THE CAP GEMINI ERNST & YOUNG CENTER FOR BUSINESS INNOVATION
Perspectives on
Business Innovation ISSUE
8 Connected Innovation
www.cbi.cgey.com Please visit www.cbi.cgey.com to explore other research under way at the Center for Business Innovation, as well as additional issues of Perspectives on Business Innovation.
T H E C A P G E M I N I E R N S T & Y O U N G C E N T E R F O R B U S I N E S S I N N O VAT I O N is a research organization focused on emerging management trends, problems, and solutions. It seeks to facilitate a shared conversation among business practitioners, advisors, and observers, enhancing the knowledge of all involved.
c on t e n t s
Perspectives on
Business Innovation Connected Innovation
4
WELCOME TO THE CONVERSATION
The Big Idea 7
CONNECTIVITY REINVENTS THE RULES OF INNOVATION
Ubiquitous connectivity has changed the way we innovate, how the process works, whom we decide to partner with, and where we find our customers and disseminate information. Rudy Ruggles takes us through the innovation life cycle—in a connected world. 16
STILL WAITING FOR THE REVOLUTION: A CONVERSATION WITH ALAN KAY
Alan Kay is one of the most influential computer scientists of the modern era. His contributions, among many others, include the concept of the personal computer. We sat down with him to discuss his take on how innovations happen.
Innovation in Action 21
REFINING THE INNOVATION PROCESS AT TEXACO
Amid sweeping changes in the oil and gas industry, innovation has never been more important. Find out how Texaco met this challenge by harnessing the innovative ideas of its employees. 27
INNOVATION-BASED SUSTAINABILITY AT CAPITAL ONE FINANCIAL
Capital One Financial’s remarkable growth can only be attributed to one thing: innovation—in its processes and its people. 33
FROM ROADMAP TO ROADWAY: MANAGING INNOVATION AT BMW
Innovations sometimes just happen, yet more often, they are a calculated part of corporate strategy. Learn how BMW’s sustainable innovation process sees ideas through to fruition.
A Blueprint for Change 39
ONLINE COLLABORATION: THE NEXT WAVE OF INTERNET INNOVATION
Utilizing the benefits of the Internet and new technologies, Collaborative Product Commerce (CPC) is strengthening alliances and improving productivity for many innovative companies. 46
DEMYSTIFYING INNOVATION
Innovation is commonly regarded as one of today’s most important value drivers in a company. Here are some suggestions for recognizing and assessing innovation in your own organization.
ISSUE
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T H E C A P G E M I N I E R N S T & Y O U N G C E N T E R F O R B U S I N E S S I N N O VAT I O N
On the Horizon 53
THE CBI FUTURE SCAN: A VIEW FROM THE CROW’S NEST
What forces will shape our economy over the next two years? The Center for Business Innovation has identified the five trends companies will either embrace or resist. Your choice may determine tomorrow’s success. 59
OPEN SOURCE: BEYOND THE FAIRY TALES
It’s not just a software development model. The open source movement is being embraced by innovative companies and imbedded in their business strategy.
Shared Conversation Our purpose in Perspectives on Business Innovation is to promote a Shared Conversation among business practitioners and observers. Here are some vital perspectives we’ve heard lately . . . 66
DISRUPTION IN A NETWORKED WORLD: WILL CLIFFORD ON PATTERNS OF STRUCTURAL SUCCESSION
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REFLECTIONS ON THE FUTURE OF SOFTWARE
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THE INVISIBLE ADVANTAGE OF INNOVATION
Departments 79
Technology Watch Cap Gemini Ernst & Young’s Technology Advisory Board recently convened to discuss how the relationship between technology and its users will evolve in the future.
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Well-Read Manager A review of Seth Godin’s Survival is Not Enough by Larry Keeley, CEO of the Doblin Group, and other books worth reading.
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Heads-Up A list of upcoming events not to be missed.
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Research Roundup Summaries of current research projects at the Center for Business Innovation.
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Inconclusion We discovered some of the most obscure patents we’ve ever seen. Apparently, every invention doesn’t always become an innovation.
Welcome to the conversation THE EVOLUTION OF INNOVATION Christopher Meyer
“You can't have science with one scientist.”—Alan Kay nly 30 years ago, innovation was perceived as a threat: “if it ain't broke, don't fix it” was the common approach to trying anything really new. Growth came from linear expansion. And the Standard Industrial Classification codes didn’t leave much room for the creation of new industries. Innovation was about incrementally improving what already existed and building efficiency into established products and processes.
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But today, highly prized, innovation is regarded by the financial markets as one of the most important value drivers in a company. In fact, nonfinancial performance like innovation accounts for as much as 35 percent of institutional investors’ portfolio allocation decisions today. Our research at the Center for Business Innovation (CBI) shows that in the nondurable sector, 7.2 percent of the average company’s market value is based on innovation. And out of the top 10 nonfinancial drivers of market capitalization, innovation consistently ranks in the top five across industries—ahead of more expected value drivers like technology and customer service. Why the new emphasis on innovation? We can look to nature for answers. In nature, the pace of biological innovation depends on the rate of recombination of genetic “ideas.” Evolutionist Stephen J. Gould tells us that bacteria dominate the biomass because they breed every 20 minutes. Each generation is an opportunity for their genomes to recombine and for the environment to exert selective pressure; thus the species evolves three times an hour. Industrial businesses have been more like pandas in their evolution, with a gestation period of 18 months and a low frequency of romantic recombinations. And like pandas, it hasn’t taken much change in their environments to kill them off. But their Himalayan habitat was hardly volatile. Now, both the culture and the connectivity of the Internet have changed the rate of recombination of business ideas, bringing about a fundamental shift in the way ideas are collected, communicated, and combined. This open and free exchange has created a host of opportunities for innovation to occur. The rules of evolution teach us that permeable boundaries, which let new information into the species, and a robust gene pool, which provides the species with a broad repertoire of adaptive behavior, are essential to survival in a volatile environment. Today’s ubiquitous connectivity supports both. Organizations are transplanting these rules, partnering more freely to combine capabilities and exploring more openly to incorporate solutions “not invented here.” As we say in our article on Open Source in this issue, “Innovation Happens Elsewhere.” At the Center for Business Innovation, we posit that innovation is accelerated based on these precepts. Thus, we dedicate this issue of Perspectives on Business Innovation to the topic of Connected Innovation.
Our lead article, “Connectivity Reinvents the Rules of Innovation,” walks us through the new process for innovating in a connected economy. Rudy Ruggles, who leads the Innovation initiative here at the CBI, explains how to reap the rewards of connectivity while overcoming barriers. The article addresses the exponential benefits of the recombination of ideas and the benefits of a mechanism to facilitate idea sharing. Also addressed in this article (and in further depth later in the issue) is the concept of disruptive innovation—what happens when a new technology starts out below normal standards but improves at such a rate as to overtake the industry’s best, ultimately changing the rules of the game. Finally, we illustrate how connectivity and subsequent communities change the way innovations are diffused and adopted. Our interview with Alan Kay, one of the founders of the Xerox Palo Alto Research Center (PARC) and also the innovator responsible for the Point and Click GUI we now take for granted, takes us into the mind of the innovator. Notorious for his saying “The best way to predict the future is to invent it,” Alan Kay details the trials and tribulations of getting a great idea into the marketplace. He points out the differences between the scientific process of innovation and that process typically adopted by business, and notes the drawbacks of the latter. As always, Perspectives contains a series of case studies. Our story on BMW showcases the company’s sustainable innovation process, a remarkable means of sensing the market and getting new ideas into commercialization quickly. Another case study on ChevronTexaco describes the company’s collaboration with the Center for Business Innovation in an effort to capture and capitalize on the ideas of its employees. The CBI’s software tool, IdeaX, provided ChevronTexaco with a much needed platform for employees to voice new ideas and recombine with others. Our final case study on Capital One Financial gives an account of this company’s fantastic growth attributed to its feedback loops, continual testing of new products, and innovative culture. Other articles in this issue include a how-to piece on assessing and measuring innovation—both quantitatively and qualitatively, what the open source software movement can teach us about strategy, and the premiere report-out from the CBI’s new Technology Advisory Board. We hope this issue of Perspectives will provide both a thoughtful and thorough vision of innovation in the connected economy. Stay tuned for our next issue—we’ll take a look at innovation’s new prominence as an element of a broader trend toward the adaptive enterprise.
Christopher Meyer is director of the Cap Gemini Ernst & Young Center for Business Innovation and a vice president in CGE&Y’s Management Consulting practice.
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The Big Idea
CONNECTIVITY REINVENTS THE
RULES
OF
INNOVATION Rudy Ruggles
Rudy Ruggles is a senior manager at the Cap Gemini Ernst & Young Center for Business Innovation where he leads the Center's research on innovation. His research focuses on idea diffusion, social network dynamics, and technological knowledge management tools and techniques. Rudy holds a B.S.L.A. in Japanese language from Georgetown University and an M.M. (M.B.A.) from Northwestern University’s School of Management.
nnovation drives value. It powers growth and it reduces costs. It is one of the most significant attributes investors use to judge a company’s overall value.1 It appears prominently in the annual reports and on the websites of nearly all of the Fortune 500. By all indications, innovation matters.2
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This is not news, however. History is full of innovations that have altered the course of human events, redistributing power, causing and crushing revolutions. The study of innovation isn’t new either. Economist Joseph Schumpeter, for instance, described the economic, sociological, and organizational impacts of innovation and its “winds of creative destruction” well over half a century ago. What is new, however, is the rise of how connectivity—both technological and nontechnological—is affecting the actual process of innovation. In today's highly connected economy, ideas are being created and recombined at great speed and in new ways. Traditional models for creating, developing, distributing, and benefiting from innovations no longer suffice. Success depends on an ability to leverage connectivity throughout the innovation life cycle. After several years of research, the Cap Gemini Ernst & Young Center for Business Innovation (CBI) has begun to understand how organizations can use the dynamics of the networked economy to enhance each of the four stages of the innovation life cycle: Idea Generation, Concept Development, Innovation Adoption & Diffusion, and End Game.
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Figure 1 Innovation Life Cycle Source: Cap Gemini Ernst & Young Center for Business Innovation
➤
The Big Idea
Value or Benefit
Idea Generation
Development
The Innovation Life Cycle Figure 1 shows the typical s-shaped value curve so often drawn in relation to innovation. The rise of the curve represents the unique value generated by an innovation over time. Given the quirky nature of innovation, the shape of this line will vary considerably—some have long lead-in tails, some have near vertical takeoffs from the start, and so on—but all will show some sort of s-shape. Also, as discussed above, the value calculations will differ, but the dynamic remains the same.
There are four major stages in the life of an innovation:
Idea Generation—The earliest stage of idea creation, this is where it all begins. It includes everything from early scanning, to rigorous gap analysis, to random sparks of insight. At this stage, even those concepts destined for greatness are just barely recognizable. Development—Here is where resources are applied to turning an idea into an actual product, service, process, business, etc. This stage includes activities such as prototyping, experimentation, beta testing, and other activities that make an idea actually useful. Adoption & Diffusion—Adoption is the uptake and application of a concept, product, etc., by someone or some group. It is here that innovations get put into action and start to add real value. Diffusion represents the spread of that uptake throughout a population, organization, or other system. The impact
Adoption/Diffusion
End Game
grows, and it is here that innovations become distinguishable from mere inventions.
End Game—At some point, there is no more unique value to be gained from an innovation as an innovation. The premium rents to the innovator have all but disappeared. This may be because the innovation has become a commodity (e.g., automatic teller machines) or been overtaken by superior technology (e.g., the fax machine being pushed aside by e-mail). All innovations hit a point of decreasing returns, even if they are still valuable. They are just not uniquely valuable as innovations. These stages actually represent a fluid progression through the life of an innovation. But understanding each unique stage helps to further the conversation about what to do about innovation to make it happen more often and with better results. Connectivity opens up new realms for the way in which an innovation can be enabled and encouraged throughout its life. Connectivity Creates The truly new idea that turns into an innovation is a rarity. More often, existing ideas are brought together in a new way or in a new context that opens up new avenues. This sort of recombination can only happen if elements are given the opportunity to interact with each other. Increasing connectivity creates these opportunities.3
It is important to note that the idea of recombination is only interesting if the population of elements is
The Big Idea
9
heterogeneous, i.e., diverse. Connecting like-to-like may give you mass, but it won’t give you innovation. For example, connecting oxygen molecules to other oxygen molecules isn’t nearly as interesting as what happens when you add hydrogen to the mix. And look around you to see what you get when you have all 109 of the elements at play. Whether the elements are people, ideas, or organizations, where the mix is rich, connectivity enables whole new opportunities. While connections create opportunities for recombination, recombinations (and for that matter innovations) do not create themselves. Energy is required to take the potential innovations that lie in those connections and make something happen. Therefore, organizations should do the following: Remove Barriers to Connectivity Removing barriers to connectivity is challenging. Connections are not just technological, but also personal. Ensuring everyone is on e-mail, for example, is only the first step. Can they find each other, especially if they don’t know whom they’re looking for? Quick, what’s the e-mail address of the top innovation expert in your organization (besides you)? Who is the person who might help you develop that perhaps harebrained (but possibly ingenious) idea you have about a new business opportunity your organization should pursue? Just because someone has the capability to communicate with another person doesn’t mean that she will.
Encourage Recombination Through the Interaction of Ideas The best way to encourage recombination in this sort of early stage idea development is through a community of interest. Communities, as defined here, are social networks of people who find each other through a variety of means and are drawn together by a shared context, a topic or topics of interest, and some sort of social cohesion.4 They exist within, and beyond, every organization, alongside traditional hierarchies and transaction-based “market” relationships. While each type of structure has its own strengths in what it takes to make innovation happen (see Figure 2), communities are most effective at exactly the types of behaviors and interactions that are so useful at this early, formative stage of idea generation.5 How does all of this work in the real world? International oil and gas giant Texaco (now ChevronTexaco) was constantly on the lookout for new business opportunities. While its Strategic Management Group was specifically tasked with creating, finding, and analyzing such growth ideas, Texaco wanted to open up the front end of this process to as many people as possible within (and eventually beyond) the organization. It created an idea development and capture mechanism on its intranet that enabled all interested to participate in the development process. People could submit ideas for opportunities, discuss other people’s contributions, evaluate the postings, and develop new
Refining the Innovation Process . . ., pg. 21
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Figure 2
Effectiveness of Organizational Structures in Supporting Innovation
The Big Idea
Innovation Ingredients
Hierarchies
Markets
Communities
Diversity of input
Low
Medium
Medium High
Recombination
Low
Low
Feedback & iteration
Low
Medium
High
Filtering
Low
High
Medium
Resource allocation
Medium
High
Low
Execution
High
Medium
Low
Source: Cap Gemini Ernst & Young Center for Business Innovation
strategic solutions. Additionally, those in search of new opportunities could use the system to find highly rated, appropriate concepts as needed by searching and through collaborative filtering.6 Other companies, such as Procter & Gamble and Nortel Networks, use similar approaches, drawing upon a diverse set of inputs and feedback mechanisms to generate a more robust population of initial ideas to feed into the innovation process. Still, for an idea to turn into an innovation, no matter how interesting and well thought through, it needs devoted resources. It needs to move into the realm of development. A Thousand Blooms From a Thousand Gardeners Organizations have been trying to streamline and improve their development processes for decades. Portfolio analysis, stage-gate processes, options pricing models, and numerous other tools and techniques have decreased time to market and increased average returns on investments in nearly every industry. These gains are certainly attractive, and firms that are not already trying such approaches should do so. Still, these techniques primarily focus on internal, linear processes. There is a whole new horizon for what kinds of gains are possible when connectivity is leveraged. The age-old idea of letting a thousand (innovation) flowers bloom becomes a much more tenable proposition if the gardeners are working together.
The Conference Board of Canada reports that “firms that collaborate are . . . significantly more likely to
introduce breakthrough (world-first) innovations.”7 Collaborations include inter-firm but also working relationships with universities and government labs. This represents the power of multiple members of an economic “web” of relationships working together. Firms can take advantage of connectivity to enhance innovation development in two new ways: dealing with disruptive innovations by managing networks of modules, and leveraging the power of many through distributed development. Networked Innovation Readers of Professor Clayton Christensen’s work, including his book The Innovator’s Dilemma, will recognize the term “disruptive innovation” as describing a new technology that starts out below normal standards but improves at such a rate as to overtake the industry’s best, ultimately changing the rules of the game. What is particularly frustrating about such disruptions is that incumbent firms may be doing everything “right,” including creating faster, better, and cheaper sustaining innovations. They find it impossible to justify investing in the new technology (broadly defined) since it initially meets none of their (or their customers’) criteria for a competitive product. Then, when the technology has improved enough to be a threat, they are too far behind and cannot make the switch. So, how can organizations have their innovation cake and eat it too? Connections. Understanding this entails understanding modularity.
The self-contained elements of a connected system are often called modules. Modularity—structuring
While most companies have already realized the importance of innovation, the effects of connectivity on the innovation process remain largely undiscovered. Connectivity is the progeny of our networked economy, and business managers need to understand its impact on the four stages of the innovation life cycle, the importance of diversity, and the organizational energy and resources necessary to unlock the potential of connected innovation.
article abstract
complex products from smaller subsystems that can be designed independently yet function together in a seamless fashion—begins at the product level, then ripples upward through organizational structure, and then through to industry structure. CBI researcher Will Clifford has studied how firms can spot and leverage disruptive innovations by managing modularity (i.e., the configuration of their own modules and connections to others’).8 By focusing only on their core competencies and creating relationships to outsource, yet access, all other competencies, organizations can remain nimble. Management then entails strengthening and weakening links as needed, depending on the dynamics of the environment, be they changes in cus-tomer preferences, new market entrants, or the rise of disruptive innovations. Even if it doesn’t make sense for your organization to invest money in a potential disruption, it is certainly worth being connected to those who are working on these new solutions. Microsoft’s move into the “Information Superhighway” arena is an interesting example. In the early 1990s, Microsoft paid little attention to the emerging Internet industry. Then, in about 1994, Bill Gates decided that Microsoft should be in that game. Microsoft was able to get up to speed extremely quickly by combining its own competencies and market strength with a very aggressive relationshipbuilding strategy with players in all of the major industries who had the necessary complementary competencies. Microsoft’s ability to develop into
Disruption in a Networked World . . ., pg. 66
an Internet powerhouse came from its ability to combine modules quickly and flexibly to achieve its objectives.8 Distributed Development On a more tactical level, connectivity enables a whole new innovation development model. The most straightforward version of this is a virtual team collaborating on a project. While not particularly recent, technology is enabling such teams to do new and different things.
At the extreme is what is referred to in the software development world as “open source.” While this approach and its implications receive far more detailed treatment elsewhere in this issue, it is worth touching on briefly here.10 Source code is the root programming that runs the software. Software firms usually guard it extremely carefully since it allows people to make changes to the very DNA of the program. However, there are some software efforts that post this source code for anyone to use and change. Often done in an academic context, open source has recently gotten a lot of recognition as the way in which the operating system Linux was created. Linux is an interesting story for two reasons. First, the scale of the effort was considerable, with some 40,000 people from all over the world contributing to the code, all of whom did so voluntarily. The second reason is that Linux is seriously challenging Microsoft’s server operating system dominance. This is not just a hobby.
Open Source . . ., pg. 59
The Big Idea
11
12
“Increased connectivity allows new social dynamics, The Big Idea
and in fact whole new social systems
”
and communications patterns to emerge.
Snowball Effects Where the development stage of an innovation’s life cycle takes it from mere concept to something that actually has an impact, the adoption and diffusion stage determines just how significant an impact it turns out to be. While there is no golden rule when it comes to the acceptance of an innovation, firms now have the opportunity to use connectivity to increase the likelihood that their innovations will spread.
In 1962, Everett M. Rogers published the first edition of Diffusion of Innovations, now in its fourth edition. This landmark work continues to be the touchstone for all studies on diffusion, which he defines as the process by which an innovation is communicated through certain channels over time among the members of a social system.11 Increased connectivity allows new social dynamics, and in fact whole new social systems and communications patterns to emerge. Malcolm Gladwell, in his book The Tipping Point, examines adoption and diffusion patterns as examples of outbreaks, or as he puts it, “social epidemics.” Such diffusion patterns relate to practices as much as they do to products. It is therefore imperative for organizations not only to understand that such patterns exist, but also to be able to do something about them. As Seth Godin writes in his book Unleashing the Ideavirus, “Ideas that spread the fastest win.” And, as Procter & Gamble has said, some 60 percent of the adopters rely more on social
Well-Read Manager, pg. 85
influence than mass media. Leveraging connectivity is the key to success. There are four major steps in leveraging connected innovation. First, assess the network as is, using social network mapping and analysis tools. Next, profile the adoption and diffusion potential of the innovation itself. Rogers’ work uses the following five characteristics of an innovation to assess its adoption potential: 1. Relative advantage—The degree to which an innovation is perceived as better than the idea it supersedes. 2. Compatibility—The degree to which an innovation is perceived as being consistent with the existing values, past experiences, and needs of potential adopters. 3. Complexity—The degree to which an innovation is perceived as difficult to understand and use. 4. Trialability—The degree to which an innovation may be experimented with on a limited base. 5. Observability—The degree to which the results of an innovation are visible to others. Once you have established the connectivity of the “market” for the innovation and the adoption potential of the innovation, the third step is to test hypotheses and introduction strategies, experimenting with changes in various attributes of both the network and the innovation. While it is possible to do this with prototyping and test marketing, many companies are
The Big Idea
13
finding that doing these tests “in silico” is much more effective. For example, the simulation software created by the CBI and Bios Group, called Snowball, uses an agent-based modeling approach to reflect the complex nature of the interaction of the innovations and the networks.13 The results of such models can then be used to guide the fourth step: making and implementing strategic marketing and manufacturing decisions. For example, one company found that changing the “observability” setting in the model for one of its products had a significant impact on its diffusion score. This helped the company decide to offer an instant spot-remover in small pocket/purse-sized applicators, since even though that was a more costly packaging approach, it paid for itself in broader diffusion (i.e., more usage). However, the most significant diffusion gains came through connecting previously separate geographic customer clusters by giving samples and coupons to people who crossed the geographic boundaries. The target users were identified as college students in one location who were heading home for the holidays in the other locations. The model enabled the marketers to find the most appropriate ways to leverage, and in this case augment, connectivity to enhance diffusion. End Game Once innovations stop being innovations, they tend to fade into the background. At best they’ve become commodities, at worst they’ve failed altogether and have disappeared from view. What good is connectivity at this point? You might be surprised.
The point of the innovation “end game” is to make sure that you’ve received all the extraordinary value possible from your innovation. It’s about making sure that the upper tail of the s-curve does not flatten prematurely. While it is certainly possible to extend this tail through product extensions, for instance, this is a low-leverage solution. The best way to increase the return on your investments here is to establish, support, and learn from communities. Harley Davidson, Saturn, and others have done a wonderful job creating and enabling user communities, to the admiration and envy of others in their industries. Such communities are nearly impossible to emulate and so create a particularly strong source of competitive advantage. While such supported communities are well-studied, there is another variation on these social networks that is even more powerful: self-organizing communities. An illustrative case of this is the community that formed around the Amiga computer. The Amiga, first introduced in 1985, was an integrated hardware/ software platform that was tuned for multitasking and multimedia applications from the beginning, even with the rudimentary memory allocations available at the time. What’s particularly interesting about the Amiga story is that the corporate “ownership” of Amiga has died and been resurrected many times since the mid-1980s. And yet, there are tens of thousands of dedicated Amiga fans who have continued development and support efforts throughout. There are thousands of fan sites on the Internet, and some
Open Source . . ., pg. 59
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Figure 3
Traditional vs. Connected Innovation and the Innovation Life Cycle
The Big Idea
Idea Generation
Development
Traditional Innovation
Connected Innovation
●
Occasional Internal ● Idea “factories”
●
●
●
Constant Inclusive ● Idea “markets”
Stage-gate Centralized (R&D)
●
●
●
Stage-gate + internal venturing Decentralized (R&D + intrapreneurs)
Adoption/Diffusion
●
Markets as segments
●
Markets as relationships
End Game
●
Value ends
●
Learning continues
●
Source: Cap Gemini Ernst & Young Center for Business Innovation
50 online and print magazines in the U.S., the U.K., Germany, and a dozen other countries. Connectivity has enabled the community of people passionate about Amiga to work together to keep the value alive, even when the corporate manifestation of Amiga disappeared altogether for long periods of time. The lesson to be learned from this example is that often the community can do your job for you (whether you like it or not). Lastly, the best way to use connectivity in the “end game” is to use it to feed your next innovation. MIT Professor Eric von Hipple’s work on “lead user” analysis has demonstrated that these first adopters (and adapters) are an efficient source of ideas for new solutions. The problem with lead users is that they tend to be quite fickle and quick to try another new innovation. On the other hand, communities like Amiga’s are perhaps better labeled “lag users,” not because they are late to adopt the innovation (some may in fact be lead users), but that they stick around even after “normal” users have moved on. Because so much of their interaction happens online and in public or open forums, these communities are a great source of learning for companies. The key is to listen to these communities for what makes them so passionate about this innovation and watch what they are doing to enhance its value. These ideas can be invaluable input to the next generation of that same product (if it is your product they are discussing), or even to similar products. What can television, PDA, or car makers learn from the enthusiasm of the Amiga
community? Or, similarly, from the comments posted in such forums as Edmunds.com or Vault.com? Connectivity allows people to talk. After all, according to Cluetrain Manifesto Thesis No. 1: “Markets are conversations.”14 Are you listening? Are you learning? Are you benefiting? Change the Rules of Your Game Organizations should approach innovation in new ways in the connected economy. As previously discussed, organizations can use a variety of approaches to leveraging connectivity to enhance the generation, development, and diffusion of innovations, reaping the greatest possible value throughout their life cycles. While traditional innovation models still have their place, connected innovation has opened up a whole other set of opportunities for those organizations looking to create new products, services, processes, structures, and strategies (see Figure 3).
Certainly the implementation challenges are many. Connectivity, in the end, is just an enabler for new creations. However, there are powerful indicators of what's possible in the world of innovation enabled by connectivity. We hope that you will use these ideas to change the rules of your game.
Demystifying Innovation, pg. 46
The Big Idea
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I. Low, Kalafut, Seisfeld, Measuring the Future: The Value Creation Index, CGEY CBI Special Report, March 2000. 2. We use the term “innovation” to indicate a significant, valuable, new product/service, process, organizational structure, or strategy/business model. For more on how to determine whether something is an innovation, see Ho and Chen's article in this issue, “Demystifying Innovation.” 3. For more information on the nonlinear dynamics of Connected Systems, see Stuart Kauffman’s “At Home in the Universe,” Oxford Press, 1995. 4. For more on such communities, see Etienne Wenger’s Communities of Practice, the Doblin Group’s work on communities (http://www.doblin.com), and Brown and Duguid’s The Social Life of Information. 5. See Ruggles, Abraham, “Innovation and the Failure of Markets,” CGEY CBI Just Thinking paper, July 2001. 6. For more on this, see Abraham, Pickett, “Refining the Innovation Process at Texaco,” in this issue. 7. “Collaborating for Innovation: 2nd Annual Innovation Report,” The Conference Board of Canada, 303-00 Detailed Findings, 2000. 8. Clifford, William, “Disruption in a Networked World: Capitalizing on Patterns of Structural Succession,” CGEY CBI Working Paper, December 2001. 9. Valdis Krebs has mapped such relationship structures; see http://www.orgnet.com/netindustry.html. 10. For a more detailed description of this approach, see Gabriel, Goldman, “Open Source: Beyond the Fairy Tales” in this issue. 11. Rogers, Everett M., Diffusion of Innovation, 4th edition, Free Press, 1995, pg. 10. 12. Ibid, pp. 15–16. 13. For more on this model, see “Letting the Market Manage Your Offer” in Perspectives on Business Innovation, Issue 6. 14. http://www.cluetrain.com.
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The Big Idea
STILL WAITING FOR THE REVOLUTION A CONVERSATION WITH ALAN KAY
lan Kay’s biggest fault may be that he has always been a visionary—in the truest sense of the word. More than 30 years ago, he invented the concept of the personal computer, even coining the term to describe it. But he soon discovered that even great ideas don’t always meet marketplace success. As one of the founders of the Xerox Palo Alto Research Center (PARC), Alan faced a number of challenges as he tried to introduce new computing ideas to executives at Xerox. It wasn’t easy to explain the creation of an entire industry when executives at Xerox asked him what the PC “did.” From the Ethernet to the laser printer to client-server computing to the Arpanet (the beta version of the Internet), Alan Kay played a part in developing the most significant computing innovations in history. Yet, as Alan discovered, innovations—and all great innovators—are often ahead of their time. It was Steve Jobs who eventually borrowed Alan’s idea for the personal computer and later called it the Macintosh. Then Bill Gates’ iteration became Windows. While considered progress in the eyes of the consumer, what has happened in the computing industry has been more like a slow evolution than the revolution that Alan Kay dreamed of.
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Perspectives on Business Innovation editor Kate Kane sat down with Alan and talked to him about where great innovations come from, why the mass market often resists innovation, and what advice he has for businesses to overcome their fear of change.
Q: Is an innovation only an innovation if it reaches commercialization? A: Innovation actually requires that people don’t accept it. We all like our own ideas, but you can’t have science with one scientist. You need to be in a community of people who are constantly challenging your ideas and looking to debug models. So all of these skeptical processes are going on with an innovation. The physical world is the ultimate critic. Q: When you’re working with a group of people and you’re onto something hot, something ahead of its time, something “innovative,” how much do you care whether it’s going to be accepted by the masses? A: Down the road, there’s a lot of caring. But in the research phase, zero. Because this is art. The impulse to have a new point of view has to come from within. The urge is not to make something new just to have it, but to know how to make it—to understand the process for creating something new. But we are limited in our ability to understand something truly new, so our models will always be somewhat limited. Q: What is the measure of success then for an innovation if it’s not about mass appeal or commercialization? A: I think the first measure of innovation is whether it’s beautiful or not. You look at music—all the different styles and approaches that have been considered beautiful. Some are cultural and some are more universally accepted. But it’s the learning that goes
The Big Idea
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on—educating people on how to appreciate something as beautiful. It’s complex and the metrics vary. Take mathematics—this discipline has been around for a long time. Most mathematicians now agree on the kinds of things considered to be beautiful in mathematics. And since science is expressed in mathematics, one of the things you’re trying to come up with in a scientific theory is whether the math that expresses this idea is beautiful in itself or whether or not it has anything to do with the physical world. Q: So, in some ways, the idea of making something appeal to the physical world inhibits the innovator? A: It does. On one hand, you’ve got the people who like nothing better than building castles in the air, which are generally mathematical in nature. Then you have the poor experimenters who are supposed to go out and see whether these castles actually have anything to offer in the real world. Q: So maybe the answer is to find some balance between that kind of blue-sky thinking and practicality? A: That’s right. When I was at Xerox PARC, we had a new programming idea. We were able to find a way of getting it to run efficiently by cooperating with some of the hardware designers to make machines that would run it, even though it wasn’t very efficient on standard hardware. And by doing just this, our little group of six or seven people all of a sudden became very powerful in being able to make real things on a
computer that were new, and test them, throw them away, or keep them and build on them. It was much more efficient. Q: What would a company that was following a scientific model of innovation look like? A: Many companies have a weighted investment model, a portfoliolike investment. This is good. But typically, the riskier these endeavors are, the fewer resources are put into them. It is known that even though some things are very risky, you need to put resources behind them. Companies believe this as rhetoric, but it’s tricky to figure out how to allocate resources to such a venture. Companies are traditionally not comfortable funding people. They’re comfortable funding projects. So the resources are administered with corporate goals in mind rather than corporate vision. A vision is something that expresses a desirable state of affairs rather than a particular configuration of affairs. Basically, anyone willing to take money to work on the corporate goal is probably not the person you want to have spending money. Q: Why is it so difficult for companies to adopt a scientific approach to innovation? A: Well, for humans, we have a mechanism called culture. This is how we gradually discover ways of living in an environment. It becomes our common sense and is passed down through stories, generation to generation. It’s usually based more on a proverb than a model. Most cultures don’t have a strong notion of physical cause and effect. Look at American
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The Big Idea
business. Almost every process they operate with is based on an old-style cultural process. So, they have none of the thinking skills that you learn through a scientific process. They don’t know about models. They don’t know that stories are a bad idea. They think goals are important. Q: What is the best model you’ve seen in business for enabling innovation? A: The model at Bell Labs, until the divestiture. The mission that was written up on the wall was: “Either Do Something Very Beautiful or Very Useful.” The company really wanted to turn this slogan into reality. When I was at Xerox, it did not do this—to them, innovation was just a word not a vision. That’s the difference. First of all, you need to fund the people, not the projects. You need both a dream and a vision without breaking the vision down into goals or missions. This, of course, is antithetical to business. Business rationale thinks problem solving is a good rubric and a metaphor for what they’re trying to do. Articulating goals actually stifles innovation. Q: How does a company really put this into practice? A: Any company should look at the Xerox PARC model and see that only 35 people, costing in today’s dollars, 10 or so million dollars, were enough to create trillions of dollars of wealth. Every large company has more than enough to afford PARC. Q: Something tells me this is easier said than done. A: That's because of “goal seepage”: It’s hard
psychologically to let go of the control. But real innovators need freedom. They have an inner fire to do their thing no matter where they work. A lot of management theories are based on the idea that employees won’t be productive unless they toe the line. You have to take attendance and punch the clock and all that stuff. Q: If you have found the right innovators and you want to enable them, what’s the best model? A: You need to have two kinds of critical mass. One group that comes up with new ideas and another critical mass that acts as a coalition to float back and forth. Q: Obviously, in order for an innovation to get any traction in an organization, you need executive buy-in. How did that work at PARC? A: We would create a new technology and then give zillions of demos. But it was very difficult to sell them on a new idea without creating real anxiety. Q: What would have helped make the situation easier? What do innovators need to get beyond this kind of corporate bureaucracy? A: You really need a champion for your ideas. Someone influential in the company who can recognize a good idea and work it into the corporate process. At Apple, you had an unusual situation where the founder, Steve Jobs, was also the champion. That’s how they got things out the door and why Xerox did not.
From Roadmap to Roadway . . ., pg. 33
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is killing the goose that lays the golden egg.
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You need to reward these guys.
Q: But surely the creation of Xerox PARC reflected the company’s desire to try to enable an innovative culture. A: Yeah, but nobody at Xerox headquarters thought to ask themselves what would happen if everything that came out of PARC was successful. They didn’t really want us to be innovative. They really just wanted basic improvements on existing products— those things that they already understood. Like the railroads that didn’t realize they were in the transportation business and failed to invest in airlines and aircraft companies, Xerox didn’t realize that it was in the office business. It failed to understand that personal computing was going to revolutionize the offices of the future. From our standpoint, we thought this was the simplest slam dunk of all time. Xerox already had salespeople and maintenance people in every office in the U.S. So it had the perfect infrastructure—much better than IBM—for creating a new industry. Q: Why was this so difficult for Xerox? A: Xerox was essentially a one-product company. This hurt the chances of running with something new. Even Apple had problems where it was narrowing itself down to just selling and marketing the Mac. Whereas a company like Sony, or 3M, one where there are many thousands of products in the works at any one time has an easier time of accepting and enabling innovations. The latter has a completely different attitude because it doesn’t link its identity to any single product. This allows them to be more nimble.
Q: But there’s more to the story than just setting up a research center with a bunch of smart thinkers. How does an idea get pushed through the process? A: When I worked at Disney, the person who came up with the idea was required to be the champion of the idea. This was a disaster. Sometimes, the person who thought up the idea was a fantastic salesman. And these ideas were the ones that actually got built. But sometimes the person who thought up the great idea didn’t have the right personality to sell it. A company needs to have a process in place for handing off the ideas to someone else who can see them through the process. There are lots of people who are good in the lab but don’t care what other people think. They do it for their own satisfaction. Q: Ok, so on the one hand you’ve got the group that’s coming up with tomorrow’s great innovations and another group that wields all the control and power. They need each other. How do you reconcile this? A: One thing executives need to watch out for is killing the goose that lays the golden egg. You need to reward these guys. If you’ve got incredible superprogrammers, do you have a way of paying them what the top tier makes? The other thing is to involve the idea guys in the commercialization process. It can be disastrous to slap some paint on the prototype of something and get it into market. So, you need to be careful of the gap between the inventors and the executors.
Refining the Innovation Process . . ., pg. 21
The Big Idea
“One thing executives need to watch out for
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The Big Idea
Successful innovators value the creative process behind innovations as much as the end product itself. The innovation process is more art than science and needs to be carefully nurtured by a company. Most importantly, a company must be willing to open its mind and reconfigure its corporate identity when it develops an innovation whose impact is beyond its traditional boundaries. Only then can a company fully capitalize on an innovation.
article abstract
Q: Can you give me an example of something you tried to sell internally that faced these challenges? A: When I showed the Alto—what is now known as the PC—to the Xerox executives, we started realizing that there was a big disconnect when they asked us what its application was. We said, “It isn’t an application. It’s an industry.” The company wasn’t equipped to handle an innovation; it would have meant completely new packaging, all new manuals, handling updates, training staff, localizing to different countries . . . this is why executives truly love appliances. But you don’t make nearly as much money with an appliance as with an industry.
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REFINING THE INNOVATION PROCESS AT TEXACO Susan Elena Pickett
Innovation in Action
Don Abraham
About the Authors: Don Abraham is a senior consultant at the Cap Gemini Ernst & Young Center for Business Innovation (CBI). Don contributes to research on community innovation’s role in organizational growth. Don also manages recruiting and is contributing to the commercialization efforts of the CBI. Susan Elena Pickett specializes in energy and environmental policy. She has most recently worked in Texaco’s Strategic Management Group developing business strategies to address emerging energy markets and environmental concerns. Susan holds a Ph.D. from the University of Tokyo.
hanges in environmental standards, social pressure for sustainable business practices, advances in energy technologies, and energy deregulation have drastically shifted the landscape of the oil and gas industry over the last 20 years. Having recognized these trends, Texaco Inc., (now ChevronTexaco) knew that in order to thrive in this fundamentally different environment, radical changes to how the company innovated were necessary. Known more for its short-term innovations and ability to make changes quickly to improve the bottom line, Texaco needed a significant shift in mindset. In an organization juggling multi million-dollar, multidecade investments with the need to present rosy quarterly earnings reports, the challenge of innovation was daunting.
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The mission for ChevronTexaco, a company of 53,000 employees across 180 countries, is to incorporate Texaco’s learnings from its attempt to improve the way it solicits, evaluates, and acts on ideas from employees, while focusing on the best interests of today and being cognizant of potential new challenges further down the road. Texaco viewed its thousands of employees as fertile and largely untapped resources for new business ideas, and it set out to discover ways to facilitate the elicitation and recombination of their ideas and develop processes for those considered to be most promising. The catalyst in revamping Texaco’s approach to innovation over the last five years was a management with a prescient perspective on an industry that was
Still Waiting for the Revolution . . ., pg. 16
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Innovation in Action
quickly becoming much more complicated. Most importantly, Texaco saw that new energy technologies were much closer to generating more dramatic profits than originally anticipated due to years of investment by the industry’s incumbents. Wind turbines, solar panels, fuel cells, or even younger technologies could redefine how energy is generated or vehicles are powered in coming decades. The need to create and evaluate technological innovations inside Texaco had never been greater, and it remains a major challenge for ChevronTexaco today. Coupling these new technologies with deregulation’s potential to allow customers to choose their energy provider, companies like ChevronTexaco are deciding whether they should diversify the types of energy they provide beyond oil, gas, and gasoline. Deregulation also means that customers are given more power to choose how they generate energy or power their vehicles, resulting in an unprecedented conflict between what is most profitable for companies that produce energy or fuel and their customers’ preferences for the source of those commodities. These emerging challenges were demanding both technological and service offering innovations at Texaco over the last five years. Another fundamental change to the energy provider/ customer relationship is due to the Internet and increased access to information. Customers, shareholders, and nongovernmental organizations are becoming more informed about the oil and gas industry, often leading to conflicting pressure on the bottom line and demands for more sustainable
business practices. Local community groups in foreign nations are expecting to see a much greater economic benefit from the removal of their natural resources. Larger organizations including Greenpeace are also increasingly pressuring large oil and gas companies to not only carefully examine the full economic and societal impact of their resource extraction, but to give back to the communities or countries from which they take. The United Nations and other international organizations have also focused attention on sustainable development. This pressure to achieve sustainability is increased by stricter environmental regulations regarding emissions. Texaco and other oil refiners have been challenged in recent years to reduce emissions largely by changing the way they refine their gasoline. One of Texaco’s approaches was to determine whether innovations to its business model would help achieve greater sustainability and environmental friendliness. All of these changes required that Texaco re-examine what it produced and how it produced it. Texaco already had a grasp of what was possible yet needed to better understand what outside forces or trends were most likely to occur and strongly affect its industry. The pervasiveness of fuel cell-powered automobiles, the future of governmental deregulation, the strength of alternative energy technologies, the power of social activism, changing environmental codes, more informed shareholders, and the Internet’s role in redefining corporate business models—all of these possibilities and many others necessitated tangible actions by Texaco to manage and enable innovation.
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“Texaco believed that nearly everyone in the company had ideas about different products the company could offer or ways it could run its business.
It felt it had thousands of oil and gas experts inside its walls and wanted them to focus on
” Innovation in Action
creating and sharing innovative ideas with management.
In 1997, Texaco and then CEO Peter Bijur took the first step with the formation of the Strategic Management Group (SMG). The group’s genesis was due to a desire to complement Texaco’s successful focus of the previous 10 years on corporate efficiency with research into the key issues of the next 10 years and developing strategies about how Texaco should evolve to handle them. The SMG was also formed as a solution to the challenge of balancing long-term investing with short-term business success, so that investments of today were made while considering potentially radically different futures. Prior to the SMG, Texaco favored building strategic plans based on past financial history. While this approach held some benefits in planning budgets, the predictions were almost always incorrect—they failed to take into account the changing industry environment and the increasing demand for innovation. Realizing that scanning the future was more than a numbers game, Texaco formed the SMG. Innovation at Texaco now had a sponsor, and the SMG was tasked with developing innovations involving everything from new ways of refining gasoline to reconsidering what types of energy Texaco produces. The SMG’s first major project was to generate multiple, independent corporate scenarios of what the future of Texaco’s industry might look like in 10 to 15 years. Another project of the SMG and Texaco involved the company assembling some of its brightest engineering minds to decide which of the most promising innovative ideas the company had generated should be funded. The company was committed to devoting resources to experimentation.
The Invisible Advantage of Innovation, pg. 75
Texaco and the SMG were still in search of a method to generate a reservoir of ideas reflective of the entire company’s diversely experienced employees. Texaco believed that nearly everyone in the company had ideas about different products the company could offer or ways it could run its business. It felt it had thousands of oil and gas experts inside its walls and wanted them to focus on creating and sharing innovative ideas with management. The company also wanted to become known as the most innovative company in the energy world. Texaco realized communicating this change of management perspective to its employees was going to be vital to encouraging participation in any mechanisms created to harness its people’s ideas. Reflecting its desire to turn employee ideas into business solutions, Texaco and its e-business unit launched an E-Business Contest in the fall of 2000. All of Texaco’s employees were offered cash prizes for ideas on how Internet technologies could help Texaco improve the company’s performance. To persuade people to discuss the contest and share their innovative ideas, the payout structure favored ideas submitted as a team rather than those submitted by an individual. Two hundred twenty ideas were eventually submitted, and the teams behind the five winning ideas each received $20,000. An Internet consulting company was also hired to act upon these innovative ideas. The submissions included multiple online customer services, a Web-based reservoir for Texaco’s management training programs, and online reporting systems for machinery in refineries.
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Innovation in Action
The E-Business Contest allowed Texaco to communicate to its employees a renewed corporate focus on innovation and Internet technologies. This was possible because the contest had clear management support and a well-defined mission. It also empowered individuals to affect management’s strategy or offerings by creating an internal mechanism to better use the Internet and information technologies. However, Texaco’s experience with the contest also taught them what could be improved upon. The e-business unit realized many of the 215 ideas that were not winners also merited attention, yet there was no means of encouraging discussion around these ideas and allowing them to mature and become as viable as the five winners already were. Secondly, this contest was a one-time event, and the flow of innovative ideas from employees to management ended once the contest ended. Texaco realized it still had not yet created an ongoing mechanism that would allow all ideas to be continually generated, or discussed and improved. As the E-Business Contest was coming to a close, Texaco’s Strategic Management Group was also considering how to create a more permanent solution for idea sharing, essentially an eBay for ideas. The Cap Gemini Ernst & Young Center for Business Innovation (CBI) had a solution. The CBI had extensively researched innovation and believed strongly in the importance of strengthening the connectivity between people and their ideas in order to innovate better and faster.
Connectivity Reinvents the Rules . . ., pg. 7
Out of the CBI’s research into how organizations facilitate innovation was borne the approach of Community Innovation. The goal of the Community Innovation approach is to maximize the quality of ideas generated by an organization and discover synergies among seemingly unrelated ideas. Fundamental to the approach are the concepts that ideas are neither owned nor easily quantifiable, and that ideas grow in depth as more people see them and contribute to the refining process. By facilitating idea recombination, companies can increase the speed of the progression from nascent ideas to potential innovations. Idea-X was the tool developed by the CBI to accomplish this. Idea-X is a customizable software application built by the CBI that allows an organization’s employees to share and evaluate their ideas and move them closer to potential corporate innovations. The CBI's insights into Community Innovation and familiarity with Idea-X made it an ideal partner for the Strategic Management Group. The SMG desired to improve its ability to continuously capture employees’ ideas on how Texaco could become more competitive in the industry. In the first stage of the CBI–SMG engagement, the groups built a customized version of Idea-X that best suited Texaco’s specific culture. The CBI first assessed the gap between the processes already in place to enable innovation at Texaco and employees’ feelings about an ideal climate for encouraging innovation. Secondly, Texaco’s innovative capacity was measured along an innovation continuum developed by the CBI. A Texaco-specific version
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Faced with an unprecedented demand for innovation in its industry, Texaco set out to infuse innovation into corporate strategy and harness the innovative ideas of its employees. Each project aimed at increasing innovation taught the company the value of creating diverse employee communities where fledgling ideas can recombine and grow into viable business solutions. When management is empowered to act upon the ideas these communities produce, innovation inside a company as a whole becomes much more likely.
Innovation in Action
article abstract
of Idea-X was subsequently created that reflected data gleaned from the company’s employees and management. Variables affected by these data included what incentives to attach to idea submissions, what system to use to rank idea submissions, and what people in management would be tasked with acting on the mature ideas. After customizing the Idea-X tool for Texaco and naming it IdeaMarket, the CBI and Texaco embarked on a Beta phase that allowed several dozen people to participate in a Web-based idea-generation process. This phase successfully engaged a group of Texaco employees from different business units and with diverse expertise in multiple online conversations, an impressive feat considering this group had rarely been in the same physical space. Employees now had the ability to share ideas in this online community, comment on the ideas, submit a need for ideas about a subject, attach supporting data to an idea, or champion the idea and try to turn it into a more concrete business solution. A steering committee was proposed to take over the task of examining the ideas and identifying ones that either could be combined to form a more complete business proposal, or those that required more nurturing for further development. One major benefit of IdeaMarket was that it recorded a permanent written history of how an idea developed. Such an idea history became very useful for Technology Ventures, a division of Texaco that looked for new technologies in which to invest. The group requested the conversation thread that centered on
the topic of alternative energy conversion be printed out so that it could investigate the issue further. Rather than the opinions of employees about this process being lost at the office water cooler, an online discussion through IdeaMarket brought it to a higher level, and eventually to the attention of management. In addition, IdeaMarket helped create a databank of ideas that may become of value to ChevronTexaco in the future and help create long-term value as the oil and gas industry’s environment shifts. IdeaMarket was also a defined venue for employees to share their creative thinking, while encouraging network building among the participating members. IdeaMarket had the less obvious benefit of teaching employees who thought a particular idea was unnoticed by the company that the issue was already being studied elsewhere in the organization. The tool allowed employees participating in the Beta phase to better educate themselves about all the innovations Texaco was researching. For example, an employee found out Texaco had been studying potential applications of nanotechnology to its business, and he was thus able to devote brainstorming attention to concepts not yet on the company’s horizons. The engagement of the SMG and the CBI also revealed insights into Community Innovation, IdeaMarket, and an overall approach to the innovation process. Connecting idea submissions to incentives and recognition for submitters was determined to be pivotal to mass support of the software application. It was clear that daily use of IdeaMarket was a major habitual
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Innovation in Action
change for many employees who participated in the Beta phase, and that vocal management support of the tool and the clear positioning of IdeaMarket participation within overall job responsibilities are vitally important to its success. This collaborative engagement confirmed that companies have the ability to harness their employees’ creative thinking by building a mechanism for all employees to share ideas and have them grow in power. Ultimately, these evolved ideas can then be evaluated and acted upon by those capable of affecting management strategy. Texaco and the SMG learned that to rally a company’s employees to participate in idea generation, management must make it clear in the company’s mission that innovation is a key strategic corporate value. Furthermore, participation in innovation must be an expected part of each person’s job description, rather than a task lumped on top of all other necessary responsibilities. If a company makes every employee a potential idea generator, it is heavily increasing the number of innovative ideas that will be shared and the number of people who will help refine them. With the merger of Chevron and Texaco in October of 2001, the future impact of the IdeaMarket approach on ChevronTexaco remains to be seen. A great challenge awaits this new company—the surplus of ideas will be even greater, and a mechanism to capture them will be important. Post-merger, ChevronTexaco’s increasing scale will bring both more possibilities for innovation and more challenges in coming up with tomorrow’s new ideas.
From Roadmap to Roadway . . ., pg. 33
Fundamentally, any organization must undergo a shift in the standard perception about where the future direction of a company or a new product or service should come from. Companies that empower a bottom-up approach to idea generation in their organization can actually maximize the combined intellect of their organization. Experienced and intelligent leaders are necessary to make the final decisions, but their task of increasing innovation may become much easier once they extract the precious resources in the minds of their employees.
Acknowledgements: Special thanks to Geoff Styles for his invaluable assistance in crafting this journal article.
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INNOVATION-BASED SUSTAINABILITY AT CAPITAL ONE FINANCIAL J o h a n n a Wo l l
Annual Report 2000
About the Author: Johanna Woll is a senior consultant at the Cap Gemini Ernst & Young Center for Business Innovation. Johanna has led the research for and managed the publication of the third book co-written by Christopher Meyer and Stan Davis. This book lays out some of the technologies and principles of a postinformation economy driven by advances in the molecular sciences. Over the past year, she has been exploring recent developments in biotechnology, nanotechnology, and materials science through executive interviews and secondary research.
ith 43.8 million customers (and membership growing at a rate of more than 430 percent for the past three years), $45.3 billion in managed loans, and earnings of $642 million in 2001 (a 30 percent growth rate), it's no wonder Capital One Financial is considered one of today's most innovative companies. Innovation at Capital One Financial cannot be traced to a single department or set of activities. It’s not a unique R&D function; there is no internal think tank. Innovation is not localized but systemic. It’s the lifeblood of this organization and drives its remarkable growth.
W
How does the company establish and sustain a track record of such growth and innovation? The short answer would cite an information-based strategy and exceptional people. But these are merely the resources. Applying these boldly—but judiciously— generates the remarkable results. Two characteristics, in particular, drive every one of Capital One’s serial innovations: a process of testing and launching information-based offers rapidly and frequently and an unstructured, bottom-up corporate environment. Feeding Innovation Information-Based Strategy In today’s global, connected economy, companies have unprecedented access to information—information on customers, on channels, and on costs. Fierce competition has forced down the price of communications technology and has driven an explosion in the capacity to capture and manipulate information. Though information is proliferating at an incredible
Innovation in Action
“Capital One is an innovation laboratory where entrepreneurs start micro-businesses and test ideas that add value for consumers.”—Capital One Financial
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Innovation in Action
rate, many companies fail to tap into this prodigious source of value. Capital One is built on it. Information-Based Strategy (IBS), Capital One’s proprietary approach to managing data, describes not only the raw material, but its artful analysis. Capital One uses information to design massively diverse, multidimensional models of potential offers. A strategy of modifying a core offer along selected dimensions—such as product, price, promotion, or channel—spawns infinite diversity, and from this diversity emerge winning innovations. Last year, Capital One conducted 64,000 structured tests. A highly developed competency in test design allows them to test very hostile—that is, negatively profitable—areas of the market, areas that their competitors often avoid. This kind of testing allows Capital One the opportunity to find profit in the riskier markets—ones that would typically be avoided.
have cards that show a snowboarder jumping off a mogul, and their monthly statements might include inserts that describe tournaments, broadcast updates, or special promotions. This product line is driven by consumers’ “pockets of passion.” Since Capital One cannot identify and analyze these scientifically, it conducts detailed market research and creates numerous micro-affinity categories themselves. Without any partners (and no commissions), there’s a huge amount of risk involved. Capital One creates these mass-customized credit cards by focusing on the confluence between people’s emotional connections and their needs. Then, it offers a whole series of account management programs— interest reductions, interest increases, line extensions, line depressions—built on data it gathers about customers’ behaviors.
Capital One adds continuously to this data source, actively gathering information about its customers and the marketplace. For example, by monitoring traffic at its website, it can determine which visitors become customers. Based on this information, it’s able to create banner ads to match the demographics and affinities of eyeballs at other sites.
People Any company’s success begins with its people. While most companies know this implicitly, Capital One pursues it explicitly, in its recruiting, hiring, assimilation, and performance processes. Growing a company from 2,000 employees to 20,000 employees in seven years calls for an extraordinary commitment of resources.
Capital One’s Lifestyles product set serves thousands of micro-segmented niches in the marketplace. Lifestyles credit cards feature pictures that match customers’ interests—Japanese gardens, Latino culture, and so on. Snowboarding enthusiasts might
Indeed, senior executives at Capital One spend up to 25 percent of their time recruiting . . . which is better, they say, than spending double that amount later managing mistakes. They look for entrepreneurial, analytical, ambitious, and self-motivated people.
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“At Capital One, short product life cycles are both the impetus and consequence of innovation. Sixty percent of its products didn’t exist six months ago;
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Innovation in Action
80 percent didn’t exist one year ago.
People who are passionate enough to pursue an idea that they believe in, even if doing so means extending well beyond their primary responsibilities. In fact, responsibilities are somewhat undefined, by design. New hires won’t arrive at Capital One and find a policy book. Instead, they are put through fairly elaborate assimilation programs during which they are told about the Capital One business strategy, the business model, and the organization. Then, they are given a Success Profile that outlines the behaviors that make for an effective employee. The Success Profile outlines 23 competencies, clustered around five primary success factors, behaviors like building relationships and taking personal ownership. These detailed behavioral descriptions form a clear and practical road map for career development. Innovation in Practice Product Churn and Testing “When you work backwards from the marketplace, there’s a life span of six months for any product, so you have to create a completely different kind of financial services company, and it’s based on innovation.”—Rich Fairbank, CEO
At Capital One, short product life cycles are both the impetus and consequence of innovation. Sixty percent of its products didn’t exist six months ago; 80 percent didn’t exist one year ago. With products that are entirely intangible and very flexible, innovations can hatch like fruit flies or bacteria, and Capital One can respond quickly to a capricious consumer market to capture first-mover advantage.
Refining the Innovation Process . . ., pg. 21
Product churn creates more opportunities for migrating to new market niches before the competition, and a diversity of offers and the ability to generate new offers quickly improves robustness in a rapidly changing environment. Capital One produced 6,000 new offers last year, each one a response to a new opportunity identified, or at least sensed, through market tests. When the raw material is information, failure is relatively cheap but extremely valuable in what it can teach. If you kill an idea in the lab, you can’t learn. So, Capital One lets the market test new products. Here’s how it works. A project leader, often self-appointed, recruits a cross-functional team to pursue an idea. Once a loose team is assembled, it explores the idea in a brainstorming session, tapping the group’s intuition, listening to diverse perspectives, and presenting findings derived from initial research. The team then identifies a range of customer segments for test marketing (based on demographics, lifestyle, life stage, credit risk, and so on), builds a model, launches a beta test, and screens the results to select offers with the highest profit potential. If an offer passes the tests, it is rolled out to the entire target group. Later, Capital One might decide to exit the offer (even if only temporarily). Impermanence is a fact of life. Information gained during this entire process helps refine the model. It might lead the team to think differently about credit policy or to generate new hypotheses that could point to alternative, even more profitable offers. The strategy emphasizes diversity;
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Innovation in Action
it’s all about creating seeds for future success, even if in the short term they do not prove profitable. Each test is deliberately designed to test extremes, up and down the risk spectrum. More often than not, the insights that drive Capital One’s product innovation, which expand its competitive advantage, come from the fringe. Most companies conduct market research, design products, roll them out, and then live with their success or failure. In contrast, Capital One looks for promising economic levers, and using a variety of quantitative and qualitative market research tools, engages with customers to understand their needs. The modelers combine these factors and build them into the test designs. By launching tests in the marketplace and analyzing the feedback, Capital One can figure out not what customers say they will buy, but what they actually do buy—and that’s what it rolls out. This kind of test-and-learn culture requires the scientific disciplines of rigorous testing, experimentation, and analysis. This kind of discipline shows up in decision-making, too. Without smoking-gun evidence that the economics are as positive as they were in the test, a project cannot go forward. At Capital One, employees can’t actually harvest the values out of the testing program unless someone more senior studies the test results, agrees to the analysis, and authorizes, in most cases, a quantum shift in the marketing budget, earmarked to chase the opportunity.
Connectivity Reinvents The Rules . . ., pg. 7
When Capital One wanted to establish a process for accepting credit card applications electronically, it was able to build on the credit policies and fraud technology it had developed for other products. Capital One was one of the first in the industry to process applications online, and it now serves more than 3 million customers through this Internet channel. Initially, it encountered massive fraud, so it kept its activity volume at a low testing level, for more than two years, before scaling up. The company continued to get reads on the performance of the accounts originating on the Web and acted on this feedback to build better fraud defenses, learning how to detect and reject computer-submitted applications (for example, those filled out in less than a millisecond or those submitted using the same computer ID number or ISP session number). Rather than conducting thousands of fraud prevention tests in the lab, Capital One let the market teach it how to deal with fraud. When it encountered new problems, it scaled back the project and returned to testing until discovering a solution. This test-andlearn cycle permeates every activity at Capital One, and underlying it is a commitment to acting on feedback, to analyzing information every way possible, and to using it to make smarter, more intelligent, or profitable business decisions. In doing so, it empowers the organization to grow very rapidly with very high profitability and to out-maneuver competitors. The information flow is so close to real time that it can turn on a dime and react. In the case of fraud
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Innovation is not a process at Capital One. Rather, it is the underlying philosophy upon which every aspect of the company is organized and managed. Information is the company’s sustenance, and it uses market data to constantly bring new credit card offers to consumers. Capital One learns by designing models of its potential offers and by listening to feedback gleaned from experimentation in the market. Combining this information with an emphasis on an entrepreneurial spirit among its employees, Capital One has created the most innovative corporate environment in its industry.
Innovation in Action
article abstract
detection, a rapid feedback loop lets the company know within a single day that it has a problem. Without these kinds of information systems in place, it might not learn about fraud for months, perhaps, or until the quarter closes. Capital One has even translated this testing culture into its hiring process. Candidates must pass a series of tests, designed to uncover their analytical and behavioral strengths and weaknesses. The same kind of modeling correlates post-hire performance with pre-hire test results and identifies potential performers very early on. A Fluid, Forgiving Culture That Encourages Risk “At Capital One we create an environment where scientific labs can be created, where people can fly, where exploration and risk-taking are rewarded and failure accepted.”—Rich Fairbank, CEO
At Capital One at any one time, there are hundreds of in-house entrepreneurs running internal businesses. These might be activities, product lines, or entire units with their own P & L’s, but each is run as an individual business. There are hundreds of such enterprises running inside the company, and the profits generated and claimed by them add up, at least virtually, to several times corporate earnings. In such a fluid environment, ideas percolate from the bottom up. Indeed, Capital One’s corporate culture evolved from the founders’ understanding that the command-and-control strategy typical of most lending institutions severely curbs the potential for innova-
Refining the Innovation Process . . ., pg. 21
tion and rapid growth. In Capital One’s less hierarchical environment, local information can drive decisions. Associates, who are closest to the data, are empowered to find better ways of operating, put a business case together, and make it their mission for that quarter. Such direct feedback keeps pressure on the entire system to improve continuously. In many ways, Capital One is a chaotic culture, where people just bump into each other somewhat randomly, like molecules in Brownian motion. When one person bumps into another who’s headed in a similar direction to pursue a similar idea, the two negotiate to determine who should continue on. Often they make commitments to each other and maintain contact in a customer and performer relationship. Such random encounters serve not only to eliminate redundant efforts, they enable innovation by bringing diverse elements together. Without these kinds of connections, diversity has little inherent value. Introducing new people into such a culture can be a struggle. Without a formal work chart, and few clearly defined roles, it can be a very intimidating place for new people, and it takes them a while to understand where they can add value and what is expected of them. But the benefit of loosely defined responsibilities is that no one knows where his job ends and someone else’s begins. As a result, people will go to great lengths to make sure that they optimize whatever it is that they’re working on, whether a particular product, mission, channel, or process. Managers really are like coaches, encouraging their staff to
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“Capital One separates outcome from behavior and balances these factors
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when evaluating performance.
Innovation in Action
step off the cliff and just jump into the organization, trying to create change and trying to identify valuecreation opportunities. Capital One’s associates have permission to fail; there are no negative repercussions for trying something that didn’t work, as long as they behave according to the rules. Rather than penalizing people who fail, Capital One’s leadership praises them for their commitment and intentions. CEO Rich Fairbank often asks them to explain what happened, so that others can learn. In doing so, not only does he reinforce the organization’s tolerance of risk and failure, he sets expectations and helps revise best practices. Capital One separates outcome from behavior and balances these factors when evaluating performance. Last year, an associate in the collections department was working her way toward a big award for conducting 10 perfect calls. After nine successful calls— monitored by her boss—she broke rank and risked it all, violating company policy for the sake of a customer in need. She gave the customer $700, a huge amount relative to the credit line. She explained to her superiors that treating customers with compassion was not only more effective in extracting payments, it was highly effective in building trust and loyalty. In the end, her boss was really pleased that she had uncovered a poor policy. Rather than punishing her, he celebrated her insight and boldness and communicated several important messages. He reconfirmed
that it’s okay to break the rules in the right way. And he acknowledged that, at Capital One, it’s the keen, hardworking associates who are the real heroes, the ones that the company depends on. Capital One has shaped its organization by developing a competency model that integrates hiring, performance management, professional development, and pay—a compensation program favoring long-term incentives, such as stock equity-based compensation, that really promotes value creation. Performance reviews with 360-degree feedback happen twice a year. And while many companies focus their performance process on competencies and results, Capital One evaluates, in addition to these, performance potential and people’s ability to learn and grow quickly. Testing, failing and learning, shifting, and recombining . . . innovation at Capital One would be far less successful if these guiding principles did not permeate all aspects of the enterprise, from offer and technologies, to employees and new business ventures. Together, they enable the organization to grow, improve, and innovate, to respond to change with change, and to thrive in a volatile economy.
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FROM ROADMAP TO ROADWAY: MANAGING INNOVATION AT BMW
Jochen Hartmann
Markus Seidel Innovation in Action
David Sutherland
About the Authors: David Sutherland is the CEO of the Business Innovation Consortium (BIC), a consulting firm specializing in innovation management. David holds a Ph.D. from the University of Virginia. Jochen Hartmann is responsible for the transfer of innovations into special vehicle projects at BMW. He studied combined mechanical engineering and business administration and specializes in R&D management and product development. Markus Seidel is general manager for Innovation Management at BMW Group and responsible for the predevelopment portfolios of the BMW and Mini brands. He graduated with a master’s degree in business engineering and a Ph.D. in economics. He is a specialist in product development issues.
sked in January 2001 “which brand stands for new technology,” readers of Auto, Motor and Sport for the second consecutive year ranked BMW first. The winner and the loser were in the opposite positions in the magazine’s initial 1997 survey, which just goes to show that anything can happen with a focus on finding the best ideas and creating a sustainable innovation process. The impact of BMW’s innovation roadmap is translating to success on the world’s roadways.
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At BMW, to “innovate” may mean introducing a new component or technology into an automobile. But at the end of the test drive, it also persuades customers to buy the BMW when, until the moment they drove it, they had intended to buy the competition. Once, lean production was the name of the game in the automotive industry. Then mass customization became the key. Now, innovation is the most effective way to differentiate from the competition. Figure 1 displays the progression of competitive differentiation in the automobile industry during the last century. But innovation at BMW has not been happenstance. The company has defined a deliberate process to achieve an integrated flow from idea to finished product, the notion being to create sustaining winning innovations with a quick cycle time. Since 1997, BMW has significantly decreased the time-to-market for new components and linked increasing sales to the introduction of leading-edge components. To reach sustainable growth, businesses must continually introduce new products, new services,
The Invisible Advantage of Innovation, pg. 75
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Figure 1 “The Name of the Game” Why Innovation?
Evolution of the Automotive Industry
Source: Institute for Technology Management (2000), Hochschule St. Gallen, Switzerland
Mass Innovation Mass Customization Lean Production
Mass Production for a Buyer’s Market Mass Production for a Seller’s Market Pure Craftsmanship
Innovation in Action
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new channels, and new processes. New markets also must be constantly explored. It’s not possible, however, to pursue every new idea that comes up. Most companies simply don’t have the resources or infrastructure to mine the volume of new ideas and stay ahead in today’s competitive marketplace. The key to success, therefore, lies in nurturing new ideas, picking the “winners” and making them happen quickly through an integrated innovation process. Three years ago, BMW underwent an assessment of its innovation process and set out to create a more rigorous and focused approach. Today, BMW has made innovation a systematic part of its product development process with resources, accountabilities, and a governance system to facilitate the decisionmaking process. Concerned that the best new ideas were not always getting the most attention, and that those that were sometimes lagged through the innovation process at an unacceptably slow pace, BMW engaged the Business Innovation Consortium (BIC) to work with it to analyze BMW’s existing method for identifying new automotive components and getting these ideas into production. What the BIC found was that BMW actually had many new component ideas circulating, but the process for selecting the best ideas and applying the appropriate resources could be more efficient. It was virtually impossible to find the best new ideas, manage them, and get them commercialized as quickly as the market opportunities appeared. An idea census found that the various BMW divisions developing
Refining the Innovation Process . . ., pg. 21
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components were trying to manage more than 1,200 innovations at once, all of which were potential changes to the production process. The BIC created a model to reduce the potential innovations to a smaller number and focus them on specific customer areas with the intent of integrating innovation more seamlessly into BMW’s business strategy. Managing innovation is no easy task—it’s almost an oxymoron—because it’s about risk and change. While many companies find it easy enough to put an “idea generation” process in place, few have discovered the discipline for prioritizing, categorizing, and supporting ideas all the way through production. The BIC estimates that in a typical company, decisionmaking consumes up to 65 percent of the innovation process. As a result, companies’ processes for generating ideas literally die on the vine because they haven’t instituted a means for supporting an idea through the entire life cycle. The Process BMW and the BIC created an innovation model for BMW using explicit filtering criteria to weed out the weak ideas from the strong ideas. The criteria developed were customer-driven and became the basis for developing six specific Innovation Fields that would be used for opportunity identification. Upon passing through the filter, ideas may be promoted to the next innovation stage, recycled for further evaluation, or removed from the process and stored within an ideas repository (part of the innovation infrastructure) for possible future use (see Figure 2). Any accompanying
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BMW is currently considered the most innovative brand in its industry. But it has not always been that way. After management chose to focus on making innovation an explicit way that consumers differentiate BMW from its competitors, the company was able to create numerous internal mechanisms to manage and speed innovation without stifling creativity. Most importantly, the company realized it must risk failure to create success and solidify the future of the company.
information associated with the idea is saved so new technologies and new business opportunities won’t fade to black or be lost in the system when people leave. This is known as the “Focus” stage. From Focus through implementation, each idea may be filtered out of the funnel if evidence shows the idea won’t survive as a business proposal. The business proposal considers the idea’s value and risk and determines if the idea can be managed to a result. This guarantees that resources always are focused on optimizing the business return from new ideas. At each stage (idea generation, focus, concept development, prototyping), these filtering criteria are crucial to making the organization’s innovation process successful. These common innovation disciplines apply to every stage of the process: ■
Strict schedules (“timeboxes”) to ensure focus and timeliness.
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All departments likely to be significantly affected by a particular innovation are involved at the earliest step of the process.
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A responsible, committed sponsor is accountable for each step: a Business Innovation executive, followed by a Business Unit sponsor (e.g., a line manager) who has to be identified before concept generation.
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· Exit criteria is explicitly applied to determine whether an idea progresses, dies, or hibernates.
Innovation in Action
article abstract
These parameters must be applied within an environment that supports innovation and cannot be simply seen as reasons to abort new ideas. Successful innovation hinges upon a balance between creativity to spark ideas and business pragmatism to certify there are real commercial benefits. BMW executives established a Research and Innovation Management Center to manage ideas through the defined process to completion. This group is charged with identifying new component ideas quickly and getting the best ideas into production as quickly as possible. Centered in Munich, the group has linkages throughout the BMW organization and to different “satellites” around the world, as seen in Figure 3. The satellites have been established to ensure BMW is first to identify new technologies and market trends by being in the right places around the world. The set of six customer-driven Innovation Fields is the focal point for defining market opportunities and managing a portfolio of ideas. Each Innovation Field is focused on a particular customer-driven need: ■
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Still Waiting for the Revolution . . ., pg. 16
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Figure 2
The BMW Innovation Process Flow
Innovation Research
Innovation Management
Technology Exploration
Innovation Transfer
Innovation Fields
Innovation Concepts
Virtual Innovation Agency
Innovation in Action
Source: BMW
Each Innovation Field, stewarded by a full-time Innovation Field Manager (IFM), is linked to a component of the company’s business strategy that is determined by an innovation strategy board made up of BMW board members, corporate strategists, and innovation managers. Each Innovation Field Council (IFC) is made up of members of appropriate operating units and levels across BMW. These councils interpret the directives of the innovation strategy board into needs and opportunities for new products and components. The fields are not meant to be mutually exclusive— ideas do overlap—but to provide focus and decision traction to prioritized ideas and opportunity areas. Fields can be added as necessary to keep the range focused. Each field is linked to a corporate principle such as strategic direction in R&D, market introduction policies for the most important innovations, and transparent, companywide accepted evaluation of innovations. BMW also has developed an innovation portfolio that is managed by the innovation team in Munich, ensuring the company stays focused on the best opportunities and to understand the value each new car component brings to overall automobile sales. This portfolio tracks ideas from the point of generation through completed projects and then monitors the projects’ results once they are put into series development. The portfolio also is used as a type of business radar screen, identifying areas of “white space,” or opportunity areas where there is a need
for ideas. Because ideas often have been developed but have not been moved to project status, the white space technique enables engineers throughout BMW to connect their ideas to opportunity areas. Sensing the Market To buttress its competitive advantage and to actively position itself in areas where significant market and technology opportunities exist, BMW has adopted an “empathic” approach to market sensing utilizing its various innovation satellites. This strategy allows the company to understand market opportunities by participating in them rather than by simply reviewing market research. If the situation warrants the required investment, the company will establish an on-site Innovation Satellite office to augment those in Munich, Palo Alto, Tokyo, and Park Ridge, N.J.
The Palo Alto Technology Office (PATYO) is perhaps the leading example of BMW’s managing innovation strategy. Once the decision-makers were determined to make what PATYO director Holger Jeebe calls a “pre-emptive strike” to mine the Valley’s intellectual capital and its leading-edge technologies, where better to set up than in today’s most progressive high-tech neighborhood? There, a small group of engineers work among the brains behind advanced hardware and software developments, sharing insights and co-creating new automobile component products. “We do things in the PATYO we could never do in Munich,” Jeebe says. “We’ve created an intercultural, interdisciplinary work mode that combines structural
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Figure 3 From Idea
BMW’s Innovation Organization
International Procurement ➤
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BMW Research
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Research and Innovation Center, Munich IFC
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processes from Munich with Silicon Valley’s practices and work habits.” At the PATYO, there are opportunities to explore new ideas such as the Helmet Project, through which an innovative motorcycle helmet that employs new technology to enhance the BMW riding experience was created. Combining advanced technologies with the product vision, doing market research, designing the prototype, and getting customer response yielded a helmet with an integrated information display in just 18 months. And while this product may never go wider than the open-vehicle market for which it was developed, that isn’t the point. This research center allows the opportunity for experimentation and taking a chance, risking failure to create success. Every year, 10 BMW employees, who compete for the honor, travel to Palo Alto to discover the next big thing in automotive innovation. Teams of three people then have 90 days to identify, explore, and develop new projects. Teams are cross-functional so that each project has the perspective of a marketer, an engineer, a strategist, etc. This way, there is no holdup later in the process as the idea makes its way from one stage to the next. If the team determines the technology has a chance, the engineers begin to create a component. They then build a working prototype. Once a design and prototype are finished, the concept is tested in the interiors of three production cars. If that survives a rigorous testing process, it goes to Munich for further evaluation, development, and final commercialization.
IFC 1 Full-Time Field Manager 8–12 Council Members from various parts of BMW
“If a project takes 95 days, that’s ok,” Jeebe says. "We’re in Silicon Valley for faster time-to-market and for faster product development. But the ideas have to make sense, or we won’t explore them. If Munich takes our idea, then we count it as a success.” The iDRIVE is one such success. With approximately 700 different selectable functions available in today’s deluxe cars, the instrument panel can look like that of the Concorde—and be just as difficult to operate. With customers complaining that the dashboard was taking too much of their attention from the road, the company’s marketers and engineers began to think about redesigning the dashboard panel. Their challenge was to restructure the controls so the important driving functions would be easy to access and the less important ones wouldn’t get in the way. Could drivers function more efficiently with a different interface? Could fewer knobs be positioned within one visual point of view? BMW headquarters relied on the PATYO for help. The Innovation Strategy Board asked PATYO to investigate the possibilities. An engineering team from Munich was assigned to combine its intellectual capital with that of local software developers. Within 90 days the international team had developed a draft iDRIVE device. The prototype was then brought back to Munich for feedback from engineers and marketing mavens and ultimately seen through to production. Not long afterward, the new iDRIVE hit the street in a Z9 study vehicle at the 1999 Frankfurt Motor Show. It now comes with every Series7 car.
Innovation in Action
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Figure 4
Innovation Research—Virtual Innovation Agency (VIA) Source: Business Innovation Consortium
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The gestation period was less than a year. BMW’s other information pipeline is the Virtual Innovation Agency (VIA), an Internet portal for developing new relationships with any potential external innovators: individuals, small companies, and large companies from other business centers and research centers. This way, BMW can be sure of a continual idea generation flow and keep a direct pulse on the market, customers, and small business partners. Those who have developed an idea that could increase BMW’s competitive advantage can go to the website (http://zulieferer.bmw.de/en/via/), where the company promises to support them and maintain the confidentiality of their idea. If the company is interested in implementing the idea, it provides personal contacts in the appropriate special departments. The company then reimburses the innovator for the idea.
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Innovation in Action
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Competence (CoC) thinks the idea has merit, it seeks the approval of the appropriate cross-functional council. If the council agrees, a contract is signed to begin a market assessment. Figure 4 captures the process of narrowing down VIA submissions. Only three ideas have survived the VIA’s rigorous test. BMW has partnered with other startup companies to explore them. But the company and its customers have just begun to familiarize themselves with sharing information over the Internet, so the ideas soon will flow faster. The more there are, the more winning ones there will be.
BMW instituted filters and self-assessment procedures to help decide which innovative solutions were best suited to go through the VIA. This way, the novelty, technical feasibility, and economic viability of the idea can be assessed effectively and quickly. VIA associates, acting as the first filter, assess the survivors’ ideas, register them, and report their findings to the innovation fields. The VIA associates and innovation field managers work together to identify the appropriate center of competence, which then analyzes the idea and the associates’ reports. If the Center of
Refining the Innovation Process . . ., pg. 21
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ONLINE COLLABORATION: THE NEXT WAVE OF INTERNET INNOVATION
About the Authors: Lisa Fretwell is a managing consultant in Cap Gemini Ernst & Young’s B2B Supply Chain service line. She has worked across a number of industries, including manufacturing, financial services, consumer goods, retail, automotive, and defense. Her specialties include B2B collaboration, innovation and product development, operational improvement, and organizational change. Bud Strandquest is an executive consultant in Cap Gemini Ernst & Young’s B2B Supply Chain Strategy practice. He leads the U.K. Collaborative Business Solution team and is director of the Workrooms collaborative
Bud Strandquest
he combination of the Internet and new technology tools has made more sophisticated collaboration between companies and their various stakeholders a real and cost-efficient possibility. These developments are prompting businesses and the scores of eMarketplace sites that survived the dot-com bubble burst to move well beyond their initial online tools that employed aggressive procurement tactics. Instead, companies are adopting tools that support a wide range of internal and external activities. The payoff could be huge: namely, more comprehensive solutions yielding greater benefits in areas such as supply-chain management, joint product design, manufacturing, distribution, or marketing and sales activities.
T
solution program. He has worked with clients across the world, leading projects in the area of supply chain management, knowledge management, and innovation in the chemical, energy, manufacturing, defense, and engineering sectors. His specialty is in the area of B2B collaboration and business performance management.
This is the world of collaborative product commerce (CPC), and current tough economic conditions have only increased businesses’ interest to work closer with trusted suppliers and find new ways to enable inhouse teaming. Indeed, some organizations have already emerged as the early adopters of CPC in their respective industries, with companies within the aerospace, automotive, and consumer products sectors leading the way. Both the Ford Motor Company and General Motors are prime examples of successful collaborative product commerce implementations. Ford has begun using Web-collaboration technology to boost fuel efficiency. Linking engineers and suppliers working in multiple locations during a vehicle’s design phase, the company can instantaneously determine how a
A Blueprint for Change
Lisa Fretwell
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“General Motors, meanwhile, has had similar results with its Web-enabled collaboration efforts, cutting vehicle development time from 42 to 24 months,
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a decrease of 43 percent.
A Blueprint for Change
proposed design change would affect a vehicle’s fuel consumption. This has eliminated an analysis process that previously took three days to complete. As importantly, the collaborative technology will help trim $5 million to $15 million off a vehicle’s development costs. While this cost savings represents only a fraction of an average car’s $2 billion development costs, the potential for companywide savings is sizeable. General Motors, meanwhile, has had similar results with its Web-enabled collaboration efforts, cutting vehicle development time from 42 to 24 months, a decrease of 43 percent. The initiative provided product teams around the world with simultaneous online access to vehicle information. In the medical-device industry, c-Medica also reports impressive success with CPC. Launched in June 2001, its collaborative data-management site is dedicated to improving speed to market for new medical devices. c-Medica provides original equipment manufacturers (OEMs) and suppliers with a suite of online tools that seeks to streamline the product-development process. Collaborators use the c-Medica site to share CAD files and technical data, access databases, conduct meetings, manage project milestones, and make use of work plan processes that are aligned with Food and Drug Administration guidelines. The site also gives users access to medical industry news, discussion forums, and procurement offerings from a wide variety of suppliers. c-Medica itself is the product of cross-industry collaboration; the site was brought to life by Dow Plastics, a
business unit of Dow Chemical, and the Medical Device Manufacturers Association, and has steadily increased its reach across its sector. As in the automotive industry, the thousands of manufacturers and suppliers that make up the $150-billion-a-year medical-devices marketplace stand to reap substantial benefits by coordinating their new-product-development activities. Until c-Medica’s launch, however, the opportunities for real-time information sharing and data exchange were extremely limited. In an industry that sees more than 30,000 new-product-development projects initiated each year, the site’s ability to bring business partners together in a centralized—and most significantly, neutral—workspace has helped reduce costs, shorten development times, increase efficiency, and simplify increasingly complex innovation initiatives. By connecting designers, manufacturers, and suppliers throughout the development process, especially in its earliest phases, c-Medica has proven that in the right circumstances, collaboration can significantly benefit individual companies as well as an entire industry sector. The Power of Collaboration While corporate innovation has long depended on collaborative work relationships to achieve desired results, the rise of the Internet has provided an enticing environment for managed and self-organizing collaboration. Aided by the Internet’s possibilities, businesses reasoned that they could deliver more complex and customized products and services—and do it faster, cheaper, and better than ever before.
Connectivity Reinvents the Rules . . ., pg. 7
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Moreover, as Ford, c-Medica, and others are finding, these advantages often lead to other benefits as people across the enterprise gain access to databases through their Web browsers wherever and whenever they want. Over time, as business models morph to support collaboration—and as more and more processes are shared—teams, rather than individuals, begin to manage various processes and drive further change across the organization. Before starting down this road, however, a business must understand that this change does not happen overnight. CPC success is an evolutionary process that unfolds within the context of business processes. As a result, gains from CPC are highly dependent on the organization’s ability to support and embrace cultural change. Indeed, unless a company and its trading partners have a thorough understanding of the roles, relationships, objectives, and needs of the collaborating parties—and can create an environment that
incorporates and builds on those insights—it is extremely unlikely that a CPC initiative will succeed. Collaboration is not the end product of technological innovation; rather, it flows from a measured approach to process complexity. Evolutionary Change The most successful efforts in collaborative product commerce often begin very modestly, for example, from technology that supports “one-way” data posting of office files—and with a transformation “map” and timeline that reflect an understanding that more robust collaboration may well be two or three years away.
In the next evolutionary step, companies may adopt two-way data sharing, enabling users to access, view, and amend each other’s documents. From here, as more advanced technology and process improvements are integrated across the enterprise, workers within the organization may begin to collaborate on data via virtual team rooms and notice boards, real-time conferencing, and application sharing. At this level, decision-making across the business is enhanced, and reporting and management controls are simplified. Further along the collaboration continuum, more evolved organizations may have already installed shared databases and collaborative software tools such as those designed for project planning and bill of material (BOM) data. Teams involved in development initiatives can update their individual status through dashboard-style information displays that
Open Source . . ., pg. 59
A Blueprint for Change
Thus, by combining the Internet with the right set of collaborative tools, companies were empowered to:
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Online collaboration has become a major opportunity for companies to rethink how they partner with other firms and where they might be able to become more efficient. Specifically, Collaborative Product Commerce (CPC) allows companies to share information in real time and shorten the product development process, as well as work cooperatively in a neutral, virtual environment. The future of CPC has much broader implications, but companies need to be open to share their information and be able to embrace a major cultural change. The payoff, however, for such openness in a market of interconnected firms is huge.
article abstract
A Blueprint for Change
give simple traffic-light summaries of an overall project’s progress.
ments such as reduced process time, lower cost, or increased quality.
At the most advanced level of CPC, true process collaboration becomes a reality. In this stage, discrete initiatives are linked to centralized business systems, including ERP, PDM, CRM, and APS, for resources, costs, product data, etc. At this level, protection issues regarding intellectual property and network security have been addressed. With gains toted in business process efficiencies, product-development cost reduction, and enhanced organizational effectiveness, the company freely exchanges information with outside business partners, vendors, and other stakeholders, setting the stage for improved revenue and market share.
Based on what we have seen in the marketplace, the likelihood for success is significantly enhanced when companies:
Implementing Collaborative Product Commerce As noted earlier, the automotive and aerospace industries already are seeing the benefits of this approach, reporting time-to-market reductions of up to 67 percent, efficiency improvements of up to 30 percent, and product-part savings of between 3 percent and 5 percent because of various CPC initiatives.
Not every company that incorporates CPC, however, will have these results. Collaboration is a complex process that sometimes does not work or proves too difficult to produce the desired outcome. To improve the likelihood of success, CPC initiatives must focus on making it easier for people to collaborate rather than on the technology. And this new corporate culture must concentrate on delivering significant improve-
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Provide the resources—the technological and procedural means—that participants need to collaborate effectively
Even with these foundation blocks in place, however, companies must still confront several other key issues before they can move ahead. These tend to fall into four key categories: Protecting Intellectual Property: Are trade secrets safe? Organizations attach great value to their intellectual capital, so the prospect of collaborating with other parties—some of whom also may be competitors— introduces the threat that the value of that knowledge
may be diluted if it’s shared with others. The challenge is to mitigate IP risk where appropriate, while expanding the collective knowledge base of one’s own organization and partners. Having developed a collaborative approach for Britain’s Ministry of Defense, CGE&Y has firsthand experience in developing strategies to protect intellectual property rights while encouraging collaborative working. In our experience, people present both the greatest risk and the best protection for intellectual capital. Thus, as a starting point, people need to understand and find ways to balance the perceived risk of sharing information against the potential benefits. Once the organization decides to move forward and support a collaborative approach, the IP risk issues must be consciously and systematically addressed in organizational interventions (i.e., behaviorally) as well as in the technology design. Moreover, all participants must become actively involved in creating a work environment that encourages trust and openness while still safeguarding IP. Attracting Trading Partners and Suppliers: Why are vendors slow to collaborate? The value proposition is there, the business case for collaboration seems solid, yet trading partners and suppliers often balk at getting on board. Stakeholder resistance, as recent case studies document, stems from a mix of operational, political, and emotional reasons, most having to do with a prospective partner’s stage of eReadiness. Executive support,
Technology Watch, pg. 79
organizational culture, and operating capability all have to be in alignment for collaboration to make economic sense to a wide range of customers. Think of the welter of choices in the eMarketplace arena— the diverse technology platforms, widely varying value propositions and service offerings, and roster of signed-on trading partners that each offers, not to mention the attendant costs of participating in any of them—and you can see how prospective partners may be reluctant to sign on. CGE&Y believes a holistic approach that integrates buyer and supplier approaches is the best method to delivering accelerated solutions. We consistently find that the presence of four key drivers increases the likelihood that trading partners and suppliers will agree to collaborate: creating a clear, politically supported governance structure; collaboratively building joint-value propositions; providing hands-on service, technical, and integration support; and taking a tailored, individualized approach to addressing partners’ and suppliers’ concerns. Creating a Robust and Realistic Business Case: Can we justify a CPC investment? Building a business case for collaboration must be a collaborative activity for it to truly have any validity. To that end, those involved must be able to show how the collaborating parties can reap quantifiable benefits from participating. It is not enough to pinpoint “soft” benefits such as improved quality or lowered administrative effort to rationalize what could be a significant investment in change to business-processes
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Figure 1
Real-Time Collaboration With Workrooms First-Floor Workrooms
1st Floor
(Open to Project Members Only)
❸
❷
❶ Personal Office—The starting point of the project suite. This room acts as your desk equipped with various tools and knowledge. It is also the portal to collaborative rooms.
❶
❷ Project Delivery Room—This room is where you can find all information concerning the current project and have real-time discussions.
❸ Conference Room—This room is where you can hold real-time data conferences and meetings with project members.
Ground Floor Public Areas (Open to Members and Guests)
❹ Exhibition Stand—In this area you can display and
Ground Floor
❺
communicate information you wish to share with guests and team members.
❹
❺ Public Conference Suite—The Conference Suite is open to anybody who is invited to attend, either externally or as a team member.
Source: Cap Gemini Ernst & Young
people management or information technology.
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In order to make a viable business case for CPC, all collaborative partners need to understand how they will benefit. CGE&Y generally uses accelerated solution techniques to drive clear agreement and quantification on what will be significant benefit areas and to gain adoption momentum. Our proven approach combines a top-down benchmark approach combined with a bottom-up organizational validation to develop a realistic business case.
CGE&Y can develop and deliver collaborative solutions with the cutting-edge CPC technology providers as well as with our own technology, WorkroomsSM, which is driven from a business-process context as well as a behavioral approach by collaboration.
Selecting the Right Technology Partners: Where should we place our bet? Today, many organizations are migrating toward collaborative environments, either for their own internal use or to enable collaboration with their supply chain. Before they can go very far, however, companies have to find their way through a minefield of technology offerings, each with its own particular strengths and limitations. Today, there are hundreds of applications vying to support CPC initiatives, each having evolved from a different legacy background, including: ERP, PDM, CAD/CAM, software providers, emarketplaces,and dot-coms.
Virtual WorkroomsSM Supports Real-Time Collaboration CGE&Y’s Workrooms (see Figure 1) is a solution to delivering online collaboration. It creates virtual work spaces that are “outfitted” with the applications and knowledge components needed to support and accelerate business processes. The software is extremely intuitive, replicating how people work together naturally in a traditional physical setting. This graphical approach supports rapid user adoption without much training; thus, it fits well with the needs of highly dynamic teams.
Additionally, companies must choose among a broad range of implementation models, including selfhosting, ASP, and public marketplaces. Yet, unless all parties involved in the collaboration use the same tool and implementation model, they cannot work together. The challenge then becomes to figure out how organizations that have implemented different collaborative solutions can interoperate.
Moreover, the Workrooms platform supports real-time collaboration among multiple enterprises, thereby uniting global teams and delivering value and benefits by reducing cycle time and cost. Similarly, it supports collaboration among members within an enterprise, bringing efficiency and effectiveness to new ways of working, including home-based and remote work processes. Workrooms’ basic functionality includes: · ·
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Document management, including version control
■
“Thin client” architecture, which allows users to operate from any computer with an Internet connection
·
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Voice and data conferencing
·
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User self-editing and visual content display, including project metrics
·
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Project management
·
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Community management of teams, including realtime collaboration with guests
·
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A replication of “natural” work environments
As shown in Figure 1, the Workrooms suite includes personal offices for all team members, private collaborative rooms for various sub teams, and public areas where team members can collaborate with guests or outside stakeholders. CPC Opportunities, and Beyond Although most CPC success to date has been in product development, significant opportunities lie ahead in the areas of project management, post-merger integration and outsourcing management, collaborative service development, collaborative supply-chain management, and knowledge management.
Online collaboration is all about leveraging technology to break down boundaries and accelerate decision-making. For many companies, the move to CPC is a natural evolution of their online procurement activities. Early adopters, having seized the opportunity to enhance their supply-chain positions, are starting to report significant benefits from collaborative initiatives.
For companies considering a leap into CPC, successful implementation will depend on a clear understanding of the benefits of collaboration. This blueprint will assist companies in gaining the confidence of collaborative partners and addressing internal behavioral issues as they arise. Most importantly, CPC implementation will provide companies with stronger relationships with partners and a better grasp on how their employees can collaborate most productively.
For more information about collaborative product commerce please contact Bud Strandquest at
[email protected] or Lisa Fretwell at
[email protected].
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46
DEMYSTIFYING INNOVATION
Eric Chen
Kathryn Kai-ling Ho
About the Authors: Eric Chen is a consultant at the Cap Gemini Ernst & Young Center for Business Innovation. Eric’s work focuses on innovation metrics and intangible valuation, and he recently completed research for a book on intangibles. Eric received his S.B. in economics from MIT. A Blueprint for Change
Kathryn Kai-ling Ho is a consultant at the Cap Gemini Ernst & Young Center for Business Innovation. Her work focuses on innovation assessment and media relations. Kathryn graduated from Bryn Mawr College in May 2000 with a dual degree in neuropsychology and East Asian Studies
ver the last two decades, many companies felt the most surefire way to maintain a competitive advantage in their industry was through increased revenues and cost cutting. Our research at the Cap Gemini Ernst & Young Center for Business Innovation (CBI) has revealed, however, that innovation has become just as important as one of the most valuable competitive differentiators. Innovation may be the only sustainable competitive advantage in today’s economy. Not only is innovation now regarded by the greater business audience as vital to any organization’s current success, but research shows the financial markets value innovative companies higher.
O
At the CBI, our research has shown a direct correlation between companies that are innovative and their standing in the financial markets. Statistical analyses of industries, ranging from durable manufacturing to B2B e-commerce, place innovation at the top of the list of nonfinancial drivers of corporate market value. If we know that the market is incorporating innovation into its valuation of companies, then companies must also carefully examine how innovative they are. To understand this, companies should be asking two major questions. How do I recognize innovation in my organization? And, can I assess my organization’s innovativeness? The CBI’s research shows significant quantitative results that innovation is one of the key factors of corporate value creation. Specifically, innovation has consistently ranked among the most powerful drivers
The Invisible Advantage of Innovation, pg. 75
47
Figure 1 CGE&Y Value Creation Index Innovation: A Top Value Driver B2B 1. Innovation 2. Customer 3. Brand 4. Globalization 5. Quality
B2C 1. Innovation 2. Brand 3. Customer 4. Quality 5. Survivability
Durable Manufacturing 1. Innovation 2. Management 3. Employee 4. Quality 5. Environment
Non-Durable Manufacturing 1. Innovation 2. Employee 3. Management 4. Alliances 5. Quality
Tech Infrastructure 1. Management 2. Innovation 3. Quality 4. Workplace 5. Environment
Consulting Services 1. Quality 2. Innovation 3. Employee 4. Technology
Identifying an Innovation What is an innovation? Very often, managers view any product, service, technology, or process that is new or different as an innovation. But this definition is limited. In order for something to qualify as a true innovation, it must meet three basic criteria in tandem: It must engage a creative process, it must be distinctive, and it must yield a measurable impact.2 By understanding how the three components combine to
Connectivity Reinvents the Rules . . ., pg. 7
define an innovation, a company will be positioned to identify them and assess their effectiveness. Innovation Criteria Creative Process A vital qualification for assessing innovation is the creative process. This component refers to how a product, service, technology, or process is created. The creative process involves finding a new solution to a problem with the aspiration that a novel solution will lead to an efficient and valuable gain.
We reasoned that a reliable way of quantitatively measuring organizational investment in the creative process was through analysis of a company’s research and development budget. Granted, putting more money into R&D may not have a direct causal relationship with the presence of a creative process, but we believe a strong correlation does exist. Benchmarking studies for the R&D Scoreboard, published by the U.K. Department of Trade and Industry (DTI), have shown that “in previous downturns companies that have cut R&D investment have often found that their range of products and services compare less well with competitors when the upturn comes and it is then more difficult to protect market share and value added.”3 DTI research has also shown a positive correlation between R&D intensity (R&D as a percentage of sales) and sales growth. Specifically, the revenue growth of companies with above-average R&D intensity is six times as fast as companies with below-average intensity.
A Blueprint for Change
across different industries in the CBI’s Value Creation Index (VCI). The CBI created the VCI in order to define and weigh the importance of nonfinancial value drivers (such as innovation, brand, management, social responsibility, etc.) as measured by their impact on a company’s market value (see Figure 1). These value drivers are composed of quantitative data indicators; in the case of innovation, both internal processes such as R&D spending and external output, such as patents awarded and power of patents (measured by the number of references to a specific patent by other patents), factored into how we measured how innovative a company was. Statistical modeling has shown that the composite of these value drivers significantly explains market value, and the analysis of our industry-specific VCI models have directly linked innovation to corporate success across industries. In addition, its high ranking among the other value drivers in the VCI means that innovation is one of the best ways to differentiate oneself as superior to competitors in the eyes of the financial markets.1
Source: Cap Gemini Ernst & Young Center for Business Innovation
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Not only is innovation a major differentiator in today’s economy, but there is a direct correlation between corporate innovativeness and position in the market. The onus rests on a company to improve its ability to innovate, and that process begins by measuring how innovative it currently is. When evaluating innovations, a company must see if it has: discovered a new solution to a problem to create a valuable gain; changed how its competitors and collaborators must act, or brought a new firm into the market; and generated a measurable impact. If so, it has an innovation.
article abstract
A Blueprint for Change
While companies can act upon new ideas that originate externally and are initially unrelated to investment dollars, those ideas need to be nurtured in an organization that devotes the necessary time and money to develop them. Thus, R&D investment, both as a raw number and as a percentage of sales, proves to be a meaningful quantitative measure of the creative process involved in innovation. The creative process can also be measured, however, with qualitative findings. Companies might ask themselves if the development of a new solution to a problem is better characterized as: · a) A rigid, previously applied process used only because it is the organizational standard. · b) A parallel process used in a new environment. · c) A flexible process incorporating the best combination of old and new ideas. On a linear scale of the creative process, (c) is better than (b), which is better than (a). Some organizations view the mantra “not invented here” as taboo; these firms are stuck on creative process (a). But cultivating innovations by constantly repeating the same creative process is likely to yield diminishing returns. Other companies may pride themselves on searching outside the organization for better ways of doing things and see “not invented here” as a good thing; these firms typically espouse creative process (b). One of the most popular methods of developing new ideas and opportunities of many of today’s well-connected orga-
nizations is borrowing from others in their network. Ultimately, however, we believe that those organizations that are open-minded enough to understand the best way of doing something can come from inside the firm, outside the firm, or a combination— organizations employing creative process (c) will be the most successful. In a positive example of employing the creative process, the National Institute of Education (NIE), a division of the Nanyang Technological University in Singapore, was tasked with devising a method to grow temperate plants in the warm lowland tropics. As academics, they initially combed literature to analyze the landscape of research related to the topic. Recent research, however, was largely conducted only by temperate countries in extremely cold climates, the opposite of the NIE’s dilemma. Nonetheless, the NIE scientists focused on a case from Holland, in which the Dutch had warmed the soil within the greenhouse to promote warm air to rise and create a warm aerial zone for the lettuce to grow. The scientists from the NIE then inferred that the warmth of the soil had growth implications on the root physiology and in turn the plants’ development. In Singapore’s warm climate the opposite conditions exist, therefore scientists needed to develop a system that cooled the critical rootzone. Until recently, they had attempted to simulate an ideal overall temperate condition by building a greenhouse where the environment is cooled to levels similar to those found in moderately cooler countries. This approach was
extremely costly due to the amounts of energy consumed to cool the entire greenhouse environment.
output. Simply put, how does a company determine if what it has created is new?
NIE eventually realized they could leverage existing aeroponics technology, a method of growing plants with roots suspended in the air within an enclosed trough while feeding the roots with chilled nutrient solution in the form of a mist. By cooling only the rootzone, scientists were able to grow temperate leafy vegetables by simulating their indigenous, more temperate environment even though the actual environment was in the mid-30s degrees Celsius (low 90s degrees Fahrenheit).
The granting of a patent is an excellent measure of the distinctiveness of an innovation. In order for the United States Patent & Trademark Office to grant a patent, the product or process must be “new,” “useful,” and “non obvious.” These criteria serve as a good screen for distinctiveness, making the number of patents associated with a particular output a useful quantitative measure.
The NIE’s innovative success was largely due to the creative process undertaken. The scientists involved combined the findings of the Dutch case with their own technology to arrive at a creative new solution to a long-time problem. Without employing such a creative process, the NIE might still be searching for cost-effective ways to cool greenhouse temperatures.
Just like the creative process of a company, an innovation can have different levels of distinctiveness. To assess distinctiveness, a company should ask questions such as:
Distinctiveness Distinctiveness is the second major component in evaluating an innovation. A distinctive innovation rewrites the rules of the game. Something that is distinctive is so different that it changes what both competitors and collaborators are doing, and it oftentimes brings new players into the fold who were not initially considered to be part of the game. The key differentiation between distinctiveness and the creative process criteria is that the creative process relates to how something comes into being, while distinctiveness refers to the nature of the discrete
Disruption in a Networked World . . ., pg. 66
·
■
How is this innovation distinct from other ideas that have historically emerged?
·
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Is it the first of its kind in any form?
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Is it the first successful implementation?
Companies should also ask questions that help us understand if the “rules of the game” really have been rewritten: ·
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Does your innovation make others react to what you have created and now offer?
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Are others forced to make changes based on your actions?
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Does this innovation change the basis of competition?
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These include fees earned from licensing agreements, increased revenue, increased market share, and substantial cost savings, among others.
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If we return to the NIE example of incorporating aeroponics into tropical farming, several facets of its offering are distinctive. For example, this innovation has not helped produce non-indigenous vegetables, but it also considerably revamped perceptions on plant physiology with respect to both content and methodology. Since traditional plant physiology mainly deals with shoot physiology, this innovation’s focus on roots has opened up new paths and directions for the field.
As with the previous criteria, qualitative data is also invaluable in measuring an innovation, particularly since its impact is often social as well as economic. Important questions in assessing impact include: ·
■
Is a company only dealing with primary impact? Or is it also valuing the effects of the innovation beyond the scope of its primary customers and achieving secondary impact? (e.g., the primary impact of war is that it takes many lives, but we can see that war also leads to significant secondary impacts, such as inciting ideological and cultural shifts. Some feel strongly that secondary impacts should be given equal consideration when assessing impact.)
■
Is a company evaluating measurable impact today as well as the future potential impact? (e.g., Boston’s Big Dig construction project: Today the Big Dig has yielded little impact to Bostonians other than the dreadful congestion and confusion around construction sites. Some believe, however, that the completion of this project will undoubtedly have a huge impact on traffic flow, create a needed green space, and in turn, impact life in Boston. Therefore, a company must be cognizant of what type of impact it is measuring.)
So if a company has a robust creative process that turns out a very distinct output, it is two-thirds of the way to having an innovation. Impact The third piece of the innovation puzzle is impact or the realization of value from a new product, service, technology, or process. Impact is the element that truly differentiates the innovations from the mere inventions.
Of the three criteria, impact is probably the easiest to measure in terms of available quantitative measures. One way we measure the realization of value from an innovation is measuring the power of patents—the number of times a patent is referenced by other patents. The more a particular patent is referenced, in all likelihood, the more of an impact its existence has generated. There are also a number of financial results that can be used to measure impact as long as the figures can confidently be attributed to a particular innovation, a challenging but necessary step.
Connectivity Reinvents the Rules . . ., pg. 7
·
51 Creative Process
▲ Figure 2
▲ Adoption of an Evolving Process
The Innovation Spectrum
Parallel Use of a Process in a New Environment
Market Acceptance Causes Others to React & Make Decisions Based on Your Offer
Impact
·
·
■
■
Can a company assess social, economic, and technological impacts? (When dealing with such different variables, it becomes increasingly difficult to benchmark one against another. Does 300 lives saved carry more or less impact than a $5 billion return on investment? Therefore, each type of impact must be taken into consideration.) Do we assess impact with respect to or irrelevant of intentionality? (Should the gap between what a company intended to achieve and what its actual results were affect its assessment?)
Consider the way the Singapore National Institute of Education integrated its newfound understanding of root physiology with aeroponics to develop a technology for growing temperate vegetables on a commercial scale. This process has not only saved energy costs, but in turn eliminated the necessity of importing certain vegetables. This innovation even created new markets around these vegetables. Two commercial farms have now been developed based on this technology. As a result, consumers in Singapore can now enjoy fresh lettuce supplied locally everyday, as well as more creative products such as Lettucinno™ (a lettuce drink), Lettu-jello™ (lettuce jelly), and lettuce cake. Irrespective of whether these products are as delicious as advertised, the innovation clearly has had impact both directly—growing temperate vegetables in a tropical climate—and indirectly—creating new markets for lettuce-based products.
▲
First Successful Implementation in That Market
Cross-Market Application
Creation of a New Market
▲
▲
Makes Something Else Obsolete
▲
Incremental Improvement of a Standard Process
Distinctiveness
Importance of the Trio While projects that do not meet all three criteria can still be of some value, they must incorporate the creative process, be distinctive, and yield a significant impact to be considered a true innovation.
We have provided an innovation spectrum for managers (see Figure 2) to assess their own innovations both quantitatively and qualitatively in tandem. Using the spectrum, companies can gain a better insight on their innovations. An innovation’s success in each of the three criteria places it at a point along each of the three axes. So, in addition to helping a company understand how to identify an innovation, this graphic helps companies realize where the limitations of an innovation or a potential innovation reside, providing guidance in how to better manage burgeoning ideas, technologies, processes, products, or services. It is important to articulate that assessment is not the same as measurement. Rather, measurement is one aspect of assessment that refers to the use of concrete quantitative data. In order to gauge innovation, purely measuring statistical data is not useful for capturing the entire picture. Instead, innovations should be evaluated according to these three criteria based on both quantitative and qualitative information. Innovations do not grow in a vacuum, and companies that want to gain a competitive advantage now and ensure long-term earnings potential need to create a
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Source: Cap Gemini Ernst & Young Center for Business Innovation
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A Blueprint for Change
climate supportive of innovation. Rather than viewing the evaluations of innovations as separate from a company’s main objectives, the same criteria that define an innovation should also represent guiding tenets for a company as a whole. An organization should be focused on creative processes that build new solutions to old problems, should try to be distinctive with their offering in their market, and should hope for and measure the impact of each new business development.
1. For more information on the Value Creation Index, see http://www.cbi.cgey.com/research/current-work/valuingintangibles/value-creation-index.html. 2. This statement is derived from the CBI’s definition of innovation: Innovation is the realization of value from a new solution to a problem, rewriting the rules of the game. 3. Cookson, Clive, “Survey - R&D Scoreboard,” Financial Times, Sep. 27, 2001.
From Roadmap to Roadway . . ., pg. 33
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THE CBI FUTURE SCAN: A VIEW FROM THE CROW’S NEST
Mark Maggiotto
Mark Maggiotto is a consultant at the Cap Gemini Ernst & Young Center for Business Innovation (CBI). His work focuses primarily on marketing communications efforts at the CBI. He contributes in an editing and writing capacity to Perspectives on Business
Innovation, the CBI website, white papers, articles, reports, and other documents that emanate from the CBI. Mark received a B.A. in English from Haverford College.
hile it is nearly impossible to predict the future, the challenge for businesses to do so remains imminent. To be truly competitive, organizations must sift through what could potentially happen in the economy and discern what will become significant industry shifts and what will simply end up as hyperbole. At the Cap Gemini Ernst & Young Center for Business Innovation (CBI), we believe diversifying where you scan and thinking differently about what you discover is a healthy start to anticipating the future. What follows is the CBI Future Scan, our point of view on the trends we think will blossom over the next two years. Many of these forces are already under way, and we believe they are now ready to mature and redefine our economy and our society in the immediate future.
W
The Network Knows Where You Are There is an emerging location paradox: As people desire to be more liberated from their location when using various devices and services, that same location freedom can only be made possible by an intelligent network that always knows where they are. Location will become less important in the future as mobile networks grow in number and range. Simultaneously, technologies that can track your precise location at all times will be steadily increasing the portfolio of location-based services available to individuals and companies.
An Opportunity for Companies The automobile. Cars are potential homes for many different wireless services, from XM satellite radio to
Disruption in a Networked World . . ., pg. 66
On the Horizon
About the Author:
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an Internet interface. The services that provide access to business networks for adults and entertainment for children (and some adults) could proliferate as costs become realistic to most consumers and wireless and satellite infrastructures expand. Another opportunity is in public transportation. A group of MIT students is currently building and installing GPS technology into campus buses that is accessible from the Internet and bus stops so people waiting can know when a bus is about to arrive at the next stop.
On the Horizon
A Danger for Companies Disrespecting individuals’ privacy concerns. Comcast recently suffered public condemnation and governmental fury when it became public that it recorded the Web browsing habits of its 1 million high-speed Internet users. With the ability to collect more information about customers, companies must make clear what information they collect and why or watch their reputation and share price potentially plummet. What Products Are Taking Advantage of This Emerging Force? Blackberry wireless devices have the potential to combine the benefits of laptops, PDAs, and possibly even cell phones to become the dominant mobile device. In addition to allowing a user to e-mail and surf the Internet, the hand-held device is now assisting airport security guards in Boston to instantly run passengers’ names through state and federal databases. Meanwhile, the PageTrack system from Elite Logistics is using wireless communications and a GPS system to assist the trucking industry. PageTrack
allows an individual to view a truck’s real-time location and speed, know where it has been, and even change the itineraries of truckers in transit. Who Is Missing the Boat? Starbucks. The growth of omnipresent networks does not mean consumers will want coupons printed out of their PDA when they pass by a coffee shop. We believe those services that users opt to use, rather than those that are forced upon them, will be the most successful. This is a key distinction because a well-timed coupon is a reminder of an invasive network, while being able to offer a service when people choose to be connected makes them feel empowered, rather than watched. Indirect Competitors and Unexpected Allies Due to growing networks of people whose purpose is not profit, companies will need new types of strategic alliances and a more complicated view of their competition. Open source is revolutionizing software development, and the same principles of cooperation to create or share products and services for free are proliferating in many different parts of business. Companies must redefine the groups that may cause their downfall and the untraditional organizations that could be their most valuable partners.
An Opportunity for Companies Mining online conversations. Online customer collaboration might already be prolific, and companies need to find these discussions and incorporate their opinions into management strategy. If these conversations have not begun, firms must start them to find out how
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A Danger for Companies Unprecedented shareholder activism. With instant access to information and new ways to collaborate, shareholders of today are as informed as analysts of yesterday. The consequence of that reality is that major management decisions cannot be made in the comfort of the boardroom without the input of stakeholders. The boardroom is developing a permeable boundary, and those managers that resist may quickly find themselves on the outside looking in. Who Is Capitalizing on This Emerging Force? Microsoft realized that once Windows XP proliferated in the marketplace, it would be infeasible to provide the needed technical support. The company relies on a public community of Usenet users to post bugs and solutions in the 1,440 discussion threads surrounding XP. Microsoft’s MVP reviewers, non- employees who have a demonstrated expertise, moderate these conversations. The company realized that its own customers could function as its best partners. Rather than allowing these conversations to occur without it, it also realized it could facilitate and enrich the discussions, benefiting its customers and allowing Microsoft to collect and incorporate vital feedback.
Who Is Struggling to Adapt? Name any industry whose content can be transferred digitally—whether its music, movies, television programming, software—and they are overwhelmed by the question of what methods of content-sharing they should fight in court and which to incorporate in the way they deliver their content. Napster is crippled, but Kazaa, Morpheus, and Grokster are even more powerful, allowing users to swap songs, TV episodes, movies, pictures, and software. Sonicblue’s recent release of ReplayTV 4000 allows people to send recorded programming to friends with similar units. How to make money off of this unstoppable behavior of sharing is the billion-dollar question. The scary part is that there may not be an answer. Disputed Boundaries of Intellectual Property The licensing of intellectual property is becoming an enormous new source of revenue for many companies. Firms with years of research and accumulated patents are realizing great value in sharing their more intangible assets. The potential of profit, however, is sending companies and individuals into a patenting and copyrighting frenzy. This overprotective behavior and hoarding mentality is both alienating customers and undermining the legitimacy of the patent and copyright process. Companies need to better discern what assets to protect and what to share, while anticipating how their behavior will affect public opinion and governmental attention.
An Opportunity for Companies Many companies could benefit from a new perspective
The Invisible Advantage of Innovation, pg. 75
On the Horizon
their products or services disappoint or satisfy customers. Rather than costly investment in soliciting individual customer opinions, conversations are already occurring about your business and what you offer. The challenge is to find them, but the reward for listening to what is being said could be immense.
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Businesses today are charged with the task of predicting the future in an extremely volatile and unpredictable economy. The CBI Future Scan represents the most important business trends to come over the next 24 months. The trends are relevant to every industry and cover almost every aspect of business. The Center for Business Innovation does the scanning for you and determines the greatest opportunities to be reaped from each trend as well as specific examples of companies that are already benefiting.
article abstract
on research and development. Rather than consider R&D simply as a cost, the insights uncovered in-house could be relevant to the challenges facing many other companies. Once the parent organization of the R&D department no longer is its exclusive client, there is potential to see research as both internally useful and as an asset that can be shared and sold.
On the Horizon
A Danger for Companies Despite success in the market, overprotective behavior like Microsoft exhibited over its intellectual property created battles with consumers, partners, and the government. British Telecom (BT) is fighting in U.S. courts to prove its 1976 patent application for hyperlinks, approved in 1989, entitles it to royalties for anyone who has used a hyperlink since then. Even if BT wins in court, angry programmers will most likely develop a new open protocol for hyperlinking, and all the company will be left with is a soiled public image and a worthless patent. Who Is Capitalizing on This Emerging Force? IBM and Monsanto. IBM is a great example of an early adopter of the potential value in licensing intellectual property. In 2001, the company generated $1.7 billion from licensing income, which accounted for 2 percent of sales and 10 percent of profits. Monsanto, on the other hand, is demonstrating a new approach to tracking intellectual property with its Newleaf potato. The spud’s biggest benefit is a superior bug resistance, yet Monsanto will only allow farmers to plant it for one year. Through genetic markers, the company can determine which harvests contain its potato strain. The company is taking advantage in
advances in genetics to shift its offer from one tangible potato spud to a one-year lease of Monsanto’s intellectual property. Who Stands to Lose Because of This Burgeoning Trend? Big pharmaceutical companies. Governments are reconsidering the role that patents play in preventing or impeding the wide-scale distribution of drugs. Both international AIDS epidemics and U.S. biological warfare scares have brought the patent process under scrutiny. While patents represent an essential mechanism to motivate multi million-dollar investments by these companies, patents’ absolute nature may be compromised in the future to better remedy international health crises and better achieve social responsibility. Security Beyond Prevention Preventing calculated attacks or guarding against unexpected disasters no longer ensures corporate immunity. Nor should building an impenetrable border around an organization or network be a realistic or desirable goal. Instead, prevention must be accompanied by an infrastructure capable of real-time responses to crisis. An organization must be able to adapt when threatened by unforeseen problems. Companies are slowly realizing that an immune system in their organization is much more effective than trying to maintain a firewall around their perimeter.
An Opportunity for Companies Realizing the benefit of a redundant or decentralized organization and network. Companies will have to
Open Source . . ., pg. 59
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“Companies will always be blindsided by unexpected catastrophic events; the danger lies in devoting all of an organization’s resources
”
sacrifice some measure of efficiency in order to build a more adaptable and secure means of storing information or running their organization. LOCKSS (Lots of Copies Keeps Stuff Safe) serves publishers and libraries by caching master copies of scientific data in digital format in multiple locations. Companies will continue to lessen the impact of potential natural disasters and targeted attacks by decentralizing their people, office space, and networks.
crime rates in Glasgow and Northampton have dropped 68 percent and 57 percent respectively since the cameras were installed. In addition, Symantec and IBM’s Watson Laboratories have collaborated on digital immune systems that create and download virus immunizations in 45 minutes before their network is even infected. This process promises to be far more reliable than after-the-fact updates to anti-virus software.
A Danger for Companies Believing you can predict all of your organization’s potential threats. Whether you consider the California energy crisis, the New Mexico water shortage, or tragedies of September 11th, each of these 2001 events was difficult to anticipate yet had major effects upon business. Companies will always be blindsided by unexpected catastrophic events; the danger lies in devoting all of an organization’s resources to preventing known threats. Instead, capital and management attention need to be devoted to building in the ability to adapt into an organization’s infrastructure. An organization that can quickly and nimbly respond to disaster and change will be stronger than a firm that believes it is prepared for anything.
Who Is Struggling to Embody This Trend? Companies that cut back on security and information technology spending after the Y2K hysteria. The security systems underlying many corporate information systems have not been as heavily invested in as prior to Y2K, and companies are now suffering from either directed or random attacks to their network. Internet worms, the earliest digital dissident, continue to evolve and cause millions of dollars in damages to corporations. While continuing to spend on network security seems less desirable in our current economy, it becomes much more costly for companies to allow programs and hackers to become more technologically sophisticated than they are.
Who Understands the Importance of This Emerging Force? The British government. An omnipresent public surveillance network of cameras has allowed British law enforcement to build an infrastructure that can handle unexpected problems such as random crimes. As a result of apprehending more criminals, overall
Useful Data Becomes a Scare Resource The growth of storage capacity is dwarfing the growth of processing power, allowing companies to create data warehouses of unprecedented scope. Yet, along with the ability to collect more and more information comes the challenge of deciding what data is most useful and what data should be discarded. Information-gathering systems need to evolve by
Innovation-Based Sustainability . . ., pg. 27
On the Horizon
to preventing known threats.
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beginning with specific problems or questions, rather than just collecting everything. Growing numbers of sensors that collect information on everything from machines in a production process to retailer habits will become one of the most important and frustrating tools of business managers.
On the Horizon
An Opportunity for Companies Change the way financial information is gathered and shared. Porsche AG has replaced its quarterly earnings reports with continuous reporting. On the surface, this appears to burden the analyst or investor with too much information. Yet, Porsche AG’s new system clearly tracks the company’s progress toward its goals and identifies any changes in its market. Porsche AG has been applauded by the media, not for providing more data, but for providing data in a more useful and sensible manner. Other companies have the opportunity to mimic Porsche AG’s attempt to choose their most relevant financial information and share it liberally with investors. Investor fear of another Enron collapse should also motivate firms not to appear that they operate outside the public view. A Danger for Companies Not policing the doors to data warehouses. The amount of data a business can store doubles every nine to 12 months, yet processing power doubles every 18 months. How can a company keep up? By controlling what information is stored and analyzed. Companies’ computer networks need to mimic the human brain’s ability to absorb mass amounts of information and instantly analyze and forget data
depending on a level of relevancy. Without calculated data filters, accumulated information can quickly become more of a nuisance than an asset. Who Is Trying to Fight This Trend? General Electric. GE imbeds technology developed for medical devices into its airplane engines and analyzes information on their performance at a pattern recognition facility. It can then detect slight changes in its engines’ behavior, so that problems can be anticipated before they come to fruition many thousands of miles later at takeoff or in-flight as a much bigger problem. Who Is Overwhelmed by This Trend? Many product manufacturers. The machines that manufacture disposable diapers make 1 million measurements during the production of one diaper. There is great value in gathering information to monitor the health of the machines and ensure a flawless product is created. Only a fraction of the information generated by the sensors, however, should be stored for future analysis. But which part? That is one of the most difficult questions facing business managers. The challenge remains to measure not because you can, but instead, to solve specific problems.
If you would like more information on the CBI Future Scan, please contact David McIntosh at
[email protected] or Karina Funk at
[email protected].
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OPEN SOURCE: BEYOND THE FAIRY TALES
About the Authors: Richard P. Gabriel is a poet, essayist, and computer scientist. He is a Distinguished Engineer at Sun Microsystems, Inc., and lives in California. Ron Goldman is a researcher working at Sun Microsystems, Inc., on alternative software development methodologies and new software architectures. He is currently finishing a book on how companies can participate in open source software development.
Ron Goldman
pen source is a software development model that too often is synonymous with a free and free-wheeling operating system juggernaut destined to upend current computer markets. IBM is embracing Linux to unify its hardware product line, and Microsoft is screaming that open source is “anti-American and destructive of intellectual property.” Analysts and executives have been gathering around open source to find out what it’s all about, and people like Eric Raymond and Linus Torvalds—once indistinguishable from society’s stereotype of the elfin programmers working in the dark on the software that powers the digital age—have become heroes, spokesmen, and leaders in the new age of anti-monopolistic software.
O
But is this narrow view adequate? Many other companies such as Sun Microsystems, Inc., have embraced open source but offer neither Linux nor Apache nor any other of the open source icons in their product lines. What are they doing? Open source, for corporations, has more to do with a particular business strategy than it does with any specific technology. In fact, technology is just another piece of the puzzle for a successful technology company—certainly it’s a necessary piece, but often it’s not the distinguishing piece. Apple Computer, for example, is viewed as an innovative technology company, but it actually competes on industrial design, habitable human interfaces, image, and lifestyle while its technology is largely borrowed (Power PC CPUs, BSD Unix, Sony and Samsung flat screens, etc.) or a bit old-fashioned (Mac OS 9.x, for example). It’s Apple’s business strategy and
On the Horizon
R i c h a r d P. G a b r i e l
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Figure 1
Single Community Built Around Source Code
Code Core Developers Other Developers Users
There are many definitions of what constitutes open source or, as it was originally called, free software. The basic idea is very simple: By making the source code for a piece of software available to all, any programmer can modify the software to better suit his or her needs and redistribute the improved version to other users. By working together, a community of both users and developers can improve the functionality and quality of the software. Thus, to be open source requires that anyone can get and modify the source code and that she can freely redistribute any derived works she creates from it. The different licenses have various wrinkles on whether modifications must also be made into open source or if they can be kept proprietary. On the Horizon
largely borrowed technology that has brought about the company’s success. We believe this strategy is indicative of a more complex view of open source, in which individuals or companies join collaborative communities in order to mutually benefit from one another’s expertise. We call this strategy “Innovation Happens Elsewhere” (IHE). What Happens When You Assume About Open Source . . . If you ask almost anyone connected with open source about how it works, she will draw something like Figure 1.
Demystifying Innovation, pg. 46
She will tell you about how people start as just users and how some will become more involved by reporting bugs. Some may become developers who fix bugs or make minor enhancements. A few developers then get more involved and join the ranks of the core developers, being granted the right to check in changes to the actual project’s source code. This is a very code-centric view of the open source process as a hierarchy that has users at the periphery, occasional developers closer in, core developers even closer in, and the code at the center. And in fact, this view makes the hierarchy into a funnel in which the goal is to convert people from one ring in the diagram to people in the next inner one—almost as if the goal were to turn people into code in the end, the highest form of existence. A direct result of this perspective is that the actual users of the program are marginalized. While the success of the project is often measured by the number of people who use the computer program being developed, only those people who are willing and able to talk about the code can participate in discussions on the project’s mailing lists. Major decisions are made by those writing the code, not by those who will simply use it. The roles that people and communities play in open source development are in reality, however, less hierarchical, yet much more complex. Open source contributors often discuss how best to do their jobs, maybe only just touching on how the project’s tools can help them. Other conversations may focus on
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Figure 2 Communities Built Around Common Interests
Other open source projects
User tasks Code development
Marketing Standards
Each of these communities has its own special interests. For example, some communities connected to Linux might include system administrators concerned with installing and configuring the Linux operating system on various types of computers. Another group of people might be concerned with business productivity tools (such as word processors, spreadsheets and presentation tools) that are available for Linux— its focus is on what tools exist and how to use them. A third community might form around computer games available for Linux, with a subcommunity around a specific game like Quake—it would focus on exchanging tips, rumors of new games, and finding opponents to play with. Each community will flourish or wither depending on how well its interests are met by the community resources. For example, a community of newbies asking basic questions about how to use a piece of software will only succeed if more-experienced users who can answer those questions are also part of the community. In addition, in a successful community a vocabulary might spring up which is derived from the
Connectivity Reinvents the Rules . . ., pg. 7
project’s technology, application area, and existing culture. Such a community will come to resemble a long-existing club with its own phrases, in-jokes, rituals, and customs—an astute creator of such a community will know this and will help the community grow these aspects. One less astute will focus on the code, probably leaving out vital potential members of the community. In the course of a successful open source project different communities will come and go. New ones will spring up, grow, and possibly become dormant or die. As long as there are always some thriving communities, the larger open source project can be considered alive and well. Note that death of a community does not equal failure. Consider a community that arose to develop a new standard. After the standard it developed is accepted by the larger Internet community, the community would have achieved its purpose and no longer be necessary. If in the future revisions to the standard are called for, the community might be resurrected. Therefore, rather than viewing the open source movement as the story of tiered production of a software application or operating system, it is important to recognize that the pervasiveness of open source is largely due to the communities it builds and empowers with solutions to problems and questions. While these coalescing communities are becoming a staple of online collaboration, innovative companies are also recognizing that they may benefit from incorporating open source philosophies into their business strate-
On the Horizon
standards for protocols or APIs that the project uses. Still other conversations may address issues affecting the larger open source community. Each different conversation involves a different group of people. These groups may range in size from small working groups of less than 20 members to full communities of hundreds or thousands of participating individuals. We might represent these multiple communities in Figure 2.
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Open source is commonly recognized as a software development model that has challenged the likes of Microsoft. But open source is more than just a software movement—it is a new model for organizational strategy. In strategy, open source is not about technology but about the way companies share information, partner with one another, and interact in communities. The most significant learning from open source is the “Innovation Happens Elsewhere” theory. That is, individuals or companies join collaborative communities in order to mutually benefit from one another’s expertise.
article abstract
gies. Those companies embody the Innovation Happens Elsewhere ideology.
encourage other companies or organizations to do this work—but for their own purposes.
Innovation Happens Elsewhere Most companies find they often need to fine-tune designs and products over a series of releases. Some companies use time to improve products: The Saturn car company started by introducing inexpensive but high-value cars that appealed to young adults just starting out in their careers, and while learning the tastes and values of that generation, Saturn has introduced new models that reflect the increasing affluence of its core customer base. This is an example of using the world outside the corporation as a source of innovation. Software companies using open source can perhaps exploit this strategy in its most pure form. So, what is the strategy?
The impetus for companies to do this comes from tools, technology, communities, and prototypes that the IHE company provides. By opening up part of itself to the outside, the IHE company can provide gifts that trigger the gift-economy effect: technology, tools, and prototypes that are of high value to outside companies and organizations. Releasing these previously proprietary tools triggers other firms to work in areas important to the IHE company,
On the Horizon
To simplify the discussion, let’s consider only companies that produce technology products. The Innovation Happens Elsewhere strategy begins by recognizing where the company’s proprietary value lies. Everything outside this inner circle of protected ideas and technology is available for instigating outside innovation beneficial to the company. The primary goal of the strategy is to increase the number of potential customers—that is, the size of the market available to the company. To do this, the IHE company tries to create more products in the market that either are enablers for the products the IHE company sells or form an aftermarket for them. Rather than trying to accomplish this alone, the IHE company tries to
It helps to understand open source as a gift economy rather than the traditional capitalist model of a commodity economy. In a gift economy, gifts are exchanged, forming a bond based on mutual obligation. In the simplest form of gift exchange, when one person gives a gift to another, the receiver becomes obligated to the giver, but not in a purely mercenary way—rather, the recipient becomes very much like a member of the giver’s family where mutual obligations are many, varied, and long-lasting. In an open source project, the gift of source code is reciprocated by suggestions, bug reports, debugging, hard work, praise, and more source code. Giving gifts of technology and tools initially spurs outside individuals to work on or with those gifts for their own benefit—perhaps one of the tools is useful to a software developer for one of his or her home projects. Later, or instead, that developer might bring the tool into his or her company, which starts to use it
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Figure 3 Innovation Happens Elsewhere Process ➤
Customers
New products incorporating outside innovations
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New products
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Other Companies & Organizations
Tools & ideas
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Tools, technology, communities, prototypes
for their own purposes. Because the tool was a gift (and perhaps its source is available), individuals and their companies reciprocate and send bug fixes, extensions, modules, and ideas back to the IHE company. The gift has been accepted—for selfish purposes—but it stimulates a gift in turn that is of value to the IHE company, which uses it to enhance its own products (see Figure 3). In the open source realm, this is the fundamental expected payback for opening up software source. For the IHE company, this is only the beginning. Next, an outside company using gifts from the IHE company recognizes that these tools, technology, and prototypes can be combined with its own company’s technology to produce products at lower cost, less risk, and of great value to its customer base. Again, this is done for selfish reasons, but such decisions help expand the customer base for the IHE company. Sometimes a company or organization will think of an application or variation of the gift that will open the IHE company up to entirely and unexpected markets. This is one of the most important return gifts the IHE strategy can provide. Even further, the IHE company, by creating, building, and maintaining a set of communities around these gifts, can engage in serious conversations with outside companies, organizations, and individuals. Such conversations not only can improve the IHE company’s products, designs, and directions, but also provides the IHE company with an opportunity to demonstrate leadership and vision, thereby putting it
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in a position to strongly influence the direction and structure of the competitive landscape. Because this is done in a context of gift-giving, culture exchange, and conversations, this is leadership and seduction, not control and power. If the IHE company exhibits learning in response to these communities, other members will continue to give gifts, work with the company, and help it maneuver through difficult competitive and market situations. When a company puts out white papers, advertising, and other public relations materials, the audience is likely to discount these as hype statements. Within a community, however, where developers and engineers are talking to one another, the messages can be both smaller—too small for press releases— and larger: global visions and proposals for new directions couched in design and other engineering statements. By valuing the comments and ideas from outside community members—by showing respect— the IHE company can spread its vision while minimizing media or corporate cynicism. The IHE company puts itself in the best position by embracing at all levels the philosophy of “Innovation Happens Elsewhere” and when people in the company are always looking inside and outside the company for innovation they and their groups can use. We might represent the relationship of a company with customers and other companies and organizations that employ the IHE philosophy with Figure 3. In order to embody this strategy, there are several keys to remember. The first is understanding and
Connectivity Reinvents the Rules . . ., pg. 7
On the Horizon
➤ IHE Company
Innovations, new technology, ideas, designs
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Figure 4 NetBeans Open Source Strategy ➤
Customers
Forte product Forte market Sun servers
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NetBeans-based products Modules for Forte
➤ NetBeans
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➤ Sun Microsystems
isolating the true proprietary value and technologies of the company. The more accurately this is done, the better the company is able to use its gifts and thrive. If what’s proprietary and valuable to customers is too small, the company will have a hard time surviving as others crowd into its space. If what’s judged proprietary and of value is too large—or too much of what the company makes or works on—then there will be few gifts available to get the cycle of innovation going. The second key is having the confidence that your organization can engineer products quickly and well enough to stay ahead of the competition. Microsoft, for example, does not believe it has enough of an engineering edge over competitors to do other than hold proprietary all its source code. This is why it tries to combat open source rather than embrace it. On the Horizon
The third key is having a company culture that can embrace and celebrate innovations wherever they occur. In a sense, this is confidence and enthusiasm for ideas, but it is also respect and the right balance of pride and humility. Some organizations seem to fear ideas that originate from outside. Such organizations cannot use Innovation Happens Elsewhere. Others, meanwhile, are less discriminate, and much more likely to succeed. NetBeans: A Case of Open Source and “Innovation Happens Elsewhere” Companies that truck in software can use open source as a basis for sharing tools, technology, and prototypes, and communities can be built around open-
Innovation-Based Sustainability . . ., pg. 27
Bug fixes, modules, and improvements
Tools, technology, communities, prototypes
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Other Companies & Organizations
source projects. In this case, it’s important to recognize both that such communities need to succeed as software development efforts and that the goal of such communities is to fuel the IHE feedback cycle. Sun Microsystems’ NetBeans open source project is a good example of a community built to support the IHE strategy. NetBeans is an open source platform for building an integrated development environment (IDE), specifically for the Java language. Sun gets improvements from the open source community and builds a proprietary version of NetBeans—called Forte for Java—which is a tested version of NetBeans extended with proprietary modules. Other companies use the NetBeans technology in-house and as part of other products. Forte for Java is additionally positioned as a platform on which other companies can sell plug-in modules—that is, Forte for Java is the basis of a marketplace. The effect is to increase the population of Java language programmers by both providing tools for those developers directly and through other companies building on the NetBeans platform. This way, not only is Sun Microsystems building the Java community, but so are other companies and individuals in the NetBeans community. Sun sells an IDE derived from NetBeans, but most importantly, Sun sells server hardware that runs Java particularly well. Further, Java developers within Sun use NetBeans and Forte for their own work. Figure 4 demonstrates how NetBeans supports and is supported by the IHE strategy.
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Implications for the Future of Open Source There are other advantages to using open source, but being able to engage the Innovation Happens Elsewhere strategy is certainly the most compelling. Not only does it build the market size, but the tactics to make it work help companies that use it get to better products faster by involving directly its customer base in their design. Through direct conversations with customers, there is reduced guesswork in gathering market requirements. Moreover, there are some operational efficiencies to be gained through better testing, community-based support, and some significant product contributions.
Sometimes—no, actually usually—a surprise will happen; an innovation or application of the ideas and technology will come along that you never dreamed of, never heard of, couldn’t imagine—done by a group or individual you never heard of. And it could be a pivotal market for you or could change how you view and develop your original technology.
Disruption in a Networked World . . ., pg. 66
What is most stunning, though, is the difference in the feel of companies that truly engage with their communities of customers, partners, and competitors. Morale is boosted, progress is constant, and it simply feels like something good is always happening.
On the Horizon
An unexpected innovation happened when a group removed the Java-specific modules from the NetBeans IDE and replaced them with mapping, visualization, and analysis modules in order to build a modular environment for spatial analysis and visualization. This potentially opens up a future geographic information systems market to Sun, a market never contemplated.
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DISRUPTION IN A NETWORKED WORLD: WILL CLIFFORD ON PATTERNS OF STRUCTURAL SUCCESSION
Will Clifford
About the Author: Will Clifford is a consultant at the Cap Gemini Ernst & Young Center for Business Innovation. He is currently conducting research for the third book to be co-written by Christopher
The following is an excerpt focusing on modularity from a more extensive white paper on the topic of disruptive innovation. To read the complete whitepaper, please see our website at www.cbi.cgey.com.
Meyer and Stan Davis on the role of the molecular sciences in the next economy. He has also explored developments in nanotechnology, biotechnology, and the relationship between the emergence of disruptive innovations and the structures of firms and industries. Will holds a B.A. from Kenyon College where he studied economics, ecology, and philosophy.
hile innovation can be a key driver of growth, certain types of technological innovation can pose significant problems. In particular, business executives are concerned with the effect that disruptive innovations—products or services that are technologically inferior to the status quo but improve over time to unseat incumbent firms1—can have on their business and industry. The real threat of disruptive technologies lies not so much in their frequency, but rather it derives from the sheer amplitude of the impact a disruption has upon incumbent firms.
W
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Clayton Christensen’s book The Innovator's Dilemma articulated the process by which great companies fail even while seemingly doing everything “right.” Typically successful strategies employed by firms, such as keeping abreast of the competition, paying attention to customers, and investing in new technologies, are the same strategies that render companies helpless when confronted with disruptive technologies. Why? Because well-established companies’ strong focus on satisfying their core customer base and hesitancy to abandon cash cows prevents them from developing the technologically inferior products that turn out to be the next new thing. Perhaps even more unsettling is the fact that disruption seems to be a
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“By viewing disruption as an organic phenomenon endemic to the business cycle, we can increase our ability to identify
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and leverage disruptive technologies.
By viewing disruption as an organic phenomenon endemic to the business cycle, we can increase our ability to identify and leverage disruptive technologies. Using patterns of “structural succession”—the observed sequence of changes in the architecture of products, firms, and industries over time—we can identify technologies with disruptive potential and vulnerable markets before it’s too late for incumbents to react. Patterns of Structural Succession The term “structural succession” refers to the observed sequence of changes in the architecture of products, firms, and industries over time in response to factors such as competitive pressures, customer demands, and engineering constraints. The concept has its origins in ecology where succession refers to the bottom-up assembly process of ecological communities after a disturbance. Similarly, succession in the economic sphere is a process traced from the product level up to the firm level, and eventually to market structure.
Product Modularity Modularity—structuring complex systems from a set of building blocks that can be designed independently yet function together in a seamless fashion—provides a lens through which to trace the structural evolution
of systems in response to changes in competitive pressures, customer demands, and engineering constraints over time. Modularity is a design principle that has a long history, particularly in manufacturing, but has received much attention recently given its success in the computer industry.2 It is a particularly useful strategy for managing products of increasing complexity, and when selective pressures favor rapid change and customizability, modularity trumps integrality. When a new technology hits the market, the primary basis for competition among firms is product functionality. Since the technology is still nascent, welldefined subsystems do not yet exist and architectures tend to be technologically integral. As sustaining innovations improve product performance to meet customers’ demands for functionality, the basis for competition tends to shift to reliability. No longer is functionality sufficient to win market share. As markets mature, the bases for competition move to customization and convenience. These middle stages in the adoption life cycle have the largest number of customers. Consequently, firms spend the majority of their resources catering to these segments through sustaining innovations. Finally, products are essentially commoditized and competition revolves around price.3 In response to markets characterized by these latter three bases of competition, product and process architectures become more modular in order to increase a product’s flexibility and speed to market,
From Roadmap to Roadway . . ., pg. 33
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natural evolutionary occurrence that inevitably emerges to punctuate periods of industry growth wherein incumbents measure success by their ability to serve an established customer base.
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while decreasing costs through specialization. From a pure functionality standpoint, modular architectures usually do not provide the performance of an integral system, but for the majority of users the value of modular products’ other characteristics outweighs the functionality shortfall.
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Firm and Market Structure In the era of integral products, design is a highly iterative process usually managed by groups working in close contact. Collaboration is key, and tacit knowledge plays a large role in product development. With customer demand focused on product functionality, firms tend to be vertically oriented. As products become increasingly sophisticated, architectures become more modular and design rules are developed to mitigate coordination costs. These rules specify parameters within which groups can operate and codify the requisite pieces of tacit knowledge. Clear design rules allow engineers of different modules to act independently, without the coordination of a central planner, leading to flatter hierarchies and greater decentralization. The resulting organizational map exhibits a close resemblance to the product’s architecture, with different groups dedicated to each module.4 Thus, modularity is a fractal concept, emerging in the design of products and scaling to describe organizational structure. When a given firm’s design rules become known and accepted by a number of firms, industry standards emerge. At this point, the vertically integrated firm no longer maintains extensive control over the product
architecture. In an effort to compete on the bases of reliability, customization, and price, incumbents outsource to specialty firms that focus solely on the production of a particular module. This precipitates a shift in firm structure away from vertical integration toward a more horizontal model. The end result is an industry that resembles a networked cluster of specialized firms. Architecture as a Strategic Guide Viewing the key attributes of disruption in concert with the patterns of structural succession indicates the conditions when firms may be particularly vulnerable to disruption. Vertically oriented firms producing an integral product face two primary risks: overshooting the functionality that their customer base can absorb and failing to meet the needs of a more heterogeneous market. When this happens the conditions are prime for an inexpensive, highly customizable modular offering to be disruptive. One needs only to look at the dynamics of the computer server market and the efforts of Sun Microsystems to fend off the modular “Wintel” configurations assembled by companies such as Dell and Compaq to see how this is playing out.
The pattern is clear. When integral architectures exceed customers’ demands for functionality and the basis for competition changes, product architectures become more modular. Modular product architectures are eventually replaced by an entirely new value proposition, often in the form of products with integral architectures. This suggests that succession does
Connectivity Reinvents the Rules . . ., pg. 7
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Modularity and the Competitive Landscape Modularity is a generative architecture that can be used to embed evolvability into both products and organizations. But managers must be aware of several factors to manage it effectively in the face of potential disruptions. For incumbents there are a number of factors—technical, economic, and psychological—that prevent them from fully exploiting the advantages of modularity. Sustaining innovations are about optimizing along a set of well-defined metrics for an established customer base. Sure, these innovations may be faster, better, or cheaper. But the optimization mindset focuses on maximizing performance around established metrics, not exploring new value propositions. So modular products are not immune to disruption. In fact, the very existence of modular product architectures can be indicative of a market overserved on the basis of functionality and therefore vulnerable to disruption. The pattern of succession shows that modular architectures are most often disrupted by more integral offerings that fundamentally reframe the value proposition. Emerging Disruption Areas The concept of structural succession has allowed us to identify many areas of the economy that are susceptible to disruption. Applied to the electric utilities industry, we find that the industry fits many of the conditions of being primed for disruption. The
Innovation-Based Sustainability . . ., pg. 27
economies of scale that favored the large, vertically integrated power company are now under pressure as a result of the confluence of three factors: market liberalization, environmental concerns, and an insatiable demand for reliable, uninterrupted power. Micropower, the generation of power by small, decentralized stations, is an emerging technology positioned well to exploit these industrywide changes.5 The technology comprises modular systems that can be adjusted to match the scale of demand and installed far more quickly than a centralized station. Additionally, the fuels used by micropower stations generate few negative externalities and can greatly increase environmental quality in both developed and developing nations. Incumbent utilities companies have attempted to erect barriers, such as tariffs and standards, to inhibit the widespread adoption of micropower technology. In fact, this resistance to new and strategically important technology is characteristic of established companies’ futile attempts to preserve their existing business model in the face of disruption. The Upshot Whether or not a technology is disruptive often derives from the nature of the situation into which it is introduced as well as from the characteristics of the technology itself. Insurgents using disruptive technologies are, in essence, exploiting opportunities incumbents cannot because they each perceive markets differently. Where the established firm sees an unproven technology lacking a clear market, the
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not reach an end state, but is in fact a dynamic cycle.
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insurgent sees the opportunity to use a simple technology to reframe the value proposition and usurp market share from the incumbent. Mapping the evolution of product architectures from integral to modular highlights the conditions under which disruptions are likely to occur and illuminates new strategies for taking advantage of these opportunities and gaining competitive advantage.
1. Christensen, Clayton M. The Innovator’s Dilemma. Harvard Business School Press. Boston, MA, 1997. 2. Baldwin, Carliss Y., and Clark, Kim B., Design Rules: The Power of Modularity. MIT Press. Cambridge, MA, 2000. 3. Moore, Geoffrey A., Crossing the Chasm. HarperBusiness. New York, NY, 1991. 4. Henderson, Rebecca M., and Clark, Kim B., “Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms.” Administrative Science Quarterly, Vol. 35, pp. 9–30, 1990. 5. Dunn, Seth, “Micropower: The Next Electrical Era.” Worldwatch Institute Paper 151, July 2000.
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REFLECTIONS ON THE FUTURE OF SOFTWARE Alan Radding
Geoff Cohen
“Now, although I am too small a man to make propositions which might effect a reform in this dreadful state of things, nevertheless I may as well sing my fool’s song to the end, and say, so far as I am able, what could and should be done . . . ”
Martin Luther, An Open Letter to The Christian Nobility of the German Nation Concerning the Reform of the Christian Estate, 1520
About the Authors: Alan Radding is an independent writer, researcher, and analyst specializing in business and technology. His writing can be found in leading business, finance, technology, and telecommunications publications and websites. Mr. Radding also works with many leading research and consulting firms and major manufacturing and service companies. Geoff Cohen is a manager at the Cap Gemini Ernst & Young Center for Business Innovation where he directs the research into emerging
Ten years from now, software will be created, used, and understood very differently from today. But how? There are innumerable research projects employing vastly different theories, trying to tackle the same question. Unfortunately, there has not been a vibrant conversation among the disparate research efforts. We tried to change that. On August 13, 2001, the Center for Business Innovation (CBI) gathered together leading researchers in computer science, insightful writers, social scientists, and educators in an effort to determine how software might evolve in the first decade of the new millennium. The CBI’s Future of Software Rave addressed the fundamental issues of creating software, including new methodologies, management techniques, and technologies. The following is excerpted from a longer paper, An Open Letter to the Software Nobility, that synthesizes the ideas discussed during the Rave.
technologies. His work focuses on wireless
the future of software development. Geoff received a B.A. from Princeton University in public and international affairs and a Ph.D. in computer science from Duke University.
artin Luther struggled against a single, monolithic church that maintained absolute standards and laws. And although his goal was to reform this single church, his protest instead sparked the creation of hundreds of competing churches, each with incompatible doctrines, rules, and cultures. The subsequent conflict took tens of thousands of lives and devastated Europe for a generation. Today, however, most of us have learned to live with many churches and faiths, each serving its own community in its own ways.
M
The world of software—far younger than Catholic church in the 1500s, though no less dogmatic—is as
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trends, biological principles for software, and
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fragmented as the post-Reformation churches and as prone to religious wars over languages, methodologies, operating systems, protocols, tools, and the like. In the process, the software world has spawned a vast amount of criticism, complaint, frustration, anger, resentment, envy, greed—a veritable litany of sins. Fifty years after people started programming commercial computers, the applications are still late, costly, bloated, inflexible, hard to use, unreliable, flawed. And the slew of paradigms and approaches spanning the cathedral to the bazaar have failed to quell the rumblings. The Cap Gemini Ernst & Young Center for Business Innovation recently gathered 20 leading thinkers to focus on the future of software. Although the group did not leave with 95 theses to nail on the IT department door, it did identify three key changes that will redefine how software is created and used: ■
The abandonment of top-down control as the central dogma of computation
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Shifts in the balance of responsibility between users and software creators
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The legitimization of alternate models of computation beyond the Turing machine
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The common thread that unites these changes is an increasing diversity in approaches, applications, users, and architectures. And although diversity often comes at a cost of increased maintenance and coordination cost, ultimately, there is no one way to create software any more than there is only one church.
Still Waiting for the Revolution . . ., pg. 16
In 1976, Bill Gates sent an “Open Letter to Hobbyists,” calling on personal computer owners to stop stealing his software. No one will write software for free, he claimed and thus heralded the dawn of the age of commercial PC software. Perhaps our open letter—this fool’s song—may in some small way signal another age of software, one with broader participation, changed assumptions, and new metaphors. And although we can only roughly describe the changes that will bring in this new age, we believe that they are necessary, and that they are coming. The world is rapidly turning into a very different place where creating software is an engineering discipline. Myriad computers and environments communicate and collaborate using dozens, if not hundreds, of different protocols. Remote resources can no longer be predicted, not to mention trusted. And without warning, interfaces and behavior change, evolve, or even go away entirely. As independent consultant and researcher Clay Shirky emphasizes, the assumptions and techniques of the world of the single box simply no longer apply to software functioning at Internet scale. Our first impulse is to deal with these problems the same way we dealt with old problems: by trying to contain and manage this anarchy through the use of such techniques as comprehensive global standards and well-defined protocols, in effect just building a much bigger single box. This approach has its merits. A certain amount of standardization is necessary and desirable. It allows trains to move smoothly from one
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How will software be created, used, and understood in the future? In the next millennium, software will evolve drastically with new methodologies for creation, new techniques for management, and new options for technology. The Center for Business Innovation’s Future of Software Rave gathered leading thinkers to focus on where software was heading and identified three key changes that will redefine how software is created and used.
article abstract
In the network age, however, software standards inevitably fall short. The natural anarchy of software undermines adoption of “universal” standards. Variations in the way people implement a standard or unreliable services or malicious intent can break the system. Worse, even when successful, overreaching standards constrain innovation, limit freedom, and lock applications and users into an increasingly false model of reality. In the end, we’ve networked Pandora’s box, and we can’t wish the new world back the way it was. Yet anarchy in software is not such a bad thing. It is the very anarchy of software, with its alphabet soup of competing standards, which allows it to adapt to dynamic reality, to escape the constraints of engineered reality. And so although this anarchy makes software less reliable, buggier, and more unpredictable, we should welcome it. We ought to: We don’t have a choice. And once we allow for the fact that software doesn’t have to be perfectly repeatable or predictable, all sorts of things are possible. The dominant paradigm in software and computation is that of control: absolute control of the machine, of the process being modeled, of the environment, and of communications. Just think of the derivation of the word “program.” Despite the fact that this idea under-
Open Source . . ., pg. 59
lies all of our efforts in computing, it is dangerously wrong. To have any hope of forward progress, software creators must repent from this orthodoxy and abandon these lies: that a computer and the world in which it operates are deterministic, that an environment can be completely described, and that software infallibility is achievable or even desirable. One major myth is that software infallibility is both desirable and achievable. Quality Assurance departments try to produce bug-free software; software products are built to last forever; resources are assumed to be available all of the time. Again, this is a set of unreachable goals. Software, as a complex system (whether or not it is adaptive) simply has too many connections and interdependencies to be absolutely free of bugs. Instead of striving toward perfection, we should instead embrace imperfection. To paraphrase a famous programmer motto, bugs may be a feature, not a bug. Like the mutations and genetic variation found in biological populations, bugs represent opportunities for adaptation. It may be that the “404” error on the Web (indicating a page not found) was a key component to its success; trying to build a system in which you could not address a nonexistent page would have made the Web far more complicated, restrictive, and unscalable. Our livers are composed of millions of cells performing their liver-duties; we do not die if a single cell dies. Why must we build software that cannot survive the failure of a single component?
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set of tracks to another, and it builds enough confidence so that people will be willing to invest time and money in building on top of that standard foundation. Without any standardization, interoperability would be an unreachable goal.
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Sometimes, the accumulation of bugs represents an opportunity for death. The problem with the Y2K bug was not that the programmers back in the 1960s were so short-sighted (though they were); it was that our whole system of software usage allowed such programs to remain in place for decades. Organisms die to make way for further generations, but software generally doesn’t die, and when it does it often orphans its users and its data. We must allow for death but also be smarter about it. Already, we see early signs of these new ideas being applied to practical issues. Routers and anti-virus systems exhibit adaptive behavior. CAS concepts are being used to model the behavior of heavy metropolitan traffic. Swarm intelligence approaches are being applied to supply chain management, answering questions like how a system should respond to disruptions in the air transport system that slow the delivery of just-in-time materials. Similarly, these concepts can be used to model pricing in complex, dynamic markets and consumer behavior.
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The trick will be to make the leap from creating models based on these concepts to creating software that actually incorporates these concepts as the heart of the very system itself. This means creating software that doesn’t just model swarm intelligence or organic process but actually employs it to perform the intended task. This doesn’t mean that every old technique goes away, but it does mean that we need to integrate this new tool into our repertoire and understand better how it fits in with those things that we do know how to do.
The eventual arrival of post-electronic computing, whether based on DNA, photons, neurons, molecules, or quanta, offers the opportunity to finally break from the limitations of the deterministic approach to software. Whatever the device, the software of the future will likely be nonmechanistic and nonlinear at its core. Software creators must accept, even embrace, a level of anarchy if they are to avoid building the brittle, precarious, fragile systems so prevalent today. This will require new tools, new training and education, new paradigms, and new computers. Indeed, the great challenge of moving to this new world will not be the technical challenge of building new machines, or finding a new killer application, but the rejection of the orthodoxy, an ideology so deeply embedded in our assumptions, language, and literature that we are often unconscious of it. Martin Luther feared his reform efforts would amount to little more than a fool’s song. Perhaps our call to embrace organic computation and liberate ourselves from deterministic Turing machines will turn out as badly as Luther feared. According to author Cory Doctorow, however, “lies about the future inspire people who actually know how to build the future to build it.” In that case, even if it is a fool’s song, it still might be what could and should be done.
If you would like the full text of this paper, please contact Lesley Livingstone at lesley.livingstone@ us.cgeyc.com. If you would like more information on The Future of Software Rave, please contact Geoff Cohen at
[email protected].
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THE INVISIBLE ADVANTAGE OF INNOVATION Jonathan Low
About the Authors: Jonathan Low is a senior research fellow at the Cap Gemini Ernst & Young Center for Business Innovation (CBI). Jonathan is the leader of the CBI’s Intangibles Valuation initiative and has produced four major studies in this area and published numerous articles and reports on their findings. Jonathan is the co-author of Invisible
Advantage: How Intangibles Are Driving Business Performance. Pam Cohen Kalafut is currently the president of Cohen Kalafut Associates, LLC, a consulting firm specializing in strategic business modeling and linkages to firm performance. As a behaviorist, Pam’s
Pam Cohen Kalafut
The following is an excerpt from Invisible Advantage: How Intangibles Are Driving Business Performance (Perseus, June 2002) by Jonathan Low and Pam Cohen Kalafut. For more information on this book and other Invisible Advantage offerings, please go to www.invisibleadvantage.com. nnovation has always been a key to business success and wealth creation. It has always been a central driver of economic development. But when people say “innovation” they usually mean some new invention, like the Walkman or the digital camera. As important as such products may be, to limit the discussion of innovation to new inventions or technologies is rather like limiting a discussion of marketing to the latest ad campaigns. It’s only the tip of a rather large iceberg.
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maximizing the utility of human capital, and researching the role of emotions in the workplace. Pam is the co-author of
Invisible Advantage: How Intangibles Are Driving Business Performance.
In fact, a hallmark of the Intangibles Economy is that product innovation is no longer sufficient to stay in the competitive race. Rather, companies must innovate across a variety of fronts. The Intangibles Economy encourages, thrives on, and in fact requires companies to be innovative along many dimensions. So, instead of banishing innovation initiatives to the research division of a company, today’s organizations must innovate in: services, business models, organizational structures, internal processes, profit zones, alliances, marketing, and strategy. Managing for Successful Innovation There are four imperatives to managing intangibles in today’s economy:
Disruption in a Networked World . . ., pg. 66
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work has focused on intangible valuation,
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Leadership: Make Resources Available In summer 2000, Eli Lilly was in trouble. The term of patent protection for Prozac, its blockbuster antidepression drug, had been challenged in court, and Lilly had lost; according to the judge’s ruling, Prozac would come off patent in a year rather than in three years, as Lilly had hoped. The company’s stock plunged, wiping out $36.8 billion in market cap. Twelve months later, generic pharmaceutical maker Barr Laboratories entered the market with its version of the chemical in Prozac, at a price 20 percent to 40 percent less than the original. Lilly expected to lose some $2.4 billion in annual sales, nearly a quarter of its total revenue. “As CEO Sidney Taurel often points out,” read one report, “no company has survived a patent expiration of this magnitude without losing its independence.”1
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Taurel, however, had done just what a leader in this economy has to do: poured resources into innovation. He increased the R&D budget 30 percent, brought on 700 new scientists, and ordered the company’s researchers to focus on drugs capable of producing more than $500 million in revenue. The result: “Lilly now has a medicine cabinet stocked full of promising new drugs, including treatments for schizophrenia and for sepsis . . . Provided that management is able to handle some significant challenges from regulators and competitors, those new products could more than offset Prozac’s loss in just 12 months.”2 Lilly shares had partially rebounded by autumn 2001. Its market to book ratio by then was higher than the pharmaceuti-
cal industry average and considerably higher than the S&P 500 average. Strategy Execution: Deliver on Your Innovative Promises Innovation is such a hot commodity in today’s economy that companies are tempted to overpromise. Software firms are notorious for announcing “vaporware”—programs that are nowhere near ready for market—in hopes of discouraging competitors. New companies routinely promise the sky—and as the dot-coms showed, the sky is likely to fall in on them. But even well-respected businesses such as Palm Inc. can run into trouble from an inability to deliver an innovation. Palm’s troubles began with the economic downturn of 2001. Sales of its hand-held computers were off, and the company wanted to announce an innovative new product right away in hopes of adding to its revenues. Managers promised senior executives that the product would be ready to go in two weeks. Palm made the announcement, but in fact it would be six weeks before the new devices—the so-called m500 line—were ready to ship in volume. Meanwhile, consumers decided to hold off on buying older Palm products. Sales slumped. So did Palm’s stock, which at one point was down 95 percent over a 10-month period. What happened? Poor execution, pure and simple. Preoccupied with a new headquarters building, senior execs were paying little attention to operations. A key operations-management job went unfilled. There wasn’t enough time for testing the new
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“No leader can do everything that needs to be done, because ideas about new products or production methods often must come from others in the organization.
The question is whether a company stimulates or discourages
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the creation and testing of new ideas.
Processes: Encourage Bottom-Up Innovation or “Intrapreneurship” No leader can do everything that needs to be done, because ideas about new products or production methods often must come from others in the organization. The question is whether a company stimulates or discourages the creation and testing of new ideas. At the level of workplace processes, the kind of empowerment described in the previous chapter is a requirement, along with a culture that encourages and rewards suggestions for improvements. Companies can also stimulate the development of new products and business units. 3M Corp. is legendary for doing so; others have learned in the past few years. Thus Royal Dutch Shell’s Exploration and Production division went so far as to set up an internal “venture board” to review new ideas and business plans created by division employees. Siemens’s Strategic Business Development Group sponsors business-plan competitions.4 One key to success in all such enterprises is to realize that many—perhaps most—new ideas may be wrongheaded and that even seemingly promising ones may wind up in failure. Strategy consultant Gary Hamel makes the point with his usual flair for colorful language:
Refining the Innovation Process . . ., pg. 21
In devoting themselves entirely to the pursuit of efficiency, top management inadvertently drives out the “waste” and “extravagance” that is the very fuel of innovation. As top management strives for ever greater efficiency, it must learn to tolerate “stupid” ideas and “failed” experiments. After all, when a man and a woman celebrate conception, they seldom bemoan the 59 million little swimmers that never made it.5 Brand: Manage for Innovation Marketers long ago learned to manage line extensions, such as Bud Light and Crest mint gel, although exactly how far a line can productively be extended is always a matter of debate. But innovation of the kind required in today’s economy adds a whole new dimension to brand management. What happens to a retailer’s brand, for example, when the company puts some or all of its wares online? The customer is no longer subject to the same kind of in-store merchandising, can no longer be wooed by professional salespeople, can no longer touch and feel the goods. So protecting the brand in this kind of innovation requires paying attention to a whole new kind of marketing. How is the site presented? What goods are sold on it? What kind of customer service and back-office support is available? The answers will differ from one retailer to another, but none can afford to ignore the opportunities and constraints presented by its brand. The issues are even greater when a company branches beyond into new business arenas. IBM has famously
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models, so the manufacturing subcontractor ran into both design and performance problems. (In one model, the battery didn’t fit.) Eventually Palm had to lay off hundreds of people—and stop construction on that new headquarters.3
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recreated itself as a service company; its brand was strong enough to support the new emphasis on delivering solutions to customers, as opposed to simply delivering hardware. Had Hewlett-Packard succeeded in buying the consulting division of PricewaterhouseCoopers (which it tried to do before acquiring Compaq Computer), the prospects would have been much less clear. Is the H-P name—so well known in one arena— extendable into the wholly different arena of management consulting? What has made Virgin so successful in extending its brand is the fact that the name stands for something—a style, a culture—that transcends any particular business. It’s not clear that the famous “H-P way” is anything comparable. This list could go on, but we hope we have made our point. Nowhere, perhaps, is the interaction between one intangible and others so clear as it is in respect to innovation. An innovative company—one that is effective—almost by definition is a company that manages its other intangibles well.
Shared Conversation Demystifying Innovation, pg. 46
1. McLean, Bethany, “A Bitter Pill,” Fortune, Aug. 13, 2001. 2. Arndt, Michael, “Eli Lilly: Life After Prozac,” Business Week, July 23, 2001. 3. Tam, Pui-Wing, “How Palm Tumbled from Star of Tech to Target of Microsoft,” Wall Street Journal, Sep. 7, 2001. 4. Hamel, Gary, “Bringing Silicon Valley Inside,” Harvard Business Review, September–October 1999; and Pinchot, Giffod, Intrapreneuring: Why You Don’t Have to Leave the Corporation to Be an Entrepreneur, Berrett-Koehler Publishers, 1999. 5. Hamel, Gary, “Innovation’s New Math” Fortune, July 9, 2001.
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The Bionic Organization John Parkinson
Geoff Cohen
About the Authors: Geoff Cohen is a manager at the Cap Gemini Ernst & Young Center for Business Innovation where he directs the research into emerging technologies. His work focuses on wireless trends, biological principles for software, and the future of software development. Geoff received a B.A. from Princeton University in public and international affairs and a Ph.D. in computer science from Duke University. John Parkinson is the chief technologist of Cap Gemini Ernst & Young. Before joining CGE&Y, John worked in the Strategy and Corporate Development Group and was the Director for Innovation and Strategy for Ernst & Young in the Americas region. He joined E&Y Consulting Services in 1985. Originally from the U.K., John holds degrees in maths and information sciences from Exeter University. He has been involved in the IT industry since 1969 and has written or edited four books on IT systems development.
or the past century, no economic force has been more effective in creating and destroying businesses than the accelerating pace of technological innovation. To thrive, indeed to survive, companies must be able to quickly and effectively capitalize on the opportunities created by new technologies. The dustbin of history, however, is full of companies that rushed to embrace a technology only to find that they did not understand how that technology would be used, underestimated barriers to adoption, or failed to foresee unintended consequences. At a recent meeting of Cap Gemini Ernst & Young’s Technology Advisory Board, a discussion of emerging technologies dwelled on these very points. Humans are key to the success or failure of technologies, and a better understanding of the business and strategic opportunities created by technology can only come through an improved grasp of the emotional, cognitive, psychological, and social factors that surround how, and if, humans use tools.
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We Have the Technology Most analysis of technology mentions Moore’s Law, the observation that the density of transistors on chips, and thus the processing power available, doubles every 18 months. A lesser-known but equally important law is known as Amdahl’s Law, named after IBM engineer Gene Amdahl. Amdahl’s Law states that as you speed up a single stage of a process, the overall improvement is limited by that stage’s share of the total execution time. For example, if a stage consumes 20 percent of the total time, doubling the speed of that stage only saves 10 percent overall. In other
Reflections on the Future of Software, pg. 71
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technology watch words, solving problems in one part of a system just makes other problems look bigger.
Both of these forces are at work in technology today. As Moore’s Law and similar trends relentlessly improve processing speed and storage capacity, other problems emerge as the limits to functionality. Like an ocean tide receding, heretofore unseen shoals become revealed. An obvious example is battery capacity: As portable computers such as laptops and palmtops become more and more popular, the need for longlived batteries becomes far more important, arguably more important than processing speed. And yet a laptop now runs for about two hours, the same as some laptops five years ago—a far cry from Moore’s Law. Similarly, while bandwidth delivery technology has improved immensely, the cost of usable bandwidth is actually increasing. Consider that at current prices, over the three-year life span of a typical computer, you may spend more money on broadband access ($1,800 to $3,000) than on the hardware (which could be well under $1,000). The most challenging issues, however, are those tied to cognition and communication. It’s these human issues that must be overcome to make technology, especially software, more effective and useful. Information technology particularly is increasingly about enabling groups of humans, not just individuals, to work more effectively. Unfortunately, the human brain doesn’t follow Moore’s Law, and our imperfect brains and, worse, imperfect understanding of our brains, are both barriers to making great strides. This
affects issues ranging from user interface design and manageability, to increasingly important features like security and reliability. A key insight is that an enterprisewide service, such as security, is a process that involves both technology and people, and effective solutions must factor in the strengths, weaknesses, and interactions of both elements.
We Have the Capability The Web would change everything, we were told. As the economy shifted to knowledge-based production, the Web and other pieces of networked software were supposed to revolutionize the way enterprises learned, collaborated, and took action. It didn’t turn out to be so simple. Years can pass between the invention of a technology and its mass deployment. Even when a technology is actually deployed, it may not be used or may be used incorrectly.
There’s technology, and then there’s technology adoption. “The Internet took 20 years to get ready for overnight success,” pointed out Alan Kay. There’s a lag, sometimes a lengthy one, between the invention of a technology and when it becomes widely adopted. This lag can be driven by many factors. One factor is simply the cost and time necessary for the rollout: This is at least one important reason why broadband deployment has run so very slowly. Even installing DSL as fast as possible, it will be many years before everyone can be connected. Even when a technology is widely available, however, that does not mean that people, even in a corporate environment, will embrace it.
Still Waiting for the Revolution . . ., pg. 16
While it is true that the accelerating pace of technology has been instrumental in creating and destroying businesses for the past century, it is the human element—the ability to understand and optimize technology—that holds the key to success or failure. Human issues must be overcome to fully realize the potential of technology. The most challenging issues—human cognition and communication—need to be taken into account as more technology becomes about enabling groups of humans to work more efficiently together.
abstract
A dramatic and familiar example of this is knowledge management. Over the past years, many companies launched, with great fanfare, large knowledge management portals, only to see the knowledge in them decay in usefulness over time as resources get diverted. Increasingly, employees use simple e-mail more often than expensive and complex solutions as a way to exchange knowledge. What’s so great about e-mail? You’re using it anyway, so it doesn’t represent a new thing to learn or remember to do. Your social network is built in, since the people you know best and feel more comfortable interacting with are the ones in your address book and your inbox. And finally, e-mail’s free-form looseness provides a low-overhead way to send a quick note or attach a file. Contrast this to the extra effort you must put in to use heavier-duty systems that have lengthy forms and descriptions. People—and organizations—generally do the thing that makes the most sense, given their situation and assumptions. Adoption can be influenced by people’s perception of the value of the new application, as well as by incentives (or punishments) to encourage use. But we shouldn’t fight against activities like the use of e-mail as a knowledge-sharing tool; instead, we must understand and embrace the user’s point of view. Organizational barriers can also limit the value of technologies. Clay Shirky told a story of a bookstore chain that used a data-mining system to monitor how visitors were using its website. Analysis of the data indicated that users were ignoring the editorial
content. When confronted with this fact, senior management rejected the finding, insisting that editorial content was how they differentiated themselves. The problem wasn’t the technology, but the organizational willingness to respond to the results. The situation isn’t hopeless, however. Usama Fayyad countered with a story of a national upscale department store chain. Suddenly, many visitors to their website were entering “navel ring” into the search box. This was puzzling, since the store offered no such product. Looking into it, they discovered that a model in one of their advertisements happened to be wearing one. Within three days, the chain began stocking similar navel rings in their stores and online. We Can Rebuild It The IT department’s ancestry was the white labcoated priesthood that tended the mainframe, often the company’s sole computer, in a glass-windowed but otherwise inaccessible room. Computers were expensive and difficult to operate, and using them required a highly trained staff.
Today, the IT department faces just the opposite challenge: ubiquitous access to technology, with employees able to install new applications or make changes with little or no oversight. IT managers are sometimes considered to have done a good job if they have only avoided disaster. This drives a fundamental conservatism; if nothing new is introduced, then perhaps the environment can be controlled and nothing will go wrong. This is not to beat up on IT managers; they are, after all, doing exactly the right
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“Today, the IT department faces a new challenge: ubiquitous access to technology, with employees able to install new applications
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or make changes with little or no oversight.
thing, considering how their performance is measured. And yet this mindset prohibits the most valuable aspects of widely distributed computer and connected assets: wide-ranging exploration, experimentation with new applications and tools and languages, and distributed learning as many employees find new ways to use tools.
an intuitive user interface for any but the most superficial plasticity. Indeed, the more a software user interface offers ease of use, the harder plasticity becomes. Another cost is that with increased customization, different users may in effect be using different applications, reducing economies of scale, and building barriers to knowledge transfer.
The irony is that the killer app of the computer isn’t really a single application, but the plasticity of the computer. That is, the ability to reform itself, to be able to run new applications, to change the way it works. IT departments that insist on a standard load-set, with dire consequences to employees that deviate, eliminate much of this plasticity. And yet that plasticity is an ingredient in the organization’s ability to adapt to new circumstances and expand its capabilities.
These dilemmas imply a powerful, new potential role for the IT department. Its role would be to respond to, in fact support, these two antithetical forces: the need for users to explore and customize, and the need for corporatewide efficiencies and a shared language. The way to do this is to shift focus away from maintaining applications, toward promoting standards and protocols, promote user education (not merely training), and package and offer centralized capabilities as services, not as applications. Only as a second-order concern should IT departments “clean up” after users, optimizing and standardizing those applications that the users adopt. Finally, the IT department can serve as ambassadors to other enterprises, meeting the wider need for common vocabularies and shared protocols and taking advantage of opportunities for collaboration and commerce in services.
The value of plasticity isn’t always easy to see. When Alan Kay and his team at Xerox PARC demonstrated the prototype of the Alto, the first graphic interfacedriven computer, to Xerox executives, their response was “what’s its application?” The researchers’ response was that it wasn’t any one application, it was the very ability to run any application. “Yes,” the executives replied, “but what’s its application?” Eventually, Xerox decided to commercialize a singleapplication word processor instead of the Alto. It was clear to them what its application was. Furthermore, taking advantage of plasticity isn’t without cost. It requires a good deal more education on the part of users; as yet, no software interface offers
IT departments specifically and technology vendors in general need to improve their insight into users’ language. Like the e-mail example earlier, users have a specific set of needs and patterns of behavior that cannot be changed on demand. Successful applications must start by using the user’s existing language and assumptions. Yes, new languages and behaviors
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can be introduced, but only by providing pathways to users to migrate from the old to the new. One way to do this is to encourage the gradual adoption of new behavior, in sharp contrast to existing interfaces that generally make it difficult to find out about unused functionality, much less include it in a limited repertoire of knowledge without a great deal of training or a drastic change in usage behavior. Meeting these challenges will be necessary for any software applications any more complicated, feature-rich, or sophisticated than those we have today. Better . . . Stronger . . . Faster We asked the members of the board what they thought the interesting new features would be in technology in the next few years. One danger in predicting the future is assuming that the whole world is like you. Although we try to take a global point of view, the fact remains that we’re living in North America, and it’s hard to avoid making invisible assumptions. How will electronic technology be adopted in China, for example, or the Middle East? Will it be used the same way in rural India as it is in Silicon Valley? These questions can really only be answered with time, and yet it does seem that if you look at adoption and penetration curves, different regions of the world begin to look pretty similar, only starting at different times.
This isn’t to say that technology is used the same everywhere, of course, or even that North America is always ahead of the pack. Certainly, the northern European and Japanese markets have embraced wireless telephony service faster and more firmly than
have Americans. Similarly, the huge success of “texting,” or Short Messaging Service, in Southeast Asia and Japan, has been largely ignored in the U.S. market. These differences are results of many factors, including different regulatory schemes, existing fare structures on telecommunication, and social norms (such as the acceptability of speaking into a phone in a public place such as a subway car). Yet another difficulty in making predictions relates to what seems to be a real difference in the usage patterns between generations. Those over 30 are, in general, unlikely to have used Napster or instant messaging. For the under-30 crowd, these applications are a standard part of life. With those caveats, the board discussed a number of technology trends from the near to the distant future, including the arrival of consumer networks, advances in user interface design, and the establishment of biological models of computing. Consumer devices are nothing new, but with the proliferation of digital media available, the ability for these devices to be able to communicate is becoming an important feature. At the same time, the availability of wireless home networking means that nest of cables connecting stereos, DVD players, computers, cable boxes, etc., may go away. Using this network, the output from any box can be routed to any other device in the house. Entertainment isn’t the only application; telephones, security, environmental control may all work with this system. Furthermore, the technology isn’t limited to the house; the no-
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wires, many-device features make this extremely attractive for automobiles as well. There hasn’t really been a significant advance in user interface design for software since the now-familiar overlapping windows interface. The progress remaining to be made is not so much around ease of use, but in the ability to augment the effectiveness and productivity of the user. With the increasing amount of information easily available, the challenge is to improve the user’s attention, focus, and short-term memory and to do so with appropriate levels of intrusiveness. The one place where there is a great deal of experimentation and innovation in user interfaces is in gaming, and clues from this space may provide hints of the steps forward. Farthest out, but potentially with the greatest impact, is the advent of biological models for computing. Today, computation is thought of as a mechanical process, more akin to engineering than neuroscience. A number of software researchers, however, believe that by borrowing techniques and organizational principles from biology, they can make software that is more adaptive, robust, and better suited for human applications with all their messiness. There are plenty of early signs of this, including neural nets, genetic algorithms, digital immune systems, and self-healing routing networks. And yet these techniques often borrow only a mechanism, without changing some of the fundamental assumptions and architectures found in software today.
The Six-Million Dollar Idea It’s actually old hat for consultants to say that you must consider culture and process as well as technology. What’s new in this discussion is an acknowledgement that it’s not enough to say that you’ll shape the people to fit a new technology. In the past, the assumption has been that it is in fact possible to get people to use a new technology if only you can provide the right training, incentives, punishments, or management.
But the discussion of the board delivers quite a different message: that there are kinds of human behaviors that aren’t amenable to change, and that it’s better to alter the technology to fit human needs. The late Michael Dertouzos observed in his last book, The Unfinished Revolution, that all too often, humans are at the service of computers, rather than the much more desirable opposite. To take full advantage of new technologies, to really enable the widest range of possibilities opened up by innovation, we must make sure that technologies aren’t designed in isolation from their eventual users; technology ought to help us, to shore up our weak points, and to magnify our strong points. Without ignoring or dismissing our alltoo-real human limitations, technology ought to make us better at being human.
Open Source . . ., pg. 59
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WELL-READ MANAGER
Za Za Za Zoom! When You Don’t Know Where You’re Going, for Heaven’s Sake Go Faster!
Well-Read Manager
Larry Keeley
Book Review Survival Is Not Enough: Zooming, Evolution, and the Future of Your Company by Seth Godin
(Free Press, January 2002)
eth Godin has built a meteoric career capturing the essence of a marketing moment in clear phrases, packaging them well, then making his insights available in books, e-books, personal speeches, websites, and consulting. His latest, Survival Is Not Enough, continues the signature approach he used to make a big splash with earlier books, Permission Marketing (1999) and Unleashing the Ideavirus (2000).
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There is always a core of pragmatic insight in Godin’s works. Permission Marketing offered an opinionated indictment of mass marketing and urged readers to realize that they’re not alone in hating spam, since everyone does. Such an insight might seem selfevident, but Godin goes to lengths to persuade people of this position and to take it seriously enough to deal with the consequences. Unleashing the Ideavirus built on this to suggest that ideas can be infectious if they are “smooth” enough, have the right “vectors and velocities,” and especially if “powerful sneezers” like Oprah transmit them. As this summary suggests, Godin is fond of adapting au courant ideas in the sciences to coin new marketing phrases. His newest book repeats this formula,
simplifying select ideas of evolution and trying to embed them in the catchphrase “Zoom.” Godin wants Zoom to be a verb that companies adopt, meaning: “To move quickly without pain. People who zoom can embrace change at work and at home. If you’re open to new ideas and can see the opportunity that chaos brings, you know how to zoom.” There is also a “zooming process” that companies need to adopt urgently— though help is available in the form of five starter steps you can begin tonight, plus a handy lapel pin you can display once you “get it.” To some this may seem like a distant echo of the time in 1976 when Gerald Ford introduced the Whip Inflation Now lapel pin. The “WIN” pin proved a real loser—perhaps because the President of the United States is not a good enough sneezer. It is too soon to tell if Godin’s “Zoometry” will share a similar fate. But it is possible to summarize his latest insights and mine them for useful principles. “Don’t know” vs. “Can’t know” Sometimes it is fun to tease little kids. Never in a mean way, of course, just merely to see how the neural logic paths are getting wired up in their frontal lobes. Kids of a certain age think it perfectly reasonable that an airplane might land in their bedroom or that ice cream comes from very cold cows.
Once past this stage of phantasm—a tragic loss of innocence that has many of them well on their way to becoming McKinsey analysts—another class of fun comes along. Try posing a logic trap. You ask a kid how old she is. “Five and a half!” comes the answer.
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well-read “Huh,” you say. “You must be very advanced. Why, when I was your age I was only four.” After a pause, wait to see how much confusion reigns. The really smart kids will be especially confused. Ah, then raise the stakes with a dilemma. Try the old George Carlin routine: God is so powerful He can do anything, right? “Right!” comes the response from the precocious little one. So can He make a rock SO big that He Himself can’t lift it? Another long pause . . . One time the tables got turned. Faced with such a dilemma, one cute child held his head in his hands, plopped down smack onto the floor, rolled around a while, scrunched his eyes shut tight, then gave up. “I can’t know!” he declared, in obvious exasperation and at the end of where his hot little wits could take him. In that moment dawned an enduring principle of understanding. There is a fundamental difference between questions that may be knowable and those that—no matter what you do or how much effort you put in—are simply not knowable at all. Wise people need to sense which class of problem they are wrasslin’ with: those that may be bloody hard but can be cracked vs. those that are impossible to resolve now. The Challenges of Planning at Sony This simple dichotomy appears routinely in corporate life. Everyone knows the famous story of the Sony Walkman. Faced with overwhelming market research “proving” that the device would be a dud, Akio Morita, Sony’s then CEO and Chief Gadget Enthusiast simply
said, “I like it, so we will build it.” Fewer people know the long-term effects of this dictum. For two decades after this accidental mega-hit, marketing research was the department reserved at Sony for the complete screw-ups they wouldn’t fire. The new orthodoxy was that it was impossible to know what people wanted, so you should simply build lots of cool stuff and make more of whatever people seem to like. Central Tenet: You Can't Know Anything About the Future Seth Godin would say that the important part of this story is just that—Sony doesn’t do a good job of predicting which products will be a hit because it cannot know. Indeed, he goes further. Godin thinks we have entered a time of such intense, permanent turbulence that nearly every situation is too tough to understand. This puts him firmly in the Yogi Berra School of Advanced Planning: “Prediction is very hard. Especially when it involves the future.”
He supports this thesis with one of many ideas he pulls out of the hot-at-the-moment evolutionary biology toolbox. In 1973 evolutionary biologist L. van Valen observed that species evolve to improve their fitness, but that in an ecosystem filled with competitors this is really co-evolution—trees get taller to steal more sunlight, so other trees get taller too. Sure, you end up with taller trees but no relative increase in fitness of one species over another. Borrowing the name from Lewis Carroll’s Through the Looking Glass, van Valen called this the “Red Queen” principle. As alert readers may recall, in the original
The CBI Future Scan . . ., pg. 53
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“Godin describes strategy as “based on one fundamental assumption: We can predict the future and influence its course through our actions.”
The straw man all propped up,
” Well-Read Manager
Godin then blasts away at it with a bazooka.
manager story the Queen was frustrated by all the pieces moving at once. She said, “In this place it takes all the running you can do, to keep in the same place.” In a fashion typical of this book, Godin interprets van Valen's narrow biological concept very expansively. His conclusion: Every move you make alters the makeup of the entire market and your competitors will rapidly respond. Ipso facto: You can’t know nuthin’ about the future. Hyperbole can be fun. It can even be a useful technique for clarifying a trend ahead of general acceptance. Still, before we rush off zooming, it would be good to know if this assertion is true. Specifically: Is it true about all things all the time, all things some of the time, some things some of the time, or what? Such an evaluation is important because the case for zooming hinges on accepting that we are in a permanent state of turbulence in the midst of which nothing can be known, nothing predicted, and nothing optimized. Godin describes strategy as “based on one fundamental assumption: We can predict the future and influence its course through our actions.” This straw man all propped up, Godin blasts away at it with a bazooka, saying, “I don’t know is the only true thing you can say about the future.” Apparently strategists have been delusional for a long time, maybe decades. Is this fair? It seems unlikely that any thoughtful strategist anywhere would agree with Godin’s characterization of her beliefs. A more nuanced, much more accurate statement would be something like: Although
there are an infinity of things you could try, certain basic patterns of resource allocations tend to produce the most predictable results. This leads to some enduring principles. Having low costs matters. Being differentiated is a plus. Knowing what customers you are trying to serve and serving them with intensity can work. Peering Into a Foggy Future In a time of volatile change it would be silly to staunchly defend conventional wisdom. But neither should we rush to discard every principle that once worked on a loose assertion that everything is somehow suddenly and permanently different. Such precipitous action would be very Chicken Little of us. Nevertheless, much of the intellectual underpinning of Survival Is Not Enough, hangs on our accepting this precise form of reasoning and implores us to give up planning and get busy “zooming.”
This line of reasoning always appears in times of change and adaptation. Some readers may recall Alvin Toffler’s Future Shock from 1970—a book with a tone eerily similar to Godin’s, providing an argument that the pace of change was suddenly much too great to permit human adaptation so that calamitous futures were inevitable. Toffler himself backed off these views a few years later, essentially reversing himself completely by the time his much better book The Third Wave came along in 1980. What Toffler learned and Godin may yet discover is that change may occur at astonishing rates sometimes, but humans are remarkably skilled at creating non-
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“Godin’s primary advice is to overlay one über strategy above all others: Build a company that’s so flexible and responsive
”
that you don’t care what happens.
Well-Read Manager
linear innovations in response. After Ma Bell projected that it would need to hire half of all U.S. women (it never imagined it might hire men!) to be operators, it created entirely new forms of switches to displace this role. When its help desk costs ballooned out of control, FedEx did the same by making the system simple and accessible enough for customers to track their own shipments. Significant stages of human progress—internal combustion, flight, semiconductors, radar, antibiotics, vaccines, genetic engineering, many others—have occurred routinely when teams learned to take something that seemed impossible, but cracked it in a novel way. This is precisely what is happening now as tough planning problems are yielding up their mysteries to new forms of modeling and simulation that Godin seems unaware of. Josh Epstein’s work with “Sugarscapes,” new techniques for preference modeling, new algorithms for risk analytics, new forms of sensors, and many related techniques are giving us more sophisticated methods than ever before to take hard prediction problems and handle them as if by magic. So it is patently not true that nothing can be known about the future. It is merely hard to know some of the most valuable aspects about it—and it has become a very exciting frontier in science, economics, marketing, and management. Enduring and Useful Themes Godin’s primary advice is to “overlay one über strategy above all your others: Build a company that’s so flexible and responsive that you don’t care what
happens.” Godin believes he can help individuals, then teams, task forces, divisions, and even entire companies to overcome the nearly universal human (mammalian?) belief that change is dangerous and should be resisted. Not many are brave enough to rail against native behavioral instincts. Just try to get a cat to stop stalking whatever is moving no matter how much dry cat food is piled in her dish. But this part of Godin’s argument is compelling. He points out that some daily behaviors exhibit the kind of willingness to experiment that he finds virtuous: buying a new CD when we don’t know all the music on it; buying tomorrow’s edition of The New York Times even though we read today’s; trying an unfamiliar food once a day, just because it is unfamiliar. The logic here comes again from a pick-up piece of evolutionary biology. Godin reminds us that evolution has no direction—no central control agent, no governing authority. This portion of the book plows familiar ground and does so less powerfully than does Kevin Kelly in Out of Control or Richard Pascale in Surfing the Edge of Chaos, among others. But he makes these ideas accessible and connects them well to the kinds of real-world judgments managers are often called to make. Seth Godin believes that if we habituate change, especially if we embrace simple, constant change without waiting for a clearly articulated objective, then we are better suited for these times. He draws a sharp distinction between this advocacy and the
Innovation-Based Sustainability . . ., pg. 27
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well-known field of change management. His beef with those specialists is their focus on episodic change, change around a plan, after which a new stability can be attained. The world would likely be a better place if people could turn off their reflexive fear of the unfamiliar at will. These deeply ingrained habits were once necessary to survive. Godin believes we need to actively change them to thrive. On Beyond Fast Feedback All of Seth Godin’s books provide clear, actionable, pithy advice that managers can put to practical use. The prescription at the heart of Survival Is Not Enough has much to recommend it. In particular his focus on rapid action, many experiments, and fast feedback loops to reveal what is working is sound advice. Almost any enterprise that institutionalized this practice would be better off.
Newer kinds of planning methods such as sciences around pattern recognition, preference modeling, simulation, and risk optimization also have a place in the future. If Godin takes these principles into account, his next book will be even richer. Savvy companies ought to try more things to be sure. And they ought to be obsessive about detecting which of these trials work well, as Godin advises. But strong leaders should still bring some sense of intention and direction to these efforts. Otherwise, experience shows that overall business performance may be merely random.
Larry Keeley is president of Doblin Inc., an innovation strategy firm with offices in Chicago and San Francisco. He is a Fellow of the CGE&Y Center for Business Innovation.
Recommended Reading
Hyperinnovation: Multidimensional Enterprise in the Connected Economy Chris Harris Palgrave Macmillan, July 2002 Innovating at the Edge Tim Jones Butterworth-Heinemann, June 2002 What Genes Can't Do Lenny Moss MIT Press, June 2002 Small Pieces Loosely Joined: A Unified Theory of the Web David Weinberger Perseus, April 2002 F'd Companies Philip Kaplan Simon & Schuster, April 2002 Cultivating Communities of Practice Etienne Wenger, Richard McDermott, William Sydner Harvard Business School Press, March 2002 Digital Aboriginal: The Direction of Business Now: Instinctive, Nomadic, and Ever-Changing Mikela Tarlow, Philip Tarlow Time Warner AudioBooks, May 2002
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RESEARCH ROUNDUP
Special Items Research Roundup
I
Our research at the Center for Business Innovation revealed that adaptation was a vital characteristic of successful businesses amid this volatility. We define an “adaptive” organization as one that is able to sense and respond to changes in its environment and learn from these responses to change its behavior and evolve. In our research into adaptability, we began to analyze the increasing frequency of companies that declared “special items” in their financial statements. Taking an adaptive view of the economy, we reasoned that companies that declare large special items are less adaptive than companies that do not. The logic
for this is that the companies that don’t declare special items are able to use their existing systems and approaches to respond to changes in their business, while companies declaring large special items are acknowledging the inability of their businesses to adapt. Special items are non-recurring costs, or less often, gains, that are excluded from a company’s reported earnings. Special items can include one-time restructuring charges, asset impairments, product recalls, inventory write-offs, or quite commonly, merger and acquisition charges. They can be any size and be taken any time of the year. A recent example of a sizable special items filing is the $4.1 billion charge announced by Ford in January of 2002 to account for a restructuring program that included five plant closings and severance pay for 35,000 recently fired employees. Special items should be distinguished from extraordinary items. The latter must be both unusual and infrequent, such as a fire, flood, or earthquake. Notably, the September 11th terrorist attacks did not qualify as an extraordinary item. The SEC cited the difficulty in separating losses due to the attacks from losses stemming from other factors. Part of our research focused on the companies in the Standard and Poor 500, and another part analyzed the firms in the Russell 3000 Index, the most valuable firms in the U.S. in terms of market capitalization. Examining financial filings and various indicators of financial performance from 1982–2000, we tracked
Research Roundup
Connectivity Reinvents the Rules . . ., pg. 7
Research Roundup
n our current economy, the unprecedented degree of connectivity of people to people and people to information has made the business world function at a blurred speed. Moving beyond this truism that has become a cliché, the Center for Business Innovation reasons that our current economy is dominated by the increased market volatility that is a direct result of ubiquitous connectivity. As the number of connections between nodes in a system increases, each node is exposed to many more threats and opportunities. The system thus behaves less predictably and is more likely to exhibit unforeseen properties. That is why our connected economy is characterized by an increasing frequency of calamitous events and explosive corporate growth. Stock markets are their most volatile ever, the number of business failures is increasing and CEOs are turning over faster than ever, and corporate results are becoming less predictable.
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“The increase in special items declarations is real and can be seen as a reflection of increased market volatility, shifts in accounting practices to describe unusual gains and losses,
and more managers realizing the impact
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of financial statements to affect market perception.
research the frequency of special items declarations, extraordinary items declarations, and compared the performance of firms that declared special items and those that did not or took minor charges. One of our hypotheses was that firms declaring relatively small special items charges—less than 10 percent of income over a five-year period—were handling the volatility of the market nearly as well as those companies with no declarations. Declarations of special items equivalent to 10 percent of annual income or less is a small amount considering that some firms declared special items in excess of their annual income. Our research revealed a number of valuable findings: · The number of S&P 500 firms declaring special losses has grown from 68 in 1982 to 233 in 2000. This supports our thesis that the world has become more volatile, resulting in a larger number of firms that cannot adapt their business to account for changes in their environment.
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During the last 10 years, firms that did not declare special items or took minor charges performed significantly better than those that did. Those that did not declare special items had a 3 percent higher annual growth rate in earnings—a sizable difference. In arriving at the 3 percent differential, we even ignored the special losses when comparing annual income, so that companies declaring special items would not be penalized.
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Companies with more volatile earnings had higher earnings growth than those companies with less volatile earnings. Over the last 10 years, the earnings of more volatile firms grew at a 30.5 percent annual rate, while companies with more stable earnings grew at a 13.1 percent annual rate.
What hypotheses can be built upon our findings? First off, the increase in special items declarations is real and can be seen as a reflection of increased market volatility, shifts in accounting practices to describe unusual gains and losses, and more managers realizing the impact of financial statements to affect market perception. Companies legitimately want to separate non-recurring charges to present what they consider to be their true operating cost and earnings. Because firms that classify losses or gains as special items, however, perform worse in the market than those that do not, companies that can adapt to account for unforeseen, one-time events are more likely to be more profitable. In addition, having variable earnings can be beneficial, so long as an organization’s structure does not force it to account for losses and gains in a special category. Therefore, forcing stability upon your earnings as a manager or demanding stability as an investor may be counterproductive. Our findings also suggest a different type of performance structure is in place in more successful companies. These companies are better able to change in response to the changes in their business environment—they can do so without having to make structural readjustments.
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The Center for Business Innovation’s research into special items is part of our larger focus on how a company can become an Adaptive Enterprise. Our aim is to help organizations thrive in economic volatility by becoming permanently adaptive. We believe that adaptation is what separates the most successful organizations from their competitors, as well as being a major reason for financial growth in our increasingly chaotic economy.
Research Roundup
If you would like to learn more about the CBI's research on special items, please contact Prabal Chakrabarti at
[email protected].
Roundup
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RESEARCH ROUNDUP
Decisions That Matter
esearch at the Center for Business Innovation (CBI) demonstrates a dramatic shift in value creation over the past decade. Formerly, investors’ understanding of a company’s value resulted from analysis of audited financials such as a balance sheet and income statement. Today, however, a more accurate and comprehensive view of a company’s value needs to account for intangibles such as brand value, alliances, and customer relations. Decisions that Matter is one report in a portfolio of research studies undertaken by the CBI. The purpose of this body of research was to determine which intangibles are most relevant to business managers, how to quantify their value, and strategies to manage and improve a company’s intangibles.
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Research Roundup
In 1998, with the support of Forbes ASAP and professors at the University of Pennsylvania’s Wharton School, the Center for Business Innovation conducted an online survey of business people. We polled respondents on what they regarded as the key drivers of value in their companies. We defined key drivers as the financial and nonfinancial factors that they thought helped them create value as managers of organizations. The second part of the survey asked what type of information they were accumulating to help them measure and understand those value drivers, and whether they were satisfied with the quality of the information. The results surprised us: 81 percent of respondents said they received very poor information on the intan-
gible value drivers in their company. Surprisingly these managers felt uninformed about the factors of business success they thought were actually most important in their company. A couple of months later, at a Forbes executive conference, we used the conference’s automatic audience response system to survey the audience of CEOs and high-level executives. We imagined that since the people in the audience were the people who decide what information to measure, surely they would be satisfied with the data they accumulate about the drivers of value in their company. What did we find? Seventy-one percent of these chief and senior executives rated the information they provided and received about their value drivers as extremely poor. The results of these surveys suggested that managers in large corporations were suffering from a major gap in the information they value and the information they have. Because of these initial findings, the CBI launched the study Decisions that Matter. There were two main objectives of this recently completed study. First, we wanted to identify the critical nonfinancial drivers of long-term economic value from the perspective of senior managers. Secondly, we wanted to assess the financial consequences of a major gap between the value drivers managers rated highly and the quality of the measurement of those drivers. We wanted to know if the presence of information gaps was reflected in a company’s financial performance. In our initial research we surveyed CFOs and other high-level executives controlling capital allocation in
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Research Roundup
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Short-term financial performance Annual earnings, return on assets
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Customer relations Market share, customer satisfaction, customer loyalty/retention ●
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Employee relations Employee satisfaction, employee turnover, workforce capabilities
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Operational performance Productivity, on-time delivery, safety, cycle time
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Product and service quality Defect rates, refunds/returns, quality awards
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Alliances with other companies Joint marketing, joint research and development, joint product design
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Relations with suppliers On-time delivery, input into product/ process design ●
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Environmental performance EPA citations, environmental compliance ●
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Product and service innovation New product development, product development cycle time ●
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Community Public image, community involvement ●
After measuring the gap between the value executives placed on these value drivers and the information they collected about them, we analyzed the financials of each of the companies participating in the survey. We then compared the gaps with various measures of financial performance to see if there was any noticeable relationship. Most importantly, we did not directly measure the relationship of, for example, a major gap in environmental performance with fiveyear net-income growth. Instead, we measured the companies’ overall financial performance with the overall findings on their gaps. We felt this was vital to accurately determining the relationship of a company’s gaps with its success in the market. Major Findings Both surveys in this study demonstrated that a majority of executives in every industry believed that there was a disconnect, or gap, between the drivers they felt were critical to their company’s success and what was being measured and reported to the investment community. Executives rated the aforementioned 10 value drivers ranging from not at all important to extremely important in reference to their impact on
The Invisible Advantage of Innovation, pg. 75
Research Roundup
a specific industry, namely financial services. In the second phase of research, we wanted to test our findings in a cross-industry selection and surveyed similar high-level executives in control of corporate finances in many different industries. Our analysis ranked the executives’ perception of the importance of 10 value drivers and their ability to measure them. Respondents were asked about the following value drivers:
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organizational success. When the respondents were asked how well their companies measured these critical factors, however, the majority reported their company’s efforts were inadequate. In the financial services study, our research showed the largest gaps between value drivers and corresponding measurement systems were in relations with customers, relations with employees, and product and service quality. Companies that possessed better measurement systems, and thus had smaller gaps, in customer relations, operational performance, alliance partners, supplier relations, environmental performance, innovation, and community relations had better return on equity, better one-year and threeyear stock returns, higher five-year growth, and higher five-year net-income growth. Research Roundup
In the cross-industry study, relationships with suppliers and alliance partners had the most significant gap between the value the executives placed on them and their ability to measure them. Companies that had smaller gaps in customer relations, employee relations, operational performance, product and service quality, and innovation were found to also have higher return on equity, better one-year and threeyear stock return, and higher five-year sales growth. Both studies demonstrated that better use of performance measures, and correspondingly smaller gaps, in key areas correlated to better long-term and shortterm financial performance.
Demystifying Innovation, pg. 46
The CBI’s research on intangible valuation is entering a significant stage. Along with our Decisions that Matter study, which reflects the financial community’s opinions on intangibles, is our Measures that Matter study, which demonstrates which nonfinancial factors analysts look at in measuring companies' value, and our Value Creation Index, which examines publicly available data to rate the intangible assets of hundreds of companies across industries. The Center for Business Innovation and Cap Gemini Ernst & Young are now using this research to provide companies with strategic insights into how to better measure, manage, and improve their intangibles.
Please contact Jonathan Robinson at
[email protected] or see our website, www.cbi.cgey.com for more information about this research.
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INCONCLUSION
The Obscure Patents Hall of Fame Mark Maggiotto
Motorized Ice Cream Cone
e all know people who claim to have dreamed up the next great invention. Maybe they even have a prototype of their idea in the basement. We have all seen the commercials, beckoning fledging innovators to buy an “inventor's kit” that includes instructions on how to apply for a patent. But what are these fledgling inventors coming up with?
W
A toe puppet? That's just one in our sample of obscure patents assembled by Delphion, an intellectual asset management group that claims its products transform the world of intellectual property. While all of the inventions below were concocted through a creative process, are surely distinctive, and solve some everyday problems, cool party tricks still don't account for real impact. Maybe these patents are simply ahead of their time, but for now, however, we suggest you stay away from the basement.
umbrella over the length of your automobile. The Sun Shield can be also transferred from your roof top to your trunk in minutes. Aspiring innovators may want to see if the Sun Shield could be built to rapidly rotate, thus providing the added bonus of allowing car owners to helicopter to their destination when in a hurry. Motorized Ice Cream Cone US05971829 Ever get tired or bored with constantly licking your ice cream cone? Well, this invention makes the cone do all the work. Simply stick out your tongue, and the cone rotationally feeds the ice cream to you and your outstretched tongue. Toe Puppet US0580035
These party stoppers can be mounted on any of your ten toes to create animated motion of a figurine. The creativeness of these pedi-puppets lies in that they are puppets adapted for toes, and that the inventor created a hollow chamber that supports the figurine some six to 12 inches above the digits of the foot, where it dances when you flex your toe.
Inconclusion
Sun Shield for Automobiles US04805654 For those of us for whom windshield sunglasses are not enough, this invention protects your car from damaging effects of the sun by suspending a cloth-like
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Method and Means for Creating Anti-Gravity Illusion
Method and Means for Creating Anti-Gravity Illusion US05255452 Ever thought that Michael Jackson defied the laws of nature? Well, you were right, although you might not have known that it was because of the shoes he wears. Using specially designed heels, the King of Pop can temporarily lock into a hitch on stage, providing himself seemingly impossible balance. Biodegradable Toothbrush US05213428 Designed to fit over a user’s index finger, these toothbrushes are made out of biodegradable plastic and are designed to be disposed of after one usage. To boot, the bristles of the toothbrush are “impregnated” with dehydrated toothpaste, which upon contact with water are hydrolyzed to aid in the brushing of teeth.
Inconclusion
Method of Exercising a Cat US05443036 For those of you with a fat cat who is also apathetic, this patent covers an exciting new game that might be exactly what your cat needs. By directing a beam of light from a hand-held laser apparatus in an irregular pattern in front of the cat, you can stimulate its chase instinct and get it burning carbohydrates in no time. Another cheaper alternative is buying a ball of string.
Self-Containing Enclosure for Protection From Killer Bees
Self-Containing Enclosure for Protection From Killer Bees US05571247 An apiphobic’s dream come true, this invention just leaves us asking one major question: Why not just stay in the house? Levitationarium for Air Flotation of Humans US04457509 If you ever wondered where the word levitationarium was coined, look no further than this patent. This invention describes how a building, room, or chamber may be constructed to produce an upward airflow powerful enough to levitate human beings. Gravity-Powered Shoe Air Conditioner US05375430 Using the normal pressures of the human foot working as its catalyst, this invention can be incorporated into shoes to create either a cooling or heating system. While useful, the “killer app” for this invention might be a modification that also improves the smell of shoes. Greenhouse Helmet US04605000 This plastic dome completely covers your head and allows you to breathe the oxygen given off by the potted plants resting on platforms above your ears. Whether this invention will ever be widely adopted is unclear, but it definitely gives new meaning to the expression “pot-head.”
