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Assessing the  State of Innovation

David Matheson
President and CEO

In partnership with Frost & Sullivan

The last few years have seen a major wave of management attention on innovation. For a time, regular articles appeared in Business Week and other publications; a series of prominent books like Blue Ocean Strategy, Open Innovation, and The Innovators Dilemma (along with a flotilla of greater and lesser books) vied our attention ; new innovation buzzwords like “Design Thinking”, “Idea Management” and “Voice of the Customer” demanded action.

Swept away with enthusiasm and by the promise of easy growth, many of us tried many of these innovation approaches.  We had varying degrees of success.

After the recession and with brightening prospects, it is a good time to look over this past wave of attention on innovation and assess what we have learned. In June of 2010, a group of about 30 executives active in innovation from a variety of industries (see end of article for list) came together to share experiences and develop their collective expertise by assessing the state of innovation.

Some of these approaches are truly new and great ideas that will become part of the canon of innovation.  Ignore them at the risk of hampering your growth.  Others of these approaches are great ideas, but you probably already know them, a sort of “old wine in new bottles.” We endorse these approaches and celebrate their renewal in the recent wave. A few of these approaches were significantly oversold or ineffective, “innovation fads” if you will, that will fade into history like dot com enthusiasm. Ignore these.

The bottom line: our executives identified four areas of innovation practice as must-dos.  If you have started down the path in these areas, kudos to you,—keep up the work of continuous improvement.  If you have not started these things, you risk missing out on some of the real gems of insight polished over the last ten years. Here are the top four vote-getters from a list of about twenty candidates:

Allow innovation to challenge your strategy.  It is an article of faith that innovation should start with strategy:  first figure out what your corporate strategy is, then innovate around it.  To everyone’s astonishment, we found out that this conventional wisdom is wrong and counterproductive, or at least very misleading.

At the beginning of the assessment, we asked executives to reflect on what they had tried in innovation in the last several years and to make a list of things they were disappointed with and things they felt had produced fantastic results. No theory, no pitches, just what worked and did not work. Then we clustered the experiences on each executive’s list into meaningful groups to map out the innovation landscape.

One of the clusters we named “fit to strategy”. The cluster contained a surprising number of disappointing experiences, with people calling out things like “innovation aligned to corporate strategy” as a major problem. During the discussion of this cluster it became clear that innovation frequently occurs at the boundaries of the existing business, and therefore often seems not to fit. People impose constraints and assumptions on the current business and strategy too quickly, killing great ideas too early and unintentionally converting innovation into mediocrity.

History is littered with examples. It is only a bit of an exaggeration to say that many great companies were created in frustration as an effort to escape the strategic shackles of a now moribund predecessor. Xerox PARC famously invented the personal workstation, computer networking and laser printing, while Xerox only capitalized on laser printing. A host of other companies, such as Apple and 3Com to name only two, have built an entire industry around PARC innovations.

Our group also came across examples of ideas that at first blush challenged corporate strategy, but with the maturation of the idea helped reinvigorate it. Paraphrasing one executive, “In the end, our strategy is to serve customers with our capabilities. This imperative trumps pre-conceived ideas dreamed up in the corner office.  Properly positioned, innovation creates a learning opportunity for the executives about what their strategy should be.”

To be clear, we are not saying strategy is unimportant. Usually goofy ideas or opportunities a company has no business pursuing are properly screened out because they do not fit the basic capabilities of the company.  Our executive group would be horrified if someone argued that it was OK not to fit to strategy as a cover up to fund a poorly conceived idea or to avoid the heavy lifting involved in demonstrating why the innovation is in fact a great strategy.

The take home is this: if you begin only with strategy, you probably will not hit your innovation growth objectives. You need to allow innovation to occur that is a bit off-strategy, and create the space for hard work to demonstrate that the strategy should be refined.

How do you do this work?  Where do innovations with enough potential come from?  How do you demonstrate something so powerfully that it becomes compelling? The next two top-vote getters provide insight on these questions.

There are many areas that contribute to innovation, among them technology, customers and business. Insight in any area can drive an opportunity forward, or be the source of the idea.  The second top-vote getter addresses the customer.

Experience your customers. Another major cluster around  innovation was deeply understanding your customer (or customer chain).  We all know innovation must meet a true customer need, but where do you obtain the insight? There are many techniques and approaches our group has had successful  experiences with; to name a few:  “day in the life of”, living with your customer, focused user councils, client personas, in-depth customer pilots and rapid prototyping.

The key theme recommendation is to gain deep experiential understanding of what your customers do, and develop your innovations around the jobs they are trying to get done.  You may need to watch what they do.  You may need to see how they use a prototype.  You may need to live with them.  The richness and integrity of innovation that comes from this level of understanding often  proves to be the difference between success and failure or between having a compelling proposition or not.

Other approaches to understanding customers are based on what customers say they will do or want, like customer surveys or focus groups. These are good so far as they go, but they are no substitute for direct experiential knowledge.

Experiential knowledge is easiest when your development team is composed of your users.  Microsoft pulled together a team of dedicated video gamers to design the very successful Xbox. When the successful Xbox team were assigned to develop a music player, the Zune, the product flopped.  Why?  Because for the Xbox the team had a deep experiential understanding of the user needs; on the Zune they did not.

Certainly the idea that you should understand your customers has been around a long, long time. So much of this is “old wine in new bottles.”  However, the added emphasis on experiential understanding and associated techniques seem to be genuinely new and great as evidenced by the  last wave of innovation.

Other interesting insights emerged during the discussion around understanding customers.

The web has enabled crowd sourcing, predictive markets and viral approaches to marketing, distribution and understanding customer needs.  These approaches are genuinely new and worth consideration.

Many executives were disappointed with “The Voice of the Customer” (VOC). During the discussion it became clear that VOC is sort of a category, a big tent that covers lots of approaches to understanding the customer. To some people, VOC means gaining experiential understanding. To others, it includes a number of superficial techniques. These disappointments stem from approaches that do not get to the heart of the matter . Disappointments also derive from creating an endless series of studies and bog everything down.

Even with good insight, innovation involves lots of learning.  Traditional development processes, like phase gate, take a project management approach. This brings us to the next top-vote-getting “must-do.”

Use an iterative learning-based process.  Whether you call it agile development, spiral processes or rapid prototyping, a fundamental insight is at the core: innovation is all about maximizing the rate of learning. This means trying your ideas out as quickly and as tangibly as possible; refining the customer experience, refining technology and engineering, and refining the business approach.  Reviews need to be structured around achieving a new level of insight about what the innovation should be and around developing significant new learning.

In contrast, a traditional phase gate process is typically implemented as a “waterfall,”, in which everything needs to be done to proceed to the next stage.  These processes are typically dominated by project management considerations: milestones, deliverables and tasks.  They make the assumption that the future can be predicted and that the project can be planned.  They hold project leaders accountable to delivering on their plans.  And they give lots of people the opportunity to say “no” to an idea if something is not quite right.

This traditional framework is simply the wrong one for managing innovation:  Most good innovations go off-plan.  Most good innovations jump into the unpredictable.  Most good innovations have loose ends. Most good innovations change direction several times along the rocky path from conception to business result.  The process framework needs to fit these realities.

Our executive group isn’t saying that phase-gate processes are intrinsically bad, but rather that they are misapplied to innovation. You could think of a phase gate as a kind of deployment process, a way of making sure that something reasonably definable is done well and efficiently. At one time, AT&T had a fourteen-step gated development process.  This makes sense for deploying something that could bring down all international communications if there is a mistake – everything has to be cross-checked and gotten exactly right.

One example of the iterative approach is extended beta periods for new ideas.  You create a product and try it in the market.  If people like it and use it, then you improve it.  If not, you drop it. Google has built much of its success on this approach, for example. Google maps and Gmail were both created using this framework.  WL Gore & Associates, makers of  the well known Gor-Tex fabric and everything from electrical cable insulation to industrial filter bags, has a culture that allows small groups to try things out and then build on success or walk away from failure.  While fully endorsing this iterative learning-based approach, our executive group counsels some caution to make sure projects that arenot  forever in beta.

Other companies have had great success with a spiral framework by developing several dimensions of the project simultaneously (typically four: technical / solution, customer / market, business / financial and organizational).  A new idea does a quick turn around each of these dimensions to get a rough look, often based on several variations of the concept.  Then it is reviewed, and if approved takes another pass around each dimension with a greater level of effort.  The result is a slowly maturing idea that gets closer and closer to a winning innovation.  Each review is against the lessons learned in the last iteration and the approval is to fund the next round of learning. Plans may well change radically from iteration to iteration.

A great advantage of such approaches is that they tend to focus on the areas where greatest learning is needed. This means that assumptions and hypotheses are tested quickly and that fatal flaws are found early and cheaply; projects either fail or morph to become even greater over time. Some people call this the “fail fast” principle, which is hard to pull off in a traditional framework, but is a more natural outcome of an iterative learning-based process.

However, since plans are shifting, efforts are focused on resolving the unknown and there tend to be many possibilities in play, how do you make decisions about what to pursue? How do you manage the team?  This brings us to our final must-do insight.

Bring venture-capital approaches to your innovation process. Venture capitalists have honed techniques for turning innovative ideas into business successes. Corporations have a lot to learn from how VCs think about opportunities.  People in companies need to be able to have good dialog about the risk in new businesses with colleagues who are accustomed to the sorts of risk inherent in their core business.  Companies, like VCs,  need measurement methods to deal with radical levels of uncertainty (both downside and perhaps more importantly upside). They need ways to evaluate new opportunities with credibility. They need ways to fund and manage opportunities when learning rates are high. Our executive group identified several approaches they had adapted with success.

One approach is the corporate innovation board, which has significant resources for innovation and is located high in the organization. Ideas get funding based on their own merit, even if they would not make the cut for a P&L-focused VP.  By providing multiple paths to funding, innovation can get resources. One example is a GE program  that gives visibility to about 100 innovative projects to the CEO.  Other companies have had success with the board approach at other levels in the company.  There are a few cautionary notes here about preventing the group from moving to too low a level in the organization and making sure ideas eventually become relevant to the company, but on the whole this appears to be a good approach.

Another approach is to lay out multiple options for exploiting an idea – strategies if you will.  Then, pick a “plan A” to pursue, while keeping the others as backup.  This provides two important benefits:  first, it ensures that teams actually pick the best approach rather than just the one that first comes to mind.  Second, if one learns that plan A is not going to work out, the team can move quickly to plan B. As a result, they are less likely to get stuck in a dead-end.  For example, HP’s Lightscribe product (a DVD labeling system) could have been launched as a proprietary feature on HP computers, which is the obvious approach. However, the HP team pushed further and realized that a better much strategy would be to create a consortium and develop a standard;  Lightscribe is now HP’s only “ingredient” brand.

Pursuing the above strategies should be judged based on the delivery of proof points (not just accomplishment of project milestones).  What are the biggest uncertainties on the project? How do you learn about these? How to best organize work to deliver evidence on the things that most need proving out.

Continuing with HP’s Lightscribe example, the natural momentum of an engineering organization like HP is to build out the product, addressing crucial proof of concept issues like a rotating reference frame for printing. But HP is really good at technical work like this so it is not what needs to be proven out. For the consortium strategy, a crucial proof point is to get partners to contribute to an IP pool. By first focusing on this deal-making aspect of the project, HP dramatically increased the rate of learning and the overall probability of success.

Finally, don’t limit financial analysis to a single set of assumptions cranked through a spreadsheet.  Rather, look at what evidence you actually have about each key factor in the business (like market size and share), consider what would drive the value high or low, and put this range of estimates into your model. Use sensitivity analysis to prioritize effort on proving out the uncertainties that matter the most.

In the Lightscribe example, HP realized trends in sharing of disks were the huge uncertainty driving the business – would people continue putting their favorite songs on CDs and passing them around (which was common in the early 2000), or would the Internet (just taking off) or MP3 players (then a niche product) dominate. In response to uncertainty, HP took a staged approach and when the iPod came out and altered the landscape, HP was able to rapidly and successfully adapt to a potentially fatal blow.

These approaches work very naturally within a framework based around iterative learning. VCs use rounds of funding:  friends and family, angels, series A, series B etc. to indicate the maturity of an idea relative to the type of investor.  Your stages should follow a similar path.  For instance, one company in our study employs rounds that include Ideate, Formulate, Incubate and Scale.  Another took the VC metaphor more directly, calling the rounds Business Concept, Seed, Startup and Accelerate.

The four must-dos above have a nice reinforcing quality. Recognizing that innovation can take you a bit off strategy, you need to be sure to build on fundamental customer needs that you can only understand through experiential understanding of the customer. Since innovation involves lots of unknowns, you must employ an iterative learning-based approach as the management framework, and you need to use approaches adopted from the Venture Capital world to evaluate projects and make decisions about them.

In addition to the top-vote getters, a number of innovation methods received significant votes:

Take a portfolio approach.  Any specific innovation is likely to fail.  So you need a portfolio of innovations to reliably generate business growth.  Further, the portfolio of innovations needs to be able to stand against, and compete for, resources relative to other projects. It often takes a portfolio view for executives to realize they are over-investing in the short term and need to create options for the future.

Develop strong linkages.  Organizations are becoming increasingly complex.  From the large multi-national, to smaller companies with alliances and ties to other organizations and sites, innovation requires crossing boundaries.  It is essential to have strong human connections and communications across boundaries, which may go outside your organization.

Use the crowd.  The internet has created a whole new way of conducting research, getting feedback, making predictions, making connections, finding solutions, etc.  You can use these tools to great effect and they need to be on your radar.

Interestingly, a couple of very popular areas in the last round of innovation resulted in clusters largely composed of disappointment; first, a caution and then a surprise.

Caution—Open Innovation seems to be oversold.  One executive cynically put it this way “give me one example of a company that has been truly successful with open innovation other than P&G.” The idea of open innovation is undoubtedly here to stay and has provided an answer to what has been a perennial issue, the “not invented here” syndrome.  From our discussions, one conclusion is that open innovation is a powerful set of approaches, but it is not a panacea nor universally appropriate.  Finding limits on as big an idea as open innovation is hardly surprising, but it is worth a cautionary note.

A Surprise—The real surprise was in the idea-generation cluster, which was totally dominated by disappointing experiences. Many executives reported that they had used these techniques to generate a lot of ideas, and then ended up with a huge number of ideas. The real work, they found, began after the ideas were generated. Others found that since the vast majority of ideas generated tended to be junk, the overhead in filtering through them was just not worth it – the probability of a gem is too low to make the efforts worthwhile. Idea generation has a few bright spots.  Carefully structured efforts on focused questions generally produce better results.  On the whole, idea generation has not lived up to expectations.

To conclude, what is the state of innovation? The recent recession certainly took a lot of attention away from a management fad that had previously absorbed a lot of energy. This is probably a healthy thing; part of the ebb and flow of business.  Innovation is a perennial topic that is here to stay.  It has been vital in management thinking for more or less as long as there has been management thinking.

It boils down to reaffirming wisdom about innovation. Innovation will change something, so your current way of doing things (like strategy) will need to be refined. Change is hard.  It won’t work unless it truly addresses a real need that real customers have. The whole innovation enterprise is fraught with uncertainty and possibility, so manage to learn and make decisions based on proving out the potential.

Yet a lot has changed.  The last round of focus on innovation is benefiting from a host of new tools and capabilities that were absent or less developed a decade or two earlier: the Internet, information processing, observation, analytics, communication, global reach, etc. It is a brave new world.

Perhaps the key to innovation success is to always see the world as fresh and open to great possibilities.  Innovators must learn and grow in their mastery at an ever faster rate than the ideas they passionately bring to life.

Finally, I’d like to thank all the companies and executive thought leaders who participated in this assessment.

Bob Clemens, VP Corporate Technology, Eastman Chemical
Rich Duncombe, Distinguished Strategist, HP
Jeff Erle, Director, Center of Excellence, Multi-Fineline Electronix
Robert Finocchiaro, Technical Director, 3M
Allan Kidd, Director of Emerging Technologies, Dresser-Rand
Melissa Stein, Sr. Director of Product Management, Yahoo
Bruce Steinhaus, Associate (Medical Device Products), W.L. Gore & Associates
Steve Wilhelms, Executive Director – Encapsys, Appleton

And also to all the participating organizations who contributed to the assessment.

About SmartOrg

SmartOrg Inc is a leading provider of value-based management processes and software that optimize the economic value of innovation. Our Portfolio Navigator™ software helps companies like Hewlett-Packard, Dow AgroSciences, EUROCONTROL and like companies in the U.S. and Europe create exceptional value from new product development, R&D and innovation.  The material in this white paper was drawn from a Frost & Sullivan Conference held in Anaheim, California, USA in June 2010.  The Global Innovations in New Product Development event focus was on resources remaining constrained, and risk aversion remaining prevalent. Companies and employees have to stay alive and keep their eyes on the basics. They need to be ready when big investment catches up with big ideas.

Bio-Rad Laboratories
Boston Scientific
Cardinal Health
Care Fusion
Clorox Company
Daymon Worldwide
Eastman Chemical
Edwards Lifesciences
GE Healthcare
Johnson Controls
Rapidscan Systems
Roche Diagnostics
W.L. Gore & Associates