Saturday, January 12, 2013

Exnovation!

This article was featured as a part of the Tuck-IIPM-B&E Joint Study cover story on 'Reverse Innovation and Exnovation' that appeared in the October 2012 issue of Business & Economy magazine.

Creating a best-seller of a product or service isn’t easy. And CEOs further make the task tougher by encouraging their employees to innovate further on a successful prototype. It’s a strategy that spells disaster. Forbid improvisations.

Despite outcomes over the years having proven why toil for the sake of radical innovation was a delusion, hundreds of billions of dollars continued to be flushed out from coffers of companies in the hope that the risks would pay dividends. As per the 2011 Booz Allen Hamilton’s Global Innovation study, in just the past three years, the world’s top 1000 R&D spenders have burnt over $1.57 trillion in the labs. Globally, the US Center for Science and Engineering Statistics, concludes in a 2012 report that R&D expenditures over the past decade has increased at a CAGR of 7%, from $640 billion in 1999 to $1.28 trillion (in 2009). And the payoffs? Prof. David Midgley of INSEAD, in his book, ‘The Innovation Manual’ writes: “Innovation is one of the least well-managed areas in most companies. It leads to wasted resources and costly mistakes. ” Booz Allens 2011 report has explains the futility of spending big in R&D in a line: “Spending more on R&D won’t drive results!”

Against this backdrop, it become important for companies to adopt a disciplined approach in their quest for innovation. More important is to harness any innovation that is born – products and processes. This is where organisations need to necessarily integrate exnovation as a critical process within their operational structures and make it a vital part of their cultures for innovation to work. As Jaruzelski, Loehr and Holman of Booz Allen conclude in their Winter 2011 R&D report, “The elements that make up a truly innovative company are many: a focused innovation strategy, a winning overall business strategy, deep customer insight, great talent, and the right set of capabilities to achieve successful execution. More important than any of the individual elements, however, is the role played by corporate culture – the organisation’s self-sustaining patterns of behaving, feeling, thinking, and believing – in tying them all together. According to this year’s Global Innovation 1000 study, about half of all companies say their innovation strategy is inadequately aligned with their overall corporate strategy.” Lesson: To innovate is good. To harness the potential of each innovation and make such a practice central to the organisational philosophy of growth and sustainability is more important. And that is where exnovation steps in. Creation of a winning overall business strategy by leveraging focused innovation with great talent that has been trained with the right set of capabilities to achieve standardised execution targets is what exnovation stands for.

Exnovation only means the opposite of innovation to an extent. It does not signify distancing the company altogether from innovation (and the associated risks attached to R&D) and the wealth it can bring to shareholders. It’s about keeping a check on the flow of innovation in your company. A process is tested, and if the popularity of the final product is found to bear the potential of spreading like wildfire in the market, it is mastered within an innovation group in the organisation. The next step is to put in place a critical system that ensures that this process is replicated (“copied blindly”) across branches, departments and groups within the organisation depending on the validity of the discovery. To ensure that the process is implemented unaltered and uncut is important. No employee or manager within the organisation should be allowed to tailor the process for whatever reason. Translation: Innovation gives an organisation the much needed big leap. But only if favourable processes are passed on and repeated over and over again by concerned team(s), with a strict check on non-customisation by any ‘unauthorised’ personnel. Individuals in specalised innovation groups are the only ones who should be given the liberty of access to the R&D budget. Not everyone. Reason being the same as why every employee in an airline does not get to occupy the cockpit, and every defense personnel is not a commanding officer.

It’s a prescient story line. Employees want to innovate. They ‘all’ think they can. Only a chosen few actually succeed in building something worthy of their ideas. It’s the same reason why it took two different Steves (working at the same company) to conceptualise and build the Macintosh and the iPhone in two different eras. Your employees cannot be given the right to test their fortunes at will. Never at the cost of shareholder and company assets. As a justification to this argument, Prof. Clayton M. Christensen of Harvard Business School, in a May 2012 paper titled, ‘Five ways to make your company more innovative’, writes, “I don’t want to overstate the case. I think about 40% of people just are not going to be good at innovating regardless of what they do.” So what is the proportion of people in your company’s educated workforce that stand a chance of justifying your R&D dollars? Christensen puts it like one not remotely confident of taking a chance of allowing every employee in the supply chain to innovate. His number? “5% are born with the instinct. There are things that they do and ways that they think that are intuitive. The rest of us could learn what these innovators do if somebody would just crawl inside their brains and codify what to them is intuitive.” That last part of course is not a possibility. Our argument stays. Don’t bet on 95% burning cash. Teach them ‘exactly’ what the other 5% have pioneered.

Think of great companies selling great products. CEOs that made these companies turn good (or nothing) to great have mastered the science of exnovation. These visionaries have methodically thumbed out the links on the process chain, setting up exnovation units in their organisations – manned by supervisors who ensure that successful processes that have led to authentic and profitable results in the past are replicated to the hilt, each time, by each employee – thus curtailing employee independence to tamper with the set procedures without formal instructions from the supervisors. This practice of deploying a process-orientated strategy is what helps them make money for their shareholders without breaking a sweat. Prof. Stefan Thomke of Harvard Business School (in his May 2012 treatise titled, ‘How can a company balance creativity and innovation with the need for process and structure?’) makes a compelling argument to justify why for an innovative company too, to be process-oriented. He concludes, “Innovation and process within a firm can coexist and even feed off each other, if you manage their different and sometimes opposing functions smartly. Indeed, if you want to be an innovative company, you can’t be one without process and structure.” In the August 2010 report titled, ‘Leading your business to innovation’, published by the Australian Government’s Department of Education, Employment and Workplace Relations and The Industry Skills Council of Australia, it is clearly stated that “Innovation involves creating cultures and systems that effectively sustain innovation. Teams are a major tool for promoting internal and external collaboration. Over 100 independent studies have found that having shared goals in a business is one the most influential factors for innovation. Significantly, team leaders play the critical role in providing teams with such clearly stated, shared goals.” Evidently, such shared goals cannot be established without providing adequate training to employees and putting in place exnovation teams who champion the process to replicate the innovation model. And this is one problem with the current understanding of innovation, as Prof. Gary Hamel of London Business School quotes in LBS’ Business Strategy Review. The Spring 2006 paper titled ‘Inside the innovation lab’ states, “Hamel, and others, have been espousing the benefits of innovation for some years now. At one level, executives appear to be getting the message. They know that they can’t do the same things. Innovation is routinely identified by companies and their leaders as a top priority. The rhetoric is convincing, but is often followed by inaction. The problem, says Hamel, is that employees lower down the corporate hierarchy have not been trained and there are few processes or support mechanisms. Hamel compares our current understanding of innovation with the business world’s understanding of quality in 1970. At that time, people knew that quality was important but didn’t know the processes or systems which could enable quality to happen.” For innovation to be really nurtured therefore, Hamel, recommends a solid process to be established, with clear messages and training being passed on to employees.

Over the decades, iconic CEOs have been associated with supporting a culture of innovation. But it was this group for whom putting in place a process-oriented system to allow innovation and associated best practices to seep through their organisational walls was religion. They learnt early on that after the discovery, comes the hard part. And to tackle those challenges, they took it upon themselves to implement a process of exnovation in their companies. Iconic CEOs. Think of Steve Jobs. The secret to Jobs being considered one of the greatest innovators in the world lies in his habit of being a compulsive exnovator. Many have written about an ‘i’ that he was most known for: ‘i’mpatience. Allow us to clarify how he Exnovation was as much about patience and careful decision-making when it came to exnovation. It was the first day of the week in the autumn of 2007. Apple was scheduled to launch its most important product yet – the iPhone – in a month’s time. Jobs realised that the R&D team had not done a convincing job with the product. In a meeting with 50-odd employees, he declared: “I just don’t love this. I can’t convince myself to fall in love with this. And this is the most important product we’ve ever done. All this work you’ve done for the last year, we’re going to have to throw it away and start over, and we’re going to have to work twice as hard now because we don’t have enough time.” He was unhappy with the enclosure design for the first iPhone. What Apple managed in a month’s time thereafter changed not only the way the first three versions of the iPhone were to appear but also how the world would thereon perceive smartphones. Jobs had in mind the set process at Apple. He knew that a design that walked out of his R&D lab would be replicated from head to toe and because his engineers would not be allowed to add even a touch or two in the name of “improvement” thereon, he wanted the iPhone prototype to be perfect. This strict adherence to process-orientated exnovation is what has earned Apple its fans – be it the iPod, the iPhone, the iMac or the iPad! Talking about what makes innovation successful, Prof. Midgley of INSEAD writes in his book (‘The Innovation Manual’), “It’s not the effort that companies put into innovation that decides success. Instead it is how firms go about doing innovation that separates leaders from the rest.” He goes on to describe how the Apple iPod has sold hundreds of millions of iPods since introducing them in 2001 “not because the iPod is an innovative product. The real point behind the iPod is the business model that allows both Apple and the music industry to make money.” In short, the process that Jobs put in place to make, market and milk a product at Apple makes him the visionary that we knew him to be.

Today, Apple is still a company that believes in exnovation and zero-independence to its engineers to change products every now and then (that has been the case ever since Jobs returned in 1987). Google isn’t. Its doodles, beta versions of applications et al, are proof how its open “innovation” culture allows its engineers (at Google X Labs) to experiment with the company’s products on almost a daily basis. Compare how this difference in innovation culture has had an impact on the market values of these two firms over time. Precisely five years back (endQ3, 2007), Google was more valuable that Apple ($122.86 billion as compared to Apple’s $118.30 billion). Today, its m-cap is almost 1/3rd (35.4%) of that of Apple’s ($231.46 billion as compared to Apple’s $656.27 billion, as on September 22, 2012). As Prof. Thomke of HBS writes, Apple’s genius lies in the ability to get to the heart of a problem and not settle for convoluted solutions until they find, the key, underlying principle of the problem and then the beautiful, elegant solution that works.” Jobs ensured that this beautiful, elegant solution once found is cloned – processor by processor, code by code! [Tough task considering Apple outsources 100% of its manufacturing! But he did.] And that is what Tim Cook, his successor has carried forward at the company. Even today, to ensure that set production procedures and quality levels are not tampered with and that there is 100% adherence to exnovation, Apple buys material and equipment on behalf of its suppliers like Foxxcon, Jabil, Pegatron et al. Little wonder that Apple has grown into this most valuable company in the world today (miles ahead of the #2 Exxon Mobil, whose m-cap stands at $426.03 billion).

From the most valuable to the most profitable. Exxon, is the largest corporation in America – both in terms of revenues ($452.93 billion in FY2011) and bottomlines ($41.06 billion). This petrochemical company is an example of how duplication of set methods comes around as a greater good than new, daily innovation. The last time Exxon introduced a real innovation in its upstream activities was in the World War II era when it invented the naptha steam cracking technology. Till date, whether it be in the oil fields of Russia or Iraq, the company uses the very same technology to refine oil. The company’s CEO Rex Tillerson does not believe in fanciful connections about ‘futuristic’ innovations and payoffs. Even when the world was going loud about bio-fuels, Tillerson was hellbent to stick to fossil fuels. “I am not an expert on biofuels. I am not an expert on farming. I don’t have a lot of technology to add to moonshine. Because to just go in and invest like everybody else – well, why would a shareholder want to own Exxon Mobil?”, he had claimed. Explaining his attitude to innovations in fuel production, especially green fuels, Fortune magazine wrote, “The other supermajors are all proclaiming their greenness and investing in biofuels, wind power and solar power. Exxon (Left-Right) Adopting exnovation to maximise shareholder return: Rex Tillerson, CEO & Chairman, Exxon Mobil, Michael T. Duke, CEO, Walmart and Jack Welch, Former CEO & Chairman of General Electric Co. are examples of CEOs who maximise the potential of each innovation by believing in exnovation. They inspire leaders of companies to work on a structured, training-intensive and process-oriented strategy and not encourage every passerby in their companies to improve on prototypes isn’t. At Exxon it’s all petroleum. Why isn’t the company investing in less polluting energy sources like biofuels, wind, and solar? Remembering that Exxon is above all in the profit business, we know where to look for the answer. As a place to earn knockout returns on capital, alternative energy looks wobbly. Exxon just doesn’t know much about building dams or burning agricultural waste. Its expertise is in oil and gas.” To consider an example, in the current times, oil majors are all investing in Floating Liquefied Natural Gas. This technology requires innovations to be introduced into the production process. Exxon hasn’t stepped into that room yet. Exnovation creates wealth for its shareholders. And despite many-an-objection raised by environmental groups around the world, the company claims that oil majors (and even governments!) are fast recognising how its process-orientation post-innovation represents the most viable approach (leading to profitability) in this industry. In a company discussion report, Exxon claims that the initiatives Federal and State governments define as “energy efficiency opportunities” is only “for the most part an attempt to duplicate business processes that ExxonMobil already undertakes on a global basis.”

The only thing more palpable about Exxon than pride is confidence in its track record of having made billions out of replicating technologies that mostly others developed from scratch. In fact, as a solution to reduce CO2 emissions from non bio-fuels, the solution that Exxon provides is called CCS – Carbon Capture and Storage technology. And how does the company suggest we go about it? Mirror past practices. It recommends: “The scale, significant investment and required new infrastructure cannot be overlooked. The concept includes potentially duplicating the oil and gas industry’s infrastructure and pro-What Walmart did to earn $447 billion in revenues in 2011 was follow the supply chain process 100% & innovate 0% cesses – which has been built over 100 years.” At 10.47%, Exxon not only enjoys the highest net profit margin amongst all Big Oil supermajors (in FY2011; others include RoyalDutchShell, BP, Chevron, Total S.A. and ConocoPhillips), but also the highest return on assets (9.48%). Do exnovation critics need a bigger proof than Exxon?

From the largest to the second-largest. Walmart. Whatever Walmart did to earn $446.95 billion in revenues last year was nothing but follow the supply chain process 100% and innovate 0%. To say that the company is very different from other retailers would be wrong. At least on the innovation scale. It does not believe in reboots. From using a satellite-based IT system (developed more than 60 years back) to exploiting an inventory management system that came across as a common-sense more than three decades back (called ‘Float’), Walmart ensures that its retail outlets adopt a standard look and approach to the millions of customers who walk into them each day. It focuses on imparting training to its employees and managers, teaching them standardised and time-tested techniques with an aim to make ‘Save Money. Live Better’ slogan global. Be it imparting hands-on training to all its employees to operate the data delivery and reporting Retail Link software that is used across 8,500 stores in 15 countries and the Sam’s Club retail warehouses in North America, be it educating them about Walmart’s 50 year-old pricing strategy (‘to provide value for its customer’s hard earned money’ by doing everything to reduce costs at the warehouses and stores) through workshops, or be it giving each manager at the company a week-long cultural at The Walton Institute at the University of Arkansas (where they are primarily imparted lessons to solve problems that help eliminate business risks), Walmart is one that doesn’t take pride in innovation, but in reproducing processes. Perhaps the only innovation that has been introduced at Walmart in the past five years is a change of attire of its sales associates: from blue t-shirts and jeans to khaki pants and polo shirts!

When Jeff Immelt first walked into GE’s corner office in September 2001, the first thing he did was throw a billion dollars into GE’s R&D centre. [And of that $100 million was just to ‘renovate’ GE’s New York research centre.] “I made the businesses themselves spend more in R&D. And we started getting a flow of technology,” said Jeff Immelt in June 2006. So how did this new focus on constant innovation and flow of new technology born there-with help the company’s shareholders? When Immelt took over, the company, under a “strictly process-oriented” Jack Welch, had become worth $415 billion. In 11 years (as on September 18, 2012), under Immelt, the process turned-innovation driven company has lost 44.1% of value! This is how Immelt described his gut-feel a decade back: “After I came in as CEO, I looked at the world post 9/11 and realised that over the next 10 or 20 years, there just was not going to be much tailwind. It would be more driven by innovation. We have to change the company to become more innovation driven – in order to deal with this environment. It’s the right thing for investors.” He did nothing wrong by focusing on innovation. What he did wrong was that he tried to kill Welch’s process-orientation philosophy at the company. Immelt forgot that innovations once got, and those with a potential to give birth to multi-billion-worth selling products and services should not have been tampered with. And that is despite the fact that he knew why exnovation scored over innovation, as he said, “I knew if I could define a process and set the right metrics, this company could go 100 miles an hour in the right direction. It took time though, to understand growth as a process. If I had worked that wheelshaped ‘execute for growth process’ diagram in 2001, I would have started with it. Jack was a great teacher in this regard. I would see him wallow in something like Six Sigma.” What Welch did was that he created a culture of exnovation at GE, which Immelt calls a “formidable toolkit and mindset to maintain bottomline discipline”. Jack Welch wasn’t against innovation. He just paid more importance to ex-novation. From his firing rule to his quality maintenance six sigma system, from teaching brains at GE the ‘common’ culture and organisational philosophy at the company’s Crontonville Training Centre and GE Management Academy, Welch ensured that all best practices at GE were shared with all concerned. And those who didn’t fit into Welch’s process-oriented culture, were given the boot. As Ron Ashkenas, Managing Partner of Schaffer Consulting and co-author of the book, ‘The GE Work-Out’, writes in a 2011 HBR article titled, ‘You Can’t Dictate Culture – but You Can Influence It’, “The real turning point for GE’s transformation came when Jack Welch publicly announced to his senior managers that he had fired two business leaders for not demonstrating the new behaviours of the company – despite having achieved exceptional financial results.” Welch was the CEO. He behaved like one. And he knew, process-orientation and exnovation would work best for his shareholders. Not surprising, when he left GE in 2001, he had created the world’s most valuable company. For him, it was as simple as allowing a group of research scientists to work on the most efficient aircraft engine, but not allowing ‘every’ technician to try out combinations with the blades to achieve greater efficiency. That would mean ambush in a world where competition is the sniper.

Would America’s top airlines that boast of the best on-time performance (OTP) record like US Airways (OTP of 86.99% in March 2012), Delta Air Lines (84.96%), Alaska Airlines (84.53%), American Airlines (80.83%), Jetblue (79.9%), United-Continental (75.77%), and Southwest (74.33%) maintain their neat records had each of their crew members and pilots innovated with each departure? Would the world’s best luxury hotels like Tower Suites at Wynn Las Vegas (Most luxurious as per Forbes), Lodge at Sea Island on the Georgia coast (Most unique), Boston Harbor Hotel in New York (Best turndown service) et al, remain as famed if lobby managers and hostesses are allowed to add their individual touches of genius in the name of innovation? Would Chinese steel companies like Hebei Iron and Steel, Baosteel and Wuhan grab a spot in the world’s top ten steelmakers (World Steel Organisation, 2011 report) if they experiment with each ounce of steel during the smelting process? Not a prayer! Talking about why innovation alone does not suffice, Scott Berkun, author of the May 2007 book, ‘The Myths of Innovation’ writes, “Competence trumps innovation. If you suck at what you do, being innovative will not help you. Business is driven by providing value to customers and often that can be done without innovation: make a good and needed thing, sell it at a good price, and advertise with confidence. If you need innovations to achieve those three things, great, have at it. If not, your lack of innovation isn’t your biggest problem.” This thought throws light on another important principle of exnovation. For a multinational, operating in different geographies may pose region-wise problems, owing to differences in consumer behaviours as compared to the parent market. In such cases, set processes would require innovation – incremental innovation.

When a firm comes to face with such a situation, where such a change is required, chosen individuals in the exnovation unit should be vested with the authority to tailor the process to suit needs of a geographical market. Take for instance the case of Haier in China. In 2004, in China’s Sichuan province, on attending a service request call, a company technician found that the washing machine was clogged with mud. He learnt that residents in that region were using these machines to wash sweet potatoes and other vegetables. The company engineers modifed the washing machine’s washer unit to make it suitable for vegetable cleaning! Since then, Haier’s washing machines are being sold in Sichuan with a new label: “Mainly for washing clothes, sweet potatoes and peanuts”. This was not the only market specific modification that the company made. In Shanghai, for washing summer clothes (where greater volumes of light clothes are cleaned each day), the company introduced a small washing machine that cleaned two or three pieces of clothing at a time. This saved water and electricity for the city dwellers and became a hot-selling product in Shanghai. Also across cities in China, the company marketed small-sized refrigerators for urban dwellers to save on space. These instances prove how Haier understood the geo-graphic context well and introduced innovation through their exnovation units. As Harvard Professors Tarun Khanna and Krishna Palepu document in their book titled, ‘Winning in Emerging Markets’, “Most critical to Haier’s success in building a highly competitive business in its home market were the company’s attempts to change the market context by filling institutional voids.” So we repeat – if changes in established processes are to be made to suit geographic needs, empowered heads of ex-novation teams should recommend it to the senior management, so that the changes in product(s) can be formally introduced. It then becomes a process which should not be tampered further.

Exnovation is not about saying no to innovation or killing innovation at the roots. It is about hammering out a process-oriented strategy and avoiding overhauls of process models that have given birth to products that have already been introduced in the marketplace. Everybody in your organisational circle cannot innovate. Hard to swallow, but it’s the given truth. Most of them can’t. Teach them the best-seller of a process that a lucky few have been gifted to generate. And it is these very gifted minds that should be put in charge of exnovation units to keep a check on processes and structures throughout the organisation and to innovatively improve them when the geography demands so.

Jobs of Apple, Welch and Coffin of GE, Mulally of Ford, Tillerson of Exxon, and many such names are proof that what the world assumes to be the magic of innovation, is actually one created with great exnovation. Exnovate and your corporation thrives. Simply innovate with no process in place, and all the dollars you fed the lab rats with will be soon forgotten. So will that idea which could have potentially grown into a best-seller.

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