Innovation for CEOs

by Bob Donnelly

Innovation is one of the most misunderstood concepts; time to clear things up.

What is an innovator?

Definitions abound by all kinds of academics and business experts, but in reality most innovations are just a new way of doing something.

One of my favorite innovations was George Foreman's lean, mean, grilling machine and all of its recent derivatives. George just developed a way to reduce the fat in grilling. His simple innovation has resulted in about 100 million George Foreman Grills being sold since they were introduced in 1995.

In 1997 Foreman entered into a $137.5 million deal with the grill manufacturer for unrestricted global use of his name to market the devices. Not bad for such a simple innovation by a classic entrepreneur who was also the heavyweight champion of the world at one time and who went on to reclaim the title when he was 44 years old.

Another part of the confusion about innovation is how symbiotic it is with entrepreneurship. Entrepreneurs are innovators by nature.

Foreman is infamous for the entrepreneurial/innovative way he has used his name and persona to market a clothing line for big men, shoes for diabetics, a chain of health-food restaurants, household cleaning products, and even his Big Boy sausages. If you visit his website you can buy cookbooks, autographed boxing gloves and even his memoirs. And George has done all of this while boxing and having 10 children!

Another confusing description for a real innovation is "disruptive technology". The best way I can describe disruptive technology is an unexpected new way of doing things that through a quality, price or service improvement changes the dynamics of the marketplace.

Dell changed the business model for selling computers when they introduced their online model for ordering customized computers. Dell eliminated the need for finished goods inventory in stores or warehouses, and in so doing created a cash cow as a result of customers paying for the product before it was made, and in turn allowing Dell to pay their suppliers before the product was delivered.

Starbuck's was another classic innovation when introduced and for many years thereafter. How about the Swiffer, a simple replacement for the age old mop and pail. Even better was the Tide Spot Stick for removing stains from ties and clothing.

Something that I had been waiting years for was the iPod. And what an innovation the iPhone has become.

Apple, through Steve Jobs creativity and vision has become an icon for innovation. Apple stores are jammed with customers talking to iHeads and sitting at Genius Bars waiting to be helped. How about that for innovative retailing?

Rachel Ray began with her 30 Minute Meals concept and has expanded the market for all things tagged with her logo, much like George Foreman before her and many others who have become a part of our world. I often wonder, what did everyone do before all of these wonderful innovations?

I guess the real explanation of innovation is the entrepreneurs perpetual ability to come up with better, faster and cheaper solutions to their own and others problems. But, the best innovations are those that solve a problem before the customer realizes that they have it.

Think about all the problems that you encounter or things that bug you in your day-to-day activities. Each one of those problems or daily irritants represents an opportunity to come up with a creative and innovative solution. Look around your marketplace at all the issues customers have or problems that they constantly deal with and you will have a list ripe for potential innovations.

What kinds of innovations can you come up with for your business?

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Bob Donnelly is the Editor of the online Entrepreneurial CEO column for Chief Executive magazine.

How Understanding Customer Jobs turns Crowdsourcing into Smartsourcing

by Graham Hill

Crowdsourcing is becoming a part of many companies' innovation strategy. But crowdsourcing suffers from a number of problems that limit its effectiveness. By selecting 'emerging customers' - who are better at spotting winning innovations - and helping them innovate around unmet customer needs, crowdsourcing can be turned into smartsourcing. Leading companies like Cisco already use smartsourcing to identify tomorrow's winning innovations.

Peter Drucker the gurus' guru famously said, "Because the purpose of business is to create a customer, the business enterprise has two - and only two - basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs." Marketing is hard enough to get right, but innovation is a whole lot harder still. Depending on the industry, about 80% of new products fail on introduction in the market. And up to 60% fail in reintroduction.

To overcome this disastrous failure rate, companies have started to recruit customers to generate ideas for new products. A process Jeff Howe called Crowdsourcing in a 2006 article in Wired magazine. There are a number of great examples of successful crowdsourcing programmes, however, two examples illustrate what happens when companies start crowdsourcing programmes without really thinking them through properly.

The first of these is Dell with its Ideastorm programme. Anyone can come up with a computer-related idea, post it on the Ideastorm website, vote for the best ideas, comment about them and hopefully, see them implemented. Sounds great. Why not harness ideas from customers? And why not get customers to vote for them to cut programme staff costs. Unfortunately, crowdsourcing has a number of serious problems. The first problem is that customers, even large numbers of them, typically produce average, unremarkable, incremental innovations, rather than the step-change innovations that companies hope for. Although 12,483 ideas have been posted on the website since Ideastorm started in February 2007, only 366 have been implemented to-date, a miserly 2.9% of the total. And most of the implemented ideas provide only incremental improvements to Dell's business. To its credit, Dell says that Ideastorm is intended as an extension of its relationship with its customers, rather than just as a source of product ideas. Just as well, as Ideastorm is a failure as a source of winning new innovations.

The second example is Starbucks with its My Starbucks Idea. Similar to Ideastorm, My Starbucks Idea allows any registered customer to post an idea, vote for the best ideas, comment on them and see them implemented. Or not as the case may be. My Starbucks Idea, despite receiving over 75,653 ideas, has only implemented 315 ideas to-date, an even more miserly 0.4% of the total. You wouldn't think that having ideas to improve a coffee-house chain would be all that difficult to implement. But the low rate of implementation illustrates the second problem with crowdsourcing; that customers have no idea of how the business works, what business capabilities it has and thus, no idea whether even the simplest of ideas can realistically be implemented, (let alone whether they will turn a profit). In stark contrast to Starbucks, Toyota implements over 1,000,000 employee ideas every year, 95% of them within 10 days of being submitted. But unlike Starbucks's customers, Toyota's employees know exactly where the best innovation opportunities lie, what can realistically be implemented and the profit-impact of doing so. Coming up with innovations like this is part of the Toyota Way. It's what makes Toyota such a unique company.

And there is another big problem too. Customers expend a lot of creative goodwill generating ideas for Dell and Starbucks, only to see the vast majority of them shot down by their peers or ignored by the companies. All that talk by Dell of building a relationship with customers quickly comes to nothing when its customers' hard work creating ideas is neither recognised nor rewarded. As Dell and Starbucks attempts at crowdsourcing illustrate only too clearly, crowdsourcing's supposed advantage of harnessing customers as sources of innovation is in fact its biggest weakness. The fact is that most customers simply don't have any good ideas, those that do are often not implementable and the miniscule implementation rate burns a lot of customer goodwill in the process.

So what should companies who still want to harness customers to generate winning innovations do? How can they turn wasteful crowdsourcing into productive smartsourcing.

One company that got it right is Cisco with its I-Prize competition. Starting in late 2007, Cisco asked innovators to come up with ideas that could it turn into the next billion dollar business. Cisco collected over 1,200 ideas from 2,500 innovators in 104 countries across the globe The ideas were initially filtered to see if they tackled Cisco's pain paints, if they could be delivered using Cisco's capabilities and if Cisco could make money from doing so. The filtering was done by a full-time, six-man team, drawn from across Cisco's business. The best 40 ideas were then assigned a mentor to help the innovators turn their idea into a workable business plan. The final 10 ideas were then selected, and taken though an interview and further filtering process to find the eventual winner. A single idea -- for a smart electricity grid -- by a German/Russian team was selected to collect the $250,000 prize.

Cisco's success at smartsourcing shows the importance of focussing ideas on particular pain points or opportunities. Rather than just let innovators come up with ideas, it is much better to focus their creativity on just those opportunities where they can produce a breakthrough. As innovation gurus Tony Ulwick of Strategyn and Prof. Clayton Christensen have shown, in today's customer-centric business environment this means understanding the jobs customers are trying to do and the outcomes they want from doing them. And not only functional 'doing' jobs, but also emotional jobs that describe how the customer feels about what they are doing and social jobs that describe how the customer relates to their peers too. Once you understand customer jobs and outcomes, they should be prioritised to find the areas where the importance to customers is highest but satisfaction with current solutions is lowest. This is the innovation sweet spot. Experience suggests that focussing on the innovation sweet spot can produce an 80% success rate for new products; a whole lot better than the 80% failure rate we commonly see.

Only when you know where the innovation sweet spot is should you seek to harness the creativity of customers. And not just any old customers either. As Dell and Starbucks' experience with crowdsourcing shows, harvesting ideas from the mass of customers produces a very small number of good ideas and a large volume of poor ones. It also generates a lot of wasteful costs if ideas are to be assessed properly. Recent research on emergent customers suggests that by screening potential customer innovators for their ability to imagine how innovations can be developed that will be successful in the market, the quality of ideas generated is significantly increased. Emergent customers produce much better ideas than the mass of customers, better ideas even than the lead-customers who are alredy pushing products beyond wheree they were designed to go. Just think what being able to identify the best innovators from the broad customer base could mean for companies. Companies could harvest a smaller number of high quality ideas. That would free up resources to help develop the best ideas together with customers. And more ideas would make it successfully to market. It would enable companies to turn inefficient, wasteful crowdsourcing into much more productive smartsourcing.

As the failure of Dell and Starbucks' crowdsourcing programmes, and the success Cisco's smartsourcing one shows, understanding customer jobs provides a solid foundation for targeted open innovation, whilst identifying emergent customers provides the best way to harness just those customers whose ideas will help produce winning innovations: new products that help customers get important jobs done well and create profit for the company too.

What do you think? Have you been disappointed by crowdsourcing initiatives? Have you seen great examples of smartsourcing in action? Are you an emergent customer?


Further Reading:

Jeff Howe, The Rise of Crowdsourcing

Matthew May, Elegant Solutions: Breakthrough Thinking the Toyota Way

Harvard Business Review, Inside Cisco's Search for the Next Big Idea

Tony Ulwick, What is Outcome-driven Innovation?

Hoffman et al, Identifying and Using Emergent Consumers in Developing Radical Innovations

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Graham Hill is a Customer-centric Innovator and CRM Guru at CustomerThink.com. Follow me on Twitter.