CHAPTER FOURTEEN

BRIDGING THE GAP BETWEEN THE OLD AND THE NEW ECONOMIES

HE COULDN’T UNDERSTAND IT. HERE he was, stumbling along in what was both a familiar and an unknown world, with all the familiar landmarks changed. Worse, he felt—and looked—old and tired. Only this morning he had been in the prime of his life. This afternoon he was out of his element. He hadn’t changed—the world had changed.

When Rip van Winkle woke up just over two hundred years ago from his twenty-year sleep, his world had changed. Just imagine him having to understand the changes that have taken place in the business environment since 1980—in just over twenty years! Even managers who have been navigating the changing waters over this period face challenges. If innovation is all about preparing the company to take advantage of future business opportunities and challenges, how do companies manage innovation in a dramatically changing world?

These challenges form three clusters. First, what business models seem appropriate in the new economy? Second, how should companies organize to innovate and take advantage of new opportunities? Third, and perhaps most important, what new challenges will confront the successful innovator? If we can determine what the new environment will be, we can then develop strategies for bridging the gap between yesterday and today.

WHAT BUSINESS MODEL?

THERE ISN’T A whole lot new under the sun, at least as far as social organizations are concerned. As Henry Mintzberg has said, companies are about four things: finding, keeping, transforming, and distributing.¹ This hasn’t changed from the first corporate venture. Sure, the world has become progressively more complex, we have new technologies that have destroyed industries and created others, and we have instantaneous access to breaking information from across the globe. But the basic business model of people organized to create value—at personal risk and for their own gain—has not changed.

What has changed over the years is more the philosophy of business. Now we are more concerned about conserving limited resources and about sustainability. We are more concerned about the longer-term viability of the communities in which our businesses operate, and about ensuring that our suppliers and customers are successful. We are concerned about our employees being successful. So how we think about doing business has changed dramatically in the past 200 years.

Customers’ needs haven’t changed a whole lot in that time, but customers’ expectations about how they will be treated and what comes in the increasingly complex bundle of attributes we call a product have changed rather fundamentally. The marketing movement of the 1920s recognized that customers had product choices to make, and if we wanted to sell something in a competitive market, we’d better be able to differentiate our product enough that a group of people would prefer our product to that of our competitors.

The mass-marketing model worked when we didn’t have the ability to communicate our message very well, and while customers couldn’t communicate with us very well, either. Getting good feedback from the marketplace took so long that companies had to put new products out into the marketplace in volume and trust they would be purchased. Few people thought that the mass-market model of economies of scale and limited choice made much sense, but it was the only effective means of servicing markets available.

Well, now we have the capability of servicing very small market segments and at the same time economically produce very small batches of product. But that isn’t enough. What we have to do now is meet the expectations of customers. This is very much the age of the individual in the organization and in any society. And the golden rule has been replaced by the platinum rule: Treat individuals as they want to be treated, not as we want to be treated. This throws a new curveball in the business game. In addition to wanting better innovations and wanting them more quickly, customers now want individual treatment. They want businesses to say “I see you,” and they want businesses to mean it.

So the basic assumption underlying the generic business model has gone from the manufacturer rules through the customer rules to the individual customer rules. Now companies have to deal with meeting and managing expectations at the level of the individual.

The new information technologies help us do this. We can gather tremendous amounts of data that we can then drill down through to give us insights almost to the level of the individual consumer. And we can link organizations and individuals, or organizations and organizations, at the click of a button. Because we can do this quickly, expectations are that we will do this quickly. Of course, our notions of lines of communication and linearity in distribution are now completely irrelevant when we think about transferring information and knowledge.

Just as we have pools of customers and pools of suppliers with whom we can deal instantly over the Internet, now we have pools of knowledge that we can access in the same way. So along with the business-to-consumer and business-to-business hub systems for commercial communication, we also have the creativity-to-business hub, through which ideas for development can flow.

The new model of instantaneous access to information and the implication of instantaneous satisfaction of demand together pose a real challenge for developing new innovations. Companies have to be increasingly innovative and flexible enough to satisfy very small market segments if they are to survive in the future. What can they do? How should they organize?

ORGANIZING FOR E-INNOVATION

THERE HAS BEEN a lot of discussion about whether or not traditional businesses—the brick-and-mortar companies—should keep their Internet operations separate from their traditional operations. While this might not appear to have much of an impact on the company’s innovation, the reality might be very different. Separating the two distribution methods might give greater focus to each and might give more flexibility and access to venture funding to the Internet operations. It also gives rise to a completely different culture, a culture in which the company never sees the product or the recipient of the service. The Internet doesn’t merely give rise to a new distribution avenue, one with ostensibly lower costs of acquisition and servicing than the traditional model. Innovation in one side of the business is therefore extremely unlikely to flow to the other system.

What we might finish up with, then, are two different innovations in response to a single customer need or expectation. Both might be appropriate, but they both might be suboptimal. If the common challenge had been looked at with both distribution systems in mind, it might have been possible to develop an even better innovation that satisfied both pieces—and that cost less to develop and launch and would sell in greater volumes than either of the single-channel solutions.

OUTSOURCING INNOVATION

STRATEGIC MANAGEMENT OF outsourcing is perhaps the most powerful tool of management, and outsourcing of innovation is its frontier.² Outsourcing is attractive for a number of reasons. Suppliers automatically increase the innovation potential of a company, they often have talents that we don’t, and they help us manage risk by accepting some of the development risk. And they have knowledge we don’t have.

One organization cannot possibly hope to keep track of the new information currently being generated. In the pharmaceutical industry, for instance, it is thought that independent biotechnology research adds 100 gigabytes per day to the databases of the National Institutes of Health genetic sequence database.

How, then, should businesses organize their innovation search and development to take advantage of the flood? One way is to outsource those parts of the innovation process we either can’t do well or that are not core to the company’s strategy. We won’t dwell on the various ways we might think of outsourcing or the parts that can be outsourced. The issue for us is how to manage outsourced innovation.

MANAGING OUTSOURCED INNOVATION

There are a few general principles for managing outsourced innovation. Perhaps the most basic is that we expect the innovations we outsource to have a finite life. But we should expect the value to us to be temporary and plan for it. That means we need a process that allows us to observe and monitor many types of innovation at the same time, and then decide which innovation “wave” we want to follow. And we also need a process that allows us to change direction when the wave begins to change. This is synonymous with fishing in a stream with many active pools, deciding which pool is providing the greatest activity, deciding how to approach the fish, deciding which fish to release and which to keep, and deciding when to leave the pool and move on. It is similar to the Pacific islanders who navigate in unknown waters, sensing where new islands are only by the complex interplay between winds, currents, and tides—reflected in wave patterns. How do we set about following the wave, catching the fish, and sailing into the unknown?

Committing to Exciting Goals

An exciting vision and exciting goals are essential for energizing people internally and externally to work together. What may be exciting to one group might not be exciting to another, so it is important that both parties share similar cultures and senses of purpose. Both groups have to realize that the relationship is temporary in nature and limited in scope. It is not a courtship. Both groups have to jointly develop the vision and goals and be viscerally committed to them. Otherwise, it is very unlikely that useful innovation will occur.

Ensuring that Partners Benefit

Synergies must exist, and these synergies must benefit both parties. The outsourcing organization must be able to add value for the innovating organization, which means being able to provide significant value to customers in a significant market the innovating company could not otherwise access. As a rule, the outsourcing organization has to possess, and use, a competitive advantage built on strategic core competencies.

Developing Internal Experts

As with other forms of knowledge gathering, companies find gatekeepers—now called knowledge brokers—useful as a means of identifying and making known both best-of-breed internal innovations and external innovation capabilities that are of strategic interest to the company. These knowledge brokers are especially important to senior managers, for without them the likelihood of replacing obsolescent or obsolete processes before the system fails is much reduced. Remember: Systems that don’t change are already dead. However, developing masters of innovation knowledge will help transform the innovation system from an active to a hyperactive system. And where opportunities are transitory, hyperactivity is important.

Developing Effective, Interactive Models

Without open, interactive software models, it is unlikely that development will occur either quickly or particularly effectively. How the model is structured is not as important as the fact that everybody using the model must understand the model and be able to use it The model therefore should have unambiguous interface, goal, and performance criteria. This will allow experiments to be conducted and alternative prototypes to be built in parallel, speeding up the development process.

Establishing Exponential Performance Targets

One way to make the exciting goals concrete is to establish performance targets significantly higher than trends would indicate. This requires developers to find new ways of attacking the problem. The payoff is in the marketplace, where customers will be willing to shift from one supplier to another for significantly greater value. Canon set that challenge for its developers—the challenge of building a camera using the APS photographic system that was no bigger than a cigarette packet. The result was the Ixus/ELPH camera, a clear market leader.

Concentrating on the Destination, Not the Journey

Riding herd on an outsourced innovator is like having a dog and barking yourself. The interactive software contains the critical aspects of the design envelope and the performance criteria for the innovator’s systems, so if the model is appropriate, why not let people get on with it? The risks inherent in relying on one innovator for a particular innovation can be overcome by having an ongoing competition among several alternative suppliers. And if competitors can be encouraged to collaborate, it is likely that the interaction will produce synergies that the customer organization can readily exploit.

Sharing Gains

One way to gain collaboration is to share gains above targets with suppliers, even those whose designs were not accepted. If this expectation is established at the outset, it may lead to better than anticipated performance levels or lower costs that may then translate into better than anticipated market performance.

Managing the Information Interchange

In the Innovation Management Model (Figure 3-1), information interchange occurs in Systems I, III, and IV, as Figure 14-1 shows. Contact is first made at System IV, where strategic goals and challenges are reviewed and set. The second contact point is in System III, where development team leaders from both or all organizations meet to develop operational and coordination plans and time lines. The third contact is in System I, with continuous interchange between lower-level teams and individuals actually working on the project. Managers have to ensure that tacit knowledge developed in one organization and needed by the other is effectively transferred, at the appropriate time. This is the point, incidentally, at which the cultures touch constantly. If the values and vision shared at the top of the organization are not shared at the bottom of either organization, innovation will wither and die.

FIGURE 14-1.INFORMATION INTERCHANGE IN OUTSOURCING.

Developing Incentives and Open Communications

We manage what we measure—trite but true. But we also get what we encourage, and if the incentives encourage behavior other than what we want, we’d better change the incentives. Rewarding stewardship does not encourage people to seek challenges, so if we want to encourage innovation, we have to encourage risk taking and accept the occasional failure. And information has to be available to everyone in order for the innovation team to have the best chance of success.

IDEO, the Palo Alto, California–based design group, goes one step further. Although the contact point for a client is in one of the group’s scattered offices, all new projects are posted electronically companywide. Any person is able to post her thoughts on issues surrounding the project on the project bulletin board and bill her time to the project. Clients are warned that this practice will happen and that they should be prepared for a large bill for the first month’s activities. The challenge for the project team is to parse the information and use what is relevant—a more rewarding challenge than having to try to find information by itself.³

Accepting Guided Anarchy

The continuing development of the Linux operating system is one of independent developers improving the system as they see fit. We don’t advocate going this far for commercial innovators, but there are elements of the process that fit with our model of outsourcing. Letting it be known that we want products or services with certain characteristics, and that we will treat innovators fairly, is one way of encouraging small innovators to work toward our goals. Helping provide or locate resources may encourage more innovators to us. Companies like Microsoft and Apple have used this approach to encourage software developers. If we decide that we don’t want the innovation, the developers can feel free to take it elsewhere.

Using Innovation Incubators⁴

We’ve all seen business incubators. Usually, they are government-financed centers that provide space, some funding, and some basic services to small start-ups that have an acceptable business plan. Unfortunately, these incubators don’t encourage innovation, nor do they coordinate innovation. This shouldn’t be surprising, for everything is against them from the start. It is a myth that small companies are particularly innovative; in fact, the majority are not innovative at all. Nor are small businesses the source of new jobs: The rate of closure of small businesses isn’t too much different from the rate of formation of new businesses measured over a period of a few years. So independent businesses in small business incubators can’t expect much.

So we need a new model of incubator, and we have one. It is called the networked incubator,⁵ and it differs from the traditional incubator in a number of ways.

1.NETWORKED INCUBATORS NEED NOT BE STAND-ALONES. For example, Ford and Lucent have incubators. Ford’s incubator, ConsumerConnect, focuses on speeding up the process of creating and developing Internet businesses. Meanwhile, Lucent’s New Business Group funds and incubates ventures that commercialize Bell Lab’s technologies.

2.NETWORKED INCUBATORS ARE FOR-PROFIT ORGANIZATIONS. This means it is in the incubator’s interests that innovations be successfully commercialized. To foster this, incubators allow the small innovators to retain majority ownership in their businesses, unlike venture capital firms that typically take ownership. They also ensure that the innovators are relieved of the bureaucratic and organizational drudgery and impediments that can get in the way of the risky challenge the innovators will be pursuing.

3.NETWORKED INCUBATORS RELIEVE START-UPS OF THE OPPORTUNITY COST OF SEARCHING FOR FUNDS BY PROVIDING ACCESS TO FUNDS THEMSELVES. The incubators provide funds from top-tier sources at competitive rates. Anyone who has done the rounds of banks looking for a sympathetic ear and an open hand knows how long this search can take.

4.NETWORKED INCUBATORS PROVIDE ACCESS TO A NETWORK OF COMPANIES. This can be critically important, for gaining access to development resources and distribution can be the difference between success and failure of the venture. In a sense, networked incubators can play a role in mediating the outsourcing search of a customer and the developer search of an innovator.

5.NETWORKED INCUBATORS CAN PROVIDE COACHING AND MENTORING. They can also provide access to legal services, important to many inventors and innovators. The cost of patenting an invention is very high, and many smaller innovators reluctantly accept the risks they run by not patenting because they cannot afford the cost of the patent application process.

6.NETWORKED INCUBATORS CAN HELP WITH RECRUITING, PARTICULARLY IF THE SMALL BUSINESSES ARE ALL BASED AROUND SIMILAR TECHNOLOGIES. This latter characteristic underlies the success of the networked incubator. The incubator has the opportunity to select each of the innovative small businesses. Ensuring that all the businesses have the same cultures and operate in the same general technology field makes it easier to operate the incubator and to cultivate the necessary networks of resource suppliers and customers.

7.NETWORKED INCUBATORS CAN WORK QUICKLY, EVEN STARTING “COMPANIES” OF THEIR OWN. For instance, Idealab! companies were often started using the incubator’s funds. Most were experimental Web sites, opened to see if people would visit and buy the product or service. Given sufficient interest, the incubator would establish the company.

Incubators run risks, of course, principally because they choose to put most of their eggs in one basket. Idealab!, the first networked incubator to be launched (in 1996), has since failed because it ran out of cash before any of its small businesses began returning a profit or could be sold. But that doesn’t invalidate the concept. The jury is still out.

SYNDICATING INNOVATIONS

In Chapter 13, we looked at the syndication of media products—films and television products in particular. These products, along with newspaper columns, are information products. The Internet, being a pure information medium, makes it intriguing to think of syndicating physical products as well. How might we do that?

It is now possible for people in all corners of the world to gain access to the Internet. E-retailers therefore compete against each other for all the customers in cyberspace, but choose the geographic limits they impose on themselves. There is no reason the developer of an innovation shouldn’t offer the product to a number of e-retailers, who would bundle the innovation with others that they want to sell. This absolves the developer of any marketing responsibilities. If the developer ships the product directly to the customer, it also absolves the e-retailer of any warehousing and shipping responsibilities.

Some companies have been producing house labels for years, such as Sears and Kenmore. Now, though, the e-retailer is simply selling information, bundled with other products for a specific market segment. The developer is being exposed to a great number of different market segments by being aligned with several e-retailers, each of whom focuses on a particular segment. Making the developer/distributor invisible to the customer requires the developer to have access to detailed distribution capability.

CHALLENGES FOR
INNOVATIVE ORGANIZATIONS

GIVEN THE CHANGES that information technologies have wrought, it shouldn’t be surprising that there are more pressures on innovators now than there were twenty years ago. These pressures can be grouped into three clusters, as Figure 14-2 shows:

1.Managing knowledge

2.Managing material resources

3.Maintaining control

FIGURE 14-2.THE CHALLENGE FOR INNOVATIVE ORGANIZATIONS.

MANAGING KNOWLEDGE

Locating Knowledge

Spreading Knowledge

Making Transitions

MANAGING MATERIAL RESOURCES

Outsourcing Manufacturing

Managing Distribution

Managing IT Infrastructure

MAINTAINING CONTROL

Control of the Innovation

Control of the Company

Control of Innovation Projects

Control of the Brand

MANAGING KNOWLEDGE

We need to manage knowledge for several reasons. First, knowledge is a perishable commodity, and its half-life seems to be getting shorter. Second, knowledge comes in two basic forms: (1) embodied knowledge, which is the knowledge captured in equipment, books, and increasingly in software, and (2) disembodied knowledge, which is the knowledge in the heads of the people in the organization. This latter knowledge can either be codified (captured as a written procedure) or tacit (residing solely in people’s heads). What we need to do in the new economy is ensure that information becomes usable knowledge, and that usable knowledge becomes effective understanding as quickly as possible and is disseminated as quickly as possible to the places where it will have best effect. Turning knowledge into understanding is the slowest activity in the loop, so organizing for effective learning is crucial.

Locating Knowledge

Traditionally, managers have thought of people in R&D and engineering as creative knowledge workers, and workers in operating departments as needing to have predictable jobs. This thinking has to change, and everyone in the organization has to be expected to have something to offer in the way of useful and usable knowledge. If they don’t, we haven’t lost anything. But if they do, while we’ve already lost something, we can make up for it.

To find all the useful knowledge, we have to locate the company’s best practices—all of them. This is a very difficult task. There are differences between the procedure as laid out in the manual, and differences between what people think they do and what they actually do. The more complex the systems with which people work, the more likely there are to be problems that require new fixes. In addition to watching what people do and determining what actually is best practice, we have to find out why people do what they do and how they manage exceptions. Both “normal” best practice and “exception” best practice capture knowledge that should be spread around the organization. More important, though, is capturing the understanding about why the best practices were needed. Aping others without understanding why change is important is unlikely to result in new embedded practice.

Spreading Knowledge

People working in small groups automatically distribute knowledge. They also generate new knowledge and deeper understanding by challenging each other. It is as true in R&D as it is on the shop floor and in after-sales service. The key issue is how to capture and disseminate the knowledge in a way that allows all receivers to recognize the information as credible.

Building a gigantic database and loading everything into the database—standard practice in many companies—is precisely the wrong answer. What seems to be most appropriate are databases that contain specific classes of knowledge—service and repair, sales and marketing, purchasing and vendor management, R&D, and so on. In addition, a peer group should vet the knowledge in these databases. The scientific community has had peer-reviewed publications for countless years. Extending the process to all classes of knowledge workers (and that’s everybody) makes sense. Now some Web sites seem to be accepting the challenge, with articles posted by anybody who wants to post some knowledge and given “value scores” by readers. Those writers who consistently score highly have their writings placed in very accessible places on these Web sites. The more useful the knowledge is deemed to be, therefore, the easier it is to access.

Making Transitions

Spreading best practice is essential, but sometimes it is not enough. When a business wants to make a substantial internal innovation, many different classes of knowledge are required. Xerox faced this challenge in late 1994 when the company wanted to move from proprietary information technology infrastructures to an industry standard. Instead of using either a highly centralized or a highly decentralized approach to initiating and managing the change, Xerox chose a third path. This was an alliance of specialists from corporate headquarters and the business units to share knowledge from different parts of the organization and to create deeper knowledge and understanding of the whole system.⁶ This deeper and more robust understanding allowed teams in the business units and in corporate headquarters to more effectively and more quickly develop procedures for making the changeover, and making the change more effective than might possibly have been the case. This approach has great merit and should be more broadly applicable. It is similar to the approach used at Daewoo Shipbuilding and Heavy Machinery to develop and deepen its understanding of welding.

MANAGING MATERIAL RESOURCES

Three things are involved here: (1) outsourcing manufacturing, (2) managing distribution, and (3) managing IT intrastructure.

Outsourcing Manufacturing

Many companies are now intent on getting out of manufacturing. Manufacturing will always be important, as will agriculture and high-contact services, but many e-commerce companies seem content to act more as distributors or final assemblers than their counterparts in traditional businesses in the same industry. This approach isn’t new—just ask the companies that manufacture products for Sears under the Kenmore label. But what is new is that some manufacturers are now essentially selling production capacity to anyone who wants it. And the approach has its advantages, at least to the seller.

Manufacturing for many clients makes sense in volatile businesses. While the demand for individual products is very unpredictable, the overall demand is much more stable. The key for the manufacturer is to be able to switch very rapidly from product to product. (Celestica Inc. of Toronto, for instance, says it can handle “thousands of new products per month.”) For an innovator who wants to get a new product into the market, or who needs extra manufacturing capacity to take advantage of a new launch success, identifying manufacturing sources capable of rapid flexibility is critical.

Managing Distribution

Many of the companies engaged in e-commerce, particularly business-to-consumer (B2C), never see what they sell. All they handle is information. Most of the senior and middle managers in a traditional business rarely see the company’s products or the people who purchase the company’s services. These managers deal solely with information about products or customers most of the time. In B2C companies, this separation from products and customers extends to the entire organization. This is as true of Internet universities as it is of furniture sellers. Third parties handle the physical distribution, and the receipt and warehousing of the company’s products is also at a distance.

This places the B2C company in the hands of those people handling the distribution. This isn’t much of an issue for many purchases, but it can be troublesome for larger items that require some assembly. For example, trucking companies delivering furniture and other durables for e-retailers find their drivers besieged and begged to assemble the furniture, to take away the packaging materials and the furniture that is no longer required, and to position the furniture to the satisfaction of the purchaser. Deliveries are also expected to occur on time. This requires buffers built into driving lead times to accommodate highly variable physical handling issues when delivering to a particular customer. The customer counts any failure in the distribution system as a failure of the e-retailer. Selection of these links is critical, and the criteria that customers use for selection are increasing by the day.

Managing IT Infrastructure

We have referred above to the need to have access to sufficient manufacturing sources to take advantage of a highly successful launch. With shortening product life cycles, it is important to be able to ramp up for manufacturing very quickly. But we also have to have the order-taking capacity to handle the demand. The experience with e-retailers is that popular products generate “hits” on the Web site in huge numbers in a very short time. This means that e-retailers, or anybody offering an Internet sales function, have to have a large surplus of handling capacity.

MAINTAINING CONTROL

Working in the chaotic field of innovation that exists around the cluster of industries and technologies that defines the “knowledge” sector creates challenges for innovative companies. There are no greater challenges than the control challenges. Four categories of control challenges exist: (1) control of the innovation, (2) control of the company, (3) control of innovation projects, and (4) control of the brand.

Control of the Innovation

Given the pressures to outsource more, to develop innovation alliances, and to decide quickly how to take advantage of successful innovations, smaller innovating companies face the risk of losing control of the innovation to competitors or to the dominant player in the industry’s value chain. This is particularly true where the company’s ability to develop the innovation is so limited that the development path will be lengthy, allowing larger competitors to outpace the innovator to the marketplace.

Many innovators resolve this by ceding control early and selling the rights to the innovation to a larger company. Others, though, try a different approach, using relationship marketing to help establish a branding position that becomes impregnable. Dolby Laboratories achieved this with its specialist audio technologies. It is virtually impossible to see a movie or buy a piece of audio equipment that does not have the Dolby imprimatur on it somewhere. The strategy has been so successful that Dolby now sells other technologies, including those developed by other companies, to its customers. This approach is now being used by NXT, a Cambridge, England–based developer of slimline loudspeakers. Using this approach requires an ability to lead the market, which, for fledgling concerns, is very difficult. Forming an alliance with a potential customer is probably the most appropriate form of protection.

Control of the Company

Innovative companies need to remain in a position of “unstable balance,” teetering on the edge of tipping out of control. One thing they cannot run foul of, though, is their fiduciary duty to their owners and lenders. The closer innovative companies get (deliberately) to being out of control, the greater the care they need to take of their financial management, particularly their cash flow. As with any business, a lack of cash and an inability to raise more means an end to the business as we know it. Recent research shows that large innovative companies are using the finance function more and more to support business decisions. And this is not just because of their information systems. Companies seem to be responding by moving more and more of their finance function back in-house, creating control rooms that oversee e-engineered transaction processes. Control applies not just to cash. It also applies to controlling the physical innovation process, particularly when an innovation project should be folded.

Control of Innovation Projects

In some companies, projects that should be beaten to death with a heavy stick keep on surviving. These projects devour resources, particularly management and creative resources, as people develop new and creative ways to keep the sick patient alive. What these companies are disobeying is the “Law of the Rathole”: knowing when to quit.⁷ The law is important because resources are scarce and the opportunities to squander them numerous. There are five rules of thumb for limiting the loss created by a turkey:

1.DON’T MARRY A TECHNOLOGY. The world may prefer the old. Leading edge is bleeding edge.

2.MONITOR THE DEVELOPERS. Don’t allow development to occur in a black box.

3.CREATE RIVAL RATHOLES. Try three approaches to the challenge and, if none shows signs of working, can the project.

4.SPREAD THE RISK. Use alliances and lay off the risk where applicable or where necessary.

5.MANAGE EXPECTATIONS. Don’t make grandiose claims at the beginning, as there is only so much humble pie that people will be prepared to eat.

Firm and early decisions to abandon projects also send important signals throughout the company and the industry. Clear messages like this can send a chill through competitors and make it possible to gain competitive advantage.

Companies that are able to stay in control in turbulent times will survive as others lose their cash flow—and their heads. The demise of so many dot-com businesses was not only the result of the lack of an effective product and business model. It was also the result of unrealistic and unwise pursuit of hedonistic pleasure—not the pursuit of innovation excellence. In the final analysis, personal control by those at the head of small innovating concerns is perhaps the most critical control that must be exercised.

Control of the Brand

Successful innovative companies often develop successful brand identities. This shouldn’t be surprising, for if we have done everything right, every employee, every department, and every process in the organization is engaged and aligned with the values of the brand.⁸ Successful small companies become acquisition targets for larger companies, and companies with well-established brands need to ensure that the brand experience and the corporate values stay intact. The potential purchaser should also ensure that this happens. If they don’t, people will leave the organization, and the purchaser will have squandered its own opportunity. And customers will desert the brand.

When Unilever purchased Ben and Jerry’s Ice Cream, both parties recognized the need to protect the brand and worked hard to ensure that every Ben and Jerry’s employee was comfortable with the sale and the conditions surrounding it. In early 2001, McDonald’s purchased Pret A Manger, an English coffee-and-sandwich chain that has an established brand image. Customers have demanded that McDonald’s leave the chain alone and its supply and distribution chain intact—a promise McDonald’s has made. To meddle invites retaliation from employees and customers. The challenge for McDonald’s is to learn from Pret A Manger and to capture the better parts of Pret A Manger’s innovation management system and install them in the McDonald’s system—and vice versa.

SUMMARY

•Companies still perform only a maximum of four functions: find, keep, transform, or distribute.

•More and more, what is being transformed, processed, and distributed is information.

•Customers’ expectations of how they are treated and what services they require are increasing.

•Companies should apply the platinum rule: Treat customers as each customer wants to be treated.

•Companies that separate their traditional business and their e-business gain focus, but they run the risk of suboptimized innovation.

•In managing outsourcing, companies need to:

Commit to exciting goals.

Ensure that partners benefit.

Develop internal experts.

Develop effective, interactive models.

Establish exponential performance targets.

Concentrate on the destination, not the journey.

Share gains.

Manage the information interchange.

Develop incentives and open communications.

Accept guided anarchy.

•Networked incubators, with access to finance and customers, are the most effective form of business incubators for innovative companies.

•The three major groups of challenges for innovators are managing knowledge, managing material resources, and maintaining control.

•In managing knowledge, managers need to be concerned with locating knowledge, spreading knowledge, and making transitions.

•In managing material resources, managers need to consider outsourcing manufacturing, managing distribution, and managing IT infrastructure.

•In maintaining control, managers need to control the innovation, control the company, and control innovation projects.

•Innovative businesses often develop clear brand identities. Managers selling or buying companies with clear brand identities should protect the brands. If they don’t, employees and customers will desert the brand.

•Remember the “Law of the Rathole”: Know when to quit.

NOTES

1. Henry Mintzberg and Ludo van der Heyden, “Re-Viewing the Organization,” Ivey Business Journal, September–October 2000.

2. James Brian Quinn, “Outsourcing Innovation: The New Engine of Growth,” Sloan Management Review, Summer 2000.

3. Tom Kelley with Jonathan Littman, The Art of Innovation (New York: Currency Doubleday, 2001).

4. For a comprehensive survey of incubators, see Morten T. Hansen, Nitin Nohria, and Jeffrey A. Berger, The State of the Incubator Marketspace (Boston: Harvard Business School, June 2000).

5. Morten T. Hansen, “Networked Incubators: Hothouses of the New Economy,” Harvard Business Review, September–October 2000.

6. John Storck and Patricia A. Hill, “Knowledge Diffusion through ‘Strategic Communities,’ ” Sloan Management Review, Winter 2000.

7. G. Pascal Zachary, “The Law of the Rathole,” Technology Review, May–June 1999.

8. Shaun Smith, “Experiencing the Brand—Branding the Experience,” FTDynamo Forum, January 30, 2001.