How To Create a Culture of Innovation

July 6, 2009

I define innovation as an “organization’s ability to adapt and evolve repeatedly and rapidly to stay one step ahead of the competition.” A culture of innovation, when done right, gives you a competitive edge because it makes you more nimble with an increased ability to sense and respond to change.

A culture of innovation has less to do specifically with new products, new processes, or new ideas. There are of course discrete innovations such as the iPhone or a battery that is powered by viruses (MIT has developed this). These are valuable and necessary in order to create a culture of innovation.

But a culture of innovation is more than new ideas. It needs to be repeatable, predictable, and sustainable.  This only happens when you treat innovation like you treat all other capabilities in your business.  This means having, amongst other things, a defined process.

An organization’s innovation process must achieve three things.  It must:

  • focus on the “right” challenges
  • find appropriate solutions to those challenges, and
  • implement the best solutions.

These translate into three “portfolios” an organization must create:

  • A portfolio of challenges
  • A portfolio of solutions
  • A portfolio of projects

Let’s take each one at a time.

A Portfolio of Challenges

All companies have challenges. They can be technical challenges on how to create a particular chemical compound. They can be marketing challenges on how to best describe your product to increase market share. They can be HR challenges around improving employee engagement.

An organization’s ability to change (i.e., innovate) hinges on its ability to identify and solve challenges. Challenges are sometimes referred to as problems, issues, or opportunities. But at the end of the day, they are all just various forms of challenges. I will use these terms interchangeably here.

Where do you find these challenges? You can find them anywhere – from customers, employees, shareholders, consultants, vendors, competitors, and the list goes on.

Let’s face it, companies have no shortage of challenges.

And guess what, some of the most important challenges to solve are hidden due to organizational blind spots and assumption-making.

The “meta-challenge” for all organizations is to find which challenges, if solved and implemented, will create the greatest value. Given that organizations have limited resources and money, prioritization is critical.

My favorite quote (used many times in this blog) comes from Albert Einstein – “If I had an hour to save the world, I would spend 59 minutes defining the problem and one minute finding solutions.” Most companies spend 60 minutes of their time finding solutions to problems that just don’t matter.

Therefore, the first step in creating a culture of innovation is to surface, identify, and codify challenges. And then you must become masterful at valuing, prioritizing, and framing these challenges.

Think of your innovation portfolio much like you would handle a financial investment portfolio.  You want some safe bets (incremental innovation) and some riskier investments (radical innovation).  You also want a variety of innovations ranging from technical challenges to marketing challenges, and service challanges to performance improvement challenges.

Once you have the right challenges to solve, the next step is to find solutions.

A Portfolio of Solutions

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Innovation 101

October 9, 2008

Although much has been written about innovation, there is little agreement on what it is or why it is necessary. Is innovation the same as creativity? Is it synonymous with product development? Or is innovation just radical change?

I like to describe innovation through an old, yet relevant, joke. The joke begins with two men who are hiking in the mountains of Canada when they stumble upon a hungry 600-pound grizzly bear. Immediately, one of the hikers takes off his backpack and hiking boots and proceeds to put on his running shoes. The other hiker looks at him and asks, “What are you doing? You can’t outrun a bear!” The first hiker responds, “I know, but I only need to outrun you!”

This is innovation. It is not simply about new products, new processes, new services or new ideas. It is about staying one step ahead of your competition.

Why you need innovation now more than ever
Sometimes the “competition” is not another company, but rather socioeconomic shifts. Rising oil prices, a slumping housing market, the collapse of well-known financial institutions, and a looming recession have all left corporate executives on edge.

While many companies are tightening their belts due to unstable market conditions, truly successful companies use these times as a chance to outstrip their competition. My favorite company, Koch Industries, increases their investments during difficult times. They know that if they focus on innovation while others are cutting costs, they will quickly catapult past everyone else. They must be doing something right; Koch Industries has grown seven times faster than the S&P 500 for the past 40 years.

How can innovation benefit your company? It is not just about product development or radical growth. When used properly, innovation can help you achieve the following:

  • Reduce costs
  • Increase service levels to customers
  • Improve overall employee performance and retention
  • De-commoditize a commodity business
  • Become recession-proof

Three levels of innovation

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7 Ways Innovation Can Help Recession-Proof Your Business

March 13, 2008

As the economy continues to tumble, it is tempting to cut back on your investments in innovation. But now is the perfect time to increase your innovation efforts. Here are seven creative ways that innovation can help you recession-proof your business.

1. Make Your Products/Services More Accessible

Successful companies are now shifting their emphasis away from increased performance and sophistication to increased accessibility and affordability. This helps you tap into an under-served market. Low cost and ultra-portable netbook computers are outselling more expensive models. The Nintendo Wii has sold more boxes than PlayStation and Xbox combined. To learn more about specific innovation strategies, read our articles on The Innovation Bell Curve.

2. Use Open Innovation to Reduce R&D Costs

Sometimes it can be less expensive to have others do your innovating for you. Organizations like InnoCentive enable you to define the “value” of a new idea and then post your request to a large community of expert solvers. This moves innovation from an unpredictable cost (infrastructure, the cost of researchers, and other hidden costs) to a predictable cost (the posting fee and reward).  Other Open Innovation option include asking your customers what they want.  Check out MyStarbucksIdea.com.  Open Innovation is a perfect way to reduce costs while growing the business.  Learn about my own Open Innovation experiences…and dilemmas.

3. Use Process Innovation to Reduce Operating Costs

Innovation is not just about new products or new business models. It can also be focused on ways of reducing operating costs. Use my 7Rs of process innovation to help make your processes more efficient and more effective. I have seen companies reduce costs by 60% while improving responsiveness to customers by as much as 90%. If you can increase service while increasing margins, you are sure to recession-proof your business.  Download my 7Rs worksheet and improve your processes

4. Use Innovation to Match Supply and Demand

Sometimes you only want temporary measures to help you ride out tough times. I worked at Accenture, the large international management consulting firm, for 15 years. During my time there we went through three recessions. Each time the pattern was the same: the economy tanks, customers reduce spending on consulting, Accenture lays off employees, the economy picks up, Accenture scrambles to hire talent. During the 2001 dot-com bubble burst, they used a different approach. Instead of handing out pink slips, they offered a leave of absence for a period of time. The employee on sabbatical would get 20% of their salary (plus benefits) and would be assured a job upon their return. This helped match supply with demand, while keeping morale relatively high. Sometimes a creative solution can help you smooth the ups and downs of the economy.

5. Solve Your Customers’ Pain

Although customers have reduced spending on discretionary items, they may be willing to invest in products or services that eliminate their pains.  Problem solvers are always in big demand.  If their pain is the need for cost containment, how can you do it for them – and take a slice of the action?  In my business, I get more requests for speeches on ”recession proofing” than I do for those on general innovation.   What pain do you solve?  Or how can you make your customer aware of a pain that they may not have noticed?  Learn more about why solving a pain is more powerful…during any economic condition. You may also be interested to learn why the ATM machine was headed for failure…until it was seen as solving a specific pain.

6. Fail Cheaply

If you are truly innovative, you will fail.  If you don’t fail, you are playing it safe.  Therefore, if you are going to fail, FAIL CHEAPLY.  And no, this is not the same as failing fast.  I am not talking about speed, I am addressing the cost to implement.  To fail cheaply, you must embrace the “build it, try it, fix it” mentality.  Build out your idea as a small experiment.  Implement it.  Learn from the experience. My Innovation Personality Poker was developed using this approach.  I first created a simple spreadsheet to test for personalities.  Next I wrote the words across the face of an ordinary deck of cards.  Then I created home-made cards printed at FedEx Kinkos on card stock.  Finally, when we knew it was perfect, we invested in designers and 500 decks of casino-quality poker cards.  Eventually we “perfected” the words and process and printed 40,000 decks…and the commercially published book.  Learn more about the “build it, try it, fix it” approach.

7. Before You Can Multiply, You Must First Learn to Divide

While in Asia, I heard a great expression, “Before You Can Multiply, You Must First Learn to Divide.”  I now find myself using this saying nearly every day.  The idea is that if you want to grow your business, you must learn to partner with others – and give them a slice (and a vested interest in YOUR success).  This means you take a smaller slice of a bigger pie.  With the economic downturn, this philosophy is even more appropriate.  People are now hungry for new money making opportunities.  When you help others make money, you make money.  Read more about this powerful, yet simple concept.

BONUS: Use Innovation to Improve Your Suppliers’ Business

We often underestimate the value of our various business partners, and in particular the value of our suppliers. I once worked with a potato chip manufacturer. They were dependent on the quality of the potatoes grown by small, financial unstable growers. Instead of squeezing their suppliers, they helped the suppliers grow their business. They helped the growers buy equipment and fertilizer at reduced costs by leveraging the buying power of the large chip manufacturer. They gave them business loans at reduced rates. When the market gets tight, your suppliers may struggle more than you. But if you help them be successful, you might find you are more successful.

The Bottom Line: Use Innovation to Leapfrog the Competition

While others are tightening their belts, truly successful companies use the recession as a chance to leapfrog their competition. My favorite company, Koch Industries, increases their investments during difficult times. They know that if they focus on innovation while others are cutting costs, they will quickly catapult past everyone else. They must be doing something right. They have grown seven times faster than the S&P 500 for the past 40 years. This is a company that has proven it is recession proof.  Innovation is a powerful tool that can help you ride out the tough times and position you for future growth. With the recession here, you need innovation now more than ever.

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Innovation as a Weapon

August 9, 2007

To say the global economic environment is undergoing the most rapid change in the history of business is to state the obvious. Unless you have been living under a rock for the past year, you know all about the market blow following the September 11 terrorist attacks, the dot-bomb phenomenon and the collapse of Enron. To make matters worse, many American companies are increasingly facing resistance — internal and external — as they try to expand globally.

These events, combined with an already declining global economy, have left corporate executives on edge. Yes, it’s bad news and it’s depressing. The good news? Everyone’s in the same boat.

But now as before, the fundamentals stand: If you create a business that can adapt quickly and flexibly to the changing economic and cultural landscape, you may have the silver bullet you’re looking for.

A key to achieving this kind of quick response is learning how to inject innovation into decision-making at all levels of the organization. It won’t happen by decree from the CEO, and I’m afraid there is no shortcut. Real innovation requires broad cultural change based on values, guidelines, and outcome-based measurement systems that give flexibility to all employees while mitigating risk for the business as a whole. Done properly, a company can stay ahead of the change curve and beat the competition while also easing its move into new markets.

If you aim to achieve and sustain a leadership position in a global marketplace that never sleeps, your company must be a hothouse of creative thinking, flexibility and agility – twenty-four hours a day, seven days a week.

Continuous innovation
Innovation has traditionally been thought of as something separate and discrete, brought into the organization from outside, from the laboratory. Take your most innovative, creative people and lock them in a room while they develop a new process. Then tell them to implement the change company-wide.

But is this really the way a company should be run? A study carried out at Eckerd College in Florida challenges the traditional models.

Managers who came to the Eckerd leadership course were broken up into teams and given a problem to solve, “The Hollow Square”. Before being allocated to their teams, the managers were assessed to determine whether they were “innovators” or “adapters”. In general, innovators tend to “do things differently” and are prepared to break with rules or ignore past traditions. Adapters, on the other hand, are focused on “doing things better”, but they tend to work within the rules and accept the status quo.

For this exercise they were divided into teams, of which three are of particular interest. Each team was comprised of two groups. One of the groups was designated as “planners”, and its task was to work out a solution to the problem. The second group consisted of “implementers”, charged with making it work. The planners told this group what to do in order to form a hollow square with the tools that had been made available to them.

In the first team, the group of planners was made up of the “innovators” and the implementers group was made up of “adapters”. In the second team, they were all mixed up together. The planning group had both innovators and adapters, and so did the group of implementers. In the third team, however, the groups were turned upside down. The planning group contained only “adapters” and the implementing group contained only “innovators”.

Although most would dismiss the structure of the first team as unworkable, this is how most companies implement change. Team structure two, the cross-functional approach, is usually assumed to be the best alternative. But in reality, the third option is the one that turns out to be most effective — the one where the “adapters” do the design and the “innovators” implement it. The “adapters” are able to come up with a design very quickly, albeit an imperfect one. And the creative types are then able to take that design and build something from it, correcting and improving as they go along. Whenever a problem arises they are able to solve it there and then without checking back with someone else.

Can everyone be innovative?
Continually competitive businesses will be built not around a lot of heads and hands, but around a lot of hearts, around motivation, dedication and commitment to creative thinking. Successful innovation is continuous, and that very continuity enables companies to keep pace. Executives recognize that their company loses ground when the pace of change outside the company is greater than the pace of change within.

A popular myth is that some people are born creative, and some are not. There is, in this view of the world, a creative type of personality – Michelangelo, Mozart or Tolstoy, for example – and then there are the rest of us. But this is totally wrong. It’s all a matter of degree. We all have the potential to be innovative – perhaps not quite as much as Mozart, but innovative nonetheless.

This premise has been tested out many times over the years. For example, George Land and Beth Jarman, gave 1,600 five-year olds a creativity test used by NASA to select innovative engineers and scientists, and 98 percent of the children scored in the “highly creative” range. These same children were re-tested five years later and only 30 percent of the 10 year-olds were still rated “highly creative”. By the age of 15, just 12 percent of them were ranked in this category, while a mere 2 percent of 200,000 adults over the age 25 who had taken the same tests were still on this level. So, it seems, creativity is not learned, but rather unlearned.

And yet the business world has traditionally favored analytical thinking over the capacity to innovate and has seen to it that business schools produce highly trained young men and women to think along strict parameters.

But times have changed, and now the mission has to change — to help people unlearn their uncreative habits. The ability to innovate is much more pervasive and ubiquitous than most of us imagine.

A word about definitions. Innovation is not the same as invention. Invention is something to be pursued in a carefully controlled laboratory atmosphere. Invention is the process of discovering things that have never been discovered before. Innovation is different. In the business world, innovation is the discovery of new ways of creating value. Not everyone can be an inventor, but everyone can be innovative.

Stimulating employees
Innovation is a must, because (to the great frustration of some) the environment in which companies operate is highly unpredictable. Customers today are perplexingly fickle and demanding, and they want us to do things that our detailed binders of workflows are not able to handle. How can we satisfy them when the policy book does not provide the answer?
We must look elsewhere. Jazz is the perfect metaphor for innovative business activity. This appeals to me because in my other life I love to improvise on the tenor sax. I am not the only one who has been struck by the appropriateness of the jazz metaphor. In 1996, John Kao wrote “Jamming” which used jazz as a theme for creativity. And, in “The Social Life of Information”, the authors, John Seely Brown, director of Xerox’s Palo Alto Research Center (PARC), and Paul Duguid describe some work done by two Xerox technicians trying to repair a client’s machine.

To paraphrase the authors: “The afternoon resembled a series of alternating improvisational jazz solos, as each took over the lead, ran with it for a little while, then handed it off to his partner, all against the bass-line continuo of the rumbling machine, until it finally all came together”. That is the way the two technicians found a solution to their client’s problem, a solution they would never have found by simply following the book.

But for me, jazz is more than just creativity. It is bringing a company together in such a way that there is coordinated action throughout. Just as with jazz, this requires simple structures that enable innovation to take place in a harmonized and collaborative fashion. These simple structures equate to the role of process in fostering innovation. They provide the framework for freedom inside the structure.

What the jazz musician adds of his own accord is not pulled out of thin air. It is based on fundamental rules about chord progression and chord structures. Likewise, what the business invents in order to improve any given capability has also to be founded on certain basic ground rules. The players in a business have to be able to innovative at any minute of the day while literally “on their feet”. Innovation in business thus is just as important as improvisation is to jazz.

Employees have to be trusted to search intelligently for improvements. But they do need guidance, training, and the tools to fulfill whatever solutions they come up with. It’s not a straightforward choice between rigid structures and allowing total anarchy. It’s a question of finding the right balance of structure and freedom.

What this leads us to is the difference between “box” thinking and “line” thinking. When people say you need to get “out of the box” to be innovative, they are right, but for the wrong reasons. The box that most people operate in is focused on activities, computers, people, or departments within a company. It is the lines, the interconnections and interdependencies between the boxes, where innovation emerges. Innovative thinking comes from making connections. Connections between boxes. Connections between ideas. Connections between companies. Or connections between industries. Focusing on the lines frees up the organization to improve within the guidelines of the simple structure

Strategies that have worked
How do the concepts of jazz, lines, improvisation and five-year-olds translate into practical business application? Over the years I have seen many innovative companies. And although there is no formula for their success, here are a few common strategies:

Make everyone accountable: Because a few individuals at the top cannot possibly plan all of a company’s activities, give employees a set of rights, responsibilities and rewards that make them accountable for their own actions. Koch Industries, an oil and gas company based in Wichita, Kansas, wanted to achieve world-class safety. Rather than have a few safety engineers scour the company, Koch (pronounced “coke”) gave this responsibility to all employees, with rewards both for uncovering unsafe conditions and for discovering new ways to conduct business more safely. This initiative resulted in as much as a 50 percent improvement each year in the number and severity of accidents across Koch Industries. Within one year the company had moved from middle of the pack to one of the best safety records in its industries.

Replace rigid processes with clear business objectives: Too often innovation is stifled because companies define business processes in great detail, then hand those designs to the line that is expected to execute them. Mölnlycke Health Care, one of Europe’s leading manufacturers and suppliers of single-use medical products, allowed production teams to decide how to meet their goals. With the responsibility for quality products moved to individuals on those teams, nearly 70 percent of the company’s new products launch on time, compared with just 15 percent previously. As a result, the company will have quadrupled its shareholder value in only five years.

Challenge employees to compete: When challenged by external (or sometimes internal) organizations, groups are kept on their toes. For example, prior to being acquired by RWE AG in 2000, VEW Energie AG, a German-based utility, created a new business entity responsible for service, maintenance and construction. But other VEW managers were allowed to do business with competitors offering the same services if the price was right. As a result, the new unit worked hard to remain competitive, and in return was able to offer services to outside companies as well.

Encourage employee innovations, and reward them accordingly: Companies are often fast to turn to outside help, when in fact they already have the capabilities within their organization to do the job. Koch’s pipeline business in Minneapolis had budgeted $30 million to expand its pipeline with external support. A team of company employees decided that they could do the job themselves better and cheaper, and within a couple of months they had increased the pipeline’s capacity by 15 percent while spending only just over $1 million. Koch immediately gave them all a check averaging 15 percent of their annual salary.

Focus on your core strengths… and outsource: Another way of using innovation to stay nimble and competitive is by focusing on your differentiators, and relegating everything else to partners who have that expertise. Imagine an insurance company established only two years ago that has already contracted 15,000 policies and is issuing 200 new policies every week. Now imagine that the company has only two employees. This is Universal Leven, a Netherlands-based subsidiary of Allianz, focused on large, professional broker organizations. The two employees are in charge of corporate strategy, network expansion and product development. Everything else, including product branding, product design, marketing and all back-office operations, is outsourced.

Link strategy, customers and capabilities: To be competitive and sustain market leadership in a changing Brazilian marketplace, Multibras (appliances) embarked on an ambitious change program. This was achieved by focusing the business imperatives at three levels: industry, customers, and competencies. Multibras first looked at future discontinuities in the industry by mapping potential future transformations and expected changes. They did this through the creation of scenarios and business imperatives. The changes were then fed into a view on what customers would want in the future. What are customer expectations (current, and potential future), needs and wants? This was done using current customer knowledge, direct involvement from customers (e.g., Whirlpool), and leveraging marketing expertise. The outcome helped drive the definition of the distinctive capabilities required in the future. This effort ultimately generated $50 million in cost reduction benefits for the company, reduced time to market by 35 percent, and cut development cost by 15 percent.

Creating a culture of innovation
This all sounds impressive, but unfortunately your company’s culture may be light-years away from that of the companies cited above. And, typically, organizations are not comprised of five-year-olds with an infinite supply of creativity, energy, and flexibility. They are more likely composed of adults with long histories, territories to protect, and boxed-in thinking. This makes any kind of change difficult, and culture change particularly difficult. As someone once said, “The only one who likes change is a wet baby.”

Structural changes alone are not sufficient for an organization to become innovative throughout. Changes must be made in virtually all parts of the organization, from the management style to the measurement systems. Ramming home a new change program without preparation would be a bit like dropping a high-powered engine into a Volkswagen Beetle without altering the transmission, the drive train, the suspension and so forth. It can be done, but chances are the finished product won’t work very well.

It is important to recognize that even the greatest enthusiast has finite limits to the amount of change that he or she can tolerate. Since each company is made up of a unique bunch of individuals, and each company’s capacity for change is unique. Any company’s plans have to take these limitations into account. The timing of the change, the approach to it, and the people who lead it will all vary depending on each company’s circumstances. There are no templates here.

In my experience, culture change goes through three waves as it moves toward a true culture of innovation. Each wave starts at a modest level, then builds up to a plateau. It then rests for a while (as if to take a breath) before gathering enough momentum to go to the next level. Successful companies move through three waves of S curves, each of which increase the company’s capacity for change:

1. Leadership-Driven Capacity
At this early stage, progress is invariably based on the tenacity and leadership of a single individual, someone who gets the bit between his or her teeth about an opportunity for improvement. By taking responsibility for it, the individual drives the change. This top-down approach requires the individual to create such a sense of urgency about the initiative that he or she prevents it from falling into what is all too common – a debilitating series of fits and starts. If there is no compelling need to change, change is unlikely to happen.

2. Structural-Driven Capacity
At this stage the responsibility for change no longer rests with an individual. To some extent, it has been taken over by the organization. Mechanisms have been put in place to enable employees across the business both to implement change and to drive it. Typically, such mechanisms include various performance measures, organizational structures and lines of communication. This often includes a move towards a process orientation. Process improvements in one area eventually help to build up the organization’s over-all ability to improve. The better a company becomes in one area, the more skilled it becomes at getting better in other areas.

3. Organic Capacity
By this stage, the capacity for change has become built into the organization, and it is often being driven from the bottom, with employees seeing it as an integral part of their jobs. This comes about partly because companies that reach this level have focused specifically on developing change competencies in their employees. They have reached the idyllic stage where innovation is an integral part of the company culture.

The path through these three waves will take years but the payoff can be great. Once completed, a company can avoid the continuous gut-wrenching change programs that have plagued organizations for so long. Change will happen much more continuously and pervasively throughout the business.

The impact on global companies
Due to the relative homogeneity of the United States, many American companies are structured in a more centralized and standardized manner. Control is driven from the center of the organization, with strong corporate governance. But this model has caused heartburn for many companies trying to expand overseas. I have worked with a number European companies over the past few years. Their approach to organization models is quite different.

With their varying cultures, economies and (until recently) currencies across Europe and the world, non-American companies typically use a more decentralized structure. This enables businesses in each country to get close to the customers and markets and design propositions and ways of working that meet local needs. And while market turmoil can mean sharp swings in profitability, much can still be learned from these global companies.

One British company, Invensys, is a large, global electronics and engineering firm that was created by the merger of BTR and Siebe in 1999. At that time it operated globally through four divisions — Software Services, Controls, Power Systems, and Intelligent Automation. And within those divisions there were approximately 30 product groups, each of which operated in the countries of its choosing. Profit and loss accountability is at the product group level, giving a fair amount of autonomy and supporting the decentralized philosophy of the company.

This “small business within a business” approach has enabled Invensys to reconfigure its portfolio from hard-core engineering to a focus on smart products via selective purchases of automation, and technology businesses. One of the ways this is achieved is by only allowing the strongest, most profitable, highest-growth areas of business to dominate, while others that are withering on the vine are lopped off. Invensys acquires and disposes of new operations as needed. And more importantly, its business model allows each of the countries to operate somewhat independently, enabling them to make decisions that meet local needs. In their industries, Invensys leads in the area of global diversity, with over 50 percent of their business coming from sales outside of their home region.

ABB, the Swiss-based technology and engineering company, is renowned for its ability to create a powerful global structure. ABB serves customers in power transmission and distribution; automation; oil, gas, and petrochemicals; building technologies; and in financial services (this last group is in the process of being sold at the time of writing). The ABB Group is comprised of 800-900 companies operating in 142 countries, and employs 170,000 people. ABB’s historical strengths lie in its decentralized management philosophy. This enabled local businesses to tailor offerings to the needs of the local market and respond quickly to changing market conditions. Throughout the 90′s ABB was the poster-child for how to create and run a global business.

These types of structures have enabled these and other companies to quickly enter new markets or even new businesses. However, anyone who has followed these two companies knows that the past two years have been difficult for them and a number of other companies in their sector. I contend one reason (but certainly not the only one) is that these companies did a great job of focusing on the “boxes”. Lots of little boxes (in contrast to one big box typically used by American companies). They created powerful, localized businesses. The problem is, they did not focus on the lines. There was little synergy across the operating units within the company. Because of this, doing business internally with other operating units can be more difficult and expensive than buying product from external competitors.

One company I am familiar with believes that nearly 50 percent of business transactions that could have been conducted internally across operating units, were sourced externally from competitors. This is not helped by the fact that it is not unusual for these companies to have dozens or even hundreds of different ERP systems. Unfortunately, each ERP system does not talk to the others, and typically has different number schemes for customers, suppliers, parts and products. This makes any level of collaboration as difficult as if each business were speaking a different language.

The Koch example
Earlier I referred briefly to Koch Industries’ innovative safety program. This is a customer-focused innovative organization that believes deeply in the tenets of the free market. The company is the largest privately held firm in the United States and would rank 21st on the Fortune 500 if it were public. Koch is a conglomerate with a wide range of interests. But it is not so much what the company does that is interesting as the original way it does it. Koch Industries operates as a network of employee-entrepreneurs who work within a framework of appropriate incentives and decision-making powers. Anyone brought in specially to do a job within the group is immediately given the authority to spend money and to move people when and where he or she chooses.

Koch Industries is a highly entrepreneurial company that does also connects the dots. A clear mission, set of values, and culture are shared throughout the organization. Decision-making is decentralized as far as possible, and based on the best local knowledge and information, while knowledge is shared across the company.

But potentially most important is the company’s use of “internal markets”, which brings the price system of the free market inside the organization. This is done by applying internally the prices and services that employees actually use in their daily work. Koch allows any two units within the organization to account for an internal transaction at the prices they would seek in the open market, even if these prices differ (of course done in conformance with Generally Accepted Accounting Procedures. The important point is that this ensures that units are rewarded appropriately for co-operating with each other. The company reckons that up to 50 percent of its profit comes from such initiatives. These approaches have helped the company grow 200-fold over three decades, and helped it expand into new business areas previously not considered.

What’s the bottom line?
So, what is the key for global companies trying to compete in today’s difficult, volatile environment? It is creating a culture of innovation where decision-making is pushed to the lowest levels of the organization. This then needs to be balanced with a set of simple structures, rules, and measures that enable coordination throughout the company.

A one-size-fits-all structure will hamper the efforts of American companies to truly compete globally. It is rarely smart to try to export Los Angeles to Paris. But adopting a culture of flexibility through pervasive innovation, based on market and cultural realities, can lead to changes that suit the business environment. It is never quick and easy, it is never painless, but failure to face up to the challenge will almost surely mean losing advantage in the marketplace, and ultimately seeing the more creative competition take away business.

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Unleash Your Inner Innovator

August 8, 2007

Here’s a question for all upwardly mobile employees: Do you want to be a contender in today’s workplace? Sure you do! Problem is, you’ve got lots of competition, all vying for a few scarce jobs and promotions. And the marketplace is in such a state of flux that you don’t know from one moment to the next what companies are looking for. How can you set yourself apart from the horde? One effective way is by unleashing your inner innovator. Differentiate yourself from others by finding new ways of adding value to your organization.

If you are a senior executive, naturally you want your company to be a leader in the marketplace. But there are so many followers trying to steal your thunder! Think about it. It’s discouragingly easy for competitors to copy your products, rip off your business processes, and go after your customer base. Yes, someone is always nipping at your heels. So what can your company do that’s impossible to copy? You guessed it. Create a pervasive culture of innovation that allows your organization to outperform the competition and always stay a few jumps ahead.

So, what can you do? How can you increase the innovative ability of yourself and your organization? One way is to bust open the myth that creativity is a trait a few select people are “born with”… that there are those with “creative personalities” and then there are the rest of us. Actually, we all have the potential to be creative. Perhaps not to the same degree, but we all do have innate creative abilities. As children, we were all more creative than we are today. This premise has been tested out many times over the years. For example, 1,600 five-year-olds were given a creativity test used by NASA to select innovative engineers and scientists, and 98 percent of the children scored in the “highly creative” range. These same children were re-tested five years later and only 30 percent of the 10-year-olds were still rated “highly creative”. By the age of 15, just 12 percent of them were ranked in this category, while a mere 2 percent of 200,000 adults over the age 25 who had taken the same tests were still on this level. Creativity is therefore not learned, but rather unlearned.

Unless you go through a second childhood or hire a bunch of 5-year-olds, what can you do to tap into that innovative potential? First it would be useful to consider what creativity really is. I contend that creativity is about collecting and connecting dots … dots being ideas, disciplines, ways of looking at problems, and experiences. As Albert Einstein once said, “Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.”

Expertise is the Enemy of Innovation

In fact, knowledge is, in my opinion, the enemy of innovation. I am always amused when someone, upon finding a lost item, says, “Can you believe it? It was in the last place I looked.” Well of course, who finds something and then continues to look for it? The same thing is true when looking for a solution to a problem. Once your brain finds what it thinks is the best solution, it stops looking. Where do we look for these solutions? We tend to look into our memory banks of what has worked in the past. And for those of you out there who are experts, I’ll bet you “find” an answer quite quickly. Unfortunately, your solution might not be new, innovative, or even good. What we need to do is train our brain to keep looking, even when we have found an answer.

The reason children are so creative is that they look at the world with fresh eyes. They are always collecting dots that they eventually string together. Everything is a new experience. And rarely do kids jump to quick solutions. However, once they start going to school and socializing with other children, they are forced to fit it. Peer pressure drives conformity. Education focuses on the regurgitation of facts rather than on gathering new experiences. At university, you choose a major and then become an expert in that area. As we get older we find things in life that we like, to the exclusion of all else. We read the same sections of the newspaper. We watch the same movies. Eat the same food. Socialize with the same people. Read the same magazines. And we tend to find ways of operating that work for us. We use those modes continually without trying anything new. Our communication style. Our view of the world. Our political thoughts. As we get older, instead of collecting dots, we begin a process of dot elimination. We ride down the same path over and over.

What can be done to reverse the effects of time? The key is to restart the process of collecting and connecting dots. Much has been written on the techniques for sparking creativity and innovation. In fact, there are over 2,500 books with the word “innovation” in the title. A large portion of these are focused on “event-based” techniques for generating new ideas. That is, approaches to be used during brainstorming sessions. These approaches may be a “5-step process”, “7 techniques” or “9 tools”. Although these are useful, I want focus on approaches that change the way you see the world. Approaches that, with practice, help make innovation an every day activity. As Aristotle has written, “We are what we repeatedly do. Excellence then is not an act but a habit”.

Here are, what I call “The Four Thinking Lenses”. Try thinking like a Pack Rat, a Matchmaker, a Kid, and a Contrarian. These lenses will help you collect and connect dots. But more importantly, they will shape your view of the world, which will subconsciously change your actions and behavior. And that will ultimately lead to different (and hopefully better) results.

Thinking Like a … Pack Rat
Children are creative because they are looking through fresh eyes. As adults, we start to filter everything we see, just like a polarized lens that lets in only light that is aligned one way. So to reverse the years of filtered thinking, you need to start collecting new dots. Start gaining new experiences. To paraphrase Steve Jobs, “Creativity is just having enough dots to connect … connect experiences and synthesize new things. The reason creative people are able to do that is that they’ve had more experiences or have thought more about their experiences than other people.” So, our first lens is to get you thinking like a pack rat. Collect and hoard every experience for later use. You never know when some randomly stored experience will be the catalyst for breakthrough thinking. To do this I encourage you to use three techniques. The first two should be used on a daily basis. The third is to help accelerate the process even further during brainstorming sessions.

1. Filters
Because we can only see the world through the filter that we have built up over time, the only way to change perspective is to change the filter. Unfortunately, it is difficult to “see” the filter you are wearing. Therefore, it is easier to replace your existing filter with a new one. So, each morning, when you wake up, make believe you are someone different. Make believe you are a detective, a mechanic, an artist, a gardener … it really doesn’t matter, so long as it is someone other than you. You will then begin to see things over the course of the day that you have never seen before — because what you focus on expands. By focusing on something different, you will begin to have new experiences and will gain new dots that you can use when trying to be creative. On other days, make believe that people are a particular way. Assume all people to be kind, agreeable, friendly, or whatever empowers you. You may find that when you talk to that jerk in the corner office, you see that he is not so bad after all. And finally, some days assume the world is a particular way. Look at the world as art, as music, as simplicity. You will see, hear, smell, and sense things you’ve never noticed in the past. Changing your filter, whether it be on a daily basis or just during specific conversations, can have a profound impact on your view of the world.

2. Try Something New
As adults we tend to do the same things over and over. Our lives play out and repeat themselves like a broken record. Predictable. No new experiences gained. So try something else new. Read magazines you have never read before. Listen to music you think you don’t like. Try new hobbies. Meet new people. Eat different food. The more you do this, the more experiences you will gain and the more ideas you will have to draw from in the future.

3. Rip & Rap
What do you do when you want to accelerate the process of collecting dots? Try this fun technique: Rip & Rap. Buy a number of magazines. A wide variety of magazines. Things you would typically not read. Then, when in a brainstorming session, while trying to solve a problem in a new way, hand out the magazines to other participants. Have them look through the pages and find pictures that call out to them. Some pictures may connect on an intellectual level. But others may connect at a more emotional level. Regardless of why the picture calls to you, cut it out and save it. Make a collage. Try and see how everything fits together. Try to make connections across pictures … which leads us to our next thinking lens …

Thinking Like a … Matchmaker
Now that we have collected lots of new experiences by being a pack rat, we have to do something creative with them. As adults, when we try to solve a problem, we often ask, “What does this mean?” We try to pull the answer from our knowledge bank, just like finding the solution in an encyclopedia. Solve the problem the way it has been solved in the past. This can be useful, but it provides a limited set of possibilities. This is about replication and regurgitation. An alternative (and more insightful) way of looking at problems is to ask, “What is this like?” Be a matchmaker. Make connections. Try and find analogies, metaphors, and associations that fit the problem you are looking to solve. Recombine ideas in new ways. If you are redesigning a business process, borrow a best practice from a different industry. South West Airlines did this when it benchmarked an Indianapolis 500 pit crew. Or when hospitals benchmarked Marriott Hotels for the check-in processes. But take it a step further and look to non-business analogies and metaphors. Look at nature. Model your business after an evolutionary process, an ecosystem, jazz music, or whatever tickles your fancy. If redesigning a product, ask what the product is really like. If redesigning a computer chip, look to racing circuits, rivers, or anything with a flow. When you have many dots collected, you have limitless ways of recombining them to create something new. This is not about invention, which is pulling something out of the thin air. This is about innovation which is about reconstituting old ideas in new ways. Don’t always go for the obvious solution. Some of the best ideas come from some of the most unlikely combinations.

Thinking Like a … Kid
The first two lenses enable you to better collect and connect dots. This gives you a fresh perspective on things, just like a kid. But fresh eyes are not the only thing that differentiates children from adults. Children love to play. To them, everything is a game. And if you watch them play, one of their favorite games is “Yes, and…” This is a game where kids fully use their imagination. The game starts with the first kid concocting a scenario. Let’s say, making your fingers into a gun, pointing it at another person and saying, “I’m zapping you with my laser beam.” The next person then says, “Yes, and…” and builds on what the previous person said. So, the second child may say, “yes, and… I am wearing my mirror suit so that it bounces back at you.” And the game continues going back and forth between two or more children. Very simple, and the game can go on for hours. Interestingly, if you watch adults play this game, they are more likely to respond with “yeah, but” rather than “yes, and…” Instead of contributing back, they shoot down the previous idea. So, if the first adult makes his fingers into a gun, points it at his friend, and says, “I’m zapping you with my laser beam,” the next adult would probably fall over and say, “I’m dead”. Not much of a contribution, and the game would end quite quickly. This is particularly true of people who are good “implementers”. They see all of the reasons why things won’t work. They put the “NO” in innovation. So, be a kid, and keep the play alive. This is a technique that can help you generate new ideas rapidly…and have fun while doing it. In fact, according to Neil Mullarkey, a well-known comedian, the “yes, and…” approach is core to improvisational comedy. Therefore, the next time you have a problem to solve, like inventing the next hot design for a toilet, try this game. Have one person throw out the first idea, and then continue with, “Yes, and…”, building on the previous idea. The key is to answer quickly and avoid thinking too much. Top-of-head answers tend to tap into a part of the brain we don’t use during our normal thinking process. And be sure that your answer is a contribution. It should build on what the previous person said rather than invalidate it. You will develop many new ideas over the course of play. Many of the ideas will be duds. But don’t worry. Play with it. Have fun. You never know when a real gem will be found. After all, it is only a game. And over time, this will become a normal mode of operating. You will become the master at breakthrough thinking on a regular basis by building on the ideas of others.

Thinking Like a … Contrarian
We now have a number of ways of collecting and connecting dots. This last thinking lens is about connecting dots in ways that we might never have thought possible. Normally when asking “What is this like?”, we look for logical answers. Sometimes the best answers are ones that are illogical. So think like a contrarian. Turn everything upside down. Stand on your head. Here are six “techniques” for thinking like a contrarian. Although there are many more, these should get you started thinking differently.

1. Oppose the Assumption
This technique has two parts. The first part is to surface any assumptions. The next part is to challenge the assumption and think in opposites. How do you surface hidden assumptions? One clue to an assumption is when people say, “We always do it this way”, or “We never do it that way.” Then ask, “What if the opposite were true?” Challenge all assumptions. Another way of surfacing hidden, concealed assumptions is to ask “who, what, where, when, how, how much, and why” questions. I used this in challenging some models of consulting. For example, in determining the fees paid to a consultant, typically the consultant (who) sets the rate (how much) before (when) the work is done. I have introduced a billing concept where the client (who) determines how much to pay me after (when) my work is done. The amount is solely at their discretion. Although this idea could have been derived from assumption busting, I in fact got the idea from a Chinese restaurant in London that has no prices on its menu. When the customer receives the bill, they pay what they feel the meal was worth. Connecting dots.

2. Worst Idea
Sometimes the best ideas seem like the worst ideas. The California Dancing Raisins advertisement came from asking the question, “What is the worst way we could sell raisins?” Think about the world prior to vaccines. What would be the stupidest way to prevent an outbreak of polio? Inject everyone with the virus. But of course that is exactly how it is done. Breakthrough answers are often hiding in illogical solutions.

3. Illogical Combinations
One way of coming up with new ideas is to force illogical combinations. The way it works is simple: select some or all of the “who, what, where, when, how, and how much” attributes. Next, come up with various answers for each attribute to solve your problem. Then randomly mix and match various combinations. For example, if redesigning the supermarket checkout process, we might look at “who”, “where”, and “when”. The typical combination for checkout is that it is done by the cashier (who), at the cash register (where), after all of the purchases are made (when). Try different random combination. What if the customer (who) did the scanning as they make their purchases (when) at their shopping cart (where)? A number of supermarkets are now experimenting with a similar checkout system whereby customers scan in prices as they make purchases. And random audits help prevent theft or miscounting. Some of the most creative ideas come from the most unnatural combinations. One amusing tool we developed is a “slot machine” that facilitates illogical combinations. You simply enter in different “who, what, where, when, how, and how much” parameters (e.g., in the shopping example above, “who” may include customers, checkout clerks, the butcher, the security guard, or the cleaning lady), you then pull the handle, and see what random combination comes up. Many combinations do end up being losers. But when you get a winner, the payoff can be huge. And using this approach is a great way to uncover implicit assumptions about the business. When you generate combinations that are different than have been done in the past, people will almost surely say, “Hey, we can’t do that because…” You then begin to uncover the underlying assumptions. This is where real innovation can emerge. So, you get the idea. So go wild and try lots of interesting combinations.

4. Competitor War Games
The best way to beat your competition is ask the question, “What are you most afraid your competition will do to you?” Only then can you try and beat them to the punch. If you really want to see how the competition thinks, immerse yourself in their competitor’s shoes. Play a competitor war game. Have your team act as though they are the competition vying to make a sale to your target customer. Play the game for a day. Don’t let up. Only after you really believe that your can think, breathe, talk, and act like your competition should you step out of the role play and back into your own shoes. Armed with this valuable information about how your competitors will try and beat you, beat them at their own game.

5. Innovation Targeting Matrix
Although not specifically a tool for unleashing the inner innovator, a powerful “contrarian-thinking” tool is the Innovation Targeting Matrix (ITM). The ITM is a useful framework for turning the operating model of your organization on its head. It is a 2 x 3 matrix. Along one axis are two very distinct types of capability: “transaction” and “knowledge”. The other axis is organized around strategic importance: “differentiating”, “core”, and “support”. First, map your capabilities on this chart. Next, on a separate chart, map your competitor. Companies that are in similar businesses can have very different positions on the matrix. For one firm, its own internal research may be central to its differentiation, while a rival in the same business may depend on licensing arrangements for its new products. Such differences can make you aware that competitors know something you don’t. However, looking at your positions within the boxes of the matrix is only part of the story. The real power of the ITM is in the lines, the moves that you can make to change your business model. Try down-skilling a knowledge-based capability and transactionalize it. Or up-skill a transactional capability, so that it is now knowledge-based. Alternatively take a support capability and make it differentiating. The number of moves is limitless. Try moving an activity to somewhere on the matrix that seems counter-intuitive and illogical. This is certain to stimulate some interesting discussion. The implications of switching activities from what seems to be their “natural” position on the matrix to somewhere else can reveal insights into the rigidities of the existing structure. And it helps uncover hidden assumptions. I describe the Innovation Targeting Matrix more fully in Chapter 7 of my book, 24/7 Innovation.

Thinking Like a … Whole Brained Team
The last way to think is more organizational in nature. It is quite simply to think and work like a whole brained team. It is human nature to surround ourselves with people we get along with. Recruiting processes tend to focus highly on competencies and chemistry. Interestingly, nearly every company looks for people who “fit the mold”. Unfortunately, all this does is perpetuate the thinking and culture of the past. Having people on your team that you get along with and who are “yes” people may make you feel better and make your job easier. But rarely will it lead to new and more innovative ideas. When everyone thinks the same way there is little opportunity for something new. Creativity comes from tension. Differing viewpoints. Differing ways of solving problems. So, on your team, surround yourself with people who think differently than you. Choose people with different analytical, creative, and personality styles. Welcome the creative tension that is inevitable. Relish not always getting your way. New ideas are bound to emerge, and as long as you are open to them, your whole brained team will create new ideas never previously conceived

Thinking Like an … Innovator
If you try these techniques and really put them to practice, you will build the brain muscle necessary to think like an innovator. If you are already creative, this may help provide some new angles. If you are an implementer who rarely likes to challenge norms, this may have a profound impact on the way you view the world. Not only will you have more fun, but you’ll be able to add more value to your organization…and to your life.

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The Innovation Capabilitity

April 24, 2007

Innovation Capabilities

For innovation to be repeatable, it needs to be treated like any other business capability (e.g., finance, HR, or sales). All capabilities are comprised of five key components:

innovation capability diagramStrategy
A strategy is needed to decide when, where, and how innovation will be used within the organization. It also needs to address “why” innovation is important. Are you looking primarily for a new pipeline of products? Do you want to better serve your customers? Are you looking to create a more nimble, flexible, and adaptable organization? For one company, the innovation mantra was “2 by 10” – to become a $2 billion business by 2010. This made it clear to all employees why innovation is needed and what innovation must deliver.

Measures and Performance
Innovation, as with any capability, needs to be measurable and measured. You will want to measure the value of your innovation pipeline. But who will be measured? What kinds of measures are used? How will you measure less tangible values such as adaptability? How will you relate innovation to overall business outcomes and results?

Process (and infrastructure)
Innovation requires an end-to-end process for targeting, generating, and selecting innovative ideas. Therefore, to help organizations make innovation repeatable and sustainable, we developed the CRACK IT! process.

People
Your people are your culture. If you want a culture of innovation, your employees must embrace actions, values, beliefs, skills, and language that are consistent with this objective. Everyone, at all levels, must embrace failures while giving up control.

Technology
Innovative companies use technology to enable collaboration between employees, customers, and suppliers. Decisions are supported by data. Ideas are captured in idea banks to facilitate the dissemination of innovative thinking. These technologies enable communication at all levels, across all organizations, and across business boundaries.

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