For companies looking to be the best they can be, it's all about profitable growth. Innovation is important, but that's only a tool to reach profitable growth.
In “Innovation Engineering Management System,” Chris Wayne of the South Carolina Manufacturing Extension Partnership said his experience tells him it's easier to increase sales than increase profits.
“The issue is, how can you do it profitably?” he said. “It's a combination of people and process. It seems like most of time, I'll go into a company and they will have people but no process or growth. In the other extreme, they have this big product development system, but people are not turning out stuff. Usually, the president or CEO is frustrated with the money he's spending and not getting a return. They're not growing. There are no new customers, no new markets. There are the same models year after year, and all they're doing is chasing after price.
“There so many pieces. They're not parallel. They're serial. So you need to do steps #1, #2, #3, #4, #5 in order to do step #6. If you get out of order, the whole thing falls apart. If you're making a trailer, there has to be a process of events. So we need some sort of process for growing the business.
“A standardized profitability curve includes increase, plateau, decrease. Steep incline, peak, long, painful decline, then the death spiral. Most companies find themselves on the right-hand side of the curve. They're a new business starting up, with an incline. Why does profitability peak out? You have increased competitors. It's kind of hard to hide success. If it's a sweet deal, people taste it and know it. Then you have additional competitors. What does that mean? Lower price. You start competing on price, and as more and more enter the market, you are competing more and more on price. You focus all your energy and effort on maximizing profitability and have no capacity for looking for anything new or different that would make you more profitable.”
He said that in a poll of 6000 managers over the past 15 years, 60% of business owners want ideas for cost savings and 80% want ideas for innovation and growth, but fewer than 20% think they have what it takes to succeed.
“You say you need help,” he said, “but you don't feel like anybody has help to offer.”
He said those research findings show that a strategy of innovation outperforms all other strategies by a margin of at least two to one when it comes to profits. They have higher profit margins, better employment, and more of the money comes from customers and new products.”
So why is there so much pessimism?
He said these are the reasons he hears the most:
- “We tried to innovate, and it didn’t work.” (Which, he said, is because they didn’t have a process.)
- “Real innovation takes too long.”
- “Innovation is a gamble we can’t afford to make.”
- “We need to stick with what makes us great.”
- “I just don’t think our people are creative.”
- “Innovation is just a buzzword. It doesn’t really mean anything.”
Wayne said he is a member of the Product Development Management Association, which collects data every year and has found that:
- One in nine new product concepts makes it to launch. “So if you work on three or four projects a year, it’s going to take you a couple of years to find something that works.”
- 40% of new products fail at launch. “So if you take one in nine multiplied by 40%, you end up with an overall 4.5% success rate. If you had a lot of money to invest, you can either invest in product development or go to Vegas and play the slot machines. Which gives you better odds? The slot machines: 31%.”
- 46% of new product development resources go to unsuccessful ventures. “It’s very expensive. If you’re a business owner, you know there is no direct correlation between the amount of money you spend on product development and the profit realized from product development. You can’t draw a straight line between the two. You can’t predict. That’s the problem. How do you make decisions that are wise based on incomplete information?”
He said the Stage-Gate System is a project-management technique in which an initiative or project is divided into stages or phases, separated by gates. The continuation of the process at each gate is typically decided by a manager or steering committee—based on the information available at the time, including risk analysis and availability of necessary resources.
Clayton Christensen, author of The Innovator’s Dilemma, has said that “the Stage-gate system is not suited to the task of assessing innovation whose purpose is to build new growth businesses, but most companies continue to follow it simply because they see no alternative.”
Wayne said the problems are:
- Product life cycles are getting shorter.
- Companies treat innovation as a side show.
- Leaders are not making innovation systemic.
“There is a deficit of leadership in most companies,” he said. “A lot of times, leaders have to step back and say, ‘Am I leading the organization in the right direction, as opposed to reacting to the day’s issues or chasing after cash flow or managing orders?’ Leaders are not leading. Few have passion. Few have hope. Passion is the #1 success factor. It’s not money. It’s not resources. It’s not capital. It’s not even necessarily who you know. It’s a function of how much you want it. It’s been proven empirically over and over. You as a business owner may have passion but do your people have it?”
Wayne said that in the minds of most consumers, most of the product categories are commoditized, and there’s not a significant difference between them. That’s why companies need to develop a process to build innovation.
“Innovation must be a core competency,” he said. “A deep systemic capability for innovation can take three to five years, and requires skills, tools, management processes, metrics, values, and IT systems. It should become as run-of-the-mill as quality. The ‘innovation movement’ is worldwide.
“Back in the ‘70s, globalization was just starting to occur. Japanese companies had really poor quality. US companies had really poor quality. But if you were going to sell overseas, you needed to boost quality. So where do we start? Let’s have meetings. People sit around and talk about quality. The result is the majority of companies said, ‘We tried the quality thing and it wasn’t working for us.’
“Meanwhile, in Japan, they had a different take on things. They saw quality as a process. They said, ‘This isn’t really different than anything else we do in the organization.’ Forty years down the road, we look at the list and say, ‘This is simple. My daughter is in high school and is doing this stuff.’ But now I’m talking to companies about process and they give me the stupid, dead-fish look: ‘What do you mean, a process for growth? What’s a process?’
“Tom Peters (author of In Search of Excellence) has an interesting spin. He said innovation comes from ticked-off people. So far from people being the problem, people are the solution. Buts it’s not all about people. You can’t go out next Monday and say, ’I need to hire somebody who’s innovative. That’s going to be the fill that’s going to make us great.’ It’s a combination of people and process. You need to establish a foundation—offering things that are meaningfully new and different, things that will help you leap-frog the competition, not just save 30 cents on a trailer.”
Wayne said there are three critical preconditions to people making change:
- Creating time and space in people’s lives for reflection, ideation, and experimentation.
“We are rushed and distracted, asked to do too many things. We have to stop responding to what Charles Swindoll calls ‘the tyranny of the urgent.’ We come in to work and all of a sudden there are problems. Material shortages. A welder that’s down. A customer calling me and screaming. And I can’t think. Life is chaos. The day is one constant fire. That’s the tyranny of the urgent.
“Leaders must give employees extra bandwidth and scope. Push some of your tasks some of your management down to allow you more time to lead. If you constantly are having to tend to payroll and employee manuals, you’ll never be able to lead. The history is that if you offer people more responsibility, they gladly take it.
“Reflect: Where are we headed? Who do we need to become? How do we regain the ‘spark’? What is my passion? What do we do that does or does not work? It’s not just the owner’s business. It’s everybody’s business. If you build a culture of innovation, this is how you do it. You open up broad thinking to everybody. You might get people who are cynical. But if you hold it for 30 days, they start to buy into it.
“Innovation is a numbers game. If you come up with 100 ideas for growing your business, two or three of those are really going to pan out big. All hands have to be on deck. So you have to get everybody involved generating ideas. That boosts your odds of success dramatically. Do not funnel ideas through just a few people.
“Use re-combinations and mash-ups, which are a combination of two or more ideas. The iPod was a combination of multiple ideas. It was the real cool intuitive user interface that was easy to use, but also had the ability to buy one song at a time, as opposed to a whole CD. If you get together and generate ideas, you generate another level of innovation. Awesome innovation comes out of mash-ups.
“Experimentation involves risk, requires resources, takes time, builds capabilities, and leads to breakthroughs.”
- Maximizing the diversity of thinking that innovation requires.
“Diversity includes thinking styles, behavioral styles, life experiences, and the ability to connect people with different skill sets, capabilities, and perspectives.
“Innovation introduces operational chaos. If you’re a product manager, you have devoted seven days a week, 24/7, toward eliminating everything that can go wrong. I want things to go smoothly so I keep making the same things and don’t change anything. There is truly the fear with these analytical people that change will kill them. We need to drive fear out of it.
“You need a combination of younger people and older people. You also need folks with high imagination vs high experience. Typically it’s one or the other. It’s also a combination of people you like and people you don’t like. We tend to surround ourselves with people we like. So why would I bring somebody into this that I don’t like? You need that diversity.
“Where in the typical organizational chart do we find the most diversity? At the top or at the bottom? At the bottom, because you have the most people there. Allow them to participate at a higher level. Don’t focus on getting people onboard that have tremendous abilities. Focus on people who have breadth of experience. That’s very innovative.”
- Fostering connection and conversation—the combinational chemistry that provides the breeding ground for breakthrough ideas.
“The entire organization must engage. ‘Creative collision’ is putting together thoughts that do not normally fit together—forced association.
“Over time, conversational patterns tend to become etched in stone. Fixed reporting lines, committee groups, task forces. Free thought becomes more difficult, if not impossible.
“When our family gets together at Thanksgiving, it’s almost like the conversation picks up where we left off 364 days earlier. You know you’re going to talk about the same stuff. This happens in our companies. We talk about operational things, and that doesn’t give us the chance to talk about stuff that’s new and different. Like amorphous metallurgy. If you take real hot steel and instantly cool it 800 degrees in a second, it doesn’t have a chance to crystallize. It has tremendously different properties. It enables you to make completely different stuff.”