The Innovation Manual

Welcome to the Innovation Manual (Wiley, 2009)

The PURPOSE of this site is to introduce the book and share key lessons about innovation.

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“A definitive book destined to become a key reference for executives and managers. Solidly based in theory and best practice, comprehensive in coverage and oriented to action. The title says it all, a manual for innovators, everywhere!”

Pierre Pringuet, Chairman and CEO, Pernod Ricard

The Electric Car’s Even Bigger Challenge

I was reading an interesting blog on the Blue Car from Bolloré, yet another entrant into the race to bring a workable electric car to market. (http://innovtoday.wordpress.com/2010/01/29/can-bluecar-create-an-upset-in-the-auto-industry/).  The Blue Car will use a more advanced battery than most (LMP-Lithium Metal Polymer) and that is interesting in itself.  However, following from my blog on the Apple iPad, I started to think about the marketing challenge of getting people to buy electric cars.  Of course this marketing challenge also goes to the design and technological choices of electric car suppliers.  If electric cars don’t deliver the right benefits people won’t adopt them. 

The first problem for electric cars is that no innovation succeeds unless it is (1) as good as the existing technology in all-important areas and (2) brings an advantage over the existing technology.  So far most electric cars fail on the first issue.  They do not have the range, performance or carrying capacity of hydrocarbon-fuelled cars.  Now I will agree that statistics show most people don’t drive far on a typical day, nor in congested cities do they drive fast.   Also the typical car on the road has one person in it. So on paper electric car performance is fine.  But it is not fine in my mind—I might want to drive from Fontainebleau to Nice next week and I don’t want to have to charge or change my battery every 200kms, or worse get stranded in the countryside.  Or I might want to go to Germany and drive at 180kph on the autobahn.  Or I might want to take my family of four on a vacation. Thus most electric cars do not reach parity in people’s minds, which in turn means they never consider the advantage of zero pollution or cheaper operation.  There are electric cars that do better on some of these points.  Tesla has a sports car whose performance is stellar (electric motors are inherently better for car performance than petrol or diesel engines because they produce maximum torque at zero revolutions).  However, it still has a range problem.  You can burn rubber but not for long.  Bolloré are silent about the range of their Blue Car on their website (http://www.bluecar.fr/en/pages-accueil/default.aspx). But since their LMP battery can store several times more energy than the laptop battery technology other manufacturers use it will likely have a better range than the Tesla Roadster while having similar acceleration.  The Blue Car also seats four but is not a car for the German market as it cannot go more than 130kph. 

The second problem for electric cars is the psychological status quo or ownership bias. What I own (in my case a turbo-diesel car) is psychologically worth more than an objectively equivalent car I don’t own.  To overcome this bias, and assuming the electric car achieves parity in other areas, the advantage of the innovation must be compelling.  And so far they are not.  Zero pollution is a tangential, esoteric and “in-the-future” benefit compared with “how do I get to work today.”  Yes, we know in a conceptual sense that zero pollution is an important societal goal but it will be hard for many people to give this goal much weight when faced with a car-buying decision.   Zero-pollution is not a compelling advantage. In contrast cheaper operation could be a compelling advantage.  Running a car is not cheap (it is typically ranked two or three in household spending after housing costs).  So a car that came with the message that it only cost half as much to operate would attract serious interest.  The hurdle here is the economics of electric cars are not yet fully worked out—no-one has yet given a detailed picture of what operating costs will be when there are many electric cars on the road.  At the moment the cost of the battery itself dominates the discussion, with various business model innovations trying to get around this hurdle.  These include Shai Agassi’s battery swapping stations and Blue Car’s plan to only rent their cars.  And the electric car industry also faces the chicken-and-egg problem of building an adequate infrastructure to enable access to everyone who might want an electric car.

So my conclusion is that electric cars will only be successful if they produce a better car.  A car that has the range, performance and carrying capacity of my current diesel car, but also costs less to operate. And a car that is supported by a service infrastructure that lets me “refuel” in five minutes pretty much anywhere, just like today.  Anything less than this is not an innovation in my opinion—whatever technologists or environmentalists might say—it is actually an inferior car.  Will electric cars reach the level of development they need to provide a compelling reason to change?  Hard to predict I’d say. I’m not ruling it out but it is an immense challenge, with many hurdles that could cause it to fail.  Indeed, the problems may be less on the technology side than the service infrastructure side.  One can see the technology itself has promise. But it is much harder to see how the infrastructure can be built to a level where it competes with hydro-carbon technology.  Unless, that is, a government or a brave large company decides to push it; or the price of oil rises sharply over the next ten years.  And of course the electric car faces competition from bio-fuels—which can use the current infrastructure—and other alternatives such as hydrogen (which is the worst of the three in my opinion).  So an immense challenge that I hope will succeed (I like the dream of the perfect electric car) but I’m not yet sure it will.

Apple’s big challenge

I have to write about the iPad, the most anticipated launch of 2010.  I waited a few days for the dust to settle, but it hasn’t really.  The world still divides into Apple fans and Apple detractors.  The tech blogs remain confused between those who see it as a phone with a bigger display and those who see it as an under-equipped laptop.  What, no camera?  No handwriting recognition (like a “real” tablet).  And worst of all, no Flash?  Therein lies Apple’s big challenge—what exactly is the iPad?    They claim it is a new category.  Building a new category is a challenge Apple has not faced since the Newton, where they failed.  On that occasion they left the market to Palm, which arguably had stronger grasp on customer needs and hence better arguments for building the new category in customers’ minds.  However, to be fair, Palm came after Apple (and Motorola and Tandy) and so had the benefit of learning from their mistakes.  What were these mistakes?  Two come immediately to mind.  First, failing to identify the right group of early adopters.  Second, not finding a point of differentiation that would change the status quo.  In contrast, Palm focused on road warriors (remember those) and synchronization with office systems.  And the rest is business history as Palm went on to create a great success out of the rubble of the three previous attempts at creating a “PDA” category.   

Faced with a “new” category, most customers try to classify the innovation into a category they already understand.  In this case, a phone or a laptop.  Either would be disastrous for Apple.   The iPad makes web browsing or emails easier than a smart phone but is too big to be a phone replacement.  And as a laptop or tablet the iPad (or at least the first version of the iPad) is under-featured.  To succeed Apple needs to target a group of customers who have a real need for an in-between device and then give them a compelling reason the iPad is better than the status quo.  Can they do this?  I think the answer is yes (which is not the same as saying they will succeed—I am not privy to Apple’s marketing strategy, and in any event execution is more difficult than strategizing).  To me the target group is most likely teenagers and the compelling reason is that the iPad is easier to carry around and use.  The teenagers I know live on Messenger and Facebook and in a totally different social environment to the one I grew up in.  If they use their phone it is to SMS rather than talk (and they complain loudly when they reach their monthly limit).  And they find lugging a netbook around a chore, let alone a laptop.  The iPad is thus a great solution for Generation Z (the net generation—born from the mid 1990s).  So I think most of the tech bloggers have (yet again) missed the point.  Moreover, if Generation Z starts to adopt, then the rest of us will fall in line, perhaps not to adopt but at least to accept the new category as valid.  My only reservation is the lack of multi-tasking.  The teenagers I know are good at multi-tasking and really value it.  So Apple will need to fix that in the next version, along with the lack of a webcam (some people say this is already provided for in the design).  But I’m sure Apple has a product roadmap.

The last point to make is, of course, that the iPad is not just about product innovation.  It has the same powerful—App Store—driven business model as the iPhone.  Who knows what value may emerge from that in the next 12 months and how this will enhance the chances of success.

What is a Good Customer Insight?

The CMO Council (www.cmocouncil.org) recently released a report entitled Greater Innovation through Closer Collaboration.  The report builds on a survey of executive opinion on the topic of collaboration and partner networks.  The conclusion is that firms are more and more relying on external networks of partners and suppliers to help them deliver innovation.  However, what struck me was the frequent use of the two words customer insight, in quotes from firms like Best Buy and Pepsico.  No quarrel with that as a good step to take for any firm that wants to innovate but I think you have to be careful about what customer insight means and how you go about getting good ones.  The word insight has several meanings but the one I think comes closest to what we need here is ‘a clear understanding of a complex situation.’  That is because creating an innovation that changes the customer’s thinking, and thus reshapes the market, is not a simple task.  It requires a deep understanding of the customer’s goals and needs. That understanding includes both stated and latent needs, and building the ladder from the potential features of the new product or service to customer benefits and then to customer needs.  And it requires an understanding of customer differences, especially as they drive the market dynamics that will come into play once the firm launches the innovation.  The most important differences are those between the innovators and the mainstream customers.

 

So good consumer insights do not come from running a few focus groups, neither do they come from looking at the results of quick web survey. Nor do they come from brainstorming up a bunch of questions over lunch and asking them of whichever customers you can quickly get hold of.  In fact getting good customer insights is a science, needing rigour, system and sound theory.   Although it is an old point, ‘garbage in’ does equal ‘garbage out’.  In contrast there are sound theories and methods that managers can use to get good insights, some of which I list in Chapter Five of the Innovation Manual. Unfortunately they require a significant investment of time and money.  One paradox of the financial crisis has been that while R&D spending has increased, there has been a clear tendency of firms to cut costs on professionally conducted market research (Rockhopper Research 2009). I only hope that does not bite the firms involved too hard.  For if you have poor insights it is difficult to see how your increased R&D will result in anything valuable to the customer. 

Watch out! Smart companies used the recession well indeed

The release of Booz and Company’s latest Global Innovation 1000 survey confirms the views in one of my early blogs.  While net income fell, R&D spending rose in these firms in 2008, though at a slightly slower rate of growth than 2007.  This is remarkable, amid the worst financial climate since the Great Depression, 1000 of the world’s top firms increased their spending on R&D! (As the report points out, this is more D than R. Firms increasingly leave pure research to universities and governments, and focus more on turning technologies into commercial products and services. This is a trend that has been developing for several years.) 

Why did this increase in spending occur when firms cut costs in nearly every other activity?  According to this survey for three reasons:

1. These firms see innovation as a core part of their overall strategy
2. They commit to product development cycles many years in advance &
3. They see the recession as an opportunity to gain advantage over weaker firms.

It is point 3 I raised earlier (“Innovation and the Crisis” Post on Mar 20, 2009 at 3:58pm).  These leading firms have also used the recession to become more efficient at innovation, killing weak projects earlier and focusing on fewer bigger ideas to get more growth.  So they will emerge from the downturn, with more innovative products and more efficient processes, putting further pressure on their weaker or more short-sighted rivals.

 

I think that is a good argument, but it needs one qualification. The survey presents data to show that many of these firms are changing their mix of projects toward “more products with growth potential” and “more products for new markets”.  That is a laudable goal but not as straightforward as it seems.  Most companies are setup to create the incremental innovations they need to stay in business in their existing markets.  As a result their organization structures, employee incentives and skill sets develop to support modest levels of innovation.  Faced with developing more radical products, adding novel services or re-engineering business models they may find structures, incentives and skills also need to change.  Innovation that brings bigger rewards also involves bigger risks and more marked changes in organizational culture and skills. It will be interesting to see how these firms fare over the next year or two. Especially what lessons emerge about higher levels of innovation?  I believe the ones who will succeed will be those firms that go about it in a systematic and grounded way—building on all we know about innovation and organizational change.

Innovation and the Crisis (Revisited)

In my blog of March 20 I suggested the crisis is a good time to be thinking about innovation, especially for those companies that still have reasonable cash flow or employees with some time on their hands.  It was therefore pleasing to see my comments justified this week on two web sites.  First the World Advertising Research Center has an article on how P&G, Unilever and Wal-Mart plan to use the crisis to out-innovate their competitors.  P&G plans to outspend them on innovation, Wal-Mart to use the time to refocus on customer loyalty and Unilever to co-create new AXE products with customers.  WARC article on innovation in the crisis

        Similarly the Economist Intelligence Unit has a sponsored paper on “Taking advantage of the pit stop: How to prosper in a recession.”  EIU paper  Their conclusion is "A company with a strong team and a pipeline of new products or services is going to be in a winning position when the recession finally bottoms out. For the rest, playing catch-up when resources are once again scarce and expensive is going to put a significant drag on recovery."

And they make three great points here, rethinking your business model, finding new talent and finding new markets.  The Innovation Manual covers new business models and new markets extensively. Both are important to growth and profitability ands both involve mind-sets, skills and tools that many managers are not familiar with.  So in the Innovation Manual I place great emphasis on using evidence-based theory to identify the right people and the right tools for the task.   The point the EIU makes on talent is that of making sure you don’t layoff talented people during the crisis, talent which cost you a big investment to develop.  You may find it is not easy to hire similar talent when economic growth returns.  I would take this point further, as follows.

Working at a top business school I also see many talented MBAs looking for work right now.  Individuals who before might have thought about a career in consulting or investment banks (remember those).  But now they are much more open to jobs in mainstream firms, the firms that create and deliver innovation rather than give advice or fund it.  So the crisis is also a great opportunity to bring new people into your firm, people you would not normally be able to attract.

The Momentum Effect, the Innovation Manual and engaging the innovators

In 2008 my colleague Jean-Claude Larreche published a book The Momentum Effect with the tagline “how to ignite exceptional growth.”  I highly recommend this book to you, especially if you are in marketing (and it is endorsed by Sir Richard Bransom, a superb marketer).  And of course growth is also what the Innovation Manual is about so there is a thread linking both books.  This link is most clearly seen in my Chapter Seven Building the Market for the Innovation where in one section I build on Jean-Claude’s work.  In particular, on the role of marketing in designing and communicating powerful offers.  Jean-Claude focuses on the idea of offers whose benefits to the customer far outweigh their costs, so they create what he calls vibrant satisfaction and vibrant retention.   Essentially, the customer becomes emotionally engaged with the product or service, even becoming advocates for it. 

 

I apply these ideas to the task of getting those customers who are innovators to engage with the innovation, adopt it and thus give this innovation credibility in the eyes of other customers.  Unless this happens the innovation will fail within a few months.  Who are the innovators?  Well this will be the topic of another blog, but for the moment let’s define them as that small segment of customers interested and willing to take a risk on new things.  In other words the customers who get new markets started.  In Chapter Seven I look at the “Virtuous Circle for Engaging Innovators.” This circle involves making sure the new offer has advantages over the status quo, building satisfaction by removing sources of dissatisfaction and recovering innovators with grievances, and creating customer advocates for the innovation.  Following Jean-Claude I note this doesn’t mean “some” advantages, “good” satisfaction scores or a “complaints department.”  It means being systematic and open-minded to what are the real benefits and costs of the innovation to the customer (many firms are myopic about the costs, just focusing on the price paid).  It means identifying what are the clear and verifiable advantages of the innovation over the status quo (be this existing products or alternative uses of the customer’s money).  It means getting satisfaction and customer retention scores in the 90^th percentile.  And it means a pro-active strategy for listening closely to the innovators and moving speedily to remove sources of dissatisfaction or recover angry innovators.  All of which has a high payoff because the innovators are the catalysts for success or failure in the mass market.  Thus high and early marketing investment on a small segment has a compelling rationale through future profits. 

 

However, where I extend the Momentum Effect is to argue that for breakthrough innovation “positioning” (choice of which advantage to promote) is another critical part of the engagement story.  Of course positioning is an accepted part of all marketing, be it for innovations or existing products and services.  But for breakthrough innovation it is key and firms often get it wrong, choosing a poor frame of reference (which mental category does the innovation belong to) or the wrong points-of-parity or difference.  The Innovation Manual contains examples of this (both good and bad) and a tool to help managers think about the right positioning to engage the innovators. 

Blue Ocean Strategy

Some people have asked me where Blue Ocean Strategy (by Chan Kim and Renee Mauborgne, Harvard Business School Publishing 2005) fits into the framework advanced in the Innovation Manual. 

What is Blue Ocean Strategy?

First though a little about Blue Ocean Strategy (BOS).  To me BOS has one big idea and then two useful tools.  The big idea is that firms and industries mistakenly focus on what they know best—competing with other similar firms with other similar products—and often overlook groups of potential customers who are held back from buying a product or service because of some barrier.  [They call these groups “non-customers”].   If an astute firm can identify and remove these barriers, they can open up a significant new market just for themselves—the Blue Ocean or “uncontested market space” —and make substantial profits before others enter.   The classic examples of removing these barriers are Cirque du Soleil—which reinvented the circus and broadened its audience--and Accor’s Formula 1 hotels (not racing cars)—which opened up a new segment of the hotel business.  The useful tools are the strategy canvas and its associated value curves and the ERRC grid—ERRC stands for, eliminate, reduce, raise and create value to the customer.  To me these tools are useful because they help managers to discuss and debate what an innovative solution might be and to do so thinking outside current solutions.  [I don’t totally agree with the way Kim and Mauborgne generate these value curves but that is the subject for another blog post, and does not detract from the usefulness of these tools in helping managers see better customer value].

BOS is useful in helping teams set objectives for innovation projects

Now, where does this fit into the Innovation Manual?  Well, the two books have completely different purposes.  BOS to introduce this new thinking about competition and customer value, the Innovation Manual to integrate thinking across a wide range of business functions into one useful framework, as well as provide a range of tools across the whole innovation process.  Thus BOS fits into one chapter of the Innovation Manual, namely Chapter 3.  That chapter is about chartering innovation within the organization and chartering happens at two levels, the organizational and the specific project level.  To me the ideas of BOS are most useful for the latter; specifically in the preparatory stages of an innovation where the team is trying to define its objectives.  There BOS thinking, the strategy canvas and the ERRC grid are ONE set of tools that can help them define their objectives.  [Note: they are not the only tools; teams need to complement them with others that the Innovation Manual talks about].  In getting the project objectives right BOS makes a big contribution to better innovation.  However, there is much more to better innovation than this, much, much more—both before and after the preparation stage of an innovation project.  That is what the Innovation Manual talks about.  Including the solid theory and evidence on how customers perceive value and accept innovation that is a necessary background to using any of these ideas or tools. 

Co-creation: how do you make this bright idea work?

There is much talk about co-creation at the moment.  The idea is that it is better to work closely with customers in developing an innovation rather than relying on traditional market research. This idea is correct.

Traditional market research on innovation comes in roughly three forms. The first seeks to watch or question customers to identify their needs, the second gets them to brainstorm solutions in groups, and the third seeks their reactions to the firm’s solutions through surveys or conjoint studies.  So either we ask customers to express opinions or create solutions without concern for their practicality or we ask customers to react to react to the firm’s predetermined solutions.  Usually third-party agencies do these jobs, creating a barrier between customers and managers. 

None of this is satisfactory because both primary parties--customers and the firm’s managers—have something to contribute to a successful innovation.  The customers their understanding of their needs and insights on what would work for them, the managers a deeper understanding of how to deliver a useful and profitable solution.  Successful innovation needs a close dialogue to develop between customers and managers. If the firm uses an agency this should just be to help in finding the right customers, rather than intervening between managers and customers in their co-creation work.   And when a close dialogue develops between the two there is ample evidence it can indeed lead to better innovations. 

 

But, and this is a big but, effective co-creation needs the right customers and the right managers talking to one another. Put the wrong ones together and the firm almost guarantees failure.  Put the right ones together then, while this does not guarantee success, you significantly increase your chances of it.  So who is the right manager and who is the right customer?

 

Chapters Four and Five of the Innovation Manual deal with these topics extensively. The short story is that we know a lot about the characteristics of both and they do not look like the typical manager or typical customer.  The typical manager is not mentally open to big new ideas, often because the culture of the firm does not support these, or because he or she worries about the opinions their superiors should the project fail.  In the typical firm “failure” is a bad for your career prospects. The typical customer is also not mentally open to big new ideas, unless those ideas have the support of many other people.  (Then if the idea turns out to be bad, at least many other people made the same mistake, and the customer does not look stupid).  If these two brief (and overly simplified) stereotypes seem similar to each other that is because they are.  Both managers and customers are human beings, and common patterns of behaviour drive human beings.  To co-create we need executives, managers and customers who are open to big new ideas and prepared to consider directions outside the current norm.  They also need to be creative to develop good solutions and to have some base of expertise that can contribute to the practicality of these solutions.

See the book for more details on these selection criteria and tools to turn these basic notions into a practical method for a firm to use.   There is much more to this story than you can put in a blog post!  But the above is the essence of the right managers and the right customers to co-create successfully.

Learn from history and listen to your customers

Two interesting articles on presentations at the Advertising Research Foundation annual convention were recently put on WARC (www.warc.com, accessed on April 4).  Both are by Geoffrey Precourt and tackle the subject of innovation.  One concerned how Wrigley uses research to predict what breakthrough innovations might be coming.  The argument is that many breakthrough products build on ideas already seeded in the customer’s mind by previous products. Previous products that might have been ahead of their time or the customer’s comfort level at time of launch.  Thus many digital music players preceded iPod and other search engines Google.  And the astute marketer who watches how the “tree” of innovation grows can predict what the next breakthrough might be.

 

          This is a good point and builds on a large body of research evidence. Pioneering is difficult and many fail. The classeic example here is Palm's PDA. This built on the spectacular failures of Apple's Newton, Motorola's Envoy and Tandy's Zoomer. Palm just listened to what customers said about these pioneers, figured out who the right target market was (road warriors) and designed a product for them with the right features. More critically Palm chose connectivity as the feature to position the product on. That grabbed the road warrior's attention and the rest is history. I look at how you can repeat Palm's success in  Chapter Seven.

 

           The second article concerns how P&G has learned to listen to customers rather than ask them questions in the old-fashioned way of much market research.  This is also a good point.  There are many ways to gain insight into your customers, above and beyond asking them closed-ended questions in a survey.  If you watch what they do in natural settings, listen to their conversations on FaceBook or Twitter, or engage them in dialogue you can learn so much more.  But note this is not an argument for replacing surveys with focus groups.  Proper observation, listening and dialogue need science, structure and planning, and a notable investment, especially in management time.  In the book I argue it is the managers in charge of innovation projects that need to do much of this, rather than delegate it to an agency.  Only they can see the opportunities the customer insights provide.  This is in Chapter Five. I also argue that you must be careful to listen to the right customers at the right time…which is a good subject for another blog.

Innovation and the crisis

First we need to get rid of the argument I’ve heard that innovation itself caused the crisis.  Financial innovations might be a prime suspect but rather than the products themselves I’d blame the individuals and organizations that sold them to customers who could not afford them or did not understand them.  Caveat emptor is all well and good when the product or service is simple.  When it is complex, every manager knows that people will struggle to understand it unless they receive a clear and careful explanation.  Firms marketing innovations have a duty not only to explain them well, but also not to cause harm to their customers.  Not only is that short-sighted and unethical but it is also not in the firm’s longer-term interests.  Innovation in itself is not the culprit; it is what firms do with it that matters.  And I’m interested in firms that use innovation to add value to their customers and build new markets in a long-term and sustainable way.

The real question is what role innovation can play in firm strategy during a deep economic downturn?  For some firms this downturn will be an opportunity.  There are many global firms with low debt and strong cash flow.  For example, the CEO of Volkswagen was in the news recently saying he saw the downturn as an opportunity for Volkswagen to increase its market share.  When competitors are struggling, cash rich firms can increase their rate of innovation and get a stronger position in the minds of their customers.  When the economy turns upward and sales increase they will reap the benefit.  Here I have in mind not only new products but also investments in new services and business models. 

For other, less fortunate firms, innovation may be the right strategy or it may not.  Or it may be that they should prefer certain types of innovation over others.  In the book I note there are three challenges in innovating, the customer challenge, the development challenge and the appropriation challenge.  In hard times struggling firms should probably not try to take on all three at once, but focus on the one with the greatest payoff and least risk.  There are opportunities in each challenge during the downturn—such as customers looking for better value, developers able to cut production costs, or partners in the value chain willing to rethink business models.  But there are also risks, particularly if the organization needs to change to deliver the organization.  Struggling firms have to be sure they will pull it off if they want to go down that route.  

But given those cautions, I think the ideas and tools in the Innovation Manual are just as relevant to a downturn as the good times.  They show how firms can create the best opportunities for themselves by following a clear systematic approach.  And that is always valuable, whatever the economic climate.