Building an Idea Factory

Resources

•  Building an Idea Factory.

Resources

•  The Future of the New York Times.

Resources

•  Beyond Blue.

New Strategies

Buil mg An Idea Factory Inspiration is fine, but above all, innovation is really a management process. By Robert D. Hof

A SK MOST PEOPLE WHO invented the lightbulb, and they will promptly provide the wrong answer: Thomas Alva Edi- son. Truth is, the famous inventor’s 1879 debut of his in- candescent light trailed others by decades. So why does he get all the glory? Mostly because of what he did next, notes Andrew Hargadon, author of How Breakthroughs Happen: The Surprising Truth about How Companies Innovate. To get

his creation to the masses, Edison and his team of engineers in Menlo Park, N.J., spent years building the entire electric system, from light sock- ets and safety fuses to generating facilities and the vdring network. Only then did the electric light flare into the innovation that lit the world.

In short, Edison beat all his predeces- sors at one crucial task: managing the whole process of innovation, from light- bulb moment to final product. Today that task is scarcely easier than it was 125 years ago. Sure, ifs easy to get lucky once in a while. The real trick is doing it over and over again. “Managing innovation means cultivating an environment where lightning can strike twice,” says Patil Saf- fo, research director at the think tank In- stitute for the Future. “It’s extraordinari- ly difficult.”

To hard-headed business people, inno- vation often seems as predictable as a rainbow and as manageable as a butterfly. Penicillin, Teflon, Post-it Notes—they

194 I BusinessWeek I October 11, 2004

sprang from such accidents as moldy Petri dishes, a failed coolant, and a mediocre glue. Ifs no wonder so many executives throw up their hands. “Our ap- proach has always been very simple, which is to try not to manage innova- tion,” shrugs Silicon Valley venture capi- talist Michael Moritz, a partner with Se- quoia Capital. “We prefer to just let the market manage it.”

Yet even in the Darwinian chaos of Sil- icon Valley, innovations are made, not bom. The world’s most innovative com- panies, from Procter & Gamble and Toyota Motor to Apple Computer and Edison’s own General Electric, make their own luck They plunge ahead on

new ideas even though they know most vñll fail. “You have to go down blind al- leys,” says Jeffrey P. Bezos, founder and chief executive of pioneer online retailer Amazon.com Inc. “But every once in a while you go down an alley and it opens up into this huge, broad avenue. That makes all the bhnd alleys worthwhile.”

“COMMODITY HELL” PROBLEM IS, A LOT of forces today con- spire against innovative products getting to market. Small outfits that are often the most innovative get short shrift because

fSí.’

buyers aren’t sure they can deliver or even survive to keep supporting their products. And for large corporations, there’s the innovator’s dilemma” coined by Har-

vard Business School professor Clayton Christensen. By catering to their best cus- tomers -with increasingly advanced and More expensive products—a seemingly sensible approach—successful compa- nies ignore or even discourage less prof- itable low-end products. But as startups produce these low-end products and they improve, they eat into the core markets of large companies. Thanks to such innova-

tions as Internet phones, discount air- lines, and open-source software, the in- novators’ dilemma is now afilicdng blue- chips AT&T, United Airiines, and Microsoft. Says Gerard M. Mooney, vice- president and director of corporate strat- egy at IBM : “All big companies have trou- ble coming up with the Next Big Thing.”

Managing innovation better may be the only way out of the “abyss called com- modity hell,” as GE Ghief Executive Jeffrey R. Immelt has put it. Today, having the biggest factories or running the most ads is no longer enough to stay ahead. Shorter

Amazon TRY, TWEAK, AND TRY AGAIN: The e-tailer struck out when it fried auc- f ions à la eBay. But thanks fo CEO Bezos’ “culture of divine discontenf,” Amazonians kept pushing, coming up with the idea of letting other merchants sell on its pages. Profit margins on those sales have helped Amazon log four straight profitable quarters.

Ocfober 11. 2004 I BusinessWeek 1195

Starbucks INVENTING MARKETS, NOTJUST PRODUCTS: Never just a coffee joint, Starbucks views itself as a “third place” to hang out. That’s why wireless Net: access paid off. Subscribers visit more and stay longer. And the network is the foundation for a new music-CD-burning service.

product cycles, ultra-efBcient contract manufacturers diat upstarts can use to en- ter a market fast, and a glut of factory ca- pacity that depresses prices—all of tiiose render tradidonal Industrial Age competi- tive advantages moot. Serial innovadon may prove to be the key skül of the Infor- madon Age. “Serendipity is nice, but we can’t leave this to happenstance,” says John Seely Brovm, a visiting scholar at the University of Southern California’s An- nenberg Center for Communicadon and former chief sciendst and head of Xerox Corp.’s legendary Palo Alto Research Cen- ter. “We just don’t have the money any longer to screw around.”

The good news is that crisis is the mother of innovation. The economic boom of the 1990s produced a raft of nimble new rivals, forcing established companies from IBM to Procter & Gam- ble to shake up longstanding habits. And even if some of those threats looked less fearsome as the economy soured, the sawiest CEOs realized it was a comped-

üve advantage to continue pushing their troops to rethink how they develop prod- ucts and services—in a sense, to rethink innovadon itself “We went through a re- ally tough patch in 2000,” says P&G Chief Technology Officer G. Gilbert Cloyd. “That got us moving.”

Some of the methods companies are using to spur innovadon, such as setdng impossibly high goals and relendessly ex- perimendng, will sound familiar in places like Süicon Vaüey. But they’re often considered unwise or frilly by traditional corporadons. Others, such as opening up company procedures and research to the outside world, are new and controversial. One thing underlies them all: courage. The companies that have endured are those whose leaders bet the future not just on markedng savvy or manufactur- ing might but on innovation.

RISKY GOALS FOR ONE, THEY’RE NOT afraid to think big and tackle goals that others deem too risky. Consider Apple Computer Inc. In early 2001, the Cupertino (Calif.) person- al-computer pioneer hit on the idea of making a digital music player as easy to use as Sony Corp.’s Walkman was for cas- sette tapes. Yet whue the iPod debuted just nine months later, CEO Steven P. Jobs realized that selling hardware wasn’t good enough. That’s when he set to work on the seemingly impossible: providing easy, legal access to lots of songs, some- thing no one had yet managed.

By Aprü, 2003, Jobs had done it. By painstakingly working out digital-right issues with recalcitrant record companies, Apple opened an online download store that featured 200,000 songs, soon to grow to an unprecedented 1 mulion. Now Apple owns tech’s hottest product, with total sales of 3.7 mulion iPods grossing $1 bühon. Says Jobs: “We can invent a com- plete solution that works.”

What’s more, Jobs’s big bet has helped him redefine the company. Apple, widi a negligible 2% share of the PC market, has a shot at becoming a dominant force in the exploding market for digital entertain- ment. That kind of radical shift stands in stark contrast to the safe path too many companies take, says A Richard Newton, dean of the College of Engineering at the University of California at Berkeley. “What’s missing today is inspired leader- ship that has a lofty enough vision to spin

»Oneadjustmentto Toyota’s manufacturing system slashea 75% off the cost of refitting the production line

196 I BusinessWeek I October 11. 2004

great things along the way,” says Newton. Thinking big is important, but sweat-

ing the details is just as critical to spurring continuous innovation. Several years ago, Toyota Motor Corp. made one change to its production hnes, using a single brace to hold auto frames together instead of the 50 it took previously. In the context of Toyota’s famously complex production system, it looked almost in- significant. But this Global Body Line sys- tem helped slash 75% off the cost of refit- ting a production line. And it is the reason behind Toyota’s ability to make different models on a single line. The change con- tributed to manufacturing cost savings of $2.6 billion last year, helping produce profits in the year ended Mar. 31 that topped those of Ford Motor Co. and Gen- eral Motors Corp. combined.

If s a testament to the importance of managing the thousand-and-one small innovations that together become some- thing transformative. Through a process called kaizen, the Japanese word for con- tinuous improvement, the auto maker re- lentlessly tries to find ways to enhance every step from design through assembly. “Every day, every minute, they’re trying to improve their production systems or pro- ductivity or quality,” says Goldman Sachs & Co. auto analyst Kunihiko Shiohara.

That requires perhaps the most funda- mental quality of innovative companies. They never stop hammering away at problems and opportunities. They lmow that if they do, someone else wiU hammer them. Says John L. Hennessy, president of Stanford University and co-founder of chip designer MIPS Computer Systems: “Ifs better to shoot yourself in the foot than to allow somebody else to shoot you in some more vital part of the anatomy.”

When Amazon.com managers noticed in 1999 that eBay Inc. was taking off, for instance, they launched their own auction site to tap into the same group of sellers— and the high-margin stream of commis- sions. But eBa/s momentum was too great, and Amazon’s auctions largely fiz- zled. Amazon also opened zShops, a gallery of independent merchants on its site, but that attempt to create a market- place didn’t catch fire either. In late 2000, an Amazonian came up with yet another idea: Let other sellers offer their wares on the same page as Amazon’s own products. “Inviting third-party sellers onto our prime real estate—that made some palms sweat,” Bezos admits.

But the Seattle-based company plowed ahead, and this feature has turned into a hit. Now some 26% of unit sales on Ama- zon.com are by other sellers, who like

how easy it is to list items. “The Amazon- seUing platform is second to none,” says Scot Wingo, CEO of ChannelAdvisor Corp. in Research Triangle Park, N.C., which helps large merchants sell on eBay and Amazon. The 60%-plus profit margin on the commissions and fees it charges other merchants has overcome any can- nibalizadon. Bezos says people who buy used books buy more new books, too. All that has helped the company to log four straight profitable quarters.

“CONNECT AND DEVELOP” BEZOS ISN’T JUST STUBBORN. He makes his constant experimentation eco- nomical by keeping project teams small and nimble. That way, even when they fail, they haven’t spent much time or

P&G TEARING DOWN CORPORATE WALLS: When the company entered the car-care market, it tapped in-house experts to produce the Mr. Clean AutoDry handheld sprayer, which soaps down cars and rinses them. It’s a hit, more than doubling Mr. Clean brand sales in a year.

money. Says Bezos: “To the degree that you can get people in teams small enough that they can be fed on two piz- zas, you’ll get a lot more productivity.”

Increasingly, companies are rethinking where innovations come fi-om. The best ideas aren’t always inside corporate re- search and development labs, notes Heniy Chesbrough, visiting assistant professorat UC Berkeley’s Haas School of Business and author of die book Open Innovation: Tk New Imperative for Creating and Profiting from Technology. So if s becoming crucial to knock down walls inside the company- between research and manufacturing ot marketing—while at the same time reach- ing outside the company for ideas. But it’s not easy to do. Says Chesbrough: “Thetï are powerful forces resisting the opening

up of companies’ inno- vation processes.”

Nowhere was that more apparent than at Procter & Gamble. Growth and profits at the Cincinnati pack- aged-goods company stalled several years ago, partly because some costly products developed in-house tanked. New CEO Alan G. Lafley shook things up, replacing half of the company’s top 30 officers and urging product groups “connect and develop* by pulling in experts from unrelated braná to help on new product creation.

For example, when P&G decided to move into a new market, the home car-care business, researchers didn’t statt from scratch. They looked around P&G foi related expertise—i struck gold. The com- pany’s PuR unif s wata-

filter experts knew how to deionize water to get rid of minerals, and its Cascade unit al- ready had a compound in its dishwasher detergent that reduced water spots. They used both technologies in what became Mt Clean AutoDry, a $24.99 handheld sprayet system. If s so popular that it has helped to more than double overall Mr. Clean brand sales in the past year. It also showed tli£ company a new way to innovate. Says Kan Ronn, vice-president of P&G’s home-cas division: “Innovation nowadays is moff

198 I BusinessWeek I October 11. 2004

Voices of Innovation

Jeff Hawkins

t Creator of the first PalmPilot PDA and Handspring smart phone and author of the book On Intelligence, about the hu- man brain and intelligent machines.

«Let’s tail( about sériaiinnovators. What’s thesecret to success?I don’t know if there’s asecret to success. I’ve had a great deal of success myself I also have had my share of failure. To me, being a great innovator is like batting in baseball. If you’re batting .300 or .350, you’re doing pretty well. Most people, they never get a hit. I try to think very hard about whaf s ultimately going to happen. Ultimately, everything’s going to be vidreless. Ultimately, everything’s going to be portable. I figured that out a long time ago.

The trick is once you see that long- term vision, you then ask yourself, how do I get there step by step? You can’t just solve all the problems at once and bhigo, you have an industry. No, you have to solve a whole bunch of those problems, and along the way you have to make money while you’re doing it.

And so what steps do you do? Even though I thought all computers would be mobile computers at some point, we said we can’t do the wireless piece. We could do a connected organizer, and bingo, we did that. You always have the future vision in place. Tliat tells you what you have to do.

Can a company be a big innovator? Companies don’t innovate; people do. If you’re going to innovate, you have to overcome problems. In a startup, you’re going to have all these people telling you you’re wrong. If you’re at a big company, you’re going to have all these people telling you you’re wrong. It takes a lot of nerve and perseverance. You have to keep fighting the batties.

200 I BusinessWeek I October 11, 2004

like improvisation in jazz than playing out a score thaf s already written.”

Lafiey didn’t stop there. He also de- creed that half the company’s new prod- uct ideas eventually come from outside, up from 20% last year. That push has pro- duced several popular products such as Olay Regenerist, a new antiwrinkle cream based on a skin-repair compound from a French company. The approach seems to be paying off. P&G’s overall unit growth before acquisitions has jumped from zero in 2001 to 8% last year. For the fourth quarter ended June 30, overall profits shot up 44%, to $1.4 billion, on a 10% rise in sales, excluding acquisitions.

Other companies are reaching out in more radical ways, such as tapping their own customers’ expertise to develop fresh products and services. EBay CEO Margaret C. Whitman wasn’t exaggerat- ing when she told thousands of attendees at the online marketplace’s annual con- ference of buyers and sellers in June, “You are in the room with us whenever we make a decision.” EBay watches what they trade on the site and flies in buyers and seOers for feedback. Effectively, it lets its customers decide where to expand next. That approach has paid off: 11 cate- gories, from cars to jewelry, now top $1 billion in annual gross sales each, and eBa^s stock is worth $59 bilhon.

EBa/s approach may be hard for many conventional companies to emulate. But the notion of bringing customers inside to help develop new products is catching on in mainstream corporations as well. In 2000, for Lastance, IBM signed a deal with GM to co-develop a supercomputer for GM’s car design and crash testing. The ma- chine saved GM $1 billion in product-de- velopment costs in the past three years and cut by as much as 64% the time to get a car from the design stage to the dealer’s lot.

IBM may have gained even more. The work put into IBM’s microprocessor chip, operating system, and other software to make it a leader in supercomputing also helped supercharge its commercial-server business. “We got a huge competitive edge,” says Bernard V. Schwartz, IBM’s global account executive for GM product development. In late August market watcher Gartner Research said IBM ex- panded its leading share of the $11.5 bu- lion server market to nearly 31%.

The ultimate in innovation, though, is not merely to come up with new products and services. If s to create entirely new markets where none existed before—and better yet, to provide something that changes the way we live and work. Inno- vation was never just about new gizmos

and gadgets. But in a service economy, in- novations more than ever must transcend objects. Some of today’s most successfiil companies, from Virgin Group Ltd. to eBay, create not only innovative products or services but also novel business modek,

“THIRD PLACE” MOST PEOPLE MIGHT think of Starbucks, for instance, as a fancy coffee joint. Not Chairman Howard D. Schultz. He sees the 8,000-store chain as a “third place” for people to hang out besides home and work Thaf s why a seemingly unrelated service- offering wireless Net access in its stores starting two years ago—tumed out to be a winner. Although Starbucks Corp. won’t quantify the revenue impact, people using the service stay nine times longer than áe usual five minutes, almost certainly buying more lattes. And 90% of customers who log on are doing so after peak morning hours, filling stores during previously light peri- ods. Says Anne Saimders, Starbucks’ setiiot vice-president of marketing: “If we’d only thought of ourselves as a coffee company, we wouldn’t have done this.”

The wireless network also inspired a new initiative that could again remake the Seattie-based company. Its new Hear Music Coffeehouses, about to be rolled out in existing Starbucks stores in Seattle with plans for up to 1,000 sites by the end of 2005, feature dozens of listening sta- tions where people can make custom CDS, at about a buck a tune, from hundreds of thousands of songs. In addition to offer- ing a new service to 30 million weekly customers, Schultz has said he thinks Starbucks could transform the music business. At the least, he’s transforming Starbucks once again.

Who ever would have thought that Ap- ple and Starbucks might compete! Therein lies a ñindamental constant of in- novation: Nothing stays constant. Con- tending wdth innovation’s disruptive in- fluence requires what Amazon’s Bezos calls a “culture of divine discontent” iJ which everyone itches to improve things. “Most people, unleashed, are innova- tors,” he says. “We’re this great species of tool-using animal who likes to make oui world better.” The companies that can unleash that particular animal instinct are the ones that will thrive. •

-With Peter Burrows, in San Maten, Calif, Steve Hamm ad

Diane Brady in New Yori and Ian Rowley in Tokji

Bii.siiicssVVeek For a Q&A with Procter & Gamble Chief Technology Officer G, Gilbert Cloyd, go to www,businessweek.com/75

Copyright of BusinessWeek is the property of Bloomberg, L.P. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder’s express written permission. However, users may print, download, or email articles for individual use