Innovation in these most Financial of Times

I was lucky enough to be invited to attend the Financial Times FT:Innovate Conference over the last 2 days. Given the work we did for NESTA on the impact of Innovation in hard times (the Depression) where some astounding companies (e.g HP, Texas Istruments) were founded, I thought it would be fascinating to see where the state of (mainly Corporate) Innovation was today. I would like to say that after 2 days of listening to some entertaining talks, some good case studies, some interesting panel discussions and two tutorial sessions that Innovation is alive and well in the Corporate world.

Except I can't.

What I heard over 2 days had some great highlights of Innovative Thinking, and I will go into them further down the page, but I am worried that far too much of what was presented as "Innovation" was, in my days as a Lean Operations Improvement / Turnaround guy, called something completely different. We called much of the stuff presented over the last two days "Quality Assurance", or "Lean Ops" or "Continuous Improvement" or Kaizen if the kool aid was bought from source . (Not putting words into her mouth, but some of the sharp comments from session chair Julie Meyer of Ariadne Capital gave me the impression she had similar thoughts). Lest we forget, Joseph Schumpeter defined economic innovation in The Theory of Economic Development as:

1. The introduction of a new good — that is one with which consumers are not yet familiar — or of a new quality of a good.
2. The introduction of a new method of production, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially.
3. The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before.
4. The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created.
5. The carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position

Twiddling around with what already exists is not called Innovation, its called Optimisation. But you can understand how it evolves in CorporateLand:

- Corporate Bigwig decides that "we gotta do this Innovation thing, just look at what real Innovative Guys are doing"
- Appoints a Czar of Innovation in a staff role. Czar of Innovation enthusiastically starts off with radical, change the needle things but has no staff or money to execute
- The Big Divisional Barons ignore Innovation Czar, subvert projects, deny funding etc etc because things ain't broke, why fix em, don't rock my boat etc etc
- CEO is now onto Next Shiny Thing and wants to know what Czar is doing to justify existence, wants to see (unforthcoming) evidence of Great Innovation Leap Forward
- Czar realises that to keep job and get next one, best plan is to help Big Divisional Barons on the day to day so diverts most of his/her meagre resources to Kaizen stuff, gets hearty approbation of the Big Dogs

One of the key reasons for this, according to our emerging research, is that traditional company accounting systems and market measures structurally underprice the amount of innovation spend required just to keep existing products and services going, especially in fast moving industries. In other words the cost of NOT innovating is massively underestimated. This is typically due to innovation coming from all over the organisation, squirrelled away in all sorts of budgets and even done without budgets - also, a lot of the informal information and knowledge networks in companies are not easily measurable so are not measured. This was brought home to me in one of the roundtable group sessions, where we had three (three!) McKinsey guys round the table with a pack they had done, and one of the charts showed no correlation between R&D spend and company benefit (in terms of stock valuation). "Oh yeah", sez I "where is this data from?" From a selection of large corporates over 30 years, they say. "OK", sez I, "that implies if you spend 0% on R&D there is no differentiation then?". Smooth move on to next slide at that point....... (This is emerging as An Issue - its is so easy to cull R&D etc in the short term, but our research shows that it has longer term competitive implications. The problem is the management who enact the cull are seldom around when the chickens some home. Also, if our initial research hypothesis that many major, mature industry sectors are sitting on innovation laurels won in the 60's and 70's proves correct, the McKinsey analysis may well be true for many sectors)

Anyway, onto the Good. To me, these below were the presentations that showed what Innovation could and should be (I missed the EMI one which was a real humdinger too, I am told)

Willie Harcourt-Cooze

Willie wowed the audience because of his style, enthusiasm and sartorial oddness - he wore jeans! (I was quite surprised that at an Innovation Conference the only colour was Suit Grey, and the only choice was pinstripes or not - yours truly in Biz Cas felt decidedly under-dressed). Willie fell in love with a farm in South America that had its highlands "in the clouds", found out he was in a high quality cacao growing area, and moved on to making chocolate. He found it was very hard to get small scale chocolate making equipment, and harder still to get publicity - he was told he "couldn't be put on reality TV entrepreneurial shows as he was not famous". This guy has had to innovate from Day One as he had very little funding. Some interesting thoughts:

- Willie reckons when a Market (like chocolate) is dominated by a few v big players gives major opportunity for small niche players. R
- Re bootstrapping - no matter how much money you get you will spend, but you don't want to lose equity so balance what you will take and you don't like to take too much debt
- You just have to be damn persistent, everyone will laugh at your idea until it succeeds

Beth Comstock, SVP Innovation and CMO, GE

Followers of this blog will know that we follow Hulu, and before she became Innovation Czar Beth was heavily involved in setting that up. And Hulu is Real Innovation, so Beth starts with Cred. Beth's views:

- Business Model innovation is as important as Technical innovation (see Chesbrough point below too).
- There is major benefit from Reverse Innovation - ie see what innovation emerges in tweaking things for local conditions, and then export that out of the environment
- Key is filtering (too many ideas) and trying to understand where the real value lies, also what is the desired outcome and innovate back from it
- Focus more on innovation in big systems (Given my above Czar process model, I wish Beth had had more time to go into how they strong armed the company to do Hulu, I'll bet there were several "over my dead body" cries from Big Dogs in that)
- Often problem is people fund too many things too far, and not well enough for any one to succeed
- They have about 100 projects in "THe FUnnel" at any one time, 50 - 75% success rate of the 100, but Beth notes - "don't forget the 1000's we killed"
- Adjacencies in new innovation is a natural act, but you need a few big swings too
- Big challenge in a 130 year old technology Company is the wish to build in too many bells and whistles - its easier to complicate than simplify, and need to get user experience feedback early
- Use independents to set up scorecards etc, but evaluate internally

Re Hulu specifically, Beth noted the following:

- Hulu was born out of seeing others do it, not an internal thing (ie no doubt suggestion boxesw ould have come up with it, but validation was the market doing it).
- They decided to go for an aggregation strategy bigger than any one provider
- They set it up separately to ensure innovation, and from some of her comments they had to be very forceful internally to ensure independence
- This also diffuses risk
- In parallel with Hulu they are also experimenting with many other ideas and business models on their own and with other partners

Brian Dunn, CEO Bestbuy

The Best Buy CEO told of how his company was embracing new social media channels, much of which readers of this blog will already understand - but it was when he was talking about ROI that my ears pricked up. He noted:

"I dunno how to monetise it, but that's where our customers are spending a lot of time so we will talk - and listen - to them."

Real Innovation, no?

Henry Chesbrough

Henry wrote the book on Open Innovation (literally), and summarised some of its thinking here (there is a lot more in he book). In short, much corporate innovation is based on a "Closed" innovation funnel, they do this because they don't know what will work. To reduce costs the funnel has "stage gate" reviews to winnow projects, but often its far too early to tell. The next evolution is to allow projects to go on for longer but kill them early if no traction ("killing puppies"). But the overall problem says Chesbrough is that the issue is structural - one way in and one way out (product launch). Some companies then increase the exit routes, eg "strategic" projects or spinning off projects. The problem is there are too many false positives (stuff that should never be funded) and false negative (stuff that should not have been killed) this way. His insights:

- the Funnel is actually a business model funnel too, many projects are killed not because they won't work, but because they won't work with acceptable models to the company (cf what Beth said)
- He researched the Funnel in detail in one client (Xerox PARC), and found that quite a few "false negatives" started to be worked on outside the company - most failed too but 10 of 35 worked with different businessz models, and their total value exceeded Xerox value over a 20 year period.
- Also The Funnel is aimed at the current Market, not at emerging or other potential markets

In other words, it is imperative to look at licencing and spinoffs of stuff that won't fit the company business model (this fits with another of our emerging research tenets - Nearly no Innovation is Useless) and to open up the innovation process - other people's stuff coming in, continual leakages out The Funnel. For examples, he quoted

- Phlips opening up Eimdhoven labs in 2003, went from 1500 Philips employees to c 5,000+ from a host of companies, forming an Innovation Ecosystem
- BP entering into biofuels - couldn't do all in house as a new field moves too fast, so created an energy bioscience institute with bunch of Unis and of $50m, $35m is open (non exclusive royalty free licences)
- Procter & Gamble - uses tech scouts and acquired technology via venture fund and M&A as well as in-house

Where things got stickier is in how IPR and patents work in this world, and his thinking has evolved fro the book. He is now proposing, for Copenhagen, that the Planet Change requires an Open model which he calls the Green Exchange - He is suggesting open patents (the CC Science Commons) where everyone contributes patents but put in different of conditions depending on how core they are to contributors (eg a competitor can't use this). Interesting idea, we will see.....it still sounded like a fertile ground for big arguments if anyone succeeded wildly.

In summary, an interesting conference, with many diamonds in the rough and some interesting conversations. I haven't captured all the gems, mine the Twitterstream - thin as it is (and there's a signal for you) - for others; but there remains an uncomfortable impression that too many companies have renamed incremental "Doing Things Right" work as Innovation, rather than using Innovation as a way to "Do The Right Things". Perhaps its due to the current tough times, but I think it could be because its so easy to slip into comfortable ways. Hopefully we can shake them all awake when we release our "Radical Innovation" research soon.

(Addendum re Radical Innovation note above - over the last few months I've been working with a few other Innovation thinkers and practitioners on the issues with linear corporate innovation in the non linear worlds new technology is driving, and what can be done about it. Watch this space )