Waiting for the economy? That won't work.

by Adam Hartung

Every day it seems someone tells me they "are looking forward to an improved economy." When I ask "Why?" they give me a horrified look like I must be stupid. "Because I want my business to improve" is the most frequent answer. To which I ask "What makes you think an improved economy will help you?"

This recession/depression is the result of several market shifts. What people/businesses want, and how they want it, has changed. They no longer are willing to part for hard earned (and often saved) dollars for the same solutions they once purchased. They want advances in technology, manufacturing processes, communications and all aspects of business to give them different solutions. Until that comes along, they are willing to put money in the bank and simply wait.

Take for example restaurants. Many owners and operators are complaining business was horrid in 2009, and still far from the way it was years ago. And regularly we hear it is due to "the recession. People fear they'll lose their jobs, so they don't eat out as often." Nicely said. Sounds logical. Makes for a convenient excuse for lousy results.

Only it's wrong.

In "Dinner out Declines: Economy Not Sole Factor" MediaPost.com does a great overview of the fact that dining out started declining in 2001, and has steadily been on a downward trend. Across all age groups, eating out is simply less interesting - at least at current prices. When the recession came along, it simply accelerated an existing trend. Increasingly, people were less satisfied with cookie-cutter, similar establishments that had similar food (almost all of which was prepared somewhere else and merely heated and combined in the restaurant) and exorbitant drink prices. For years restaurant prices had outpaced inflation, and simultaneously family changes - along with the growth of better prepared foods at grocers and specialty markets - was enticing people to eat at home.

This is true across almost all industries. A revived economy will not increase demand for land-line phone service. Nor for large V-8 American autos costing $60,000. Nor for newspapers, or magazines - or even books most likely. Or for oversized homes that cost too much to heat and cool. In fact, it was the trend away from these products which caused the recession. People simply had all of these things they wanted, so they stopped buying. Fearful of economic change, they simply accelerated a trend brought on by shifts in technology and underlying ways of doing things. When we once again talk about better economic growth in America it will not drive people to these purchases. Rather, people will be buying different things.

For the recession to go away requires a change in inputs. Providers have to start giving buyers what they want. They have to understand market needs, and give solutions which entice people to part with their money. Waiting for "the economy" will make no difference. Government stimulus can go on forever, but it won't create growth. It can't. Only new products and services that fulfill needs create growth. That will cause spending (demand), which generates the requirement for supply.

There are companies that had a great 2009. Google, Apple and Amazon are popular names. Why? Not just because they are somehow "tech" or "internet" companies. 2009 saw the demise of Sun Microsystems and Silicon Graphics, for example. The difference is these companies are studying the market, looking to the future and introducing new products and services which meet market needs. Because of this, they are growing. They are doing their part to revitalize the economy. Not with stimulus, but with products that excite people to part with their cash.

Those who are waiting on the economy to improve are destined to find a rough road. An improving economy will be full of new competitors with new solutions who did not wait. To be a winner businesses today must be bringing forward new products and services that meet today's needs - not yesterday's. And if we start getting winners then we will climb out of this economic foxhole.





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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."

Heads of Banking Innovation are Now Bottoms

by Chris Skinner

Over the past year, most of the banks I deal with have dropped the word 'innovation' from their mantra. It's strange but true that the focus upon being innovative had been such a focal point during the 2000s and now it's all over.

To illustrate the point, the Top 10 American banks used the word innovation' an average 1.2 times per annual report in 2000, rising to over six times per report by 2007.

Heads of Innovation were popping up everywhere and innovation was the key to being different, attracting customers, growing business and increasing revenues.

Now the Heads of Innovation have all gone and Innovation is at the bottom of the banks 'to-do' lists... in other words, the Heads have become Bottoms.

Banks have realised that the last thing they want to be is innovative.

They want to be boring.

So innovation has disappeared over the parapets as fast as Tiger Wood's pants.

But that's not the end of the story.

There will still be some innovation in banks. The question will be: which ones?

Let's roll back to the beginning.

Innovation became a focus for banks because technology was moving at such a pace, and client demands with it, that any bank which was not seen to be innovative felt they would lose business.

Hence, as is the way with banks, they all appointed a head of innovation, used the word 'innovate' in all of their customer marketing materials, and appeared to be innovative by doing funky things like using employees to advertise the bank and giving away pens in branches.

That's all the token gestures of innovation.

Meanwhile, some banks were actually being innovative, but just weren't talking about it that way.

Banks such as Goldman Sachs who were creating incredibly innovative trading systems that ensure best price for their investors, which is why they get so much investment business, whilst creating huge market volatility.

Banks like JPMorgan Chase who invented the whole concept and trading of Credit Default Swaps. By being the first mover to invent and then trade these products, JPMorgan were not only the first into profits from such instruments but the first out of the losses created by them, as were Goldman Sachs.

Very clever.

Banks such as Wells Fargo meanwhile, have made it a clear focus to engage customers using social media, and see this as a differentiation in the customer experience. Rather than having a head of innovation in this area however, they instead invest in creating platforms to engage customers in remote social interactions via blogs, virtual worlds, YouTube, Facebook and Twitter.

That's innovation, but it is not seen as token innovation but core developments in customer engagement.

For the average bank however, innovation is not in their blood.

This is because innovation demands doing things in a different way, and banks don't like to be different. They want to be the same.

They don't want to break away from the crowd, but want to do things in robust, proven, low risk ways.

They don't want to be leaders but lemmings, all running in the same direction doing the same thing in a nice, safe, undifferentiated manner.

They cannot invest in something new and different, because it has to have a clear business model, financial analytics to support the investment, clear returns on investment and absolute management buy-in and commitment.

All of the above would never happen with something that is not proven, not clear, not justified, and unable to be supported by a strong financial business case.

Hence innovation lies in a heap at the bottom of the bank's corporate agenda.

So what are we really talking about today, when it comes to innovation in banking?

We are talking about banks that create cultures of being prudent risk avoiders, entrepreneurial innovators, excellent customer engagers, aggressive market makers or active acquisitors.

These cultures sit at opposites with each other and rarely would you find a bank that could be all in one.

For example, I wouldn't put Wells Fargo in the bracket of prudent risk avoider as they see themselves as an excellent customer engager; Goldman Sachs are an aggressive market maker, as are JPMorgan, but they probably wouldn't use the word prudent; Citi are now a prudent risk avoider having learned their lesson of being an active acquistor; and Lloyds TSB were always a prudent risk avoider until they became an active acquistor.

These cultures are driven from the man or woman at the helm - a fish sets its direction from the head but also begins to rot first from the head - and it is the man or woman in the driving seat that creates the innovation and risk culture of a bank, not the label 'innovation'.

That is why you can find banks that are hybrids of this model - such as Barclays where John Varley has created a retail and commercial banking operation that is prudent whist Bob Diamond runs an aggressive market making operation in BarCap.

There are other banks that demonstrate this mix, and it is purely a reflection of the management team.

For example, HSBC is a prudent risk avoider under Chairman Stephen Green and CEO Mike Geoghagan, but is also an entrepreneurial innovator thanks to Chief Technology and Services Officer Ken Harvey.

All in all, the lesson learnt for most banks is that innovation is not a function or label, but a culture and so it is gratifying to see innovation has been removed from the mantra of the banks as a label.

Now let's see which banks create innovative cultures over the next decade, and watch them grow.


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Chris Skinner is Chairman of the Financial Services Club and regular commentator on banking at The Finanser.

Uncertainty of Economic Growth Remains

by Steve McKee

The National Federation of Independent Business (NFIB) says that small business optimism grew slightly in January. Slightly. The NFIB Optimism Index currently sits at 89.3, ten points below where it was prior to the recession.

Commenting on the index, Lawrence Mishel, president of the Economic Policy Institute, said:


"To absorb the over 15 million officially unemployed workers in this country... job openings and hirings must rebound dramatically. This report offers no indication that this is happening."


The NFIB's report is consistent with Decision Analyst's January Economic Index, a survey of several thousand households based on nine different economic measurements. The index remained unchanged for the third month in a row, stuck at 94, well below the 110 which signals an economic expansion. This index tends to lead the U.S. economy by up to a year, suggesting the economy will remain sluggish throughout 2010.

That's what the CEO of Unilever, one of the world's largest consumer product companies, is preparing for. Speaking of the economy, Paul Polman says:


"It's not going to just drastically change in the next 12 to 24 months. We will be in for a long and slow recovery, and that's what we're planning our business on."


Policy makers continue to point the finger at the difficulty of securing business credit. But the indexes above suggest the bigger problem is simply a lack of revenue growth, meaning employers simply don't need to hire. That sentiment is borne out by the fact that fewer than one in ten owners surveyed by the NFIB added employees in January, while more than twice as many cut jobs.

Businesses don't want to borrow money as long as economic uncertainty remains high. What we most need now is normalcy, not big ideas. Let's hope the politicians are paying attention.


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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.

Picture - Trends for the 2010s

by Venessa Miemis

Here are a few recurring themes that have been popping up on my radar.
(click to enlarge)



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Venessa Miemis is a Media Studies graduate student at the New School in NYC, exploring what happens at the intersection of technology, culture, and communication. Connect with her at www.emergentbydesign.com and on Twitter @venessamiemis.

Speed vs Strategy

by Steve McKee

Cristobal Conde is CEO of SunGard, a leading global software and IT company. In an interview with the Wall Street Journal, Conde was asked what has been the best move he's made during the downturn. He answered, "We could have generated more earnings by having more layoffs. We wanted to protect R&D. We wanted products ready to go at the end of the cycle. I saw a huge competitive opportunity to protect programmers when others weren't."

Conde's perspective is smart, but rare. Our research shows that most companies overreact to a downturn and cut not just fat, but muscle. If they go beyond what's absolutely necessary, that can easily compromise their future. Conde turns the fear on its ear by asking his employees "What is it you need to do now so you will remember the crisis as a gift?"

Chilean by birth, Conde has developed a taste for a uniquely American institution: NASCAR. Perhaps it's because he sees in racing similar patterns to those of business. "Going into the crisis is not that different from going into a turn," he says. "You slam on the brakes. In the turn, the most important thing is your position relative to other cars. I've been telling people, 'Focus on our relative market shares rather than overall volumes you can't control. What are we doing to improve our position?' After the turn, you take that better position."

Conde can't guarantee that SunGard will come out of the recession a winner, just as even the best NASCAR drivers don't know when they'll cross the finish line first and when they'll come up short. But races are decided by the strategy of the driver as much as the speed of the car.

Drive 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.

Welcome to 2010 - Now What?

by Steve McKee

The best thing about hope is that it springs eternal, especially at the beginning of a new year. 2009 is behind us, 2010 lies ahead and we have to believe that the coming year will be better than the last.

There is, of course, no telling. I recall in late 2008 looking forward to the calendar turning, hoping that with a new year the craziness of that fourth quarter would settle down and enable us to rebuild our economic prospects. Alas, the recession wore on. And on. The downturn has now lasted more than two years, and it simply has to be over. Doesn't it?

Time will tell. In the meantime, those of us who have any say over investment and job creation should go about our business with the intent of bringing about growth. We don't have any other choice, really - nor would we want to do anything else. As bad as last year was, we survived, and most of our companies are leaner and meaner for it. That's the silver lining.

So we get up, we go to work, we look ahead, we make decisions, we take risks. Just as we always have, and just as we always will. As I alluded to in my final FindYourNerve.com post, we are blessed to operate within the most productive, dynamic, and resilient economic system the world has ever seen. As each of us does our part, the whole will take care of itself.

Image Credit: Witness

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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.

The Worst Decade Ever :-)

by Steve McKee

Now that 2009 is over, I have bad news and I have good news.

First the bad news. According to the Wall Street Journal, stock performance in the decade now ended was the worst ever - worse even than the woeful 1930s. For the past ten years, the value of NYSE-traded stocks has declined by an average of 0.5 percent a year. Compare that to the 1990s, when the average annual increase was an incredible 17.6 percent.

Factor in inflation and it gets even more depressing, with the S&P 500 declining an inflation-adjusted 3.3 percent annually. During the 1930s, stocks showed an inflation-adjusted (deflation, really) annual gain of 1.8 percent. And the decade now ending saw many notable companies fall out of the S&P 500, for reasons of scandal (Countrywide, Enron), excess (Bear Stearns, Merrill Lynch, Lehman Brothers, Wachovia), misfortune (Circuit City, Lucent, Reebok) and just plain changing dynamics (AT&T, Compaq, Dow Jones & Co., Maytag, Wyeth).

Pretty discouraging, when you think about it. But here's the good news. The vast majority of American corporations found a way to move ahead during the turbulent ten years past, and all of them - all of us - are the stronger for it. We face challenges ahead, but having muddled through the most difficult decade in two centuries we'll face little that will surprise us. And those of us who have maintained our focus, kept our nerve and remained consistent throughout should profit all the more.

Here's to 2010, the dawn of a new decade. May the old one rest in peace.

[Note: Today marks the one-year anniversary of this blog. Prior to launching it last December I wondered - and worried - if I would have enough to write about. If there's any silver lining to the year now past, it's that it provided plenty of content for a blog called "When Growth Stalls." Let's hope next year is a little tougher on me.]

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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.

Should We Revive Dying Brands and Companies?

Or are we better off creating new ones? Does "The Circle Of Life" apply here?

by Idris Mootee

We make assumptions that it is the management team responsibility to extend or prolong the life of any companies even they have fewer reasons to exist. Management is different from practicing medicine, although sometimes I am called the strategy doctor. Instead of wasting resources and energy to save a company or a brand, should we just take whatever assets and redeploy them? In life, the cycle of life is the natural order of things.

Although we do live longer now, death is inevitable. Technology is the same. Should corporations be the same? Saab is at the end of life. Should it deserve a second life? Apple had its near death experiences and came back stronger. Many argued at that time Apple should be sold to Sony. Wang Computers thought they were beating IBM and could become the next IBM. IBM was also close to disappearing from the scene just 15 years ago.

Management consultants usually have a keen preference for prolonging corporate life. I guess to keep them spending. The pharma companies don't want patients to die, just stay sick. Why do we care about extending the life of large companies or big brands? Is it because they can afford our fees? Or we have a love for them. Yes, build to last. Business schools love transformation stories because they make great business cases, and portray CEOs as heroes. For many large companies, transformation and renewal is the only source of survival.

The world of fashion has a lot of comeback stories, although they are generally not sophisticated from a management capability perspectives compared to the GEs of the world. Think how Burberry, Adidas, Dior, and Abercrombie & Fitch all have found prosperity in their new life. Many business school case studies have been written about of how brands were "brought back from the graveyard." Unfortunately, however, the lessons are often so idiosyncratic. There 100 times more cases where companies tried revitalizing old brands by hiring new CMOs and advertising agencies and throwing big money towards advertising, hoping to rebuild a great brand even when there wasn't a relevant product or service or a sound business model behind it.

For those fashion companies, it is about hiring the right designer (call Tom Ford or Marc Jacob) and for other businesses, whom do you call? The designer is often viewed as the critical component to reengineering a brand, and total attention must be paid to the brand in an effort to return to its essence and reason for being successful in the first place. It used to be case that you could recruit a top CMO and things will work out. This is not working anymore. You need a master strategist, a great storyteller and a change agent, all in one person (call Indra Nooyi or Steve Jobs). In fashion, you go back to the essence of the brand. In other business what do you do? How do you rediscover your core or find a new core?

Successful transformation and re-invention rests on two major premises: first, that our time is characterized by a rare confluence of new behavior and economic disruption, and second, that the "new global reality" is turning toward a "whole new emphasis on innovation". I was speaking to a group of graduating Ivey MBAs on global strategy. You can check them out at slideshare below:

Ivey Lecture Global Strategy Short

View more documents from Idris Mootee.

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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.

Panera Bread Rising

by Steve McKee

"Most of the world seems to be focused on the Americans who are unemployed. We're focused on the 90% that are still employed."


Those are the words of Ron Shaich, CEO of Panera Bread, the 1,300-unit bakery-cafe that has found a way to thrive in spite of the recession. Its formula? A combination of smart financial management and keen understanding of its core customers, most of whom remain gainfully employed (and ever-more attuned to good value).

Rather than cutting corners, Panera has focused on offering more to its broad range of middle income customers, including free wi-fi access and frequent new menu offerings. According to Shaich:


"In many ways, we're renting space to people and the food is the price of admission,"


Panera COO Rick Vanzura agrees, saying, "A bunch of folks have been cutting quality to cut price to go after the marginal customer. We said a better strategy that addresses a bigger group of people is providing better value."

The strategy is working. In 2008 (a very bad year for most fast-casual restaurants), Panera Bread grew by double digits. In 2009 - the worst economic year in generations - the company managed to keep same store sales from declining, and in the third quarter actually increased them by 3 percent. Food industry analyst Darren Tristano pinpoints why:


"Panera's on-trend with what consumers are asking for: fresh, customizable, convenient, won't break the bank."


Panera Bread has been able maintain its focus because of careful cash management. Rather than using debt to expand, assuming the good times of years past would keep on rolling, the company grew slowly and deliberately over the past decade. That kept it healthy from a cash flow perspective and prevented it from having to cut corners or cut margins (or both) when times got tough. As Shaich says:


"Every chain is cutting something - portion size, quality, hours of labor. The result is that ultimately the customer feels it."


Most players in the restaurant industry - in most industries, for that matter - think the current game is all about price. Panera Bread is an all-too-rare exception, demonstrating that companies that keep their focus, nerve, consensus and consistency can thrive even in bad times. I'm a fan.

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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.

Elevating HR to Drive Innovation

by Rowan Gibson

It's every employee's nightmare in recessionary times: finding a "pink slip" in the pay envelope, or getting a fateful phone call from HR. Over five million workers in America have had that gut-wrenching experience since the economy hit a wall in 2007. And this year the global layoff tsunami will claim millions more jobs worldwide. So I imagine that, right now, a lot of HR Directors are feeling about as popular as bird flu. But they need to take heart. Even in the midst of the worst economic woes for several decades, a new day is dawning for Human Resources. It's the day that HR finally gets the strategic recognition it deserves; the day that HR steps up from a mundane back-office function to play a center stage role.

My friend, Dave Ulrich, professor of business at the University of Michigan, has long argued that HR leaders should assume a more vital, strategic role inside their companies. Rather than merely busying themselves with everyday stuff like policies, payroll, and picnics, Ulrich says that HR professionals should be striving to build and strengthen the unique set of organizational capabilities that give a company its competitive advantage. In essence, that means developing a particular mix of resources, processes and values that makes it hard for rivals to match what the company does.

Sounds good in theory. But before the HR department starts packing boxes and moving upstairs, we should first give some serious thought to exactly which organizational capabilities today's companies should be building. Let's face it, most traditional forms of competitiveness - cost, service, technology, distribution, manufacturing, product design - can now be quite easily copied. Sure, these variables may still provide a company with a temporary head start, but over time they no longer offer the basis for a sustainable competitive advantage. So what do we have left? The answer, in a word, is radical innovation. As my colleague Gary Hamel puts it in "The Future of Management":


"In a world where strategy life cycles are shrinking, innovation is the only way a company can renew its lease on success."


What we're finding out in today's value-based economy is that radical, game-changing innovation is literally the only strategic weapon we have left, in the sense that it's the only capability that can create value for customers in a way that is difficult for competitors to imitate.

That's why innovation is now such a major strategic priority for every company on earth, not to mention national and even regional governments. But it's also where the real problem starts. Because, until now, very few organizations in either the private or the public sector have managed to turn innovation from a buzzword into a core competence - a wall-to-wall, top-to-bottom enterprise capability. Most of them wouldn’t even know where to start - or, indeed, how to sequence - the capability-building process.

As I have written before in this column, making innovation a systemic organizational capability is a complex and multifaceted challenge. It simply cannot be solved with some Band-Aid or silver bullet. Instead, it requires deep and enduring changes to leadership focus, performance metrics, organization charts, management processes, IT systems, training programs, incentive and reward structures, cultural environment and values. All of these elements need to come together and mutually reinforce each other as a system in order to institutionalize innovation. Otherwise, a company's efforts to make "all-the-time, everywhere" innovation happen will be doomed.

What companies need is not merely a pro-innovation mindset, or better brainstorming techniques, or "hot teams". The challenge is not about quickly coming up with a few new products or services to get the sales curve moving upward. It's about making innovation a new organizational way of life; something that permeates everything a company does, in every corner of its business, every single day. It's about infusing the entire lifeblood of an organization with the tools, skills, methods and processes of radical innovation.

That's the true imperative for rethinking the role of Human Resources. As soon as we recognize the strategic value and the immense organizational transition that's involved in building a corporate-wide innovation capability, HR automatically moves to center stage.

Who else but HR leaders would be capable of turning a company's strategic intent with regard to innovation into tangible everyday action? Who else could make the necessary changes to executive roles and goals, political infrastructures, recruitment strategy, broad-based training, performance appraisals, awards and incentives, employee contribution and commitment, value systems, and so on? Who else could build and foster the cultural and constitutional conditions - such as a discretionary time allowance for innovation projects, maximum diversity in the composition of innovation teams, and rampant connection and conversation across the organization - that serve as catalysts for breakthrough innovation? Who else could ensure that each employee understands the link between his or her own performance (as well as compensation) and the attainment of the company's innovation strategy? In short, who else but HR leaders could create a company where everyone, everywhere, is responsible for innovation every day—whether as an innovator, mentor, manager, or team member?

The sad reality is that too many CEOs overlook HR's potential in this regard. They still think of HR solely in terms of regulatory compliance, hiring and firing, employee comfort, compensation and benefits. Notably, Jack Welch, illustrious ex-CEO of GE and arguably one of the greatest corporate leaders of our times, sees things differently. In a recent column in BusinessWeek, he writes that "every CEO should elevate his head of HR to the same stature as the CFO." I couldn't agree more. It's time for HR to step up to the plate and take on the strategic role of innovation capability builder.

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Rowan 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.

Some Decisions are Forever

by Steve McKee

Earlier this year I commented on a decision by Panasonic to rein in R&D investment in flat-panel televisions and instead expand its reach into the entry-level market (see "Is Panasonic Kissing Its Future Goodbye?").

The company appeared to be eyeing significant market share opportunities offered up by the 2009 conversion to digital TV in the U.S. It was a bold move, because while it's easy to cash in your brand equity and go down-market, once the decision is made it's nearly impossible to reverse course.

Last month another famous brand made that fateful choice. Liz Claiborne, Inc. agreed to license its namesake brand exclusively to J.C. Penney, ending decades-long relationships with department stores like Macy's, Dillard's and Bon-Ton. The Claiborne brand has long been in decline, and a Macy's spokesperson said the retailer could no longer justify expanding the line because of customer confusion between it and the "Liz & Co." sub-brand that was being sold exclusively at - you guessed it - J.C. Penney.

The Claiborne brain trust may have created their own problem by overextending the brand, a common manifestation of the loss of focus that afflicts many stalled companies. That said, this new decision may work out. It's not the first time J.C. Penney has partnered with respected, high-profile designers (Polo Ralph Lauren and Nicole Miller, to name two), and Penney is doing better than many of its rivals in this tough economy.

As with Panasonic's decision, however, this one will be interesting to watch, and will serve as yet another object lesson for any company struggling with stalled growth. Going downscale - where all the value-conscious buyers are these days--can be extremely tempting. But if you do it, make sure you're extremely comfortable with your decision. There's no turning back.

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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.

Has Old Navy Righted its Ship?

by Steve McKee

It's a classic "When Growth Stalls" scenario: start with a fast-growing and profitable company; add an aggressive new competitor that begins to successfully woo the same customers; watch as the previously flourishing company loses its nerve, its focus, and its consistency, leading to languishing sales and lackluster results.

When Gap, Inc. launched Old Navy in 1993, the spare retail chain sporting affordable merchandise and wacky ads was an immediate hit. Rather than risk losing focus at brand Gap (which was near its zenith atop the retail world), parent company Gap, Inc. used Old Navy as a counterforce to the big discount stores that were trying to ride on Gap's fashion coattails by ripping off its designs.

Within four years Old Navy sailed past the billion-dollar revenue mark, accounting for nearly half of Gap, Inc.'s top line and some 40 percent of its profits. Offbeat commercials featuring has-been celebrities made the chain the talk of the retail industry, as well of teens and young families that comprised its core market.

Enter H&M, the trendy Swedish retailer, which opened its first U.S. store in 2000 offering discount apparel with a more fashionable edge. Fearing that H&M's success marked a sea change in the industry, Old Navy shifted its focus from the basics to more trendy, upscale mechandise. It didn't work. Sales fell by more than a billion dollars between 2006 and 2008, with last year's same store sales sinking an incredible 17 percent.

It was then that Gap, Inc. decided to do something about it. As the Wall Street Journal put it, "Returning Old Navy to its roots was the central theme of Gap's remaking of the brand." The Journal quoted Old Navy's interim president, Tom Wyatt, as he reflected on the brand's original recipe: "We got tired of it. The customer never did."

Eighteen months ago Old Navy recommitted to its original focus and began redesigning more than a thousand stores, hoping to leverage consumers' renewed frugality in this toughest of tough economies. Year-to-date 2009 revenue is up 1 percent, due largely to a third quarter same store sales increase of a healthy 10 percent (the first rise in five long years). Pardon the pun, but Old Navy seems to have righted its ship.

There's no guarantee that, having returned to its former course, Old Navy can count on smooth sailing. The retail industry is too dynamic to let any successful company alone. But Old Navy's experience is one more point of evidence that when even the most successful concept runs into a rough economy, a tough competitor, or some other external threat, destructive internal dynamics can turn it into its own worst enemy.

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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.

Find Your Nerve Guest Post

Over at www.findyournerve.com I have written a guest post about strategy in the downturn. The central question being:

Are you going to be nervous in the downturn, or nervy?

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Braden 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.

Detroit's Decline and Fall

by Rowan Gibson

In March 2008, British Airways discontinued its decades-old daily service between London Heathrow and Detroit. Not exactly world-shattering news, you might think. But BA's decision was quite significant. They made it because passenger numbers had dwindled so pathetically low that the flights were no longer profitable. It's just one of a whole kaleidoscope of symptoms that signaled the Motor City's dismal decline. Then, Detroit's "Big Three" automakers were forced to beg for billions in bailout money to stave off bankruptcy (although Ford opted out). Yet, as far as I can see, not one of them seems to have a credible plan for long-term viability. All of which begs the burning question: How could such powerful car giants ever get in this sorry state?

Over twenty years ago, auto-industry analyst Maryann Keller wrote a book called "Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors". It recounts hair-raising stories of GM's arrogant excesses. One story involved a sales VP attending a regional sales meeting who insisted that his hotel room have a refrigerator filled with soft drinks. Since the hotel couldn't get the fridge up the stairs, GM's local people persuaded the hotel to take out the room's window and part of the wall, then use a crane to insert the fridge through the hole! Another story involved a junior GM staffer who was assigned to stand for ages outside a hotel in a snowstorm, just so he could be there to open the door for an assistant general sales manager who was flying in from Central Office. GM even bought one of the hotel elevators and blocked it off so that this manager would have his own private elevator to use. And, as if that wasn't enough, the kitchen staff was instructed to test his glass of morning orange juice with a thermometer because Mr. Important wanted it served at a particular temperature!

This was the kind of insane stuff that continued to go on while the Japanese were stealing percentage point after percentage point of GM's U.S. market share. Fast forward to today, and we found that the five best-selling automobiles in North America in 2008 were (in this order): the Toyota Camry, the Honda Accord, the Toyota Corolla, the Honda Civic, and the Nissan Altima. And, bailout or no bailout, the prognosis for Detroit was not looking good.

It seems the Big Three have taken an excessive, heavy-handed approach to almost everything they have touched over the last few decades. Including innovation. While Toyota, for example, took a careful, staged approach to building alternative powertrains (and scored big with its hybrid technology), GM famously blew billions of dollars on its massive but so far failed forays into electric and hydrogen-powered vehicles. In the late 1980s, Ford's top brass tried to push the company's engineers to be more innovative by setting up a high level "Committee for Creativity". Yet rather than making the cultural environment more conducive to innovation, this initiative actually had the reverse effect. When engineers were brought in to report to the committee, they found that they were being judged, criticized, and ordered to work on their boss's pet projects. It became just another example of the massive hand of authority imposing itself and intimidating people. Instead of fostering or facilitating creativity, the committee was trying to command and control it. No wonder the structure was eventually scrapped.

In 1994, I had a conversation with strategy guru Gary Hamel about the state of innovation in Motor City. His gripe was that 'there has not been one fundamental strategic innovation in the automobile industry in the last 40 to 50 years that has come out of Detroit'. A couple of years later, I related this to a former top manager at one of the Big Three. At first, his response seemed to contradict Hamel's view. He said, 'Rowan, some of the most important and innovative ideas in the auto industry came out of Detroit'. But then, with a look of deep frustration and despair, he added, 'Very few of them were implemented'. The reason? People couldn't get the resources, the investment and the support they needed to make their ideas happen. As The New York Times put it last year, 'GM's biggest failing, reflected in a clear pattern over recent decades, has been its inability to strike a balance between those inside the company who pushed for innovation ahead of the curve, and the finance executives who worried more about returns on investment.'

Of course, uncontrollable external events in the U.S. economy have rapidly worsened Detroit's woes over the past couple of years. But, let's be honest, the Big Three have been hemorrhaging billions of dollars for years. In 2006 and 2007 alone, Chrysler lost over $3 billion, Ford lost over $15 billion, and GM lost over $40 billion! Nobody can blame those numbers on the U.S. economy, because it was growing briskly for six straight years from 2001 through 2007, as were the sales figures of Detroit's Japanese and German competitors. Instead, the accusing finger is increasingly being pointed at the failure - particularly of GM - to successfully innovate; to continually come up with and commercialize new ideas (and new vehicles) that create meaningful value for customers.

GM candidly admitted this for the first time in a one-page advertisement that ran a year ago in Automotive News. In this open letter, entitled "GM's Commitment to the American People", the company frankly acknowledged that it had "disappointed" and sometimes even "betrayed" U.S. consumers with its lackluster products. Instead of innovating in response to shifts in the marketplace (come on, guys, the writing has been on the wall since the 1973 oil crisis, for crying out loud!), GM has been impossibly slow at adapting its cars to changing customer needs.

If, then, it's essentially an ineptitude at innovation that has driven Detroit's once-great industry leaders down the toilet, I would argue that companies of all shapes and sizes should sit up, take note and, more importantly, take action to make innovation happen inside their own organizations.

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Rowan 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.

Future of Shopper Marketing

by Kevin Roberts

The Sam Walton Business School at the University of Arkansas is on our calendar every October because of the superb annual conference run by the Center for Retailing Excellence. Andy Murray, Global CEO of Saatchi & Saatchi X, was a founder of the conference, and this year a keynote speaker. His subject was "the future of shopper marketing" - which should apply to anyone and everyone who wants to sell something to a customer.

The presentation featured five key points (and a whole bunch of arresting stories, insights, and examples):

• Put yourself at the heart of the customer (most companies try it the other way around)


• Navigate the experience of your customer from the "shelf back"


• Create ways for customers to participate and be involved in your brands and store experiences


• Explore the fringe/edge/margin for new ideas (Wal-Mart was a fringe idea, it came from Bentonville, not Chicago)


• Find new ways for manufacturers and retailers to collaborate authentically based on trust, transparency and shared goals

This is a special presentation and will be viewed in five years time as a definitive statement about the world's biggest activity: shopping.

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Kevin Roberts is the CEO worldwide of The Lovemarks Company, Saatchi & Saatchi. For more information on Kevin, please go to www.saatchikevin.com. To see this blog at its original source, please go to www.krconnect.blogspot.com.

The Innovation War Room

by Rowan Gibson

There are three ways to react to an economic crisis. One way is to bury your head in the sand and hope the whole thing just blows over (good luck!). Another way is to run around in a panic-induced cost-cutting frenzy that could seriously impair your company's long-term growth potential. The third and, of course, smartest way is to recognize the impending threat to both your top and bottom line, and quickly adapt your company's strategy and business model to the new market conditions. Is that what your organization is currently doing? Perhaps. But what if you're having a difficult struggle radically rethinking and reinventing what you do, and how you do it, as economic circumstances rapidly change. If so, here's some advice.

I have, via this column, argued vigorously over the past few years that, in a world where the pace of change has gone hypercritical, today's most important race is the race for strategic renewal. It is the race to change as fast as the environment is changing around you; the race to invent new sources of profit before the old ones disappear; and the race to reinvent your strategy and your business model before they become obsolete. When the economy is on the up, most companies tend to postpone this work of strategic renewal based on the old notion that "If it ain't broke, don't fix it." Yet, as the current crisis proves once again, a successful business model can get broken almost overnight when the economy takes a downturn.

So what exactly is strategic renewal? It's the act of dynamically adjusting business models and strategies to the deep changes at work in the external environment. Above all else, this requires innovation. In a 2003 article in Harvard Business Review entitled "The Quest for Resilience", Gary Hamel wrote, "Strategic renewal is creative reconstruction." It's about taking your traditional business model apart and looking for imaginative ways to reconstruct it to create significant new value for your customers and your company. This becomes all the more urgent in recessionary times, when customer needs and market conditions swiftly and dramatically change.

But how can you actually go about the task of strategic renewal? My answer is this: set up an 'Innovation War Room'. This may well be a physical space, as in the case of Emerson Electric, the global technology and engineering leader, where former CEO Chuck Knight set aside a specific room, right next to his own office, for directing the company's strategic renewal efforts. It was reminiscent of the cabinet war room in London, used by Winston Churchill to direct military strategy during World War II. Chuck Knight's Innovation War Room was a simple but highly effective device that forced all of Emerson's people to focus on reinventing the business model and finding bold, new growth opportunities. And its impact on the company's strategies - and, ultimately, its performance - is still being felt today. Last year, even in the face of formidable pressures, Emerson announced record financial results for 2008, and it continued to be one of the most reliable earnings machines in the American economy.

Very few companies could claim to have a specific innovation war room somewhere at headquarters. But what every company can and should do - right now! - is organize a serious, high-level strategy forum (at least call it the 'Innovation War Room') to start rethinking their business from the customer backward. One of the fundamental questions they need to ask at that meeting is, "How do we get the sales curve moving upward in a market where customers are no longer buying?" And, in a nutshell, my own response to that question would be identical to a slogan IBM is now using:


"Stop selling what you have. Start selling what they need!"


The absolute worst thing your company can do in a stalled economy is to assume you can just continue to sell the same old product or service to the same old customers in the same old way - and at the same old price. Instead, you need to get busy working out how your customers' priorities may have changed, and quickly realign your business model to address their new needs. When I read through a Wall Street Journal a while back, most of the ads (for luxury watches, exorbitant real estate, and fabulous vacation resorts) looked embarrassingly inappropriate in view of the times. One ad, from NOKIA, stood out in contrast. The headline: "Can anyone provide cost cutting solutions that work now? Yes, we can." Now, there's a company that seemed to get it. But wait a minute. Didn't that headline sound more than a little like Barack Obama? NOKIA seemed to have understood the lesson from last year's US election: whether you're selling politics or products, the winners will be those who recognize that the game has changed, and that "same old, same old" will no longer cut it.

In some of my own keynote speeches and strategy workshops, which - guess what - are now entitled "The Innovation War Room" (hey, right product at the right time, no?), I teach companies to unpack their business model into five components: who they serve, what they provide, how they provide it, how they make money, and how they differentiate and sustain an advantage. Then I show them how to radically rethink each component using the 'Four Lenses of Innovation' - the cutting-edge ideation methodology outlined in my latest book "Innovation to the Core". So I get the strategy teams to:

1. Challenge deeply-held orthodoxies about who their customers are, how they interact with them, how they define their products or services, how they configure the value chain, and so on


2. Harness emergent trends and discontinuities to substantially change the way things are done in their industry


3. leverage core competencies and strategic assets in novel ways to generate new growth


4. Understand and address deep customer needs that are currently going unmet

Isn't it time you subjected your own business model to some 'creative reconstruction', aimed at making it better suited to today's shifting customer needs and new economic realities?

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Rowan 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.

Up or Down - Innovation and Value are Key

by Rowan Gibson

A couple of years back, when the economic barometer was pointing upward, all the talk in company boardrooms was about growth, innovation and value creation. Today, with the global economy lingering in the doldrums, corporate strategy is shifting inexorably back to the safe haven of operational efficiency. Now you might argue that this reaction is both inevitable and understandable, and I would accept that at some level. But remember this: something far deeper and more significant than these episodic upswings and downswings is the fact that we've entered a new kind of economic era - an era where cost-cutting is no longer enough. Whether it's currently an 'up' economy or a 'down' economy, we now do business in a value-based economy. And innovation is the only sustainable source of value-creation we have left.

What organizations need to understand is that, at the macro level, productivity - which of course is central to profitable economic growth - has always been determined by two elements. On one side, it is determined by the efficiency with which companies use their inputs - how much labor and capital it takes to produce their goods and services. On the other side, productivity is determined by the value that customers place on the outputs.

For most of the industrial era, the predominant focus was on efficiency as opposed to value. Yet when we look at the companies that are creating most of the new wealth today, we find that they are not doing it by eeking out the last few percentage points of efficiency from their business processes. They are doing it by creating things that bring incredible new value to customers.

Think about Apple, or BMW or Porsche. What we find is that, while these companies are highly efficient in their operations, they do not necessarily enjoy the largest economies of scale. It's their ability to deliver value - to create things that are compelling, exciting and wonderful - that has made them enormously effective engines of wealth creation. BMW and Porsche, for example, command the highest margins per vehicle in the world. Contrast this with the meager performances of GM and Ford and we find that huge economies of scale do not per se deliver an advantage. If a company is not capable of combining low operating costs on the one side with high value-creation on the other, it simply becomes incredibly efficient at making the kind of products customers don't want.

On the whole, large companies have spent about a hundred years building a 'hyper-efficiency' mindset into their organizations. But, until recent years, they have given very little thought to the other side of the productivity coin - how to build a mindset around creating 'hyper-value' for the customer. That's why innovation goes so much against the grain in most companies. It has to fight against a whole set of management principles, processes and systems that are basically set up to deliver something else.

Creating value requires a deep understanding of unarticulated customer needs. It requires enormous creativity. It requires a degree of messiness - i.e. recursive cycles of experimentation and learning. It requires radical thinking in terms product configuration or value proposition. But the industrial age has given us organizations that are not very good at doing any of that. It has given us organizations that treat variety as the enemy - that believe variance from a quality standard, or from a budget, or from a production schedule is a fundamentally bad thing. Yet creating value for the customer often entails challenging and deviating from these norms.

To use the language of complexity theory, most companies have been operating predominantly at one end of the spectrum - "the ordered regime" - and hardly at all at the other end, which scientists refer to as "the edge of chaos." It is this 'other' end - the messy, creative, experimental end - that is so vital for value creation, wealth generation and long-term growth. Indeed, in his book, "The Hacker Ethic", Pekka Himanen wrote that, in today's economy, the "most important source of productivity is creativity." This is the sort of mantra that becomes popular when the economy is growing; when companies find themselves drawn naturally toward the innovation end of the spectrum. But the big challenge comes when things take a downturn and there's pressure to cut costs again - which is exactly the situation we're in now. Organizations must ensure that the pursuit of radical, value-creating innovation does not get neglected as they pull back reflexively toward the 'ordered regime'.

As Charles Simeon, a pastor at Cambridge University in the 18th century, profoundly observed, "The truth is not in the middle, and not in one extreme, but in both extremes." The same could be said of operational efficiency and innovation. Now more than ever, organizations need to learn how to operate equally well at both extremes - they need to be both highly innovative and highly efficient at the same time. In a value-based economy, companies must be able to continually dream up products and services their customers wouldn't want to live without, yet they must simultaneously have the capacity to deliver those things with brutal efficiency.

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Rowan 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.

Can Innovation Create Competitive Advantage?

by Jeffrey Phillips

Over the last six or seven years, definitely since about 2003 or 2004, there has been an increased focus on innovation in many businesses. I think much of this was driven by several factors, including an increased rate of change in competition, especially the growing capabilities of India and China. I also think that information costs have fallen as the web has become more fully adopted, and consumers are demanding more. Finally, I think the focus on cost-cutting and outsourcing is reaching it's logical conclusion. Most of the things that could be cut, trimmed or outsourced have been. Many businesses in the US are relatively lean, and need to return to growth and differentiation.

All of these factors contribute to the need for innovation. However, there are a lot of trends that suggest innovation is important in the near future as well. The focus on global warming means new technologies are required to reduce emissions. In the US, health care reform will mean new demands on an antiquated health care system. The US Government is straining to provide services that the population expects and demands. The banking sector is ripe for change and disruption. All of these factors suggest a significant amount of change is in store for our government and for major businesses.

None of this is going unnoticed in the hallowed halls of major corporations. Booz and Company has just released its yearly Innovation survey, and more than ever, innovation is moving from an interesting sideshow in most organizations. Now, innovation is being recognized as offering a competitive advantage, perhaps one of the few sustainable advantages, and CEOs and executives are taking note. The survey points out that over 90% of the executives surveyed said innovation was critical to the success of their firms as they prepared for the market and economy to improve. One executive went so far as to say "the recession was a catalyst for increased innovation".

Booz and Company listed three reasons why they felt companies have continued to invest in innovation during the economic downturn:

1. Innovation is becoming a core component of overall corporate strategy


2. Recognition that product development cycles are longer than recessionary periods


3. Many see the recession as an opportunity to build advantages over their
   competitors

One of the biggest impediments to innovation continues to be the "constraints of the product development lifecycle". The product development life cycle in many industries is simply too long and too cumbersome, and any opportunity to shorten the development life cycle could mean real rewards. Conversely, any slacking off could mean falling behind the competition.

My take: Innovation is gradually moving from an occasionally interesting sideshow that is not focused and not strategic, to becoming a key focus of senior executives as they realize that only innovation can help the firm continually grow and differentiate. Innovation is rapidly becoming a capability or enabler that strengthens and focuses the corporate strategies, and should over time become a key enabler to many corporate goals and strategies. Once more firms create a continuous capability for innovation and modify their cultures to embrace innovation, then we'll see the real transition occur. It is heartening to see that more and more firms are placing more emphasis on innovation at a strategic level.

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Jeffrey Phillips is a senior leader at OVO Innovation. OVO works with large distributed organizations to build innovation teams, processes and capabilities. Jeffrey is the author of "Make us more Innovative", and innovateonpurpose.blogspot.com.

Are You Playing Offense or Defense?

Interview - Bill George of "7 Lessons for Leading in Crisis"


I had the opportunity to meet Bill George at the World business Forum and later interview him. He is the author of "7 Lessons for Leading in Crisis", and a professor of management practice at Harvard Business School, where he has taught leadership since 2004. Bill George is the author of three other best-selling books, and the former Chairman and Chief Executive Officer of Medtronic. I interviewed him about social media, the recession, offense vs. defense, leadership, and needs of the innovation workforce.

Here is the text from the interview:


1. Do you think that CEO's and other corporate leaders should be participating in the social media conversation on Twitter?

I actually wrote a blog on this very subject last month (Extra, Extra, Tweet All About It). Just as it's important for CEOs to read the newspaper and watch TV to remain current with customers and trends, it is equally important for CEOs to participate in social media, particularly Twitter. In no other forum can you be the spokes of a potentially very large, real-time communication wheel - this can be very useful in assessing one's standing in the marketplace. On Twitter, CEOs can have unfiltered access to customer opinion, engage with customers and other CEOs, respond to questions, and further build their personal brand and promote their company.

However, there is one caveat every CEO should keep in mind: You cannot join Twitter just to say that you are "on Twitter." From my limited experience (I've been on since August), I've learned that engagement is crucial to getting the true informational and relational benefit of the service. If you don't devote sufficient time and energy, others will see right through you and the entire operation will be a waste of time. The long and short of it is: The world of social media is the new marketing and communication standard. CEOs would be wise to keep pace.


2. Any tips for people having trouble facing their reality?

Be open to criticism. In fact, go looking for it. If you are truly having difficulty facing your reality, ask your support network - your internal management team, your family, your friends - to help face it with you. "Facing reality, starting with yourself" is the first step in my latest book "7 lessons for Leading in Crisis", and I find that this step is the most difficult, particularly for veteran leaders with well-defined egos and track records of success.

A good rule of thumb for any leader: Whenever your company falls into the depths of crisis, automatically acknowledge partial fault or involvement. This is because under every conceivable circumstance, as the leader you had a hand in a creating the crisis. This does not mean accepting all the blame and putting the weight of the world on your shoulders, it's just a good starting point. Concede the need for improvement, and that mindset will aid in your finding exactly where you fell short, and what your reality looks like.


3. How do you help your organization see that it is time to switch from defense to offense?

When you notice that your competitors are going on defense! One of the worst things you can do in a crisis is hunker down and ride out the storm. And that is the tendency for many companies - they sit idly by, and wait for the "norm" to come return. Meanwhile, the market landscape is adapting to new consumer wants and industry needs. When you see your competitors sidle off and play defense, that's when your organization needs to go on offense. But don’t be a bull in a china shop - be measured and precise in your moves.


4. Any tips for people who feel their company is wasting a good crisis?

Yes - don't let it continue! Crises present rare opportunities for companies to reinvent as there is typically less internal resistance to change if employees believe it will have positive impact. For those leaders who fear their company is in fact wasting the crisis, I would recommend they pull an about face, communicate their concerns, and work the problem from scratch with their management teams. Leaders need to dig deep and prepare for the long haul if they want to be effective in crisis-time, and that begins with open communication internally and an on-the-offensive approach to solutions.


5. What traits do you believe managers need to acquire to succeed in an innovation-led organization?

Open-mindedness, trust, vigilance, and determination. You must be open to outside-the-box thinkers. Plenty of people claim to have that mindset, but many are unnerved by truly original innovation as it may seem foreign to the point of being impractical. However, a handheld phone-mp3-computer seemed impractical (and impossible) 10 years ago, but now we have the iPhone. Trust is also key. You have to trust your teams to work effectively and create good ideas. There is a requisite need to delegate some control. It's the only way truly creative people create. At the same time, however, leaders are in charge - they must be vigilant and active in the innovation process. Leaders cannot be timid in voicing skepticism or input. Finally, one must be determined. Seldom does an idea work the first time around. Leaders have to be determined to see a great idea through to the end. In fact, what makes it a great idea is that it has been put through the wringer and improved.


In the future, I hope to bring you a review of "7 Lessons for Leading in Crisis" and right now you can enter to win one of three signed copies of this book in our October Innovation Contest.

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Braden 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.

When Innovation Goes Wrong

by Rowan Gibson

Ever 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."


It'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.

Or 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.

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Rowan 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.

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.

Innovating on a Tighter Budget

by Andrea Meyer


Point: Innovation doesn't have to be expensive


Story:

Current surveys indicate that more companies are reducing innovation budgets this year, but the good news is that innovation doesn't have to be expensive. Here are two stories that show how to innovate inexpensively:

J.B. Hunt was just a truck driver in the 1940s when he saw that rice mills in Arkansas were disposing of rice hulls by burning them. Rice hulls are the fluffy tough fibrous shells removed to create white rice. The waste hulls gave Hunt an idea: he contracted with the mills to haul away their rice hulls, and then he sold the hulls to poultry farmers as chicken-house litter. After Hunt's revelation of the potential value of rice hulls, others found additional innovative uses for the material: pillow stuffing, high-fiber additives for pet food, natural building insulation, filler for injection-molded plastics, and using rice hulls to improve apple juice extraction.

Similarly, old rubber tires are being ground up and made into roads and shoes. And clothing & outdoor gear maker Patagonia asks customers to bring in their worn-out Capiline® clothing (a polyester fabric) rather than throwing it away. Patagonia has devised a way to break down the discarded fabric into plastic chips and then re-spin them into new synthetic yarn. Given the increasing concerns about proper waste disposal, waste products provide attractive opportunities as no-cost or low-cost sources of innovative raw materials.

In addition to innovating with waste products, companies can leverage fallow innovations. During the early 1980s, IBM Corp was spending at least a hundred times more on R&D than Apple Inc. But upstart Apple found a way to leverage some new underutilized technologies (the computer mouse, high-resolution display monitors, the power of the 32-bit microprocessor and the graphical user interface) to create the Lisa and then the Macintosh. What existing technologies could you put to use in new ways?

Action:

• Survey existing supplies of materials and streams of byproducts


• Look for materials that are underutilized or are discarded


• Consider how those materials might be recombined, repurposed, or refurbished for other, valuable applications

For More Information:

Patagonia's Common Threads Garment Recycling Program

"Innovation to the Core" by Peter Skarzynski and Rowan Gibson

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Author of more than 450 company case studies and contributor to 28 books, Andrea Meyer writes & ghostwrites about innovation, IT and strategy for clients like MIT, Harvard Business School, McKinsey & Co., and Forrester Research. Follow her at www.workingknowledge.com/blog and twitter.com/AndreaMeyer.