Letting a wave pass-by: story of Warren Buffett’s non-investment in Intel and Microsoft

In the past few articles on “strategy as surfing a wave” (see part 1, 2, 3 and 4), we looked at how a big wave like Internet hits people like Gorssman and Patrick. And how they surfed the wave. Well, do you really need to surf every wave coming? Can you choose not to surf a wave? How do wise men let a wave pass by? Let’s explore these questions using the story of Warren Buffett who chose to be a by-stander to both the PC and the Internet waves.

Let’s rewind to 1967 and zoom into the campus of Grinnell College which sat like a tiny radical island in the middle of the farming hamlet of Grinnell, Iowa. Its liberal-minded students tended to go into social services after graduation, and the school was focusing its funding on increasing its African-American enrollment. One of Grinnell trustees, Joe Rosenfield had become a friend of Warren and Susie Buffett. In October 1967 Warren attended a fund raising convocation and was moved by an electrifying speech by Dr. Martin Luther King, Jr. For the first time in his life, Warren felt in Susie’s words, “Perhaps there is more to life than sitting in a room making money”. After King’s speech, Rosenfield easily recruited Buffett to become a Grinnell trustee. Naturally, he went straight into the finance committee. And guess who the chairman of the committee was? An ex-Grinnell student Bob Noyce who at that time ran a company called Fairchild Semiconductors.

In 1968 Buffett showed up for a meeting at Grinnell College to find his fellow trustee Bob Noyce itching to leave Fairchild and start a new company. Joe Rosenfield and the college endowment fund each said they would put in $100,000, joining dozens who were helping to raise $2.5 million for the new company – which was soon to be named Intel, for Integrated Electronics. Out of regard for Rosenfield, Buffett signed off on a technology investment for Grinnell. As far as he was concerned, “We were betting on the jockey, not the horse”. It goes without saying that Buffett did not put any money from Buffett Partnership into Intel. Now, let’s fast forward 23 years to 4^th July 1991 onto Bainbridge Island, a half-hour ferry ride from Seattle, where his friend Kay Graham dragged him to attend a party on a long holiday weekend.

And guess who were there at the party? Mr and Mrs Gates along with their son Bill Gates. It was the first time Buffett met Bill Gates. Buffett immediately asked Gates whether IBM was going to do well in the future and whether it was a competitor of Microsoft. Computer companies seemed to come and go, why? Gates started explaining. Buffett remembers, “We talked and talked and talked and talked and paid no attention to anybody else. He’s a great teacher and we couldn’t stop talking”. Gates told Buffett to buy two stocks: Intel and Microsoft. Buffett did not buy either – at least seriously. Why?

To get a glimpse of the answer, we need to understand two of the three pillars of Buffett’s business philosophy. The first one is “margin of safety”. It means having sufficient confidence in protecting your investment over long enough period. And why wouldn’t Buffett have confidence in the competitive position of Microsoft or Intel? There comes the second pillar: “Circle of competence” i.e. sticking to an area that you understand better than most others. In his own words, “I don't know what the world will look like in 10 years, and I don't want to play in a game where the other guy has an advantage over me."

In case you are wondering what the third pillar of Buffett’s philosophy is – It is “exploiting Mr. Market vagaries” i.e. exploiting the irrational behaviour of market investors. You may also want to check out: Warren Buffett and disruptive innovation. (source for Buffett stories: The Snowball by Alice Shroeder).

Innovation Sandbox: a low-cost grass-root level example

In the previous article A look at Tata Nano through dynamic innovation sandbox lens, we saw how Tata Motors created an innovation sandbox based on an insight from Tata Group chairman Ratan Tata. At the end we asked 2 questions: (1) How do we build innovation sandboxes when you don’t have a Ratan Tata or a Steve Jobs at the top? (2) Does every innovation sandbox have to be as expensive as Tata Nano? Let’s explore these questions using an example from a technology offshore center in Bangalore.

Let’s first understand the context a little more. This technology offshore center located in Bangalore is part of a global financial services firm. It has 1000 engineers responsible primarily of the maintenance of mature technology / products. Their day-to-day work involves fixing bugs raised by customer and adding new features whose design has been worked out by experts at the headquarters. The engineers and managers aspire to own products end-to-end. However, there is a huge chasm between the aspirations and perceived capability by their parent organization. Here is what happened starting February 2008.

There was a change of guard at the top of the parent company and in his welcome speech the new president mentioned “international trading” as a possible new area the company might enter. Video of this speech was available on the corporate intranet. A manager at the India offshore center, let’s call him Ajit, watched this video and “international trading” caught his attention.

In the next few days, he gathered 7-8 engineers together, some with business background, some with back-end technology knowledge like Oracle / mainframes and some with front-end expertise like .Net / user interface. Each of them decided to study implications of supporting “international trading” from their point of view. The group met once in two weeks for the next three months mostly studying the relevant systems and running small experiments and sharing the results.

In June 2008 India center got a call from onsite saying that they are kick-starting a project on “international trading” and checking if they have any inputs. With three months of solid experimentation the boys had more insights than what the onsite could believe. Pretty soon two of the engineers joined the team onsite in the conceptualization phase. The product went live this month. It is no surprise that one of Ajit’s team ended up owning a sub-system end-to-end.

Ajit is a middle manager (not a VP) and the sandbox they created with “international trading”, a “back-end” and “front-end” technology as constraints wasn’t expensive. In fact, all the experimentation happened by stealing time from the regular hours and more often putting in extra time. Ajit certainly played a key role in both identifying an opportunity and exciting a bunch of engineers around the opportunity.

What if the “international trading” project never got started? Well, unless you have a Ratan Tata or Steve Jobs with you, systematic innovation is a portfolio game. You need to ask, “Do we have a few such innovation sandboxes active with potentially high upside?”

A look at Tata Nano through “Dynamic Innovation Sandbox” lens

Earlier this year we looked at a structure called “Dynamic Innovation Sandbox” which creates a platform for systematic innovation. In this article let’s look at Tata Nano innovation through the sandbox lens and see how the sandbox evolved over the years.

Innovation Sandbox has 3 key elements:

1. The walls: A set of constraints each corresponding to the wall of the sandbox.
2. The sand: A lab for rapid prototyping and systematic experimentation
3. The kids: A diverse set of passionate people doing the exploration

Let’s look at each element in the context of Tata Nano:

1. The walls: As Jai Bolar, senior manager (development) at Engineering Research Centre (ERC) and a member of the initial team says, “What was defined was cost: Rs. 1 lakh, without compromising on aesthetics, value to the customer or safety and environment requirements”. Soon the “transport” changed to “Rural car” and eventually to a “full-fledged car” as good as or better than Maruti-800. The safety requirements evolved into “Euro-II” compliance.

2. The sand: As Ratan Tata said in an interview, “I think more than anything else the vendors disbelieved that the project was real. They didn’t respond because they thought it was a hypothetical project.” And how did vendors begin to believe and participate? By seeing the rapidly evolving prototypes. As Ratan Tata says, “I should say that more of this car has been made under rapid prototyping by us than you would find in standard cars”. Girish Wagh, head of the Nano project since 2005 says, “Nearly everything went through continuous nips and tucks. The floor panel changed 10 times to meet noise, vibration and stiffness requirements. The dashboard and seat went through equal number of modifications.”

3. The kids: Nano team had a nice mix of people: some industrial designers like Nikhil Jadhav from INCAT, some gasoline geeks, styling experts from Institute of Development in Automotive Engineering, Italy. Wagh credits the team with both passion and resilience, two qualities helped the team cut the mental fatigue of redoing something over and over gain. What made a big difference was Ratan Tata’s personal involvement and checking the prototypes minutely.

Now, let’s ask a question: What kind of investment was it to create such a sandbox? Overall the project cost Tata Motors close to $400 million over 6 years. Let’s assume a pessimistic scenario and say that the total cost was double the original estimate and the project was delayed by 2 years. This means Tata Motors thought it would spend $200 million over say 4 years. Considering annual revenue of $2 billion in FY2003 Nano project meant significant investment. It was also perhaps the last chance for Ratan Tata to hit a sixer before his retirement. And that helped. Not every company has a Ratan Tata or a Steve Jobs who have deep insights and willing to put such bets. How are they to create innovation sandboxes? Let’s address this question soon.

(source: Tata Nano compiled end edited by Pradeep Thakur, 2009).

Tata Nano: How the story evolved over years

In the previous article, we looked at how “story” forms an important element of an evolving business model. Adapting the story as we understand market and technology better is an important aspect of business model exploration. Let’s see how “Tata Nano” story evolved over the past 6 years. We will see the remarkable difference between “Rural car” to “Global car” story and how the “open distribution” model took a back-seat after Singur trouble and perhaps the downturn. (source: Tata Nano compiled by Pradeep Thakur).

Four wheel scooter version (2003): Ratan Tata says – The two wheeler image (with the family of four) got me thinking that we needed to create a safer form of transport. My first doodle was to rebuild cars around the scooter, so that those using them could be safer if it fell. Could there be a four-wheel vehicle made of scooter parts? Nikhil Jadhav, an industrial designer part of the initial four member team recalls, “It began as an advanced engineering project. The idea was to create a low cost transportation with four wheels. It was not even defined as a car”.

Rural car version (2004): A door-less car with a bar as a safety measure, having soft doors in vinyl with plastic windows, a cloth roof, two big doors (stead of four). Conclusion after seeing the concept designs: The market does not want a half-car, it wants a car.

Global car version (Jan 2008): Who might be the buyer of this small car? Ratan Tata articulates three personas (1) If I were to look in the US or Europe, in some garages you would have a Bentley or two Bentleys or a high-end Mercedes, and you may find a Smart also in that same garage because that person thinks it’s a fun extra car to have. He doesn’t need it but he may have it. (2) Then you may have a person who needs utilitarian form of transport. He is not looking for a lot of creature comfort; he wants to get around in a sensible way. (3) Then on the other side, you have someone who aspires for a car which is beyond his reach. He has a two wheeler or a three wheeler and this fills his needs.

Open distribution with toolkit (Jan 2008): In Rata Tata’s words – My aim was that I would produce a certain volume of cars and then I would create a very low-cost, low break-even plant that a young entrepreneur could buy and that a bunch of young entrepreneurs could establish an assembly operation. Then Tata Motors would train their people who would oversee quality assurance and they would become a satellite assembly operation for us. We would produce all the mass items and ship it to them as kits so it’s similar to an SKD or CKD operation. The assembler would also be the dealers for the car and thus we would eliminate one level.

Distribution – latest version (Jul 2009): Ravi Kant says in his interview (ET 10 Jul 2009) – I am afraid we have not made much progress on that (open distribution) front because we got caught in creating a factory in West Bengal. Then we had to move it lock, stock and barrel across the country and I think that took a lot of energy. We are already beginning to look at it, but it’s taken a backseat at the moment.

Strategy as surfing a wave #4: What do successful surfers do?

We saw in previous articles how Internet wave hit Grossman at IBM and how he teamed up with Patrick to surf the wave. Skeptics asked the question, “How will we make money from this?” Unfortunately, neither Grossman nor Patrick had any numbers to back up in the beginning. What do successful surfers do in such situations? Let’s see how Stephen Denning helps us understand the surfing through “storytelling” goggle. (source: The leader’s guide to storytelling by Stephen Denning)

According to Steve, successful surfers like Grossman, Patrick and Gerstner are good at 4 things: They have (1) the ability to perceive a new story of business opportunity (2) the courage to believe passionately in that future story and act on it (3) the flexibility to adapt the story in the light of market realities and above all (4) the ability to persuade others to believe in the story. Let’s see each of these in brief below.

1. Perceive a new story: When Grossman showed Internet demo to 3 people, only one of them, Patrick got excited. Patrick recalls - Two people can see the same thing, but have a very different understanding of the implications. A lot of people did say, “What’s the big deal about the Web?” but I could see that people would do their banking here and get access to all kinds of information. I had been using online systems like CompuServ for a long time. So for people who weren’t already using online systems, it was harder for them to see. (source: Gary Hamel case study)

2. Believe in the story: Patrick didn’t stop at perceiving the story. He hired Grossman and together with Singer they started building a primitive corporate intranet. Patrick wrote a nine page manifesto extolling the Web titled “Get Connected”. It included things like: Replace paper communications with e-mail, Make top executives available to customers and investors online, Use the home-page for e-commerce. It’s only when you believe in a story passionately does it translate into actions of these sort.

3. Adapt the story: Much of the technology that Grossman and his crew first prototyped would later make its way into industrial-strength products. For example, The Web server software developed for 1996 Olympics evolved into a product called Websphere and much of what they learned formed the basis for a Web-hosting business today supports tens of thousands of websites.

4. Persuade others: Both Patrick and Grossman continuously looked for opportunities to spread the movement within IBM. Patrick would present the story in senior management forums and trade shows while Grossman would work with engineers spread across multiple businesses. Within months more than 300 enthusiasts had joined virtual Get Connected team.

We looked at Joan Magretta’s 2-critical tests to check if your business model is sound. (1) Narrative test: Check if the story makes sense and (2) Numbers test: Do some basic math and see if the numbers add up. Grossman-Patrick story tells us that when big waves hit, numbers are not available. Successful surfers learn to master the narrative test.

Strategy as surfing a wave #3: Grossman-Patrick story and “dog that didn’t bark” analysis

We saw earlier how Internet wave hit David Grossman of IBM. We stopped at a point where Grossman drove down to his headquarters with his workstation to demo Internet at Armonk. Let’s see what happened next and do a Shorlock Holmes style “Dog that didn’t bark” analysis. i.e. we will ask a question “What didn’t happen in this story?” Perhaps that will give us clues as to what happens when we surf a wave especially a big one like Internet.

· 3 people were present for Grossman’s Internet demo – his boss Irving Wladawsky-Berger head of Supercomputer division, Hohnstamm - head of marketing and David Patrick part of corporate strategy who was scouting for his next big project after a successful run as head of marketing at ThinkPad business. Within minutes Grossman had Patrick’s full attention. Patrick recalls, “When I saw the Web for the first time, all the bells and whistles went off. Its ability to include colorful, interesting graphics and to link audio and video content blew my mind”.

· Patrick and Grossman teamed up. Patrick acted as a sponsor and broker for resources and Grossman championed Net in IBM’s far-flung development community. Grossman says, “The hardest part for people on the street like me was how to get senior-level attention within IBM.” Patrick became his mentor and his go-between.

· Patrick-Grossman teamed up with David Singer, a researcher at Alameda, California who had written one of the first Gopher programs (a text-only browser). Grossman-Singer started building a primitive corporate intranet.

· Patrick wrote a “Get connected” manifesto outlining six ways IBM could leverage the Web and circulated the paper informally by email. It found ready audience among IBM’s Internet aficionados.

· Patrick and “Get connected” renegades cobbled together a mock up of an IBM home page. Patrick got CEO Lou Gerstner’s appointment through his technology advisor. When Gerstner first saw the mock-up his first question was, “Where is the buy button?”

· Patrick grabbed the chance at a senior management meeting of IBM’s top 300 officers on May 11, 1994 (note only 3-4 months have passed since Grossman’s epiphany at Ithaca). Patrick presented some of the Web sites that were already up like HP, Sun, and a page for Grossman’s six year old Andrew. Patrick ended the demo by saying, “Oh, by the way, IBM is going to have a home page too, and this is what it will look like”. It included a 36 second video clip of Gerstner saying, “My name is Lou Gerstner. Welcome to IBM”.

· Patrick continued to campaign the Web at various events like Internet World trade convention. He says, “Somebody would invite me to talk about the ThinkPad and I would talk about the Internet instead”.

· In 1996 IBM set up a small Internet group with Patrick as the chief technical officer. During 1996 during Kasparov and Deep Blue match IBM site crashed. People started asking the question – If IBM is having difficulty running a web-site for the chess match, what were the Olympics going to be like? Internet buzz started growing within IBM.

We know where the story is heading. So let’s take a pause here and ask the question, “What didn’t happen in this story?” Here are a few things I can think of:

· Two out of three people in the room didn’t get excited by Grossman’s demo.

· Neither Patrick nor Gerstner asked for a business plan or numbers when they first saw the Web demo.

· Patrick’s boss Jim Canavino didn’t set up a separate immediately, instead he said, “You know, we could set up some sort of department and give you a title, but I think that we be a bad idea. Try to keep this grassroots thing going as long as possible”.

· Not everybody jumped on the Internet bandwagon immediately. It took a few years and shocks like chess game web-site crash for the movement to gain momentum.

Source for this story is Gary Hamel’s case study. Please stay tuned for more on what we can learn from big-wave surfing.

Strategy as surfing a wave #2: More MORs (Moments of Recognition)

In the previous article, we saw how Internet wave hit IBM’s David Grossman. Let’s look at a couple of more examples how waves hit surfers.

PC-wave hits Bill Gates: This is how Bill Gates remembers PC-wave hitting him when he was 16 years old and his friend Paul Allen 18:

"As early as 1971, Paul and I had talked about the microprocessor. And it was really his insight that because of semi-conductor improvements, things would just keep getting better. I said to him, "Oh, an exponential phenomenon is pretty rare, pretty dramatic. Are you serious about this? Because this means, in effect, we can think of computing as free." It is a gross exaggeration, but it is probably the easiest way to understand what it means to cut cost like that. And Paul was quite convinced of that. So I would sort of say to Paul, "Well, you know what that means?" And he'd say, "Yeah, that is what it means." It is kind of fun to know this, and think, gosh, how are companies going to react, how are they going to respond to something that phenomenal? The early days were very slow moving, though. By the time I went to Harvard, all there was the 8008 chip. And the 8080 was just coming out, which was the first good general purpose microprocessor chip that Intel was coming out with.

Internet wave hits Jeff Bezos of Amazon:

Taken from this interview:

"I started working at the intersection of computers and finance, and stayed on Wall Street for a long time, ultimately worked for a company that did this thing called quantitative hedge fund trading. What we did was we programmed the computers and then the computers made stock trades, and that was very interesting too.

The wake up call was finding this startling statistics that web usage in the spring of 1994 was growing at 2,300 percent a year. You know, things just don't grow that fast. It's highly unusual, and that started me about thinking, "What kind of business plan might make sense in the context of that growth?" (Recall that the Grossman incident also occurred around the same time in February 1994).

Strategy as surfing a wave: David Grossman’s moment of recognition at IBM

In a dialogue between UCLA’s Richard Rumelt and McKinsey’s Lowell Bryan, Bryan says – In this (uncertain) environment if you say “I see the future. I’m visionary, I’m going to make the future happen” then it’s a hallucination, not vision. To which Rumelt adds – Good strategy is more like surfing a wave than having this clear vision of the future. I like this metaphor of “surfing a wave” (I had also liked his "predatory leap" metaphor). However, before we see what “surfing” means, let’s step back and ask - how does “moment of recognition” of a wave look like? Let’s zoom into Cornell University’s campus at Ithaca, New York in February 1994 and see what David Grossman is up to. (Full story here).

David Grossman was a mid-level IBMer stationed at Cornell’s Theory Center using a supercomputer connected to early version of Internet. Grossman was one of the first people in the world to download Mosaic browser and experience the graphical world wide web. The Winter Olympics had just started at Lillehammer, Norway and IBM was its official technology sponsor, responsible for collecting and displaying all the results. Watching the games at home, Grossman saw the IBM logo on the bottom of his TV screen. But when he sat in front of his UNIX workstation and surfed the web, he got a totally different picture. A rogue Olympics web site, run by Sun Microsystems, was taking IBM’s raw feed and presenting it under the Sun banner. Grossman says, “If I didn’t know any better, I would have thought that the data was being provided by Sun. And IBM didn’t have a clue as to what was happening on the open Internet.” When he talked to a marketing executive part of Olympics campaign, Grossman got a feeling that one of them was living on the other planet. Grossman felt – Sun was about to eat Big Blue’s lunch. Grossman subsequently took a workstation with him and drove down to IBM headquarters four hours away at Armonk, New York to personally show the Internet to senior executives.

This story shows how sensing a wave happens. But not everybody present senses the wave – at least not with the same intensity. Around the same time Internet wave hit Grossman, I was only 125 miles away from Ithaca perhaps sitting in front of a Sun workstation in Computer Science Department at SUNY Buffalo. As a graduate student I used Mosaic to surf the web and find technical papers. However, I don’t recall any moment when I felt, “Man, this web will change the world”.

By combining Pasteur's first law of innovation with surfing metaphor, we can say: Waves favor prepared mind. Stay tuned for more surfing.

Alignment and innovation: Friends or foes?

Management thinker Gary Hamel says in “Leading the revolution” – alignment is the enemy of business model innovation. Innovation guru A G Lafley says in Game-changer – At P&G, the innovation process is integrated with all the other business strategy, operations and management processes. Is there a contradiction here? One seems to be saying - innovation and alignment are enemies and the other seems to be saying exactly the opposite. Who is right? Let’s explore this question below.

First, let’s understand where Hamel is coming from. At the heart of Hamel’s argument are two assumptions: (1) Strategy is not a monopoly of the top management and good ideas can come from anywhere (e.g. see Google’s AdSense story). In a perfectly aligned world, everybody may be marching to the top management orders and there is no room for dissent which is disastrous. (2) If business is perfectly aligned with customers, then you may be blind to non-customers. And many radical ideas have come from outside the industry. e.g. Jeff Bezos and retailing. Hence, Hamel argues, organizations should be creating “space” for corporate rebels who experiment with ideas wildly different from existing business. Then the question arises – can creation of such a “space” be part of a process – called innovation process? There comes in A G Lafley.

AG has turned these assumptions on their head and created a process out of it. AG’s innovation process dances to a different kind of tune. For example, a global structure called Connect + Develop sources ideas not only from various parts of the organization but also from other sources such as suppliers, customers, technology entrepreneurs and 1.5 million R&D professionals outside of P&G. There is a separate fund for radical ideas and a separate structure (Future Works) for working on cross-business ideas and joint ventures (see structures enabling innovation at P&G). AG mandated that for every two innovations that reach market one should have a partner outside P&G. This process respects failure and a different incentive scheme is used to measure performance (see More open innovation insights from P&G). To address the second assumption, P&G emphasizes “immersive research” which tries to get insights from unarticulated anxieties and aspirations of consumers (customers and non-customers). So, what’s the result? Well, over the last decade P&G has produced 10 new brands, 5 new business models (reflect.com, Prestige Fine Fragrances, Bella and Birch, Mr. Clear Car Wash and Juvian laundry services) and 1 disruptive innovation (ultra-thin low-cost Pampers diaper released in China) (source: Game-changer).

So, at the end – are innovation and alignment friends or foes? Well, that depends whether your innovation process encourages non-alignment. And by the way, both AG and Hamel are right.

Amoeba metaphor and structures enabling innovation: P&G story

It is believed that “freedom in creativity” can have good one night stands with “structures and systems” but not a sustainable marriage. Is this really true? When innovation-guru A G Lafley was asked about structures enabling innovation, he said – I believe in the amoeba as the best model for organization and what I love about amoeba is that they continuously change their shape to eat and survive. Well, AG didn’t exactly succeed in creating amoeba structure at P&G. But I think he came pretty close and more importantly the structures did help P&G become more innovative. Let’s take a look at the structures enabling innovation at P&G in brief.

There are broadly four kinds of structures: (1) those that fund innovation (2) those that manage idea funnel (3) those that catalyze idea funnel (4) those that open the funnel and connect it to the outside world (open innovation). Let’s see examples of each kind below:

1. Structures funding innovation: Like most large organizations, P&G has a corporate venture fund called Corporate Innovation Fund (CIF). CIF specializes in high-risk/high-reward ideas. It is led by CTO and supported by the CEO and CFO. It’s primary objective is to provide the “seed money” to either create totally new businesses and/or create major disruptive innovations. CIF budget is separate from Business Unit budget. But CIF funds projects lead by innovation teams that reside in different organizations throughout P&G. Swiffer and Crest Whitestrips are examples of products that came from CIF funding.

2. Structures managing idea funnel: P&G has two structures that manage idea funnels: one outside of business units and the other within each BU. FutureWorks consists of multidisciplinary team, led by a general manager. Its primary objective is to seek out innovation opportunities that create new consumption eventually resulting in new sales and profits. They are primarily funded by CIF. Although FutureWorks reside outside BU, its innovation efforts are not off in “never-never land”. A BU “sponsor” is identified early on for each FutureWorks project to provide pragmatic business input up front and, more importantly, take responsibility for the commercialization phase in case the project qualifies for it.

New Business Development (NBD) resides within each BU. It focuses on creating disruptive and incremental innovation for a specific category, like laundry, home, or skin care. Innovation led by NBD are usually based entirely on ideas, products and technologies that are developed inside the business, for example, Downy Single Rinse fabric enhancer.

3. Structures catalyzing idea funnel: Hot zones get the innovation structure closer to amoeba. Their purpose is to identify, develop ideas and test ideas especially through the eyes of the consumer. P&G has created innovation centers around the world – in Kobe, China, Geneva, Singapore and Cincinnati – that are designed to represent real-world home and shopping environments. “Clay Street” is a combination of think tank and playground. There are desks and whiteboards, computers and conference areas. And there are also crayons, toys and chalkboard walls and storytelling is common. Cross-functional teams spend 3 to 6 weeks solving a critical business problem or addressing a deep consumer insight and creating a breakthrough product or packaging.

4. Structures that open-up the idea funnel: Connect + Develop works with a global innovation network that contributes to idea funnel in all stages. It creates a permeable wall between P&G and outside world. It nurtures partnerships with customers, suppliers, technology entrepreneurs and even competitors and leverages them to create and capture new value. More about this in: Open innovation insights from P&G Connect + Develop.

More open innovation insights from P&G Connect + Develop

What was the biggest challenge P&G faced when they started the open innovation initiative? And how did they overcome it? Let’s explore answers to these two questions in this article.

In his interview Chris Thoen, Director Innovation and Knowledge Management at P&G says: the biggest challenge was changing the culture: shifting the mindset from “only invented in P&G” to “proudly found elsewhere”.

What were some of the anxieties in P&Gers mind?

A G Lafley explains in Game-Changer – Initially, many people at P&G thought this was the fad du jour. Some were defensive about what C&D could mean to their positions. Some were fearful – was this outsourcing in disguise? Some were worried – does my technical expertise still matter?

How did P&G overcome the mindset challenge?

1. Setting concrete goal: As AG says in Game-changer, “I knew the only way we would dramatically step up our approach to innovation was to establish a measurable target.” The goal was to partner 50 percent of innovations with outsiders. Why 50 percent? AG says – It seemed like an ambitious but possible goal; it was specific and easy to remember (At that time the figure was around 15 percent).

2. Training: P&G introduced new training programs in order to build ambidextrous leaders – those who operate and innovate. For example, a program helps people focus on running an open architecture operation where you need to be truly open-minded in order to be connect and develop. In another program people learn how to build innovation strategy where you create a program that stretches over five, six, seven years. There are innovation specific assignments such as Future Works (funds new game-changing ideas) and corporate innovation fund.

“Clay Street” an idea borrowed from Toy industry creates 6 to 12 week experience where participants work on the fragile front-end (ideation) and any business can send a team in. At “Beckett Ridge” innovation center participants work on the commercialization side (fuzzy back-end).

3. Incentivization: In 2001, two thousand current & former P&Gers were interviewed to isolate leadership behaviours that result in success. In 2003, a new performance evaluation was introduced to all employees. Innovation project teams were evaluated on depth of customer understanding in each step of innovation development, qualification process to improve odds of commercial success, collaboration with a diverse team etc. Success stories were identified and marketed. Those who were passionate and on-board were spotted and made heroes for the rest of the business.

4. Respect for failure: AG says in Game-changer – companies that really want to show their commitment to innovation, and fearlessness when it comes to failure, can promote someone whose project failed – and make the promotion totally transparent. The only reason to punish someone because an innovation project failed is carelessness or laziness. P&G’s feminine care introduced Presidents Fail Forward Award to the “team or individual that enabled the organization to significantly learn from a failure”. In Game-changer there is a page (109) containing “A G Lafley’s 11 biggest innovation failures”. You can see the table here.

If you find this article useful, you may like these related articles:

Open innovation insights from P&G Connect + Develop

Saying, “We need a culture of innovation” is mostly correct and useless

Does God still innovate?

Considering various products he has created so far, nobody would doubt whether God did innovate. However, it has been 200 thousand years since he launched his last innovative product on earth (human being). And it is debatable whether that product is a successful one. Question is: does he still innovate? or has he hit innovator’s block?

God might say the next version is in the making and it is going to be much better. But who cares about incremental changes? How much difference a pair of eyes on back is going to make? And how many of us are going to be happy watching our back and butt? Some might say his strategy of launching complementary products: a man and a woman simultaneously was a major flop. Would he then drop the old strategy and launch only a single product next time? Perhaps he is tired of incremental changes. I feel if God still has guts he would be thinking radical.

But, wait a minutes…Doesn’t conventional wisdom say “Prototyping is a shorthand for innovation”? This means if God is serious about innovation, he must be prototyping. Did you read anything shocking recently? I read about someone climbing the tallest building in the world in Kaulalampur. Would that be one of his prototypes? Why would he waste his time creating spidermans? Humans have already visualized them. They aren’t that shocking.

What if he decides not to change outer appearance at all? Then it is going to be more difficult to find out if the person sitting next to me is a prototype of the next generation human. What about the so-called enlightened souls like Jesus, Mohammad, Buddha etc? Would they be his prototypes? And if they were, then he has a long way to go before his real launch. Look at how much confusion & fighting that got added because of them. But then in an innovator’s laboratory, failed prototypes count as much as successful ones. Perhaps cost of innovation is getting out of hand for God. Has he considered off-shoring? It is time we show CMM certificates to him.

What is systematic innovation?

When we hear about “Systematic innovation”, it is mostly like blind men touching different parts of an elephant and mistaking it to be the complete elephant. Some say it is primarily about managing research or R&D, some say it is about using technique like TRIZ, some say it is about managing change systematically, others say it is about taking new products to market systematically. Well, what kind of a beast is this “systematic innovation”? Let me attempt to present my view using an example of Tata Motors.

Let’s look at Tata Motors situation from three perspectives:

• Year 2009 would be a year of contrasts in the history of Tata Motors. On one hand, it is proud to roll-out its already-iconic product Nano to the masses. On the other hand, it has suffered a massive quarterly loss of Rs.2,505 Crores in quarter ending June, primarily due to its expensive acquisition of Jaguar and Land Rover (JLR). Swaminathan Aiyar in his swaminomics blog says, Tata Motors is already in a survival mode.

• Seeing a family of four riding a scooter and deciding to create a 4-wheeler which is affordable to the family is a story that will be told and re-told in India for generations to come. The manner in which Tata Motors went about transforming Ratan Tata’s insight into developing Nano is a matter of pride for the nation. It involved rapid prototyping, it involved out of the box thinking, it involved massive collaboration and much more.

• When Tata Motors engineers met its partners and talked to them about the small car project and the critical role they will be playing, nobody believed them. There were two reasons: (1) They thought it to be a crazy idea, good for prototyping but not for real business. (2) They knew that engineers at Tata Motors hold car design close to their chest. With 75% of the design of cars like Indica and Ace done internally, partners thought Tata Motors engineers will never relinquish the control. As it turned out, Nano has less than 20% design done internally in Tata Motors. This was a huge transformation in mindset.

I view “systematic innovation” as a three-legged stool.

First leg rests on the theory of business which obeys laws of capitalism and creative destruction. At the end of the day it is the return of capital employed that matters and how you protect your competitive advantage or what Buffett calls business moat. And cost of capital like JLR acquisition makes a huge difference to the game you are playing.

Second leg rests on the process of idea management. It operates at the intersection of creativity and discipline. And it involves research not just in technology but also in marketing like immersive research and it involves business model exploration (see CEO model).

Third leg rests on the theory of human psychology especially social psychology and the laws of gravity associated with it. We humans don’t like change and we suffer from what Edgar Schein calls “learning anxiety”. In fact, unlearning is more difficult to us than learning. Letting go is even harder, like Tata Motors engineers letting go of their design control.

For building an innovation engine that is sustainable, you need to look at all the three legs and their relationships. When addressed in isolation, it can take you to a place worse than where you already are.

Related articles:

1. Organizational innovation eco-system

2. How innovative are you? A simple innovation dashboard

What can innovation movement in India learn from Quality movement?

Dr. Mashelkar writes about how the “innovation buzz” is getting stronger everywhere and getting voiced in places like President of India’s address in Parliament (7^th June), Obama’s Cairo address (7^th June), creation of I-20, the first Global Innovation Leaders’ Summit (fashioned on G-20) held at San Francisco (3^rd Jun to 5^th Jun). Mashelkar represented India at this I-20. In his article, he has written about on how innovation can become 21^st century India’s mantra. At this point, it certainly looks like a dream. I can see three possible ways in which innovation movement in India can pan out over the next decade:

1. Innovation movement not only creates more global brands from India (like Tata, Reliance, Infosys), but takes the innovation capacity of India to the next level. (Most optimistic scenario)

2. Innovation movement goes up and down its hype cycle and ends up initially increasing innovation capacity for India but also creates a number of dysfunctional processes and systems, eventually becoming a gaali (bad word).

3. Innovation movement never takes off and goes into oblivion like a passing fad (most pessimistic scenario)

If I sense the buzz correctly, I feel it is very unlikely that innovation will be a passing fad. Innovation becoming a gaali is a distinct possibility. Question is: Can we learn from a past movement which eventually became a gaali? And this brings me to the quality movement which dominated Indian industry over the past decade, starting with ISO and then bringing all sorts of new acronyms like TQM, CMM, CMMI, PCMM until people got sick of it all.

I believe all movements start with good intent. Where did the quality movement take the wrong turn? Let’s look at what one of the fathers of the movement, Dr. Edward Deming felt when he was at the fag end of his life (age 90). He writes in his letter to Peter Senge (given in Fifth Discipline):

Our prevailing system of management has destroyed our people. People are born with intrinsic motivation, self-respect, dignity, curiosity to learn, joy in learning.

What Dr. Deming is saying that as we became obsessed with creating quality processes we lost touch with human nature, we forgot our anxieties and aspirations. We mistook means as the goal. As a person who can now relate to anthropology more than technology, I can see that changing management psyche is not easy. But are there things that can be learnt from the quality movement? Here are a few things I can think of:

1. Simplicity: Systems should be simple to use and maintain. CMM and its variants are far too bulky and one is easily lost in creating checkboxes.

2. Flexibility: Systems should separate “weighing scales” and “fitness programs”. Weighing scales should be easy to use and fitness programs should offer lots of options. CMM is far too normative in its implementation.

3. Accountability: It should need very little or almost no support staff. The army of so called “Quality engineers” actually gave a feeling to the manager as though quality is someone else’s responsibility.

Any thoughts?

Assessing capacity of innovation engine using CEO model

I wrote last week about the innovation engine here. Innovation engine is best understood by contrasting it with the delivery engine whose job is to fulfill current customer demand – efficiently and productivity. In contrast, innovation engine (1) anticipates and creates new demand and; (2) establishes business viability to fulfill it. Every organization has an innovation engine in some form or the other. Even your corner grocery store has one and hopefully someone there is thinking about how to protect its margins from the onslaught of organized retail stores and big malls. One important question is: Can you assess the capacity of your innovation engine? Is it more like 100cc or more like 300cc? Let’s explore this using the CEO model.

I wrote about the CEO model of innovation last year. Since then I along with my customers have been tinkering with it and making it more usable and robust. For example, I found that the metaphor of a 3 cylinder engine is more suitable than the factory metaphor used earlier. The picture above shows how it looks currently.

Here are a few observations about the engine:

• Each cylinder has a capacity
• All cylinders fire simultaneously
• “Experimentation” is at the heart
• “Communication” link is critical

Combination of Opportunity identification and part of experimentation (O + half-E) is typically known as “fragile front-end” of innovation engine. The remaining part: half-E + Commercialization is what I call: “fuzzy back-end”. Capacity of opportunity identification cylinder is measured in terms of number of insights gathered from market. Capacity of experimentation cylinder is measured in number of prototypes created. Capacity of commercialization cylinder is measured in number of products/ideas in market testing phase.

Now, one can start asking interesting questions like: Where does customer fit in this picture? And you say, wouldn’t he be the “petrol” without which the engine has no meaning? Then you ask – What would correspond to the gears that help engine go faster? And now the story starts becoming more interesting. This is what makes the engine metaphor a generative metaphor.

Generative metaphors: Disney’s “cast members” vs Subway’s “sandwich artists”

Metaphors and analogies are useful in communicating abstract ideas. For example, when Arun Shourie calls BJP “kati patang” (adrift kite) we get the point immediately. Some metaphors are so useful they don’t merely shed light on a concept; they actually become platforms for novel thinking. Dan and Chip Heath call these powerful metaphors “Generative Metaphors” in their bestseller “Made to Stick”. Let’s see how they explain this concept using two examples: one from Disney and the other from Subway.

Disney calls its employees cast members. This metaphor of employees as cast members in a theatrical production is communicated consistently throughout the organization:

· Cast members don’t interview for a job, they audition for a role

· When they are walking around the park, they are onstage.

· People visiting Disney are guests, not customers

· Jobs are performances, uniforms are costumes

Beauty of generative metaphors is that they help you predict things associated with the concept. For example, one can guess that employees are not allowed to be on break while in costume and in public area (An actor would never have a chat and a cigarette in mid-scene). Street sweepers are evaluated on criteria other than cleanliness of their sidewalks. That’s because they are highly visible onstage and obvious target for customer questions. “Employees as a cast member” is a generative metaphor that has worked for Disney for more than fifty years.

Let’s contrast this with a non-generative metaphor, “sandwich artists” which Subway created for its frontline employees. As Chip brothers explain, this metaphor is “utterly useless” as a guide to how employees should act. Defining trait of an “artist” is individual expression. And anyone who has been in Subway knows how much individual expression frontline employees have – in dress, in interaction, in the presentation of sandwiches.