Re-tooling Your Business Model in Challenging Times
An interview with Robert Tucker, author of "Driving Growth Through Innovation, Second Edition: How Leading Firms are Transforming their Future"
More than ever before incremental innovation is not sufficient for survival. Many businesses need to re-tool their business models in order to achieve breakthrough innovation.
How do we upgrade our innovation process? Implement a new and improved idea management system.
Vern Burkhardt (VB):
How do you convince CEOs and senior business leaders that innovation should be their top priority right now?
Actually, I don't. The top priority of CEOs right now should be survival, because this is the economic equivalent of a one-hundred-year flood. That said, innovation is the tool to help you survive and emerge stronger.
What I'm hearing from senior executives is not just that they can't get credit but that their business model is melting. Their customers are disappearing. Their value proposition is suddenly out of whack.
If you're approaching this economic upheaval with the usual countermeasures—conserve cash, downsize, crisis management, lower your breakeven—it may not be enough this time. There has never been a more critical time to retool your business model going forward.
As Rahm Emanuel, who is President Obama's chief of staff, said about the global financial crisis, "you never want a serious crisis to go to waste." Meaning it's an opportunity to do things that maybe you think you couldn't do before.
Making innovation everybody's business. Until recently, innovation was the responsibility of the research and development department, the province of marketing or new product development. No longer. To keep pace with relentless, disruptive change, firms must broaden responsibility for innovation. Everyone in the company must be encouraged to engage in idea-hunting and idea-implementing.
Can you give me some examples of managers doing this?
Sure. Brent Gow is Starbuck's payroll chief. Payroll in many a company is about as far away from innovation as you can get, except maybe the legal department (laughs).
Gow asks himself what his CEO really needs right now, and he starts innovating how people get paid. He starts voluntarily migrating more and more "partners" as they are called away from paper cheques to various direct deposit models. He forms strategic alliances with pay card suppliers and gets all kinds of value adding benefits for partners. And he builds the buy-in for his
innovations by showing the CEO the bottom-line benefits and how they make employees happier to be working at the company.
Or we could talk about Mary Crawford at American Express. Mary leads an internal group called GRSS—global re-engineering and six sigma. They've taken a billion dollars in cost savings and cost-avoidance out of Amex's cost structure in each of the past five years—and they are now embracing top-line innovation.
The Innovation Vanguard companies that are weathering the storm best have a process in place for idea management. These are the companies that are successful in mastering and using innovation for coping with disruptive market forces like we're seeing across industries today.
You and your research team study Innovation Vanguard companies. What is an Innovation Vanguard firm, exactly?
It's a firm that uses innovation as a tool to drive growth, drive re-invention, create new customer value, and avoid becoming locked into commoditization. They have a system that helps them identify threats and pounce on opportunities and streamline the selection of ideas to allocate resources to.
It all starts with a well-oiled idea factory. They generally have a culture that promotes innovation at all levels, and are apt to be more open to ideas coming to them from outside the firm. They have learned they will only get all the ideas they need if they have a system to solicit ideas from everybody, and to simplify and streamline the process for submitting and vetting these ideas.
Would you talk about your concept of the idea factory?
I talk about it in depth in my online, executive-level e-course Inside the Innovation Elite: Best Practices of the World's Most Innovative Firms.
It's a metaphor. Imagine a machine where idea inputs—the raw materials—go into a funnel to be processed. The throughput includes a selection process to rationally sort and find what appear to be winning ideas.
These ideas are pursued in an organized, disciplined process, so they can be developed and executed. The output phase of the factory is the launching into the marketplace of new products, services, business process improvements, and strategic innovations.
Without a structured process—the idea factory—employees and even managers won't bother generating all the new ideas the company needs. They will become cynical about the slow and unpredictable way new ideas are handled in their organization.
We have to bear in mind that almost all new ideas seem like duds at first so the idea factory, a process, is needed to adequately analyze all ideas and implement the promising ones.
You identify three types of innovation: product, process, and strategy. Would you describe what strategy innovation is—what is sometimes called business model innovation—and why is it so important to a company's success?
Being adept only at product, service, or process innovation is not enough today because you can and will be copied. Strategy innovations are harder to rip off.
We do informal surveys with executives and what they tell us repeatedly is that they are seeing the most potential for future profits from doing strategy innovation. Strategy innovation is what you do to add tangible, unique, and exceptional new value to your customers' experience.
Can you think of some examples of strategy innovations?
Look at what Progressive Auto Insurance has done with its 24/7 claims adjustment service, and the ability of customers and potential customers to obtain online quotes and to easily compare its rates with those of its competitors. They even show when the competitors' rates are lower!
Another example of establishing a new business model is Wal-Mart with its "everyday low prices," whereas the traditional model in the retail sector is to offer customers markdown prices to stimulate sales. And Wal-Mart's supercenters are challenging the superstore business model.
Garage sales and swap meets used to be the methods of sale for used items, but eBay and Craig's List have created new markets—another form of strategy innovation.
In my book I talk about some other types of strategy innovation, such as re-branding existing products to generate increased customer awareness, selling existing products into new markets and geographic areas, or introducing new products to sell to your existing markets.
You are suggesting that strategy innovation is becoming more important, but you quote studies in your book that high-growth firms enjoy higher profit margins, because they do a lot more innovating of new products and services. These studies also show low-growth firms only do incremental innovation.
Why is innovation of products and services such a differentiator?
The most powerful innovations often involve all three categories: product, process, strategy.
For example, when McDonald's opened for breakfast, they needed to develop new products. They needed to develop new processes to accommodate the extended hours. And certainly opening for breakfast was primarily a strategy innovation in the sense that it took them into a new market space.
It's the same with Amazon's Kindle, the e-book reader, which is on its way to becoming a breakthrough idea. So innovation is a multifaceted, multidimensional discipline when it's practiced well. It encompasses strategy, marketing, products and services, and organizational behavior.
In many organizations there's a great deal of what I call innovation illiteracy. Innovation is still new territory. Employees and even managers don't understand fully how their organization works—its goals, the needs of customers, how to propose an idea—so they don't have the skill set or the mindset to further the company's strategic objectives.
Firms like Whirlpool that implement an organized, effective process for innovation spread innovation literacy by training what they call I-Mentors, essentially black belts in innovation. Employees at Whirlpool and other companies think like real entrepreneurs promoting the company's future. They know the latest techniques for how to generate lots of ideas, to sift, sort out, and develop the promising ones, and move them past the goal line of implementation and revenue enhancement.
The differentiator is that firms that have an effective process for generating breakthrough innovation will be better able to meet the unprecedented challenge of the global financial crisis and emerge stronger and more resilient. They'll be able to attract top talent, engage employees, pursue new markets, flex faster, try new things, and seize opportunity when competitors stumble.
Should all companies strive for breakthrough innovation related to products, processes, or business strategy? What's wrong with incremental innovation?
Absolutely nothing. Incremental innovations are to be encouraged—for they are needed en masse, and from everyone. They can and do produce positive results, such as taking ever more cost out of the operation, increasing customer satisfaction, and improving existing products or services. They increase productivity, and lower costs.
But if a company's primary focus is on incremental innovation, it's likely the driving force isn't on figuring out how to reinvent its value proposition with radically better products, services, and business models.
Does a breakthrough innovation have to be something new?
Robert Tucker: Not necessarily. It might be something quite old. It might be something as seemingly simple as dusting off an old model car, the Mini Cooper, say, giving it a facelift, and re-launching it for a new generation of car buyers.
It also could entail process improvements that result in significant reductions in costs or increases in productive outputs.
VB: Driving Growth Through Innovation
focuses on the type of innovation where new products, services, processes, and business models give temporary monopoly to the sponsoring firm.
Why is this type so important that it was your focus?
Because it gives you a temporary monopoly, as for example, the iPod did for Apple.
I was in India shortly after the iPhone was launched and noticed that you could already buy knockoff iPhones, only weeks after launch! But nevertheless, look at the astounding power of this temporary monopoly, as other mobile phone makers and even Research in Motion were caught flat footed.
It means that you don't get caught in the trap of commoditization, where businesses spend money on incremental product and service improvements but can't increase their prices to recover and make a profit on the investment. Customers merely come to expect these improvements without paying more. The result is companies are competing on price but spending more on incremental innovation.
But here's the thing. If you're going to be the first mover with a new product, service, technology, process, or business model you'd better be able to aggressively keep on innovating after your idea is launched.
Otherwise, fast followers will intrude into your monopoly. If they are at all on their game—able to ask your existing customers how they can improve your idea or give it a new twist—they may even overtake you and steal your thunder, if you don't keep innovating.
What are radical innovations? How are they different from, or similar to, breakthrough innovations?
Radical innovations are complete new businesses or product lines that are based on new technologies, ideas, or cost reductions. They can take ten, fifteen, or more years to develop, and years more to build a market for them. But when they hit, they are well worth it. GE's digital X-ray system is a good example.
Radical innovations may or may not be breakthroughs. When they are breakthroughs, they provide customers with complete new ways of solving their problems or meeting their needs. In many cases radical innovations create new needs, often needs the customers did not even know they had.
You compare the approach of most companies toward innovation as being like panda bears mating. Would you explain the comparison?
Panda bears, at least in captivity, lose interest in mating. Even in the wild they are slow to produce a cub—the reproductive rate of a female is only about once every two years.
Many companies are slow to germinate new, breakthrough ideas. As a result, like the panda bears, they become endangered species. They haven't designed and implemented an organized process for innovation, a process that engages the whole enterprise.
You refer to the Growth Gap and say that cost-cutting, enhanced marketing and sales efforts, efficiency measures, and acquisitions and divestitures of other companies are generally not the solutions to closing that gap.
Would you explain what is the Growth Gap and what is required to close that gap?
The Growth Gap is the gap between the rate of growth companies are achieving and the rate they want, or need, to be competitive.
Of course there are many strategies required to close that gap. You want to maximize product and service quality standards to exceed customer expectations. You want to generate higher perceived value, not just lower prices of your existing products and services. It all comes to innovation as being the best way to stimulate growth and close this Growth Gap. That's how to experience explosive, sustained top-line growth.
I refer in my book to PricewaterhouseCoopers' study of 399 companies in seven countries, which found a significant growth chasm in revenue enhancement and shareholder returns between the most innovative and least innovative companies.
It is also interesting to review the 2008 list of the world's 25 most innovative companies, as compiled annually by the Boston Consulting Group and Business Week, and to examine their revenue growth between 2004 and 2007.
High-growth firms are highly innovative while low-growth firms innovate only incrementally.
You say innovation must create value for customers. It must be customer-centered. Listening to customers through surveys and focus groups will likely lead only to incremental ideas. And you have to be careful about which customers you listen to.
You recommend watching how customers use your products and services in order to gain insights into how they will respond to new offerings. Would you explain how this approach can lead to breakthrough ideas rather than merely to incremental changes?
Innovation-adept firms are customer-centered but they also know that customers are difficult to please, especially if you are engaged in incremental innovation to improve your existing products and services. You may end up in price wars.
If you ask customers through surveys, focus groups, or one-on-one interviews, they may lead you astray—have you focus on incremental innovation. You may conclude you should keep doing what you are doing, make small improvements, and reduce prices.
Listening is instructive but you will find it even more useful if you watch how customers use your products and services. You'll get insights into how customers actually respond, and while watching them you may discover or think of needs they don't even know they have. This is called the unarticulated needs of customers.
Of course, you shouldn't restrict yourself just to your existing customers. You might consider firms or people who've never done business with you, former customers, competitors' customers, or your customers' customers.
In Driving Growth Through Innovation
, I talk about Callaway Golf Company's development of the driver golf club known as Big Bertha. They observed golfers, talked to them about their skill level, and talked to former golfers. The conclusion was that many people were intimidated when they had to drive the golf ball. Big Bertha was developed and marketed as making golf less difficult and more fun.
Provide new, exciting, unique customer value?
Earlier we talked about strategy innovation. Strategy innovation must solve problems for customers that they perceive to be superior or significantly different from their current way of dealing with those problems. Such innovations must create value for your customers.
For an idea to be really original, it must solve a problem the customer may not even be aware of having or consider as being a problem. If you identify this need, the idea may create a new market.
No matter how successful your company is today, no business model is sustainable in an age of change, competition and disruption. Is this one of the greatest challenges businesses face—continually engaging in retooling your model to remain relevant or face extension?
Today business models have shelf lives. I don't need to remind you of the rapid financial impact on recording companies when new technology enabled downloading of music onto MP3 players. And now you can download for low cost individual song tracks from Apple and Amazon. Newspapers are being challenged by declining readership and the related decline in advertising revenues. You see this everywhere you look.
Many breakthrough business model innovations exploit change. Of course, in order to exploit change you have to recognize it and see the trends and opportunities. Change may be global, technological, regulatory, political, social, economic, or a myriad of other types.
The greatest challenge is being flexible, limber, and faster to flex than the competition.
With about 31,000 new products being introduced annually in the developed world, competition is fierce for customers' attention and spending. Therefore sales and marketing and branding are bound to become even more important in the future, right?
Selling an idea is critical to the idea's success.
Increasingly, and especially in today's financially troubled times, there are too many incremental improvements chasing customers with finite resources and limited ability and motivation to adopt them all.
Think about it. In developed countries, and perhaps in some developing countries as well, customers' basic needs have been met by existing products.
Many customers have upgrade fatigue, and they are simply sitting out your latest upgrade. Just look at the resistance to Microsoft's Vista—they spent tons of money advertising it, and many users, myself included, were gravely disappointed.
Where was the new value added? How does it benefit the consumer when all you've done is changed things around on the interface but merely confused the user? Don't get me started (laughs).
You recommend that irrespective of your business you will benefit from prototyping "early, often, and in conjunction with customers." Would you talk about how prototypes, models and simulations enhance collaboration and product development?
Sophisticated computer-aided-design programs have made it much easier and faster to construct prototypes, providing visual representations of products and designs that people can use in their collaborations.
The result is an ability to play with ideas, to make a proposed or existing product better, and to rapidly see the results. It not only makes the process much faster at less cost, it enables a better end product.
The prototypes for collaboration don't always need to be computer-generated, although that approach is becoming more commonplace. I talk about Chrysler's design of the PT Cruiser. Customer input was obtained in Europe, South America, Asia, and the United States using a full-size, clay model with some innovative approaches for obtaining input.
The point is, it enabled them to finalize the design for this breakthrough product using customer and potential-buyer input rather than having the designers, engineers, and marketers design it in a vacuum.
Fear is the enemy of an innovative culture, because it tends to arrest the very activities necessary for it to take place: experimentation, risk-taking, and failure.
Is the role of fear in an organization one of the symptoms you look for when starting to work with an organization that wishes to establish a culture where innovation is a core value?
What other key factors do you look for when determining whether an organization has an innovation-adept culture?
Fear of failure and consequently of taking risks is a big issue, even in well-run, successful companies like Intel, with whom I've worked. My advice to management is that you have to be clear about acceptable risks. You have to communicate these parameters, and you can't allow a perception to sprout that folks associated with failures get punished in their jobs or careers.
I always say, you get the behavior you reward. Especially in these times of downsizings and layoffs, what you will get if you don't watch it is a compliant culture, but very little innovation.
What are the reasons Innovation Vanguard firms have regularly scheduled ideation sessions?
It seems obvious that unless good ideas emerge, good ideas won't be launched. Relying on chance or happy accidents to identify breakthrough ideas is not a viable option.
Ideation is purposefully coming up with many ideas using state-of-the-art techniques, because that is the proven way to come up with a few ideas worth pursuing. We have found that on average, it takes 80 to 100 ideas to generate one you will want to seriously consider.
The goal is to stimulate new thinking, to purposely think beyond the status quo in order to identify new possibilities, opportunities, and vehicles for growth.
It turns out that you don't need a company full of stark, raving brainiacs. You just need a process in place to stimulate the endorphins of possibility. It's amazing the creativity that will result when you ask ordinary folks for their ideas.
You seek to encourage a culture where all employees are encouraged to generate lots of new ideas. And yet employees and their managers seem to have less available time, are electronically connected virtually around the clock, even while on vacations.
You point out that an interrupted work style—over connected, overcommitted, overworked, and overwhelmed—is an innovation inhibitor. It leads to a state of mind of "continuous partial attention."
Are the pressures of time universal inhibitors of innovation?
Lack of time to innovate is second only to an absence of an innovation process in inhibiting innovation.
Of course, a lack of time doesn't always mean a paucity of innovation nor does an abundance of time lead to accelerated innovation. It's not that simple.
Most can recall how a crunch deadline led them to come up with a novel solution. During crunch times employees may be more adept at identifying the inadequacies of the company's existing processes, methods, and safeguards. During times of stress customers may be more likely to identify limitations of your products and services, such as lack of ability to provide rush delivery or to customize.
Employees and their managers do need some reflection time, time to gather information about an idea, and think about their company's next strategic breakthrough. If they are required to constantly work at a frenetic pace, a shortage of time becomes a major barrier to innovation.
When you studied fifty leading innovators for the book Winning the Innovation Game
you found they were passionate about keeping abreast of trends and new ideas. You recommended when establishing our future-scan system, we should make time for reading an eclectic and wide-range of materials, connect with people, and listen to our intuition.
Are there any other things you recommend leaders do to enhance their awareness and ability to be in the lead in innovation?
Funny you should ask that. I'm actually working on a book that takes up this very issue. All I can say is, "Stay tuned."
While many companies try to attract and retain talented people, which often means intelligent, experienced and team players. You recommend balancing three personality types. Of these three types, are mavericks the most likely to stimulate innovation?
You need a balance of contributors, champions, and mavericks in the organization, all of which have different roles during the development of an idea.
Contributors are the heart and soul of companies' culture. Rather than underestimate their potential contributions to innovation, leaders and managers should be reminded that people want to create. The innovation process should accelerate bottom-up innovations.
In over twenty years of working with top leaders in companies worldwide, I consistently find that rank-and-file employees are underestimated—their ideas are not sought and their jobs are designed to eliminate thinking. There are numerous examples one can think of, where ordinary contributors in a company made extraordinary contributions.
Champions, or what Gofford Pinchott III calls intrapreneurs, are idea quarterbacks with experience and credibility within companies. They know how to get things done within the organization—how to overcome obstacles, solve problems, work the system, and find required resources.
Mavericks don't want to blend in, get along, or be popular. Every company needs at least a few of them to stimulate creativity, and to keep others from becoming complacent with the status quo. By their actions they remind us that we humans are conforming-prone, which is the antithesis of what is needed for breakthrough innovation.
Mavericks are the ones most likely to come up with tomorrow's breakthroughs so you'd better have some of them on your team!
Many performance measures monitor past performance—lag indicators—rather than future potential. For innovation, measuring the proportion of revenue from new products and services is a key indictor of innovation.
Is this the most useful metric of the innovation performance of a company?
Innovation Vanguard companies recognize that the way they measure innovation will motivate the behavior of managers and employees, thereby influencing the type and amount of innovation they achieve. Metrics shouldn't focus only on incremental innovations. The measures should capture breakthroughs on products, processes, and business model changes.
Measuring the percent of revenue from new products and services is a key indicator but shouldn't be the only indicator to measure a firm's success at innovation. Measuring the number of new and promising ideas in your new product pipeline would be a useful measure as would measuring the number or proportion that are brought to the stage where they are introduced to the marketplace.
Another good measure is speed to market of new product and service introductions. Seldom measured is return on innovation investment—ROII. Perhaps a measure of the relative amount of R&D effort, both internal and external, directed at breakthrough innovation compared to incremental innovation would be a useful metric.
The reward structure within the company and how it relates to the metrics on innovation will also have an important influence on whether innovation will be given a high priority. We shouldn't ignore the importance of intrinsic motivations to innovate. Therefore metrics should, at a minimum, not discourage employees from generating many new ideas.
If you were CEO of a medium to large company today, faced with increasing financial pressures, would you consider incurring the cost of appointing a Chief Innovation Officer? If so, what would be the key performance goals and measures you would establish for such a position for its first two years?
The right person in this role with the right mandate from the chief can really do incredible things.
One thing I caution is that the Chief Innovation Officer should not be viewed as responsible for innovations, letting everyone else off the hook. Rather the CIO should be responsible for building innovation literacy that we talked about before, for coordinating efforts across organizational lines, and for allocating resources in a disciplined manner.
I think the jury is still out on the merits of having such a position. Time will tell.
You are president of the Innovation Resource Consulting Group. Would you tell us about your firm and the products and services you provide. And to whom?
We are a full service firm, meaning that we can put a team together to address whatever challenge the client has. I lead all our projects, and bring aboard other specialists in our network, who have specific skills that are needed.
We tend to do a lot of ideation sessions, and we tend to get involved in helping companies rethink their approach to innovation. It's been my experience that innovation makeovers are best led primarily by the clients.
We serve as advisors and teachers and help our clients grapple with the essential questions. We give them a range of options to think about. The best engagements are where the client has total buy-in from the CEO to drive transformation and sufficient time and resources to make it happen.
Thank you for taking the time to talk to me about driving growth through innovation.
My pleasure, Vern.
Driving Growth Through Innovation
describes the emerging best practices of 23 Innovation Vanguard companies. The author provides many practical ideas and tips about how to jump start innovation in a firm and why you should do so.
Robert B. Tucker is president of The Innovation Resource, and an internationally recognized leader in the field of innovation. Formerly an adjunct professor at the University of California, Los Angeles, Tucker has been a consultant and keynote speaker since 1986.
His research in interviewing over fifty leading innovators was published in the book Winning the Innovation Game
in l986. Since then, he has continued to publish widely on the subject, including Managing the Future: 10 Driving Forces of Change for the New Century
, which has been translated into 13 languages.
As one of the thought leaders in the growing Innovation Movement, Tucker is a frequent contributor to publications such as the Journal of Business Strategy, Strategy & Leadership, and Harvard Management Update. He has appeared on PBS, CBS News, and was a featured guest on the CNBC series, The Business of Innovation.
Robert Tucker is based in Santa Barbara, California and can be reached at Robert Tucker
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