‘Companies should work like venture capital firms’  

Rowan Gibson's new book, Innovation to the Core,  explains how to build and sustain a company-wide innovation capability.

.. we looked at 200 cases of successful business model innovations and then came with four lenses for innovation. These are

a) challenging orthodoxy

b) Harness trends and discontinuity

c) Leverage core competencies in new ways and

d) address unmet consumer needs.

It is at the intersection points of these lenses that we get the big ideas.

CNN is a classic example. At the time the channel was born various new trends were popping up. To his credit, Ted Turner put all of it together and came up with CNN, a 24-hour news channel.

People were working longer hours and did not get home in time to watch the six o’ clock news. People were traveling more on their job, and hence not getting their daily share of news.

Now who should have really seen the opportunity? The BBC. But they remained blind to the opportunity.

 In a small firm, it is very easy for an individual to put across a new idea. However, in big firms, great ideas get killed, in most cases by the immediate boss of the individual who has come with the idea.

Hence organisations need to approach innovation as they once approached quality. Edwards Deming built a system which ensured that quality was everybody’s job. He made quality systematic. The same things need to come for innovation to happen.

Take the case of Whirlpool, the appliance manufacturer. They realised that there products were becoming commodities and being drowned in a sea of white. Given this, price of their products would keep going down. In this situation they asked themselves, “How do you create a brand in an industry like this to differentiate, command a good price and brand loyalty?”

This led to a corporate innovation system. One of the teams formed was asking itself, “We are selling products to women, why don’t we start thinking products to address men?” or “We are primarily addressing the kitchen and the washroom, how can we start addressing other spaces in the house?”

One of the breeding grounds for innovation is diversity. But the problem is big companies get rid of diversity. Having said that, innovation teams need diversity. You need young people or people who are young at heart, people from the periphery of the organisation, people from every level and every function and also people who are either new to the company or the industry. This ensures that they do not have any preconceived notions.

This diversity creates intersection points and it is at these intersection points between various groups that form the innovation team that radical ideas come out.  Nokia did this very successfully in the 1990s. Whirlpool also did the same thing in their own way.

Yes it is. Let us take the case of Procter & Gamble. Their employees now spend less time in office and more in observing how people use their products, the frustrations they have using them and what’s wrong with the product. Ideas spring out in observing these things.

Take the case of the Tata Nano. No one was begging Ratan Tata to come up with that car. So these needs are unknown but not invisible. All they are is “hidden in plain sight”. Hence companies need to address these needs before their competition does.

What is needed is a disruptive business model.  Most companies in a given space of business compete with other companies who are doing business on the basis of a very similar business model.

Now if somebody comes up with a radically different business model that becomes very tough for companies to compete with, the existing companies will literally have to undo everything they have already set up in order to compete with the new business model.

How to create a business model that is differentiated from competition is the new holy grail

But in a world where we have hyper acceleration, hyper competition and hyper commoditisation, business models do not last as long as they used to. One look at financial services industry, telecommunication industry, automotive industry, television industry and even Hollywood you will find that old business models are getting obsolete.  And more than that are very rapidly being replaced by new business models.

The Apollo Hospitals group, I think, is a marvellous business model. Medical service is a new business model, which is competing with the biggest hospital chains in America and is actually winning.

An individual looking for treatment gets better, cheaper and faster service here. More than that you are treated better as a complete person with offerings of wellness and other programmes. And add to the equation cheap air travel and the whole thing really takes off. If you go back 10-15 years, that kind of business model this would have been unthinkable.

Microsoft  and Google approach innovation very differently. Microsoft puts a whole army of programmers behind something.

Google has very small teams around ideas. Google allows ideas to bubble up from everywhere. So they have a top 100 pet projects that Larry Page lists and the greatest honour for an employee is to get his project listed on it. What they try at Google is to grow a lot of Googlets (baby Googles) and see where they go. They then have a thing called Google labs where you can come from outside and test your ideas and see if they work. Employees are given the 10:20:70 principle.As much as 70% of their time is spent on normal projects, 20% is spent on special strategic projects and 10% is just for you to work on their pet projects.

So people are given the time and that means a whole different kind of innovation that comes from the from the hearts of people and from their passion, that is being generated at Google.

On the other hand, innovation at Microsoft is top down. That would have worked well in the past. Not now.

Microsoft almost missed the internet opportunity in the early nineties. When Bill Gates realised this he turned the battleship around and got it working in terms of major strategy.

Having said that, I believe in the Google model of ongoing innovation.

And if you look at it, Google competes with Microsoft on the basis of a completely different business model. Microsoft’s business model is that we make a huge operating system and everything is integrated with everything else. And we sell software products in shrink-wrapped boxes in stores and online.

Google does not sell software at all. They sell advertising space. It is a totally different business model. So what do we see now? Microsoft is trying to shift its business model to an online model. Steve Ballmer has said that within the next two to three years he hopes that 30% of the business would come from online advertising.

Hats off to Microsoft for what they did with the internet. From 1993 to 1995 in 2-to 3 years they shifted the entire company around. So they have proven it is possible. Nevertheless, it is very difficult for large companies to do that. That is why it is much smarter to put your money on Googlets.

Those things may be the future of your entire company. Some of them will die but some of them will roll. Innovative companies should work like a venture capital firm.

Today many companies are creating such a portfolio of ideas. Global oil major Shell has something called ‘Game changer’ where it is funding a lot of small experiments and see where they go.

There is a peer review panel for these ideas and the company gives  $25,000 and 30 days off to employees to test their ideas. If this is successful, then the employee gets ninety days off and $50,000 to take the idea forward.

A lot of businesses have come out of this. Some are built around business models, some are around technologies and some of them are around products. Microsoft doesn’t do it that way.

One of the greatest examples in our book Innovation to the Core is about a global cement company Cemex. They made innovation their number one priority. One of things that Cemex introduced  was to cut down on the length of time that it takes to receive cement.

For the cement to reach the customer’s end it took about 2-to-3 hours. Now Cemex has reduced the delivery time to 20 minutes. To do that they checked other systems such as the 9/11 call centres, where paramedics reach a destination in double quick time and even taxi services. What they did was using analogies outside their industry, which no one had thought of earlier. It is a new business model. Thus it is possible in a commodity industry,to differentiate.

Well there are two arguments. Jim Collins (management guru and author of Built to Last, Good to Great),  set up the idea of being built to last. I actually believe companies should be built to change, built to innovate and built to renew…that’s a much more important issue. I do believe that you can renew over and over again and you can go from one thing to another.

I think there are firms that are able to make the metamorphosis. There are those that are not able to do so. Take the big automotive firms such as General Motors and Ford, they are really struggling. So there are companies that are at their end and will be replaced through creative destruction. You see it everywhere and that just seems to be the natural way of things.

My advice would be to make innovation number one on the agenda. Jeff Immelt, CEO of General Electric, the biggest company in the world by market capitalisation, when asked about his priorities for the future said, and I quote “The only answer today is innovation.”

That’s the man who has understood that the game has changed.
Jack Welch was from another era. Welch’s era was all about natural cost-cutting efficiencies, six sigma, mergers & acquisitions etc. But now we have a new era. Immelt has realised that it is all about innovation.

Sam Palmisano, the CEO of IBM, says all roads lead to innovation. You think of hyper competition you think about new business models, you think about strategic renewals …  you think of all those issues and you realise that all roads lead to innovation.

So number one is getting there and understanding it that’s just the first step, crucial step The second step is what you are going to do about it. People like Immelt and Palmisano have created this cultural change programs inside their companies to make innovation a daily reality. To take it out of R&D, where it has traditionally been, and spread the responsibility of innovation throughout the firm.

This is because you can’t expect technicians of R&D to come up with new business models. IBM learnt this first-hand as what saved the company was not technology but coming up with new business models. So the realisation now is to involve people across the firm.

R&D is relevant. However, today the key advantage that technology gives you can be copied very, very quickly. There are very few companies which have some proprietary technology that no else can get their hands on. Therefore, if your advantage is based on some technological advances then I think it will be very short-lived. Same is true of product innovation. Any new product that comes to the market other companies can copy it in weeks or months.

Hence, the issue is, we need to focus on a different kind of innovation and that is business model innovation. And to do that we need to more people across the firm thinking about business model in a systematic way.

(On M&A).......buying some other company is not going to make us unique. And what is also important is, why does a company acquire another company. Is it just trying to play catch-up as it failed to innovation.