4 types of innovations: BusinessWeek classification

There are many ways to slice innovation. In this article we look at one such way which BusinessWeek uses while listing its 50 Most innovative companies. For example, it says that Apple is a product innovator, while Google is a customer experience innovator; IBM is a process innovator etc. This classification can help us answer questions like: What are we innovating around? How many levers are we turning?

There are 4 types:

· Process innovation: If Coffee Café Day uses a new and perhaps faster machine to make cappuccino, it is changing an internal process. Process innovation involves changing internal business processes and making them more efficient. Toyota is considered the role model of process innovation through its “continuous improvement” or “kaizan” methodology.

· Product/Offering innovation: When 3M offers Post-It notes or when SBI offers a new type of card called SBI gift card, it would be a product/offering innovation. It is about providing a new product or service to customers.

· Customer experience innovation: When a retail shop re-arranges the layout in its stores or when Intel runs an “Intel Atom inside” advertising campaign, they are trying to change customer experience. Visual merchandizing is a discipline that focuses on customer experience innovation in retail industry. Innovating a brand would fall under type of innovation.

· Business model innovation: When a company re-configures a value-chain by (a) creating a new customer and/or (b) by creating or eliminating a channel and/or (c) by re-defining a pricing model, it is doing a business model innovation. Tata Nano created a new customer (offering 4-wheeler to 2-wheeler owner). UFO Moviez eliminated the movie distributor in the value-chain. Google’s AdSense created a new way of monetizing Internet search.

In many organizations, these types of innovations happen in different departments. For example, delivery or product departments operationalize process innovation. New Product Development (NPD) or Business Development (BD) or Portfolio Management departments work on product/offering innovations. Brand managers work with customer experience innovations. Business model innovations are usually with strategy departments. Many of these departments speak their own language and usually don’t talk to the other innovators. It would be interesting to get a few representatives in a single room and see what concoction happens.

Future-proofing: A workshop with innovation leaders

Last week I facilitated a workshop Future-proofing: Making innovation engine fire and sustain held at Royal Orchid Park Plaza, Bangalore. We had 14 leaders from 9 organizations exploring together the topic of systematic innovation and how it can be operationalized.

We started with the question – Can we do to innovation what TQM did to quality? That means, can we systematically become better at managing innovation? Related to this broad question, we collectively thought of questions like:

• How to create an environment of innovation?
• Are there any systematic steps for innovation?
• How do we predict timing of ideas?
• How to identify innovative people?

We tried out Pain-Wave-Waste technique of sourcing ideas and we looked at how big ideas come about e.g. we looked at a story of creating a prepared mind and asked a question: Can we cook big ideas systematically? We looked at AdSense story and explored how we can bring experimentation to the heart of the innovation process. We looked at 4 types of risks every innovator should be aware of and how we can apply cost-impact matrix to select ideas. Finally, we also looked at how we can systematically create innovation sandboxes (additional examples: dynamic innovation sandbox, Tata Nano through sandbox lens).

At the end, we felt that each of us could start with a few steps in our respective organizations and make some progress step-by-step.

40 years, 20 million ideas: The Toyota suggestion system

As “innovation” buzzword gains popularity, various sub-areas start getting attention too. However, many of the sub-disciplines associated with “systematic innovation” are several decades old. One such sub-discipline is “idea management system”. In fact, the book “40 years, 20 million ideas” gives an excellent overview of how an idea management system evolved from 1951 till 1988 in Toyota. The book traces the origins (in 1950s), structures, processes, challenges in adoption and psychology of change and the role senior management played in making Toyota suggestion system work. It was a surprise to me to find out that idea management system came to Toyota from Ford when Toyoda and Saito visited Ford's River Rouge plant in Detroit in 1950-51.

During its first year (1951) there were 789 suggestions and awards totaling $2638. Both the quantity and quality of the suggestions were rather low. One reason apparently was that the employees thought “creative ideas” must be something like “big inventions”. Consequently, Shoichi Saito, father of the creative idea suggestion system, started emphasizing quantity and efforts were made to increase the number of suggestions. In fact, they replaced the formal kanji characters with hiragana alphabet in the logo to soften the stiff tone of the message. It took 20 years for that number to reach 100,000 ideas a year. Idea per person per year increased from 0.1 to 2.2 during the same time.

Yasuda-san writes – One factor responsible for increasing the number of suggestions at Toyota is the element of company culture called “on-site actual checks”. This means that before judging whether a certain idea will be successful, it is first tried out. To see whether something is suitable for customer, the first thing is t check out the customer’s actual situation. Failures are treated in a positive way, with absolutely no criticism. This minimizes the chances of rejection from the selection committee and helps keep the morale up for the employees submitting the suggestions.

Another factor that helped the suggestion system was a social club called Toyota GI (Good Idea) Club formed in 1974. It began as a social club by 13 people who had received annual gold prize for excellent suggestions. It was a voluntary group that received no subsidy from the company. The GI club began as a group of friends, but through training sessions, lecture meetings and other activities, it subsequently became a place for self-study for the purpose of making higher quality suggestions in the suggestion activities. As of 1988 the group had 1000 members.

This book is currently out of print. However, I hope it becomes available to others as it is the most comprehensive documentation on any idea suggestion systems I have seen. I found it in the Indian Institute of Management Bangalore library.

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.