I repeatedly see people protecting "ideas' to the nth degree of paranoia. Even comments such as we don't want our own employees to see ideas of other employees because they may steal them! My answer to that sentiment is simple. Follow the conversation:

• Them: "We don't want to let our employees to ideas that other employees have submitted because they may steal them?"
• Me: "Help me understand, you are afraid an employee will take an idea that you are aware of, leave the company, start a new business from scratch, resource that business, build the solution, and penetrate the market faster than your well-established, well-funded company can?"
• Them: "Yes....err no...err wait"

Claim: To use a word broadly renders it meanless.

Some examples from the twitershpere and blogisphere: "Retailers can improve private label performance by focusing innovation on specific age segments where private label is under-developed."  (from @infores)

• Isn't the concept of private label simply being able to rapidly produce clones of other successful products?
• Instead of innovation, doesn't the author really mean "target" products in specific age segments

"Wolf Blass leading wine innovation with new green label PET bottles... 29% less GHG emissions than before..."  (from @Wine_Australia)

• In this case the innovation is agreeing to "adopt" someone else's new product (new green label PET bottles)

"Have ERPs traded innovation growth in favor of M&A growth? And what does it mean for customers?" (from @tminahan)

• Here I assume the author is referring to "new product development", but could refer to "process or business model changes".

Techdirt's Mike Masnick uses a different definition in his post, "Why Segway Failed to Reshape the World". He distinguishes innovation from inventions defining innovation as "an ongoing process of taking a product and adjusting and adapting it to the market".

• Here innovation happens after the invention; it is the "enhancing of the product".
• I wonder if  @tminahan was referring to this in the above quote?I don't think so.

"1.2 million students each year fail to graduate. ..American schools need innovation." (from @edutopia)

• What do the schools need? It sounds like a "plan" to reduce drop outs

If innovation can mean target, adopt, new product development, process or business model changes, enhancing a product or a plan are we truly communicating anything when we use the term?

While the value that the Annual Revenue Growth (ARG) from New Products returns is a good indicator about the success of an innovation program, in conjunction with the other data derived in its calculation it can become a strategic tool. Here is a suggest best practice on how to use this metric.

1. Evaluate the Health of the Core - By deriving Annual Revenue Growth and  Annual Revenue Growth from New Products, you can calculate Annual Revenue Growth from Core Products (I = G - H from last post's example). This number will give you an indication of the health of the business's core product line (often the products that brought you to the dance). There are 3 categories for Core Product health:
   • Growing (>20%) - The core is still in growth mode. Like most growing things, it needs support so focus efforts on enhancing the core products.
   • Hitting Steady State (0%-20%) - Core growth is maturing and heading to a steady state level (often between 0%-5%). Now is time to begin thinking about moving into product or market adjacencies to fuel new growth.
   • Declining (<0%) - Core has begun to shrink usually as the result of some exogenous shock. If not already underway, New Product development into product or market adjacenies should be a priority. If the shock is expected to be permanent other strategies may need to be considered such as harvest/exit strategy or refocusing the core.
2. Determine Your New Product Growth Needs - Once you understand and predict how your core will grow next year, you can set a New Product Innovation Strategy. If your core is:
   • Growing - You probably don't need much revenue growth from New Products. So focus on building out your core products, but you should be slowly doing research on potential adjacent markets to enter when growth slows.
   • Steady State - Two good options exist: 1) segment your customers; and 2) move into adjacent markets or products. Segmenting your customers allows you to identify which segments are growing and find new needs and uses for your product that you haven't considered. If your core is well rounded, another strategy is to identify new adjacent markets to offer your existing products or services; or identify new products/technologies to offer your existing customers (customer  segmenting helps identify this).
   • Decline - Not only does your New Product Growth need to be strong, it needs to offset the declines from your core. Note as mentioned above, if this is viewed to be a permanent decline you will need to determine a strategic response such as harvest/exit strategy or refocusing the core.

What Should Your Target ARG from New Product Be? This will really depend on what stage your company is in. Obviously a more mature company would expect more modest growth rates compared to a new start up. So assuming we're talking about a mature company, the first question is what is the overall ARG that the company expects to get in a sustainable steady state? Chris Zook in his great book, Beyond the Core, references a US study in the 1990's that found that public companies that grew revenue by <5% saw a return to shareholders of 4.1% per year; and companies that grew between 5-10% per year, saw a return to shareholders an average of 12.1%! So let's say our target ARG is 8%. Next we ask, how do we expect our core to grow in the future. Maybe a healthy company sees a 4% Core ARG. That leaves us with 4% ARG from New Products (note there could be other sources such as acquisitions).  Now we have very visible metric targets for growth from our core and new products. If a company sees that its new product growth is falling to 2%, then it immediately knows that it has an issue with its new product development and should be doing a more thorough analysis. The ARG from New Products is a great metric for innovation because it leaves no doubt to its interpretation.

In my last post, I talked about the common innovation metric Percentage of Revenue from New Products Released in the Past 5 Years and discussed it was a poor metric because it was not actionable or had a common interpretation. I would like to propose a modified metric that will eliminate these problems. To recap the Juicy Analytics blog pointed out that the four dimensions of a good metric are 1) Actionable; 2) Common Interpretation; 3) Accessible, Credible Data; and 4) Transparent, Simple Calculation. By taking the data from the percentage of revenue from new products, one can construct a new metric that is Actionable and has a Common Interpretation: Annual Revenue Growth from New Products. What this metric attempts to do is to separate the annual revenue growth that came from new products (released in the past 5 years) and the revenue growth that came from the core (products release more than 5 years ago). The formula relationships is:

% of Annual Revenue Growth (ARG) = %ARG from New Products + %ARG from Core

Let's review the four dimensions and see how this metric will stack up:

1.  Actionable: While you will need to do some digging to better understand the source, the results are very consistent - if the %ARG from New Products increases that is good and if it decrease that is bad. A definite improvement from percentage of revenue from new products.
2. Common Interpretation: Once people understand the metrics construction, it can be painfully clear what the metric is telling you.
3. Credible, Actionable Data: Data is sourced from your financial system, so I hope that it is good data.
4. Transparent, Simple Calculation: As I show below, the metric is slightly more difficult to construct, but once you understand the concept it is simple to construct.

To construct the metric: To demonstrate the metric consider this example. A company has the following financial results in 2007 and 2008

		2007	2008
A.	Annual Revenue	2000	3000
B.	Revenue from New Products Released in the Previous 5 Years	500	1200
C.	Revenue from Core Products (C=A-B)	1500	1800
D.	Change in Annual Revenue (D=2008A - 2007A)		1000
E.	Change in New Product Revenue (E=2008B - 2007B)		700
F.	Change in Core Product Revenue (F=2008C - 2007C)		300
G.	Annual Revenue Growth (G=D/2007A)		50%
H.	Annual Revenue Growth from New Products (H=E/2007A)		35%
I.	Annual Revenue Growth from Core Products (I=F/2007A)		15%
J.	Percentage of Annual Revenue from Products Released in the Previous 5 Years (J=B/A)	25%	40%

Using the ARG from New Products metric it becomes clear where a companies revenue growth is coming from. An added bonus is that you also compute ARG from Core which in the next post on using these metrics can be quite insightful.

A common metric associated with measuring innovation is the % of revenue from products released in the past five years. The theory behind the metric is that a company with a strong percentage of revenue coming from new products is innovative. I believe this metric is very dangerous for a company to rely on. The Juice Analytics blog notes that the four key dimensions of a good metric are 1) Actionable; 2) Common Interpretation; 3) Accessible, Credible Data; and 4) Transparent, Simple Calculation. *Source: Juice Analytics Blog The problem with the percentage of revenue from new products is that it is not actionable and doesn't have a common interpretation. Let's say a business that moves from value of 10% to 20% over the course of a year, most people would say that this company improved it's innovative capacity over the past year. This is not necessarily true. What if, over that year, the companies revenues dropped by 20% and revenues from the new products dropped by 5%. In this case the Percentage of Revenue from New Products would increase, but I doubt we would say the company is improving innovation. Therefore, if the metric goes up or down, it is not clear if this is good or bad. That is why this is a dangerous metric to use to evaluate innovation efforts. In our next post, I will propose a slight variant on this metric that will eliminate this common interpretation weakness.

Blockbuster's stock isn't doing very well these days. That decline coincides with the rise in popularity of Netflix and its disruptive business model. As MG Siegler from Venture Beat observes that it is cheaper to buy Blockbuster stock than it is to rent a movie. Unfortunately, Blockbuster is one of those oft-repeated cautionary tales that public company CEO's seem to forget.

Blockbuster was the dominant movie rental business of the 90's and early 2000. Their business model was simple, build national brand by locating a brick & mortar rental store near every major North American neighborhood. Their strategy was speed. No other franchise was able to execute as quickly as Blockbuster and thus they were destined to be market followers. This strategy worked great until improvements in web technologies brought a threat to their business.

First, the internet enabled new entrants like Netflix to offer a wider catalog rentals to consumers. Second, it automated the regular routine of renting movies by allowing consumers to create a queue of the movies that they wanted to rent and immediately mailing a new movie when the renter mailed back their current one. Later, the spread of broadband would allow Netflix to offer streamed videos to its customers. Together, these factors combined to offer a compelling value proposition to Blockbusters most profitable customer group: Avid Movie Renters.

This threat did not come out of nowhere. Netflix was founded in 1997. It really doesn't impact Blockbuster's share price until 2004. Coincidently, 2004 is the year that Blockbuster finally decided to enter the online video rental business. So for a full seven years Blockbuster ignored this threat to their business! Why? Ask Kodak when digital photography was introduced into the 80's. Blockbuster was trapped by their business model that cultivated a myopic view of their industry. It took them  seven years to acknowledge the threat of online rentals. The good news is that their brand name and market position afforded them the ability to enter late and still win the market. Unfortunately, they did not learn their lesson and continued to make mistakes in this new competitive market.

After aggressively building an online customer base by using their brick&mortar stores to attract customers, they began to raise online pricing and removing benefits when they saw revenue and profits shrink as their brick&mortar business was being cannibalized by the lower margin online business. This short-sighted response had a double wammy effect of pushing the remaining regular customers it had just introduced to online rentals into Netflix waiting hands who had a more competitive offering. In other words, they had just moved their loyal, profitable B&M customers into their online business. Then, they changed their online offering to make it less competitive to Netflix thus pushing these good Blockbuster customers to their competitor. Netflix, understanding that the market is moving to on-demand video streaming, introduced a streaming service. Rather than trying to charge separately for each movie, netflix made it part of its subcriptions. This had the effect of improving their capabilities to stream movies (learning through doing) and introducing its audience to this technology at no risk to them.

Blockbuster responded by acquiring a video streaming service of their own. However, they were slow to integrate into its online offerring. Why? Because their executives built their company on the previous decades of renting by the movie - "Customers must want to do this". They did not know how the online business fit into their business model, so how could they know how would video streaming? Blockbuster is now moving to integrate streaming with its online rental business, but the damage is done. Netflix did not necessarily win the war as much as Blockbuster lost it because they could not adapt to the new market realities. So what lessons can we take away from Blockbuster?

1. Raise Awareness: Every few years conduct an exercise on how can new trends disrupt your business.
2. Shift Your View: Take the time step outside of your business to understand how the disrupters view your business. Dedicate a team to represent that point of view in the company.
3. Build a New Industry View: Accept that the industry that your core dominated is or will soon be changed. Ask yourself what business will dominate this new industry.
4. Accept the Impact on Your Core: Your core business will be destroyed by this disruption and you have two choices: 1) do nothing and harvest as much profit as you can until your core is destroyed; or 2) build a business to survive in the new market with full permission to destroy the core business.

I agree not the most attractive choices for multi-billion dollar, market leader and you can definitely ignore them. Of course, then you can be another cautionary tale like Blockbuster and Kodak.

Measuring innovation presents a conflict of interest. If you build a measurable process around innovation are you not destroying the openness needed to fuel innovation? Maybe so, but when trying to instill a culture of innovation in a large, successful corporation it will be hard to change anything that isn't measured. So a CEO has two options: 1) Let the final performance of a business unit be the ultimate judge of successful innovation or 2) Find some metrics that will provide indications of how well a business unit is executing in all phases of innovation.

The first option demands that business units meet a threshold level of Revenue and profitability growth (GE sets it at 8% per year) . The problem is that a CEO will never know there is a problem until they miss their numbers. After heads roll, getting the business unit back on track will be a 2 - 4 year process. I know of few CEOs who could survive such a setback. The second option tries to find a delicate balance of measurement without dictating process. Measuring innovation provides a second challenge that most innovation will take multiple years to come to fruition (often with losses in the front end). As Robert Louis Stevenson said, "Don't Judge each day by the harvest you reap, but by the seeds you sow."Any interpretation of innovation metrics must keep this statement as the overriding context. A fair innovation metric exercise should try to incorporate a balanced scorecard approach - there is no dominant innovation metric. Try to look at innovation in multiple phases. I propose Inputs, Process, Execution, and Value Creation.

• Inputs - Are you putting sufficient resources and generating enough ideas to fuel your target growth (see my post on innovation math)? Track the number of ideas you generated, how much resources you had dedicated to innovation (not evolutionary product developement), and what types of opportunities do you have in your pipe (is your pipeline evaluating enough ideas of a sufficient market opportunity).
• Processes - How quickly are you processing ideas through each stage of your pipeline from early evaluation through to launch?
• Execution - How many launches have you had this year? How many launches attack large market opportunities? How accurate have your forecast efforts been?
• Value Creation - What is the contribution margin of your recent years' launches? What percent of revenue growth is contributed by innovation projects?

You can find the best measures for the four headings based on your company environment. The goal of these metrics is not to judge the success or failure of a business unit. It needs to be a collaborative effort to help business units identify any red flags in their innovation processes so that they can course-correct before it becomes a big problem.

Found this great interview with mobile phone maker HTC's CMO, John Wang. In it he discussed the structure HTC put around innovation. You can read the article, but the structure breaks down like this:

1. Separate Group - HTC created an independent group of 60 "magicians" called "Magic Labs". Magic Labs is different from other product groups in that they do not have specific delivery dates for products. Makes complete sense - it is easy and necessary to have targeted delivery dates for v2, v3 and so on of your product. You can't really say make X product by Y date. I do think you can supplement this with miny target dates for certain prototypes.
2. Diverse Experiences - HTC populates Magic Labs with skills across functions (mechanical, software, UI, graphic design) and backgrounds (they even have a jewelry designer). This follows a case from 3M where they brought in focus groups of experts from diverse areas to stimulate creativity for a new sterile wrapping product (like a make up expert to shed a new perspective on cleaning wounds). Different perspectives bring about different ideas. I was surprised Wang did not reference marketing as I feel it is important to bring someone trained to deliver the voice of the consumer - and I am not referencing just asking what the consumer wants, I mean skilled at understanding their true needs and emotions.
3. An Oganization Designed to Fail - I love this! Yes, you read it correctly - an organization designed to fail! Exploration of new ideas requires alot of ideas that go nowhere to fuel success. As Wang puts it, "You want to be able to generate ideas very fast, very cheaply and fail very often but at very low cost." The cross functional nature of the teams builds a organizational competency at quickly building prototypes and tests to validate assumptions and risks of the promising ideas. This helps HTC to quickly, and cheaply, identify the best ideas to invest greater resources.
4. Support the Winners - When Magic Labs finds a great opportunity, the whole company supports it. This is show in their Touch Flo screen technology that is laid over Windows Mobile to make a better user experience. All of HTC's Windows Mobile phones quickly incorporated the technology into their product lines.

That's HTC's recipe for success. I like the structure, but I just hope that they also are building a marketing competency in that group. Any other thoughts?

"Innovation" is in the CEO toolkit of buzzwords to say to Wall Street. Investors love to hear those words; as if it makes them feel their investments become safer each time the word is dropped. However, times like these help us discover which CEO walk the talk. In good times it is often difficult to see if a company is truly innovating. Revenues are going up, but that is true for most of their competition. Sure, we could look at their product portfolio, but if we do not use the products how do we understand if they are truly innovative and resonate with customers? Nope, the good times are for buzz words with litttle accountability for our corporate leaders.

Now, it is very different. It is now that we discover who is committed to long term visions and who is focused on right now politics. During the good times, were companies generating improving margins due to true innovation or aggressive dedication to operational efficiencies? If due to operational efficiencies, they will be hit harder than other companies because their ordinary product line becomes exposed in a down-cycle. Without revenues from innovative products to mitigate the slow down of revenues for their cores, companies dedicated to hitting their numbers panic; all they know is operational efficiency, but an extreme op-eff response in a down cycle can cripple a company for long run growth. There will always be a little fat to trim entering a down-cycle - identify poor performing products to cut and invest in the strong performers - but cutting for the sake of hitting numbers in a market you can not control is a suicide strategy.

Here is where you can identify the true innovators. Do they respond to poor earnings announcements with mass layoffs? Do they dramatically pull back ad spending? Do they completely abstain from M&A? Those innovation buzzwords may be all for show and they may not be walking the innovator walk. As these companies release their numbers for this quarter's earnings, you must ask yourself "was this the result of mass cost cutting or new products? It should be much easier to see in this environment. If it was due to cost cutting, I would argue that their long term growth will be tied to the health of the market - great for a commodity company, poor for everything else. If it was due to products, then this is a long term play because they will outperform the market. It is times like these were we see the true mettle of today's public company CEO. I encourage you to look carefully to distinguish the true innovators from the word droppers in preparation for investing in the next up-cycle.

McKinsey recently posted an interesting article that lays out a formula to spur innovation in an organization. The article examines the 100,000 lives campaign that encouraged hospitals to become innovative in attacking preventable error deaths. I encourage you have a look at the article (free if you register on McKinsey's site), but it demonstrates that a implementation of a successful innovation strategy can follow this roadmap:

1. Name the Problem - Grab peoples attention by giving the problem a simple to remember name. The 100,000 lives campaign used "Needless Deaths". That grabs your attention.
2. Define a Clear Goal - The goal should embrace all aspects of SMART. A clearly defined goal helps focus an organization.
3. Break Out the Hard Count - Take that goal and break it down in the individual actions and/or resources that you will need to achieve the goal. The actions/resources makes it easy to understand what needs to be done.
4. Use Affordances -  Give people concrete, easy to understand tools to attack the problem. Ease of use allows them to quickly use it and enhance it with their own innovations.
5. Share - Share the victories and defeats with all participants. Diffusion of knowledge will accelerate achievement of the goal.

Great tips for any change campaign, but very applicable to encouraging innovation in a large corporation.