How to Institutionalize Innovation?

I am an innovator by nature. I am always trying to do something more, to try something different, and for the companies for which I worked, to move them ahead of the competition. And I have been at the forefront of innovation thinking for quite some time through my associations with the Product Development and Management Association in the past, an angel investor with TechCoastAngels, and an Entrepreneur in Residence at UCI’s Applied Innovation.

I have been asked by clients and start-ups if a company can institutionalize innovation. The answer is simple: You bet. And you have to have a culture and management that supports innovation.

Let’s step back for a moment. First, do you know the difference between creativity and innovation? Creativity is defined as the spark generating a new idea. Innovation takes the idea to a new level and the essence of innovation is implementation through execution. Now with that out of the way, can companies figure out a way to create innovation in their company? To me the answer is clearly YES! How do you do that?

What are the categories of innovation? Here’s one list that I put together and depending on the company and their goals, there may be other categories. For innovation to take place, it should be put in the context of the company’s strategic and business plans.

1. New products and services, ranging from line extensions, to new-to-the-company products, to new-to-the-world products.
2. New ventures putting companies together in different ways to solve a problem.
3. New market development such as paint companies introducing anti-bacterial paint for hospitals and children’s rooms. (Also can be classified as a new product.)
4. New business models – for example the SaaS model replacing ownership of resources.
5. New partnerships such as GM and Lyft or Apple and McLaren for autonomous vehicles.
6. New business practices like Home Depot implementing Velexo’s one button installation for new technology and equipment.

There are several models that can be used to define the architecture of innovation for a company but let’s take a simplistic approach. For each of these categories, I believe we can define five different ways the categories can be analyzed and the driver of innovation can be investigated. These areas include: customer, competition, competencies, technologies, and processes.

• Customer. Think about how you can develop new ideas. One concept is to make sure marketers and developers talk to customers on a regular basis. In Japan, engineers routinely visit customers to understand how they work with their current products and ask questions on what else is needed. Another thought for integrating customers into a company’s product development cycle is to include customers on internal development teams as we did when I was at Connexion by Boeing. Or set up a living lab where customers can play with new concepts and ideas as I believe Ford has done in the past as it designed new cars and continues to do with their new designs.
• Competition. Looking at the competition can give insights into what is possible. Perhaps you can build off of what the competitor is doing and does it better, faster, cheaper by using new technology or developing new processes. Tools such as Spider Diagrams and SWOT analysis can provide perspective and focus.
• Competencies. I like what Intel does and how they go about innovating. They are not afraid to make their current products obsolete and in fact, they are always thinking two steps ahead. Their competence is engineering skills. But even Intel misses the mark and has left opportunities for others in the mobile chip area such as AVAGO/Broadcom, NXPI (in the process of being acquired by Qualcomm), Skyworks and others. Companies can focus on building their competencies in various ways such as partnerships with schools/universities, labs, and even smaller, more nimble companies. An attendant benefit which we often see is that the larger company buys the smaller company because of the smaller company’s unique competencies.
• Technologies. This, to me, is the kingpin for growth. I am probably biased as I am a technologist by training who converted to marketing and to being a business executive. Technology, above all, provides corporations the opportunity to think about the Art of the Possible. Technology can be developed internally as it used to be at Bell Labs or IBM, or can be acquired through licensing deals with universities, individuals, or start-ups.
• Processes. Companies can look at new processes as a way to innovate. Think about ways to do self-service support for various products and services. What if a car dealer set up a few bays to enable customers to do their own repairs using their equipment and their parts? Think about Sears which has a fleet of service vans and can set a new process such that when a customer orders a washer/dryer the customer can push one button to have it installed. This is process change enabled by new technology, e.g. Velexo, which benefits both the customer and the company.

What are we missing from this model? The key requirement for innovation in a company is when senior management drives innovation and sets a standard and goal for innovation to take place. This includes the reward and recognition system that encourages innovation and makes heroes out of the innovators. Companies like 3M encourage people to spend 10% of their time developing new products. Think about the classic story of Art Fry innovating not only a product but a market based on glue that did not bond well i.e. post-it notes! Or think about how Google encourages self-directed teams to form to develop new products and services. They recognize that most of these new ideas will not be commercialized although there will be substantial winners along the way.

And let’s not forget how companies can set a metric for the number of new products that should be developed and the revenue obtained from those new products so they can sustain growth. Can anyone say Newell Rubbermaid a formidable product developing Fortune 1000 company whose brands such as Lenox, Sharpie, Sunbeam, Dymo, Oster and a slew of others?

Finally, let’s look at a few ways companies can execute their innovation program: Here are just a few ways that we have seen in the past and have participated in over the years.

• New product advisory boards to generate new ideas on features and products.
• New channel management advisory committees where companies can leverage their channels view of their customers and work with the channels to develop unique products and services using a common platform.
• Appointment of a new product czar or growth leader to be the focal point for new ideas. In one of my prior assignments I formed a small organization called Ideation and Feasibility (IF) with the goal of “adopting” ideas from outside the industry to our industry.
• Product/service roundtables that meet once every few weeks, but certainly on a recurring and regular timetable and that would include cross-functional members from technology, marketing, account management, IT, and perhaps other groups as needed. Each member will have specific roles and even track specific competitors. Think about using Dropbox or some other common storage area for posting what the competitor is doing. Better yet, how about a “war room” where the group can track what customers and competitors are doing?
• Participation directly or through Corporate VC or business development functions in entrepreneurial activities such as the angel investment groups like TechCoastAngels and venues such as UC Irvine’s Applied Innovation where the corporation can invest in or participate in other ways in new start ups. This might be particularly true of innovations in the life sciences and cyber security areas.

In a future blog I will cover how to evaluate such opportunities in order to drive profitable revenue growth. In the meantime, if you want to discuss this topic feel free to reach me at dfriedman@clevelpartners.net.

Six (Relatively) Easy Steps to Meet Regulatory Requirements

I get the question all the time of “how do we meet regulatory requirements” and that question comes from different industry segments. Many times, we think meeting these requirements is extremely difficult and onerous. Yet, I have a very simple approach and a checklist to share that can ease the burden of meeting these requirements.

Here are my six steps:

1.  Deliver a quality product or service. Set standards for your industry and your company but most importantly get feedback from your customers on whether they perceive the product or service is of high quality. There are many tools that can help you do this.
2. Do this reliably and repetitively
   
   • Staff must have appropriate education and/or experience
   • Staff must engage in an appropriate training process
   • An independent function must monitor the business to ensure proper operation
3.  Ensure your activities are auditable
   
   • Company must have appropriate policies and procedures in place and understood
   • Documentation should be kept up to date
   • Reports from monitoring activities must be directed to and read by senior management
4. Perform audits at an appropriate frequency, but at least annually
   
   • Results from these audits should be reported to and read by management. In fact, including the results as part of normal operational reviews would be ideal.
   • Management should use these reports to guide decision making.
     
5. Ensure the staff understands that exceptions must be reported to management promptly
   
   • When an exception occurs the correct staff can be engaged and the appropriate corrective action can be performed quickly.
   • Exceptions will occur. These present opportunities for improvement – be it better documentation, better or more frequent training, and improved monitoring among other things.
6. Disclose all relevant information to your customers
   
   • Open book management is preferred as customers appreciate being kept informed.
   • Additionally, by so doing, customers are able to make informed decisions on whether the product or service is right for them.

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Thinking about these steps leads me to believe this is simply an articulation of the best long-term business strategy. Of course, most people will agree that the goal is to produce a quality product! And to ensure that the quality is delivered consistently! Who wouldn’t follow these steps? It makes so much sense.

Ah yes, it seems obvious, but one needs to consider why companies fail to do this. Let’s look at a recent, high profile case in the news relating to Wells Fargo. Why didn’t Wells Fargo ensure that accounts being opened by some of the 5,300 staff that were terminated were in fact requested and authorized by their clients? How could over 2% of the total staff be fired and this not raise questions from senior management, in particular the Audit Committee of the Board?

Many things have been cited as contributing to this untoward outcome, in particular, unrealistic sales targets for retail bank employees that were part of the business culture. The culture of the bank was not as described in the Code of Conduct. While profits did grow and senior managers were rewarded for achieving that growth, clearly reporting of problems to senior management either was non-existent or ignored by senior managers. Neither bodes well.

But let’s think about a completely different regulatory environment – that of the FDA. These same six steps have to be part of the business model so that FDA inspections do not result in product recalls, FORM 483s or even Warning Letters. All three of these events entail reputational damage for the business. Not having these, or at worst only on a very exceptional basis, would indicate to the market that the business is indeed following an appropriate business model. In this case, the market perceives that the business produces quality products, and discloses in its labeling all relevant facts so that medical professionals and their patients can make informed decisions about their products. And this applies to the food industry as well. Consider the damage to Chipotle’s reputation and the impact this has had on their revenues.

So we again come to those few salient questions. Why wouldn’t a business deliver a quality product or service? And why would they not choose to do so consistently? The answer is really quite simple. Consistently delivering a quality product or service is not free. Doing so requires overheads such as maintaining documentation, continuing staff training, monitoring of business activities, and consistently reporting to management so their decision making is consistent with business performance. Ah yes, and those audits really are necessary to ensure there are no gaps and the business is consistently delivering quality to its customers. We believe that you inspect to get the expected!

Over the long term, a firm’s reputation strengthens as customers trust that the firm delivers quality in its current and new product offerings. This leads to more effective product introductions and quicker adoption by the target market. The net effect is that doing the right thing will, in the long term, increase the firm’s profitability which no doubt is in the interest of all stakeholders. But short term profits might suffer and that is the rub in this myopic financial world, especially for publicly traded companies.

Oh yes, those overheads mentioned above. They reduce the near-term bottom line and therefore the bonus potential, i.e. bonuses of the current management. Cutting some of those overhead expenses means current management can participate in a larger bonus pool in the short term. And as tenure in managerial roles has reduced over time, what’s to worry about if it hits the fan three or four years down the road? The probabilities are that management change will have occurred and the new managers will have to clean up the mess – likely at greater expense than the cost savings chosen by the previous management – and the firm’s reputation will be damaged. Repairing reputational damage is always expensive, if it is even possible.

What happened at Wells? The head of the retail division that was responsible for opening over 2 million unauthorized accounts to meet sales targets retired in July with a package worth $125 million. This executive was lauded by the CEO as the embodiment of the firm’s culture and a champion for customers. When asked by the Senate Banking Committee if her past bonuses would be clawed back, not to mention his own, the CEO said he couldn’t comment on that as it would be determined by the Board. Time will tell whether the CEO survives and whether any bonuses are clawed back by the Board. Needless to say the reputational damage is perceived by investors who have marked down the bank’s shares. That, in addition to the $185 million fine are the costs being born by shareholders. Arguably all for increased short-term bonuses to management.

In my practice area, Risk and Crisis Management, we help companies understand the various risks of managing a public or a private business. We can then affect the right plans and help the executives reduce their business, marketing and regulatory risks. Feel free to contact me at bnewton@clevelpartners.net and I will be glad to share some additional thoughts with you.

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