GauravBhalla.com: The Practice of Customer-Driven Innovation

Collaboration and Co-Creation of Social Value: Government, Citizens, and Sustainable Cities

The next few years are likely to witness numerous environmental initiatives around the globe. For starters, the 2009 UN Climate Change Conference is expected to update the Kyoto Protocol. Additionally, several countries are looking to green policy stimulus packages to pull them out of the current recession.

At recent G20 conferences, Japan and South Korea trumpeted their stimulus plans as Green New Deals, while China has earmarked $30 billion of its package for environmental programs. In the United States, the Obama administration continues to emphasize its commitment to the environment, dedicating $80 billion of its $800 billion package to support green projects.

To maximize the benefits from these investments, local governments must successfully engage their citizens to influence their thinking and behaviors. Indeed, it is no coincidence that the most significant innovations occur within distinct cities or communities, as local governments can more easily interact with citizens, soliciting their feedback on key initiatives and working with them to execute policy.

The greenest communities share some common characteristics - energy-efficient buildings, renewable energy sources, widespread recycling, efficient and comprehensive mass transit, and substantive nature trails/green space. But that's just the cost of being green!

At the end of the day what they excel at is actively involving their residents in implementing green initiatives--the same way as corporations like Whole Foods do (discussed in the previous post). Two shining examples of innovative community initiatives are Curitiba and Malmö.

Curitiba, in Brazil, developed a holistic urban plan in the 1970s and 80s to preserve green space, establish a recycling program, and reinvent its public transportation system. However, given Curitiba's limited resources, it relies heavily on its residents to execute its initiatives.

Watch Brazilian urban planning guru, Jaime Lerner explain his philosophy of how to make life better for people by making cities more livable.

Curitiba's Cambio Verde program enables low-income citizens to exchange their metal and glass waste for fresh produce and bus tickets. Due to this program and widespread recycling of all residents, the city has emerged as Brazil's number one recycler, reusing 70% of its waste.
Curitiba used existing roadways to develop a rapid transit bus system that links all areas of the city. Investments in a high-speed, high-capacity bus network increased ridership by 400% in over 20 years; now 60% of urban travel occurs by bus. While citizens are more likely to own cars than other Brazilians, they use 25% less fuel per capita. Furthermore, 41 cities, ranging from Los Angeles to Bogotá to Seoul, are in the process of replicating Curitiba's transit system.
The city's Technology Street showcases 24 different homes, each built to spotlight sustainable construction materials, such as bamboo, or homes operating with renewable energy. The city encourages prospective homeowners to meet with the architects of these residents prior to starting any new construction.
Mandates for dedicated green space have encouraged residents to independently plant more than 1.5 million trees on city streets. A city-appointed shepherd and his flock of 30 sheep trim the grass in many of the nation's parks!

Malmö, Sweden, an industrial city in which the economy crashed and burned in the 1990s, has reinvented itself as a pioneer in sustainable development as an Ekostaden, or eco-city. Currently, Scandinavia receives more recognition than any other region for its sustainable living practices, with Sweden alone supporting more than 60 "eco-cities." How have they done it? A combination of bold politics, experimentation, and community empowerment.

Several key initiatives have enabled the city to achieve the following:

Widespread solicitation and implementation of citizens' unique ideas. One resident developed a plan for a new storm water system that captures 70% of rain water in one area of the city.
A community (Western Harbour) in which the government encouraged innovation from architects and planners to enable 100% renewable energy from the sun, wind, hydropower, and biofuels generated from organic waste
A mandate for increased green space, resulting in one of the largest developments of botanical roof gardens in the world with which citizens can insulate their homes, plant their own herbs and vegetables, and reduce the city's carbon dioxide emissions
A transportation system dominated by cyclers and mass transit. The city worked to make the cycling paths and bus network aesthetically pleasing to encourage shifts in citizen behavior.

Collaboration and Engagement are potent platforms for the co-creation of value, whether commercial or social. In both the commercial and social arenas, companies and institutions are only just beginning to truly understand the power of WE. Appropriately harnessing it and leveraging its power is still a few horizons away.

The old way of doing business is dead for business and marketing executives. It is dying fast for those who run countries and communities as well.

Continue reading Collaboration and Co-Creation of Social Value: Government, Citizens, and Sustainable Cities.

Customer Collaboration and Cause-Driven Marketing

You can hardly turn on the television or open a newspaper without witnessing a company's advertisements featuring its "green" or "sustainable" products or business practices.

In response to rapidly growing demand from consumers, the market for these products tripled between 2007 and 2008 with Nielsen predicting a marketplace of more than $400 billion in 2010.

But what do companies mean when they claim a green product or sustainable business practice? A range of interpretations exist, but the majority feature these ideas:

•   Green products are both environmentally and socially responsible and can often be described as follows: organically grown, locally sourced, carbon-neutral, recycled/recyclable, and/or energy-efficient. A variety of sources show that consumers perceive consumer goods manufacturers such as Seventh Generation, which makes cleaning products from natural ingredients, and Toyota, with the Prius and its commitment to environmental management, as some of the world's greenest companies.

•   Sustainable business practice can include organizations that produce green products and services but more broadly, it requires a corporate focus on long-term benefits for the environment, community, and society. Sustainable companies also pursue the "triple bottom line" of people, planet, and profits. Wal-Mart and Whirlpool, with their efforts to "green" their entire supply chains and introduce eco-friendly products to the masses, represent two companies dedicated to sustainable development. Some researchers also cite products linked to a cause, such as the Product Red suite, whereby companies donate proceeds to fighting AIDS in Africa.

Due in large part to rapidly shifting consumer attitudes and increasing enthusiasm for green products, companies ranging from Honda to Clorox brought nearly 6,000 "green" products to market in 2007 alone. However, this proliferation of products during a global recession has led consumers to become very discerning regarding the legitimacy of companies' green claims. The cynicism is justified, as often terms like green and sustainable are used to describe a variety of practices ranging from "greenwashing" to reputation-management to customer-focused, holistic sustainable business practice.

As more companies make green claims, government and consumer scrutiny of these claims also increases. Many groups now watch out for greenwashing, a practice whereby companies lead consumers to think that their products are more environmentally friendly than they actually are. Clairol received considerable scrutiny in the early 2000s for claims that its Herbal Essences line offered "a truly organic experience," when in fact, the formula included many chemicals. More recently, Kmart and other chains have provoked criticisms for false claims of biodegradable paper goods.

Companies working to improve their reputation in the area of sustainability attempt to offset or neutralize the effects of their businesses without concerning themselves with influencing consumer behavior or the behavior of partners in their supply chain. Enterprise Rent-a-Car, for example, has independently committed to building 50 million trees over the next 50 years to more than offset the emissions from its vehicles.

However, the most interesting examples of greening and sustainability tend to be where companies actively involve their customers in sustainable business practice. These companies are most likely to improve their own profitability and succeed in tangibly benefiting their communities through improved consumer behavior. A few examples of companies leading the pack follow.

Whole Foods won the 2009 Green Choice award from Natural Health magazine due to its commitment to substantive, earth-friendly initiatives that inspire its suppliers, competitors, and customers to follow suit.
•   After banning plastic bags from its stores in early 2008, the company recently announced that three times as many customers now shop with reusable bags.   Furthermore, it estimates that this shift has kept 150 million bags out of landfills since 2008. COO A.C. Gallo states, "At first we wondered if shoppers would just switch to paper but to our great surprise, people have been truly excited about using reusable bags."

Fairmont Hotels and Resorts was the first global hotel to launch an environmental management program back in 1990. Since then, its commitment to sustainability has touched its partners, guests, and the broader business community.
•    By 2010, the company's largest suppliers will comply with its Green Procurement Policy.
•    The company has sold tens of thousands of copies of its Green Partnership Guide, a "going green" handbook for companies across industries.
•    Guests worldwide pay a premium to contribute to the company's environmental initiatives, which include Lexus Hybrid Living Suites and Travel Green packages:

Finally, retail giant Wal-Mart has committed itself to improving sustainability across every facet of its business, extending this goal from suppliers to stores to consumers. The trump card with consumers, not surprisingly, continues to be everyday low prices even within its green product lines. Evidence that collaboration with consumers is working:
• 66% higher adoption rate of green products (including compact fluorescent bulbs, organic foods, and paper products made with recycled material) among its shoppers between April 2007 to April 2008
• Increased mainstream acceptance and purchase of Clorox Green Works natural cleaning products and Fair Trade coffee

Corporate practices in green and sustainable initiatives are still in an embryonic stage, making it difficult to offer a prescription for those companies who have yet to start walking. Perhaps you have come across some initiatives that have impressed you or made you change your own behavior.

Care to share them with the readers of this blog? Please do, we can learn together.

GM Reinvention: Symbolism or Substance?

In December, I blogged about why GM needs to reinvent itself and why a bailout will not be enough. So, when I heard that GM was planning to reinvent itself, naturally I was both excited and curious. But before we go any further, just in case any of you gung-ho readers get any wrong ideas - no, I am not taking any credit, just asking questions.

Is GM truly reinventing itself or is it merely trying to dress up its image for life after bankruptcy? Let's not be self-serving and evaluate GM's actions against the criteria for reinvention laid out in my December blog, let's just listen to GM's own words on how it intends to lead its new reinvented life and then pause to ask ourselves - symbolism or substance?

Based on reviewing a number of GM's press and video releases, GM's new identity revolves around the following features:

New GM to be built from GM's best and strongest parts
Best brands, best products (fuel efficient, world class quality, green, outstanding design)
Best in class cars and trucks
Product focussed and dedicated to customers (quality and service)
Leaner, meaner, greener, faster

While we don't need to add to the growing numbers who want to kick GM in the teeth, we don't need to be naive bystanders either. Does the agenda above suggest reinvention or does it suggest semantic symbolism aimed at placating its new stakeholders and gaining unexamined sympathy of the general public? Seems like the latter - as far as my vote goes.

Reinvention is not stitching together the best remnants of an eroding asset base that is incapable of producing relevant value for future markets. Its about transformation, about creating a new asset base capable of producing relevant value for future markets.

GM has failed on both counts. Its reinvention manifesto is totally silent on its vision of future value and future customers.

Cars and Trucks are not the only platforms for future value - or is GM declaring that it has no intention of participating in creating mass transit systems for green cities of the future?

Individual customers and families are not the only future customers - or is GM declaring that it has no intention of partnering with municipalities and local governments to help them search for longer term and sustainable transportation solutions?

Alfred D. Chandler, the noted business historian declared that essentially businesses are people. Another Alfred, Alfred Adler, no business historian, but a psychologist par excellence, advised us that in order to understand people watch their feet. The Washington Post informs us that at the Detroit Metropolitan Airport, before you reach baggage claim, a new GM auto sits on display in the airport's gift shop. Its not the much touted 2011 Volt, not one of the new GM hybrids, not even the Chevy Malibu which has got some impressive positive press. But a car that flies in the face of all claims of reinvention - the Chevy Camaro SS with a V8 engine!

A throwback to the muscle car days, an era that still maintains an eerie grip on GM's self image and its business mission. Sexy with charisma, is how Bob Lutz one of the executives most identified with GM's reinvention, recently described the Camaro. He himself drives a gas guzzling Corvette 2009, the ultimate aspiration of muscle car lovers. If businesses are people, and the people most responsible for GM's reinvention walk as described above, then all the din about GM's reinvention is exactly what it is - all hype, no hope!

Wake up, GM! For true reinvention to materialize, the caterpillar needs to become a butterfly! Time for merely being a faster, leaner, meaner, car company are over - that's just the cost of doing business, not the platform of a rejuvenated glorious existence.

What Do General Mills and Finland Have In Common?

The answer: A desire to grow through innovation, to provide greater and better value to their customers/citizens, and to co-create this value with selected collaborators and customers.

Let's visit General Mills first.

Most companies have big egos! Not surprisingly they are quick to disproportionately aggrandize their own skills and knowledge; especially when it comes to innovation and new product/service development. A symptom of this kind of thinking is the not invented here (NIH) syndrome - companies suddenly turning deaf and blind to suggestions coming from outside their four walls.

At one time or the other, the NIH syndrome has struck several big and not-so-big name companies. Apple, Hallmark, and even P&G are all guilty. Remember the well-publicized case of Shea O'Gorman. Apple drove the 9-year-old third-grader to tears, when in response to her hand written letter to Steve Jobs offering ideas on how to improve the iPod Nano, she got a response not from Steve but from the company's law department. They curtly informed young Shea that Apple doesn't accept unsolicited ideas, so she should not send them her suggestions and if she wanted to know why she could read their legal policy posted on the Internet.

Till very recently General Mills had their own version of NIH - Policy 16 - which stated that no outside product suggestions would be accepted. But all that changed a few years ago when the company had Wheaties for breakfast and became a champion and an industry role model for open innovation.

General Mills' G-WIN, an open innovation initiative, is entering its terrible twos. Happy birthday G-WIN! The initiative seeks outside partnerships with entrepreneurs, inventors, universities and other food companies. During its young life the program has generated hundreds of concepts for patented technologies or potential products that are complementary to its existing brands and businesses.

Two notable successes:

Fiber One® Chewy Bars: General Mills teamed with an exclusive partner on a fiber ingredient to develop a delicious snack bar with 9 grams of fiber per bar. Within months of the product launch, Fiber One bars were among the top 10 best-selling grain bars on the market.
Progresso® Reduced Sodium soups: Through a new proprietary partnership with an external company with considerable expertise in healthy foods, General Mills was able to source a great-tasting new lower-sodium ingredient for its Progresso Reduced Sodium soups. In the first year of launch, fifty percent of sales for lower-sodium Progresso soups came from consumers who weren't previously buying Progresso.

Collaboration and customer driven innovation bring resources, passion, and an energy that companies bogged down by their rules, standard operating procedures, and reverence for hierarchy just can't match.

It's just not companies but also countries that are fast signing on. Not surprising to see Finland, one of the top 3 knowledge economies of the world, leading the pack. Last Fall, Finland, home of Nokia, the world's largest manufacturer of mobile phones, unveiled a new innovation plan to keep the tiny Nordic country competitive in an increasingly competitive global market.

Two aspects of the new strategy are especially noteworthy:

A desire to be more connected with innovative companies and researchers from abroad - Finland has just over 5 million people. In order to make this connectedness a reality, Finland has begun establishing a network of international innovation centers under its FinNode program. These centers help Finnish scientists and companies establish contacts with centers of excellence globally and can be found in Japan, Russia, China, and USA
A second noteworthy objective of the new strategy is to move beyond a knowledge push environment, where scientists and engineers come up with the ideas and push them to the market, to a demand pull system, with private companies and users playing an active role in market oriented innovation.

Two different economic entities, a company and a country, similar platforms for growth - collaboration and customer driven innovation. Good Luck G-WIN; Onnea Finland!

Do Innovations Payoff? A Conversation with Gerry Tellis

Cutting back on R&D is not a smart idea, even in tough economic times, despite the temptation to report higher short-term earnings. That is because stock markets tend to react positively to innovation and R&D announcements and reward companies long before the innovation projects actually reap in the rewards.

Show me the money you say! I can with the help of Gerry Tellis and his co-author Ashish Sood. Their article - Do Innovations Really Pay Off? Total Stock Market Returns to Innovation - is due to be published in Marketing Science, a leading peer-reviewed journal.

However, since not too many of us are going to be devouring Marketing Science any time soon, I thought it would be nice to have Gerry share his thoughts with us in plain English, rather than in simultaneous equations.

Gerry, do companies truly appreciate the value of innovation?

I don't think so. Emotionally, I think they understand how important Innovation is in driving growth and in creating new markets, but I don't think they have an effective framework for computing the true value of innovation and its payoff in the long run. So, in a nutshell, they understand its importance, but underestimate its value and payoff.

What are some of the roadblocks that prevent companies from appreciating the full value of innovation?

The payoff to innovation is highly uncertain and occurs over the long term. Firms find it very difficult to measure this payoff. They tend to believe that stock markets react positively only to announcements of immediate earnings, so they eschew spending on risky, long-term projects such as innovation, to boost their firm's stock price.

You of course disagree?

Absolutely. That's what our paper is all about. Our assertion is that stock markets value announcements on innovation projects and reward companies with disproportionately higher stock returns. Our results clearly show that the total market returns to an innovation project are $643 million, more than 13 times the return of $49 million from an average innovation event. Additionally, returns to initiation of innovation projects occur 4.7 years ahead of launch.

Gerry, could you please explain briefly, three key terms which are central to your research, but which the reader may be puzzling over - innovation project, innovation event, and announcement?

Sure:

An innovation project is the sum total of all of a firms activities (such as researching, developing, and commercializing) involved in introducing a new product based on a new technology; from initiation to say about 12 months after launch
An innovation event is some tangible event indicating that the project is progressing, such as patents, launch, and new rounds of funding.
An announcement is release of information about the innovation event, either directly from the firm, or from other sources

Surely the stock market is not just reacting to the announcement of innovation projects, what if a company games the system?

The market is reacting to the announcement, as it's a strong signal of intent. But it does so in an efficient, intelligent manner. We found that a company can't game the system by merely varying the sheer number of announcements; quantity of announcements are not related to returns. So, no evidence that a company can influence returns by adopting different announcement strategies.

What about negative announcements - as when a firm slips up, fails to carry through its intentions, has to abort what it announced earlier, how do they influence returns?

In a big way! We found, that on average, returns to negative announcements are higher in absolute value than returns to positive announcements. Which is why companies should think twice before resorting to vaporware or exaggerating progress in their innovation projects.

You also claim that your paper is unique in the way you approach an innovation project - as three distinct phases, rather than as a single homogenous activity. Help us understand that?

You are right; our paper does make a unique contribution. Managers may want to know which set of activities attract the highest returns. And to the best of my knowledge, no previous study has answered this question. By examining the innovation project as a set of three distinct activities, we are able to do just that.

And the three sets of activities being - - -?

Initiation, development, and commercialization -

initiation - start of a project, comprising events like alliance, joint ventures, and funding
development - progress in research, comprising events like patents, prototypes, and preannouncements
commercialization - marketing an innovation, comprising events like product launch, shipments, and awards

And which activities attract the highest return?

We find that development activities generate the highest return, followed by initiation and commercialization activities.

I find this a little counter-intuitive, given the importance placed on execution and implementation.

To be honest, we were a little surprised too. There is no strong theory to support this result. However, we think that development won out because development activities represent a greater reduction in uncertainty than commercialization and they don't require as much upfront investment as initiation.

Its time for some free consulting Gerry - what advice would you give to companies to actively manage payoffs on their innovation projects?

First, managers should adopt a new metric to gauge whether and to what extent their R&D efforts are paying off in the long run; market returns capture the discounted future value of all current events.
Second, they should learn that markets respond to and reward all stages of an innovation project; by limiting the value of innovation to a few select events, companies actually undervalue the total returns to innovation.
Third, communication of progress on innovation projects, without resorting to exaggeration or vaporware, is absolutely critical. If companies don't manage this proactively, they lose the opportunity to increase their market capitalization from positive announcements.

Thank you Gerry. Good to have you share your insights with us. And while we wait for Gerry to generate some more blockbuster insights, let's update our thinking and knowledge on measuring the true payoff to innovation, so we don't kill innovation projects prematurely, or delay initiating them.

Flu Trendwatch: The Collective Intelligence of Web Search Logs

The Internet is a key source of information for millions around the globe. Not surprising therefore that search engines, like Google are one of the first places people turn to for information on topics ranging from movies (Slum Dog Millionaire), overnight sensations (Susan Boyle), and threatening pandemics (swine flu).

The sheer numbers of people who use the Internet for search or Google's dominant share of search engines is exciting at a mere wow level. More exciting is the fact that on-line search behavior of individuals litters the electronic highways with digital crumbs and telltale clues, leading to the obvious question - are they related to events in the real world and can they predict off-line behavior?

A team of researchers from Google and the CDC answer this question in a most compelling and topical way in the February issue of Nature. The authors were able to accurately model the outbreak of flu epidemics by tracking search engine query data. Their research tool, Google Flu Trends, has a warm intuitive basis to it - people are more likely to be searching for sunscreen during summer months and for flu remedies and prevention tips during the flu season.

The research team observed that some search queries tend to be popular exactly when the flu season is in full swing. A few examples:

flu complications, syptoms
cold/flu remedy
antibiotic/antiviral medication

By observing and counting the frequency of these search queries the authors are able to accurately estimate how much flu is circulating in various regions of the United States.

The CDC also tracks influenza across the United States through their Influenza Sentinel Program, which relies on a network of approximately 2500 doctors who see 16 million patients each year. The doctors keep track of and report the percentage of their patients who have an influenza-like illness (ILI).

The CDC publishes national and regional data from these surveillance systems on a weekly basis, typically with a 1-2-week reporting lag. In an attempt to provide faster detection innovative surveillance systems using indirect signals of flu and flu-like activity like call center volume and sale of OTC drugs have been adopted recently.

While the CDC innovations are laudable, it is difficult to top the value of Google search queries as an early warning system for epidemics and pandemics. They can be counted automatically, quickly, results can be made available daily, and can be consistently published 1-2 weeks ahead of CDC ILI surveillance reports.

Early detection and rapid response are not just mantras for the commercial world. They are just as important in the worlds of institutional and government action. With over 90 million adults searching online for information about specific diseases or medical problems each year in USA alone, web search queries are an important line of defense for preventing and containing epidemics, before they become a pandemic.

It is in that spirit, that after conferring with US and Mexican health officials Google Flu Trends has created and released experimental flu activity estimates for Mexico based on aggregated search data. With the WHO raising the alert level concerning swine flue twice in the last three days, elevating it to one notch below a full-scale pandemic, all available data needs to be brought into play, regardless of whether its been validated against actual flu cases or not.

During difficult times like this, with the financial gloom still hanging heavy and swine flu threatening, it is encouraging to find social media being used to promote social well being, not just the goals of a few corporations with the right technology.

Web search logs, whether generated by Google or some other search engine, represent the collective intelligence of millions of Internet search users. We already have an example of how its being used intelligently for the early detection of influenza. Perhaps it can also be used to tease out early signals of a much-needed economic recovery!

What digital crumbs should we be looking for - search for air-fares, travel and holiday destinations, home prices, marriages and honeymoons?

When is an Innovation Not an Innovation?

"One word is too often profaned..."

The poet Shelley was of course talking about love!

The word innovation, while undoubtedly more prosaic, could soon be wearing that tag, if we are not careful. The current practice of labeling anything new as an innovation, maybe acceptable literally, but leaves a lot to be desired if we are to capture both the body and soul of the word - not merely something new, but also creating incremental value and welfare for some segment of society.

I have been thinking about this issue for some time now. The trigger was Akerlof and Shiller's excellent book Animal Spirits and Gillian Tett's FT article Lost through destructive creation. Both are truly impressive pieces, but I was uncomfortable with the usage of the word innovation to discuss financial products and practices that had heaped unprecedented ruin on millions of people around the globe. It led me to start a dialogue with some of my academic and corporate collaborators on when is an innovation not an innovation?

Federal Reserve Chairman Ben Bernanke's address in Washington on April 17 on Innovative Financial Services for the Underserved was the nudge we needed to stop discussing and start writing. In his speech, Bernanke admitted that financial innovations can misfire, but appealed for regulation not to prevent innovation. Rather, he recommended, that regulation should ensure that innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes.

Not everything new creates incremental value! So, back to the key question - what characteristics of innovation best capture its literal meaning and its economic soul?

In a single sentence: an innovation is not an innovation, when it produces snake oil! More formally, for an innovation to capture and reflect both its body (literal meaning - new) and soul (economic meaning - incremental value) it needs to pass the following litmus tests.

Is the innovation creating a valued asset?

Fundamentally, innovations are about asset creation. These assets can be tangible or intangible. Consider any of the past or current innovations - ATM's, MRI, iPhone -all of them created assets. The financial innovations that created products, better known by their acronyms, like CDO (collaterilsed debt obligations of asset-backed securities), fail this test.

Credit risk, by definition, is a liability. No amount of packaging and reselling it can convert it into an asset. Furthermore, moving credit risk around in an economic system by selling it and reselling it to a variety of interlinked organizations does not create value; it erodes it.

Is there mutuality of benefits?

Gillette promotes its Fusion Power shaving system as better than a Mach 3 - a result of 8 years of shaving innovation and 20 patents. Since Gillette would like to benefit from this innovation, wet shaving enthusiasts have to shell out more money for the Fusion Power razor and shaving cartridges than they did for Mach 3. But is it only Gillette that benefits? Not really, so does the shaver, in a mix of real and perceived ways.

But who benefited from the host of credit derivative innovations that are at the center of the current global financial crisis. Not the consumers borrowing, not even the shareholders of the banks doing the lending, only those banks and brokerage institutions that garnered fees at each stage of the slicing, dicing, and lending chain!

Is the process of value creation transparent?

Both Apple and Pandora have introduced innovations in the personal music listening space. The process through which they create value for music lovers is very different - iTunes vs. the music genome project - but very transparent.

But that was not the case with Enron or the dot-com companies. The innovations in natural gas trading and gas-fired electrical generation systems that allowed Enron to miraculously book ever growing profits were hardly transparent. Valuation systems followed by analysts to forecast and monetize eyeballs in the case of dot-com companies were not transparent either. Nor are innovations, like securitized debt products, that transform mortgages to bonds and allow banks to lend significantly more per unit of capital.

Is the innovation simple to understand?

Two blades are better than one, three better than two, and five better than three. Gillette's positive that an average wet shaving enthusiast can handle this level of complexity. Innovation or overkill is the subject for another blog, but for the time being Gillette and the wet shaving army get it - more is better.

Simplicity is not part of the vocabulary of financial innovations that have landed us in this mess. These innovations were the result of complex computer-based systems that were imported from elsewhere - usually hard sciences - and designed and operated by statistical decathletes with next to no domain knowledge. Very much like 17-year olds designing CRM systems in their dorm rooms in the valley at the height of the dot-com boom.

Tett is spot on in his assessment when he states that these innovations became so intense that they outran the comprehension of ordinary bankers and regulators. Bernanke too echoes this sentiment when he alluded to complexity and opacity of financial innovations being at the heart of the current financial crisis.

Do claims and puffery totally overshadow substance?

Quackery and fraudulent patent medicines were well and alive in 19^th century USA. Theatrical performances and fire and brimstone selling pitches, more befitting religious sermons, usually accompanied the selling of these products. Not difficult to understand why? The extra sizzle had to compensate for the lack of steak!

The original developers of credit derivatives wanted us to believe that their creations would promote market completion, or more perfect free markets. Perhaps, but not when they are not traded on the free market! In the case of both Enron and the financial innovations in question, the claims far exceeded the benefits. Far from creating freer markets, they created opaque trading worlds for concentrating risk that few on the outside truly understood.

The word innovation is more than just a label. Greater understanding is required of its essence as a key driver of economic prosperity. Hopefully, this will lead to more discipline in its usage. The word innovation is a merit badge and not every new product or service is worthy of it.

Fairness and the Innovation Imperative

What do you make of the following?

Protests in front of luxurious homes of AIG executives in USA
Windows at the Royal Bank of Scotland smashed during the recently concluded G20 summit in London
3M and Caterpillar executives held by angry employees in France for several hours before being released

Not exactly the second coming of the French Revolution, but definitely a telling tale of our times! Three different countries, three different events, same message; two key stakeholders, employees and customers, are crying out loud and clear - it's not fair!

The sentiment on the street is clear - the dice is loaded in favor of the self- interest of companies and their senior executives; employees and customers are getting the short end of the stick.

What does this have to do with value, innovation, and growth? A lot, if you consider the role that perceived fairness plays in influencing economic well being.

Fairness is one of three key factors Akerlof and Shiller focus on in their insightful book on how human psychology drives economic cycles. Concerns of fairness - whether the prices companies charging for their products are fair, whether the credit terms being offered by credit card manufacturers are fair, whether health care insurance policies are fair - have the potential to override rational economic motivation.

Still not convinced? Have you heard of Julius Harper? He's a video-game producer in Los Angeles, not a celebrity, who achieved temporary celebrity status (NBC Nightly News, etc.) by spearheading a drive against Facebook's new Terms of Service, which stated - We Can Do Anything We Want With Your Content, Forever.

According to the previous terms, Facebook's rights to original content uploaded by registered users remained valid only for the duration of the life of the account. The rights expired when an account was closed. Not anymore. Now, anything a user uploads to Facebook can be used by the company in any way it deems fit, forever.

Harper didn't think these new Terms were fair!

In fact, he thought - this is bull-crap. So what did he do? With a few clicks of his mouse, he created a protest group - People Against the New Terms of Service. The net result - the movement got support, it got the media attention, and yes it got Facebook's attention. Its important to keep in mind that it was the perceived unfairness of the situation that triggered the action. The Internet, the connectedness, the collaboration were all enablers, not the reasons for driving behavior.

So, at a time, when the perception of fairness between companies and consumers is at an all time low, it is eerie to observe how few companies, consultants, and business gurus are treating it as a priority item to fuel recovery from the current slump and drive future growth.

A new equilibrium of fairness is essential if companies want to jump-start their recovery and if they want to sustain it. In the absence of this new equilibrium companies may experience temporary short-term gains but no real long-term success.

This new equilibrium of fairness can be achieved only if companies are willing to invest in developing new vectors of value for new/existing sets of customers. Merely exercising greater marketing muscle, and relying on pushing tired company agendas on customers crying - "it's not fair" - is not the right prescription for long-term well being.

Several good role models exist:

The Tata Nano, a people's car, launched on March 23, represents a very different vector of value for a different set of customers, best expressed in Ratan Tata's own words:

"I observed families riding on two-wheelers - the father driving the scooter, his young kid standing in front of him, his wife seated behind him holding a little baby. It led me to wonder whether one could conceive of a safe, affordable, all-weather form of transport for such a family. We are happy to present the People's Car to India and we hope it brings the joy, pride and utility of owning a car to many families who need personal mobility."

Nokia too is creating a different vector of values for a different set of customers with Nokia Life Tools:

The goal of Nokia Life Tools is to inform, involve, empower and help bridge the digital divide in emerging markets; these tools will focus on Agriculture information and Education services with Entertainment supplementing the offering.

By reengineering the twin concepts of credit and loans, Grameen Bank has created numerous value vectors for entirely new markets in areas ranging from fisheries to solar energy.

Opportunities for creating different vectors of value for a different set of customers abound in a number of areas, such as digital journalism, hospitality, casual and fancy dining, medicine, education, energy, peer-to-peer lending, and transportation, to name a few. All that we need now is companies with both the will and the vision to innovate and develop new handshakes with the market.

Fairness is not just a feel-good, sound-good word or academic concept. It's a real and significant driver of your customer's willingness to do business with your company.

And shouldn't that be the goal of every business?

Experimentation: Critical to Customer-Driven Innovation Success

In the Feb. 2009 issue of HBR, Tom Davenport offers advice on how to design smart business experiments. His main assertion is that in too many companies business innovations are launched on a wing and a prayer.

Tom's focus is on rigor, and knowledge, and valid conclusions. No arguments there; but there is even a more fundamental issue - a company's willingness to embrace experimentation.

Several thinkers, like Eric von Hippel, Stefan Thomke, and Michael Schrage have discussed the benefits of experimentation. Going beyond the obvious links with innovation, they discuss how experimentation can help companies create new value for customers faster and more effectively.

Experimentation is an essential ingredient for customer driven innovation. Getting companies to embrace it enthusiastically is key, if the true potential of co-creating value with customers is to be realized. So, the critical question then becomes: How do we get companies excited about experimentation in the context of value co-creation?

Here are a few prescriptions with extremely positive side-effects:

Recommendation 1: Get over the Steve Jobs syndrome

Too many companies suffer from the White Knight and the one omniscient, omnipotent decision maker syndrome. As brilliant as Steve Jobs is even he could not have predicted that the backbone of iPhone's mass appeal would be their multitude of diverse open-source apps. Even their latest ad speaks to this phenomenon.

In an environment where it is difficult to predict where users will take an innovation, involving a larger group of interested users through experimentation is even more critical. And before you dismiss this as being applicable only to technology products - think Arm & Hammer! It did not start off in our refrigerators and toothpastes, but it sure did show up there.

Recommendation 2: Lose addiction to control

All addictions thrive on the addict's perceived sense of loss, if the addiction were to be given up. Behavioral economists will have a field day with the psychological addiction companies have to control. Their gain-loss equation is totally focused on what they will lose; not what they stand to gain. Those that have - Mozilla Firefox, Dell, P&G, Hallmark, Under Armour - can testify that less company control often translates into more value for the customer, because you can engage in more "what-if" thinking. In short, you can experiment more, something that Mitchell Baker points to in explaining the success of Firefox in her interview with The Mckinsey Quarterly.

Recommendation 3: Redefine success

For most companies failure is the deviation from what was expected or planned for. Not so in the world of experimentation, where failures are often the proverbial stepping stones to success. In the world of innovation, experiments that fail can actually have a large number of positive side effects, such as speedy elimination of unproductive alternatives, rapid learning, and building on that learning through more rapid testing. According to Stefan Thomke, early failures can lead to more powerful successes faster; a sentiment that IDEO echoes when they talk of failing often to succeed sooner!

Recommendation 4: Get serious about play

Most companies have tired ideas about work and play. The unrelenting focus on tasks, processes, and narrowly defined outcomes are a major stumbling block to turning people loose. And you can't experiment if you don't invite your people to play.

Inviting people to play lures them to play innovative "what-if" games and turns passive stakeholders into active collaborators - as Dell did with its customers, Boeing with its engineers and designers on the 737 assembly project, and Toyota with its suppliers.

Experimentation is essential to customer-driven innovation not only because it enables faster development of products and services better suited to customers' needs, but also because it enables innovations that companies alone can't imagine!

Companies that don't enthusiastically embrace experimentation forego this opportunity to start new conversations on innovation and value creation. All that remains - to paraphrase George Orwell - is a huge dump of worn-out metaphors, recycled as new and improved thinking.

Customer Driven Innovation: A Top Priority for the CIO?

A little late perhaps, but I came across InformationWeek's Top 10 CIO Issues for 2009. The list is a blend of technology and business issues.

Surprisingly, a business issue - Customer-Facing Innovation - got the top vote!

The article tells us that while its essential to be innovating across all parts of a company's operation, the greatest value in 2009 will come from efforts that directly connect a company's brands, products, services, and capabilities with its customers.

The report also goes on to make an interesting prediction.

In 2009, I think we'll see this term shift from "customer-facing" to "customer-embracing" to signify the move from the largely passive approach of merely facing your customers to the more active and engaged notion of embracing.

Personally, I think the prediction misses its mark - they should have labeled the priority customer-driven innovation!

But semantics aside, my first reaction was a positive one. Not that we need IT czars or CIOs endorsing our passions. But I thought it could only help if departments other than innovation and marketing embrace and implement customer driven innovation programs.

My initial positive reaction however gave way to gripping anxiety, thanks to Gillian Tett and Krishna Guha. In his excellent FT article, analyzing the current financial crisis, Guha identifies a key culprit:

The adoption of computer-based systems for measuring credit risk, imported from the hard sciences, designed by statistical geeks with little or no understanding of the dynamics of credit markets.

I could not help ask myself the question, what do CIOs know of customer-driven innovation? Are they going to spend the time and effort learning about customer-driven innovation, before trying to intervene? Will they tailor their interventions to suit the needs of customer-driven innovation in different business contexts? Or will they embrace it so tightly in their arms of standardization and efficiency as to suffocate its spirit?

Remember CRM - Customer Relationship Management? Its widely recognized and accepted that in most companies, CRM programs achieved significantly less than what they were expected to. And while finger-pointing never helped clean up a mess, there is irrefutable evidence that CRM programs failed due to:

too much IT involvement,
too much focus on internal processes,
too much discussion about dirty data,
too many arguments about integration, and
too little focus on the customer!

Ironically, in their preoccupation with implementing technological solutions, companies and their vendors lost sight of the obvious - CRM programs are about customers! They are about getting customers closer to the company, about increasing customer loyalty, by providing them with relevant and unique value that they would find difficult to get from the company's competitors. Or if they would, they would have to pay a much higher price.

No matter how companies sugar coat the finger-pointing game, at the end of the day we can safely say that implementing market-facing programs, especially those that involve customers, who don't always behave predictably, are about more than just technological wizardry.

Whiz kids, whether they be yet-to-start shaving ivy league graduates, or overgrown beards at SAP and Oracle with little or no understanding of why customers buy, how their preferences are shaped, and how why they decide to stay with a company or switch, is a sure recipe for failure. This was true for CRM; and will hold for customer-facing/embracing/driven innovation as well.

So the question is - will CIO's benefit customer driven innovation, or will they limit and circumscribe it?

Should we evoke George Santayana's wisdom and remind the various CXO's of CRM's history of underachievement so they are not doomed to repeat it, this time for customer driven innovation? Or should we heave a sigh of relief that it is indeed history, keep our fingers crossed, and hope for the best?

I am for waving banners and marching! How about you?