Breakthrough innovation - one step at a time

You have got to take a look at this really great IBM commercial that brings home a point close to my and my co authors heart.

Companies often do get stuck in the ideation stage (Discussed in the post on the Discovery capability). Coming up with ideas, even good ones, is actually the easy part. At one of our workshops a company representative ended the day by repeating implementation, implementation, and implementation that is what it is all about.

Of course that is not so easy when you realize all the politics, powerbases and uncertainties you have to deal with. The way around this is continually doing and experimenting and articulating the impact and implications of the results (Gina discussed this in her earlier posts on incubation and acceleration). Developing good experiments around markets, resources and organizing as well as technology and executing these experiments thoughtfully gets you to the level where you can begin to be poised for success. The data helps build the political coalitions you need to move ahead.

This morning I was making my bed, listening to all the bad economic news – worst holiday retail sales in five years, the housing crisis, gas prices and now egg and milk prices skyrocketing– and wondering if I still had enough chutzpah to shout about the importance of innovation in such a spiraling environment.

When companies hit hard times their initial reflex is to cut down on long term risky projects, which is to say breakthrough innovation programs. Then I heard about the new ‘People’s Car’. Yes, Tata Motors of India unveiled a car that will cost $2500! That’s the cheapest car ever made. It gets 54mpg. Such a low cost car may be welcome in America if other costs keep rising as they have been.

It turns out Tata Motors is a company devoted to innovation. They adapted lighting technology used by the Indian film industry and developed the only world class crash facility in Asia outside of Korea and Japan by innovating while reducing costs. In fact Tata’s mantra is innovation around cost. This is different than the focus of new product development in the nineties around efficiency and cost reduction.

Innovating around cost can reshape the competitive landscape and change the world. Of course many environmentalists are worried that that such cheap cars will greatly accelerate global pollution levels —-and that is something to worry about. (It is reported that the Tata Nano complies with the ‘Euro III’ pollution standards that prevail in India and should meet the tougher Euro IV standards with a bit of tweaking).

But back to innovation and why companies pull back from it just when they really do need it. They are scared of uncertainty and don’t realize it is everywhere and that they need to have dedicated systems or an infrastructure to deal with it. At least three companies we studied faced a very serious decline in their mainstream businesses. When the going got really tough two pulled their breakthrough innovation programs. Of these two, one filed for bankruptcy and the other is floundering. The company that maintained its commitment to breakthrough innovation won three prestigious innovation awards last year and is viewed by some on Wall Street to be on track for a strong comeback. So what is my point? Well I like this idea of innovating AROUND cost. But it is more than that.

Breakthrough innovation is a mindset, not a luxury or something that others must think about. If you have a system that allows for opportunity identification and articulation, experimentation with technology, markets and business models and development of new business creation, given any circumstance there are opportunities to capture value from breakthrough innovation.

Found this brilliant article that I happen to agree with COMPLETELY. In fact, I believe Daniel Scocco must have read some of my papers! He says that managing, actually, CREATING new markets is distinctively different from managing current ones. He’s absolutely, positively correct.

While he focuses on reviewing the reason why MBA students don’t learn how to do the latter (because as his Professor correctly pointed out, business schools offer Masters in Business Administration rather than Masters in Business Innovation (MBI)…. The Lally School is addressing this very problem!). I’d like to focus on why companies don’t know how to create new markets.

The fact is, companies don’t have a process for new market creation. They use conventional market management techniques (The Blu-ray HD-DVD tussle is a case in point). Companies refuse to engage with the market early and often when they have a novel technology that could take them down a myriad of application paths. Look at what happened to Analog Devices when they first realized the possiblities for accelerometer technology. They had wanted to enter the automotive market (why?….because it’s BIG. Does that make it a smart choice? NO). So they found a way to make accelerometers that could detonate airbags…for 5% of the cost of the technology that was being used at the time. Now that’s a radical innovation, right?

Great. But they could not make a profit. They priced based on an estimated cost at a full volume, assuming finely honed manufacturing processes that provide cost economies.

In the meantime, they started talking about accelerometer technology. At professional and technical conferences, In the news. Everywhere.

Companies began calling them. “We see a use for this,” said the gaming industry. “How about medical applications?” said a medical instrument company. And there were more. It turned out that these smaller, niche application areas would tolerate higher prices than the automotive industry would.

It’s a phenomenon we’ve seen many times. We call it application migration. For the case of Analog Devices, it looked like this:

So how can companies CREATE new markets for novel technologies?
1. Realize that the application choices your discovery team elects to pursue are for learning the possible market landscape. Don’t focus on implementing the first application explored. Explore many applications, and explore them simultaneously.

2. Get a New Business Creation person (one with an MBI, not an MBA!)…on the technical team. This is different from a New Business Development person. People think of NBD roles as either a) those who find and vet potential acquisition/merger candidates, or b) those who find new markets to sell current products/solutions into. NBC is different. These people create new value chains, find customers for an entirely new to the world product who may never have been identified as a ‘market’ before. It’s a difficult job, but it’s extreme. Fun, that is.

3. Make sure there’s no pressure on the ultimate business unit to deliver high margin profit on the breakthrough platform before the pursuit of applications defines just that, an entire platform of product lines. Most of the time the business unit is so pressured to show profits they commercialized the low hanging fruit of a radical innovation, and then forget the rest. What a waste.

4. Talk about the technology, before it’s perfected. Talk about its promise. You don’t have to reveal HOW it works, only that it works. DuPont used to put ads in trade and science magazines describing the properties of their coolest materials. These ads asked the market (technical people in other companies) what they perceived the material could be used for. What a way to create a market! Here’s one for Biomax, a biodegradable polyester material that we studied long ago.: DuPont doesn’t run such ads anymore. But wow, they sure helped stimulate markets.

Companies have to develop a capability for breakthrough innovation. They can’t rely on strong maverick individuals to get it done. Not that those people aren’t crucially important…they just have too little muscle in the organization to make breakthrough happen often enough.

Here are some questions for you. Does your company have a breakthrough innovation capability that addresses Strategic, Portfolio and Project level issues? Think about these:

Strategic Level Issues: The Innovation Agenda

1. Is there a Corporate innovation strategy? A corporate Strategic Intent regarding where your company should be in terms of technology/market domains ten years from now? Is it used to drive investment decisions in terms of hiring, acquiring and networking?

2. Who in your senior leadership team is responsible for major innovation? Who’s responsible for cultural change associated with breakthrough innovation?

3. Do you have a dedicated group of people responsible for making breakthrough innovation happen? Does it have a known structure and a mission that’s clearly articulated? Are they located within the main part of the company, rather than relegated off to the sidelines, with the hopes that they’ll come up with cool ideas that’ll change the future of the company? (Turns out that approach doesn’t work very well).

4. Who are the key innovation stakeholders at all levels in the firm and externally? Who manages their expectations, and how?

5. How are diverse expectations managed?

The Innovation Portfolio

6. What is the right innovation portfolio mix (incremental to radical; current strategy versus strategic intent; aligned with one of your current businesses, aligned with several of your current businesses, and unaligned)?

7. Who’s overseeing the portfolio? Is there anyone in charge of the sub sector of the portfolio that is the set of initiatives that offer the potential to be real gamechangers? Who makes decisions regarding the mix of initiatives within that breakthrough portfolio? Who is coaching those project teams? Is there a governance model in place for the portfolio of possible breakthrough innovations percolating along in your company???

8. How are investment decisions made? What defines strategic, portfolio and project success?

9. How is a culture of innovation nurtured?

Project Level Issues for Breakthrough Innovation: Team Learning and Uncertainty Management Mechanisms

10. What are the considerations for initiating, maturing and transitioning innovation projects?

11. How are projects managed with high levels of technical, market, resource and organization uncertainty?

12. What is required to build entrepreneurial teams and individual buy-in? How are people rewarded?

Breakthrough innovations are not individual acts.

• Interview on the Krow Show - March 26th, 2008
• Innovation Is Not Accidental - March 25th, 2008
• Why can’t we just admit we don’t know??? - February 29th, 2008
• Innovation Need Not Start at the Top - February 11th, 2008
• Minutes for my (auto)mobile? - January 22nd, 2008
• Creating New Markets for Novel Technologies - January 8th, 2008
• 12 Questions to assess your Company's capability for Breakthrough Innovation - January 4th, 2008
• Acceleration and building the business - December 29th, 2007
• Incubation for generating business proposals - December 27th, 2007
• Recognizing the capability for Breakthrough Innovation - December 22nd, 2007
• Identifying Career Paths for Innovators - December 20th, 2007
• Career Paths for Innovators - December 12th, 2007
• Breakthrough Innovation in big companies - December 11th, 2007

• Innovating Coffee in a weakening economy - July 10th, 2008
• Innovating Coffee - July 4th, 2008
• Will Gates return? - July 1st, 2008
• Innovating is not inventing - January 24th, 2008
• What the Innovation Man forgot - January 12th, 2008
• Tata Nano: Innovation around Cost - January 10th, 2008

The third competency needed to have a full up breakthrough innovation capability is acceleration. Acceleration activities ramp up the fledgling business to a point where it can stand on its own relative to other business platforms in the division that’s eventually going to house the new business.. Whereas incubation reduces market and technical uncertainty through experimentation and learning, acceleration focuses on building a business to a level of some predictability in terms of sales and operations. As one Innovation Director told us:

“I need a landing zone for projects that the business unit does not feel comfortable with. If I transfer these projects too early, the business unit leadership lets them die. I need a place to grow them until they can compete with ongoing businesses in the current operating units for resources and attention.”

The skills needed are those required for managing high growth businesses. Acceleration involves exploitation rather than either exploration (which Discovery requires) or experimentation (which Incubation requires). The activities of acceleration include investing to build the business and its necessary infrastructure, focusing and responding to market leads and opportunities, and beginning to institute repeatable processes for typical business processes such as manufacturing and order delivery, customer contact and support. Acceleration involves turning early customer leads into a set of qualified customers and predictable sales forecasts. Similar to an independent start up firm in first stage growth, acceleration pursues top line revenue rather than bottom line profitability.

Whereas discovery competencies generate or recognize RI opportunities, the incubation competency involves activity that matures radical opportunities into business proposals. A business proposal is a working hypothesis about what the technology or business platform could enable in the market, what the market space will ultimately look like, and what the business model will be. Incubation is not complete until that proposal (or, more likely, a number of proposals, based on the initial discovery) has been tested in the market, with a working prototype, and first revenues are flowing in.

We’ve observed that the skills needed for incubation are experimentation skills. Experiments are conducted not only on the technical front, but, also for market learning, market creation and to test the business proposal’s match with the company’s strategic intent.

In most of the companies we studied, most projects entering into the incubation phase were filtered out when the experiments failed for one reason or another, due to the high uncertainty associated with what initially appeared to be a promising opportunity. One BI portfolio manager described his frustration at the ‘churn’ rate in the portfolio at the early phases of the projects, when they were moving from the idea phase to early technical and market experimentation. Still, he admitted how that was to be expected given the high level of innovativeness, and therefore risk, of the ideas.

It turns out the incubation is the hardest competency to develop and maintain in companies. It takes too long. We don’t train business students how to do it. Certainly not how to evaluate it. We call incubation “The Long and Winding Road.”

When we started studying the companies who have a declared strategic intent to build a breakthrough innovation capability, we saw companies who wanted BI but didn’t have enough good ideas. We saw companies with lots of great ideas that couldn’t get them built into businesses. They’d send them over to the business unit once the technology or concept was developed ‘enough,’ and then nothing happened. They just stalled.

We were asking ourselves, “What is a capability for breakthrough innovation, anyway?”As it turns out, there are three separate and distinct capabilities. How do we know? Because some companies had some, and some companies had others, but only 1 had all three of them. AND even that one didn’t have them tied together very well. We saw projects slip off the radar screen.

We believe that breakthrough innovation is about the three following capabilities: Discovery, Incubation and Acceleration.

The discovery capability involves activities that create, recognize, elaborate, and articulate opportunities for radical innovation. The skills needed are exploratory, conceptualization skills, both in terms of technical, scientific discovery and external hunting for opportunities. Discovery activities can include invention, but needn’t always.

While the vast majority of companies in our study invested in internally focused laboratory research , most also hunted inside and outside the company for ideas and opportunities, and licensed technologies or placed equity investments in small firms that hold promise.

We saw ‘alpha teams’ of idea generators…really creative, smart types who just pumped out idea after idea because they understood the wealth of scientific expertise resident in their company. We saw idea hunters who went out into business units and help workshops and idea jams. We saw “exploratory marketing’ teams within R&D groups. These were pairs (a technical person and a business person) who hunted outside the company,…indeed, across the globe, for opportunities.

One of our companies relied upon an informal network of external contractors to generate and develop wild ideas and inventions. This network was maintained and funded by a senior executive who elected not to bring them within the company for fear that their creativity would be stifled.

Discovery if about idea generation, opportunity recognition and opportunity elaboration. All of it. It’s definitely about R&D, but there’s more to it than that.

We’ll share our thoughts on the capabilities of Incubation and Acceleration in future posts.

Yesterday my colleague Andrew and I (he’s a Strategy Professor, also involved in our research program), spoke with the person in Organizational Development at the company I told you about a few days ago, who’s working to develop career paths for innovators. Turns out he’s taking a different approach now. Says that all rising leaders in the organization should do a development rotation through the innovation group. Then, they should go back to the business units and be promoted up through the traditional ranks.

Interesting, we said (though we did not really find it interesting at all…. more like discouraging). Why not stick with the plan to promote people up through an innovation function? He agrees that innovation is becoming a function, but also noted that the whole company has to understand innovation, so it’s important to have every general manager do a rotation through that group. Then, when they’re vice presidents of Business units, they’ll be better ‘receivers,’ of breakthroughs, even though those opportunities may not ‘fit’ their business units very well.

He’s absolutely right, of course. We all believe the innovation…. breakthrough innovation… is much more likely to succeed in companies whose senior leaders understand it and, indeed, have experienced it.

But he’s also wrong, we believe. How can innovation become a function if there’s no one in that group on a consistent basis? If there’s no recognition of success via promotion? Does that mean we do not believe there’s a set of skills, responsibilities, and activities that are unique to innovation? Specifically, unique to New business Creation…the part that’s beyond what the technical team does? When we posed that question to him, he paused. Well….. yes.

He agreed to speak with us again in six weeks or so,..the time it’s going to take him to get buy in from the senior Vice President of Innovation in that company on his plan for promotion that does not involve promotion through the ranks of innovation.

We’ll see what happens. I’m placing my bets that the plan will be substantially modified. At least I hope so.