Leap Innovation

I have a confession to make. I’m a tech geek. It drives my wife nuts, but I can’t help it. You can imagine my fascination with all the latest smartphones coming out. Palm with the Pre, RIM with the Blackberry Tour, Nokia with the N97, 2nd generation Androids from HTC and Motorola, and of course, the market leader Apple with the iPhone 3GS. It’s technological eye candy. The industry analysts are having a field day predicting who the winnders and losers might be, but as I set back and reflect I have to wonder if anyone’s innovation advantage is sustainable?

The amount of innovation in smartphones is incredible. Palm has taken a disruptive technology approach with a new OS that everyone is raving about. Blackberry is attracting consumers with the Tour and Curve models, which have captured 80% market share. The Android has created a standard smartphone platform that makes it difficult for ISPs to differentiate on features. The N97 is packed with cool features, but definitely priced higher than the others.

And then there is the iPhone. The latest release was definitely an incremental innovation on the hardware and OS. However, offering a better phone at the same $199 as the old iPhone 3G (which now costs $99) indicates they are going after more market share too.

With the entire smartphone industry being so crowded, will there be a clear winner? The smartphone players are going after each other’s market in what’s starting to look like a pricing war. Margins are shrinking which will impact P/E ratios and make investors anxious. Commoditization seems inevitable unless smartphone providers can’t break the stranglehold of ISPs. It appears the only winners are the ISPs and the smartphone software application providers.

Smartphone providers need to find ways to capture more of the value chain. The fat juicy profit margins will not last forever and eventually many of these markets will be overshot. Apple has been the most successful with iTunes and the App Store which are additional sources of revenue. The winner will create a disruptive innovation of the current business model and capture value in new areas. Who will be the winner? I don’t know who will win, but I do know that smartphone users will ultimately decide.

It’s very serendipitous that I recently finished the book, “The Black Swan: The Impact of the HIGHLY IMPROBABLE” by Nassim Nicholas Taleb. We’ve all been shaken by the recent and painful collapse of the U.S. real estate market, highly leveraged financial institutions, and the automotive industry. They tried to manage risk using financial models based on Gaussian distribution models, which failed to predict the effect of catastrophic random events. If you think about other recent events such as 9-11, the collapse of Long Term Capital Management, the U.S. Savings and Loan bailout – none of these were predicted.

I was talking to one of my MBA finance professors a few weeks ago and mentioned reading the Black Swan and shared some of what I considered the most important and controversial aspects of the book. The one that raised the most ire from my finance professor was Taleb’s comment that what is being taught in academia (to hundreds of thousands of MBA students each year) about using statistics to forecast and manage risk is just wrong. This obviously displeased my professor and he responded (somewhat rhetorically), “What else can we do to manage risk?”

That question seems to be an appropriate one as the U.S. along with the rest of the world slowly re-builds a global economy. Perhaps we really can’t “manage” risk as it relates to future events. Taleb’s position is that Black Swan events are random and can’t be predicted, but we can mitigate the impact of Black Swans, and in many cases, even take advantage of it.

So what does this mean to you and your business? My interpretation is that it’s important to manage your core business to minimize the impact of huge random events. You can’t predict what will happen, but what would you do if your market, technology, customers etc. collapsed? Mitigation is more important than forecasting.

The flip side is that it is important to take risks. As Christiansen as documented in “Innovator’s Dilemma:” the disruptive innovator is the winner because they attack incumbents in a way that was never “predicted.” A “black swan” event to the incumbent is a disruptive strategy to the innovator.

What are the necessary and sufficient requirements for a culture that will sustain innovation?

In a recently-published management book, Extreme Toyota, the senior management at Toyota point out two significant aspects of their workplace culture that has led to their success: continuous improvement and knowledge creation.

Toyota has survived horrendous quality problems with their cars, several world wars, economic downturns in the 1950’s and 1980’s and globalization to now be one of the most-respected companies in the world. Toyota executives created a culture that was able to become stronger after each challenge. That’s because they invest in the most important asset to the organization: their knowledge workers.

Those knowledge workers relentlessly drive continuous improvement learning from both their mistakes and successes. Those learnings become part of the knowledge creation that is shared with others. It’s a virtuous cycle that allows Toyota to adapt and thrive in tough times.
Changing a culture is hard work – nearly impossible in most cases. Companies tend to focus lots of resources on changes in process, methods and tools, but practically nothing on change management. It doesn’t come as a surprise that these companies only get short-term benefits. Things revert back to the mean and the benefits are lost. It becomes a vicious cycle of change, reversion and change again.

It would be impossible for any company to duplicate the Toyota experience, but they need to start where Toyota did – focusing on continuous improvement and knowledge creation.

Attention auto execs: What were you thinking?

The U.S. automotive industry is focused on a government bailout/bridge loan to prevent the loss of approximately three million jobs and major damage to the economy. The blame game centers on greedy executives, unions and escalating healthcare costs. Rather than finger pointing, perhaps it would be better to ask one fundamental question, “What were they thinking in the first place?”

Some questions I would have asked might be:
• Is our strategy sustainable?
• Have we accounted for systemic risk?
• Have we taken an honest look at market realities?

While few would question their motivation (profit), U.S. auto executives have persisted with a strategy of gas guzzling SUVs and trucks that was doomed to fail. Just because a fast-growing market segment exists; it doesn’t mean it’s sustainable.

It doesn’t take a marketing genius to see that trends in rising oil prices, climate change and the consumer shift to greener products would make for a tougher value proposition and pose systemic risk. The U.S auto executives’ past sins have has hit them faster than $5-a-gallon gas did last summer.
However, Toyota and Honda stood in stark contrast. Toyota took the bold move to introduce the Prius despite an unproven technology and market. Honda has been reluctant to enter the big truck and SUV market because it conflicted with beliefs that vehicles should be efficient and not have bad fuel economy. The better strategies of these two Japanese automakers resulted in a more balanced, risk adjusted portfolio of automotive brands compared to the Big Three.

The U.S. automotive companies’ flawed strategy has resulted in acres of gas guzzling vehicles sitting on new car lots throughout the country. Now the U.S. automakers are forced to play catch up for survival sake. 

Okay, so there are literally three I’s in sustainability, but hear me out. What do executive pay, climate change and the recent collapse of Fortune 500 companies have in common? They all share three E’s: ethics, environment and economics.

ETHICS. Most of us have acknowledged you can’t legislate morality. You can establish laws and regulation, but if an unethical person really wants to “game” the system then they will find a way. For example, while few really understood how dangerous mortgage derivatives were, many people saw it as an easy way to distribute risk and make a lot of money.

ENVIRONMENT. My concern about ethics leads me to the environment. If there are no ethics in the boardroom, then what is the real intent of being green or philanthropic? It is a slippery slope  to have making money as a business’s the top priority and “doing good” lower on the totem pole.  It’s too easy for profit to become the only incentive.

ECONOMICS. Ethical and environmental failure has led to the economic collapse of many businesses. Take a second and think about any failing company that’s been in the news lately. Can they tout success with the three E’s? What about companies that are prospering? They just happen to be doing a better job at the three E’s.

Is straying from the E’s always a bad thing? Not necessarily, but being sustainable means that businesses must be guided by a strong moral compass, and it demonstrates stewardship and accountability in how it conducts business. The businesses that excel at the three E’s will reap the economic benefits over the long term – and that’s what sustainability is all about.

Sustainable Products & The Bottom Line: Three Key Elements You Need to Know

Companies that take an integrated approach to developing and designing their products more sustainably will achieve positive triple bottom line results. Maybe you’re like a lot of folks and wondering where to get started on this.

Here are three essential elements to get the process jump started:

1.    Re-evaluate your corporate values and strategy.  What does sustainability really mean to your business?  How do customers perceive your company brand and products? Make sustainability important by making it core to your business.

2.    Incorporate sustainability into operations. For instance, sustainability should be a major factor during  the early product planning stages where decisions can be aligned with your strategies. It should also be incorporated into your product and technology roadmapping as well as portfolio management.

3.    Lastly, embed Design for Sustainability (DFS) into your product development framework. DFS best practices operate in the same manner as Design for Manufacturing (DFM) or Test (DFT) methodologies where earlier in development is always better and the upfront planning drives process improvements in efficiency, cost and time to market. 

Companies are just beginning to initiate a socially responsible perspective on product innovation but few are doing all three of these.  In the future, the companies that do take this holistic approach will be the market winners over the long run.  From my perspective, our futures depend on it.

As I mentioned in my last blog entry, the next phase of the quality movement will be corporate social responsibility. While the philanthropic and charitable initiatives are to be highly commended, organizations will need to address how sustainability affects their core business.

I define sustainable product innovation (SPI) as the creation, delivery, operation and disposition of a product or service in a manner that delivers a net benefit to individuals, shareholders and societies. The impact of SPI is already being felt across the board in many industries. Take a look at investments, global markets, brand positioning, product concepts, manufacturing, distribution, usage and disposition processes. They’re all facing major transformations. Global 100 companies such as GE, Walmart, Toyota, P&G, Intel and Phillips that are already embracing SPI are causing ripples throughout markets and supply chains.

Out of necessity and self-interest, regulatory and non-governmental organizations (NGOs) will continue to narrowly focus on a specific aspect of sustainability (e.g. ethical, environmental or health). Organizations will be compelled to take a broader perspective on sustainability and develop a holistic approach to address compliance and perceptions, but more important, stakeholder interests.

At a minimum, stakeholders include employees, customers, suppliers, media, NGOs and the communities in which organizations operate. While the focus of quality in the past has been primarily on the customer needs and wants, SPI will compel organizations to consider all stakeholder requirements and rights. Those that succeed will not only gain in corporate goodwill and world-class brands, but also in profitability and efficiency of operations. SPI will make a direct, measurable impact on the triple bottom line.

How do you predict SPI will affect your company and/or industry? Have you already felt the SPI ripple effect?