I wrote this article in two parts five years ago. Then innovation was the hot topic among US publicly traded firms. I have edited the text with some new but conflicting data. But I also end with a question: is innovation still the (or a) hot topic or in the ensuing five years has innovation become like the quality revolution thirty-five years ago where quality became a common denominator just to stay in the competitive ball game? I think it has although some consultants are still trying to sell their version of innovation as the new miracle. In the ensuing five years, there have also been some conflicting newer studies. Some studies have shown there is no correlation between R&D spend and actual new products and services being demanded at prices where an economic profit can be made. Other studies show a positive correlation. What are we to make of these conflicting studies? Here is what I wrote five years ago, updated to 2017, and combining Parts 1 and 2:
Innovation is at the top of the agenda of nearly every publicly traded American company. Here is a quick quiz: What is your firm’s percentage of each year’s revenue that comes from totally new products and services? If the answer is not at least 15-20%, your firm does not compare with the leading firms in the Global Innovation 1000, as measured by the consulting firm Booz and Company. Why do you need to care about innovation?
Michael Porter, the esteemed Harvard strategy professor, told the American Council on Competitiveness in 2007 that innovation is the only thing left for American industry to export. And his pronouncement appears to be just as true in 2017. The low cost structures found in Chinese, Indian and now South American industry are just too low for American industry to compete on price. The view is that innovation is the only way to command premium prices or hold prices in falling markets.
What should your organization’s stance on innovation be?
This is a serious discussion as innovation is typically at cross-purposes with operations at many firms.
Firms like Best Buy, Whirlpool, Nestle, Google, Apple, CEMEX, Procter & Gamble, Royal Dutch Shell, IBM, Netflix, 3M, Virgin, Visteon, Gore and others are looking to innovation as the catalyst for continuing rounds of profitable revenue growth and increases in firm value. They are not letting the lingering recession deter them from their path either.
The revolution of innovation is not about making just one big home-run and living on those laurels. It is about developing and embedding a deep capability for streams or even avalanches of new products and services that will win in the marketplace. Spending for innovation is part of the puzzle. The Global Innovation 1000 spends between 3 and 10% of revenue on R&D. This was $503 billion in 2009. But this is a surprising fact: there is no statistical correlation between the raw amount of investment on innovation and increases in total shareholder return (TSR) or firm valuation. Something else is needed to turn innovation into wealth creation.
Before we discuss some of these firms’ innovation secrets in Part 2 of this article, let’s debunk some myths. Many business people cringe at the word innovation because they associate this word with misguided efforts to increase “creativity” in employees. This swept the business world some 15 to 20 years ago and still lingers today. A leading snack foods company spent millions in creativity training, for no real benefit. Why? Psychologists tell us that our individual creativity abilities as adults are set by the time most of us are 10 to 12 years old. So individually most of us are not going to get much better at being creative. But here is the key insight: there is enough creativity residing in most firms’ people that if it is harnessed correctly, sustained innovation can happen. It is the capability to harness and channel what is already there!!!
Creativity is seeing patterns in seeming chaotic and inconsistent information that very few others see. Innovation is harnessing those creative insights to bring products and services to market people will pay for – and at a price that is economic profit making.
Answer “Yes” to Deep Innovation Capability
If you feel it is time to start thinking about whether to develop a deep innovation capability in your organization, ask yourself these questions, which the leading innovation firms answer yes to for every question:
- Do we have a legitimate mechanism through which most employees can dedicate 10% of their time to innovation projects?
- Are leaders at every level accountable for helping employees take advantage of this mechanism?
- Does top management reserve time for regular meetings where the sole purpose is to discuss the company’s innovation and growth efforts?
- Do we have a significant number of people, outside of R&D and new product development, who officially work full or part time on innovation and growth activities?
- Does my organization have formal programs to teach innovation skills like we did for the quality revolution of the 1980s?
- Would a large percentage of employees say that innovation is part of their job?
- Is innovation on my own agenda?
- Do I spend a specific percentage of my time mentoring innovators?
Remember the low cost countries of China and India discussed above? They are growing their country R&D budgets four times as fast as Europe and the United States. While this is a trick of math – they are growing from smaller numbers – their commitment is there to innovation. Innovation may not be for every firm but how should your organization proceed?
In the last article, I built the case for why your firm should think about whether the innovation revolution that is sweeping publically traded companies would be right for it. In Part 2 I want to give you a glimpse of some of the “secrets” to innovation some leading firms are using. There are many approaches being used but I like the approaches by IDEO, Strategos and Booz and Company the best.
The common themes to nearly all of the productive approaches to innovation are 1. Quick Prototypes of products or services developed in conjunction with “early adopter” customers and 2. something called Open Innovation.
Quick prototypes are nothing like the lengthy approaches to market survey research done in years past. In 1984 Coca Cola engaged in the most sweeping market research and analysis to date before deciding on and launching its New Coke brand. The product launch was a disaster with the product being pulled after six months. Good market research is always needed. It is just that quick prototypes, even on three dimensional e-drawings, balsa wood or foam mock ups, can give early adopter customers all they need to know to tell your firm that they will buy.
Open Innovation is casting a net far and wide for innovation ideas outside of the boundaries of a given organization. Did you know that in two clicks at Richard Branson’s Virgin Corporation website (www.virgin.com) you can begin the process of offering them an innovation idea for mutual benefit? While someone has to keep up with all the proposals, firms embracing Open Innovation feel the benefits outweigh the costs. What would it be like for your firm to entertain innovation proposals, possibly from all over the world via the net?
Both quick prototypes and open innovation are part of a larger explicit innovation process. IDEO, Strategos, and Booz each have their own processes.
IDEO Process
IDEO (www.ideo.com) is the leading company that helps firms develop new products and services. ABC News Nightline gave IDEO a test challenge. A team had four days to completely redesign the standard shopping cart. The main team was divided into four teams for internal competition. In phase one of their process, Understand/Observe, the teams went to grocery stores to observe people using shopping carts. The teams then Visualize/Realize what would serve user needs not only better, but to “wow” users. Then a series of rapid prototypes in balsa wood, foam and plastic moves the process forward quickly. Concurrently they asked how the emerging ideas could be produced at a desired cost and price point. They then synthesized the four teams’ brilliant ideas into one final prototype in the last phase of their process. Their solution earned IDEO a new product award – and all in just four days.
From the design of a single product let’s move to Strategos (now ITC Business Group www.itcbusinessgroup.com) four “lens” approach for embedding a deep capability in companies for avalanches of totally new products or services. Strategos approach is not sequential but “crashes” the four lens of:
- Constantly Challenging A Firm’s Own Biases
- Harnessing “Unstoppable Trends” in the industry
- Understanding the Latent, Unarticulated Needs of Customers
- On a Foundation of Leveraging Current Valuable Company Skills to produce innovation insights others find difficult to see and implement.
Strategos Approach
Whirlpool used the Strategos approach to much innovation success. One was Gladiator GarageWorks. The teams noticed in their “Understanding Latent, Unarticulated Needs” work in actual homes in laundry rooms (where their washers and dryers go) that the garage was just a door away and was a huge opportunity for innovation. Gladiator GarageWorks was not centered on appliances and was a substantial hit.
Booz and Company – Four Phases of Winning
Booz and Company (www.booz.com) adds to our knowledge with clearly depicting what capabilities are needed over four phases of winning innovation. For example, the key capability in the four phases is:
- Ideation Stage – Deep Consumer and Customer Insights (i.e. their “pain points”)
- Project Selection – Ongoing Assessment of Market Potential
- Product Development – Engagement With Customers to Prove Real-World Feasibility
- Commercialization – Pilot-User Selection and Controlled Rollouts
This brief overview of proven innovation approaches is meant to suggest to you that the innovation train is moving, and quickly. Notice the similarity in the approaches. The evidence is strong that prudent R&D investment with a process to deeply imbed ongoing innovation into companies is a huge contributor to increasing the value of a firm. What are you waiting for to at least discuss the revolution going on in innovation at your next senior management or board meeting and if it is something your firm should tackle?
The above is what I wrote a mere five years ago. In my view innovation has indeed become like quality became thirty-five years ago: it is now a common denominator just to stay in the competitive ball game. Most Fortune 500 firms have embraced innovation to some degree. But I do not think the innovation revolution has hardly touched the mid-sized private for-profit firms in the U.S. Is this true for these sized firms in the other developed economies? If it is, is this a problem? What are your thoughts?
Dr. William Bigler is the founder and CEO of Bill Bigler Associates. He is a former Associate Professor of Strategy and the former MBA Program Director at Louisiana State University at Shreveport. He was the President of the Board of the Association for Strategic Planning in 2012 and served on the Board of Advisors for Nitro Security Inc. from 2003-2005. He has worked in the strategy departments of PricewaterhouseCoopers, the Hay Group, Ernst & Young and the Thomas Group. He can be reached at bill@billbigler.com or www.billbigler.com.