Sunday, December 21, 2008

4 types of risks every innovator should be aware of

If innovation is so ‘cool’ then why aren’t all the businesses pouring money into it? There is a valid reason for it. Innovation is inherently risky. For example, look at following facts from BusinessWeek (Sept 11, 2008) on scenario in the US:

Since 2000, the nation's public and private sectors have poured almost $5 trillion into research and development and higher education, the key contributors to innovation. Nevertheless, employment in most technologically advanced industries has stagnated or even fallen. The number of domestic jobs in the computer and electronics sector continues to plunge while pharmaceutical and biotech companies lay off as many workers as they hire. And even the industry category that includes Google —Internet publishing and Web search portals—has added only 15,000 jobs since 2003.

Let’s listen to what the wise men say: the best way to conquer fear is to understand it deeply. Similarly, as a first step towards managing innovation risks, let’s understand them well.

What are the types of risks involved in innovation process? Prof. Stephan Thomke of Harvard Business School says in his book “Managing product and service development” there are 4 types of risks involved in every innovation: (1) Need risk: What do customers really want? How do we know? How do they know? (2) Technical risk: This relates to solutions (e.g. materials or physical changes) that have not been combined or tried before. What happens if components are reduced in size? (3) Production risk: What happens when something works in lab or in prototypes but now must scale up to much larger quantities? Can that be done – at all? (4) Commercialization risk: Is the price point right? Is it better than competition? Are we getting the message across? Are we reaching the real customers?

These risks are depicted with iPod example below. It is a thought-experiment. Actual risks associated with iPod might have been completely different.

What kind of moat does your business have?

It is good to re-visit basics from time to time. One such fundamental concept I like to ponder upon is that of “economic moat” which Warren Buffett popularized. To characterize a good business Warren says:

In business, I look for economic castles protected by unbreachable ‘moats’.

Having visited a number of forts in the last couple of years, I am beginning to appreciate the concept of moat. Moats are interesting to me for two reasons: (1) I run a business myself and I definitely would like my business to have a moat and grow it wider over time; and (2) As a consultant, I assist my customers strengthen their moat. It helps to understand what kind of moat a business can have and where I can make a difference.

Morningstar gives a good introduction to economic moats. I also liked the interview of Pat Dorsey, Director, Equity Research at Morningstar on economic moats. They classify moats into 4 categories:

1. Intangible assets: These are assets an organization has that are hard to replicate. The most widely recognized intangible asset is company’s brand. A typical test used to test strength of a brand is its ability to ride inflation. Ask yourself the question: Will I continue to buy the product or service if the price goes up? Think of your favorite doctor or your favorite cigarette brand. Another type of intangible asset is Intellectual Property Rights (IPR). Many pharma companies differentiate based on IPRs. Another intangible asset is regulatory protection.

2. Cost advantage: Whole of offshoring in India is based on this type of moat. However, one needs to see where the cost advantage comes from. As Pat says, a process based cost advantage is relatively easily replicated. Southwest Airlines and Dell were icons of low-cost business model innovation once upon a time. Competition has since caught up and they are re-inventing themselves. A cost advantage due to economies of scale is more enduring. Think Wal-Mart.

3. High switching costs: It is ok for a techie to use Windows and Linux interchangeably. However, I know what a nightmare it would be to convince my parents to switch from Windows to Linux. For most people it won’t be worth the effort. There lies Microsoft’s moat. Apparently bank accounts are sticky in a similar way. Although a savings account does not differ much from bank to bank, people don’t like to switch.

4. Network effect: You create a network effect when a whole industry gets built around your product. eBay is a classic example where its attractiveness improves as it gains more buyers and sellers. Lego has created similar effect by producing modular bricks which can be used interchangeably. A visa card or American Express has the same effect.

I am visiting a marine fort Sindhudurg (100km north of Goa) this week. Perhaps I will see moat from a newer perspective.

Saturday, December 20, 2008

Technology captives in India and crossing the cost-value chasm

It was nice to participate at the International conference on Doing Business in India held at IFIM Bangalore on 18-19 Dec. I presented a paper on the study I and my research partner Dr. Pradeep Desai did over last 8 months on how technology captives are Moving Up The Value Chain (MUTVC). We met business leaders (MD, VP, Business head, Innovation leaders) at four technology captives of sizes varying from 800 engineers to 6000 engineers. We addressed following 3 questions:

1. What are the challenges technology captives facing in MUTVC journey?
2. What approaches are they taking?
3. What do they view as the critical success factors in these initiatives?

We discovered a chasm what we call "cost-value chasm" in the MUTVC journey. The presentation below gives our findings. You can see the paper here.

Thursday, December 18, 2008

Immersive research: P&G’s approach of getting deep customer insights

Getting deep consumer insights: How do you get deep customer insights? P&G asked this question when it realized in 2001 that in spite of having one of the finest market research organizations, it does not have enough consumer insights. Since then it has turned the market research organization into a consumer-understanding powerhouse and consumer-insight generator. Between 2002 and 2007 it has invested more than a billion dollars in what it calls “immersive research” involving more than 4 million consumers a year. What is “immersive research”? Let’s look at it briefly in this article. (source: Game-changer by A. G. Lafley and Ram charan)

Immersive research: In 2002, P&G launched 2 programs: Living It and Working It. Living It enables employees to live with consumers for several days in their homes, eat meals with the family, and go along on the shopping trips. Employees experience firsthand these consumers’ demands for their time and their money, the way they interact with their social networks, what’s most important to them, which products they buy and how they use the products, and how the brand and products fit into their lives. Working It provides employees with the opportunity to work behind the counter of a small shop. This gives them insights about why shoppers buy or do not buy a product in a store. They also gain appreciation of how the innovations they bring to market make life easier or difficult for the person stocking the shelf. Let’s look at the story of Downy Single Rinse as to how Living It helped P&G.

Downy Single Rinse story: By spending time with lower-income Mexican households P&G gained following insights:
  • Lower-income Mexican women take laundry very, very seriously. They cannot afford to buy many new clothes very often, but they take great pride in ensuring that their family is turned out well. Sending your children to school in clean, ironed, bright clothing is a visible sign of being a good mother. Mexican women spend more time on laundry than on the rest of the housework combined.
  • More than 90 percent use some kind of softener, even women who do some or all of their laundry by hand.
  • Softening process is really demanding; it required a lot of energy and time. A typical load of laundry went through following six-step process: wash, rinse, rinse, add softener, rinse, rinse. No problem if all this is just a matter of pressing a button every once in a while. But it’s no joke if you have to walk half a mile or more to get water.
DSR, a product to match the insight: With this insight, P&G came up with Downy Single Rinse which reduced the six-step process to three: wash, add softener, rinse. Cutting down on the number of rinses saves enormous time, effort and water. DSR was launched with endorsement of the Mexican water and environment agency. There were lots of in-store demonstrations so women could see it work. DSR was a hit from the start.

Saturday, December 6, 2008

Story of “Plan B”

I have a friend whose favorite past-time is to talk about “Plan B”s. We used to work together and every time we went for a walk after lunch, he would talk about what he would do if he were not doing the current job. Sometimes it was about “writing a book”, other times it was about “designing new tools”. Recently he actually changed his job. And guess what he is doing in the new job? Pretty much the same thing he was doing in the old job.

I am not a great believer in “Plan B”s. May be because I am not very good at creating them. The last time I went for a job interview was more than 10 years ago when I was returning back from the US. I stuck with one company I joined till the time I felt that I am completely satisfied with “employee” phase of life and the phase is now over. The feeling was similar to feeling in 10th standard that school was a fun place but we need to move on to the next phase. At that time (2 years ago) I started my new career as an independent consultant.

During the initial days of consulting career people used to ask me what I am going to consult on. I am sure whatever I used to say wasn’t convincing. Because immediately the next remark would be: You can always go back to a job if this doesn’t work out. Isn’t it? Frankly, that is not how I looked at the situation. You don’t say that if you don’t like a college, you will go back to school, do you? The idea is to enjoy college while being there.

Perhaps you have a much better experience with Plan Bs. In that case it will be good to exchange our notes some day.

Friday, December 5, 2008

Want to increase capacity of your innovation factory? Check your C-E-O

Innovation factory: Conventional wisdom says that “Innovation” and “factory” don’t go together. Factory is meant to be for producing pre-specified goods and picture of a factory with new ideas getting converted into cash appears more like a surrealistic painting. But conventional wisdom also says that don’t trust conventional wisdom all the time. Especially when an innovation guru and CEO of Proctor and Gamble A. G. Lafley (called AG) says, “We started from the premise that it is possible to run an innovation program much the same way we run a factory” in his book Game-changer co-authored with Ram Charan. Can we create a simple and yet useful model of the innovation factory? A model that can tell us where we should build more capacity? Let’s give it a shot.

3 stages of innovation factory: Let’s assume we are looking at for-profit organization. This model has 3 stages: (1) Opportunity identification (2) systematic Experimentation and (3) Commercialization. Combining the initials of our three underlined keywords O, E and C leads us to our tagline: C-E-O in the reverse order. Ideally the title should have said: Do the opposite of CEO. Let’s look at each of stages briefly.

Stage-1: Opportunity identification: This stage is the eyes and ears of your factory. This stage has 3 distinct characteristics. 1. Its output is insights and not ideas (see Innovation trigger: idea vs insight). As AG mentions, insights come from deep understanding of your customer’s and non-customer’s anxieties and aspirations. Sometimes these needs are articulated; many times they are unstated 2. Throughput of this stage may not increase by investing in market research. P&G having one of the finest market research departments wasn’t creating enough insights. 3. Throughput of this stage may not increase just by conducting more brainstorming sessions. This is especially true if the group is homogeneous like people from only one department like engineering or marketing or research. An insight may look something like this: Lower-income Mexican women like to use softner; they have high standards for performance; and doing the laundry is arduous, time consuming and requires plenty of water for multiple cleaning and rinsing steps (from Game-changer).

Stage-2: Systematic Experimentation: If opportunity identification stage is your eyes and ears, this stage is your hands and tools. Output of this stage is learnings which results from answers of 2 types of questions: 1. What works under what context and why? 2. What does not work under what context and why? For example, the red balls correspond to “failures” and green balls correspond to “successes” in experiments, both contributing significantly towards the throughput of the factory. For every green ball, there is an associated prototype which gives glimpse of benefit the idea offers. Every quarter or half-year you should ask, “How many prototypes did we create? What are the learnings from the failed experiments?” You can read more about this in Stefan Thomke’s Managing product and service development.

Stage-3: Commercialization: This stage is similar to your traditional production, marketing selling stages with following exceptions. If it is a completely new product, you may have to develop new production factory (e.g. Nano), find new channels, create new sales force etc. More often than not your output will be new features, processes or brand proposition which may need tweaking of one or two existing processes.

Map this to your innovation factory and you should be able to find out your weakest link. Are you ready to check your CEO?