Unrelenting Innovation: A book review by Bob Morris

Unrelenting Innovation: How to Build a Culture for Market Dominance
Gerard J. Tellis
Jossey-Bass/A Wiley Imprint (2013)

How to avoid or overcome “the incumbent’s curse” to achieve market dominance

By nature, books about innovation should contribute something new and/or something better to our understanding of what innovation is and isn’t as well as how to develop a mindset and skills that will enable us to (yes) contribute something new and/or something better. Gerard Tellis makes such a contribution as he explains how to build and then sustain a culture for market dominance. As Vijay Govindarajan suggests in the Foreword, “I like the central argument in this book: success breeds complacency, lethargy, or arrogance – in short, a culture that embraces the status quo instead of the future abhors risk and protects current successful products.”

This is what Tellis characterizes as “the incumbent’s curse”: Becoming successful hampers continued innovation and hinders continued leadership. He identifies three defining traits: “First, incumbents fear cannibalizing their current successful products…Second, incumbents are risk averse…Third, incumbents focus too much on the present” and probably the past. Hence a paradox: To paraphrase Marshall Goldsmith, whatever got an organization to its current success (however defined) will not only be able to sustain that success; worse yet, it will almost certainly eliminate that success in weeks and months (probably not years) to come.

Simply stated, “unrelenting innovation” is constant effort to make something new and/or make something better.” Odd are that, more often than not, innovation will not be the result. The process “fails” only when it does not continue. Every so-called “failure” is in fact a precious learning opportunity. I agree with Tellis that a culture within which innovation thrives must have defining characteristics that include the three he identifies: a willingness to “cannibalize” incumbent products and/or services, embracing risk, and a focus on the future. Organizations that aspire to establish and nourish such a culture must (a) provide appropriate incentives (i.e. strong for successful innovation but weak penalties for anything less), (b) establish internal competitive markets, and (c) empower innovation “champions” who not only create but also develop (with others) whatever is new or better.

These are among the dozens of passages I found to be of greatest interest and value, also listed to suggest the range of subjects covered during the course of the book’s narrative:

o Why Incumbents Fail to Innovate Unrelentingly (Pages 3-17)
o Understanding Technological Evolution (33-37)
o The Reflection, Hot-Stove, and The Expectation Effects (63-69)
o Availability Bias (114-121)
o Incentives for Enterprise (143-155)
o Four Characteristics of Markets (181-192)
o Four Characteristics of “Champions” (208-210)
o Steps in Empowering Champions (235-236)
o Micro Theories (238-250)
o Macro Theories (250-260)

With rare exception, the best business books are driven by research and that is certainly true of this one. Check out the list of major studies Tellis co0nsulted on Pages 17-19, the additional details in Chapter 8, his Notes (263-288), and his Bibliography (289-306. Exemplar innovation cultures include IBM, Samsung, P&G, and General Motors. However different they may be in most respects, all of them demonstrate highly developed communication, cooperation, and most important of all, collaboration. This book is also a major collaborative effort, as Tellis gratefully acknowledges on Page 307.

No brief commentary such as mine can possibly do full justice to the scope of material that Gerald Tellis provides in this volume but I hope that I have at least suggested why I think so highly of it. Also, I hope that those who read this commentary will be better prepared to determine whether or not they wish to read the book and, in that event, will have at least some idea of how to build and then nourish a culture for market dominance, an achievement that would be of substantial benefit to his readers’ professional development as well as to the success of their organization.

Those who share my high regard for this volume are urged to check out as well as Josh Lerner’s The Architecture of Innovation: The Economics of Creative Organizations as well as Reverse Innovation: Create Far From Home, Win Everywhere co-authored by Vijay Govindarajan and Chris Trimble with Indra K. Nooyi and The Other Side of Innovation: Solving the Execution Challenge co-authored by Govindarajan and Trimble; also, Steven Johnson’s Where Good Ideas Come From: The Natural History of Innovation and two co-authored by Tom Kelley and Jonathan Littman: The Art of Innovation: Lessons in Creativity from IDEO, America’s Leading Design Firm and The Ten Faces of Innovation: IDEO’s Strategies for Defeating the Devil’s Advocate and Driving Creativity Throughout Your Organization.

The Thought Leader Interview: Dov Seidman

Photograph by Matthew Septimus

Here is the introduction to an interview of Dov Seidman, conducted by Art Kleiner and featured in strategy+business magazine published by Booz & Company, during which the influential business author and CEO explains why the practice of enlightened self-governance gives companies an edge. To read the complete interview, watch a video of it, check out other free resources , and obtain subscription information, please click here.

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This interview, formally conducted in January 2012, started as an argument two and a half years earlier, when the economic crisis was at its peak. Dov Seidman — the founder and CEO of LRN, a global firm that helps companies with such matters as legal and regulatory compliance, reputation and principled performance, environmental sustainability, business ethics, governance, leadership, and culture change — had published a book, How: Why HOW We Do Anything Means Everything…in Business (and in Life) (Wiley, 2007). In August 2009 he visited the strategy+business offices to propose an article about the link between enlightened corporate behavior and performance. The most sustainably successful businesses, he argued, were also the most moral — not through formal programs like corporate social responsibility (CSR), but through what he called “sustainable values” (as opposed to “situational values”). They had an orientation toward sustaining human relationships built into their day-to-day practices and behaviors. Hence his book title:How a business is operated, led, and governed is just as important as what that business chooses to produce.

I was skeptical. Sure, many companies promoted themselves as ethical and responsible, but was there really a clear cause-and-effect relationship between values and performance? Among the most successful companies were quite a few that were known for visibly amoral — or, in some cases, exploitative — values and practices. Seidman persisted, arguing that the world’s growing transparency and interconnectedness were changing the culture of business: making it harder for large companies to operate purely on the basis of expediency and short-term returns. Consumers and employees were shifting their loyalty to companies they perceived as more principled. He added that in part because of the general criticism of corporations that had followed the economic crisis, there was a groundswell of enlightenment among the CEOs he knew. “We’re in a world,” he said, “in which you have to live and earn your reputation; you can’t just assert and manage it.”

We found one intriguing point of common ground when we talked about the government bailouts of General Motors, AIG, Bear Stearns, and Fannie Mae — companies that had all been dubbed “too big to fail.” Their size wasn’t the reason they had been saved, we agreed. They were really “too connected to fail”: too enmeshed in a chain of suppliers, financiers, customers, and community members. If they went down, too many others would go down with them, so they had to be kept alive. In that light, maybe Seidman’s argument made more sense; maybe companies would increasingly have to justify their existence on the basis of the ways in which their presence benefited an interwoven web of other companies and people.

Since then, the business world has seen two almost contradictory trends involving corporate values. As organizational learning expert Meg Wheatley recently noted in an interview in this magazine (Winter 2011), many companies seem to be moving away from enlightened management and retreating to command-and-control authoritarianism, often in the name of cutting costs. At the same time, there is indeed a visible wave of interest in the kinds of values that Dov Seidman champions. Banks and health insurance companies are becoming more consumer-centric; food companies are developing healthier packaged goods; automakers are putting less-polluting vehicles on the roads; and some company leaders are talking about authenticity, integrity, and participative management.

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Art Kleiner is the editor-in-chief of strategy+business and the author of The Age of Heretics: A History of the Radical Thinkers Who Reinvented Corporate Management (2nd ed., Jossey-Bass, 2008).

Michael Michalko: An interview by Bob Morris

Michael Michalko

Michael Michalko is one of the most highly acclaimed creativity experts in the world and author of the best sellers Thinkertoys (A Handbook of Business Creativity), ThinkPak (A Brainstorming Card Deck), Creative Thinkering (Putting your Imagination to Work), and Cracking Creativity (The Secrets Of Creative Genius).

 As an officer in the United States Army, Michael organized a team of NATO intelligence specialists and international academics in Frankfurt, Germany, to research, collect, and categorize all known inventive-thinking methods. His international team applied those methods to various NATO military, political, and social problems and in doing so it produced a variety of breakthrough ideas and creative solutions to new and old problems.  After leaving the military, Michael facilitated CIA think tanks using his creative thinking techniques. Michael later applied these creative-thinking techniques to problems in the corporate world with outstanding successes.  Michael has provided keynote speeches, workshops, and seminars on fostering creative thinking for clients who range from Fortune 500 corporations, such as DuPont, Kellogg’s, General Electric, Kodak, Microsoft, Exxon, General Motors, Ford, USA, AT&T, Wal-Mart, Gillette, and Hallmark, to associations and governmental agencies.  In addition to his work in the United States, Michael has worked with clients in countries around the world.

Here is an excerpt from my interview of him. To read the complete interview, please click here.

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Morris: Before discussing any of your books, a few general questions. First, who has had the greatest influence on your personal growth? How so?

Michalko: My mother was my greatest influence because she taught me by example that your life and happiness are determined by what you choose to or refuse to do.

We do not choose to be born. We do not choose our parents. We do not choose our historical epoch, or the country of our birth, or the immediate circumstances of our upbringing. We do not, most of us, choose to die; nor do we choose the time or conditions of our death. But within all this realm of choicelessness, we do choose how we shall live: with purpose or adrift, with joy or with joylessness, with hope or with despair, with humor or with sadness, with a positive outlook or a negative outlook, with pride or with shame, with inspiration or with defeat and with honor or with dishonor. We decide that what makes us significant or insignificant. We decide to be creative or to be indifferent. No matter how indifferent the universe may be to our choices and decisions, these choices and decisions are ours to make. We decide. We choose. In the end, the meaning of our own life is decided by what we choose to do or what we refuse to do. And as we decide and choose, so are our destinies formed.

Morris: The great impact on your professional development? How so?

Michalko: While in the military I observed that the more an expert one became in an area of military specialization, the less creative and innovative that person became. The paradox is that people who know more, see less; and the people who know less, see more. Consequently, the majority of the generals had a fixed mindset about what is possible and what is not. The creative and innovative solutions to military problem came from the youngest noncoms and officers who still had open minds.

I discovered the same paradox in civilian life. An example of this is when Apple Computer Inc. founder, Steve Jobs, attempted, without success, to get Atari and Hewlett-Packard interested in his and Steve Wozniak’s personal computer. As Steve recounts, “So we went to Atari and said, ‘Hey, we’ve got this amazing thing, even built with some of your parts, and what do you think about funding us? Or we’ll give it to you. We just want to do it. Pay our salary; we’ll come work for you.’ And their experts laughed and said, ‘No.’ So then we went to Hewlett-Packard, and they said, ‘Hey, we don’t need you. You haven’t gotten through college yet.”

It seems that once a person has formed an expectation concerning the subject being observed–this influences future perceptions of the subject.  Ken Olson, president, chairman and founder of Digital Equipment Corp., thought the idea of a personal computer absurd, as he said, “there is no reason anyone would want a computer in their home.” Robert Goddard, the father of modern rocketry, was ridiculed by every scientist for his revolutionary liquid-fueled rockets. Even the New York Times chimed in with an editorial in 1921 by scientists who claimed that Goddard lacked even the basic knowledge ladled out daily in high school science classes. Pierrre Pachet, a renowned physiology professor and expert, declared, “Louis Pasteur’s theory of germs is ridiculous fiction.”

If we experience any strain in imagining a possibility, we quickly conclude it’s impossible. This principle also helps explain why evolutionary change often goes unnoticed by the experts. The greater the commitment of the expert to their established view, the more difficult it is for the expert to do anything more than to continue repeating their established view. It also explains the phenomenon of a beginner who comes up with the breakthrough insight or idea that was overlooked by the experts who worked on the same problem for years.

Morris: Years ago, was there a turning point (if not an epiphany) that set you on the career course you continue to follow? Please explain.

Michalko: The realization that most educated people have a fixed mindset that encourages robotic thinking and determines a person’s outlook and behavior. Think of the fixed mindset shaped like an upside down funnel. At the wide bottom, there is a wide variety of different experiences. At the top, there is the narrow opening which represents a fixed mindset that superimposes itself on all the experiences. Once people with a fixed mindset have settled on a perspective, they close off all other lines of thought. Whereas, a creative thinker’s mind is shaped like a right side up funnel with the narrow opening over one experience. At the wide top there is a wide variety of different ways to see and think about the one experience. This represents a creative thinker’s growth mindset.

Imagine a mud puddle waking up one morning and thinking, “This is an interesting world.  I find myself in this hole and I find that it fits me perfectly. In fact, it fits me so well, it must have been made to have me in it. Everything is fine and there is no need for me to worry about changing anything.” Yet every day as the sun rises in the sky and the air heats up, the puddle gets smaller and smaller. Yet the puddle frantically hangs on to the notion that everything’s going to be all right, because the puddle believes the world is what it is and was meant to have him in it. The moment he disappears catches him rather by surprise.

People with fixed mindsets are like the mud puddle. They were taught by authority figures that their genes, family, education and environment have determined their destiny, and they, like the atom, just are. Many of them were taught that they are not creative. Consequently, they believe they are a certain kind of person and there is not much they can do to change that. They might be able change some small things but the important part of who they are can’t be changed.

It was this realization that encouraged me to research, write and teach the importance of understanding these cognitive mindsets, how they influence us and how we can easily change the dynamics of a mindset and change the way we think and see things.

Morris: To what extent has your formal education been invaluable to what you have accomplished in life thus far?

Michalko: What I learned from observing and listening to academics in college was their curious tendency to assimilate new information into their pre-existing views. Their mental image of the established view interferes with their perception and understanding of new ideas and concepts. In the case of real life, physicists could not see Einstein’s theory of relativity because of their established, accepted view. For years, they tried to incorporate his view into the established view without success.

Experts always try to assimilate new insights, ideas and concepts into their view. What happens in real life is, despite ambiguous stimuli, people form some sort of tentative hypothesis about what they see. The longer they are exposed to this hypothesis, the greater confidence they develop in this initial and perhaps erroneous impression, so the greater the impact this initial hypothesis has on subsequent perceptions.

Suppose an expert has an established theory about the danger of boxes and their effect on human life and the environment. The theory is that boxes might be harmful and the use of boxes should be regulated. Now, suppose that I leave a box on the floor, and my wife trips on it, falling against my son, who is carrying a carton of eggs, which then fall and break. The expert’s approach to an event like this would be that the best way to prevent the breakage of eggs would be to outlaw leaving boxes on the floor. As silly as this example is, it is analogous to what is happening in the world of global warming. If you survey the history of science, it is apparent that most individuals who have created radical innovations did not do so simply because they knew more than others. One of the most important experiences Noble laureate, Richard Feynman, had in his life was reading a copy of James Watson’s typescript of what was to become his famous book, The Double Helix, about his discovery, together with Francis Crick, of the structure of DNA. Feynman had become unproductive and began to believe he had run out of ideas. The discovery Feynman made was that Watson had been involved in making such a fundamental advance in science, and yet he had been completely out of touch with what everybody else in his field was doing.

As told in Watson’s classic memoir, The Double Helix, it was a tale of boundless ambition, impatience with authority and disdain, if not contempt, for received opinion. “A goodly number of scientists,” Watson explained, “are not only narrow-minded and dull but also just stupid.” Feynman wrote one word, in capitals: DISREGARD on his notepad when he read that. This word became his motto. That, he said, was the whole point. That was what he had forgotten, and why he had been making so little progress. The way for thinkers like himself to make a breakthrough was to be ignorant of what everybody else was doing and make their own interpretations and guesses.

So Feynman “stopped trying to keep up with what others were doing and went back to his roots, comparing experiment with theory, making guesses that were all his own.” Thus he became creative again, as he had been when he had just been working things out for himself, before becoming a famous physicist in academia. While this is an important lesson for science, it is a supreme lesson for any discipline where “current knowledge” can be dominated by theories that are simply incoherent.

Make your own interpretations of your experiences to shape your own beliefs and concepts about your world. This is the lesson Feynman called the most important of his life. This is the lesson I learned during my college years.

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To read the complete interview, please click here.

Michael cordially invites you to check out the resources at these websites:

His website

Psychology Today Blog: Creative Thinkering

Blog

Twitter 

Facebook Fan Page

21 Ways to Kill Your Creativity

Here is an excerpt from an article written by Michael Michalko, author of business classics that include Cracking Creativity: The Secrets of Creative Genius (2001), Thinkertoys: A Handbook of Creative-Thinking Techniques, 2nd Edition (2006), and Creative Thinkering: Putting Your Imagination to Work (2011).

Here are [seven of] 21 suggestions, recommendations and habits to help you kill your creativity, guaranteeing that you will never come up with a good idea. If used by supervisors effectively, they are also guaranteed to kill creative and innovative thinking throughout an entire organization.

To read the complete article and check out countless others. please click here.

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1. Always think the way you’ve always thought. When confronted with a problem, fixate on what you were taught about how past thinkers solved it. Then analytically select the most promising logical past approach and apply it to the problem, excluding all other possibilities.

2. Be focused. The key to logical, linear thinking is knowing what to exclude from your mental space. Exclude everything that is dissimilar, unrelated or is in some other domain from your subject. If you want to improve the can opener, only study existing can openers and how they are made. Then work on improving what exists.

3. Always do what you’ve always done. If you always do what you’ve always done, you’ll always get what you’ve always got. This will minimize surprises and mistakes. We are all a product of our experience. Stay within your comfort zone and don’t waste time and energy exploring what people in unrelated areas do.

4. Don’t embarrass yourself. You are labeled and categorized by your personal history, I.Q., and education. Don’t embarrass yourself and your family and friends by pretending to be something you’re not. Always remember an atom is an atom and cannot be anything else. Neither can you.

5. Know your limitations. Most of us do not have the genes, family history, intelligence, or education to be creative. Listen to your inner voice when it tells you that you are not creative. Play it safe. Do not take risks. If you work for yourself, don’t break what is not broken. If you work for someone else, remind yourself that you don’t get paid to create ideas. Be happy receiving a paycheck.

6. Be skeptical. Whenever an idea is offered, analyze it, criticize it and judge it. Never defer judgment. Be skeptical. Look for reasons why it can’t work or can’t be done. Take pride in being the devil’s advocate. Where’s the data? The research? Where’s the evidence it can work? What’s the history of the person who suggested the idea? Always remember people equate skepticism with wisdom.

7. Always listen to the experts. They spend their lives studying their subjects and know what’s possible and what is not. You do not. Respect their expertise and follow their advice religiously.

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To read the complete article and check out countless others. please click here.

Michael Michalko is one of the most highly acclaimed creativity experts in the world and author of the best sellers Thinkertoys (A Handbook of Business Creativity), ThinkPak (A Brainstorming Card Deck), and Cracking Creativity (The Secrets Of Creative Genius).

As an officer in the United States Army, Michael organized a team of NATO intelligence specialists and international academics in Frankfurt, Germany, to research, collect, and categorize all known inventive-thinking methods.  His international team applied those methods to various NATO military, political, and social problems and in doing so it produced a variety of breakthrough ideas and creative solutions to new and old problems.  After leaving the military, Michael facilitated CIA think tanks using his creative thinking techniques.

Michael later applied these creative-thinking techniques to problems in the corporate world with outstanding successes.  Michael has provided keynote speeches, workshops, and seminars on fostering creative thinking for clients who range from Fortune 500 corporations, such as DuPont, Kellogg’s, General Electric, Kodak, Microsoft, Exxon, General Motors, Ford, USA, AT&T, Wal-Mart, Gillette, and Hallmark, to associations and governmental agencies.  In addition to his work in the United States, Michael has worked with clients in countries around the world.

Find out more at http://www.creativethinking.net.

When It Isn’t Just Business

Here is a recent article from the Drucker Exchange (the Dx), an online resource that hosts an ongoing conversation about bettering society through effective management and responsible leadership. It is produced by the Drucker Institute, a think tank and action tank based at Claremont Graduate University that was established to advance and build on the ideas and ideals of Peter F. Drucker, the father of modern management. To learn more about the Dx and the Institute as well as to check out their resources and sign up for a free subscription to its online newsletter, please click here.

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Ever since Fred Flintstone and Barney Rubble partnered up and launched an ill-fated private detective business, negotiating personal relationships within a work setting has proven tricky. The latest evidence comes in the form of a resignation by Liam Fox, Britain’s defense secretary. Fox resigned, according to a recent Wall Street Journal, “amid an intensifying controversy” over a friend who was alleged to have acted as an unofficial adviser.

“Mr. Fox’s relationship with Adam Werritty has been under intense scrutiny in recent days,” the Journal reported, “after the defense minister acknowledged that his former housemate and best man at his wedding attended several official meetings and used a business card that described himself as an adviser—a role he doesn’t hold.” Fox, for his part, conceded that he’d allowed his personal and business interests “to become blurred.”

Peter Drucker well understood the power of workplaces to create a sense of community—and to foster friendship. “Work, since time immemorial, has been the means to satisfy man’s need for belonging to a group and for a meaningful relationship to others of his kind,” Drucker wrote in Management: Tasks, Responsibilities, Challenges. “A man can work very well with somebody whom he never sees away from the job, and for whom he feels neither friendship nor warmth nor liking. . . . But the fellow worker can also be a close friend with whom one spends as many hours away from work as possible, with whom one goes hunting or fishing, spends one’s vacation, spends one’s evenings, and shares much of one’s life.”

Where Drucker drew the line, however, was in the realm of superiors becoming too chummy with subordinates. “Men who build first-class executive teams are not usually close to their immediate colleagues and subordinates,” Drucker noted in The Effective Executive. “Picking people for what they can do rather than on personal likes or dislikes, they seek performance, not conformance. To insure this outcome, they keep a distance between themselves and their close colleagues.”

The quintessential example of an executive who maintained such a distance was Alfred Sloan, the longtime head of General Motors. “Sloan had no friends within the GM group,” Drucker wrote. “He never invited them to his home. Unless it was a business meeting with a clear business agenda, he did not even sit down to a meal with any of them. He never accepted an invitation to any of their homes, even on business trips to their hometowns.” To be a chief executive, Sloan felt, was “incompatible with friendship and social relations.”

 

 

Brand Portfolio Strategy: A book review by Bob Morris

Brand Portfolio Strategy: Creating Relevance, Differentiation, Energy, Leverage, and Clarity
David A. Aaker
Free Press (2004)

Note: I read this book when it was first published and recently re-read it. If anything, Aaker’s insights are even more valuable now than they were then.

Aaker has earned and deserves his renown as an expert on branding. Perhaps you have read one or more of his previous books: Managing Brand Equity (1991), Building Strong Brands (1995), Developing Business Strategies (1998), Brand Leadership (with Eric Joachimsthaler, 2000), and Strategic Market Management (2001). In my opinion Brand Portfolio Strategy is Aaker’s most important work…thus far. One of the most popular recent buzz words is “portfolio” which, insofar as strategy is concerned, is best understood in terms of diversity which creates or allows for options and opportunities otherwise probably unavailable.

According to Aaker, the brand portfolio strategy “provides the structure and discipline needed to have successful business strategy. A brand portfolio strategy which is confused and incoherent can handicap and sometimes doom a business strategy. One that fosters organizational and market strategies, creates relevant, differentiated and energized brand assets, and leverages those brand assets, on the other hand, will support and enable business strategy.” The brand portfolio strategy that Aaker advocates, therefore, creates relevance, differentiation, energy, leverage, and clarity.

There is a diagram inside the front and back covers of this book that illustrates precisely what such a strategy involves, and, what the various relationships are between and among its various components. (As I read this book, I found it helpful to refer back to the diagram occasionally as I would to a map throughout a journey. The same diagram also appears on page 17.) I appreciate the fact that Aaker illustrates each of his core concepts by examining various corporations’ successes and failures with a brand portfolio strategy, notably Intel, Disney, Microsoft, Citigroup, SONY, Dove, GE Appliances, Dell, and Unilever.

After having read the previous sentence, decision-makers in small-to-midsize companies may conclude that the brand portfolio strategy offers little (if any) value to them. That would be a mistake and I apologize if I inadvertently encourage anyone to reach that conclusion. Aaker’s quotation of a remark by Frank Lloyd Wright seems (to me) relevant both to the brand portfolio and to almost every organization, regardless of size of nature: “Always design [or redesign] a thing by considering it in its next larger context — a chair in a room, a room in a house, a house in an environment, and environment in a city plan.” That is as true for a family-owned automotive repair shop as it is for General Motors.

Whatever their size and nature may be, all organizations really do need to position themselves so as to be perceived in the marketplace as having relevance, differentiation, energy, leverage, and clarity. In this brilliant book, Aaker explains HOW to accomplish that. Those who share my high regard for this book are urged to check out Harvard Business Review on Brand Management, Kaplan and Norton’s The Strategy-Focused Organization, Godin’s The Purple Cow, Finzel’s Change Is Like a Slinky.

Hotbeds of Innovation

William J. Holstein

Here is an excerpt from an article written by William J. Holstein for strategy+business magazine. To read the complete article, check out other resources, and obtain subscription information, please click here.

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U.S. multinationals are looking to small companies and startups for the next big ideas.

As companies in Asia and Latin America transform themselves from low-cost manufacturers to competitive innovators, many U.S. multinational corporations are confronting a strategic dilemma: Although under pressure to stay ahead of their often-flush global rivals, these multinationals are being forced to revisit their R&D budgets — a consequence of weak sales at home, where consumers are nervous about spending.

Some companies have responded by offshoring design and engineering to drive down costs. IBM, a well-known example, has invested significantly in its presence in China and India. Others have adopted open source policies that encourage collaboration, such as Procter & Gamble Company’s “Connect + Develop” platform, which lets P&G and external product and process designers share technologies and know-how. But another option is growing more popular. Called “ecosystem investing” by some innovation executives, it refers to the increasingly complex network of suppliers and innovators supporting large companies.

In this model, well-established U.S. companies are creating strategic partnerships with startups and small companies whose technologies and skills can help the large companies expand their own capabilities. Longtime ecosystem investors such as Johnson & Johnson (J&J) and Intel are driving existing ventures toward advanced breakthroughs, and companies such as General Electric, General Motors, and Google have adopted the approach in earnest in recent years.

The goal of the incumbents is to systematically target emerging technologies and “harvest” ideas without having to take on the risk of acquiring the smaller companies. Sometimes the large company takes an equity stake, and its top executives may sit on the small company’s board or mentor its top management. Alternatively, it may seek to license the small company’s technology or buy its products and distribute them to global markets. In all these arrangements, the strategy is to use external partnering to tap into startup sectors, for example, genomics and biotechnology, advanced robotics, lithium ion batteries, semiconductor manufacturing, and nanotechnology.

As many as 12 drugs in J&J’s stable of products resulted from ecosystem investments, says Garry Neil, vice president in charge of the company’s science and technology office. To find potential partners, Neil’s office scours biotechnology clusters in cities such as Boston, San Francisco, and San Diego. “The secret sauce for the United States is the research universities and institutes, which are unparalleled in their ability to innovate, and to attract the best and the brightest from around the world,” says Neil. The company is not trying to push the frontiers of knowledge as much as it is seeking to find technologies that can be commercialized. Adds Neil, “We focus less on winning Nobel Prizes and more on trying to come up with something that people are willing to pay for.”

Neil has money earmarked in his budget to invest directly in startups, and if necessary he can seek additional funding from the Johnson & Johnson Development Corporation, an internal venture capital fund. “The idea is to make the wall between [J&J’s] R&D unit and small, academic companies porous,” he says. In 2006, for example, Ortho-McNeil Inc., a J&J division, invested the modest sum of US$40 million in Metabolex Inc., a privately held biopharmaceutical company based in Hayward, Calif., so the two companies could collaborate on the development of compounds used to treat type 2 diabetes.

The arrangement paid off for both firms. Metabolex enjoyed a vital infusion of capital at a time when it was circling the “valley of death” — what venture capitalists sometimes call the period when many small companies are spending heavily on up-front research but have not yet begun to reap the rewards. And J&J obtained access to a technology that could arguably be developed faster and more cost-effectively at a small company than through its own R&D pipeline. In June 2010, Ortho-McNeil received an exclusive worldwide license to commercialize several Metabolex drugs, including the diabetes compound, for about $330 million. That’s far less than the $1 billion a pharmaceutical company typically spends to develop drugs internally, and far more than Metabolex could have expected to bring in on its own.

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To read the complete article, check out other resources, and obtain subscription information, please click here.

William J. Holstein is the author of The Next American Economy: Blueprint for a Real Recovery (Walker & Company, 2011).

Quality – The Strength of the Product; This is Ground Zero for Business Success (Insight from Gladwell’s latest)

Malcolm Gladwell has a new article.  That sentence alone sends me to read the article immediately.  He is the most curious of writers, and such a good and thorough storyteller.

His latest, Overdrive: Who really rescued General Motors? is based on the book Overhaul by Steven Rattner, and tells the story of the overhaul of General Motors.  It is filled with insight.  But this section jumped out at me:

Kristin Dziczek, of the Center for Automotive Research, estimates that the “new” G.M. is roughly eighty-five per cent the product of the work that Wagoner, in concert with the U.A.W., did in his eight years at the company and fifteen per cent the product of Team Auto’s efforts. That seems about right: car companies stand or fall, ultimately, on the strength of their product, and teaching a giant company how to build a quality car again is something that can’t be done on the private-equity timetable.

This is business success in a nutshell.  After all is said and done, the quality of the product makes all the difference.

A few years ago, I was driving out in Lewisville (near Dallas), and noticed a new large store.  I don’t remember the name, but walked in to check it out.  It was clearly some kind of Container Store knock-off.  They were trying to out Container Store The Container Store.  What an impossibility! The Container Store oozes quality, along with its superior and legendary customer service.  This store looked similar – but a walk though the aisles told me quickly that the quality was simply not a match.  This was a counterfeit, a pale imitation…   And, predictably, the store is long gone.

Whatever your business is, here’s your real test:  how’s your quality?  If it’s not the best, the top…if you don’t ooze quality, then your work is cut out for you.  Get to work on quality.  Only after the quality is there can you do all that other stuff that is needed for success.

Karim R. Lakhani on why the Google Wave decision shows strong innovation management

Karim R. Lakhani

Here is an excerpt from an article written by Karim R. Lakhani for the Harvard Business Review blog. To read the complete article, check out other articles and resources, and/or sign up for a free subscription to Harvard Business Review’s Daily Alerts, please click here.

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Some tech pundits were surprised that Google decided to shut down Wave yesterday [click here] just a year after its launch and chastised the company for its decision. But I’m not surprised and I applaud the company’s decision to pull the plug after it was clear the market wasn’t interested in Wave [click here]. From my vantage point as someone who studies innovation [click here], Google’s decision was exactly the right move and provides some very important lessons for managing innovation in both small and large organizations.

The first lesson, of course, is that uncertainty haunts all innovation attempts. Charles Kettering [click here], inventor and VP of R&D and Board Member of GM (1920-1947) famously noted that when it comes to innovation: “You don’t know when you are going to get the thing, whether its going to work or not and whether its going to have any value whatsoever.” In essence Kettering implied that any innovation attempt faces a combination of temporal, technical and market uncertainty. Even a company like Google, recognized for its wealth of intellectual talent in its employees, was not able to figure out before hand if there would be a market for Wave. Some types of uncertainties are simply not resolvable before the fact, and the only true way to find out is to make the investment and launch an innovative product in the market place. Google should be applauded and rewarded for pioneering a risky project and publicly launching it so that it can learn from the market.

Google’s decision to launch Wave also provided an important signal to both its existing and potential employees that it values innovation [click here] and the efforts of its staff to imagine new revolutionary possibilities about the future. In a global war for talent [click here], the best scientists, engineers, marketers and managers are going to affiliate with organizations that will allow them to fully express and exercise their creativity. Supporting the inception and development of such creative projects to attract and retain top flight talent is thus another important part of managing innovation.

Failure of course is always a possibility with any attempt at innovation. Indeed the bedrock of innovation is failure. Unpacking the history of most innovative products and services will reveal a long track record of failure where innovators attempted many different (failed) ideas and approaches on their way to create high-value solutions. These failures are a necessary on the path of innovation and executives and managers need to build an organizational culture that has a high tolerance for failure so that that their staff don’t second guess big risky ideas and instead propose incremental bets.

Certainly the business world is rife with examples of other firms that keep investing more resources and staff in failing projects in the hopes of a miraculous recovery or simply to avoid the public embarrassment of failure. However, admitting failure and moving on is another key lesson in managing innovation. With Wave, Google simply did not get the user traction it needed to justify its existence. Innovation managers need to develop clear metrics about performance criteria and be ruthless about shutting down projects [click here] that do not meet the bar.

The ability to (quickly) shut down failing projects and reallocate intellectual and financial resources to other more promising endeavors is critical to innovation success as it releases individuals and budgets to take on the next big challenge. It also indicates to the internal organization that performance metrics are important and projects that do not meet the criteria will not be allowed to languish. Of course the lessons from the failure should be embraced and rapidly applied to other projects. In the case of Wave, Google has already started to bring some of the communication and collaboration features into their more successful products like Gmail and Docs.

Google should be commended for both launching and shuttering Wave as it shows that their managers both embrace creativity and innovation and are also cognizant of allowing failure and dealing with it rapidly and efficiently if the creative efforts do not bear fruit. More of us should be following in their footsteps.

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To read the complete article, check out other articles and resources, and/or sign up for a free subscription to Harvard Business Review’s Daily Alerts, please click here.
Karim R. Lakhani is an Assistant Professor of Business Administration at Harvard Business School.

Adam Hartung suggests, “Stop focusing on your core business”

Adam Hartung

Here is an excerpt from an article written by Adam Hartung that appeared in Forbes magazine (July 27, 2010). To read the complete article, please click here.

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It has become the fast track to oblivion.

“Where Have All the Flowers Gone” was a 1960s antiwar hit for Peter, Paul and Mary. The “flowers” meant soldiers dying in Vietnam. These days we might be tempted to sing, “Where Have All the Mighty Corporations Gone?”

Circuit City, Fannie Mae, Washington Mutual, AIG, General Motors, Chrysler, Sun Microsystems, Silicon Graphics, General Growth Properties, Linens ‘n Things, Sharper Image, FAO Schwarz, United Air Lines, Northwest, Delta, US Airways. These were all leading companies, often dominating their industries, that either failed, declared bankruptcy or were saved from failure by the government.

Were they all run by dopes? Circuit City and Fannie Mae were named two of the best companies in corporate America in Jim Collins’s bestselling book Good to Great. By Mr. Collins’ measure, Circuit City had the best performance of any company on his entire vaunted “great” list. Collins, who is known to have received more than $100,000 for a single speech, said all American management should emulate Circuit City and Fannie Mae. Surely leaders aren’t emulating those examples now.

What happened to bring down all these great names, and for that matter to bring on the Great Recession? It would seem a great deflection to blame it all on government. Most of the last decade saw Republican pro-business policies dominate the landscape, and contraction in government oversight across almost all industries. The pro-business policies promoted by an M.B.A. president were supposed to help businesses grow. No, the collapse of growth has to be related in some way to management, to decisions that business leaders systematically make that–well–haven’t worked out too well.

A central tenet of business wisdom is that you must “focus on your core.” That can range from core customers and markets to core capabilities, functionality, assets and technology. The message is to know what is at the heart of your business success historically, then make sure you do more of it better, faster and cheaper than anyone else. If you focus, focus, focus on being excellent at what you do, as Tom Peters told us in the 1980s, everything will work out fine in the end.

Only we’ve increasingly seen, year after painful year, that it’s not true. The leaders of the above listed great companies weren’t stupid, or lazy or so arrogant as to ignore important business concerns. They knew their core strengths, and they doubled down on improving them time and again. In the end, the strategy simply didn’t work.

Perhaps it’s time we realized that competing in 2010 is nothing like competing in 1975. Capacity shortages of just about everything, including capital, are nonexistent. In fact there’s overcapacity–just look at manufacturing utilization numbers and interest rates. America today is fatter (more overfed), better housed (more and bigger homes) and better transported (there are more cars registered in America than licensed drivers) than ever. More, better, faster, cheaper was a mantra for industrial era management. Today if you focus on efficiency and optimizing your business model, you’ll get declining marginal returns, really, really fast.

That’s because today the basis of competition can change within months. The value of customer databases and product purchase histories are worth more ($53 billion at Amazon) than brick and mortar retail stores ($47.5 billion at Home Depot and $7.8 billion at real estate rich Sears). Moving fast is worth a lot more than hard assets or an optimized business model.

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To read the complete article, please click here.

Adam Hartung lives in Chicago and is a partner in Vector Growth Partners, a growth strategy consulting firm in suburban Washington, D.C. He is the author of Create Marketplace Disruption: How to Stay Ahead of the Competition. Learn more at AdamHartung.com.