Innovation

When people think of services, they often think about offerings that are neutral or routine. These tend to be services they use regularly -- for example, dry cleaning, haircutting or gardening. However, there is a third type of service that is not often considered or well understood. The authors refer to these as "negative" services because they are related to events most people hope they will not have to deal with: toothaches, leaky roofs or collision repairs, for example. Because the events that trigger the need for negative services are not everyday occurrences, many people are not equipped to diagnose the needs or to make informed judgments about the solutions required; furthermore, even after the service has been provided, most people are in a poor position to judge its quality or the price they paid for it. Negative services are offered by many kinds of companies in many industries, including health care, insurance, household repair, pest control, ambulance use and so on. Companies discussed in the article include Laidlaw International, Multiasistencia Group, American Home Shield, Terminix, Fresenius Medical Care AG, Enterprise Rent-A-Car and Sears. Sears HomeCentral, for example, is an attempt to turn negative services for homeowners into a profitable segment of Sears' overall business. Even companies that are not primarily negative-service providers have negative-service aspects to their offerings. For example, product companies often provide warranties as a means of staying competitive. Companies hoping to build positions in negative services face two major challenges: (1) how to access inexperienced customers who are not in a strong position to evaluate the service being provided and may have a poor idea of its cost and (2) how to organize and deploy their services to meet customer needs when demand is unpredictable.

Advanced tools like computer simulations can significantly increase developers' problem-solving capacity as well as their productivity, enabling them to address categories of problems that would otherwise be impossible to tackle. This is particularly true in the pharmaceutical, aerospace, semiconductor and automotive industries, among others. Furthermore, state-of-the-art tools can enhance the communication and interaction among communities of developers, even those who are "distributed" in time and space. In short, new development tools (particularly those that exploit information technology) hold the promise of being faster, better and cheaper, which is why companies like Intel and BMW have made substantial investments in these technologies. But that enthusiasm should be tempered: New tools must first be integrated into a system that's already in place. It is important to remember that tools are embedded both within the organizations that deploy them and within the tasks the tools themselves are dedicated to performing. Moreover, each organization's approach to how people, processes and tools are integrated is unique -- a result of formal and informal routines, culture and habits. All too often, companies spend millions of dollars on tools that fail to deliver on their promise, and the culprit is typically not the technology itself but the use of the technology. When new tools are incorrectly integrated into an organization (or not integrated at all), they can actually inhibit performance, increase costs and cause innovation to founder. To avoid this, companies should beware three common pitfalls: (1) using new tools merely as substitutes, (2) adding -- instead of minimizing -- organizational interfaces and (3) changing tools but not people's behavior.

Research has repeatedly demonstrated that managers contribute to a company's bottom line by enabling the emergence of work processes in constantly changing situations. But managers have received insufficient guidance about what exactly they should be doing to manage these emergent processes. The authors contend that managers must actively facilitate the confluence of participatory "spurts" of innovation. By examining the methods of companies such as Novell, IDS Scheer AG and Entergy, the authors identify four methods successful managers employ to address an emergent environment. First, these managers structure the work so that information, assumptions and interpretations are continually being challenged. Second, they accept that changing circumstance will continually require new knowledge and skill sets. Third, they understand that emergent processes involve unpredictable inputs from suppliers, employees, customers and other stakeholders. Lastly, they understand that they alone cannot induce participatory innovation, so they have learned to create or identify existing "reputation networks." Managers who have mastered these principles help their organizations to react so quickly to unpredictable events that the reactions often appear to have been planned and preemptive.

New products suffer from notoriously high failure rates. Many new products fail, not because of technical shortcomings, but because they simply have no market. Not surprisingly, then, studies have found that timely and reliable knowledge about customer preferences and requirements is the single most important area of information necessary for product development. To obtain such data, many organizations have made heavy -- but often unsuccessful -- investments in traditional market research. The authors provide an alternative. Companies including Threadless, Yamaha and Ryohin Keikaku have begun to integrate customers into the innovation process by soliciting new product concepts directly from them. These firms also ask for commitments from customers to purchase a new product before the companies commence final development and manufacturing. This process -- called "collective customer commitment"-- can help companies avoid costly product failures. In essence, collective customer commitment enables firms to serve a market segment efficiently without first having to identify that segment, and it helps convert expenditures in market research directly into sales.

For several decades, research about large companies' internal corporate venturing has shown that such activities frequently exhibit substantial cyclicality. Companies may enthusiastically launch ICV initiatives, later shut them down, and still later launch new ICV programs again. In this article, the authors describe four common situations that occur in cycles of corporate venturing. They argue that, unless properly managed, corporate commitment to ICV is apt to fluctuate according to the availability of uncommitted financial resources and the growth prospects of the organization's primary businesses. For example, if the corporation has uncommitted financial resources but the growth prospects of the main business are perceived to be insufficient, then the company may launch a top-down "all-out ICV drive" that is vulnerable to costly mistakes. If, however, the growth prospects of the primary business are perceived to be adequate and there are few uncommitted financial resources, top management is likely to perceive ICV as largely irrelevant. The authors examine factors contributing to ICV cyclicality; they then suggest that companies can achieve better outcomes if executives recognize the strategic importance of internal corporate venturing activities and view them as a way of gaining insights into emerging opportunities.

Many complicated, proprietary systems attract a community of underground innovators who explore and alter them -- and not always in ways that manufacturers appreciate. These individuals have little regard for the business models that companies have carefully devised to profit from those systems. Instead, they are driven by utility, curiosity and occasionally even anger, bypassing technical and legal safeguards in their drive to explore. Called by different names -- hackers, phreakers, crackers and modders, among them -- these underground innovators have complex and often antagonistic relationships with the companies whose products they modify. Indeed, in many cases the underground innovation triggers a war between the community and the company. But if handled properly, it also can lead to cooperation between the two parties, potentially resulting in new business models and novel products. To achieve that, though, companies first need to understand how underground communities operate. Underground groups typically contain two distinct classes: elites and kiddies. "Elite" is a term reserved for those who truly innovate -- the wizards who understand the inner workings of a proprietary system and are able to make it do things never intended by its developers. "Kiddie" is short for "script kiddie," signifying someone who does not truly understand a system but merely uses tools created by the elites to exploit the system in some way. Most companies make the mistake of treating elites and kiddies the same way, often alienating those who might make positive contributions. A more effective approach is to nurture the constructive elites, rewarding and even supplying them with tools to encourage their efforts, all while deploying more aggressive means to thwart the destructive kiddies.

Most agree that innovation ensures superior performance, but there is less agreement on which innovation strategy or strategies best sustain that performance over time -- that is, which lead to resilience. The authors seek to answer that question by analyzing a set of global companies that have successfully adapted to diverse and turbulent changes over a period of two decades, as evidenced by their book value per share, return on assets and sales growth. Among those that sustained superior performance are multinationals such as pharmaceutical, coating and chemical manufacturer Akzo Nobel, electronics company Philips, energy and petrochemical company Shell, consumer goods manufacturer Unilever, life-science products and chemicals manufacturer DSM, multimedia publisher Wolters Kluwers, information and media provider VNU, investment and fund management group Robeco and brewing company Heineken. The research shows that resilient companies continually orchestrate a dynamic balance of four innovation strategies: knowledge management, exploration (internal research and development), cooperation (acquisitions, alliances and other relationships) and entrepreneurship. The authors conclude that focusing on one innovation strategy to the exclusion of others may produce innovation, but it will not lead to resilience. Pursuing several different innovation strategies simultaneously maximizes a company's chances of successful adaptation. Investments in innovation, they say, should not be driven by costs or short-term returns but rather should flow naturally to the most effective strategy for the changing context. The timing of increasing or decreasing the emphasis on innovation strategies is important to maintain the dynamic balance, and that timing, they argue, is primarily the responsibility of leadership.

The importance of implementing best management practices is widely understood. However, the authors argue, best practice alone is not enough. They use examples of three high-performing companies to show that those companies not only use standard best practices but also embrace internally developed idiosyncratic "signature processes" that reflect the history and values of the organization and executive team. Such "signature processes" -- a daily morning meeting of senior executives at the Royal Bank of Scotland Group, an easily reconfigured organizational structure at Nokia that involves modular teams and a "peer assist" program where business-unit heads help one another at BP Plc -- help drive high performance because they engender passion and energy within an organization. The mechanisms by which signature processes develop differ from those associated with best-practice ideas, however. The latter are often adapted from shared knowledge originating outside the company, whereas signature processes start with the values that internal executives champion.

The authors' research suggests that a variety of traps that forestall innovation can be avoided by, paradoxically, placing boundaries on innovation activity. In an environment without boundaries, say the authors, there is no context for shared interpretation or common expectations. Boundaries, on the other hand, act not as constraints but as aids to defining innovation needs and producing useful outputs that business units can exploit. Smartly placed constraints actually act as enablers of innovation by making it more palatable and execution friendly and giving it traction in the competition for corporate attention and resources. Drawing on their research, the authors offer several scenarios of "boundaries in use." They describe how Shell makes the radical legitimate by making it thematically relevant to core business, how Nokia restricts its innovation efforts to business-unit strategies and environmental turbulence, how Air Products focuses on ideas that leverage operational capabilities, how Siemens focuses on innovation potential that crosses products and businesses, and how IDEO's work with Texas Health Resources reframes the customer experience to anchor solutions in new ways.

Some techniques seem to drive new product development better than others.