Beyond Incremental Innovation, Part 1

IdeaConnection Interview with Langdon Morris, author of Permanent Innovation, and Managing the Evolving Corporation; and co-author of Fourth Generation R&D
By Vern Burkhardt
"There is no genius in fear, or intimidation, or mediocrity. But there is genius in dreams, in creativity and innovation, and in breakthrough thinking!" (Langdon Morris, Permanent Innovation, page 236)

Vern Burkhardt (VB): On your website you say, "If you don't know where you're going, you'll never get there; the [Innovation] Master Plan Framework defines the route to take." How does it help companies define the route to take?

photo of Langdon MorrisLangdon Morris: Innovation is a function or aspect of a company's strategy. When we ask what are the right innovations in our project pipeline we're really asking, "Where is our corporation headed? Where is our innovation headed in the future?" This is a strategic question. In a sense, innovation is the execution of strategy because we say, "Ok, we want to go into certain markets." In order to do so companies have to innovate. They have to create new products and services that enable them to enter those markets. There is a complete link between innovation and strategy.

The Innovation Master Plan Framework is an approach, a process that manages innovation. It begins with strategy because that's where the direction occurs – where the innovation process should come from. When you talk about the Innovation Master Plan™ you work on your strategy, and how you're going to reflect this strategy in your innovation targets and investments, innovation process, intended results from innovation, and organizational capacity.

VB: You share the Master Plan concept with participants before they start so they know where they are heading?

Langdon Morris: Yes. In a way it is quite simple. This is where you should tackle the big issues around innovation. It is a guideline that helps structure the conversation in an effective way.

VB: In Permanent Innovation you say, "…the search for the future … is what innovation is all about." Are the corporate leaders you work with feeling a sense of urgency about the need for an innovation culture that can deal with a marketplace characterized by "the acceleration of change and the intensification of competition"?

Langdon Morris: Everyone I talk to is aware they need to improve their innovation culture and they're looking for help. I think it is universal.

If you look at business magazines and books that are being published these days, you will conclude that innovation is very high on everyone's agenda. Everybody recognizes that creating an innovation culture is important in order to create and sustain an innovation momentum in their organizations.

VB: What does it mean to "embrace change?"

Langdon Morris: We need to recognize that change around the world is accelerating and every business has to deal it. Not only is change happening faster, it's also a fact that there are more changes coming even after a company implements a breakthrough innovation. Most people involved in innovation want to create a stable environment with predictable conditions, because they want to replicate a business model and achieve profits over time. This is a problem because change is happening so fast it's throwing a lot of business models into question. It's making it harder to create sustainable profitability.

Our strategy is to take the opposite tack, to ask our clients, "How can we profit from change?" "How can we exploit change?" "How can we create change?" If a company can create change they can create a competitive advantage because they're bringing change to the market place and their competitors have to respond. Rather than trying to avoid change we try to create a context where companies can recognize, embrace, and create change to their advantage.

VB: You say, "Economic globalization combined with technological advancement has brought the world to a different kind of change, exponential change." "…accelerating change will keep accelerating." Is it possible for traditional business structures to cope with such a chaotic, complex, and ever changing world?

Langdon Morris: They have to change the way they think, the way they gather information, and the way they make decisions. In terms of the way they think they could spend much more time paying attention to what is happening in the external environment, not only in their particular industry but also across the entire economy. They need to become much more sensitive to what is happening around the world.

Globalization is obviously a part of it. For example, most American companies are now significantly affected by what happens in China, even if they don't have direct competitors in China, and are not outsourcing products or services to China or South Asia. The impact of the Chinese economy on the world economy is so significant that it has an impact on every business, and that means all businesses must pay attention to this. It requires a different kind of thinking process.

Companies have to make decisions faster, be more agile, and be more participative. More people are going to be involved in collecting the information that enables companies to make a good decision. They have to change from linear sequential thinking to parallel processing, where a lot of information gathering happens all the time. The information is then brought together when it's recognized that a key decision needs to be made, and made quickly.

VB: They have to have a different view of risk?

Langdon Morris: I think the issue of risk is the same.

Innovation is certainly a risk investment. We suggest to our clients that they look at innovation risk as a portfolio process. One element of our Master Plan framework is that companies create innovation portfolios, expecting that some projects will do extremely well and create value, while others will be failures. Across the entire portfolio we'll look for success at the net average, rather than trying to pinpoint the future success of any particular project. Creating an innovation portfolio is less risky.

VB: Is one of the problems in adapting to the changing world the command and control hierarchies that exist in large, complex organizations?

Langdon Morris: I don't think that the problem is command and control; I don't think the problem is hierarchy. The problem is the way people think about it.

The notion of command and control is simply a rational response to a very complex world, and the need for decision-making to be coherent. Every business has a strategy. They need to follow this strategy. They can't have thousands of people off doing their own thing. This means they need a structural framework. A hierarchical organization is the way to bring this kind of discipline.

Your question might relate to the question, 'What decisions are made in what part of the hierarchy?' Today organizations are finding they are more successful when the people who are not at the top of the hierarchy are gathering information and making decisions about their own business environment. Decisions certainly need to come from the top but by no means do all of them.

VB: It is also an issue about how fast well-informed decisions are made?

Langdon Morris: I think that is absolutely right. Remember the fabulous story Andy Grove tells, in Only the Paranoid Survive, about the change they made at Intel decades ago. Intel was getting hammered in some of their markets, and when Andy Grove and Gordon Moore looked at their market portfolio they realized they needed to shift into microprocessors. It was a momentous change for the company. It signified lots of changes in their innovation investment, in how the company was structured, and how it was running. Moore and Grove symbolically stood up, walked out of their office, and said, "We're changing our business model." Then they walked back in and began to develop the new structure, process, and product line.

When Grove and Moore communicated this message to the upper and middle managers in their organization they discovered those managers had already made the discovery and started to make the change. In a sense Grove and Moore were the last ones to figure it out.

This is a fresh look at command and control. The leaders have the responsibility of making a lot of decisions and if there's effective communication it will all come together. Effective communication and the ability to collaborate are important in making a hierarchy work effectively.

VB: What is "permanent innovation?"

Langdon Morris: "Permanent innovation" is an attempt to express a paradox. On the one hand, there has to be a constant flow of new stuff; the market is changing so we have to change. In a sense new stuff has to be coming into the organization permanently.

Permanence implies structure and stability – non-change. It occurs in a culture and process where change is happening all the time in a systematic way. "Permanent innovation" is an attempt to put together two worlds that you wouldn't naturally think would go together. But that's what organizations need to achieve.

VB: It's a hybrid?

Langdon Morris: Yes, definitely a hybrid. It's trying to get people's attention by having them say, "Wait a minute that doesn't make sense." And trying to expose what needs to be accomplished in order to achieve permanent innovation.

VB: In Permanent Innovation you identify ten principles. If we understand these principles will we fully appreciate the essence of innovation?

cover of Permanent InnovationLangdon Morris: It may surprise you to hear me say it, but no, I don't think so.

Those ten principles are about defining some of the key management practices and principles around innovation. They're about managing innovation. Better than describing what innovation is, they say what we need to do to manage it. I think you'd have to look somewhere else for an actual definition of the essence of innovation.

VB: They help us understand how to deal with, and push for permanent innovation.

Langdon Morris: Yes, absolutely. The idea behind the ten principles is to identify the concepts that are critically important for someone who is saying, "I need to improve the innovation process in our organization; what do I look for or pay attention to?"

Our experience is that by paying attention to these principles you'll make significant improvements in the quality of the innovation process in your organization, and quantum leaps forward in the quality of the innovation outputs you produce.

VB: "Since innovations are critical to the future, it's clear that the management of innovation is entirely strategic in nature." Would you talk about this?

Langdon Morris: We know that innovation is how organizations create their future. We know that change is happening more and more quickly and therefore innovations have to emerge more and more quickly in order to respond to changing conditions. This is what corporate strategy is all about. It's about defining where we want to go in the future and how we're going to get there. I may just be restating what we already talked about but it's an important point.

VB: You observe, "…it's possible to over perform in a given market segment, and to incur unnecessarily high costs as a result." You identify Southwest Airlines as an example of an innovation that moved away from over performing. Is it often the case that there needs to be mainstream companies that are over performing in order for a lesser service or function to appear to be innovative and attractive?

Langdon Morris: You have to define "over performing" in order to answer that question. The underlying issue is, "Where will we find opportunities?" That's the basis of what innovators and innovation managers are asking themselves. In our view there are two ways opportunities are defined. It was surprising because as we thought about it, we kept thinking, 'There must be more than two. But we kept coming back to two.

One is we could make it cheaper. In the example you mentioned, Southwest Airlines, their business model says we're going to offer the same service for cheaper. Same service means air transportation. A seat on a Southwest plane it is going to cost you less than on another carrier. That is the value proposition.

A lot of other companies have embraced the same value proposition. Look at the success of Wal-Mart over the past 25 to 30 years. Their business model says, "We're going to make it cheaper than it has ever been before". And they've created tens of millions of loyal customers because they've done it.

Many other companies are using the same strategy: IKEA, the Swedish retailer is an obvious example, as are Costco and Home Depot. Making it cheaper is a strategy that has existed since the beginning of commerce.

The other strategy is to make it better. Obviously better is a subjective term – it could be higher quality, fancier, better materials, or longer lasting. "Better" can mean many things and consumers each have their own definition. "Better" can refer to luxury markets, to customization. A Bentley is better than the average Ford, Toyota, or GM car.

VB: Can it be better and cheaper, rather than the choice being between these two?

Langdon Morris: Not many companies have succeeded in achieving better and cheaper, but some have done so. 'Better' often implies more expensive. We can visualize this on a matrix. On the horizontal axis we have 'cheaper;' on the vertical access 'better.' In the upper right hand corner is the sweet spot – much better and cheaper. Not many companies have succeeded in occupying that part of the market, but if you can figure out a business model that gets you into that corner you are in the sweet spot for sure.

Your previous question was about companies that are over performing. Customers' primary value criterion is price. If you can provide the same product or service at a lower price then, by definition, your competitors are over performing because they are providing too much. It's costing them too much to build too much.

This is, in fact, how companies succeed. Southwest Airlines was able to create a business structure that enabled it to be profitable at a lower price, which meant the other airlines were over performing. And what happened? All the other airlines have redefined their business models in order to stop over performing to the point where the quality of service in the airline industry is now approaching the Southwest model. It's not going towards higher service. It is going progressively towards lower service, because cost has proven to be the thing people care about the most.

The small percentage of people who don't care about cost buy a business or first class ticket, and get the service they want. But 95% of passengers make travel decisions based on cost.

VB: "New ideas are difficult to find, and great ideas are rare." What advice do you have for business leaders who bemoan the fact they rarely encounter ideas that have the potential to lead to great innovations?

Langdon Morris: It means that the ideation process in their organization isn't working very well.

There are a number of reasons why this might be happening. Often people in corporations tend to look for new ideas about how to serve their existing core markets. But it is usually much more fruitful to look outside core markets at what we might call the 'edge markets.' These are the markets where things are done differently, where people are experimenting, and consumers are trying to change their consumption because they're not satisfied with existing products and services.

If you have to struggle to think of ideas, it means your ideation process is broken. It doesn't mean there aren't ideas available to you. It means you are not finding them because you're not looking in the right place, and in the right way. You have to fix your process and then you'll find more ideas than you can possibly cope with.

VB: "Four strategic innovation viewpoints are critical to innovation success [top-down, bottom-up, outside-in, and peer-to-peer]. Do many business leaders understand and consider using outside-in and peer-to-peer viewpoints?

Langdon Morris: Earlier – before this interview – we talked about IdeaConnection's business model, which is opening up the innovation process. Outside-in innovation, peer-to-peer orientation is a concept you're creating. If we open up our innovation process we will engage in a much richer conversation and we'll make progress faster towards turning our ideas into valuable innovations.

It seems that more and more executives are realizing they can't get all the good ideas from inside their organization. That charge was led by Procter and Gamble, which has been very upfront about their process of opening up the R&D process to outside influence. They realized they weren't getting enough good ideas. I think they're much happier with the ideas available to them now that they're using a very open innovation process.

VB: Procter and Gamble's CEO A.G. Lafley blazed a trail with new thinking in this area.

Langdon Morris: P&G's weapon was that some people in the R&D profession and in the academic fields were starting to advocate the need to open up the R&D process. Lafley at Procter and Gamble viscerally embraced this and was public about it.

Among business executives A.G. Lafley was clearly a leader in this area. He increased the public profile of an approach that people working in the field of innovation wanted to explore and implement.

VB: I noticed you used the term business executives. Are you of the view that mid-level business managers may be more reluctant to use outside R&D help?

Langdon Morris: I think it is a cultural question. Business managers are accustomed to dealing with outsiders. The question is, "Is it safe, in their corporate culture, for them to pursue an approach to innovation that may not be what their organization has done in the past." If they won't be criticized or ill judged for doing so, they are more than ready to open up their innovation process.

If the senior management of an organization has set a tone in which it is not safe to take such risks, then obviously people will be reluctant to try open innovation even if they think it is the right thing to do. So I think it is a cultural question more than anything else.

VB: Is fear of loss of patent rights and other intellectual property also a part of it?

Langdon Morris: Yes, that can be an issue but there are now enough models for open innovation that it shouldn't be as much of a barrier as it may have been in the past.

VB: Your permanent innovation principle #8 is "Ready, Aim, Aim, Aim, Fire." Why three aims!

Langdon Morris: I was trying to inject a little humor into the conversation.

The underlying issue is that a lot of organizations are in a "Ready, Fire!" mode, and they don't do much aiming at all. They jump onto the first idea. It's a problem if you're in a brainstorming session and participants come up with ten or twenty ideas, pick the one they like best, and start working on it. What they need to do is to come up with 100 or 200 ideas, and be systematic about choosing the ones that are the best.

Very often in American business we jump on the first idea that comes along and go for that one. The first is rarely the best idea.

It's important to be more thoughtful about how we target innovation, including the type of innovation we are going for.

In our consulting practice, InnovationLabs, we've identified four different types of innovation. We think there is a difference between incremental innovations, product and technology breakthroughs, business model innovations, and new ventures. Often corporate executives, leaders, and innovation teams don't think about business model innovation as something they should consider, but we think it's a very important type of innovation. In the innovation process we want people to think not only about the ideas, but also about what type of innovation they should be pursuing in their organization.

VB: "Who should not be involved in the search for new ideas? Can you think of anyone in your organization who should be excluded from this process? I can't either." Is this a key point for encouraging a culture of permanent innovation?

Langdon Morris: Absolutely! The organizations that are most successful in innovation have the broadest participation in the innovation process.

Probably the best example is Toyota. Toyota has a fabulous idea-gathering system. Every employee in the company as well as people who are partners from the outside contribute ideas every year, and the company ends up with millions of ideas. Most of them are incremental ideas. A lot pertain to the manufacturing floor where the ideation process is the natural way people work. Of course, a lot of the ideas are not new. I'm sure today in some Toyota factory somewhere somebody had an idea that somebody had last week, somebody else a month ago, and somebody else a year ago. But the fact that they have a culture where people are constantly asking questions, coming up with new ideas, and suggesting them to management has been one of the main factors that has led the corporation to be the world leader in auto manufacturing.

It is a culture that says everyone can contribute to this process; everyone has insights. A lot of the insights don't happen at work, they happen in peoples' lives. What happens in your personal life can contribute to the ideation process in your work life.

VB: Toyota is an example where it is not only encouraged, it is expected that you come up with innovative ideas.

Langdon Morris: Exactly. A lot of companies are now realizing they haven't been encouraging people to contribute ideas. They haven't been rewarding people for contributing ideas or teams for promoting innovation. Now many are shifting both the way they measure and the way they reward to reflect the need and desire to create widespread participation in the innovation process.

VB: You mentioned that Toyota tends to have mainly incremental innovation but in focusing on incremental innovation they seem to have realized or benefited from other types of innovation including business model innovation. Is that a good strategy to follow?

Langdon Morris: First of all I wouldn't say Toyota only focuses on incremental innovation. My comment, just to clarify, was that most ideas are incremental ideas because that's the nature of how ideas come to us.

The way the brain works is really fundamental to the innovation process. It works by association. The brain is not a linear, sequential processor like a computer. It is an association-connection machine.

Things that happen in our lives are quite disparate. Connections are made in our brains during experiences in our personal lives, at work, or when discussing ideas with clients. This is where most ideas and innovations come from. Naturally most ideas pertain to what we're doing from day to day, hour to hour, and minute to minute – so they're incremental. This doesn't mean Toyota is only coming up with incremental ideas. It merely means that the natural process results in most being incremental.

Out of the millions of ideas the company collects every year, some percentage are going to be ideas that break free and some will be, as you say, ideas pertaining to the business model. And some will be ideas for new ventures. The ideas which are not incremental have to be managed in a different way than incremental ideas.

An incremental idea on the factory floor might be implemented in five minutes and add value in a fundamental way. But an idea for a new venture, like the creation of Lexus, can be decades in preparation and execution. It requires a different kind of management process, a different framework.

All four types of ideas are essential to the ongoing success of any organization, and therefore all should be encouraged.

VB: More radical types of innovation may have started with what appeared to be an incremental innovation on the shop floor, but turned out to be the germ of a break through idea.

Langdon Morris: Absolutely. These things are entirely unpredictable. Going back to your comment and question about permanent innovation, the emergence of an idea is not fully predictable. You and I can't sit here and say, "Well, it is 11:32 a.m. and six minutes from now we're going to have a great idea." It's just not possible to predict. That isn't the way we humans work.

We need a process when there are many people working in our company and coming up with new ideas every day. We will come up with many new ideas every year and some will lead to breakthroughs, new ventures, and new business models. We have to manage the whole process so we make sure we capture these ideas, and manage them according to their market potential.

VB: "Developing a systemic capability inside of your organization to understand the customer's experience at a deep level is therefore not a nice complement to the capabilities your organization already has, but an absolute requirement for success at all forms of innovation beyond the incremental." What do you mean by "a deep level," and how does it relate to success?

Langdon Morris: We are trying to understand what it is that the customer wants today and what it is that the customer wants tomorrow.

VB: And what they need that they don't even know they want?

Langdon Morris: Exactly. A lot of customer decisions are made intuitively while they are shopping. They make decisions according to criteria they may not be aware of. In fact, market researchers find that a lot of what leads to a given market decision is not conscious in people's minds. So we have to probe and understand customers' motivations, ambitions, aspirations, and desires. We also need to understand their ostensible needs. When we understand those more hidden factors we can design products and services that respond to issues that are underneath the surface – which will ultimately influence what people choose.

We have to get good at doing research. It's not just researching the obvious. We have to ask questions, probe, and look at people's behaviors in a way that helps us understand what is going on behind the choices they make so we can better meet their needs.

VB: You need to think about who you are targeting as your customers if you're going to observe and understand at a deep level.

Langdon Morris: Absolutely, and embedded in your comment is the important realization that tomorrow's customers may not be today's customers. For example, Oldsmobile kept targeting its primary market, its core market, for about 25 years. These were successful, middle-class Americans who worked their way up to be able to afford to own an Oldsmobile. They felt they had accomplished something when they had reached this milestone. Oldsmobile targeted those customers perfectly for 20 to 25 years. In fact, in 1976 Oldsmobile had the number one best-selling car in America.

The problem is those people started to get older. Then they died. The strange thing about people who are dead is they don't buy new cars! Oldsmobile stayed with its core market right into the grave, and didn't prepare the brand for the next generation, or the generation after that. Tomorrow's customers may not be today's customers.

VB: Their children didn't necessarily want to buy an Oldsmobile.

Langdon Morris: Clearly they did not want to buy an Oldsmobile; there was no 'necessarily' about it. It was clearly not the brand of choice and that's why it doesn't exist any more.

VB: "I cannot emphasize enough the need to expand your innovation efforts beyond incremental innovation." Why is this so important?

Langdon Morris: Incremental innovation aims at protecting or enlarging your market share. But when the market turns, incremental innovation is not going to do it for you. You have to be prepared with a new business model or new core technologies, because the market will eventually evolve away from your core products or services. If you want to stay viable in the marketplace you have to be prepared for more fundamental kinds of change than incremental innovation can deliver.

VB: Producing ever better Oldsmobiles won't cut it.

Langdon Morris: Exactly.

Vern's Note: We will continue our interview with Langdon Morris in IdeaConnection's newsletter next week. We'll cover many topics, such as neutralizing idea killers, change driven by science and technology, why some companies don't have an innovation culture, why North America and Europe must wake up to the growing interest in innovation in Asia, and recommendations for some key books to read.

Langdon Morris' bio:
Langdon Morris is a co-founder and partner of InnovationLabs, an innovation-consulting firm. He is a frequent speaker at workshops and conferences worldwide.

Morris is the author of Managing the Evolving Corporation – Industrial Engineering (1994), The Knowledge Channel: Corporate Strategies for the Internet (1999), Permanent Innovation: The Definitive Guide to the Principles, Strategies, and Methods of Successful Innovation (2006), and co-author with William L. Miller of 4th Generation R&D: Managing Knowledge, Technology, and Innovation (1999).

In the fourth quarter of 2010 Langdon Morris' new book will be published: The Innovation Master Plan: How to Create a Winning Business Model.

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