Innovation Blog

Not something you expect on CrunchGear

2009-07-22T12:41:00.000-04:00

http://www.crunchgear.com/2009/07/22/on-the-apple-suicide/

Google Searches for Staffing Answers

2009-05-22T15:03:00.001-04:00

Google Searches for Staffing Answers

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By SCOTT MORRISON
Concerned a brain drain could hurt its long-term ability to compete, Google Inc. is tackling the problem with its typical tool: an algorithm.
The Internet search giant recently began crunching data from employee reviews and promotion and pay histories in a mathematical formula Google says can identify which of its 20,000 employees are most likely to quit.
Google officials are reluctant to share details of the formula, which is still being tested. The inputs include information from surveys and peer reviews, and Google says the algorithm already has identified employees who felt underused, a key complaint among those who contemplate leaving.

More
Digits: Internet Archive Founder Questions Google Books Settlement
Applying a complex equation to a basic human-resource problem is pure Google, a company that made using heavy data to drive decisions one of its "Ten Golden Rules" outlined in 2005.
Edward Lawler, director of the Center for Effective Organizations at the University of Southern California, said Google is one of a few companies that are early in taking a more quantitative approach to personnel decisions.
"They are clearly ahead of the curve, but a lot of companies are waking up to the fact that there is a lot of modeling that can provide you with critical data on human capital," Mr. Lawler said.

Associated Press

Current and former Googlers said the company is losing talent because some employees feel they can't make the same impact as the company matures.
The move is one of a series Google has made to prevent its most promising engineers, designers and sales executives from leaving at a time when its once-powerful draws -- a start-up atmosphere and soaring stock price -- have been diluted by its growing size. The data crunching supplements more traditional measures like employee training and leadership meetings to evaluate talent.
Google's algorithm helps the company "get inside people's heads even before they know they might leave," said Laszlo Bock, who runs human resources for the company.
Concerns about a talent exodus have revived in recent weeks amid the departures of top executives, including advertising sales boss Tim Armstrong and display-advertising chief David Rosenblatt. Meanwhile, midlevel employees like lead designer Doug Bowman, engineering director Steve Horowitz and search-quality chief Santosh Jayaram continue to decamp to hot start-ups like Facebook Inc. and Twitter Inc.

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Google needs to develop a human touch vs. always looking to tech.
"

— Gregory Lynn
Current and former Googlers said the company is losing talent because some employees feel they can't make the same impact as the company matures. Several said Google provides little formal career planning, and some found the company's human-resources programs too impersonal.
"They need to come up with ways to keep people engaged," said Valerie Frederickson, a Silicon Valley personnel consultant who has worked with former Google employees. "If Google was doing this enough, they wouldn't be losing all these people."
Google spokesman Matt Furman said the chance to contribute to "constant and often amazing innovation" keeps employees engaged. The company is determined to retain top product managers and engineers.
Google wouldn't say how many people have left, but says it has managed to hang on to its most important staffers. "We haven't seen the most critical people leave," Mr. Bock said.
Write to Scott Morrison at scott.morrison@dowjones.com

Cool bike!!

2009-05-22T14:56:00.001-04:00

http://www.ted.com/index.php/talks/lang/eng/yves_behar_s_supercharged_motorcycle_design.html

Merci/ thanks
________________________________________________________________
Jean-François Barsoum, MBA
Senior Managing Consultant & Practice Leader, Green + Innovation Strategies
ibm +1.514.964.4192 :: fax +1.845.491.2412 :: jbarsoum@ca.ibm.com
IBM Canada: Suite 400, 1360 boul. René-Lévesque Ouest, Montréal (QC) H3G 2W6
P Si possible, s.v.p. évitez d'imprimer ce courriel - please avoid printing this e-mail if possible

When IBM Beats Facebook And Twitter: Discover Relevant People Within Your Network

2009-01-29T09:59:00.001-05:00

http://www.techcrunchit.com/2009/01/29/when-ibm-beats-facebook-and-twitter-discover-relevant-people-within-your-network/

When IBM Beats Facebook And Twitter: Discover Relevant People Within Your Network
5 Comments
by Jeff Widman on January 29, 2009

When twitter recently added a "Suggested Friends" feature, I was more than a little disappointed. Unlike Facebook's "People You May Know" feature, no explanation is provided for why these people were suggested.

In an enterprise setting, the most valuable people are the connectors: "The people who know which people know what", according toAlan Lepofsky.

The larger the organization, the more likely someone else is working on the same problem. And the less likely you'll find them.

Automatic "Friend Suggestions" shift the connector role from people to software. These suggestion algorithms can use all sorts of data, from mutual friends to similar content (if we both tweet the same thing) to match relevant people. If you have the data, there's a million ways to slice it. But every attempt I've seen seems mediocre at best.

While touring IBM's Innovation lab at Lotusphere last week, I was surprised to see IBM is also tackling this problem with their "Social Networks & Discovery" project (SaND for short). And it looked FAR better than anything I've seen previously.

Their relevant person suggestion engine (screenshot above) uses mutual connections across multiple networks, shared knowledge tags, and even values certain connections above others (like a mutual boss).

Perhaps even more interesting, the IBM aggregation and filtering system works on any entity in a system–people, textual documents, or meta-information (tags). Like Google, searching on any term returns a ranked results list. But unlike Google, pausing over a link shows the relationships between people, tags, and documents (screenshot below).

As I tweeted earlier this week, I rarely read RSS anymore. Too much content, too little time. As this information proliferation grows–on both sides of the firewall–filtering relevant people and content will only become more necessary.

This is still in the research phase, and isn't shipping in any IBM products yet, but I expect to see it in Lotus Connections fairly soon.

(Hat Tip to TechCrunch fan Ido Guy–an IBM researcher on another project, he pointed this out to me and said, "No one else in consumer or enterprise is doing this yet.")

If you like mind maps....

2009-01-26T15:34:00.001-05:00

You might like this http://www.amap.org.uk/

Story: http://www.techcrunch.com/2009/01/26/make-amap-of-your-best-arguments/

Flaws in strategic decision making: McKinsey Global Survey Results

2009-01-19T11:13:00.001-05:00

Note: "executives at companies with satisfactory outcomes ... [ensure] that truly innovative ideas reached senior managers."

Flaws in strategic decision making: McKinsey Global Survey Results
Irrational thinking doesn't just affect individual economic decisions; it affects corporate strategic planning as well. These results highlight the practices of companies that have made successful strategic decisions—and also reveal what the same companies have gotten wrong.
January 2009
Since its inception nearly three decades ago, behavioral economics has upset the pristine premise of classical economic theory—the view that individuals will always behave rationally to achieve the best possible outcome. Today it's clear that the vagaries of individual and group psychology can cause irrational decision making by both individuals and organizations, resulting in less than ideal outcomes. Even the best-designed strategic-planning processes don't always lead to optimal decisions. A recent survey by McKinsey attempts to assess the frequency and intensity of the most common managerial biases in companies. Specifically, we asked executives about a single recent strategic decision at their companies that had a clearly satisfactory or unsatisfactory outcome, focusing on the role that various biases may have played.¹
It's evident from the results that satisfactory outcomes are associated with less bias, thanks to robust debate, an objective assessment of facts, and a realistic assessment of corporate capabilities. A few clear paths to making successful decisions also are apparent. But even when a decision had a satisfactory outcome, executives note several areas where their companies aren't all that effective, such as aligning incentives with strategic objectives and forecasting competitors' reactions.² Also notable is that companies that typically make good decisions focus more on their own ability to execute than other companies do, regardless of the outcome of the particular decision described in the survey.
Notes
¹The McKinsey Quarterly conducted the survey in October 2008 and received responses from 2,207 executives representing a global range of industries, regions, and functional specialties.
²This is in line with the results of another survey on how companies respond to competition. See "How companies respond to competitors: A McKinsey Global Survey," mckinseyquarterly.com, May 2008.

When all goes well
Most companies work hard to make their strategic decision-making processes as rigorous as possible. And when executives are satisfied with the outcome of their decisions, they tend to rate their companies' processes highly in terms of practices that avoid many biases, though some do creep in (Exhibit 1).³
Companies that reach satisfactory outcomes do so in a few different ways, and three distinct themes emerge from executives' responses. The first theme is assessment: at companies with satisfactory outcomes, executives give their processes high marks for forecasting demand and competitor reaction, assessing their own capabilities, and tailoring their evaluation approach to the specific decision.
The second theme is process: executives at companies with satisfactory outcomes rate their processes highly when it comes to seeking contrary evidence and ensuring that decision makers had all the critical information, giving dissenting voices the floor, reviewing the business case thoroughly even though senior executives were strongly in favor, and ensuring that truly innovative ideas reached senior managers.

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And the third theme is a focus on targets: the satisfied respondents assign high ratings to aligning incentives and basing the decision on a mix of financial and strategic targets as well as on a mix of short- and long-term targets.
It's also notable that at companies where executives rate their strategic decisions overall as good, they are much likelier than others to say the company's assessment of its own capability to carry out the particular decision was realistic, regardless of whether this decision had a good or bad outcome (Exhibit 2). Indeed, at companies with good overall processes, realistic assessment of execution capabilities is the third highest-rated activity, regardless of whether the particular decision had a satisfactory outcome. While at companies that make poor decisions overall, realistic assessment of execution ranks sixth for respondents evaluating a satisfactory decision and tenth for respondents evaluating a poor decision.

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Notes
³Though there is a well-known tendency among people to rate themselves or their companies highly on specifics when they also think they do well in general, the differences in the intensity of the biases asked about here nonetheless provide a clear understanding of what executives think they do well and less well.

What goes wrong
At companies where the outcome of the decision was unsatisfactory, respondents generally rate themselves lower across the board. As one would expect, compared with the executives who are satisfied with their business results, they are less likely to say they have adequately used all the practices associated with successful decision making (Exhibit 3).
Further, regardless of what type of decision a company was making or what the outcome was, the best practice cited least often is that of actively seeking evidence contrary to the initial plan.
Decisions on certain subjects, whether leading to satisfactory or unsatisfactory outcomes, tend to include or avoid similar practices aimed at preventing bias. For example, whether the outcome was satisfactory or not, marketing decisions incorporate more of the best practices than any other single type of decision (Exhibit 4). Perhaps this is because companies make these types of decisions relatively often. Merger or acquisition decisions, which by nature tend to be less frequent, are the most likely to be missing elements of good decision making when the outcomes were poor.

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Looking ahead

One of the most frequent practices at companies that make good decisions is the accurate assessment of execution capabilities, indicating that managers should increase their focus on this element when considering strategic options.
Even satisfactory decisions tend to overlook a good assessment of competitors' reactions or a good alignment of individual incentives with strategic objectives, suggesting that all companies can improve their decision making by focusing on these practices.
Given the prevalence of individual and group biases in decision making that these findings highlight, managers could likely make better decisions by actively experimenting with alternative techniques such as prediction markets or other collective intelligence tools, which can nullify many pervasive biases.
About the Contributors
Contributors to the development and analysis of this survey include Renee Dye, a consultant in McKinsey's Atlanta office; and Olivier Sibony and Vincent Truong, a director and consultant, respectively, in the Paris office.

Eight business technology trends to watch

2009-01-19T09:58:00.001-05:00

Eight business technology trends to watch
Eight emerging trends are transforming many markets and businesses. Executives should learn to shape the outcome rather than just react to it.
DECEMBER 2007 • James M. Manyika, Roger P. Roberts, and Kara L. Sprague

In This Article
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About the authors
Letters to the editor

Technology alone is rarely the key to unlocking economic value: companies create real wealth when they combine technology with new ways of doing business. Through our work and research, we have identified eight technology-enabled trends that will help shape businesses and the economy in coming years. These trends fall within three broad areas of business activity: managing relationships, managing capital and assets, and leveraging information in new ways.
Managing relationships
1. Distributing cocreation
The Internet and related technologies give companies radical new ways to harvest the talents of innovators working outside corporate boundaries. Today, in the high-technology, consumer product, and automotive sectors, among others, companies routinely involve customers, suppliers, small specialist businesses, and independent contractors in the creation of new products. Outsiders offer insights that help shape product development, but companies typically control the innovation process. Technology now allows companies to delegate substantial control to outsiders—cocreation—in essence by outsourcing innovation to business partners that work together in networks. By distributing innovation through the value chain, companies may reduce their costs and usher new products to market faster by eliminating the bottlenecks that come with total control.
Information goods such as software and editorial content are ripe for this kind of decentralized innovation; the Linux operating system, for example, was developed over the Internet by a network of specialists. But companies can also create physical goods in this way. Loncin, a leading Chinese motorcycle manufacturer, sets broad specifications for products and then lets its suppliers work with one another to design the components, make sure everything fits together, and reduce costs. In the past, Loncin didn't make extensive use of information technology to manage the supplier community—an approach reflecting business realities in China and in this specific industrial market. But recent advances in open-standards-based computing (for example, computer-aided-design programs that work well with other kinds of software) are making it easier to cocreate physical goods for more complex value chains in competitive markets.
If this approach to innovation becomes broadly accepted, the impact on companies and industries could be substantial. We estimate, for instance, that in the US economy alone roughly 12 percent of all labor activity could be transformed by more distributed and networked forms of innovation—from reducing the amount of legal and administrative activity that intellectual property involves to restructuring or eliminating some traditional R&D work.
Companies pursuing this trend will have less control over innovation and the intellectual property that goes with it, however. They will also have to compete for the attention and time of the best and most capable contributors.
Further reading:
Yochai Benkler, The Wealth of Networks: How Social Production Transforms Markets and Freedom, Cambridge, MA: Yale University Press, 2006.
Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, Boston: Harvard Business School Press, 2003.
James Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, New York: Doubleday, 2004.
Eric von Hippel, Democratizing Innovation, Cambridge, MA: MIT Press, 2005.
2. Using consumers as innovators
Consumers also cocreate with companies; the online encyclopedia Wikipedia, for instance, could be viewed as a service or product created by its distributed customers. But the differences between the way companies cocreate with partners, on the one hand, and with customers, on the other, are so marked that the consumer side is really a separate trend. These differences include the nature and range of the interactions, the economics of making them work, and the management challenges associated with them.
As the Internet has evolved—an evolution prompted in part by new Web 2.0 technologies—it has become a more widespread platform for interaction, communication, and activism. Consumers increasingly want to engage online with one another and with organizations of all kinds. Companies can tap this new mood of customer engagement for their economic benefit.
OhmyNews, for instance, is a popular South Korean online newspaper written by upwards of 60,000 contributing "citizen reporters." It has quickly become one of South Korea's most influential media outlets, with around 700,000 site visits a day. Another company that goes out of its way to engage customers, the online clothing store Threadless, asks people to submit new designs for T-shirts. Each week, hundreds of participants propose ideas and the community at large votes for its favorites. The top four to six designs are printed on shirts and sold in the store; the winners receive a combination of cash prizes and store credit. In September 2007 Threadless opened its first physical retail operation, in Chicago.
Companies that involve customers in design, testing, marketing (such as viral marketing), and the after-sales process get better insights into customer needs and behavior and may be able to cut the cost of acquiring customers, engender greater loyalty, and speed up development cycles. But a company open to allowing customers to help it innovate must ensure that it isn't unduly influenced by information gleaned from a vocal minority. It must also be wary of focusing on the immediate rather than longer-range needs of customers and be careful to avoid raising and then failing to meet their expectations.
Further reading:
C. K. Prahalad and Venkat Ramaswamy, The Future of Competition: Co-Creating Unique Value with Customers, Boston: Harvard Business School Press, 2004.
Don Tapscott and Anthony D. Williams, Wikinomics: How Mass Collaboration Changes Everything, New York: Portfolio Hardcover, 2006.
3. Tapping into a world of talent
As more and more sophisticated work takes place interactively online and new collaboration and communications tools emerge, companies can outsource increasingly specialized aspects of their work and still maintain organizational coherence. Much as technology permits them to decentralize innovation through networks or customers, it also allows them to parcel out more work to specialists, free agents, and talent networks.
Top talent for a range of activities—from finance to marketing and IT to operations—can be found anywhere. The best person for a task may be a free agent in India or an employee of a small company in Italy rather than someone who works for a global business services provider. Software and Internet technologies are making it easier and less costly for companies to integrate and manage the work of an expanding number of outsiders, and this development opens up many contracting options for managers of corporate functions.
The implications of shifting more work to freelancers are interesting. For one thing, new talent-deployment models could emerge. TopCoder, a company that has created a network of software developers, may represent one such model. TopCoder gives organizations that want to have software developed for them access to its talent pool. Customers explain the kind of software they want and offer prizes to the developers who do the best job creating it—an approach that costs less than employing experienced engineers. Furthermore, changes in the nature of labor relationships could lead to new pricing models that would shift payment schemes from time and materials to compensation for results.
This trend should gather steam in sectors such as software, health care delivery, professional services, and real estate, where companies can easily segment work into discrete tasks for independent contractors and then reaggregate it. As companies move in this direction, they will need to understand the value of their human capital more fully and manage different classes of contributors accordingly. They will also have to build capabilities to engage talent globally or contract with talent aggregators that specialize in providing such services. Competitive advantage will shift to companies that can master the art of breaking down and recomposing tasks.
Further reading:
Richard Florida, The Rise of the Creative Class: And How It's Transforming Work, Leisure, Community, and Everyday Life, New York: Basic Books, 2004.
Daniel H. Pink, Free Agent Nation: How America's New Independent Workers Are Transforming the Way We Live, New York: Warner Books, 2001.
4. Extracting more value from interactions
Companies have been automating or offshoring an increasing proportion of their production and manufacturing (transformational) activities and their clerical or simple rule-based (transactional) activities. As a result, a growing proportion of the labor force in developed economies engages primarily in work that involves negotiations and conversations, knowledge, judgment, and ad hoc collaboration—tacit interactions, as we call them. By 2015 we expect employment in jobs primarily involving such interactions to account for about 44 percent of total US employment, up from 40 percent today. Europe and Japan will experience similar changes in the composition of their workforces.
The application of technology has reduced differences among the productivity of transformational and transactional employees, but huge inconsistencies persist in the productivity of high-value tacit ones. Improving it is more about increasing their effectiveness—for instance, by focusing them on interactions that create value and ensuring that they have the right information and context—than about efficiency. Technology tools that promote tacit interactions, such as wikis, virtual team environments, and videoconferencing, may become no less ubiquitous than computers are now. As companies learn to use these tools, they will develop managerial innovations—smarter and faster ways for individuals and teams to create value through interactions—that will be difficult for their rivals to replicate. Companies in sectors such as health care and banking are already moving down this road.
As companies improve the productivity of these workers, it will be necessary to couple investments in technologies with the right combination of incentives and organizational values to drive their adoption and use by employees. There is still substantial room for automating transactional activities, and the payoff can typically be realized much more quickly and measured much more clearly than the payoff from investments to make tacit work more effective. Creating the business case for investing in interactions will be challenging—but critical—for managers.
Further reading:
Bradford C. Johnson, James M. Manyika, and Lareina A. Yee, "The next revolution in interactions," mckinseyquarterly.com, November 2005.
Scott C. Beardsley, Bradford C. Johnson, and James M. Manyika, "Competitive advantage from better interactions," mckinseyquarterly.com, May 2006.
Thomas W. Malone, The Future of Work: How the New Order of Business Will Shape Your Organization, Your Management Style, and Your Life, Boston: Harvard Business School Press, 2004.
Managing capital and assets
5. Expanding the frontiers of automation
Companies, governments, and other organizations have put in place systems to automate tasks and processes: forecasting and supply chain technologies; systems for enterprise resource planning, customer relationship management, and HR; product and customer databases; and Web sites. Now these systems are becoming interconnected through common standards for exchanging data and representing business processes in bits and bytes. What's more, this information can be combined in new ways to automate an increasing array of broader activities, from inventory management to customer service.
During the late 1990s FedEx and UPS linked data flowing through their internal tracking systems to the Internet—no trivial task at the time—to let customers track packages from their Web sites, with no human intervention required on the part of either company. By leveraging and linking systems to automate processes for answering inquiries from customers, both dramatically reduced the cost of serving them while increasing their satisfaction and loyalty. More recently, Carrefour, Metro, Wal-Mart Stores, and other large retailers have adopted (and asked suppliers to adopt) digital-tagging technologies, such as radio frequency identification (RFID), and integrated them with other supply chain systems in order to automate the supply chain and inventory management further. The rate of adoption to date disappoints the advocates of these technologies, but as the price of digital tags falls they could very well reduce the costs of managing distribution and increase revenues by helping companies to manage supply more effectively.
Companies still have substantial headroom to automate many repetitive tasks that aren't yet mediated by computers—particularly in sectors and regions where IT marches at a slower pace—and to interlink "islands of automation" and so give managers and customers the ability to do new things. Automation is a good investment if it not only lowers costs but also helps users to get what they want more quickly and easily, though it may not be a good idea if it gives them unpleasant experiences. The trick is to strike the right balance between raising margins and making customers happy.
Further reading:
John Hagel III, Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow through Web Services, Boston: Harvard Business School Press, 2002.
Claus Heinrich, RFID and Beyond: Growing Your Business with Real World Awareness, Indianapolis, IN: Wiley Publishing, 2005.
Jeanne W. Ross, Peter Weill, and David C. Robertson, Enterprise Architecture as Strategy: Creating a Foundation for Business Execution, Boston: Harvard Business School Press, 2006.
6. Unbundling production from delivery
Technology helps companies to utilize fixed assets more efficiently by disaggregating monolithic systems into reusable components, measuring and metering the use of each, and billing for that use in ever-smaller increments cost effectively. Information and communications technologies handle the tracking and metering critical to the new models and make it possible to have effective allocation and capacity-planning systems.
Amazon.com, for example, has expanded its business model to let other retailers use its logistics and distribution services. It also gives independent software developers opportunities to buy processing power on its IT infrastructure so that they don't have to buy their own. Mobile virtual-network operators, another example of this trend, provide wireless services without investing in a network infrastructure. At the most basic level of unbundled production, 80 percent of all companies responding to a recent survey on Web trends say they are investing in Web services and related technologies. Although the applications vary, many are using these technologies to offer other companies—suppliers, customers, and other ecosystem participants—access to parts of their IT architectures through standard protocols.¹
Unbundling works in the physical world too. Today you can buy fractional time on a jet, in a high-end sports car, or even for designer handbags. Unbundling is attractive from the supply side because it lets asset-intensive businesses—factories, warehouses, truck fleets, office buildings, data centers, networks, and so on—raise their utilization rates and therefore their returns on invested capital. On the demand side, unbundling offers access to resources and assets that might otherwise require a large fixed investment or significant scale to achieve competitive marginal costs. For companies and entrepreneurs seeking capacity (or variable additional capacity), unbundling makes it possible to gain access to assets quickly, to scale up businesses yet keep their balance sheets asset light, and to use attractive consumption and contracting models that are easier on their income statements.
Companies that make their assets available for internal and external use will need to manage conflicts if demand exceeds supply. A competitive advantage through scale may be hard to maintain when many players, large and small, have equal access to resources at low marginal costs.
Further reading:
"Jeff Bezos' risky bet," BusinessWeek, November 13, 2006.
Leveraging information in new ways
7. Putting more science into management
Just as the Internet and productivity tools extend the reach of and provide leverage to desk-based workers, technology is helping managers exploit ever-greater amounts of data to make smarter decisions and develop the insights that create competitive advantages and new business models. From "ideagoras" (eBay-like marketplaces for ideas) to predictive markets to performance-management approaches, ubiquitous standards-based technologies promote aggregation, processing, and decision making based on the use of growing pools of rich data.
Leading players are exploiting this information explosion with a diverse set of management techniques. Google fosters innovation through an internal market: employees submit ideas, and other employees decide if an idea is worth pursuing or if they would be willing to work on it full-time. Intel integrates a "prediction market" with regular short-term forecasting processes to build more accurate and less volatile estimates of demand. The cement manufacturer Cemex optimizes loads and routes by combining complex analytics with a wireless tracking and communications network for its trucks.
The amount of information and a manager's ability to use it have increased explosively not only for internal processes but also for the engagement of customers. The more a company knows about them, the better able it is to create offerings they want, to target them with messages that get a response, and to extract the value that an offering gives them. The holy grail of deep customer insight—more granular segmentation, low-cost experimentation, and mass customization—becomes increasingly accessible through technological innovations in data collection and processing and in manufacturing.
Examples are emerging across a wide range of industries. Amazon.com stands at the forefront of advanced customer segmentation. Its recommendation engine correlates the purchase histories of each individual customer with those of others who made similar purchases to come up with suggestions for things that he or she might buy. Although the jury is still out on the true value of recommendation engines, the techniques seem to be paying off: CleverSet, a pure-play recommendation-engine provider, claims that the 75 online retailers using the engine are averaging a 22 percent increase in revenue per visitor.² Meanwhile, toll road operators are beginning to segment drivers and charge them differential prices based on static conditions (such as time of day) and dynamic ones (traffic). Technology is also dramatically bringing down the costs of experimentation and giving creative leaders opportunities to think like scientists by constructing and analyzing alternatives. The financial-services concern Capital One conducts hundreds of experiments daily to determine the appropriate mix of products it should direct to specific customer profiles. Similarly, Harrah's casinos mine customer data to target promotions and drive exemplary customer service.
Given the vast resources going into storing and processing information today, it's hard to believe that we are only at an early stage in this trend. Yet we are. The quality and quantity of information available to any business will continue to grow explosively as the costs of monitoring and managing processes fall.
Leaders should get out ahead of this trend to ensure that information makes organizations more rather than less effective. Information is often power; broadening access and increasing transparency will inevitably influence organizational politics and power structures. Environments that celebrate making choices on a factual basis must beware of analysis paralysis.
Further reading:
Thomas H. Davenport and Jeanne G. Harris, Competing on Analytics: The New Science of Winning, Boston: Harvard Business School Press, 2007.
John Riedl and Joseph Konstan with Eric Vrooman, Word of Mouse: The Marketing Power of Collaborative Filtering, New York: Warner Books, 2002.
Stefan H. Thomke, Experimentation Matters: Unlocking the Potential of New Technologies for Innovation, Boston: Harvard Business School Press, 2003.
David Weinberger, Everything Is Miscellaneous: The Power of the New Digital Disorder, New York: Times Books, 2007.
8. Making businesses from information
Accumulated pools of data captured in a number of systems within large organizations or pulled together from many points of origin on the Web are the raw material for new information-based business opportunities.
Frequent contributors to what economists call market imperfections include information asymmetries and the frequent inability of decision makers to get all the relevant data about new market opportunities, potential acquisitions, pricing differences among suppliers, and other business situations. These imperfections often allow middlemen and players with more and better information to extract higher rents by aggregating and creating businesses around it. The Internet has brought greater transparency to many markets, from airline tickets to stocks, but many other sectors need similar illumination. Real estate is one of them. In a sector where agencies have thrived by keeping buyers and sellers partly in the dark, new sites have popped up to shine "a light up into the dark reaches of the supply curve," as Rich Barton, the founder of Zillow (a portal for real-estate information), puts it. Barton, the former leader of the e-travel site Expedia, has been down this road before.
Moreover, the aggregation of data through the digitization of processes and activities may create by-products, or "exhaust data," that companies can exploit for profit. A retailer with digital cameras to prevent shoplifting, for example, could also analyze the shopping patterns and traffic flows of customers through its stores and use these insights to improve its layout or the placement of promotional displays. It might also sell the data to its vendors so that they could use real observations of consumer behavior to reshape their merchandising approaches.
Another kind of information business plays a pure aggregation and visualization role, scouring the Web to assemble data on particular topics. Many business-to-consumer shopping sites and business-to-business product directories operate in this fashion. But that sword can cut both ways; today's aggregators, for instance, may themselves be aggregated tomorrow. Companies relying on information-based market imperfections need to assess the impact of the new transparency levels that are continually opening up in today's information economy.
Further reading:
Hal R. Varian, Joseph Farrell, and Carl Shapiro, The Economics of Information Technology: An Introduction (Raffaele Mattioli Lectures), New York: Cambridge University Press, 2004.
Carl Shapiro and Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy, Boston: Harvard Business School Press, 1999.
Conclusion
Creative leaders can use a broad spectrum of new, technology-enabled options to craft their strategies. These trends are best seen as emerging patterns that can be applied in a wide variety of businesses. Executives should reflect on which patterns may start to reshape their markets and industries next—and on whether they have opportunities to catalyze change and shape the outcome rather than merely react to it.
About the Authors
James Manyika is a director and Kara Sprague is a consultant in McKinsey's San Francisco office; Roger Roberts is a principal in the Silicon Valley office.
The authors wish to thank their McKinsey colleagues Jacques Bughin, Michael Chui, Tony Huie, Brad Johnson, Markus Löffler, and Suman Prasad for their substantial contributions to this article.

How to fix the innovation gap: A conversation with Judy Estrin

2009-01-15T14:27:00.001-05:00

http://www.mckinseyquarterly.com/Strategy/Innovation/How_to_fix_the_innovation_gap_2285

How to fix the innovation gap: A conversation with Judy Estrin
The author and tech executive says we are living off the fruits of previous research and need to seed new ideas.

Motrin on web 2.0

2008-11-17T09:04:00.001-05:00

http://www.crunchgear.com/2008/11/17/motrin-screws-up-in-tweet-land/

Merci/ thanks
________________________________________________________________
Jean-François Barsoum, MBA
Senior Managing Consultant & Practice Leader, Green + Innovation Strategies
ibm +1.514.964.4192 :: fax +1.845.491.2412 :: jbarsoum@ca.ibm.com
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How Obama Will Use Web 2.0 For Change

2008-11-13T13:44:00.001-05:00

How Obama Will Use Web 2.0 For Change

Author
CG Lynch
CIO.com
Sunday, November 09, 2008

During his campaign, President-elect Barack Obama delivered on the democratic promise of Web 2.0 technologies by using them to give voices to millions of Americans who had traditionally been drowned out by TV pundits, politicians and wealthy donors.

And he's already shown he'll continue to use them when he's in office. That was the contention made by speakers Friday morning on the third day of the Web 2.0 Summit here in San Francisco.

Three guest speakers included San Francisco Mayor Gavin Newsom, considered by many to be a candidate to run for governor in California. He was joined by Joe Trippi, the political advisor credited with harnessing the Web to build Vermont Governor Howard Dean's grassroots presidential campaign back in the 2004 democratic primary, and Arianna Huffington, founder and editor in chief of the Huffington Post (which publishes a lot of citizen journalism).

The group first reflected on the 2008 campaign. Trippi noted that innovations in the Web 2.0 space, particularly around social technologies and the proliferation of online video, allowed Obama to take internet-generated politicking to a whole new level than realized under Gov. Dean back in 2004, when mainly the fundraising abilities of the Web were realized.

"Back in 2003 and 2004, Facebook was just on a few college campuses," Trippi said. "All these new tools came in [since then] and changed everything."

As Trippi noted, Obama has carried Web 2.0 into his upcoming administration by launching Change.gov, a website that allows users (or citizens) to interact with their new president by weighing in on issues of importance to them. A user could click on "health care," for instance, where they'll be taken to a page where they can send their ideas to the new administration.

But while Obama raised an unprecedented amount of money on the Web, and many see Web 2.0 technologies as enabling his rise to power, it also left questions as to whether a gaffe can unfairly bring down a candidate in the public discourse.

Though verbal miscues for Obama were rare, during a fund raiser here in San Francisco, he was quoted by a citizen journalist writing for the Huffington Post that some people in small towns of Pennsylvania "get bitter...they cling to guns or religion or antipathy to people who aren't like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations."

According to Mayor Newsom, such comments can beat down a politician due to the relentless way in which information travels the internet. As politicians become more aware of that fact, and there's less of line between on-the-record and off-the-record interactions with constituents, it can constrain what comments they might make.

"Everything you say is exposed," he said. "It's an extraordinary thing. Hopefully, we can be forgiven when we make mistakes."

But Huffington and Trippi countered Newsom by noting that Web 2.0 technologies such as blogs have a way of vetting information more thoroughly than the mainstream media, which will help candidates when false information gets stated about them.

"The internet has changed Karl Rove politics," Huffington said, which drew applause from the audience. "All the fear mongering, with Bill Ayers and calling Obama a socialist terrorist all got proven wrong [on the Web]," she said.

Despite Obama's success in harnessing Web 2.0 technologies during his campaign, and using it to gather input from citizens with change.gov, Newsom said much more work needs to be done to bridge the digital divide in America.

"There are people near here that have no idea about what we are discussing," Newsom said. "They don't have internet in their homes. We have a huge digital divide, for the people who really need this[Web 2.0 technology] the most. The only media these folks are getting is the TV set."

2008-09-24T12:17:00.000-04:00

Too funny

Design for Frugal Growth

2008-09-11T15:37:00.000-04:00

Many thanks to Norbert!

Design for Frugal Growth
by Jaya Pandrangi, Steffen Lauster, and Gary L. Neilson

Cleveland, September 10, 2008 -- With the right kind of organizational design, you can expand while cutting costs. Five elements are critical: accountable business units, an aptitude for innovation, pull-based functional relationships, differentiated capabilities, and the ability to leverage scale.

To read the full Resilience Report:
http://www.strategy-business.com/resilience/rr00062

Design for Frugal Growth
by Jaya Pandrangi, Steffen Lauster, and Gary L. Neilson

9/10/08
With the right kind of organization, you can expand while cutting costs.

Illustration by Dave Plunkert

The control of costs had been its greatest strength. But it was now the greatest weakness. The company had spent so many years trying to reduce expenses that this imperative was hardwired into its practices, processes, and organizational design. When executives tried to shift gears, to expand into new markets and introduce new products, those old ways of doing business also had to change.

That was the story of the Amberville Corporation, a major U.S. brand-name consumer packaged goods (CPG) manufacturer. (This company is fictional, a composite of three companies; although all three have been disguised, the details are based on in-depth observation and are typical of many companies in the industry.) Like many other consumer products companies, Amberville had once been an avid innovator, responsible for many new household-name products. But its priorities had swung, like a pendulum, from growth in the 1980s to cost cutting in the 1990s. Now, in 2006, the pendulum was swinging back to growth.

But the company was ill-equipped for the transition. To keep costs down and control its large and far-flung product line, Amberville had built up a vast central operation at headquarters. New product launches had to be approved at four different levels: brand, division, region, and headquarters. Senior executives in functional areas were expected to weigh in at least twice during the development cycle on such issues as capital costs and feasibility. Managing the computer systems and functions to support dozens of brand-based and regional operations groups was an immense task involving hundreds of people and a major focus on HR systems, reporting relationships, and recruiting programs.

Meanwhile, consumers were growing increasingly sophisticated. They wanted more information about Amberville's products. So did institutional customers, such as schools and restaurant chains. Some Amberville marketers saw the opportunity to build Web sites and use other online channels to connect directly with consumers. But these efforts faltered amid the sheer complexity of multiple product categories. And their failure led many people in the company to conclude that even the business units that were closest to Amberville customers had lost their market focus and speed.

There was other evidence that all was not well. For example, when the company expanded its branded line of ice cream, the unit was consistently slower than competitors in launching new flavors. Business unit leaders spent much of their time looking inward, negotiating with the executives at headquarters who made the final decisions about personnel, product launch timelines, and many other operational issues.

Amberville's dilemma is typical of many consumer packaged goods companies in North America and Europe today. Their most familiar home markets are stagnant; for the past 20 years, consumption of consumer goods in most product categories has grown only at the rate of population growth plus inflation. And consumer behavior is fragmenting; supermarket shoppers are increasingly likely to switch stores and brands. At the same time, mergers and acquisitions among manufacturers have consolidated the industry, creating larger competitors with global reach. But new consumers in emerging nations — those in Asia, Latin America, eastern Europe, and the Middle East — are eager for products. Simultaneously, around the world, global retail chains like Tesco and Wal-Mart are applying their expertise at squeezing manufacturers' margins.

As consumer packaged goods companies have struggled to create and execute growth strategies, investor expectations for the sector have remained high, and raiders continue to stalk the producers of popular brands. It's no wonder that the industry has devoted its attention, for at least a generation, to reducing cost, streamlining operations and creating economies of scale by consolidating research, manufacturing, and distribution. This approach has paid off in the past; most CPG companies have survived. But now, having turned themselves, in effect, into supercharged cost-cutting machines, how can these companies suddenly invest in the risky arenas of emerging markets and fundamental innovation? And if they can't, how will they compete when frugality alone is no longer sufficient?

Although the choice between growth and frugality is passionately debated in many companies, it represents a false dichotomy. Growth and cost efficiency should reinforce each other. Logically, cost efficiencies should make it easier to devote more resources to growth, and the launch of new products and services should lead to innovations in efficiency. Why don't things work that way in practice? Often because of organizational designs that, consciously or not, were put in place during the years of cost cutting. A CPG company, in particular, cannot move forward unless its leaders can diagnose and fix the barriers to growth that have gradually become a fixture of their enterprise.

The Limits of Good Intentions
When leaders in the sector begin a growth initiative, they often start by declaring a commitment to the new strategy, enlisting employee hearts and minds, and assuming that some kind of cultural and behavioral transformation is needed. But they overlook the organizational design, which actually drives behaviors and indirectly determines whether the rest of the growth strategy can be executed correctly.

For example, in many large organizations, the way the incentives are set up frequently clashes with the growth strategy. The corporate leaders promote bold and big innovations. But they leave in place the target demanding that all new products show a profit within two years or face being shut down. This creates almost irresistible incentives for business unit leaders to provide "work-arounds" that make them appear to generate the requisite profits, at least in the short run. They might bury costs in the most successful product lines or manipulate shipping times so that the numbers will look more favorable.

At Amberville, the core demanded a major new commitment to customer service from the business units, and they all complied — but in a halfhearted way that faded from view within six months. It would be easy to say that the local business unit leaders were resistant to change, but the truth was much more complicated. These leaders saw the value of customer service, but they had neither control nor influence over the customer service process, they lacked easy and regular communication with the leaders of that function, and their incentives favored other priorities. It was much easier to focus on other ways to deliver the results against which they would be measured. All the goodwill and strategic understanding in the world could not overcome those organizational disabilities.

The leaders at Amberville did, however, ultimately change their behavior, and not just superficially. They revamped the organization in ways that dramatically increased revenues without increasing investment. We have seen the same sorts of results firsthand in several other consumer products manufacturers in recent years. One independent condiment company, after redesigning itself, doubled its value in less than five years. All of these manufacturers have initiated significant changes in their day-to-day practice through a shift in their organizational design — specifically, by setting in place five critical enablers of accountable, innovative, autonomous, and linked behavior. (See Exhibit 1.)

The list of enablers in the growth triangle will not be a surprise to many managerial veterans. These factors are known for their impact on growth in a variety of industries. Who could argue with having truly accountable business units, a genuine capacity for customer-focused innovation, functions that successfully serve the needs of the frontline business units, capabilities that meet the needs of a differentiated customer base, or the ability to take practices and products to scale around the world? But companies often struggle to achieve these enablers, and sometimes give up trying. With a substantial shift in organizational design, the behaviors and practices of frugal growth naturally follow.

Accountable Business Units
Just before its redesign, Amberville had 25 global divisions, all located in the company's headquarters in the United States. Over the course of the following year, they were reconfigured into 64 market-facing business units — some devoted to regions such as southeast Asia, others to product brands in categories such as ice cream and chewing gum. Quadrupling the number of Amberville's business units also meant quadrupling the number of business leaders, and giving each responsibility for his or her operations.

Businesspeople often talk about "owning" their assignment, but it's not always clear what that means. At Amberville, "ownership" meant taking on a dramatically increased level of accountability. The managers of business units now defined their market, operations, and strategic space to decide how they would deliver superior growth. Business units were granted greater control over the cross-functional resources assigned to them, including the sales and customer service staff. Business unit managers could deploy these resources flexibly on the basis of shifts in market needs. Information technology staff were assigned to work with each business unit to help it obtain faster, more complete access to market and customer data.

Before the reorganization, the P&L-based budgets for marketing, R&D, sales, and other functions had been set by the core, and the business units had to operate within these limits. For example, if a business unit had received US$100 million for its R&D budget, that was the limit of its innovation spending. Now, each business unit leader had a top-line revenue and a bottom-line profit target. All the funds in between could be deployed as needed. If one product's strategy depended heavily on innovation, the business unit leader could invest $150 million in R&D, taking the money from other functions. Meanwhile, a business unit whose strategy was based on operational excellence might cut back on R&D and invest instead in production skills.

Amberville's core was now treating the business units the same way a heavily involved private equity investor might treat its favored companies. The business unit leaders rapidly learned firsthand what it was like to be an entrepreneur. They defined their strategy, they executed it, and they reaped personal rewards if they succeeded and suffered personal consequences if they failed to deliver their targets. Their own money wasn't at risk, but their career advancement was, and they had fewer institutional means of masking poor performance. Business unit leaders came to think of their new system as "autonomy with boundaries": They could accomplish much more on their own, but their limits and reporting responsibilities were clearer and less ambiguous than they had been before.

Meanwhile, the jobs of the division heads and core leaders shifted from operational involvement to guidance. They could approve requests for funds, help develop investment plans, give advice on the hiring of key players, and assist with customer relationship development. They did not have the authority to create strategies or manage operations, but their own careers were closely dependent on the success of the more junior business unit leaders. "It's like being a football coach," said one core leader. "You're not directly playing, but you're still responsible for the business. If your team loses three years in a row, you'll still get fired."

Amberville's experience is typical. When business units — whether organized by geographic region or product and service category — are accountable for their strategy and operations, they deliver superior growth. They can execute their plans far more quickly, without having to wait for approval and second-guessing the internal politics of the core. They have more to gain from delivering results, and no place to hide when performance falls short. Decision rights go to those who have the closest understanding of consumers and the external market. Because accountable business unit leaders pay close attention to business practices, the learning curve of the entire operation accelerates. Indeed, the business unit becomes more skilled at reducing overhead than ever before, because its leaders know that they can rapidly apply their cost savings to profitable investments as they see fit. So much for cost and growth consciousness being at odds.

Providing this type of virtual entrepreneurship to business units requires several organizational shifts. The local line leaders need the authority to make decisions, the capabilities to take consumer information into account, and a sustained trust that the core will not block progress and will appreciate results. The IT and information-management systems are consciously designed to deliver the right information to the right parts of the organization at the right time. For example, extensive day-to-day data stays in the business unit; if it reached the corporate core, that would be an invitation to micromanage. But quarterly reports to the core include more detail than in the past, so that division heads and business unit leaders can talk about long-range patterns in customer response or costs.

One powerful means of creating autonomy with boundaries is the "CEO contract": an agreement with the business unit leaders that specifies top- and bottom-line targets, along with the rewards (including personal bonuses) for achieving those targets and the penalties for missing them. The Amberville CEO contract was a very informal document, with three critical features. First, every business unit leader got one. Second, each contract was specifically designed for its business unit, spelling out particular goals for revenues, profit, and two or three other numerical metrics. Third, the contract specified the qualitative metrics that encouraged teaming across the organization.

This last feature of the CEO contract helped mitigate one unfortunate tendency of accountable business units: their natural disinclination to share ideas, knowledge, or resources with the rest of the company. For example, shared advertising expenses, particularly for major marketing events, had long been a bone of contention. Every business unit was expected to pay a share, but some divisions benefited far more than others. Now, thanks to the contract, it was made clear: There would be only a limited number of shared ad campaigns, but each division would contribute.

The contract also established a few minimum standards and policies that protected the corporation, such as employee safety practices. For example, many factories in emerging nations do not require people to wear safety goggles on the shop floor, but Amberville factories always did, because the performance contract insisted on it. In other respects — for example, in the details of plant construction and the design of the assembly line — the local business unit maintained control.

Aptitude for Innovation
In consumer products, the most profitable innovations vary widely by category. In food, for example, rapid introduction of new flavors can be critical. There are also opportunities for breakthrough innovation, as Groupe Danone discovered with its Activia yogurt line, which contains live bacteria with a claim of aiding digestion. More opportunities for breakthrough innovation exist in personal and home care, as Procter & Gamble Company has shown with products including the Swiffer mop and antiwrinkle creams. (See "P&G's Innovation Culture," by A.G. Lafley, s+b, Autumn 2008.)

But the most critical factor is the connection of innovation to consumer insight. The most effective way to facilitate this connection is with a change in the organizational relationship between the business units and the corporate core. The corporate core should be funded to conduct longer-range research that business units would not undertake (for example, the kind of fundamental research in biotics that led to the launch of Activia). Individual business units should develop the product extensions and process innovations that they need to stay close to their consumer markets. And some internal market-style mechanism should allow successful innovations to be quickly shared across the enterprise.

At Amberville, the R&D staff at the corporate core had traditionally worked on three- to five-year projects that they had proposed themselves. Business unit leaders had usually reacted by saying, in effect, "This has nothing to do with what we are trying to do." Now, as part of the redesign, Amberville created an internal R&D market where innovation leaders sought buyers for their ideas. If they could not interest a business unit leader, they were free to take the idea outside the company.

Pull-based Functional Relationships
One aspect of organizational design that inhibits growth is the relationship between business units and functions. Although functions often operate in all three components of the organization — the core, the business units, and the infrastructure all have information technology, human resources, and finance staffs — the highest leverage lies in the relationship between business units and the infrastructure.

The way to increase the value of support services is through pull-based functional relationships. The business units pull services from the infrastructure, specifying their requirements and sometimes codesigning them, instead of having the services pushed on them in a company-wide package.

Pull-based functional relationships have existed for years. Many businesspeople still find the idea discomfiting; it means giving internal functions the autonomy to behave like a third-party provider. But a well-designed pull-based functional relationship becomes like the relationship between a loyal customer and a regular supplier. The supplier (the functional infrastructure team) cares about the customer's opinion; the customer (the business unit leader) treats the functional staff as he or she would treat any favored external supplier, not like an internal team forced to jump through hoops. This level of mutual respect, when it occurs, is a far cry from the unfortunate dynamic in many companies, in which the business unit leaders and the functional infrastructure team tend to see each other as adversaries.

How can a company enable this type of relationship? One approach is to employ the same kind of service-level agreement (SLA) that companies use for shared services and outsourcing vendors. The trick is setting up the SLA internally and making it simple but effective. This contract establishes the types of services to be delivered, the internal cost of providing them (which can increase as the service improves), and the requirements for each side. At Amberville, SLAs are now required for all functional services, including logistics, finance, and IT. Any functional team, reporting through the infrastructure chain of command, effectively has a pool of 64 customers — the business units — and an incentive to learn from its services to each of them.

Differentiated Capabilities
No organization can be best at everything. The capabilities of a company are limited by the resources available, the skills of its population, the evolution of its existing infrastructure, and its experience. Choices must be made at the corporate core about the capabilities in which the organization will invest and the support to give them. The most important capabilities to invest in are those that distinguish a company from its competitors — or, as Alexander Kandybin and Surbhee Grover put it, those that can't be copied. (See "The Unique Advantage," s+b, Autumn 2008.)

One well-known example of a differentiated advantage is the "hot-fill" capability that PepsiCo Inc. gained in 2001 when it merged with the Quaker Oats Company (and thus acquired the Gatorade brand). Hot-fill technology, used to bottle beverages such as juices and vitamin drinks without the need for preservatives, had previously been limited to relatively small brands such as Snapple (which had invented it); now Pepsi rolled out the technology in its Tropicana brand and in a new joint venture in bottled teas with Lipton, which was the first offering of its kind and which has since enjoyed an advantage over competitors.

A portfolio of capabilities is built primarily at the corporate core, because it involves significant long-term investment. (As with Pepsi, it may also involve acquisition.) The first step is a systematic evaluation of the "leverageable" assets of the company, those distinctive capabilities that determine what types of growth might be supported. Capabilities can be found in a wide range of functions, such as supply chain, manufacturing, product development, consumer insight, marketing, brand management, and customer management. Business units may be invited to collaborate in this assessment, making the case for the capabilities that they find most useful in the market. But ultimately, the corporate core makes these choices and investments.

The difficulty of this task and the critical role of the core executive team are often underestimated. Not every capability is a candidate for the core portfolio; some contribute strongly to growth while others lag. Corporate leaders must place bets on which business units will be most adept at using, learning from, and developing the company's distinctive skills and technologies. These business units need aggressive funding; others should be more consciously managed for the bottom line, with a short-term focus on innovation.

Ability to Leverage Scale
As consumer products companies meet global demand, they bring capabilities along. Products and brands must be customized for new markets. A wide variety of retailers must be engaged as customers. And old practices must be adapted to new cultures and locales.

Leveraging of knowledge and capabilities on this global scale requires direct networking among business units, removing the bottleneck at the corporate core. Because Amberville had never built up those sorts of contacts, its leaders studied companies, like Johnson & Johnson, that had a good track record. J&J moves people among its business units frequently, encouraging employees to maintain their presence in informal networks with their former coworkers.

Amberville is now finding its own ways to foster global networking. For example, its Middle East business unit leads research and development in the frozen-drinks category, because several frozen-drink researchers are located there; the rest of the regions adapt the flavors that come out of their work.

Management fashion is full of stark choices: Centralize or decentralize? Global or local? Cost or growth? There's a long-standing proverb in the system dynamics field: "You can have everything you want, but not all at once." In the 1990s, many consumer products companies decided that they would give up growth in order to have the security of lower expenses. Now they are riding the pendulum back to growth. But in the end, those who succeed in growing their company will do so with all their frugality intact. With an organization design in place that balances the roles of the core, the business units, and the functional infrastructure, they should be able to have it all.

Author Profiles:

Jaya Pandrangi is a principal with Booz & Company in Cleveland. Her work focuses on strategy as well as sales and marketing effectiveness for consumer products companies.

Steffen Lauster is a partner with Booz & Company in Cleveland who focuses on strategy development and revenue management initiatives for consumer products clients in the U.S. and Europe.

Gary L. Neilson is a senior partner with Booz & Company in Chicago. He helps companies diagnose and solve problems associated with strategy implementation, organizational effectiveness, and efficiency.

Also contributing to this article was Booz & Company Partner Leslie Moeller.

The Many Errors in Thinking About Mistakes: When things go wrong, as they inevitably do, we focus on flagellating ourselves, blaming someone else or covering it up. Or we rationalize it by saying others make even more mistakes.What we do not want to do, most of the time, is learn from the experience.

2007-12-10T16:29:00.001-05:00

November 24, 2007
Shortcuts
The Many Errors in Thinking About Mistakes
By ALINA TUGEND

OF the many mistakes I have no doubt made over the last few weeks, two stand out: One cost me money and one cost me some pride.

I made an error in an article, and of the thousands who read it, a few gleefully e-mailed me about it.

I corrected it, although I sheepishly admit my first — though fleeting — instinct was to avoid owning up.

In the second case, in a flurry of zealous organization, I sent in a check to cover a bill for my husband's monthly train pass. It turns out that he pays by direct debit. I canceled the check.

Then we got a notice that we were being charged $20 for a bounced check.

Neither mistake was on the scale, with, say, amputating the wrong leg or causing two planes to collide.

But they bothered me and made me consider how we are taught to think of mistakes in our society.

"I think it's a very difficult subject," said Paul J. H. Schoemaker, chairman of Decision Strategies International and teaches marketing at the Wharton School of the University of Pennsylvania. "There's a lot of ambivalence around making mistakes."

On one hand, as children we're taught that everyone makes mistakes and that the great thinkers and inventors embraced them. Thomas Edison's famous quote is often inscribed in schools and children's museums: "I have not failed. I have just found ten thousand ways that won't work."

On the other hand, good grades are usually a reward for doing things right, not making errors. Compliments are given for having the correct answer and, in fact, the wrong one may elicit scorn from classmates.

We grow up with a mixed message: making mistakes is a necessary learning tool, but we should avoid them.

Carol S. Dweck, a psychology professor at Stanford University, has studied this and related issues for decades.

"Studies with children and adults show that a large percentage cannot tolerate mistakes or setbacks," she said. In particular, those who believe that intelligence is fixed and cannot change tend to avoid taking chances that may lead to errors.

Often parents and teachers unwittingly encourage this mind-set by praising children for being smart rather than for trying hard or struggling with the process.

For example, in a study that Professor Dweck and her researchers did with 400 fifth graders, half were randomly praised as being "really smart" for doing well on a test; the others were praised for their effort.

Then they were given two tasks to choose from: an easy one that they would learn little from but do well, or a more challenging one that might be more interesting but induce more mistakes.

The majority of those praised for being smart chose the simple task, while 90 percent of those commended for trying hard selected the more difficult one.

The difference was surprising, Professor Dweck said, especially because it came from one sentence of praise.

They were then given another test, above their grade level, on which many performed poorly. Afterward, they were asked to write anonymously about their experience to another school and report their scores. Thirty-seven percent of those who were told they were smart lied about their scores, while only 13 percent of the other group did.

"One thing I've learned is that kids are exquisitely attuned to the real message, and the real message is, 'Be smart,'" Professor Dweck said. "It's not, 'We love it when you struggle, or when you learn and make mistakes.'"

As we get older, many of us invest a great deal in being right. When things go wrong, as they inevitably do, we focus on flagellating ourselves, blaming someone else or covering it up. Or we rationalize it by saying others make even more mistakes.

What we do not want to do, most of the time, is learn from the experience.

Professor Dweck, who wrote a book on the subject called "Mindset" (Random House, 2006), proved this point in another study, this one of college students. They were divided into two camps: those who did readings about how intelligence is fixed, and those who learned that intelligence could grow and develop if you worked at it.

The students then took a very tough test on which most did badly. They were given the option of bolstering their self-esteem in two ways: looking at scores and strategies of those who did worse or those who did better.

Those in the fixed mind-set chose to compare themselves with students who had performed worse, as opposed to those Professor Dweck refers to as in "the growth mind-set," who more frequently chose to learn by looking at those who had performed better.

Mr. Schoemaker would agree. He was the co-author of a June 2006 article for the Harvard Business Review called "The Wisdom of Deliberate Mistakes." Among its theories is that there is too much focus on outcome rather than on process.

If businesses and people are not making a certain number of mistakes, "they're playing it too safe," he said.

The resistance to making mistakes runs deep, he writes, but it is necessary for the following reasons, which he outlined in the article:

¶We are overconfident. "Inexperienced managers make many mistakes and learn from them. Experienced managers may become so good at the game they're used to playing that they no longer see ways to improve significantly. They may need to make deliberate mistakes to test the limits of their knowledge."

¶We are risk-averse because "our personal and professional pride is tied up in being right. Employees are rewarded for good decisions and penalized for failures, so they spend a great deal of time and energy trying not to make mistakes."

¶We tend to favor data that confirms our beliefs.

¶We assume feedback is reliable, although in reality it is often lacking or misleading. We don't often look outside tested channels.

Of course, there are mistakes and then there are mistakes.

"With children, you want them to make mistakes, but not end up in prison or in a wheelchair," Mr. Schoemaker said. One also has to weigh the consequences. We want people who run nuclear power plants or fly planes to avoid mistakes as much as possible.

But most of us are not holding people's lives in our hands and can stand to take a few more chances.

"Unfortunately, the people who most need to make mistakes are the ones least likely to admit it, and the same is true of companies," Mr. Schoemaker wrote.

Of course, there are stupid mistakes, or what Stanley M. Gully, associate professor at the School of Management and Labor Relations at Rutgers University, called "unintelligent failures."

After all, nobody wants a worker who keeps making the same mistake, and "if we fail and don't learn from it, it's not an intelligent failure," he said.

Professor Gully and other researchers have looked at ways of training people to do complex tasks and found that in some cases encouraging them to make mistakes works better than teaching them to avoid them.

Those who were good at processing information, open to learning and not overly conscientious were more effectively trained if they were persuaded to make mistakes.

"We get fixated on achievement," he said, but, "everyone is talking about the need to innovate. If you already know the answer, it's not learning. In most personal and business contexts, if you avoid the error, you avoid the learning process."

But old habits die hard. I want to be more open to — or less afraid of — making mistakes. But if you catch an error in this column, do me a favor. Keep it to yourself.

E-mail: shortcuts@nytimes.com

How companies approach innovation: A McKinsey Global Survey

2007-10-30T15:47:00.001-04:00

How companies approach innovation: A McKinsey Global Survey

Executives say innovation is very important, but their companies' approach to it is often informal, and leaders lack confidence in their innovation decisions. Top managers and other professionals agree that the biggest challenge is talent but disagree on why. Nonetheless, executives agree on some steps to improve innovation.

October 2007

Table of Contents

Executives now firmly believe that innovation is central to a company's strategy and performance, but getting it right is as hard as ever, according to a recent McKinsey Global Survey.¹ Some 70 percent of corporate leaders say innovation is among their top three priorities for driving growth.

But the way companies manage and govern innovation doesn't reflect that importance. For instance, although executives say corporate performance is most likely to be affected by breakthrough innovations, they also say their companies generally focus on innovation in areas such as product or service development. Only 36 percent of top managers—and just over a quarter of other executives—say innovation is part of everything the organization does. Further, although more than a third of top managers (those at the senior vice president level and above) say innovation is part of the leadership team's agenda, an equal number say their companies govern innovation in an ad hoc way.

Top managers and other executives agree that the most important drivers of innovation are culture and people—and that companies face significant challenges with both—yet the two groups have different views of those challenges. Areas of disagreement include whether the company has the right people to innovate and particularly whether top managers adequately protect these people. Similarly, 38 percent of top managers say their organizations encourage learning from innovations that fail, a view shared by less than a quarter of other executives.

Both groups agree on a few organizational and cultural steps that would improve the innovation performance of their companies. The most widely shared idea is making innovation a core part of the leadership's agenda, followed by modeling the right behavior and improving processes for managing innovation risk.

Notes

¹ The McKinsey Quarterly conducted the survey in September 2007 and received responses from 722 executives at the level of senior vice president and above and 736 lower-level executives from around the world and representing a broad range of industries. The data are weighted to reflect a proportional representation of segments in the total population.

Table of Contents

Important but not governed

Executives certainly see innovation as an important driver of growth, with some 70 percent of top managers saying it is one of their highest priorities. In addition, more than three-quarters of survey respondents say the huge amount of media attention to innovation has, at the least, raised their companies' awareness of the importance of innovation. Nineteen percent say the attention has caused them to make innovation the main focus.

That importance is borne out in some of the decisions made by top managers. A majority, for instance, say they routinely decide where to focus innovation efforts, where and how to commercialize, or who works on innovation (Exhibit 1). But top managers don't seem to think they have a lot of control over the innovation process as a whole. For instance, less than a quarter of respondents indicate that innovation budgets or targets are decided at the top. Further, many top managers lack a structured approach to making innovation decisions: though 40 percent say they rely on a solid fact base, almost as many, 37 percent, say they depend on a consensus of their peers; only 21 percent rely on intuition.

In addition, companies often seem to isolate innovation projects within business units, even when they see bigger opportunities. When asked where change would produce the greatest improvement in performance, for example, top managers rank product and service innovations much lower than breakthrough ideas. Yet a majority also say innovation at their organizations is primarily focused on developing products or services and that dedicated teams within business units are the most common way they develop and commercialize new ideas (Exhibit 2). Less than half of top managers say they frequently define themes for breakthrough innovations.

Similarly, top managers indicate that they are isolated from the innovators within their companies. Most often, top managers get their new ideas from informal, external sources (such as discussions with peers and interactions with consumers), not from the business units or formal teams where innovation tends to occur (Exhibit 3).

Finally, most organizations seem to lack consistent central governance that could track the work of the business units on innovation. Only 34 percent of top managers, for example, say innovation is part of their leadership team's regular agenda—and only 22 percent of other executives perceive that to be so (Exhibit 4). Further, only 27 percent of top managers say that their processes for budgeting, strategy, and growth, including innovation, are fully integrated into their annual planning process, although nearly half say there are informal links.

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Too little talent or too many barriers?

It is often said that a company's main challenge with innovation is finding enough talented people. In this survey, top managers agree that identifying the right people and aligning them for innovation is their single-greatest struggle and that the most important drivers of innovation are the organization's culture and people. The survey also suggests, however, that companies discourage talented staff from pursuing innovation by offering limited incentives, being risk averse, and having no plan for dealing with failure. And the survey shows that top managers and other executives have different perceptions of the struggles related to finding and aligning their people.

Some 40 percent of top managers say that they do not have enough of the right kind of employees. Among top managers who do say enough people are available, however, nearly half say the right employees are in place, motivated, and protected by senior leadership, and only 22 percent say the organization's culture inhibits them from making progress (Exhibit 5).

Other executives take a different view. Only 31 percent say the problem is that they don't have enough of the right kind of people. Among those who say the organization does have the right employees, almost one-third say the company's culture inhibits progress. Only a third say innovators are protected by senior leaders.

There are also disparities in executives' perceptions of how their companies react to failure in innovation. Far more top managers say they actively encourage the organization to learn from failure, for instance, and far more other executives say any kind of failure is a significant detriment to career advancement (Exhibit 6).

Interestingly, however, slightly more top managers than other executives (33 percent compared with 28 percent) say leaders hinder innovation by maintaining a fear of failure in the organization. There are other notable differences in how executives rank the importance of various failures by leadership teams. For 60 percent of top managers, the biggest hindrance these teams present to innovation is their failure to follow communication with action. Only 48 percent of other executives choose that response, just below the number of those who choose failure by leaders to model behavior that encourages innovation.

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When innovation is the number one priority

A small share of companies seem to have figured out how to foster and govern innovation: 35 percent of top managers say they are "very" or "extremely" confident in the innovation decisions they make. (An additional 40 percent say they are "somewhat" confident.) At organizations where executives are confident and top managers say innovation is their single most important priority for driving growth (11 percent of the total), there are some notable organizational and cultural differences.

One key organizational difference is the use of innovation-related metrics in performance reviews. Although only 29 percent of all companies include these metrics in reviews of C-level executives and business unit heads, 47 percent do so at organizations where innovation is the top priority and 50 percent at organizations where executives are confident in their innovation decisions. Both kinds of organizations are also likelier to make innovation an integral part of the organization's annual planning process—the practice at 40 percent of companies where innovation is the top priority and 45 percent of companies where the executives are confident. Also, at companies where innovation is the number one priority, top managers say they define the themes for the crucial breakthrough innovations as frequently as they determine where to focus innovation among existing products and processes.

Although these executives also say talent is the biggest challenge to successful innovation, less than 5 percent of respondents at companies where innovation is a priority say the right people are available but not allocated to such projects; nearly three-quarters of those who have the right employees say that those people are allocated, motivated, and protected by senior leaders. Notably, less than a quarter of executives who are confident in their innovation decisions say their companies lack the right people to innovate, perhaps indicating that this confidence is based at least partly on the perceived competence of the organization.

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Making innovation work

Respondents agree on some steps that will help them improve the innovation performance of their companies, many of which are aligned with the steps already being taken by confident companies.

Those steps start with leaders. Respondents say ensuring that innovation is a core part of the leadership agenda is central to improving innovation (Exhibit 7). Other systemic changes recommended by many executives directly address organizational issues they identify, such as the failure of top managers to model behavior that encourages innovation and the neglect of innovation risk (just over a quarter of companies today focus on this risk). Some tactics often perceived as important to successful innovation, such as creating a compelling story to help communicate it, are seen as less effective.

Innovation remains a difficult challenge. While many of these suggested improvements are consistent with the approach taken by companies where innovation is the top priority—and with much management advice—most companies clearly find them difficult to implement. The reasons likely lie in what members of the leadership team identify as their top challenges: finding the time to focus on new topics, closely followed by taking risks on new initiatives and changing processes. Meeting those challenges will no doubt help companies with far more than innovation.

In a complex world, innovation happens from the top down: Many of the most popular new products, like the iPod, are dominated by a top-down elitist innovation model that does not allow for customization.

2007-07-31T12:24:00.000-04:00

In a complex world, innovation happens from the top down
By G. Pascal Zachary
Monday, July 30, 2007

NEW YORK: User-generated content - from Wikipedia to YouTube to open-source software - is generating waves of excitement. But the opening of innovation to wider numbers of people obscures another trend: Many of the most popular new products, like the iPod, are dominated by a top-down elitist innovation model that does not allow for customization.

"New technologies are becoming so complex that many are beyond the possibility of democracy playing a role in their development," said Thomas Hughes, a science and technology professor at the University of Pennsylvania.

Consider: electronic implants into human bodies; gene-splicing as common as cosmetic surgery; computer networks mining vast databases to discern consumer preferences. All of these innovations are the result of corporate or government initiatives overseen by the elite.

"The process of innovation leaves out a huge proportion of the population," said Daniel Sarewitz, director of the Consortium for Science, Policy and Outcomes at Arizona State University.

Experts like Eric von Hippel, a professor at the Massachusetts Institute of Technology, argue that the proliferation of "user-generated" designs signals the "democratizing" of innovation. Armed with inexpensive digital tools and networks, ordinary people, he says, can band together to push their own innovations. They also can hijack existing technologies, taking them in directions only dimly envisioned by the original creators.

One example is an electronic community called Instructables, whose participants share methods for customizing standard products in unpredictable ways. The chief of Instructables, Eric Wilhelm, who earned his doctorate at MIT, where he was inspired by Eric von Hippel, has posted a clever means of turning a white Asics Gel-Foundation 7 running shoe into a purple model. (The $90 official version comes only in a white-black-and-blue combination.)

Today, Web-savvy consumers "expect innovations to meet their needs," Wilhelm said. "If innovation isn't tailored to them, they expect to be able to tailor it to themselves. That is a big change."

But does this really mean that the elite no longer sits at the top of the innovation food chain?

"Elites have a lot of leverage but less than they used to," says Peter Leyden, director of the New Politics Institute in San Francisco. "More people are getting their voices heard."

Leyden sees an emergent American "republic of innovation," in which growing numbers of people influence what innovations are made and when.

Skeptics, however, say that the rosy scenario is exaggerated and that user-generated innovation is merely a kind of "democracy lite," emphasizing high-end consumer products and services rather than innovations that broadly benefit society.

"Difficult questions are going unasked about who is participating in innovation and on what terms," said James Wilsdon, director of the innovation program at Demos, a policy research group in London.

In that scenario, needed innovations can be overlooked. For example, huge amounts of money are spent on improving Internet search engines or MP3 players, while scant attention is given to alternative energy sources. Battling diseases like AIDS or Alzheimer's - efforts that lobbying groups in wealthy countries help to highlight - attract legions of well-financed innovators, while big global killers, like childhood diarrhea and sleeping sickness, are virtually ignored.

Popular pressure to pursue certain innovations sometimes gets results, of course. In 2004, voters in California passed a law to provide funding to a stem-cell research institute - in a rebuke to the administration of President George W. Bush, which has banned federal funding for such research.

"This was a great example of a democratic adjudication of an innovation issue," said Sarewitz, of Arizona State. Even so, bureaucratic and legal delays have meant a slow start for the San Francisco lab, which has not yet received approval to spend any of the $3 billion in promised taxpayer funds.

For all the hoopla over the power and promise of user-generated content, consumer-directed design and other hallmarks of our new golden era of democratized innovation, one of the iconic products of our times - the iPod - can't be customized (no, I'm not counting putting on different-colored protective jackets). There is an unbroken line between Henry Ford (with his Model T) and Steve Jobs. The new iPhone similarly reflects the elite, corporate innovator's drive to find one size that fits many.

The cliché that committees can't create great ideas, or art, still seems to be true - though whether or not that is the best way to innovate remains an open question. Who knows how much longer?

G. Pascal Zachary teaches journalism at Stanford University and writes about technology and economic development.

IBM Executive Calls for "Virtual Planet"

2007-05-08T18:54:00.001-04:00

IBM Executive Calls for "Virtual Planet"

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By China Martens

May 02, 2007 — IDG News Service (Boston Bureau) — As companies look to engage in more virtual business interactions, IBM's head of innovation called for more integration between the various online virtual worlds where avatars meet.

Nick Donofrio, executive vice president of innovation and technology at IBM, hopes to encourage the creation of what he termed "a virtual planet" where rival virtual worlds are more interlinked.

"We want to bring all the worlds together in some way," he said Wednesday during his keynote address at IBM's PartnerWorld conference in St. Louis. "Wouldn't that be a blow for freedom?" he added.

IBM will help work to make it possible for a user in one virtual world to take the assets he creates in that environment and move them to other worlds, according to Donofrio.

While Linden Research's Second Life is the most popular virtual world, there are alternatives such as Active Worlds and There.

IBM is encouraging its business partners to take more advantage of virtual meetings and training and has set up a special PartnerWorld island in Second Life. Partners can use virtual rooms on the island to meet up with each other and can opt to make those meetings private, according to Ravi Marwaha, general manager, global business partners at IBM. The vendor plans to make more of its Second Life space available to its partners so they can host their own virtual events, he said.

The creation and promotion of a 3-D Internet was one of the 10 potential business opportunities IBM unearthed last year, Donofrio said.

The vendor conducted two 72-hour brainstorming sessions, which it dubbed InnovationJam, involving its staff, partners, customers and academic institutions. More than 150,000 people participated and submitted more than 46,000 ideas at the events held in July and September. Donofrio had the task of whittling those ideas down to 10 suggested directions. IBM committed to invest US$100 million in those 10 ideas over a two-year period.

IBM conducted a similar push for ideas specifically from its partner community back in 2004 and is keen to elicit more feedback around how better to serve the needs of its small to midsize business customers, Marwaha said. To help process the ideas, IBM plans to open its ThinkPlace ideas forum to its partners, he added. IBM launched ThinkPlace nearly two years ago as a central online resource to gather ideas.

Full speed ahead for intelligent car design

2007-02-23T13:21:00.000-05:00

Full speed ahead for intelligent car design

Financial Times, 20 February 2007 - A planned 'active safety' system in US cars promises to cut congestion, but drivers may be reluctant to take it up. A decade or so down the road from now, if all goes to plan, driving in the US will be a smoother, less adrenaline-rich experience.

Your car will be wired to avoid colliding with other cars or swerving off the road, sometimes by steering, decelerating or braking automatically. Motorways will bristle with wireless equipment that can beam you messages, charge tolls without stopping, or pre-empt traffic lights for emergency vehicles. Your car will also send information on traffic or weather conditions to central agencies in an effort to prevent delays and dangerous pile-ups.

This super-safe roadway of the future is approaching thanks to a joint push by government and business. In the US, the world's largest car market, Ford, General Motors and DaimlerChrysler, along with Japan's Toyota, Nissan and Honda and Germany's Volkswagen and BMW, have formed a consortium to establish standards and protocols for equipment.

The industry has joined with the US federal and state transportation departments and professional associations in the Vehicle Infrastructure Integration (VII) Consortium, as the technology is called, which is being tried at test beds in Michigan and California.

America's Federal Communications Commission has set aside 75 MHz of communications spectrum for it, and Japan and the European Union are also studying VII.

"The vision is a nationwide communications network that includes roads, intersections and vehicles," says David Henry, of DaimlerChrysler.

Road crashes in the US alone kill about 42,000 people a year and cost the economy $230bn (£118bn), according to the state of Michigan. Accident rates have dropped recently with improvements in standard safety equipment, but the trend line is flattening due to the constant factor of human error. With "passive safety" devices such as airbags and seatbelts now widely used, safety experts say "active safety" is the new frontier. The technology could also cut fuel consumption and CO2 emissions by reducing traffic congestion.

While car companies and regulators agree the technology is coming, some barriers stand in the way. Carmakers may have agreed on the need for standardised roadside infrastructure and compatible transceivers and processors, but will US motorists embrace the technology? A universal safety and traffic-management system that wires cars to each other and terrestrial infrastructure will raise privacy and civil liberty issues.

And lawyers and carmakers have barely begun to explore the legal liability implications if cars make snap decisions for drivers.

Such concerns are not stopping the eight carmakers forging ahead with tests. On a recent afternoon near Ford Motor's headquarters in Dearborn, Michigan, Joe Stinnett, a product design engineer, heads on to the motorway to demonstrate an experimental Global Positioning System (GPS)-based device that allows motorists to "see" vehicles brake suddenly, even if the leading vehicle is several cars away or on a curve.

A processing box mounted in the Volvo allows Mr Stinnett's car to "paint" the curve of the road ahead and brake safely when a Jaguar, equipped with its own device, suddenly brakes (Ford owns the Volvo and Jaguar brands). The Volvo's driver is warned with an emergency light, but over time the technology is expected to evolve into "autonomous braking".

Carmakers are focusing most of their experiments on lane departures and intersection collisions, since they account for about 80 per cent of accidents. Also being tested are systems that will warn drivers when they are approaching a bend too fast.

Wireless infrastructure at the roadside will allow for "open-road tolling", warnings about speed limits or construction or school zones. It will also allow advertising – a potential irritant to motorists, which VII advocates argue could help pay for the equipment, US-wide, will cost an estimated $4bn to $6bn. The infrastructure can also be used to balance traffic merging from multiple roadways.

Ford is also researching driver drowsiness and the distractions posed by mobile phone use. In a possible sign of cars to come, the 2007 model of Volvo's S80 saloon car is wired to examine how well someone is driving – based on acceleration, steering and other patterns – before "deciding" whether to forward or divert an incoming phone call (see below).

Another area is collection of data from vehicles. A critical mass of cars turning on their windshield wipers at once, or detecting icy road conditions through sensors in their tyres, might beam the information to trafficcontrol centres that can warn other motorists. "There are hundreds or thousands of applications you could do," says Suzanne Murtha, head of vehicle safety systems with ITS of America. "It's limited to the collective imagination."

However, it is far from certain that the American public will share the safety advocates' enthusiasm for the technology. "American carbuyers traditionally will not buy safety equipment," admits Greg Krueger of the Michigan Department of Transportation. While the typical American driver might spend lavishly on stereo equipment, for example, anti-lock brakes were not common in the US until they became legally required about a decade ago. Techno-Com Wireless, a telematics company involved in wireless location technology estimates that the transceiver for VII will cost less than $100 per vehicle, not including related applications. But economy-minded buyers of small cars in particular may balk at the added cost. That could force carmakers to absorb it at a time when they already face intense pressure from high raw material and other costs.

The potential privacy and legal complications surrounding technology that could allow law enforcement officials or outside hackers to track cars also remain relatively unexplored. Americans have fought hard against milder incursions on their privacy.

Members of the VII Consortium met with the American Civil Liberties Union to discuss the technology last year, and committed to anonymous data transfer, with no initial objections voiced. Specialists in Michigan and elsewhere are looking at ways of shielding motorists' privacy. Potentially even thornier are legal issues that extend not just to malfunctions in vehicles themselves – worrying enough for the carmakers – but to the reliability of public infrastructure.

For the technology to work, equipment must be standard across the US from the first day, says Mr Krueger, and "has to work in every state from day one". The state and federal departments of transport, together with the eight carmakers and regional authorities, are due to decide late next year whether to recommend national deployment to the US Congress.

If it gets the go-ahead, the infrastructure will start to appear on the roadside within about three years.

Reinventing innovation at consumer goods companies

2007-01-16T10:48:00.000-05:00

Reinventing innovation at consumer goods companies

A range of orthodoxies is making it harder to develop breakthrough products in the consumer goods industry. It urgently needs a reformation.

Erik A. Roth and Kevin D. Sneader

Web exclusive, November 2006

For years, consumer goods companies excelled at innovation: the steady introduction of profitable, convenient, high-quality products—ranging from disposable diapers to frozen dinners—that changed the daily lives of consumers. Recently, however, these companies have become increasingly vocal about the poor returns on their investments in product innovation. More new products are being launched, but fewer of them are truly innovative (Exhibit 1).

Paradoxically, little has changed—and that's the problem for the consumer goods sector. As markets have matured, tried-and-true processes for selecting ideas, determining business models, and making investment decisions have become less productive. Existing methodologies have turned into orthodoxies: established ways of doing business that reinforce the status quo and hinder the adoption of novel, tailored, and flexible approaches to innovation. In defining "the way things are done," these orthodoxies also dictate what a company should not do. And because they represent deeply embedded mind-sets shaped by corporate tradition, culture, and values, they are difficult to unwind.

Clearly, not all orthodoxies are wholly undesirable: many of them facilitate the efficiency and predictability that large companies need. Nonetheless, they inhibit the development of breakthrough innovations, which can be six times as productive, measured in terms of the average percentage of sales within a category, as a typical incremental change (Exhibit 2).

Other industries have their own orthodoxies, but four are particularly ingrained in consumer goods, in the form of conventional wisdom:

Innovation starts with existing business models and categories.
Focus groups are at the heart of efforts to generate the insights companies need.
Companies should rely on internal resources first for innovation.
Companies should come up with as many ideas as possible and "let a thousand flowers bloom."

Innovation is an inherently multidisciplinary, cross-functional activity. Eliminating harmful orthodoxies therefore requires changes across business units and throughout corporate hierarchies. Some industry leaders, such as General Mills and P&G, have already begun upgrading their approaches to innovation. Others should follow because these improvements will pay significant dividends: the ability to innovate at scale and thus to deliver reliable, sustainable returns on investments in product innovation.

Starting with current business models

Consumer goods companies that stick to what they know—business models based on finely tuned business processes, existing facilities, and long-standing relationships with suppliers and customers—believe they can generate predictable results. When companies free themselves from this orthodoxy, they move beyond the development of the latest type of soda or the newest fragrance for soap (incremental moves that run the risk of overextending brands without delivering substantial growth). Instead, they take business-changing steps such as extending brands into adjacent categories, creating "platform" brands that support products across a number of categories, and moving into the white spaces between categories. Consider the following examples:

1. Extending existing brands into adjacent categories. For years, P&G's Pampers products focused on a specific consumer benefit—dryness—and overlooked opportunities such as "swimmers" (diapers children can wear in the water). Furthermore, the company categorized both diapers and babies by weight, since it believed that their weight corresponded with their absorbency needs. In 2001, P&G began to see the market differently. Through market research, it discovered that the absorbency needs of babies also correspond closely with their stage of development, as defined by the type and amount of their physical activity. Subsequently, P&G reintroduced its Pampers premium line as Pampers Baby Stages. Realizing that it also could extend the trusted Pampers brand beyond diapers into adjacent, complementary categories, it now offers wipes, disposable bibs, and other products. Since the launch of Baby Stages (which encompasses the product variants Swaddlers, Cruisers, and Easy Ups), P&G's share of the diaper market has risen to 51 percent in 2005, from 41 percent in 2001, and its share of the training-pants market has increased to 18 percent, from 0.5 percent over the same period.¹ Such stellar growth is very rare in a mature and competitive category.

2. Creating a brand that plays in a number of categories and businesses. When PepsiCo acquired Quaker Oats in 2001, the Quaker brand had already managed to refresh its old-fashioned image by moving into value-added categories such as granola bars and cold cereals. Since Pepsi's acquisition, Quaker has reached new levels by viewing its brand as a lifestyle choice rather than as a category. Quaker now stands for wholesome quality, health, and wellness (rather than a specific need state), thus allowing Pepsi to stretch into new product areas such as breakfast cookies, weight control instant oatmeal, and a variety of innovative snacks.

3. Moving into the white spaces between categories. Many breakthrough innovations arise in the white spaces between existing categories, because opportunities to introduce or fuse consumer benefits are richest there. Witness the breakfast bar, a product that combines the taste and benefits of traditional breakfast cereals with the portability and packaging of energy bars (themselves an innovation largely advanced by the success of PowerBar). Thanks to changing consumer needs and new delivery technologies, cereal makers have successfully expanded their brands into this new category. Indeed, "on-the-go" nutrition is shaping many product categories.

How can companies increase the odds of making such moves successfully? One tactic is to look assiduously for combinations of brands, technological break-throughs, and insights that help a company address a broader set of consumer needs and so spawn multiple innovations. The artificial sweetener Splenda is a breakthrough product with applications in a number of brands, such as Diet Coke with Splenda and Splenda Brown Sugar Blend.

Facilitating the out-of-the-box thinking required to identify innovation platforms is often difficult for consumer goods companies, whose managers and employees are organized by geography, business unit, brand, category, or customer. Specialized teams with discrete resources, incentives, processes, and directions—including a mandate to focus on innovation—may be needed to foster cross-functional activities, such as the systematic fusion of consumer, technical, and industry knowledge to transform seemingly unrelated ideas into feasible product concepts. Researchers gather and brand marketers interpret data on profitable consumer segments. Together with R&D, the team explores current, developing, and even hypothetical technologies. Finally, strategists share relevant analyses of market dynamics and other contextual issues to help refine ideas (for instance, by modifying the positioning of a product or creating customer-specific variants to better meet the needs of channel partners).

The rewards of this approach are unique insights that can be translated into differentiated new products and businesses. A food product company, for example, conducted a weeklong workshop to generate new ideas by combining consumer, technical, and industry knowledge. An internal team developed go-to-market plans for two new business units with separate structures, leadership teams, and income statements. One of the resulting products eventually became the second most profitable in the company's entire portfolio.

Relying on focus groups

Orthodoxies also reinforce the reliance that consumer goods companies place on established tools for generating insights about consumers. It's easy to understand the survival of popular traditional techniques such as syndicated market research, simplistic quantitative surveys, and focus groups: they are well understood, and some of them—particularly focus groups—are quick and cost effective.

Yet so many companies use the same tool kit to scrutinize consumers that the resulting insights are undifferentiated. What's more, conventional research methods often gather incomplete information. Because they rarely make it possible to experience the full benefits of new or hypothetical products, they often fail to predict accurately whether consumers will understand the technologies that underpin truly innovative products. Consumers are notoriously poor at articulating needs or benefits beyond those they have already experienced: when asking them to imagine true innovations, companies get mixed results at best. Even an industry standard such as simulated test marketing (which often emphasizes historical consumer reactions to new products) reinforces incremental thinking and can give top scores to innovations that subsequently fail the market test. In short, traditional methods can describe past consumer behavior but rarely uncover the white-space opportunities between existing product categories or the kinds of insights that lead to breakthrough innovations.

Companies should diversify both the techniques for gathering consumer insights and the way these insights are used. Many have succeeded with ethnographic or anthropological research approaches such as in-context interviewing and "living with consumers": observing people buying and using products in stores, at work, in restaurants, or at home. Leaders are pushing the envelope further by creating new environments—computer simulations, mock stores, model "homes of tomorrow," and more—to observe purchases and consumption. In this way, managers develop a deeper understanding of the motivations that shape consumer behavior. Consider these examples:
1. General Mills observed its target market—children—playing in school yards when it developed Yoplait's Go-Gurt, one of the fastest-selling yogurt-based products in the United States. The company realized that children, given their active lifestyles, would prefer a convenient on-the-go product that could be opened quickly and held in one hand. The solution, a packaging innovation, gave rise to Go-Gurt: yogurt, in a squeezable tube, that kids can eat without a spoon.
2. Nike marketers, armed with next-generation athletic-shoe prototypes, visit inner-city neighborhoods in major urban areas to interact directly with target consumers. The company can borrow much of its style, attitude, and imagery directly from its customers while simultaneously gauging reactions and building buzz around upcoming products.
3. Dove's recent Campaign for Real Beauty created a vibrant online community that encouraged women to debate the concept of beauty. By monitoring these forums, Dove gathered information critical to developing products that challenge existing paradigms (such as the female consumer's desire for "flawless" skin) in the skin care and cosmetics industries.
Relying on a company's own resources

Most consumer goods companies need to change their interactions not only with consumers but also with other external parties. Historically, these companies have relied primarily on their internal capabilities to manage innovation. But a recent analysis across major consumer goods categories demonstrated that the overwhelming majority of US patents arose outside the top seven global consumer goods companies (Exhibit 3). In the laundry and home care category, for example, 95 percent of the patents filed from 2002 to 2005 did not originate within them.² Indeed, the leading companies constitute only a tiny fraction of the world's consumer goods innovators.

Yet our research suggests that few companies look beyond their advertising agencies, to the many alternative external sources of insights: suppliers, venture capital firms, entrepreneurs, and inventors. This oversight may prove costly, since external partners can spot trends, create competition for complacent in-house teams, share technologies and manufacturing processes (in some cases developed for other purposes), and even craft fully developed product concepts. Consider a few examples.
1. Through a joint venture, Clorox (which acquired Glad Brands in 1999) gained access to a critical patented plastics technology that archrival P&G had developed for its baby, feminine-care, and paper businesses. The result of this unlikely marriage was Glad's groundbreaking product Press'n Seal, whose distinctive technology improved the underlying margins of Clorox's business and allowed P&G to generate income from its intellectual property.
2. Coca-Cola and Alcoa observed that consumers store most sodas at home in pantries and have only a few cold ones in refrigerators at any given time. Warm cans limited consumption. With this insight, the companies used Riverwood International's (now Graphic Packaging) packaging technology to create a cardboard case—the Fridgepack—that fits in refrigerators more easily. Incremental volumes rose dramatically, benefiting all three companies.
3. P&G's Connect+Develop program is well recognized as one of the most outward-looking efforts in the whole industry. The company's CEO set clear metrics and targets, such as boosting to 50 percent the proportion of innovations incorporating external ideas, from 35 percent today and 15 percent in 2000. In addition, P&G introduced incentives so that its business units receive credit for sales and profits generated through external relationships. It has also pioneered the use of collaborative online communities, which have become fruitful sources of innovation. P&G now systematically combs the world for innovations it can improve through its own technology, marketing, or distribution. The company uses its extensive external network—academics, alumni, suppliers, technical communities, consumer communities, creative agencies, bankers, and venture capitalists—both to generate ideas and to complete deals.³

Helpful as external relationships can be, collaboration does have its perils. In particular, commonly tapped external partners—creative agencies and design studios, in the case of consumer goods companies—can become insiders over time and lose the external perspective necessary to challenge conventional wisdom. Best-in-class innovators avoid this problem by creating external boards of industry thought leaders who meet periodically to supply objective, outside-in perspectives on the company's direction. Given the power of outside ideas, companies should experiment with various approaches for sourcing, jointly creating, and commercializing intellectual property with external partners.

Letting a thousand flowers bloom

Unless companies manage their portfolios effectively, they cannot rationally determine which projects to invest in and which to discard. In fact, our recent research confirmed that consumer goods companies have more ideas than capacity to develop them.⁴ Top innovators in consumer goods meet this challenge by aligning their innovation strategies with their portfolio decisions.

Many other companies, however, are overburdened by a principle of orthodoxy: letting a thousand flowers bloom, or creating portfolios loaded with less risky, incremental ideas. To be sure, a few lucky companies play in subcategories, such as yogurt and gum, that are growing rapidly enough to absorb large numbers of incremental ideas. And incrementalism can serve certain purposes, such as maintaining market share or achieving short-term financial goals. However, most companies must actively prune their pipelines, place bets, and back winners.

Few do, however. Some risk-averse consumer goods companies believe that packing their pipelines with projects, however small and derivative, will help them avoid prematurely discarding winners or, worse, the "next big thing." Incremental projects are also taken up for alleged strategic reasons (one of which is that they are the pet projects of powerful people). Industry convention also plays a role: the average brand manager has only two years to earn a promotion and isn't likely to invest in risky ideas that will take longer to realize.

Unfortunately, traditional evaluation tools (such as returns on investment and net present value) increase the likelihood of prematurely eliminating potential breakthrough ideas and of adopting incremental ones. To predict the performance of incremental innovations, companies analyze various characteristics (say, the most important customer segments) of similar products. By contrast, a company's projections for potential breakthrough ideas, even with historical data for more or less similar products, will be less accurate. Such inaccurate projections can lead companies to underestimate the sales and profits from such projects, which are then killed. Of course, the opposite could happen—profits could be overestimated—but that isn't likely in risk-averse consumer goods companies, given the number of unknowns.

Some companies defend their tendency to let small projects proliferate: they claim that a constant stream of more predictable ideas makes them better able to forecast revenues and profits. And it does, but at a price. First, companies fail to consider the opportunity costs of failing to pursue breakthrough innovations systematically. Second, they underestimate the cost of complexity, typically in the form of insufficient resources for ballooning numbers of projects. (The more projects a company attempts to push through, the more likely it is to have less than optimal operations, which could even strain its relationships with channel partners.)

Finally, these problems become worse as companies grow. Even if the average value of each project stays constant, the number of projects required to sustain high growth rates increases substantially, thus making the effort more complex and less fruitful. Recently, we worked with one senior executive who realized that an almost exponential increase in the number of initiatives would be required to meet his company's growth goals during the next five years, given the ever smaller average expected value of each innovation. Another client discovered that his company's growth goals remained beyond reach, despite the hundreds of innovation projects under development.

Rather than treating all projects equally, consumer goods companies should recognize that they can't develop incremental innovations and breakthrough ideas in the same way. Because the former are usually derivative products targeted at some large group of core customers, they tend not to change as they move through the development process. With such incremental ideas, companies primarily need to confirm that the product is feasible and that current consumers are interested in it. They can develop such products effectively through a standard stage-gate process, which evaluates a product at predetermined intervals. If a project does not meet certain criteria, such as the estimated sales volume, it is abandoned.

By contrast, potential breakthrough ideas aim to offer new sets of consumers substantially novel benefits and unproven technical features. They would therefore benefit from an iterative, learning-based evaluation with many market check-in points, similar to those that venture capital firms and high-tech companies use.⁵ Such approaches might, for example, include iterative rapid prototyping, which uses product concepts to create an ongoing dialogue with consumers whose comments shape the design throughout the development process.

Consumer goods companies, once regarded as pioneers of innovation, are now bogged down by the very practices they hoped would keep bright ideas coming. To kick-start growth and rejuvenate ailing innovation engines, these companies must break free of orthodoxy—a tricky task for large, complex, and global organizations, but one that is sure to pay off.

About the Authors

Erik Roth is an associate principal in McKinsey's Boston office, and Kevin Sneader is a director in the New Jersey office.

The authors wish to acknowledge the contributions of their colleague Lindsey Pippel.

Notes

¹ Information Resources (IRI), InfoScan Reviews, United States.

² We conducted this analysis using data from Delphion, an online data source for finding and viewing information about patents.

³ For additional information on such networks, see John E. Forsyth, Nicolo' Galante, and Todd Guild, "Capitalizing on customer insights," The McKinsey Quarterly, 2006 Number 3, pp. 42–53.

⁴ Over 75 percent of the companies in McKinsey's 2005 consumer-packaged-goods survey cited an imbalance between the number of ideas and the resources available to develop them.

⁵ For more information about stage-gate and iterative product development processes, see Richard Holman, Hans-Werner Kaas, and David Keeling, "The future of product development," The McKinsey Quarterly, 2003 Number 3, pp. 28–39.

Leading change: An interview with the CEO of Deere & Company

2007-01-12T16:40:00.000-05:00

Leading change: An interview with the CEO of Deere & Company

Bob Lane details the steps his company took to engage the whole organization in an operational and cultural transformation.

Rodger L. Boehm

Web exclusive, December 2006

When Bob Lane became chairman and CEO of Deere & Company, in August of 2000, he inherited a leading producer of agricultural, construction, forestry, and turf care equipment that enjoyed loyal customers, a strong dealer network, and a rich heritage spanning 164 years. He also inherited a company that was, in his words, "asset heavy and margin lean," too often dissipating economic value and less prepared to compete in a changing and more demanding global environment than it could be.

Lane, at the time an 18-year veteran of the company, had held a range of operating positions (including a 2-year term as CFO) and immediately set to remedy these problems. With his leadership team, Lane created an ambitious plan to manage assets more efficiently, cut costs, and manufacture a new generation of products more in keeping with retail demand. The plan aimed to reduce Deere's vulnerability to the cyclical swings and unpredictability of the agriculture and construction markets. All salaried employees received rigorous performance goals aligned with the plan, and Deere developed efficiency targets for each point in the cycle that, if met, would deliver performance exceeding, on average, that of the company's best years.

Six years into the effort, Lane and his team have made remarkable progress. In 2006 Deere's net income topped $1.6 billion—more than double the figure in 2003. Revenues are up 48 percent over that same period. More important, shareholder value added, or SVA (essentially, the difference between operating profit and pretax cost of capital), a key metric Lane chose to guide Deere's journey, topped $1 billion in 2004—twice the company's previous best—and was $948 million in 2006.

In this interview, conducted in September 2006 at Deere's headquarters in Moline, Illinois, Rodger Boehm, a director in McKinsey's Chicago office, spoke with Lane about the role that incentives, communication, and sequencing have played in the changes at Deere; the effect of these changes on the company's culture; and the challenges that remain.

The Quarterly: When you became CEO, in 2000, what were the opportunities and challenges facing the company?

Bob Lane: In 2000 it was obvious that Deere had the benefit of a tremendous heritage, a long history of quality products, a dealer organization second to none, and dedicated and loyal employees. But while we had been recognized for many good things over the years, we hadn't been noted as often for having a great business. A good business, certainly—compliments to the dedicated and talented employees who had come before—but Deere was not yet a great business.

We were operating in a very asset-heavy way, which consumed enormous amounts of cash, and our margins were under pressure. Even in the good times, we weren't performing at particularly great levels, and in the bad times we were losing enormous amounts of economic profit. For example, we had introduced a very sophisticated combine harvester in the summer of 1999, and it was a great product, a magnificent product. But it was not a great business. In fact, even at the top of the cycle it was barely carrying its cost of capital. So our opportunity and challenge was to retain all of the good things about Deere, while at the same time recognizing that performance could be taken to a higher level worldwide.

The Quarterly: Why was Deere's operational performance less than satisfactory?

Bob Lane: We'd organized ourselves in a very decentralized way. Every factory optimized its own operations to produce at a steady, level rate. While such arrangements are very efficient for the single factory, they're not optimal for the whole business. Deere is not only in highly cyclical businesses but in highly seasonal ones as well, and level production therefore tends to lead to overproduction when markets are turning down. Moreover, there's a lot of complexity involved because our products are amazingly different in function and not that similar to one another. Combines aren't like tractors. And combines aren't like seeding equipment or forestry equipment. The result was that we had grown to be excessively asset heavy and margin lean.

The Quarterly: You chose SVA as a critical metric to address that problem. Why?

Bob Lane: We are a capital-intensive business, and yet we hadn't really focused sufficiently on tightly managing our assets. So it was clear to me, back when I first became CFO actually, that a simplified form of economic profit—focusing on the left-hand side of the balance sheet—would be just the ticket. My desire was to have something all of our operating people could embrace. I felt that the Deere employees with whom I had spent virtually my entire career would benefit from something profound but very straightforward, intuitive, and simple.

The Quarterly: Were there management challenges associated with implementing SVA?

Bob Lane: The challenge, I think, was that it was a new way to run the business. It would not be enough to have a few finance people understand what SVA meant; thousands of operating people needed to embrace it and make appropriate decisions. The question was how could I, as the chief spokesman, work together with the rest of the senior-management team to propagate this?

The Quarterly: What do you think made the difference in getting employees behind SVA?

Bob Lane: One factor was the unity of the senior team. Another factor was the simplicity of the calculation itself. Importantly, it was rooted to the left-hand side of the balance sheet, not, as is typically the case, on the right-hand side. The denominator was basically receivables, inventory, and property, plant, and equipment—things our operating people knew how to manage. And the numerator was something we already calculated and published: operating profits by division. Further, for each equipment operation we said there'd be a simple-to-understand charge for capital: 1 percent a month. Very straightforward. So if you earn 12 percent operating return on operating assets and you receive a 12 percent charge, you'd have zero economic profit.

The Quarterly: Did you make organizational changes to support the initiative?

Bob Lane: Yes, early on, with the support of the board, we divided the agricultural division into two parts: worldwide harvesting, which included things such as combine harvesters and cotton pickers, and a second part that included tractors and implements. This allowed us to focus more tightly on the underlying economics, product line by product line. This is not rocket science, but it was a very big breakthrough—to have the same financial metrics broken down for every single product line worldwide. For example, now our combine factories in Zweibrücken, Germany; Jiamusi, China; Horizontina, Brazil; and East Moline, Illinois; could all work together as one worldwide product team with common metrics.

The Quarterly: How did you get employees to align their behavior with the new goals?

Bob Lane: Simplicity and consistency. We knew we needed to raise our performance significantly, but we first had to better define, with the entire senior-management team, exactly how high the bar would be. And I think there were two concepts that unlocked it for us. One was a tool—an online performance-management system—that we implemented across the salaried workforce. Every one of our 18,000 salaried employees, top to bottom, now had to develop goals in advance that were explicitly aligned with the company's goals. Again, not rocket science, but vitally important.

The second was an upward sloping line of performance expectations that turned SVA into a meaningful, useful tool that recognized the cyclicality of our business. So to support SVA for each product line, we developed targets for operating assets and operating returns at different places in the cycle: twenty percent OROA¹ at normal sales volumes, 12 percent at the bottom of the cycle, and 28 percent at the top—the key being that these targets would cause us to perform, on average, better than we had performed in our best year prior to that. This performance line was considered to be a very high bar, but it gave everybody in the organization clear goals to work on—anywhere in the world, and in any market condition.

The Quarterly: Was compensation also changed to reinforce the new goals?

Bob Lane: Yes, and that has been indispensable. What we did, under the auspices of the board, was rework the entire system to totally align compensation to SVA so that all the incentives in the short and medium term were related to economic profit. Long-term compensation for the top 1,000 is linked directly to the stock price. Compensation is certainly not the only reason to work at Deere, of course, but if you can, it's great to financially reward the people who are making these good things happen.

The Quarterly: How do the incentives work?

Bob Lane: Our short-term incentive, which applies to all salaried employees worldwide, is linked to the sales cycle. So it's now possible for individuals in a particular division to receive a very good bonus at the bottom of the cycle if the division is doing a good job and even receive a poor bonus at the top of the cycle if it is not performing adequately. Before, when business was bad out there, it was impossible, really—given the operating leverage and the heavy fixed costs of the operation—to earn a bonus.

The midterm incentive applies to around 6,000 people as one worldwide team. When we create economic value, or positive SVA, we accrue the incentive entirely in one year. However, the bonus is at risk and only paid out over four years. It can be lost if economic value is destroyed in subsequent years. In fact, anyone in the world can drain that money out—so every employee, regardless of division, has an economic interest to support other operations in the company. It's one thing to not contribute to someone else's bonus, but how about being the one that took away a bonus that was already accrued? The bonus is paid out if performance is proved sustainable. It's been an important reinforcing mechanism.

The Quarterly: How has the focus on SVA been received by Deere's union workforce?

Bob Lane: We've been very straightforward with our union colleagues and clear about what we wanted to accomplish, and they have been very involved in our thinking. In fact, when customers, board members, or other employees go out on the floor, union members will talk about product lines being SVA positive or negative. The recognition is there.

Moreover, our union colleagues have contributed to our progress. When we renegotiated the United Auto Workers' contract in 2003, we had quite a few discussions with them so they would understand how they could achieve better rewards. And their productivity, in particular, has dramatically improved: it's up about 9 percent since 2003. Without that improvement, we would need millions of additional labor hours to get our product out the door. These employees have shared in the benefits of improved productivity.

The Quarterly: What other changes—on either the cost or revenue side—did the focus on SVA necessitate?

Bob Lane: Unfortunately, we had to close a number of factories and discontinue some product lines because they weren't able to carry their weight. In addition, we did not want to overproduce, so when markets turned down we slammed our foot on the brake, which meant that earnings were suddenly hurt in the short run. This was, of course, excellent for the business but a bit painful.

The Quarterly: Looking back, what role did communications play in getting the necessary buy-in among Deere's various stakeholders?

Bob Lane: I think the key was that everybody—employees, dealers, suppliers—heard exactly the same message: we have to perform better for shareholders, and we're going to organize this company to have a great, sustainable business that delivers better shareholder returns. The economic profits have to increase. A clear and consistent message helped show our conviction. So even though the details were evolving, the direction was clear.

For example, when SVA was introduced, in December of 2000, we didn't have all of the specifics developed. In fact, during one of our management meetings early in the journey, I held up a great big meat bone in front of the group and told them that while our strategic direction and performance imperative was clear, we would put more meat on the program's bones over time. This was also true of the changes around compensation. The details came after we were already sharing with everybody how the business was going to be organized around SVA.

The Quarterly: Could you describe the role sequencing played in your approach?

Bob Lane: My original hope was that we could both dramatically improve our operating performance and grow rapidly at the same time. We quickly realized that we needed to establish a stronger operational foundation and therefore needed to improve our operating performance first. So we established two strategic imperatives early on—"Sprint North" and "Seed East." The former was focused on improving our operating efficiency in order to create the foundation for growth. The latter was focused on laying the initial seed for growth through a fairly contained and targeted set of initiatives. "Seed East" would later become "Drive East," as we established a stronger operational foundation and began to accelerate innovation and pursue global growth opportunities more aggressively.

Looking back, this desire to both grow and improve operational performance at the same time created an enormous amount of skepticism early on. And if I had it all to do over again I would be clearer and crisper at the front end about the priorities. The lesson for me was that sequencing is very important in terms of establishing the right expectations with employees and investors, and when you don't get it right it causes a lot of skepticism—legitimate skepticism.

The Quarterly: How have these changes affected Deere's culture?

Bob Lane: Trustworthiness is a vital part of Deere's heritage. For customers, that means if we say we'll make it right during the warranty period we'll make it right, even if it costs us a lot of money. For employees, it means people know where they stand. It's the same for suppliers too. One supplier told me, "You know, I wouldn't call Deere supplier friendly, but I would call Deere supplier fair." And I was pleased to hear it. As an organization, Deere aspires to be a transparent company: no smoke, no mirrors, no tricks. We're straight down the middle.

However, there were aspects of our culture that needed to change. One aspect was what you might call a "best-efforts" mind-set. If I could use an American football analogy, it was as if you could always count on Deere to move the ball at least six or seven yards. And when we got to that point, we could say "good work, good enough"—even though we hadn't reached the first-down marker. Now people are expected to have exhausted every legitimate effort to move the ball further and meet the goal, and then move the ball further again. The goal is clear.

Deere is also changing from being a family to being a high-performance team. "The John Deere family" used to be a common expression. Now that doesn't mean that in a team you don't support people when they make mistakes, but you do have to perform to high expectations. And frankly, not everybody wants to be on a high-performance team. Some people prefer to play intramurals. That's okay, but they are no longer a good fit for Deere.

The Quarterly: Have Deere's talent requirements changed as a result?

Bob Lane: In the same way that the performance bar has been raised, the skills required of our employees have gone up. Our competition is more aggressive and global in nature, and the financial demands are that much higher. And we expect our people to respond to the competition and achieve higher performance standards in a very ethical way. To respond to this challenge, there are two important institutional skills needed.

First, we need a stronger customer orientation. In the past, we probably had more of an engineering approach, versus starting with the customer need. Today it's more important than ever to understand the customer fully—maybe better than the customer understands him- or herself—and marry that understanding with innovation and technological capabilities. Second, collaborative skills will be increasingly important as we broaden our global horizons. Our strategy and performance goals require teamwork worldwide—and our culture is much more focused on enabling people to work together. This takes a different mind-set, but it's a skill that's rewarded here.

The Quarterly: You spoke of Deere's culture as being "straight down the middle." Is it difficult to balance ethics and performance, given the new demands on employees?

Bob Lane: It is a challenge, but it can be done. And we have created a new set of tests to ensure that Deere will have a high-performance culture and, at the same time, retain an environment of integrity. The emphasis is squarely on "how." It's the only word underlined in our strategy statement. So that becomes a statement to our people—how we do our business is a very important factor.

The message to our people is clear: if you get everything else done right but you don't treat people properly or you're not straightforward, you don't work here. And sometimes that hurts a lot. In fact, at our worldwide management meeting I recently announced the number of people who don't work here anymore because—even though their work was satisfactory in every other respect—how they did business was not acceptable. When I announced the number our worldwide leadership team was silent . . . silent. It got people's attention.

The Quarterly: Despite all of Deere's improvements, you have said that Deere is not yet a great business. Looking ahead, what will it take to get there?

Bob Lane: The main factor is sustainability. Delivering performance over a reasonably short period of time is insufficient evidence of sustainability. We want to be known for performance that endures. Think of our strategy as two engines. The first is sustained, exceptional operating performance, distinctively serving customers while using our assets extremely well. The second is disciplined SVA growth—proving that through innovation and invention we can expand our business and sustain that growth. A great business has both engines thrusting continuously at the same time. Those engines will flame out if you don't have the talent—the high-octane fuel to run them. So that's the third strategic component: talent from every background delivering high-performance teamwork.

Ultimately, if our business is going to be great, sustained SVA performance will contribute to human flourishing. At the end of the day, what makes profitable growth sustainable is that our exceptional operating performance delivers products and services that contribute to human advancement. Whether it's food, fiber, wood, water, wind, energy, or recreation—we'll be contributing to human flourishing.

About the Author

Rodger Boehm is a director in McKinsey's Chicago office.

[The cost of not innovating?] Companies will one day rue today's miserly approach to investment

2007-01-09T13:17:00.001-05:00

The three Scrooges

Jan 4th 2007
From The Economist print edition

Companies will one day rue today's miserly approach to investment

FOR a businessman, if there is anything better than making money, it must be making more money. Profits are accounting for their biggest share of the American economy since 1950. Interest rates and bond yields are low by historical standards. It ought to be a great chance for companies to expand.

After all, the logic of capitalism is pretty clear. If returns on capital are high (and much higher than the cost of capital), businesses ought to be falling over themselves to invest. In time, that excess investment (by increasing competition) would reduce returns. Profits would return to the mean.

But that does not seem to be happening. Business investment has been rising steadily, rather than spectacularly. From 1993 to 2000, American non-residential fixed investment grew by less than 8% in only one year. It has beaten that mark on only one occasion since. And even that rebound (in 2005) was followed by a temporary slowdown in the second quarter of last year.

One answer to this conundrum could be that businesses in America and Europe no longer need to invest as much as they used to. They have "outsourced" their investment to India and China, which are rapidly expanding their productive capabilities and supplying Western companies as sub-contractors.

However, Henry McVey, a strategist at Morgan Stanley, says that the answer lies in a "misalignment triangle", comprising listed companies, private-equity groups and fund managers. Companies are simply not using their balance sheets effectively. They are retaining cash, rather than borrowing to exploit the gap between the returns they can achieve and the cost of finance. Indeed, Mr McVey says that many companies earn a lower return on equity than they make on their operating assets; that is a very poor deal for shareholders.

Why is this? One reason is that companies have very high hurdle rates for new projects, higher than seems justified by a world of low interest rates. But that really reformulates the puzzle in a different form; why are hurdle rates so high?

Mr McVey thinks that executives are being cautious, given the regulatory scrutiny that followed the collapses of Enron, an energy firm, and others. Executives face possible prison sentences if things go wrong; keeping a bit of cash on the balance sheet is a kind of insurance policy. Managers may also have learned a lesson from the investment splurge of the 1990s.

But this cannot be the only factor. Executives are all too happy to return cash to shareholders by buying back equity. This has the great advantage of boosting earnings per share, one of the key measures watched by investors. In turn, this supports the share price on which (thanks to options) bosses' pay often depends.

In contrast, investment in new plant and equipment may take years to recoup. Given the rapid turnover of management, executives may feel there is little point in planning for the long term, when only their successors will reap the benefits.

A similar issue affects the second point on Mr McVey's triangle; private-equity firms. They usually plan to own companies for no more than five years and the main focus is in maximising cashflow to meet interest payments and to pay down debt. Capital expenditure is a hindrance rather than a help.

But such groups are also benefiting from the caution of those they are buying from. As Mr McVey says, "Whereas in the past, [leveraged buy-out] firms actually had to know something about the business they were buying, today they can earn huge returns by merely getting rid of the excess cash on the balance sheet."

In theory, investors ought to be wise to this. They should be urging companies to borrow money to enhance returns and they should be resisting buy-outs, because they understate the potential value of the companies in question.

In practice, however, Mr McVey argues that investors, particularly fund managers, are only too happy to accept a bid premium from a private-equity group. The lift such bids give a portfolio help them to beat the index, and possibly their competitors, keeping clients happy for a while.

This is good news for stockmarkets in the short term, in that profits may remain high—or at least will not be undermined by the folly of executives. But the bad news is that underinvestment will weaken companies' long-term health. The conglomerates behind the takeover booms of the 1970s and the 1980s resembled today's private-equity groups. They aimed to use their financial expertise to improve returns across a range of industries. But they tended to run subsidiaries to maximise cashflow, and the businesses slowly deteriorated, like a poorly maintained house. Today's skinflints may do the same.

Second life and other innovation news

2006-11-23T00:08:00.002-05:00

'Grey goo' engulfs virtual world

2006-11-23T00:08:00.001-05:00

IBM Jams: Big Blue Can Innovate, Too

2006-11-23T00:08:00.000-05:00

2006-10-23T13:23:00.000-04:00

The New Yorker: Fact: "THE FORMULA
What if you built a machine to predict hit movies?
by MALCOLM GLADWELL
Issue of 2006-10-16
Posted 2006-10-09

One sunny afternoon not long ago, Dick Copaken sat in a booth at Daniel, one of those hushed, exclusive restaurants on Manhattan’s Upper East Side where the waiters glide spectrally from table to table. He was wearing a starched button-down shirt and a blue blazer. Every strand of his thinning hair was in place, and he spoke calmly and slowly, his large pink Charlie Brown head bobbing along evenly as he did. Copaken spent many years as a partner at the white-shoe Washington, D.C., firm Covington & Burling, and he has a lawyer’s gravitas. One of his best friends calls him, admiringly, “relentless.” He likes to tell stories. Yet he is not, strictly, a storyteller, because storytellers are people who know when to leave things out, and Copaken never leaves anything out: each detail is adduced, considered, and laid on the table—and then adjusted and readjusted so that the corners of the new fact are flush with the corners of the fact that preceded it. This is especially true when Copaken is talking about things that he really cares about, such as questions of international law or his grandchildren or, most of all, the movies.

Dick Copaken loves the movies. His friend Richard Lig"

2006-10-04T23:08:00.000-04:00

Allergy vaccine shows hay fever promise - health - 04 October 2006 - Print - New Scientist: "Allergy vaccine shows hay fever promise

* 22:00 04 October 2006
* NewScientist.com news service
* Roxanne Khamsi

A six-week vaccine regimen appears able to reduce hay fever symptoms by 60% for at least two years, according to a preliminary study.

Researchers say the vaccine approach avoids the side effects of the steroids often used to treat allergies. And it gives a faster result than pollen injections, which condition the immune system over a course of several years, they add.

The vaccine, which uses snippets of DNA to train the immune system, has shown great promise in the new trial. “It is the first time the approach has been applied to this disease,” says Toshiaki Kawakami at La Jolla Institute for Allergy and Immunology in California, US.

It could offer a much needed alternative for patients who fail to respond to conventional therapies, such as antihistamines to control their allergic response, Kawakami says.
Immune cascade

About 40 million people in the US alone suffer from seasonal allergies – a condition commonly referred to as hay fever – which causes the body to produce excessive amounts of the immune chemical histamine. This leads to the characteristic hay fever symptoms, such as itchy eye"