P71 Hardball Innovation Taking the Best

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  • In this podcast I share another case study from the book Hardball, Are You Planning to Play or Playing to Win? It is Published by the Harvard Business School Press.
  • This is a case study about the Ford customer service division which at ne time was struggling. The division’s revenues were flat and only about 10% of dealerships were growing from their service operations. What made these results even more concerning is that in general the aftermarket parts business tends to grow faster than the original equipment market.
  • This division supplies aftermarket parts and instruction on how to repair Ford vehicles.
  • Several attempts to fix the business failed. They tried to focus on quality – “fix it right the first time.” They tried setting a goal of 100% service satisfaction – that didn’t go so well.
  • They thought about opening Ford auto care locations separate from the dealership like Jiffy Lube and Midas. Internal dissension concluded this was a bad idea.
  • They finally got fed up and established an executive team to solve the problem. They did a lot of good things – they collected information, assessed their competitive advantages and disadvantages, identified best practices, and ultimately explored options for reinvigorating growth. In the collecting information faze, they discovered challenging numbers. First year Ford car owners had less than half their maintenance done at the dealership as compared to 70% for Honda. The more they looked, the more Honda jumped out as having best industry practices.
  • At this point in time, Honda was doing something that now all dealers do. They grouped a bunch of service requirements, established intervals when they should be done, and did bundle pricing. Honda marketed these bundled services with signage in the dealership and marketing mailers. In their marketing, they made a strong case for why Honda vehicles should be only serviced at Honda. Their service marketing actually became a platform for regular interaction with Honda owners, which served to create a happy customer willing to buy a Honda a second time.
  • When the Ford team realized this, they went from fixing a problem to creating a true business growth opportunity. Egos and pride tried to derail the effort to mimic Honda. But ultimately the idea was to good to not pursue the bundled service approach. They overcame some of the internal resistance by taking the Honda program to a higher level. This is where a sense of ownership and pride kicked in.
  • Unfortunately, the path to implementation was not easy. The culprit was again company culture. Company engineers were not comfortable or supportive of putting a variety of services into one bundle and at the same interval. The engineers argued that each of the components had a different ideal interval. Engineers were getting close to derailing the entire program when another executive made a compelling argument that the needs of the customer trumped the engineer’s needs.
  • Having gained internal agreement, the next challenge the team faced was convincing their very independent dealers to join the program. In their dealer presentation, they focused on customer loyalty comparisons between Ford and Honda, the bundled service approach Honda used, and the customer sales and ownership lifecycle.
  • Very quickly dealers realized that they could increase annual service revenue by over $200,000 with almost no additional expense. Fairly soon dealers realize that they were crazy if they didn’t do this. The overall dealer’s counsel supported the bundled service approach. With this overall support, they were on the road and fairly soon had 3400 dealers signed up for the program.
  • In the next four years, Ford’s customer service division achieved double-digit growth. This was an indirect attack on Midas, Pep Boys and other independent garages that had been taking service business away from Ford dealerships. Soon into the program they added tires to the program and went from selling almost no tires to selling 1 million tires.
  • The authors conclude by saying, “Ford had learned that it’s never enough to copy the details of someone else’s successful program. It’s essential that your organization create anew and develop genuine passion for it. The growth team felt the passion when they did their research and realized the size of the opportunity.”
  • The authors mention some specific conditions when this approach of using another company’s best practices is a way to benefit your business.
  • First, they advise to “copy only when it will enable you to gain leadership.” Ford took what they learned from Honda and made it better and made it their own. That enabled them to make a dramatic turnaround in their service business. Companies that copied others but failed to gain leadership include IBM and Kodak which entered the copier business with me too products and failed miserably. Kmart copied Home Depot when they started Builders Square and failed. These examples highlight what I call the arrogance of a brand name. Some companies think their brand-name is so strong that they do not need a competitively superior product just a brand name that they consider superior. All too many times, customers see right through this. In the the case of Ford Motor Company, they were more competing with their previous version of delivering service than any competitive company. There was the indirect attack component –if Ford owners would use Ford service more then it would take business away from Jiffy Lube and Midas.
  • Second, the authors state, “borrow when it will facilitate the indirect attack.” If you copy someone else, don’t then turn around and compete directly with that someone else. If you borrow, consider using the me to version to compete with another company and target customers. Ricoh created a me to version of Xerox machines and used this version to compete in different distribution channels and with a different price and service models. Since Ricoh did not go directly against the profit sanctuary of Xerox, Xerox largely ignored their initiative.
  • Third, the authors underscore the importance of making the copy your own. It is okay to borrow best practices from someone else, but to be really successful you then need to tailor these best practices to your business and culture and set a new, higher level for these best practices. In effect, you raise the bar for best practices and become the new recognized leader. This not only has a significant business benefit, but also helps greatly with the cultural issues. When done right, the copy can become a source of inspiration and pride, because you took someone else’s best practices and raised them to a much higher level.
  • From an innovation perspective, there’s a lot to like here.
  • When we are helping a client with innovation, as a part of our deep dive into the business we always look for best practices around the world as they relate to the client’s need. You don’t always find something either worth copying or that’s a good fit for the client company. We often use best practices used by other companies as excellent stimulus in a creative session. The stimulus is a starting point, not an end point. We use the stimulus in combination with other inputs to use the creative session to take all the ideas and make them better and make them a great fit for the client’s unique needs. In a way, this is taking the best practices of another company and making them your own, except that our process greatly facilitates not only making them your own but making them better.

P69 Ten Biggest Innovation Mistakes

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  • Welcome to the ten biggest innovation mistakes you can make countdown. In this podcast I count down from the tenth biggest mistake you can make on innovation to the number one mistake you can make. While every item on this ten biggest innovation mistakes list has the potential to seriously impair or derail an innovation program, it is purely my experience that produces the rankings.
  • My purpose in sharing this list is to bring focus to some of the things that are really important for successful innovation.
  • So let’s start the countdown. The tenth most serious innovation mistake you can make is to not have the right innovation process.
  • This can be a very serious mistake that cripples your innovation program on day one. I put this on the list because I’ve seen so many people try to wing it when it comes to innovation. The conversation goes something like this. “We’ll get a few people together, get some pizza and beer, brainstorm and will have the ideas that we need. Then I will take the lead to figure out which ideas we want to pursue and ask if you want to help out here and there. So, let’s get started. When do you want me to have the pizza and beer here for the meeting?”
  • Now you may think this is an exaggeration. Unfortunately it is not.
  • I also find some larger and medium-size businesses try to figure out the next step in the innovation process immediately before it needs to be done. Their argument is that they don’t know what process is needed until they know what the idea is. It’s true you do not know the specific research questions that need to be asked. It’s not true that you can just improvise and be spontaneous as you go and expect success. The best process in most cases is some version of a stage gate process that I’ve talked about in a previous podcast. It’s not a one-size-fits-all in terms of the details, but the principles of this process are well-established.
  • Next, the ninth most serious innovation mistake that you can make is to use flawed research.
  • So many times when I work with companies, I hear something like, “the research concluded” and they share this major insight that is guiding their entire innovation program. Upon closer examination, I find all too many times that the research asked the wrong people the wrong questions. And these are just some of the potential major flaws that can be in research.
  • The other major flaw that people make all too frequent use of focus groups as decision-making research. Focus groups are never, never to be used to make even semi-important project decisions. The people in the focus group are not representative of any particular group of customers. A representative group requires at least about fifty people and more often about 100 people in a demographically and even geographically balanced way.
  • To avoid this mistake, always use a highly experienced and skilled professional researcher. For example, on the Innovate2Grow Experts team at i2ge.com we have two exceptional researchers because we deeply understand the importance of quality research can make in producing successful innovation.
  • Next, the eighth most serious innovation mistake you can make is to not have the right decision-makers involved in the innovation process.
  • So often I see one decision-maker often a senior executive or company owner as the key decision-maker. It is not wrong that they are involved in the decision-making process, but it is a mistake to have them be the only one. I have found that when it comes to innovation, people in these positions can often rely far too much on their past experience in making decisions. Innovation by definition is creating new and future experiences. In a rapidly changing world relying on the past experiences of only one person is a risky venture indeed.
  • I am a big believer in innovation as a team effort. A highly effective, empowered team creates a forum for a high-quality exchange of thinking, skills and experiences. Just as there is strength in having diversity in the idea generating process upfront, there is great value in having diversity throughout the process and especially the decision-making process. Who the right people are on this team is going to vary from project to project and company to company. It certainly needs to include the project champion that can come from a wide variety of levels and functions within the company. It then needs to include the right people from the functions critical to success. It can be people from sales, marketing, R&D, research, and supply chain. More important than from where they are, is their passion and engagement with the project and hopefully a track record of innovation success.
  • Next, the seventh most serious innovation mistake is making decisions too late.
  • Each step in the development process of an innovative idea involves increasing complexity and cost. There are risks to getting too far down the innovation process when you discover fundamental flaws that could of been detected in the very early days of the project. The problem with discovering mistakes too far down the road is that too many commitments and promises have been made. This makes it very difficult for key decision-makers to abruptly change course. The inclination is to want to fix fundamental flaws and continue moving forward. Too often this is fools gold.
  • Autopsies of failed innovations often reveal that the reason for the failure was well known fairly early on in the project. Because egos and careers became tightly intertwined with project success, management did not have the courage to kill the idea when they knew of its serious flaws.
  • The solution to this is to have a very rigorous well-thought-out stage gate development process. At each gate, the criteria for moving forward to the next stage needs to be rigorous, well-thought-out, and broadly agreed to. This is the single best antidote to this innovation mistake.
  • Next, the sixth is making decisions too early. Yes, serious mistakes can be made early on just as they can further down the road.
  • The biggest mistake that happens in making decisions to early is to kill ideas before you know enough about them. I have been in the room when ideas of been killed for reasons that never had much substance behind them. They were the personal opinions of a very few people and others did not want to stand up for an idea that was still at the embryo stage.
  • Again, the solution to this problem is having a rigorous stage gate process. When Innovate2Grow Experts at i2ge.com leads a project, we include a very diverse and highly skilled group of people in a series of voting sessions to identify the ideas with the most promise. This goes through several levels before reaching a group of ideas that clearly stands out versus the balance of the rest of the ideas. Then we use Merwyn technology as quantitative research to quickly sort out those ideas with the greatest chances for success. Personal judgment of a skilled, experienced group helps evaluate these research results to identify the next, smaller level of ideas to be developed. The key to all of this is having the right diverse, highly talented people involved in decision-making and decisions being made with the aid of the right kind of research.
  • Next, the fifth most serious innovation mistake is having weak or no reason to believe your benefit claims made to potential customers.
  • This is a mistake that can be made at virtually every stage of the process where research is used to evaluate the strength of an idea. Most people think the potential customer communication focus needs to be on how their innovation benefits a target group of people. Yes, this is important.
  • Unfortunately, too many people forget that innovation is something new or very new that customers have not seen before. There’s even a benefit promise that is not been able to be made before. When this kind of benefit communication is made without giving people a reason to believe that you can actually do what you’re promising, the air goes out of the balloon and persuasiveness drops precipitously.
  • Let me give you an extreme example to make the case. If I were to walk up to you and tell you that I have a cure for cancer, you would probably be very interested but highly skeptical. That claim would mean almost nothing unless I gave you an exceptionally powerful and credible reason to believe I could actually do what I just promised. So a benefit promise without a credible reason to believe taps into only a small percentage of your potential persuasiveness – this can end up in a innovation failure.
  • Next, the fourth biggest innovation mistake is not knowing your customers well enough.
  • Starting an innovation program by not knowing your customers well enough is like embarking on a journey into entirely new geography without a map and compass. Even if you get to your destination, it’s going to be an arduous, painful and highly inefficient process.
  • The antidote to preventing this mistake is a professional research program at each stage of the process that asks the right people the right questions. As I’ve mentioned in a previous podcast on research, research is not the final, final answer but it is a guide to judgment with the right decision-makers. Without the voice of the consumer helping to guide you each step of the way, the opportunity for major mistakes is very high.
  • Next, the third biggest innovation mistake is communicating features and weak benefits versus persuasive benefits.
  • Innovative new products and services tend to have some never before seen benefits. Customer communication becomes critical to your success. Customers want to know what’s in it for them – what do I get if I pay you for this product?
  • In an earlier podcast, I shared the example of a major car manufacturer communicating “advanced stabilization control.” No one goes out to buy a car with this feature. They do go out to buy a car that has advanced technology like advanced stabilization control that delivers the benefit of a 40% reduction in rollover risk.
  • If you say that your innovative product has more of something, that is weak benefit communication since consumers don’t know how much more. Research suggests that they will assume a rather small benefit improvement. You significantly increase the persuasiveness of your customer communication when you tell them that it has 55% more of the major benefit they are looking for.
  • The reason that this is such a serious mistake is that you can do absolutely everything right up until the time that you communicate your innovation to potential customers only to use weak communication that does not allow customers to fully understand the wonderful benefits they can get. The result is disappointing sales and often failure because of this one step.
  • Next, the second biggest innovation mistake you can make is not having a vision of success or having the wrong vision of success.
  • You absolutely need to start your innovation process with a very, very well thought out process to identify what you want the end result to be. It’s the old advice of begin with the end in mind.
  • An earlier podcast did a deep dive into this subject so I’m not going to reiterate the key points. I will add that when the process of creating a vision of success is done right, it can inspire and guide years and even decades of future work. It is that potentially powerful.
  • Next, the single biggest innovation mistake you can make is not having enough difference to persuade competitive customers to switch to your product. If the difference is not big enough then customers do not switch. When customers do not switch, you’ve invested a lot of money, but get no new customers, and probably have a significant project loss on your hands.
  • As you know from listening to these podcasts, I beat the drum of it takes a dramatic difference, a dramatic improvement in important customer benefits to get competitive customers to switch to your product. There is two key points here. First, the difference needs to be dramatic to get their attention. Second, the difference needs to be in a benefit area that is crucial to how they make decisions about which product to buy. Have a dramatic difference on the seventh most important customer benefit, and you will have a failure on your hands even though you have a dramatic difference.
  • Never lose sight of this.
  • I hope this has been both informative and helpful. I have had a fun putting this together. Seriously, keep this checklist as mistakes you will not make in your innovation program.

P67 Innovation Hardball Case Study Three

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  • This series of podcasts is inspired by case studies in a book titled Hardball, Are You Planning to Play or Playing to Win?, published by the Harvard Business School Press.
  • These case studies include a mix of innovation, strategy, tactics, and attitude. While I will focus on the innovation part, the other parts are also critical to the success of the examples in the case studies.
  • While some people may react positively or negatively to the word hardball, for the most part I like it. In many podcasts, I’ve told you how difficult it is for innovative ideas to succeed. The biggest challenge I’ve shared with you is that the innovative idea does not have a dramatic enough improvement of a critically imp ortant customers benefit. Even if you have this level of difference, execution plays a significant role in your success.
  • The authors articulate five principles that hardball players live by.
    • First, they focus relentlessly on competitive advantage.
    • Second, they strive to convert competitive advantage into decisive advantage.
    • Third, they employ the indirect attack.
    • Fourth, they exploit their employees’ will to win.
    • Fifth, they draw a bright line in the caution zone. The authors say, “before you enter the caution zone, you have to know where the unacceptable area is and draw a bright line for your company that marks the edge, the limit beyond which you will not venture. It is the leader’s responsibility to draw the line and make it very bright and clear.” This guards against the downside risk of some versions of hardball that are win at any cost and a willingness to do anything to win. This version of hardball can lead to wearing pinstripes behind bars.
  • Let’s start the third case study, which is about companies attacking the most profitable part of a competitor’s business. This truly is about hardball.
  • By attacking where competitors make the most money, you are doing something very different than was done in the previous podcast where the focus was on anomalies that often resulted in attacks on some of the least important parts of a competitor’s business.
  • There are a few options you have when attacking competitor profit centers. The first is that you can very aggressively compete on price against some, most, or all of a competitor’s product line. You can also decide to offer innovative new products that have benefits that are better than a competitor’s products – especially when the combination of benefits and the selling price create a value competitive advantage. You also have the option of competing on service. Interestingly, Hyundai did this when they extended their car warranties to 100,000 miles – about double what their competition had.
  • This case study is about Japanese automakers. When they first entered the United States market with cars they tended to be smaller, low-priced cars. Over time they added models that allowed them to compete with larger cars and at higher price points. While functionally their cars were similar to most American models, over time they developed a far better quality performance that was an important distinction for many American consumers of cars.
  • Automobiles had been an important source of American carmaker profits, but this eroded over about thirty years of competition with Japanese carmakers. American manufacturers gradually shifted their profit centers to trucks, especially light trucks and SUVs. By the late 1990s, American carmakers sold more light trucks than they did cars. In 2001 the only reason Ford made a profit that year was because of light truck profitability which wiped out the major losses on cars.
  • In the late 1990s Japanese automakers decided to enter the US market with full-size minivans, SUVs, and heftier light trucks than they had previously had. At first, American automakers were not worried. Especially in trucks they thought this was a male American business that would not turn to the Japanese for their trucks. Not surprisingly, there was a PR campaign suggesting that the Toyota tundra just wasn’t tough enough for Americans – and trucks in America are sold on a toughness. Prior to the major entry of Japanese light truck manufacturers, they had about a 10% share of the market from 1980 to 1995 – American manufacturers had a 90% share. In the early 2000’s the Japanese share rose to 25% – doubling their share in just a few years.
  • They doubled their share with value pricing on the initial purchase, higher resale value, and the same higher-quality data driven there car success.
  • As the Japanese did in cars, they gradually expanded their light truck line into the heavy truck line with stronger and more robust models. The Tundra became stronger. Nissan introduced the Titan which specifically targeted for its F150. Toyota introduced new models to go after the Ford F250 and Chevrolet Silverado models – these are models that Ford and Chevrolet reportedly made as much as a $15,000 profit per vehicle.
  • If you have been an observer of this market, you know that American truck makers have upped their game over the years. New models with new features. There’s a focus on horsepower and towing capacity. And their focus on toughness has never wavered.
  • If you step back and take a look at the entire Japanese car and truck story, you see a dramatic success story. Prior to their arrival in America, Ford Motor Company and Chevrolet essentially owned the business. When the Japanese first started arriving, one of the first offenses was to suggest it was not patriotic to buy a Japanese car.
  • The only reason that the Japanese succeeded is because they offered dramatically better value than American cars. American car quality had gotten sloppy and manufacturers showed little interest in making it better. There were even conspiracy theories suggesting that the sloppy quality was a part of American manufacturer’s efforts at planned obsolescence – your car would last only a set number of years when it would need to be scrapped and replaced by a new one.
  • If you fast-forward to today, you see American manufacturers have been forced to tremendously up their game. Quality measures like consumer reports magazine and JD Powers have captured consumer’s attention.
  • As I mentioned earlier, Hyundai is another example of a foreign manufacturer entering the US market well after the Japanese arrived. Hyundai has taken a page from the Japanese. They have a focus on quality and exceptional value. I found myself buying a Hyundai Genesis primarily because of the quality and the tremendous value. When I priced it against similar Lexis, Infiniti, and Acura models. The price was about $10,000 – $15,000 lower for comparable benefits. Interestingly many years before this experience, I bought the Infiniti Q forty-five in their first year in America for a very similar reason – feature for feature the car was at least $30,000 lower priced than comparable Mercedes models.
  • There are couple of insights from this case study that I think can help most of you listening to this podcast.
    • First, it’s the same old insight in a new context. If you want to switch customers from their current product to your product, you must offer dramatically better benefits than the products customers are currently using. For the segment of customers for whom quality is important, the ratings the Japanese vehicles received in Consumer Reports magazine were one of the key drivers of their success. Consumer Reports magazine was the reason to believe the quality of these vehicles. Remember from the Merwyn technology series the importance of providing a highly credible reason to believe to support your benefit claim, especially when you benefit claim is dramatically better than the competition. At that time I said that the stronger your dramatic difference the stronger your reason to believe needs to be.
    • Second, it is probably very difficult for a startup to do a direct competitive assault on the profit sanctuaries of existing competitors. It takes a certain level of resources to successfully execute the strategy because the strategy typically requires a long-term, expensive commitment. In this case, the Japanese could not have executed their direct attack on American carmaker profit centers without first having established a very strong and successful base of business in Japan and some other countries.
  • There will be more case studies since I think they can bring to life important business and innovation principles better than some other approaches. There will be more case studies coming from the Hardball book.

 


P66 Innovation Hardball Case Study Two

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  • This series of podcasts is inspired by case studies in a book titled Hardball, Are You Planning to Play or Playing to Win?, published by the Harvard Business School Press.
  • These case studies include a mix of innovation, strategy, tactics, and attitude. While I will focus on the innovation part, the other parts are also critical to the success of the examples in the case studies.
  • While some people may react positively or negatively to the word hardball, for the most part I like it. In many podcasts, I’ve told you how difficult it is for innovative ideas to succeed. The biggest challenge I’ve shared with you is that the innovative idea does not have a dramatic enough improvement of a critically important customers benefit. Even if you have this level of difference, execution plays a significant role in your success.
  • The authors articulate five principles that hardball players live by.
    • First, they focus relentlessly on competitive advantage. In many podcasts, I point out the great importance of having competitive advantages in the benefit areas your customers need the most.
    • Second, they strive to convert competitive advantage into decisive advantage. They say, “Decisive advantage is systemically reinforcing. The better you get at it, the harder it is for competitors to compete against it or take it away.” Another way of looking at decisive advantage is that it is a dramatic sustainable advantage.
    • Third, they employ the indirect attack. When a major competitive player first sees your innovative initiative, their first inclination is to ignore it or see it as a small annoyance. Only later did they wake up to find out it’s an attack coming right at them.
    • Fourth, they exploit their employees’ will to win. You have also heard me refer to the importance of company culture – the values and beliefs that drive behaviors. This is about creating a company culture with a competitive spirit dedicated to winning.
    • Fifth, they draw a bright line in the caution zone. The authors say, “before you enter the caution zone, you have to know where the unacceptable area is and draw a bright line for your company that marks the edge, the limit beyond which you will not venture. It is the leader’s responsibility to draw the line and make it very bright and clear.” This guards against the downside risk of some versions of hardball that are win at any cost and a willingness to do anything to win. This version of hardball can lead to wearing pinstripes behind bars.
  • Let’s start by taking a look at the second case study. This involves a paper company called Brokaw that was the most profitable division within Wausau Papers. Brokaw was especially known for high quality paper and their ability to produce them in a wide range of colors.
  • Wausau hired a new president who was committed to making the overall company far more modern and competitive.
  • As he examined Brokaw, he found a company that almost exclusively focused on one major retailer in each market and supplemented this with smaller retailers. The exclusive relationship with one major retailer in each market was thought to develop loyalty and retailer personnel who were skilled at selling their specialty products.
  • He became intrigued by the company’s Chicago market that had strongly outperformed other company markets for years. The conventional wisdom had been their salespeople were better. But a closer examination revealed other, far more intriguing reasons. First, in Chicago they did business with many major retailers, abandoning the exclusive relationships that they had in other markets. Second, they delivered products to retailers far faster than they did in other markets. In fact, many of their deliveries were next day deliveries. Upon closer examination, they discovered that their delivery trucks to other markets frequently went through Chicago so it was easy to stop there and make deliveries before going on to other markets.
  • The new president wondered if they could replicate Chicago in other geographical areas. When he looked more broadly, he discovered that customers in other markets would often have to wait 1 to 2 weeks for delivery of their paper order and even then 20% of the ordered items might be out of stock and backordered. Compared to Chicago, these other markets had horrendous customer service. In addition, these long delivery times and unshipped items created customer discontent and significant additional administrative costs because of follow-ups, customer notifications, and making sure they had accurate accounting.
  • In examining the industry he discovered that the specialty papers that Brokaw focused on were a distant secondary priority for many of their direct competitors. They didn’t like the relatively small orders. They didn’t like the changeovers required in production. Compounding this situation was that many competitors required full truckload order quantities for the specialty products – something their customers really disliked. Thus, if they focused on these products it would be an indirect attack on their competitors.
  • From a manufacturing perspective, their competitors’ equipment was ideally suited to standard paper while the Brokaw plant was ideally suited to specialty papers. From a customer perspective, they did not like ordering large, truckload quantities that significantly exceeded their immediate needs. They would inventory the slower moving items and even though they typically have higher profit margins, the low turnover made the overall profit picture far less rosy.
  • The new president decided that they would run a test of a new way of doing business in Minneapolis. They would promise customers next day delivery. Specifically, if an order came in by 4 PM, it would arrive on the customer’s loading dock by 8 AM the next morning. In addition, they wanted orders to be at least 96% complete. On products that were really low volume specialty products, they reduced the average delivery time from 4 to 6 weeks down to two weeks. In addition, they removed the requirement for truckload quantity orders.
  • They also made some significant pricing changes. They offered their specialty products at the same price as their competitors specialty products which were usually 35% higher-priced than standard products. In addition, they announced a 10% price increase for their standard products in an effort to discourage customers from ordering large quantities of these products. They wanted their manufacturing and sales focus to be on the specialty products.
  • The other big change they made was to end the exclusive retailer selling relationships. They knew that they could not make next day delivery cost efficient with only one customer in a market. They were now going to sell anyone that wanted to buy.
  • These big changes to how they marketed their products required equally big changes within the company to make these changes possible.
  • While Brokaw was good at specialty papers, they needed to get even better. Rapid changeovers needed to be even quicker. Managing color quality and reducing waste also needed major improvements. They added new computerized equipment and new finishing lines. At the end, it was one of the smallest paper plants to have such high technology. The result of all this was they could now offer 235 product variations to its customers – this really defines specialty.
  • When it came to the systems and policies necessary to make the next day delivery system work, the first change was abandoning the requirement that no truck leaves half full. Trucks now departed when they had to to deliver next day orders. To meet surge capacity they initiated leasing trucks instead of permanent increases to their fleet. They put together a special two driver teams for long-haul orders. And when no trucks were available, they had the option of shipping via FedEx and UPS. All of this change required long-term veterans to dramatically change the way they thought about the business. A culture that values efficiency was now going to have to be a culture that valued customer service.
  • To be clear, not everyone was happy. The customers who had an exclusive relationship were the most unhappy. They now found themselves having many more competitors for Brokaw’s products – not a fun outcome. On the other hand, the salespeople could now open up many more major new volume customers.
  • Not surprisingly, the next day delivery system was well received. Customers no longer needed to plan so far ahead and take on so much slow turning inventory.
  • Not surprisingly in the first ten months of the Minneapolis test, market share increased in every month. When they expanded it to a few more markets, they found that they could double their market share in two years. This is major business improvement from major changes.
  • Here are several lessons I think you can take from this case study that can help you.
    • First, it takes major changes to get major business benefits. You know from the very early podcasts on Merwyn Technology that I repeatedly stressed the importance of dramatic improvements if you wanted to increase your chances for success.
    • Second, if you have some big business improvement ideas, I strongly urge you to consider test markets. Test markets have gone a bit out of vogue in recent decades, but they can serve a very valuable function. Big ideas often can involve big business and financial risk. Test markets give you a real-world environment to evaluate those risks. Concerns about competitors learning about your innovative ideas and having greater lead time to respond, is a real risk. Unfortunately, sometimes this gets greater weight than the value of learning and improvements to the original idea that they can come from test markets.
    • Third, you can find anomalies in a wide range of places in your business. It can be in the types of products to the types of customers to geographical areas. What is your company especially good at that your bigger competitors may find as secondary priorities? How can you leverage those areas that you are best at in an indirect attack on your competitors? The value of indirect attacks is that major competitors first consider your innovations to be pesky annoyances and not major threats to their overall profitability.
    • Fourth, recognize that when making major internal changes that you need to account for the difficulty many people will have been changing their values. In this Brokaw case study, people needed to change from an efficiency culture to a customer service culture. Do not underestimate how difficult this can be and the fact that you will encounter resistance.
  • I think the insights from this podcast can help many businesses in their efforts to become more innovative and successful in the marketplace. Just remember it takes a balance of boldness, thoroughness, and vision to achieve success.

P65 Innovation Hardball Case Study One

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  • This series of podcasts is inspired by case studies in a book titled Hardball, Are You Planning to Play or Playing to Win?, published by the Harvard Business School Press.
  • These case studies include a mix of innovation, strategy, tactics, and attitude. While I will focus on the innovation part, the other parts are also critical to the success of the examples in the case studies.
  • While some people may react positively or negatively to the word hardball, for the most part I like it. In many podcasts, I’ve told you how difficult it is for innovative ideas to succeed. The biggest challenge I’ve shared with you is that the innovative idea does not have a dramatic enough improvement of a critically important customers benefit. Even if you have this level of difference, execution plays a significant role in your success.
  • The authors articulate five principles that hardball players live by.
    • First, they focus relentlessly on competitive advantage. In many podcasts, I point out the great importance of having competitive advantages in the benefit areas your customers need the most.
    • Second, they strive to convert competitive advantage into decisive advantage. They say, “Decisive advantage is systemically reinforcing. The better you get at it, the harder it is for competitors to compete against it or take it away.” Another way of looking at decisive advantage is that it is a dramatic sustainable advantage.
    • Third, they employ the indirect attack. When a major competitive player first sees your innovative initiative, their first inclination is to ignore it or see it as a small annoyance. Only later did they wake up to find out it’s an attack coming right at them.
    • Fourth, they exploit their employees’ will to win. You have also heard me refer to the importance of company culture – the values and beliefs that drive behaviors. This is about creating a company culture with a competitive spirit dedicated to winning.
    • Fifth, they draw a bright line in the caution zone. The authors say, “before you enter the caution zone, you have to know where the unacceptable area is and draw a bright line for your company that marks the edge, the limit beyond which you will not venture. It is the leader’s responsibility to draw the line and make it very bright and clear.” This guards against the downside risk of some versions of hardball that are win at any cost and a willingness to do anything to win. This version of hardball can lead to wearing pinstripes behind bars.
  • Let’s take a look at this first case study that involves Frito-Lay, a PepsiCo company. I will start with some background on the businesses and the combatants.
  • Historically, Frito-Lay has had about a 60% share or higher of the salty snack category with gross margins of about 50%. As such, it is a very important part of the overall PepsiCo company financial results.
  • Their DSD system – direct store delivered – is a critical part of their overall success. The combination of hiring better qualified people and route and selling efficiency created point-of-purchase competitive advantages and a cost advantage versus the competition.
  • Frito-Lay began to get in trouble in the 1980s when it expanded from purely salty snacks into cookies and crackers. While the delivery truck sizes remained the same, the number of products they needed on the truck increased at the expense of the faster selling salty snacks. Plus their salespeople needed to take care of more shelving sections in different parts of the store. These new products added less than 20% of sales volume but raised costs. In response to the higher costs, salty snack prices were increased.
  • Anheuser-Busch – the Budweiser beer people – also had a strong DSD system. They introduced the Eagle brand of potato chips, corn chips, and pretzels along with their honey roasted peanuts that were national by 1989. Taste tests revealed that consumers thought the Eagle brand of potato chips tasted better than Frito-Lay. By 1991 Eagle had a 6% share of the salty snack market. Feeling confident, Eagle decided to launch products as a direct attack against Frito-Lay’s Dorito product – Frito-Lay’s largest business. Up until then Eagle had focused on big but relatively minor Frito-Lay businesses. Doritos were also the biggest profit center in the salty snack business for Frito-Lay.
  • Roger Enrico took over as CEO of Frito-Lay in 1991. Prior to that he had earned his stripes in the Coke and Pepsi wars where product and distribution hardball had advanced Pepsi to a virtually coequal brand to Coke. He discovered that the primary Frito Lay business measure was profitability and that people were not concerned about losses in market share. From his Coke and Pepsi experience, he knew the critical importance of market share as a critical business barometer. He was very concerned about the market share losses to Eagle. After an assessment, he decided they needed “big changes on big things.” There were four areas that they needed big changes – make quality a reality, take back the streets, find a better way, and win together.
  • He was aware of the taste tests where Frito-Lay lost to Eagle. He went all in with his manufacturing and R&D groups on product quality. It was not easy. He needed to convince them that product quality and taste excellence were to be rigorously developed and evaluated. Regular tastings by senior management and feedback to the manufacturing organization got a lot of people’s attention. Things got more serious when executive tastings rejected a product and ordered the destruction of the already manufactured product – ultimately $30 million of product was destroyed. This is playing hardball with your manufacturing organization.
  • The next objective was to take back the streets, which meant revitalizing their DSD capability. He immediately discontinued the large bags of cookies and crackers while retaining only single serve and reduced the number of SKUs in the Frito lay line by 30%. The net result was increased focus on their very best selling items and a drive to optimize them within the distribution system and at retail.
  • As an aside here, in about this period of time I managed one of the largest Coca-Cola bottlers in the country that Procter & Gamble had purchased. I was faced with the transition from a fairly simple soft drink line to a rapid explosion in the number of SKUs we were expected to have on the DSD trucks. It started with brand expansion – Diet Coke. It then accelerated with type expansion – with lime, Cherry Coke, caffeine free, etc. With the exception of the Diet Coke brand, most of these other types were in the bottom 10% of volume and yet they took up a vastly disproportionate amount of space and sales attention at retail. It was a very challenging time to manage increased sales diversity and to reap increased profitability from the product initiatives. Prior to Enrico’s arrival, Frito-Lay established seven regional marketing operations staffed with marketing people. It had created a complex bureaucracy that had the unintended consequence of stifling efficiency, effectiveness, and innovation. Enrico killed it.
  • He was now ready to go on the attack. I have frequently defined innovation in these podcasts as developing new ideas to make things better. Enrico came up with a two-part innovation plan that was wonderful in its simplicity and focus as well as the achievement of the ultimate objective which was to regain market share and to put that pesky 6% market share competitor – Eagle from Anheuser-Busch—out of business.
  • His first line of attack caught Eagle by surprise – he cut prices. Within three years smaller brands like Granny Goose, Cains, and Borden were out of the business with most of the market share going to Frito-Lay.
  • After an objective evaluation of Eagle, he determined that he could not fight them and beat them on product quality and advertising. While he had revitalized the focus of manufacturing quality, at best they had moved from losing versus Eagle to being in a tie with them. Eagles advertising had been in the marketplace for some time and had established a positive brand image with consumers.
  • He decided on a frontal assault with every asset they had. His target was the profit heart of the Eagle brand which was their sales in supermarkets. He conducted highly motivational sales meetings that tapped into the desire of their DSD sales organization to win and win big. I know personally how this works. Its store to store combat. It’s a day-to-day battle for shelf space and more importantly merchandising and display space within stores. It is only won by a highly motivated and committed sales organization. It takes constant reinforcement, holding people to challenging objectives, and closely monitoring the retail battlefront. Compared to Eagle, Frito-Lay had more people, more motivation, and more support to win the in-store battle.
  • For those listening to this podcast that are not intimately familiar with DSD sales organizations, they have major advantages and capabilities to influence results. Versus non-DSD sales organizations, they have many more people in retail stores for more days per week – the difference between non-DSD and DSD is dramatic. For example, a large grocery store that a Procter & Gamble non-DSD sales representative called on once per week, the DSD sales representatives would call on seven days a week between advanced salespeople and delivery people.
  • By the mid-1990s Frito-Lay had gained back all the share points it had lost. Eagle competitive salty snacks went out of business and Frito-Lay bought four of its factories.
  • This was not giant Frito-Lay against some small company. This was Frito-Lay going up against Eagle – and Anheuser-Busch company. Putting them out of business is the ultimate hardball outcome and Frito-Lay achieved it.
  • Here are a few thoughts from this case study that I think can help most businesses.
    • First, when faced by adversity as Frito-Lay conduct a very thorough evaluation of how your strengths match up with your competitor. In this case Frito-Lay decided it could not compete with product and advertising, but could compete with pricing and their sales organization.
    • Second, price is always a consideration but seldom the best choice when deciding the fight competition. In this case study, a price reduction put three competitors out of business with most of that market share coming to Frito-Lay. In my experience, this is more the exception than the rule. You need to be very careful using price to compete with your competition. Once you take price down, it can be very difficult to bring it back up. Once you take your price down and your competition matches you, they have, at least for the moment, negated any competitive advantage you got by reducing your price. This can turn out to be a lose/lose option – be careful.
    • Third, identify where you have a competitive advantage and then put a turbo booster on that competitive advantage to make it an overwhelming competitive advantage. In effect, this is what Frito-Lay did with their DSD sales organization. They used a very aggressive motivational program, business objectives, and business follow-up to be sure they won in supermarkets, which was the heart of Eagle’s strength. When Frito-Lay demonstrated to Eagle that they were going to defeat them in supermarkets, Eagle made the decision to get out of the business.
  • The hardball part of these lessons is that you need to be coldly objective about your strengths and weaknesses. You then need to take your strengths and go all in.

P64 A Competitive Advantage Business Model Personal Example

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  • This podcast is about something that I have lots of personal experience with. As I mentioned in the very first podcast, I have not only been an executive at large companies like Procter & Gamble and Gallo but also been a very successful entrepreneur.
  • This is about one of my current companies in the story of how I started it, but more importantly the business model and strategy I used in starting the company.
  • I was having a conversation with a longtime friend and client who had just become president and CEO of a national company. I had done millions of dollars of projects for him over the years in the innovation area. Going back further, I had hired him from Procter & Gamble to work for me at Gallo.
  • He was in the early days of his new assignment. We were talking one evening when he mentioned that he had an internal graphic design group at a location in another state from where the headquarters was. He indicated that he was very dissatisfied with the work they were doing. He showed me a specific example of a project where you gone through three rounds of new design work for an important graphic design need. Prior to this conversation, he had made the decision to eliminate the internal group and hire an external graphic design company.
  • For reasons I will never completely understand, I responded by saying, “what if I started a graphic design company to meet your needs and had – and I named a person – as a part of this new company?” He responded by saying, “are you sure you can get – the person I named?” I responded by saying, “yes.”
  • The person I named was a great designer that both of us knew very well. We knew that any work that he and designers he knew would be truly world-class work. I had talked of this designer on and off in the recent past and knew he would agree to be part of the new company.
  • He clearly was interested. I asked him to give me 48 hours and I would get back to him with a very specific proposal. I did so and we started the company 30 days later. But I’m getting a little bit ahead of myself right now.
  • In those 48 hours I designed an innovative business model and set of services or graphic design business. While I had never run a graphic design business, I had been the client of graphic design companies and groups both internal and extra external for most of my business career at Procter & Gamble and Gallo. Put another way, I knew the graphic design business from the perspective of being a client/customer.
  • This perspective informed this business model and the set of services I created for the new company. I was going to create a graphic design company specifically designed to meet the most critical client needs better than any other graphic design company I have ever worked with. I had worked with very, very good graphic design companies and internal groups at Procter & Gamble and Gallo.
  • The number one client graphic design needed is truly great graphic design solutions that create competitive advantages for the client. This is not just beautiful work. This is not graphic design companies designing to win awards from their peers. This by the way, is the goal or objective I felt from many of the external graphic design company side work with. They were more interested in what they thought looked good instead of truly wanting designs that created wins in the marketplace enabling the client to sell more and make more.
  • I knew that if I started a traditional brick-and-mortar graphic design company that I would be limited to the world-class designers that were within a fairly short radius of the new office building. In addition, they would have to be available and not working for a competitive graphic design company in the same city. I quickly realized, I need an entirely new approach to developing a world-class designer team.
  • It was at this point that I decided to be a virtual company. I knew really great designers throughout all the Western United States. I knew that all these designers were currently freelancing and that I could invite them to work as independent contractors for the new graphic design company.
  • Starting with the designer that I had named previously, I quickly developed a list of world-class graphic designers willing to work as independent contractors for the new company. By deciding to be a virtual company instead of a traditional brick-and-mortar company, I quickly created a world-class designer team with capabilities that were at least 100 times better than I could’ve created in a traditional office environment.
  • Check the box for having a world-class designer team.
  • There were other aspects of graphic design companies that I have previously worked with that I did not like when I was a client.
  • First, when I worked with an external design group or even an internal design group, I would never know what the project I wanted to have them do was going to cost until the work was completed. And at that time I would often get sticker shock – that little project cost that much?!
  • So my first objective was to make sure the client knew the cost of a project before it started and they agreed to that cost.
  • I also wanted to create greater value. We immediately began a process of getting competitive bids from our world-class designers on a new client project. We would choose in the vast majority of cases the low bid and ask for the clients agreement to that price.
  • But I wanted to add another level of value. As a result, we made a promise to deliver 100% of projects on budget. If the client change the scope of the project in midstream, we would requote it and get their price that they agree to.
  • When we finished we had a client know what the price of the project was going to be before work began, they knew it was a high-value price because it had been competitively bid, and we committed to delivering the project on budget – no nasty surprises.
  • My other frustration in my previous experiences with graphic design suppliers was that they often had little sense of urgency and projects were seldom delivered on time.
  • We fixed this problem by promising to deliver 100% of projects on time. When the client agreed to the price, they also agreed to a timeline. If the client changed the scope of the project, the timeline would change and we would deliver against that new timeline.
  • With us had our 100% promise – we deliver 100% of projects on budget and 100% of projects on time.
  • The final point all mentioned as the economics of the company. Everyone in the company with the exception of me as an independent contractor. As a result, I only need to pay people when the client is paying me for a project. When a graphic designer wins a competitive bid, they know what they are going to be paid. I only pay them when work is being done that the client is going to pay me for.
  • This means very low overheads and a virtual guarantee of profitability.
  • Getting back to my friend who was president and CEO, when I share the business model and people in the company he quickly agreed. The most critical person after the great designers was the overall creative director for the company. This was the first person I called after I had had the conversation with my friend. She had the successful experience to do the job. My friend also knew her and respected her skills and abilities. So I had an exceptional company leader and truly world-class designers harnessed to a high service and high-value business model. It’s very difficult to say no to this.
  • The company is Blue Sage Creative and you can see our website at bluesagecreative.com. The company is thriving. Sometimes the growth is so fast that it is stressing our capabilities, but the creative director is showing excellent leadership in helping the company grow. We added another national client and are working to get even more business.
  • The bottom line is that this is a business model that enables a service company to deliver exceptionally better quality work that occurred as a brick-and-mortar business and then wrapping that in a very high value and very high service model. Clearly, all of this does not work if you don’t have the right people. Today we have an exceptional team capable of growing with the business.

P63 Innovation Step-By-Step An Overall Success Plan Steps 3-6.

 

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  • This podcast provides proven, practical, and step-by-step elements from start to finish for an innovation program. A successful innovation program is a series of steps. Innovation programs need to meet certain criteria and objectives at the completion of a step before going onto the next step. Many people refer to this as the stage gate process, with the gate being the need to meet objectives before moving on.
  • Generally speaking there are about six steps. In some cases, some businesses will combine steps and others will split a single step into multiple steps. Some companies may also skip a step if they do not have the capabilities or need for a specific step – you need to recognize that, in most cases, this means that you take on more risk.
  • The six steps are: deep dive, vision and strategy, idea generation, concept learning, proof of concept, and introduction into the marketplace.
  • Having completed the deep dive step you already have a good understanding of the dynamics of your business – both a detailed and big picture view. You have used these insights to craft a vision of what success looks like for your innovation program. To that you have harnessed a strategy statement that clearly articulates how you will achieve the vision.
  • With that completed let’s get started with step three – idea generation for your innovation program.
  • Step three is idea generation. This is essentially conducting a quantum idea generating session to produce the ideas potentially capable of helping you achieve your vision and consistent with your strategy. During the course of the session, there will absolutely be vectors of idea generation that tend to wander from the vision and the strategy. All of this is fine. When I’m facilitating a session, getting to the finish line can be a zig zag path, but it’s ultimately my responsibility to help the group get to that finish line where we deliver the needed ideas.
  • Podcast episodes P1 through P6 provide you with a great introduction into the quantum idea generating process.
  • The previous work on the deep dive and vision/strategy provides some very valuable material and insights into the best way of constructing and executing your particular quantum idea generating session.
    • Regarding stimulus, all of the previous work leading up to the session is a potential source of great and relevant stimulus. You probably want to start the session sharing the vision and strategy and how this was arrived at. In doing this, you want to backup to the deep dive and in various places during the session consider sharing the 5-10 major dynamics and insights. The scheduling and sequencing of these really depends upon the roadmap you construct for a session lasting anywhere from one day up to four days. Having said that, the stimulus is really foundational stimulus to get everybody on the same page – at least for a moment. There will need to be many other forms of stimulus that follow these examples. Go back and review the podcast on stimulus to deepen your understanding of this path.
    • Regarding diversity, your previous work will reveal where you really need more expertise than is available within the company. As mentioned in the diversity podcast, this can be people with highly specialized expertise in the direction you are exploring and/or it can be people with a very big picture view of cultural megatrends, for example. Any time your vision calls for an outcome that is dramatically better than some/most/all of competitive products, you absolutely need the right external expertise working in combination with your best internal experts to get the needed results.
  • Let’s move on to the fourth step – concept learning. Coming out of the quantum idea generating session, the group identified the ideas they think have the highest potential – in most cases this is about ten – forty ideas.
    • Following the session you want to take this group of ideas and make some further groupings of similar or related ideas and give further consideration to the relative potentials of all the ideas you have. You want to be very careful not to make too many hard and fast decisions that would cut a significant number of ideas coming out of the session.
    • You can give consideration to conducting some qualitative learning. For example, focus groups can be conducted to share your rough draft concept statements for most or all of the ideas. You can supplement the statements with visuals as appropriate. You are not using the focus groups to make decisions about which ideas have the highest potential. Rather you’re looking for how clearly people understand the concepts from what you’ve written, especially your communication about the products’ benefits and how they meet customer needs.
    • You then want to consider moving to quantitative research. This can be research with a fairly limited scope of just evaluating the concept on a series of proven and reasonably predictive criteria. You can also go an additional step of getting concept evaluation in combination with additional feedback. For example, Merwyn technology provides diagnostics on the strength of your benefit, reason to believe, and dramatic difference. It also provides a year one sales estimate based on criteria you specify.
    • In evaluating these results, you want to establish ahead of time the criteria ideas need to meet before they can move onto the next step. This can be a certain concept score or year one sales estimate – they can also be other criteria that are right for your type of business. Nonetheless, at the end of the concept learning step, you want to be making decisions. These are not necessarily irrevocable decisions since an idea that gets put on hold now may come forward later when there are new learnings or developments.
  • Next we move to the fifth step – proof of concept.
    • In this step we take the few ideas coming out of the previous step – typically one – three ideas – and take them to a deeper learning stage.
    • Most often this involves developing various forms of product prototypes. If it’s a beverage, the R&D organization works on a variety of formulations. If it is a new tool for a specific industry, the first step might be developing illustrations, followed by a looks like prototype that is not fully functional, to finally developing a fully functional prototype.
    • As prototypes are developed, they are shared with potential customer groups, usually on a small, qualitative scale. You’re looking for quick feedback on what’s working and what’s not working. This quick feedback turns into rapid prototyping followed by additional feedback from potential customer groups.
    • At the point that you have one or two product prototypes that have received generally positive feedback, you want to move into an actual product use research step. In consumer products, this is often referred to as in-home product testing in either monadic or paired comparison versus a major competitor testing. With B2B products this can be giving some of your lead users and biggest users of the product a prototype so you can learn in their actual environment working on actual products of theirs.
    • This can often require more than one round of this kind of testing. But there is a developing and learning cycle that you use that’s right for your type of business. At the end of the stage, there again needs to be a decision-making methodology, usually including reliable quantitative research. The product needs to achieve a certain score and/or a minimum year one sales potential to be considered as a candidate for production and introduction into the marketplace.
    • As a part of this decision-making process, there usually is an early on feasibility study involving all parts of the company that would be involved in manufacturing and distributing the product. You want to determine such things as potential manufacturing costs, raw material sources, and economics. Regarding economics, you want to develop preliminary cost and selling price models that are then combined with the year one sales estimates from separate research to determine the financial attractiveness of the idea.
    • I have covered this very quickly and only from an overview perspective. There are many unique variations with specifics that are right for your type of product and business. Having said that, the overall thinking flow here is appropriate in most situations.
  • When a product has met all of the criteria that each of the steps and is ready to move on to the next step, the last step is to move into the marketplace in some way. There are a variety of ways of moving into the marketplace and I will mention a few to illustrate some major options.
    • Prior to moving into the marketplace there needs to be a major team effort to manufacture and distribute the new product. This typically requires multifunctional teams, capital expenditures, and a variety of new processes that can increase the risk of the project.
    • When the product is ready to move in the marketplace here are some of the major options about how that can proceed.
      • You can make a full national introduction. You go into all your markets at the same time.
      • On the other end of the spectrum, you can go into some markets as a test market. Often the primary purpose of a test market is to test volume and price assumptions and the effectiveness of your marketing plan. Again, there are criteria that need to be achieved for the product to expand beyond the test market.
      • You can move the product into carefully chosen markets, maybe with particular types of customers that can be especially supportive and helpful. This can be part of an overall phased rollout program. This can help reduce risk by learning and incorporating changes phase. Most often these are going to be improvements to the marketing program instead of the product itself.
    • These three podcasts have covered the step-by-step innovation process from an overview perspective. As noted several times, there can be significant modifications to the steps outlined here based on the type of business and capabilities an enterprise has.
    • My hope is that you get a general understanding of the steps you need to go through that tend to optimize the product, gather critical learning, and manage risk when done properly.

P61 Innovation Step-By-Step An Overall Success Plan Step One.

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  • This podcast provides proven, practical, and step-by-step elements from start to finish for an innovation program. A successful innovation program is a series of steps. Innovation programs need to meet certain criteria and objectives at the completion of a step before going onto the next step. Many people refer to this as the stage gate process, with the gate being the need to meet objectives before moving on.
  • Generally speaking there are about six steps. In some cases, some businesses will combine steps and others will split a single step into multiple steps. Some companies may also skip a step if they do not have the capabilities or need for a specific step – you need to recognize that, in most cases, this means that you take on more risk.
  • The six steps are: deep dive– covered in this podcast, vision and strategy, idea generation, concept learning, proof of concept, and introduction into the marketplace.
  • The purpose of the deep dive is to develop a very high quality understanding of your business and customer dynamics. You will examine strengths/weaknesses and competitive advantages/disadvantages. You will look at important trends. This is not just a numbers exercise. The output from the deep dive will be an important component of defining the vision and strategy for your innovation program. It will also become a powerful stimulus contributor in the quantum idea generating session that comes in a later step.
  • Let’s get started with step one – conducting a deep dive for your innovation program.
  • Your business: you want to start your deep dive by closely examining your own business. Here are some of the key elements you want to take a close look at.
      • You want to examine sales from at least two perspectives. First you want to examine dollar sales. One of the most important perspectives is to examine dollar sales trends. Are sales growing over the last 3 to 5 years and if so are they in line with meeting your business objectives. If dollar sales are declining, what are the causes, which can be anything from overall category sales are declining to one or more competitors are taking business away from you. The second perspective you want to have when examining sales is what I call equivalent unit sales. Sometimes unit sales can decrease while dollar sales increase which is probably due to price increases. In most cases, I am more interested in unit sales more than dollar sales since this is usually a better barometer of customer purchases than just dollar sales. Having said that, if you are a publicly held company, dollar sales are pretty darn important.
      • Having examined total sales, you then want to dig deeper into the details. You want to break total sales in to the appropriate product/brand groups. If some are growing, you want to understand why. If some are declining or flat, you also want to understand why. You also want to understand sales by geographical areas and types of customers. Again, you want to understand why sales are growing with some and declining with others.
      • Lastly, when it comes to sales, I have usually found that companies have a variety of analytical methods that they feel are appropriate for their businesses. When it comes to trying to draw conclusions from data, especially when attempting to draw conclusions between cause and effect, you want to use accepted statistical tools and evaluation methods. Specifically, you want to determine if there is a correlation between two factors you believe to be interacting and causing changes in business trends.
      • You want to start by conducting a similar analysis of profits as you just did for sales.
      • You typically also need to dig deeper than you have in sales analysis. For example, you may need to analyze the allocation of corporate overhead costs to your overall business and individual products/brands. If profit and sales trends are different, you clearly want to understand why. On the positive side, there could be significant one time cost savings projects that enable profits to grow faster than sales. On the negative side, production and/or raw material cost trends could result in profits growing more slowly than sales.
      • Market share.
        • A good place to start in evaluating competitors is to take a look at market share trends. For consumer products, this is typically done with syndicated data like Nielsen data collected from a wide variety of retail outlets. You want to understand from total brand, important brand parts, and geographical perspectives how you and your competitors are performing. If you are like most businesses that do not have access to this kind of data, you need to have a method for continually collecting information about competitors. For example, your sales organization can be required to regularly report important sales information –like new customers and lost customers. You not only want to know what but you also want to determine why competitors are growing or declining. With syndicated data there are numerous forms of data associated with businesses that can be used with this type of analysis. With businesses that do not have this data, you need to closely examine competitive products for changes – not only observable changes but collecting sales materials and public relations information from competitors. Bottom line – you want a clear picture of which competitors are growing/declining and why.
      • Competitor sales and profits.
        • With businesses that have syndicated data, you can develop a fairly clear picture of which competitors’ sales are growing/declining. Profits are more difficult to determine with or without this data, but if you know that a competitor has experienced raw material price increases and not increased their prices in line with this, you have a pretty good idea that they may be taking a profit hit. For publicly held companies, this data can be available although at a specific brand or business level it may not be readily available. Bottom line – you want to do your best to determine the sales and profit health of your competitors.
      • Competitive advantages/disadvantages.
        • While we will examine competitive advantages/disadvantages when we look at customers, you can determine the relative health of your advantages/disadvantages from marketplace observations. If you lost a sale, buyers will tell you why they bought a competitor instead of yours. If you made a sale at the expense of competitors, the buyer will tell you why. Bottom line – you want to do everything you can to develop an objective view of the state of advantages/disadvantages versus all of your competitors. Be careful when you do this because your bias will be to value your brands more than competitors. Be objective.
        • Customer evaluations: you want to use qualitative and quantitative research methods to determine how consumers rate all the major brands from both an overall perspective and from a key elements perspective – like performance, customer service, convenience, and price. In today’s world of online research, this can be done relatively quickly and inexpensively. This is the type of research you want to do on a fairly regular basis – like annually – so that you can see trends where you’re getting stronger/weaker relative to some, most, or all of your competitors.
        • How customers are using products like yours: in consumer products we call this kind of research habits and practices research. We want to understand qualitatively and quantitatively how our products are being used. In many cases, these habits and practices do not change dramatically unless a new competitor enters the field. But even with well-established products like laundry detergents, at one time research to determined more and more consumers were using only cold water in doing the wash. This resulted in significant product reformulations so that a product like Tide would perform in cold water as well as it did warm and hot water – they introduced a specific cold water formula product.
        • In-depth customer understanding. Your customers are not a homogeneous group. A type of research called segmentation research determines the major groups of consumers based upon things like demographics, how they use your products, and the circumstances in which they use your products. In a previous podcast I talked about two very valuable consumer groups when it comes to innovation – lead users and heavy users. The latter group is people that use dramatically more product over time than the average customer. Because they are heavy users, they tend to have a greater sensitivity to strengths and weaknesses of your and competitive products. This makes them a particularly good source for learning and sometimes for innovative ideas.
      • After listening to all this, you can easily conclude that there is a tremendous amount of data analysis and output from this analysis. What you want to do when all of it is done, is to select the 5 to 10 most important insights. Most of these are going to address competitive and customer dynamics – especially changes. When you’re done you want to step back and create a big picture look about what you have learned. You want to include not only a factual perspective but also a feeling or emotional perspective in this bigger picture.
      • There is a very important purpose in all of this. These insights will become an important component of creating a vision and strategy for your business. Many of the key insights will then become powerful stimulus in the quantum idea generating session. Net, there is tremendous value in doing a deep dive into your business as a part of your overall innovation program.

P60 The Innovator’s Dilemma A Landmark Innovation Book  

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  • This podcast is about the landmark book on innovation – The Innovator’s Dilemma. The book is by Harvard’s Clayton Christiansen who continues to be one of the most respected voices on everything innovation.
  • In this podcast, I’m going to give you a peek into the book. I will use many of his direct quotes so that there is no loss in communication of his key points. Having said that, the book is somewhat dated – first published in 1997. Some of the primary companies used as examples are either seriously struggling today or out of business – for example, Digital was a very big and successful company in the minicomputer business. This company was first bought by Compaq computer which was then bought by Hewlett-Packard.
  • The author makes it very clear why he wrote the book.
  • “This book is about the failure of companies to stay atop their industries when they confront certain types of market and technological change. It’s not about the failure of simply any company, but of good companies – the kinds that many managers have admired and tried to emulate, the companies known for their abilities to innovate and execute. Companies stumble for many reasons, of course, among them bureaucracy, arrogance, tired executive blood, poor planning, short-term investment horizons, inadequate skills and resources, and just plain bad luck. But this book is not about companies with such weaknesses: it is about well-managed companies that have their competitive antenna up, listen astutely to their customers, invest aggressively in new technologies, and yet still lose market dominance.”
  • In the author’s research he developed a set of rules from extensive research and analysis of both failures and successes. These rules or principles he calls the principles of disruptive innovation. The author says that these principles show, “that when good companies fail, it often has been because their managers either ignore these principles or chose to fight them. Managers can be extraordinarily effective in managing even the most difficult innovations if they work to understand and harness the principles of disruptive innovation.”
  • Before getting into the five principles, let’s first his three key findings. First, there is a “strategically important distinction between what I call sustaining technologies and those that are disruptive.”
  • While acknowledging that sustaining technologies can sometimes be radical most are incremental in nature. He defines sustaining technologies as ones that “improve the performance of established products, along with the dimensions of performance that mainstream customers in major markets have historically valued.” These kinds of technologies are some of the most frequently used by industry. Importantly, these sustaining technologies have “rarely have even the most difficult sustaining technologies precipitated the failure of leaving firms.”
  • On the other hand, disruptive technologies have led to the failure of leading companies. In describing disruptive technologies, he says, they “underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequently, more convenient to use.” Two of the main examples he utilizes in the book to illustrate this are computers and discount retailing – which were still young new categories in the mid-1990s when the book was written.
  • The author points out a very interesting phenomenon that “technologies can progress faster than market demand.” This means that companies in their attempt to continuously improve product performance eventually may overshoot the market and “give customers more than they need or ultimately are willing to pay for.” This opens the door for disruptive technologies that “may underperform today, relative to what users in the market demand, may be fully performance competitive in that same market tomorrow.” An example the author cites is large, mainframe computers that eventually developed massive data processing capabilities whose power surpassed what many of the original customers actually needed and desktop machines could eventually do that.
  • From a financial standpoint investing in disruptive innovations has its challenges. For example, many disruptive products are simpler and cheaper with a business model that delivers lower margins and profits. Compounding this is that sometimes disruptive technologies are first sold to emerging markets where consumers are relatively few and sales are limited. These same companies developing disruptive innovations may find that some of their most profitable and largest customers do not initially want these kinds of products. Conversely, sometimes the greatest interest income from a company’s least profitable customers.
  • This adds up to a potentially serious problem for companies. The author says, “most companies with a practice discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it’s too late.”
  • From this the author articulates five principles.
  • Principle one: companies depend on customers and investors for resources.
    • Within established businesses, it’s really customers and investors that determine how money will be spent because if investors and customers are not satisfied, they don’t survive.
    • This makes it very difficult for this model to support disruptive innovation until it’s too late.
    • The author states, “the only instances in which mainstream firms have successfully established a timely position in a disruptive technology were those in which the firm’s managers set up an autonomous organization charged with building a new and independent business around the disruptive technology. Such organizations, free of the power of the customers of the mainstream company, ensconce themselves among a different set of customers – those who want the products of the disruptive technology.”
  • Principle two: small markets don’t solve the growth needs of large companies.
    • Since disruptive technologies often start in small and emerging markets, when large established companies look at these kinds of opportunities as a potential source of growth, these opportunities look pretty puny. The author says, “the larger and more successful an organization becomes the weaker the argument that emerging markets can remain useful engines for growth.”
    • The author suggest how larger companies can be successful with these kinds of opportunities. “Those large established firms that have successfully seized strong positions in the new markets enabled by disruptive technologies have done so by giving responsibility to commercialize the disruptive technology to an organization whose size matched the size of the targeted market. Small organizations can most easily respond to the opportunities for growth in a small market.”
  • Principle number three: markets that don’t exist can’t be analyzed.
    • Market research and planning work for sustaining technologies in existing markets. These tools do not work well with disruptive technologies that lead to the creation of entirely new markets.
    • The author says, “companies whose investment processes demand quantification of market sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies.”
    • The alternative is what the author calls “discovery-based planning.” It starts with the assumption that any forecasts you make now about a market that does not yet exist are probably wrong. In this approach “managers develop plans for learning what needs to be known, a much more effective way to confront disruptive technology successfully.
  • Principle number four: an organization’s capabilities defined its disabilities.
    • Companies need to be careful not to overvalue their capabilities when thinking about disruptive technology markets. Instead, they need to approach the market opportunity with a deep sense that they probably do not know important knowledge points and that they will need to develop new capabilities.
  • Principle five: technology supply may not equal market demand.
    • Understanding, estimating, and planning for demand in emerging markets can be a treacherous, risky undertaking.
    • Compounding this is what the author says is the situation: “when the performance of two or more competing products has improved beyond the market demands, customers can no longer base their choice upon which is the higher performing product. The basis of product choice often evolves from functionality to reliability, then the convenience and ultimately to price.”
    • Understanding this exceptionally critical insight is important for anyone listening to this podcast. The hierarchy of benefits that are most important to customers can change dramatically from performance to functionality to reliability to convenience, and price.
  • Here are a few insights that I think are relevant for virtually any business that come out of this podcast.
    • First, in developing a disruptive innovation it often needs to be done outside of an existing operational unit. Consider creating operational unit unto itself dedicated to this purpose. Recall the earlier podcast where major companies are attempting to create startup like units within the company but as independent operations.
    • Second, recognize that in new and emerging markets there is little to be learned from traditional research tools. Your research plan needs to be built around how you’re going to learn as you go.
    • Third, no matter how good you think your company is, a disruptive innovation is likely to require some new capabilities and probably letting go of certain existing capabilities that can get in your way.

P58 Business Model Innovation—How to Make More $$$

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  • In several previous podcasts, I have talked about business model innovation. I have given some examples. I’ve talked about its power. In this podcast I want to take a deeper dive into this very important form of innovation. In the last decade it has been associated with some of the biggest and most successful innovations.
  • To share with you best practices on business model innovation I am drawing from multiple sources including a Boston Consulting Group paper on the subject – they are often, as it is in this case, a very good source of best practices.
  • Let’s start by defining what is business model innovation.
    • There is a two-part answer to the definition – a value proposition and the operating model that delivers the value proposition.
    • The value proposition defines what you’re offering to whom.
      • You identify a target group of customers that you choose to serve and what needs they have that will be served by this business model.
      • You define what products and services you are selling and what benefits they have to meet specific target group customer needs.
      • Lastly, and importantly, you define how you will be paid.
    • The operating model defines how you will deliver the product/service, what costs and assets this requires, and the organization needed to make all this happen.
  • Business model innovation is always an option for virtually any kind of business and any kind of economic conditions. Having said that, there are some situations where it can be especially valuable and needed.
    • Intense and threatening competition – when competition becomes especially aggressive with their own innovation, it can threaten both short and long-term viability of your business. If you are not prepared with a competitive product/service of your own, considering business model innovation may be a way of responding. Done right, it can change the rules of the game and even threaten the economic viability of the competitive threat.
    • Negative economic times – when customers are tightening their spending, keeping the same business or economic model may not be exactly what customers need. This can involve a reconfiguration of an existing business that brings cost savings and potentially new pricing models.
  • One study made a compelling case that business model innovation is far more successful from a shareholder return perspective than product or process innovations. A survey conducted by the Boston Consulting Group and BusinessWeek concluded “business model innovators earned an average premium that was more than four times greater than that enjoyed by product or process innovators. Furthermore, business model innovation delivered returns that were more sustainable; even after 10 years, business model innovators continue to outperform competitors and product and process innovators”.
  • Again, Apple is a great example of highly successful business model innovation. When they started with their series of what I call “i” products – like the iPod, iPhone, iPad, and iTunes, they also had tremendous business model innovation.
    • Instead of just offering a single hardware or software product, they offered an integrated system of products and services. The hardware products, like iPhones and iPads, were highly innovative in their own right and quickly captured customer attention and market share leadership. The software – both the operating system and apps – created tremendous additional value and functionality for the hardware.
    • Lastly, they integrated iTunes into their system. ITunes answered a major challenge the music industry was facing – how to generate revenue in the digital age. The new marketplace allowed customers to quickly search the music they wanted and buy only the music that they wanted – single songs instead of entire albums. All of this worked seamlessly with one Apple ID.
  • The result was that Apple successfully expanded into a market that was 30 times larger than their computer only market. And by the way, it helped them to grow their computer business also. Let’s start by taking a look at a couple of examples
  • When the Virgin group entered the Australian airline market, they came in with low fares and a strong brand name. Not too surprisingly they quickly gained a 30% market share, primarily at the expense of Qantas, an Australian airline. Qantas quickly realized it was not going to effectively compete with the Virgin group under the Qantas brand name. Their response was to go one step further than the Virgin group when it came to low-cost airlines. They introduced an ultralow cost airline, Jet Star, as a separate division that had lower fares than the Virgin group. Jet Star was so successful that it gradually expanded and entered international service as the world’s first low-cost, long-haul airline. Its business model was to bundle services à la carte. With this consumers were able to have greater control and customization of their onboard experience with different options for food, comfort, and entertainment. It was so successful that Virgin blue eventually backed out of the discount positioning and shifted their focus to business travelers.
  • Another example JC Decaux which is the number one street furniture company in the world. A major focus of the company was signing exclusive agreements for outdoor advertising on highly desirable public spaces, for example in Paris. They often did this in exchange for returning some of the advertising revenue to the city or covering some of the furniture costs such as public toilets. When their decade-long contract with Paris came up for review, the city made some different requests that resulted in a new business model. They wanted the company to create the world’s largest free or nearly free Paris wide network of bicycles and bicycle racks that could be used both by tourists and residents. There were bumps in the road like vandalism that required more cost than initially estimated, but the basic new model was successful and expanded to other cities. It’s a good example of bundling different types of services and associated revenues to create a new and successful business model that competitors find very difficult to overcome.
  • The Boston Consulting Group report shares an interesting story about IKEA entering Russia. When they opened a new store they discovered that the surrounding real estate greatly increased in value. Recognizing this they created a new division they called megamall. They now create malls around their retail outlets. This new way of making money – a new business model – now makes more money than their standalone stores to in Russia.
  • So how can you apply these insights to your business and your innovation program?
  • Remember that the heart of business model innovation is your value proposition. There are a number of ways that you can consider changing your current value proposition into a win for your customers and you.
    • First, you can bundle additional customer wanted services -like the Paris bicycle system – into a new pricing model. Think of Apple with their hardware, app, and iTunes integration.
    • Second, you can add a new line to your business that is better equipped to compete with existing or emerging competitor – what Qantas did with Virgin blue.
    • Third, you can move from a selling price model where the customer buys your product and the relationship pretty much ends at that point. You can move to a lower selling price bundled with a longer-term service contract where the immediate economics get even more attractive for your business. Some of the major software companies are doing both of these. Of course, you need to have a product that has these additional needs – for example, this would not work for Tide detergent.
  • Lastly remember that this form of innovation in one survey significantly outperformed product and process innovations by a wide margin.
  • From where you sit today there may appear to be few if any business model innovation opportunities. When you engage in the quantum idea generating process, with all of its internal and external diversity, you may very well find world of options to be far greater than you ever imagined.