THE CAP GEMINI ERNST & YOUNG CENTER FOR BUSINESS INNOVATION
Perspectives on
Business Innovation
ISSUE
8
Connected Innovation
www.cbi.cgey.com
Please visit www.cbi.cgey.com to explore other research under way
at the Center for Business Innovation, as well as additional issues
of Perspectives on Business Innovation.
T H E C A P G E M I N I E R N S T & Y O U N G C E N T E R F O R B U S I N E S S I N N O VAT I O N
is a research organization focused on emerging management trends, problems,
and solutions. It seeks to facilitate a shared conversation among business
practitioners, advisors, and observers, enhancing the knowledge of all involved.
c on t e n t s
Perspectives on
Business Innovation
Connected Innovation
4
WELCOME TO THE CONVERSATION
The Big Idea
7
CONNECTIVITY REINVENTS THE RULES OF INNOVATION
Ubiquitous connectivity has changed the way we innovate, how the process works,
whom we decide to partner with, and where we find our customers and disseminate
information. Rudy Ruggles takes us through the innovation life cycle—in a
connected world.
16
STILL WAITING FOR THE REVOLUTION: A CONVERSATION
WITH ALAN KAY
Alan Kay is one of the most influential computer scientists of the modern era. His
contributions, among many others, include the concept of the personal computer.
We sat down with him to discuss his take on how innovations happen.
Innovation in Action
21
REFINING THE INNOVATION PROCESS AT TEXACO
Amid sweeping changes in the oil and gas industry, innovation has never been more
important. Find out how Texaco met this challenge by harnessing the innovative ideas
of its employees.
27
INNOVATION-BASED SUSTAINABILITY AT CAPITAL ONE FINANCIAL
Capital One Financial’s remarkable growth can only be attributed to one thing:
innovation—in its processes and its people.
33
FROM ROADMAP TO ROADWAY: MANAGING INNOVATION AT BMW
Innovations sometimes just happen, yet more often, they are a calculated part of
corporate strategy. Learn how BMW’s sustainable innovation process sees ideas
through to fruition.
A Blueprint for Change
39
ONLINE COLLABORATION: THE NEXT WAVE OF INTERNET INNOVATION
Utilizing the benefits of the Internet and new technologies, Collaborative Product
Commerce (CPC) is strengthening alliances and improving productivity for many
innovative companies.
46
DEMYSTIFYING INNOVATION
Innovation is commonly regarded as one of today’s most important value drivers in a
company. Here are some suggestions for recognizing and assessing innovation in your
own organization.
ISSUE
8
T H E C A P G E M I N I E R N S T & Y O U N G C E N T E R F O R B U S I N E S S I N N O VAT I O N
On the Horizon
53
THE CBI FUTURE SCAN: A VIEW FROM THE CROW’S NEST
What forces will shape our economy over the next two years? The Center for Business
Innovation has identified the five trends companies will either embrace or resist.
Your choice may determine tomorrow’s success.
59
OPEN SOURCE: BEYOND THE FAIRY TALES
It’s not just a software development model. The open source movement is being
embraced by innovative companies and imbedded in their business strategy.
Shared Conversation
Our purpose in Perspectives on Business Innovation is to promote a Shared Conversation
among business practitioners and observers. Here are some vital perspectives we’ve
heard lately . . .
66
DISRUPTION IN A NETWORKED WORLD: WILL CLIFFORD ON PATTERNS
OF STRUCTURAL SUCCESSION
71
REFLECTIONS ON THE FUTURE OF SOFTWARE
75
THE INVISIBLE ADVANTAGE OF INNOVATION
Departments
79
Technology Watch
Cap Gemini Ernst & Young’s Technology Advisory Board recently convened to discuss how
the relationship between technology and its users will evolve in the future.
85
Well-Read Manager
A review of Seth Godin’s Survival is Not Enough by Larry Keeley, CEO of the Doblin Group, and
other books worth reading.
90
Heads-Up
A list of upcoming events not to be missed.
91
Research Roundup
Summaries of current research projects at the Center for Business Innovation.
97
Inconclusion
We discovered some of the most obscure patents we’ve ever seen. Apparently, every invention
doesn’t always become an innovation.
Welcome to
the conversation
THE EVOLUTION OF INNOVATION
Christopher Meyer
“You can't have science with one scientist.”—Alan Kay
nly 30 years ago, innovation was perceived as a threat: “if it ain't broke, don't fix it”
was the common approach to trying anything really new. Growth came from linear
expansion. And the Standard Industrial Classification codes didn’t leave much room
for the creation of new industries. Innovation was about incrementally improving what already
existed and building efficiency into established products and processes.
O
But today, highly prized, innovation is regarded by the financial markets as one of the most
important value drivers in a company. In fact, nonfinancial performance like innovation accounts
for as much as 35 percent of institutional investors’ portfolio allocation decisions today. Our
research at the Center for Business Innovation (CBI) shows that in the nondurable sector, 7.2
percent of the average company’s market value is based on innovation. And out of the top 10
nonfinancial drivers of market capitalization, innovation consistently ranks in the top five across
industries—ahead of more expected value drivers like technology and customer service.
Why the new emphasis on innovation? We can look to nature for answers. In nature, the pace of
biological innovation depends on the rate of recombination of genetic “ideas.” Evolutionist
Stephen J. Gould tells us that bacteria dominate the biomass because they breed every 20
minutes. Each generation is an opportunity for their genomes to recombine and for the environment to exert selective pressure; thus the species evolves three times an hour.
Industrial businesses have been more like pandas in their evolution, with a gestation period of 18
months and a low frequency of romantic recombinations. And like pandas, it hasn’t taken much
change in their environments to kill them off. But their Himalayan habitat was hardly volatile.
Now, both the culture and the connectivity of the Internet have changed the rate of recombination of business ideas, bringing about a fundamental shift in the way ideas are collected,
communicated, and combined. This open and free exchange has created a host of opportunities
for innovation to occur.
The rules of evolution teach us that permeable boundaries, which let new information into the
species, and a robust gene pool, which provides the species with a broad repertoire of adaptive
behavior, are essential to survival in a volatile environment. Today’s ubiquitous connectivity
supports both. Organizations are transplanting these rules, partnering more freely to combine
capabilities and exploring more openly to incorporate solutions “not invented here.” As we say in
our article on Open Source in this issue, “Innovation Happens Elsewhere.” At the Center for
Business Innovation, we posit that innovation is accelerated based on these precepts. Thus, we
dedicate this issue of Perspectives on Business Innovation to the topic of Connected Innovation.
Our lead article, “Connectivity Reinvents the Rules of Innovation,” walks us through the new
process for innovating in a connected economy. Rudy Ruggles, who leads the Innovation initiative here at the CBI, explains how to reap the rewards of connectivity while overcoming barriers.
The article addresses the exponential benefits of the recombination of ideas and the benefits of a
mechanism to facilitate idea sharing. Also addressed in this article (and in further depth later in
the issue) is the concept of disruptive innovation—what happens when a new technology starts
out below normal standards but improves at such a rate as to overtake the industry’s best, ultimately changing the rules of the game. Finally, we illustrate how connectivity and subsequent
communities change the way innovations are diffused and adopted.
Our interview with Alan Kay, one of the founders of the Xerox Palo Alto Research Center (PARC)
and also the innovator responsible for the Point and Click GUI we now take for granted, takes us
into the mind of the innovator. Notorious for his saying “The best way to predict the future is to
invent it,” Alan Kay details the trials and tribulations of getting a great idea into the marketplace.
He points out the differences between the scientific process of innovation and that process typically adopted by business, and notes the drawbacks of the latter.
As always, Perspectives contains a series of case studies. Our story on BMW showcases the
company’s sustainable innovation process, a remarkable means of sensing the market and getting
new ideas into commercialization quickly. Another case study on ChevronTexaco describes the
company’s collaboration with the Center for Business Innovation in an effort to capture and capitalize on the ideas of its employees. The CBI’s software tool, IdeaX, provided ChevronTexaco with
a much needed platform for employees to voice new ideas and recombine with others. Our final
case study on Capital One Financial gives an account of this company’s fantastic growth attributed to its feedback loops, continual testing of new products, and innovative culture.
Other articles in this issue include a how-to piece on assessing and measuring innovation—both
quantitatively and qualitatively, what the open source software movement can teach us about
strategy, and the premiere report-out from the CBI’s new Technology Advisory Board.
We hope this issue of Perspectives will provide both a thoughtful and thorough vision of innovation in the connected economy. Stay tuned for our next issue—we’ll take a look at innovation’s
new prominence as an element of a broader trend toward the adaptive enterprise.
Christopher Meyer is director of the Cap Gemini Ernst & Young Center for Business Innovation and a vice president
in CGE&Y’s Management Consulting practice.
7
The
Big Idea
CONNECTIVITY
REINVENTS
THE
RULES
OF
INNOVATION
Rudy Ruggles
Rudy Ruggles is a senior manager at the Cap
Gemini Ernst & Young Center for Business
Innovation where he leads the Center's research
on innovation. His research focuses on idea
diffusion, social network dynamics, and technological knowledge management tools and
techniques. Rudy holds a B.S.L.A. in Japanese
language from Georgetown University and an
M.M. (M.B.A.) from Northwestern University’s
School of Management.
nnovation drives value. It powers growth and it
reduces costs. It is one of the most significant
attributes investors use to judge a company’s
overall value.1 It appears prominently in the annual
reports and on the websites of nearly all of the
Fortune 500. By all indications, innovation matters.2
I
This is not news, however. History is full of innovations that have altered the course of human events,
redistributing power, causing and crushing revolutions. The study of innovation isn’t new either.
Economist Joseph Schumpeter, for instance, described
the economic, sociological, and organizational impacts
of innovation and its “winds of creative destruction”
well over half a century ago. What is new, however,
is the rise of how connectivity—both technological
and nontechnological—is affecting the actual process
of innovation. In today's highly connected economy,
ideas are being created and recombined at great
speed and in new ways. Traditional models for
creating, developing, distributing, and benefiting
from innovations no longer suffice. Success depends
on an ability to leverage connectivity throughout the
innovation life cycle.
After several years of research, the Cap Gemini Ernst
& Young Center for Business Innovation (CBI) has
begun to understand how organizations can use the
dynamics of the networked economy to enhance each
of the four stages of the innovation life cycle: Idea
Generation, Concept Development, Innovation
Adoption & Diffusion, and End Game.
8
Figure 1
Innovation Life Cycle
Source: Cap Gemini Ernst & Young
Center for Business Innovation
➤
The
Big Idea
Value or Benefit
Idea Generation
Development
The Innovation Life Cycle
Figure 1 shows the typical s-shaped value curve so
often drawn in relation to innovation. The rise of
the curve represents the unique value generated by
an innovation over time. Given the quirky nature of
innovation, the shape of this line will vary considerably—some have long lead-in tails, some have near
vertical takeoffs from the start, and so on—but all will
show some sort of s-shape. Also, as discussed above,
the value calculations will differ, but the dynamic
remains the same.
There are four major stages in the life of an
innovation:
Idea Generation—The earliest stage of idea creation,
this is where it all begins. It includes everything from
early scanning, to rigorous gap analysis, to random
sparks of insight. At this stage, even those concepts
destined for greatness are just barely recognizable.
Development—Here is where resources are applied to
turning an idea into an actual product, service,
process, business, etc. This stage includes activities
such as prototyping, experimentation, beta testing,
and other activities that make an idea actually useful.
Adoption & Diffusion—Adoption is the uptake and
application of a concept, product, etc., by someone or
some group. It is here that innovations get put into
action and start to add real value. Diffusion represents the spread of that uptake throughout a
population, organization, or other system. The impact
Adoption/Diffusion
End Game
grows, and it is here that innovations become distinguishable from mere inventions.
End Game—At some point, there is no more unique
value to be gained from an innovation as an innovation. The premium rents to the innovator have all but
disappeared. This may be because the innovation has
become a commodity (e.g., automatic teller machines)
or been overtaken by superior technology (e.g., the
fax machine being pushed aside by e-mail). All innovations hit a point of decreasing returns, even if they
are still valuable. They are just not uniquely valuable
as innovations.
These stages actually represent a fluid progression
through the life of an innovation. But understanding
each unique stage helps to further the conversation
about what to do about innovation to make it happen
more often and with better results. Connectivity
opens up new realms for the way in which an
innovation can be enabled and encouraged
throughout its life.
Connectivity Creates
The truly new idea that turns into an innovation is a
rarity. More often, existing ideas are brought together
in a new way or in a new context that opens up new
avenues. This sort of recombination can only happen
if elements are given the opportunity to interact with
each other. Increasing connectivity creates these
opportunities.3
It is important to note that the idea of recombination
is only interesting if the population of elements is
The
Big Idea
9
heterogeneous, i.e., diverse. Connecting like-to-like
may give you mass, but it won’t give you innovation.
For example, connecting oxygen molecules to other
oxygen molecules isn’t nearly as interesting as what
happens when you add hydrogen to the mix. And look
around you to see what you get when you have all 109
of the elements at play. Whether the elements are
people, ideas, or organizations, where the mix is rich,
connectivity enables whole new opportunities.
While connections create opportunities for recombination, recombinations (and for that matter
innovations) do not create themselves. Energy is
required to take the potential innovations that lie in
those connections and make something happen.
Therefore, organizations should do the following:
Remove Barriers to Connectivity
Removing barriers to connectivity is challenging.
Connections are not just technological, but also
personal. Ensuring everyone is on e-mail, for example,
is only the first step. Can they find each other,
especially if they don’t know whom they’re looking
for? Quick, what’s the e-mail address of the top innovation expert in your organization (besides you)? Who
is the person who might help you develop that
perhaps harebrained (but possibly ingenious) idea
you have about a new business opportunity your
organization should pursue? Just because someone
has the capability to communicate with another
person doesn’t mean that she will.
Encourage Recombination Through the Interaction
of Ideas
The best way to encourage recombination in this
sort of early stage idea development is through a
community of interest. Communities, as defined here,
are social networks of people who find each other
through a variety of means and are drawn together
by a shared context, a topic or topics of interest,
and some sort of social cohesion.4 They exist within,
and beyond, every organization, alongside traditional
hierarchies and transaction-based “market” relationships. While each type of structure has its own
strengths in what it takes to make innovation happen
(see Figure 2), communities are most effective at
exactly the types of behaviors and interactions that
are so useful at this early, formative stage of idea
generation.5
How does all of this work in the real world?
International oil and gas giant Texaco (now
ChevronTexaco) was constantly on the lookout for
new business opportunities. While its Strategic
Management Group was specifically tasked with
creating, finding, and analyzing such growth ideas,
Texaco wanted to open up the front end of this
process to as many people as possible within (and
eventually beyond) the organization. It created an
idea development and capture mechanism on its
intranet that enabled all interested to participate
in the development process. People could submit
ideas for opportunities, discuss other people’s contributions, evaluate the postings, and develop new
Refining the Innovation Process . . ., pg. 21
10
Figure 2
Effectiveness of Organizational Structures in Supporting Innovation
The
Big Idea
Innovation Ingredients
Hierarchies
Markets
Communities
Diversity of input
Low
Medium
Medium
High
Recombination
Low
Low
Feedback & iteration
Low
Medium
High
Filtering
Low
High
Medium
Resource allocation
Medium
High
Low
Execution
High
Medium
Low
Source: Cap Gemini Ernst & Young Center for Business Innovation
strategic solutions. Additionally, those in search of
new opportunities could use the system to find highly
rated, appropriate concepts as needed by searching
and through collaborative filtering.6 Other companies,
such as Procter & Gamble and Nortel Networks, use
similar approaches, drawing upon a diverse set of
inputs and feedback mechanisms to generate a more
robust population of initial ideas to feed into the
innovation process.
Still, for an idea to turn into an innovation, no matter
how interesting and well thought through, it needs
devoted resources. It needs to move into the realm
of development.
A Thousand Blooms From a Thousand Gardeners
Organizations have been trying to streamline and
improve their development processes for decades.
Portfolio analysis, stage-gate processes, options
pricing models, and numerous other tools and
techniques have decreased time to market and
increased average returns on investments in nearly
every industry. These gains are certainly attractive,
and firms that are not already trying such approaches
should do so. Still, these techniques primarily focus
on internal, linear processes. There is a whole new
horizon for what kinds of gains are possible when
connectivity is leveraged. The age-old idea of letting
a thousand (innovation) flowers bloom becomes a
much more tenable proposition if the gardeners are
working together.
The Conference Board of Canada reports that “firms
that collaborate are . . . significantly more likely to
introduce breakthrough (world-first) innovations.”7
Collaborations include inter-firm but also working
relationships with universities and government labs.
This represents the power of multiple members of an
economic “web” of relationships working together.
Firms can take advantage of connectivity to enhance
innovation development in two new ways: dealing
with disruptive innovations by managing networks of
modules, and leveraging the power of many through
distributed development.
Networked Innovation
Readers of Professor Clayton Christensen’s work,
including his book The Innovator’s Dilemma, will
recognize the term “disruptive innovation” as describing a new technology that starts out below normal
standards but improves at such a rate as to overtake
the industry’s best, ultimately changing the rules of
the game. What is particularly frustrating about such
disruptions is that incumbent firms may be doing
everything “right,” including creating faster, better,
and cheaper sustaining innovations. They find it
impossible to justify investing in the new technology
(broadly defined) since it initially meets none of their
(or their customers’) criteria for a competitive product. Then, when the technology has improved enough
to be a threat, they are too far behind and cannot
make the switch. So, how can organizations have
their innovation cake and eat it too? Connections.
Understanding this entails understanding modularity.
The self-contained elements of a connected system
are often called modules. Modularity—structuring
While most companies have already realized the importance of
innovation, the effects of connectivity on the innovation process
remain largely undiscovered. Connectivity is the progeny of our
networked economy, and business managers need to understand
its impact on the four stages of the innovation life cycle, the
importance of diversity, and the organizational energy and
resources necessary to unlock the potential of connected
innovation.
article abstract
complex products from smaller subsystems that can
be designed independently yet function together in a
seamless fashion—begins at the product level, then
ripples upward through organizational structure, and
then through to industry structure. CBI researcher
Will Clifford has studied how firms can spot and leverage disruptive innovations by managing modularity
(i.e., the configuration of their own modules and
connections to others’).8 By focusing only on their
core competencies and creating relationships to
outsource, yet access, all other competencies, organizations can remain nimble. Management then entails
strengthening and weakening links as needed,
depending on the dynamics of the environment, be
they changes in cus-tomer preferences, new market
entrants, or the rise of disruptive innovations. Even if
it doesn’t make sense for your organization to invest
money in a potential disruption, it is certainly worth
being connected to those who are working on these
new solutions.
Microsoft’s move into the “Information Superhighway”
arena is an interesting example. In the early 1990s,
Microsoft paid little attention to the emerging
Internet industry. Then, in about 1994, Bill Gates
decided that Microsoft should be in that game.
Microsoft was able to get up to speed extremely
quickly by combining its own competencies and
market strength with a very aggressive relationshipbuilding strategy with players in all of the major
industries who had the necessary complementary
competencies. Microsoft’s ability to develop into
Disruption in a Networked World . . ., pg. 66
an Internet powerhouse came from its ability to
combine modules quickly and flexibly to achieve
its objectives.8
Distributed Development
On a more tactical level, connectivity enables a
whole new innovation development model. The
most straightforward version of this is a virtual team
collaborating on a project. While not particularly
recent, technology is enabling such teams to do new
and different things.
At the extreme is what is referred to in the software
development world as “open source.” While this
approach and its implications receive far more
detailed treatment elsewhere in this issue, it is worth
touching on briefly here.10 Source code is the root
programming that runs the software. Software firms
usually guard it extremely carefully since it allows
people to make changes to the very DNA of the
program. However, there are some software efforts
that post this source code for anyone to use and
change. Often done in an academic context, open
source has recently gotten a lot of recognition as the
way in which the operating system Linux was created.
Linux is an interesting story for two reasons. First, the
scale of the effort was considerable, with some 40,000
people from all over the world contributing to the
code, all of whom did so voluntarily. The second
reason is that Linux is seriously challenging
Microsoft’s server operating system dominance.
This is not just a hobby.
Open Source . . ., pg. 59
The
Big Idea
11
12
“Increased connectivity allows new social dynamics,
The
Big Idea
and in fact whole new social systems
”
and communications patterns to emerge.
Snowball Effects
Where the development stage of an innovation’s life
cycle takes it from mere concept to something that
actually has an impact, the adoption and diffusion
stage determines just how significant an impact it
turns out to be. While there is no golden rule when it
comes to the acceptance of an innovation, firms now
have the opportunity to use connectivity to increase
the likelihood that their innovations will spread.
In 1962, Everett M. Rogers published the first edition
of Diffusion of Innovations, now in its fourth edition.
This landmark work continues to be the touchstone
for all studies on diffusion, which he defines as the
process by which an innovation is communicated
through certain channels over time among the
members of a social system.11 Increased connectivity
allows new social dynamics, and in fact whole new
social systems and communications patterns to
emerge. Malcolm Gladwell, in his book The Tipping
Point, examines adoption and diffusion patterns as
examples of outbreaks, or as he puts it, “social
epidemics.”
Such diffusion patterns relate to practices as much
as they do to products. It is therefore imperative for
organizations not only to understand that such
patterns exist, but also to be able to do something
about them. As Seth Godin writes in his book
Unleashing the Ideavirus, “Ideas that spread the
fastest win.” And, as Procter & Gamble has said,
some 60 percent of the adopters rely more on social
Well-Read Manager, pg. 85
influence than mass media. Leveraging connectivity
is the key to success.
There are four major steps in leveraging connected
innovation. First, assess the network as is, using social
network mapping and analysis tools. Next, profile the
adoption and diffusion potential of the innovation
itself. Rogers’ work uses the following five characteristics of an innovation to assess its adoption potential:
1. Relative advantage—The degree to which an
innovation is perceived as better than the idea
it supersedes.
2. Compatibility—The degree to which an innovation
is perceived as being consistent with the existing
values, past experiences, and needs of potential
adopters.
3. Complexity—The degree to which an innovation is
perceived as difficult to understand and use.
4. Trialability—The degree to which an innovation
may be experimented with on a limited base.
5. Observability—The degree to which the results of
an innovation are visible to others.
Once you have established the connectivity of the
“market” for the innovation and the adoption potential of the innovation, the third step is to test
hypotheses and introduction strategies, experimenting
with changes in various attributes of both the network
and the innovation. While it is possible to do this with
prototyping and test marketing, many companies are
The
Big Idea
13
finding that doing these tests “in silico” is much more
effective. For example, the simulation software
created by the CBI and Bios Group, called Snowball,
uses an agent-based modeling approach to reflect the
complex nature of the interaction of the innovations
and the networks.13
The results of such models can then be used to guide
the fourth step: making and implementing strategic
marketing and manufacturing decisions. For example,
one company found that changing the “observability”
setting in the model for one of its products had a
significant impact on its diffusion score. This helped
the company decide to offer an instant spot-remover
in small pocket/purse-sized applicators, since even
though that was a more costly packaging approach, it
paid for itself in broader diffusion (i.e., more usage).
However, the most significant diffusion gains came
through connecting previously separate geographic
customer clusters by giving samples and coupons to
people who crossed the geographic boundaries. The
target users were identified as college students in one
location who were heading home for the holidays in
the other locations. The model enabled the marketers
to find the most appropriate ways to leverage, and in
this case augment, connectivity to enhance diffusion.
End Game
Once innovations stop being innovations, they tend
to fade into the background. At best they’ve become
commodities, at worst they’ve failed altogether and
have disappeared from view. What good is connectivity at this point? You might be surprised.
The point of the innovation “end game” is to make
sure that you’ve received all the extraordinary value
possible from your innovation. It’s about making
sure that the upper tail of the s-curve does not flatten
prematurely. While it is certainly possible to extend
this tail through product extensions, for instance,
this is a low-leverage solution. The best way to
increase the return on your investments here is to
establish, support, and learn from communities.
Harley Davidson, Saturn, and others have done a
wonderful job creating and enabling user communities, to the admiration and envy of others in their
industries. Such communities are nearly impossible
to emulate and so create a particularly strong source
of competitive advantage.
While such supported communities are well-studied,
there is another variation on these social networks
that is even more powerful: self-organizing communities. An illustrative case of this is the community that
formed around the Amiga computer. The Amiga, first
introduced in 1985, was an integrated hardware/
software platform that was tuned for multitasking and
multimedia applications from the beginning, even
with the rudimentary memory allocations available
at the time. What’s particularly interesting about the
Amiga story is that the corporate “ownership” of
Amiga has died and been resurrected many times
since the mid-1980s. And yet, there are tens of thousands of dedicated Amiga fans who have continued
development and support efforts throughout. There
are thousands of fan sites on the Internet, and some
Open Source . . ., pg. 59
14
Figure 3
Traditional vs. Connected Innovation and the Innovation Life Cycle
The
Big Idea
Idea Generation
Development
Traditional Innovation
Connected Innovation
●
Occasional
Internal
● Idea “factories”
●
●
●
Constant
Inclusive
● Idea “markets”
Stage-gate
Centralized (R&D)
●
●
●
Stage-gate + internal venturing
Decentralized (R&D + intrapreneurs)
Adoption/Diffusion
●
Markets as segments
●
Markets as relationships
End Game
●
Value ends
●
Learning continues
●
Source: Cap Gemini Ernst & Young Center for Business Innovation
50 online and print magazines in the U.S., the U.K.,
Germany, and a dozen other countries. Connectivity
has enabled the community of people passionate
about Amiga to work together to keep the value alive,
even when the corporate manifestation of Amiga
disappeared altogether for long periods of time. The
lesson to be learned from this example is that often
the community can do your job for you (whether you
like it or not).
Lastly, the best way to use connectivity in the “end
game” is to use it to feed your next innovation. MIT
Professor Eric von Hipple’s work on “lead user” analysis has demonstrated that these first adopters (and
adapters) are an efficient source of ideas for new
solutions. The problem with lead users is that they
tend to be quite fickle and quick to try another new
innovation. On the other hand, communities like
Amiga’s are perhaps better labeled “lag users,” not
because they are late to adopt the innovation (some
may in fact be lead users), but that they stick around
even after “normal” users have moved on. Because so
much of their interaction happens online and in public
or open forums, these communities are a great source
of learning for companies. The key is to listen to these
communities for what makes them so passionate
about this innovation and watch what they are doing
to enhance its value. These ideas can be invaluable
input to the next generation of that same product
(if it is your product they are discussing), or even to
similar products. What can television, PDA, or car
makers learn from the enthusiasm of the Amiga
community? Or, similarly, from the comments posted
in such forums as Edmunds.com or Vault.com?
Connectivity allows people to talk. After all, according
to Cluetrain Manifesto Thesis No. 1: “Markets are
conversations.”14 Are you listening? Are you learning?
Are you benefiting?
Change the Rules of Your Game
Organizations should approach innovation in new
ways in the connected economy. As previously
discussed, organizations can use a variety of
approaches to leveraging connectivity to enhance
the generation, development, and diffusion of
innovations, reaping the greatest possible value
throughout their life cycles. While traditional innovation models still have their place, connected
innovation has opened up a whole other set of
opportunities for those organizations looking to
create new products, services, processes, structures,
and strategies (see Figure 3).
Certainly the implementation challenges are many.
Connectivity, in the end, is just an enabler for new
creations. However, there are powerful indicators of
what's possible in the world of innovation enabled by
connectivity. We hope that you will use these ideas to
change the rules of your game.
Demystifying Innovation, pg. 46
The
Big Idea
15
I. Low, Kalafut, Seisfeld, Measuring the Future: The Value
Creation Index, CGEY CBI Special Report, March 2000.
2. We use the term “innovation” to indicate a significant, valuable, new product/service, process, organizational structure,
or strategy/business model. For more on how to determine
whether something is an innovation, see Ho and Chen's article
in this issue, “Demystifying Innovation.”
3. For more information on the nonlinear dynamics of Connected
Systems, see Stuart Kauffman’s “At Home in the Universe,”
Oxford Press, 1995.
4. For more on such communities, see Etienne Wenger’s
Communities of Practice, the Doblin Group’s work on
communities (http://www.doblin.com), and Brown and
Duguid’s The Social Life of Information.
5. See Ruggles, Abraham, “Innovation and the Failure of Markets,”
CGEY CBI Just Thinking paper, July 2001.
6. For more on this, see Abraham, Pickett, “Refining the
Innovation Process at Texaco,” in this issue.
7. “Collaborating for Innovation: 2nd Annual Innovation
Report,” The Conference Board of Canada, 303-00 Detailed
Findings, 2000.
8. Clifford, William, “Disruption in a Networked World:
Capitalizing on Patterns of Structural Succession,” CGEY CBI
Working Paper, December 2001.
9. Valdis Krebs has mapped such relationship structures; see
http://www.orgnet.com/netindustry.html.
10. For a more detailed description of this approach, see Gabriel,
Goldman, “Open Source: Beyond the Fairy Tales” in this issue.
11. Rogers, Everett M., Diffusion of Innovation, 4th edition, Free
Press, 1995, pg. 10.
12. Ibid, pp. 15–16.
13. For more on this model, see “Letting the Market Manage Your
Offer” in Perspectives on Business Innovation, Issue 6.
14. http://www.cluetrain.com.
16
The
Big Idea
STILL
WAITING
FOR THE
REVOLUTION
A CONVERSATION
WITH ALAN KAY
lan Kay’s biggest fault may be that he has
always been a visionary—in the truest sense
of the word. More than 30 years ago, he
invented the concept of the personal computer, even
coining the term to describe it. But he soon discovered that even great ideas don’t always meet
marketplace success. As one of the founders of the
Xerox Palo Alto Research Center (PARC), Alan faced a
number of challenges as he tried to introduce new
computing ideas to executives at Xerox. It wasn’t easy
to explain the creation of an entire industry when
executives at Xerox asked him what the PC “did.”
From the Ethernet to the laser printer to client-server
computing to the Arpanet (the beta version of the
Internet), Alan Kay played a part in developing the
most significant computing innovations in history. Yet,
as Alan discovered, innovations—and all great innovators—are often ahead of their time. It was Steve Jobs
who eventually borrowed Alan’s idea for the personal
computer and later called it the Macintosh. Then Bill
Gates’ iteration became Windows. While considered
progress in the eyes of the consumer, what has
happened in the computing industry has been more
like a slow evolution than the revolution that Alan
Kay dreamed of.
A
Perspectives on Business Innovation editor Kate Kane
sat down with Alan and talked to him about where
great innovations come from, why the mass market
often resists innovation, and what advice he has for
businesses to overcome their fear of change.
Q: Is an innovation only an innovation if it
reaches commercialization?
A: Innovation actually requires that people don’t
accept it. We all like our own ideas, but you can’t
have science with one scientist. You need to be in a
community of people who are constantly challenging
your ideas and looking to debug models. So all of
these skeptical processes are going on with an
innovation. The physical world is the ultimate critic.
Q: When you’re working with a group of people and
you’re onto something hot, something ahead
of its time, something “innovative,” how much
do you care whether it’s going to be accepted by
the masses?
A: Down the road, there’s a lot of caring. But in the
research phase, zero. Because this is art. The impulse
to have a new point of view has to come from within.
The urge is not to make something new just to have it,
but to know how to make it—to understand the
process for creating something new. But we are
limited in our ability to understand something truly
new, so our models will always be somewhat limited.
Q: What is the measure of success then for an
innovation if it’s not about mass appeal or
commercialization?
A: I think the first measure of innovation is whether
it’s beautiful or not. You look at music—all the different styles and approaches that have been considered
beautiful. Some are cultural and some are more
universally accepted. But it’s the learning that goes
The
Big Idea
17
on—educating people on how to appreciate something
as beautiful. It’s complex and the metrics vary.
Take mathematics—this discipline has been around
for a long time. Most mathematicians now agree on
the kinds of things considered to be beautiful in
mathematics. And since science is expressed in mathematics, one of the things you’re trying to come up
with in a scientific theory is whether the math that
expresses this idea is beautiful in itself or whether or
not it has anything to do with the physical world.
Q: So, in some ways, the idea of making
something appeal to the physical world inhibits
the innovator?
A: It does. On one hand, you’ve got the people who
like nothing better than building castles in the air,
which are generally mathematical in nature. Then you
have the poor experimenters who are supposed to go
out and see whether these castles actually have
anything to offer in the real world.
Q: So maybe the answer is to find some
balance between that kind of blue-sky thinking
and practicality?
A: That’s right. When I was at Xerox PARC, we had a
new programming idea. We were able to find a way of
getting it to run efficiently by cooperating with some
of the hardware designers to make machines that
would run it, even though it wasn’t very efficient on
standard hardware. And by doing just this, our little
group of six or seven people all of a sudden became
very powerful in being able to make real things on a
computer that were new, and test them, throw them
away, or keep them and build on them. It was much
more efficient.
Q: What would a company that was following a
scientific model of innovation look like?
A: Many companies have a weighted investment
model, a portfoliolike investment. This is good.
But typically, the riskier these endeavors are, the
fewer resources are put into them. It is known that
even though some things are very risky, you need
to put resources behind them. Companies believe
this as rhetoric, but it’s tricky to figure out how to
allocate resources to such a venture. Companies
are traditionally not comfortable funding people.
They’re comfortable funding projects. So the
resources are administered with corporate goals in
mind rather than corporate vision. A vision is
something that expresses a desirable state of affairs
rather than a particular configuration of affairs.
Basically, anyone willing to take money to work on
the corporate goal is probably not the person you
want to have spending money.
Q: Why is it so difficult for companies to adopt a
scientific approach to innovation?
A: Well, for humans, we have a mechanism called
culture. This is how we gradually discover ways of
living in an environment. It becomes our common
sense and is passed down through stories, generation
to generation. It’s usually based more on a proverb
than a model. Most cultures don’t have a strong
notion of physical cause and effect. Look at American
18
The
Big Idea
business. Almost every process they operate with is
based on an old-style cultural process. So, they have
none of the thinking skills that you learn through a
scientific process. They don’t know about models.
They don’t know that stories are a bad idea. They
think goals are important.
Q: What is the best model you’ve seen in business
for enabling innovation?
A: The model at Bell Labs, until the divestiture. The
mission that was written up on the wall was: “Either
Do Something Very Beautiful or Very Useful.” The
company really wanted to turn this slogan into reality.
When I was at Xerox, it did not do this—to them,
innovation was just a word not a vision. That’s the
difference. First of all, you need to fund the people,
not the projects. You need both a dream and a vision
without breaking the vision down into goals or
missions. This, of course, is antithetical to business.
Business rationale thinks problem solving is a good
rubric and a metaphor for what they’re trying to do.
Articulating goals actually stifles innovation.
Q: How does a company really put this
into practice?
A: Any company should look at the Xerox PARC
model and see that only 35 people, costing in today’s
dollars, 10 or so million dollars, were enough to create
trillions of dollars of wealth. Every large company has
more than enough to afford PARC.
Q: Something tells me this is easier said than done.
A: That's because of “goal seepage”: It’s hard
psychologically to let go of the control. But real
innovators need freedom. They have an inner fire to
do their thing no matter where they work. A lot of
management theories are based on the idea that
employees won’t be productive unless they toe the
line. You have to take attendance and punch the clock
and all that stuff.
Q: If you have found the right innovators and you
want to enable them, what’s the best model?
A: You need to have two kinds of critical mass. One
group that comes up with new ideas and another
critical mass that acts as a coalition to float back
and forth.
Q: Obviously, in order for an innovation to
get any traction in an organization, you need
executive buy-in. How did that work at PARC?
A: We would create a new technology and then give
zillions of demos. But it was very difficult to sell them
on a new idea without creating real anxiety.
Q: What would have helped make the situation
easier? What do innovators need to get beyond this
kind of corporate bureaucracy?
A: You really need a champion for your ideas.
Someone influential in the company who can
recognize a good idea and work it into the corporate
process. At Apple, you had an unusual situation where
the founder, Steve Jobs, was also the champion.
That’s how they got things out the door and why
Xerox did not.
From Roadmap to Roadway . . ., pg. 33
19
is killing the goose that lays the golden egg.
”
You need to reward these guys.
Q: But surely the creation of Xerox PARC reflected
the company’s desire to try to enable an innovative culture.
A: Yeah, but nobody at Xerox headquarters thought to
ask themselves what would happen if everything that
came out of PARC was successful. They didn’t really
want us to be innovative. They really just wanted
basic improvements on existing products— those
things that they already understood. Like the railroads
that didn’t realize they were in the transportation
business and failed to invest in airlines and aircraft
companies, Xerox didn’t realize that it was in the
office business. It failed to understand that personal
computing was going to revolutionize the offices of
the future.
From our standpoint, we thought this was the simplest
slam dunk of all time. Xerox already had salespeople
and maintenance people in every office in the U.S. So
it had the perfect infrastructure—much better than
IBM—for creating a new industry.
Q: Why was this so difficult for Xerox?
A: Xerox was essentially a one-product company.
This hurt the chances of running with something new.
Even Apple had problems where it was narrowing
itself down to just selling and marketing the Mac.
Whereas a company like Sony, or 3M, one where there
are many thousands of products in the works at any
one time has an easier time of accepting and enabling
innovations. The latter has a completely different attitude because it doesn’t link its identity to any single
product. This allows them to be more nimble.
Q: But there’s more to the story than just setting
up a research center with a bunch of smart
thinkers. How does an idea get pushed through
the process?
A: When I worked at Disney, the person who came up
with the idea was required to be the champion of the
idea. This was a disaster. Sometimes, the person who
thought up the idea was a fantastic salesman. And
these ideas were the ones that actually got built. But
sometimes the person who thought up the great idea
didn’t have the right personality to sell it. A company
needs to have a process in place for handing off the
ideas to someone else who can see them through the
process. There are lots of people who are good in the
lab but don’t care what other people think. They do it
for their own satisfaction.
Q: Ok, so on the one hand you’ve got the group
that’s coming up with tomorrow’s great innovations and another group that wields all the control
and power. They need each other. How do you
reconcile this?
A: One thing executives need to watch out for is
killing the goose that lays the golden egg. You need
to reward these guys. If you’ve got incredible superprogrammers, do you have a way of paying them
what the top tier makes? The other thing is to involve
the idea guys in the commercialization process. It can
be disastrous to slap some paint on the prototype
of something and get it into market. So, you need
to be careful of the gap between the inventors and
the executors.
Refining the Innovation Process . . ., pg. 21
The
Big Idea
“One thing executives need to watch out for
20
The
Big Idea
Successful innovators value the creative process behind innovations
as much as the end product itself. The innovation process is more
art than science and needs to be carefully nurtured by a company.
Most importantly, a company must be willing to open its mind and
reconfigure its corporate identity when it develops an innovation
whose impact is beyond its traditional boundaries. Only then can a
company fully capitalize on an innovation.
article abstract
Q: Can you give me an example of something you
tried to sell internally that faced these challenges?
A: When I showed the Alto—what is now known as the
PC—to the Xerox executives, we started realizing that
there was a big disconnect when they asked us what
its application was. We said, “It isn’t an application.
It’s an industry.” The company wasn’t equipped to
handle an innovation; it would have meant completely
new packaging, all new manuals, handling updates,
training staff, localizing to different countries . . . this
is why executives truly love appliances. But you don’t
make nearly as much money with an appliance as with
an industry.
21
REFINING THE INNOVATION
PROCESS AT TEXACO
Susan Elena Pickett
Innovation
in Action
Don Abraham
About the Authors:
Don Abraham is a senior consultant at the Cap
Gemini Ernst & Young Center for Business
Innovation (CBI). Don contributes to research
on community innovation’s role in organizational growth. Don also manages recruiting
and is contributing to the commercialization
efforts of the CBI.
Susan Elena Pickett specializes in energy and
environmental policy. She has most recently
worked in Texaco’s Strategic Management
Group developing business strategies to
address emerging energy markets and environmental concerns. Susan holds a Ph.D. from
the University of Tokyo.
hanges in environmental standards, social
pressure for sustainable business practices,
advances in energy technologies, and
energy deregulation have drastically shifted the landscape of the oil and gas industry over the last 20
years. Having recognized these trends, Texaco Inc.,
(now ChevronTexaco) knew that in order to thrive in
this fundamentally different environment, radical
changes to how the company innovated were necessary. Known more for its short-term innovations and
ability to make changes quickly to improve the bottom
line, Texaco needed a significant shift in mindset. In
an organization juggling multi million-dollar, multidecade investments with the need to present rosy
quarterly earnings reports, the challenge of innovation was daunting.
C
The mission for ChevronTexaco, a company of 53,000
employees across 180 countries, is to incorporate
Texaco’s learnings from its attempt to improve the
way it solicits, evaluates, and acts on ideas from
employees, while focusing on the best interests of
today and being cognizant of potential new challenges
further down the road. Texaco viewed its thousands of
employees as fertile and largely untapped resources
for new business ideas, and it set out to discover ways
to facilitate the elicitation and recombination of their
ideas and develop processes for those considered to
be most promising.
The catalyst in revamping Texaco’s approach to innovation over the last five years was a management with
a prescient perspective on an industry that was
Still Waiting for the Revolution . . ., pg. 16
22
Innovation
in Action
quickly becoming much more complicated. Most
importantly, Texaco saw that new energy technologies
were much closer to generating more dramatic profits
than originally anticipated due to years of investment
by the industry’s incumbents. Wind turbines, solar
panels, fuel cells, or even younger technologies could
redefine how energy is generated or vehicles are
powered in coming decades. The need to create and
evaluate technological innovations inside Texaco had
never been greater, and it remains a major challenge
for ChevronTexaco today. Coupling these new technologies with deregulation’s potential to allow
customers to choose their energy provider, companies
like ChevronTexaco are deciding whether they should
diversify the types of energy they provide beyond oil,
gas, and gasoline. Deregulation also means that
customers are given more power to choose how they
generate energy or power their vehicles, resulting in
an unprecedented conflict between what is most profitable for companies that produce energy or fuel and
their customers’ preferences for the source of those
commodities. These emerging challenges were
demanding both technological and service offering
innovations at Texaco over the last five years.
Another fundamental change to the energy provider/
customer relationship is due to the Internet and
increased access to information. Customers, shareholders, and nongovernmental organizations are
becoming more informed about the oil and gas
industry, often leading to conflicting pressure on
the bottom line and demands for more sustainable
business practices. Local community groups in foreign
nations are expecting to see a much greater economic
benefit from the removal of their natural resources.
Larger organizations including Greenpeace are also
increasingly pressuring large oil and gas companies
to not only carefully examine the full economic and
societal impact of their resource extraction, but to
give back to the communities or countries from
which they take. The United Nations and other international organizations have also focused attention on
sustainable development. This pressure to achieve
sustainability is increased by stricter environmental
regulations regarding emissions. Texaco and other oil
refiners have been challenged in recent years to
reduce emissions largely by changing the way they
refine their gasoline. One of Texaco’s approaches was
to determine whether innovations to its business
model would help achieve greater sustainability and
environmental friendliness.
All of these changes required that Texaco re-examine
what it produced and how it produced it. Texaco
already had a grasp of what was possible yet needed
to better understand what outside forces or trends
were most likely to occur and strongly affect its
industry. The pervasiveness of fuel cell-powered automobiles, the future of governmental deregulation, the
strength of alternative energy technologies, the power
of social activism, changing environmental codes,
more informed shareholders, and the Internet’s role
in redefining corporate business models—all of these
possibilities and many others necessitated tangible
actions by Texaco to manage and enable innovation.
23
“Texaco believed that nearly everyone in the company
had ideas about different products the company could offer
or ways it could run its business.
It felt it had thousands of oil and gas experts inside its walls
and wanted them to focus on
”
Innovation
in Action
creating and sharing innovative ideas with management.
In 1997, Texaco and then CEO Peter Bijur took the first
step with the formation of the Strategic Management
Group (SMG). The group’s genesis was due to a desire
to complement Texaco’s successful focus of the previous 10 years on corporate efficiency with research
into the key issues of the next 10 years and developing strategies about how Texaco should evolve to
handle them. The SMG was also formed as a solution
to the challenge of balancing long-term investing with
short-term business success, so that investments of
today were made while considering potentially radically different futures. Prior to the SMG, Texaco
favored building strategic plans based on past financial history. While this approach held some benefits in
planning budgets, the predictions were almost always
incorrect—they failed to take into account the changing industry environment and the increasing demand
for innovation. Realizing that scanning the future was
more than a numbers game, Texaco formed the SMG.
Innovation at Texaco now had a sponsor, and the SMG
was tasked with developing innovations involving
everything from new ways of refining gasoline to
reconsidering what types of energy Texaco produces.
The SMG’s first major project was to generate multiple, independent corporate scenarios of what the
future of Texaco’s industry might look like in 10 to 15
years. Another project of the SMG and Texaco
involved the company assembling some of its brightest engineering minds to decide which of the most
promising innovative ideas the company had generated should be funded. The company was committed
to devoting resources to experimentation.
The Invisible Advantage of Innovation, pg. 75
Texaco and the SMG were still in search of a method
to generate a reservoir of ideas reflective of the entire
company’s diversely experienced employees. Texaco
believed that nearly everyone in the company had
ideas about different products the company could
offer or ways it could run its business. It felt it had
thousands of oil and gas experts inside its walls and
wanted them to focus on creating and sharing innovative ideas with management. The company also
wanted to become known as the most innovative
company in the energy world. Texaco realized communicating this change of management perspective to its
employees was going to be vital to encouraging participation in any mechanisms created to harness its
people’s ideas.
Reflecting its desire to turn employee ideas into business solutions, Texaco and its e-business unit
launched an E-Business Contest in the fall of 2000. All
of Texaco’s employees were offered cash prizes for
ideas on how Internet technologies could help Texaco
improve the company’s performance. To persuade
people to discuss the contest and share their innovative ideas, the payout structure favored ideas
submitted as a team rather than those submitted by
an individual. Two hundred twenty ideas were eventually submitted, and the teams behind the five winning
ideas each received $20,000. An Internet consulting
company was also hired to act upon these innovative
ideas. The submissions included multiple online
customer services, a Web-based reservoir for Texaco’s
management training programs, and online reporting
systems for machinery in refineries.
24
Innovation
in Action
The E-Business Contest allowed Texaco to communicate to its employees a renewed corporate focus on
innovation and Internet technologies. This was possible because the contest had clear management
support and a well-defined mission. It also empowered individuals to affect management’s strategy or
offerings by creating an internal mechanism to better
use the Internet and information technologies.
However, Texaco’s experience with the contest also
taught them what could be improved upon. The
e-business unit realized many of the 215 ideas that
were not winners also merited attention, yet there
was no means of encouraging discussion around these
ideas and allowing them to mature and become as
viable as the five winners already were. Secondly,
this contest was a one-time event, and the flow of
innovative ideas from employees to management
ended once the contest ended. Texaco realized it
still had not yet created an ongoing mechanism that
would allow all ideas to be continually generated, or
discussed and improved.
As the E-Business Contest was coming to a close,
Texaco’s Strategic Management Group was also
considering how to create a more permanent solution
for idea sharing, essentially an eBay for ideas. The
Cap Gemini Ernst & Young Center for Business
Innovation (CBI) had a solution. The CBI had extensively researched innovation and believed strongly
in the importance of strengthening the connectivity
between people and their ideas in order to innovate
better and faster.
Connectivity Reinvents the Rules . . ., pg. 7
Out of the CBI’s research into how organizations facilitate innovation was borne the approach of
Community Innovation. The goal of the Community
Innovation approach is to maximize the quality of
ideas generated by an organization and discover
synergies among seemingly unrelated ideas.
Fundamental to the approach are the concepts that
ideas are neither owned nor easily quantifiable, and
that ideas grow in depth as more people see them and
contribute to the refining process. By facilitating idea
recombination, companies can increase the speed of
the progression from nascent ideas to potential innovations. Idea-X was the tool developed by the CBI to
accomplish this. Idea-X is a customizable software
application built by the CBI that allows an organization’s employees to share and evaluate their ideas and
move them closer to potential corporate innovations.
The CBI's insights into Community Innovation and
familiarity with Idea-X made it an ideal partner for the
Strategic Management Group. The SMG desired to
improve its ability to continuously capture employees’
ideas on how Texaco could become more competitive
in the industry. In the first stage of the CBI–SMG
engagement, the groups built a customized version of
Idea-X that best suited Texaco’s specific culture. The
CBI first assessed the gap between the processes
already in place to enable innovation at Texaco and
employees’ feelings about an ideal climate for encouraging innovation. Secondly, Texaco’s innovative
capacity was measured along an innovation continuum developed by the CBI. A Texaco-specific version
25
Faced with an unprecedented demand for innovation in its industry, Texaco set
out to infuse innovation into corporate strategy and harness the innovative
ideas of its employees. Each project aimed at increasing innovation taught the
company the value of creating diverse employee communities where fledgling
ideas can recombine and grow into viable business solutions. When
management is empowered to act upon the ideas these communities produce,
innovation inside a company as a whole becomes much more likely.
Innovation
in Action
article abstract
of Idea-X was subsequently created that reflected
data gleaned from the company’s employees and
management. Variables affected by these data
included what incentives to attach to idea submissions, what system to use to rank idea submissions,
and what people in management would be tasked with
acting on the mature ideas.
After customizing the Idea-X tool for Texaco and
naming it IdeaMarket, the CBI and Texaco embarked
on a Beta phase that allowed several dozen people to
participate in a Web-based idea-generation process.
This phase successfully engaged a group of Texaco
employees from different business units and with
diverse expertise in multiple online conversations, an
impressive feat considering this group had rarely been
in the same physical space. Employees now had the
ability to share ideas in this online community,
comment on the ideas, submit a need for ideas about
a subject, attach supporting data to an idea, or champion the idea and try to turn it into a more concrete
business solution. A steering committee was proposed
to take over the task of examining the ideas and identifying ones that either could be combined to form a
more complete business proposal, or those that
required more nurturing for further development.
One major benefit of IdeaMarket was that it recorded
a permanent written history of how an idea developed. Such an idea history became very useful for
Technology Ventures, a division of Texaco that looked
for new technologies in which to invest. The group
requested the conversation thread that centered on
the topic of alternative energy conversion be printed
out so that it could investigate the issue further.
Rather than the opinions of employees about this
process being lost at the office water cooler, an online
discussion through IdeaMarket brought it to a higher
level, and eventually to the attention of management.
In addition, IdeaMarket helped create a databank of
ideas that may become of value to ChevronTexaco in
the future and help create long-term value as the oil
and gas industry’s environment shifts. IdeaMarket was
also a defined venue for employees to share their
creative thinking, while encouraging network building
among the participating members. IdeaMarket had the
less obvious benefit of teaching employees who
thought a particular idea was unnoticed by the
company that the issue was already being studied
elsewhere in the organization. The tool allowed
employees participating in the Beta phase to better
educate themselves about all the innovations Texaco
was researching. For example, an employee found out
Texaco had been studying potential applications of
nanotechnology to its business, and he was thus able
to devote brainstorming attention to concepts not yet
on the company’s horizons.
The engagement of the SMG and the CBI also revealed
insights into Community Innovation, IdeaMarket, and
an overall approach to the innovation process.
Connecting idea submissions to incentives and recognition for submitters was determined to be pivotal to
mass support of the software application. It was clear
that daily use of IdeaMarket was a major habitual
26
Innovation
in Action
change for many employees who participated in the
Beta phase, and that vocal management support of the
tool and the clear positioning of IdeaMarket participation within overall job responsibilities are vitally
important to its success. This collaborative engagement confirmed that companies have the ability to
harness their employees’ creative thinking by building
a mechanism for all employees to share ideas and
have them grow in power. Ultimately, these evolved
ideas can then be evaluated and acted upon by those
capable of affecting management strategy.
Texaco and the SMG learned that to rally a company’s
employees to participate in idea generation, management must make it clear in the company’s mission that
innovation is a key strategic corporate value.
Furthermore, participation in innovation must be an
expected part of each person’s job description, rather
than a task lumped on top of all other necessary
responsibilities. If a company makes every employee a
potential idea generator, it is heavily increasing the
number of innovative ideas that will be shared and
the number of people who will help refine them.
With the merger of Chevron and Texaco in October of
2001, the future impact of the IdeaMarket approach on
ChevronTexaco remains to be seen. A great challenge
awaits this new company—the surplus of ideas will be
even greater, and a mechanism to capture them will
be important. Post-merger, ChevronTexaco’s increasing scale will bring both more possibilities for
innovation and more challenges in coming up with
tomorrow’s new ideas.
From Roadmap to Roadway . . ., pg. 33
Fundamentally, any organization must undergo a shift
in the standard perception about where the future
direction of a company or a new product or service
should come from. Companies that empower a
bottom-up approach to idea generation in their organization can actually maximize the combined intellect
of their organization. Experienced and intelligent
leaders are necessary to make the final decisions, but
their task of increasing innovation may become much
easier once they extract the precious resources in the
minds of their employees.
Acknowledgements: Special thanks to Geoff Styles
for his invaluable assistance in crafting this journal
article.
27
INNOVATION-BASED
SUSTAINABILITY AT
CAPITAL ONE
FINANCIAL
J o h a n n a Wo l l
Annual Report 2000
About the Author:
Johanna Woll is a senior consultant at the
Cap Gemini Ernst & Young Center for Business
Innovation. Johanna has led the research
for and managed the publication of the
third book co-written by Christopher Meyer
and Stan Davis. This book lays out some of
the technologies and principles of a postinformation economy driven by advances in
the molecular sciences. Over the past year,
she has been exploring recent developments
in biotechnology, nanotechnology, and materials science through executive interviews and
secondary research.
ith 43.8 million customers (and membership growing at a rate of more than 430
percent for the past three years), $45.3
billion in managed loans, and earnings of $642 million
in 2001 (a 30 percent growth rate), it's no wonder
Capital One Financial is considered one of today's
most innovative companies. Innovation at Capital One
Financial cannot be traced to a single department or
set of activities. It’s not a unique R&D function; there
is no internal think tank. Innovation is not localized
but systemic. It’s the lifeblood of this organization and
drives its remarkable growth.
W
How does the company establish and sustain a track
record of such growth and innovation? The short
answer would cite an information-based strategy and
exceptional people. But these are merely the
resources. Applying these boldly—but judiciously—
generates the remarkable results. Two characteristics,
in particular, drive every one of Capital One’s serial
innovations: a process of testing and launching information-based offers rapidly and frequently and an
unstructured, bottom-up corporate environment.
Feeding Innovation
Information-Based Strategy
In today’s global, connected economy, companies
have unprecedented access to information—information on customers, on channels, and on costs. Fierce
competition has forced down the price of communications technology and has driven an explosion in the
capacity to capture and manipulate information.
Though information is proliferating at an incredible
Innovation
in Action
“Capital One is an innovation laboratory where
entrepreneurs start micro-businesses and test ideas
that add value for consumers.”—Capital One Financial
28
Innovation
in Action
rate, many companies fail to tap into this prodigious
source of value.
Capital One is built on it. Information-Based Strategy
(IBS), Capital One’s proprietary approach to managing
data, describes not only the raw material, but its
artful analysis. Capital One uses information to design
massively diverse, multidimensional models of potential offers. A strategy of modifying a core offer along
selected dimensions—such as product, price, promotion, or channel—spawns infinite diversity, and from
this diversity emerge winning innovations. Last year,
Capital One conducted 64,000 structured tests. A
highly developed competency in test design allows
them to test very hostile—that is, negatively profitable—areas of the market, areas that their
competitors often avoid. This kind of testing allows
Capital One the opportunity to find profit in the
riskier markets—ones that would typically be avoided.
have cards that show a snowboarder jumping off a
mogul, and their monthly statements might include
inserts that describe tournaments, broadcast updates,
or special promotions.
This product line is driven by consumers’ “pockets of
passion.” Since Capital One cannot identify and
analyze these scientifically, it conducts detailed
market research and creates numerous micro-affinity
categories themselves. Without any partners (and no
commissions), there’s a huge amount of risk involved.
Capital One creates these mass-customized credit
cards by focusing on the confluence between people’s
emotional connections and their needs. Then, it offers
a whole series of account management programs—
interest reductions, interest increases, line
extensions, line depressions—built on data it gathers
about customers’ behaviors.
Capital One adds continuously to this data source,
actively gathering information about its customers
and the marketplace. For example, by monitoring traffic at its website, it can determine which visitors
become customers. Based on this information, it’s able
to create banner ads to match the demographics and
affinities of eyeballs at other sites.
People
Any company’s success begins with its people. While
most companies know this implicitly, Capital One
pursues it explicitly, in its recruiting, hiring, assimilation, and performance processes. Growing a company
from 2,000 employees to 20,000 employees in seven
years calls for an extraordinary commitment of
resources.
Capital One’s Lifestyles product set serves thousands
of micro-segmented niches in the marketplace.
Lifestyles credit cards feature pictures that match
customers’ interests—Japanese gardens, Latino
culture, and so on. Snowboarding enthusiasts might
Indeed, senior executives at Capital One spend up to
25 percent of their time recruiting . . . which is better,
they say, than spending double that amount later
managing mistakes. They look for entrepreneurial,
analytical, ambitious, and self-motivated people.
29
“At Capital One, short product life cycles
are both the impetus and consequence of innovation.
Sixty percent of its products didn’t exist six months ago;
”
Innovation
in Action
80 percent didn’t exist one year ago.
People who are passionate enough to pursue an idea
that they believe in, even if doing so means extending
well beyond their primary responsibilities. In fact,
responsibilities are somewhat undefined, by design.
New hires won’t arrive at Capital One and find a
policy book. Instead, they are put through fairly elaborate assimilation programs during which they are
told about the Capital One business strategy, the business model, and the organization. Then, they are
given a Success Profile that outlines the behaviors
that make for an effective employee. The Success
Profile outlines 23 competencies, clustered around
five primary success factors, behaviors like building
relationships and taking personal ownership. These
detailed behavioral descriptions form a clear and
practical road map for career development.
Innovation in Practice
Product Churn and Testing
“When you work backwards from the marketplace,
there’s a life span of six months for any product, so
you have to create a completely different kind of
financial services company, and it’s based on innovation.”—Rich Fairbank, CEO
At Capital One, short product life cycles are both the
impetus and consequence of innovation. Sixty percent
of its products didn’t exist six months ago; 80 percent
didn’t exist one year ago. With products that are
entirely intangible and very flexible, innovations can
hatch like fruit flies or bacteria, and Capital One can
respond quickly to a capricious consumer market to
capture first-mover advantage.
Refining the Innovation Process . . ., pg. 21
Product churn creates more opportunities for migrating to new market niches before the competition, and
a diversity of offers and the ability to generate new
offers quickly improves robustness in a rapidly changing environment. Capital One produced 6,000 new
offers last year, each one a response to a new opportunity identified, or at least sensed, through market
tests. When the raw material is information, failure is
relatively cheap but extremely valuable in what it can
teach. If you kill an idea in the lab, you can’t learn. So,
Capital One lets the market test new products. Here’s
how it works.
A project leader, often self-appointed, recruits a
cross-functional team to pursue an idea. Once a loose
team is assembled, it explores the idea in a brainstorming session, tapping the group’s intuition,
listening to diverse perspectives, and presenting findings derived from initial research. The team then
identifies a range of customer segments for test
marketing (based on demographics, lifestyle, life
stage, credit risk, and so on), builds a model, launches
a beta test, and screens the results to select offers
with the highest profit potential. If an offer passes the
tests, it is rolled out to the entire target group. Later,
Capital One might decide to exit the offer (even if only
temporarily). Impermanence is a fact of life.
Information gained during this entire process helps
refine the model. It might lead the team to think
differently about credit policy or to generate new
hypotheses that could point to alternative, even more
profitable offers. The strategy emphasizes diversity;
30
Innovation
in Action
it’s all about creating seeds for future success, even if
in the short term they do not prove profitable.
Each test is deliberately designed to test extremes,
up and down the risk spectrum. More often than
not, the insights that drive Capital One’s product
innovation, which expand its competitive advantage,
come from the fringe.
Most companies conduct market research, design products, roll them out, and then live with their success
or failure. In contrast, Capital One looks for promising
economic levers, and using a variety of quantitative
and qualitative market research tools, engages with
customers to understand their needs. The modelers
combine these factors and build them into the test
designs. By launching tests in the marketplace and
analyzing the feedback, Capital One can figure out
not what customers say they will buy, but what they
actually do buy—and that’s what it rolls out.
This kind of test-and-learn culture requires the scientific disciplines of rigorous testing, experimentation,
and analysis. This kind of discipline shows up in decision-making, too. Without smoking-gun evidence that
the economics are as positive as they were in the test,
a project cannot go forward. At Capital One, employees can’t actually harvest the values out of the testing
program unless someone more senior studies the test
results, agrees to the analysis, and authorizes, in most
cases, a quantum shift in the marketing budget,
earmarked to chase the opportunity.
Connectivity Reinvents The Rules . . ., pg. 7
When Capital One wanted to establish a process for
accepting credit card applications electronically, it
was able to build on the credit policies and fraud
technology it had developed for other products.
Capital One was one of the first in the industry to
process applications online, and it now serves more
than 3 million customers through this Internet channel. Initially, it encountered massive fraud, so it kept
its activity volume at a low testing level, for more
than two years, before scaling up. The company
continued to get reads on the performance of the
accounts originating on the Web and acted on this
feedback to build better fraud defenses, learning how
to detect and reject computer-submitted applications
(for example, those filled out in less than a millisecond or those submitted using the same computer ID
number or ISP session number).
Rather than conducting thousands of fraud prevention
tests in the lab, Capital One let the market teach it
how to deal with fraud. When it encountered new
problems, it scaled back the project and returned to
testing until discovering a solution. This test-andlearn cycle permeates every activity at Capital One,
and underlying it is a commitment to acting on feedback, to analyzing information every way possible,
and to using it to make smarter, more intelligent, or
profitable business decisions. In doing so, it empowers the organization to grow very rapidly with very
high profitability and to out-maneuver competitors.
The information flow is so close to real time that it
can turn on a dime and react. In the case of fraud
31
Innovation is not a process at Capital One. Rather, it is the underlying
philosophy upon which every aspect of the company is organized and
managed. Information is the company’s sustenance, and it uses market data
to constantly bring new credit card offers to consumers. Capital One learns
by designing models of its potential offers and by listening to feedback
gleaned from experimentation in the market. Combining this information
with an emphasis on an entrepreneurial spirit among its employees, Capital
One has created the most innovative corporate environment in its industry.
Innovation
in Action
article abstract
detection, a rapid feedback loop lets the company
know within a single day that it has a problem.
Without these kinds of information systems in place,
it might not learn about fraud for months, perhaps, or
until the quarter closes.
Capital One has even translated this testing culture
into its hiring process. Candidates must pass a series
of tests, designed to uncover their analytical and
behavioral strengths and weaknesses. The same kind
of modeling correlates post-hire performance with
pre-hire test results and identifies potential performers very early on.
A Fluid, Forgiving Culture That Encourages Risk
“At Capital One we create an environment where
scientific labs can be created, where people can fly,
where exploration and risk-taking are rewarded and
failure accepted.”—Rich Fairbank, CEO
At Capital One at any one time, there are hundreds of
in-house entrepreneurs running internal businesses.
These might be activities, product lines, or entire units
with their own P & L’s, but each is run as an individual
business. There are hundreds of such enterprises
running inside the company, and the profits generated
and claimed by them add up, at least virtually, to
several times corporate earnings.
In such a fluid environment, ideas percolate from the
bottom up. Indeed, Capital One’s corporate culture
evolved from the founders’ understanding that the
command-and-control strategy typical of most lending
institutions severely curbs the potential for innova-
Refining the Innovation Process . . ., pg. 21
tion and rapid growth. In Capital One’s less hierarchical environment, local information can drive
decisions. Associates, who are closest to the data, are
empowered to find better ways of operating, put a
business case together, and make it their mission for
that quarter. Such direct feedback keeps pressure on
the entire system to improve continuously.
In many ways, Capital One is a chaotic culture, where
people just bump into each other somewhat randomly,
like molecules in Brownian motion. When one person
bumps into another who’s headed in a similar direction to pursue a similar idea, the two negotiate to
determine who should continue on. Often they make
commitments to each other and maintain contact in a
customer and performer relationship. Such random
encounters serve not only to eliminate redundant
efforts, they enable innovation by bringing diverse
elements together. Without these kinds of connections, diversity has little inherent value. Introducing
new people into such a culture can be a struggle.
Without a formal work chart, and few clearly defined
roles, it can be a very intimidating place for new
people, and it takes them a while to understand where
they can add value and what is expected of them.
But the benefit of loosely defined responsibilities is
that no one knows where his job ends and someone
else’s begins. As a result, people will go to great
lengths to make sure that they optimize whatever
it is that they’re working on, whether a particular
product, mission, channel, or process. Managers really
are like coaches, encouraging their staff to
32
“Capital One separates outcome from behavior
and balances these factors
”
when evaluating performance.
Innovation
in Action
step off the cliff and just jump into the organization,
trying to create change and trying to identify valuecreation opportunities.
Capital One’s associates have permission to fail; there
are no negative repercussions for trying something
that didn’t work, as long as they behave according to
the rules. Rather than penalizing people who fail,
Capital One’s leadership praises them for their
commitment and intentions. CEO Rich Fairbank often
asks them to explain what happened, so that others
can learn. In doing so, not only does he reinforce the
organization’s tolerance of risk and failure, he sets
expectations and helps revise best practices. Capital
One separates outcome from behavior and balances
these factors when evaluating performance.
Last year, an associate in the collections department
was working her way toward a big award for conducting 10 perfect calls. After nine successful calls—
monitored by her boss—she broke rank and risked it
all, violating company policy for the sake of a
customer in need. She gave the customer $700,
a huge amount relative to the credit line. She
explained to her superiors that treating customers
with compassion was not only more effective in
extracting payments, it was highly effective in building
trust and loyalty.
In the end, her boss was really pleased that she had
uncovered a poor policy. Rather than punishing her,
he celebrated her insight and boldness and communicated several important messages. He reconfirmed
that it’s okay to break the rules in the right way. And
he acknowledged that, at Capital One, it’s the keen,
hardworking associates who are the real heroes, the
ones that the company depends on.
Capital One has shaped its organization by developing
a competency model that integrates hiring, performance management, professional development, and
pay—a compensation program favoring long-term
incentives, such as stock equity-based compensation,
that really promotes value creation. Performance
reviews with 360-degree feedback happen twice
a year. And while many companies focus their
performance process on competencies and results,
Capital One evaluates, in addition to these, performance potential and people’s ability to learn and
grow quickly.
Testing, failing and learning, shifting, and recombining
. . . innovation at Capital One would be far less
successful if these guiding principles did not permeate
all aspects of the enterprise, from offer and technologies, to employees and new business ventures.
Together, they enable the organization to grow,
improve, and innovate, to respond to change with
change, and to thrive in a volatile economy.
33
FROM ROADMAP
TO ROADWAY:
MANAGING
INNOVATION
AT BMW
Jochen Hartmann
Markus Seidel
Innovation
in Action
David Sutherland
About the Authors:
David Sutherland is the CEO of the Business
Innovation Consortium (BIC), a consulting firm
specializing in innovation management. David
holds a Ph.D. from the University of Virginia.
Jochen Hartmann is responsible for the transfer of innovations into special vehicle projects
at BMW. He studied combined mechanical
engineering and business administration and
specializes in R&D management and product
development.
Markus Seidel is general manager for
Innovation Management at BMW Group and
responsible for the predevelopment portfolios
of the BMW and Mini brands. He graduated
with a master’s degree in business engineering
and a Ph.D. in economics. He is a specialist in
product development issues.
sked in January 2001 “which brand stands for
new technology,” readers of Auto, Motor
and Sport for the second consecutive year
ranked BMW first. The winner and the loser were in
the opposite positions in the magazine’s initial 1997
survey, which just goes to show that anything can
happen with a focus on finding the best ideas and
creating a sustainable innovation process. The impact
of BMW’s innovation roadmap is translating to
success on the world’s roadways.
A
At BMW, to “innovate” may mean introducing a new
component or technology into an automobile. But
at the end of the test drive, it also persuades
customers to buy the BMW when, until the moment
they drove it, they had intended to buy the competition. Once, lean production was the name of the game
in the automotive industry. Then mass customization
became the key. Now, innovation is the most effective
way to differentiate from the competition. Figure 1
displays the progression of competitive differentiation
in the automobile industry during the last century.
But innovation at BMW has not been happenstance.
The company has defined a deliberate process
to achieve an integrated flow from idea to finished
product, the notion being to create sustaining winning
innovations with a quick cycle time. Since 1997, BMW
has significantly decreased the time-to-market for
new components and linked increasing sales to the
introduction of leading-edge components.
To reach sustainable growth, businesses must
continually introduce new products, new services,
The Invisible Advantage of Innovation, pg. 75
34
Figure 1
“The Name of the Game”
Why Innovation?
Evolution of the Automotive Industry
Source: Institute for Technology
Management (2000), Hochschule
St. Gallen, Switzerland
Mass Innovation
Mass Customization
Lean Production
Mass Production for a Buyer’s Market
Mass Production for a Seller’s Market
Pure Craftsmanship
Innovation
in Action
1920
1930
new channels, and new processes. New markets also
must be constantly explored. It’s not possible,
however, to pursue every new idea that comes up.
Most companies simply don’t have the resources or
infrastructure to mine the volume of new ideas and
stay ahead in today’s competitive marketplace. The
key to success, therefore, lies in nurturing new ideas,
picking the “winners” and making them happen
quickly through an integrated innovation process.
Three years ago, BMW underwent an assessment of
its innovation process and set out to create a more
rigorous and focused approach. Today, BMW has
made innovation a systematic part of its product
development process with resources, accountabilities,
and a governance system to facilitate the decisionmaking process.
Concerned that the best new ideas were not always
getting the most attention, and that those that were
sometimes lagged through the innovation process at
an unacceptably slow pace, BMW engaged the
Business Innovation Consortium (BIC) to work with it
to analyze BMW’s existing method for identifying new
automotive components and getting these ideas into
production. What the BIC found was that BMW actually had many new component ideas circulating, but
the process for selecting the best ideas and applying
the appropriate resources could be more efficient. It
was virtually impossible to find the best new ideas,
manage them, and get them commercialized as quickly
as the market opportunities appeared. An idea census
found that the various BMW divisions developing
Refining the Innovation Process . . ., pg. 21
1940
1950
1960
1970
1980
1990
2000
2010
components were trying to manage more than 1,200
innovations at once, all of which were potential
changes to the production process. The BIC created a
model to reduce the potential innovations to a
smaller number and focus them on specific customer
areas with the intent of integrating innovation more
seamlessly into BMW’s business strategy.
Managing innovation is no easy task—it’s almost an
oxymoron—because it’s about risk and change. While
many companies find it easy enough to put an “idea
generation” process in place, few have discovered
the discipline for prioritizing, categorizing, and
supporting ideas all the way through production.
The BIC estimates that in a typical company, decisionmaking consumes up to 65 percent of the innovation
process. As a result, companies’ processes for generating ideas literally die on the vine because they
haven’t instituted a means for supporting an idea
through the entire life cycle.
The Process
BMW and the BIC created an innovation model for
BMW using explicit filtering criteria to weed out the
weak ideas from the strong ideas. The criteria developed were customer-driven and became the basis for
developing six specific Innovation Fields that would
be used for opportunity identification. Upon passing
through the filter, ideas may be promoted to the next
innovation stage, recycled for further evaluation, or
removed from the process and stored within an ideas
repository (part of the innovation infrastructure) for
possible future use (see Figure 2). Any accompanying
35
BMW is currently considered the most innovative brand in its industry.
But it has not always been that way. After management chose to focus
on making innovation an explicit way that consumers differentiate BMW
from its competitors, the company was able to create numerous internal
mechanisms to manage and speed innovation without stifling creativity.
Most importantly, the company realized it must risk failure to create
success and solidify the future of the company.
information associated with the idea is saved so new
technologies and new business opportunities won’t
fade to black or be lost in the system when people
leave. This is known as the “Focus” stage.
From Focus through implementation, each idea may
be filtered out of the funnel if evidence shows the
idea won’t survive as a business proposal. The business proposal considers the idea’s value and risk and
determines if the idea can be managed to a result.
This guarantees that resources always are focused on
optimizing the business return from new ideas. At
each stage (idea generation, focus, concept development, prototyping), these filtering criteria are crucial
to making the organization’s innovation process
successful. These common innovation disciplines
apply to every stage of the process:
■
Strict schedules (“timeboxes”) to ensure focus
and timeliness.
·
■
All departments likely to be significantly affected
by a particular innovation are involved at the
earliest step of the process.
·
■
A responsible, committed sponsor is accountable
for each step: a Business Innovation executive,
followed by a Business Unit sponsor (e.g., a line
manager) who has to be identified before concept
generation.
·
· Exit criteria is explicitly applied to determine
whether an idea progresses, dies, or hibernates.
Innovation
in Action
article abstract
These parameters must be applied within an environment that supports innovation and cannot be simply
seen as reasons to abort new ideas. Successful innovation hinges upon a balance between creativity to
spark ideas and business pragmatism to certify there
are real commercial benefits.
BMW executives established a Research and
Innovation Management Center to manage ideas
through the defined process to completion. This
group is charged with identifying new component
ideas quickly and getting the best ideas into production as quickly as possible. Centered in Munich, the
group has linkages throughout the BMW organization
and to different “satellites” around the world, as
seen in Figure 3. The satellites have been established
to ensure BMW is first to identify new technologies
and market trends by being in the right places around
the world.
The set of six customer-driven Innovation Fields is the
focal point for defining market opportunities and
managing a portfolio of ideas. Each Innovation Field is
focused on a particular customer-driven need:
■
Experience dynamics
■
Convenience and service
■
Safety and security
■
Concept cars and experimental vehicles
■
Esthetics and value
■
Environmental acceptability
■
Still Waiting for the Revolution . . ., pg. 16
36
Figure 2
The BMW Innovation Process Flow
Innovation
Research
Innovation
Management
Technology
Exploration
Innovation
Transfer
Innovation
Fields
Innovation
Concepts
Virtual
Innovation
Agency
Innovation
in Action
Source: BMW
Each Innovation Field, stewarded by a full-time
Innovation Field Manager (IFM), is linked to a
component of the company’s business strategy that
is determined by an innovation strategy board made
up of BMW board members, corporate strategists,
and innovation managers. Each Innovation Field
Council (IFC) is made up of members of appropriate
operating units and levels across BMW. These councils
interpret the directives of the innovation strategy
board into needs and opportunities for new products
and components.
The fields are not meant to be mutually exclusive—
ideas do overlap—but to provide focus and decision
traction to prioritized ideas and opportunity areas.
Fields can be added as necessary to keep the range
focused. Each field is linked to a corporate principle
such as strategic direction in R&D, market introduction policies for the most important innovations,
and transparent, companywide accepted evaluation
of innovations.
BMW also has developed an innovation portfolio
that is managed by the innovation team in Munich,
ensuring the company stays focused on the best
opportunities and to understand the value each new
car component brings to overall automobile sales.
This portfolio tracks ideas from the point of generation through completed projects and then monitors
the projects’ results once they are put into series
development. The portfolio also is used as a type of
business radar screen, identifying areas of “white
space,” or opportunity areas where there is a need
for ideas. Because ideas often have been developed
but have not been moved to project status, the white
space technique enables engineers throughout BMW
to connect their ideas to opportunity areas.
Sensing the Market
To buttress its competitive advantage and to actively
position itself in areas where significant market and
technology opportunities exist, BMW has adopted an
“empathic” approach to market sensing utilizing its
various innovation satellites. This strategy allows the
company to understand market opportunities by
participating in them rather than by simply reviewing
market research. If the situation warrants the required
investment, the company will establish an on-site
Innovation Satellite office to augment those in
Munich, Palo Alto, Tokyo, and Park Ridge, N.J.
The Palo Alto Technology Office (PATYO) is perhaps
the leading example of BMW’s managing innovation
strategy. Once the decision-makers were determined
to make what PATYO director Holger Jeebe calls a
“pre-emptive strike” to mine the Valley’s intellectual
capital and its leading-edge technologies, where
better to set up than in today’s most progressive
high-tech neighborhood? There, a small group of
engineers work among the brains behind advanced
hardware and software developments, sharing insights
and co-creating new automobile component products.
“We do things in the PATYO we could never do in
Munich,” Jeebe says. “We’ve created an intercultural,
interdisciplinary work mode that combines structural
37
Figure 3
From Idea
BMW’s Innovation
Organization
International
Procurement
➤
IFC
➤
BMW
Research
IFC
Palo
Alto
IFC
Research and Innovation
Center, Munich
IFC
➤
➤
Market
Market
Market
Sensors
Market
Sensors
Sensors
Sensors
Innovation
Strategy
Board
IFC
IFC
➤
To Results
processes from Munich with Silicon Valley’s practices
and work habits.”
At the PATYO, there are opportunities to explore new
ideas such as the Helmet Project, through which an
innovative motorcycle helmet that employs new technology to enhance the BMW riding experience was
created. Combining advanced technologies with the
product vision, doing market research, designing the
prototype, and getting customer response yielded a
helmet with an integrated information display in just
18 months. And while this product may never go wider
than the open-vehicle market for which it was developed, that isn’t the point. This research center allows
the opportunity for experimentation and taking a
chance, risking failure to create success.
Every year, 10 BMW employees, who compete for the
honor, travel to Palo Alto to discover the next big
thing in automotive innovation. Teams of three people
then have 90 days to identify, explore, and develop
new projects. Teams are cross-functional so that each
project has the perspective of a marketer, an engineer, a strategist, etc. This way, there is no holdup
later in the process as the idea makes its way from
one stage to the next. If the team determines the
technology has a chance, the engineers begin to
create a component. They then build a working prototype. Once a design and prototype are finished, the
concept is tested in the interiors of three production
cars. If that survives a rigorous testing process, it goes
to Munich for further evaluation, development, and
final commercialization.
IFC
1 Full-Time Field
Manager
8–12 Council Members
from various parts of
BMW
“If a project takes 95 days, that’s ok,” Jeebe says.
"We’re in Silicon Valley for faster time-to-market and
for faster product development. But the ideas have to
make sense, or we won’t explore them. If Munich
takes our idea, then we count it as a success.”
The iDRIVE is one such success. With approximately
700 different selectable functions available in today’s
deluxe cars, the instrument panel can look like that
of the Concorde—and be just as difficult to operate.
With customers complaining that the dashboard was
taking too much of their attention from the road, the
company’s marketers and engineers began to think
about redesigning the dashboard panel. Their challenge was to restructure the controls so the important
driving functions would be easy to access and the less
important ones wouldn’t get in the way. Could drivers
function more efficiently with a different interface?
Could fewer knobs be positioned within one visual
point of view?
BMW headquarters relied on the PATYO for help. The
Innovation Strategy Board asked PATYO to investigate
the possibilities. An engineering team from Munich
was assigned to combine its intellectual capital with
that of local software developers. Within 90 days the
international team had developed a draft iDRIVE
device. The prototype was then brought back to
Munich for feedback from engineers and marketing
mavens and ultimately seen through to production.
Not long afterward, the new iDRIVE hit the street in a
Z9 study vehicle at the 1999 Frankfurt Motor Show. It
now comes with every Series7 car.
Innovation
in Action
➤
38
Figure 4
Innovation Research—Virtual Innovation Agency (VIA)
Source: Business Innovation Consortium
100
50
10
VIA
2
IFM
CoCs
2nd Valuation
Record/
filter/
assign
1st Valuation
Councils
Decision for
recommendation of
implementation
The gestation period was less than a year.
BMW’s other information pipeline is the Virtual
Innovation Agency (VIA), an Internet portal for developing new relationships with any potential external
innovators: individuals, small companies, and large
companies from other business centers and research
centers. This way, BMW can be sure of a continual
idea generation flow and keep a direct pulse on the
market, customers, and small business partners.
Those who have developed an idea that could
increase BMW’s competitive advantage can go to the
website (http://zulieferer.bmw.de/en/via/), where the
company promises to support them and maintain the
confidentiality of their idea. If the company is interested in implementing the idea, it provides personal
contacts in the appropriate special departments. The
company then reimburses the innovator for the idea.
▲
Innovation
in Action
6–8 weeks
◆
Competence (CoC) thinks the idea has merit, it seeks
the approval of the appropriate cross-functional council. If the council agrees, a contract is signed to begin
a market assessment. Figure 4 captures the process of
narrowing down VIA submissions.
Only three ideas have survived the VIA’s rigorous test.
BMW has partnered with other startup companies to
explore them. But the company and its customers
have just begun to familiarize themselves with sharing
information over the Internet, so the ideas soon will
flow faster. The more there are, the more winning
ones there will be.
BMW instituted filters and self-assessment procedures
to help decide which innovative solutions were best
suited to go through the VIA. This way, the novelty,
technical feasibility, and economic viability of the idea
can be assessed effectively and quickly. VIA associates, acting as the first filter, assess the survivors’
ideas, register them, and report their findings to the
innovation fields. The VIA associates and innovation
field managers work together to identify the appropriate center of competence, which then analyzes the
idea and the associates’ reports. If the Center of
Refining the Innovation Process . . ., pg. 21
39
ONLINE
COLLABORATION:
THE NEXT WAVE OF
INTERNET INNOVATION
About the Authors:
Lisa Fretwell is a managing consultant in
Cap Gemini Ernst & Young’s B2B Supply Chain
service line. She has worked across a number
of industries, including manufacturing, financial
services, consumer goods, retail, automotive,
and defense. Her specialties include B2B
collaboration, innovation and product
development, operational improvement,
and organizational change.
Bud Strandquest is an executive consultant
in Cap Gemini Ernst & Young’s B2B Supply
Chain Strategy practice. He leads the U.K.
Collaborative Business Solution team and is
director of the Workrooms collaborative
Bud Strandquest
he combination of the Internet and new
technology tools has made more sophisticated collaboration between companies and
their various stakeholders a real and cost-efficient
possibility. These developments are prompting businesses and the scores of eMarketplace sites that
survived the dot-com bubble burst to move well
beyond their initial online tools that employed aggressive procurement tactics. Instead, companies are
adopting tools that support a wide range of internal
and external activities. The payoff could be huge:
namely, more comprehensive solutions yielding
greater benefits in areas such as supply-chain
management, joint product design, manufacturing,
distribution, or marketing and sales activities.
T
solution program. He has worked with
clients across the world, leading projects
in the area of supply chain management,
knowledge management, and innovation in
the chemical, energy, manufacturing, defense,
and engineering sectors. His specialty is in
the area of B2B collaboration and business
performance management.
This is the world of collaborative product commerce
(CPC), and current tough economic conditions have
only increased businesses’ interest to work closer
with trusted suppliers and find new ways to enable inhouse teaming. Indeed, some organizations have
already emerged as the early adopters of CPC in their
respective industries, with companies within the aerospace, automotive, and consumer products sectors
leading the way.
Both the Ford Motor Company and General Motors
are prime examples of successful collaborative product commerce implementations. Ford has begun using
Web-collaboration technology to boost fuel efficiency.
Linking engineers and suppliers working in multiple
locations during a vehicle’s design phase, the
company can instantaneously determine how a
A Blueprint
for Change
Lisa Fretwell
40
“General Motors, meanwhile, has had similar results
with its Web-enabled collaboration efforts,
cutting vehicle development time from 42 to 24 months,
”
a decrease of 43 percent.
A Blueprint
for Change
proposed design change would affect a vehicle’s fuel
consumption. This has eliminated an analysis process
that previously took three days to complete. As
importantly, the collaborative technology will help
trim $5 million to $15 million off a vehicle’s development costs. While this cost savings represents only a
fraction of an average car’s $2 billion development
costs, the potential for companywide savings is sizeable. General Motors, meanwhile, has had similar
results with its Web-enabled collaboration efforts,
cutting vehicle development time from 42 to 24
months, a decrease of 43 percent. The initiative
provided product teams around the world with simultaneous online access to vehicle information.
In the medical-device industry, c-Medica also reports
impressive success with CPC. Launched in June 2001,
its collaborative data-management site is dedicated to
improving speed to market for new medical devices.
c-Medica provides original equipment manufacturers
(OEMs) and suppliers with a suite of online tools that
seeks to streamline the product-development process.
Collaborators use the c-Medica site to share CAD files
and technical data, access databases, conduct meetings, manage project milestones, and make use of
work plan processes that are aligned with Food and
Drug Administration guidelines. The site also gives
users access to medical industry news, discussion
forums, and procurement offerings from a wide variety of suppliers.
c-Medica itself is the product of cross-industry collaboration; the site was brought to life by Dow Plastics, a
business unit of Dow Chemical, and the Medical
Device Manufacturers Association, and has steadily
increased its reach across its sector. As in the automotive industry, the thousands of manufacturers and
suppliers that make up the $150-billion-a-year
medical-devices marketplace stand to reap substantial
benefits by coordinating their new-product-development activities. Until c-Medica’s launch, however, the
opportunities for real-time information sharing and
data exchange were extremely limited. In an industry
that sees more than 30,000 new-product-development
projects initiated each year, the site’s ability to bring
business partners together in a centralized—and most
significantly, neutral—workspace has helped reduce
costs, shorten development times, increase efficiency,
and simplify increasingly complex innovation initiatives. By connecting designers, manufacturers, and
suppliers throughout the development process, especially in its earliest phases, c-Medica has proven that
in the right circumstances, collaboration can significantly benefit individual companies as well as an
entire industry sector.
The Power of Collaboration
While corporate innovation has long depended on
collaborative work relationships to achieve desired
results, the rise of the Internet has provided an enticing environment for managed and self-organizing
collaboration. Aided by the Internet’s possibilities,
businesses reasoned that they could deliver more
complex and customized products and services—and
do it faster, cheaper, and better than ever before.
Connectivity Reinvents the Rules . . ., pg. 7
41
■
Enhance their focus
·
■
Create multiple connections among the right
parties
·
■
Expand access to content
·
■
Streamline work processes internally and to
external enterprises
·
■
Accelerate decision-making
·
Moreover, as Ford, c-Medica, and others are finding,
these advantages often lead to other benefits as
people across the enterprise gain access to databases
through their Web browsers wherever and whenever
they want. Over time, as business models morph to
support collaboration—and as more and more
processes are shared—teams, rather than individuals,
begin to manage various processes and drive further
change across the organization.
Before starting down this road, however, a business
must understand that this change does not happen
overnight. CPC success is an evolutionary process that
unfolds within the context of business processes. As a
result, gains from CPC are highly dependent on the
organization’s ability to support and embrace cultural
change. Indeed, unless a company and its trading
partners have a thorough understanding of the roles,
relationships, objectives, and needs of the collaborating parties—and can create an environment that
incorporates and builds on those insights—it is
extremely unlikely that a CPC initiative will succeed.
Collaboration is not the end product of technological
innovation; rather, it flows from a measured approach
to process complexity.
Evolutionary Change
The most successful efforts in collaborative product
commerce often begin very modestly, for example,
from technology that supports “one-way” data posting
of office files—and with a transformation “map”
and timeline that reflect an understanding that
more robust collaboration may well be two or
three years away.
In the next evolutionary step, companies may adopt
two-way data sharing, enabling users to access, view,
and amend each other’s documents. From here, as
more advanced technology and process improvements
are integrated across the enterprise, workers within
the organization may begin to collaborate on data via
virtual team rooms and notice boards, real-time
conferencing, and application sharing. At this level,
decision-making across the business is enhanced, and
reporting and management controls are simplified.
Further along the collaboration continuum, more
evolved organizations may have already installed
shared databases and collaborative software tools
such as those designed for project planning and bill
of material (BOM) data. Teams involved in development initiatives can update their individual status
through dashboard-style information displays that
Open Source . . ., pg. 59
A Blueprint
for Change
Thus, by combining the Internet with the right set of
collaborative tools, companies were empowered to:
42
Online collaboration has become a major opportunity for companies to rethink how
they partner with other firms and where they might be able to become more
efficient. Specifically, Collaborative Product Commerce (CPC) allows companies to
share information in real time and shorten the product development process, as well
as work cooperatively in a neutral, virtual environment. The future of CPC has much
broader implications, but companies need to be open to share their information and
be able to embrace a major cultural change. The payoff, however, for such openness
in a market of interconnected firms is huge.
article abstract
A Blueprint
for Change
give simple traffic-light summaries of an overall
project’s progress.
ments such as reduced process time, lower cost, or
increased quality.
At the most advanced level of CPC, true process
collaboration becomes a reality. In this stage, discrete
initiatives are linked to centralized business systems,
including ERP, PDM, CRM, and APS, for resources,
costs, product data, etc. At this level, protection
issues regarding intellectual property and network
security have been addressed. With gains toted in
business process efficiencies, product-development
cost reduction, and enhanced organizational effectiveness, the company freely exchanges information with
outside business partners, vendors, and other stakeholders, setting the stage for improved revenue and
market share.
Based on what we have seen in the marketplace, the
likelihood for success is significantly enhanced when
companies:
Implementing Collaborative Product Commerce
As noted earlier, the automotive and aerospace industries already are seeing the benefits of this approach,
reporting time-to-market reductions of up to 67
percent, efficiency improvements of up to 30 percent,
and product-part savings of between 3 percent and 5
percent because of various CPC initiatives.
Not every company that incorporates CPC, however,
will have these results. Collaboration is a complex
process that sometimes does not work or proves too
difficult to produce the desired outcome. To improve
the likelihood of success, CPC initiatives must focus on
making it easier for people to collaborate rather than
on the technology. And this new corporate culture
must concentrate on delivering significant improve-
·
■
Demonstrate a clear-cut rationale for
encouraging collaboration
·
■
Ensure that organizational support is in place
·
■
Understand the extent of participants’ willingness
and need to collaborate
·
■
Develop clear guidelines for how to collaborate
within the context of business processes
·
■
Have an appropriate, attainable objective on
which to collaborate
·
■
Provide the resources—the technological and
procedural means—that participants need to
collaborate effectively
Even with these foundation blocks in place, however,
companies must still confront several other key issues
before they can move ahead. These tend to fall into
four key categories:
Protecting Intellectual Property: Are trade
secrets safe?
Organizations attach great value to their intellectual
capital, so the prospect of collaborating with other
parties—some of whom also may be competitors—
introduces the threat that the value of that knowledge
may be diluted if it’s shared with others. The challenge
is to mitigate IP risk where appropriate, while expanding the collective knowledge base of one’s own
organization and partners. Having developed a collaborative approach for Britain’s Ministry of Defense,
CGE&Y has firsthand experience in developing strategies to protect intellectual property rights while
encouraging collaborative working.
In our experience, people present both the greatest
risk and the best protection for intellectual capital.
Thus, as a starting point, people need to understand
and find ways to balance the perceived risk of sharing
information against the potential benefits.
Once the organization decides to move forward and
support a collaborative approach, the IP risk issues
must be consciously and systematically addressed in
organizational interventions (i.e., behaviorally) as well
as in the technology design. Moreover, all participants
must become actively involved in creating a work
environment that encourages trust and openness
while still safeguarding IP.
Attracting Trading Partners and Suppliers: Why
are vendors slow to collaborate?
The value proposition is there, the business case for
collaboration seems solid, yet trading partners and
suppliers often balk at getting on board. Stakeholder
resistance, as recent case studies document, stems
from a mix of operational, political, and emotional
reasons, most having to do with a prospective partner’s stage of eReadiness. Executive support,
Technology Watch, pg. 79
organizational culture, and operating capability all
have to be in alignment for collaboration to make
economic sense to a wide range of customers. Think
of the welter of choices in the eMarketplace arena—
the diverse technology platforms, widely varying
value propositions and service offerings, and roster of
signed-on trading partners that each offers, not to
mention the attendant costs of participating in any of
them—and you can see how prospective partners may
be reluctant to sign on.
CGE&Y believes a holistic approach that integrates
buyer and supplier approaches is the best method to
delivering accelerated solutions. We consistently find
that the presence of four key drivers increases the
likelihood that trading partners and suppliers will
agree to collaborate: creating a clear, politically
supported governance structure; collaboratively building joint-value propositions; providing hands-on
service, technical, and integration support; and taking
a tailored, individualized approach to addressing partners’ and suppliers’ concerns.
Creating a Robust and Realistic Business Case: Can
we justify a CPC investment?
Building a business case for collaboration must be a
collaborative activity for it to truly have any validity.
To that end, those involved must be able to show how
the collaborating parties can reap quantifiable benefits from participating. It is not enough to pinpoint
“soft” benefits such as improved quality or lowered
administrative effort to rationalize what could be a
significant investment in change to business-processes
A Blueprint
for Change
43
44
Figure 1
Real-Time Collaboration With Workrooms
First-Floor Workrooms
1st Floor
(Open to Project Members Only)
❸
❷
❶ Personal Office—The starting point of the project
suite. This room acts as your desk equipped with
various tools and knowledge. It is also the portal to
collaborative rooms.
❶
❷ Project Delivery Room—This room is where you can
find all information concerning the current project and
have real-time discussions.
❸ Conference Room—This room is where you can
hold real-time data conferences and meetings with
project members.
Ground Floor Public Areas
(Open to Members and Guests)
❹ Exhibition Stand—In this area you can display and
Ground Floor
❺
communicate information you wish to share with guests
and team members.
❹
❺ Public Conference Suite—The Conference Suite is open
to anybody who is invited to attend, either externally or
as a team member.
Source: Cap Gemini Ernst & Young
people management or information technology.
A Blueprint
for Change
In order to make a viable business case for CPC, all
collaborative partners need to understand how they
will benefit. CGE&Y generally uses accelerated solution techniques to drive clear agreement and
quantification on what will be significant benefit areas
and to gain adoption momentum. Our proven
approach combines a top-down benchmark approach
combined with a bottom-up organizational validation
to develop a realistic business case.
CGE&Y can develop and deliver collaborative solutions with the cutting-edge CPC technology providers
as well as with our own technology, WorkroomsSM,
which is driven from a business-process context as
well as a behavioral approach by collaboration.
Selecting the Right Technology Partners: Where
should we place our bet?
Today, many organizations are migrating toward
collaborative environments, either for their own
internal use or to enable collaboration with their
supply chain. Before they can go very far, however,
companies have to find their way through a minefield
of technology offerings, each with its own particular
strengths and limitations. Today, there are hundreds
of applications vying to support CPC initiatives, each
having evolved from a different legacy background,
including: ERP, PDM, CAD/CAM, software providers,
emarketplaces,and dot-coms.
Virtual WorkroomsSM Supports Real-Time
Collaboration
CGE&Y’s Workrooms (see Figure 1) is a solution to
delivering online collaboration. It creates virtual work
spaces that are “outfitted” with the applications and
knowledge components needed to support and accelerate business processes. The software is extremely
intuitive, replicating how people work together naturally in a traditional physical setting. This graphical
approach supports rapid user adoption without much
training; thus, it fits well with the needs of highly
dynamic teams.
Additionally, companies must choose among a broad
range of implementation models, including selfhosting, ASP, and public marketplaces. Yet, unless all
parties involved in the collaboration use the same
tool and implementation model, they cannot work
together. The challenge then becomes to figure out
how organizations that have implemented different
collaborative solutions can interoperate.
Moreover, the Workrooms platform supports
real-time collaboration among multiple enterprises,
thereby uniting global teams and delivering value and
benefits by reducing cycle time and cost. Similarly, it
supports collaboration among members within an
enterprise, bringing efficiency and effectiveness to
new ways of working, including home-based and
remote work processes.
Workrooms’ basic functionality includes:
·
·
■
Document management, including version control
■
“Thin client” architecture, which allows users to
operate from any computer with an Internet
connection
·
■
Voice and data conferencing
·
■
User self-editing and visual content display,
including project metrics
·
■
Project management
·
■
Community management of teams, including realtime collaboration with guests
·
■
A replication of “natural” work environments
As shown in Figure 1, the Workrooms suite includes
personal offices for all team members, private collaborative rooms for various sub teams, and public areas
where team members can collaborate with guests or
outside stakeholders.
CPC Opportunities, and Beyond
Although most CPC success to date has been in product development, significant opportunities lie ahead
in the areas of project management, post-merger integration and outsourcing management, collaborative
service development, collaborative supply-chain
management, and knowledge management.
Online collaboration is all about leveraging technology to break down boundaries and accelerate
decision-making. For many companies, the move to
CPC is a natural evolution of their online procurement
activities. Early adopters, having seized the opportunity to enhance their supply-chain positions, are
starting to report significant benefits from collaborative initiatives.
For companies considering a leap into CPC, successful
implementation will depend on a clear understanding
of the benefits of collaboration. This blueprint will
assist companies in gaining the confidence of collaborative partners and addressing internal behavioral
issues as they arise. Most importantly, CPC implementation will provide companies with stronger
relationships with partners and a better grasp on how
their employees can collaborate most productively.
For more information about collaborative product
commerce please contact Bud Strandquest at
bud.strandquest@capgemini.co.uk or Lisa Fretwell at
lisa.fretwell@capgemini.co.uk.
A Blueprint
for Change
45
46
DEMYSTIFYING
INNOVATION
Eric Chen
Kathryn Kai-ling Ho
About the Authors:
Eric Chen is a consultant at the Cap Gemini
Ernst & Young Center for Business Innovation.
Eric’s work focuses on innovation metrics and
intangible valuation, and he recently
completed research for a book on intangibles.
Eric received his S.B. in economics from MIT.
A Blueprint
for Change
Kathryn Kai-ling Ho is a consultant at the Cap
Gemini Ernst & Young Center for Business
Innovation. Her work focuses on innovation
assessment and media relations. Kathryn
graduated from Bryn Mawr College in May
2000 with a dual degree in neuropsychology
and East Asian Studies
ver the last two decades, many companies
felt the most surefire way to maintain a
competitive advantage in their industry
was through increased revenues and cost cutting. Our
research at the Cap Gemini Ernst & Young Center for
Business Innovation (CBI) has revealed, however, that
innovation has become just as important as one of the
most valuable competitive differentiators. Innovation
may be the only sustainable competitive advantage
in today’s economy. Not only is innovation now
regarded by the greater business audience as vital
to any organization’s current success, but research
shows the financial markets value innovative
companies higher.
O
At the CBI, our research has shown a direct correlation between companies that are innovative and their
standing in the financial markets. Statistical analyses
of industries, ranging from durable manufacturing to
B2B e-commerce, place innovation at the top of the
list of nonfinancial drivers of corporate market value.
If we know that the market is incorporating innovation into its valuation of companies, then companies
must also carefully examine how innovative they are.
To understand this, companies should be asking two
major questions. How do I recognize innovation in my
organization? And, can I assess my organization’s
innovativeness?
The CBI’s research shows significant quantitative
results that innovation is one of the key factors of
corporate value creation. Specifically, innovation has
consistently ranked among the most powerful drivers
The Invisible Advantage of Innovation, pg. 75
47
Figure 1
CGE&Y Value Creation Index
Innovation: A Top Value Driver
B2B
1. Innovation
2. Customer
3. Brand
4. Globalization
5. Quality
B2C
1. Innovation
2. Brand
3. Customer
4. Quality
5. Survivability
Durable Manufacturing
1. Innovation
2. Management
3. Employee
4. Quality
5. Environment
Non-Durable Manufacturing
1. Innovation
2. Employee
3. Management
4. Alliances
5. Quality
Tech Infrastructure
1. Management
2. Innovation
3. Quality
4. Workplace
5. Environment
Consulting Services
1. Quality
2. Innovation
3. Employee
4. Technology
Identifying an Innovation
What is an innovation? Very often, managers view
any product, service, technology, or process that is
new or different as an innovation. But this definition
is limited. In order for something to qualify as a true
innovation, it must meet three basic criteria in
tandem: It must engage a creative process, it must be
distinctive, and it must yield a measurable impact.2 By
understanding how the three components combine to
Connectivity Reinvents the Rules . . ., pg. 7
define an innovation, a company will be positioned to
identify them and assess their effectiveness.
Innovation Criteria
Creative Process
A vital qualification for assessing innovation is the
creative process. This component refers to how a
product, service, technology, or process is created.
The creative process involves finding a new solution
to a problem with the aspiration that a novel solution
will lead to an efficient and valuable gain.
We reasoned that a reliable way of quantitatively
measuring organizational investment in the creative
process was through analysis of a company’s research
and development budget. Granted, putting more
money into R&D may not have a direct causal relationship with the presence of a creative process, but
we believe a strong correlation does exist.
Benchmarking studies for the R&D Scoreboard,
published by the U.K. Department of Trade and
Industry (DTI), have shown that “in previous downturns companies that have cut R&D investment have
often found that their range of products and services
compare less well with competitors when the upturn
comes and it is then more difficult to protect market
share and value added.”3 DTI research has also shown
a positive correlation between R&D intensity (R&D as
a percentage of sales) and sales growth. Specifically,
the revenue growth of companies with above-average
R&D intensity is six times as fast as companies with
below-average intensity.
A Blueprint
for Change
across different industries in the CBI’s Value Creation
Index (VCI). The CBI created the VCI in order to define
and weigh the importance of nonfinancial value
drivers (such as innovation, brand, management,
social responsibility, etc.) as measured by their
impact on a company’s market value (see Figure 1).
These value drivers are composed of quantitative
data indicators; in the case of innovation, both
internal processes such as R&D spending and
external output, such as patents awarded and power
of patents (measured by the number of references
to a specific patent by other patents), factored into
how we measured how innovative a company was.
Statistical modeling has shown that the composite
of these value drivers significantly explains market
value, and the analysis of our industry-specific VCI
models have directly linked innovation to corporate
success across industries. In addition, its high ranking
among the other value drivers in the VCI means that
innovation is one of the best ways to differentiate
oneself as superior to competitors in the eyes of the
financial markets.1
Source: Cap Gemini Ernst & Young
Center for Business Innovation
48
Not only is innovation a major differentiator in today’s economy, but there is a direct
correlation between corporate innovativeness and position in the market. The onus
rests on a company to improve its ability to innovate, and that process begins by
measuring how innovative it currently is. When evaluating innovations, a company
must see if it has: discovered a new solution to a problem to create a valuable gain;
changed how its competitors and collaborators must act, or brought a new firm into
the market; and generated a measurable impact. If so, it has an innovation.
article abstract
A Blueprint
for Change
While companies can act upon new ideas that originate externally and are initially unrelated to investment dollars, those ideas need to be nurtured in an
organization that devotes the necessary time and
money to develop them. Thus, R&D investment, both
as a raw number and as a percentage of sales, proves
to be a meaningful quantitative measure of the
creative process involved in innovation.
The creative process can also be measured, however,
with qualitative findings. Companies might ask themselves if the development of a new solution to a
problem is better characterized as:
· a) A rigid, previously applied process used only
because it is the organizational standard.
· b) A parallel process used in a new environment.
· c) A flexible process incorporating the best
combination of old and new ideas.
On a linear scale of the creative process, (c) is better
than (b), which is better than (a). Some organizations
view the mantra “not invented here” as taboo; these
firms are stuck on creative process (a). But cultivating
innovations by constantly repeating the same creative
process is likely to yield diminishing returns. Other
companies may pride themselves on searching outside
the organization for better ways of doing things and
see “not invented here” as a good thing; these firms
typically espouse creative process (b). One of the
most popular methods of developing new ideas and
opportunities of many of today’s well-connected orga-
nizations is borrowing from others in their network.
Ultimately, however, we believe that those organizations that are open-minded enough to understand
the best way of doing something can come from
inside the firm, outside the firm, or a combination—
organizations employing creative process (c) will be
the most successful.
In a positive example of employing the creative
process, the National Institute of Education (NIE), a
division of the Nanyang Technological University in
Singapore, was tasked with devising a method to grow
temperate plants in the warm lowland tropics. As
academics, they initially combed literature to analyze
the landscape of research related to the topic. Recent
research, however, was largely conducted only by
temperate countries in extremely cold climates, the
opposite of the NIE’s dilemma. Nonetheless, the NIE
scientists focused on a case from Holland, in which
the Dutch had warmed the soil within the greenhouse
to promote warm air to rise and create a warm aerial
zone for the lettuce to grow. The scientists from the
NIE then inferred that the warmth of the soil had
growth implications on the root physiology and in
turn the plants’ development.
In Singapore’s warm climate the opposite conditions
exist, therefore scientists needed to develop a system
that cooled the critical rootzone. Until recently, they
had attempted to simulate an ideal overall temperate
condition by building a greenhouse where the environment is cooled to levels similar to those found in
moderately cooler countries. This approach was
extremely costly due to the amounts of energy
consumed to cool the entire greenhouse environment.
output. Simply put, how does a company determine if
what it has created is new?
NIE eventually realized they could leverage existing
aeroponics technology, a method of growing plants
with roots suspended in the air within an enclosed
trough while feeding the roots with chilled nutrient
solution in the form of a mist. By cooling only the
rootzone, scientists were able to grow temperate leafy
vegetables by simulating their indigenous, more
temperate environment even though the actual environment was in the mid-30s degrees Celsius (low 90s
degrees Fahrenheit).
The granting of a patent is an excellent measure of
the distinctiveness of an innovation. In order for the
United States Patent & Trademark Office to grant a
patent, the product or process must be “new,”
“useful,” and “non obvious.” These criteria serve as a
good screen for distinctiveness, making the number of
patents associated with a particular output a useful
quantitative measure.
The NIE’s innovative success was largely due to the
creative process undertaken. The scientists involved
combined the findings of the Dutch case with their
own technology to arrive at a creative new solution to
a long-time problem. Without employing such a
creative process, the NIE might still be searching for
cost-effective ways to cool greenhouse temperatures.
Just like the creative process of a company, an
innovation can have different levels of distinctiveness. To assess distinctiveness, a company should
ask questions such as:
Distinctiveness
Distinctiveness is the second major component in
evaluating an innovation. A distinctive innovation
rewrites the rules of the game. Something that is
distinctive is so different that it changes what both
competitors and collaborators are doing, and it oftentimes brings new players into the fold who were not
initially considered to be part of the game. The key
differentiation between distinctiveness and the
creative process criteria is that the creative process
relates to how something comes into being, while
distinctiveness refers to the nature of the discrete
Disruption in a Networked World . . ., pg. 66
·
■
How is this innovation distinct from other ideas
that have historically emerged?
·
■
Is it the first of its kind in any form?
·
■
Is it the first successful implementation?
Companies should also ask questions that help us
understand if the “rules of the game” really have
been rewritten:
·
■
Does your innovation make others react to what
you have created and now offer?
·
■
Are others forced to make changes based on your
actions?
·
■
Does this innovation change the basis of
competition?
A Blueprint
for Change
49
50
These include fees earned from licensing agreements,
increased revenue, increased market share, and
substantial cost savings, among others.
A Blueprint
for Change
If we return to the NIE example of incorporating
aeroponics into tropical farming, several facets of its
offering are distinctive. For example, this innovation
has not helped produce non-indigenous vegetables,
but it also considerably revamped perceptions on
plant physiology with respect to both content and
methodology. Since traditional plant physiology
mainly deals with shoot physiology, this innovation’s
focus on roots has opened up new paths and directions for the field.
As with the previous criteria, qualitative data is also
invaluable in measuring an innovation, particularly
since its impact is often social as well as economic.
Important questions in assessing impact include:
·
■
Is a company only dealing with primary impact?
Or is it also valuing the effects of the innovation
beyond the scope of its primary customers and
achieving secondary impact? (e.g., the primary
impact of war is that it takes many lives, but we
can see that war also leads to significant
secondary impacts, such as inciting ideological
and cultural shifts. Some feel strongly that
secondary impacts should be given equal
consideration when assessing impact.)
■
Is a company evaluating measurable impact
today as well as the future potential impact?
(e.g., Boston’s Big Dig construction project:
Today the Big Dig has yielded little impact to
Bostonians other than the dreadful congestion
and confusion around construction sites. Some
believe, however, that the completion of this
project will undoubtedly have a huge impact on
traffic flow, create a needed green space, and
in turn, impact life in Boston. Therefore, a
company must be cognizant of what type of
impact it is measuring.)
So if a company has a robust creative process that
turns out a very distinct output, it is two-thirds of the
way to having an innovation.
Impact
The third piece of the innovation puzzle is impact
or the realization of value from a new product,
service, technology, or process. Impact is the
element that truly differentiates the innovations
from the mere inventions.
Of the three criteria, impact is probably the easiest to
measure in terms of available quantitative measures.
One way we measure the realization of value from an
innovation is measuring the power of patents—the
number of times a patent is referenced by other
patents. The more a particular patent is referenced, in
all likelihood, the more of an impact its existence has
generated. There are also a number of financial
results that can be used to measure impact as long as
the figures can confidently be attributed to a particular innovation, a challenging but necessary step.
Connectivity Reinvents the Rules . . ., pg. 7
·
51
Creative Process
▲
Figure 2
▲
Adoption of an Evolving Process
The Innovation Spectrum
Parallel Use of a Process
in a New Environment
Market Acceptance
Causes Others to React & Make
Decisions Based on Your Offer
Impact
·
·
■
■
Can a company assess social, economic, and
technological impacts? (When dealing with such
different variables, it becomes increasingly
difficult to benchmark one against another.
Does 300 lives saved carry more or less impact
than a $5 billion return on investment?
Therefore, each type of impact must be taken
into consideration.)
Do we assess impact with respect to or irrelevant
of intentionality? (Should the gap between what
a company intended to achieve and what its
actual results were affect its assessment?)
Consider the way the Singapore National Institute of
Education integrated its newfound understanding of
root physiology with aeroponics to develop a technology for growing temperate vegetables on a
commercial scale. This process has not only saved
energy costs, but in turn eliminated the necessity of
importing certain vegetables. This innovation even
created new markets around these vegetables. Two
commercial farms have now been developed based on
this technology. As a result, consumers in Singapore
can now enjoy fresh lettuce supplied locally everyday,
as well as more creative products such as Lettucinno™
(a lettuce drink), Lettu-jello™ (lettuce jelly), and
lettuce cake. Irrespective of whether these products
are as delicious as advertised, the innovation clearly
has had impact both directly—growing temperate
vegetables in a tropical climate—and indirectly—creating new markets for lettuce-based products.
▲
First Successful Implementation in That Market
Cross-Market Application
Creation of a New Market
▲
▲
Makes Something Else Obsolete
▲
Incremental Improvement of a
Standard Process
Distinctiveness
Importance of the Trio
While projects that do not meet all three criteria can
still be of some value, they must incorporate the
creative process, be distinctive, and yield a significant
impact to be considered a true innovation.
We have provided an innovation spectrum for
managers (see Figure 2) to assess their own innovations both quantitatively and qualitatively in tandem.
Using the spectrum, companies can gain a better
insight on their innovations. An innovation’s success
in each of the three criteria places it at a point along
each of the three axes. So, in addition to helping a
company understand how to identify an innovation,
this graphic helps companies realize where the
limitations of an innovation or a potential innovation
reside, providing guidance in how to better manage
burgeoning ideas, technologies, processes, products,
or services.
It is important to articulate that assessment is not
the same as measurement. Rather, measurement is
one aspect of assessment that refers to the use of
concrete quantitative data. In order to gauge
innovation, purely measuring statistical data is
not useful for capturing the entire picture. Instead,
innovations should be evaluated according to these
three criteria based on both quantitative and
qualitative information.
Innovations do not grow in a vacuum, and companies
that want to gain a competitive advantage now and
ensure long-term earnings potential need to create a
A Blueprint
for Change
Source: Cap Gemini Ernst & Young
Center for Business Innovation
52
A Blueprint
for Change
climate supportive of innovation. Rather than viewing
the evaluations of innovations as separate from a
company’s main objectives, the same criteria that
define an innovation should also represent guiding
tenets for a company as a whole. An organization
should be focused on creative processes that build
new solutions to old problems, should try to be
distinctive with their offering in their market, and
should hope for and measure the impact of each new
business development.
1. For more information on the Value Creation Index, see
http://www.cbi.cgey.com/research/current-work/valuingintangibles/value-creation-index.html.
2. This statement is derived from the CBI’s definition of innovation: Innovation is the realization of value from a new solution
to a problem, rewriting the rules of the game.
3. Cookson, Clive, “Survey - R&D Scoreboard,” Financial Times,
Sep. 27, 2001.
From Roadmap to Roadway . . ., pg. 33
53
THE CBI
FUTURE SCAN:
A VIEW FROM THE
CROW’S NEST
Mark Maggiotto
Mark Maggiotto is a consultant at the Cap
Gemini Ernst & Young Center for Business
Innovation (CBI). His work focuses primarily
on marketing communications efforts at the
CBI. He contributes in an editing and
writing capacity to Perspectives on Business
Innovation, the CBI website, white papers,
articles, reports, and other documents that
emanate from the CBI. Mark received a
B.A. in English from Haverford College.
hile it is nearly impossible to predict
the future, the challenge for businesses
to do so remains imminent. To be truly
competitive, organizations must sift through what
could potentially happen in the economy and discern
what will become significant industry shifts and what
will simply end up as hyperbole. At the Cap Gemini
Ernst & Young Center for Business Innovation (CBI),
we believe diversifying where you scan and thinking
differently about what you discover is a healthy start
to anticipating the future. What follows is the CBI
Future Scan, our point of view on the trends we think
will blossom over the next two years. Many of these
forces are already under way, and we believe they are
now ready to mature and redefine our economy and
our society in the immediate future.
W
The Network Knows Where You Are
There is an emerging location paradox: As people
desire to be more liberated from their location when
using various devices and services, that same location
freedom can only be made possible by an intelligent
network that always knows where they are. Location
will become less important in the future as mobile
networks grow in number and range. Simultaneously,
technologies that can track your precise location at
all times will be steadily increasing the portfolio of
location-based services available to individuals
and companies.
An Opportunity for Companies
The automobile. Cars are potential homes for many
different wireless services, from XM satellite radio to
Disruption in a Networked World . . ., pg. 66
On
the Horizon
About the Author:
54
an Internet interface. The services that provide access
to business networks for adults and entertainment for
children (and some adults) could proliferate as costs
become realistic to most consumers and wireless and
satellite infrastructures expand. Another opportunity
is in public transportation. A group of MIT students is
currently building and installing GPS technology into
campus buses that is accessible from the Internet and
bus stops so people waiting can know when a bus is
about to arrive at the next stop.
On
the Horizon
A Danger for Companies
Disrespecting individuals’ privacy concerns. Comcast
recently suffered public condemnation and governmental fury when it became public that it recorded
the Web browsing habits of its 1 million high-speed
Internet users. With the ability to collect more information about customers, companies must make clear
what information they collect and why or watch their
reputation and share price potentially plummet.
What Products Are Taking Advantage of This
Emerging Force?
Blackberry wireless devices have the potential to
combine the benefits of laptops, PDAs, and possibly
even cell phones to become the dominant mobile
device. In addition to allowing a user to e-mail and
surf the Internet, the hand-held device is now assisting airport security guards in Boston to instantly run
passengers’ names through state and federal databases. Meanwhile, the PageTrack system from Elite
Logistics is using wireless communications and a GPS
system to assist the trucking industry. PageTrack
allows an individual to view a truck’s real-time location and speed, know where it has been, and even
change the itineraries of truckers in transit.
Who Is Missing the Boat?
Starbucks. The growth of omnipresent networks does
not mean consumers will want coupons printed out of
their PDA when they pass by a coffee shop. We
believe those services that users opt to use, rather
than those that are forced upon them, will be the
most successful. This is a key distinction because a
well-timed coupon is a reminder of an invasive
network, while being able to offer a service when
people choose to be connected makes them feel
empowered, rather than watched.
Indirect Competitors and Unexpected Allies
Due to growing networks of people whose purpose is
not profit, companies will need new types of strategic
alliances and a more complicated view of their
competition. Open source is revolutionizing software
development, and the same principles of cooperation
to create or share products and services for free are
proliferating in many different parts of business.
Companies must redefine the groups that may cause
their downfall and the untraditional organizations that
could be their most valuable partners.
An Opportunity for Companies
Mining online conversations. Online customer collaboration might already be prolific, and companies need
to find these discussions and incorporate their opinions into management strategy. If these conversations
have not begun, firms must start them to find out how
55
A Danger for Companies
Unprecedented shareholder activism. With instant
access to information and new ways to collaborate,
shareholders of today are as informed as analysts of
yesterday. The consequence of that reality is that
major management decisions cannot be made in the
comfort of the boardroom without the input of stakeholders. The boardroom is developing a permeable
boundary, and those managers that resist may quickly
find themselves on the outside looking in.
Who Is Capitalizing on This Emerging Force?
Microsoft realized that once Windows XP proliferated
in the marketplace, it would be infeasible to provide
the needed technical support. The company relies on
a public community of Usenet users to post bugs and
solutions in the 1,440 discussion threads surrounding
XP. Microsoft’s MVP reviewers, non- employees who
have a demonstrated expertise, moderate these
conversations. The company realized that its own
customers could function as its best partners. Rather
than allowing these conversations to occur without it,
it also realized it could facilitate and enrich the
discussions, benefiting its customers and allowing
Microsoft to collect and incorporate vital feedback.
Who Is Struggling to Adapt?
Name any industry whose content can be transferred
digitally—whether its music, movies, television
programming, software—and they are overwhelmed
by the question of what methods of content-sharing
they should fight in court and which to incorporate in
the way they deliver their content. Napster is crippled, but Kazaa, Morpheus, and Grokster are even
more powerful, allowing users to swap songs, TV
episodes, movies, pictures, and software. Sonicblue’s
recent release of ReplayTV 4000 allows people to
send recorded programming to friends with similar
units. How to make money off of this unstoppable
behavior of sharing is the billion-dollar question. The
scary part is that there may not be an answer.
Disputed Boundaries of Intellectual Property
The licensing of intellectual property is becoming an
enormous new source of revenue for many companies. Firms with years of research and accumulated
patents are realizing great value in sharing their more
intangible assets. The potential of profit, however, is
sending companies and individuals into a patenting
and copyrighting frenzy. This overprotective behavior
and hoarding mentality is both alienating customers
and undermining the legitimacy of the patent and
copyright process. Companies need to better discern
what assets to protect and what to share, while anticipating how their behavior will affect public opinion
and governmental attention.
An Opportunity for Companies
Many companies could benefit from a new perspective
The Invisible Advantage of Innovation, pg. 75
On
the Horizon
their products or services disappoint or satisfy
customers. Rather than costly investment in soliciting
individual customer opinions, conversations are
already occurring about your business and what you
offer. The challenge is to find them, but the reward for
listening to what is being said could be immense.
56
Businesses today are charged with the task of predicting the future in an
extremely volatile and unpredictable economy. The CBI Future Scan represents
the most important business trends to come over the next 24 months. The
trends are relevant to every industry and cover almost every aspect of business.
The Center for Business Innovation does the scanning for you and determines
the greatest opportunities to be reaped from each trend as well as specific
examples of companies that are already benefiting.
article abstract
on research and development. Rather than consider
R&D simply as a cost, the insights uncovered in-house
could be relevant to the challenges facing many other
companies. Once the parent organization of the R&D
department no longer is its exclusive client, there is
potential to see research as both internally useful and
as an asset that can be shared and sold.
On
the Horizon
A Danger for Companies
Despite success in the market, overprotective behavior like Microsoft exhibited over its intellectual
property created battles with consumers, partners,
and the government. British Telecom (BT) is fighting in
U.S. courts to prove its 1976 patent application for
hyperlinks, approved in 1989, entitles it to royalties
for anyone who has used a hyperlink since then. Even
if BT wins in court, angry programmers will most likely
develop a new open protocol for hyperlinking, and all
the company will be left with is a soiled public image
and a worthless patent.
Who Is Capitalizing on This Emerging Force?
IBM and Monsanto. IBM is a great example of an
early adopter of the potential value in licensing
intellectual property. In 2001, the company generated
$1.7 billion from licensing income, which accounted for
2 percent of sales and 10 percent of profits. Monsanto,
on the other hand, is demonstrating a new approach
to tracking intellectual property with its Newleaf
potato. The spud’s biggest benefit is a superior bug
resistance, yet Monsanto will only allow farmers to
plant it for one year. Through genetic markers, the
company can determine which harvests contain its
potato strain. The company is taking advantage in
advances in genetics to shift its offer from one
tangible potato spud to a one-year lease of
Monsanto’s intellectual property.
Who Stands to Lose Because of This Burgeoning
Trend?
Big pharmaceutical companies. Governments are
reconsidering the role that patents play in preventing
or impeding the wide-scale distribution of drugs.
Both international AIDS epidemics and U.S. biological
warfare scares have brought the patent process under
scrutiny. While patents represent an essential mechanism to motivate multi million-dollar investments
by these companies, patents’ absolute nature may
be compromised in the future to better remedy
international health crises and better achieve
social responsibility.
Security Beyond Prevention
Preventing calculated attacks or guarding against
unexpected disasters no longer ensures corporate
immunity. Nor should building an impenetrable border
around an organization or network be a realistic or
desirable goal. Instead, prevention must be accompanied by an infrastructure capable of real-time
responses to crisis. An organization must be able to
adapt when threatened by unforeseen problems.
Companies are slowly realizing that an immune system
in their organization is much more effective than
trying to maintain a firewall around their perimeter.
An Opportunity for Companies
Realizing the benefit of a redundant or decentralized
organization and network. Companies will have to
Open Source . . ., pg. 59
57
“Companies will always be blindsided
by unexpected catastrophic events;
the danger lies in devoting all of an organization’s resources
”
sacrifice some measure of efficiency in order to build
a more adaptable and secure means of storing information or running their organization. LOCKSS (Lots of
Copies Keeps Stuff Safe) serves publishers and
libraries by caching master copies of scientific data in
digital format in multiple locations. Companies will
continue to lessen the impact of potential natural
disasters and targeted attacks by decentralizing their
people, office space, and networks.
crime rates in Glasgow and Northampton have
dropped 68 percent and 57 percent respectively since
the cameras were installed. In addition, Symantec
and IBM’s Watson Laboratories have collaborated on
digital immune systems that create and download
virus immunizations in 45 minutes before their
network is even infected. This process promises to
be far more reliable than after-the-fact updates to
anti-virus software.
A Danger for Companies
Believing you can predict all of your organization’s
potential threats. Whether you consider the California
energy crisis, the New Mexico water shortage, or
tragedies of September 11th, each of these 2001 events
was difficult to anticipate yet had major effects upon
business. Companies will always be blindsided by
unexpected catastrophic events; the danger lies in
devoting all of an organization’s resources to preventing known threats. Instead, capital and management
attention need to be devoted to building in the ability
to adapt into an organization’s infrastructure. An
organization that can quickly and nimbly respond to
disaster and change will be stronger than a firm that
believes it is prepared for anything.
Who Is Struggling to Embody This Trend?
Companies that cut back on security and information
technology spending after the Y2K hysteria. The security systems underlying many corporate information
systems have not been as heavily invested in as prior
to Y2K, and companies are now suffering from either
directed or random attacks to their network. Internet
worms, the earliest digital dissident, continue to
evolve and cause millions of dollars in damages to
corporations. While continuing to spend on network
security seems less desirable in our current economy,
it becomes much more costly for companies to allow
programs and hackers to become more technologically
sophisticated than they are.
Who Understands the Importance of This
Emerging Force?
The British government. An omnipresent public
surveillance network of cameras has allowed British
law enforcement to build an infrastructure that can
handle unexpected problems such as random crimes.
As a result of apprehending more criminals, overall
Useful Data Becomes a Scare Resource
The growth of storage capacity is dwarfing the growth
of processing power, allowing companies to create
data warehouses of unprecedented scope. Yet, along
with the ability to collect more and more information
comes the challenge of deciding what data is most
useful and what data should be discarded.
Information-gathering systems need to evolve by
Innovation-Based Sustainability . . ., pg. 27
On
the Horizon
to preventing known threats.
58
beginning with specific problems or questions, rather
than just collecting everything. Growing numbers of
sensors that collect information on everything from
machines in a production process to retailer habits
will become one of the most important and frustrating
tools of business managers.
On
the Horizon
An Opportunity for Companies
Change the way financial information is gathered and
shared. Porsche AG has replaced its quarterly earnings
reports with continuous reporting. On the surface, this
appears to burden the analyst or investor with too
much information. Yet, Porsche AG’s new system
clearly tracks the company’s progress toward its goals
and identifies any changes in its market. Porsche AG
has been applauded by the media, not for providing
more data, but for providing data in a more useful and
sensible manner. Other companies have the opportunity to mimic Porsche AG’s attempt to choose their
most relevant financial information and share it liberally with investors. Investor fear of another Enron
collapse should also motivate firms not to appear that
they operate outside the public view.
A Danger for Companies
Not policing the doors to data warehouses. The
amount of data a business can store doubles every
nine to 12 months, yet processing power doubles
every 18 months. How can a company keep up? By
controlling what information is stored and analyzed.
Companies’ computer networks need to mimic the
human brain’s ability to absorb mass amounts of
information and instantly analyze and forget data
depending on a level of relevancy. Without calculated
data filters, accumulated information can quickly
become more of a nuisance than an asset.
Who Is Trying to Fight This Trend?
General Electric. GE imbeds technology developed for
medical devices into its airplane engines and analyzes
information on their performance at a pattern recognition facility. It can then detect slight changes in its
engines’ behavior, so that problems can be anticipated
before they come to fruition many thousands of miles
later at takeoff or in-flight as a much bigger problem.
Who Is Overwhelmed by This Trend?
Many product manufacturers. The machines that
manufacture disposable diapers make 1 million
measurements during the production of one diaper.
There is great value in gathering information to monitor the health of the machines and ensure a flawless
product is created. Only a fraction of the information
generated by the sensors, however, should be stored
for future analysis. But which part? That is one of the
most difficult questions facing business managers. The
challenge remains to measure not because you can,
but instead, to solve specific problems.
If you would like more information on the CBI
Future Scan, please contact David McIntosh at
david.mcintosh@us.cgeyc.com or Karina Funk
at karina.funk@us.cgeyc.com.
59
OPEN SOURCE:
BEYOND THE FAIRY TALES
About the Authors:
Richard P. Gabriel is a poet, essayist, and
computer scientist. He is a Distinguished
Engineer at Sun Microsystems, Inc., and lives
in California.
Ron Goldman is a researcher working at
Sun Microsystems, Inc., on alternative
software development methodologies and
new software architectures. He is currently
finishing a book on how companies can
participate in open source software
development.
Ron Goldman
pen source is a software development
model that too often is synonymous with
a free and free-wheeling operating system
juggernaut destined to upend current computer
markets. IBM is embracing Linux to unify its hardware
product line, and Microsoft is screaming that open
source is “anti-American and destructive of intellectual property.” Analysts and executives have been
gathering around open source to find out what it’s all
about, and people like Eric Raymond and Linus
Torvalds—once indistinguishable from society’s
stereotype of the elfin programmers working in the
dark on the software that powers the digital age—have
become heroes, spokesmen, and leaders in the new
age of anti-monopolistic software.
O
But is this narrow view adequate? Many other companies such as Sun Microsystems, Inc., have embraced
open source but offer neither Linux nor Apache nor
any other of the open source icons in their product
lines. What are they doing? Open source, for corporations, has more to do with a particular business
strategy than it does with any specific technology. In
fact, technology is just another piece of the puzzle for
a successful technology company—certainly it’s a
necessary piece, but often it’s not the distinguishing
piece. Apple Computer, for example, is viewed as an
innovative technology company, but it actually
competes on industrial design, habitable human interfaces, image, and lifestyle while its technology is
largely borrowed (Power PC CPUs, BSD Unix, Sony and
Samsung flat screens, etc.) or a bit old-fashioned (Mac
OS 9.x, for example). It’s Apple’s business strategy and
On
the Horizon
R i c h a r d P. G a b r i e l
60
Figure 1
Single Community Built Around Source Code
Code
Core
Developers
Other
Developers
Users
There are many definitions of what constitutes
open source or, as it was originally called, free
software. The basic idea is very simple: By making
the source code for a piece of software available
to all, any programmer can modify the software to
better suit his or her needs and redistribute the
improved version to other users. By working
together, a community of both users and developers can improve the functionality and quality of
the software. Thus, to be open source requires
that anyone can get and modify the source code
and that she can freely redistribute any derived
works she creates from it. The different licenses
have various wrinkles on whether modifications
must also be made into open source or if they can
be kept proprietary.
On
the Horizon
largely borrowed technology that has brought about
the company’s success.
We believe this strategy is indicative of a more
complex view of open source, in which individuals or
companies join collaborative communities in order to
mutually benefit from one another’s expertise. We call
this strategy “Innovation Happens Elsewhere” (IHE).
What Happens When You Assume About Open
Source . . .
If you ask almost anyone connected with open
source about how it works, she will draw something
like Figure 1.
Demystifying Innovation, pg. 46
She will tell you about how people start as just users
and how some will become more involved by reporting bugs. Some may become developers who fix bugs
or make minor enhancements. A few developers then
get more involved and join the ranks of the core
developers, being granted the right to check in
changes to the actual project’s source code. This is a
very code-centric view of the open source process as
a hierarchy that has users at the periphery, occasional
developers closer in, core developers even closer in,
and the code at the center.
And in fact, this view makes the hierarchy into a
funnel in which the goal is to convert people from
one ring in the diagram to people in the next inner
one—almost as if the goal were to turn people into
code in the end, the highest form of existence. A
direct result of this perspective is that the actual users
of the program are marginalized. While the success of
the project is often measured by the number of
people who use the computer program being developed, only those people who are willing and able to
talk about the code can participate in discussions on
the project’s mailing lists. Major decisions are made
by those writing the code, not by those who will
simply use it.
The roles that people and communities play in open
source development are in reality, however, less hierarchical, yet much more complex. Open source
contributors often discuss how best to do their jobs,
maybe only just touching on how the project’s tools
can help them. Other conversations may focus on
61
Figure 2
Communities Built Around Common Interests
Other open source projects
User tasks
Code development
Marketing
Standards
Each of these communities has its own special interests. For example, some communities connected to
Linux might include system administrators concerned
with installing and configuring the Linux operating
system on various types of computers. Another group
of people might be concerned with business productivity tools (such as word processors, spreadsheets
and presentation tools) that are available for Linux—
its focus is on what tools exist and how to use them.
A third community might form around computer
games available for Linux, with a subcommunity
around a specific game like Quake—it would focus on
exchanging tips, rumors of new games, and finding
opponents to play with.
Each community will flourish or wither depending on
how well its interests are met by the community
resources. For example, a community of newbies
asking basic questions about how to use a piece of
software will only succeed if more-experienced users
who can answer those questions are also part of the
community. In addition, in a successful community a
vocabulary might spring up which is derived from the
Connectivity Reinvents the Rules . . ., pg. 7
project’s technology, application area, and existing
culture. Such a community will come to resemble a
long-existing club with its own phrases, in-jokes, rituals, and customs—an astute creator of such a
community will know this and will help the community grow these aspects. One less astute will focus on
the code, probably leaving out vital potential
members of the community.
In the course of a successful open source project
different communities will come and go. New ones
will spring up, grow, and possibly become dormant or
die. As long as there are always some thriving communities, the larger open source project can be
considered alive and well. Note that death of a
community does not equal failure. Consider a community that arose to develop a new standard. After the
standard it developed is accepted by the larger
Internet community, the community would have
achieved its purpose and no longer be necessary. If in
the future revisions to the standard are called for, the
community might be resurrected.
Therefore, rather than viewing the open source movement as the story of tiered production of a software
application or operating system, it is important to
recognize that the pervasiveness of open source is
largely due to the communities it builds and empowers with solutions to problems and questions. While
these coalescing communities are becoming a staple
of online collaboration, innovative companies are also
recognizing that they may benefit from incorporating
open source philosophies into their business strate-
On
the Horizon
standards for protocols or APIs that the project
uses. Still other conversations may address issues
affecting the larger open source community. Each
different conversation involves a different group of
people. These groups may range in size from small
working groups of less than 20 members to full
communities of hundreds or thousands of participating individuals. We might represent these multiple
communities in Figure 2.
62
Open source is commonly recognized as a software development model that has
challenged the likes of Microsoft. But open source is more than just a software
movement—it is a new model for organizational strategy. In strategy, open
source is not about technology but about the way companies share information,
partner with one another, and interact in communities. The most significant
learning from open source is the “Innovation Happens Elsewhere” theory. That
is, individuals or companies join collaborative communities in order to mutually
benefit from one another’s expertise.
article abstract
gies. Those companies embody the Innovation
Happens Elsewhere ideology.
encourage other companies or organizations to do this
work—but for their own purposes.
Innovation Happens Elsewhere
Most companies find they often need to fine-tune
designs and products over a series of releases. Some
companies use time to improve products: The Saturn
car company started by introducing inexpensive but
high-value cars that appealed to young adults just
starting out in their careers, and while learning the
tastes and values of that generation, Saturn has introduced new models that reflect the increasing
affluence of its core customer base. This is an example
of using the world outside the corporation as a source
of innovation. Software companies using open source
can perhaps exploit this strategy in its most pure
form. So, what is the strategy?
The impetus for companies to do this comes from
tools, technology, communities, and prototypes that
the IHE company provides. By opening up part of
itself to the outside, the IHE company can provide
gifts that trigger the gift-economy effect: technology,
tools, and prototypes that are of high value to outside
companies and organizations. Releasing these previously proprietary tools triggers other firms to work in
areas important to the IHE company,
On
the Horizon
To simplify the discussion, let’s consider only companies that produce technology products. The
Innovation Happens Elsewhere strategy begins by
recognizing where the company’s proprietary value
lies. Everything outside this inner circle of protected
ideas and technology is available for instigating
outside innovation beneficial to the company. The
primary goal of the strategy is to increase the number
of potential customers—that is, the size of the market
available to the company. To do this, the IHE company
tries to create more products in the market that either
are enablers for the products the IHE company sells or
form an aftermarket for them. Rather than trying to
accomplish this alone, the IHE company tries to
It helps to understand open source as a gift economy
rather than the traditional capitalist model of a
commodity economy. In a gift economy, gifts are
exchanged, forming a bond based on mutual obligation. In the simplest form of gift exchange, when one
person gives a gift to another, the receiver becomes
obligated to the giver, but not in a purely mercenary
way—rather, the recipient becomes very much like a
member of the giver’s family where mutual obligations
are many, varied, and long-lasting. In an open source
project, the gift of source code is reciprocated by
suggestions, bug reports, debugging, hard work,
praise, and more source code.
Giving gifts of technology and tools initially spurs
outside individuals to work on or with those gifts for
their own benefit—perhaps one of the tools is useful
to a software developer for one of his or her home
projects. Later, or instead, that developer might bring
the tool into his or her company, which starts to use it
63
Figure 3
Innovation Happens
Elsewhere Process
➤
Customers
New products
incorporating
outside innovations
➤
➤
New products
➤
Other Companies &
Organizations
Tools &
ideas
➤
Tools, technology,
communities,
prototypes
for their own purposes. Because the tool was a gift
(and perhaps its source is available), individuals and
their companies reciprocate and send bug fixes,
extensions, modules, and ideas back to the IHE
company. The gift has been accepted—for selfish
purposes—but it stimulates a gift in turn that is of
value to the IHE company, which uses it to enhance its
own products (see Figure 3). In the open source realm,
this is the fundamental expected payback for opening
up software source. For the IHE company, this is only
the beginning.
Next, an outside company using gifts from the IHE
company recognizes that these tools, technology, and
prototypes can be combined with its own company’s
technology to produce products at lower cost, less
risk, and of great value to its customer base. Again,
this is done for selfish reasons, but such decisions
help expand the customer base for the IHE company.
Sometimes a company or organization will think of an
application or variation of the gift that will open the
IHE company up to entirely and unexpected markets.
This is one of the most important return gifts the IHE
strategy can provide.
Even further, the IHE company, by creating, building,
and maintaining a set of communities around these
gifts, can engage in serious conversations with outside
companies, organizations, and individuals. Such
conversations not only can improve the IHE
company’s products, designs, and directions, but also
provides the IHE company with an opportunity to
demonstrate leadership and vision, thereby putting it
➤
in a position to strongly influence the direction and
structure of the competitive landscape. Because this is
done in a context of gift-giving, culture exchange, and
conversations, this is leadership and seduction, not
control and power. If the IHE company exhibits learning in response to these communities, other members
will continue to give gifts, work with the company,
and help it maneuver through difficult competitive
and market situations.
When a company puts out white papers, advertising,
and other public relations materials, the audience is
likely to discount these as hype statements. Within
a community, however, where developers and
engineers are talking to one another, the messages
can be both smaller—too small for press releases—
and larger: global visions and proposals for new
directions couched in design and other engineering
statements. By valuing the comments and ideas from
outside community members—by showing respect—
the IHE company can spread its vision while
minimizing media or corporate cynicism.
The IHE company puts itself in the best position by
embracing at all levels the philosophy of “Innovation
Happens Elsewhere” and when people in the company
are always looking inside and outside the company for
innovation they and their groups can use. We might
represent the relationship of a company with
customers and other companies and organizations
that employ the IHE philosophy with Figure 3.
In order to embody this strategy, there are several
keys to remember. The first is understanding and
Connectivity Reinvents the Rules . . ., pg. 7
On
the Horizon
➤
IHE Company
Innovations, new
technology,
ideas, designs
64
Figure 4
NetBeans Open
Source Strategy
➤
Customers
Forte product
Forte market
Sun servers
➤
➤
NetBeans-based products
Modules for Forte
➤
NetBeans
➤
➤
Sun Microsystems
isolating the true proprietary value and technologies
of the company. The more accurately this is done, the
better the company is able to use its gifts and thrive.
If what’s proprietary and valuable to customers is too
small, the company will have a hard time surviving as
others crowd into its space. If what’s judged proprietary and of value is too large—or too much of what
the company makes or works on—then there will be
few gifts available to get the cycle of innovation going.
The second key is having the confidence that your
organization can engineer products quickly and well
enough to stay ahead of the competition. Microsoft,
for example, does not believe it has enough of an
engineering edge over competitors to do other than
hold proprietary all its source code. This is why it tries
to combat open source rather than embrace it.
On
the Horizon
The third key is having a company culture that can
embrace and celebrate innovations wherever they
occur. In a sense, this is confidence and enthusiasm
for ideas, but it is also respect and the right balance
of pride and humility. Some organizations seem to
fear ideas that originate from outside. Such organizations cannot use Innovation Happens Elsewhere.
Others, meanwhile, are less discriminate, and much
more likely to succeed.
NetBeans: A Case of Open Source and “Innovation
Happens Elsewhere”
Companies that truck in software can use open source
as a basis for sharing tools, technology, and prototypes, and communities can be built around open-
Innovation-Based Sustainability . . ., pg. 27
Bug fixes,
modules, and
improvements
Tools, technology,
communities,
prototypes
➤
Other Companies &
Organizations
source projects. In this case, it’s important to recognize both that such communities need to succeed as
software development efforts and that the goal of
such communities is to fuel the IHE feedback cycle.
Sun Microsystems’ NetBeans open source project is a
good example of a community built to support the IHE
strategy. NetBeans is an open source platform for
building an integrated development environment
(IDE), specifically for the Java language. Sun gets
improvements from the open source community and
builds a proprietary version of NetBeans—called Forte
for Java—which is a tested version of NetBeans
extended with proprietary modules. Other companies
use the NetBeans technology in-house and as part of
other products. Forte for Java is additionally positioned as a platform on which other companies can
sell plug-in modules—that is, Forte for Java is the
basis of a marketplace.
The effect is to increase the population of Java
language programmers by both providing tools for
those developers directly and through other companies building on the NetBeans platform. This way, not
only is Sun Microsystems building the Java community, but so are other companies and individuals in the
NetBeans community. Sun sells an IDE derived from
NetBeans, but most importantly, Sun sells server hardware that runs Java particularly well. Further, Java
developers within Sun use NetBeans and Forte for
their own work. Figure 4 demonstrates how NetBeans
supports and is supported by the IHE strategy.
65
Implications for the Future of Open Source
There are other advantages to using open source, but
being able to engage the Innovation Happens
Elsewhere strategy is certainly the most compelling.
Not only does it build the market size, but the tactics
to make it work help companies that use it get to
better products faster by involving directly its
customer base in their design. Through direct conversations with customers, there is reduced guesswork in
gathering market requirements. Moreover, there are
some operational efficiencies to be gained through
better testing, community-based support, and some
significant product contributions.
Sometimes—no, actually usually—a surprise will
happen; an innovation or application of the ideas and
technology will come along that you never dreamed
of, never heard of, couldn’t imagine—done by a group
or individual you never heard of. And it could be a
pivotal market for you or could change how you view
and develop your original technology.
Disruption in a Networked World . . ., pg. 66
What is most stunning, though, is the difference in the
feel of companies that truly engage with their communities of customers, partners, and competitors. Morale
is boosted, progress is constant, and it simply feels
like something good is always happening.
On
the Horizon
An unexpected innovation happened when a group
removed the Java-specific modules from the NetBeans IDE and replaced them with mapping,
visualization, and analysis modules in order to build
a modular environment for spatial analysis and
visualization. This potentially opens up a future
geographic information systems market to Sun, a
market never contemplated.
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DISRUPTION IN A
NETWORKED WORLD:
WILL CLIFFORD ON PATTERNS OF
STRUCTURAL SUCCESSION
Will Clifford
About the Author:
Will Clifford is a consultant at the Cap Gemini
Ernst & Young Center for Business Innovation.
He is currently conducting research for the
third book to be co-written by Christopher
The following is an excerpt focusing on modularity
from a more extensive white paper on the topic
of disruptive innovation. To read the complete
whitepaper, please see our website at
www.cbi.cgey.com.
Meyer and Stan Davis on the role of the
molecular sciences in the next economy.
He has also explored developments in
nanotechnology, biotechnology, and the
relationship between the emergence of
disruptive innovations and the structures
of firms and industries. Will holds a B.A.
from Kenyon College where he studied
economics, ecology, and philosophy.
hile innovation can be a key driver of
growth, certain types of technological
innovation can pose significant problems. In particular, business executives are concerned
with the effect that disruptive innovations—products
or services that are technologically inferior to the
status quo but improve over time to unseat incumbent
firms1—can have on their business and industry. The
real threat of disruptive technologies lies not so
much in their frequency, but rather it derives from
the sheer amplitude of the impact a disruption has
upon incumbent firms.
W
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Clayton Christensen’s book The Innovator's Dilemma
articulated the process by which great companies fail
even while seemingly doing everything “right.”
Typically successful strategies employed by firms, such
as keeping abreast of the competition, paying attention to customers, and investing in new technologies,
are the same strategies that render companies helpless when confronted with disruptive technologies.
Why? Because well-established companies’ strong
focus on satisfying their core customer base and hesitancy to abandon cash cows prevents them from
developing the technologically inferior products that
turn out to be the next new thing. Perhaps even more
unsettling is the fact that disruption seems to be a
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“By viewing disruption as an organic phenomenon
endemic to the business cycle,
we can increase our ability to identify
”
and leverage disruptive technologies.
By viewing disruption as an organic phenomenon
endemic to the business cycle, we can increase our
ability to identify and leverage disruptive technologies. Using patterns of “structural succession”—the
observed sequence of changes in the architecture
of products, firms, and industries over time—we
can identify technologies with disruptive potential
and vulnerable markets before it’s too late for
incumbents to react.
Patterns of Structural Succession
The term “structural succession” refers to the
observed sequence of changes in the architecture of
products, firms, and industries over time in response
to factors such as competitive pressures, customer
demands, and engineering constraints. The concept
has its origins in ecology where succession refers
to the bottom-up assembly process of ecological
communities after a disturbance. Similarly, succession
in the economic sphere is a process traced from the
product level up to the firm level, and eventually to
market structure.
Product Modularity
Modularity—structuring complex systems from a set
of building blocks that can be designed independently
yet function together in a seamless fashion—provides
a lens through which to trace the structural evolution
of systems in response to changes in competitive
pressures, customer demands, and engineering
constraints over time. Modularity is a design
principle that has a long history, particularly in
manufacturing, but has received much attention
recently given its success in the computer industry.2
It is a particularly useful strategy for managing products of increasing complexity, and when selective
pressures favor rapid change and customizability,
modularity trumps integrality.
When a new technology hits the market, the primary
basis for competition among firms is product functionality. Since the technology is still nascent, welldefined subsystems do not yet exist and architectures
tend to be technologically integral. As sustaining
innovations improve product performance to meet
customers’ demands for functionality, the basis for
competition tends to shift to reliability. No longer is
functionality sufficient to win market share. As
markets mature, the bases for competition move
to customization and convenience. These middle
stages in the adoption life cycle have the largest
number of customers. Consequently, firms spend
the majority of their resources catering to these
segments through sustaining innovations. Finally,
products are essentially commoditized and competition revolves around price.3
In response to markets characterized by these latter
three bases of competition, product and process
architectures become more modular in order to
increase a product’s flexibility and speed to market,
From Roadmap to Roadway . . ., pg. 33
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natural evolutionary occurrence that inevitably
emerges to punctuate periods of industry growth
wherein incumbents measure success by their ability
to serve an established customer base.
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while decreasing costs through specialization. From a
pure functionality standpoint, modular architectures
usually do not provide the performance of an integral
system, but for the majority of users the value of
modular products’ other characteristics outweighs the
functionality shortfall.
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Firm and Market Structure
In the era of integral products, design is a highly iterative process usually managed by groups working in
close contact. Collaboration is key, and tacit knowledge plays a large role in product development. With
customer demand focused on product functionality,
firms tend to be vertically oriented. As products
become increasingly sophisticated, architectures
become more modular and design rules are developed
to mitigate coordination costs. These rules specify
parameters within which groups can operate and
codify the requisite pieces of tacit knowledge. Clear
design rules allow engineers of different modules to
act independently, without the coordination of a
central planner, leading to flatter hierarchies and
greater decentralization. The resulting organizational
map exhibits a close resemblance to the product’s
architecture, with different groups dedicated to each
module.4 Thus, modularity is a fractal concept, emerging in the design of products and scaling to describe
organizational structure.
When a given firm’s design rules become known and
accepted by a number of firms, industry standards
emerge. At this point, the vertically integrated firm no
longer maintains extensive control over the product
architecture. In an effort to compete on the bases of
reliability, customization, and price, incumbents
outsource to specialty firms that focus solely on the
production of a particular module. This precipitates a
shift in firm structure away from vertical integration
toward a more horizontal model. The end result is an
industry that resembles a networked cluster of
specialized firms.
Architecture as a Strategic Guide
Viewing the key attributes of disruption in concert
with the patterns of structural succession indicates
the conditions when firms may be particularly
vulnerable to disruption. Vertically oriented firms
producing an integral product face two primary risks:
overshooting the functionality that their customer
base can absorb and failing to meet the needs of a
more heterogeneous market. When this happens
the conditions are prime for an inexpensive, highly
customizable modular offering to be disruptive. One
needs only to look at the dynamics of the computer
server market and the efforts of Sun Microsystems
to fend off the modular “Wintel” configurations
assembled by companies such as Dell and Compaq
to see how this is playing out.
The pattern is clear. When integral architectures
exceed customers’ demands for functionality and the
basis for competition changes, product architectures
become more modular. Modular product architectures
are eventually replaced by an entirely new value
proposition, often in the form of products with integral architectures. This suggests that succession does
Connectivity Reinvents the Rules . . ., pg. 7
69
Modularity and the Competitive Landscape
Modularity is a generative architecture that can
be used to embed evolvability into both products
and organizations. But managers must be aware of
several factors to manage it effectively in the face
of potential disruptions.
For incumbents there are a number of factors—technical, economic, and psychological—that prevent them
from fully exploiting the advantages of modularity.
Sustaining innovations are about optimizing along a
set of well-defined metrics for an established
customer base. Sure, these innovations may be faster,
better, or cheaper. But the optimization mindset
focuses on maximizing performance around established metrics, not exploring new value propositions.
So modular products are not immune to disruption. In
fact, the very existence of modular product architectures can be indicative of a market overserved on the
basis of functionality and therefore vulnerable to
disruption. The pattern of succession shows that
modular architectures are most often disrupted by
more integral offerings that fundamentally reframe
the value proposition.
Emerging Disruption Areas
The concept of structural succession has allowed us to
identify many areas of the economy that are susceptible to disruption. Applied to the electric utilities
industry, we find that the industry fits many of the
conditions of being primed for disruption. The
Innovation-Based Sustainability . . ., pg. 27
economies of scale that favored the large, vertically
integrated power company are now under pressure as
a result of the confluence of three factors: market
liberalization, environmental concerns, and an insatiable demand for reliable, uninterrupted power.
Micropower, the generation of power by small,
decentralized stations, is an emerging technology
positioned well to exploit these industrywide
changes.5 The technology comprises modular systems
that can be adjusted to match the scale of demand
and installed far more quickly than a centralized
station. Additionally, the fuels used by micropower
stations generate few negative externalities and can
greatly increase environmental quality in both developed and developing nations.
Incumbent utilities companies have attempted to
erect barriers, such as tariffs and standards, to inhibit
the widespread adoption of micropower technology.
In fact, this resistance to new and strategically important technology is characteristic of established
companies’ futile attempts to preserve their existing
business model in the face of disruption.
The Upshot
Whether or not a technology is disruptive often
derives from the nature of the situation into which it
is introduced as well as from the characteristics of the
technology itself. Insurgents using disruptive technologies are, in essence, exploiting opportunities
incumbents cannot because they each perceive
markets differently. Where the established firm sees
an unproven technology lacking a clear market, the
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not reach an end state, but is in fact a dynamic cycle.
70
insurgent sees the opportunity to use a simple technology to reframe the value proposition and usurp
market share from the incumbent.
Mapping the evolution of product architectures from
integral to modular highlights the conditions under
which disruptions are likely to occur and illuminates
new strategies for taking advantage of these opportunities and gaining competitive advantage.
1. Christensen, Clayton M. The Innovator’s Dilemma. Harvard
Business School Press. Boston, MA, 1997.
2. Baldwin, Carliss Y., and Clark, Kim B., Design Rules: The Power
of Modularity. MIT Press. Cambridge, MA, 2000.
3. Moore, Geoffrey A., Crossing the Chasm. HarperBusiness. New
York, NY, 1991.
4. Henderson, Rebecca M., and Clark, Kim B., “Architectural
Innovation: The Reconfiguration of Existing Product
Technologies and the Failure of Established Firms.”
Administrative Science Quarterly, Vol. 35, pp. 9–30, 1990.
5. Dunn, Seth, “Micropower: The Next Electrical Era.” Worldwatch
Institute Paper 151, July 2000.
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Conversation
71
REFLECTIONS ON THE FUTURE
OF SOFTWARE
Alan Radding
Geoff Cohen
“Now, although I am too small a man to make propositions which
might effect a reform in this dreadful state of things, nevertheless I
may as well sing my fool’s song to the end, and say, so far as I am
able, what could and should be done . . . ”
Martin Luther, An Open Letter to The Christian Nobility of the
German Nation Concerning the Reform of the Christian Estate, 1520
About the Authors:
Alan Radding is an independent writer,
researcher, and analyst specializing in business
and technology. His writing can be found in
leading business, finance, technology, and
telecommunications publications and websites.
Mr. Radding also works with many leading
research and consulting firms and major
manufacturing and service companies.
Geoff Cohen is a manager at the Cap Gemini
Ernst & Young Center for Business Innovation
where he directs the research into emerging
Ten years from now, software will be created, used,
and understood very differently from today. But how?
There are innumerable research projects employing
vastly different theories, trying to tackle the same
question. Unfortunately, there has not been a vibrant
conversation among the disparate research efforts.
We tried to change that. On August 13, 2001, the
Center for Business Innovation (CBI) gathered
together leading researchers in computer science,
insightful writers, social scientists, and educators in
an effort to determine how software might evolve in
the first decade of the new millennium. The CBI’s
Future of Software Rave addressed the fundamental
issues of creating software, including new methodologies, management techniques, and technologies. The
following is excerpted from a longer paper, An Open
Letter to the Software Nobility, that synthesizes the
ideas discussed during the Rave.
technologies. His work focuses on wireless
the future of software development. Geoff
received a B.A. from Princeton University in
public and international affairs and a Ph.D. in
computer science from Duke University.
artin Luther struggled against a single,
monolithic church that maintained
absolute standards and laws. And
although his goal was to reform this single church,
his protest instead sparked the creation of hundreds
of competing churches, each with incompatible
doctrines, rules, and cultures. The subsequent conflict
took tens of thousands of lives and devastated Europe
for a generation. Today, however, most of us have
learned to live with many churches and faiths, each
serving its own community in its own ways.
M
The world of software—far younger than Catholic
church in the 1500s, though no less dogmatic—is as
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trends, biological principles for software, and
72
fragmented as the post-Reformation churches and
as prone to religious wars over languages, methodologies, operating systems, protocols, tools, and the like.
In the process, the software world has spawned a vast
amount of criticism, complaint, frustration, anger,
resentment, envy, greed—a veritable litany of sins.
Fifty years after people started programming
commercial computers, the applications are still late,
costly, bloated, inflexible, hard to use, unreliable,
flawed. And the slew of paradigms and approaches
spanning the cathedral to the bazaar have failed to
quell the rumblings.
The Cap Gemini Ernst & Young Center for Business
Innovation recently gathered 20 leading thinkers to
focus on the future of software. Although the group
did not leave with 95 theses to nail on the IT department door, it did identify three key changes that will
redefine how software is created and used:
■
The abandonment of top-down control as the
central dogma of computation
·
■
Shifts in the balance of responsibility between
users and software creators
·
■
The legitimization of alternate models of
computation beyond the Turing machine
·
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The common thread that unites these changes is an
increasing diversity in approaches, applications, users,
and architectures. And although diversity often comes
at a cost of increased maintenance and coordination
cost, ultimately, there is no one way to create software any more than there is only one church.
Still Waiting for the Revolution . . ., pg. 16
In 1976, Bill Gates sent an “Open Letter to Hobbyists,”
calling on personal computer owners to stop stealing
his software. No one will write software for free, he
claimed and thus heralded the dawn of the age of
commercial PC software. Perhaps our open letter—this
fool’s song—may in some small way signal another age
of software, one with broader participation, changed
assumptions, and new metaphors. And although we
can only roughly describe the changes that will bring
in this new age, we believe that they are necessary,
and that they are coming.
The world is rapidly turning into a very different
place where creating software is an engineering
discipline. Myriad computers and environments
communicate and collaborate using dozens, if not
hundreds, of different protocols. Remote resources
can no longer be predicted, not to mention trusted.
And without warning, interfaces and behavior change,
evolve, or even go away entirely. As independent
consultant and researcher Clay Shirky emphasizes,
the assumptions and techniques of the world of the
single box simply no longer apply to software functioning at Internet scale.
Our first impulse is to deal with these problems the
same way we dealt with old problems: by trying to
contain and manage this anarchy through the use of
such techniques as comprehensive global standards
and well-defined protocols, in effect just building a
much bigger single box. This approach has its merits.
A certain amount of standardization is necessary and
desirable. It allows trains to move smoothly from one
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How will software be created, used, and understood in the future? In the next
millennium, software will evolve drastically with new methodologies for
creation, new techniques for management, and new options for technology.
The Center for Business Innovation’s Future of Software Rave gathered
leading thinkers to focus on where software was heading and identified three
key changes that will redefine how software is created and used.
article abstract
In the network age, however, software standards
inevitably fall short. The natural anarchy of software
undermines adoption of “universal” standards.
Variations in the way people implement a standard or
unreliable services or malicious intent can break the
system. Worse, even when successful, overreaching
standards constrain innovation, limit freedom, and
lock applications and users into an increasingly false
model of reality. In the end, we’ve networked
Pandora’s box, and we can’t wish the new world back
the way it was.
Yet anarchy in software is not such a bad thing. It is
the very anarchy of software, with its alphabet soup
of competing standards, which allows it to adapt to
dynamic reality, to escape the constraints of engineered reality. And so although this anarchy makes
software less reliable, buggier, and more unpredictable, we should welcome it. We ought to: We don’t
have a choice. And once we allow for the fact that
software doesn’t have to be perfectly repeatable or
predictable, all sorts of things are possible.
The dominant paradigm in software and computation
is that of control: absolute control of the machine, of
the process being modeled, of the environment, and
of communications. Just think of the derivation of the
word “program.” Despite the fact that this idea under-
Open Source . . ., pg. 59
lies all of our efforts in computing, it is dangerously
wrong. To have any hope of forward progress, software creators must repent from this orthodoxy and
abandon these lies: that a computer and the world in
which it operates are deterministic, that an environment can be completely described, and that software
infallibility is achievable or even desirable.
One major myth is that software infallibility is both
desirable and achievable. Quality Assurance departments try to produce bug-free software; software
products are built to last forever; resources are
assumed to be available all of the time. Again, this is a
set of unreachable goals. Software, as a complex
system (whether or not it is adaptive) simply has too
many connections and interdependencies to be
absolutely free of bugs.
Instead of striving toward perfection, we should
instead embrace imperfection. To paraphrase a
famous programmer motto, bugs may be a feature,
not a bug. Like the mutations and genetic variation
found in biological populations, bugs represent
opportunities for adaptation. It may be that the
“404” error on the Web (indicating a page not found)
was a key component to its success; trying to build
a system in which you could not address a nonexistent page would have made the Web far more
complicated, restrictive, and unscalable. Our livers
are composed of millions of cells performing their
liver-duties; we do not die if a single cell dies. Why
must we build software that cannot survive the failure
of a single component?
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set of tracks to another, and it builds enough confidence so that people will be willing to invest time and
money in building on top of that standard foundation.
Without any standardization, interoperability would
be an unreachable goal.
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Sometimes, the accumulation of bugs represents an
opportunity for death. The problem with the Y2K bug
was not that the programmers back in the 1960s were
so short-sighted (though they were); it was that our
whole system of software usage allowed such
programs to remain in place for decades. Organisms
die to make way for further generations, but software
generally doesn’t die, and when it does it often
orphans its users and its data. We must allow for
death but also be smarter about it.
Already, we see early signs of these new ideas being
applied to practical issues. Routers and anti-virus
systems exhibit adaptive behavior. CAS concepts are
being used to model the behavior of heavy metropolitan traffic. Swarm intelligence approaches are being
applied to supply chain management, answering questions like how a system should respond to disruptions
in the air transport system that slow the delivery of
just-in-time materials. Similarly, these concepts can be
used to model pricing in complex, dynamic markets
and consumer behavior.
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The trick will be to make the leap from creating
models based on these concepts to creating software
that actually incorporates these concepts as the heart
of the very system itself. This means creating software
that doesn’t just model swarm intelligence or organic
process but actually employs it to perform the
intended task. This doesn’t mean that every old technique goes away, but it does mean that we need to
integrate this new tool into our repertoire and understand better how it fits in with those things that we do
know how to do.
The eventual arrival of post-electronic computing,
whether based on DNA, photons, neurons, molecules,
or quanta, offers the opportunity to finally break from
the limitations of the deterministic approach to software. Whatever the device, the software of the future
will likely be nonmechanistic and nonlinear at its
core. Software creators must accept, even embrace, a
level of anarchy if they are to avoid building the brittle, precarious, fragile systems so prevalent today.
This will require new tools, new training and education, new paradigms, and new computers. Indeed, the
great challenge of moving to this new world will not
be the technical challenge of building new machines,
or finding a new killer application, but the rejection of
the orthodoxy, an ideology so deeply embedded in
our assumptions, language, and literature that we are
often unconscious of it.
Martin Luther feared his reform efforts would amount
to little more than a fool’s song. Perhaps our call to
embrace organic computation and liberate ourselves
from deterministic Turing machines will turn out as
badly as Luther feared. According to author Cory
Doctorow, however, “lies about the future inspire
people who actually know how to build the future to
build it.” In that case, even if it is a fool’s song, it still
might be what could and should be done.
If you would like the full text of this paper, please
contact Lesley Livingstone at lesley.livingstone@
us.cgeyc.com. If you would like more information on
The Future of Software Rave, please contact Geoff
Cohen at geoff.cohen@us.cgeyc.com.
Technology Watch, pg. 79
75
THE INVISIBLE
ADVANTAGE
OF INNOVATION
Jonathan Low
About the Authors:
Jonathan Low is a senior research fellow
at the Cap Gemini Ernst & Young Center for
Business Innovation (CBI). Jonathan is the
leader of the CBI’s Intangibles Valuation
initiative and has produced four major
studies in this area and published numerous
articles and reports on their findings.
Jonathan is the co-author of Invisible
Advantage: How Intangibles Are Driving
Business Performance.
Pam Cohen Kalafut is currently the
president of Cohen Kalafut Associates, LLC,
a consulting firm specializing in strategic
business modeling and linkages to firm
performance. As a behaviorist, Pam’s
Pam Cohen Kalafut
The following is an excerpt from Invisible Advantage:
How Intangibles Are Driving Business Performance
(Perseus, June 2002) by Jonathan Low and Pam Cohen
Kalafut. For more information on this book and other
Invisible Advantage offerings, please go to www.invisibleadvantage.com.
nnovation has always been a key to business
success and wealth creation. It has always been
a central driver of economic development. But
when people say “innovation” they usually mean some
new invention, like the Walkman or the digital
camera. As important as such products may be, to
limit the discussion of innovation to new inventions
or technologies is rather like limiting a discussion of
marketing to the latest ad campaigns. It’s only the tip
of a rather large iceberg.
I
maximizing the utility of human capital,
and researching the role of emotions in
the workplace. Pam is the co-author of
Invisible Advantage: How Intangibles Are
Driving Business Performance.
In fact, a hallmark of the Intangibles Economy is that
product innovation is no longer sufficient to stay in
the competitive race. Rather, companies must innovate across a variety of fronts. The Intangibles
Economy encourages, thrives on, and in fact requires
companies to be innovative along many dimensions.
So, instead of banishing innovation initiatives to the
research division of a company, today’s organizations
must innovate in: services, business models, organizational structures, internal processes, profit zones,
alliances, marketing, and strategy.
Managing for Successful Innovation
There are four imperatives to managing intangibles in
today’s economy:
Disruption in a Networked World . . ., pg. 66
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work has focused on intangible valuation,
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Leadership: Make Resources Available
In summer 2000, Eli Lilly was in trouble. The term of
patent protection for Prozac, its blockbuster antidepression drug, had been challenged in court, and
Lilly had lost; according to the judge’s ruling, Prozac
would come off patent in a year rather than in three
years, as Lilly had hoped. The company’s stock
plunged, wiping out $36.8 billion in market cap.
Twelve months later, generic pharmaceutical maker
Barr Laboratories entered the market with its version
of the chemical in Prozac, at a price 20 percent to 40
percent less than the original. Lilly expected to lose
some $2.4 billion in annual sales, nearly a quarter of
its total revenue. “As CEO Sidney Taurel often points
out,” read one report, “no company has survived a
patent expiration of this magnitude without losing its
independence.”1
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Taurel, however, had done just what a leader in this
economy has to do: poured resources into innovation.
He increased the R&D budget 30 percent, brought on
700 new scientists, and ordered the company’s
researchers to focus on drugs capable of producing
more than $500 million in revenue. The result: “Lilly
now has a medicine cabinet stocked full of promising
new drugs, including treatments for schizophrenia and
for sepsis . . . Provided that management is able to
handle some significant challenges from regulators
and competitors, those new products could more than
offset Prozac’s loss in just 12 months.”2 Lilly shares
had partially rebounded by autumn 2001. Its market to
book ratio by then was higher than the pharmaceuti-
cal industry average and considerably higher than the
S&P 500 average.
Strategy Execution: Deliver on Your Innovative
Promises
Innovation is such a hot commodity in today’s
economy that companies are tempted to overpromise.
Software firms are notorious for announcing “vaporware”—programs that are nowhere near ready for
market—in hopes of discouraging competitors. New
companies routinely promise the sky—and as the
dot-coms showed, the sky is likely to fall in on
them. But even well-respected businesses such as
Palm Inc. can run into trouble from an inability to
deliver an innovation.
Palm’s troubles began with the economic downturn
of 2001. Sales of its hand-held computers were off,
and the company wanted to announce an innovative
new product right away in hopes of adding to its
revenues. Managers promised senior executives that
the product would be ready to go in two weeks. Palm
made the announcement, but in fact it would be six
weeks before the new devices—the so-called m500
line—were ready to ship in volume. Meanwhile,
consumers decided to hold off on buying older Palm
products. Sales slumped. So did Palm’s stock, which at
one point was down 95 percent over a 10-month
period. What happened? Poor execution, pure and
simple. Preoccupied with a new headquarters building, senior execs were paying little attention to
operations. A key operations-management job went
unfilled. There wasn’t enough time for testing the new
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“No leader can do everything that needs to be done,
because ideas about new products or production methods
often must come from others in the organization.
The question is whether a company stimulates or discourages
”
the creation and testing of new ideas.
Processes: Encourage Bottom-Up Innovation or
“Intrapreneurship”
No leader can do everything that needs to be done,
because ideas about new products or production
methods often must come from others in the organization. The question is whether a company stimulates
or discourages the creation and testing of new ideas.
At the level of workplace processes, the kind of
empowerment described in the previous chapter is a
requirement, along with a culture that encourages
and rewards suggestions for improvements. Companies can also stimulate the development of new
products and business units. 3M Corp. is legendary
for doing so; others have learned in the past few
years. Thus Royal Dutch Shell’s Exploration and
Production division went so far as to set up an internal “venture board” to review new ideas and business
plans created by division employees. Siemens’s
Strategic Business Development Group sponsors business-plan competitions.4
One key to success in all such enterprises is to
realize that many—perhaps most—new ideas may
be wrongheaded and that even seemingly promising
ones may wind up in failure. Strategy consultant
Gary Hamel makes the point with his usual flair for
colorful language:
Refining the Innovation Process . . ., pg. 21
In devoting themselves entirely to the pursuit of
efficiency, top management inadvertently drives
out the “waste” and “extravagance” that is the very
fuel of innovation. As top management strives for
ever greater efficiency, it must learn to tolerate
“stupid” ideas and “failed” experiments. After all,
when a man and a woman celebrate conception,
they seldom bemoan the 59 million little swimmers
that never made it.5
Brand: Manage for Innovation
Marketers long ago learned to manage line extensions, such as Bud Light and Crest mint gel, although
exactly how far a line can productively be extended
is always a matter of debate. But innovation of the
kind required in today’s economy adds a whole new
dimension to brand management. What happens to
a retailer’s brand, for example, when the company
puts some or all of its wares online? The customer is
no longer subject to the same kind of in-store
merchandising, can no longer be wooed by professional salespeople, can no longer touch and feel the
goods. So protecting the brand in this kind of innovation requires paying attention to a whole new kind
of marketing. How is the site presented? What goods
are sold on it? What kind of customer service and
back-office support is available? The answers will
differ from one retailer to another, but none can
afford to ignore the opportunities and constraints
presented by its brand.
The issues are even greater when a company branches
beyond into new business arenas. IBM has famously
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models, so the manufacturing subcontractor ran into
both design and performance problems. (In one
model, the battery didn’t fit.) Eventually Palm had to
lay off hundreds of people—and stop construction on
that new headquarters.3
78
recreated itself as a service company; its brand was
strong enough to support the new emphasis on delivering solutions to customers, as opposed to simply
delivering hardware. Had Hewlett-Packard succeeded
in buying the consulting division of PricewaterhouseCoopers (which it tried to do before acquiring Compaq
Computer), the prospects would have been much less
clear. Is the H-P name—so well known in one arena—
extendable into the wholly different arena of
management consulting? What has made Virgin so
successful in extending its brand is the fact that the
name stands for something—a style, a culture—that
transcends any particular business. It’s not clear that
the famous “H-P way” is anything comparable.
This list could go on, but we hope we have made our
point. Nowhere, perhaps, is the interaction between
one intangible and others so clear as it is in respect to
innovation. An innovative company—one that is effective—almost by definition is a company that manages
its other intangibles well.
Shared
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Demystifying Innovation, pg. 46
1. McLean, Bethany, “A Bitter Pill,” Fortune, Aug. 13, 2001.
2. Arndt, Michael, “Eli Lilly: Life After Prozac,” Business Week,
July 23, 2001.
3. Tam, Pui-Wing, “How Palm Tumbled from Star of Tech to Target
of Microsoft,” Wall Street Journal, Sep. 7, 2001.
4. Hamel, Gary, “Bringing Silicon Valley Inside,” Harvard Business
Review, September–October 1999; and Pinchot, Giffod,
Intrapreneuring: Why You Don’t Have to Leave the Corporation
to Be an Entrepreneur, Berrett-Koehler Publishers, 1999.
5. Hamel, Gary, “Innovation’s New Math” Fortune, July 9, 2001.
79
The Bionic
Organization
John Parkinson
Geoff Cohen
About the Authors:
Geoff Cohen is a manager at the Cap Gemini
Ernst & Young Center for Business Innovation
where he directs the research into emerging
technologies. His work focuses on wireless
trends, biological principles for software, and
the future of software development. Geoff
received a B.A. from Princeton University in
public and international affairs and a Ph.D. in
computer science from Duke University.
John Parkinson is the chief technologist of Cap
Gemini Ernst & Young. Before joining CGE&Y,
John worked in the Strategy and Corporate
Development Group and was the Director for
Innovation and Strategy for Ernst & Young in
the Americas region. He joined E&Y Consulting
Services in 1985. Originally from the U.K., John
holds degrees in maths and information
sciences from Exeter University. He has been
involved in the IT industry since 1969 and has
written or edited four books on IT systems
development.
or the past century, no economic force has
been more effective in creating and destroying
businesses than the accelerating pace of technological innovation. To thrive, indeed to survive,
companies must be able to quickly and effectively
capitalize on the opportunities created by new technologies. The dustbin of history, however, is full of
companies that rushed to embrace a technology only
to find that they did not understand how that technology would be used, underestimated barriers to
adoption, or failed to foresee unintended consequences. At a recent meeting of Cap Gemini Ernst &
Young’s Technology Advisory Board, a discussion of
emerging technologies dwelled on these very points.
Humans are key to the success or failure of technologies, and a better understanding of the business and
strategic opportunities created by technology can only
come through an improved grasp of the emotional,
cognitive, psychological, and social factors that
surround how, and if, humans use tools.
F
We Have the Technology
Most analysis of technology mentions Moore’s Law,
the observation that the density of transistors on
chips, and thus the processing power available,
doubles every 18 months. A lesser-known but equally
important law is known as Amdahl’s Law, named after
IBM engineer Gene Amdahl. Amdahl’s Law states that
as you speed up a single stage of a process, the overall improvement is limited by that stage’s share of the
total execution time. For example, if a stage consumes
20 percent of the total time, doubling the speed of
that stage only saves 10 percent overall. In other
Reflections on the Future of Software, pg. 71
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words, solving problems in one part of a system just
makes other problems look bigger.
Both of these forces are at work in technology today.
As Moore’s Law and similar trends relentlessly
improve processing speed and storage capacity, other
problems emerge as the limits to functionality. Like an
ocean tide receding, heretofore unseen shoals become
revealed. An obvious example is battery capacity: As
portable computers such as laptops and palmtops
become more and more popular, the need for longlived batteries becomes far more important, arguably
more important than processing speed. And yet a
laptop now runs for about two hours, the same as
some laptops five years ago—a far cry from Moore’s
Law. Similarly, while bandwidth delivery technology
has improved immensely, the cost of usable bandwidth is actually increasing. Consider that at current
prices, over the three-year life span of a typical
computer, you may spend more money on broadband
access ($1,800 to $3,000) than on the hardware (which
could be well under $1,000).
The most challenging issues, however, are those tied
to cognition and communication. It’s these human
issues that must be overcome to make technology,
especially software, more effective and useful.
Information technology particularly is increasingly
about enabling groups of humans, not just individuals,
to work more effectively. Unfortunately, the human
brain doesn’t follow Moore’s Law, and our imperfect
brains and, worse, imperfect understanding of our
brains, are both barriers to making great strides. This
affects issues ranging from user interface design and
manageability, to increasingly important features like
security and reliability. A key insight is that an enterprisewide service, such as security, is a process that
involves both technology and people, and effective
solutions must factor in the strengths, weaknesses,
and interactions of both elements.
We Have the Capability
The Web would change everything, we were told. As
the economy shifted to knowledge-based production,
the Web and other pieces of networked software were
supposed to revolutionize the way enterprises
learned, collaborated, and took action. It didn’t turn
out to be so simple. Years can pass between the
invention of a technology and its mass deployment.
Even when a technology is actually deployed, it may
not be used or may be used incorrectly.
There’s technology, and then there’s technology
adoption. “The Internet took 20 years to get ready for
overnight success,” pointed out Alan Kay. There’s a
lag, sometimes a lengthy one, between the invention
of a technology and when it becomes widely adopted.
This lag can be driven by many factors. One factor is
simply the cost and time necessary for the rollout:
This is at least one important reason why broadband
deployment has run so very slowly. Even installing
DSL as fast as possible, it will be many years before
everyone can be connected. Even when a technology
is widely available, however, that does not mean that
people, even in a corporate environment, will
embrace it.
Still Waiting for the Revolution . . ., pg. 16
While it is true that the accelerating pace of technology has been instrumental
in creating and destroying businesses for the past century, it is the human
element—the ability to understand and optimize technology—that holds the
key to success or failure. Human issues must be overcome to fully realize the
potential of technology. The most challenging issues—human cognition and
communication—need to be taken into account as more technology becomes
about enabling groups of humans to work more efficiently together.
abstract
A dramatic and familiar example of this is knowledge
management. Over the past years, many companies
launched, with great fanfare, large knowledge
management portals, only to see the knowledge in
them decay in usefulness over time as resources get
diverted. Increasingly, employees use simple e-mail
more often than expensive and complex solutions as a
way to exchange knowledge.
What’s so great about e-mail? You’re using it anyway,
so it doesn’t represent a new thing to learn or remember to do. Your social network is built in, since the
people you know best and feel more comfortable
interacting with are the ones in your address book
and your inbox. And finally, e-mail’s free-form looseness provides a low-overhead way to send a quick
note or attach a file. Contrast this to the extra effort
you must put in to use heavier-duty systems that have
lengthy forms and descriptions.
People—and organizations—generally do the thing
that makes the most sense, given their situation and
assumptions. Adoption can be influenced by people’s
perception of the value of the new application, as well
as by incentives (or punishments) to encourage use.
But we shouldn’t fight against activities like the use of
e-mail as a knowledge-sharing tool; instead, we must
understand and embrace the user’s point of view.
Organizational barriers can also limit the value of
technologies. Clay Shirky told a story of a bookstore
chain that used a data-mining system to monitor how
visitors were using its website. Analysis of the data
indicated that users were ignoring the editorial
content. When confronted with this fact, senior
management rejected the finding, insisting that editorial content was how they differentiated themselves.
The problem wasn’t the technology, but the organizational willingness to respond to the results. The
situation isn’t hopeless, however. Usama Fayyad countered with a story of a national upscale department
store chain. Suddenly, many visitors to their website
were entering “navel ring” into the search box. This
was puzzling, since the store offered no such product.
Looking into it, they discovered that a model in one of
their advertisements happened to be wearing one.
Within three days, the chain began stocking similar
navel rings in their stores and online.
We Can Rebuild It
The IT department’s ancestry was the white labcoated priesthood that tended the mainframe, often
the company’s sole computer, in a glass-windowed but
otherwise inaccessible room. Computers were expensive and difficult to operate, and using them required
a highly trained staff.
Today, the IT department faces just the opposite challenge: ubiquitous access to technology, with
employees able to install new applications or make
changes with little or no oversight. IT managers are
sometimes considered to have done a good job if they
have only avoided disaster. This drives a fundamental
conservatism; if nothing new is introduced, then
perhaps the environment can be controlled and nothing will go wrong. This is not to beat up on IT
managers; they are, after all, doing exactly the right
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“Today, the IT department faces a new challenge:
ubiquitous access to technology,
with employees able to install new applications
”
or make changes with little or no oversight.
thing, considering how their performance is measured.
And yet this mindset prohibits the most valuable
aspects of widely distributed computer and connected
assets: wide-ranging exploration, experimentation
with new applications and tools and languages, and
distributed learning as many employees find new
ways to use tools.
an intuitive user interface for any but the most superficial plasticity. Indeed, the more a software user
interface offers ease of use, the harder plasticity
becomes. Another cost is that with increased
customization, different users may in effect be using
different applications, reducing economies of scale,
and building barriers to knowledge transfer.
The irony is that the killer app of the computer isn’t
really a single application, but the plasticity of the
computer. That is, the ability to reform itself, to be
able to run new applications, to change the way it
works. IT departments that insist on a standard
load-set, with dire consequences to employees that
deviate, eliminate much of this plasticity. And yet
that plasticity is an ingredient in the organization’s
ability to adapt to new circumstances and expand
its capabilities.
These dilemmas imply a powerful, new potential role
for the IT department. Its role would be to respond to,
in fact support, these two antithetical forces: the need
for users to explore and customize, and the need for
corporatewide efficiencies and a shared language. The
way to do this is to shift focus away from maintaining
applications, toward promoting standards and protocols, promote user education (not merely training),
and package and offer centralized capabilities as
services, not as applications. Only as a second-order
concern should IT departments “clean up” after users,
optimizing and standardizing those applications that
the users adopt. Finally, the IT department can serve
as ambassadors to other enterprises, meeting the
wider need for common vocabularies and shared
protocols and taking advantage of opportunities for
collaboration and commerce in services.
The value of plasticity isn’t always easy to see. When
Alan Kay and his team at Xerox PARC demonstrated
the prototype of the Alto, the first graphic interfacedriven computer, to Xerox executives, their response
was “what’s its application?” The researchers’
response was that it wasn’t any one application, it
was the very ability to run any application. “Yes,” the
executives replied, “but what’s its application?”
Eventually, Xerox decided to commercialize a singleapplication word processor instead of the Alto. It was
clear to them what its application was.
Furthermore, taking advantage of plasticity isn’t without cost. It requires a good deal more education on
the part of users; as yet, no software interface offers
IT departments specifically and technology vendors in
general need to improve their insight into users’
language. Like the e-mail example earlier, users have a
specific set of needs and patterns of behavior that
cannot be changed on demand. Successful applications must start by using the user’s existing language
and assumptions. Yes, new languages and behaviors
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can be introduced, but only by providing pathways to
users to migrate from the old to the new. One way to
do this is to encourage the gradual adoption of new
behavior, in sharp contrast to existing interfaces that
generally make it difficult to find out about unused
functionality, much less include it in a limited repertoire of knowledge without a great deal of training or
a drastic change in usage behavior. Meeting these
challenges will be necessary for any software applications any more complicated, feature-rich, or
sophisticated than those we have today.
Better . . . Stronger . . . Faster
We asked the members of the board what they
thought the interesting new features would be in
technology in the next few years. One danger in
predicting the future is assuming that the whole world
is like you. Although we try to take a global point of
view, the fact remains that we’re living in North
America, and it’s hard to avoid making invisible
assumptions. How will electronic technology be
adopted in China, for example, or the Middle East?
Will it be used the same way in rural India as it is in
Silicon Valley? These questions can really only be
answered with time, and yet it does seem that if you
look at adoption and penetration curves, different
regions of the world begin to look pretty similar, only
starting at different times.
This isn’t to say that technology is used the same
everywhere, of course, or even that North America is
always ahead of the pack. Certainly, the northern
European and Japanese markets have embraced wireless telephony service faster and more firmly than
have Americans. Similarly, the huge success of
“texting,” or Short Messaging Service, in Southeast
Asia and Japan, has been largely ignored in the U.S.
market. These differences are results of many factors,
including different regulatory schemes, existing fare
structures on telecommunication, and social norms
(such as the acceptability of speaking into a phone in
a public place such as a subway car).
Yet another difficulty in making predictions relates to
what seems to be a real difference in the usage
patterns between generations. Those over 30 are, in
general, unlikely to have used Napster or instant
messaging. For the under-30 crowd, these applications
are a standard part of life.
With those caveats, the board discussed a number of
technology trends from the near to the distant future,
including the arrival of consumer networks, advances
in user interface design, and the establishment of
biological models of computing.
Consumer devices are nothing new, but with the
proliferation of digital media available, the ability for
these devices to be able to communicate is becoming
an important feature. At the same time, the availability of wireless home networking means that nest of
cables connecting stereos, DVD players, computers,
cable boxes, etc., may go away. Using this network,
the output from any box can be routed to any other
device in the house. Entertainment isn’t the only
application; telephones, security, environmental
control may all work with this system. Furthermore,
the technology isn’t limited to the house; the no-
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wires, many-device features make this extremely
attractive for automobiles as well.
There hasn’t really been a significant advance in user
interface design for software since the now-familiar
overlapping windows interface. The progress remaining to be made is not so much around ease of use, but
in the ability to augment the effectiveness and
productivity of the user. With the increasing amount
of information easily available, the challenge is to
improve the user’s attention, focus, and short-term
memory and to do so with appropriate levels of intrusiveness. The one place where there is a great deal of
experimentation and innovation in user interfaces is
in gaming, and clues from this space may provide
hints of the steps forward.
Farthest out, but potentially with the greatest impact,
is the advent of biological models for computing.
Today, computation is thought of as a mechanical
process, more akin to engineering than neuroscience.
A number of software researchers, however, believe
that by borrowing techniques and organizational principles from biology, they can make software that is
more adaptive, robust, and better suited for human
applications with all their messiness. There are plenty
of early signs of this, including neural nets, genetic
algorithms, digital immune systems, and self-healing
routing networks. And yet these techniques often
borrow only a mechanism, without changing some of
the fundamental assumptions and architectures found
in software today.
The Six-Million Dollar Idea
It’s actually old hat for consultants to say that
you must consider culture and process as well as
technology. What’s new in this discussion is an
acknowledgement that it’s not enough to say that
you’ll shape the people to fit a new technology. In the
past, the assumption has been that it is in fact possible to get people to use a new technology if only you
can provide the right training, incentives, punishments, or management.
But the discussion of the board delivers quite a different message: that there are kinds of human behaviors
that aren’t amenable to change, and that it’s better to
alter the technology to fit human needs. The late
Michael Dertouzos observed in his last book, The
Unfinished Revolution, that all too often, humans are
at the service of computers, rather than the much
more desirable opposite. To take full advantage of
new technologies, to really enable the widest range of
possibilities opened up by innovation, we must make
sure that technologies aren’t designed in isolation
from their eventual users; technology ought to help
us, to shore up our weak points, and to magnify our
strong points. Without ignoring or dismissing our alltoo-real human limitations, technology ought to make
us better at being human.
Open Source . . ., pg. 59
85
WELL-READ MANAGER
Za Za Za Zoom!
When You Don’t Know Where You’re Going,
for Heaven’s Sake Go Faster!
Well-Read
Manager
Larry Keeley
Book Review
Survival Is Not Enough: Zooming, Evolution, and the
Future of Your Company
by Seth Godin
(Free Press, January 2002)
eth Godin has built a meteoric career capturing
the essence of a marketing moment in clear
phrases, packaging them well, then making his
insights available in books, e-books, personal
speeches, websites, and consulting. His latest, Survival
Is Not Enough, continues the signature approach he
used to make a big splash with earlier books,
Permission Marketing (1999) and Unleashing the
Ideavirus (2000).
S
There is always a core of pragmatic insight in Godin’s
works. Permission Marketing offered an opinionated
indictment of mass marketing and urged readers to
realize that they’re not alone in hating spam, since
everyone does. Such an insight might seem selfevident, but Godin goes to lengths to persuade people
of this position and to take it seriously enough to deal
with the consequences. Unleashing the Ideavirus built
on this to suggest that ideas can be infectious if they
are “smooth” enough, have the right “vectors and
velocities,” and especially if “powerful sneezers” like
Oprah transmit them.
As this summary suggests, Godin is fond of adapting
au courant ideas in the sciences to coin new marketing phrases. His newest book repeats this formula,
simplifying select ideas of evolution and trying to
embed them in the catchphrase “Zoom.” Godin wants
Zoom to be a verb that companies adopt, meaning: “To
move quickly without pain. People who zoom can
embrace change at work and at home. If you’re open
to new ideas and can see the opportunity that chaos
brings, you know how to zoom.” There is also a “zooming process” that companies need to adopt urgently—
though help is available in the form of five starter
steps you can begin tonight, plus a handy lapel pin
you can display once you “get it.”
To some this may seem like a distant echo of the time
in 1976 when Gerald Ford introduced the Whip
Inflation Now lapel pin. The “WIN” pin proved a real
loser—perhaps because the President of the United
States is not a good enough sneezer. It is too soon to
tell if Godin’s “Zoometry” will share a similar fate. But
it is possible to summarize his latest insights and mine
them for useful principles.
“Don’t know” vs. “Can’t know”
Sometimes it is fun to tease little kids. Never in a
mean way, of course, just merely to see how the
neural logic paths are getting wired up in their frontal
lobes. Kids of a certain age think it perfectly reasonable that an airplane might land in their bedroom or
that ice cream comes from very cold cows.
Once past this stage of phantasm—a tragic loss of
innocence that has many of them well on their way to
becoming McKinsey analysts—another class of fun
comes along. Try posing a logic trap. You ask a kid
how old she is. “Five and a half!” comes the answer.
86
Well-Read
Manager
well-read
“Huh,” you say. “You must be very advanced. Why,
when I was your age I was only four.” After a pause,
wait to see how much confusion reigns. The really
smart kids will be especially confused.
Ah, then raise the stakes with a dilemma. Try the old
George Carlin routine: God is so powerful He can do
anything, right? “Right!” comes the response from the
precocious little one. So can He make a rock SO big
that He Himself can’t lift it? Another long pause . . .
One time the tables got turned. Faced with such a
dilemma, one cute child held his head in his hands,
plopped down smack onto the floor, rolled around a
while, scrunched his eyes shut tight, then gave up. “I
can’t know!” he declared, in obvious exasperation and
at the end of where his hot little wits could take him.
In that moment dawned an enduring principle of
understanding. There is a fundamental difference
between questions that may be knowable and those
that—no matter what you do or how much effort
you put in—are simply not knowable at all. Wise
people need to sense which class of problem they
are wrasslin’ with: those that may be bloody hard
but can be cracked vs. those that are impossible to
resolve now.
The Challenges of Planning at Sony
This simple dichotomy appears routinely in corporate
life. Everyone knows the famous story of the Sony
Walkman. Faced with overwhelming market research
“proving” that the device would be a dud, Akio Morita,
Sony’s then CEO and Chief Gadget Enthusiast simply
said, “I like it, so we will build it.” Fewer people know
the long-term effects of this dictum. For two decades
after this accidental mega-hit, marketing research was
the department reserved at Sony for the complete
screw-ups they wouldn’t fire. The new orthodoxy was
that it was impossible to know what people wanted,
so you should simply build lots of cool stuff and make
more of whatever people seem to like.
Central Tenet: You Can't Know Anything
About the Future
Seth Godin would say that the important part of this
story is just that—Sony doesn’t do a good job of
predicting which products will be a hit because it
cannot know. Indeed, he goes further. Godin thinks
we have entered a time of such intense, permanent
turbulence that nearly every situation is too tough to
understand. This puts him firmly in the Yogi Berra
School of Advanced Planning: “Prediction is very hard.
Especially when it involves the future.”
He supports this thesis with one of many ideas he
pulls out of the hot-at-the-moment evolutionary biology toolbox. In 1973 evolutionary biologist L. van
Valen observed that species evolve to improve their
fitness, but that in an ecosystem filled with competitors this is really co-evolution—trees get taller to steal
more sunlight, so other trees get taller too. Sure, you
end up with taller trees but no relative increase in
fitness of one species over another.
Borrowing the name from Lewis Carroll’s Through the
Looking Glass, van Valen called this the “Red Queen”
principle. As alert readers may recall, in the original
The CBI Future Scan . . ., pg. 53
87
“Godin describes strategy as
“based on one fundamental assumption:
We can predict the future and influence its course through our actions.”
The straw man all propped up,
”
Well-Read
Manager
Godin then blasts away at it with a bazooka.
manager
story the Queen was frustrated by all the pieces
moving at once. She said, “In this place it takes all the
running you can do, to keep in the same place.” In a
fashion typical of this book, Godin interprets van
Valen's narrow biological concept very expansively.
His conclusion: Every move you make alters the
makeup of the entire market and your competitors
will rapidly respond. Ipso facto: You can’t know
nuthin’ about the future.
Hyperbole can be fun. It can even be a useful
technique for clarifying a trend ahead of general
acceptance. Still, before we rush off zooming, it
would be good to know if this assertion is true.
Specifically: Is it true about all things all the time,
all things some of the time, some things some of the
time, or what? Such an evaluation is important
because the case for zooming hinges on accepting that
we are in a permanent state of turbulence in the
midst of which nothing can be known, nothing
predicted, and nothing optimized.
Godin describes strategy as “based on one fundamental assumption: We can predict the future and
influence its course through our actions.” This straw
man all propped up, Godin blasts away at it with a
bazooka, saying, “I don’t know is the only true thing
you can say about the future.” Apparently strategists
have been delusional for a long time, maybe decades.
Is this fair? It seems unlikely that any thoughtful
strategist anywhere would agree with Godin’s characterization of her beliefs. A more nuanced, much more
accurate statement would be something like: Although
there are an infinity of things you could try, certain
basic patterns of resource allocations tend to produce
the most predictable results. This leads to some
enduring principles. Having low costs matters. Being
differentiated is a plus. Knowing what customers you
are trying to serve and serving them with intensity
can work.
Peering Into a Foggy Future
In a time of volatile change it would be silly to
staunchly defend conventional wisdom. But neither
should we rush to discard every principle that once
worked on a loose assertion that everything is somehow suddenly and permanently different. Such
precipitous action would be very Chicken Little of us.
Nevertheless, much of the intellectual underpinning of
Survival Is Not Enough, hangs on our accepting this
precise form of reasoning and implores us to give up
planning and get busy “zooming.”
This line of reasoning always appears in times of
change and adaptation. Some readers may recall Alvin
Toffler’s Future Shock from 1970—a book with a tone
eerily similar to Godin’s, providing an argument that
the pace of change was suddenly much too great to
permit human adaptation so that calamitous futures
were inevitable. Toffler himself backed off these views
a few years later, essentially reversing himself
completely by the time his much better book The
Third Wave came along in 1980.
What Toffler learned and Godin may yet discover is
that change may occur at astonishing rates sometimes,
but humans are remarkably skilled at creating non-
88
“Godin’s primary advice is to
overlay one über strategy above all others:
Build a company that’s so flexible and responsive
”
that you don’t care what happens.
Well-Read
Manager
linear innovations in response. After Ma Bell
projected that it would need to hire half of all U.S.
women (it never imagined it might hire men!) to be
operators, it created entirely new forms of switches to
displace this role. When its help desk costs ballooned
out of control, FedEx did the same by making the
system simple and accessible enough for customers to
track their own shipments. Significant stages of human
progress—internal combustion, flight, semiconductors,
radar, antibiotics, vaccines, genetic engineering, many
others—have occurred routinely when teams learned
to take something that seemed impossible, but
cracked it in a novel way.
This is precisely what is happening now as tough planning problems are yielding up their mysteries to new
forms of modeling and simulation that Godin seems
unaware of. Josh Epstein’s work with “Sugarscapes,”
new techniques for preference modeling, new algorithms for risk analytics, new forms of sensors, and
many related techniques are giving us more sophisticated methods than ever before to take hard
prediction problems and handle them as if by magic.
So it is patently not true that nothing can be known
about the future. It is merely hard to know some of
the most valuable aspects about it—and it has become
a very exciting frontier in science, economics, marketing, and management.
Enduring and Useful Themes
Godin’s primary advice is to “overlay one über strategy above all your others: Build a company that’s so
flexible and responsive that you don’t care what
happens.” Godin believes he can help individuals, then
teams, task forces, divisions, and even entire companies to overcome the nearly universal human
(mammalian?) belief that change is dangerous and
should be resisted.
Not many are brave enough to rail against native
behavioral instincts. Just try to get a cat to stop stalking whatever is moving no matter how much dry cat
food is piled in her dish. But this part of Godin’s argument is compelling. He points out that some daily
behaviors exhibit the kind of willingness to experiment that he finds virtuous: buying a new CD when we
don’t know all the music on it; buying tomorrow’s
edition of The New York Times even though we read
today’s; trying an unfamiliar food once a day, just
because it is unfamiliar.
The logic here comes again from a pick-up piece
of evolutionary biology. Godin reminds us that
evolution has no direction—no central control agent,
no governing authority. This portion of the book
plows familiar ground and does so less powerfully
than does Kevin Kelly in Out of Control or Richard
Pascale in Surfing the Edge of Chaos, among others.
But he makes these ideas accessible and connects
them well to the kinds of real-world judgments
managers are often called to make.
Seth Godin believes that if we habituate change,
especially if we embrace simple, constant change
without waiting for a clearly articulated objective,
then we are better suited for these times. He draws
a sharp distinction between this advocacy and the
Innovation-Based Sustainability . . ., pg. 27
Well-Read
Manager
89
well-known field of change management. His beef
with those specialists is their focus on episodic
change, change around a plan, after which a new
stability can be attained.
The world would likely be a better place if people
could turn off their reflexive fear of the unfamiliar at
will. These deeply ingrained habits were once necessary to survive. Godin believes we need to actively
change them to thrive.
On Beyond Fast Feedback
All of Seth Godin’s books provide clear, actionable,
pithy advice that managers can put to practical use.
The prescription at the heart of Survival Is Not Enough
has much to recommend it. In particular his focus on
rapid action, many experiments, and fast feedback
loops to reveal what is working is sound advice.
Almost any enterprise that institutionalized this practice would be better off.
Newer kinds of planning methods such as sciences
around pattern recognition, preference modeling,
simulation, and risk optimization also have a place in
the future. If Godin takes these principles into
account, his next book will be even richer. Savvy
companies ought to try more things to be sure. And
they ought to be obsessive about detecting which of
these trials work well, as Godin advises. But strong
leaders should still bring some sense of intention and
direction to these efforts. Otherwise, experience
shows that overall business performance may be
merely random.
Larry Keeley is president of Doblin Inc., an innovation
strategy firm with offices in Chicago and San
Francisco. He is a Fellow of the CGE&Y Center for
Business Innovation.
Recommended Reading
Hyperinnovation:
Multidimensional Enterprise in the Connected
Economy
Chris Harris
Palgrave Macmillan, July 2002
Innovating at the Edge
Tim Jones
Butterworth-Heinemann, June 2002
What Genes Can't Do
Lenny Moss
MIT Press, June 2002
Small Pieces Loosely Joined: A Unified Theory
of the Web
David Weinberger
Perseus, April 2002
F'd Companies
Philip Kaplan
Simon & Schuster, April 2002
Cultivating Communities of Practice
Etienne Wenger, Richard McDermott, William Sydner
Harvard Business School Press, March 2002
Digital Aboriginal: The Direction of Business Now:
Instinctive, Nomadic, and Ever-Changing
Mikela Tarlow, Philip Tarlow
Time Warner AudioBooks, May 2002
90
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91
RESEARCH ROUNDUP
Special Items Research Roundup
I
Our research at the Center for Business Innovation
revealed that adaptation was a vital characteristic of
successful businesses amid this volatility. We define
an “adaptive” organization as one that is able to sense
and respond to changes in its environment and learn
from these responses to change its behavior and
evolve. In our research into adaptability, we began to
analyze the increasing frequency of companies that
declared “special items” in their financial statements.
Taking an adaptive view of the economy, we reasoned
that companies that declare large special items are
less adaptive than companies that do not. The logic
for this is that the companies that don’t declare
special items are able to use their existing systems
and approaches to respond to changes in their
business, while companies declaring large special
items are acknowledging the inability of their businesses to adapt.
Special items are non-recurring costs, or less often,
gains, that are excluded from a company’s reported
earnings. Special items can include one-time restructuring charges, asset impairments, product recalls,
inventory write-offs, or quite commonly, merger and
acquisition charges. They can be any size and be taken
any time of the year. A recent example of a sizable
special items filing is the $4.1 billion charge announced
by Ford in January of 2002 to account for a restructuring program that included five plant closings and
severance pay for 35,000 recently fired employees.
Special items should be distinguished from extraordinary items. The latter must be both unusual and
infrequent, such as a fire, flood, or earthquake.
Notably, the September 11th terrorist attacks did not
qualify as an extraordinary item. The SEC cited the
difficulty in separating losses due to the attacks from
losses stemming from other factors.
Part of our research focused on the companies in the
Standard and Poor 500, and another part analyzed the
firms in the Russell 3000 Index, the most valuable
firms in the U.S. in terms of market capitalization.
Examining financial filings and various indicators of
financial performance from 1982–2000, we tracked
Research
Roundup
Connectivity Reinvents the Rules . . ., pg. 7
Research
Roundup
n our current economy, the unprecedented
degree of connectivity of people to people and
people to information has made the business
world function at a blurred speed. Moving beyond this
truism that has become a cliché, the Center for
Business Innovation reasons that our current economy is dominated by the increased market volatility
that is a direct result of ubiquitous connectivity. As
the number of connections between nodes in a system
increases, each node is exposed to many more threats
and opportunities. The system thus behaves less
predictably and is more likely to exhibit unforeseen
properties. That is why our connected economy is
characterized by an increasing frequency of calamitous events and explosive corporate growth. Stock
markets are their most volatile ever, the number of
business failures is increasing and CEOs are turning
over faster than ever, and corporate results are
becoming less predictable.
92
“The increase in special items declarations is real
and can be seen as a reflection of increased market volatility,
shifts in accounting practices to describe unusual gains and losses,
and more managers realizing the impact
”
of financial statements to affect market perception.
research
the frequency of special items declarations, extraordinary items declarations, and compared the
performance of firms that declared special items and
those that did not or took minor charges. One of our
hypotheses was that firms declaring relatively small
special items charges—less than 10 percent of income
over a five-year period—were handling the volatility
of the market nearly as well as those companies with
no declarations. Declarations of special items equivalent to 10 percent of annual income or less is a small
amount considering that some firms declared special
items in excess of their annual income.
Our research revealed a number of valuable findings:
· The number of S&P 500 firms declaring special
losses has grown from 68 in 1982 to 233 in 2000.
This supports our thesis that the world has
become more volatile, resulting in a larger
number of firms that cannot adapt their business
to account for changes in their environment.
■
Research
Roundup
■
During the last 10 years, firms that did not
declare special items or took minor charges
performed significantly better than those that
did. Those that did not declare special items
had a 3 percent higher annual growth rate in
earnings—a sizable difference. In arriving at the
3 percent differential, we even ignored the
special losses when comparing annual income,
so that companies declaring special items would
not be penalized.
■
Companies with more volatile earnings had
higher earnings growth than those companies
with less volatile earnings. Over the last 10 years,
the earnings of more volatile firms grew at a 30.5
percent annual rate, while companies with more
stable earnings grew at a 13.1 percent annual rate.
What hypotheses can be built upon our findings?
First off, the increase in special items declarations is
real and can be seen as a reflection of increased
market volatility, shifts in accounting practices to
describe unusual gains and losses, and more managers
realizing the impact of financial statements to affect
market perception. Companies legitimately want to
separate non-recurring charges to present what they
consider to be their true operating cost and earnings.
Because firms that classify losses or gains as special
items, however, perform worse in the market than
those that do not, companies that can adapt to
account for unforeseen, one-time events are more
likely to be more profitable.
In addition, having variable earnings can be beneficial, so long as an organization’s structure does not
force it to account for losses and gains in a special
category. Therefore, forcing stability upon your earnings as a manager or demanding stability as an
investor may be counterproductive. Our findings also
suggest a different type of performance structure is in
place in more successful companies. These companies
are better able to change in response to the changes
in their business environment—they can do so without
having to make structural readjustments.
93
The Center for Business Innovation’s research into
special items is part of our larger focus on how a
company can become an Adaptive Enterprise. Our aim
is to help organizations thrive in economic volatility
by becoming permanently adaptive. We believe that
adaptation is what separates the most successful organizations from their competitors, as well as being a
major reason for financial growth in our increasingly
chaotic economy.
Research
Roundup
If you would like to learn more about the CBI's
research on special items, please contact Prabal
Chakrabarti at prabal.chakrabarti@us.cgeyc.com.
Roundup
94
RESEARCH ROUNDUP
Decisions That Matter
esearch at the Center for Business
Innovation (CBI) demonstrates a dramatic
shift in value creation over the past
decade. Formerly, investors’ understanding of a
company’s value resulted from analysis of audited
financials such as a balance sheet and income statement. Today, however, a more accurate and
comprehensive view of a company’s value needs
to account for intangibles such as brand value,
alliances, and customer relations. Decisions that
Matter is one report in a portfolio of research studies
undertaken by the CBI. The purpose of this body of
research was to determine which intangibles are most
relevant to business managers, how to quantify their
value, and strategies to manage and improve a
company’s intangibles.
R
Research
Roundup
In 1998, with the support of Forbes ASAP and professors at the University of Pennsylvania’s Wharton
School, the Center for Business Innovation conducted
an online survey of business people. We polled
respondents on what they regarded as the key drivers
of value in their companies. We defined key drivers as
the financial and nonfinancial factors that they
thought helped them create value as managers of
organizations. The second part of the survey asked
what type of information they were accumulating to
help them measure and understand those value
drivers, and whether they were satisfied with the
quality of the information.
The results surprised us: 81 percent of respondents
said they received very poor information on the intan-
gible value drivers in their company. Surprisingly
these managers felt uninformed about the factors of
business success they thought were actually most
important in their company.
A couple of months later, at a Forbes executive
conference, we used the conference’s automatic audience response system to survey the audience of CEOs
and high-level executives. We imagined that since the
people in the audience were the people who decide
what information to measure, surely they would be
satisfied with the data they accumulate about the
drivers of value in their company. What did we find?
Seventy-one percent of these chief and senior executives rated the information they provided and
received about their value drivers as extremely poor.
The results of these surveys suggested that managers
in large corporations were suffering from a major gap
in the information they value and the information
they have. Because of these initial findings, the CBI
launched the study Decisions that Matter. There were
two main objectives of this recently completed study.
First, we wanted to identify the critical nonfinancial
drivers of long-term economic value from the
perspective of senior managers. Secondly, we wanted
to assess the financial consequences of a major gap
between the value drivers managers rated highly and
the quality of the measurement of those drivers. We
wanted to know if the presence of information gaps
was reflected in a company’s financial performance.
In our initial research we surveyed CFOs and other
high-level executives controlling capital allocation in
95
Research
Roundup
■
Short-term financial performance
Annual earnings, return on assets
·
●
■
Customer relations
Market share, customer satisfaction, customer
loyalty/retention
●
■
Employee relations
Employee satisfaction, employee turnover,
workforce capabilities
·
●
■
Operational performance
Productivity, on-time delivery, safety,
cycle time
·
●
■
Product and service quality
Defect rates, refunds/returns, quality awards
·
●
■
Alliances with other companies
Joint marketing, joint research and development, joint product design
·
●
■
Relations with suppliers
On-time delivery, input into product/
process design
●
·
■
Environmental performance
EPA citations, environmental compliance
●
·
■
Product and service innovation
New product development, product development cycle time
●
·
■
Community
Public image, community involvement
●
After measuring the gap between the value executives
placed on these value drivers and the information
they collected about them, we analyzed the financials
of each of the companies participating in the survey.
We then compared the gaps with various measures of
financial performance to see if there was any noticeable relationship. Most importantly, we did not
directly measure the relationship of, for example, a
major gap in environmental performance with fiveyear net-income growth. Instead, we measured the
companies’ overall financial performance with the
overall findings on their gaps. We felt this was vital to
accurately determining the relationship of a
company’s gaps with its success in the market.
Major Findings
Both surveys in this study demonstrated that a majority of executives in every industry believed that there
was a disconnect, or gap, between the drivers they
felt were critical to their company’s success and what
was being measured and reported to the investment
community. Executives rated the aforementioned 10
value drivers ranging from not at all important to
extremely important in reference to their impact on
The Invisible Advantage of Innovation, pg. 75
Research
Roundup
a specific industry, namely financial services. In the
second phase of research, we wanted to test our
findings in a cross-industry selection and surveyed
similar high-level executives in control of corporate
finances in many different industries. Our analysis
ranked the executives’ perception of the importance
of 10 value drivers and their ability to measure
them. Respondents were asked about the following
value drivers:
96
organizational success. When the respondents were
asked how well their companies measured these critical factors, however, the majority reported their
company’s efforts were inadequate.
In the financial services study, our research showed
the largest gaps between value drivers and corresponding measurement systems were in relations with
customers, relations with employees, and product and
service quality. Companies that possessed better
measurement systems, and thus had smaller gaps, in
customer relations, operational performance, alliance
partners, supplier relations, environmental performance, innovation, and community relations had
better return on equity, better one-year and threeyear stock returns, higher five-year growth, and higher
five-year net-income growth.
Research
Roundup
In the cross-industry study, relationships with suppliers and alliance partners had the most significant gap
between the value the executives placed on them and
their ability to measure them. Companies that had
smaller gaps in customer relations, employee relations, operational performance, product and service
quality, and innovation were found to also have
higher return on equity, better one-year and threeyear stock return, and higher five-year sales growth.
Both studies demonstrated that better use of performance measures, and correspondingly smaller gaps, in
key areas correlated to better long-term and shortterm financial performance.
Demystifying Innovation, pg. 46
The CBI’s research on intangible valuation is entering
a significant stage. Along with our Decisions that
Matter study, which reflects the financial community’s
opinions on intangibles, is our Measures that Matter
study, which demonstrates which nonfinancial factors
analysts look at in measuring companies' value, and
our Value Creation Index, which examines publicly
available data to rate the intangible assets of
hundreds of companies across industries. The Center
for Business Innovation and Cap Gemini Ernst & Young
are now using this research to provide companies with
strategic insights into how to better measure, manage,
and improve their intangibles.
Please contact Jonathan Robinson at
jonathan.robinson@us.cgeyc.com or see our
website, www.cbi.cgey.com for more
information about this research.
97
INCONCLUSION
The Obscure Patents
Hall of Fame
Mark Maggiotto
Motorized Ice Cream Cone
e all know people who claim to have
dreamed up the next great invention.
Maybe they even have a prototype of
their idea in the basement. We have all seen the
commercials, beckoning fledging innovators to buy an
“inventor's kit” that includes instructions on how to
apply for a patent. But what are these fledgling inventors coming up with?
W
A toe puppet? That's just one in our sample of obscure
patents assembled by Delphion, an intellectual asset
management group that claims its products transform
the world of intellectual property. While all of the
inventions below were concocted through a creative
process, are surely distinctive, and solve some everyday problems, cool party tricks still don't account for
real impact. Maybe these patents are simply ahead of
their time, but for now, however, we suggest you stay
away from the basement.
umbrella over the length of your automobile. The
Sun Shield can be also transferred from your roof
top to your trunk in minutes. Aspiring innovators
may want to see if the Sun Shield could be built to
rapidly rotate, thus providing the added bonus of
allowing car owners to helicopter to their destination
when in a hurry.
Motorized Ice Cream Cone US05971829
Ever get tired or bored with constantly licking your ice
cream cone? Well, this invention makes the cone do
all the work. Simply stick out your tongue, and the
cone rotationally feeds the ice cream to you and your
outstretched tongue.
Toe Puppet US0580035
These party stoppers can be mounted on any of your
ten toes to create animated motion of a figurine. The
creativeness of these pedi-puppets lies in that they
are puppets adapted for toes, and that the inventor
created a hollow chamber that supports the figurine
some six to 12 inches above the digits of the foot,
where it dances when you flex your toe.
Inconclusion
Sun Shield for Automobiles US04805654
For those of us for whom windshield sunglasses are
not enough, this invention protects your car from
damaging effects of the sun by suspending a cloth-like
98
Method and Means for Creating
Anti-Gravity Illusion
Method and Means for Creating Anti-Gravity
Illusion US05255452
Ever thought that Michael Jackson defied the laws of
nature? Well, you were right, although you might not
have known that it was because of the shoes he
wears. Using specially designed heels, the King of Pop
can temporarily lock into a hitch on stage, providing
himself seemingly impossible balance.
Biodegradable Toothbrush US05213428
Designed to fit over a user’s index finger, these toothbrushes are made out of biodegradable plastic and are
designed to be
disposed of after
one usage. To
boot, the bristles
of the toothbrush
are “impregnated”
with dehydrated
toothpaste, which upon contact with water are
hydrolyzed to aid in the brushing of teeth.
Inconclusion
Method of Exercising a Cat US05443036
For those of you with a fat cat who is also apathetic,
this patent covers an exciting new game that might be
exactly what your cat needs. By directing a beam of
light from a hand-held laser apparatus in an irregular
pattern in front of the cat, you can stimulate its chase
instinct and get it burning carbohydrates in no time.
Another cheaper alternative is buying a ball of string.
Self-Containing Enclosure for
Protection From Killer Bees
Self-Containing Enclosure for Protection From
Killer Bees US05571247
An apiphobic’s dream come true, this invention just
leaves us asking one major question: Why not just
stay in the house?
Levitationarium for Air Flotation of Humans
US04457509
If you ever wondered where the word levitationarium
was coined, look no further than this patent. This
invention describes how a building, room, or chamber
may be constructed to produce an upward airflow
powerful enough to levitate human beings.
Gravity-Powered Shoe Air Conditioner
US05375430
Using the normal pressures of the human foot working
as its catalyst, this invention can be incorporated
into shoes to create either a cooling or heating
system. While useful, the “killer app” for this invention might be a modification that also improves the
smell of shoes.
Greenhouse Helmet
US04605000
This plastic dome
completely covers your
head and allows you to
breathe the oxygen given
off by the potted plants
resting on platforms
above your ears. Whether this invention will ever be
widely adopted is unclear, but it definitely gives new
meaning to the expression “pot-head.”