The Business Innovation Insider

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November 25, 2005

Goodness, Outside and In: Douglas Rushkoff Contest #4

The FORTUNE Business Innovation blog is pleased to announce the fourth of its "Get Back in the Box" contests. Douglas Rushkoff, a globally-recognized thought leader on media, marketing and Internet culture, has created a fourth reader contest based around the notion of goodness from the "inside-out," as described in his forthcoming book Get Back in the Box: Innovation from the Inside Out:

"Questioning the ethical commitment of a company such as Ben & Jerry’s Homemade Ice Cream may be as outlandish as questioning the long-term profitability of a Wal-Mart. The company was started with end-to-end social responsibility foremost in mind. It is committed to using organic ingredients, grown in a sustainable manner, from local farmers wherever possible, and with continuous monitoring of environmental impact. The company’s “social mission coordinator” oversees an employee-led grant-making program,and the human resources epartment is one of the most caring and lauded in any industry.

But when push comes to shove, Ben & Jerry’s makes ice cream in a nation where 64.5% of the population 20 or older is overweight, 30.5% are obese, and type II diabetes is at an all-time high. According to the World Health Organization, obesity-related illnesses claim more than 500,000 lives each year. Ben & Jerry’s chocolate-dipped waffle cones each pack 320 calories and 10 grams of fat before any ice cream is added. Its homespun ads showing cows on clean pastures make ice cream look positively healthy. Does encouraging charitable giving, environmental responsibility, and fair labor standards compensate for the obesity encouraged by its products and marketing campaigns?"

Based on that excerpt from Rushkoff, What example can you provide of a company that does its good works from the inside-out, as its primary function rather than merely a portion of revenues? Some examples Rushkoff includes in his book are Honest Tea, conceived from the inside out as a way to reduce sugar intake and provide jobs for aboriginal people, or Voxiva, a successful for-profit company born out of a non-profit idea to provide healthcare connectivity in developing regions.

Submit your selections over the next few days for your favorite example of an "inside-out" socially responsible company and you could win a free, autographed copy of Get Back in the Box: Innovation from the Inside Out by Douglas Rushkoff. The most innovative entry, as judged by Douglas, is the winner. That’s all you need to know – so start submitting today (either by adding comments to this blog entry or sending email responses with "CONTEST" in the subject line to: basulto@gmail.com).

What happens when good technology meets bad business?

In coordination with the upcoming FORTUNE Innovation Forum, Gerry Komlofske, the President and CEO of ipIQ, discusses ipIQ’s unique view on the characteristics of winning technologies and highlights one specific “rule-of-the-road” of intellectual property and business strategy. That rule, which is true more often than we would like, is: When a good technology meets a bad business, the business usually wins.

ipIQ has three decades of experience helping clients leverage technology against emerging business opportunities. This experience includes helping Honda recognize the value of the CVCC combustion technology, identifying Acuson as an acquisition target for Siemens, identifying technological hot spots in polymer coatings, and helping private equity firms recognize undervalued technology assets in the medical products industry.

In order to illustrate the point that "when good technology meets bad business, the business usually wins," Komlofske takes a closer look at the example of Sun Microsystems:

"The table below depicts the patent-based intellectual property of Sun Microsystems. Across the board, Sun has very strong technology. It is clear that Sun’s technology is fundamental in the industry with an ipIQ current impact indicator that is at least 2x the average in each platform area. ipIQ’s current impact measure is an indexed indicator which measures how much influence Sun’s technology is having on the platform area across all competitive technologies. However when we look at our valuation model, Sun doesn’t do quite as well.

Why is Sun not more highly valued?
To answer that question, we introduce the ipIQ valuation model. In its general form, the model relates a company's equity value (in the form of PE ratio, EBITDA multiple or market/book ratios) to our indicators of technology value. At the highest level, these include the above mentioned current impact indicator, the technology’s proximity to fundamental science, the age of the technologies on which a company is building (either their own or others), and an indexed research and development budget comparison. This model generates a predictive stock target based on the technologies' potential. For companies in focused, well defined industry sectors ipIQ models work very well. Figure 1 compares ipIQ’s predictive stock price with the actual price of ATMI since 2001.

Figure 1: ATMI vs. ipIQ predictive model.

ATMI is a Semiconductor material manufacturer. Product cycles are quick and the technology is the primary source of competitive position. The actual stock price is closely related to our modeled value, with the evident “momentum” nature of investors.

Figure 2 below compares ipIQ’s predictive stock price with the actual price of Sun since 2001. Sun’s value since the dot com bubble evaporated, and market performance has fallen well short of its technology value, even as Sun has strengthened its portfolio recently.

Figure 2: SUNW vs. ipIQ predictive model.

ipIQ believes that the drop in relative market performance is due to the fact that Sun continues to focus commercially on its hardware/server related business, with over three quarters of its revenue in this area. This is a crowded commodity business with stiff competition from IBM and HP, with commodity components manufactured offshore – a bad business which cannot be rescued by strong IP. And SUN does have some strong IP, but has not capitalized on its strength.

Did Sun miss the boat?
Arguably, Sun’s Java technology could have been a Microsoft killing platform. However, antitrust issues became a leading business issue rather than leveraging Java. This failure to exploit Java actually gave Microsoft time to develop .Net and minimize a very real threat from Sun. This is a classic example of a failure to exploit IP for business gain and reinforces the gap between the actual stock price and ipIQ’s predictive measure.

Can Sun Turn Itself Around?
The strength of Sun’s technology portfolio is significant, but is leveraged in a difficult area. Interestingly, Sun’s strong technologies including Java, have been recognized outside the core IT industry, as illustrated by Google’s licensing of Java. Google is clearly focused on becoming a standard, which requires two things – a large market share and the means to maintain that share. Google’s search engine share is undisputed. Their desire to make the Google interface the only interface for users is apparent. Licensing of Sun’s Java technology gives Google the tools to create applications that battle the installed base of Microsoft. ipIQ would bet that the Google/Sun relationship will evolve into the licensing of security patents to exploit another perceived weakness Microsoft applications. That make’s better business sense and is the beginning of aligning Sun’s strong technology with better business practice.

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An innovation commons in Vancouver

Apparently, for the past two months, there has been a grassroots movement underway in Vancouver to establish an "innovation commons." According to Boris Mann, the leader of the movement, the idea just might work: "Of course, my interest is seeing this actually happen here in Vancouver, but I think the model would work well in any city in the world: Throw a bunch of smart, independent, motivated people together in one space and let collaboration and innovation blossom." According to the Vancouver Innovation Commons wiki set up by Boris, the innovation commons would be a "physical, 24/7 space where Vancouver's entreprenuer community can gather to motivate each other's innovation."

Linkage about the Vancouver Innovation Commons:

The Innovation Commons Wiki [Bryght Wiki]
Why Vancouver needs an innovation commons [Roland Tanglao's QuickTime movie]
Commentary on the Vancouver Innovation Commons [Darren Barefoot]
Another Canadian innovation commons: Prince Edward Island [The Queen Street Commons]
Vancouver Innovation Commons kick-off message [Yahoo! Groups]

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The innovation fulcrum

A buzzword gaining traction in consulting circles is the notion of the innovation fulcrum - the point at which an additional offering by a company destroys more value than it creates. In fact, I ran across the innovation fulcrum term again over the Thanksgiving holiday, when a colleague pointed out an amusing little article in the Wall Street Journal ("An MBA Thanksgiving"), about the consulting strategies designed by top-tier consultants to reduce the complexity of preparing and serving a Thanksgiving feast. [For Thanksgiving, identifying the innovation fulcrum is surprisingly easy: "Concentrate on the most crucial elements of the holiday, also known as the core product line. Surveys show that this includes turkey, stuffing and gravy."]

Indeed, this innovation fulcrum term is usually mentioned within the framework of "managing complexity," as the following article by two Bain consultants in the Harvard Business Review demonstrates:

"What's the number of product or service offerings that would optimize both your revenues and your profits? For most firms, it's considerably lower than the number they offer today. The fact is, companies have strong incentives to be overly innovative in new product development. But continual launches of new products and line extensions add complexity throughout a company's operations, and as the costs of managing that complexity multiply, margins shrink. To maximize profit potential, a company needs to identify its innovation fulcrum--the point at which an additional offering destroys more value than it creates."

[image: FreedomLab.org via Flickr]

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The future of Chinese innovation: the R&D strategy of search engine leader Baidu

Andrew "Muskie" McKay, a business school student at the Tsinghua School of Economics and Management, recently posted about the R&D strategy at Chinese search engine leader Baidu (the Google of China) on his Muskblog. As part of a Managing Global Innovations class at Tsinghua, Muskblog interviewed two of the search engine experts at the company responsible for shaping Baidu's R&D strategy, including a former Netscape/AOL veteran who was recruited to move to China from Silicon Valley. It's a unique, first-hand glimpse at the future of Chinese innovation.

For now, it looks like Baidu has placed a significant emphasis on R&D expenditures:

"Guo Dan [the head of the Search Channels group] describes Baidu as a technology company first and foremost and thus R&D is at the heart of their operation and always will be. Five out of eight original Baidu employees were trained as engineers. R&D investment is 12% of yearly revenues. The culture of Baidu and its non-traditional workplace with its relaxed atmosphere is crucial to attracting and retaining high quality employees...

One of the key questions I put to Guo Dan was whether technology was developed and pushed onto the market or whether market demand or a niche was identified than R&D was directed to develop a product. At Baidu it seems to be a mixture of the two strategies with approximately 50% of products developed as pure R&D and the other half developed to fill a particular niche or request from advertisers/end-users.

I also inquired whether improving the quality of the data indexed by Baidu was the focus of research or whether increasing the size of the data indexed by Baidu was the primary driver while spidering/indexing the web. Improving the quality of the index is the focus of R&D - this includes ensuring the freshness of the results, eliminating duplicate data, and combating the spammers who attempt to influence the search results for their own financial gain...

Every feature developed at Baidu is ultimately aimed at advertisers. Everything is free for the end-user. The goal of R&D is to develop useful tools and services for Chinese consumers and recoup development costs and generate future revenue streams through the sales of ads. This includes accepting payment for placement in the search results a practice largely pioneered by Inktomi, now part of Yahoo."

The remainder of the Muskblog post goes on to describe the uniqueness of creating a Chinese-only Internet search engine as well as the specifics of innovating for the Chinese market.

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November 23, 2005

Innovation Linkage: the Macy's Thanksgiving Day Parade edition

Business Process Innovation and Social Networks [Irving Wladawsky-Berger]
Renovation: innovation adapted to mature markets [Geoffrey Moore]
Innovation vs. Design [Larry Keeley on CPH127]
Attention shoppers! Innovation in the grocery store [IdeaFlow]
Is Your Genius at Work? [Dave Pollard of How to Save the World]
Design as a signature skill for knowledge workers [Future Tense]
The Most Innovative MBA Team in the World [Innovation Challenge]
Watch People and You'll Know [Evelyn Rodriguez]
A Warning Label for Innovators [The Daily Innovator]
Corporate Ethnography at Intel and Microsoft [Pasta and Vinegar]

[image: Monopoly Man, jdr3k via Flickr]

FedEx and innovation within the delivery services industry

Monday's print edition of the Wall Street Journal featured a comprehensive, 10-page section called "The Top 10 Trends in 10 Industries." In industries ranging from retail to radio to advertising to venture capital, the Wall Street Journal offered a comprehensive look at the primary trends that are shaping the future direction of those industries. Within the delivery services vertical, Rick Brooks of the Wall Street Journal focused on innovation at four primary competitors: FedEx, UPS, DHL and, yes, the United States Postal Service.

So what can FedEx teach you about innovation? Well, according to the Wall Street Journal, there are at least four different ways that FedEx is driving business model innovation within the delivery services industry:

(1) Branching out into new businesses in order to "burrow deeper into the supply chains of customers"

(2) Expanding into China and other fast-growth Asian markets

(3) Improving package-tracking capabilities and other customer-oriented features

(4) Adopting a "here, there, everywhere" strategy

Regarding the last point, FedEx has been touting its relationship with Kinko's as a way of demonstrating its ubiquitous delivery presence:

"The number of shipping locations is mushrooming as delivery companies escalate their fight for small and medium-size business customers. These customers typically account for some of the industry's most profitable shipments, since they lack the bargaining power of bigger companies with more regular deliveries.

FedEx now has more than 1,450 Kinko's outlets, up from 1,200 when it acquired the copy-store chain in February 2004 for $2.4 billion... These outlets' offerings include pack-and-ship services and document production and shipment."

[image: "...Or Trucks in a Commercial?": lorenzodom via Flickr]

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Process and environment: the two foundations of innovation

Over on CIO.com, there's a great article by Michael Schrage (co-director of the MIT Media Lab’s eMarkets Initiative), who delves into the inner workings of innovation at three large companies and comes up with the following conclusion: the right type of environment and "consistent and rigorous methodologies" are the two keys to fostering breakthrough innovation.

What's surprising is that "people" (what Schrage calls "the oh-so-politically-correct answer") wasn't the number one factor responsible for driving return on innovation at companies like Circuit City, Capital One or 1-800-Flowers. Instead, it was process and environment. For C-level executives, this creates a clear strategic mandate:

"While it's true that virtually all organizations of size have their own little innovation process pockets and microclimates, the truth is that CIOs have a special responsibility to strategically rethink how best to blend process-defined and environment-shaped innovation enterprisewide. Precisely because IT organizations enable innovation throughout the enterprise, the supply chain and the customer, CIOs have to devote special care in determining whether process or environment offers the better organizing principle for innovation initiatives.

They know they need to be more innovative; they know their IT shops need to be more innovative; and they know their companies need to be more innovative. Indeed, they're looking for innovative people to hire and train. But there's no doubt that they're paying extra special attention to whether it's better environments or better processes that will tap the innovative best in their own people — and in people enterprisewide. Innovatively balancing process and environment for cost-effective innovation is at the core of real CIO leadership."

[photo: Michael Schrage]

The infinite idea loop

On his personal blog, innovation guru Jim Carroll has a link to a new three-minute videoclip: The Infinite Idea Loop. The promotional text for the video on Jim's blog was so compelling that I had to watch:

"If you need to understand why your markets or industry is changing rapidly, you need to watch this clip! We live in a world of the infinite global idea loop - Jim describes open collaboration, open innovation, and the global innovation idea cycle -- trends which forever change the source of change and innovation. Understanding the loop and learning to work within it is critical to understanding how to thrive in todays' complex economy."

It's hard to discuss all of these trends succinctly within a brief 3-minute period, but Jim does a great job - it was like watching a motivational speaker up on stage exhorting companies to embrace open collaboration and global connectivity. If you like this videoclip, there's a whole library of other videoclips on Jim's blog.

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The Innovation Perception Gap

Jeffrey Phillips of the Innovate on Purpose blog points out that many businesses suffer from an "innovation perception gap" - they know that innovation is good for them, but they haven't established the right types of systems, processes or metrics to support innovation within the organization. Pointing to a recent survey on innovation trends, Jeffrey explains this innovation perception gap:

"Over 90% of the respondents felt that innovation was important in their industry, and over 85% of the respondents indicated that their management team emphasized innovation. Over 66% of those responding said that there is a current innovation initiative within their organization.

The perception gap occurs when we begin to dig a bit deeper to understand what's actually happening in these firms. When we asked about actual cultural and process changes, the numbers drop significantly. We asked in the survey whether or not the firm had specific metrics tied to innovation. Of those that responded, only 38% indicated their firm had metrics tied to innovation. In addition, only 25% indicated that their firm had standard processes and systems to support innovation."

[image: fabbio via Flickr]

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If you want to be innovative, challenge industry assumptions

On the Creating Blue Oceans blog, Gabor George Burt continues to provide insightful - and often amusing - examples of companies and organizations that are implementing Blue Ocean Strategies. As highlighted in the book of the same name, the basic rule of any Blue Ocean Strategy is that a company must search out and find uncontested market space (the "blue oceans"), thereby making the competition irrelevant. In creating such a Blue Ocean Strategy, companies must be willing to challenge taken-for-granted industry assumptions: "While most businesses are stuck competing within boundaries and rules set by others, questioning such assumptions can lead to unprecedented value propositions for customers, and hence blue oceans."

In a PowerPoint slide provided to the FORTUNE Business Innovation blog, Gabor George Burt illustrated this concept by pointing to the example of dry-cleaning fees:

"As an illustration, consider the outrageous prices of dry-cleaning. You buy a $20 shirt then pay $4 to dry-clean it pretty much after each wear. In other words you pay twenty percent of the purchase price of an item just to have it cleaned.

Using the same ratio you would pay four thousand dollars for every car wash if you own a twenty thousand-dollar car. The expression 'being taken to the cleaners' is no joke. Such an out-of-whack cleaning cost to purchase price ratio seems like a strong justification for introducing disposable shirts, suits and dresses even."

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Modern Marvels competition

The History Channel, in coordination with its popular series "Modern Marvels," is co-sponsoring the Modern Marvels competition, which invites inventors everywhere to submit their most ingenious ideas to a panel of innovation experts: "You supply the invention. We'll be the launch pad." According to the Modern Marvels site, the innovation challenge is "a contest that invites the everyday inventor to share his/her vision and ingenious design with the world." As part of the competition, 25 semi-finalists will have their invention exhibited at a national exposition. In addition, the most outstanding invention submitted will be named the 2006 "Modern Marvel of the Year" and receive a $25,000 Grand Prize.

All it requires is logging on to the "Modern Marvels" site between now and December 31st to enter the competition. A patent is not required for submittal; however, it is suggested that a patent has already been applied for.

The "Modern Marvels" series on the History Channel celebrates ingenuity, invention and imagination: "The programs tell the fascinating stories of the doers, dreamers and sometime-schemers that created everyday items, technological breakthroughs and man-made wonders."

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November 22, 2005

Kenneth Lombard: Innovation has been instrumental to success at Starbucks from the beginning

In coordination with the upcoming FORTUNE Innovation Forum in New York City, Kenneth T. Lombard, SVP of Starbucks and President of Starbucks Entertainment, has generously offered to share his thoughts about business innovation in an interview with the FORTUNE Business Innovation blog. Building on Starbucks' longstanding commitment to innovation, Lombard is spearheading the build-out of the company's music and entertainment strategy. At the FORTUNE Innovation Forum, Kenneth will be speaking on the topic of "The importance of partnerships for innovation."

Kenneth Lombard is the former president of Johnson Development Corp. (JDC)/Magic Johnson Theatres and co-managing partner of Canyon Johnson Urban Fund. Lombard served as JDC president from 1992-2004, where he negotiated partnerships with Loews Cineplex Entertainment (Magic Johnson Theatres), Starbucks Coffee Company (Urban Coffee Opportunities), T.G.I. Friday's and Washington Mutual Bank. He has also served as a consultant to former New York State Comptroller Carl McCall. For the latest news about Kenneth and Starbucks' digital music strategy, be sure to check out the Starbucks archives over at Paid Content.

Q: How does the entry of Starbucks into music correlate with the company’s commitment to innovation?

Kenneth Lombard: Innovation has been instrumental to the success of Starbucks from the beginning. Above all, our goal is to enhance the Starbucks Experience. We provide much more than a premium cup of coffee -- our stores are a community gathering place where people come together to connect over coffee. Whether it is through the development of an innovative new beverage, food item, merchandise or service, or establishing the brand as the “third place,” we consistently strive to find ways to surprise and delight our customers by offering the highest quality products and services.

Our move into music is another example of how we are continuing to innovate. Music has always been a part of the coffeehouse culture and is an essential part of the Starbucks heritage and in-store experience. In recent years we noticed that our customers have responded exceptionally well to our music offerings, so we decided to expand them. We seized a unique opportunity to leverage our strengths and core competencies to transform an ailing music industry, and as a result, in a time where the music industry is searching for ways to increase sales, Starbucks has truly become a destination for musical discovery. It’s a win-win situation – we’re offering a new distribution channel for the music industry, and our customers are benefiting from an enhanced in-store experience and an expanded selection of music across a broad array of music genres.

Q: Why has Starbucks' entry into the music business been so successful?

Kenneth Lombard: One of the reasons we’ve had so much success with our music strategy is that we identified a problem and recognized we had a unique vision and set of assets to solve it. As the music industry reached a critical time in its history, we recognized we had a unique opportunity to reach disenfranchised music consumers who are interested in music beyond the typical Top 40 selection offered by current broadcast radio and big box retailers. These are people with busy, full lives who still have a huge love of music but who have been overlooked by the traditional marketing channels of the music industry.

We serve approximately 35 million customers per week worldwide; the most loyal of these customers visit 18 times per month. This unmatched level of customer loyalty and frequency enables us to introduce our customers to quality music as part of their daily coffee routines. We’re finding that they trust the curatorial voice of Starbucks Hear Music, because we offer them unique and compelling music selections that they wouldn’t be exposed to anywhere else.

By elevating the music experience in our stores and instilling a renewed sense of value to the discovery and acquisition of music in our customers, we have created a powerful new distribution channel for the music industry – one that we believe is transforming the way labels, artists and music fans connect. The success of our music initiative demonstrates the company's rich history of innovation while supporting our long-term growth strategy.

Q: What is the most important thing that needs to happen before innovation inside a company can occur?

Kenneth Lombard: The most important thing a company needs to have in place is a strong sense of identity and customer trust in the brand, so that you can innovate while staying true to the core of the business.

When we began thinking about expanding our music strategy, we knew we needed our customers and our partners to give us permission to enter the music business, and we had to execute in such a way that would not dilute the coffee experience. We’ve done so strategically by incorporating key learnings from past initiatives, listening to customer feedback on our music offerings, and taking a critical look at the competitive landscape. At our core we are a coffee company and we are very mindful that the music should always complement the coffeehouse experience, not distract from it.

Q: Who should be responsible for innovation at a large corporation?

Kenneth Lombard: Innovations should come from employees at all levels, not just senior management. A company that constantly and successfully innovates is one where the employees feel inspired and empowered to create.

A perfect example of this is how one Starbucks employee, Timothy Jones, rose through the Company. Starbucks' journey into music began in the late 1980s, when we had just over 100 stores. Around that time, Howard Schultz visited a Starbucks in Seattle’s University Village, where Timothy, then a store manager, was playing his own music mixes and constantly soliciting feedback from customers to see how it was received. Howard eventually took Timothy’s suggestion that Starbucks sell music in its stores.

Today Timothy manages development of many of the Starbucks Hear Music CD compilations as well as Starbucks in-store music programming. Timothy’s innovative thinking and the Company’s willingness to explore his idea was instrumental to the development of the overall music strategy and key to the building the Starbucks brand.

Q: Does the structure of your department directly impact Starbucks ability to implement innovation?

Kenneth Lombard: Absolutely. When it comes to Starbucks Hear Music, everything is a team effort. I credit our team with making tremendous strides in forming strong, innovative alliances with companies, labels and artists alike. These mutually beneficial relationships have contributed to some of our biggest successes, including the co-production, marketing, and distribution of Ray Charles’ Genius Loves Company, Herbie Hancock’s Possibilities and, most recently, Rolling Stones’ Rarities, all of which speak to our strength as a viable entrant to the music industry and our clout as a distributor. The success of these albums has been instrumental to extending the loyalty of our customers who have learned to trust in the curatorial voice of Starbucks Hear Music.

Q: Can you innovate without having access to large amounts of capital? If so, how?

Kenneth Lombard: Innovation is free. It consists of creative thinking, empowerment, and above all, passion for the growth of the company. To execute against an innovative idea, a company will need some amount of capital. But my philosophy is, if the idea makes sense for the company and more importantly, our customers, the capital will follow.

Q: How can failure lead to innovative breakthroughs in business?

Kenneth Lombard: True failure occurs when you do not learn from your missteps.

Innovative breakthroughs come when you take calculated risks and optimize your approach based what you’ve learned. With more than 4,700 company operated stores in North America, we met with some initial challenges to executing our music strategy from a logistical standpoint.

Merchandising music is much different from merchandising coffee, so we faced a steep learning curve for making our music selection really stand out. By working closely with partners across the company, we were able to leverage the knowledge and key learnings from the earliest days of growing the Starbucks business to improve our execution as it relates to music, and as a result we’ve come up with some powerful and effective ways to enhance the music experience in our stores.

Q: What specific innovations can you point to that have been the most successful for Starbucks?

Kenneth Lombard: Innovations such as creating signage to spotlight our music offerings and the introduction of standing floor fixtures as a way to merchandise multiple CD titles simultaneously and effectively have been instrumental to the success of our music strategy. We also have carefully selected music playing overhead in all Starbucks locations, something we feel is very important to what we do, because it provides such an enhancement to the Starbucks Experience.

In addition, we’ve developed various strategic alliances to strengthen and further our entertainment initiatives. Our XM Satellite Radio channel, Starbucks Hear Music Channel 75, features programming in support of our CD projects. We also offer complimentary multimedia content delivered via the T-Mobile HotSpot network, which, with more than 4,300 stores Wi-Fi enabled, is one of the largest Wi-Fi networks in the world.

For hints about innovation in the steel industry, check out the Guggenheim Museum in Bilbao

Yesterday's print edition of the Wall Street Journal had a blockbuster, 10-page section called "The Top 10 Trends in 10 Industries." In industries ranging from retail to radio to advertising to delivery services, the Wall Street Journal offered a comprehensive look at the trends that are shaping the future direction of those industries.

You might think that "the future of advertising" would be one of the more interesting of the 10 segments, but actually, I really enjoyed the segment on the steel industry. It goes back to my first reading of "The Innovator's Dilemma," when Clayton Christensen expertly laid out the ways that the vertically-integrated titans of the U.S. steel industry were waylaid by the minimills like Nucor during the mid-1960's.

Now, it's Nucor (the 9th-largest steel producer in the world) that must innovate its way out of competitive harm. It's fascinating stuff, especially when the WSJ explores the link between radically different industries - like architecture and steel. Here's an extended excerpt from a section about the steel industry called Pushing the Envelope:

"Metal makers are doing more than ever to expand beyond generic commodity markets... Steelmakers are rolling out roofing material for houses in hurricane-prone regions and new varieties of smooth stainless steel for kitchen appliances.

This trend is a global phenomenon, with steelmakers in China and Eastern Europe investing in galvanizing and other steel-coating lines in an attempt to expand beyond production of cheaper, construction-type steels and into the high-priced steels used to make cars and washing machines. Stainless-steel and titanium panels are even being sold as architectural flourishes, for the roofs of airports and art museums such as the Guggenheim in Bilbao, Spain..."

There you have it - architects like Frank Gehry are at least partially responsible for the state of future innovation in the global steel industry!

[image: mumblemurmur via Flickr]

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Pitney Bowes and Customer-Centered Innovation

In an 8-page whitepaper called The Practice of Innovation: Customer-Centered Innovation at Pitney Bowes, James Euchner, VP of Advanced Technology at Pitney Bowes, describes how the company has "turned the traditional innovation process inside-out" to focus more on customers as it develops innovative solutions in areas like mail management and document management. Using this customer-centered approach to innovation, Pitney Bowes is now able to develop new products and services that are within the strategy and capability of the company, technologically feasible, financially worthwhile and targeted to the needs and values of its customers.

As proof of the company's "deep and continuing reliance on the customer for direction," James Euchner explains that four of the five strategic steps that define the Pitney Bowes innovation process focus explicitly on the customer:

* Understand the customer needs
* Invent into the customer needs
* Create new value propositions for users
* Conduct trials with real people in realistic settings

After setting up this innovation framework, James Euchner's whitepaper then works through each of these strategic steps of the innovation process, using a simple strategic question as a guide: "How can Pitney Bowes develop solutions to meet the needs of those currently paying for their postage with stamps?" By observing first-hand how small businesses and larger enterprises interact with each step of the mailing process, Pitney Bowes was able to understand the common "frustrations and desires" surrounding the mailing process - and then devise new solutions meant to address these wants and needs.

As far as whitepapers go, it's an easy read filled with easy-to-understand graphics (hint: we like Venn diagrams). The full 8-page whitepaper from Pitney Bowes is available for download here.

What's cool, too, is that the author of the whitepaper, James Euchner, was honored last year as a co-winner of the Inventor of the Year award by Pitney Bowes for his work on a new invention now used by eBay:

"Pitney Bowes announced the winners of its 12th annual Inventor of the Year award at a special ceremony held recently at its world headquarters in Stamford. This year, the award was shared by a team of seven inventors including: Feliks Bator, David Chamberlin, James Euchner, Thomas Foth, Andrei Obrea, David Rich, and David Riley.

The winning patent issued in September 2003 by the U.S. Patent and Trademark office covers “Instant Online Postage.” The invention is the foundation for the Internet postage application that was deployed earlier this year for eBay. This invention allows users to download postage easily over the Internet without the need for special software. Millions of packages have already been shipped since the new service’s launch, attesting to the popularity and convenience of the solution."

James is also a speaker at the upcoming FORTUNE Innovation Forum in New York, where he will be participating on a panel discussion on the topic of "New Innovations in Traditional Industries."

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35 leading innovators of our time

This month's Smithsonian Magazine has an in-depth feature on 35 innovators who have made a difference. The names are all over the board - ranging from musician Yo-Yo Ma to astronaut Sally Ride to World Wide Web inventor Tim Berners-Lee. Interestingly, Bill Gates made the list - but not for anything that has to do with Microsoft. Instead, Smithsonian saluted Gates for his mega-philanthropic activities:

"Through the Bill & Melinda Gates Foundation, Bill has brought the same far-sighted approach to public health challenges in the developing world as he did to computer technology. Just as he changed the landscape of electronic communication, his foundation is reshaping the landscape of deadly and debilitating diseases in the developing world. Someday, this may be his greatest legacy...

Since making its first global health grant in 1998, the Gates Foundation already has made a huge impact. It has helped save the lives of more than 670,000 children in the developing world through its support of an aggressive vaccination program. Yet Bill has set his sights much higher: preventing the deaths of millions of children a year. Such a goal requires new ideas, so his foundation offers grants to stimulate fresh thinking—for example, to try to come up with vaccines that need no refrigeration, or to try to alter the genetics of mosquitoes to kill or render them incapable of transmitting diseases such as malaria."

[image: Bill & Melinda Gates Foundation]

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The winners of the National Medal of Technology

This year's winners of the National Medal of Technology were announced last week by U.S. Commerce Secretary Carlos Gutierrez. Since the National Medal of Technology is the highest honor awarded by the President of the United States to America’s leading innovators, it's always exciting to see who's at the cutting-edge of technological progress each year. This year's winners will attend a special award ceremony at the White House at a later, to-be-determined date.

There were two individual award winners this year (Ralph Henry Baer and Roger Lee Easton) in addition to five corporate winners: Gen-Probe (blood testing technologies); the microelectronics division of IBM; Industrial Light & Magic (visual effects technology for movies); Motorola; and PACCAR (aerodynamic, lightweight trucks).

In previous years, winners of this prestigious honor have included Robert Metcalfe (2003), Douglas Engelbart (2000), Bill Gates (1992), Gordon Moore (1990) and Steve Jobs (1985).

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For manufacturers, innovation is the best competitive strategy

The 2005 Georgia Manufacturing Survey released by Georgia Tech confirms what most of us already know: "Companies basing their competitive strategies on the development of innovative products or processes enjoy higher returns on sales, pay better wages and have less to fear from outsourcing than do manufacturers relying on other competitive strategies."

In fact, the gap between companies that focus on innovation and those that do not is remarkably wide: "Georgia manufacturers that rely on innovation for their competitive edge reported returns on sales 50% higher than companies that compete by providing low cost products... Innovative companies paid workers a third more than the average Georgia manufacturer and were 40% less likely to lose work to outsourcing than were companies competing on low cost." [The graphic to the left shows "average return on sales" for two different competitive strategies]

Yet, as Renee Hopkins Callahan of IdeaFlow points out, the number that really jumps off the pages of the report is that only 8% of the 648 manufacturing firms that responded to the survey listed "innovation" as their primary competitive strategy. In contrast, a whopping 53% of firms listed "high quality products and services" as their primary strategy, while 20% of companies prefer a "low-cost" strategy. According to Renee, these companies need to deploy a more proactive innovation strategy:

"The idea that 53% of the companies surveyed believe that providing high quality prices and services is a worthwhile competitive strategy amazes me. High quality is table stakes, not a strategy. These companies, and the 20% that are competing on a low-price strategy, are the companies that are going to lose to outsourced competitors."

The full results of the 2005 survey are available on the Georgia Manufacturing Survey site, as are the results from previous years (1994, 1996, 1999, and 2002).

[graphic: "Average return on sales for manufacturers competing primarily through low price versus those competing primarily on innovation: 2002 vs. 2005," via Georgia Tech EDTV]

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The need for an innovation ecosystem

Innovation Weblog points to an excellent post by Geoff Moore on his Dealing With Darwin blog, where he explains that a breakthrough idea or product is not enough when it comes to building a model for sustainable innovation. Without a full-fledged innovation ecoystem in support of this "deviation from the norm" (in Moore's parlance), true innovation is not possible:

"The big challenge may not be coming up with the initial deviation — there are usually lots of good ideas in play. No, the real challenge is coming up with all the supporting innovations that reinforce the initial vector, aligning all the other functions in your company to reengineer their processes in such a way as to further accentuate the new value proposition, thereby creating a sustainable differentiation that can generate deep and lasting competitive advantage.

This doesn’t happen in creativity labs or at offsites, although it can gets it start there. Such systemic reinforcement of a single vector of differentiation represents instead a deep commitment from top management to align the entire enterprise, supported by a careful cascade of strategy down through each function, each being asked to show how it can reengineer some aspect of its work to further the differentiating effort."

According to Innovation Weblog, the best example of such an innovation ecosystem at work is the Apple iPod: "Think of the Apple iPod, which isn't just a cool music player, but which is actually part of an entire music ecosystem, which encompasses the engaging iTunes software, Apple's 99 cent per track pricing agreements with major music labels, and much more."

[image: "iPod," by Julien Menichini on Flickr]

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What is the next step in the evolution of product complexity?

Over on Gizmodo, Jim Phillips, Director of Innovation Processes for frog design in Palo Alto, discusses the ever-evolving product: a product so complex and sophisticated that it continues to evolve, even after it has left the factory floor:

"Take the latest BMWs to roll off the assembly line in Bavaria. They feature TeleService, a system that uses an embedded phone in order to stay connected to an authorized service provider. The auto shop can thus be alerted when signs of trouble are brewing, giving its mechanics the ability to predict failure before it happens...

Another example is Rolls-Royce’s product service bundle for its jet engines, called TotalCare. Rolls-Royce guarantees trouble-free engine operation (or flight time) based on an hourly rate. Rolls-Royce has designed a diagnostic system that continually monitors the performance of the engine; it communicates to a central Rolls facility via a satellite network, to spot engine performance issues before they adversely affect uptime and costs..."

These two examples are just the tip of the iceberg, says Phillips of frog design, when it comes to product evolution and adaptability: "We are rapidly heading towards the day when connected ever-evolving products become the standard rather than the exception." The post also looks at a number of other built-in feat