The Innovation Manual

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.

Welcome to the Innovation Manual blog

One purpose of this blog is to introduce the book, who it is for, what it contains, why it might be worth reading and what experts are saying about it.  Please have a look at the other pages through the tabs above.  And if you like what you read please buy the book!  There is a link to Amazon at the right.

But my broader objective is that the blog will be about managing innovation in general.  I’m convinced firms can do better at innovation if they just put into a practice a few of the key lessons that we have learned on this topic.  There is a wealth of research findings and proven best practice on managing innovation. In one sense there is perhaps too much knowledge, especially as this knowledge stays within academic and business silos.  However, if we focus on the essentials, and organize this knowledge around a sound framework, the key lessons are simple and applicable to most firms. 

So in the coming months I hope to use the blog to share some of these lessons and debate how they may apply to different firms and innovation projects.  I also want to pick up on current topics in innovation.  So my next post will be on innovation and the economic crisis. 

Practical matters: my aim is only to post when I have something useful to say rather than every day or week.  My initial goal is two posts per month. So if you want to bookmark this page or subscribe to the RSS feed you can do so in the knowledge I will try to make each post useful.    And please, if you want to get in touch with me use the form on the “contact us” page. 

Copyright © 2009 by David Midgley: all rights reserved