Recently in Open Innovation Category

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

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:

1. The purpose of company is to create a customer.
2. A business is defined by the needs, wants, desires a customer satisfies when buying the company's product or service.
3. 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!

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.  

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.

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.

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!

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.

  

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.  

Have you heard Branford Marsalis' rendition of I heard you twice the first time? 

There's something about champions that sets them apart from the rest of us. They never stop challenging themselves to grow, to become better, to get to the next level of performance.

Walter Payton, the Chicago Bears running back standout was a true champion. In his book - The New Dynamics of Winning - Denis Waitley tells the story that during off-season Payton would train by running up a steep hill in a Chicago suburb. Sometimes other pro-footballers would join him, but Walter would go a few more times, after they had stopped totally exhausted. And then when he felt he had enough, he would go, one more time.