Radical Innovation for Discontinuous Times By Garrett Delcourt April 2002 This article is a contribution from Garrett Delcourt, to the management issues raised by "Business Navigation in the Roaring Noughties" (from the title of his coming book). It's certainly time to go for a change Uncertain times move fast Business strategy has rarely been a comfortable occupation but it seems that we are now in for turbulent and tough times. Uncertainty is the rule and companies are caught in the crossfire: on the one hand, the shareholders expectations are still high in the wide-open deregulated financial markets that enable them to switch investments virtually overnight. On the other hand, the marginal returns are rapidly decreasing under the pressure of converging factors such as global competition, digitisation, shorter development time and product life cycles, to name just a few. Let's take some examples: - Globalisation is a reality: the international trade has increased by 1500% in 40 years . 10-15% of the world population was in a market economy at the beginning or the 20th century, they were 40% in the 70s, and they are 90% today . There are 200M Indians and 100M Chinese with a consumption level equivalent to Westerners , let alone the 4 Billion poor who are just about to join in as well (see the business models recently developed by Unilever in India or the Grameen Bank in Bangladesh: the bottom of the pyramid is now a strategic priority for Unilever). China is expected to become the biggest economic power in 2010 . - But globalisation has brought global overcapacity: 40% in automobiles, 100% in bulk chemicals, 50% in steel (cf. the recent tariffs imposed by the US), and 140% in computers . Hence, high-pressures on price. - Who can tell the price of a standard class flight from London to Nîmes in France? It actually varies from £1.49 (!) to £300: Price is no longer a fixed reference point in discontinuous change. Newcomers are likely to bring radically new business models into any of your markets. - Dell turns around its inventory 52 times a year, Compaq only 13.5 times . In Tokyo, you can order a customized Toyota on Monday and drive it on Friday . How would your business cope with such a requirement? Last but not least, ethics is now truly part of the game and this may be an even bigger challenge: customers' concerns for ethical business have followed a constant and sharp increase over the last years . This moral responsibility is definitely part of the corporate game now as it directly impacts the way people buy, invest in or perceive a brand . Ethical funds are a growing and long lasting trend. This move is enforced by what Pr Spar from Harvard Business School calls the "spotlight phenomenon": any misdoing company faces the threat of being virtually pilloried on the web by NGOs and customer groups: The lesson dramatically learnt by Shell in the 90s was well remembered by Exxon when it had to plan its Chad-Cameroon pipe line . In business today, you have to do well and to do good as well! Power to the customer We live in a fast and ever changing world and nobody can stop it. No wonder that the good old strategic planning has reached its limits: it was designed in different times, when things were predictable and slower. When the industry ruled the game. And the dance has just begun: we are witnessing the dawn of new socio-technological times where power has finally shifted to customers, with no other loyalty than to themselves (just wait and see who comes next): "Control has been tacitly transferred to 10M today and soon 100M users worldwide" said IBM's Lou Gerstner . We have moved without noticing into a friction free market. The dream of economists has come true, a nearly perfected market. Informed demand meets real time supply with dynamic pricing. This means that customers compare, organise, bid and bargain even more. We all know Ebay.com, an auction web site ($3.5B transactions in 2000) but have you heard of priceline.com? A travel website where the user enters his/her destination, expected price and card number. It is then up to companies to accept the deal or not (7.5M airlines tickets, 3.5M hotel nights and car days sold in 3.5 years). Who said "power has shifted?". The problem with friction free markets is that they are like the sound barrier or light speed: you'll disintegrate if you're not built to cope with it. It kills mediocre products and slow transactions. This means that the best wins wherever they come from, whether from Seoul, Gdansk, Tokyo or Seattle: 1000 new soft drinks were introduced on the Japanese market in 1995; 1 year later 1% had survived . One third of the 70s Fortune 500 have disappeared today . To compete successfully in such a radical context, you have to be sure you are the best in the world at making what you sell and that you constantly keep in touch with your markets. For example, you have to be first or second in most of your markets to be part of GE core businesses. In a world dominated by exponential curves due to global interactions, if you get off track from your market just for a moment, you might well never be able to get back into it (see what happened to Rover or Fiat in the car industry, to Xerox, Apple, Eriksson, Motorola, Compaq in high tech an others). Remember, no business, even small or local, is safe from such a global evolution. Sooner or later, it will be hit by this wave of radical change, starting with its customers' clients or its suppliers. The networked economy brought us entanglement or chaos depending on how you view it, and we have to deal with it, whatever our business, wherever and however we operate. Innovation as an organisational concept So, how can we make strategic planning work better? Add another dimension to it: Radical innovation is the key to unlock new wealth in a discontinuous context. Here I don't mean innovation as being the ability to invent new products or services systematically produced in strategic marketing departments or R&D laboratories. Nor do I mean inventions carefully protected by Intellectual Property Rights. Nothing new here, these are old stories . But innovation as an organisational concept, an ability to constantly create wealth from radically new business models, innovation as a widely distributed corporate capability. The ability to generate change individually and collectively. We spent the last 30 years in improving and reengineering our processes and practices. We have now to reinvent ourselves, to project ourselves and our companies into radically new environments. This projection is what innovation is about. This starts from the people, and more precisely from middle managers, according to most researches . As spotted by Gary Hamel , we are in a time similar to the end of the 60s when western organisations discovered Total Quality Management: getting quality out of the inspectorates and corporate quality experts into the working behaviours of the whole staff all over the company. We have now to invent the Total Innovation Management with the equivalent of its Quality Circles and other Six Sigma. This is the challenge of the time and there is no other way to create new wealth. Constant creation of innovative business models throughout the company has to be at the centre of our corporate strategies, of our organisation culture because it is increasingly difficult to predict who will be in your market, who will your customers turn to, in which markets you will compete tomorrow. Examples? 50% of HP revenues come from products that did not exist a year ago (3 years ago for ABB) . Sony launched 5000 new products in 1996 (2 per working hour) . How do we do this? How do we get our companies ready for this challenge? To be that fit, you have to be tightly focused with a highly effective core. But that's not enough. You have to be immensely curious of what's happening out there, to develop corporate antennae able to decipher your markets' weakest signals. Last but not least, you have to constantly combine this cumulative knowledge and make it available throughout your organisation. These are the 3 fundamental principles that need to be developed and integrated into any innovation process in order to generate self-correcting systems. "An organisation's ability to learn and translate rapidly this learning into action is the ultimate competitive advantage" says GE's Jack Welch.   Organisations must support change, not resist it. The hypertext organisation Organisations usually get in the way of change instead of facilitating it. Mainly for 2 reasons: - First, we all sit more or less comfortably in our established procedures and processes and we don't quite see the benefit of a change. We may have changed so many times already for so little benefit that we are afraid of throwing the baby with the bathwater, of losing more than what we'll gain. In a knowledge based organisation, you have to demonstrate and to show first. - Secondly, organisation is often the wrong target. In focusing on organisational issues, you may concentrate on the bones instead of seeing the body. Set the body in motion, make it fit for a good run, the bone structure will eventually adapt. By this, I mean that new procedures and processes are naturally attached to projects. When a successful project is incorporated in the core business, it is exemplified and comes with its own set of skills, resources and procedures, which are then easier to integrate. The hypertext organisation advocated by Nonaka and Takeuchi corresponds to this model . It makes it easy to demonstrate the benefits of a change before adopting it. It comes as a 3-tier organisation: - The core layer: The core layer is your current organisation with its SBUs, departments or divisions. It is the level with highly optimised processes built to cope with the business complexity. Most of the time, it is a rather slow changing structure, which accumulates momentum and direction for the whole. It provides the overall resources, focus and strategy. As regards innovation, the core layer should determine the strategic "attractors", the combination of market's emerging sociological trends and new technological capabilities, which are specific to your organisation, and on which you have chosen to build your very own areas of excellence. For example, the mobile phone thrived on the convergence of the GSM technology and the need for mobility and connectivity. Napster, which badly harmed the music industry, blossomed on MPEG technology combined with the long established practice of swapping songs. Ikea flourished on the DIY boom associated with the discovery of functional design. An innovation portfolio should be deployed according to one or several of these focus points. What is required at the core level is the ability to compete. If you don't relate to this level, you disconnect from the company's objectives, develop chaotic trajectories and eventually get pushed out of the game. - The project layer: The project layer is the experimental part of the organisation, the business web where you try lots of different ideas and check if they work. It is a constant lab in charge of business opportunities, a very fast moving and short lived structure (there is in fact very little structure here, just plain team work) which provides energy to the whole. It is an open market for talents and capital according to the Silicon Valley analogy. Here, failure may be OK and what is required is as many projects as possible and the ability to complete, re-orientate or stop them according to fast market responses. Don't confuse this layer with corporate incubators or venture funds. Projects start with informal ideas, far before the stage when concepts, teams and resources already exist. The project layer is a boundary-less organisation where would-be entrepreneurs from various functional backgrounds meet and exchange. It provides maximum interaction with the outer environment as well, in constant communication with customers and other stakeholders. It is very much project oriented and the realm of tacit knowledge: individual knowledge based on trial and errors, experience which can only be shared to be understood (Is it easier to describe the sweetening quality of sugar or to experiment it?). The purpose here is to spin all projects that prove successful back into the core level and reincorporate the skills, rules and processes that have brought great results. Don't get too quickly into spinning off your ventures! If you spin off too many of your successful ventures, you export your value creation capability and miss an opportunity of rejuvenating your core business. If you don't relate to the project level, you keep on doing more of the same thing, develop group think and rapidly lose touch with emerging opportunities: you end up never entering the game. - The knowledge layer: The knowledge layer is the accumulative part of the organisation, where you store and share everything you know and have learnt. It is the open market for ideas, a very interactive IT based structure which binds the 2 other levels together. It is the realm of the shared and organised knowledge whether tacit or explicit: from scientific and market data to the results of short lived experiments or the mental models and problem solving processes gathered from the company's experts. It is freely accessible and open to all. The explicit knowledge is stored and organised by document management processes, expert systems, data mining and workflows. The tacit knowledge is gathered by methodologies such as KADS or MKSM . This knowledge layer is what turns your organisation into a learning organisation: change is OK as long as you have access to your memories and the lessons you learnt. If you don't relate to this level, you've learnt nothing; you keep on being stretched between change versus continuity, incremental versus radical innovation, tacit knowledge versus explicit, history versus future, constantly opposing what is complementary. This is where you learn how to rule the game. There are many benefits in this model - It is an integrative one: It puts an end to an antagonism as old as humankind, between stability and movement (the bicycle is another universal example of such practical integration). From project to core level: When a project proves successful and is acceptable according to the core principles, it is rapidly integrated in the core level, helping it to expand into new horizons with additional profitability. From core to project level: the project layer is a meritocracy, highly visible to the whole organisation. Anyone with would-be entrepreneurial talent, from any functional background or hierarchical position can contribute or participate to it. - It provides room for all profiles: Efficient people who are optimisation-oriented, at ease with processes stay in the core: they will participate to the overall momentum. Entrepreneurial people at ease with breakthrough thinking and who like being on the edge stay in the project level: they will help the organisation to keep moving. People who are OK with change might be happy to go from one level to the other: they will help the organisation to continuously integrate variety and movement. Middle managers engineer and assess the knowledge creation: they bridge the gap between the vision and the market reality, in what Nonaka and Takeuchi describe as a "middle up down management process". -It is easily scalable: it can apply to the corporate, divisional, departmental or local levels all the same. It can even be applied at the individual level to bind what you are good at with your personal aspirations or explorations. - It disseminates an innovation culture throughout the company (starting a project, moving between layers is neither a hierarchical nor a functional prerogative). - It facilitates continuous change in a low risk environment: the lessons learnt from the project level are integrated in the core level if only they have proved successful and in accordance with the core principles and strategy. Conversely, there is virtually no limit to what can be experimented with at the project level. What are the conditions for this to work? - Never confuse a level for another: don't bring a business you know nothing about into your core activity: it must be a project first and meet your project requirements. (e.g. it must fit to at least one strategic attractor, be focused, have a limited life span, report on the implementation conditions and success factors). Conversely, the core must provide efficiency, rules and guidelines, people and resources. No agreed project should be hampered by lack of resources. Core is not a bore. Knowledge is structured to four constant principles: gather, organise, share, date and update. Keep knowledge at the edge. - Progress by example and don't focus on organisation as such. Exemplify successful projects and make their specifics explicit. When you spin a successful project back into the core business, don't pollute it by applying your good old rules or financial criteria to it (who could honestly establish a radical innovation's Discounted Cash Flow?). Incorporate differences! Understanding and respecting a project's specifics (people, skills, processes, rules) is critical to keep it successful and to progressively bring change to the core. - No single level is the organisation itself (let's keep aware of the other/unknown part of ourselves). - No denial between levels: they have equivalent contribution to the company's survival although they follow different metrics. - Open and continuous communication between layers is essential: nothing hidden or secret can be developed in any of the levels. - Trust and sense of belonging to the organisation as a whole, whatever its dimension, not only to the single level one is comfortable with.   Build your own innovation capability The hypertext organisation is a living body: it changes and adapts constantly. Therefore you need an ongoing process to fill the pipeline with the right projects at the right time. Prototypes are the ultimate goal of this process designed to help your organisation constantly generate high value innovation portfolios, to experiment with them and to turn them into possible business ventures. It is often better to think of a scalable process that can be started simultaneously in as many different places as you like, as many times as necessary. Its depth and width vary according your goals and constraints. To test itself, it should be implemented in a limited context before being generalised throughout the company. The First stage: Define the scope Any innovation portfolio should start from a vision. This vision would optimally be built upon a clear perception of what the company's very specific strategic attractors are. For instance, the chip industry is caught in a (very hot) race for miniaturization and speed. Or check the convergence between the cosmetic, food and healthcare businesses. A vision is not so much as an ability to sense the future (who can?), but an intense curiosity, an acute capacity to be aware of the present: what's really happening now out there? What knowledge do you have of the faint signals, whether technological or sociological, currently developing in your internal or external markets? Not only your current markets but your clients', or the adjacent ones that might impact your business. Ask Exxon about how they got to work with the WorldBank. An interesting analogy here is a recent breakthrough in volcanology: Bernard Chouet, a physicist new to volcanology noticed long period changes in seismic data (which no specialist was aware of) and used them to successfully predict an eruption (we can easily imagine how, as an outsider, he may have been welcomed by the incumbents before he proved his vision right). Vision needs this ability to perceive a pattern within usual data, by looking at them from a radically different perspective. Furthermore, innovation is a choice even more than a necessity: a decision about yourself, a choice about the future you'd like to live in and you feel able to contribute to What difference does your business really make in the world? This is a purposeful act of self re-creation and comes along with responsibilities. theBodyShop's Anita Roddick , Guidant's Ginger Graham or the Grameen Bank's Muhammad Yunus have made such choices. Last but not least, experimentation needs focus to concentrate the energies and pack maximum value into the smallest target possible to maximise differentiation and attractiveness. Scanning the market is critical to draw an opportunity chess board: how near or far are the new, promising or threatening segments from your main business lines, what are their main driving forces and faint signals, what are their own strategic attractors? For each market opportunity, identify possible partners and champions within and without your organisation. You will then be able to determine the portfolio scope: what could be a privileged focus for a set of experiments (don't worry! If this one does not work, you'll try others later). The Second stage: build the portfolio Creating your innovation portfolio usually follow three steps (methodologies may vary but they ultimately come down to the same process): - An exploratory step, the purpose of which is to generate high value proposals and ideas. A limited number of champions share their experience in a very informal way, something like an intense conversation where loads of ideas are expressed, combined and compared with input and impact from other markets. The Japanese call this "nomunication" as it happens when you have a drink with your boss or colleagues . Different processes such as the Open Space Technology may be applied. Outsiders usually make the game richer. At the end of the day, the team selects a set of high value ideas that fit with the brief for further exploration. - A concept step where each idea is transformed into a possible business concept. The purpose here is to concentrate maximum value onto the smallest market niche (the "value maximum-market minimum" approach ). It is a progressive process where value is weighed and the potential business concepts constantly tested, sharpened and evaluated. The same participants as before work in small and parallel teams to make the pace fast and provide different solutions to similar problems. It may prove useful and save time to take knowledgeable customers and market experts on board. - A business case step, where the business concepts are turned into business plans. A preliminary project Work Breakdown Schedule clarifies the different project tasks. Functional departments should be involved at this stage to share the projects and to provide additional perspectives and resources (marketing, R&D, production, finance). The purpose is to determine how to best deliver the expected value /market mix: here, resources, processes, costs, contribution and potential profitability are evaluated against market and financial data . They are compared to the company's core competencies and objectives. A risk and feasibility analysis may complement the project to make its evaluation easier. Alliances and partnerships might be considered to save time and minimise risks. For instance, Accenture and the Lagardère Group created The Broadway Factory joint venture to get into the interactive TV market. - Eventually, each business case is proposed to a wide audience of users and doers for evaluation. Doers and users should make the final decision on whether the project is worth prototyping or not. It is up to the final stakeholders to freely chose which project to concentrate on. At Clariant France, the intranet users propose and evaluate which applications should be developed. This step will provide the internal market dynamics, momentum and resources that the projects will need to be completed. This can be done, using various evaluation matrix or criteria. This "open market" approach gives a fairly good idea of the project's potential success. The Third stage: manage the projects The previous stages would have determined the projects portfolio and brought in the necessary resources: a project leader, the project team, and the project resources. This stage is managed according to the usual project management practice: - Organise the project: set up kick off meetings, organise reporting and communication procedures, design issue management and risk management plans. - Plan the project: complete the operational Work Breakdown Schedule, the resources and trade offs, the milestones (go/no go decision points). - Track the project: decide on how to collect status information, to make adaptative actions, to organise project closure. The Fourth stage: impact the organisation In order to contribute to the knowledge layer, each process needs to be thoroughly documented and followed up within the company's IT infrastructure. Market data, project documentation, issues, reports and decision processes are organised, stored and updated in the company's knowledge base. All participants to projects are identified and easily accessible by other project teams. The basic rule in evaluation is "what you measure is what you get" (the "wymiwyg" principle), therefore, the impact of the process's specific rules is constantly tested and evaluated. What kind of organisation serves or hinders the project needs to be identified. Setting up new metrics is part of the change process, whether within or without the organisation: For instance, each project specific success factors are tracked and monitored. On the HR level, bonus schemes are set up for project completion (or even for stopping a project according to go/no go criteria). As in Lucent where part of the pay of the searchers involved in the LambdaXtreme project will be based on its commercial success, "shares" on projects could be incorporated in the usual bonus schemes to encourage entrepreneurial dynamics. As another example, the division/ department/ plant's contribution to projects is part of the reward scheme (for instance, according to number of projects combined with contribution per project). Risk taking (movement between layers) and contribution to knowledge should be rewarded as well (e.g. the number of articles published and how many times the articles are consulted and scored by users). Movements between the core and project layer can be part of horizontal fast tracking procedures in HR management. The human relationship is paramount in the process. Staff should report to one level only and optimally, participants to the project layer should be detached from their original position. This might prove unpractical and tradeoffs or compromise may be needed. we are at the brink of a world of opportunities New technologies, globalisation and digitisation may indeed put a lot of pressure on our businesses, but they bring a lot of opportunities as well. Tough times may well be an uncomfortable indication of a necessary change, a further step in our evolution. When your organisation's hotbed for innovation isn't working anymore, it is time indeed to reinvent yourself and find new ones. Our current period of time compares well with the end of the 19th century when so many scientific and technical breakthroughs founded a century-long industrial era. Radical new Science (we'd better have a close look to what quantum mechanics or genetics have in store for us), new technologies (bio tech, nano tech…), new sociological models (Extended families, What to do with religions? How does your company cope with its variety of ethnic groups if any?) are currently shaping our children's and grand children's world. Business has to embrace these changes and welcome some radical paradigm shifts in the same time. Century old beliefs such as nationality being confused with identity, earnings with value and income with wealth, islands of profit built on oceans of poverty, organisation superseding action, action without vision and vision without awareness, markets without buffer or over regulated by states, ignorance used as a lever for power, etc. might be short lived and not sustainable. Creating wealth and improving the life of 6 Billion humans is "clearly no longer just a moral issue, it's a bottom-line issue" The good news is that we already have a glimpse of what a coming world could possibly be made of: innovation and constant adaptation, transparency and accountability, individual choice and responsibility, openness and focus, competition and excellence. Businesses which are able to know themselves well and organise themselves according to these principles will be the first to thrive on the benefits of this new era. Notes 1 77% of American customers look for corporate support of charities before deciding what to buy, where to shop or work. 63% do so before investing. 2 Ottawa 99 3 Even in the pharmaceutical industry which is highly patent intensive, you can expect new business models to appear soon, based on open standards and coopetition. 4 KADS is a comprehensive methodology for the development of a knowledge-based system. Check KADS at http://www.commonkads.uva.nl/ MKSM is a wider set of methods designed by the French Nuclear Agency (CEA). Check MKSM at http://www.mcxapc.org/ateliers/8/mksm.htm 5 nomu means "to drink": see http://www.jlgc.org/jlgcnews/028/Nomunication.html 6 check http://www.openspaceworld.org/english/openspace.html 7 We contend that to successfully start projects and business ventures, one must concentrate on the smallest segment possible: niche marketing played globally is one of the factors generating the most wealth in an interconnected world (see G.Moore's "bowling alley" concept in Inside the Tornado). 8 This is not always possible. If not, the pilot phase will produce the data we need to evaluate the concept. 9 As team spirit and cooperation is needed in a knowledge-based organisation, collective reward schemes work better than individual ones. 10 Pr Deborah Spar Harvard Business School References Time 13-4-1998 Mulgan: Connexity, How to live in a connected world 1997 Fortune 5-9-1994 Business Week 14-7-1997 Ghoshal & Bartlett Financial Time Handbook of Management 1995 Fast Company Feb-March 1999 Davis & Meyer The speed of change 1998 Cone Study Boston 2002 The "Exxon African Adventure" in Fortune April 2002. Tapscott The digital Economy: promise & peril in the age of the networked intelligence 1996 A. De Gueus The Living Company 1997 Nonaka and Takeuchi "The knowledge creating company" in Leading the Revolution Tapscott The digital Economy: promise & peril in the age of the networked intelligence 1996 ibid. Business Week 22-6-1998 Nonaka & Takeunchi ibid. The Author Garrett received his MBA from the HEC group in France in 1983 and specialised in business creation. He has nearly 20 years of experience in innovative business models and project development, with international organisations as well as with SMEs in France and Europe. innovation process. He is currently working on his first book: "Business navigation in the roaring noughties" Resources - The Knowledge Creating Company (Nonaka & Takeuchi) 1995 - Leading the Revolution (G. Hamel) 2000 - Funky Business (Ridderstrale & Nordstrom) 2000 - Inside the Tornado (G. Moore) 1995 Why not take a look at some other articles: Communicating change - get it right on the inside (apr 2002) Change management 101 - a primer (feb 2002)