Innovation Lies in Misunderstanding

"You cannot have innovation unless you are able to move through the unknown and go from curiosity to wonder.", claims Dawna Markova in a recent New York Times article.

One of the best tools that creates this "movement through the unknown" is an open and honest dialogue. This takes place when people from different frames of reference, backgrounds, specialities, locations and objectives meet to discuss a common problem.

While this seems so simple and obvious, in the business context this is an enormous task that is fraught with wicked issues.

Do the participants agree that there is a problem? Very often, just getting agreement on the problem itself is a challenge. This is because of the diversity in the group. A natural response is to remove the diversity, which is not helpful.

It is far better to find a way of facilitating the debate, ironing out differences of opinion to get to some consensus on the problem. Even if this consensus was not reached participants should be able to get to the point of "I understand why this grouping of people believe this to be a problem and I have a view on subject, so I will contribute to the discussion."

I have often found in these processes that diverse people have developed 'dialects', local languages and ways of expressing the subject matter, that cause confusion. To operate in a trusting environment and to process these 'locally' induced misunderstanding is the route to innovative problem solving. There is a psychological reason for this. It lies in the functioning of the brain. On hearing and thinking about subjects our brain retrieves our stored patterns of related material for review. In order for innovation to take place, we need 'just enough' overlap. Too much is like having a meeting with yourself and too little means there is no understanding. In between these two extremes is the 'sweet spot' of good innovative dialogue.

In this 'sweet spot', ideas spark off each other and the new pathways that are formed are the basis of the innovation or idea that ultimately will need implementation.

The next, and perhaps most wicked issue, is the level of trust around the table. People who are involved in some sort of posturing or power struggle which they bring into the debate, have clouded their ability to retrieve the useful information and patterns. The patterns being sent back are those needed to interpret the dynamics and power fields around the room.

Then there is the question of time and capacity to hold these discussions. If you are embroiled in a survival struggle, or you have major operational concerns, or you are simply too busy with the mundane grind of doing your daily activities, you do not have the capacity for this process.

For these reasons, I believe that firms need to practice constantly these dynamic skills in order to build up their innovative capabilities. This means having a constant supply of initiatives and experiments that require diverse thinking against a backdrop of known problems. Not only will your known problems get solved in ways you never imagined, but you are building capabilities that will let you stand head and shoulders above your competitors.

China Rising

Why does China owe a huge debt of gratitude to a little known US trucker?

In 1953, Malcom McLean, a trucking magnate in the United States, got tired of seeing his trucks stuck in traffic jams. He hit on the idea of driving them onto ships at one end of the states and shipping them to a port at the other end where they could continue their journey.

Malcom soon realised that he was wasting a lot of money shipping the engine and wheels together with the goods. As soon as he left these at the harbour, the shipping container was born. As is usually the case, others had similar ideas and for a number of years there was competition around the format (size and shape) of the containers.

Eventually, McLean's company won significant contracts to ship supplies to the Vietnam-war effort. This led to a ready acceptance of container shipping. The US Government imposed standards on the format of containers used in these efforts.

People realized that not only was containerization feasible but the innovation dramatically reduced shipping costs. Manufacturing started moving from high-cost areas to low-cost areas, first domestically and then internationally. This allowed companies to take advantage of low labour costs and not have the savings eaten up in exorbitant shipping charges.

Over 50 years of this process has led to seismic shifts in economic development with the phenomenal growth in the economies of Japan, followed by India and now China.
This clear example of disruptive innovation illustrates some key ideas in innovation. First, the length of time these developments can take; second, the far reaching industry changing consequences of a seemingly simple initial change; third, the resistance to such a change when it is noticed by the incumbent powers.

The management challenge in these situations are enormous. First, how do you recognize that what you are looking at is a disruptive innovation that cannot be ignored? Second, and perhaps more importantly, how do you allow both the old and the new to develop side-by-side during the transition?

I believe that it is almost impossible for an incumbent to recognize a disruption until it is too late. Instead all firms should develop an experimental capability in which a reasonable amount of scanning and prototyping becomes a constant part of the organization.

This is not a trivial thing. Organizations taking this route will need to develop significant dynamic and deep learning capabilities. They will have to develop cultures that are flexible and reflective, that tolerate mistakes, regarding them as failed experiments from which much can be learnt.

A Tale of Two Industries

In Gordon Ramsay's book Playing with Fire, he relates how various parts of his operation work. One of the key features is what I would call a system of loose/tight controls. Certain things are centralized and run from headquarters while others are decentralized and operate locally.

This centralized/decentralized process has even been extended to the centralized reservations system where there is a call centre where each restaurant is answered in the restaurant's own name, but if the one being asked for is full there is an ability to cross-sell into one of the other restaurants.

" ... hire the right people and leave them to organize.", says Ramsay. But he is very selective in this area, especially with the chefs. Many of the chefs have had previous direct experience of working with him. It is this skill of getting the right people, giving them freedom and, importantly, a direct stake in the operations of their restaurants, that has allowed Gordon Ramsay Holdings to grow at the speed that they have without resorting to a franchise model.

In a similar manner, EFG International (European Financial Group), has established a model where the Client Relationship Officer (CROs) are regarded as having the primary relationship with the clients, they are given wide decision-making rights and individual P&L accountability. The Private Banking Innovation blog has a video interview with the founder Jean-Pierre Cuoni.

Jean-Pierre highlights the relationship between the client and the people in the bank. Alex Osterwalder, interviewed a number of people in the hospitality industry to gain insights into service cultures. The common thread amongst these is an ability to anticipate the customer expectations and then use this as a benchmark to measure the extent to which these expectations are exceeded or met.

According to Ruud J. Reuland, General Director of the Ecole Hôtelière de Lausanne, hospitality takes place whenever products are consumed in the premises of the producer. This is certainly true of banking products yet how many of them see the hospitality angle as clearly? When we do, all manner of branch and location innovations become possible.

Of course, there are many aspects in which banking is dramatically different from the hospitality industry. However, the one area where the hospitality industry (at its best) beats banks hand down is in putting the client or customer at the centre of their universe.

Let's Start with Culture

The second most quoted success factor for any business change is 'a supportive culture'. The first of course is 'top management support'. We throw these terms around as though simply saying them will make things happen. Then if nothing changes, we can blame these amorphous concepts.

One of the least understood is 'culture'. Let's spend a few seconds on understanding how 'culture' came about in organizations. I like to define the 'culture' of an organization as the commonly understood way of doing and getting things done. It is behaviour oriented.

The example I most often give is our behaviour in religious situations; the wearing of traditional clothes, food taboos or preparation, or commonly understood codes of behaviour while attending rituals. In a commercial setting, the base is usually established by the founders' either explicit or implicit reinforcing of behaviours that work for them. Over time new people are recruited into the organization. These people go through a number of conversations in which they try to make sense of what is required to behave appropriately. The conversations subtly change the culture. Of course, over time these conversations get embodied into meetings, decision rights, formal and informal levels of authority and various processes. At some point, these matters become ever more rigid and change to them becomes more and more difficult.

This sets up the challenge for anyone wanting anything (but especially the culture) to change in an organization. It must start with a number of conversations in which people are able to process the required changes. It is important to understand the context around the use of the word people here. To divorce the person from their formal and informal power structures is impossible. So, in an organization what is the weight of the opinion of the CEO in these conversations versus that of the shop-floor worker? It is so easy for a strong successful CEO to kill off innovative ideas simply by saying 'we tried that..' or 'that is not how we do things around here ...'. Each time this happens, in spite of wishing or thinking that they have an innovative organization, the CEO destroys their capacity for innovation.

A culture of innovation is one where the CEO and other senior executives actively and continuously allow conversations throughout the organization to blossom into action. Action that yields experiments to challenge the way in which 'things are done around here'.

Founders' Fire

"You have to be a little silly about the goals you set. ... You should try to do the things that most people would not.", Google's co-founder Larry Page told a group of students. I am fascinated by the stories founders tell of their trials and tribulations in going from their grand idea to implementation. There is so much to learn from these tales.

I recently interviewed the founder of a student portal in South Africa. He said, "At first we wanted to get a deal with the Universities for the student email accounts. But dealing with Universities is impossible, there is just so much bureaucracy. In the end we went and built the community person by person using any trick we could to entice members to the portal. This total change in strategy has really paid off because we are now free to do what we want."

So here is a digest of some of the lessons from the founders that I have researched.

1. Believe in the impossible

So many new businesses have flown in the face of conventional wisdom. "It doesn't work like this.", is a perfect response. The stronger you get it, the stronger your potential. Think about how the record labels have fought and fought and fought on-line music. Ten years or more later and so many missed opportunities they are coming to realise that their way of operating has changed forever. Think of discount airlines, most successful e-commerce sites and the Blackberry.

On opening his chain of Internet Cafes, EasyJet's Stelios Haji-Ioannou, told the media, "This is a category killer. I look for opportunities where I can totally change a market."

2. It needs dedication and focus

Of course just having the idea is not enough. "The idea is just the beginning, and I will openly discuss all of mine, because the hard work is in making it happen.", a serial entrepreneur once told me. So often I find that inventors are almost paranoid about talking about their ideas to anyone in case they get stolen. But ideas need to be hardened in the cauldron of debate.

Having done this, you are presented with the opportunity of fine-tuning the ideas. People will give you many practical reasons why you shouldn't be doing this. These are the obstacles you will have to overcome. Make a careful note of them. Then you have to decide whether you are able to push through these or whether they require a change in your approach.

There is a real skill in deciding between making a change, sticking with your original, or retreating totally and giving up.

3. Get it known by the world

The final piece of advice is you simply have to get it out there. This means finding the best way of getting exposure. In today's world we are spoiled for choice. But you need to rise above the clutter and become noticed.

Tools at your disposal consist of a variety of new media from blogs, wikis, and social networks.

The stronger you make the network surrounding your products the more secure your growth will be. The one thing that makes the iPod a success, other than the great design, is the network effect created by the iTunes store. Of course, Steve Jobs' social network with the record labels helped to make iTunes store great. Even Apple Music may finally concede and allow the Beatles music onto iTunes. Then Jobs' network with Hollywood has made it possible to add video and movies to iTunes.

We see these network effects over and over. What is a DVD without a DVD-player? I am sure not many people remember the MD music format. Here was a great piece of technology that simply didn't have content and so the format was doomed to obscurity.

So we see that a dedicated focus on implementing the impossible in a way that will capture the imagination of the world is all that is required.

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This post is cross-posted from Helium.

Reflection 1: The Innovation Value Chain

In the Reflection series on this blog, I want to consider lessons that can be drawn from some of the earlier articles. This Reflection is devoted to the idea of an innovation value chain.

The value chain refers to the sequential steps that support the achievement of a particular outcome. The word sequential is italicized because innovation is a complex set of interrelated processes with both positive and negative feedback loops that have deep roots both within and beyond your organization. But to make the discussion easier it is best to separate them into themes in a value chain.

Organizations can only be considered distinctive if they have distinctive value chains. So, it does not help to prescribe generic value chains. But it is important to establish the innovation value chain for your firm within your industry.

You are bound to find that your firm may not be able to describe its value chain, even though your firm may be considered innovative. Establishing your innovation value chain (at any level of detail) allows you to measure and diagnose where to place your emphasis; in some industries recruiting the right people might dominate, in others R&D effort, in others their patent process or relationships with academic research institutions.

More importantly, working in groups, you are able to conduct a focused conversation about innovation in your firm and what it means.

Here are a three starter topics to consider in these conversation. I will explore these and others in later blog posts.

- Organized for Innovation
Consider how your organizational structures, both formal and informal, support or detract from innovation and its success. Who are the power brokers? How do they respond to new ideas? From where do they take their advice and counsel? Are you or your team part of that power structure? Is there a tolerance for 'underground' experimentation?

- Generating ideas
What processes do you have generate ideas? Are they formal or informal? Is idea generation rewarded? What happens to the ideas once they are generated?

- Attitudes to experimentation and failure
At the heart of all real learning is an action, response, observation cycle that needs to be understood. How does your organization create opportunities for experimentation by doing? How does it respond to failures? How does it reflect on the experience?

When innovation in technology is not enough

"It was the holy grail of inkjet printing", Antonio Perez, the new CEO of Kodak told BusinessWeek in an interview last year. Ever since the lab produced specialist inks that promised archival vivid inkjet prints, Kodak had been working on a top-secret project to make a grand entrance into the inkjet business. The distant echoes of Kodak's founding by finding the mechanisms to switch from wet- to dry-plate technology is muted. This is not revolutionary, but merely incremental; improving on a theme.

"You press the button and we do the rest", is the famous catch phrase coined by George Eastman in 1888. At the age of 24, Eastman was about to go on holiday and a friend suggested that he record his trip on his wet-plate camera. While he never made it to his holiday, he became obsessed with simplifying the process of making pictures. This effort culminated in the Eastman Kodak Company, which has been around for close to 130 years.

The switch to digital away from film is a classic example of a "disruptive technology", where a slow-start, fringe technology is taken up and eventually threatens the existence of the major players.

Kodak's mainstream business of consumer and professional film and the associated ecosystem of processing and print shops seemed too big and stable to take any significant interest in the growing field of digital photography. However, the trend reached the point in the early 2000's that simply couldn't be ignored. In 2003, Kodak slashed its dividend to provide R&D funds to refocus its imaging business, which made up 70% of its revenue, on the digital market.

Now Antonio Perez, who hails from HP, is attempting to complete the turn-around. Besides the increased range and capabilities of the consumer level cameras and the retooling the processing shops to be more digital and self-service friendly, he has taken a huge bet on innovating the home printing business model.

He argues that people don't print at home because the costs of the inks are too high. Working with a team of ex-HP staff he has tried to rewrite the inkjet printer business model. Three years of R&D and some $300 million later, the new range of Kodak printers was launched in February 2007.

A year later the jury is still out on these printers, with Kodak selling only 520,000 units of their multi-function printer against global sales of 61 million.

Here we have an example of a systematic and strategic attempt at innovation in the hope of turning a company, if not an industry, around. Looking at Perez's background at HP it is not at all surprising that he is focused on the inkjet printer market. The dangling question is whether the market is appropriate for a late, but innovative, entrant who is using innovation to drive a low running cost, higher initial cost model.