Friday, August 03, 2007

Minimizing Risks in Innovation

Often times the main objection to implement innovation is the risks associated with it. People are afraid that innovation requires a hefty investment and the returns are not predictable. It is this risk on ROI forces companies to shy away from innovation.

To many managers, innovation appears as a vague process that comes with a hefty price tag and unpredictable return. In other words, it is fraught with risk - hence avoided.

Globalization and increased competition has made it absolute necessity for companies to be innovative. This places companies in a strange paradox. On one hand, the market is forcing them to innovate - while managers are reluctant to walk down the path of innovation.

To overcome this paradox, I recommend a proven process that will help manage the risk of innovation by approaching in a process oriented way. When this process is implemented with business acumen, businesses can produce highly innovative products/service while generating predictable results.

Five step process

I have studied several companies and their approach to innovation. These companies are generally considered to be high tech & innovative. During this study, it occurred that the fundamental process of innovation, at a vast majority of the companies all over the world, is very simple. All these companies have developed a disciplined approach towards innovation and implement their approach in five simple steps. ( The actual implementation itself may not be simple, but the fundamental principle is.)

Step-1: Start with the end in Mind

Innovation must start with an end in mind. The objective of the innovation exercise must be clearly defined at the very start. Having a clear definition of the end and clear definition as when to kill the project is essential. This will minimize the risks. Management will now know what the expect, how much it costs and when to expect. Ideally one must be able to clearly define the end product, the total budget, and the expected timeline.

One should also define the exit criteria. Conditions to exist the innovation project - such as: time overruns, cost overruns, changes in market conditions etc. Having a clear exist strategy is essential for successful innovation management.

Step 2: Develop Deep Customer Insight

Developing a customer insight is not as complex as it sounds. All that it takes is some basic listening skills to listen to the voice of the customer, experience in that industry, knowledge & technical skills and ability to draw parallels from happenings in other industries. Once a person has the above skills, developing a deep insight is a child's play.

Please note that developing customer insight is not the same as relying on customer's statements. Often times it does not make sense to follow the voice of the customer alone. This is because most customer rarely tell you what they want in the future and they may not always know what they really want, and they rarely know what is technically possible.

For example, if Apple were to purely follow the customer's voice, then it could not have developed radical products such as iPhone, iPod, iMac etc. For example Harley-Davidson developed bikes that could be easily customized - this was based on studying customer's behavior and satisfying their unexpressed need for a customized bike - that was mass produced. Toyota developed hybrid cars based on their insight on pollution: customer's need for a less polluting cars and the high cost of fuel in the future. Back in 1994, no customer would have told Toyota to develop a fuel sipping hybrid cars. Hybrid car technology at that time was only in research labs - and the knowledge of such cars was beyond the customer's grasp.

As a rule of the thumb: don't rely exclusively on the voice of the customer - but listen to what they have to say. You should also look at how customers are using your current product & your competitor's products, observe and document their behavior in the buying process. Understand the value of your current offerings as perceived by the customer.

This can be done by an anthropology study of the customer, customer's product usage and buying habits

Step 3: Feel free to Borrow Proven Ideas from other Industries

Almost all innovations in this world are based on existing knowledge. The challenge you are facing in your industry is probably solved in nature or in another industry. Therefore you only need to adapt that solution into your industry. For example CD was developed based on ideas from light detectors (LDR - Light detecting resistors) and the floppy disk technology. Idea for hybrid car was taken from diesel-electric locomotives.

The key here is to focus on the core issue and identify other industry that deal with similar issues. Often times people outside your industry will have the different perspective you need to help you move ahead. Most great ideas come from unlikely sources: Outsiders, consultants or people hired from other industries.

Applying techniques from one industry to your own is a key ingredient in rapid, risk-reduced innovation.

Step 4: Take a disciplined approach to Innovation

Companies that are new to innovation often have a wrong perception to innovation: Innovation comes from mad scientist or a nutty professor or a solitary person working in isolation - undisciplined people in an unfocused process. This image was created by Hollywood movies. This idea is often reinforced by artists & writers - who take a solitary approach to creativity - and then brag how they got the creative spark when they were thinking alone.

In the commercial world, the reality is far different. Innovation requires team work, structured approach and above all - discipline. Corporate innovation is based on the same principles as that of all other corporate functions - except that the risk tolerance needs to be higher for innovation.
The risks associated with innovation are the uncertainty & unpredictability of the outcomes. By approaching innovation with a systematic process - with solid project planning, one can accurately predict the outcomes. ( The end result is known - but the timeline may have little variance)

By saying the word discipline, I mean:

  1. A disciplined rigor to define the destination:

    Clearly define the desired outcome. The management leaders should give a clear definition of the desired outcome. The expected outcome must be made known to all those who are involved in innovation. At Intel, this desired outcome was called as "landing zone" - i.e., it contained a list of acceptable outcomes within the defined parameters.
    For example, an automobile company may define the objective of its innovation efforts to be:

    Improve fuel efficiency by at least 20%

    Ensure safety of passengers when a collusion occurs at 45-60 Mph - while keeping the cost of manufacturing the same.

  2. A disciplined methodology for technical innovation

    Innovation needs a methodology framework - framework that defines the series of steps involved, how to test the design in each of the steps, how to implement etc. Having a predefined methodology ensures that the innovation project does not go astray. It is important to define the methodology and then make everyone aware of it.

    During the innovation process if there came a need to modify the methodology, then the changes to the methodology must be managed through a change management process defined by the change management board. Any change in methodology must be taken very seriously and the need to change and the actual change must be studied in detail and approved - before the change is implemented. (For more details on change management please refer to IT Infrastructure Library)

  3. A disciplined process to drive the required alignment within the organization

    Innovation requires involvement of other departments within the organization. For example if the development team is working on developing a new product line, then manufacturing must be involved.

    Large organizations often have problems getting different parts of the organization to cooperate and coordinate for a common innovation purpose. These issues must be cleared by the top leadership.

  4. A discipline to stay the course when distractions occur

    Innovation often takes time. During that time, there will be several distractions. These distractions often make managers lose focus on innovation and the innovation project gets side tracked or suspended (and ultimately shelved).

    If innovation projects are managed in a professional way with a proper project plan, then the managers responsible for innovation will be able to keep their focus on innovation irrespective of other distractions.

Step 5: Create a Culture of Creativity & Innovation

When I go around and ask people - "According to you, what are the most innovative companies?" The answers are usually: Apple, Google, Nokia, Sony, Intel, Microsoft, IBM etc. These companies are successful and one of the main reason for that is they have lots of creative employees. If you were to talk to any employee of these companies, they will tell you how much they value innovation and how innovation is critical for their success.

An innovation culture starts at the top of an organization: the CEO. CEO must be a person who has enough authority and respect to oblige others across the company to think in a new way. If I were to look at the top management of the Google, Apple, Microsoft etc, the top leaders were innovators. The innovation culture starts at the top and spreads to every level. Innovation is a process that must involve the entire company.

Once a culture of innovation is built into the company, all employees will be monitoring what's going on in the world, what the trends of technology and marketing are and ask, "what is the next generation of products customers will want?" How can we improve the existing products? How can we enhance customer experience? How can we make this product more profitably?

Former Procter & Gamble chief executive, John Pepper led an effort to train 6,000 engineers and scientists to think in a more innovative way. He felt that if every one of those 6,000 employees worked 5% more innovatively, the company as a whole would operate much more effectively. How do you like that for a culture of innovation?

Closing Thoughts

If your company is at the early stage of walking down the innovation path, then you must think of steps to minimize risks. It is possible to lower the risks of innovation and at the same time keep the returns high. It requires an organization wide culture of innovation, strong leadership and good management skills. During the innovation process, one should not be shy to copy from other industries or even imitate the competition - Imitation is also a form of innovation.

Successful innovation is a disciplined, process oriented approach led by strong leadership.

1 comment:

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