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Insights into Innovation: How Companies Can Improve Innovation

6/7/2013

Chris Bingham is associate professor of strategy and entrepreneurship at UNC Kenan-Flagler . Below, read a Q&A with him, the fourth in a five-part services. Previous posts touched on innovation versus entrepreneurship, the importance of failing fast and often and detailed why organizations must innovate.

Why do so many organizations find innovation so hard?Innovation

I think there are a number of reasons that innovation is challenging and difficult in organizations.  The first one is pretty simple – most new ideas are bad.  If you look at stats about product failure, you’re going to see studies citing between 60 to 95 percent of new products failing.  For the very simple reason that most new ideas are bad, that presents challenges for organizations trying to innovate.

In line with that is the idea that change is difficult and often damaging in the short term.  You think about innovation, which is broadly defined as change in a product or service that enhances the experience of stakeholders.  When you engage in a change, things are often going to get worse before they get better.  I like to call this slipping into the performance trough.  If you are in an organization and you have P&L responsibility, no one wants to be caught slipping into that performance trough. So, that prospect of things getting worse before they get better holds a lot of people back from changing and innovating.  That’s another reason that change is just difficult besides the fact that most new ideas are bad.

A third challenge, and this is a little counterintuitive, is that core competencies can actually become core rigidities.  The very things that have made organizations successful in the past can actually cause their demise and make it very challenging to innovate.  This is because the things that you do well you tend to emphasize and reinforce and hone over time and continue to repeat such that you develop what some people might call a core competency in that area.  The challenge is that people tend to overexploit those competencies past their useful lives. I think Chrysler is a pretty good example of sort of a company that fell into this trap.  In the early 60s, Chrysler introduced the first SUV, the Wagoneer.  A few years later in the early 80s, Chrysler introduced another first, the first minivan.

Over the next 20 years, Chrysler continued to refine its capabilities as a truck and SUV powerhouse.  They actually sold just a little over 10 million minivans worldwide fine tuning that line and introducing and reinforcing their pickup and truck lines.  They have the Rams and Dakotas and Durangos.  Really by the turn of the century, Chrysler had the largest share of pickups, minivans, and SUVs.  But, think about what’s happened lately in the automobile industry.  The price of oil has made these gas-guzzling trucks and SUVs quickly fall out of favor with many consumers.  While other big automakers producing SUVs and trucks have responded to the change by retooling plants in order to manufacture new compact and subcompact cars to produce more fuel efficient four-cylinder engines, Chrysler didn’t do much.  They continued to exploit those heavy truck and SUV capabilities to the point that it became very difficult for the organization to compete.  Thus, a third challenge is that core competencies that have been critical to your organization’s success in the past often become core rigidities and can prevent innovation.

The last thing that makes innovation challenging is what you might consider the innovator’s dilemma.  One thing that you are sure to learn in an MBA class on marketing is to listen to your customers.  When it comes to innovation, by listening to your customers, you’re always just going to give them more and better on the things that they already desire.  What studies show is that when a new technology enters, very rarely is the incumbent in a position of power. This is because new technologies often relate to new customers that value a different bundle of attributes.  Listening to your customers is good, but often those customers are just going to put you on the glide path forward and not help you recognize opportunities that might exist in the marketplace.

 

Given the realities of innovation and the speed of change, how do organizations counter those challenges?  How do they become more effectively innovative?

How to be more effective in innovation.  I think that’s another great topic.  There are a couple of things that organizations can do.

First, I think you can make innovation better by making the unfamiliar familiar.  What you need to do is help people make the cognitive transition from what they know to what’s unknown.  Let me give you a few examples here.

Edison, when he developed the electric light, he did a couple of things that helped people make the transition to this new technology.  First, he kept the same wattage as the gas lights so even though electricity could have created a lot brighter room, Edison kept the same wattage.  This helped people tie back to what was familiar and known to them.  Edison did a couple of other things.  He kept lampshades.  A lot of people don’t think about this, but why do we actually have lampshades?  Lampshades are just really a historical artifact.  They were originally put on to prevent the wind from blowing out the gas lamps, but you really didn’t need them when you had electric lights.  Edison kept them because it was familiar and known to people.

If we fast forward many decades, you see that savvy innovators are continuing to help make the unfamiliar familiar.  Think about computers.  When you boot up your computer, the thing that you’re staring at is called a desktop.  It’s really not a desktop in the physical sense, but what it is doing is helping people transition to what is done in a virtual world to what’s familiar to them in their real world.  This is basically doing the equivalent of what a desktop would do in the real world.  You’ve got your trashcan.  You’ve got your files in there.  It helps people see how this might operate in this new environment.

Think about e-commerce.  When Amazon.com came on the scene for e-commerce this was a new category.  People were unfamiliar with how this thing was going to operate.  Amazon did a couple of things to help people make that transition from the known to the unknown.  When you shop on Amazon.com where do you put things?  You put them into what’s called a shopping cart.  Again, not a term that was chosen lightly.  It was deliberately selected to help people make that transition from the known to the unknown.  When you’re done with all of your shopping, what do you do?  You check out.  Here Amazon is trying to help people understand that we do things in the virtual world very much like we would do them in the online world.  Making the unfamiliar familiar I think is a very important thing to facilitate innovation.

Another idea is to think about how to make things simpler and more accessible.  In most industries, there’s often a core dimension that customers care about.  When you’re innovating, you want to think about how you can compete, not by being better on that core dimension, but by being different.  That often requires being simpler and more accessible.  Let me give you an example.  If you think about the video game industry.  What might that core dimension that customers care about be?  It’s probably graphics quality.  If you look at the PlayStation 3, the images and the graphics are just stunning. This is what hardcore gamers really care about.  Now you have the Wii that comes onto the scene.  If you look at the graphics of the Wii, it actually sort of reminds me of my Atari 2600 days.  The graphics are fairly juvenile.  On that core dimension, it’s vastly inferior, but notice that Wii is not trying to compete by being better on that core dimension that people care about like graphic quality.  They’re trying to compete by being different, by being simpler and more accessible.  They deliberately went after this nongaming segment that Sony or Microsoft wouldn’t even have dreamed of going after.  In doing so, they opened up this huge new market for themselves.  Notice that Nintendo was not trying to compete by being better, but by being simpler and more accessible.

Another example of this is the CVS MinuteClinic.  If you think about medical care, one of the things customers traditionally want is a full suite of medical services, which is what most hospitals provide.  Here, CVS MinuteClinic is trying to innovate by being simpler and more accessible.  CVS MinuteClinic is not going to give you all the services, but will give you the ones that people really demand like checkups and shots and vaccinations and simple procedures.  Not everything, but the ones that are in most demand.  So, that’s a second idea – think simplicity and accessibility.

A third way to improve innovation is to pace it.  What often happens to an organization is that they only change when the market forces them to change.  What I often see in more successful organizations is an internal rhythm driving change.  Two quick examples here. One is Intel.  People are often familiar with Intel’s pacing rule to come out with a new chip every 18 months. Pixar, which seems to knock every movie they make out of the park, also has a pacing rule, which is to come up with a full-length feature film every 18 months.  They’re not waiting for the market to tell them to change.  They actually have an internal rhythm that keeps all of their employees in sync and keeps them moving forward in a coordinated manner.  Pacing innovation is a third one.

Adding diversity to the organization is a fourth idea that I think is important to juice innovation.  You can think about diversity in a couple of different ways.  First, you can think about diversity of teams.  Adding more functional backgrounds to teams, adding a diverse set of ages. This increased diversity creates task conflict, which helps surface better ideas in an organization.

Speaking of ideas, another important part about diversity is increasing the number of ideas.  If you look at IDEO which is probably the premier product design company in the world, they’ve helped create everything from the toothbrushes we use to the original iPod to space shuttles and that giant mechanical Free Willy whale.  They often rely on brainstorming.  It’s not uncommon in a 60-minute brainstorming session at IDEO for their individuals to come up with 100 ideas.  Let me tell you why the sheer number of diverse ideas is important. If you just have a few ideas, then what happens is that ideas become very personal.  It’s my idea versus yours.  What happens is when you can crank out more and more ideas and have more diverse ideas, it depersonalizes the selection process so that people can be more objective and select the idea that’s going to be most beneficial for the organization.  Adding diversity is the fourth one.

Maybe the last one that I’ll mention is, and it seems kind of obvious, but it’s actually quite important, is that you really need to understand fundamental needs.  Dig deeper to understand fundamental needs.  Let me just give you a recent example of this.  There were some colleagues of mine at Harvard that were asked to help McDonald’s become more innovative with regards to its shakes.  What these researchers did was quite interesting.  They went in and basically stationed themselves at the entrances and exits at a number of different McDonald’s to just get a sense of who this prototypical drinker of a shake might be.  If you were to guess who these people might be you might guess families or youth coming in the afternoons for a treat.  In contrast, what the researchers found was that a lot of these shake buyers were coming in early in the morning.  They were working professionals and they were buying them for breakfast.  That was surprising to these researchers so they started asking these consumers why they were buying shakes and what was their situation.

They found that there was a common theme – most of these buyers had a very long commute to work.  If you take that information, what might be the need?  Well, they had a long commute to work.  Essentially there is some boredom in their car and they kind of need something for that cup holder.  With that information, what could you do if you’re McDonald’s to be more innovative?  You might make the shake more viscous.  Right?  You might make it thicker so it doesn’t come up in the straw for about 10 minutes into the ride so it’s going to last the whole trip.  You might put some fruit in it to make it healthier if you’re consuming it for breakfast.  You might put the shake dispenser on the other side of the counter so people can get in or get out.  Realize that if you hadn’t understood these needs of these consumers, you probably would have just made a bigger shake or added a new flavor but you would have missed a lot these great insights.

The point on that exercise is that people hire a product to fill a need.  People hire a product to fill a need and you really have to understand that need.  If you understand that need, you’ll be able to innovate more effectively.  Those are a couple of things that help organizations improve innovation.

One thing you  shared there is McDonald’s recognizes they needed some new ideas and they brought an outside team in to help them innovate.  Are there any changes organizations can make so that they can start embracing these five areas you identified to help improve innovation internally?

Yes.  Your point about the outsiders is a good one.  I think it often helps to bring an outsider in.  Think about Wal-Mart and amazon.com.  We know that Wal-Mart is the largest discount retailer in the world, but if you look at the online space, they’re getting clobbered by Amazon.  Wal-Mart wants to essentially take over Amazon’s space.  What they’ve done is they said, “Let’s try and move away from our Bentonville culture.  Let’s establish a satellite office in Silicon Valley and let’s try to create a more innovative culture.”  They did something which was important, which is they created a small satellite office.  The challenge that they had was that they stacked the office with many Bentonville executives.  While they did one step correctly which I think is moving slightly away from the corporate headquarters, they are essentially just going to infuse it with the same blood by having Bentonville executives in charge of this online division.  I think having outsiders is critically important to sort of move away from the dominant paradigms and models and policies and procedures that organizations have had.  I think you see that in a lot of organizations.  When Toyota came up with its Prius automobile, it did not take the top engineers within the firm.  It actually pulled a younger executive from a completely different division that had almost no experience in this area and put him in charge for the very reason that they did not want him to be biased by experiences of the past.

Interesting.  Could you kind of take from that that organizations that are committed to innovation are changing peoples’ roles and the teams they’re working with to try to spark new interactions and new ideas?

Yes.  I think that might be a good way to think about it.  What you often see, too, in organizations is rotations.  Nokia was famous for shifting their executives around the organization.  I think they weren’t in one place longer than about two years before they were being rotated to new divisions.  I think that really facilitates the cross fertilization of ideas.  I think that’s another good thing.  I think the more times that you’re interacting with other teams in your organization and frankly other organizations outside of your own, you’re able to see and borrow best practices.

I’ve been doing some work on business accelerators, which are three-month intensive entrepreneurship programs.  These accelerators bring in cohorts or groups of firms that start together and they work through this three-month process.  What’s interesting is that when you are in an accelerator with a cohort, what often emerges is what one informant described as pacers.  When you think about a running race, there’s often a pacer that sets the speed and helps everybody pick up their momentum.  What happens is when you’re in this group of multiple firms, different pacers emerge in different areas.  You might have a product development pacer, someone that’s an expert in product development.  You might have a fundraising pacer that’s expert in fundraising.  You might have a web designer, a coding expert.  What happens is the more you interact with teams inside and outside your organization is you find these multiple pacers that can help you speed your own learning so that you don’t have to experience everything through trial and error.

Do you have any closing thoughts that you’d like to leave everyone with?

Overall, a key counterintuitive insight is that when markets become very fast paced and rapid and complex and require more innovation (which is what we’re seeing across many different industries), often the best strategies are the most simple. High performing organizations often rely on simple rules to facilitate innovation.  Cisco, which was known for creating a lot of growth through acquisitions often relied on a very simple acquisition rule.  It’s called the 75-75 rule:  acquire firms with less than 75 employees, 75 percent of which have to be engineers.  You see that in a lot of innovative organizations.  Organizations are cutting back rather than adding to structure.  By having some, but not too much structure, you can benefit from the past but also improvise in the present.  That’s a counterintuitive insight.  Again, when markets become very complex and fast paced, often the best strategies are the most simple.