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When a company talks about trading off pure performance in the name of lower prices, disruptive alarm bells start ringing. After all, companies like Dell Computer, Southwest Airlines, Wal-Mart, Charles Schwab, and Nucor have prospered by following this kind of low-cost disruptive strategy.

A startup company called LifeSize Communications hopes to be next on the list. As described in a recent BusinessWeek article, the company offers reasonably high-quality videoconferencing over the Internet at prices that are sharply below emerging market leaders Cisco Systems and Hewlett-Packard. LifeSize's solutions range from $5,000 to $40,000, compared to as much as $300,000 for Cisco's solutions.

It's reasonable to predict that we'll see an increasing number of similar low-cost strategies as economic woes continue and start-up companies seek to find the opportunity in economic turmoil. Therefore, it's natural to ask: How can you tell if a low-cost disruptor is going to succeed?

Our analysis of companies that have successfully and unsuccessfully followed low-cost disruptive strategies suggest that for LifeSize to succeed, it must be able to answer yes to three key questions: ...

Read the rest at Scott's Harvard Management blog, Innovation Insights.

People typically associate innovation with the introduction of a sexy new product or service. While this kind of innovation gets the headlines, innovative ideas applied to everyday problems can have just as much business impact.

Consider a recent Wall Street Journal article describing how top fashion companies like Gucci and Burberry are working hard to better manage their supply chain. One critical problem: replacing dud collections before retailers grow antsy. Burberry has spent more than $100 million to improve its ability to ensure that the right products get to the right stores at the right time.

These challenges of course require a fair amount of blocking and tackling, but there's also ample room for fresh, innovative thinking. And think of the top- and bottom-line impact of finding better, cheaper, and faster ways to get products into stores more quickly.

Innovation should matter to you if your job doesn't involve strategy or product development. ...

Read the rest on Scott's Harvard Management blog, Innovation Insights.

Companies just starting innovation efforts often begin by getting a group of people together and telling them "It's innovation time!" I've never seen efforts like this succeed in meaningful ways.

Instead, we suggest that companies begin innovation efforts by creating an innovation strategy that details clear targets and tactics.

Clear targets help internal innovators know what they're shooting for. A reasonable starting place is to imagine what success looks like five years in the future. Are you seeking to double your business? Hold it steady? Something else? Setting a target that is several years in the future can help to de-politicize a potentially charged discussion.

Then think about the sources of growth. How much can you reasonably expect your core business to contribute? In some industries your five-year contribution might be below today's contribution, and that's okay.

Next, look at what's already in your development pipeline. What can you reasonably expect that pipeline to contribute in the future? One tip here: make sure to risk-adjust your pipeline. If you assume all of your projects will succeed, you are being wildly optimistic....

Read the rest at Scott's Harvard Management blog, Innovation Insights.

Innovation inspiration can come from outside the business world. Today's source of wisdom: The Simpsons. Today's lesson: Be wary of peddlers offering skin-deep fixes for deeply rooted innovation issues.

Companies looking to boost their abilities to innovate routinely turn to companies that seem to have solved the innovation equation for inspiration. They observe elements of the company's environment (free food! no doors! online jam sessions!). They seek to mimic those environmental elements to get similar results.

The problem is that a "culture of innovation" involves much more than these superficial elements. In fact, my colleague Steve Wunker is fond of saying that culture is a lagging, not a leading indicator. Changing culture requires changing activities. Changing superficial stuff without changing the real stuff doesn't accomplish much.

If you have trouble remembering this, think back to the episode of The Simpsons when, after a random bear sighting, the town of Springfield invests heavily to guard against future "attacks." The town thinks the heavy investment pays off, because bear sightings drop by 100 percent.

Read the rest at Scott's Harvard Management blog, Innovation Insights.

“Why bother?” That was the question posed by a manager after hearing me describe how very hard it is for even the best run incumbents to successfully create new growth businesses. “If historically the success rate has been less than 20 percent,” the manager continued, “shouldn’t I just leave this game to start-ups?”

It is a provocative question. After all, markets often punish companies that diversify into non-related industries, because individual investors can get the benefits of diversification by investing in different industries themselves. Are companies similarly wasting their time — and their investors’ money — when they try to invest in innovation?

Maybe established corporations should solely focus on exploiting what already exists, leaving the creation of what doesn’t to start-ups. Of course, not investing in innovation ultimately will consign a company to failure, but hey, that’s what creative destruction is all about.

There is no doubt that the innovation struggles of incumbents lead to significant waste. Companies spend billions of dollars developing fatally flawed products and services. They give advertising agencies billions more to convince people to want things that they really don’t.

An inefficient incumbent innovation market has spurred the ascendancy of the venture capital industry. Venture capitalists earn substantial fees attempting to fix this market inefficiency by providing capital to startups. Similarly, growth-seeking incumbents pay investment bankers handsome fees to advise them on acquisitions to plug the growth holes created by their innovation struggles.

However, we strongly reject the view that incumbents should eject from the innovation game. Incumbents have tremendous assets at their disposal. They have whip-smart developers with ample resources to invent cool, new things. They have economies of scale that can help them operate efficiently. They have partnerships that can help accelerate the development and deployment of new growth initiatives.

Read the rest on Scott's Harvard Business blog, Innovation Insights.

A brewing discussion about Starbucks’ new coffee flavor highlights a challenge facing innovation-seeking incumbents: Which customers should we listen to?

As part of a broader effort to reinvigorate the company, Starbucks recently rolled out a mild-tasting coffee called “Pike Place Roast.” It has quietly moved away from offering bolder-tasting coffees, such as its Sumatra brand, particularly in the afternoon.

Starbucks brought Pike Place Roast to market in response to complaints from Consumer Reports and others that its coffee tasted bitter or burnt. A small group commercialized the brew in six months—an astonishingly short period of time in the food industry.

While Consumer Reports and the mass-market has cheered, a vocal group of core Starbucks loyalists panned the coffee—one reviewer on a Starbucks Web site designed to solicit customer feedback called it a “fundamental, grievous error”—as watered-down and away from what makes Starbucks distinct.

Incumbents seeking to create new growth often face a version of this dilemma. Should we listen to our best, most loyal customers, or should we turn our ears towards customers we’re not serving well, or even to customers we are not serving at all?

Read the rest on Scott's Harvard Business blog, Innovation Insights.

As mentioned, this morning I did the "Q" part of a 75-minute Q&A session with P&G CEO A.G. Lafley. The discussion was wide-ranging, covering everything from the need to re-think marketing and advertising to the benefits of a liberal arts education. At the end of the session, I told the audience that my six takeaways were:

1. In an age of disruption, growth is getting increasingly difficult.
2. Companies need to take the long view. Lafley said he finds it hard to watch CNBC for more than 7 minutes because the focus is so short-term.
3. The customer needs to be the center of the innovation equation. When Lafley took over as CEO in 2000, he said he saw too many managers on their cellphones, or buried in spreadsheets, in essence "showing customers their behind."
4. Experimentation is key. Lafley talked about the value of giving customers even crude prototypes to test an idea. He also described how different parts of his organization approach innovation differently, and that's a good thing.
5. Complex organizations need to simplify to successfully innovate. Lafley said he seeks Sesame Street simplicity.
6. The CEO has to be the "Chief External Officer" to manage external pressure and the "Chief Innovation Officer" to push the innovation agenda forward.

Read the rest at Scott's Harvard Management blog, Innovation Insights.

If any of you are going to be at the Front End of Innovation conference this week, stop by the Innosight booth on Tuesday. I'll be there, and would love to meet any of my readers!

Also, on Wednesday morning I'll be doing the "Q" part of a Q&A with Procter & Gamble CEO A.G. Lafley about "The Art and Science of Game-Changing Innovation." The discussion will focus on some of the key messages in his recently released book. I'd love to have one of the questions come from you, so suggest a question, and I'll try to pick one or two of the best ones (and of course let you know what A.G. has to say).

Feel free to add a question in the comments here or on my Harvard Management blog (link below).

Thanks!

Cross-posted from Scott's Harvard Management blog, Innovation Insights

The Fortune 500 issue had a fascinating story about Amazon.com. “It’s easy to believe that Jeff Bezos is one of the great innovators,” the story noted. “But that’s not exactly the case. His rise into Fortune 500-dom actually has little to do with innovation and more to do with iteration.”

It pains me when I see innovation and iteration painted as opposed in some way. In fact, the only way to successfully innovate is to be prepared to iterate like crazy.

There is a misbegotten belief that new growth businesses arise fully formed out of an innovator’s head. That couldn’t be further from the truth. Carefully look at the history of just about any innovation success and you’ll find a course correction, if not an outright failure.

There are many classic examples of innovation through iteration. Google was just another search engine until it iterated its way to AdWords and AdSense. About three months before the public launch of the iPhone, Apple CEO Steve Jobs sent the design team back to the drawing board because of flaws in the product’s design. James Dyson created more than 5,000 failed prototypes of his wildly successful vacuum cleaner. And so on. ...

Read the rest at Scott's Harvard Management blog, Innovation Insights

If you work in a large company and you want to become humble quickly, check out Stall Points, a fascinating stream of research by the Corporate Executive Board that was recently a cover story for the Harvard Business Review. The research shows that almost all companies hit a point where historical growth rates decelerate. Once the corporate growth engine stalls, it is very hard to restart.

The study involved close to 500 companies that have appeared on the Fortune 100 or international equivalents over the past 50 years. Close to 90 percent of those companies experienced a stall, or “secular reversals in company growth fortunes.” Only 50 percent of companies that stalled were able to grow even moderately over the next decade.

There are many reasons why growth becomes increasingly difficult as a company grows. One challenge is that the hurdle for new initiatives becomes so high that many potential game-changing initiatives never see the light of day.

A few weeks ago I was with a group of senior executives at a Fortune 100 company. We were talking about the strategic objectives of that company’s innovation efforts. One executive said that $1 billion felt like a reasonable target for a generic new growth initiative. Another said, “A billion is nice, but at our size we really need to set the target at $10 billion.”

Mathematically, of course, the executive is right. It got me thinking, though. Only 261 public U.S. companies had $10 billion in revenues last year. How many of the high-flying start-up companies over the last decade reached $10 billion in revenue in 10 years? Well, Google hit $10 billion in its eighth year (2006) and … I think that’s it.  …

Read the rest at Scott's Harvard Management blog, Innovation Insights

"What’s best practice?” Just about any manager seeking to improve corporate performance has fielded this question from leadership. The theory is that the manager should find a successful company, find out what practices have made them successful, mimic those practices, and expect success.

However, blindly worshiping at the altar of best practices is dangerous. The problem is that practices that work incredibly well in one circumstance can be ill-suited for another circumstance. Even if your company has successfully overcome a problem in the past, it is always worth asking if the circumstances have changed in a way that means your approach needs to change as well.

Read the rest at Scott's Harvard Management blog, Innovation Insights.

I thought I’d write a short post providing some immediate reflections from an interesting panel discussion I facilitated today.

The panel, titled “Innovation: Change Happens,” featured Dow Corning Chairman, CEO and President Stephanie Burns, Eastman Kodak President and COO Phil Faraci, and Procter & Gamble Chairman and CEO A.G. Lafley. It was part of the Newspaper Association of America and American Society of News Editors “Capital Conference 2008.”

Each of the panelists provided a short account of their respective company’s change efforts and answered audience questions. The six key points that seemed to be in common across the three companies were:

• The need for a crisis or some kind of “burning platform” to motivate transformational change
• A clear vision and strategy … that allows room for iteration
• A recognition that transformation is a multi-year journey
• A need to put the customer or consumer in the center of the transformation equation
• The critical importance of demonstrating to skeptics that different actions can lead to different results
• The need to over-communicate to employees, customers, stakeholders, and shareholders

Read the rest at Scott's Harvard Management blog, Innovation Insights