Sailing Into the Storm: From Execution to Innovation
Our normal sequence would call for taking up the market situation but that's not only too depressing, for several reasons, but Sun. seems more suited to reflection on big issues. So we're going to focus on Innovation. Now hopefully some previous posts have established the motivation for that, and they're listed below the break, but in discussing sad, not so sad and good stores about business performance a couple of themes emerged. One of course was good execution and another was balancing strategy with operations. But if you review some of the readings sustainable long-term performance, by which we mean growth in revenue, profits and earnings, also requires adaptability and invention. Innovation in other words. And when you look at the examples from HPQ to P&G you can see where this is all born out. And conversely when you look at the sad stories where the counter-examples also support the argument.
But in case you need more more convincing or, better yet, you'd like to see it explained by
somebody with a real track record of both sustained performance and sustained change management we'll point you at the recent appearance of A.G. Lafley on Charlie Rose. IOHO this ought to be required listening in every MBA program and executive suite in the country. As well as by every analyst mistaking this quarter for infinity and beyond. Another interesting exercise is look over the recently published list of the Fortune 1000 and see who ranks where by revenue, profit and return. You'll have to do some eyeball work as the story behind the ranking won't just jump out but a couple of themes emerge. One of course is energy and hot commodities. Another is folks who've been franchises and moats, e.g. WMT and MSFT, who continue to enjoy the fruits of the legacy for now. But you'll also find some of our exemplars moving up those ranks as well. The other thing you'll notice is that ten years it was all about "technology" per se. Now it's about changing the way you do business, bring products to market and is beginning to appear across leaders in all industries.
There's a lot of confusion about innovation, especially as distinct from invention and raw R&D. We define Innovation as the ability to create new products, services and business models that deliver value to the customer profitably. And sustain that over a period of time. Enterprises that can do this are rare but they are the ones who'll do more than merely prosper in the coming storms. And notice some of the subtleties. Innovation is not number of patents, % of revenue spent on R&D or any of those similar metrics. Heck, by those measurements Ford is an innovative company. But what has it to show for it ? Or the Auto Industry in general.
We were happy to hear Mr. Lafley not only has a similar view but is very eloquent both on how hard it is and how important. But also on how becoming an innovative company requires a fundamental change in every aspect of the company. In other words this is NOT about what happens in the lab but the ability to look at the market, develop new products, make them and then delivery them. And then repeat.
After the break we'll share some of the conceptual framework we've developed over the last several years for what's required, what the typical problems are and what an integrated approach to innovation should look like. At the end of the day this matters to investors, stakeholders, employees and any other related party because the closer a company gets to these "Should-Be" ideals the more likely it'll be on the list in another ten years, or 20...or 30 or....well you pick your horizon. One warning note - right now US companies have something of an advantage in this business "software" but our friends in China, India and elsewhere know that and are taking steps to improve their own capabilities.
Product Development As-Is
The problem with most organizations is that innovation is viewed as an isolated, stove-piped process which occurs, to the extent it does, within the confines of the R&D organization. Which is itself isolated from marketplace and customer realities and disconnected from the downstream activities that turn bright idea into invention into profitable innovation. The picture of things as they are looks something like the chart at right. All to often the way products are improved or created starts with a "bright" idea (or just history for that matter) which is thrown over the wall to Design and Development. The result is then forced thru a manufacturing (make) and packaging process and then Marketing puts lipstick on the pig while Sales is handed the fun task of forcing it down the throats of the customers. In those few sentences we've just summarized, for example, the typical process in the Auto Industry. Which, sadly as some of the earlier readings,e.g. the story of the Taurus, show that they in fact know better. But don't do it on a sustainable basis.
The Capabilities vs Knowledge Gap
The primary reason is that companies tend to focus on what they've done, if for no other reason than it's what they know, have the current capabilities (here labeled technology) that've built up over years and decades, it's what they've always done and, worst, have interests inside the company who're invested in continuing to do things as they've always been done. Most of the bad performers on our previous lists suffer from this Customer Requirements vs Inherited Capabilities Gap. Whether it's software companies building applications that don't meet customer needs, auto companies building cars that no one wants to buy or pharmaceutical companies making yet one more variation on old, tired drugs the inability to match marketspace value to capacities is the most fundamental barrier to Innovation. We'd even go so far as to argue that this describes the content generation processes (WRFest (Telemediatainment): The Content Who Would Be King) of the media and entertainment industries. Compare Disney and Pixar for example to the last bunch of multi-$M bombs :) !
The Three Gaps
That fundamental gap is composed of three major breakdowns. The first and most fundamental breakdown usually lies in a lack of understanding of how customers actually function. That is a lack of understanding of how their businesses work in commercial and industrial sector or how customers live their lives in consumer sectors. So the first thing to repair is the focus on internally generated ideas with learning those things. In other words replacing "not-invented-here" with "how it works really". Related to that is the Marketing gap where most enterprises go to market with the story they want to tell rather than the story that explains how they'll benefit their customers. This btw is a great index that any outside observer can use to judge how truly customer focused any company that claims to be innovative is. Do they truly understand and talk to their customers the way those customers would like to be talked to ? The twin of the breakdown in Marketing is a parallel breakdown in Sales where yet another salesman shows up to talk about the latest brochureware. As a friend of mine said, "no matter how busy I am any salesman who's there to talk about solving my problems will get time. But most of them are there to sell me another pig in the poke where I have to figure out what it's worth". Successfully innovative companies sell (and service and support) to their customers value propositions.
How It Should/Could Work
The chart at right shows how Innovation should work if it's done right. Here what you see is an integrated, closed-loop and end-to-end view on Innovation. Which strangely looks more than a bit like what Mr. Lafley discusses in his interview. It starts with analyzing the markets and customers, translating that into a deep description of the real needs and characteristics of those customers and then turning those into high level product designs. That's then passed on to operations in an integrated, not throw it over the wall fashion, where manufacturing and delivery requirements are incorporated at the earliest design stages. Not as after-thoughts. In other words innovation involves putting all the relevant disciplines onto the same team and operating concurrently, with feedback and feed forward. Not as one isolated stovepipe after the other. Again something Lafley emphasizes strongly.
Finally, with this deep understanding of the customer, the entire Go-to-Market and Service/Support operations inherit a basic of customer value propositions. The other thing that happens is that each stage is used as an information gathering and feedback mechanism to make sure that innovation is continuous and adaptive. Finally, as Lafley continuously emphasizes, you have to organize around these sorts of processes.
Companies that put these sorts of innovation capabilities in place, invest in them and maintain them will be the ones who will establish long-term survivability and prosperity. These are the ones you want to invest in or work for or work with. Good luck.