Reducing the Risk of Innovation

by Dr. Mike Shipulski

Though we can't describe it in words, or tell someone how to do it, we all know innovation is good. Why is it good? Look at the causal chain of actions that create a good economy, and you'll find innovation is the first link.

When innovation happens, a new product is created that does something that no other product has done before. It provides a new function, it has a new attribute that is pleasing to the eye, it makes a customer more money, or it simply makes a customer happy. It does not matter which itch it scratches, the important part is the customer finds it valuable, and is willing to pay hard currency for it. Innovation does something amazing, it results in a product that creates value; it creates something that's worth more than the sum of its parts. Starting with things dug from the ground or picked from it - dirt (steel, aluminum, titanium), rocks (minerals/cement/ceramics), and sticks (wood, cotton, wool), and adding new thinking, a product is created, a product that customers pay money for, money that is greater than the cost of the dirt, rocks, sticks, and new thinking. This, my friends, is value creation, and this is what makes national economies grow sustainably. Here's how it goes.

Customers value the new product highly, so much so that they buy boatloads of them. The company makes money, so much so stock price quadruples. With its newly-stuffed war chest, the company invests with confidence, doing more innovation, selling more products, and making more money. An important magazine writes about the company's success, which causes more companies to innovate, sell, and invest. Before you know it, the economy is flooded with money, and we're off to the races in a sustainable way - a way based on creating value. I know this sounds too simplistic. We've listened too long to the economists and their theories - spur demand, markets are efficient, and the world economy thing. This crap is worse than it sounds. Things don't have to be so complicated. I wish economists weren't so able to confuse themselves. Innovate, sell, and invest, that's the ticket for me.

Innovation - straightforward, no, easy, no. Innovation is scary as hell because it's risky as hell. The risk? A company tries to develop a highly innovative product, nothing comes out the innovation tailpipe, and the company has nothing for its investment. (I can never keep the finance stuff straight. Does zero return on a huge investment increase or decrease stock price?) It's the tricky risk thing that gets in the way of innovation. If innovation was risk free, we'd all be doing it like voting in Chicago - early and often. But it's not. Although there is a way to shift the risk/reward ratio in our favor.

After doing innovation wrong, learning, and doing it less wrong, I have found one thing that significantly and universally reduces the risk/reward ratio. What is it?


Know you're working on the right problem.

Work on the right problem? Are you kidding? This is the magic advice? This is the best you've got? Yes.

If you think it's easy to know you're working on the right problem, you've never truly known you were working on the right problem, because this type of knowing is big medicine. Innovation is all about solving a special type of problem, problems caused by fundamental conflicts and contradictions, things that others don't know exist, don't know how to describe, or define, let alone know how to eliminate. I'm talking about conflicts and contradictions in the physics sense - where something must be hot and cold at the same time, something must be big while being small, black while white, hard one instant, and soft the next. Solve one of those babies, and you've innovated yourself a blockbuster product.

In order to know you're working on the right problem (conflict or contradiction), the product is analyzed in the physics sense. What's happening, why, where, when, how? It's the rule (not the exception) that no one knows what's really going on, they only think they do. Since the physics are unknown, a hypothesis of the physics behind the conflict/contradiction must be conjured and tested. The hypothesis must be tests analytically or in the lab. All this is done to define the problem, not solve it. To conjure correctly, a radical and seemingly inefficient activity must be undertaken. Engineers must sit at their desk and think about physics. This type of thinking is difficult enough on its own and almost impossible when project managers are screaming at them to get off their butts and fix the problem. As we know, thinking is not considered progress, only activity is.

After conjuring the hypothesis, it's tested to prove or disprove. If dis-proven, back to the desk for more thinking. If proven, the conflict/contradiction behind the problem is defined, and you know you're working on the right problem. You have not solved it, you've only convinced yourself you're working on the right one. Now the problem can be solved.

Believe it or not, solving is the easy part. It's easy because the physics of the problem are now known and have been verified in the lab. We engineers can solve physics problems once they're defined because we know the rules. If we don't know the physics rules off the top of our heads, our friends do. And for those tricky times, we can go to the internet and ask Google.

I know all this sounds strange. That's okay, it is. But it's also true. Give your engineers the tools, time and training to identify the problems, conflicts, and contradictions and innovation will follow. Remember the engineering paradox, sometimes slower is faster. And what about those tools for innovation? I'll save them for another time.


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Dr. Mike Shipulski (certfied TRIZ practioner) brings together the best of TRIZ, Axiomatic Design, Design for Manufacturing and Assembly (2006 DFMA Contributer of the Year), and lean to develop new products and technologies. His blog can be found at Shipulski On Design.

The Decade's Top Performing CEOs

by Adam Hartung

I 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.

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Adam 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."

Time for Innovation in Trains?

Warren Buffet Is Betting His Farm Investing In A 190 Years Old Innovation Platform

by Idris Mootee

I love trains. I remember how happy I was when my Dad bought me the first expensive German made Minitrix train set (I was about 8). I was fascinated for months by different freight and passenger trains and had the catalog under the pillow going bed every night dreaming about them. Whenever I see trains, I think about him even sadly he is not around anymore. It is funny how toys can have so much sentimental value.

Anyone know when the railroad was invented? It depends on how you look at it. The invention of the steam engine was critical to the invention of the modern railroad and trains. In 1803, a man named Samuel Homfray decided to fund the development of a steam-powered vehicle to replace the horse-drawn carts on the tramways (it is a performance-driven innovation).

Richard Trevithick (1771-1833) built that vehicle, the first steam engine tramway locomotive. On February 22, 1804, the locomotive hauled a load of 10 tons of iron, 70 men and five extra wagons the 9 miles between the ironworks at Pen-y-Darron in the town of Merthyr Tydfil (Wales) to the bottom of the valley called Abercynnon. It was a two hours trip and was a slow train. Then in 1821, an Englishman Julius Griffiths first patented a passenger road locomotive - another great British innovation!

Almost 20 decades later Warren Buffett sees the same opportunity and decided to invest heavily in railroad; he is paying US$44 billion for a 19th century innovation the railroad that moves things from one place to another. (I don't want to bet against him, given his track record, Its stock is up 84% over the past decade, while the S&P 500 is down by 18%). He is smart. Doesn't matter what innovation coming next, people still need to move goods around in the most energy (and cost) efficient means. At least before some one crack teleporting.

Why the railroad? It is not because of nostalgic reason that the train was one of his favorite childhood toys. I am sure that's not the reason. It is not toy money. "It's an all-in wager on the economic future of the United States. I love these bets," said Beffet "Railroads are among the most energy-efficient modes of mass transportation to date. And also due for a major upgrade". What is Mr. Buffet betting on? He is betting on three things:

1. Oil pries will remain high. If oil prices regain its upward momentum, trains will be more productive then trucks in that environment when oil is king, rail is queen. His money can fuel a massive upgrade of the railroad with the most advanced innovative technologies.


2. US economy will recover and that demand will resumes for transportation. According to Buffet: I basically believe this country will prosper and more people will be moving more goods 10, 20, 30 years from now and the rails will benefit."
   
3. China economic progress will continue at a fast pace. Commodities fuel such as coal powers the economic engine of China (the factory to the world). US coal and goods are shipped via rail to Pacific ports and then shipped to China. Buffet believes China will further integrate with the US economy.

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Idris Mootee is the CEO of idea couture, a strategic innovation and experience design firm. He is the author of four books, tens of published articles, and a frequent speaker at business conferences and executive retreats.

Are you an Innovation Venture Capitalist?

by Paul Sloane

The most innovative leaders have a mindset like that of a venture capitalist. They take a portfolio view of innovation projects. The venture capitalist will invest in a basket of different start-up companies, fully knowing that most will fail. A few might break even and one or two might be successes. But one big success can pay back the costs of all the failures. Even though he is smart, the VC does not know at the outset which ventures will succeed and which will fail so initially he backs them all. As time goes on he cuts funding for the failures and gives more to the winners.

It is the same with prototypes in business. The leading innovators run many different pilots and measure progress carefully. They chop the losers but pour more resource into the successful trials. That way they are first to market with the real winners.

VCs use a portfolio approach so that they balance the risk of losers with the upsides of winners. They are comfortable with the knowledge that many of the ideas they back will fail. They are also comfortable with quantity. They receive hundreds or thousands of business proposals every year from all sorts of diverse sources. Many of these have already been rejected by several other VCs but that does not matter.

The VC sets his own criteria and selects several ideas to support and put into his portfolio. If the business plan then misses its targets or milestones or the customer reaction is poor or the technology fails to deliver then the VC is sanguine about pulling the plug on this investment. He wants to put more resources into the portfolio ideas that are working and he is quite relaxed about strangling the losers. If he can cut his losses and get out early he will.

Contrast this with a typical corporate environment where a small number of new business proposals are considered. A handful is eventually selected and then every effort is made to make them succeed. Failure is abhorred. Extra resources and efforts pour into the CEO's pet project even when the market is screaming that this one won't fly. Emotion and egos come to the fore.

Think like a VC and remember these key points:

• Quantity is good - we want lots of ideas


• If an idea has been rejected before, we are happy to consider it again


• We will select the most promising on objective criteria


• We want a return on our innovation portfolio as a whole


• We know that many of the more radical ideas will probably fail


• We will focus our resources on the winners and cut resources on the losers

Why not get a venture capitalist to speak at your next executive meeting?


If you enjoyed this post, check out Blogging Innovation's book review of "Innovation Tournaments" and its interview of co-author Christian Terwiesch.

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Paul Sloane writes, speaks and leads workshops on creativity, innovation and leadership. He is the author of The Innovative Leader published by Kogan-Page.

Is there something to like about Sara Lee?

by Steve McKee

I've kept my eye on Sara Lee for several years now, originally because the company was a poster child of the Loss of Focus principle. But in 2005 new CEO Brenda Barnes introduced a plan to streamline Sara Lee, which analysts would have described as a conglomerate but could more accurately have been characterized a beast.

Launched in 1939 as C.D. Kenny Company, over the course of the next sixty-plus years the organization acquired and divested brands in industries as varied as supermarkets (Piggly Wiggly), electronics (Electrolux), apparel (Aris Isotoner, Hanes, Champion, Playtex), shoe polish (Kiwi), and even chemicals (Oxford Chemical Corporation). It took its present name from a company acquired in 1956, The Kitchens of Sara Lee.

By the early 2000s Sara Lee's strategic chickens had come home to roost in the form of slow sales growth and weak earnings. A company that had fueled growth for decades through artificial diversification had simply become too unwieldy to manage.

That's when Barnes launched (according to internal company documents) "a bold and ambitious multi-year plan to transform Sara Lee" by divesting brands comprising 40 percent of its revenues and focusing R&D efforts on food. By 2007 Sara Lee was increasing market share faster than any of its major competitors, and last month Barnes announced that she was selling Sara Lee's deodorant and skin care brands to Unilever. When asked about the rationale behind this recent move, Barnes - no doubt for the umpteenth time over the past four years - said, "Our intent is to build a great business in food and beverage." (It was a "multi-year plan," remember?)

Count me a fan. Contrary to the strategic flailing about demonstrated by many companies when they encounter rough waters, Sara Lee has kept its focus. Barnes has consistently executed on her now four year-old strategic plan, and the nearly $2 billion take she'll get from the sale to Unilever will equip her to further strengthen Sara Lee's food and beverage brands. Which will leave a good taste in the mouth of the company's investors. Smart.

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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.

Time to Search for New Strategic Growth Opportunities

by Rowan Gibson

It had to happen. After several years of solid growth and blue sky thinking, we now have a big, dark cloud hanging over the global economy. So what do we do next? Many
companies are likely to put the brakes on strategic growth initiatives, reasoning that money is getting too tight to invest in innovation. It's the usual knee-jerk reaction. And it's totally counterproductive. In a stalling economy, companies need to find new opportunities for pushing up revenues, not just focus on cutting costs.

Judging by all the long faces at this year's World Economic Forum in Davos, the party is definitely over (at least for a while). I may be sticking my neck out here, but I'm not entirely sure I want to join the pessimists. In the past, the mighty U.S. economy has proven to be incredibly resilient, despite all the prophets of gloom and doom. In this decade alone, America Inc. took severe beatings from the Dotcom bubble, the 9/11 attacks, and financial scandals like the Enron meltdown, yet it came back stronger than ever.

Clearly, we experienced a significant slowdown in 2008 (and so far in 2009), but I'm far from convinced that America is the new Japan, destined to spend the next decade in the economic doldrums.

When the world's dominant economic player (the U.S. accounts for 22.5% of the global economy) starts sneezing, it's obvious that everyone else panics about catching flu. But let's not forget that, taken together, Europe and Japan also account for about 25% of the global economy. And while recent stock market turbulence indicates that decoupling from the U.S. economy is still mostly wishful thinking, there remains some hope that China, India and other developing markets can somehow continue to drive global growth, even as America stalls.

Some of the world's leading companies are already a lot less interested in the U.S. market. Take Nokia. Most of the company's revenue growth is currently coming from China, Asia Pacific, Middle-East and Africa. For the Finnish mobile phone giant, North America and even Europe represent yesterday's growth opportunities. Or consider U.S. based Yum Foods, owner of the fast food chains KFC, Pizza Hut and Taco Bell. Today, 50% of the company's profits come from overseas markets where business is booming (Yum is particularly focused on China, India and Russia), compared with U.S. sales which grew by a mere 2% in 2007.

The big question is whether these emerging economies, which are still highly dependent on exports (especially to the U.S.), can continue to grow their domestic markets if consumer spending in the West - and thus demand for their products - starts to plummet. Only time will tell.

One thing's for sure: now is not the time to start mothballing your company's innovation initiatives. Innovation is not a luxury reserved for the good times. It's the mainstay of revenue growth and company value and market share and competitive advantage, whatever the state of the economy.

Recessions aren't forever - the current slowdown is likely to last maybe three or four quarters at the most, which is nothing in product development terms. When the economy returns to growth, your company needs to be ready with innovative new offerings on the marketplace with which to attract current and future customers. If you put the brakes on innovation now, you won't be able to come out swinging once growth takes off again.

To illustrate the point, do you think for a minute that a company like Apple is going to stop innovating because the economy is in a downturn? Not on your life. As Bruce Nussbaum pointed out in his BusinessWeek article, during the last recession Apple got busy working on iTunes, iPod and its retail stores. When the economic skies cleared up, Apple took off like a rocket. By the same token, hands up if you think the Chinese are going to relax their innovation efforts while America tries to get its economic act together. I don't think so, do you?

This, then, is not the time to pull the plug on innovation. If the growth rate in your industry is slowing down, what you need now more than ever is new sources of revenue - new products, new markets, new customer segments. Otherwise you'll be faced with ever-declining revenues and profits from your existing business.

The thing to do now is engage your whole organization in the search for new strategic growth opportunities - and ways to make more out of the business you already have. This doesn't call for huge innovation budgets. One of the most inexpensive methods for generating lots of new ideas is simply to ask for them. Another is to look outside your organization, and involve suppliers, partners and even customers in the search for new, value creating opportunities. This kind of 'open innovation' is what my colleague Gary Hamel would call "innovating on the cheap".

By all means, take a careful look at your innovation investments and try to manage them just as efficiently as any other in the company. But don't let innovation become the victim of a shortsighted focus on bottom line results. Instead, continue to build and maintain your company's foundation for long term growth, which is centered on its capability to innovate.

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Rowan Gibson is a global business strategist, a bestselling author and an expert on radical innovation.

It's Not Too Late - What have you done this year?

by Rowan Gibson

Tom Peters once posed this question at a seminar I attended back in the early 1990s. I remember it vividly. Sitting there at one those big round tables in the ballroom at Amsterdam's Okura hotel, Tom's question connected with me like a left hook from Mike Tyson. I vigorously scribbled those words on the notepad in front of me and sat there for a few moments staring at them. What had I actually done with one whole precious year of my life? And, more to the point, what exactly was I going to do with the next one?

When I left the Okura hotel that cold December day and headed home, I made a passionate resolution: I was going to start writing the book that had long been on my mind but not on my agenda. It turned out to be one of the major turning points in my life. That book, "Rethinking the Future", became an international bestseller sold in over 20 languages and the launch pad for my public speaking career. It also gave me the great honor of working with (and getting to know) some of the smartest business thinkers of all times – luminaries like Warren Bennis, Gary Hamel, Charles Handy, John Naisbitt, Michael Porter, CK Prahalad, Peter Senge, and Alvin Toffler, among others.

As another year comes to an end, and we contemplate what lies ahead for us all in 2010, I challenge you to think about Tom's question. Sit down and write an annual report - not for your company or department, but for your own career and personal life. Doubtless you have been very busy throughout this year so far doing all kinds of... er, 'stuff'. But can you list your most 'stunning' accomplishments so far in 2009? Have you made a significant difference this year in your organization or, better yet, in your field? Have you started working on that book, or blog, or pet project, or new business you've been wanting get off the ground? Did you do something - anything - that could one day be legendary? What will your children or your grandchildren boast to their friends about you? Molly Sargent, OD consultant and trainer, asks a powerful question: "Have you invested as much this year in your career as in your car?"

Sometimes it takes an exercise like this to jolt us out of our complacency and get us to make those hefty adjustments to our careers and our lives that we know we should be making but somehow haven't yet gotten around to. So, having done the self assessment looking back at 2009 so far, the next challenge is to look ahead to 2010. What are you going to do next year that could meet the test of being truly 'Wow'? What projects, goals, values, are you going to adopt a 'fanatic's posture' toward? How exactly do you plan to make a dent in the universe?

Most people start the year with some kind of New Year's resolution. The usual suspects include "going on a diet", "joining a fitness club" or "reducing my personal debt". But how many of those resolutions ever get beyond January? How many even get off the starting block? I believe the reason so few resolutions ever go anywhere is that most of us are aiming too low. Instead of resolving to lose a few pounds before Easter (how inspiring is that?), why not aim to create an innovative new diet that will become the basis for a bestseller that will turn you into the next weight-loss guru? Instead of aiming to reduce your personal debt, why not aim to start building the business that will eventually make you completely debt-free and financially independent?

The greatest piece of advice I ever followed (which came from my friend, Al Ries) was just one single word: "focus". Make a list of all the things you will inevitably end up doing next year unless you intervene. Then make a list of what you would truly love to do, and where you would love to be. Throw the first list away and start crossing things off the second list one until you get down to just one big career-changing or life-changing goal. Then resolve to focus all your energy in 2010 on that one big thing and treat all else as secondary. Pursue your goal tenaciously as if it's the only thing worth doing for the rest of your life. View it as a grand adventure. Before I wrote one single word of Rethinking the Future, I bought myself a T-shirt and had Helen Keller's famous mantra printed in large red letters on the front: "Life is either a daring adventure, or nothing." It certainly worked for me.

Or as advertising legend Leo Burnett once put it, "When you reach for the stars you may not quite get one, but you won't come up with a handful of mud either."

If you're gutsy enough to follow your dream next year, and to work like hell to make it happen, I salute you. May 2010 bring you and your family wealth, health and happiness.

Or even better, 2009 isn't over, yet...

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Rowan Gibson is a global business strategist, a bestselling author and an expert on radical innovation.

Innovation Regeneration

by Rowan Gibson

In biology, there's an old saying: "Growth is the only evidence of life". A lot of investors on Wall Street seem to echo these words when they evaluate today's corporations - and business leaders are getting the message. At GE, for example, CEO Jeff Immelt is on the hook to deliver an incredible 8% of organic growth each year. This represents around $15 billion of new revenue - equivalent to the combined annual revenue of America's entire bookstore industry, or fitness industry, or music production and distribution industry! No wonder "Driving Growth" has become today's dominant management mantra, not just at GE but at companies all over the world.

Yet if we go back to biology for a moment, we realize that there is more subtlety to organic growth than we may have previously imagined. In fact, we find out that life actually requires two very different kinds of growth.

The first kind of growth is about cell multiplication and organization - it's about increasing the size and strength of the organism until it reaches physical maturity. In the case of human beings, it's the process that starts with a single cell and finally produces the estimated tens of trillions of cells that make up our adult bodies.

The second kind of growth, however, is not about size; it's about longevity. It's the process of self-renewal by which our body cells are continually replaced or repaired, as the need may be. If this process - of growing new cells to replace those that deteriorating - could somehow be sustained, human beings could theoretically live forever.

The biology of business is not dissimilar; companies need both kinds of growth as they progress through their life cycle. In the early years, most companies are primarily concerned with scaling up their organizations as rapidly as possible, with a pressing need for systems or processes to help them manage their ever-expanding business. Eventually, though, this kind of growth tends to flatten out and the company reaches a level of maturity in terms of its size and strength, just like humans and other biological organisms do. As my colleague Gary Hamel likes to put it, "Trees don't grow to the sky".

Again, consider GE. In the last five years of Jack Welch's tenure, which ended in the year 2000, GE's market value grew from around $50 billion to somewhere between $350 and $400 billion. But to do that again over the next five years, GE's market value would have had to go from $450 billion to $3 trillion! Extrapolating from the year 2000, this meant that by 2005 GE would have to represent 20% of the entire New York stock exchange! The chances of that happening were very remote. Here's the point: it's simply a lot easier to grow by 100% a year when you are a $10 million firm or even a $100 million firm than when you a $50 billion firm. Because to achieve that kind of growth rate at that kind of size, you would practically have to recreate half of the economy every year.

Of course, expanding the business remains crucial even when a company's growth-rate has naturally flattened out, but at some point increasing the scale of the organization is no longer the main issue (in fact, it may even need to get smaller to become more profitable). That's when the emphasis shifts to a different kind of growth - the need to grow new sources of profit to replace those that may be losing their economic value. These might be new product ideas, new services, new strategies, new markets, new customers, new business opportunities, or new competencies - whatever it takes to offset the long-term irreversible decline in the economic efficiency of the company's core business model.

This is the challenge that currently faces companies like McDonald's or Coca-Cola or Microsoft or Dell. It's the task that bedevils Hollywood as it watches box office figures shrink and DVD sales stalling in a world of digital downloads. It's the hurdle for big pharmaceutical firms as they confront declining R&D yields, escalating price pressure, and the growing threat from generic drugs. It's the big headache for traditional airlines as they compete with industry revolutionaries like Southwest, JetBlue, Ryanair, Easyjet or AirAsia. For all of these businesses, and many more, success now hinges not on size but on the capacity for strategic renewal.

Like human beings, organizations start to grow old and die when they lose the power to renew themselves. That's why it's crucial to build a deep capacity for self-renewal - the capacity to replace the old and decaying with the fresh and new on a perpetual basis. The goal is to be "forever young". And the fountain of youth - the only real source of renewal on the longer term - is deep, strategic innovation. It's not going to come from anywhere else.

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Rowan Gibson is a global business strategist, a bestselling author and an expert on radical innovation.

Is Innovation Expensive?

I was asked last night how companies could afford to allocate scarce resources to innovation in these unprecedented times. When every extraneous expenditure is cut back to preserve cash flow how can it be justified to lavish money on experiments that might fail?

You do not get innovation for free - you have to allocate time, money and people to the search for new products, services, methods etc. However, innovation can lead to powerful cost savings, profitable new products and competitive advantage. Indeed right now the main benefit of innovation might be survival. If you just cut costs and don't innovate you will be bypassed in the market by more agile competitors.

There are inexpensive ways to achieve innovation. Let's divide activities into three categories.

1. It costs virtually nothing to:

• Communicate a vision of innovation


• Set goals and objectives for ideas, prototypes and innovations


• Ask your people for ideas


• Ask customers for ideas


• Ask suppliers for ideas

2. It costs very little to:

• Run brainstorm meetings


• Set up an intranet based suggestion scheme


• Evaluate and select the best ideas


• Build models and prototypes


• Ask customers to evaluate your prototype products or services


• Implement small incremental innovations in your products, services and methods


• Empower people to try more initiatives in their areas


• Investigate new collaborations and partnerships

3. It costs a lot of money to:

• Roll out major new products or services


• Try an entirely new business model


• Re-engineer your IT systems

So you should do a lot of items from Category 1. Generate many ideas from all sources - it costs very little.

You should do a few things from Category 2. Definitely move the best ideas to the prototype stage and evaluate them (but kill them if necessary).

You should think carefully about items from Category 3, but be prepared to allocate some of your scarce resource in this area.

Innovation involves making bets. Often these bets fail. But you have to stay in the game and keep making small bets until one or more come off. Innovation is not free, but it can be done on slender means if you adopt this kind of approach.

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Paul Sloane writes, speaks and leads workshops on creativity, innovation and leadership. He is the author of The Innovative Leader published by Kogan-Page.

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?

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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.

Innovating Through Downturns

While most individuals and organizations natural reaction to an economic downturn is fear and retrenchment, they also present a time of great opportunity.

Where would Microsoft be if they hadn't continued investing through the downturn of the early 90's?

• Microsoft may never have finished the hugely successful Windows 95.

Where would Apple be if they hadn't continued investing through the technology crash of 2001-2003?

• Apple may never have fully realized the promise of the iPod and subsequent iPhone.

When a recession arrives, great opportunity presents itself:

• The unemployment rate increases (more available workers)


• Interest rates drop (lower cost of capital)


• People become fearful of losing their jobs making it easier to recruit from companies reducing or eliminating their innovation investments (increased labor mobility)


• People are more open to moving if a spouse's job is eliminated or at risk (increased labor mobility)


• When a recession arrives, it is easier to acquire tax breaks or other incentives for expansion, new sites, etc. (lower investment costs)

So, if companies have positive cash flows or significant amounts of cash on their balance sheet, or promising ideas to invest in, then there is no better time to invest. Companies with the courage and financial capability to invest in innovation through a downturn, absolutely should.

In addition to all of the other benefits, there is no better opportunity to achieve competitive separation through continued investment in innovation.

It does, however, take a strong CEO and steady board to have the courage and conviction to make such an investment. Innovation is not a perfect science and requires a tolerance for failure and a long-term commitment.

In today's short-term Wall Street quarterly profit-driven corporate reality, investors' short-term outlook may be the biggest impediment of all. But, smart organizations will find strategic solutions to overcome this impediment.

Organizations should take the following strategic actions to maintain or expand their innovation initiatives, despite the current global economic downturn:

1. Secure the leadership flexibility capable of continuing to invest in innovation despite financial pressures


2. Identify resources that you would like to have had access to during good times, that you might now have access to such as:


• Labor in scarce specialties


• Affordable capital


• Scarce real estate


3. Increase competitive monitoring to identify opportunities that may be created in areas where the competition reduces previous innovation investment


4. Increase customer research to identify opportunities to refine your ability to deliver products and services that deliver increased customer value, ideally at lower cost


5. Improve your innovation processes to improve your ability to innovate more quickly and effectively than your competition


6. Improve your organizational agility to increase its flexibility to adapt to changes in market conditions caused by the downturn and to shift resources efficiently and with increased speed

Organizations that take these necessary strategic actions, will come out the other side stronger than the competition, stronger than ever before, and create opportunities to preserve or attain market leadership.

Happy innovating!