Monday, June 21, 2010

What if: Leading an innovation team was a reward?

Paul Sloane wrote an article a while back that for some reason just popped into my consciousness.  I guess I have Twitter to thank for that.  Paul's article examines the fact that many organizations place junior executives on innovation efforts.  The thinking often is that more experienced executives are running "important" businesses or products and can't be bothered to run an innovation project.  He highlights a story about IBM and the fact that IBM was constantly "killing" new innovative ideas due to a lack of management and resources.  I won't repeat the entire Sloane article.  You can read it for yourself here.

What I do want to think through with you today, gentle reader, is the great "what if" of innovation.  What if it was a reward to run an innovation project or initiative, rather than a burden or a risk?  What if the executive teams handed out the leadership of innovation projects as the culmination or final step in the maturation of a seasoned executive?  Wouldn't people scramble to identify new products or services they could champion, or struggle to simply lead an innovation project?  Today, when innovation comes up in an executive committee meeting, most managers flinch away, too busy or too occupied with existing projects or business lines to consider running a nascent, risky innovation effort.  The risks are too great and the rewards too small.  So the people who usually run innovation efforts come from one of three camps:  1) junior executives with less credibility, smaller networks and less experience 2) people who dreamed up the idea in the first place (the "true believers") and 3) the executives who don't have "enough" on their plates and who are assigned to the leadership role rather than volunteering for it.  Let's look at reasons why each of these are fateful choices.

First, placing a junior executive on a risky innovation project doubles the chance of failure.  If innovation is important, it needs every chance to succeed.  Junior executives many not have the relationships, organizational pull, access to resources and funding and knowledge of how things get done that will ensure the project is successful.  By assigning a junior executive to the effort, the executive team hedges their bets.  If the project isn't successful, we can hang it on a less experienced executive and didn't "waste" a more senior executive's time.

Placing a "true believer" as the leader of the team has it's pluses and minuses.  Assigning the person who dreamed up the idea as the leader of the effort means the leader has real passion.  That person is likely sold out on the success of the idea.  However, that passion and commitment may mean the individual has tunnel vision about his or her idea.  Like a junior executive, the true believer may not have access to the resources or networks that could make the difference between success and failure.  And, after all, the true believer may not belong to the executive club and other executives may be less than willing to extend assistance.

But I prefer either of the previous leadership examples over simply assigning an executive to lead an innovation effort who is unwilling or uninterested.  Given the pressures that most executives are under, and how people are evaluated and compensated, anything thrust on someone who is already busy will fall to the back burner, or fall right off the table.  Nothing puts the brakes on an innovation project like a dispassionate, uninterested executive who feels the project or initiative was assigned against their interests or judgement.  Yet this is how many innovation projects get kicked off.  Then the executive spends time seeking someone to run the project and minimize problems and mistakes.  Keep the project alive, just don't take any risks and don't screw up.  Probably the worst of all possible innovation worlds.

Why is it that we insist that our best and most connected and experienced people run the most stable and predictable lines of business, where there are few changes, and insist that the best growth and differentiation opportunities are run by people with less management skill, fewer relationships and less capability?  In a world that is constantly changing with new competitors and a rapidly shifting customer base, why do most firms insist on placing their best executives on yesterday's products and services, and under-staffing and under-resourcing the concepts that will drive new revenue in the future?  Don't we have this exactly backwards?  Shouldn't their be a demand by executives to be the one assigned to create the new product or service that will drive the business forward, rather than ducking away from an innovation assignment?  Shouldn't we have our junior executives cut their teeth running a "safe" existing business to gain insights and skills before leading an innovation effort?

Regardless of your thoughts on the previous paragraph, shouldn't we build compensation and reward structures that attract our best people to lead innovation efforts?  Would that mean that leading a smaller, more innovative team and creating a new product is more highly rewarded and compensated than leading a large team and cranking out dependable revenues from existing products?  Which one is really harder to do?
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posted by Jeffrey Phillips at 7:20 AM 6 comments

Friday, June 18, 2010

Book Review: The Open Innovation Revolution

I've just had a chance to read a new book by Stefan Lindegaard, who is an active innovation consultant and blogger.  If you follow innovation topics on the web, you may have seen his site, www.15inno.com, or seen him on Twitter, where his handle is @lindegaard.  At any rate Stefan is an active participant in the online innovation community, and is always worth listening to.

Stefan's area of focus is open innovation, and his new book, The Open Innovation Revolution, is a book meant to provide the ground work for any firm considering an open innovation approach.  Stefan's approach is very pragmatic, and the reason I like it is that he takes a very top down, strategic approach to innovation.  After introducing what open innovation is and why it matters, he quickly turns his attention to the "mandate" for open innovation.  He discusses innovation strategy and strategic purposes, what we at OVO call "strategic intent".  Innovation is often a "bolt-on" process that conflicts with strategy rather than a carefully integrated capability, so this focus on strategy rings very true.

He then turns his attention to people and culture, which are the right focus areas.  To be successful at open innovation, we need to identify the best partners to work with and also change the thinking inside the firm.  The predominant thinking in most firms is to protect intellectual property and to assume "we know best".  In a firm focused on open innovation, the presumptive thinking is:  we can identify the best ideas, ours or someone else's.  It took P&G and Lafley to make this thinking acceptable in the Fortune 500. 

Stefan then turns his attention to the individual or team that will lead the open innovation initiative and provides these individuals with insight and support, especially focused on overcoming internal barriers, building a new culture and communicating effectively.

I found it interesting that he didn't spend a lot of time trying to categorize the different "types" of open innovation.  Open innovation runs the gamut from solutions like Dell's IdeaStorm to solutions provided by Innocentive to proprietary networks built by firms like P&G.  There are a range of approaches that will satisfy very different needs.  Additionally, I was a bit surprised that Stefan didn't discuss more about the challenges of intellectual property when considering an open innovation model.  When working with a number of customers, partners and vendors, identifying intellectual property, who owns it and who claims it can be a very dicey problem. 

This book is addressed to the people who will lead an open innovation initiative, so in some cases it takes on a coaching or consultative voice.  The book has a lot of what appear to be verbatim interviews with executives who are conducting open innovation initiatives and each chapter includes a recap and recommendations.

Any individual or team tasked with starting an open innovation program should check out The Open Innovation Revolution.
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posted by Jeffrey Phillips at 6:08 AM 4 comments

Wednesday, June 16, 2010

Relying on the kindness of strangers

Like it or not, all successful innovators share at least one characteristic with Blanche Dubois.  We rely on interactions with strangers to drive our best ideas.  Thanks to Tim Kastelle, I found this recent work by Jared Diamond, who uses anthropology to demonstrate that people need interactions to create and sustain new technologies.

Diamond uses the example of Tasmania, which is an isolated island off the coast of an isolated continent.  At one point in history, Tasmania and Australia were connected.  At that point in time the people living in both locations had roughly the same technologies and advancement.  As the sea levels rose, there were far fewer people on Tasmania who lost interaction with a relatively small population of Australians. When first "discovered" by Europeans, Tasmanians lacked many of the technology innovations that their distant relatives on Australia had created during the separation.  Since neither the Australians nor the Tasmanians had boats that would cover the 130 mile distance between there, there was no interaction.  In fact, the Tasmanians at some point lost or abandoned some of the tools that they had when they were in contact with the Australians.

Diamond suggests that it is at the point of contact with other cultures, other people, other civilizations that innovation and technical advancement occurs, and uses the Tasmanians as an example of the opposite case.  Totally isolated with a very small population, they actually regressed in many ways and did not create new innovative solutions or technologies.  On the other hand, in many places throughout history where there are many interactions between cultures and people, we see innovation flourishing, spreading, being adopted and improved. 

Interesting history lesson, but what does it say about innovation in a business?

First, any firm that doesn't engage with its customers, partners and markets will likely fall behind and regress.  Isolation from your customers is not only risky, it's possibly deadly.  Yet we lock people away from conferences, tradeshows and opportunities for interaction.  Instead of resisting opportunities for interaction, firms should create them.  We need far more interaction, with people who like us, and people who don't.  With people who have similar outlooks and people who don't.  Instead most people in most organizations rarely interact with a customer, and those that do - customer support and sales - have very skewed notions of what customers and prospects want and need.

Second, perhaps we can finally leave the myth of the "lone innovator" behind.  In the US we herald people like Thomas Edison, whom we are often led to believe toiled for hours in his lab alone.  Wrong.  Edison surrounded himself with a wide range of people and constantly interacted with representatives from a number of the emerging industries.  He employed a large number of people in his lab and forced cross-pollination of ideas from several important technologies and industries.  Good innovators rarely work alone.  They need the demands and conflict of a market to test their ideas and introduce new perspectives.

Third, in a tightly contested market good ideas will propagate quickly, and in an isolated market ideas may never propagate at all.  This means that in our society and economy, with 24x7 news sources, social media and other communication tools, a new idea that has merit will be recognized and adopted fairly quickly.  It also means that a new idea has a fairly short shelf life.  When the Europeans landed in Tasmania, the natives there were using the same technologies as had been used by their forefathers when Tasmania and Australia separated, since there was no interaction.  Today, new ideas spread like wildfire and are quickly adopted, improved and copied.  The entire product life cycle has shrunk dramatically as more participants enter the market and compete. Therefore we need a robust innovation cycle tied closely to a robust product development cycle that can identify the best ideas and rapidly convert them into new products or services.  Or we can hold on to existing technologies and isolate ourselves from today's economy, like the Tasmanians who didn't have the ability to start fires when the Europeans arrived in 1642.

Innovation isn't just about having smart people or good processes.  Innovation happens at the margin where markets, people or ideas intersect.  We all rely on the kindness of strangers when we innovate, and if we fail to interact, we will fail to innovate.
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posted by Jeffrey Phillips at 7:27 AM 4 comments

Tuesday, June 15, 2010

Innovation - leaving the safety of sameness

In a recent, and strangely unremarked post, I wrote about some reasons that firms don't innovate.  Perhaps one of the most telling is what I call the "safety of sameness".  No one ever gets fired if they:  1) Hire IBM, 2) execute a strategy McKinsey suggested or 3) become a "fast follower" and mimic what other firms in the space do.  The beauty of the safety of sameness strategy is that we'll allow others to take all of the innovation risk and we'll swoop down, copy their ideas and we'll be the winner. In theory this is a great idea, in practice there are a number of reasons why this is risky.

First, becoming a fast follower, if there is such a thing, means intentionally adopting a reactive posture.  If you are a fast follower you are intentionally setting out your strategies, processes and operations to react to what others do - in fact you've abdicated any responsibility for uncovering new opportunities or establishing an alternative vision.  Over time, any strategic capabilities you have will atrophy, and when the disruption happens, and it will happen, you won't have the internal capabilities to respond.

Second, I remain unconvinced that there is such a thing as a "fast follower".  If a fast follower exists, it must have the most optimized decision making and product development and launch practices in the industry.  It must be able to decide exactly when to enter each market, just as the early adopters are giving way to the late adopters.  It must be able to re-engineer or re-architect its competitors products in such a way that customers view them as indistinguishable.  In my experience, no such firm exists.  There are pioneers, slow followers and laggards, but no "fast followers".  

Third, a fast follower strategy assumes that there is a relatively lengthy product development cycle.  The length of that cycle allows you to gear up, copy the innovators and get into the market before the onslaught of competition, and with enough time to generate revenues and profits before the market deteriorates.  While that thinking may have held water in the past, the pace of change and speed of business has increased to the point where product cycles are far shorter.  Do you have the ability to shrink your product cycles and still make money?

Fourth, being a fast follower means identifying the "right" innovator to follow and hoping like crazy that that firm has good insights.  Supposed you'd hitched your wagon to DEC computers in the 80s, or even Apple computer in the 90s before the iPod.  These market leaders fell on hard times.  DEC never recovered and Apple recovered not because of computers but because of consumer electronics.  So for all of those fast followers that were pursuing Sony (Walkman/Discman/etc), you lose and Apple wins, at least for now.

Finally, being an innovator means setting out your own course.  As they say in dog sledding - if you aren't the lead dog the view never changes.  Innovators want to be out in front, establishing their own "blue oceans" and meeting previously unmet or unarticulated needs.  I often have clients tell me they want to be the next iPod or Google of their industry.  What I hope they'll become is the first "X Corp" in their industry.  Becoming the next anything is setting your sights too low.  I thought about differentiation when I saw the cartoon above from GapingVoid.  Don't be the "next" Google.  After all, Google was just the next Yahoo.  Decide to leave the safety of sameness and become the first "something".
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posted by Jeffrey Phillips at 11:22 AM 2 comments

Monday, June 14, 2010

Innovation and Optimism

I've been thinking a lot lately about the power of optimism and how it pertains to innovation and to issues like the Gulf Oil spill.  This promises to be a long and rambling post, so suffice it to say that most innovators are optimists, and wouldn't be innovators otherwise. Yet we have to balance the challenges that optimism introduces into the reality the world imposes.

Look, for example, at the BP rig explosion.  There. within a day or so of the explosion, we had a terrible outcome - oil spilling into the Gulf. However, BP and with some reluctance the Obama administration posited that the oil output into the Gulf was a mere 5000 barrels a day.  As we now know, and most scientists hinted at for days after the explosion, that was an OPTIMISTIC estimate, based more on hope than facts.  This optimistic viewpoint may have caused the machinery of the public and the government to move more slowly to demand action.  What would have happened if a pessimist had set the oil flow, and said there's 20,000 barrels flowing into the Gulf from the day it happened?  Would our response have been faster?

In positive outcome circumstances (meaning outcomes where the positive outcome is most likely), it's probably best to be an optimist, since you are more likely to reinforce success.  In a negative outcome circumstance, it's probably better to be a pessimist, since you'll invest more readily in resources to recover or fix a problem.

Where innovation is concerned, we typically have two conflicting goals.  True innovators are optimistic people who believe in their ideas, their processes and their solutions.  So they tend to be viewed by the rest of the organization as rather "pollyannish" to say the least.  Since they have that reputation going in, many other participants will view their role as the "pessimist" to level the playing field and ensure a balanced set of perspectives or views.  Note as well that most people with pessimistic outlooks will easily identify problems or challenges for ideas, or reasons they can't succeed, so having more than a few pessimists on any innovation effort makes the innovation effort far more challenging.  Too many pessimists and the innovation effort never has a chance at all, since all of the pessimists act as "boat anchors" and drag down the effort.

What's interesting is that most pessimists represent the "conservative" base of knowledge from an innovation perspective. They are defending what the firm has done, what they believe it can do.  They operate from a position of strength - budgets, timeframes and resources are on their side.  What they often fail to grasp is that even though they have the established "truth" on their side, innovators almost always succeed at upsetting the established norms.  Once the norms are changed or overturned, entirely new horizons and perspectives are required.  The old rules and knowledge may not work anymore.  So innovation is a constant battle between established knowledge, norms and rules, and those that believe they have a vision for an entirely new set of rules and norms.  That means, by definition, innovators have to have an optimistic outlook or they will fail to innovate.

Yet this also means that we need a seasoning of pessimists to ensure there's no "tunnel vision" or evaluation of only the best possible outcomes.  Fortunately for us there were many scientists - perhaps one of the first examples of crowdsourcing on a large public scale - who refuted BP's and the government's claim that 5000 barrels a day were leaking into the Gulf.  These rationalists questions the most optimistic assumptions and helped us arrive at a better, more reasonable estimate, which accelerated the response.  BP and the government had strong reasons to hope that the leak really was only 5000 barrels per day.  That would make the clean up easier, less costly and have far less impact on the Gulf.  Scientists and environmentalists had a much more pessimistic view from their experience in the Valdez disaster and felt the need to publish a more pessimistic estimate to speed the clean up and the capping of the well.

The point here from an innovation perspective is that most organizations have far more "pessimistic" people - those willing to defend the status quo, than "optimistic" people - those who believe in new products and change.  Innovation teams need to be staffed primarily with people who have an optimistic frame of mind.  Given the challenges that face any new idea, the last thing an idea needs to confront is doubt within the team.  However, the optimists must be balanced by people who evaluate the idea using consistent framework and real world insight, to ensure the idea has mass appeal.

Takeaway:  Staff your innovation team with optimistic people.  Evaluate the ideas with pessimistic people.  Most organizations do the reverse - generating ideas with a team of strong pessimists, which creates lots of incremental ideas, and using optimistic people to evaluate the ideas, which creates expectations of results far better than can be achieved.  What you end up with is incremental ideas with little impact, but much bigger expectations.  The worst of all worlds.
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posted by Jeffrey Phillips at 12:40 PM 4 comments

Thursday, June 10, 2010

Why firms don't innovate: an alliterative list

I was meeting with a group that is interested in fostering innovation in the state where I live and we were talking about the reasons why organizations don't innovate.  We talked about the lack of strategy and cultural barriers and a number of other reasons.  There are hosts of very smart people writing books and research papers on this very topic, but it struck me that I should be able to communicate the reasons firms don't innovate in a way that a fifth grader can understand, since some of the folks we work with..never mind.

At any rate, I created my alliterative list of reasons why firms don't innovate, and if I get the time I'll explore them in more detail over the next week or so.  I encourage you to add your own reasons in the comments - alliterative or not, they are welcome as we begin to first name the reasons, and hopefully eventually debunk the reasons why firms won't or can't innovate.  Herewith, Dr. Seuss meets Clayton Christensen.

Reasons your firm can't or won't innovate:

  1. The Tyranny of Today.  Yes, I know that most fifth graders may not fully understand the word tyranny, but they understand the pressures of delivering "today".  Most businesses are so focused on delivering this week, or this month, or this quarter that they simply cannot or will not think beyond some corporately directed and reinforced time horizon.  I've written before about the use of scenario planning and future forecasting to identify opportunities that are beginning to unfold.  Very few firms use scenario planning effectively and most are comfortable reacting to market changes rather than being the "leader".
  2. The Safety of Sameness.  Innovating requires that you create strategies, products and services that make you different from your competition.  As a firm gets larger and industries or market mature, being "different" seems risky or threatening.  I was driving by my bank branch recently and it struck me that all bank branches look exactly the same - a squat square building with few windows and exactly three drive up alleys.  I'm sure most are exactly the same on the inside as well - exactly three teller windows, a velvet rope alley to guide customers to the tellers, with offices along the periphery.  Why is every bank and every branch so similar?  Because there is safety in sameness.
  3. Inevitable inertia.  Innovation is change, and as we all know change is difficult.  One of the reasons change is difficult is simply overcoming the inertia of the way things are currently done.  Even when change makes a lot of sense, overcoming the inertia that sets in around the way things are done is difficult.  Since innovation is typically risky change, the inertia is even more pronounced.
  4. Creatures of the Culture.  An organization runs on unwritten rules and informal processes we lump together in something we call culture.  Corporate culture guides and dictates our thinking, and encourages activities and discourages activities and perspectives as well.  We are all creatures of the culture of the organization we belong to.  A culture can encourage innovation or discourage innovation.
  5. Fear of Failure.  No one likes to fail, but innovation simply requires the ability to fail and keep going, incorporating the learning from the failure rather than punishing the failure.  If the organization promulgates a fear of failure, it can't innovate.
  6. Containing the creativity.  Innovation requires creativity and divergent thinking.  Any company that doesn't promote creative thinking stymies innovation, since all ideas seem so similar to existing products and services.
  7. Cannibalization Concerns and Turf Toughness.  Many organizations are afraid to innovate because the new product or service may undercut or obsolete an existing product or service.  So these firms defend the existing products at the expense of new ideas and new products, and are disrupted by another firm.  Additionally, a new idea may intrude on someone else's "turf" - that is, someone else believes the idea should belong with their team and they resist it.  Don't underestimate the power of a bureaucracy that feels threatened.
These are the reasons why firms can't, or won't innovate - not an exclusive list, but an alliterative list.  What we should address now is:  having named our fears, are they really all that terrifying?  Are they really that difficult to overcome?  I think the answer is obvious.  Some of these challenges may entail a significant amount of work, but it's not hard work or difficult work, or work for rocket scientists.  It requires focus and commitment, but there's little here that any business so inclined can't do.  If we can draw that conclusion, then the next question is:  if these are the barriers, and they aren't really all that significant, why don't we see more firms innovating?
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posted by Jeffrey Phillips at 9:07 AM 2 comments

Tuesday, June 08, 2010

Applying a social media rule to innovation

I've suggested before that there are parallels between social media and innovation.  In fact much "open innovation" is simply a subset of social media.  In many open innovation programs a group of people submit ideas and rank and comment on the ideas within the community.  The organizing feature of the community is often the topic of innovation, rather than other shared beliefs or interests.

Today in a meeting I postulated (just wanted to use that word) a new social media rule.  I suggested that there are really two interesting types of social media communities - broad and topical (think Twitter) or deep and narrow (think forums or some blogs).  Yes, I recognize that this is a simplistic two by two matrix, but what's interesting is that most social media exists in the two "extremes".  There are probably examples of narrow and topical, but they will shortly be either broad and topical or extinct.  I couldn't come up with an example of a social media site that was both "deep" in terms of information richness and "broad" in terms of participation, but it may exist.  The real point is that most social media examples consist of two very diverse types:  a topical interaction site where there are thousands of participants examining interesting but not very informative or deep information, or smaller groups of people connected to discuss very deep or information rich sources.

What's interesting about this phenomenon is that it aligns well to the best kinds of innovation, especially idea generation but all aspects of innovation in general.  A good rule of thumb in the innovation space is that the more diverse the participation, the better, but only up to a point.  Once you tip over into a large group setting, no matter how diverse the population the ideas you receive are more likely than not to be incremental.  That's because it is exceptionally difficult to get everyone on a disruptive page, and just a few people in a large group who don't buy in or didn't get the memo will pull the group into a more incremental discussion.  Most innovation consultants will tell you that once you reach a tipping point somewhere between 8 and 10 participants you inevitably will produce more incremental ideas.  Thus, you have an innovation corollary to broad and topic social media and incremental innovation.  The greater the number of people involved in the dialog, the more likely the conversation is to turn to topical or incremental issues.

Conversely, where innovation is concerned, the more "radical" or disruptive the desired outcome is the more emphasis you place on diversity and restricting team size.  As discussed above, it is much easier to get 5, 6 or 7 people on board to radical thinking - and to do really interesting radical innovation you need everyone on board and on the same page.  The number of participants and the ability to define the problem effectively are the limiting factors in this case.  So, again another corollary to social media.  A smaller community is much more likely to create and discuss deeper concepts and deal with information rich environments as long as the scope is well defined. 

What does this say for your innovation work?  Using "Open Innovation" or "closed innovation", you can achieve incremental ideas with a broad set of people or a small set of people, but will rarely get really interesting radical ideas.  However, for really interesting radical ideas you usually need a smaller set of diverse people who have been prepared with the proper scope and who are "bought in" to the disruptive task.  The participants may be inside your organization or outside or both, but the numbers should be limited and the team well prepared.

Our work history demonstrates that as the number of participants increase, they expect others in the team to do the reading, to submit ideas and to debate.  In a larger group there is less commitment and less engagement and often the opportunity to "lurk" increases.  In a smaller group where everyone is accountable and all input is recognized, there's no room to slough off the work, and individuals can more easily be held accountable to the scope and nature of the work.  In a larger group it is also difficult to discuss radical ideas if the entire team is not prepared or "on board", so most radical ideas get shot down early and those who wish to generate radical ideas are marginalized.

With this background it's easy to see that most "open" innovation programs are great for incremental innovation, mirroring the broad and topical social media, but aren't typically well suited for radical idea generation.  "Open" innovation can provide "radical" answers when the participants are carefully selected, well prepared and highly engaged, and that usually means that a very thorough scope or problem statement has been created, which is the Innocentive model.
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posted by Jeffrey Phillips at 1:34 PM 5 comments

Monday, June 07, 2010

The roles have shifted: creatives take the lead

We've been developing a theory of business over the last few years, based on our work with a number of companies.  The theory is less about innovation tools and techniques and more about the structure of a firm's workforce.  What's become apparent is that the mix of skills drives a lot of innovation success.  While you can take a fairly conservative culture and rally it to an occasional innovation effort, that conservative organization will revert to its comfort zone over time.  To innovate consistently and effectively, a firm needs a supportive culture, a committed management team and the right mix of skills, interests and perspectives to sustain innovation.

We believe that there are four kinds of perspectives that are important in a business, and the distribution of these perspectives in your organization will tell you a lot about your firm's propensity for innovation.  The four perspectives are:
  • Optimizer:  Very comfortable executing the existing strategy, squeezing all the efficiency and value out of current skills and practices.  Prefers the existing methods and models.  Doesn't want to change.
  • Reacters:  Likes the existing strategy but also enjoys "fighting fires" and reacting to new market demands or competitive moves.  A real task switcher who isn't necessarily creating new ideas but reacting to the market.
  • Forecasters:  These folks tend to appear to be "dreamers" - they are constantly trying to understand what will happen next.  They often seem less focused on delivering value today, and trying to understand what will happen tomorrow.  
  • Creators:  These folks are inventing new products and services that align to the opportunities identified by Forecasters and meet the needs of customers.  Creaters ignore the existing processes and demands in an attempt to create radically new products, services and business models.
As you might guess, every firm has some quotient of each type. Even firms that don't think of themselves as particularly innovative have forecasters and creators.  It's just that the forecasters and creators are more easily ignored in the most conservative firms.

Today, most firms have shifted from a preponderance and focus on Optimizers (which was the focus in the 90s and early 2000s) to Reactors.  Six Sigma, downsizing, outsourcing, lean and a number of other management concepts created opportunities for Optimizers, those would could squeeze the most value out of the firm.  Reactors, Forecasters and Creators were sidelined.  Over time, as globalization increased, new competitors sprang up and customers demanded new products, the focus has shifted.  Walk into any firm today and you'll find most people in Reactor mode.  They understand that change is happening and they have been asked to quickly react to shifts in a market or new competitive entries.  Today, many firms are "fighting fires" and are being asked to react to all kinds of market pressure and new government regulation.  Thus, the Optimizer skills are less valuable than the Reactor skills currently.

What's interesting is that if the Forecasters had been more active or more vocal, the firms may have been able to avoid some of the Reacting and would have had products and services available as the conditions changed, rather than being forced to react to the change.  We think that the Forecaster skill becomes much more important in a time of constant upheaval, global competition, currency fluctuations and government changes.  The firms that foster Forecasters and enact their ideas will be better positioned to create new products and services and force others to React to their actions.

At the logical end of this progression are Creaters, those people who simply demand new products and services to come into being.  Sometimes this is based on their vision for a new product or service, sometimes it is based on their reading of the Forecasters' insights, and sometimes it may simply be blind luck.  But for years many firms have ignored their Creaters to focus on Optimizers and Reacters.  Only in the last few years do you hear CEOs demanding more innovation from their organizations, which are made up of people who are best suited as Optimizers and Reactors.

I suspect, as with any other trait distributions, there are more people who are naturally inclined to be Optimizers and Reactors as opposed to Forecasters and Creators.  I also suspect that the hiring practices of larger organizations places more value on people with Optimizer and Reactor skills, while Forecasters end up in analyst firms or consulting firms and Creators end up as entrepreneurs.  For larger firms, this distributional mix has to change.  Fortune 5000 firms have to identify their Forecasters and Creators and start listening to them, and building teams around these individuals.  They need to recruit more Forecasters and Creators and train their Reactors and Optimizers to think and act more like Forecasters and Creators.

This distribution of proclivities, skills and talents shouldn't come as a surprise.  We've built large organizations to take advantage of scale opportunities, which require the assumption of steady business environments and competitive equality over a period of time.  What's changed is the nature of competition, the pace of change and the demands of consumers.  While Optimizers are valuable, and are the people who do the work that keeps the lights on, there is an increasing need for a shift in skills and talents away from reacting, which simply makes a firm a follower at best, to Forecasting and Creating, which places the firm ideally in a leadership position.

One other point about the shift from Reactor to Forecaster and Creator.  Don't believe the "fast follower" lie.  In the best of all worlds, the absolute best competitive position is probably as a fast follower, allowing a pioneer to open a market and quickly delivering a better product to a slightly established marketplace.  Every firm claims to be a "fast follower" and virtually none of them are, since they don't have the reaction speed and market flexibility to do so.  Most firms that claim to be "fast followers" are really slow followers, late to a market, and firms that aren't fast followers are simply laggards.  While a "fast follower" strategy is great in concept, very few firms have the speed, reaction time and capability to deliver on that strategy.  Therefore, becoming stronger at Forecasting and Creator skills is paramount.
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posted by Jeffrey Phillips at 5:41 AM 3 comments

Friday, June 04, 2010

Innovation is playing offense, not defense

Where would we be without a good sports analogy every so often?  I was thinking about the challenges of innovation recently and it occurred to me that corporate strategy and innovation is often about making a choice between defending turf and taking or creating turf.  Most firms prefer to try to thwart other attackers and defend their turf rather than create new turf or attack another firm in their markets.  The larger a firm becomes and the more comfortable it is on its own turf, the more defensive minded it becomes, because an offensive move detracts from playing defense and ensures a counter attack somewhere else.

The problem with playing defense - simply defending your existing product lines and market share - is that it is a "static" way of thinking.  If we think about traditional "defensive" strategies - in war or in sports - they are meant to prevent someone else from doing something or taking advantage of their strengths.  However, most defensive strategies are by their very nature tactical and static - think trench lines, castles in warfare or big defensive linemen in football.  These factors mean that the defense is in constant reactive mode, not proactively attacking but intent on defending and making an attack by the offense costly and difficult.  Which works as long as the offensive team or army works with the same mindsets as the defensive plan calls for.  If the thinking changes and doesn't align with the defensive capability or plan, the defense can be quickly rolled up.  I call to your attention the fact that in most wars in the 20th century, the army on the offensive usually won, and even in the cases where that wasn't true (Germany in World War II for instance) they were the aggressor and were winning, just made the mistake of fighting on too many fronts.

The point here is that playing defense becomes a game of what you are willing to concede.  It places the organization in a hunkered down, reactive mode where most of the energy is committed to quick reaction to thrusts and attacks.  It also assumes that the environmental conditions will remain relatively the same.  These concepts were probably reasonable for Fortune 500 companies in the 50s through the 90s.  A firm could scale up, put up reasonable defenses and operate in a profitable but defensive posture.  All of that changed with NAFTA, the consolidation of Europe and the emergence of China, India and Brazil.  Now, we have aggressive competitors intent on offensive engagement who don't necessarily play by the same rules.  The pace of change increases and any firm in a defensive mindset is attacked on all sides, as large and small competitors chip away at valuable customers and products.

Meanwhile there is a growing interest in innovation.  Innovation is offensive in nature.  It assumes there are new markets to address, new customers to reach, new problems to solve.  Innovation is proactive - it forces the firm that embraces innovation to change and it forces the firms that are impacted to change as well.  Given the fact that innovation requires change, both internally and externally, you can understand why some firms would prefer to play defense rather than offense.  Defense in a static environment is fairly safe and predictable, doesn't invite risks and requires little change.  Offense, on the other hand, is risky and uncertain.  As a famous football coach was quoted about the advent of the forward pass, three things can happen when you throw the football, and two of them are bad. 

However, in a market where the pace of change accelerates, and competition increases from every quarter, and the environmental and legislative conditions change constantly, playing defense is exceptionally difficult.  Adapting to the changes and anticipating and taking advantage of the changes is paramount.  In conditions such as these, you can't simply play defense - you must play offense as well.  It used to be said in football that offense brought the crowds but defense won the championships.  That may be true in sports but it is not true in the business world.  Firms that believe they can survive in these market conditions by defending turf are bound to lose, while those that innovate are more likely to survive and thrive.

Think about the cognitive dissonance associated with the change from a defensive minded approach.  In football terms the difference between Mike Ditka and Joe Gibbs.  Firms that have been comfortable in a defensive minded approach are fighting off competitors, extending existing products and optimizing their operations.  Good defensive approaches ward off competitors, consolidate logistics and build up defenses like patents and other protections.  However, they also impede the ability to move quickly and shift direction.  Offensive minded organizations tend to seek advantages, are willing to move quickly and address new opportunities.  They think on their feet and attack where they have opportunities and advantages.  The methods and concepts are radically different, and trying to shift a company from a defensive mindset to an offensive mindset - from business as usual to innovation oriented - is a time consuming but highly necessary process.
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posted by Jeffrey Phillips at 6:01 AM 5 comments

Tuesday, June 01, 2010

Outsourcing Innovation

Over the last 20 years or so, as global barriers fell and telecommunications and information infrastructure increased, it has become easier and cheaper to outsource some functions.  In the US this started with NAFTA for manufacturing and then moved to Taiwan and to mainland China.  For services it started in the nineties as many firms moved high overhead operations like call centers to places like India and the Philippines.  Today, we are reaching the point where anything that can be reduced to information can be outsourced.  For example, when you have an x-ray or CAT scan, there's a good chance someone overseas is reviewing that and sending information back.  It won't be long before much of our backoffice accounting and financial planning will be done overseas as well.

Richard Florida wrote a post today entitled The Global Innovation Paradox, which points out that we think that much of the low margin work is getting outsourced but we also believe that the US leads in general innovation.  In his article he points to new research by the National Science Foundation that finds that many US firms are outsourcing R&D.  In the most extreme example, foreign-based Automotive R&D accounts for 40% of the total R&D for US companies.  In a number of other industries, from pharmaceuticals to semiconductors, an increasing amount of the R&D is happening overseas.  I'm glad he pointed out the research, but I don't understand his title of an Innovation Paradox.  It's not a paradox to see American companies outsourcing their R&D when they want to make products for the global market.  These firms are leveraging smart, well connected people in a number of different geographies to create new products and services faster, and more relevant in all markets.  Additionally, as the developing world catches up with the US in investments in education, they are "climbing the learning curve" by taking on more innovative research and development.  Soon, countries like India and China will do what Finland has done - match the US in innovation research and output, no longer following our lead but competing with us for the innovation lead.

Anything that can be outsourced - done less expensively at the same level of competence - will be outsourced.  Whether that is answering phones for customer support or designing circuit boards, it can and will seek the best people at the lowest cost.  That's a reality.  What we in the States need to understand is that we can either attempt to differentiate on cost, or differentiate on innovation and creation.  For the most part we've ceded the cost battle to other countries, so we can't afford to cede the innovation battle.  That means we need to continue to innovate in traditional R&D forms where we can, and also create new innovation models in new forms.  Notice that much of what Florida points out in the NSF research is still basic "R&D" which will become for the most part new physical products.  We in the US can continue to innovate in new products, but can open up new innovation opportunities in services, customer experiences, business models and so forth.  As these other countries develop, their customers, too, will demand the new products, services and business models we've created.  The benefit to being a follower in this case is that other countries get to learn from our mistakes and can be fast followers rather than pioneers.

We in the US have to remain the innovation pioneers.  We have to continue to break new ground, because we can't assume that we'll retain the "innovation" lead, whether we measure that in dollars of R&D invested or patents generated or whatever measure we choose to use.  There are too many smart, motivated people outside the US who are using our models and our methods that we've perfected over a 20-30 year time horizon.  They benefit from the fact that we have perfected the models and that we offer the world a compelling, ever growing market that demands new products and services.  So, to some extent, we are building our own gallows, demonstrating the best methods and models for innovation, and consuming the products created by others using our techniques.  If that is the case, we have to continue to invest in innovation and develop new techniques and new insights that continue our lead - in R&D yes, but in all facets of innovation.  The alternative is stagnation, loss of innovation leadership and being forced to compete as a high cost, low innovation economy.  Not the best situation to find oneself in.
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posted by Jeffrey Phillips at 7:23 AM 30 comments