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Friday, April 09, 2010

2010: The Year of Innovation and Entrepreneurs in the Middle East

by Kamal Hassan

2010: The Year of Innovation and Entrepreneurs in the Middle EastWhat a year it has been in the Middle East! Let's start with the good news:
  • Qatar Airways completed the world's first commercial passenger flight powered by natural gas.

  • The fully automated Dubai Metro became the first urban train network in the Middle East.

  • And in Saudi Arabia, the King Abdullah University of Science and Technology opened its doors. Called "an oasis of freedom," the university aims to fund research that will spawn economic diversity for Saudi.

2009 has truly been a year of breakthrough achievements in the Middle East. It's also been a year of disappointments. Who could imagine that the bottom would fall out of the real estate market in most of the Middle East? Or that unemployment would rise and workers without a stake in the Gulf countries would flee, leaving their debts unpaid? Or that Dubai World would need a $26 billion bailout?

Yet, as disastrous as these situations may seem, they provide an unprecedented opportunity for growth in the region... the growth of innovation and entrepreneurs. 2010 could finally be the year that start-ups and companies investing in innovative products, services, business models and management come into serious play in the Middle East. The conditions are ripe.

Cheaper Resources: The events of 2009 have made resources - office space, talented personnel, raw materials, supplies - that are often too expensive for new businesses more affordable. The Middle East will likely see an influx of entrepreneurs taking advantage of the cheaper cost of doing business. Such businesses will likely be cash-based and will be able to survive month-to-month while they develop a customer base. On the other hand, highly financially-leveraged organizations will continue to bleed money unless they have vast reserves of cash or liquid assets.

Innovation and Agility: Real innovation is not about "bigger, faster, taller, or fancier." It's about adding value for both the business and its customers. Established companies may lose sight of this as they get bogged down by misguided corporate agendas and shareholder expectations. Entrepreneurs, on the other hand, have less to prove, and less to lose. For new businesses, innovation, especially during tough times, becomes a daily occurrence as they look for unique ways to attract customers and add value. Some may even have the flexibility to adopt innovative new business models that take them in a completely different direction. Such agility is, and will continue to be, a real advantage in every industry.

Access to Affordable Technology: Sloan Management Review recently reported on how affordable technology is enabling businesses to test consumer reactions to new products more quickly, easily and cost-effectively than ever before. Thus, innovations can be tested and tweaked earlier in the development process, paving the way for a more successful market launch. While the article focused on the achievements of Google and other large, established companies, the underlying argument is sound for entrepreneurs and smaller businesses, as well. The cheaper technology becomes, the more the innovation playing field is leveled between organizations of all sizes. In addition, the Internet and social networking technology is enabling collaboration and open innovation as never before. This phenomenon will no doubt continue in 2010 as entrepreneurs around the world leverage this affordable technology.

Access to Information: Businesses today must deal with the most educated consumers the world has ever seen. Buyers know exactly what they want and have a higher level of expectations (green, socially responsible, clean energy, etc.). With such informed customers, companies cannot afford to limit their employees' access to information and new knowledge. Yet this is exactly what many established organizations are doing as they slash R&D and training budgets. Newer businesses, which tend to place more value on individual contributions, know that information and knowledge is essential to growth. So, while traditional companies hunker down and wait for things to get better, innovators and entrepreneurs continue to make things better by continuously learning and adapting.

Process Innovation: During the past year, companies both large and small were forced to cut costs. As per usual, organizations that could afford to cut jobs let the heads roll and hoped it would be enough. The UAE alone saw 16 percent of workers lose their jobs in 2009, and a recent survey by Gulf Talent reports that 15 percent of employers surveyed plan to continue cutting jobs. On the flip side, smart companies - many of them led by entrepreneurs - reduced job losses by focusing on managing processes, making them more cost-effective, innovative and efficient, and on eliminating or downsizing unnecessary infrastructure. Who do you think will be better prepared to face the challenges of 2010?

(Hint: it's not the company with fewer employees trained to do one thing that may not even be value-added anymore.)

So here is a question for the Middle East.

Where will you put your money and effort next year? Should we continue to follow the U.S. model of bailing out established corporations that are overextended with large-scale risky investments? Or should we increase support for entrepreneurs, start-ups and innovators that can make a real difference and also turn a profit?

Here's also a challenge for private equity funds: I read that you have $11 billion to invest in the region next year. What will you do to make 2010 the year of innovation and entrepreneurs in the Middle East?

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Kamal HassanKamal Hassan is President and CEO of Innovation 360 Institute, and is responsible for leading the company's global operations and customer acquisition.

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Sunday, April 04, 2010

Innovation Perspectives - Where's Your Innovation Friction?

This is the eighth of several 'Innovation Perspectives' articles we will publish this week from multiple authors to get different perspectives on 'How should firms develop the organizational structure, culture, and incentives (e.g., for teams) to encourage successful innovation?'. Here is the next perspective in the series:

by Braden Kelley

Innovation Perspectives - What's Your Innovation Friction?When it comes to creating an innovation culture, often people make it far too complicated. If you're part of the senior leadership team and you're serious about innovation then your job is simple - reduce friction.

If you're serious about innovation and you're not a senior leader, then your job is to do what you can to convince senior leadership that innovation is important. Then, gently help your execs see the areas of greatest friction in your organization so they can do something about it.

When it comes to creating a culture of innovation, the most frequently cited area of friction in organizations is the acquisition of resources for innovation projects (the infamous time and money). Senior leaders serious about innovation must eliminate the friction that makes it difficult for financial and personnel resources to move across the organization to the innovation projects that need them (amongst other things).

But this particular impediment is just a part of a much larger barrier to innovation - the lack of an innovation strategy. When senior leadership commits to innovation and sets a strong and clear innovation strategy then policies and processes get changed and resources move.

I recently ran a poll on LinkedIn asking people to identify their organization's biggest barrier to entry. 548 people responded and 58% of respondents identified either the absence of an innovation strategy or the psychology of the organization as the biggest barrier. 'Organizational psychology' came out on top with 32% of the vote, with 'Absence of an innovation strategy' a close second (26%). Other choices in the poll included - 'Organizational structure', 'Information sharing', and 'Level of trust and respect'. See the poll results and comments here.

A second major area of innovation friction is the movement of information. Too often there is information in disparate parts of our organizations that remains separated and unknown to the people who need it. Organizations that reduce the friction holding back the free flow of relevant information to where it is needed will experience a quantum leap in not only their product or service development opportunities, but in many other parts of their organization including sales, marketing, and operations.

So, what are the areas of friction that are holding your organization back from reaching its full innovation potential?

What are the barriers to innovation that have risen in your organization as you struggle to maintain a healthy balance between your exploration and exploitation opportunities?

My contribution to the body of innovation literature out there will be published this fall from John Wiley & Sons and focus on some of these issues.

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You can check out all of the 'Innovation Perspectives' articles from the different contributing authors on 'How should firms develop the organizational structure, culture, and incentives (e.g., for teams) to encourage successful innovation?' by clicking the link in this sentence.
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Braden KelleyBraden Kelley is the editor of Blogging Innovation and founder of Business Strategy Innovation, a consultancy focusing on innovation and marketing strategy. Braden is also @innovate on Twitter.

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Saturday, April 03, 2010

Innovation Perspectives - Challenge Your Specialists

This is the sixth of several 'Innovation Perspectives' articles we will publish this week from multiple authors to get different perspectives on 'How should firms develop the organizational structure, culture, and incentives (e.g., for teams) to encourage successful innovation?'. Here is the next perspective in the series:

by Michael Soerensen

Innovation Perspectives - Challenge Your SpecialistsChallenge your specialists, to help you develop an innovative culture!

After you have checkmarked all the essentials of getting your company to focus on innovation - tools, workshops, gurus, funding, and management buy in - you are now faced with the biggest challenge:

How to develop and maintain it!?

First, try to SWOT what you need to succeed - HR competencies, communication, internal marketing, ROI methods, nifty design, IT...

Why start doing this halfhearted, when you already know that you don't possess these skills?

Many innovative efforts - even with the largest funding and management buy in - have failed because these key elements were not done properly. Instead of failing, make sure that you get carte blanche to tap into your company's specialists:

HR - They are brilliant at helping you tackle the different sub-cultures of the company - and knowing how to get them involved!

Sales & Marketing - They can help you design a marketing plan and a pitch - and your webmaster probably knows some mind-blowing methods of spreading the word on your intranet!

Finance - The numbers people will love the challenge of setting up that awesome spreadsheet on the innovation ROI!

Production & Engineering - These hands-on groups will be pleased to evaluate - and test - the groundbreaking new product ideas!

IT - Don't forget them - they are vital!

All of above are savvy specialists, who know their way around their subjects, and if you involve their key competencies in the challenge, you will be on the road to success - harnessing their vast knowledge and dedication.

And a great side effect is that you will get ambassadors and lobbyists working for your project, in every vital and strategic corner of your company!

After you do the above, don't forget to play your part:
  • Publish all results... good or bad!
  • Support, support... and support everybody involved!
  • Make sure to announce any progress - personally - and throughout the company!
  • Embrace suggestions to your project with enthusiasm!
  • In general, spread kudos and karma to everyone helping you out!

And finally - keep challenging your enrolled experts and specialists, with important new tasks!

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You can check out all of the 'Innovation Perspectives' articles from the different contributing authors on 'How should firms develop the organizational structure, culture, and incentives (e.g., for teams) to encourage successful innovation?' by clicking the link in this sentence.
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Michael SoerensenMichael Soerensen is CMO at Nosco.dk, a danish company, creators of the SaaS innovation platform; Idea Exchange. Michael is a serial entrepreneur, and after great successes and learnful failures he is now truly at home with his buddies at Nosco.

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Sunday, January 10, 2010

Should you be measuring ROR instead of ROI?

by Ric Merrifield

Should you be measuring ROR instead of ROI?For literally decades, the notion of return on investment, or even more specifically return on invested capital (R.O.I. either way) was the gold standard for justifying a business decision. If the return exceeded the investment enough (also weighing risk, disruption, and many other factors) then it would get the green light for funding.

This was, and is, especially common in investments in enterprise software. But I predict we will see a (long overdue) rapid decline in the use of R.O.I. as the gold standard for project justification for these four reasons:

1) Smart organizations have figured out that you can justify almost anything with R.O.I. math. Someone recently said "if you do project X at a cost of $2 million and it saves you $5 million per year, then you should do it, right?" Many people would say yes, I would say there's nowhere near enough information. For large companies, a $5 million savings could be a distraction to more important activities, just to name one reason, but too often I see these sorts of projects approved.

2) The metrics are often very squishy. Organizations don't generally have great metrics to begin with, but especially when anchored to the process view (which is often very volatile, with a short half-life), and when the process changes, organizations end up comparing apples to oranges. The simple solution there is to use the business capabilities lens described in the pages of Rethink, starting with the "what" outcome you are measuring, and then looking to the "how" of process.

3) There needs to be larger context setting. What overall goals is the department, division, or enterprise setting? It isn't enough just to cover costs for a lot of projects. These days, it's about staying ahead of competition, differentiating, and knowing who your most valued customer is (see #4 below). If the $5 million in savings in #1 above doesn't connect to a key performance indicator, you need to be certain that it's not going to be too distracting or disruptive in an area in need of much more attention someplace else and the "shiny object" project selected out of context from the rest of the organization always has that risk.

4) Many organizations need to look at their R.O.R. (Return On Relationship). How much do you spend on each customer and how much do you get in return. Someplace in almost every industry, their is a vital set of relationships, sometimes it's partners, sometimes it's customers or sales channels, and sometimes it's employees and you have to know what is most valuable to your most valued relationships so that when the least valued relationships whither, you don't worry, but when you see blinking red or yellow lights in the most valuable relationships, nothing can get in your way of fixing that.

So as we enter this new decade, and hopefully start to get further out of a recession, start to measure your R.O.R., do better context setting in terms of the value of a project to the overall, be sure you have concrete metrics, and be leery of the R.O.I. math of the one-off "shiny object" projects.

Ric Merrifield is known at the "Business Scientist" at Microsoft Corporation in Redmond, WA and is the author of "Rethink". He blogs about ways to rethink through getting out of what he calls "the 'how' trap".

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Friday, January 08, 2010

The Decade's Top Performing CEOs

by Adam Hartung

The Decade's Top Performing CEOsI was intrigued when I read on the Harvard Business Review web site "Do we celebrate the wrong CEOs?" The article quickly pointed out that many of the best known CEOs - and often named as most respected - didn't come close to making the list of the top 100 best performing CEOs. Some of those on Barron's list of top 30 most respected that did not make the cut as best performing include Immelt of GE, Dimon of JP Morgan Chase, Palmesano of IBM and Tillerson of Exxon Mobil. It did seem striking that often business people admire those who are at the top of organizations, regardless of their performance.

I was delighted when HBR put out the full article "The Best Performing CEOs in the World." And it is indeed an academic exercise of great value. The authors looked at CEOs who came into their jobs either just before 2000, or during the decade, and the results they obtained for shareholders. There were 1,999 leaders who fit the timeframe. As has held true for a long time in the marketplace, the top 100 accounted for the vast majority of wealth creation - meaning if you were invested with them you captured most of the decade's return - while the bulk of CEOs added little value and a great chunk created negative returns. (It does beg the question - why do Boards of Directors keep on CEOs who destroy shareholder value - like Barnes of Sara Lee, for example? It would seem something is demonstrably wrong when CEOs remain in their jobs, usually with multi-million dollar compensation packages, when year after year performance is so bad.)

The list of "Top 50 CEOs" is available on the HBR website. This group created 32% average gains every year! They created over $48.2B of value for investors. Comparatively, the bottom 50 had negative 20% annual returns, and lost over $18.3B. As an investor, or employee, it is much, much better to be with the top 5% than to be anywhere else on the list. However, only 5 of the top best performers were on the list of top 50 highest paid - demonstrating again that CEO pay is not really tied to performance (and perhaps at least part of the explanation for why business leaders are less admired now than the previous decade.)

Consistent among the top 50 was the ability to adapt. Especially the top 10. Steve Jobs of Apple was #1, a leader and company I've blogged about several times. As readers know, Apple went from a niche producer of PCs to a leader in several markets completely unrelated to PCs under Mr. Jobs' leadership. His ability to keep moving his company back into the growth Rapids by rejecting "focus on the core" and instead using White Space to develop new products for growth markets has been a model well worth following. And in which to be invested.

Similarly, the leaders of Cisco, Amazon, eBay and Google have been listed here largely due to their willingness to keep moving into new markets. Cisco was profiled in my book Create Marketplace Disruption for its model of Disruption that keeps the company constantly opening White Space. Amazon went from an obscure promoter of non-inventoried books to the leader in changing how books are sold, to the premier on-line retailer of all kinds of products, to the leader in digitizing books and periodicals with its Kindle launch. eBay has to be given credit for doing much more than creating a garage sale - they are now the leader in independent retailing with eBay stores. And their growth of PayPal is on the vanguard of changing how we spend money - eliminating checks and making digital transactions commonplace. Of course Google has moved from a search engine to a leader in advertising (displacing Yahoo!) as well as offering enterprise software (such as Google Wave), cloud applications to displace the desktop applications, and emerging into the mobile data/telephony marketplace with Android. All of these company leaders were willing to Disrupt their company's "core" in order to use White Space that kept the company constantly moving into new markets and GROWTH.

We can see the same behavior among other leaders in the top 10 not previously profiled here. Samsung has moved from a second rate radio/TV manufacturer to a leader in multiple electronics marketplaces and the premier company in rapid product development and innovation implementation. Gilead Sciences is a biopharmaceutical company that has returned almost 2,000% to investors - while the leaders of Merck and Pfizer have taken their companies the opposite direction. By taking on market challenges with new approaches Gilead has used flexibility and adaptation to dramatically outperform companies with much greater resources - but an unwillingness to overcome their Lock-ins.

Three names not on the list are worth noting. Jack Welch was a great Disruptor and advocate of White Space (again, profiled in my book). But his work was in the 1990s. His replacement (Mr. Immelt) has fared considerably more poorly - as have investors - as the rate of Disruption and White Space has fallen off a proverbial cliff. Even though much of what made GE great is still in place, the willingness to Defend & Extend, as happened in financial services, has increased under Mr. Immelt to the detriment of investors.

Bill Gates and Warren Buffett are now good friends, and also not on the list. Firstly, they created their investor fortunes in previous decades as well. But in their cases, they remained as leaders who moved into the D&E world. Microsoft has become totally Locked-in to its Gates-era Success Formula, and under Steve Ballmer the company has done nothing for investors, employees - or even customers. And Berkshire Hathaway has spent the last decade providing very little return to shareholders, despite all the great press for Mr. Buffett and his success in previous eras. Each year Mr. Buffett tells investors that what worked for him in previous years doesn't work any more, and they should not expect previous high rates of return. And he keeps proving himself right. Until both Microsoft and Berkshire Hathaway undertake significant Disruptions and implement considerably more White Space we should not expect much for investors.

This has been a tough decade for far too many investors and employees. As we end the year, the list of television programs bemoaning how badly the decade has gone is long. Show after show laments the poor performance of the stock market, as well as employers. We end the year with official unemployment north of 10%, and unofficial unemployment some say near 20%. But what this HBR report tells us is that it is possible to have a good decade. We need leaders who are willing to look to the future for their planning (not the past), obsess about competitors to discover market shifts, be willing to Disrupt old Success Formulas by attacking Lock-in, and using White Space to keep the company in the growth Rapids. When businesses overcome old notions of "best practice" that keeps them trying to Defend & Extend then business performs marvelously well. It's just too bad so few leaders and companies are willing to follow The Phoenix Principle.

Adam HartungAdam Hartung, author of "Create Marketplace Disruption", is a Faculty and Board member of the Lake Forest Graduate School of Management, Managing Partner of Spark Partners, and writes for "Forbes" and the "Journal for Innovation Science."

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Sunday, December 13, 2009

Open Innovators Outperform the Market by 16.9%

Open Innovation Funnel
by Hutch Carpenter

At the Open Innovation Summit last week in Orlando, there were a number of companies there discussing their various initiatives for open innovation. What is open innovation? UC Berkeley professor Henry Chesbrough, perhaps the father of the movement, formulated this definition several years ago:

"Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology.

At the Summit, several companies expressed their growth related to and/or impact of open innovation:
  • Cisco: Cisco's internally generated growth is at 5%. Its partner-based growth is 10%. #ois09

  • Clorox: Clorox target for growth from innovation is 4%. Last few years around 2.5% to 3.5% = significant portion of growth. #ois09

  • Royal Dutch Shell: Conser: About 40% of projects in Shell's R&D program come from GameChanger. #ois09 [GameChanger is its open innovation program]

  • Rockwell Collins: Aggarwal: 75% of firms expect 40% of innovation to come from external sources by 2012. #ois09

  • Hewlett Packard: McKinney: 60% of ideas generated internally. Via HP Garage. Use employee crowdsourcing to filter and refine these. #ois09

Given the way these companies described their open innovation efforts, I decided to check out their stock performance. Hat tip to Jackie Hutter for suggesting this idea.

The table below compares the 5-year performance of the companies presenting at the Open Innovation Summit against the S&P 500:

Stock Performance of Companies Using Open Innovation
It's not a clean sweep, but most of the companies have outperformed the S&P 500 handily the past five years. While it's not all due to initiating open innovation, it appears that you can't rule out its influence on company performance.

Here's how industry consultant Stefan Lindegaard describes the open innovation landscape:

"I also argued that only about 10% of all companies are adept enough at open innovation to get significant benefits today. Another 30% have seen the light and are scrambling to make open innovation work and provide results that are worth the bother. I call them contenders.

The other 60% are pretenders - companies that don't really know what open innovation is and why or how it could be relevant for them."

Looking for growth ideas? See what the firms in this open innovators stock index are doing right.

Hutch CarpenterHutch Carpenter is the Vice President of Product at Spigit. Spigit integrates social collaboration tools into a SaaS enterprise idea management platform used by global Fortune 2000 firms to drive innovation.

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Tuesday, November 03, 2009

How a Blizzard Saved the ATM

by Stephen Shapiro

Early ATM"Build it and they will come." We hear that mantra a lot. But with innovation, it is often more like, "Solve a pain and they will come." The ultimate success of the Automated Teller Machine (ATM) is a great example of this.

The other night I was having dinner with someone who in the mid-1970's worked with Citibank, the second largest bank at the time. He shared with me the story of the birth of the ATM, at least from his perspective.

In 1977, after investing hundreds of millions of dollars in ATM technology research and development, Citibank decided to install machines across all of New York City. But at first, they were not very popular. The technology was confusing to first-time users, the machines were not always accurate (they sometimes dispensed the wrong amount of money), and they were impersonal. I was told that customers who used ATM machines were so frustrated that many closed their accounts.

The ATM may never have been an instant hit if it weren't for a natural disaster.

January 1978 will always be remembered for a blizzard that dumped as much as four feet of snow in the Northeast. In New York City, nearly two feet of snow brought the city to a halt. Banks didn't open. Instead, people got their money from supermarkets. But most of those quickly ran out of money.

This created a massive 'pain'.

Where did people turn? The ATMs. It is estimated that during the storms, use of the machines increased by over 20%. Soon after, Citibank started running TV ads showing people trudging through the snow drifts in New York City. That's when the company introduced their wildly popular slogan, "The Citi Never Sleeps." This was the real birth of the automated teller machine.

I found an interesting Fortune article that corroborates his story. The article claims that by 1981, Citibank's market share of New York deposits had doubled. A lot of this growth could be attributed to the ATM.

This story illustrates an innovators dilemma. Brilliant innovations are not necessarily taken up by the masses. Some ideas just need time to incubate and gain acceptance. But can your business survive long enough to see the success? Too many ideas, like Webvan, could not endure the incubation period. Sometimes your innovations need a little boost.

As I have pointed out in previous blog entries, people take massive risks to eliminate their pains, but play is safe when it comes to adding convenience. ATMs were primarily about convenience. What did it take for them to become a success? A pain caused by a natural disaster.

Are your new ideas solving a pain? Or are they just a nice to have? If they are just a convenience, what can you do to create a pain - without having to rely on a natural disaster?

Stephen ShapiroStephen Shapiro is the author of three books, a popular innovation speaker, and is the Chief Innovation Evangelist for Innocentive, the leader in Open Innovation.

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Monday, October 12, 2009

When Innovation Goes Wrong

by Rowan Gibson

Broken InnovationEver since innovation became the buzzword du Jour, a lot of people seem to have lost their ability to tell smart ideas from stupid ones. Case in point: the financial "innovations" (read: stunningly stupid loan products) that kicked off the trillion-dollar economic meltdown mess we're currently in. The simplistic notion that "new equals good" has often been a recipe for grand-scale disaster, just as it was in the dotcom debacle at the turn of the millennium. And when the doo-doo inevitably hits the fan, it's all too easy to level the blame at innovation per se rather than admit to being a bonehead. Here's why many ideas that are labeled "innovations" are just plain stupidity.

Simply put, innovation goes wrong (sometimes big time) when an organization over-commits to an idea before validating the key assumptions on which it is based. Let's take the infamous sub-prime mortgage. The assumption here was that a jobless, homeless person who is just out of jail and doesn't even have a bank account can afford to make mortgage repayments of any description, let alone horrendously overpriced ones.

The idea of selling mortgages to poor people with bad credit was clearly "new" given that banks have traditionally offered 30-year, fixed-rate amortizing home loans to people who looked like they could actually pay the money back. But going after this risky, low-end market segment with a ripoff financial product wasn't exactly what C.K. Prahalad had in mind when he talked about "the fortune at the bottom of the pyramid". And it turns out - duh! - that this particular "financial innovation" wasn't a very smart one (to put it mildly), and even less smart when used as the cornerstone for a multitrillion dollar house-of-cards based on endless derivatives of derivatives.

"Innovation can never be risk-free, but you can certainly make sure you look before you leap."

Financial InnovationIt's precisely big boondoggles like this one that give innovation a bad name. In fact, columnist Paul Krugman wrote in the New York Times that "financial innovation" is a phase that "should, from now on, strike fear into investors' hearts." Yet should the financial services industry - or any industry for that matter - now decide to "throw the baby out with the bathwater" when it comes to innovation? Absolutely not. It's worth remembering that over the last couple of decades, innovation has given us a string of success stories in financial services: Charles Schwab's online equity trading, Commerce Bank's open-all-day, seven-days-aweek business model, First Direct's branchless banking, Grameen Bank's micro-credit lending concept, PayPal's user-friendly, online-payment service, or Umpqua Bank's people-centered retail environments, to name just a few. The difference with these opportunities is that they were all based on very solid assumptions about the viability and sustainability of the business model; they were not built on proverbial sand. That's why these innovations have created significant new value and wealth, instead of destroying it.

Unfortunately, there are all too many cases where companies have overcommitted to an idea that wouldn't even pass the sanity test. These tend to be ideas where the customer benefit is unclear or unimportant to people, or where the technology is not yet up to the task, or where the market is just not there, or where the business model is so stupid that it's dead on arrival. Instead of first checking the validity of critical assumptions on which the idea is based, sometimes a company (or even a whole industry) decides to jump from 10,000 feet without a spare parachute, hoping against hope that the thing will somehow work.

Take Iridium, Motorola's failed satellite telephone venture, which was built on a fundamentally flawed assumption about the size of the target market. Basically, Motorola totally underestimated the speed at which cellular coverage would spread. Their premise was that there would be huge regional gaps in the global network - parts of the world that would have no mobile phone coverage for a long time to come. That would have made Iridium the perfect answer. It turned out quite quickly that those regions would be very few and far between (you would practically have to be an Arctic explorer to need an Iridium phone!), so the target market soon shrank to insignificance. This is something Motorola should have known better.

WebvanOr take Webvan, the "oh-so-dotcom" online grocery business that burned through a billion dollars and went belly-up. There was nothing fundamentally flawed about the idea of online grocery shopping, as a host of other retailers have since proven. Rather, Webvan's massive failure was based on a whole series of flawed and untested assumptions around the customer value proposition, the economic engine, the value of partnerships, and the product and service offering.

Business history is full of such examples: from Coca-cola's infamous "New Coke", to GM's all-electric EV-1 project (which cost a billion dollars and sold only 700 vehicles), to all those other empty dot-com business models in the late 1990s - like Pets.com - that quickly disappeared. The lesson from all these disasters is to look before you leap. A company should first reduce the uncertainty surrounding critical project assumptions before committing irreversible and non-recoverable resources to an idea. The greater the uncertainty surrounding these assumptions, the greater the risk associated with any new opportunity. Therefore, the focus of an innovation project should initially be on learning rather than earning. It should be on launching experiments to test whether a business model makes sense or not, or whether a new technology will work or not, or whether customers would value the new service, or what they would be willing to pay for it, or which product configuration would work best, or which distribution channels would be most effective, and so on.

Clearly, innovation can never be risk-free. But the process of validating or invalidating these critical project assumptions should stop you from ever completely misreading the basic economics of an opportunity. It will make sure that hubris never gets the better of humility.

Rowan GibsonRowan Gibson is widely recognized as one of the world's leading experts on enterprise innovation. He is co-author of the bestseller "Innovation to the Core" and a much in-demand public speaker around the globe. On Twitter he is @RowanGibson.

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Tuesday, August 04, 2009

Is Your Innovation Drowning in Cash?

Jason Zweig writes the Intelligent Investor column for the Wall Street Journal. His recent contribution oddly echoed a query I received the prior Thursday during a speaking engagement in New York. Referencing the 'Loss of Nerve' principle in "When Growth Stalls", my questioner wanted to know if it was prudent to conserve all the cash he could during the economic downturn. My answer to him was "not necessarily," a thought reinforced by Zweig's column.

"While many financial companies are thirsting for cash," Zweig says, "there's an even bigger group of businesses drowning in the stuff - to the detriment of their shareholders." Citing Goldman Sachs research that found non-financial S&P 500 companies have over $800 billion in cash and liquid securities on hand, Zweig said, "Squirreling away cash is almost as bad a frittering it away. The returns on idle cash are lousy, and putting cash to productive use is one of management's central obligations to shareholders."

He's right. Zweig says research from the University of British Columbia shows that stocks with the biggest cash hoards have actually underperformed those with the least amount of extra cash. That is consistent with the behavior my research revealed at stalled companies - a fear-driven pullback on the reins of innovation and marketing. It's a malady that keeps many companies stuck in their funk, some of which never recover.

While hunkering down is a natural response to a tectonic event, there comes a time after the shaking stops to get up and get on with life. Whatever shape your house may be in, it won't repair itself. Somebody has to reinforce the walls and re-shingle the roof, both of which require resources.

"Many big companies are being too cautious with their cash by any measure of prudence," Zweig says. Are you?

Steve McKee is a BusinessWeek.com columnist, marketing consultant, and author of "When Growth Stalls: How it Happens, Why You're Stuck, and What To Do About It." Learn more about him at www.WhenGrowthStalls.com and at http://twitter.com/whengrowthstall.

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