A list of reasons why innovation lists are worthless

It's that time again - the time to breathlessly await which Fortune 500 firm will be anointed as "the most innovative" firm.  Typically we see several "Top 50" lists each year nominating particular firms as the "most" innovative.  This year, as in several previous years, BCG has created its "50 Most Innovative Firms" list. 

I guess you can tell from my tongue in cheek introduction what I think of these lists.  There are so many reasons to find fault in the listings that one scarcely knows where to begin. 

First, I think many of these lists are simply to validate the egos of the firms in question.  How can one compare an Apple to a Haier to a 3M and argue that one is clearly more innovative than the other?  In what dimensions?  3M has a stated corporate goal to generate a significant share of its earnings from products that are less than 3 years old.  Therefore they have a significant public stake in the financial markets on innovation.  Apple, the "leader" in the innovation field, creates one new product about every 18 months.  Those products don't break new ground technically, but innovate around a customer experience or business model.  Can these two firms really be compared?  If P&G's partnering and networking strategy can be compared with Apple's "go it alone" strategy then we can compare apples and oranges.  There's really no good methodology to use to "measure" how innovative a firm is and measure it against another.

Second, the list is composed almost exclusively of large, well-known firms.  Do we really believe that all the valuable and interesting innovation is happening in these firms?  I'd have to disagree.  There are many mid-sized and smaller firms that are doing much more innovation, and much more consistently,and as a larger percentage of their revenue and earnings, than the firms named in this list.  Let's simply look at another cultural phenomenon - the TED talks.  Many of the firms or individuals who present at the TED talks are doing exceptionally innovative work, yet they aren't on this list of the Top 50 most innovative firms.  Why?  They don't have the same publicity engines.  Yet where do disrupters come from?  Christensen has shown they are usually smaller, new entrants rather than large, existing firms.

Third, as in most of life we recognize greatness only after it has reached its peak.  Sports figures and actors often win awards later in their career, after their peak performances, once their body of work is established.  Many of the firms on this list - Google for one, I have argued recently, may be past their innovation prime already.  When people put lists like these together, they are usually looking backward at achievements from several years ago, not forecasting what the firm is likely to do next.  This list includes potential up and comers (like Haier) and those who may be on the downslope of their innovation greatness already (Google).

And sorry, while GE is large and a very profitable company, it is not especially innovative, regardless of what their marketing wants us to believe.  Good marketing and messaging don't necessarily demonstrate good innovation, and a firm locked in the embrace of Six Sigma often finds it difficult to create interesting, disruptive innovations.

I understand the reasons for a list of innovative firms.  We enjoy short rankings like this because they create an artificial hierarchy of firms.  The list helps us focus on firms that at least one expert has told us are innovative, which makes it easier for the press and bloggers to respond to.  However, I think this is a ranking of large firms with good publicity that may demonstrate occasional innovation , rather than the most innovative firms on a global basis. 

These lists are moderately interesting but ultimately don't tell us much.  Are any of you surprised to find Apple at the top?  What's insidious about these kinds of lists, however, is that they distract from really interesting work being done in a number of firms not on the radar screen and direct our attention to firms that aren't all that innovative but are constantly in the news.  So, we ignore excellent innovation that is happening in smaller, less publicized firms and focus on firms that are actually becoming less innovative or that simply have great PR.

Innovation and the Subtle Knife

I have to admit that Twitter has become a distraction for me.  I use Twitter as a smart Feed Reader, relying on people I follow in the innovation community to alert me to things that are informative and interesting.  Unfortunately there are so many people writing so much good stuff about innovation that Twitter itself becomes almost overwhelming.  Here's a case in point, which leads us to the case of the Subtle knife:

The folks at the Creative Realities created a really funny short video which they claim demonstrates what happens when someone presents a new idea to management. You can see that video here:

If you've watched the video you'll recognize some truths and some fictions in the video, namely, the truth that ideas are often not well received even when they've been requested, and the fiction...  Well the fiction that makes the video funny is the instant, almost visceral reaction by the executive to the idea.  Sorry, but while funny it almost never happens that way.

In fact, most ideas perish in one of two ways:  neglect, or the cuts from what I call the Subtle knife.  Not the book by Philip Pullman.  No, the Subtle Knife is much more insidious than that.

First, ideas often "die" in larger firms due to inaction or neglect.  In most organizations there are thousands of what we like to call "zombie" ideas - not really dead, or perhaps they just can't realize that they are dead.  No one has actually "killed" the idea but the idea has never gained enough traction or supporters to move forward.  You recognize these ideas - they constantly resurface, seem viable momentarily, and are quickly discarded but never abandoned or eliminated.  They are the reason your management team believes the firm has "lots of ideas" that don't add value.  The zombies are the idea that few people really like, don't seem to solve an important problem, and are constantly reintroduced in brainstorming sessions.  These ideas should receive the result of the ideas in the video.  They need to be put out of our misery.

But the real focus of my post isn't zombie ideas.  It's the mastery of the Subtle Knife.  Most good ideas die as well-meaning executives wield the Subtle Knife.  The Subtle knife is a metaphor for the small cuts, the slight twists, the indirect associations that chip away at an idea until it seems less valuable, less interesting and less important.  The Subtle knife is used when attacking an idea directly would seem inappropriate, but the Subtle knife creates fear, uncertainty and doubt about an idea.  Examples of the Subtle Knife include:

• This is a great idea but ...
• If only this had been presented (yesterday, last week, last month...)
• We've looked at this before and sadly ...
• While a valuable idea, it just isn't "us"...
• I could get behind this idea if you'd (make a significant change)...
• There just aren't the resources necessary to take on this excellent idea

These indirect assaults never suggest that the idea is "wrong".  In fact the idea doesn't have to be wrong to be killed, it just needs to distract from someone else's priorities or attack someone else's sacred cows.  The Subtle knife is always used with a smile, a shrug of the shoulders and a facial expression that demonstrates that only the best intentions are meant.

There's a problem with this, however.  Rather than deal with the merits of an idea, its strengths and weaknesses, many organizations prefer to react in a very indirect way, creating just enough fear, uncertainty and doubt about their own ideas(!) that the management team feels led to conduct "further research" or to investigate other ideas, delaying implementation and in many cases creating another zombie.

How do you avoid the Subtle Knife?  The Subtle knife works when objectives aren't clear and goals are uncertain.  It's easy to chip away at an idea if the plans and goals weren't very clear from the start.  That's why we always focus on obtaining a clear problem statement and scope for our innovation efforts.  Once that is established, it's harder to deflect an idea that meets a clear objective.  Second, prioritize the work.  Determine just how important the innovation effort is.  If it is going to fall prey to a re-ranking later, intended to delay and obstruct, make sure you identify what the original prioritization was and what has changed.  Third, innovation introduces change.  If you want to create that change, you better arrive with proof in the form of market insights, market research and prototyping or piloting results.  Don't tell the management team the idea fulfills the needs - show them the needs and research and help lead them to the right conclusions.

Take away the mystery and the Subtle Knife is difficult to use.  Then it becomes a question of how to prioritize innovation programs and outcomes versus other leaders' priorities and personal needs.

Frankly, in many cases I'd prefer to see an executive bash the idea as forthrightly as is portrayed in the video.  That kind of clarity rarely happens.

What Innovation Consultants do

So my wife's favorite aunt has arrived for a visit.  This sounds like the set up for a vaudeville punch line but actually leads to some great stuff.  We sat at dinner last night and she turned to me and asked "So what does your firm with the funny name (OVO) do, anyway?"  I love slash hate this question, especially from people who aren't quite sure what "the Google" is, anyway. 

So I broke it down as best as I could.  I told her that we helped companies try to create new ideas that become new products and services.  We help with new product and service discovery, refinement and identification.  We help them innovate.

She thought about that for a while, and in her own inimitable way said "that sounds wonderful".  Actually, it can be.

But it left me thinking about what it is that an innovation consulting firm does, and I think I've managed to break it down into at least four significant offerings that help me think about what we do, and hopefully help you think about what you should expect from an innovation consultant.

First, I like to think we help organizations rediscover their inner entrepreneur.  Every firm at one time was based on a single idea.  The founder or founders had an idea that they could offer value - products, services or business models - that were unique and different.  Over time what happens is that the business becomes much more focused on keeping the existing businesses afloat and loses focus on the creation of new things.  In fact, keeping the existing business afloat and profitable becomes such an effort that new, different and disruptive things are shoved aside or cut.  So our first job is to remind firms that they were once innovators, and have to be innovators again in order to grow.  We remind them by helping the executive teams create a strategic vision and communicate that vision that reminds the business about the importance and relevance of innovation.  We help by establishing goals - for example, 3M's goal that 30% of its revenue must come from products generated in the last five years.  Your goals and strategies don't have to match 3M's, but you must have a specific goal for innovation, just as the initial founders did.  Asking for innovation isn't enough.

Second, we remind people about the future.  All new ideas will launch in a future that's not quite the same as today.  Having a "future orientation" is important because innovators need to identify the needs and wants of customers and address them before others do, otherwise you are simply a fast follower at best.  In the hustle and bustle of a large corporate enterprise, the vast majority of the people are worried about the next quarter.  That's how they are compensated and what the market dictates.  Very few people are worried about a 3 to 5 year horizon, but that's what will make or break the company.  The future, as William Gibson has pointed out, is already here, it's just not widely distributed.  In other words, without a lot of work we can begin to discover what's likely to happen, and how that will effect our products, services, customers and markets.  And with some luck, we can create new products and services that allow us to take advantage of the unfolding future.

Third, we create a conduit for ideas.  I've yet to enter a firm that doesn't have lots of ideas, and in many cases we'll encounter not just "lots of ideas" but some actual good ones as well.  The problem isn't ideas.  The problem, strangely enough, is the process for ideas.  In firms that have highly automated processes for just about everything, including time for stretching, snacking and restroom breaks, the most important process - the one that will create the valuable new products and services - is non-existent.  In most cases people with good ideas simply give up, frustrated with the fact that there appears to be no way to present a good new idea and move it to some commercialization.  That's because the firm is organized in stovepipes and silos, and any idea that doesn't align to those silos is automatically rejected.  Even ideas within silos are suspect, because they'll upset the natural order of things that we have humming along so nicely.  People forget that it's not the responsibility of the business to simply operate efficiently.  It needs to create new things as well, and anyone who has been present at the birth of a baby or a product can tell you that it is messy, loud and frequently not on time.  Note as well that I didn't say good innovation consultants "create" ideas.  My belief is that we assist your teams to find the great ideas that are "out there".  If you rely on innovation consultants to "give you" ideas, you've outsourced your strategic thinking.

Interestingly, innovators are also storytellers, because we tell these stories to influence our customers to do things that they know deep down they should be doing.  Stories have a way of reminding people about core values and inner truths that often can't be confronted directly.  Finally, a good innovation consultant also is a training and cultural maven, able to help the client think about the dichotomies of innovation and the "day job".  Why ask someone to spend time innovating when they will be evaluated on their original "day job" performance?  All you do in that situation is create dissonance in the individual's mind.  While they want to innovate (who doesn't) they are forced to spend time in the day job because that's where their income and evaluation bread is buttered.  We, as hopefully successful innovation consultants, have to help our clients think through the rationale of evaluation, recognition and compensation as tied to innovation work.  Most firms prefer to reward actual, measurable results, except in many cases for the CEO, while giving lip service to the importance of innovation.  Once again, we innovation consultants need to try to encourage our clients to balance requirements and expectations between commitment to innovation and individual return.

Now, back to Aunt Sally.  How does one encapsulate all of that into one simple statement?  I've not yet found the short elevator speech that can encompass all that I think we innovation consultants need to be able to do to help our clients succeed.  I do like to think we offer all of those skills, but I find it hard to create a short, sweet description.

Has Google jumped the innovation shark?

I was thinking recently, with the demise of Google Wave, that it is entirely possible that Google has jumped the innovation shark.  For those of you unfamiliar with the "jumped the shark" phrase, that harkens to a famous television show in the US.  To boost ratings, a character decided to waterski and jump over a shark.  The fact that the character couldn't swim and was skiing in a leather jacket can tell you where this is headed.  Everyone saw through the obvious ploy to drive ratings and the show continued to nosedive.

The question becomes then, has Google lost its edge, or is Google Wave an example of experimenting and failing forward, to bring new and better products to market? 

I think it's inevitable that small, interesting companies who tap into the global zeitgeist and grow quickly become media darlings.  Firms like Facebook, Twitter and Google have been media darlings lately.  The question is:  are they really innovative, and as they grow can they continue to innovate?  The inertia that comes with size is often a limiting factor in many firms for innovation.  The larger the firm, the greater the diversity of products, the more a firm plays "defense" rather than "offense".  Will Google grow to the point where its ability to innovate is hampered or stymied by previous success?  Are we actually witnessing that?

One of the best ways to evaluate an innovator is to determine not just the number of new products or services, but also consider whether or not those new products and services solve a problem or create new value.  For example, Google has recently released the instant search capability, which provides results as you type.  That's perhaps interesting, but so far I haven't found it to be valuable.  Whether I get my results in three seconds after I type or "live" as I type really isn't a big gain for me.  So, here's an "innovation" that lacks any real value proposition.  Google gets points for trying to be innovative, but there's really not much value in this innovation.

Google hasn't capitalized on a number of its most solid applications - especially Gmail, and other firms, even Microsoft, have copied or duplicated many of the features that Google originated.  Other than Google Voice, Google hasn't created a really compelling new product or service in several years, which indicates that the pace of innovation has slowed.  The question becomes - is that because there are more innovators in the space, or fewer innovation opportunities, or more overhead and bureaucracy?  My personal vote is for the latter.  Google's employees didn't suddenly get less interesting or insightful, and while there are a number of innovators few have the benefits of scale that Google has.  This means that as Google has grown, it has actually become less able to create innovative new products and services.

They aren't alone in this regard.  As firms grow and their product and service portfolio get larger, their original mission and purpose gets fuzzy.  They have more things to develop and support, so there's less energy and enthusiasm for new stuff.  New ideas may cannibalize existing profitable products, so the new stuff seems risky.  As you get larger there's more stuff to protect, and more process to follow.  Whether you are Google or P&G, inertia and defensiveness sets in.

That doesn't mean that Google, or P&G, or any large, distributed firm can't be innovative.  It simply means they need to be even more intentional about innovation.  It needs to be part of their strategy, reinforced by their executives, and regularly reported and measured.  There need to be explicit innovation goals that are regularly reviewed, and well-understood processes that people can follow.  In other words, innovation has to move from a disorganized, ad-hoc initiative to a more consistent process. 

Google may struggle with this transition, since it has had a fairly ad-hoc innovation methodology.  Trying to lasso those folks who have had a significant amount of freedom and corral them into more defined processes may spark discontent.  While the objectives and outcomes are the same, the more formal approaches may grind on those who had a lot of freedom previously.  Google and its innovation teams may need to "grow up".

Or grow out.  The other model is to decide that once a product line, or business unit, reaches a certain size we spin it out to allow it some freedom out from under the corporate umbrella.  W.L. Gore and others follow this model to ensure the business units and product groups don't get too weighed down with inertia and overhead, which blocks innovation.

So, has Google jumped the innovation shark?  We need to watch carefully.  The executives are saying the right things about innovation, but will we continue to see interesting but not so valuable "innovations" like instant search, or will we see really valuable new products and services?  Can Google scale its innovation models or will there be a backlash to try to organize innovation now that Google is a large conglomerate?

Innovating for the future that will be

When we work with our clients to create interesting new ideas, we always first start with trend spotting and scenario planning.  Many will argue initially that this seems unnecessary - it's easy to identify challenges or problems that need to be solved today.  Why spend the time looking 5 to 7 years out at a minimum?

There are several viable answers for this question.  Let's start with the undeniable facts and work our way to the suppositions.

Product Development Cycles.  The first issue to consider is how long it takes to get a new product to market.  In many firms we work with, this can vary from 18 months to 36 months.  So even if you are really good at spotting a near term problem or opportunity and are fairly good at bringing the new product to market, your solution will hit the market not today, not tomorrow, but at least a year and a half from now.  Will the conditions be the same?  Will the circumstances be the same?  Probably not.  Product Development cycles are undeniable - they exist.  If you aren't considering the future at least as far out as your product development cycle, you are shooting behind the curve.

The Pace of Change.  Looking at the adoption rate of new products and services, it's easy to say that we adopt new products and services much more quickly than previous generations, and it's also not a great stretch to assume they'll adopt many technologies faster than we do.  It took television almost two decades to become pervasive, but the cell phone did so in far less time and the internet even less time.  This means that product life cycles are ever shortening and new competitors enter or update their products and services all the time.  Firms that fail to understand that competition is increasing and product lifecycles are shorter than ever will be constantly surprised by competitive offerings.

Radical shifts.  Two years ago, if I told you that Lehman Brothers would be out of business and the US would own a substantial portion of GM, your response would have been ROTFLMAO.  Yet two years later we have fully adjusted our realities to those concepts, and many others.  As globalization increases, access to information increases and competitive barriers fall, radical shifts in economies and markets are more likely than ever, and the pace is only increasing.  If you assume your markets and your competitors aren't subject to significant and unexpected shifts, then you don't need to forecast trends and develop scenarios.  You are also arguing that you live in a protective bubble.  Radical shifts in an economy, in society or in legislation are much more difficult to predict, but it's useless and dangerous to assume these or other factors won't undergo a significant shift.  Better to anticipate the shift and plan accordingly.

What many firms do is solve obvious problems that exist today that may, or may not, exist in the future.  These firms are constantly disappointed to find that by the time their ideas are commercialized as products or services the products are either late to the game or don't provide any unique value.  That's because no matter how good you are at solving an existing problem, your product or service development cycle takes time to get that solution to market, and the idea competes with all of the other pressing objectives.  Your team needs to innovate in the context of the relevant future, which is dictated by how quickly you can bring a product to market, and what the relevant conditions will be in that time frame.  You must plan for change, and understand how trends will change your market and the expectations of your customers.  Then, you can create interesting, valuable ideas that are unique in that context, rather than produce ideas that are late to market or simply aren't unique.

Innovate with the future that "will be" in mind, rather than solving today's problems tomorrow.

Rituals as an innovation lens

Far too often, we in the innovation space are interested in creating a really interesting new product, rather than thinking about the product in the context of its use or experience.  It was during a car trip with some new friends at Pure Insight when we were talking about daily rituals that I realized what a powerful "lens" rituals could be for focusing on new innovation opportunities.

We happened to be talking about shaving - in this case, the drudgery of waking up every day to scrape the bristles from our faces (our correspondents happened to be men.  I'll assume women think the same way about shaving their legs, etc).  While we complained about the task, the discomfort, the risk of cuts and so forth, we also came to the realization that each of us has a specific ritual about the way they approach shaving, and for the most part that ritual is the same no matter where they shave, or when they shave.  The same steps, the same thinking applies, and to break that ritual seems almost like breaking a sacred vow.

Now, many of us see the ads on TV for new razors.  The recent "innovations" in men's razors have been to add three, no four, no five! blades to the razor for an ever closer shave.  You'll notice that regardless of the number of blades in the razor, the ritual hasn't changed.  Whether it's three or four or five blades, we are still scraping our chins in the same way as we have for years, and our own learned, invented or inherited rituals around shaving don't change.

I suspect that the last two major changes to shaving rituals happened with the advent of packaged foams and creams for shaving and the electric razor.  Before that time you actually mixed up your own cream.  I can remember on my father's countertop a "shaving" mug, but you certainly don't see that anymore.  The electric razor changes how one shaves, to a certain extent, but more importantly WHERE one shaves.  If private detective shows are any indication, every self-respecting PI uses his electric razor behind the wheel.

These two innovations changed the rituals of shaving.  In the case of packaged creams and foams, there was less preparation and fewer tools necessary.  In the case of the electric razor, there was more freedom to decide where to shave and when to shave.  Yet, for the most part, many of us follow the same rituals every day.

This is important because true innovation will probably require a significant change to a standing ritual.  Whether that ritual is encapsulated in how we shave, or how we interact with a sales clerk, or how we sit down to eat a meal, we are a formulaic and ritualistic people.  Innovation forces changes to established rituals, and those changes are more difficult to digest and more disruptive than merely changing a tool.  Imagine for example eliminating the need to shave all together and how that would change your getting up and your preparation for the day.  While we may grumble about the task, it is one that requires patience, thinking and contemplation, one of the few times of the day where we are really deeply focused on one task.  If an innovation came along that eliminated the need to shave, we humans would almost require some new task or ritual to take its place.

Rituals are important for another reason as well.  They are developed behavior and often learned or taught, so they can be studied through ethnography.  We need to understand the entire ritual of an experience, whether that is shaving, or car repair, or eating a meal, to truly understand the problem solved or opportunity addressed.  Improving or radically changing one small step of the ritual, or one tool of the ritual, may not impact the overall ritual at all.

Rituals are an important and undervalued tool for innovators to study, understand and deconstruct.  They form a significant portion of what we do, and why we do what we do, and we ignore them at our own peril.

Innovation and a Body of Knowledge

I've had the opportunity in the last few weeks to lead workshops in the US and in the UK, primarily introducing OVO's ideas about innovation process and methods to innovators from companies of all sizes.  What continually surprises me is that individuals who are working on innovation efforts, or who have a title that includes the word "innovation" are seemingly unaware of the significant body of knowledge available to them.  I've tried to reason out why people who have such an important responsibility are not aware of, or aren't engaged with, all of the ideas, science, methods and thinking that support innovation.  It's something like an accountant ignoring generally accepted accounting principles or a lawyer ignoring documented legislation and case law.

I'm not going to speculate on the reasons people aren't aware of, or don't delve into, the Body of Knowledge that supports innovation.  I will, however, list some books and thinkers whose works should be on your desk, at least, if you have innovation as a title or a responsibility.

First, you need to know about Alex Osborn and the Creative Problem Solving Process.  Osborn developed much of the original concepts around idea generation that we still use today.

Next, you need to know about Clayton Christensen, who dramatically re-invigorated innovation as a corporate or strategic tool with his book The Innovator's Dilemma.  While Christensen and his co-authors have written other, very valuable books about innovation, this is the one that you need on your shelves.

We like a number of authors who have written books about specific innovation topics, including:

• Peter Schwartz, who wrote the Art of the Long View, about Scenario Planning
• Henry Chesbrough, who wrote Open Innovation, about, well, Open Innovation
• Eric von Hippl, who wrote Democratizing Innovation, which incorporates the concept of lead users
• Gary Hamel, who wrote The Future of Management, focused on using innovation to change the way we structure organizations and change corporate hierarchies
• Roger von Oech, who wrote A Whack on the Side of the Head, one of the best books to spark creativity.
• Group Genius by Keith Sawyer, which identifies the best ways to get ideas from your teams
• Think Better by Tim Hurson, which focuses on idea generation facilitation
• Blue Ocean Strategy by Kim and Mauborgne, which focuses on finding new markets or customer niches
• Intangible Capital by Mary Adams, which identifies intangible ideas and intellectual property as the new capital
• Business Model Generation a great book that was actually crowdsourced!
• Six Thinking Hats by Edward de Bono, for more creativity

I could easily go on.  The point is that a Body of Knowledge exists, and should be used effectively.  If anything, one could possibly argue that there's too much information about innovation and much of it is somewhat conflicting.  That's because innovation is such a large, and often poorly defined, topic. That clearly doesn't excuse the innovator from being unaware or ignorant of the source material any more than the overwhelming about of new legislation should excuse a lawyer from learning about the law to represent his or her clients.

Once you have these books and gain the skills defined in these books and others, you need to refresh and replenish your skills regularly.  There are hundreds of innovation training courses, creativity courses and seminars, and new tools like storytelling and design competencies that will add to, and extend your capabilities.

Innovation is not a black art or a capability that must be constructed from scratch.  There is plenty of good documentation and thinking available in the public domain that describes how to do the work, and innovators who ignore it do so at their own peril.

Innovation and Porter's Value Chain

I'm reviewing the relationship between a number of tried and true strategic management models and innovation, to see if those models and concepts hold up under the increasing importance of innovation.  A few days ago I reviewed Porter's Five Forces model and concluded that while Porter didn't explicitly call out innovation, it was clear that the Five Forces model embraced innovation.  Today, we'll look quickly at another Porter model - the Value Chain Analysis - and investigate how it holds up innovation.

In the 1980s, Michael Porter wrote a number of books about corporate strategy that became the basis for much of the education of MBAs, at least where strategy was concerned.  Few MBAs in the 80s and 90s failed to study Porter's Five Forces or Value Chain Analysis. Since many of those MBAs minted in that period are now in leadership positions in their firms, it behooves us to understand the models they carry around with them, and whether or not those models are open and extensible where innovation is concerned, or whether they ignore or resist innovation.

First, let's remind ourselves of the Value Chain Model.   Portner's insight  was to identify all the primary functions of a business and all the support functions of a business and seek to understand what the firm did exceptionally well, and what it must do at least moderately well.  While other strategists had thought and written about the linkages between internal operations, Porter was one of the first to create the concept of the Value Chain.  Today we often think of the value chain as extending "upstream" to suppliers and "downstream" to distribution channels and even to customers or consumers.  The tool is a powerful metaphor when thinking about where and how a firm adds value.

Primary activities are the ones we usually think of as distinct operations or departments and are the "direct" costs in a business - inbound and outbound logistics, "operations" which could be manufacturing or development, marketing and sales, and service.  Support activities are those that we traditionally think of as "overhead" - Human Resources, Information Technology, Procurement, and what Porter called Firm Infrastructure - legal, financial, management and so forth. 

The model, once again, does not explicitly call out innovation, and in this breakdown of the organization it is hard to decide where and how innovation should add value.  Clearly innovation can play a role in any of the primary functions.  Innovation can improve the way we make things, or the way we distribute products and services, or the customer support and service we offer.  Conversely, innovation could be considered a "supporting" capability that improves all functions from an enabling perspective.  It's possible that innovation exists in both locations.  However, there are two other items to consider when thinking about innovation and the Value Chain analysis.

First, the model describes a business operating at peak efficiency turning out products and services, but doesn't do such a great job describing where in the business new ideas, new products and services are originating.  It's hard to pinpoint where the "R&D" function is within this model, and whether that is a primary function or a support function.  Second, as we've already noted, when Porter built the model it reflected the operations within the context of the business.  Given the integrated nature of most organizations and their upstream suppliers and downstream partners, we typically think of the "value chain" as reaching from the companies and individuals that provide raw materials and inputs, to the end consumer on the "downstream" side.  The same is true for innovation.  Good ideas may come from anywhere, not just within the context of the firm.

Like many organizations today, the concept of innovation is important, but as in the Value Chain model it is not clear where it should reside, or how it should be considered, as a primary function or a support function.  In almost 30 years we've yet to answer that question successfully.  Perhaps the Value Chain Model and our existing corporate hierarchies need to be rethought in the context of innovation.

Innovation and Porter's Five Forces

I've been pondering the "truths" we hold dear and wondering whether or not the mental models we were taught in college and graduate school hold up under the changes occurring in our economy.  Do the great business thinkers of the past twenty or thirty years and their models and descriptions hold true, especially when we introduce innovation into the mix?  Over the next few months I'll look at a couple of the models we hold dear and place innovation within the context of the model, to see if the model is extensible enough to account for innovation, or whether we may want to revise our thinking to account for innovation.

First up:  Porter's Five Forces.  Michael Porter wrote the book on corporate strategy.  Well, he actually wrote a number of books about corporate strategy, competitive advantage and a number of other topics.  The books that were mantras when I was in school were Competitive Strategy and Competitive Advantage.  In these books and others Porter introduced models, tools and methods to analyze the firm and its competitive position and its competitive advantage.  Two of these tools, the "Five Forces" model and the Value Chain model, are ones that have become ingrained in the way we think about businesses strategically.  What I wanted to know is:  does the model hold up in light of an increased emphasis on innovation?

The Five Forces model is basically a way of looking at an industry, and a firm within an industry, and all the factors that will come to play against that firm and its industry.  The Five Forces are:

1. Supplier Power
2. New Market entrants
3. Substitutes
4. Buyer Power
5. Competitive Rivalry

These are the "totality" of forces acting on an industry, and by extension, firms within an industry.  In the model, Porter didn't necessarily account for "innovation", but the ghost of innovation haunts the model.  For example, New Market Entrants.  This force accounts for firms that weren't traditionally in an market that decide to enter the market.  These could be large firms seeking to enter or disrupt an existing market, or entrepreneurs who will enter a market and chip away at a small subset of the customer base.  Those of you who have read Christensen will recognize the smaller entrepreneur or firm as a potential disrupter from Christensen's book the Innovator's Dilemma.  While Porter didn't explicitly call out disrupters, he did account for new market entrants.

Similarly he accounted for advances in technology and in trends.  He foresaw the impact of legislative effects on business as a discontinuity that opened the door for innovation.  He saw the power of innovation in supplier and buyer channels as well.

There are a few gaps from an innovator's perspective that bear examination, however.  Two that spring to mind upon initial examination are business model innovation and customer experience.  In Porter's mind, the business needed to define its business strategy and model and build competitive barriers to the five forces.  I think in hindsight that has proven only to create Maginot lines that other, more nimble firms have found easy to skirt and attack.  A firm should place a significant amount of emphasis on the development of its business model, but should also place some emphasis on the evolution or dramatic shifting of its business model as competitive pressures ramp up and the pace of change increases.  I don't think the model responds well to the increase in the pace of change and global competition, and in that sense must introduce nimbleness and agility into the model.

Secondly, the model was developed in a time of increasing systemization and process definition.  Buyers and sellers were considered as entities to optimize.  Now that we've reached a point of increasing saturation and commoditization in so many areas, firms must differentiate by improving customer experience - designing and innovating the customer interaction and experience rather than simply optimizing it.  In an age of product and service abundance, customers want individual service and attention, and have high expectations for the goods and services they buy and the partners they interact with.  Porter's model treats the buyers and suppliers and neutral third parties, which they no longer are.  They are now extended relationships.

On the whole, Porter's Five Forces holds up well in light of an increased strategic focus on innovation, although it never explicitly calls out innovation as a "force".  Innovation can easily be discovered in several, if not all, of Porter's Five Forces, and its impact is easily seen.  Porter might argue that innovation is simply embedded in each of the Five Forces, as to a certain extent is a concept like Six Sigma, where Six Sigma represents small, incremental change and Innovation represents large, disruptive change within each of the Five Forces.  This is one historical, well-respected strategic model that seems extensible and capable of incorporating innovation as an emerging business strategy.

In a historical sense, innovation is critical to our economic success

First, a joke.  Do you know why you'll never meet a one-handed economist?  Because all economists say "one one hand (long explanation).  On the other hand...

I'm beginning to wonder if all of the answers to all of our problems lie exposed, like bleaching dinosaur bones, somewhere in our immediate past, or whether this time may be somewhat different.  Several noted economists (hence the starting joke) suggest that we need to look to the recent past for answers to our current problems.  Krugman, in the NYT, argues that our situation today is very much like 1938.  We have too little stimulus and a too conservative population.  He quotes the Gallup survey from 1938 where 63% of the population favored tax cuts to speed a recovery, while 15% favored increased government spending.  Things never change.

Another writer actually indicates that no, our situation is really more akin to 1930, not 1933 or 1938. No wonder economics is called the dismal science.

Let's look at this in an entirely different way.  The US economy in the 1930s was still very much based on agriculture and manufacturing - a production economy.  Our agricultural production had fallen (Grapes of Wrath, anyone?) due to the Dust Bowl and terrible tariffs on imports and exports.  Our manufacturing had fallen due to a contraction of the economy and tariffs.  What propelled us out of the Great Depression, finally, was a war.  Our factories and farms starting exporting to the UK, France and Russia as WW II started in 1939 and 1940, and accelerated when we were bombed by the Japanese and entered the war in earnest.

But comparing the situation now to the situation that existed in the 1930s seems like comparing the horse and buggy to the modern automobile.  Yes, they are both for transportation, but use different fuels, have different delivery capabilities, and require different maintenance.

Today, we face a crisis in the financial markets, not unlike the Great Depression, but what will pull us out is not manufacturing jobs or agricultural jobs.  Today agriculture represents less than 2% of our employment base, and manufacturing somewhere near 20% at full production.  That means that 78% of our workforce is employed in service industries, knowledge industries, academia or the government.  In the past, stimulating agriculture and manufacturing could dramatically increase employment, but today that will have only a secondary or tertiary effect on employment.

What we need to do is stimulate the rapid conversion of ideas into new knowledge, new intellectual property, new products and services.  While we could stimulate manufacturing in the past, and need to do that now, we need to accelerate our ability to create interesting and valuable new ideas and intellectual property much faster than most organizations and firms can do so today.  A burst of new products and services based on new ideas will resonate in the US, but can also be easily and readily exported.  And to grow our economy, we need to spur exports.  Again, that's not going to be done to great extent with manufacturing, but with ideas.

What would a stimulus in 2010 look like (looking forward for solutions rather than backward)?

First, either make the Patent Office more efficient and effective by increasing it or completely outsourcing it.  Today the Patent Office is overwhelmed with submissions and can't respond effectively.  Let's put far more resources into helping people protect and commercialize their ideas.

Second, improve technology transfer out of the Federal Government and universities.  Today, many universities and many national labs do a good job of creating new ideas and new technologies, but do a terrible job translating them into commercial products and services.  We need to revamp our technology transfer policies to make them more open, more friendly and more efficient.

Third, recognize that many ideas are now about services and business models.  We need better ways to develop, protect and promote ideas that are conceptual in nature.  This recommendation has to do with documenting the ideas, protecting the ideas and commercializing the ideas.

Fourth, innovation exists where people and ideas meet.  Just as our economy boomed when the national transportation and highway legislation was passed, we need more "infrastructure" for communication, interaction and networking.  A national infrastructure project based on encouraging high speed internet and wireless access could become this century's answer to the highway system in the 1950s.

We could go on - but I'll stop here.  Innovation is more important to pull us out of the recession we are in, and the conditions are far different than they were in previous recessions/depressions.  We need to focus on the innovation investments that can pull us out of the recession and put us on a course for renewal and sustained growth and leadership.  Looking backward for answers is not the right perspective.  We have new problems and we need new thinking to solve those new problems.  If it was good enough for Einstein it should be good enough for us.

PS.  Not long after I wrote this I noticed that John Judis at The New Republic has an article about the similarities and differences between this recession and historical ones.  On the second page of his article he suggests that the Obama administration tried to increase green jobs, and that if the Republicans are elected they'll favor extractive and not-so-green jobs.  As if the options were only "green jobs" versus polluting jobs.  If this is the extent of our options and our thinking, then we are already doomed.

Ideas and IP are the new product

As my final sally into the intellectual capital topics introduced by Mary Adams in her book Intangible Capital I wanted to respond to one other question that Mary posed.  She asked - what's the relationship between innovation and intangible capital.  My answer to that is to paraphrase Keynes by saying we're all innovators in the long run.

In today's economy every business is an idea business.  Think about it carefully.  Is there a business you can think of that isn't constantly trying to improve its operations, cut costs, increase market share?  From the most automated manufacturer to the firms that make a living spitting out ideas for other firms, every firm is in the idea business.  It's simply a matter of how the ideas are used.  In many firms that would scoff at the concept that they are idea businesses, the focus of idea generation is on improving productivity and efficiency.  Yes, firms that use concepts like Lean and Six Sigma are generating and applying new ideas - they may not consider themselves "innovative", but the ideas they generate are meant to improve the bottom line or the top line.  Firms that have specific innovation functions are  clearly generating ideas to differentiate, disrupt other markets or create organic growth.  Firms that have deep R&D skills are creating ideas to add depth to intellectual property, patents and trade secrets, which adds value to the firm.  Service industries that generate ideas to radically improve customer experience are generating ideas to differentiate in a completely different space, but those ideas are no less important or valuable.

There's a misconception about innovation that seems to suggest that ideas that don't introduce sweeping change or become a patent or other intellectual property aren't "innovation".  The fact is that every business today competes on the value of its ideas, they just differ on how the ideas are applied and implemented.

If you'll accept my hypothesis that all businesses are therefore idea businesses, then ideas and intellectual property are the "new" product.  They may not be the "only" product your business creates, but they are a valuable product.  The question becomes then, what does your "idea factory" look like?

I'm going to assume that most businesses that don't consider themselves "idea" firms have optimized their processes and factories to get the most output per unit of input.  They've optimized their productive resources and have highly tuned product production or service production.  Much, if not all of their investment goes into improving these processes or factories to make them ever more efficient.  But what about innovation and idea generation?  If we accept that all firms are idea firms, then what do we do about the idea processes?  Where's the optimized "idea factory"?

Just as you can't create good products without a well defined process and optimized factory, you can't sustain good innovation without a well defined process and optimized "idea factory".  And if we are now all idea firms, we'd better get started designing, developing and improving our abilities to consistently generate good ideas.  Whether those ideas are implemented internally as improvements to existing processes or products, or implemented externally as new products, services or business models is somewhat beside the point.  Ideas are the new product and the one most likely to sustain your firm over time.

The linkage between innovation and intangible capital?  It's the same as the linkage between manufacturing processes and finished products.  We have gleaming factories that generate thousands of finished products.  Now, we need well defined innovation capabilities that will generate the ideas and intellectual capital necessary to sustain those businesses.

Book Review: Intangible Capital

Yesterday I used a small portion of Mary Adam's Intangible Capital to expound on the fact that innovation does not begin with idea generation.  And now, as Paul Harvey used to say, the rest of the story.

Intangible Capital is a book that seeks to create a new way of thinking about our businesses and how we operate them.  Traditionally our businesses and how we organize them, even how we measure and report on them, have been based on labor and tangible capital (property, plant and equipment).  That's because traditionally these were the motive forces behind how firms differentiated and made money.  Firms that managed their tangible assets and labor effectively made more money than those that didn't.  But what if the situation changed and tangible capital wasn't as important as intangibles.  Those intangibles might reflect the accumulated knowledge in the business, its strategies and recipes, its intellectual property and ideas.  What happens to how we structure an organization and how we value an organization if intangible capital becomes as important, or more important, than physical capital?

One could argue that in many businesses - software firms for example - intangible assets have far greater value than the tangible assets.  And software firms are probably just the leading indicator.  More and more as the US moves from a manufacturing economy to a services and intellectual capital economy, intangible assets will be what we use to derive value and differentiation.  And if that's so, everyone will need to read and reflect on the ideas in the book Intangible Capital.

Adams and Oleksak argue that there are four kinds of "structural" capital - culture, organizational knowledge, intellectual property and processes.  They begin the book by defining these kinds of intangible capital and why, increasingly, these are becoming ever more important.  The book mentions a presentation by Irving Wladawsky-Berger who argued that "future work will be in market-facing solutions where you are dealing with people and services (intangibles)...".  Adams and Oleksak go on to argue that intangible capital of these types is the "new" factory, and firms that hope to compete in this environment will need to create "knowledge factories" that are designed to create intangible capital.

The focus on intangible capital doesn't simply change the way you "produce" ideas and intellectual property.  It also changes how you organize.  Adams and Oleksak argue that "networks are the new organization charts" and begin the argument about the importance of social media.  I would have liked to see them take this further - since much intangible capital is created at the intersection of firms, or industries, or communities.  But their main point here is that a top-down, hierarchical organizational structure doesn't support the development of intellectual capital as well as a network.  Additionally, "managing" within this space is more about orchestrating and encouraging collaboration than directing and correcting.  Innovation isn't a "nice to have" in this worldview but is a requirement.  Firms that create the best ideas, and constantly create new ideas, have an advantage over those that don't create new intangible capital.

Toward the end of the book Adams and Oleksak look at how intangible capital is measured.  Intangible capital, while increasingly valuable, isn't adequately captured or reported in a balance sheet or an income statement, neither of which can sufficiently capture the value or report the impact of intangible capital and its role in value generation.

Every once in a while a book will pull back the covers and try to direct our vision and thinking toward what is likely to happen next.  This book is an attempt to introduce what's already happening, although many businesses still haven't recognized it yet.  Increasingly, intangible capital is far more important than tangible capital, and as that becomes more evident and more true over time, we have to adjust our businesses to that new reality. It impacts how we organize, how we manage, what we produce and what we report.   The creation of intangible capital will require different skills than we have in our organizations today, and different interactions with our customers and suppliers.  If you want to know what issues businesses will be grappling with in the next few years, read Intangible Capital and think about the possible impacts as, not if, the ideas presented in this book come to pass.