The best way to predict the future is to create it.1
—Peter F. Drucker
Nobody was better at defining and helping companies capture opportunities than Peter Drucker. When I think back on our conversations, one phrase that sticks in my head because Peter said it so often is, “Tomorrow is an opportunity.” Peter’s first view of the United States was in 1937, and he was forever influenced by a country striving to create tomorrow. Drucker believed that the most important measure of a company is its ability to anticipate and invest in tomorrow’s opportunities. This view is why innovation was so central to Peter’s thinking. It was fundamental to everything he wrote. To Peter, the conventional view of innovation, focused solely on product development or brand extension, missed the point. To truly innovate, Peter believed you had to radically change customers’ expectations.
Tomorrow is an opportunity.
For Peter it was simple: If you don’t understand innovation, you don’t understand business. Starbucks exemplifies what Peter considered to be true innovation. Beginning with a single store in 1971, Starbucks grew to over 12,000 locations in 37 countries in 2006. While visiting Starbucks, I spoke to Dorothy Kim, a Starbucks executive vice president, who told me that Starbucks didn’t set out merely to make a better cup of coffee. That was the old way of looking at the coffee retail business. Instead, the executives had a much bigger idea: to make Starbucks a destination between your home and office—a place where people can find a respite.
Starbucks didn’t just offer a better cup of coffee than the average restaurant; it delivered an instant community—a shared experience. The company made it easy to relax with a comfortable, “stay as long as you like” setting that now includes wireless Internet access. Starbucks became the extended living room, the familiar meeting place in a strange city, the funky (but not too funky) way station to escape from the corporate cubicle, the place to stop between classes to surf the Net. It did much more than simply crush, boil, and filter a sack of coffee beans; it changed our expectations.
If you don’t understand innovation,
you don’t understand business.
Much of Starbucks’s innovation has to do with marketing, not product. This isn’t just about coffee served one cup at a time. Starbucks came up with an insider mystique by inventing a new language for size—tall, grande, and venti, instead of small, medium, and large—along with endless variations on what’s essentially the humdrum old theme of coffee and milk. Think about it: tall, grande, and venti have become part of your vocabulary, especially if you earn more than $50,000 and you’re under age 60. Starbucks makes you feel like a savvier consumer by telling you the flavor difference between Ethiopian and Guatemalan coffees. And the third time you visit the shop, the barista generally knows your preference.
Apple is another company with a high innovation IQ that changed our expectations with the introduction of the iPod. Before the iPod, people didn’t sit around thinking, “I wish I had a little jukebox with 1,500 songs that I selected, and I could carry it in my pocket.” Apple introduced the iPod in 2001, and within four years more than half the people in the United States owned or used iPods. Apple changed people’s expectations and their definition of value. It was no longer fine to have a Sony Walkman with 20 songs on a CD. Anything less than an iPod was unacceptable. Today, Apple appears to be taking this to video with ambitions of linking everyone wirelessly.
Innovation is about shaking loose from
yesterday’s world so that we gain the freedom
to create tomorrow.
Peter Drucker liked to talk about what was and what was not an innovation. On one of my business trips, I overheard two airline travelers debate the merits of the new Apple PowerBook with an Intel chip. They decided it was not an innovation. Customers are sure that every new model will have more computing power and capabilities; simply meeting their expectations is not true innovation. When I replayed the conversation and posed the question to Peter, he seemed to agree with the travelers, but added there may still be an innovation lurking that does change our expectations, but it is not there yet. Peter believed that innovation is about shaking loose from yesterday’s world so that we gain the freedom to create tomorrow.
Peter wrote about innovation for decades—long before anyone heard of iPods and Starbucks, or even the Internet; it fascinated him. By the Vietnam War years he was predicting that technology would change everything about the way we do business. He liked to discuss the delicate balance between innovation and change on the one hand, and preservation of the status quo on the other. He first described this fundamental tension between the new and the old 70 years ago, shortly before World War II. During one of our last conversations in 2005, he told me that finding this balance was still critical to business survival. “You can’t throw everything out, or you’ll have anarchy,” he said. “You can’t hold onto everything, or you’ll die.”
“You can’t throw everything out,
or you’ll have anarchy.”
“You can’t hold on to everything, or you’ll die.”
Peter understood the difficulty of innovating for the future while hanging on to the past from personal experience. In 1935, he left London to make his first trip to the United States. He’d decided then and there to leave Europe. “America,” he wrote, “was starkly different from Europe. In America, people were looking to tomorrow. In Europe they were trying to re-create yesterday. That is why we moved to America.”2
Half a century later he wrote one of his best books, Innovation and Entrepreneurship. In it Peter focused on innovation as a discipline rather than a serendipitous flash of brilliance. The book, written in 1985, is remarkably practical. It is based on the executive courses on innovation he taught at New York University, where he had one of the best business laboratories around—evening students working at all sorts of jobs in New York. After trying his ideas out on his students, he tested them with his clients. More than 20 years later, the book is still astoundingly relevant. In fact, when I listened in on the 2005 Fortune conference on innovation, more than half the speakers alluded to Drucker’s ideas. All of them were leaders of highly innovative organizations, from the Toyota Hybrid Car Division to Cisco Systems.
This chapter explores Peter’s four basic questions about innovation:
1. What do you have to abandon to create room for innovtion?
2. Do you systematically seek opportunities?
3. Do you use a disciplined process for converting ideas into practical solutions?
4. Does your innovation strategy work well with your business strategy?
Included as well is the best proof I’ve seen that Peter’s approach to innovation actually works in the real world, a case story about GE. GE is successful because it embraced innovation as Peter defines it, while its competitor, Siemens, struggled. As you think about these questions, you will likely come up with some interesting answers. Then you’ll be faced with an even harder task: acting on your answers.
WHAT DO YOU HAVE TO ABANDON TO
CREATE ROOM FOR INNOVATION?
1. If you weren’t in this business today, would you invest the resources to enter it?
2. What unconscious assumptions might constrain your business practices and limit your innovative thinking?
3. Are your highest-achieving people assigned to innovative opportunities? Or are they merely working on yesterday’s problems and yesterday’s products?
In many organizations, innovation is stymied by excessive loyalty to the old products and to the old ways of doing things. Drucker put it this way: Most companies hang on to the business they have and are hugely reluctant to loosen their grip. This prevents them from innovating and determining their own destiny.
Kodak built a legendary film business, but it finally had to abandon this mainstay in order to invest talent and resources in the digital imaging business. Xerox is another innovative company that had to embrace abandonment. Xerox chairman and CEO Anne Mulcahy said, “I don’t think any company gets to restore or preserve what made them great in the first place. I have no illusions we’re going to be the Xerox we once were. We’re in a very competitive marketplace. We’re not a monopoly. We have to fight to be best in class.” Mulcahy adds, “I believe by not hanging onto the past, we have a much better chance to redefine a future of excellence.”3
In my conversation with Jack Welch, he said that by far the most important lesson he learned from Drucker was to ask the above question. It led him to issue an edict early in his tenure as CEO: Each of GE’s businesses had to be number one or number two in its market, or the manager would have to sell it or close it. Welch said that Drucker’s questions raised the bar for every business unit in GE and freed up resources, thereby greatly strengthening the whole company.
GE is one of the best-known examples of Drucker’s principle of abandonment in action. Another is Kimberly-Clark, the giant paper company. For 100 years, Kimberly-Clark was mainly a coated-paper manufacturer with mills in the United States and overseas. In 1972, Darwin Smith took over as CEO. Despite the company’s large historical investment in paper mills, he believed that making paper was a mediocre business, and he decided to sell most of Kimberly-Clark’s mills and put its muscle behind two brands, Kleenex and Huggies. Both product lines had shown promise but lacked corporate support. Darwin Smith took an enormous risk by abandoning everything Kimberly-Clark had done successfully until then. He planned to market what were essentially afterthoughts, going head to head against the globally recognized leaders Procter & Gamble and Scott Paper, strong American rivals.
Without the will to take risks,
to venture into the unknown
and let go of the familiar past,
a corporation cannot thrive in the
twenty-first century.
One board member described Smith’s decision as “the gutsiest move I’ve ever seen a CEO make.” Critics inside and outside of Kimberly-Clark were less diplomatic, calling the idea stupid and Smith a fool. Wall Street analysts downgraded the stock.4 Forbes magazine lambasted the move. Thirty-three years later, Kimberly-Clark’s revenues had jumped from less than $1 billion to over $15 billion, and Forbes recanted its criticism. By 2006, Kimberly-Clark owned Scott Paper, its former rival, and was outselling Procter & Gamble in six of its eight categories.
Darwin Smith exemplifies the courage it takes to innovate. Without the will to take risks, to venture into the unknown and let go of the familiar past, a corporation cannot thrive in the twenty-first century.
Yet courage isn’t enough when it comes to breaking from the past. Companies that want to innovate must adopt what Drucker called systematic abandonment, the deliberate process of letting go of familiar products in favor of the new or as yet unknown. Peter went further than almost anyone: “Even when a product is being launched, its target abandonment date should be set.”5 As part of routine operations, you need to constantly evaluate which of your existing businesses should be jettisoned, and revisit these decisions annually, quarterly, or even monthly. Peter went so far as to advocate regular abandonment meetings. Of course, unprofitable businesses are clear candidates for abandonment, but so are businesses reaching the end of their useful lives whose growth has slowed or stopped. The same goes for those where it is becoming more difficult to compete—often because the rules of the game have changed unfavorably.6
Drucker put it this way: “Putting all programs and activities regularly on trial for their lives and getting rid of those that cannot prove their productivity works wonders in stimulating creativity in even the most hidebound bureaucracy.”7
Managers can’t stop at abandoning just a business unit or product line. They need to leave behind their assumptions as well; they need to challenge all beliefs and make room for new ideas. Hansjorg Wyss, chairman and CEO of Synthes, recently shared a story about challenging his company’s assumptions. Synthes is the world’s leading provider of implants and biomaterials for rebuilding joints and bones. The company had always assumed that having the highest-quality products was the only thing that mattered, so executives were surprised to discover that competitors’ products were being used when Synthes products were not immediately available. Looking into the distribution problem, they learned that hospital ordering systems made it difficult to have enough Synthes implants on hand.
“We didn’t sit still,” Hansjorg told me as we sat in a conference room at MIT. “We stepped back and reevaluated how we were serving hospitals.” The company developed an inventory management service for hospitals so that Synthes products would always be available. These changes required innovating how business was done, rethinking customer relationships, and seeing hospital managers as well as doctors as customers to be served. The company now also provides a counseling service for doctors to discuss which of its product fits best.
Systematic abandonment is both the
most important and most difficult step
in innovation.
Challenging assumptions often leads to changes in the basic operations and economics of a business. As a pioneer in grocery home delivery, Peapod assumed that the economics of its business would require large volume (which it did not have). Marc van Gelder, Peapod’s president, told me about his eureka moment: Rather than build the company around the ability to move a lot of product, Peapod challenged this assumption and partnered with Stop & Shop, using its warehouses and size as the foundation for Peapod’s operations. By partnering with an established megastore, Peapod didn’t need to spend a fortune on infrastructure, and it could turn a profit on more modest volume.
This all sounds logical enough, but it is tough to break free from the relentless hold of past and present. Sometimes the constraints are so subtle that they are hard to recognize. In many ways, systematic abandonment is both the most important and most difficult step in innovation. It requires real discipline to regularly challenge the organization’s assumptions and encourage the outrageous. But as Peter said, “If you don’t abandon, you can’t innovate. The effective organizations learn systematically to abandon or at least to build systematic abandonment into their ordinary life cycle. Extra weight is a burden on the heart and the brain. And volume by itself is no great benefit.”8
“There’s an old medical proverb,” Drucker once explained. “There’s [probably] nothing more expensive, nothing more difficult, than to keep a corpse from stinking!”9 Most corporations waste time, energy, and precious resources on keeping their corpses—their old products—from stinking. Because these old products are still generating large revenues, most executives don’t even recognize that they have stinking corpses. And so the bosses assign smart people to tackle serious problems in old businesses. This is a misallocation of precious, creative resources.
In an interconnected world, trying to generate high-impact innovation, despite the high failure rate, is actually much less risky than sticking with the old standby. The innovative organization uses incentives, employment guarantees, performance measures, and active engagement by leadership to help people embrace change rather than fear it.
DO YOU SYSTEMATICALLY SEEK OPPORTUNITIES?
1. Do you continually look for opportunities as if your survival depended upon it?
2. Are you looking at the seven key sources of opportunities?
a. The unexpected
b. Industry and market disparities
c. Process vulnerabilities
d. Incongruities
e. Demographic shifts
f. Changes in perceptions
g. New knowledge
Peter Drucker viewed innovation as a discipline, a skill that can be learned and practiced like playing the piano. To innovate, you must devise a systematic method of identifying opportunities that provide new value for your customers. Many people think that the discovery of new ideas is random and unpredictable. Far from it; such discoveries come from scouring the landscape and translating sightings into “what we don’t know that might matter.”
The organization needs to be continually on the offensive. It must watch for potential new frontiers instead of just playing defense against intruding competitors. P&G’s Lafley put it this way: “We have to open our minds, open our doors, open our ears, and open our hearts to good ideas that can come from anywhere.”10 Playing offense requires well-placed external feelers, a careful and unbiased ear to the ground, and a disciplined process that links opportunities and capabilities within your organization.
A desire to innovate must come from the firm’s top leadership and permeate every muscle and sinew of the organization. At Google every engineer is charged with investing 30 percent of his or her time on new products and ideas (split between related businesses and totally new initiatives). Sergey Brin, one of Google’s co-founders, described the management practices as a 70/20/10 rule: “We spend 70 percent on core search and ads, 20 percent on adjacent businesses, and then at least 10 percent of our time on things that are truly new.”11 Of course, the portion of time a company devotes to innovation will vary by industry and the stage of business development it’s in.
The organization needs to be
continually on the offensive.
Peter advocated that innovation be explicit and supported by management. Google has an e-mail list devoted to new ideas, which is open to anyone in the company as well as to select third parties who want to post or comment on a proposal. Marissa Mayer, vice president, search products and user experience and Google’s champion of innovation, devotes regular office hours three times a week exclusively to brainstorming. She wants to ensure that new ideas rise to the surface when deciding which projects are ready for the review of Google’s founders.
To gauge the orientation of your company to innovate, ask 100 people what fraction of their time they spend on innovation. Often, companies say innovation is important, but they don’t show it’s important. It gets pushed back and rarely receives the time executives think it does. “What is our company doing to innovate?” must be one of the top questions senior executives ask everybody in the organization, including the board of directors. And those who drive innovation must be rewarded.
Peter believed that academics should be immersed in the real world, and he practiced what he preached by testing ideas about where to find opportunities with the entrepreneurs and executives in his classes. Peter taught the first U.S. business course on innovation at New York University in 1956. In that class, he mapped out the seven key sources of opportunity shown in Figure 3-1. Peter explained to me that when demand and supply do not fit as you expect them to, there is an opportunity. He added that new opportunities rarely mesh with the way an industry has traditionally approached existing business and that they require new thinking.
Figure 3.1 Where to Look for Opportunities
From that one extraordinary class, students started or transformed three businesses. Scott Lawn Care morphed from an outdated player to the leading lawn supply company in North America; Psychology Today became a leading middle-market publication; and many of the ideas behind investment bank Donaldson, Lufkin & Jenrette were largely driven by the kind of thinking Peter inspired. Fifty years later, Peter Drucker’s innovation road map still guides entrepreneurs.
Frequent unexpected occurrences signal that business expectations are out of sync with reality. Recognizing and understanding the reason for this mismatch is a powerful tool for innovation. These occurrences include unforeseen successes and failures within the organization, and unexpected activities at suppliers, competitors, customers, and complementors (partners whose products complement yours and thereby create a combined product or customer experience).
At my father-in-law’s 80th birthday party, I learned a little more about how Sandy Weill, the former chairman and chief executive of Citigroup, had managed to move his firm, Smith-Barney, into the institutional equity market so rapidly. He did this in 1989, prior to the acquisitions of Salomon Brothers and Citicorp.
“The entrepreneur always searches
for change, responds to it,
and exploits it as an opportunity.”
Weill always expected what others didn’t. He viewed Drexel Burnham Lambert’s unexpected bankruptcy in 1989 as an opportunity for him to pick up whole departments and capabilities of very qualified people with solid relationships in an area he wanted to pursue. Within 12 hours of the bankruptcy announcement, he had written notes by hand and had them placed on the doorsteps of key Drexel employees, including my father-in-law. Weill had described his approach in a very Druckerian mode: “The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.”12
On a recent visit to the Druckerian Club outside of Tokyo, I heard another story of a CEO who jumped on a surprise opportunity. In 2003 one of Japan’s construction companies was concerned that demand in its core business, building bridges and tunnels, was declining. The CEO made the rounds, asking employees, “What do customers want that we do not supply, or that surprised you?” The key answer came not from a vice president, but from a receptionist who said she got two to five calls a week asking whether the company built parks and gardens. Several others in the organization confirmed that story. Today 20 percent of the company’s work is on major gardens.
Rather than being constrained by history and expectations, the Tokyo firm identified the unpredictable—the unmet need. The company ultimately implemented a system for tracking every inquiry for services it did not provide, so that it could identify patterns and customer needs that represented new opportunities and then redirect resources to promising areas.13
The second set of circumstances in which a mismatch between supply and demand becomes an opportunity is when a company has stayed constant while its industry structure or market has changed. While information has certainly enabled a global economy, geography and market differences continue to be real.
For instance, the increased availability of information can undermine the conventions of an industry. The Internet turned the travel industry on its head. Leisure travel and then business travel became self-managed by highly price-sensitive customers. Travel agents, who had relied on steady margins, had to appeal to luxury markets or find other specialties—or go out of business. At the same time, these shifts created opportunities for new online services such as Orbitz.com and Priceline.com. And they flourished.
India, for example, on the surface appears to be a terrible market for prosthetics. Most Indian consumers cannot afford $12,000 for an artificial limb, and health care is much more heavily regulated in India than it is in the United States. But Jaipur Foot made a radically cheaper prosthetic that was perfectly suited to the Indian market. The prosthetic can be used without shoes and is flexible enough to be worn in a cross-legged sitting position on the floor. It is priced at only $25.14
Incongruities in market behavior and expectations also signal opportunity. A customer value incongruity is a discrepancy between what the customer wants and what the company thinks the customer wants. JetBlue is a good example of a company that exploited such an incongruity. The airline industry had long focused on getting customers to their destinations. But JetBlue focused on upgrading and redesigning the experience of flying, from selling fresh food and providing wireless Internet service in waiting areas to fitting each passenger seat with television screens that feature many channels. JetBlue also made flying more family-friendly by offering snacks and TV programs that kids love. JetBlue exploited a discrepancy between what the customer wanted—a better flying experience—and what most airlines thought the customer wanted—a no-nonsense trip to a destination.
The company’s management built a profitable $1.3 billion airline in five years by providing customers with what they really value: easy-to-understand low fares, convenient flights, friendly service, easy online booking and check-in, and the highest on-time performance of any airline. In the meantime, in 2004, five airlines, representing a quarter of U.S. capacity, were operating under bankruptcy protection.15 The other airlines clearly had legacy costs that limited their competitive agility. But as Drucker maintained, when a high-volume industry is not profitable, opportunity lurks.
A process vulnerability refers to some piece of the workflow or operation that is missing, difficult, or not working, ultimately preventing users from embracing the product. The critical innovation that morphed Scott Lawn Care into a successful company was the spreader to distribute seed on the lawn. Without it, grass seed was too difficult to plant, so there was a process vulnerability. TiVo built its success on a process vulnerability it perceived at the consumer level, namely, the limiting and sometimes frustrating process of taping a television program.
In our new world, smart small companies have profited mightily by finding new ways to deal in information and reduce vulnerabilities. It’s possible to imagine many opportunities for creating value by connecting specific types of information with people who can benefit from that knowledge. In the real estate market, for example, buyers historically committed large sums of money on the basis of imperfect data. Today, 80 percent of buyers visit the Internet before they see their first house. Multiple services have taken off. Realtor.com is the number one site that advertises real estate. Its advertising revenue today is four times greater than that of any single U.S. newspaper. Luxuryhomes.com and Zillow.com each play new and unique roles in this information-imperfect marketplace as well.
Broad shifts in demographics, such as a rapid growth in the population over 65 and their attendant income, asset base, and longevity, create shifts in demand and mismatches with historical supplies of services.
Ikea has mined demographic changes to transform the global home furnishings retail market. The company recognized that young families with newborns no longer wanted to furnish their first homes with hand-me-downs from the older generation. To cater to this large but lower-income market, Ikea offered a self-service store filled with well-designed, assemble-it-yourself furniture at extremely affordable low prices. It then took this idea around the world, where many people, not just the young, had the same need for affordable yet attractive furniture. By 2005, Ikea had become a global cult brand with sales of $18 billion, driven by the mission to “create a better everyday life for the majority of people.”
Emory Ayers, retired chairman of Intercontinental Bakeries and one of the students in Peter’s early class on innovation, recalled, “Peter emphasized that changes in perception don’t change the facts, they just change customers’ interpretation of the facts—and that creates opportunities.” Demand and supply no longer square. For example, is Wal-Mart a hero or a villain, and how does that public perception create opportunities? It is hard to compete with a hero, but there are opportunities to partner with one. Many companies have grown with Wal-Mart, from Bell Helmet to Ol’ Roy dog food.
There are opportunities to create a unique market position when the competitor is a villain. The articles contrasting the employee benefits at Target with the benefits at Wal-Mart have prompted both job defections and customer loyalty.
Perception is represented by both vulnerability and customer receptivity. Online banking and bill payment, a very useful service that eliminates almost all the hassle of paying bills, floundered until customers became more receptive to the idea of paying their bills online. Founded in 1981, CheckFree Corp. has built a business providing more than 1,700 financial institutions across the globe with software that enables millions of consumers to have the convenience of securely paying their bills online. The company struggled for 20 years. Founder Pete Knight estimates that in early 2000 there was a tipping point when people were no longer afraid of online transactions. Perception had changed; because the service had become established and secure, reputable businesses were using it, and enough nontech people were talking about it. By June 2005, more than 40 million U.S. households paid at least one bill online,16 and the availability of online banking and bill payment now ranks among the top three considerations when selecting a bank for personal accounts.
The most obvious source of innovative ideas is scientific breakthroughs. These innovations tend to have long lead times and are often both high risk and high impact. A good example of scientific innovation is Procter & Gamble’s Crest, which defined the toothpaste market. People had been using various substances for several thousand years to clean their teeth (with some early formulas calling for everything from urine to dragon’s blood17). In 1955, after years of intense research, P&G achieved a scientific breakthrough18 and introduced the first fluoride toothpaste, clinically proven effective in preventing cavities. Crest was the first toothpaste to receive an endorsement from the American Dental Association, which effectively changed buyers’ attitudes and created the market for therapeutic toothpaste. P&G brought Crest to the schools, where kids were taught to brush their teeth with the new toothpaste, helping P&G wrest U.S. market leadership from Colgate and keep it for the next 30 years. In addition, providing fluoride in the water became a community responsibility and created new market opportunities.
In 1997, however, Colgate19 announced its own scientific, market-changing breakthrough. The FDA had approved the use of Triclosan (a soluble antibiotic) to combat gingivitis, and a groundbreaking oral hygiene pharmaceutical was born. Colgate’s breakthrough product was Total, a compound that kept Triclosan on the teeth for over five hours so that plaque could not build up. One Colgate executive confided in me that he had not been to the dentist for five years. He was certain that Total had made that possible. Capitalizing on the fears of aging baby boomers that they risked losing their teeth to gum disease, Colgate Total regained the U.S. market leader position from P&G.
Unilever quickly imitated these two first movers, but in a new geography. It created its own versions of anticavity and gum-health toothpaste, which it sold in India and other developing markets in tiny packages costing a few cents each.20 The toothpaste wars soon moved on to the next battlefield—whiteners. Current research efforts include leveraging marine biology to improve gum health and exploring, with pharmaceutical companies, alternative means for delivering medications.
The global toothpaste war is still in full force to determine who can best provide the whitest, tartar-free teeth and the healthiest, best-smelling gums in two distinct markets: to the aging population in developed countries and the poor in developing countries.
Collectively, the seven sources of opportunity—the unexpected, industry and market disparities, incongruities, process vulnerabilities, demographic changes, perception and priority changes, and new knowledge—account for the great majority of all innovation opportunities.
DO YOU USE A DISCIPLINED PROCESS FOR
CONVERTING IDEAS INTO PRACTICAL SOLUTIONS?
1. Do you brainstorm effectively? Do ideas and opportunities get put on the table for consideration?
2. Do you match up ideas with the opportunity?
3. Do you test and refine ideas by fine-tuning them based on the market response?
4. Do you deliver the results by allocating the right resources, creating customers one by one, and monitoring progress with external barometers?
Peter Drucker first wrote in the 1950s about the need for disciplined processes to convert opportunities into real values. His ideas are still remarkably timely. In 2006, the American Management Association conducted a survey of 2,000 companies and found that the biggest challenge is creating disciplined processes for innovation, from defining an opportunity or creating an idea to implementing it with the customer.
Once we have identified opportunities, it takes a real effort to capture them, put them in place, and actually deliver better value to customers. One way to do this is to conduct action-oriented brainstorming sessions that encourage employees to openly participate in developing new opportunities into viable products and services.
Listening is one of the hardest jobs,
and at a brainstorming session it is critical.
To be effective, these sessions need to bring together people from different areas of the business—people with different perspectives. The meetings also need to strike a balance. On one hand they must be open, with participants free to speak their minds and to propose ideas that may seem far afield of the topic being discussed. On the other hand, the sessions must focus on results and value. To achieve this balance, set ground rules that encourage constructive conversation which leads to action and that discourages never-ending debates about things that don’t matter. These rules may be as simple as requiring the group to report back with a plan after a defined period of time.
To focus the discussions, ask questions Peter would have asked, such as:
1. Customer by customer, where are there possible problems and solutions that can create value?
2. What would it take for us to seriously consider this idea?
This type of brainstorming was used at Nokia, where senior management involved hundreds of employees in answering three questions: What new needs can we serve? How can we use our competencies in different ways? How can we change the economics of this industry?
The real work of top management in brainstorming sessions is not to generate the new thinking but to consider all the ideas and try to find within them the themes that will give overall direction to the company’s innovation efforts. When I spoke to a senior executive at Nokia, he confided that his challenge at a brainstorming session was to keep telling himself to listen, to make sure he understood what was being said, and to keep his opinions to himself. Listening is one of the hardest jobs, and at a brainstorming session it is critical.
Will the idea respond effectively to the real-world opportunity? Finding the answer to this question falls somewhere between science and intuition. An idea is a possible mechanism for serving a customer need, such as a pink cell phone. Opportunities are unmet customer needs, such as the customer’s desire to be stylish. The challenge is to assess the scope of the need and the ability of the idea to meet that need. With the proper analysis—often utilizing targeted market research—you can predict in many cases which ideas will be successful.
“Aiming high is aiming for something
that will make the enterprise capable
of genuine innovation and self-renewal.”
Aim high! Minor modifications rarely address unmet needs. When I spoke to Peter about this, he leaned back in his chair and told me: “If an innovation does not aim at leadership from the beginning, it is unlikely to be innovative enough to change the customers’ habits.” He continued, “Aiming high is aiming for something that will make the enterprise capable of genuine innovation and self-renewal. That means inventing a new business and not just a product-line extension, reaching a new performance capacity and not just an incremental improvement, and delivering new, unimagined value, and not just satisfying existing expectations better.”
But how do we know what’s right? “Most good ideas will not generate enough wealth to replicate the business’s historical success, and many more will fail,” Peter explained. “Thus, the need to aim high is a practical reality; the one big success is needed to offset the nine failures.”
At the same time, Peter always stressed the need to be practical. When it came to innovation, he felt that the most practical approach was to use the absolutely best people. In many ways this is the art of innovation: remaining practical while having the courage to aim high.
In many ways this is the art of innovation:
remaining practical while having the
courage to aim high.
The criteria listed in the box on the next page help assess whether an idea matches an opportunity and whether you are aiming high enough while still taking market realities into account. The analysis must also address the risks of success, of near success, and of failure. For example, in 2004 the Riddell Company launched a new football helmet that was designed to reduce the incidence of concussions by 50 percent. High schools traditionally replace 20 percent of their helmets every year, and Riddell has about a 50 percent market share. The company expected its volume to double and wanted to be able to cope with up to a tenfold increase. Riddell identified outside manufacturers that could help it meet demand without investing in any new in-house capacity. It aimed high. In fact, volume tripled for two years running. Riddell sourced all the components of the helmet and used its reconditioning facilities to assemble the units. President and CEO Bill Sherman commented that it forced Riddell to enter the twenty-first century, working with a network of partners to manage the sudden surge in demand and control the quality of their product.
Figure 3.2 Criteria for Evaluating Practical Success of Innovative Ideas
To make sure that you are not getting overly excited about a new idea, you must corroborate, reality-check, and test your analysis. Drucker pushed consumer testing in almost every client meeting. One manager at Motorola recalled him exhorting a team, “Why don’t you test it in three distinct markets, for example, a suburb of Chicago, a more rural area in Missouri, and an area with an older population in, say, Arizona . . . From that you will learn more than testing it in a lab or with customers in interviews for the next five years. Go out and try it.”21
Testing is phenomenally powerful not only for determining an idea’s potential but also for finding out what’s needed to make it succeed. When I worked with Riddell, executives tested the helmet on five professional football teams and found ways to make it more comfortable. Testing also enabled the company to document the reduction in concussions before it offered the helmet to the full market.
When going live with an innovation, a company has to find a way to be aggressive but not foolhardy. Management needs to put the right resources on the project, separate the new effort from old activities, devise a living plan for creating customers one by one, and monitor progress with clear milestones and external goals. The living plan begins with management committing adequate resources. As Peter stated, “The best plan is only good intentions”—until it is effectively put into action with the right resources.22
“The best plan is only good intentions”—
until it is effectively put into action
with the right resources.
An innovative organization has the discipline to manage both its existing business and its innovation efforts, recognizing that the two enterprises need different sets of skills. The existing business has to meet established quantitative performance standards, according to Drucker. “Managing the future” requires the encouragement of ideas, no matter how unripe or crude. . . . It is management’s job to ask, “What would this idea have to be for it to be taken seriously?” He added, “A top management [team] that believes its job is to sit in judgment will inevitably veto the new idea. It is always ‘impractical.’”23
New innovation efforts need a different set of metrics. To put it simply, applying the conventional metrics of the ongoing business would spell death for innovation—the way a 100-pound pack would cripple a six-year-old on a hike, to use Drucker’s memorable phrase.24 Enlightened management appreciates the need for disciplined controls focused on opportunity, not profitability. This is where so many corporate innovation efforts derail—they can’t find a balance between nurturing new projects and applying responsible controls to them.
Enlightened management appreciates
the need for disciplined controls focused
on opportunity, not profitability.
I have seen many large firms acquire entrepreneurial ventures in what seem like brilliant moves. Soon, though, they became burdened with overhead and died. In many ways that’s what Lucent Technologies did to Bell Laboratories. As one former research director told me, “At Bell we were independent, with independent financial accountability. At Lucent, we bore the burden of the whole and had more than 100 percent increase in overhead, which killed most of what we were doing.”
However, even in an innovation project, accountability is essential. The success of the project must be continually measured and evaluated. One example is Allergan’s approach to evaluating its drug development efforts. The drug discovery process is lengthy and high risk: Only 15 percent of new drugs entering development are expected to reach the market, and development cost per drug is estimated at $800 million.25 Allergan uses an extensive decision tree to determine whether to continue, modify, or abandon a development project. After completing chemical, biological, and toxicological research, the company performs a cost-benefit analysis of bringing the potential drug to market. In the United States, before any clinical testing can start, the Food and Drug Administration (FDA) has to approve both the clinical trials and the new drug application, often calling for design changes in the clinical trials and causing Allergan to revisit its decision to continue versus abandon.
After the innovation is successfully commercialized and becomes an established business, it must essentially be put on trial along with the rest of the existing business. If it’s not good enough, if it doesn’t fit in as part of the future, it must be abandoned—bringing the innovation management process full circle, back to the initial step of making room for innovation through systematic abandonment of the old. Figure 3.3 is a flowchart of the first three questions that form Drucker’s map for disciplined and continuous innovative processes.
Figure 3.3 Drucker’s Continuous Process Map for Organized Management of Innovation
DOES YOUR INNOVATION STRATEGY WORK
WELL WITH YOUR BUSINESS STRATEGY?
1. What is your company’s target role or influence in defining the new markets? What is the scope of your offering to this market?
2. How does your portfolio of opportunities fit with your business strategy?
3. Are you allocating resources where you want to be making bets?
Suppose you have a number of opportunities to consider. What is your strategy? Do the opportunities fit together to define where you want to be and where you want to take the market—your tomorrow? An effective business strategy embraces external realities and opportunities and provides the context to help ensure that every decision, priority, and allocation of resources is geared to value creation. Innovation strategy is where the rubber meets the road, the program of change that will create the company of the future.
When Peter said, “The only way to predict the future is to create it,” he was highlighting innovation as a tool for giving the enterprise a degree of control over the future, by removing some amount of uncertainty. To gain this control, you need an innovation strategy that explicitly articulates each opportunity in terms of your company’s target role or influence in defining new markets and the target scope of your offerings for playing in the defined white space (see Figure 3.4).
Figure 3.4 What Is Your Target Role and What Is the Scope of Opportunities?
The company that populates the new market first with the most integrated solution becomes the first owner of the space. The success of this type of innovation strategy is temporary, because its high visibility is a magnet for imitators who may bring more advantageous economics to the product, service, or industry. Federal Express pioneered the express package delivery market in the mid-1970s and held on to its market advantage for about two years. The U.S. Postal Service, UPS, and DHL all followed soon after, offering comparable services at lower prices and forcing Federal Express to reinvent itself multiple times over to survive.
In contrast, the space definer creates something that sets boundaries, defines the new space in some fashion, or executes an idea. A dramatic example is Corning’s invention of the ribbon machine to make filaments for high-speed lightbulb production, which in turn enabled the production and marketing of low-cost electric lightbulbs around the world. This innovation gave Corning a clear advantage because anyone who wanted to sell low-cost effective light bulbs had to buy Corning’s ribbon machines. From the consumer’s perspective, Corning did not own the space; GE and Westinghouse did. But it was Corning that absolutely defined the space.
Other enterprises purposefully let their competitors define the overall space and then become providers to these leaders with products, components, or solutions. I call these companies niche players. Electronic Arts (EA) carved out a very profitable niche in video games (such as Sims and Madden NFL Football) for PCs and for all major console systems, such as Microsoft Xbox, Sony PlayStation, and Nintendo. The video gaming industry is changing at a furious pace, going online, mobile, and global while new console technology is making high-end game development complex and costly. Given that the shelf life of some games may be only three months, EA has to continually reinvent itself and its products to remain the worldwide leader in video games. The hardware manufacturers define the game space. They determine the features and hardware capabilities available to game players and designers. EA provides an essential element—the game. It leverages new hardware capabilities as they become available but does not define how we play electronic games. This too is shifting, as more and more games are played live on the Internet.
Finally, there are those last buggy whip manufacturers who use innovation to incrementally enhance the economics of their existing businesses. However, even the most conscientious of organizations cannot secure its future solely by improving what it already has. While the ongoing business needs to be optimized, the innovation strategy must take care not to allocate scarce resources to existing businesses that are on the decline. These need to be abandoned, not given more resources. A successful innovation strategy has to focus on what will come next, not on what already is.
A successful innovation strategy has to
focus on what will come next.
The strategies highlighted in Figure 3.4 are not necessarily mutually exclusive. Many companies play in multiple spaces simultaneously, but they use a different strategy for each space. Nor is any one strategy likely to be permanent in a given market space. As noted earlier, imitations by others dilute benefits to the original owner of the space. Other new realities such as a major innovation by a competitor, or social, economic, and demographic changes spur purposeful migration—or sometimes force changes in strategy. Naturally, all these strategies depend on strong linkages to external partners: customers, complementors, even competitors, and other outside resources that assist in delivering value.
The effective innovation strategy builds a portfolio that creates tomorrow. It needs to balance:
• Innovation and continuity.
• Core capabilities and new skills developed for tomorrow.
• Defining new landscapes and playing in existing ones.
• Concentration on core business activities and nuturing complementary ones.
A few years ago, I witnessed firsthand a flawed innovation strategy at Corning, when managers lost sight of core capabilities and failed to ask these questions, ushering in a brief period of trouble in the company’s otherwise strong history. Even more than most companies, Corning is in the business of innovation. From the mid-nineteenth century until the 1990s, Corning introduced a long series of inventions and processes that became the foundations of sweeping changes. For example, it developed a process for making colored and unbreakable railroad signal lenses that effectively enabled railroad crossings. In the 1950s, Corning figured out how to make extremely low-cost CRTs (cathode-ray tubes)—leading the way to low-cost television. In the 1970s, it invented the core of the catalytic converter, which is the basis for most automotive pollution control systems and is credited with the marked improvement in urban air quality. At the same time, Corning pioneered the development of optical fiber capable of effective transmission of digitized data; the company had the foresight to predict the vast market in bandwidth telecommunications.
Despite these successes, Corning never viewed its accomplishments as the results of a systematic or intentional innovation strategy. It simply believed R&D and technological inventions were important. In the late 1990s, as the telecommunications industry boomed, the optical fiber business boomed with it. Corning did not question the overly optimistic demand projections provided by its telecom customers; instead it revved up production, spending more than $9 billion on acquisitions in fiber and photonics. In 2001, when the telecom bust occurred, Corning was caught by surprise. Thousands of people lost their jobs, and Corning found itself on the verge of extinction (in 2002 its stock plummeted to $1.70 per share from its September 2000 price of $113).
As Corning fought to recover, the senior team members asked themselves, “What are we really good at?” What they came back with is, “We’re really good at certain kinds of invention and innovation in response to customer problems. We’re not a marketing company, not a telecommunications company, not a systems company. What we are is a company capable of certain kinds of invention, and we need to focus on doing that well.”
Corning’s strengths are its extraordinary depth of understanding of certain kinds of materials and technologies, and its application of process expertise to that knowledge. The company knows more about glass and inorganic materials and glass ceramics than any other enterprise in the world. Consequently, in every product in which it has a significant business, Corning is a low-cost producer with greater knowledge and capabilities than its competitors. That is the card that it plays, opting not to compete where its technical materials knowledge is of little value, or where the game is only cost (e.g., window glass).
After acknowledging the company’s strengths, senior managers realized that they had a recipe—and strategy—all along for innovating in concert with their strengths. They became the guardians of this strategy. Despite the memory of its telecom disaster, when Corning identifies a new arena or application that fits its strengths, it is still willing to invest huge amounts of money to take advantage of the opportunity.
However, Corning’s management has also learned that if it wants to aim high and take big swings, the company has to rely on more than one product. In 2005, Corning devoted billions of dollars to LCD (liquid crystal display) applications, and it also invested heavily in pollution control devices for diesel vehicles. While its inventions come from inside the organization, in envisioning the future and seeking out opportunities, Corning routinely leverages the expertise and knowledge of outsiders (academics, industry experts, advisers, consultants), no longer relying on customers alone as its source for inspiration. Since redirecting its strategy to explicitly link internal strengths to external opportunities, Corning’s performance has been on an upward trend—its stock reaching $19 per share and its profits moving from negative to over 12 percent.
Are you allocating resources where you want to be making bets? This is one of those “gotcha” questions that Drucker loved. Generally speaking, when Drucker pushed people to look at where they were allocating resources, they were surprised by the answer. Many of the people I interviewed remembered how shocked they were to find out that they weren’t allocating resources for tomorrow. Marty Davidson, the former chairman of Southern Pipe, remembers, “When we saw how little time we were spending with our new branch managers and our new projects, our routine changed overnight. We now go back and check how we are spending time every six months to make sure that it fits with our priorities.” He remembered another moment of truth with Peter: “When we saw how much of our resources were being spent in Texas and what it was going to take to build a position there, we realized it was not a wise bet.”
Along with DuPont and P&G, GE is one of only three companies that have made the Forbes 100 list every year since 1917 that are innovative to the core and have outperformed the overall market. GE adopted a Druckerian approach to innovation. Its competitor Siemens took a narrower view of innovation, with a very different result.
There are many similarities between the two companies. Both were founded on technological brilliance and have developed into huge global technology conglomerates. Both companies have relied on internally recruited executives and experienced very low turnover at the top. Yet there are fundamental differences, chiefly GE’s agility and Siemens’s inability to quickly reinvent itself. The result was that Siemens, despite its vast scientific capabilities, never achieved GE’s success. From 1995 to 2005, GE grew twice as fast as did Siemens (7.9 percent per year for GE compared to 3.8 percent for Siemens) at almost three times the profit margins (10.2 percent average net profit margins for GE compared to 3.7 percent for Siemens).
GE, like Siemens, has innovation in its DNA. It evolved from the legacy of its founder, Thomas Edison—not only a brilliant inventor but also a truly customer-driven innovator. He sounded a lot like Drucker: “I never perfected an invention that I did not think about in terms of service it might give others.”26 Although other inventors had invented lightbulbs at the same time, Edison went on to create an industry by designing the infrastructure necessary to serve his customers—the wires and generators that made his light bulbs usable.
As GE found out early on, no company, however brilliant its founder or products, is immune to changes in the environment. The company was almost bankrupt a year after its founding, in the panic of 1893, when central power stations could no longer afford to purchase new materials. To survive this crisis, GE completely changed its strategy, shifting to an innovative focus on solving customer problems. Alas, Edison was not as good a manager as he was an inventor. He was asked to leave by J. P. Morgan, who replaced him with professional managers.
Despite the near disaster, the company remained focused on its products and on creating a culture that encouraged innovation. It is worth noting that Drucker worked with every GE CEO from Swope through Welch, helping them create a culture of innovation that challenged the status quo. Gerald Swope was GE’s president from 1922 to 1940 and again from 1942 to 1945. He said: “If we could fill this body of executives and leading men with the spirit of adventure to try even unheard-of things, the company would either make progress or go broke, and the older of us would try our best to keep from going broke.”27
Jack Welch, GE’s chief executive from 1981 to 2001, completely reinvented the organization’s businesses and its corporate culture in order to stay ahead of global competitors. Central to Welch’s strategy was the company-changing policy we discussed earlier of innovation through abandonment: GE had to be number one or number two in any business, and if not, the business had to be fixed, sold, or closed. This policy arose in response to two simple questions posed to Welch by Drucker: “If you weren’t already in the business, would you enter it today? And, if the answer is no, what are you going to do about it?”28 And so Welch set out to revamp GE’s portfolio of businesses. (Drucker liked to say that Welch had “the courage of a lion.”29) He quickly got out of low-growth businesses and used his high-valued shares as currency to buy companies in high-growth businesses, such as financial services and media. At the same time, Welch attacked bureaucracy, reducing management layers from nine to four. In the process, between 1981 and 1988, GE eliminated over 240,000 positions30 from its workforce of 404,000, earning Welch the nickname “Neutron Jack.”
At the end of the 1980s, GE was ready to push global growth and amended its number one or number two standard to mean its world market position. Taking the view that regions in crisis would provide the best risk-reward ratio, Welch invested heavily in Europe, Mexico, and Asia during their downturns, laying the foundation for double-digit international growth rates.
Employees were immersed in the Six Sigma quality program, the customer satisfaction dashboard feedback system, and the boundaryless entrepreneurial culture, which quickly became part of GE’s operating system. Probably no other company is as well known as GE for its focus on developing its people. Welch built on this tradition and focused on differentiating the best employees and managers from the rest of the pack. Every year the bottom 10 percent, as well as anyone who did not share GE’s values, was weeded out, while strong performers were rewarded with generous stock options and challenging assignments in other parts of the company—a practice Welch called the vitality curve (also known throughout the industry as forced ranking).
Steeped in GE’s corporate culture, Jeff Immelt was ready to follow Jack Welch’s advice “Blow it up!”31 as he replaced his mentor in 2001. Immelt inherited a business environment vastly different from the one Welch succeeded in. After the high-flying 90’s, growth slowed, and the world became more volatile. Yet Immelt was committed to bringing GE’s organic revenue growth rate from historic levels of 5 percent per year to 8 percent while increasing earnings by at least 10 percent and keeping growth in stock prices above the S&P 500.
For a company with revenues the size of Argentina’s GNP, that meant building a new, profitable, $12 billion company every year. Immelt’s thesis was that technical and market innovations are the key to building more service income and avoiding commoditization. There were no sacred cows. Immelt abandoned businesses favored by Welch, such as insurance, which turned out to be a poor fit with GE and a significant drag on operating profits. It is no surprise to me that Peter was already speculating in 1999 about how abandonment versus investment at GE would play out in the future. “My own guess is that the next CEO may split the company because they have grown apart. The next CEO will probably put as much effort into the nonfinancial businesses, which are now the businesses they really need.”32
Immelt may not have agreed that GE should be split, but as of this writing he is making huge investments in fast-growth businesses such as health care, entertainment, infrastructure, energy, and “ecoimagination” (environmentally protective products). These businesses also fit the needs of developing economies, which are expected to account for 60 percent of the company’s growth by 2015, versus about 20 percent in 1995–2005.33 In 2003, Immelt declared that, “Ten years out, 90 percent of our company’s earnings will have no competition from China. Eighty percent of our businesses will be selling to China.”34 The plan is to become a “general store for developing countries.”35 To this end, the organization was completely revamped and shaped around selling, building, and financing infrastructure products. The plan seems to be working, with revenues from developing countries growing at 20 percent per year.
Immelt is betting the farm on being able to transform a process orientation into a marketing-driven, innovative mindset. He is looking for leaders who are passionate about customers and innovation and willing to take risks. Managers will not be rotated around but are expected to stay put and become specialists in their own industries. A process for innovation, called Imagination Breakthroughs, has been launched, requiring each of GE’s business leaders to submit at least three proposals per year that have the potential to take GE into new customer or geographical areas while generating incremental growth of at least $100 million. The hope is that the 80 innovation projects currently under way—a $5 billion investment—will generate $25 billion in revenue by 2007. Although the long-term success of Immelt’s strategy remains to be seen, organic growth reached the targeted 8 percent in 2005. What is clear, though, is what sets GE apart. At GE, change is viewed as an opportunity and is continuously pursued with a sense of urgency.
Werner von Siemens and Thomas Edison were described by Peter Drucker as “the first innovators” who, independently of each other, created the electrical industry and indeed our electrified world of today. “Siemens did not develop the electric railway because he had a generator; he developed the generator because he had visualized the electric railway.”36
Subsequent members of the Siemens family were dedicated to research and technological innovations, capitalizing on emerging technologies from the telephone to electric power generation. The company had a history of firsts that includes Europe’s first electric power transmission system, the world’s first electrified railway and one of the first elevators, as well as the world’s first X-ray tube.
The company developed a legendary ability to manage large, complex projects and prided itself on quality and durability. Siemens gradually developed into one of the largest electronics and engineering companies in the world, with 2005 revenues of $91 billion.
Until 1971, Siemens was run and controlled by the Siemens family, probably making it tough to foster a culture of company reinvention and change. GE, by contrast, has a carefully orchestrated process by which a CEO picks a successor: gradually narrowing down a field of about 100 internal candidates identified many years before the actual transition.
Siemens didn’t become a public company until 1966. Without pressure from external shareholders, the company could pursue long-term business activity while ignoring short-term profits. At GE, to quote Jack Welch: “You can’t grow long term if you can’t eat short term. Anybody can manage short. Anybody can manage long. Balancing those two things is what management is.”37
Siemens has a culture that evolved from serving primarily public-sector customers in regulated markets, thus fostering complacency and a civil-servant attitude. The sense of monopoly status with large customers such as Deutsche Telecom led to long delays in conversion from analog to digital telephone systems, which were introduced many years behind companies like ITT. Siemens’s CEO also faced the challenge of navigating the decidedly unfriendly business climate in Germany, which is dominated by powerful labor unions aggressively defending their right to high wages, lavish benefits, and total job security. Siemens was thus ill prepared for the worldwide wave of deregulation and heightened global competition in the 1990s. Siemens CEO from 1992 to 2005, Heinrich von Pierer, acknowledged, “In Germany, competition was like a wind. Now it is a storm. And it will become a hurricane!”38
Whereas Welch approached his task of reinventing GE with an enormous sense of urgency, von Pierer tailored his approach to Germany’s consensus-style corporate culture: “Good management is the art of making change painless.”39
Siemens wanted to be number one or number two in every business, just like GE. It just seemed unable to deal with the second part of Drucker’s question: If you are not, what are you going to do about it? While GE decided in 1970 that it would never become a leader in computers and sold the business, Siemens held on to its computer business for dear life despite decades of huge losses.
With the accession in 2005 of U.S.-educated CEO Klaus Kleinfeld, new winds began to blow within Siemens. Kleinfeld launched a cultural revolution of his own, with GE as his model. Aggressive profitability targets were established, and Kleinfeld declared his intention to dispose of any business that didn’t reach its targets by 2007 (then about half of Siemens’s divisions).40 True to that declaration, Siemens paid about $300 million to get out of its losing mobile telephone business while announcing layoffs in its troubled communications business.
By 2006, Kleinfeld was talking a different game and was quoted in Fortune as saying, “That is a fact of life. If I look at all our businesses, I see that only when we are in a leadership position are we able to sustainably make profits on a level that allows us to continue to invest heavily in innovation.”41
Even the most brilliant research capability will not translate into superior profitability and shareholder returns unless the organization is capable of successful, systematic organizational and business innovation. Reinventing the business to stay ahead of global shifts requires a sense of constant urgency and a willingness to embrace change.
In answering the forward-looking questions discussed in this chapter, it is critical to remember that:
1. The silent revolution has telescoped the timeline for innovation. Abandonment must occur frequently and rapidly; what needs to be considered for abandonment is everything about a business, not just products.
2. Each of the seven classes of opportunities has an information, geographic, and connection component, which may range from drawing on some far corner of the world to creating the unexpected to tapping into obscure confluences of information about consumer perceptions from multiple industries and sources.
3. The power of processes—to bring together key resources, foster disciplined decisions, and allocate resources—is exponentially more important in today’s world than it was when Drucker first wrote about it.
4. Innovation strategy in the Lego world is about building relationships and inventing white space—not pushing products one more round.
One of Peter’s biggest gifts to future generations is that he left a body of work that teaches managers and employees how to create the future. It is up to us to put those teachings into action. It’s worth repeating: The entrepreneur creates new wealth-producing resources by four means:
1. Abandoning ongoing efforts to make room for innovation.
2. Continuously seeking opportunities.
3. Converting those opportunities into value for customers.
4. Strategically allocating resources.
That’s how existing companies maximize their potential for creation. The next two chapters are about connecting with and orchestrating the best resources to collectively deliver innovations and create tomorrow.