Last time we looked at the third tenet of innovation and the eight key things every leadership team should do to promote innovation. Today we’ll look at the fourth tenet, which explores R&D’s role.
Tenet #4: The research and development department must be an innovation engine.
Most people would agree that R&D is a key contributor to innovation. While not every innovative idea will come from R&D (innovations in marketing, manufacturing, and business processes are also essential), an energized R&D team with the freedom to innovate is fundamental to success.
If you ask the typical R&D manager what it means to be innovative, you’re likely to get an answer something like this: the most innovative people are the ones who come up with the largest number of creative ideas. They have the most patents. In meetings, they come up with idea after idea. They continually awe others with their creativity.
I’ve known many of these people throughout my career. If you query their colleagues, what you’ll often hear is, “Wow, Joe is really innovative. We don’t have time to explore a tenth of the ideas he comes up with. I’m glad we don’t have more like him or we’d never get anything done!”
Wishing for fewer innovative people is not the right answer. It might be better to re-think your concept of what it means to be innovative. By now you should recognize that creativity by itself is only the first step in innovation. Joe’s brilliant ideas mean nothing if they can’t be commercialized. The true measure of innovation is not merely the number of ideas a person throws out or the number of patents they have been granted, but how much they contribute to the success of the business.
Several years ago I was asked to review a large portion of our company’s patent portfolio to see just how well we were using our intellectual property. The task was challenging and it wasn’t always easy to tell whether older patents had ever found their way into products. But one thing was clear. Somewhere around half of the company’s patents had been filed, granted, and put on the shelf, never to be heard from again. Not used in a company product. Not licensed or sold to others. Not enforced against others or used as a defense when others tried to assert patents against us. The time, energy, and expense to obtain these patents were simply wasted. It was a wake-up call that forced management to re-think and improve our whole intellectual property strategy.
Companies need more innovative people, not fewer. Creativity needs to be encouraged, not stifled. If the ideas Joe comes up with and the patents he receives are truly helping the business, he should be generously rewarded. If they sit quietly on the shelf, it is time to provide him a little gentle coaching on how to become an even stronger contributor. Most people, especially the creative ones, really want to make a difference to the business. If they clearly understand the objective, they will put all of their energy into achieving it.
It is management’s responsibility to make this happen. This involves more than just sponsoring contests and handing out awards for random innovative ideas. That’s the easy part, but it’s the less useful part. The real question is what else does management do? Do they educate people on business strategy—the target markets, the product roadmap, the competitive landscape? Do they fund training programs to develop their engineering talent? Have obstacles to productivity been removed so engineers can focus on design work, not busywork? Are people allowed to spend a portion of their time exploring new ideas beyond their current assignments? Do interesting but risky ideas occasionally get funded? Are at least portions of those investments protected over the ups and downs of a business cycle, or are they jerked away at the first sign of a downturn? These are the hard parts, but they are the more important parts.
One of the most important things you can do to stimulate innovation is to give your R&D team a deep understanding of your customers and their problems. Don’t fall into the trap that I’ve seen at some companies. They view customer relationships as the domain of marketing; R&D engineers are kept close to their desks where they won’t embarrass the company in front of customers. Don’t do this. You can’t be innovative if you don’t understand the problems you are trying to help your customers solve.
When an R&D engineer gets to walk out onto a customer’s manufacturing floor, challenges she could only imagine before suddenly become real. Armed with this new information, she is more likely to come up with creative solutions that really work. Of course not every customer will permit such visits, but even if the discussion is confined to a conference room it will still be useful. Many customers welcome the opportunity to interact with your technical experts rather than the sales people they normally see. It’s a way for them to delve into technical questions they don’t often get to discuss. And it allows them to see that you really do have technical experts in your company. These kinds of interactions can also be real motivators for your engineers. Working all day every day on specific technical challenges, it’s easy for an engineer to think everything he knows is obvious to everyone else as well. It’s usually an eye-opener to discover he really is a technical expert in his field.
Customer interactions can occur is various ways: going out on a customer site visit, manning the booth at a trade show, or presenting at a technical conference are three good examples. In all cases, it is important that the R&D engineer work closely with his marketing counterpart. Marketing can help hone the message and make sure the customer interaction goes smoothly. The connection between R&D and marketing is critical, and I will explore it more fully in my next blog entry.
Another key to developing an innovative R&D department is to treat it like the valuable resource it is. Here’s an analogy. The actor Harrison Ford starred in 2008’s hit movie, Indiana Jones and the Kingdom of the Crystal Skull. The movie grossed over $750 million for Paramount Pictures in the first year after its release, largely due to Ford’s ability attract audiences. You can bet that during the filming, Ford didn’t have to handle his own shipping, schedule his own meetings, or empty his own wastebaskets. Paramount knew how to treat Ford like the valuable resource he was. In return, they got a world-class performance that led to world-class box office results.
Your R&D engineers are your own version of Hollywood movie stars. You won’t inspire them to deliver world-class results if you don’t treat them like world-class talent. Let them focus on what they do best—creating the new products and services that will drive your success. Don’t force them to divert time to routine tasks that could just as well be handled by people with less specialized skills.
This also means rewarding them appropriately—competitive pay, bonuses (tied, of course, to business results), and an inviting work environment. Work environment is often where companies get the most creative, with things like on-site gyms, free food, and expensive parties. Once when my R&D team launched a particularly important project, my boss gave the team $2000 to spend at their discretion to improve the work environment. After much discussion, they bought a high-end massage chair for people to use after a stressful day. Recognizing the support they got from marketing and manufacturing, they emphasized the chair was for everyone’s use, not just the R&D team. This set a nice precedent, and subsequent project teams strove for similar opportunities to improve the work environment. Over time, the department added such items as an espresso maker and a foosball table. The enthusiasm generated by these incentives far exceeded the tiny cost to the organization.
Remember that while these can be good supplemental benefits, they shouldn’t be the primary focus of an innovation plan. And make sure that rewards are tied to business results, not just effort. Otherwise people won’t connect their success to that of the business. Unlike academia, R&D engineering shouldn't be a tenure track position. Joe should be rewarded today for contributions he is currently making, not for those he made years ago. Otherwise his teammates will quickly recognize the favoritism and you will lose twice—by encouraging a person who isn’t contributing and by demotivating those who are.
At this point you may be thinking, “Why is R&D so special? Isn’t marketing, manufacturing, and administration just as important to the company’s success?” The answer is a resounding “yes.” Everything we’ve just discussed about instilling an innovative spirit in R&D applies equally to the rest of your organization. But that’s the subject of my next blog entry.
Next: Innovation is a team game; R&D can’t do it all on its own.
Notes from Steve - Observations from Off the Beaten Path
Tuesday, April 27, 2010
Wednesday, April 21, 2010
The Third Tenet of Innovation
In my last blog entry I described a simple model for classifying various kinds of innovation. I made the point that the best companies are good at cultivating different kinds of innovations. Process innovations, in particular, can be even more powerful than product innovations. Today, let’s look at the third tenet of innovation.
Tenet #3: Innovation requires commitment from all levels of the organization, starting at the top.
Lots of companies give lip service to innovation. Their CEOs write inspiring columns in company newsletters. They sponsor company-wide “innovation contests” intended to send a message that innovation is important. The word “innovation” shows up prominently on their web sites and in their annual reports. Like a duck hunter blasting indiscriminately into the sky in the hope that at least one shot will find a bird, these companies employ a shotgun approach on the theory they might eventually bag a brilliant idea.
These are not the marks of an innovative company. Of course the CEO needs to communicate that innovation is important. Innovation contests might even play a minor role. But if you don’t have a larger plan, any innovative ideas that emerge will be all over the map. While it might be nice to implement a new system for selecting the menu items in the company cafeteria, that kind of innovation isn’t going to drive growth. Innovation needs to be channeled so that what emerges has a good chance of really making a difference.
The business press is enamored with the “soft” aspects of innovation. You’ll read about how engineers in an innovative company are motivated to work long into the evening because the company provides free meals and drinks. You’ll be told that the company has ping-pong tables and a well-equipped gym. You’ll hear that informality rules and engineers have a sense of camaraderie.
These are all good things that can help encourage innovation. But they’re not the foundations of an innovative culture. They’re not even the right place to start. Not every innovative company does all these things, and many failed companies did do them. So what does it really take?
First let me say there is no single “right” answer for everyone. What works in Mountain View won’t necessarily work in Boston or Beijing. That’s not to imply the engineers in Mountain View or Boston or Beijing are any more or less innovative than their counterparts elsewhere around the world. It just means that as a manager, you need to tailor what you do to the specific needs of your company.
The business press also tends to portray small startup companies as being the most innovative—they’re agile, informal, and not afraid to take risks. Large multinationals are often portrayed as unimaginative and dull. While it’s true that some multinationals are overly bureaucratic, don’t forget that 9 out of 10 startups fail. No matter how creative you are you’re not really innovative if you aren’t commercially successful. Innovation can come from either large or small companies, and neither has cornered the market on it.
Before you talk about free dinners every evening or company sponsored yoga classes every Friday, you need to start with the basics. There are a few key things every leadership team should do to foster innovation. None of these are rocket science, but I’m amazed at how often management overlooks them in favor of trendier but less useful pursuits. Here are eight key things any company should do to promote innovation:
Next: The research and development department must be an innovation engine.
Tenet #3: Innovation requires commitment from all levels of the organization, starting at the top.
Lots of companies give lip service to innovation. Their CEOs write inspiring columns in company newsletters. They sponsor company-wide “innovation contests” intended to send a message that innovation is important. The word “innovation” shows up prominently on their web sites and in their annual reports. Like a duck hunter blasting indiscriminately into the sky in the hope that at least one shot will find a bird, these companies employ a shotgun approach on the theory they might eventually bag a brilliant idea.
These are not the marks of an innovative company. Of course the CEO needs to communicate that innovation is important. Innovation contests might even play a minor role. But if you don’t have a larger plan, any innovative ideas that emerge will be all over the map. While it might be nice to implement a new system for selecting the menu items in the company cafeteria, that kind of innovation isn’t going to drive growth. Innovation needs to be channeled so that what emerges has a good chance of really making a difference.
The business press is enamored with the “soft” aspects of innovation. You’ll read about how engineers in an innovative company are motivated to work long into the evening because the company provides free meals and drinks. You’ll be told that the company has ping-pong tables and a well-equipped gym. You’ll hear that informality rules and engineers have a sense of camaraderie.
These are all good things that can help encourage innovation. But they’re not the foundations of an innovative culture. They’re not even the right place to start. Not every innovative company does all these things, and many failed companies did do them. So what does it really take?
First let me say there is no single “right” answer for everyone. What works in Mountain View won’t necessarily work in Boston or Beijing. That’s not to imply the engineers in Mountain View or Boston or Beijing are any more or less innovative than their counterparts elsewhere around the world. It just means that as a manager, you need to tailor what you do to the specific needs of your company.
The business press also tends to portray small startup companies as being the most innovative—they’re agile, informal, and not afraid to take risks. Large multinationals are often portrayed as unimaginative and dull. While it’s true that some multinationals are overly bureaucratic, don’t forget that 9 out of 10 startups fail. No matter how creative you are you’re not really innovative if you aren’t commercially successful. Innovation can come from either large or small companies, and neither has cornered the market on it.
Before you talk about free dinners every evening or company sponsored yoga classes every Friday, you need to start with the basics. There are a few key things every leadership team should do to foster innovation. None of these are rocket science, but I’m amazed at how often management overlooks them in favor of trendier but less useful pursuits. Here are eight key things any company should do to promote innovation:
- Give everyone in the organization a clear picture of your target markets, your customers, your competition, and your business strategy to win. People work better if they know what they are trying to accomplish. This insight helps channel their innovation into areas that really make a difference. And don’t limit this communication just to the R&D department. Engineers and scientists aren’t the only innovative people in your organization. Everyone from the senior engineer to the junior administrative assistant should have a basic understanding of your business strategy. You don’t need to share all the details, but enough for them to understand such things as who your customers and competitors are and what new product introductions are most critical to your success. Don’t be too stressed about what would happen if one of them left to go work for a competitor. If you do a good job of creating a truly innovative environment you’ll have a motivated workforce that won’t want to leave.
- Remove obstacles that prevent people from doing their true jobs. You wouldn’t pay an engineer’s salary to a clerk, but it’s amazing how often companies cut back on clerical support and then expect the engineers to fill the gaps. When engineers have to handle their own shipping and receiving, place their own purchase orders, empty their own waste baskets, and spend an hour trying to find the optimum time on everyone’s calendars for a meeting, you’re essentially paying an engineer’s salary to a clerk. In isolation, each of these seems like a small impact on an engineer’s time. Together they stifle creativity and kill productivity. Moreover, your people won’t be inspired if the message they’re getting is you think so little of them you’d rather have them doing busywork than creative work. We’ll look at this more fully in my next two blog entries.
- Make innovation everyone’s responsibility, not the separate function of a few individuals. Some companies have innovation departments separate from the rest of the corporation, insulated from the requirement to follow company policies. The downside of this approach is that everyone else gets the message that they aren’t the innovators. This doesn’t mean you can’t have a “skunkworks” or other group responsible for new business creation. Just be careful not to call it an “innovation department”—innovation is much more than inventing new products. And let everyone play by the same rules. If it’s OK for the skunkworks to ignore company policies, then innovation projects in other departments should have the same right. And if these groups are more successful by circumventing company policy, it’s time to revisit the value of the policy. Encourage everyone to spend 5-10% of their time working on their own ideas. If every minute of their time is consumed in routine business, they won’t have time to innovate. Their ideas don’t necessarily need to tie directly to a possible business venture as long as they are developing useful skills. Back when I was an engineer, I occasionally took advantage of company resources to design electronic products for my own use—a darkroom timer, a telescope guidance system, a photoelectric photometer. None of these turned into HP products, but they all helped hone my circuit design skills. The fact that HP not only tolerated but actually encouraged me to do this work by providing the necessary tools and components was a motivator that paid the company back many times over. And you never know when you might reap rewards. My knowledge of photoelectric photometry was a direct factor in the eventual success of a multimillion-dollar line of HP optical test equipment.
- Encourage innovation proposals and make sure you actually fund some of them. Innovation projects are not the same as the 5-10% of time allocated for people to work on their own ideas. Innovation projects should be formal assignments that have a tangible benefit for your business—a new product, a process improvement, or a new marketing program, for example. It’s best if the project proposal percolates up from the people who want to do the work rather than as a top-down directive. You should have a system for selecting and funding these projects, and a method for measuring progress. Try to staff them with full-time people who aren’t distracted with other jobs. If that’s not possible, make sure you carve out enough of their time so they can be successful. Don’t just add the assignment on top of their existing jobs. Your actions need to follow your words. Nothing will kill innovation faster than asking for innovative ideas and then never giving people the time or money to test them out. This is especially problematic in public companies that put quarter-by-quarter results above all else. At the first sign of a weak quarter, management kills the budget for anything that doesn’t contribute to this quarter’s results. A good management team has the discipline to maintain at least some level of funding for longer-term innovation projects throughout an entire business cycle. I’ve always used the philosophy that an average of 10% of the R&D budget should be committed to blue-sky innovations. In tough times, I might have to cut it to 5%, and in good times I might let it go as high as 15%. But if I could possibly prevent it, I never let it go to zero.
- Push for quick results and don’t expect perfection. The outcome of an innovation project doesn’t need to be a fully functional product or process. The primary objective is proof of concept. Encourage people to get first results quickly without worrying about all the details. Once the concept is shown to work, you can fund a more extensive project. It’s even OK for the initial concept to be put on the market as long as it has value to at least a small subset of customers. That way you can get quick feedback from real customers. Nissan’s new LEAF all-electric automobile, with a 100-mile range and 8-hour recharge time, is hardly a replacement for the family car. But it serves a limited market and gives Nissan real-world feedback from customers who end up paying to cover Nissan’s R&D expenses. But don’t do this unless you’re prepared to follow up with an improved product. Otherwise you’ll end up disappointing customers and giving your competition a head start on learning what customers really want. Who remembers that the Honda Insight was America’s first hybrid vehicle, beating the Prius to market by 7 months?
- Accept failure as an integral part of the process. Not every innovative idea will pan out. Use failure as a learning experience, not a justification for punishment. If it becomes obvious that those people who take risks are punished for failure, everyone will stop taking risks. There’s a delicate balance to play here, however. A project that failed because of management incompetence isn’t the same as one that failed because a market didn’t pan out or a technology proved more difficult to develop than expected. It’s a leader’s responsibility to watch over innovation projects and take steps to correct management deficiencies before they poison the entire project.
- Provide regular opportunities for training. Everyone needs the opportunity to improve their skills. This keeps them current with technology, allows them to grow their contributions, and builds their enthusiasm and energy. Throughout my management career I have tried to make sure everyone on my team has the opportunity for one explicit training activity each year. This could range from sending an engineer to a technical conference to sending an administrative assistant through a time management course. Even sending R&D engineers out on customer visits can be valuable training. And I expect these to be more than just passive activities. The engineer shouldn’t just attend the conference, she should consider submitting a technical paper for presentation. If that isn’t possible, I at least ask her to present to the group the highlights of what she learned. This helps disseminate the knowledge and shows others the importance of sharing this insight with teammates. One thing I stress is that each individual must take ownership for his own training program. I don’t want people to wait for me to tell them what to do. They need to assess their own interests and propose a plan. Of course I still need to approve the request, and when I do I generally look for two things: does the proposal help improve a skill that is valuable to the company, and can we afford it? In tight years when I can’t approve the more expensive requests I work with the individuals to find less expensive alternatives. Within those limits, each employee should own the details of his own training plan. Not everyone wants to take advantage of training opportunities, and I don’t force them. But I make sure everyone understands how important it is to keep their skills relevant to current needs.
- Set up a rewards system that encourages innovation. Startup companies are really good at this. Much of their employees’ pay is in the form of stock options. If the company does well, they can get rich. If it fails, they are broke and out of a job. It’s a powerful motivator that encourages everyone to work together. Large companies don’t typically do this as well. If they grant stock options or the now popular restricted stock units at all, it is usually only to their top performers—the few people they imagine they really want to retain. Moreover, in a large company there is so little correlation between stock price and the contributions of any single individual that the motivation factor is almost nonexistent. Managers in large companies must look for creative ways to tie employee rewards to their contributions. Here’s an example from my own past. Some years ago my business was faced with a dilemma. Because of unexpectedly strong sales, one of our more popular products had gone obsolete for lack of several key components. The manufacturing process for those components had been dismantled a couple of years earlier and there was no way to resurrect it. We had a replacement product in the works, but it wasn’t scheduled to be introduced for another 18 months. At that rate we would miss out on something like $50 million of revenue and $10 million pre-tax profits. So we pulled the product development team together, explained the situation to them, and gave them a challenge. If they could figure out a way to introduce the new product 9 months earlier, the company would get $25 million more revenue and $5 million more profit than if they kept to the current schedule. If they could accelerate the schedule by this much, we would split the incremental profit equally between the company and the development team—they would get an extra $2.5 million split between the 20 developers. That was roughly a $125,000 bonus each. But if they missed the mark by even one day, they would lose the entire bonus. They accepted the challenge, looked for countless ways to shave time off the schedule, worked nights and weekends, and in the end, met the challenge. The product didn’t have all the features originally envisioned and had tradeoffs in other areas, but it accomplished its objective and kept customers satisfied. And both the company and the development team shared directly in the results.
Next: The research and development department must be an innovation engine.
Thursday, April 15, 2010
The Second Tenet of Innovation
Last time we explored why innovation is important and what distinguishes a truly innovative company from all the pretenders. The truly innovative company doesn’t rely on a single innovative idea for its success; it has established a culture in which innovation thrives. Today we will look at the second tenet of innovation.
Tenet #2: There are various types of innovation, and the best companies excel at all of them.
Most books divide innovation into a large number of categories. Some authors talk about as many as ten types of innovation. Geoffrey Moore, in his book, Dealing with Darwin
, lists no fewer that fourteen. But I’ve found it useful to think in much simpler terms.
Imagine innovation being structured along two orthogonal axes. On the horizontal axis, define it as either product innovation or process innovation. On the vertical axis, define it as either incremental innovation or disruptive innovation. The result, as shown in the diagram, is a square with four quadrants. I’ll more fully define each of these terms in a moment, but let’s first understand the chart’s overall message.
In each quadrant, I give a general sense of the relative level of investment, risk, and return for that type of innovation. For example, a disruptive process innovation can return very large rewards, but to achieve it you have to make a large investment and accept a high level of risk. You should only make this kind of investment if the potential return is high. There may be considerable risk in achieving it, but the potential needs to be there. An incremental product innovation is unlikely to generate large returns, but it is much less risky. It is usually a less expensive undertaking, so it often makes sense to do even if the returns are moderate. Of course these are generalizations; “your mileage may vary.”
Note that I don’t classify any of the quadrants as “low return.” All types of innovation can be worthwhile under the right circumstances. Calling any of the quadrants “low return” would incorrectly imply innovation in that quadrant isn’t a good investment. Not every quadrant makes sense in every business climate, but none of the quadrants are inherently poor choices. The only low-return choice is no innovation at all.
Let’s first look at the horizontal axis. For this simplified view of innovation, think of “product” in broad terms that also includes “services.” Companies like Sony or Procter & Gamble sell physical products you can hold and touch, whether they be high-definition TVs or tubes of toothpaste. Companies like United Airlines or Bank of America sell services, not physical products. The service United sells you is transportation from one city to another. The service Bank of America sells you is the right to use their resources for your financial transactions. For our purposes, the single term, “product” will include services as well as physical products.
Similarly, think of “process” in broad terms. A process includes not only the methodology used to manufacture a physical product but also the channel used to deliver that product or service to the customer. Amazon’s sales channel innovation, for example, was a new process that revolutionized retailing by making on-line purchasing safe, convenient, and less expensive than a traditional brick-and-mortar store. Similarly, Google developed a business model of giving away all of their services for free, funded entirely by advertising. Although not exactly original (network television has done it that way for decades), it has certainly been one of the more successful models of the Internet era.
Product innovation tends to grab the headlines because it results in something readily apparent to customers—BMW’s latest sports car will certainly create a buzz both in the press and with car buyers. Process innovation, though, can be even more important because it benefits every product that uses the process. For example, improving the manufacturing process for integrated circuits will benefit every circuit that goes through it, not just the innovative new microprocessor hyped in the press. This is one reason it is dangerous to gauge a company’s ability to innovate by the number of patents it produces; few companies patent process improvements nearly as frequently as they do product improvements.
As an example of the value of process innovation, let’s compare the impact of two of Amazon’s recent innovations, the Kindle e-book reader and their affiliate marketing programs known as Amazon Associates and Amazon Marketplace. Kindle, introduced in 2007, has captured the media’s attention and become a centerpiece of Amazon’s cachet. Some people even go so far as to worry about Amazon’s future if Kindle is displaced by Apple’s iPad. Although Amazon doesn’t announce sales figures, reliable third parties estimate that by early 2010 Kindle had sold about 3 million units. At an average selling price of around $250, that means Kindle has accounted for about $750 million dollars of revenue in a little over two years.
In contrast, the investment community has largely ignored Amazon Associates and Amazon Marketplace. Associates is a marketing program that allows third party websites to link to Amazon product pages and earn commissions for products purchased through their sites. If I write a blog on outdoor adventuring, for example, I can include links to products like tents, sleeping bags, and GPS receivers so my readers can buy them directly from Amazon. For each sale made through these links, Amazon pays me a small commission. I can create a virtual storefront on my site without having to worry about inventory, billing, shipping, or any of the other headaches of a real store. I've used Amazon Associates in this blog entry to link to Amazon's pages for two books I mention.
Amazon Marketplace is a similar tool that allows me to sell my products directly on Amazon. For example, if I own a bookstore that specializes in used books, I can add my listings to the Amazon pages for those books. Purchasers then have the option of either buying a new copy from Amazon or a used one from me. Amazon doesn’t care which one you buy. According to their annual report, they make about the same profit in either case. (Speaking as a published author, though, I’d rather have you buy the new book so I can earn a royalty!)
Amazon Associates and Amazon Marketplace are examples of marketing process innovations. They touch everything Amazon sells, not just one product. According to knowledgeable sources, combined they account for about 40% of Amazon’s total revenue. That’s 20 times more impact on Amazon’s bottom line than Kindle. It’s a good illustration of how process innovations can be much more powerful than product innovations.
Now study the chart’s vertical axis. Clayton Christensen uses the terms sustaining innovation and disruptive innovation in his classic book, Innovator’s Dilemma
. In it, he defines sustaining innovations as those that improve existing product performance. Disruptive innovations fundamentally change markets. Other authors use the terms incremental innovation and radical innovation. Incremental innovation builds upon existing technology; the changes it introduces aren’t enough to make existing products non-competitive. Radical innovation involves large technology advancements that render existing products obsolete.
I believe the two terms that best describe the difference are incremental innovation and disruptive innovation, so those are what I use. Incremental innovation is just that—an improvement to product offerings in an existing market that incrementally improves a user’s experience. Disruptive innovation opens new markets, throws established markets into turmoil, and has the ability to completely rearrange the structure of the marketplace. Companies that were formerly market leaders could be left behind once the dust settles.
Much press has been devoted to the importance of disruptive innovation because large companies historically haven’t been very good a capitalizing on it. The literature is full of examples of market leaders falling by the wayside when they didn’t react to fundamental changes in technology. Western Union failed to follow the transition from telegraph to telephone. Polaroid resolutely stuck with film technology long after the world moved digital. WordPerfect ignored the transition from DOS to Windows and lost their leadership to Microsoft Word. Disruptive innovation rightly gets a lot of attention because the cost of missing such sea changes in markets is catastrophic to those who ignore them. Managers lie awake at night worrying about such a fate and use it as a rallying cry to stimulate innovation in their organizations.
Keep in mind, though, that incremental innovations are usually more important. While disruptive innovations such as the electronic calculator or on-line social networking catch the world’s attention, they occur only rarely. And when they do, the first to market isn’t always the one who reaps the rewards. A company that bases its future primarily on disruptive innovation is taking a long-shot bet. That’s what startups do, and that’s one reason large corporations often acquire rather than invent disruptive innovations. They can let the venture capital world sort out the winners from the losers.
Far more often, incremental innovations are what drive a company’s results. Take Apple, for example. In its early days, Apple pursued a strategy based largely on disruptive innovation. The Lisa computer, introduced in 1983, was the first personal computer to use a mouse and graphical user interface (GUI). In an instant, the fundamental way in which humans interacted with computers was changed. You no longer needed to type cryptic command lines to make things happen. Now you could simply point and click. This fundamental innovation had the potential to obsolete every previous computer overnight.
But it didn’t. Lisa’s high price ($9,995) drove away many potential users, while the lack of supporting hardware and software drove away many more. Although these problems were largely overcome with the release of the Macintosh a year later, it was too late. Far too many people had bought IBM PCs in the interim and were locked into the competition. By the time the Macintosh hit the market most people found the switching costs simply too high to convert. The mouse and GUI that won the market were Microsoft’s, not Apple’s. It was quite a literal example of the old maxim, “the second mouse gets the cheese.”
Another of Apple’s disruptive innovations was the Newton personal digital assistant, introduced in 1993. Although it coined the term “PDA,” it was big, clunky, and used a clumsy handwriting recognition system. (I still remember my manufacturing manager, an early adopter, struggling hopelessly to take notes with it during meetings.) Its lack of success discouraged further development, and as a result, Apple never participated in the eventual PDA market boom.
It wasn’t until the 1998 launch of the iMac, an incremental innovation in personal computers, that Apple finally avoided the threat of bankruptcy. Their most successful introductions of recent years, the iPod and iPhone, are both incremental innovations in existing markets. The iPod, the first digital audio player with a built-in hard drive, was a relative latecomer to the consumer digital audio market, which was then dominated by Sony. To their credit, Apple learned their lesson from the failure of Lisa, which had been hamstrung by lack of compatible software. When the iPod was introduced, Apple had already launched iTunes, a software application reminiscent of Napster that allowed you to choose from millions of songs for the low price of 99 cents each.
When Apple introduced the iPhone in 2007, it was long after such other smartphones as the Treo from Palm and the Blackberry from RIM. But once again, Apple successfully innovated incrementally. For the first time, mobile users could surf the Internet with an experience similar to a computer. And Apple extended their iTunes success with the equally successful iPhone applications store.
One other example of the challenge of the disruptive innovator is worth noting. Somewhat surprisingly, Kodak was an early player in the digital photography market. They introduced a low-resolution digital camera in 1973 and a megapixel-size consumer camera in 1986. But these products were only marginally successful. At the first introduction, few people were willing to spend $20,000 for a camera whose pictures didn’t look as good as those from a simple point-and-shoot film camera. Then, when Kodak launched their megapixel camera, there was little in the way of infrastructure to support it—no Photoshop software for picture editing, no personal computers powerful enough to edit the pictures even if the software existed, and no photo-quality personal printers for making prints. You still had to take your digital files to the photography shop for printing. It was a business model doomed to failure.
This lack of success led Kodak to conclude the future of film was secure. By the time they acknowledged their error and took digital photography seriously, they were impossibly far behind. This kind of faulty decision-making based on the failure of early introductions is not unique. If you don’t understand why a product failed, you won’t know how to predict the future of the market. I’ll relate a similar story from my own experience in a future blog entry.
During my career at HP/Agilent, I have led a variety of innovation programs, including both disruptive and incremental product innovations as well as both disruptive and incremental process innovations. In future blog entries, I will use some of them as examples. Not all of them are positive. Sometimes the best learning experiences come from failure.
Next: Innovation requires commitment from all levels of the organization, starting at the top.
Tenet #2: There are various types of innovation, and the best companies excel at all of them.
Most books divide innovation into a large number of categories. Some authors talk about as many as ten types of innovation. Geoffrey Moore, in his book, Dealing with Darwin
, lists no fewer that fourteen. But I’ve found it useful to think in much simpler terms.
In each quadrant, I give a general sense of the relative level of investment, risk, and return for that type of innovation. For example, a disruptive process innovation can return very large rewards, but to achieve it you have to make a large investment and accept a high level of risk. You should only make this kind of investment if the potential return is high. There may be considerable risk in achieving it, but the potential needs to be there. An incremental product innovation is unlikely to generate large returns, but it is much less risky. It is usually a less expensive undertaking, so it often makes sense to do even if the returns are moderate. Of course these are generalizations; “your mileage may vary.”
Note that I don’t classify any of the quadrants as “low return.” All types of innovation can be worthwhile under the right circumstances. Calling any of the quadrants “low return” would incorrectly imply innovation in that quadrant isn’t a good investment. Not every quadrant makes sense in every business climate, but none of the quadrants are inherently poor choices. The only low-return choice is no innovation at all.
Let’s first look at the horizontal axis. For this simplified view of innovation, think of “product” in broad terms that also includes “services.” Companies like Sony or Procter & Gamble sell physical products you can hold and touch, whether they be high-definition TVs or tubes of toothpaste. Companies like United Airlines or Bank of America sell services, not physical products. The service United sells you is transportation from one city to another. The service Bank of America sells you is the right to use their resources for your financial transactions. For our purposes, the single term, “product” will include services as well as physical products.
Similarly, think of “process” in broad terms. A process includes not only the methodology used to manufacture a physical product but also the channel used to deliver that product or service to the customer. Amazon’s sales channel innovation, for example, was a new process that revolutionized retailing by making on-line purchasing safe, convenient, and less expensive than a traditional brick-and-mortar store. Similarly, Google developed a business model of giving away all of their services for free, funded entirely by advertising. Although not exactly original (network television has done it that way for decades), it has certainly been one of the more successful models of the Internet era.
Product innovation tends to grab the headlines because it results in something readily apparent to customers—BMW’s latest sports car will certainly create a buzz both in the press and with car buyers. Process innovation, though, can be even more important because it benefits every product that uses the process. For example, improving the manufacturing process for integrated circuits will benefit every circuit that goes through it, not just the innovative new microprocessor hyped in the press. This is one reason it is dangerous to gauge a company’s ability to innovate by the number of patents it produces; few companies patent process improvements nearly as frequently as they do product improvements.
As an example of the value of process innovation, let’s compare the impact of two of Amazon’s recent innovations, the Kindle e-book reader and their affiliate marketing programs known as Amazon Associates and Amazon Marketplace. Kindle, introduced in 2007, has captured the media’s attention and become a centerpiece of Amazon’s cachet. Some people even go so far as to worry about Amazon’s future if Kindle is displaced by Apple’s iPad. Although Amazon doesn’t announce sales figures, reliable third parties estimate that by early 2010 Kindle had sold about 3 million units. At an average selling price of around $250, that means Kindle has accounted for about $750 million dollars of revenue in a little over two years.
In contrast, the investment community has largely ignored Amazon Associates and Amazon Marketplace. Associates is a marketing program that allows third party websites to link to Amazon product pages and earn commissions for products purchased through their sites. If I write a blog on outdoor adventuring, for example, I can include links to products like tents, sleeping bags, and GPS receivers so my readers can buy them directly from Amazon. For each sale made through these links, Amazon pays me a small commission. I can create a virtual storefront on my site without having to worry about inventory, billing, shipping, or any of the other headaches of a real store. I've used Amazon Associates in this blog entry to link to Amazon's pages for two books I mention.
Amazon Marketplace is a similar tool that allows me to sell my products directly on Amazon. For example, if I own a bookstore that specializes in used books, I can add my listings to the Amazon pages for those books. Purchasers then have the option of either buying a new copy from Amazon or a used one from me. Amazon doesn’t care which one you buy. According to their annual report, they make about the same profit in either case. (Speaking as a published author, though, I’d rather have you buy the new book so I can earn a royalty!)
Amazon Associates and Amazon Marketplace are examples of marketing process innovations. They touch everything Amazon sells, not just one product. According to knowledgeable sources, combined they account for about 40% of Amazon’s total revenue. That’s 20 times more impact on Amazon’s bottom line than Kindle. It’s a good illustration of how process innovations can be much more powerful than product innovations.
Now study the chart’s vertical axis. Clayton Christensen uses the terms sustaining innovation and disruptive innovation in his classic book, Innovator’s Dilemma
. In it, he defines sustaining innovations as those that improve existing product performance. Disruptive innovations fundamentally change markets. Other authors use the terms incremental innovation and radical innovation. Incremental innovation builds upon existing technology; the changes it introduces aren’t enough to make existing products non-competitive. Radical innovation involves large technology advancements that render existing products obsolete. I believe the two terms that best describe the difference are incremental innovation and disruptive innovation, so those are what I use. Incremental innovation is just that—an improvement to product offerings in an existing market that incrementally improves a user’s experience. Disruptive innovation opens new markets, throws established markets into turmoil, and has the ability to completely rearrange the structure of the marketplace. Companies that were formerly market leaders could be left behind once the dust settles.
Much press has been devoted to the importance of disruptive innovation because large companies historically haven’t been very good a capitalizing on it. The literature is full of examples of market leaders falling by the wayside when they didn’t react to fundamental changes in technology. Western Union failed to follow the transition from telegraph to telephone. Polaroid resolutely stuck with film technology long after the world moved digital. WordPerfect ignored the transition from DOS to Windows and lost their leadership to Microsoft Word. Disruptive innovation rightly gets a lot of attention because the cost of missing such sea changes in markets is catastrophic to those who ignore them. Managers lie awake at night worrying about such a fate and use it as a rallying cry to stimulate innovation in their organizations.
Keep in mind, though, that incremental innovations are usually more important. While disruptive innovations such as the electronic calculator or on-line social networking catch the world’s attention, they occur only rarely. And when they do, the first to market isn’t always the one who reaps the rewards. A company that bases its future primarily on disruptive innovation is taking a long-shot bet. That’s what startups do, and that’s one reason large corporations often acquire rather than invent disruptive innovations. They can let the venture capital world sort out the winners from the losers.
Far more often, incremental innovations are what drive a company’s results. Take Apple, for example. In its early days, Apple pursued a strategy based largely on disruptive innovation. The Lisa computer, introduced in 1983, was the first personal computer to use a mouse and graphical user interface (GUI). In an instant, the fundamental way in which humans interacted with computers was changed. You no longer needed to type cryptic command lines to make things happen. Now you could simply point and click. This fundamental innovation had the potential to obsolete every previous computer overnight.
But it didn’t. Lisa’s high price ($9,995) drove away many potential users, while the lack of supporting hardware and software drove away many more. Although these problems were largely overcome with the release of the Macintosh a year later, it was too late. Far too many people had bought IBM PCs in the interim and were locked into the competition. By the time the Macintosh hit the market most people found the switching costs simply too high to convert. The mouse and GUI that won the market were Microsoft’s, not Apple’s. It was quite a literal example of the old maxim, “the second mouse gets the cheese.”
Another of Apple’s disruptive innovations was the Newton personal digital assistant, introduced in 1993. Although it coined the term “PDA,” it was big, clunky, and used a clumsy handwriting recognition system. (I still remember my manufacturing manager, an early adopter, struggling hopelessly to take notes with it during meetings.) Its lack of success discouraged further development, and as a result, Apple never participated in the eventual PDA market boom.
It wasn’t until the 1998 launch of the iMac, an incremental innovation in personal computers, that Apple finally avoided the threat of bankruptcy. Their most successful introductions of recent years, the iPod and iPhone, are both incremental innovations in existing markets. The iPod, the first digital audio player with a built-in hard drive, was a relative latecomer to the consumer digital audio market, which was then dominated by Sony. To their credit, Apple learned their lesson from the failure of Lisa, which had been hamstrung by lack of compatible software. When the iPod was introduced, Apple had already launched iTunes, a software application reminiscent of Napster that allowed you to choose from millions of songs for the low price of 99 cents each.
When Apple introduced the iPhone in 2007, it was long after such other smartphones as the Treo from Palm and the Blackberry from RIM. But once again, Apple successfully innovated incrementally. For the first time, mobile users could surf the Internet with an experience similar to a computer. And Apple extended their iTunes success with the equally successful iPhone applications store.
One other example of the challenge of the disruptive innovator is worth noting. Somewhat surprisingly, Kodak was an early player in the digital photography market. They introduced a low-resolution digital camera in 1973 and a megapixel-size consumer camera in 1986. But these products were only marginally successful. At the first introduction, few people were willing to spend $20,000 for a camera whose pictures didn’t look as good as those from a simple point-and-shoot film camera. Then, when Kodak launched their megapixel camera, there was little in the way of infrastructure to support it—no Photoshop software for picture editing, no personal computers powerful enough to edit the pictures even if the software existed, and no photo-quality personal printers for making prints. You still had to take your digital files to the photography shop for printing. It was a business model doomed to failure.
This lack of success led Kodak to conclude the future of film was secure. By the time they acknowledged their error and took digital photography seriously, they were impossibly far behind. This kind of faulty decision-making based on the failure of early introductions is not unique. If you don’t understand why a product failed, you won’t know how to predict the future of the market. I’ll relate a similar story from my own experience in a future blog entry.
During my career at HP/Agilent, I have led a variety of innovation programs, including both disruptive and incremental product innovations as well as both disruptive and incremental process innovations. In future blog entries, I will use some of them as examples. Not all of them are positive. Sometimes the best learning experiences come from failure.
Next: Innovation requires commitment from all levels of the organization, starting at the top.
Tuesday, April 13, 2010
The First Tenet of Innovation
In my last blog entry, I began the discussion of innovation in corporate America with a definition:
Innovation is the ability to see opportunity in places others don’t and then turn that vision into reality.
I emphasized that real innovation is not just having a creative idea; it’s also knowing how to turn that idea into reality. I then outlined the five tenets of innovation. In today’s entry, I’ll explore the first tenet.
Tenet #1: Any company that wants to grow needs to be good at innovation.
Consider two examples. First, think about the market for gasoline. When you fill up your car’s tank, what brand are you likely to choose? The answer most people give is “whichever one is cheapest!” We all know people who drive all the way across town to save a penny or two a gallon, oblivious to the fact the extra gas they consume getting there more than offsets any savings. Chevron, Shell, BP, and Exxon all have a tough challenge, for in the mind of the consumer the only differentiation among brands is price. In an era of stable demand, their only avenue for growth is to raise prices in the hope their competition will do the same.
Now think about smartphones. What brands come to the top of your mind? Apple’s iPhone? RIM’s Blackberry? Motorola’s Droid? What about Garmin, Asus, or HP? How many people even know HP makes a smartphone? The iPhone has established such a strong perception as the innovation leader that it can command a premium price even in the face of widespread competition.
The leading companies in any field put a high priority on innovation. Intel, Walmart, Google, Southwest Airlines, HP, and Amazon all devote considerable resources to out-innovating their competition. Why? Because innovative products and services are what distinguish you from everyone else. They give customers a reason to buy from you rather than your competitors. In today’s world, gaining that share of a customer’s mind is worth a lot.
Why is it that some companies are successful innovators while others aren’t? The first thing to understand is that annual surveys of “The World’s Most Innovative Companies” don’t tell the true story. Such surveys invariably confuse innovative ideas with innovative companies. Any company can come up with a single innovative idea. An innovative company is one that has installed processes allowing it to repeat that success time after time. In particular, the truly innovative company can generate sustainable profit, not just growth, from its innovations. Any company on a “Most Innovative Companies” list that hasn’t demonstrated a sustainable, multi-year track record of profitable innovation shouldn’t be there. Twitter may well deserve to be on the same list as Intel some day, but not yet.
The secret to innovation is that you don’t just turn engineers loose and wait to reap the rewards; you need to approach it methodically. This may seem strange—how can you structure innovation, which would seem to be an inherently unstructured discipline? When I first became an R&D manager, people told me “You can’t schedule invention. R&D engineers will take as long as necessary to get the job done, and you can’t predict in advance how long that will be.” As Einstein allegedly said, “If we knew what we were doing, it wouldn’t be research, would it?”
I eventually discovered this mantra was little more than a way to cover up poor planning. Most R&D activities—perhaps as much as 90 percent—are predictable tasks that can be readily scheduled. The other 10 percent—the “R” part of R&D—typically comes at the very beginning of a project before you have committed to a firm schedule. This is the time where you are inventing those few differentiating technologies that will be key to the product. It’s true that this period of invention doesn’t lend itself to precise scheduling, but by confining it to the earliest phase of a project you can keep the total investment under control.
This doesn’t mean that all uncertainty is limited to the early phase of a project. Unpredictable events will certainly occur later, such as when a circuit design fails to meet its performance requirements or a bug-filled software program crashes regularly. But these uncertainties can be accommodated in the schedule through time-proven statistical methods.
What does this have to do with innovation? Remember that innovation isn’t just coming up with novel ideas. It also means turning those ideas into reality. To be good at innovation, a company has to be good at execution. The best companies know how to embed these concepts into their cultures so they aren’t dependent on luck or the skills of a few “super-smart” individuals. Excellence in execution is an often-overlooked element of innovation. Don’t ignore it.
By now, some of you are probably thinking, “Why all this emphasis on a sustained track record of innovation? Why is execution so important? Look at Facebook. Look at Twitter. Look at Spotify, Ngmoco, and all the other fresh-faced startups on Fast Company’s list. These are some of the most innovative companies around, and they don’t have a track record in either area. Why shouldn’t they be on the “Most Innovative Companies” list?”
I have no doubt that these are all innovative companies. Many of them are exciting places for engineers—especially new graduates—to work. They should all be recognized for their creativity. And some of them may well stand the test of time necessary to earn the moniker, “Most Innovative Company.” But at the moment, it’s the difference between having a single innovative idea and being consistently innovative. Put them on a “Rising Stars” list or a “Ones to Watch” list. But don’t put them alongside companies that have a proven track record of sustained success. Of the 50 companies on Fast Company’s 2010 Most Innovative Companies list, 33 of them are new to the list. That’s more of a popularity contest than a true measure of innovation.
To illustrate my point, let’s look at two companies of the Internet age that truly deserve to be called Most Innovative: Amazon and Google. You may not agree with every business decision they’ve made (I don’t), but you have to admit they’re continually innovative.
Amazon opened for business in 1995 as an on-line retailer of books. They soon branched out to sell such other items as videotapes, CDs, and software. Over the years they have continued to add product lines to the point where today they are the world’s largest on-line retailer, with over $24 billion in revenues. Their product lines include everything from books to automotive supplies to musical instruments to groceries.
But it isn’t primarily the breadth of their product lines that defines Amazon as innovative. It’s their continual focus on growing their business by improving the user experience: such innovations as “Search Inside the Book,” one-click ordering, and the Kindle reader, to name few. One of their most powerful but least recognized innovations is their Amazon Associates program. At little cost to Amazon, it has turned countless third-party websites into virtual marketing arms of the company (I’ll explore this in a future blog entry). This ability to adapt and grow with the times while generating healthy profits is what distinguishes Amazon from the countless other on-line retailing sites that have come and gone over the years.
Google began in 1996 as a search engine research project by two Stanford Ph.D. students, Larry Page and Sergey Brin. It wasn’t the first search engine on the Internet, but it used a new algorithm that did a better job of putting relevant pages at the top of a search. This was a true innovation, but by itself wouldn’t have earned Google the right to be called a “Most Innovative Company.” They earned this right by the way they have done something few others have achieved: not only driving millions of people to visit their site every day, but generating a healthy profit in the process.
Google’s founders initially resisted the idea of a search engine funded by pop-up ads, but they eventually relented. Today, 99 percent of Google’s revenue comes from advertising. Their two primary vehicles are AdWords, in which companies place search-relevant advertisements on Google, and AdSense, in which third parties allow Google to place these ads on their own sites, thereby earning money for both Google and the third party.
Today’s Google is much more than a search engine. Such applications as Google Maps, Google Earth, Google Docs, and Gmail all provide free productivity tools to millions of users. How can Google give all this away for free? Because these tools draw users to the site and increase traffic on Google’s revenue-generating search engine. It’s a brilliant way to build traffic that generates profit, not just hits, for the website.
Google’s business model illustrates that to be an innovation leader, you don’t need to invent everything yourself. Google didn’t invent Google Earth, they acquired Keyhole, Inc, the company that did so. I’ll bet you never saw Keyhole on a list of “Most Innovative Companies” even though its product is widely regarded as a brilliant innovation. It was Google who figured out how to make it a commercial success.
This model also illustrates that not every brilliant innovation comes from R&D. Google’s AdWords and AdSense programs are marketing innovations. And they weren’t marketing programs tied to a single product launch, they cut across all product lines. As we will see next time, this kind of process innovation can be extremely powerful.
Compare this to Facebook. They have, according to their own website, 400 million users. That’s a great start. But web traffic that doesn’t generate profit is not a model for success. When will Facebook become truly profitable? To date, their financial model is essentially this: take money away from investors and redistribute it to employees. Only when they can change this to a model of taking money from customers and redistributing it to both employees and investors, will they have achieved success. Will this happen? It’s possible. Only time will tell. They now accept advertising but it isn’t yet profitable. They will need to continue innovating to figure out how to generate real profits from real customers. And like Amazon and Google, they will need to expand well beyond the single application they are today.
By now you should recognize that it takes more than a single bright idea to make an innovative company. The true innovators are companies that can achieve a sustained track record of success. And the best of them don’t just focus on product innovation; they are good at innovating across a variety of dimensions. That’s the topic we will explore next time.
Next: There are various types of innovation, and the best companies excel at all of them.
Innovation is the ability to see opportunity in places others don’t and then turn that vision into reality.
I emphasized that real innovation is not just having a creative idea; it’s also knowing how to turn that idea into reality. I then outlined the five tenets of innovation. In today’s entry, I’ll explore the first tenet.
Tenet #1: Any company that wants to grow needs to be good at innovation.
Consider two examples. First, think about the market for gasoline. When you fill up your car’s tank, what brand are you likely to choose? The answer most people give is “whichever one is cheapest!” We all know people who drive all the way across town to save a penny or two a gallon, oblivious to the fact the extra gas they consume getting there more than offsets any savings. Chevron, Shell, BP, and Exxon all have a tough challenge, for in the mind of the consumer the only differentiation among brands is price. In an era of stable demand, their only avenue for growth is to raise prices in the hope their competition will do the same.
Now think about smartphones. What brands come to the top of your mind? Apple’s iPhone? RIM’s Blackberry? Motorola’s Droid? What about Garmin, Asus, or HP? How many people even know HP makes a smartphone? The iPhone has established such a strong perception as the innovation leader that it can command a premium price even in the face of widespread competition.
The leading companies in any field put a high priority on innovation. Intel, Walmart, Google, Southwest Airlines, HP, and Amazon all devote considerable resources to out-innovating their competition. Why? Because innovative products and services are what distinguish you from everyone else. They give customers a reason to buy from you rather than your competitors. In today’s world, gaining that share of a customer’s mind is worth a lot.
Why is it that some companies are successful innovators while others aren’t? The first thing to understand is that annual surveys of “The World’s Most Innovative Companies” don’t tell the true story. Such surveys invariably confuse innovative ideas with innovative companies. Any company can come up with a single innovative idea. An innovative company is one that has installed processes allowing it to repeat that success time after time. In particular, the truly innovative company can generate sustainable profit, not just growth, from its innovations. Any company on a “Most Innovative Companies” list that hasn’t demonstrated a sustainable, multi-year track record of profitable innovation shouldn’t be there. Twitter may well deserve to be on the same list as Intel some day, but not yet.
The secret to innovation is that you don’t just turn engineers loose and wait to reap the rewards; you need to approach it methodically. This may seem strange—how can you structure innovation, which would seem to be an inherently unstructured discipline? When I first became an R&D manager, people told me “You can’t schedule invention. R&D engineers will take as long as necessary to get the job done, and you can’t predict in advance how long that will be.” As Einstein allegedly said, “If we knew what we were doing, it wouldn’t be research, would it?”
I eventually discovered this mantra was little more than a way to cover up poor planning. Most R&D activities—perhaps as much as 90 percent—are predictable tasks that can be readily scheduled. The other 10 percent—the “R” part of R&D—typically comes at the very beginning of a project before you have committed to a firm schedule. This is the time where you are inventing those few differentiating technologies that will be key to the product. It’s true that this period of invention doesn’t lend itself to precise scheduling, but by confining it to the earliest phase of a project you can keep the total investment under control.
This doesn’t mean that all uncertainty is limited to the early phase of a project. Unpredictable events will certainly occur later, such as when a circuit design fails to meet its performance requirements or a bug-filled software program crashes regularly. But these uncertainties can be accommodated in the schedule through time-proven statistical methods.
What does this have to do with innovation? Remember that innovation isn’t just coming up with novel ideas. It also means turning those ideas into reality. To be good at innovation, a company has to be good at execution. The best companies know how to embed these concepts into their cultures so they aren’t dependent on luck or the skills of a few “super-smart” individuals. Excellence in execution is an often-overlooked element of innovation. Don’t ignore it.
By now, some of you are probably thinking, “Why all this emphasis on a sustained track record of innovation? Why is execution so important? Look at Facebook. Look at Twitter. Look at Spotify, Ngmoco, and all the other fresh-faced startups on Fast Company’s list. These are some of the most innovative companies around, and they don’t have a track record in either area. Why shouldn’t they be on the “Most Innovative Companies” list?”
I have no doubt that these are all innovative companies. Many of them are exciting places for engineers—especially new graduates—to work. They should all be recognized for their creativity. And some of them may well stand the test of time necessary to earn the moniker, “Most Innovative Company.” But at the moment, it’s the difference between having a single innovative idea and being consistently innovative. Put them on a “Rising Stars” list or a “Ones to Watch” list. But don’t put them alongside companies that have a proven track record of sustained success. Of the 50 companies on Fast Company’s 2010 Most Innovative Companies list, 33 of them are new to the list. That’s more of a popularity contest than a true measure of innovation.
To illustrate my point, let’s look at two companies of the Internet age that truly deserve to be called Most Innovative: Amazon and Google. You may not agree with every business decision they’ve made (I don’t), but you have to admit they’re continually innovative.
Amazon opened for business in 1995 as an on-line retailer of books. They soon branched out to sell such other items as videotapes, CDs, and software. Over the years they have continued to add product lines to the point where today they are the world’s largest on-line retailer, with over $24 billion in revenues. Their product lines include everything from books to automotive supplies to musical instruments to groceries.
But it isn’t primarily the breadth of their product lines that defines Amazon as innovative. It’s their continual focus on growing their business by improving the user experience: such innovations as “Search Inside the Book,” one-click ordering, and the Kindle reader, to name few. One of their most powerful but least recognized innovations is their Amazon Associates program. At little cost to Amazon, it has turned countless third-party websites into virtual marketing arms of the company (I’ll explore this in a future blog entry). This ability to adapt and grow with the times while generating healthy profits is what distinguishes Amazon from the countless other on-line retailing sites that have come and gone over the years.
Google began in 1996 as a search engine research project by two Stanford Ph.D. students, Larry Page and Sergey Brin. It wasn’t the first search engine on the Internet, but it used a new algorithm that did a better job of putting relevant pages at the top of a search. This was a true innovation, but by itself wouldn’t have earned Google the right to be called a “Most Innovative Company.” They earned this right by the way they have done something few others have achieved: not only driving millions of people to visit their site every day, but generating a healthy profit in the process.
Google’s founders initially resisted the idea of a search engine funded by pop-up ads, but they eventually relented. Today, 99 percent of Google’s revenue comes from advertising. Their two primary vehicles are AdWords, in which companies place search-relevant advertisements on Google, and AdSense, in which third parties allow Google to place these ads on their own sites, thereby earning money for both Google and the third party.
Today’s Google is much more than a search engine. Such applications as Google Maps, Google Earth, Google Docs, and Gmail all provide free productivity tools to millions of users. How can Google give all this away for free? Because these tools draw users to the site and increase traffic on Google’s revenue-generating search engine. It’s a brilliant way to build traffic that generates profit, not just hits, for the website.
Google’s business model illustrates that to be an innovation leader, you don’t need to invent everything yourself. Google didn’t invent Google Earth, they acquired Keyhole, Inc, the company that did so. I’ll bet you never saw Keyhole on a list of “Most Innovative Companies” even though its product is widely regarded as a brilliant innovation. It was Google who figured out how to make it a commercial success.
This model also illustrates that not every brilliant innovation comes from R&D. Google’s AdWords and AdSense programs are marketing innovations. And they weren’t marketing programs tied to a single product launch, they cut across all product lines. As we will see next time, this kind of process innovation can be extremely powerful.
Compare this to Facebook. They have, according to their own website, 400 million users. That’s a great start. But web traffic that doesn’t generate profit is not a model for success. When will Facebook become truly profitable? To date, their financial model is essentially this: take money away from investors and redistribute it to employees. Only when they can change this to a model of taking money from customers and redistributing it to both employees and investors, will they have achieved success. Will this happen? It’s possible. Only time will tell. They now accept advertising but it isn’t yet profitable. They will need to continue innovating to figure out how to generate real profits from real customers. And like Amazon and Google, they will need to expand well beyond the single application they are today.
By now you should recognize that it takes more than a single bright idea to make an innovative company. The true innovators are companies that can achieve a sustained track record of success. And the best of them don’t just focus on product innovation; they are good at innovating across a variety of dimensions. That’s the topic we will explore next time.
Next: There are various types of innovation, and the best companies excel at all of them.
Saturday, April 10, 2010
Innovation: Why Corporate America Often Gets It Wrong
Let’s talk innovation. Not just any innovation, but the kind corporate America needs to be good at to be successful. Last week’s introduction of the Apple iPad has once again brought this topic to the forefront. Whether you think the iPad is a true innovation or just an iPod Touch on steroids, there’s little doubt that Apple is an innovation leader. Fast Company put them Number 3 on their 2010 list of most innovative companies (although they also put Facebook Number 1, which is a bit of a stretch).
In my 30-year career as an executive in the high-tech industry, I’ve seen a lot of innovation successes as well as failures. I’ve also seen how innovation, intelligently applied, can turn a business around from failure to success. As one example, some years ago I took over as R&D manager for a small product line in Hewlett-Packard Company. The main reason I got the job was that the HP managers then responsible for it wanted to shut it down. They saw it as a weak business in a stagnant market, running a distant second to the market leader with no hope of improvement.
A few of us saw it differently. We recognized potential in areas the current management didn’t see. They were happy to give us something they saw as nothing more than an albatross around their necks. Within two years, we introduced a line of products that vaulted HP to the leadership position in a rapidly growing new market. Over the next several years, this product line generated over half a billion dollars of new revenue for the company. It has continued to be one of the company’s most profitable product lines ever since. Not bad for a business nobody wanted.
In a coming series of blog entries, I’ll share some insight on innovation in the corporate world. I’ll look at what it takes to be innovative, see why some companies are good at it and others bad, and explore some popular misconceptions about it. I’ll also share a little more insight into the HP success story. I’ll start, though, by defining what innovation is.
Innovation Defined
Every manager in the business world has heard the dire warnings. Innovate or die. Obsolete yourself before your competition does it for you. Only the paranoid survive. Fearful of being left behind, every company strives to out-innovate its competitors, to the extent you’d think society would be awash in unbridled growth.
And yet, most of that innovation fails to fulfill its promise. For every Apple iPhone or Toyota Prius, a thousand other innovations end up on the scrap heap of failed ideas. How can this be? Academic texts on growth and innovation have been around for decades, and the theories they promote are sound. Consultants make good livings showing companies how to put these theories into practice. Why isn’t every company a fountainhead of innovation?
It’s not that managers haven’t read the books or listened to the consultants. The problem is that theories that seem so simple in print are much less so in real life. If a manager could only devote all her attention to nurturing innovation, life would be so much easier. But stark reality intrudes. Shareholders demand consistent quarterly performance. Executives have little patience for a manager who misses his numbers to fund an innovative new idea. The finance team seems more interested in reducing R&D expenses and increasing gross margins than in helping build a business case for that new idea. Customers complain about defects in current products that are making their lives miserable and must be fixed. The real-life manager must deal with issues like these while simultaneously trying to position the product line for long-term growth.
Today, the importance of innovation to a company’s success is broadly accepted. But what exactly does it mean to be innovative? A review of the literature provides many definitions, generally along the lines of “inventing something new.” I find that too vague. Innovation is more than just invention. Here is a better definition:
Innovation is the ability to see opportunity in places others don’t and then turn that vision into reality.
Notice the two parts to this definition: the ability to see opportunity—the innovative idea—and the ability to turn that idea into reality. You need to be good at both. In the business world, good ideas aren’t worth anything if they aren’t successfully commercialized.
The tendency in many companies is to think about these two parts separately. For example, the business’s senior leadership team might get together for regular “innovation” discussions. From these come such things as market segmentation analyses and product portfolio plans. But how often do these discussions include an assessment of the organization’s ability to deliver? If every new product introduced in the last three years took 30 percent longer than originally planned, has the leadership team added an objective for improving execution?
It should. What good is it to come up with innovative ideas if you can’t convert them into a sustainable revenue stream? Conversely, what good is it to introduce new products on time and on budget if you haven’t chosen the right products to introduce?
The Five Tenets of Innovation
Before going any further, let’s examine what I consider to be the five most important tenets of innovation. They apply across the entire organization, but are especially important for R&D:
1. Any company that wants to grow needs to be good at innovation
2. There are various types of innovation, and the best companies excel at all of them
3. Innovation requires commitment from all levels of the organization, starting at the top
4. The R&D department must be an innovation engine.
5. Innovation is a team game; R&D can’t do it all on their own
Many people think innovation is R&D’s responsibility. After all, it’s the exciting new product or service introduced by R&D that will drive the company’s success. But that’s too narrow of a view. While R&D is central to an innovative culture, they can’t do it all on their own. Keep in mind the fifth tenet above—innovation must be a team game. In coming blog entries, I’ll take a more detailed look at each of these tenets.
Next: The First Tenet of Innovation
In my 30-year career as an executive in the high-tech industry, I’ve seen a lot of innovation successes as well as failures. I’ve also seen how innovation, intelligently applied, can turn a business around from failure to success. As one example, some years ago I took over as R&D manager for a small product line in Hewlett-Packard Company. The main reason I got the job was that the HP managers then responsible for it wanted to shut it down. They saw it as a weak business in a stagnant market, running a distant second to the market leader with no hope of improvement.
A few of us saw it differently. We recognized potential in areas the current management didn’t see. They were happy to give us something they saw as nothing more than an albatross around their necks. Within two years, we introduced a line of products that vaulted HP to the leadership position in a rapidly growing new market. Over the next several years, this product line generated over half a billion dollars of new revenue for the company. It has continued to be one of the company’s most profitable product lines ever since. Not bad for a business nobody wanted.
In a coming series of blog entries, I’ll share some insight on innovation in the corporate world. I’ll look at what it takes to be innovative, see why some companies are good at it and others bad, and explore some popular misconceptions about it. I’ll also share a little more insight into the HP success story. I’ll start, though, by defining what innovation is.
Innovation Defined
Every manager in the business world has heard the dire warnings. Innovate or die. Obsolete yourself before your competition does it for you. Only the paranoid survive. Fearful of being left behind, every company strives to out-innovate its competitors, to the extent you’d think society would be awash in unbridled growth.
And yet, most of that innovation fails to fulfill its promise. For every Apple iPhone or Toyota Prius, a thousand other innovations end up on the scrap heap of failed ideas. How can this be? Academic texts on growth and innovation have been around for decades, and the theories they promote are sound. Consultants make good livings showing companies how to put these theories into practice. Why isn’t every company a fountainhead of innovation?
It’s not that managers haven’t read the books or listened to the consultants. The problem is that theories that seem so simple in print are much less so in real life. If a manager could only devote all her attention to nurturing innovation, life would be so much easier. But stark reality intrudes. Shareholders demand consistent quarterly performance. Executives have little patience for a manager who misses his numbers to fund an innovative new idea. The finance team seems more interested in reducing R&D expenses and increasing gross margins than in helping build a business case for that new idea. Customers complain about defects in current products that are making their lives miserable and must be fixed. The real-life manager must deal with issues like these while simultaneously trying to position the product line for long-term growth.
Today, the importance of innovation to a company’s success is broadly accepted. But what exactly does it mean to be innovative? A review of the literature provides many definitions, generally along the lines of “inventing something new.” I find that too vague. Innovation is more than just invention. Here is a better definition:
Innovation is the ability to see opportunity in places others don’t and then turn that vision into reality.
Notice the two parts to this definition: the ability to see opportunity—the innovative idea—and the ability to turn that idea into reality. You need to be good at both. In the business world, good ideas aren’t worth anything if they aren’t successfully commercialized.
The tendency in many companies is to think about these two parts separately. For example, the business’s senior leadership team might get together for regular “innovation” discussions. From these come such things as market segmentation analyses and product portfolio plans. But how often do these discussions include an assessment of the organization’s ability to deliver? If every new product introduced in the last three years took 30 percent longer than originally planned, has the leadership team added an objective for improving execution?
It should. What good is it to come up with innovative ideas if you can’t convert them into a sustainable revenue stream? Conversely, what good is it to introduce new products on time and on budget if you haven’t chosen the right products to introduce?
The Five Tenets of Innovation
Before going any further, let’s examine what I consider to be the five most important tenets of innovation. They apply across the entire organization, but are especially important for R&D:
1. Any company that wants to grow needs to be good at innovation
2. There are various types of innovation, and the best companies excel at all of them
3. Innovation requires commitment from all levels of the organization, starting at the top
4. The R&D department must be an innovation engine.
5. Innovation is a team game; R&D can’t do it all on their own
Many people think innovation is R&D’s responsibility. After all, it’s the exciting new product or service introduced by R&D that will drive the company’s success. But that’s too narrow of a view. While R&D is central to an innovative culture, they can’t do it all on their own. Keep in mind the fifth tenet above—innovation must be a team game. In coming blog entries, I’ll take a more detailed look at each of these tenets.
Next: The First Tenet of Innovation
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