A PRESCRIPTION FOR BUSINESS INNOVATION – PART THREE

Six: Prescription for an Innovative Organization

The first four years of the century have seen some serious setbacks in business innovation. The corporatist-backed Bush administration has introduced legislation to reduce corporate liability to consumers, and has been extremely lax in enforcing social and environmental laws. Organizations like the RIAA and Nike have showed that the courts will allow large corporations great latitude to sue customers (including infringing on their privacy rights) and to lie to customers in their advertising (about sweatshop operations, offshoring etc.) Corporations like Enron have abused public trust and destroyed thousands of families’ livelihoods and life savings. And massive defense and security expenditures have siphoned off funds that might have been invested in innovation, and have made corporations and lenders nervous about any investment while governments and corporations are so seriously overextended and exposed to interest rate fluctuations. The result is a climate of great animosity between corporations and customers, and unprecedented risk aversion.

At the same time, recent surveys indicate a growing corporate awareness that “you cannot cut (or offshore) your way to greatness”, that the limit to improving profitability by reducing costs and margins has now more or less been reached, and that innovation must again move to the forefront if corporations are to have any hope of sustaining that profitability.

So corporations are looking for low-cost, effective ways to develop new products, new processes, new delivery channels and new technologies that will meet important human needs, provide real value to customers, and be affordable by those customers. This challenge occurs at a time when the distribution of wealth among customers is massively skewed, both within and between nations, towards a tiny elite, when many governments and most corporations and individuals are buried under a crushing debt load, and when the need for innovation to solve critical environmental, social and political problems has never been higher. Simply put, we are living in an age when we cannot afford innovation, and cannot afford to be without it. Perhaps the most critical innovation need therefore is for creative mechanisms to finance, price and pay for the costs of innovation itself. Funding, pricing, and cost management are now inseparable parts of the innovation process.

The prescription I propose draws on a wide variety of innovation processes that have been advanced by thought leaders on the subject, especially during the 1990s when the appetite for investment in innovation peaked, including Peter Drucker’s, Cap Gemini’s, Credit Suisse’s, Gary Hamel’s, and others listed in the bibliography below. This prescription draws as well from several innovation processes that I am personally aware of from my years working with Ernst & Young and its clients, and some lessons from how nature, which has been innovating since long before we appeared on the planet, goes about it.

This prescription has eighteen steps in eight stages illustrated in the chart above: Listen, Understand, Organize, Create, Experiment, Listen Again, Design, and Implement. The three stages shown in blue — Understanding, Organizing and Implementing — are analytical processes, well-suited to the left-brained deductive thinkers who predominate in most organizations. The three stages shown in green — Creating, Experimenting, and Designing — are creative processes, better suited to right-brained inductive thinkers who are relatively scarce in most organizations. The two Listening stages shown in red are communication processes, that need to involve customers and other stakeholders, and everyone in the organization involved in the innovation process. Assigning (or contracting) the right people for each stage in the process is essential to its effectiveness, and to its affordability. If it’s done well, it can draw on the strengths of everyone inside and outside the organization who has a stake in a successful innovation effort.

Here are the eighteen steps. They are in reasonably sequential order, but are somewhat recursive: For example, as part of creating alternative solutions (step 12) it may be necessary to go back and scan for some additional ideas (step 1). Who should do each step depends to some extent on the industry and size of your organization: Large organizations may benefit from having a dedicated Innovation Team responsible for this, while in a very small organization it may be a scheduled part-time task of the whole management team, drawing as well on the diverse backgrounds and ideas of an informal Advisory Board.

Listen

1. Listen broadly for ideas: Appoint your Innovation Team and have them set up an ‘environmental scan’ that systematically looks for innovations and connections not only in your industry but also outside it, outside your country, outside of business entirely. Have the Team read about, learn about, and meet with people from the broadest possible spectrum of human enterprise and natural discovery. Subscribe to journals like Innovation, and the RSS feeds of periodicals and websites that report ideas and new technologies from a wide range of disciplines. Reward members of the Team for serendipitous readings and meetings, debrief with them promptly and regularly, filter, refine and inventory their ideas and learnings for consideration at the Understand, Create and Design stages of the innovation process. Inputs: readings, newsfeeds, conferences, interviews, meetings. Outputs: a manageable inventory of ideas and insights (categorized and contextualized appropriately so that they can be simply understood and practically applied).

2. Listen to ‘pathfinder’ customers, competitors, and colleagues: Plug yourself in to the ‘voice of the customer’. Set a minimum time quota for everyone in your organization to spend face-to-face with business customers, or with customers’ customers or end consumers. Identify ‘pathfinder’ customers — those  who are most attuned to their organization’s future direction and its need to change. Employ a ‘Think the Customer Ahead’ program that engenders effective listening, elicitation skills, story-telling skills, and creative thinking skills , a capacity explained in Imparato & Harari’s book Jumping the Curve. Often the customer isn’t able to articulate his or her needs in a way that lends itself to quick technology solution development. Listening to the customer is an iterative process, that entails learning about the customer’s business, understanding the things that keep them awake at night, suggesting a lot of ‘what if’s’, proffering opportunities, points-of-view and possibilities, not just asking baldly about needs and offering off-the-shelf solutions. Connect with customers indirectly as well, using all the media at your disposal — phone surveys, e-mail, website surveys, customer satisfaction surveys (with lots of open-ended questions), self-diagnostic tools, videoconferences, etc., to capture as much information as you can about your customers, their customers, and their markets. Inputs: conversations, interviews, surveys. Outputs: needs, ideas, stories, industry future state visions, five-forces and SWOT analyses.

3. Listen to the front lines: Talk with the people who hear directly from customers and other stakeholders every day — people in sales, customer service, even delivery and reception staff. Ask them what they’re hearing, and what they think most needs improvement or rethinking. Create ‘space’ — physical and electronic — where everyone in the organization can surface, discuss and advance problems, needs and ideas collaboratively. Let anyone ‘subscribe’ to the inventory of news and ideas created in step 1 above. Consider maintaining a running list of the company’s Top 10 Challenges to encourage focus and creative thought from everyone in the organization. Make sure top-level executive sponsorship for innovation is visible to everyone on the front lines.  Give people time off their ‘regular work’ to focus on organized innovation projects, and tools and process guidance to use that time effectively. Reward front-line people for new product and other innovative ideas that they surface from their conversations with customers and others. Inputs: conversations, idea & collaboration spaces, interviews. Outputs: needs, ideas, stories.

Understand

4. Understand who your actual and potential customers are: Study companies like The Body Shop that know their customers, their needs, their buying preferences and criteria intimately. These are companies that spend a lot of face time with customers and have rigorous processes in place to capture what they learn, probe what they need, and explore the potential market for new innovations. And identify and get out and meet with potential customers as well, to understand why they’re not already customers and what could change that. And then have your Innovation Team cast a wider net and ask who might be customers that are currently not served by either your company or your competitors. Learn the lessons of Christensen’s The Innovator’s Dilemma and The Innovator’s Solution — how disruptive innovations can (sometimes inadvertently) transform whole industries, and how that presents your company with both threats and opportunities that could completely change the profile or even definition of your customers. Inputs/Outputs: list of actual and potential customers and what they currently buy, could be buying, and will and won’t be buying in the future, and why.

5. Understand and respect what end-consumers want and need: and based on that
6. Understand what immediate customers will need: Start with the end-consumer of your products and services, and the end-consumer of the products of your immediate customers. Their buying patterns, needs and preferences will determine the success of your customers, and that will in turn determine their buying patterns, needs and preferences. The end-consumer has the ultimate power, and, unlike corporations’, their buying decisions are based on broader and more subjective criteria than business need and affordability. They buy things they want, not just things they need. If you sell to the auto industry, you need to understand why consumers, against all logic, buy SUVs. And if your company is making money from sweatshop labour or old growth forests, better come clean now. Business needs to end its abusive relationship with consumers — overcharging them, misleading them, suing them, and selling them inferior, imported merchandise and services. Once consumers realize their true marketplace power, they will get back at adversarial suppliers with a vengeance. Business needs to respect them, respond to them, and be responsible members of the communities in which they operate. The Reputation Economy isn’t here yet, but it’s coming. If you cause consumers to dislike you or distrust you, you’ll soon be dead. Inputs/Outputs: current state analysis and future state vision of wants and needs for both current and future immediate customers, and end-consumers, and a resultant future state vision and emerging needs profile for your industry.

7. Understand why these wants and needs aren’t already met: Here’s the hard part. Things are usually the way they are for a reason. You know there are wants and needs that aren’t being met. The challenge is not to throw in the towel when you find out why. The technology doesn’t exist? The solution would be very costly or risky to develop? The solution is not affordable to customers? The solution is too radical for customers to accept or too complex for them to understand? The organization currently lacks the capacity or competencies to produce the solution? That’s what innovation is about. Take up the challenge with your eyes open about what must be overcome, but take up the challenge. If it was easy someone else would have already done it. Inputs/Outputs: list of challenges.

Organize

8. Organize those with a stake in solving the problem: Now you know what needs to be done, the next step is to organize the troops. Who can help solve the problem, assess the alternatives, provide the needed resources? Outputs: project team member list, including ‘pathfinder’ customers and other outsiders. (Note that the project team is responsible for solving a specific problem or need, while the Innovation Team has oversight over the entire innovation effort of the organization — they aren’t the same group).

9. Organize the program for solving the problem: There are a lot of techniques and methods that you can use to break through a problem and come up with solutions. The bibliography below is replete with them. In my experience, creative minds need a very broad framework (schedule, budget, high-level process) and a lot of freedom to figure out how to solve the problem within that framework. Self-organizing, self-managed innovation project teams seem to work well in some organizations but not in others. If you insist on imposing more discipline on the process, more hoops to jump through, control points and early-stage go/no-go filters, make sure the people you’re imposing it on see the value in these constraints, and that they don’t squeeze the boldest and potentially most successful ideas out in the process. Outputs: project schedule, budget, program.

10. Organize the resources needed to solve the problem: The project team needs sufficient tools and knowledge to be able to understand the problem, the customer need, and the variables that could impact the potential solutions. Inputs: all the Outputs from steps 1-7 above, redrafted into a cogent and digestible form.

Create

11. Create an environment and capability for innovation: Give the Innovation Team and the project teams permission to fail, and teach them how to fail early and inexpensively. Prevent executives from pushing their ‘pet’ projects to the detriment of others. Don’t let the ‘black hats’ deep-six good, hairy, audacious ideas prematurely, and ensure that ‘black hat’ behaviours are not rewarded by senior management. Help the team avoid slipping into excessive caution or incrementalism. Keep the marketing group from unduly influencing the process with antiquated ideas for ‘creating market demand’ and launching products with press releases and self-serving promotional and advertising campaigns — In the emerging customer-driven market these techniques will no longer make a mediocre product a success. Provide rewards and incentives for team members, and for other contributors to the innovation effort. Don’t tolerate hoarding of ideas and knowledge, or inter-department ‘charges’ that block knowledge transfer and cross-functional collaboration. Share credit for good ideas and successes, and don’t make innovation an area of internal competition. Help bright, creative, quiet people find their voice, and let people promote ‘crazy’ ideas without fear of ridicule. Teach the Innovation Team and the project teams (and others in the organization who show interest) techniques that will enhance their creativity and improve the innovation process, and give them time and resources to discover other techniques and try them out. Invest adequate, patient capital and resources for innovation. Give ideas sufficient time to find their market but don’t throw good money after bad, no matter how well-intentioned. Understand sunk costs and learn from failures. Consider letting those involved in the innovation ‘invest’ personally in return for a share of the ultimate revenues or profits: Having some ‘skin in the game’ can be very motivating and empowering. Inputs: time, training, tools, space, sponsorship, leadership and resources. Outputs: people who are inspired, capable and encouraged to contribute productively to the innovation effort.
   
12. Create lots of alternative solutions: Don’t put everything at risk on one option. Use scenario planning and other techniques to identify and assess alternatives. Don’t reject the really far-out alternatives prematurely — cost/risk/benefit decisions usually can’t be properly made until the customers have had the chance to say their piece again in step 15 below. Outputs: alternative solutions.

Experiment

13. Experiment: Try many things, learn fast from failures, tinker, iterate, combine, transfer: Try several alternatives simultaneously in different markets to speed up the assessment process. Use rapid prototyping and other iteration techniques to expose as many alternatives to the market as possible. Outputs: test results.

Listen Again

14. Listen to potential customers and help them imagine: Use prototypes and stories to make the innovative product, service, channel or technology as concrete as possible. Beware customers’ propensity to say ‘yes’ at this stage when there’s no required commitment. Go back to what you learned from customers in steps 1-7 and recite what you heard back to the customers for confirmation, explaining how the innovation addresses the need articulated by the customers. Listen objectively for confirmation or dissonance. Outputs: customer evaluations

15. Listen to acceptance criteria — the ëifís: If the product appears to meet the need, the next task is to assess the customers’ buying criteria: price and affordability, convenience, options, delivery time, upgradability etc. Some of these criteria may be show-stoppers that will require re-invention or other creative brainstorming, while others may be able to be addressed in the design stage below. Outputs: customer buying criteria

16. Listen to ëwhat could go wrongí: Here’s where you let the ‘black hats’ say their piece: What competitive threats exist or could arise? Is the innovation vulnerable to disruptive innovation from unexpected sources? Are there unforeseen production, quality control, political, regulatory, financial, marketing, or servicing landmines? What’s the shelf-life? Could it become a commodity prematurely? Will it be prohibitively expensive to produce or to buy? Will it cannibalize existing product sales? Is it a strategic fit for the organization? Some of these ‘what could go wrongs’ may require re-invention or other creative resolution by the project team, while others may be able to be addressed in the design stage below. Outputs: list of threats and risks, and resolution plan.

Design

17. Design: consider customer-valued attributes, cost, intuitive ease of use, ease of change, ease of enhancement: The greatest idea in the world can still be torpedoed by bad design. The designer has to be told, in no uncertain terms, what attributes are important to the customer, how much at most the solution can cost, and the trade-off between ease-of-use and power. Technology products especially are often over-engineered because additional functions and features are easy and inexpensive to add, but they add complexity disproportionate to the benefits of the additional functionality, often to the point of turning off potential customers. And in this age of constant upgrades and inter-operability requirements, the solution must be easy to change, redesign and enhance. Inputs: specifications based on Outputs from steps 12-16 above. Outputs: completed designs.

Implement

18. Make the final go/no-go decision, then implement: If there are still several alternatives on the drawing board, whittle them down to a manageable number. If necessary, send the idea back for reinvention (step 11), re-testing (step 13) or redesign (step 17). If the previous steps have been done properly, this step should be the easiest. Once the decision has been made to go, the set-up, production, viral marketing, sales, distribution, employee and user training, partnering, after-sales service, success measurement and continuous improvement should be problem-free, since the ‘what could go wrong’ possibilities have already been considered and addressed, and people from all functional areas of the organization should have been involved and consulted during the Create and Design stages.

Seven: Applying the Prescription: Some Examples

To give you a flavour for how this prescription could work in practice, here are eight fundamental business problems from different industries, and some innovations that have recently been (or are currently being) successfully commercialized to solve them. In each case, the solution shown could reasonably have been derived using the principles and process in the prescription above:

Conclusion

This presentation was itself the result of addressing an unmet need: After reading dozens of books on innovation, I was unable to find one source that explained in clear terms what innovation is, in a business context, conveyed the urgent need for businesses to become more innovative, and provided an actionable prescription for doing so. This paper was initially developed to provide the Core Innovation Team of Ernst & Young with background on the history, current state and leading practices in business innovation, and I am now using it to develop part of a core curriculum on entrepreneurship, of which innovation is a critical element.

I hope this analysis has given you a better understanding of the subject and its importance, and some useful tools and ideas that you can use to make your organization more innovative as well. I would welcome the opportunity to continue the discussion on this subject, by e-mail or through the comments thread below. You can find more of my writings on business innovation in this index.

While I’m optimistic that this prescription will work within business and other organizations, large and small, I am less convinced that it will work to solve some of the more deep-seated human needs and inexorable problems that plague us today, such as global warming, pollution, the energy crisis, biodegradation, endemic war, violence, mental illness and disease, animal cruelty, urban sprawl and decay, crime, unemployment, and the inequitable distribution of resources, income, wealth and power. While the process should work in principle, it is unlikely that this process can be followed with sufficient rigour or resources without (a) a willingness by governments to spend much more money (paid for by taxes) to solve these problems, (b) a political will to solve such problems creatively and by consensus, rather than leaving it to private interests to address them or dealing with them by brute force, and (c) a much greater awareness, commitment and sense of responsibility by the body politic of the urgency and opportunity to solve these problems. But just as business will be driven once again to invest in innovation in the search to sustain profitability, it is likely that private citizens and public institutions will ultimately be driven to invest together in innovation in the search for a liveable, sustainable world. The process they then use will probably look a lot like this prescription.

Bibliography

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