OPENING STATEMENT BY ROB AUSTIN

Reading the popular press, you could get the idea that watershed events happen in the business world pretty much daily. We're always hearing how this thing or that thing will change "the world as we know it." Shrewd managers regard such proclamations with healthy skepticism. The most jaded skeptic has to admit, though, that some things happening now do seem like a big deal.

Consider the following example: Internet and transportation networks seem to be rendering the world's many labor markets into one. Jobs move across national boundaries in increasing volume. The competitive playing field shifts in favor of some companies and against others. Most companies in developed economies see these developments, rightly, as challenges -- challenges that can lead to opportunities (say, to make more profits by offshoring) and opportunities that can lead to new challenges (for example, competition from offshore firms managed by your former offshore employees, who you've educated into being capable rivals).

Another example: In the developed world, consumers are becoming more affluent, with more disposable income. They spend more on entertainment, fashion, organic groceries, trendy restaurant meals, and cool cars. Also, they'll pay higher prices for these differentiated goods, services, and experiences.

These factors, and others, influence the strategy and execution of a firm competing in the global marketplace. The world is changing. Resist the hype but don't ignore the realities. A shrewd manager is a skeptic, but he or she must still pay attention to his or her surroundings.

So there probably are things we, as managers, need to unlearn and replace with new learning. What they all are, well, that's the subject best dealt with in a book (which, as it happens, Lee Devin and I are writing; look for it from Stanford University Press in 2009). But here let me suggest a few cherished aphorisms that I think don't quite fit the way the world is going. These are all time-honored sayings that still elicit knowing agreement from practicing managers. But for the world into which we're heading, I submit, these sayings will be less true -- or rather they'll be untrue for more and more (but not all) of the things we need to do. They are principles we must unlearn; the actions that flow from them are habits we must break.

By the way, I based what follows on research that involved studying how expert innovators succeed in what they do. This is not stuff dreamed up in ivory towers. Here goes:

• If you don't know where you're going, any map will do. Managers who agree with this statement are pointing out the importance of knowing your final objective when you begin to work, in order to avoid wasting effort. But in an innovation economy, where you think you can go as you begin the work is probably not new enough or good enough to be your final objective. In the innovation economy, if you always end up where you intended to go, you've probably missed opportunities that emerged along the way. Your products and services won't be good enough to be competitive because they will not have evolved in the process of making them. Management processes that maximize the value of emergent features of your products and services are very different from those that assure that you efficiently achieve predetermined outcomes.

• Get it right the first time. Hard to argue with this one, right? Well, no. In the innovation economy, you won't get it right the first time. You can't. If you do, it won't be good enough. Imagine a world-class string quartet operating in this mode. Maybe the performers are good enough to play all the right notes the first time, but to really set themselves apart, just playing the right notes won't be enough. Similarly, with your company, you're going to have to go beyond basic execution. Anyone can do that. And you won't achieve real difference, real differentiation, the first time. So "Get it right the first time" is not the right principle. Try, instead, "Make it great before the deadline" -- or something like that.

• If it ain't broke, don't fix it. In efficiency-based value creation, a surprise is a problem. If a car rolls off the assembly line and is surprising in some way, we have a label for that: a "quality problem." But if a new product, or service, or performance, or any example of differentiation-based value creation does not surprise us in some way, then that's a quality problem. We have long been obsessed in business with reducing, even eliminating, variation in our processes. Standardization, uniformity, and simplicity of operation have been end objectives. But innovation processes require a source of novelty, of never-before-experienced newness. To get this kind of newness, you've got to have variation. Variation, even unplanned or accidental, is a source of new outcomes. And in an innovation economy, it's a problem if your outcomes are not new enough. If it ain't broke, you might need to break it. If it's under control, you might need to inject some chaos into it.

• The customer is always right. Not if a thing is truly new. Eventually, the customer has to like it. But in the beginning, a new thing doesn't have a market yet -- by definition. If you insist that it has a market already, you'll limit yourself to things not much different from what is already out there. When composer Igor Stravinsky premiered his Rite of Spring in the early 20th century, the audience rioted and threw things at the orchestra. Today, that piece is considered a classic part of the canon, loved by many and no longer controversial. The business world today is full of consultants and authors telling you that you can innovate by listening well to your customers. Sometimes that's true, to some extent at least. But don't believe it in general. If everyone always "trusted the marketing research," many important innovations would never have seen the light of day.

• Avoid "reinventing the wheel." Managers like to reuse things. They like to store away things they'll probably need again in a place where they can be efficiently retrieved. This avoids reinventing the wheel. Expert innovators, on the other hand, collect things they think are interesting but that they don't know how they'll use. And they store them in piles, inefficiently, partly because they like to wander through the piles, searching. It gives them new ideas, even when they never find what they started out to retrieve. This helps them reinvent wheels and lots of other things, which is the point, after all, of innovation.

• What gets measured, gets managed. This is true only when people are extrinsically motivated. Intrinsically motivated people aren't driven by your measurements. They respond to their own internal sense of what's important to pursue. And social psychology research, by people like Harvard Business School's Teresa Amabile, shows conclusively that intrinsic motivation is conducive to creative work and that extrinsic motivation interferes with it. Many great designers care a lot more that they work on interesting projects than that they maximize their profits. It's one of the reasons the design industry is so fragmented (composed of small firms). I once heard the head of R&D at one of the world's largest pharmaceutical companies say that he'd finally gotten the performance measurement system in his group to a point where it at least didn't interfere much with the work of his best scientists. I asked him, "Is that the best thing you can say about your PM system, that it doesn't get in the way?" He thought for a moment and then said, "Yes. That's the best I can say about it."

Back to Table of Contents

RESPONSE BY RICHARD L. NOLAN (WITH CONTRIBUTION FROM SHANNON O'DONNELL)

Rob and I developed a Harvard Business School case on IBM's corporate turnaround led by the first outside CEO, Lou Gerstner. ¹ Many say this turnaround saved IBM. We invited Gerstner to speak to the MBA students to whom we had taught the case. He told the assembled class: "It took me more than 53 years to understand that culture isn't just important, it's everything."

Several years later, we studied another business transformation: the product-driven transformation of the Boeing Company.

Boeing experienced 37 years of industry dominance and leadership until 2003, when Airbus assumed industry leadership by selling more airliners than Boeing, booking a larger backlog, and bringing out its newest airplane, the Airbus 380. The 380 knocked off Boeing's 747 flagship -- the long-time, undisputed "jumbo" in the skies. Boeing sustained a further blow when lack of airline customer interest compelled it to scrap the Sonic Cruiser. Similar to rumors during IBM's crisis, which suggested that the only way to save IBM was to break it up, critics rampantly asserted that Boeing needed to get out of the commercial airline manufacturing business in order to prosper and survive.

Boeing took a different course of action. Like IBM, Boeing used this opportunity to hire its first outside CEO. But even before doing so, Boeing gathered itself together and struck out with a surprisingly bold move: designing the Dreamliner. The 787 Dreamliner was a radical innovation, both as a product and as a manufacturing process: it would not be made of aluminum, but of composites; it would not be made mostly by Boeing in the US, but mostly with strategic partners around the globe; it would not be hand-built in a traditional "batch and queue" assembly process, but rather built up from complete "kits" flown in by specially configured Boeing 747s (Dreamlifters) on a moving final assembly line.

The degree of work process transformation and the magnitude of innovations required to make this happen were unprecedented at Boeing, and in business generally. Boeing had started to implement process changes, such as the moving line for airplane manufacturing, in advance of, and partially in anticipation of, the Dreamliner. We interviewed the plant manager of the 737 final assembly line with the objective of capturing the management practices that generated the radical innovations required to transform what was traditionally a mammoth, risk-averse, industrial process.

During the interview, we focused our discussion on Boeing's Moonshine Group, a highly integrated group created at the same time that the moving line was first implemented and consisting of engineers, mechanics, and others who demonstrated a high level of creativity. One of the Moonshine Group's process innovations employed a piece of farming equipment for loading hay, which it "discovered" on a farm in Eastern Washington state; the team adapted the mechanism to lift airliner seats into the 737 fuselage. The result: a crane and container process that once took two full shifts of 15 people each a total of 16 hours was now replaced by a moving line process that took four people 28-32 minutes!

We asked the plant manager, "How many things do you try before you achieve an innovation like the hay loader that works?" Our ensuing conversation went something like this:

"Lots. Sometimes it's the 8th, 9th, 10th iteration where we finally get to the good idea."

We asked, "So there are a lot of experiments that fail?"

The plant manager winced at the idea of failure: "People have to try stuff; I wouldn't call it failure. It's how we learn what will work."

We pressed further, "So failure is OK?"

"People won't take risks if they are afraid of failure. How else are we going to make these kinds of changes?"

We went on to other questions and ended the interview.

When we later looked at video taken of the interview, it was clear that the concept of "failure" as a wasteful or damaging outcome was a concept that had simply been removed from the plant manager's lexicon.

In further research and reflection on my personal experiences at Boeing as well as others who worked there, we discovered how deeply the term "failure" had been inculcated into its culture from the very beginning. Failure of airplanes meant catastrophic loss. But just as important was innovation. Founder Bill Boeing was not an inventor in the strict sense of the word; he was a master innovator who crafted a lasting culture at Boeing. In his own words: "Our task is to keep everlastingly at research and experiment, to adapt our laboratories to production as soon as practical, to let no improvement in flying and flying equipment pass us by." ² Boeing was also a perfectionist. Passing by a worker jigsawing ribs to take out inner circles to lighten the wing ribs, Boeing noticed a nick in the rib where a circle had been cut out. He took the rib from the workman, cut it in half, and threw it in the trash bin.

Many of the problems encountered during the early stages of jet airplane development were solved in the Boeing high-speed wind tunnel. Completed in 1944, the tunnel was dedicated to Edmund "Eddie" Allen, test pilot and chief of Boeing Flight and Research from 1941 until his death in 1943 in the crash of a B-29 during testing.

The first commercial jet airliner, the de Havilland 106 Comet, flew on 27 July 1949 and went into commercial service in 1952 -- two years ahead of the Boeing 707. Two of Geoffrey de Havilland's sons died test-piloting de Havilland's airplanes. The Comet incurred several catastrophic failures, killing crews and passengers. The failure was later identified to be caused by square windows whereby pressurization of the airplane worked on the window joints to eventually cause fuselage failure. Airplane failures can also result in the death of a viable company, as it did for de Havilland Airplane Company.

In a modern airplane today, the pilot takes the airplane off the runway at more than 200 mph and accelerates to 550 mph at 5 miles or so above ground, where the air temperature is -75 F (-60 C) and so thin that, if the skin of the fuselage should fail, you would lapse into a coma in seconds.

In an interview between Kenny Kemp, author of Flight of the Titans, and Walt Gillette, then head of development for the 787 Dreamliner, Gillette commented on the safety of commercial airlines:

We have built one and a half thousand 737 new generation planes, and they are all flying today. Without a loss. We've built 500 Boeing 777 planes. All flying today without a loss. And, you know, our rivals Airbus have built a similar number of A330s and A340s, also without a loss. There are over two and a half thousand new generation planes out there, which are flying 18 hours a day, seven days a week and they are safer than anything ever devised by human endeavor. That is something to think about. ³

Designing and building something as complex as a commercial airline with a safety record as described by Gillette is partially accomplished by developing a strong culture among the more than 100,000 workers at Boeing -- a culture that completely rejects "failure."

I often pose to my Boeing ExecEd class of managers the question of whether Boeing could design and build a software product like a Windows operating system -- a complex product somewhat equal to a commercial airplane such as a Boeing 777. Then, while the managers are thinking, I ask whether they think Microsoft could build a 777. The answers range widely, but generally they can be summarized as "probably yes" to both questions. But Boeing would take a very long time to build a Windows operating system, and you would certainly not want to fly in a Release #1 777 built by Microsoft.

These questions emphasize the importance of understanding the nature of the two products as well as the company cultures of the workforces that build the products. The cost of failure is so high for Boeing that cultural norms at Microsoft such as "fail fast to succeed sooner" are foreign to Boeing employees.

So what needs to happen in a company when its business environment suddenly requires action as radical as designing and building an aggressively innovative new airplane like the 787? One way to pursue the answer is to investigate the successful leadership of managers like the 737 plant manager, who was able to introduce innovation thinking into the strongly risk-averse culture of the Boeing Company. Clearly, there is more involved in successful business transformation than "need," inspiring rhetoric, new organizational structures, and strategic plans. Managing change in the company's culture might not be everything, but if cultural barriers to innovation remain hidden from the business transformation leaders, those barriers are likely to thwart even the best strategies and plans that require company engagement in high levels of innovation.

NOTES

¹Austin, Robert D., and Richard L. Nolan. "IBM Corp. Turnaround." Harvard Business School Case, 14 March 2000.

²Redding, Robert, and Bill Yenne. Boeing. Brompton Books Corporation, 1983, p. 11.

³Kemp, Kenny. Flight of the Titans: Boeing, Airbus and the Battle for the Future of Air Travel. Virgin Books, 2006.

Back to Table of Contents

RESPONSE BY ROBERT M. MASON

Rob has pointed out that in today's business world, we should hold onto some of the accepted principles but challenge others. How do we decide which principles remain viable and which should be questioned? One of the former is that the language we use to manage and lead our organizations is a key to effective leadership, as author and professor Louis Pondy pointed out more than 30 years ago: "Leadership is a language game." Just how does language help in innovation leadership? Consider the following three illustrative examples.

First, how is failure perceived in our organizations? Dick and Shannon report that Boeing, at least at one point in time, tried to avoid using the word; if someone said that something had failed, this typically meant that someone's career had ended.

Second, in contrast, there is the (perhaps apocryphal) story of the young manager at IBM whose project had cost the firm $10 million, and there were no prospects of revenue to compensate. When he submitted his resignation, his supervisor rejected it, saying, "Are you serious? We just invested $10 million in your education. Do you think we want to let you go now?"

Third, and more recently, I had a discussion with a GE VP who was responsible for an international joint venture that was about to end. At the time, I was leading a team of researchers looking at technology management across national boundaries. We had been studying the GE venture as it developed, and as I wanted to wrap up the story, I asked him if it had been a success. He hemmed and hawed and, uncharacteristically, was oblique in his answer. To resolve this equivocal response, I asked more specific questions:

• "Did it meet your financial objectives?" His response was an unequivocal "no."

• "Well, did you achieve what you had hoped in terms of technology transfer between the Japanese and US teams?" Again, his response was negative.

• "If it met neither the financial nor technical objectives, why are you reluctant to call this venture a failure?" I finally asked. His response was enlightening: "Because we learned so much."

The point is that when an organization tries something and learns from it, the experience should never be considered a failure. Failing is a way to learn; the innovative leader manages risk associated with possible outcomes and doesn't manage so as to avoid failure.

Our Economic Measures of Success

We're currently in an economic environment that is not characterized by the usual economic measures associated with "economies of scale," with larger production runs leading to lower costs and thereby greater competitiveness in the market. Neither are we benefitting from "economies of scope," which also benefit market competitiveness. These measures were appropriate to production processes. Instead, with a knowledge economy, the measures can be much different. We should be thinking of the possibilities of measures appropriate to an economy of sustainability (e.g., as illustrated in The Omnivore's Dilemma for our food production ⁴) or even an economy of "increasing returns" ⁵ because of network externalities. Contemporary firms are benefitting from Web 2.0 technologies and are demonstrating novel business models, some of which are built around the "viral marketing" enabled by these network externalities. There seems to be at least the possibilities of increasing returns from lock-ins to the technologies and the human investments made in adopting services built around these technologies (which can result in high costs of switching to other services). However, the question of sustainability of these business models is still open: will they revert to conventional measures of success and, by using these measures, assure their own demise by making decisions that prove dysfunctional in this new economic environment? How the leader frames the measures of success can encourage (or inhibit) innovation.

Managing Paradoxes

Managing paradoxes may be the biggest challenge to an executive who seeks to lead an innovative organization. In the late industrial era, traditional strategic wisdom suggested that firms would choose to compete either on lower costs (economies of scale, driving down the cost of production by using the learning curve) or on innovation (rapid and continual introduction of new products). The innovative leader, however, recognized that it was not "either/or." Instead, the firm needed to be both a cost leader (e.g., from process innovations) and a product innovator (i.e., introducing new products). The leader of today's innovative organization is one who seeks out the "paradoxes" in conventional wisdom and finds ways to change "either/or" to "both/and" -- to reconcile what at first appear to be absurd and contradictory options, conditions, and requirements. Doing this is what will make the firm succeed with innovation by changing the nature of the competition.

NOTES

⁴Pollan, Michael. The Omnivore's Dilemma: A Natural History of Four Meals. Penguin Press, 2006.

⁵Arthur, W. Brian. "Increasing Returns and the New World of Business." Harvard Business Review, 1 July 1996, pp. 100-109.

Back to Table of Contents

RESPONSE BY ERIC K. CLEMONS

Despite the ongoing dialogue about innovation within most large American firms, I see surprisingly few examples of profound innovation among US enterprises. Innovations are more likely to be done to successful firms than by them; just look at the rise of super-premium ice cream, premium ice tea and fruit drinks, energy bars, and microbrew beers among consumer package goods companies, or the introduction of new retailers like Whole Foods and Trader Joe's to sell consumer products. Most experiments with nontraditional educational formats and nontraditional delivery mechanisms have come from outsiders, not from the usual American powerhouse educational institutions. Innovations in coal gasification and CO₂ sequestration at present likewise seem to be coming from startups rather than the major players in energy or engineering. Technologies as powerful as Facebook and MySpace have been harnessed as if they were just another form of media, to be used to push ads to a captive audience, and as if they were just the latest in a progression of passive media, from newsprint to radio, from radio to broadcast TV, from broadcast to cable, from cable to sponsored search on Google, and from Google to online social networks. Despite spectacular changes in audience behavior, preferences, and empowerment, we treat the milieu of a social network as if it were just another 19th-century communications medium.

Even America's newest self-proclaimed gurus of innovation seem to have based the launch of their careers on offering little more than repackaged ideas from their predecessors on competence-enhancing rather than competence-destroying change and on the slow gains of new technologies compared to the steady gains of more mature technologies.

Yes, there are occasional innovations. Apple's iPod is a novel way of putting together small screens, small but massive storage devices, and a simple user interface to revolutionize personal entertainment. The Toyota Prius captured the attention and imagination of an emerging green market. The Boeing 787 Dreamliner may represent a new level of comfort and passenger satisfaction in travel. But more often than not, innovation involves selling an old idea to a new consumer, or with a new campaign, or with a new interface. Microsoft's last great new idea, Excel, is just Lotus 1-2-3 with a new face, and that, of course, was just a repackaging of VisiCalc. Pepsi's most recent delightful new product, Naked, wasn't acquired by copying, but more directly, by acquisition.

Perhaps this is simply human nature. Beethoven was an innovative genius. During his lifetime he is purported to have stated that he wrote for future generations; he did not expect to be understood by his musicians. His first symphony opened with a dominant seventh, a chord that indicates that the composer is about to change key on you; I don't believe this had ever been done before and has to rank among the greatest raspberries ever offered by an artist to his predecessors. And yet Beethoven is probably among the most uniformly performed, unalterable idols of the current musical establishment. What would Beethoven be doing now, if he were alive and working today?

And that may be the second part of the problem. Bach and Beethoven would probably be working in private equity, earning hundreds of millions of dollars annually and dreaming of writing something creative when they retired, if they ever retired; more likely, they would each buy a winery, one in Tokay, the other in Piedmont. While they were working, they would hover, like vultures, ready to swoop down, asset strip, and break up, and in other ways "release hidden value" from any company that dared to defer shareholder returns by making long-term and uncertain investments in innovation.

And yet, we really do know how to innovate. Change specialists know how to overcome organizational resistance to competence-destroying change; that is, we know how to encourage organizations to forget what they used to do well, embrace uncertainty, and learn what they need to do next. From scenario analysis to encourage forgetting and relearning, to changed incentives to encourage experimentation and execution of new learning, proven techniques exist. Good anthropologists and ethnographic observers have mastered finding opportunities, new ways to meet wants and needs, and cravings and longings that consumers do not yet even know how to express because the limited marketplace offerings do not yet provide a vocabulary for describing what they are missing. IT infrastructure within the firm can embrace far more complexity -- in the firm's portfolio of product service offerings and in production, marketing, and distribution -- without this complexity increasing costs or slowing operational execution. We can do this. If only Bach and Beethoven would stop micromanaging our corporate finances on a quarterly basis and go back to creating great music, the rest of us would go back to creating great products and services.

Back to Table of Contents

RESPONSE BY LEE DEVIN

Dick spoke about failure, about its devastating effect on companies and people who suffered it, and about our need to reconceive, to see certain kinds of failure not as disaster but as a step along the way. A bunch of other interesting remarks got me occupied, and I didn't see until later the connection between this need to reconceive failure and an equally urgent need to reconceive our ideas about efficiency. Seems to me that we've used failure and punishment for failing as a way to enforce an industrial ideal of efficiency: Get the biggest bang for the buck, and get it right now; cut out all the waste motion; any variation is a quality problem. If you can't live with that, can't achieve continual immediate success, get outta the way for someone who can.

But in a culture of innovation, a culture in which "failure" has no useful meaning, a culture where we cannot predict the outcome of our work, we're going to have to get a new idea about efficiency. We will not "get it right the first time." Well, we might, but that would be an accident. No amount of planning and arrangements will guarantee a valuable outcome. What we used to abhor as failure becomes a fact of life, a key feature of our work processes. We must fit our expectations to the fact that of the things, services, and ideas we find innovative, many if not most will not display immediate value. Some may never do so.

Business innovators are going to have to think like artists, to celebrate processes that include failure, and to learn that a lot of what they dream up will go on a shelf, out of the way but nearby, waiting for a chance to come in handy. A lot of our brainpower will go to figuring out what the heck to do with many of the outcomes we generate on our way to the killer new thing. Indeed, a fair amount of brainpower must go simply to recognizing the killer new thing. Worse yet, many if not most of the valuable innovations we know about have been to some degree merely accidental. It's sheer chance that they happened. We need to do some serious thinking about how to create a culture that can recognize these things when they turn up.

That's one way that our idea of "efficiency" must/will change. And it's a thing an innovation think tank might put on the agenda. I bet we could come up with some innovative ideas about it.

Here's another: All too gradually we're realizing that in order for an enterprise of any kind to continue in the near future, it must be sustainable. Or even, as Bob put it, it must feature "'increasing returns' because of network externalities." We're going to move away from manufacture and commerce that use up resources and generate trash. In their short run (ca. 150 years), industrial ideas and methods have made a great success of raising the standard of living in developed economies. But, in the author conference call on "innovation" prior to writing this issue, Eric pointed out that "success is often a precursor for failure, and that being best at what you do in any era is actually a good predictor of future failure."

I think most writers on this subject refer to individual firms; I'd like us to think about it with respect to business culture at large. Let's move to a place where sustainability is an inseparable part of our concept of good business, part of how we define efficiency.

Finally, during our conference call, we talked a good bit about the word "innovation." I think we may need a new word here, or some clear way (clearer than the ones we have) to distinguish between innovation and "not innovation."

When innovation means what I use it to mean, "incremental innovation" is an oxymoron. Something truly new has no antecedents. It's a jump. I think of incremental innovations as improvements. Improvements are less scary than innovations, and we often, to comfort ourselves in the face of the new, confuse them -- "horseless carriage."

Between horse-drawn and self-propelled, there's a discontinuity, a jump. A horse pulling a moldboard plow is an improvement over an ox tugging a sharp stick. But an automobile is not an improved carriage: it's an entirely new thing, an innovation.

Bicycles may be a better example. The differences between an 1890s high-wheel, or penny-farthing, bike and a 1990s mountain bike are huge, but both machines are bikes. We can make meaningful comparisons among them. The rider propels them. The differences between T.E. Lawrence's motorcycle and the latest Yamaha crotch rocket are similarly great, but we can still compare the machines. An engine propels them. But between the motorcycles and the bicycles, there's little meaningful comparison. They all have wheels, handlebars, seats, and they all take us from A to B. But between person-power and gasoline-power, there's a gulf; they are as apples and oranges.

Back to Table of Contents

RESPONSE BY ERIN SULLIVAN

I am struck by Rob's comment, "Management processes that maximize the value of emergent features of your products and services are very different from those that assure that you efficiently achieve predetermined outcomes," in terms of the rather beleaguered industry that I know best, pharmaceuticals. This statement is particularly poignant in terms of pharmaceutical industry innovation because by its very nature, drug development depends upon an unpredictable and uncertain discovery and development process. The industry, however, would desperately like to see product innovations conform to a development process that is predictable, reliable, and replicable. Perhaps, instead of striving for efficiently achieving predetermined outcomes, the industry should embrace its current way of operating/innovating, which allows for, and even depends upon, emergent features.

Currently, the pharmaceutical industry's best entree into innovation involves hiring talented and well-educated people. Recruiting top talent from universities or industry is a high priority for most firms; managers count on the notion that recruiting a talented staff and providing employees with a measure of freedom and access to resources will produce innovation in processes and products. In this scenario, scientists are only limited in terms of their own imaginations and the boundaries of biology. Not only that, but PhDs bring a high degree of specialization in a particular scientific discipline to the organization. Because the drug development process is dependent on maximizing knowledge from different scientific disciplines, firms often focus more on bringing in specialists with targeted bodies of expertise to solve problems as opposed to educating or forcing the entire team to think beyond the boundaries of its specialties.

For pharmaceutical companies, their business is so tightly tied to science that they must stay on the lookout for new talent and collaborate with outside partners (in the form of biotech firms, other pharma firms, or universities) in an effort to keep on top of the latest scientific knowledge, research, discoveries, and advances. The industry operates within, and is dependent upon, a scientific universe that is not completely defined; the body of knowledge and definition of this universe expands and changes constantly. This contributes to an environment in which nothing is ever the same.

In comparison with other industries, pharma experiences much longer timelines as well as higher attrition rates and substantial amounts of uncertainty throughout the product development process. In practice, projects often do not progress along the lines of carefully defined development phases. While these characteristics are inherent parts of the industry, they do not stop firms from addressing them via new processes or strategies. Firms believe that shorter timelines, lower attrition rates, and reliable drug discovery and development could all positively impact drug development outcomes as well as firm profitability.

Thus, many pharma companies have expended serious resources in creating cross-functional and multidisciplinary teams throughout the drug development and discovery process only to find, however, that while some of the best science happens at the interface of two disciplines, in many cases, biologists and chemists do not like working with each other. Biologists and chemists each chose their respective disciplines because they were avoiding the other. Consequently, many firms that have overhauled their entire R&D program found that creating multidisciplinary teams does not automatically result in getting better products out faster. Thus, the industry still quotes a drug development timeline of 10-15 years, Wall Street remains frustrated with high attrition rates, and scientists continue to wait for basic science discoveries to jump-start their processes and mitigate some of the complexity underlying their products.

Back to Table of Contents

RESPONSE BY PETER HANKE

Rob's precise observations reflect the tendency of contemporary players in any business to turn more and more artistic in their innovation practice. Undergoing a change from products to knowledge as the main driver in economy growth adds interesting aspects of taste and aesthetic judgment to the former rigid measurement of fiscal results. In a broad understanding, and in various statements, this is described as looking for "soft" values rather than "hard" measurements, and managers around the globe are struggling to find out how to cope with these slippery notions of innovation and the knowledge economy.

Being a trained classical musician, I can assure everyone that the division of effort and ambitions in soft and hard parts doesn't make sense at all. The performing arts are competitive and truly tough yet innovative and curious at the same time in a way business ought to study somewhat deeper. To my joy, Rob's specific issues reflect on a set of problems and quests that a performing artist meets every day, without having to argue for the feel-good assumptions normally related to arts and culture entering business perspectives. I will comment on three of Rob's points.

Make It Great Before Deadline (Instead of "Get It Right the First Time")

This is a marvelous and simple statement that covers all the complicated sets of ambitions a performing artist will have to consider and go through in the different phases of rehearsal: numerous experiments, slow maturation, discovery of solutions in parts, and coping with the pressure of opening night.

Assuming getting there as fast as possible with efficiency and precision is the foremost virtue of an industrial-thinking organization (just as it is in India or China at the moment), you have to search for completely different methods for a successful business strategy when it comes to being a knowledge-driven organization. What makes the competitive difference between knowledgeable players will be the accumulated experience of a rehearsal process that is normally hidden when you see the end product. The performers rarely expose their experiments and discarded choices in public, but what is highly relevant to share would be the new evaluation methods that come with a different focus. When you as a manager decide not to stay with the old-fashioned efficiency model of getting it right the first time, you need better aesthetic judgments for not wasting your time. Deadlines are the normal answer in this case, which makes us aim at an "as good as possible" culture. Rob's suggestion of making it great before the deadline is a much better strategy and reflects the critical taste, passion, and emotional engagement you find among performing artists.

It's Not Broken ... Then Go Break It (Instead of the Pragmatic "If It Ain't Broke, Don't Fix It")

This is a truthful, radical, innovative approach, and I will argue somewhat further than Rob with respect to this particular issue. Business as usual might be the worst enemy of all for an organization that wants to enable innovative forces within itself. For an artist, this is obvious: you cannot repeat yourself next time; the audience will walk away and count you out as old hat if you don't creatively destroy an existing expression in order to reshape or reinvent a new one. For a modern business, this is also becoming true. Your competitors, to use a metaphor, will rapidly overtake your position if you don't jump the fence from the highest position yourself. It is dangerous to simply "stay in business." Actually, I believe in -- publicly -- burning the old recipe for success in order to put pressure on the organization to invent the next generation of products or services. Many winners in history have performed this "no way back" strategy in order to put pressure on their environment. Remember how Christopher Columbus and his generation of "developers" in the New World made it? They burned their entire fleet when they got ashore, and the common decision was made to stay. This radical act changed the mindset and made people focus on the new tasks. There are many similar interesting cultural myths sustaining the ideas of creative destruction in the name of a larger course. Consider the Greek mythological phoenix bird as an innovative idea derived from the ashes of the old and necessarily destroyed being.

Reinvention: A Discrete Virtue of Innovation (Instead of "Avoid 'Reinventing the Wheel'")

Reinventing yourself is a special artistic form of innovation. Given the profession I come from as a conductor, classical music is normally completely fixed in historical terms, and every time I take up an existing score -- often a piece I have performed before -- the task is to rediscover my own ability and the piece's potential. Transferred to other branches, this is perhaps a new notion of innovative performance; to what extent can you find new ideas in the realm of what you already know? Can you add fantasy and inspiration to the inevitable?

In many situations, your clients are not really interested in a significant change, but they are interested in certainly a deeper understanding and a rediscovery of the values that are embedded in the already existing artifacts. Connected with this is clearly the ability to unlearn old habits. The first inspiration you get from a piece of music is of an innocent kind. Based on your instincts you can often perform something really true and tastefully right, but the minute you become conscious about it dullness and boredom enter. The innovative approach and inspired rehearsals in this respect would be to aim at a new innocence -- to become a master in order to forget what you know -- and then perform as if this was the first time you ever heard this particular piece. Similarly, a business unit could learn how to enjoy the duties of the inevitable tasks that do not necessarily contain glamorous potential or a sexy, new design but surely add value to business and clients. In a sense, this is the definition of "slow" innovation and by that, I mean it characterizes the enormous scope of diversity in a true innovative approach.

Back to Table of Contents

RESPONSE BY ROBERTO VERGANTI

In the 1980s, with the invention of quartz movements, incumbents in the watch industry such as Seiko and Casio believed that people viewed watches as technical instruments, for obvious reasons; watches are tools with a clear function: to tell time. And quartz movements, together with digital displays such as LEDs or LCDs, allowed wristwatch companies to perform that function better and at a low price. Not only did these new technologies allow manufacturers to equip watches with several additional functionalities such as timers, alarms, games, and even calculators, but they also pushed companies to conduct market analysis, examining how customers used watches as tools.

What happened, however, was that people started to see watches as fashion accessories. Regardless of watch features and precision, individuals were more interested in collecting several watches, matching them to various clothing styles, and changing them every season, just like shoes and hats. This market shift was triggered by an innovative product: a watch introduced in 1986 by Swatch, a Swiss company. Users were not soliciting this vision of Swatch. They all had "tools" on their wrists. However, once Swatch released its little accessory, users who at first were confused eventually loved it. Seiko and Casio were observing needs; indeed, they observed Swatch generating new ones.

I find especially intriguing one claim in Rob's analysis: the customer isn't always right. Most studies show that radical innovation does not come by getting close to users and understanding what they need. Yet we persevere in pursuing only one approach to innovation: user-centered.

Design-Driven Innovation

In a forthcoming book, tentatively titled Design Driven Innovation (Harvard Business School Press, 2009), I illustrate how companies such as Apple, Nintendo, and Alessi create radical innovation with processes that are all but user-centered. By stepping back from users, exploring technological opportunities, and investigating broader social-cultural changes in contexts of life, they are capable of proposing new, radical products, whose meaning is unsolicited by the market -- but soon to be loved once unveiled.

Technologies and Meanings

This type of innovation is essential not only for corporations in consumer markets, but also for firms in high-tech industries as well as technology providers. These companies typically think about their technologies as substitutes of old ones in order to better satisfy existing needs, such as quartz technologies for watches, which were considered as substitutes for traditional mechanical movements. Design-driven innovation, however, is about the search for new meaning, one that a new technology can enable. Swatch simply uncovered the real potential of quartz movements, and this particular technology came at a very low cost (the cost of producing a quartz watch fell from US $200 in 1972 to $0.50 in 1984). So what was the real meaning that this technology could enable? Well, if a watch becomes inexpensive, then a person can buy it more instinctively and may have more than one. We know the end of the story: 10 years later, Swatch generated revenue of Sfr. 3 billion and profits of more than Sfr. 400 million and was, in value terms, the world's leading manufacturer of watches, with a 14% share. The impact on profits was astonishing. When compared to the Fortune 500 list of companies of 1994, the Swatch Group ranked 232 in revenues, 119 in market value, 70 in profits, and 22 in profits as a percentage of sales. The meaning of a watch as a tool almost disappeared; by 1988, watches with digital displays dropped to only 12% of the market. As always happens with design-driven innovation, it retrospectively seemed that people were just waiting for the Swatch, although they didn't appear to be looking for it. But the customer is not always right....

Back to Table of Contents

RESPONSE BY ALAN MACCORMACK

I'll let you in on a little secret. We are part of the problem. Surely you don't mean me, I hear you ask. Well, yes, I mean all of us. I sit here on the fourth floor of a beautiful ivory tower at a school that graduates 900 of the world's finest MBAs each year. They are equipped with the latest analytical tools, theories, and frameworks to help them develop strategy, manage execution, and maximize net present value. And you, perhaps sitting in a cubicle, a corner office, or an executive suite, no matter, probably manage the same way. You invest great efforts into developing elaborate plans. You commit resources based upon a detailed analysis of the available options. And you hire consultants to make sure these plans and analyses are as good as they can possibly be. So where are we going wrong? Aha, well that is the great unknown. You're not making sense, I hear you say. Actually, I mean that literally: our problem is with the unknown.

Innovation, by definition, involves the creation of something new and valuable. As such, it is inherently uncertain. The effective management of innovation therefore requires that we become masters at dealing with uncertainty -- not only dealing with it, but embracing it. For uncertainty creates opportunities for firms, providing they have the right managerial equipment. It is extremely hard to compete on better analysis and planning. But competing on uncertainty? Now that sounds like something we should do.

The problem is that organizations, quite naturally, drift toward a state where uncertainty is the enemy. We eliminate variation, striving for greater focus and an increase in efficiency. We deploy Six Sigma and statistical process control to drive convergence. We design standardized operating procedures and identify and transfer best practices across the firm. Within projects, we take similar steps. We develop more detailed plans, invest in better forecasting techniques, and listen closely to customers in an endless variety of ways. We are awash in data that attempts to remove the element of uncertainty from our daily life. The implicit aim of all these actions: to "routinize" the innovation process.

This logic can make a firm wildly successful at what it does today. But its application to innovation can eat at the very soul of a firm. Innovation requires that we explore new ideas and opportunities outside our past experiences. It involves divergence before convergence, exploration before exploitation. Ultimately, it dictates that we learn to love uncertainty, to discover and exploit the new possibilities that it brings. So where should we begin? Let me suggest we focus on two areas: diversity and flexibility.

Diversity

Firms suffer a tremendous lack of variety in the threats and opportunities that they perceive. Their R&D roadmaps, while great at accelerating progress in known directions, are poor at spotting new ideas and solutions that lie outside their current focus. Their resource allocation mechanisms are predisposed to allocate capital to ideas and solutions that look just like the existing business. And their executives work tirelessly to tie R&D more closely to production, ensuring that innovative ideas are rooted firmly in reality. In essence, for many firms, the front end of the innovation "funnel" is merely a narrow tube. As one manager told me, "We ruthlessly weed out research that doesn't fit the existing model -- those projects will only last six months inside our normal labs. The immune system of the core business is so strong." That's a powerful metaphor. Does your immune system kill diversity, and if so, what can you do about it?

The answer is that firms must generate greater diversity in the opportunities that they perceive and the solutions that they consider. But achieving this objective at a reasonable cost requires that they make different organizational choices. In essence, firms must design diversity into their DNA in order to combat the natural forces that act to reduce variety.

Some diversity-generating tactics are well known, if less well understood. Google allows engineers to spend 20% of their time on "side projects" and gives added resources and attention to those with the most merit. Yet there are limits to how different any set of ideas can be that comes from within the same corporation. So firms must think creatively about the use of external resources in this pursuit. Intel funds hundreds of university grants to understand emerging technologies that lie outside its roadmap. Its corporate venturing activities give it a window on hot spots of capital flowing to new commercial areas. In combination, these investments comprise an early warning system, geared at spotting disruptive trends at the earliest stages. By triangulating the information coming from different parts of its "network," Intel can detect signals above the noise.

Diversity works for solutions, too. The success of concepts such as open innovation, collaborative development, and innovation competitions has become a testament to its power. Consider some examples: The SpaceX prize provoked multiple teams to design rockets that can take people into space at a fraction of the prior cost. Small cash rewards prompt scientists around the globe to solve problems for leading pharmaceuticals firms through a Web broker called InnoCentive. Thousands of contributors have helped develop an operating system to compete with Microsoft and an online encyclopedia to rival Britannica. In all these cases, the efforts and ideas of any single organization or individual are small in comparison to the dramatic benefits that come from variety. While we don't yet fully understand how or why these systems work, the underlying engine is clear. Diversity can be a powerful force in helping to drive innovation.

Flexibility

Take a look in textbooks and you see that many innovation processes are founded upon an assumption that the uncertainty surrounding a product's design can be resolved early in development. The emphasis is on planning over learning, execution over adaptation. Do enough homework and you will "get it right the first time." While this approach works well for improvements to existing products, it rarely succeeds for innovations that lie further from a firm's past experiences. New technologies rarely perform as expected. New markets never develop as predicted. Understanding customer needs has little meaning in those undiscovered marketplaces where there are, as yet, no customers.

In some industries, this uncertainty never leaves. Who would have thought that a video game that combines carjacking, gambling, prostitution, and violence could be a winner? Or that we would love playing plastic guitars to our favorite rock tunes? In such settings, plans are, at best, informed guesses. And the confidence intervals that surround them reveal more about the human desire for certainty than they do about the likely outcomes. Processes that rely upon detailed plans and disciplined execution are great for building bridges, power plants, or interstate highways. But when facing the unknown, they merely become shackles around our grand ambitions. Sometimes we must accept that new possibilities cannot be predicted. Instead, they must be discovered.

So how do we achieve this? We must design processes to embrace change, not resist it. Processes that recognize innovation involve exploring a design space filled with unknowns, in which a specification, rather than being the destination, represents only our initial hypotheses about where value can be found. This allows a firm to sense and respond to evolving market dynamics, even as a project progresses. Achieving this flexibility requires a much more iterative style of development, founded upon early and frequent prototypes. The aim is to surface unknowns, generate feedback on performance, and lay the foundation for future functionality, whether planned or emergent in nature.

Consider Netscape's approach to developing its Internet Web browser, Navigator. The firm released a beta version of the product to customers just six weeks into a seven-month project. Thereafter, it paced development by a series of new releases every few weeks. In addition to feedback on how well the design performed, it generated scores of new ideas for features that could not have been predicted up front in development. After all, at this time, few customers knew what a Web browser should do. After each cycle, the firm synthesized the information it had gathered and used it to reassess the priorities for subsequent development activities. Netscape didn't set out with a concrete plan for what to build. It designed a process to discover what its product should be.

A Final Thought

Diversity and flexibility. These sound like things that all organizations value. So why don't we seek them out? Because the actions that make us good at what we do today all too often reduce our ability to explore the most innovative possibilities for tomorrow. You see, ladies and gentlemen, we are part of the problem. But we are also part of the solution. Don't wait for others to act. Take the first step. Learn to love uncertainty!

Back to Table of Contents