Innovation as Business System

There's nothing like "the next big thing" to disrupt a well thought-out strategic plan. Most planning is based on critical assumptions about the world; and innovation -- by definition -- throws those assumptions out the window. This idea of "disruptive technologies" is now classic and was introduced in a HBR January 1, 1995 article by Joseph L. Bower and Clayton M. Christensen.

Until someone has actually thought of a big new idea (the only kind that count) no one sees it coming -- not even the person in whose head the idea first occurred. That's what makes innovation so disruptive; not that it's new, but that it's a surprise -- which is why a "strategy of innovation" is an oxymoron. That's like saying: "We don't know what we are doing next year, but -- whatever it is -- it will create competitive advantage because it will be innovative." Even Steve Jobs didn't know the iPod would be coming until someone else at Apple thought of it. And a week earlier even that person didn't know there would be an iPod. So, is that strategy or simply a policy of creating an environment in which breakthrough ideas are a) encouraged and b) selectively funded?

It's no surprise then that strategy consultants look at innovation with awe and envy. In the jargon of high-tech, they'd like to put a "wrapper" around it -- a little "API" they could just plug into an organization to empower it. That's sort of what Adventis has attempted in its white paper "Managing Technology Innovation," by Ragu Gurumurthy and David Waite. They say that "traditional approaches [to innovation management] . . . fail to treat innovation as an integrated and highly dynamic business system" (illustrated here). Specifically, you should manage innovation like like you play the "futures" market. You balance risk against alternative outcomes and apply feedback loops so you can respond rapidly to changes in outlook. It's not the new ideas themselves that put you at risk, it's the follow-through on those ideas that put you at risk (or create reward). Therefore "decouple" the idea part from the follow-through part. Coming up with big ideas is one job. Managing options is another.

So, do you think organizations can bottle innovation? Creative types might say no. But a lot of companies are sure trying. In fact they see it as a necessity. Witness what Jeff Immelt is doing at GE. What you certainly can bottle is a system for investing in futures -- and isn't the future what ideas are for anyway?

(Also see my May 2006 blog post for references to this article.)

Simple Is Not Always Easy Either

I received some emails in response to my last post, about a Mercer Management Consulting article on complexity. I said that when it comes to weeding out unprofitable customers, the problem is not necessarily complexity, but the tools you use to manage complexity (or lack thereof).

There is an 80/20 rule that applies to almost everything in life

One reader suggested I take a look at a BCG article titled "As Simple as Possible" by Kenneth Keverian, Vikas Taneja, and Bob Victor. The article spcifically talks about what it calls technology hubris: "Too many companies have the naive belief that IT will 'automate away' the complexity problem.'" I agree.

There is an 80/20 rule that applies to almost everything in life, be it customers, contract terms, SKUs, discount levels or anything else. You should identify the things that make the big impact in your business and get rid of the rest -- or at least figure out how to make them not occupy a lot of expensive management attention. The BCG article does a great job of actually addressing the issue of how to reduce (or prevent) harmful complexity. That's different, however, than saying that companies should eliminate all complexity, or that they should not invest in the tools that help manage what complexity actually adds significant value.

Simple Doesn't Always Equal Smart

Mercer Management Consulting is posting a white paper on its website titled: "Unlocking Profitability in Complex Companies," which says that maufacturing companies should weed out customers that don't contribute enough to profit. Those customers are harder to identify in a complex company with lots of SKUs, brands, channels, and -- well -- customers.

That's true, but the problem is not the complexity -- although an inverse statistical correlation can probably be made between profitability and the number of SKUs or brands per customer. Statistical correlations, as we all know, do not prove causality. For example, Mercer cites its own 600-company study performed beween 1998 and 2003 that found that "fewer than half the companies with annual revenue growth rates of 5% or more also achieved increased operating margins." Mercer is not saying that revenue growth by itself causes lower margins.

There are a lot of companies that do fine with lots of complex relationships to manage and lots of SKUs. Look at Wal-Mart.

The real problem is lack of good IT. Mercer cites one of its customer's -- called "Milo" in the paper -- that can't allocate costs accurately against customers, and as a result is over-serving and over-investing in some places and under-serving and under-investing in others. Mercer says that getting a handle on this "was more difficult than anticipated because Milo lacked consistent information and systems across its many businesses and geographies."

Okay, so isn't that the real problem -- not the complexity? Although not in Milo's case apparently, but in others there could be legitimate reasons to be complex. Just getting simple for the sake of simplicity seems kind of -- well -- simple.

Tapscott V. Carr (again)

SIMposium Executive Summit 2005 ended yesterday in Boston. The event, sponsored by the Society for Information Management saw a replay of the argument about whether "IT Doesn't Matter" -- an idea that gained considerable traction during the first half of the decade with the publication of a HBR article and book by the same title by Harvard Business School professor Nicholas G. Carr.

Well, the bad old days of the meltdown are over and we're still talking about it . . . or at least Don Tapscott is. He is the author of those pre-meltdown best sellers Digital Capital: Harnessing the Power of Business Webs and Growing Up Digital: The Rise of the Net Generation. In his SIMposium keynote he said that he has debated Carr a dozen times on this issue. Tapscott's point: that IT is different from "boxes and wires." It's all about information, and that never gets old.

No, but this debate does. By now I think almost everyone agrees that the boom-bust Internet cycle was like other technology cycles (say, 19th Century railroads) where investors overbuy the early optimism. The Panic of 1893 saw the bankruptcy of virtually every railroad in the country (and by then there were lots of them). Real growth happened later -- when railroads pulled the country out of recession until automobiles took over in the 1920s. Back then it wasn't about box cars and tracks either. It was about people getting the stuff inside fast -- just like now.

If the pattern holds, we are just beginning to see the Internet's sustainable benefits. That's partly due to technology catching up to the hype and partly due (as Tapscott says) to a new generation of users getting past the hype. As I've said here before, the impact of technology is not commoditization; it's bifurcation -- with the truely talented benefiting most. Tech itself is a commodity, and information is becoming one. That leaves insight.

The Ultimate Ad Spend

The Booze Allen Hamilton Strategy + Business website is posting an article titled "The Advertising Saturation Point" (registration required) by Evan Hirsh and Mark Schweizer. In it, the authors report the results of a study in which they applied a statistical model to predicting the optimum amount car companies should spend on advertising. Running the model against historical data, they found that companies sooner or later gravitate toward a spend based on three factors: 1) market share, 2) the number of different product models ("name plates") supported, and 3) the number of new models introduced in a given year.

How much are four words worth?

The authors suggest that a similar approach might be applied to other products -- that advertising spend is like price. Incremental dollars on either side of the optimum point result in bad outcomes -- and over time force a change in management behavior (if not management itself).

What about "creative" factors like copywriting or visual imagery? The authors found that these were mostly a wash. My opinion: that makes sense given that, over time, most companies will buy as much bad copy as good. But what about companies consistently known for great copy? Wouldn't that make their ads more economically efficient? The authors believe that BMW has been able to out-perform its below-optimum ad spend because of a classic tagline: "The Ultimate Driving Machine." So, how much are four words worth?

Bain 2005 Tools Survey

Want to know what senior managers are thinking about technology and how to use it? Cut to the chase by reading the Bain & Company 2005 Management Tools & Trends Survey. Co-authored by Darrell Rigby and Barbara Bilodeau, this is the firm's 10th such survey in 12 years. with the current version compiling the views of 960 respondents.

In a case of "do as I say, not as I do", senior executives see long term success coming from their ability to innovate and use technology for competitive advantage -- particularly as a way to make customers happy. Short term, however, their instinct is to cut costs (including, presumably, IT costs).

So what's a tool vendor to do? Here's one conclusion I draw from the Bain report: The market for IT tools and services (like everything else) is not so much commoditzed as it is bifurcated. More than ever before, there is a place for the truly outstanding among us -- you just have to make sure your customers see you for what you are.