GauravBhalla.com

Co-Creation and Customization: An Interview

2010-02-22T04:37:39Z

Recently, I had the pleasure of being introduced to ICFAI University, one of India's leading educational institutions, recognized for its skills in developing innovative educational programs and writing insightful case studies. It is also a leading publisher, 18 magazines and 46 journals, in areas such as marketing, finance, environment, and health care.

Effective Executive is the flagship magazine of the University. Started in 2000 and published monthly, it features articles on topics like marketing, strategy, sustainability, and innovation. Every issue also features interviews on these topics with experts. In the recent past, the magazine has interviewed globally renowned experts and intellectuals, like Philip Kotler, Michael Tracy, Pankaj Ghemawat, Vijay Govindarajan, and Dr.A.P.J.Abdul Kalam, a renowned nuclear scientist, and former President of India.

The magazine's latest issue is dedicated to the theme Co-Creation: the New Frontiers of Competitive Advantage. The issue features an interview conducted with me on my HBR article and on co-creation.

I would like to share two key topics covered by the interview. The first deals with the nature of co-creation, and the second with the difference between customization and co-creation.

Understanding co-creation

Often, the more people use an expression, the less certain we are what they really mean by it. It's as if usage guarantees understanding, and more frequent usage guarantees deeper understanding. But that's not true. Take expressions like Web 2.0, the new normal, or sustainability. People don't often explain or use these terms the same way.

In the interview, I explained co-creation not by defining it, but by decomposing it, to better explain its features and characteristics.

Co-creation, as currently used in the business and marketing world, has a very specific meaning. Rather than present a definition, my preference would be to explain co-creation by decomposing it, so we can better understand its characteristics. First, co-creation, represents interaction, and takes place between one or more firms, and one or more actual or potential customers. Second, this interaction is willing, purposive, and intentional. Third, this interaction is managed, either by the firm, or jointly by the firm and its customers. Fourth, the output of this interaction results in value for both the firm and for its customers. Lastly, the value created for customers may or may not be unique, and is derived through a variety of experiences, such as suggesting ideas, refining current value, designing new products, improving current designs, fixing defects, and consuming new products and services.

Customization and Co-Creation

I've blogged on this topic before when I interviewed Page Moreau. But its worth revisiting, since the two words are often used interchangeably, giving the impression that the two concepts are the same.

There is no doubt that in specific cases there is a blurring of boundaries, but customization and co-creation are not the same.

Let me answer the last part of the question first - do boundaries between customization and co-creation get blurred? Yes, they do. Part of the reason is that researchers and authors who introduce these terms are not always diligent in defining them, and differentiating them from other similar terms. Let me illustrate this for you with an example. Take a men's clothing company like Paul Fredrick, that sells its offerings through a catalog. If you want to order dress shirts, you have two options. You can either buy the color and pattern you prefer, in your size, based on all the shirts displayed in the catalog, or you can order a custom shirt. Customization allows you to mix and match the fabric, collar and cuff styles, fit, pleat style, pocket, among other things! But wait, there's more. You can also have the shirt personalized, by having your initials monogrammed in several different styles, in different colors, on either the cuff, or the pocket. Customization, personalization, or both! But is it co-creation?

What is important to realize is that customization and personalization are possible only within the boundaries of choices offered by the company. To go back to the shirt example, the only way I can order a shirt with kurta sleeves (an Indian style shirt with tubular sleeves) is if the company offers that option. If the company does not offer that option, then all that I can do is pick from the sleeve styles offered. This is in sharp contrast to co-creation. If the shirt were being co-created, then all options would be on the table, including kurta sleeves, because the starting point would be a blank canvas, not a menu of predetermined options and styles.

I am sure I'll blog again on the similarities and differences between customization and co-creation. We owe it to ourselves to keep our thinking fresh and focused.

Peter Drucker's Ideas and Legacy: A Centennial Celebration!

2010-01-21T02:50:30Z

Cogito ergo sum - one of Descartes's most famous legacies - loosely translated as, I think, therefore I am.

Peter Drucker had a similar way of introducing himself - I write - is how he used to introduce himself. What Peter should have really said was - I think and I write, and I don't know which one comes first. An interesting chicken and egg problem, but not one you lose sleep over, especially if your writing borders on the prolific, and your thinking can stand the test of time!

November 2009 marked the 100th anniversary of Peter Drucker's birth and we should celebrate it. Universally acclaimed as a great management thinker and business guru, for over 50 years, from the early 1950's to the early 2000's his provocative and often controversial ideas dominated the business world.

The management kingdom is rediscovering him and finding him to be just as relevant as he was all those years ago.

HBR ran a special issue on Drucker in Nov. 2009 - asking What Would Peter Drucker Do?

Books like Inside Drucker's Brain are attempting to make him and his cutting edge thinking more accessible.

Paradoxically, in the West, where he made his greatest contributions, he is all but forgotten, pushed aside by gurus du jour. On the other side of the Atlantic, Drucker societies are still alive and flourishing. They assemble routinely to discuss his work and learn from his teachings.

It is impossible to compress a sixty-year career comprising over thirty books that have sold over 5 million copies and scores of articles, including some HBR classics, in a page or two. So, how about we take inspiration from Hollywood and present instead a 90 second trailer on the World according to Peter Drucker.

His signature idea - Management by Objectives; still relevant, especially as companies flounder with direction and purpose.

His committed and unwavering focus - the long term health and well being of companies, not short-term hits. He rarely blamed individuals, maintaining that it was always the underlying systems that were the root causes of failure. He believed organizations should constantly challenge their design and operations; he saw this as the key to long-term well being.

His favorite questions - What is your company's ultimate purpose? Who is the customer? What is your mission? What is it you should continue to do? What is it you should stop doing? Where has the obsession with the short-term undermined long-term effectiveness? Why aren't some younger people in the company earning more than the Directors?

His passions - writing, context-bound thinking, integrating ideas, processes not outcomes, urging companies to innovate and create the future, long-term corporate well being, nurturing future stars, and of course - the CUSTOMER!

What did A.G. Lafley, ex CEO of P&G, learn from Drucker?

In A.G.'s own words:

Over the years, I learned many things from Peter, but far and away the most important were the simplest:

The purpose of company is to create a customer.
A business is defined by the needs, wants, desires a customer satisfies when buying the company's product or service.
To satisfy the customer is the most important mission and purpose of every business.

No presentation of Peter Drucker's work is complete without sharing some of his memorable quotes and brilliant observations. A very brief, you might even say self-serving, sampling related to marketing, the customer, and innovation follow.

Because the purpose of business is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.
The customer rather than the manufacturer defines a market
Of course innovation is risky. But so is stepping into the car to drive to the supermarket for a loaf of bread. All economic activity is by definition 'high risk.' And defending yesterday - that is, not innovating - is far more risky than making tomorrow.

Paraphrasing Drucker and taking a few artistic liberties: since customers define markets, and market creation should be the fundamental focus of a company, and innovation is the primary fuel that drives this market creation - then what better world to be thinking, writing, and consulting in, than customer-driven innovation!

Happy 100th Peter! You are not forgotten.

Rethinking Marketing: From Marketing Products to Cultivating Customers

2009-12-30T16:35:18Z

We are being constantly reminded, by scholars, practitioners, and journalists, that today's individuals and business organizations live in a highly networked, interactive, and collaborative world.

This new reality has given rise to new customer behaviors, and to entirely new vocabularies. The consumer is dead, long live Prosumers, Trysumers, and several other forms of - - - sumers yet to be born.

Prosumers - today's customers are both producers and consumers; i.e., they are not just consumption machines, but also contributors and co-creators of unique value
Trysumers - consumers immune to most advertising, who enjoy full access to information, reviews, and navigation, who love to try out new products and services - appliances, artists, outfits, food, holiday destinations - new "anything", with post mass-market gusto

Despite this daily dose of revivalist thinking, several companies approach their customers and markets as if they were still stuck in the 1960s; an era of impersonal transactions with the customer, relying on everything "mass" - mass markets, mass media, and mass undifferentiated value. For these companies, Marketing is still a one-way street, where companies do the talking and influencing through their advertising, and customers do the listening and consuming; passively at the end of a long invisible value chain.

There is something wrong with this picture and it needs fixing. What is wrong is that most companies are still set up to market products. That needs fixing. Companies must transition from marketing products to cultivating customers!

In the January-February Harvard Business Review article - Rethinking Marketing (download here) - my co-authors (Roland Rust, Christine Moorman) and I discuss how companies must shift their focus from driving product-centered transactions, to building long-term relationships with customers by offering whichever of the company's products the customer values most at any given time.

This can only be done if companies make products and brands subservient to long-term customer relationships. And that means - reinventing the marketing department altogether.

The essence of reconfiguring marketing as a customer department is captured in this diagram:

The traditional marketing department must be reconfigured as a customer department that puts building customer relationships ahead of pushing specific products. To this end, product managers and customer-focused departments report to a Chief Customer Officer instead of a CMO, and support the strategies of customer or segment managers.

Two key implications of this reconfiguration need additional emphasis:

First, reconfiguration is not merely drawing a different looking organizational chart, with different sounding titles. It is a fundamental shift in allocating, sharing, and managing resources - people, budgets, and information. This has implications not only for which tasks get priority and how they are executed, but also for who is the best person to execute them. For instance, since the role of the customer manager is the ultimate expression of what marketing should be - cocreating unique value with and for specific customers - we expect them to approach their task more like consumer anthropologists and behavioral scientists (see my post on A.G. Lafley), as opposed to advertising or promotion specialists.
Second, in this reconfigured world, being able to offer relevant consumer value at all times becomes a key driver of business success and profitable growth. For ongoing customer value innovation to become a part of the DNA of the organization, it is important that the company move from an internally focused concept of customer value creation, to a more open, collaborative model of co-creating value with customers and other key stakeholders. Integrating R&D into the customer department will go a long way to ensuring that the customer remains at the center of all value creation activities.

A migration from marketing products to cultivating customers will also require a shift in metrics to gauge the effectiveness of a company's customer-focused strategy. We discuss four new ways of thinking about business success in this customer-led world of marketing:

Focus more on customer profitability, less on product profitability
Customer Lifetime Value (CLV) thinking should trump maximizing current sales thinking
Customer equity - the sum of all CLV's of a company's customer base - should replace a brand equity orientation
Companies should pay more attention to customer equity share, and less attention to market share

I hope you find the article relevant, interesting, and useful. If you're having similar discussions in your own organizations, please share them with me. I'd love to start a conversation with you on how we need to rethink and reinvent the fundamental focus of marketing.

DOWNLOAD: Rethinking Marketing, by Roland Rust, Christine Moormon, Gaurav Bhalla, Harvard Business Review, January-February 2010.

AMA's Future of Marketing Report - Light on Customer-Driven Innovation

2009-11-13T10:00:25Z

The American Marketing Association (AMA), Decision Strategies International, a global consultancy specializing in scenario planning, and a group of marketing leaders from industry and academics recently completed a project on the role of marketing in 2015 - Future of Marketing in 2015 - an American Marketing Association Special Report.

After nearly a year of secondary research, a survey of business and consumer marketers, and workshops with marketing leaders, the AMA developed four possible future states in 2015 and their potential impact on marketing in the organization. These scenarios are presented below. For each scenario, the project also created thumbnail sketches of key goals and objectives of professionals operating in each scenario.

The four scenarios and the CMO archetypes for each scenario follow:

CMO Archetypes:

While the effort of the AMA to peer into the future is laudable, I am personally very troubled by the output, and the lack of emphasis on some fundamental game-changing trends like customer collaboration, value co-creation, customization, and open systems thinking.

A useful tactic in evaluating the output of a future oriented undertaking is to study the inputs used. The report states that the scenario building process began with an identification of forces that might shape the role of marketing between now and 2015. The key issues and trends identified were:

Shrinking world, expanding relationships - increase in globalization and technology integration
Rise of new class, BRIC by BRIC - creation of new consumer markets
Innovation or Invasion - push back due to micro-profiling and and behavioral targeting
Command and Control becomes Cultivate and Create - two way conversations providing valuable information for new products/services offerings
Channel Convergence and Consequence - traditional media continues to be challenged
Talent Turmoil - increasing competition for valued skills and competencies
Pressure to Prove - Marketing is persistently challenged to prove strategic value and bottom line contribution.

Only one of the above inputs - "command and control becoming cultivate and create" - comes close to addressing how the concept and dynamics of value creation are changing. What could be more fundamental than the identification, creation, delivery, and nurturing of customer value? Yet not one of the archetypes presented above is obsessed with it.

The Future of Marketing should be a paradigm shift, not a straight line extension of Marketing's current focus with selling, promoting, and packaging. Even more disappointing is that the above scenarios and archetypes do little to move Marketing from its current inward product focus to a more outward customer orientation.

Marketing needs a bolder different future, one that is obsessed with customer value creation. This bolder future can't be achieved by a functional focus alone, no matter how cleverly worded - network integrator, sales facilitator, etc. Because Marketing is not a function, it is a business orientation that shapes how a company creates long term, sustainable value for customers, for society, and for itself.

The Future of Marketing can't lie in peddling influence and shouting brand superiority. It must lie in making investments in consumption ecosystems, of which the company is only one small part. For the future of marketing to be viable, it must part ways with its incarnation of today. The scenario that is personally most exciting to me is one where an obsession with customer value makes marketing as we know it today obsolete and unnecessary!

That indeed would be a bright new future.

Customization and Co-Creation: A Conversation with Page Moreau

2009-10-13T11:10:54Z

Page Moreau is an Associate Professor of Marketing at the Leeds School of Business at the University of Colorado in Boulder. She obtained her Ph.D. In Marketing from Columbia University. Her research interests span the areas of customization, value co-creation, innovation, and customer collaboration. Her 2005 paper: Designing the Solution: The Impact of Constraints on Consumers' Creativity, received the best paper award in 2008. No that's not a typo. Academics like ideas in papers to ferment before they recognize them!

I met Page a few years ago at an MSI conference on Innovation. We met again in June this year at yet another MSI conference at which she presented some of her ideas on customization. I thought the blog's readers would be interested, so I invited her for a conversation, to share her thinking, and she most graciously accepted.

Page, let's start by examining the relationship between Co-creation and Customization. Are they related?

Co-creation is the bigger concept. Any time you involve customers in the creation of value for themselves and for the company, you are in the realm of co-creation. It spans the entire range from idea generation to product development to post-purchase occasions, like usage and consumption.

And Customization?

Customization is a sub-set of co-creation. In majority of the cases, when people speak of customization, they are referring to mass customization, where the emphasis is on feature or attribute customization. A classic example being Dell - customizing PCs.

However, that's only part of the picture. Customization is more than just feature customization. Companies can do more. For example, companies can customize customer experience touch points, like web sites, user interfaces, and personal services.

Beyond the obvious benefit - I like it more - what are the key benefits of customization you have observed in your research?

As you rightly say the most obvious benefit is generating higher customer preference. But there are other equally interesting benefits. Take the case of products that can be publicly displayed. Customization give consumers the power to express their identities, what they value, and what their values are. A person who uploads the photo of an endangered specie on a coffee mug, like the Polar bear, is deriving a very different benefit and signaling a very different identity than a consumer who uploads the photo of a Parent.

In the context of gifts, the benefits of customization are equally interesting. Being able to customize a gift signals some level of effort undertaken by the giver, leading to both the giver and the recipient deriving greater value from the exchange, not just the receiver.

But can't this backfire. Can't customization sometimes be intimidating, as when you receive a very elaborate, heavily gold embroidered, wedding invitation card?

It could. There is the obvious signal of feeling that I am important enough to have received this elaborate invitation. But then there is also the added stress - what should I wear, what would the reception be like, should I brush up on my dancing skills, what gift should I give, how expensive should it be? I guess all that could be intimidating - would vary though from person to person - how much the person values the signals associated with customization and its implications for self-worth and self-identity.

Do the benefits of customization hold across different product categories or are they limited in their scope?

Interesting question! This has not been explored extensively and would actually form an interesting research agenda. Let's go back to our staple - signaling and signal value. Technically speaking customization could be more valuable in the case of products and services that are publicly consumed; because there is a greater ability to communicate self-identity.

But then how do you explain a customized Michael Graves toilet bowl brush? No public display there, at least I hope not! There will always be exceptions. But I think that the benefits of customization hold across different categories - but we clearly need more rigorous thinking here.

What about the relationship between customer-centricity and customization? Can one exist without the other?

I thought we had an agreement Gaurav. Only easy questions!

First, we need cleaner definitions. I guess customization could be one way to characterize customer-centricity. But where does it say that all customization has to involve the company's product or service? If customer-centricity is being sensitive to customers' ideas and inputs, then that sensitivity can be reflected in one's advertising, or packaging, or customer service. I think there is an asymmetry here:

a company can be customer-centric without customizing. But it would be difficult to argue how a company is not customer-centric if it is willing and able to customize its products and services.

Finally, - - -

Sorry, one more thought - my guess is that as customization increases, meaning more companies customizing their products and services, the demand for customization will increase, because customers' expectations will increase.

Which brings us to an interesting and provocative question - will the pulling power of brands decrease as customization increases? Will brands begin to mean less?

Who are the leaders of the pack when it comes to customization - best in class, so to speak?

Tough question again. The best way to answer that question is by simply saying those who are the most successful at it. Companies like Dell - functional customization; Nike - aesthetic customization; and Timbuk2 - flexible manufacturing.

Thanks Page for sharing your thinking on customization and its relation to co-creation with a larger audience. Hopefully, more readers will be motivated to experiment with and execute customization and co-creation programs.

Leadership Missteps at Whole Foods and Hyatt Hotels: Listening Could Have Helped

2009-10-01T00:50:16Z

Hyatt Hotel's has been in the news lately - for all the wrong reasons. As was the CEO of Whole Foods a few weeks ago! In fact, I could begin this blog the way I began my May 21 blog (What do General Mills and Finland have in common?) and ask - what do the Hyatt Hotel and the CEO of Whole Foods, John Mackey, have in common?

On August 11, John Mackey penned a op-ed on health care reform in the WSJ strongly aligned with right wing, conservative thinking. His opening quote makes transparent his personal leanings.

"The problem with socialism is that eventually you run out of other people's money." - Margaret Thatcher

On Sep. 17, Hyatt fired approximately 100 housekeeping staff in Boston. According to the Globe, Hyatt fired housekeepers at the Hyatt Regency Boston, Hyatt Harborside, and Hyatt Regency Cambridge, replacing them with workers from an Atlanta staffing company.

One can argue what's wrong with that. The constitution of the United States guarantees a person the right to free speech, and capitalism the right to a company to structure its labor force and its costs (most of the fired housekeepers were minority women, making $15 an hour; it is expected the replacement workers will make $8 an hour).

However, in today's networked, interconnected world, company's and CEOs are not just individuals or employers. They are symbols of what their companies stand for, and for what their customers stand for.

Customers who shop at Whole Foods are liberal, pro-environment, anti GMO, pro-organic food people. It is not that they want to deny John Mackey the right to his opinions; it is that they felt let down and violated. John's op-ed diminished the value customers derive from their association with the store and their shopping experience there. Take a look at the poll at wholeboycott.com:

Clearly, those who run Whole Foods have not spent enough time to understand the dynamics of today's interconnected networked world. The concept of customer value has changed. Customers don't just derive value from the products and services a store has to offer, they also derive value from what the company and its executives stand for.

Hyatt's case is no different. The outrage is not about whether it's a good business decision - its not about Hyatt's understanding of cost cutting and optimizing a housekeeping budget - its whether Hyatt has a good heart or not? The issue is also about whether I will get value by staying at a hotel chain that acts in such a heartless fashion.

A company or a CEO can't be so naïve as to ignore the context they operate in. There is still blood on the streets. A large number of people are struggling to get by and the evening news is full of heartbreak stories. We live in an era where Politicians are actually regarded as more trustworthy than Business Leaders! Don't believe me? Ask CNN!

Today's customers are talking to each other - in both the real and digital worlds. Though what they say in the digital world can often be more potent, due to the speed and ease with which digital opinion can whip up bystanders into a frenzy about issues they deeply care about. The environment is one such issue, health care is another, having a job and avoiding economic pain probably tops the list.

Are John Mackey and Hyatt not listening? Intelligent companies in touch with the realities of the digital market place don't just listen when customers talk to them. They listen even when customers are not talking to them or about them. Why? Because smart companies realize they don't control the conversation agenda, they are merely a part of it.

Customer Value: An Enduring Obsession of Market Leaders

2009-08-18T14:42:23Z

In the crowded world of business jargon, The New Normal, is a fast rising superstar. Its making a lot of noise, attracting attention, and rapidly gathering followers!

The Economist recently carried an issue discussing the new normal for Modern Economic Theory.
BusinessWeek carried its own version of the new normal - companies rethinking the fundamentals of doing business.
Authors like Scott Anthony and Roger McNamee discuss the new normal on dimensions such as turbulence and uncertainty. The good doctors then offer their own prescriptions on how to thrive in the new normal.

At a time when pundits and gurus are shouting themselves hoarse that the old rules of business don't apply, and that a new normal prevails, thinking managers must step aside and ask - have all the old rules gone by the wayside, or do we need to be more circumspect, asking ourselves which rules to retain and which to adapt and modify?

So, is the new normal really never before encountered scenarios and dynamics? Or is it merely a set of scenarios and dynamics that societies and businesses have been experiencing for several decades now operating in a new context?

This is not your father's economy is a standard rallying cry of the new normal protagonists. But it hasn't been our father's economy for a long time now. Rewind to 1980 and Alvin Toffler's The Third Wave. Surely the post-industrial society was a new normal then, not your father's economy, as some might have said. It represented a series of disruptions and environments different from the Second Wave (Industrial Revolution). Whoever interpreted that to mean wiping the state clean was not thinking very deeply. And if you need proof, all that you have to do is listen to the loud lamenting about shrinking manufacturing bases eroding the stability of some of the richest economies in the world, USA included.

And if you need more proof, talk to the bleeding economists. The more enlightened deeper thinking variety will tell you that the so-called new normal, the state of the global economy and the economic recession, is a result of those running companies, countries, and governments having forgotten the old normal - in this case John Maynard Keynes and his macro-economic insights. And merely to refresh our memory, Keynes himself was trying to jump start tired, post-WW II, not your father's economies!

There is little doubt that the challenges of running a business continue to change as the context or the environment within which a business operates changes. Each context/environment throws up a different set of normals. However, that does not mean that all rules go out of the window. Businesses that have survived several rounds of new normals, share a common religion; they show undying devotion to three enduring fundamentals.

Updating and Refreshing Beliefs and Assumptions - in Darwin's world species did not survive because they could not adapt. In the business world, certain world views, assumptions, and beliefs have to disappear, periodically and regularly, if the company is to morph, survive, and grow. Companies like P&G, IBM, and MacDonald's have all faced near death experiences for failing to refresh and update their concept of success and their beliefs and assumptions concerning the key drivers of success. Once they were able to update and refresh their world view, they emerged as stronger market leaders.

Investing - especially in people. Long term and sustained growth is possible only if companies invest in their value creation capabilities and none is more important than the people a company invests in. There is no doubt that technologies create value, and proprietary technologies have the potential of creating even higher value. However, in the ultimate analysis it's the people that unlock the value of these technologies by creating applications and uses for which the market is willing to pay.

Creating, Renovating, and Innovating Relevant Customer Value - too many words perhaps, but given how often companies forget to put customer value in the driver's seat we may need more. In every environment, no matter how uncertain, complex, or turbulent, the fundamental equation of a company's value remains constant - a company is only as valuable as the value it creates and delivers to its customers.

When individuals, companies, and countries are bleeding economically, it is easy to suspend one's own critical judgment and succumb to the belief that the new normal has ushered in a never before encountered set of scenarios, requiring radically different thinking. Nothing could be farther from the truth. Paying homage to enduring fundamentals still offers a sound way of navigating today's troubled waters, much the same way it enabled navigating yesterday's troubled waters.

The perils of ignoring the demands of changing environments and market contexts has been well documented. Its time we became equally mindful of ignoring enduring fundamentals as well. A few lines from Robert Frost best capture the essence of the discussion:

we dance around in circles and suppose

the secret sits in the middle, and knows!

Urban Sustainability: A Testing Ground for Collaboration and Engaging Citizens

2009-07-24T09:23:38Z

It's a good season for change! Sitting on the fence is not an option, especially when it comes to the environment.

The United States has reached the edge of deferment; it must now embrace sustainability and engage its citizens in green and clean initiatives. President Obama has promised $80 billion of the economic stimulus package for this cause. Furthermore, with the average American generating four pounds of trash per day and 10 tons of carbon per year, rhetoric alone won't do, we need action.

While the U.S. is rarely recognized among the greenest countries--in fact, it falls a dismal third from the bottom in its Environmental Performance Index category--it boasts a number of communities and states that are front runners when it comes to sustainability. In fact, if California were a country, it would qualify among the world's greenest with the world's largest solar power plant, wind farm, and geothermal installation.

Which begs the question, if a few communities and states can achieve this state of awareness and action, why not the entire country? The true goal has to be effective and active engagement of citizens on a broader national scale, not just in self-contained, isolated pockets. It's not going to be easy; USA's population is 12 times that of Scandinavia--the established leader of the green movement. Add to it the burden of the recession and an argument could be made as to why an average citizen may not be as amenable as in more prosperous times.

But there is hope and energy as a select group of cities like San Francisco (changing the way we think about recycling) and Portland (spearheading the mass transit revolution) lead the charge toward the New Economy.

Long the capital of American architecture, Chicago has emerged as a leader in green architecture and landscaping as well. Its "Forward Chicago" initiative engages companies and citizens in improving the city, while also strengthening its bid for the 2016 Olympics through the following measures:

Recent establishment of a citywide "Challenge" that offers citizens $800 for reducing their carbon emissions.
Conversion of 4 million square feet of public and private roof space into gardens, saving thousands of dollars in energy costs.
Citizen contributions to city "greening" efforts, planting more than 500,000 trees and helping convert 200 acres to park space.

Minneapolis empowers its citizens to fight climate change by using a system of mini-grants. Neighborhoods, individuals, and community groups can submit innovative ideas to receive grants ranging between $1,000 and $10,000. Funds have been used on projects ranging from the installation of at-home power consumption monitors to "block parties" that focus on how neighborhoods can fight global warming. Many grant recipients also sign up for the Minnesota Energy Challenge, which encourages residents to make significant lifestyle changes and reduce their carbon footprints. In 2007 and 2008, the grants collectively aimed to reduce carbon dioxide emissions by 10.9 tons and save $1.33 million in annual energy costs.

When it comes to renewable energy, Austin, Texas--also home to Whole Foods--attracts international attention. Austin Energy is the country's largest provider of renewable energy, and the City of Austin aims to become carbon neutral by 2020. With such lofty goals, they use a combination of positive and negative reinforcement to engage their citizens:

Resident rebates for energy-efficient home improvements; at-home solar panels subsidized at 50%.
Discounts throughout the city on rainwater barrels and low-flow toilets.
Home energy audits required prior to putting a house on the market.

San Francisco strengthens its hold on its title as the lead recycler in America with a new mandate for composting food scraps. With a goal of keeping 75% of recyclable material out of landfills by 2010, residents face a $500 fine should they fail to compost.

Will these measures close the gap, as San Francisco moves toward a waste-free city?

And finally, there's Portland--the city that many recognize as the greenest in America. Portland stands alone as an example of holistic green urban planning. Its sustainability plans reach back several decades and have involved its residents at every stage of the process.

A few examples of what the city and its residents have jointly accomplished are presented below.

Investments in mass transit and trail development rather than highway construction result in 25% of Portland residents commuting by bike, carpool, or mass transit. They've also contributed to a nascent biking industry based in Portland.
State tax credits for businesses and residents using renewable energy are encouraging a fast transition in power sources. Currently, 50% of the supply derives from renewable energy, with a goal of 100% by 2012.
The city's land-use policies and urban growth boundaries have motivated citizens and politicians to commit to becoming a "20 Minute City." This means that residents will soon be able to travel wherever they need to go by walking or cycling for 20 minutes.
Through the "Portland Composts" program, more than 200 city restaurants have begun composting their food waste--and encouraging their patrons to do the same.

Despite its bad rap, the United States boasts several cities with admirable green initiatives. However, what's missing from the resume is a single model city representing a comprehensive and complete eco-success story.

Some may argue that the foundation for such a model eco-city has been laid on the West Coast, and it's only a matter of time as progressive practices spread from Seattle down to San Diego. That said, a more significant commitment to holistic urban planning, that relies not only on legislation, but an extensive engagement of citizens and residents across all dimensions of sustainability--can only help accelerate the creation of a model American eco-city.

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

2009-06-26T14:08:17Z

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.

Customer Collaboration and Cause-Driven Marketing

2009-06-17T12:35:06Z

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?

2009-06-09T09:04:28Z

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?

2009-05-22T00:50:15Z

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

2009-05-07T11:00:26Z

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

2009-04-30T22:35:22Z

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?

2009-04-20T19:27:15Z

"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.