarf). Can you create three interesting, useful new concepts from these raw materials?

2. What's your first reaction when someone offers up a new idea? If the response is to explore it further or build on it, ask for examples. Otherwise, next question.

3. How do you gain insight into what consumers want and need as new products and services? 1 point for reading in the industry, 3 points for reading outside the industry, 5 points for putting on the consumer hat and acting as a consumer, 7 points for actually watching and interviewing customers about their behavior

4. Give an example from your personal or professional life of something new you've taken on. Could be learning a new language, learning a musical instrument. Need evidence of the attempt, and persistence. Quitting after a week or so isn't good enough.

5. Tell me how frequently you meet with people who aren't in your industry or have very different experiences or perspectives than you do. Do you intentionally seek out these interactions?

How often do you think your HR team asks these questions? If you've built a successful innovation team, did you ask questions like these?