2. Pragmatic Innovation—The New Mandate

As companies struggle to look for ways to compete against low-margin overseas competitors, they must turn to their creative side because cost-cutting manufacturing and quality initiatives no longer provide the competitive edge. Differentiation now must happen through innovation; that is the strategic weapon that drives profit in the new global economy.

Burlington, VT. Robert Nicholson was not really concerned about the health of his heart when he went in for his annual physical. Although his dad had died of a heart attack, Rob figured he was reasonably healthy at 46. He worked out a few times a week and, although he did have a soft spot for pepperoni pizza, he usually watched what he ate. So he was particularly shocked when he found out that his cholesterol count and blood pressure had risen over the past year. His physician seemed concerned as well, which is why he put Rob on a 24/7 continuous health-monitoring system. Because Rob imagined and dreaded the hassle of wearing a monitor, he was pleasantly surprised to see and feel the SenseWear armband that held the sleek little monitor by BodyMedia. The system continuously monitored his relevant vital functions and then downloaded them to his computer. The software then tracked his health with the promise of telling him to call his doctor if anything looked awry. But the biggest surprise was that he found himself showing off the little monitor to all his friends. This was the first body monitor he heard of that could really become a part of your life.

A Mandate for Change

In their struggle to adapt to the new forces affecting the development of emerging products and services, executives of many companies find themselves “drinking from a fire hose.” These managers are thirsty for answers but find it hard to handle all that is streaming at them: the volume of opportunities and demands, of ideas and constraints, of potential directions and hurdles. The pressures of external competition, of internal management issues, and of financial hurdles are overwhelming. These often result in analysis paralysis and a lack of insight into where to proceed, leaving one trying to put out daily fires instead of working productively toward larger goals. Managers and VPs have been accustomed to being part of companies that buy and sell divisions and, in a sense, to being bought and sold themselves. As a result, they have constantly been under new CEO leadership and often have been required to move semiannually to newly acquired divisions, where their assignment is to obtain unrealistic results in the new environment with new personnel.

Executives have been handed a new mandate: Grow the business using innovation, and do it organically using the company's existing resources, outsourcing only as needed. If that is not enough, they have been told they cannot compromise on manufacturing quality. Now that salary raises and career advancement are based on staying in one place long enough to establish cycles of innovation, managers are challenged to find methods and tools that are replicable and that connect to corporate strategy to grow market share and brand loyalty.

Pragmatic Innovation (and How It Differs from Invention)

One of the key concepts to understand is how innovation today differs from invention and why innovation in business must be pragmatic. When Thomas Edison developed the system of electrification and the electric light bulb, and when Ford perfected the assembly line to produce an affordable automobile, the Model T, those were inventions. One replaced gas as the primary energy for lighting at work and at home, and the other made gas (fossil fuel)-driven vehicles as inexpensive as horses and horse-drawn carriages. What was formerly beyond the imaginative daydream of the common person became an essential part of new routines and enhanced lifestyles. These inventions were technological leaps. The scale of the leaps was significant in one dimension but lacking in others. The Model T was noisy, uncomfortable, and dangerous to start, and early electric light was not as warm and attractive as gaslight or candles. We are at a point in the evolution of technology where inventions are still occurring, but innovation has replaced invention as the main day-to-day driving force in the global economy.

It is common for a word to shift in meaning to reflect changes that are occurring in business or the world at large. The term innovation is now being used to describe a new force in business in the same way the word quality shifted in emphasis and in meaning in the last two decades of the twentieth century. What we mean by innovation extends beyond invention of new technology and includes a thoughtful and insightful application, delivery, extension, or recombination of existing technology. Although innovation might involve a big engineering leap of technological invention, innovation may simply be technologically incremental. The key is that an innovation is a valued leap from the viewpoint of consumers whether or not it is incremental from the producer's standpoint.

Innovation, then, is a new comprehensive approach to product and service development that scores high on consumer value, connecting to and altering consumer lifestyles. Innovation is the ability to find nonobvious opportunity in what, after the fact, seems obvious and needed to everyone else. It is the ability to see extraordinary potential in ordinary events. It is the ability to see how to fulfill the desire of others, to elevate their common, everyday world into uncommon lifestyle experiences. We have further clarified the term innovation by adding the word pragmatic. Pragmatic innovation is a balanced approach that not only explores a range of interesting alternatives but converts that exploration into successful, profitable products. Pragmatic innovation is a process of inspired management of diverse teams working on a significant opportunity in the market. We use the term pragmatic innovation and innovation interchangeably throughout this book.

Whereas everyone can be innovative in addressing the problems in his or her own personal life, managing innovation in a corporate context is a more complex challenge. In business, innovation must be not only the development of products or services that are useful, useable, and desirable, but it also must be marketable and profitable. Balancing new insights with the practical realities of the marketplace requires a balance of vision and business acumen. Finding the right pH value between a product that is too acidic for the public to digest and one that is too basic to generate appeal is the challenge that companies face. The stakes are significant, but so are the profits. The point is that “basic” commodity products will not generate significant profit. Companies often choose the basic option because they see the opposite as dangerous, that developing “acidic” products might be trendy but too costly to risk without a clear return on profit. Instead, finding the balanced approach of pragmatic innovation will grow the company and keep it competitive in today's global economy.

A great example of innovation with minimal technological advances is the redesign of a pager by Motorola in the 1990s that had few enhanced features but offered colorful faceplates. Based on the faceplates alone, Motorola was able to successfully charge an extra $15 per unit.¹ Or consider the design of the Palm V, a commercially important advancement in the generations of Palm PDA devices. IDEO designed the unit for Palm. According to Tom Kelley, general manager of IDEO, the Palm V was designed with essentially the same technology as the previous-generation Palm but was aesthetically and ergonomically designed to appeal to executives and to women in general. The device was given organic lines, made thinner, and finished with brushed aluminum. The product was successfully sold at an additional $150 and expanded the PDA market.²

Invention is often the output of an individual genius, and inventions also come out of groups dedicated to an objective that results in a superior technological advance. The focus in invention is on the device more than the experience. Inventors are happy with Rube Goldberg solutions that work, failing to see the value in ergonomics and aesthetics. Innovation is customer-driven, a carefully crafted integrated response to customer needs and desires. It must be broader in scope to take into account the myriad of factors that make products successful. Starbucks did not invent coffee; it changed the way you experience it. Starbucks took a risk pushing the quality of the taste of coffee, the feeling of the drinking environment. It charged a price that no one would have anticipated, but everyone was willing to shell out. Chrysler did not invent the PT Cruiser; it created an innovative retro-future interpretation of a hot rod, a small van and a station wagon, while simultaneously extending its established brand. General Motors took the Hummer and turned it into the ultimate statement of fashion and security and hit a post-9/11 emotional need to make the bulky and awkward into a trend. BodyMedia, as we will soon see, did not invent sensors to measure acceleration, heat flux, skin temperature, or skin response. Their innovation was to extend sensor technology into a contemporary-lifestyle wearable product with easy-to-interpret and up-to-the-minute personal health data being collected 24/7 regardless of the activity.

Invention has an important role in advancing society's abilities to meet demanding needs. Consider the technological challenge for fuel-cell technology, biodegradable materials, and nanotechnology to noninvasively perform surgery. But invention tends to be focused along the technology dimension only. The invention—the technology—is not enough. A successful product needs to consider the complete delivery of the technology as an object or service to be used, desired, and considered useful. In other words, the successful delivery of a new technology requires innovation.

Invention and discovery must continue. We do not question the basic and core value of these two activities. The difference is that we are now talking about pragmatic innovation rather than applied technology and invention. Pragmatic innovation requires observation, interpretation, and cycles of prototyping comprehensive versions of intended solutions, not only of technology. This is as true in consumer products, the medical industry, and business-to-business. The other important concept of today's innovator is that he or she is customer-driven, not invention-driven. Finding what customers want and developing innovative solutions often means that you must bring new capabilities to a company to meet emerging customer needs. It also means that the company is not defined by its history of invention or by the number of utility patents it owns. The company's core is its knowledge of the customer and its capability to meet customer needs.

Pragmatic innovation is driven by and must respond to three factors: social change, economic situations, and technical advances. Each opportunity for a new product arises due to different combinations of changes in these factors. The social dimension is especially interesting. Responding to changes in trends and developing solutions that meet those trends tends to be the most successful strategy from a brand standpoint and allows for fat profit margins. The Segway is a great technological solution for personal transport, but the company failed to predict the lack of societal acceptance. The Prius, introduced by Toyota, anticipated the growing acceptance of hybrid power magnified by an increase in gasoline prices. Whereas both Honda and Toyota made initial hybrid versions that were met with mixed results, Toyota stuck with it and found a breakthrough solution.

Developing innovative products is not easy. The challenge now is not inventing and rushing new unrefined technology into the marketplace. The challenge is to provide more integrated, holistic solutions that address consumer needs, products, and services that respond to the changes in social conditions, economics, and technology. Given consumer expectations at home and at work, a product must successfully maximize its core technology, have a clear use in daily life, be easy to use, and be attractive enough to appeal to sensory desires. Many companies have been trying to compete by being excellent in one or two of these categories. We fully recognize the challenge in optimizing all these categories, but it is the level required for effective global competition and the core to achieving successful innovation. To be an innovative company, everyone must contribute in his or her own way to changing the culture and creating an environment that generates true consumer value.

Everybody, in some way, is an innovator at either work or home. Companies need to help their employees turn their innovation abilities, often focused on their avocation at home, into innovation in their vocation. Almost every way that you find to improve upon a task is an innovation. You may have found the perfect way to save time getting to work. You may have a unique strategy for raking leaves or for shoveling snow. It may be that you find yourself pressed for time and are preparing the same meal over and over, such as macaroni and cheese. Sometimes, you just open a package of the Kraft mix, that blue box sitting in everyone's pantry. But at other times, you might cook it from scratch. It's pretty easy. You boil the elbow noodles. Mix in some melted butter, milk, shredded cheddar. Sprinkle with breadcrumbs, and bake. You might experiment a bit by changing the pasta to penne and adding a dash of mustard and Worcestershire sauce. Each change is an innovation, a modification, or extension from the original. Not every example of personal innovation converts into a profitable idea, and some of the innovative ideas that work best for you might be rejected even by your family. When making a meal, you can afford to have some ideas that work and some that do not. When companies innovate and fail, the price is much higher and the factors that dictate success and failure are far more complex. The process of experimentation to find the right solution, however, is fundamentally the same. You can be the average Joe making adjustments to improve your car in your garage, or Steve Jobs inventing the personal computer industry in his.

How do you instill that feeling of risk and experimentation in employees in a 100-year-old company with publicly traded stock in a mature industry with global competitors aimed at defeating you in every market segment in which you compete? When you do get that new insight, how do you translate it into a useful, useable, and desirable solution that will be produced flawlessly, distributed, and sold in a systematic and thoughtful way in an appropriate amount of time to be ahead of your competition? If that is not enough, your solution has to stay competitive long enough to generate a return on investment and contribute to the company's well-established reputation for excellence. This is exactly what Dee Kapur was faced with when he started the program to develop the 2004 Ford F-150.

Moving from Invention to Innovation at Ford: The Redesign of the F-150

The Model T was an invention that made the automobile accessible to the middle-class, mostly male, consumer 100 years ago. The recent trend in the pickup industry, which is both male- and female-driven across many economic segments, required an innovative solution that would reestablish the F-150 as the undisputed leader in the pickup truck market. The F-150 has been the best-selling vehicle in America since 1982, having sold almost 30 million units. In 2003 alone, 850,000 F-150s were sold. Every seven years or so, the company undertakes a major redesign of the vehicle. Because Ford makes a significant percentage of its profits on its wildly successful F-150, why should it mess with success? Why redesign it? Well, there are many reasons. Three main ones are Chevy, Chrysler, and Toyota, and a fourth is Nissan. Each of these competitors must adapt to changes in the marketplace. Industry styles change, and a vehicle begins to look dated. Lifestyle trends change, so the expectations of the customer base change with regard to features and performance. New technology becomes standard on vehicles and must be incorporated into the design. Manufacturing technology changes, requiring the design to change to maximize the effectiveness of the production capabilities. Regulations change, requiring new fuel-efficiency standards with new engine technologies and new use of materials to lighten the vehicle. Perhaps the most important change during the 1990s was that the truck as a workhorse evolved into the work and play stallion. The SUV lifestyle trend started to extend into the truck market.

Ford was being attacked by Chevy's more aggressive designs, Toyota's quality, and Chrysler's muscle theme with Ram trucks. If Nissan creates a more exciting and better-performing truck, which it has in its Titan, Ford loses market share and its core profit. So the product development team at Ford had to innovate to compete. If they failed, the company would lose its cash cow. If the team succeeded, however, they could regain market share and gain a significant part of the new number of buyers in that evolving truck segment (mostly upscale). The challenge was to develop an innovative approach to re-creating and extending the concept of “Ford Tough,” and the solution was evident in the 2004 release of the F-150.

Ford designed models for five different market segments. Instead of relying on geographic, age, and income segmentation, Ford studied how F-150s were being used and created product user segments and scenarios. The base model F-150, the XL, is the basic workhorse for farm and construction. The STX is for a younger “wheels and tunes” crowd, those who customize their trucks and prefer certain features to be base-level and expendable. The XLT is for families, with the option of a spacious supercrew cab, complete with a full-size back door. It has all the functionality of a truck. At the same time, a two-car family does not have to compromise their ability to haul the kids, because the work truck is also a family mobile.

Kapur's team went beyond these three traditional truck markets and identified two additional segments. These segments were composed of people who buy trucks because they are cool and provide the fantasy of off-road driving and safety. The FX4 is for bragging rights, for those who want a truck that stands out. It has options that are not available on other models, such as the black leather interior complete with leather-wrapped steering wheel and chrome-clad floor shifter. Its flashy look weds truck strength with sports car style. The fifth model is a luxury truck, the Lariat, with an interior more closely related to a living room than to a vehicle. Although still a truck, it provides the essence of comfort, even having power-adjustable foot pedals so that the huge dude and the tiny wife can both call this truck theirs. The reality, however, is that this “pickup” truck will likely never stray from an asphalt road and never carry more than antiques and the family suitcases.

Dee Kapur, who is highlighted in Chapter 1, “The New Breed of Innovator,” led the beginnings of the F-150 redesign. At a time when Ford had tarnished its “Quality Is Job 1” badge as a result of the Explorer tire fiasco, Kapur kept his eye on the challenge ahead of him. He was faced with maintaining the number-one position for the F-150, the center of profit for the company. He sheltered the team from the major external problems the company was facing and provided a forum for innovation. He supported the ambitious tiered- segment approach because of innovations he saw in the marketing research and analysis. Innovation resulted in both the external and interior aesthetic and feature design to create a distinctive new look. Kapur challenged engineering to meet the demands of the new design while maintaining a commitment to quality and craftsmanship. Kapur knew that the status quo was not good enough, and Ford retained its leadership in the small truck market with the introduction of the new line.

Although Ford did its homework to assess its customers' desires, even its own expectations have been exceeded. In the months following the new F-150's release, 57 percent of buyers bought the FX4 and Lariat versions of the pickup, models that have the highest profit margins, whereas Ford had expected that these premium models would account for only 40 percent of sales. Although automobile sales were slow in early 2004, the F-150 was on target to set a sales record.

On top of these five models, Ford maintained a flagship, signature vehicle that it created as a rolling advertisement for its brand. The market size was not as important as who purchased the truck and what statement they made with it. The King Ranch version of the F-150, mentioned in Chapter 1, has seats made from saddle leather. No two seats are identical in look, and owners are responsible for treating the leather as they would a saddle. Ford produces only 20,000 of these each year, but they meet a premium-priced market and enrich Ford's brand equity. Ford also chose to increase visibility and brand equity at the upper end of its pickup portfolio with a co-branded model with Harley Davidson. The Harley truck, designed in collaboration with Harley legend Willie G. Davidson, captures the look and feel of Harley's renowned bikes. These special models, the King Ranch truck and the Harley truck, are outcomes of insights based on extensive customer research, the result of an innovation process in which product developers became so familiar with real people that they could design those customers' dreams in truck form.

Innovation in Start-Ups

On the twelfth floor in a renovated office building at the foot of the Smithfield Street Bridge, a famous Pittsburgh, Pennsylvania, landmark built two centuries ago, sits an entrepreneurial high-tech start-up company that epitomizes the concept of innovation. The office space has won several awards for its novel use of low-cost materials and has the feel of an open landscape that characterizes the company's horizontal organization. White stretch fabric hangs from the ceiling in a dramatic way that shields but does not completely hide the exposed details of the original architecture. When the heating and cooling system kicks in, the fabric expands into large sails, giving the feeling of being on a sailing ship, an apt metaphor for the river below and the activity within. The atmosphere is creative but minimalist, and it is just the right mix to keep the mostly young interdisciplinary employees inspired. The views out the windows show a panoramic view of the confluence of the Allegheny and Monongahela Rivers, the point in Pittsburgh where the Ohio River is conceived. These are the same rivers that were used in the last Pittsburgh revolution. The once-polluted rivers that were filled with coal and slag barges are now a center of tourism and leisure boats. The new revolution is innovation.

The open space is filled with desks, laboratories, computers, and a prototyping studio that can build anything from high-end electronics to wearable product concepts; they even have professional sewing machines used in fashion design and manufacture. Bulletin boards appear throughout, filled with charts, pieces of the latest technology in materials, and images of people involved in all sorts of everyday activities. In the lobby, which melds with the desks of programmers, is a glass-top table with a box underneath filled with sand that you can reach into and play with, a remnant icon from Sandbox Advanced Development, the predecessor to BodyMedia.

In that space are also the some of the world's leading experts on body sensing, ergonomics of wearable devices, the analysis and mining of monitoring data, and cutting-edge aesthetics. BodyMedia, a small but growing biotechnology company, was founded by a foursome in 1999 with the mission to “be the recognized leader in integrated products and services that track and promote health and wellness through continuous body monitoring.” CEO Astro Teller has an impressive lineage as the grandson of Edward Teller and of Gerard Debreu; Edward Teller was the father of the hydrogen bomb and advisor to six United States presidents, and Debreu was an economics Nobel Prize winner. Astro Teller has a Ph.D. in computer science and looks more like a rock star (with his below-shoulder-length hair, goatee, and mustache) than an executive. Another founder, CTO Ivo Stivoric, does not have an engineering degree. Neither does the VP of product design and mechanical development, Chris Kasabach. Instead, both have several degrees in industrial design. The fourth founder, Chris Pacione, VP of interaction design and marketing communications, does not have a marketing degree. Before teaming with Pacione and Teller, Stivoric and Kasabach had worked together in a research lab at Carnegie Mellon University developing five generations of wearable computers. Prior to returning to Pittsburgh to teach, where he ended up connecting with the other founders, Pacione had worked as an interface designer for one of the leading interaction design consulting firms in the world, Fitch. The team leads one of the most advanced and exciting technology companies in body health monitoring today.

Their product, the SenseWear armband body monitor, has won multiple national awards and has been featured in the Wall Street Journal, Time, and Business Week, among others. Against the odds in a climate of start-ups going bust, the company grew to 31 employees, raised $22 million in venture funding, and became a profitable company in its first five years. It has three significant utility patents issued on its core technology and nearly 50 more pending in the United States and abroad! The company also sells its products indirectly through partnerships that include Roche Diagnostics for clinical weight management and Apex Fitness as part of a weight-loss program and through resellers in the scientific research market.

The four founders represent further examples of the new breed of innovator. As an innovative team, they have developed a style of working that allows them to deliver state-of-the-art solutions to product opportunities. That working style incorporates interaction between their employees and their customers, a research and development approach, and a culture that keeps them on the cutting edge of discovery and application. For instance, SenseWear is not only an elegant monitoring device, it is also part of a complete service of interpreting the diverse streams of information generated by and stored within the device over periods as short as a few minutes or as long as a few weeks. BodyMedia's breakthrough insight into the need for a complete product and service solution occurred when the founders realized, after extensive observation and research with end users, that people want to incorporate the body monitoring into their everyday life (a product) and that both experts and novice users had a variety of potential applications for the information they monitored (a service). For instance, the SenseWear device might be used to accurately track calories burned during exercise, information that can be used in Web-based software (also provided by BodyMedia) that enables both personal trainers and their customers to track the success of a weight-loss regimen. Or the device might track vital cardiac signs for someone such as Rob Nicholson, mentioned previously in this chapter. The SenseWear combination of an elegant unobtrusive product, one with a simple and seamless download and easily understood interface, gave BodyMedia the right combination of innovative ideas to create a breakthrough in body monitoring.

Innovation can happen in both large and small companies. The nimble small companies, however, are often in a position to innovate without the bureaucracy and inertia of stability and the status quo. Large corporations have also found ways to build an entrepreneurial attitude, often by relying on small interdisciplinary advanced product development teams. But the new generation of start-ups is all about innovation, about change. BodyMedia developed its SenseWear product not because it had a technology looking for an application. Instead, the team had the training to observe societal trends. The team put forth the effort to understand the emergence of the desire for—and, in some cases, the need for—unobtrusive real-time monitoring of body performance. They were able to recognize this opportunity because they had extensive experience and expertise in wearability and computing.

The team of four founders at BodyMedia had gained experience in these areas through their education and experiences at Carnegie Mellon University. The team was a spin-off of a research lab in the College of Engineering. The lab was focused on the fact the technology advances were allowing for the development of highly functional computers that could be carried or worn. Whereas most labs would have addressed size alone from a technology standpoint, this lab hired research assistants who had recently graduated from the university's department of industrial design. The team of Chris Kasabach and Ivo Stivoric started to produce much more comprehensive prototypes that included product semantics—the form and interface features that describe the aesthetics of the product, human factors, and market-driven aesthetics not found in most engineering-driven labs. The result was prototypes that looked and operated like mass-produced products. When designing wearable technology for military applications for equipment inspection, they took into account that most soldiers using the equipment were Game Boy-savvy and between the ages of 18 and 24. Their work attracted researchers at Intel, and they were asked to push the concept of usability and reduction of size to new areas of application. This project brought the entire team together as Astro Teller added a computer science dimension and Chris Pacione brought in communication and interface expertise. They also added new industrial design research assistants to the team—Francine Gemperle and David Aliberti.

The first prototype concept in the university setting was given the name Digital Ink. The idea was that your pen could also be your computer. The nice thing is that everyone carries and uses a pen, and building off that common tool would make everyone instantly comfortable with “computing.” Although the concept was fantasy from the team's imagination, they had enough experience with technology to know this product was feasible, and enough practical understanding to create an innovative integration and delivery of technology in a product that everyone would embrace and that was eventually patented. The success of the product concept enabled the core team to spin out of Carnegie Mellon to start a consulting firm, Sandbox Advanced Development. The goal was to generate enough money consulting to start a new company where they would develop their own products. Within a year, they were on their way, and the original sandbox is in the lobby today, as mentioned earlier, as a reminder of where they have been and the attitude of free-flowing ideation they want to maintain.

Small and large companies alike need to build off of expertise. But innovation comes from trained insight and process. BodyMedia follows a rigorous process of innovation and exploration, processes that we discuss throughout this book. The result is a unique capability in the growing market of body monitoring.

The SenseWear device itself is comfortable and nonintrusive to wear, located at the optimal location of the body, balancing ergonomics and function. Rather than projecting a medical image, the device is a beautiful aesthetic. So it can be worn overtly rather than hidden. It is a statement of lifestyle rather than a banner of medical need. Its patented system analyzes body output such as total calories burned, duration of physical exercise, number of steps taken, active energy expenditure, and sleep onset and wake. The functional, ergonomic, aesthetic, and overall experiential qualities of the SenseWear redefined body monitoring in a market that had provided technology with little care for the experience of use.

Manufacturing Quality—The New Commodity

BodyMedia's success comes from a pragmatic approach to innovation. Any company producing a product or service that wants to differentiate, that wants to avoid being a commodity, must innovate. Innovation is the key to the competitive edge. That edge used to be found downstream in quality programs. Today, innovation is the theme that has replaced quality improvement in companies around the world. Not in the sense that quality programs are lessening in importance, but quality programs no longer offer a competitive advantage. Quality programs, such as Six Sigma, focus on producing zero-defect manufactured goods, where the goal is to improve the short-term and long-term hard-quality aspects of a product or delivery of a service. These methods have led to successful production of high-quality products, yielding goods that meet tolerance and other functional expectations, products that maintain that effectiveness throughout the life of the product. These quality methods have set a new standard; they have improved company processes and products so well that practically all companies now implement some kind of quality initiative. In fact, they must, because to be competitive everyone now must have high-quality manufacturing standards.

But now that quality manufacturing is simply the cost of doing business, corporate leaders have recognized their mandate to find other avenues for increasing bottom-line profits. Much recent effort has been directed at cost cutting. Wal-Mart's success has led many companies to see lower costs as an avenue for higher profits. Although Wal-Mart's no-nonsense price negotiations with suppliers are well known to the public, business leaders have been enticed more by Wal-Mart's cost-cutting improvements to the supply chain itself. Wal-Mart was a leader in implementing continuous replenishment programs and vendor-managed inventories, systems that have been critical to Wal-Mart's ability to keep costs down. Like quality programs, these business process enhancements are quickly becoming necessary standard operating procedures for every industry. But efficiency gains from these systems are showing up less and less in bottom-line profits and more and more in lower prices for consumers, which results in lower top-line revenues.

Attention is back on innovation as a way for top-line growth, now that companies are efficiently producing and supplying high-quality products and services. Quality programs had a guaranteed impact on the bottom line for those companies that were the first to adopt them. But after all competitors implement quality initiatives, quality programs no longer provide a competitive advantage. If they are not a competitive advantage, they are like a commodity, something everyone has. Microeconomics teaches that marginal profits are zero for commodities, that revenues simply cover the costs of wages, depreciation of equipment, and so on. Only those companies that are on the efficient cost frontier can continue to stay in business—anyone whose costs are too high must sell at a loss. Previously, when some companies had higher quality to offer, they could sell at higher prices and afford higher costs. Now that quality manufacturing is accessible to all, quality differentials have shrunk, and higher costs are unaffordable. Offshoring is a result of firms' need to stay on the efficient frontier, the need to keep costs down and profits up. But it is a short-term solution for profits, even though the moves offshore may be permanent. Innovation cannot be commoditized, for innovation leads to differentiation because innovative products offer unique value benefits. A process of innovation is a fountain of youth, a source of a profit stream that cannot be quenched from competitive replication. Each innovative solution yields its own differentiated market and unique source of revenues.

Innovation—The New Mandate

Not only are firms returning to innovation as a central source for growth and sustained viability in the competitive marketplace, they also recognize that the greatest growth potential comes from a skill they already possess—growth from within, which is organic growth. An alternative for growing revenues is acquisition. Intelligent acquisition is without doubt a valid and important growth strategy. But there are two pitfalls of acquisitions. One pitfall is that it directs the firm's energy and focus outside of the existing firm boundaries, away from existing knowledge, skills, customer insights and loyalties, and brand identity. With attention directed outside the firm, growth opportunities that are in-hand may be unseen or ignored due to management time constraints and corporate budget allocations.

A second pitfall, similar but not identical to the first, is that the company underestimates its own potential for innovation, and it may be tempted to delegate innovation to outside firms. Although outside viewpoints add valuable fresh insights, it is those inside the firm who best know their own customers, who best know their own brand identity, who best understand their own core competencies. New products are not only expressions of a brand or corporate identity, they can also alter identity, for better or for worse. Volkswagen's redesigned Beetle not only expressed the company's history, it modernized its whole brand image, reinvigorating Volkswagen's connection with contemporary culture.

Organic growth—stemming from innovation, knowledge, expertise, and skills already owned by the firm—utilizes rather than ignores the company's latent potential (not growth through acquisitions, nor that ephemeral growth seen only on the balance sheet). Organic growth is growth through innovation and new customers and markets.

But many innovative ideas never see the light of day because commodity-oriented companies are not structured to identify and foster an atmosphere that supports innovation. The intense time-to-market pressures challenge a firm's ability to thoroughly research the product opportunity, and a quality product that is precisely manufactured may fail because it never was a valid concept from the customers' viewpoint. To avoid product failure, many companies follow a rigorous process for intermediary steps of product design. A popular and prototypical one is the StageGate process of Robert G. Cooper.³ This process creates the structure for timely process to market, with a checklist along the way to make sure the process meets the target schedule and budget. This type of process keeps companies precise. If the right decisions and valid insights are not made in the earlier stages, however, the later stages will not correct a poorly conceived product opportunity. The process will get you to production, but you might be producing a product that misses the mark in the marketplace. Unfortunately, mistaking precision and quality manufacture for true product value, which is based on an accurate assessment of one's customers, is sadly common and costly. Unless the product is designed to meet the customer's experiential expectations, the well-made product will fail in the marketplace. We do not argue against a precision-oriented product development process or a well-manufactured product. On the contrary, we believe both are critical for product success. But the best and the average companies today follow those processes. To stand out and deliver value takes more; it takes a process of innovation.

Companies need to develop a culture and mind-set for innovation and organic growth. New companies, such as BodyMedia, are created with this attitude. People are there because they believe in what they are trying to do. They thrive on the challenge. They work in an integrated fashion without turf ownership and friction. Larger companies need to find ways to change the course. They must take their best creative and energetic people and provide an environment that gives them the freedom to innovate. Their success provides the velocity to pull the others along.

Although company culture and mind-set are an important foundation for successful innovation, the challenge is to develop a method to identify and develop a truly innovative product. Although some inventions and innovations have been serendipitous, innovation is generally the result of disciplined activity. Several aspects of innovation and organic growth must come together in a unified strategy in the development and marketing of new products and services. These include an approach to researching the needs, wants, and desires of the target market; an understanding of who the customer is and how the product impacts the end user and indirect users; and an understanding of societal trends. This also includes a rich and unified base of people within a company from the management to the product development team, a corporate culture that encourages and supports innovation, and a complete approach to managing and protecting intellectual property. Finally, a comprehensive process must unify each of these themes in an effective and efficient approach to innovation. These components together represent the product development process of today's most innovative companies.

The Global Dimension of Innovation

In terms of product and service development, three major changes are affecting the world we live in. The first is the balance of global production and consumption; the second is the way products and services are conceived, developed, and delivered; and the third is the perception and expectation of consumers around the world.

As China and India and other less-developed but highly populated regions gain new buying power, the center of gravity of world consumption is shifting from the United States to these larger populaces. Not only are these economies increasingly voracious in terms of consumption quantity, but consumer perceptions and expectations are rising at the same time, as the new wealth allows them to also pursue life, liberty, and happiness.

At the same time, these other countries are gaining new production skills beyond just the ability to manufacture. The United States is certainly still a significant global market for and source of innovation. At the same time, the EU is still evolving as an entity, and new alliances are forming to help countries and companies compete more effectively and open the borders for the development of interconnected markets. Russia is still a question mark but has tremendous potential given its natural resources and population, and the rest of the former Soviet bloc nations are emerging in the global economy as well. Emerging markets in China, India, and several countries in Africa are new growth areas for production and consumption of products and services.

China is now making a major change that will affect all the companies in that country and also worldwide competition. China realizes that to become a serious player in the World Trade Organization, it must be more than the world's leading supply manufacturer. China is not only turning out 300,000 engineers annually, but the country is putting major investment into industrial design. By the year 2010, China will have 500 schools of industrial design. China will become a major source of business, engineering, and design for its own emerging consumer market and will compete in global markets as well. It is already beginning to take over development of new products from former powerhouse engineering countries, such as Germany and the United States. China will follow in the same development path that first occurred in Japan, then in Taiwan and Korea. You might not drive a Hyundai today, but in fewer than 10 years, you will be tempted to buy a car from China from a company that you do not yet even know the name of. Haier has already become a competitor in the United States in refrigerators and TV monitors.

Just a decade ago, China did not have any business schools. Chinese engineering was based on copies of the Russian approach to mechanical and electrical design. Its design schools were either craft schools or based on Russian and East German models of design education and practice. We are witnessing one the fastest movements to modernize in history by the world's largest country. Remember one thing: The Chinese have been here before. Two thousand years ago, China was way ahead of Europe and light years ahead of the Americas. You might not know much about its heritage, but China invented the compass, paper, printing, and gunpowder. This is a country that was “built to last,” and it won't have any problems going from “good to great” again.

If China is attempting to become a global competitor based on innovation, and India is close behind, there is no turning back for other countries. Finland is investing huge resources in design and innovation in a program aptly named Finnovation. Building on the early success of Nokia, Finland wants to become a knowledge- and innovation-based country. Even Poland is trying to redesign its brand. It is seeking to rid itself of its image as a land of labor and strife, and is working to bring a fresh look to improve tourism. From countries to companies around the world today, the key is finding a brand strategy that serves as a center for sustained innovation and implementing a method to achieve that strategy—to innovate. The strategy must serve as guide for using methods that promote organic growth and serve evolving needs of consumers as the social, economic, and technological (SET) factors continue to change and produce opportunities for new products and services.

Not only is there a shift in global production capabilities, but the new ease of delivery of product and information is hastening the demise of economic borders. Products and services can now be developed anywhere by anyone and shipped everywhere. Soon, GM will likely sell more Buicks in China than in the United States. Haier has set up a manufacturing and distribution center in South Carolina and is competing in many white goods categories. Samsung recently became a global competitor in design and innovation after decades of being the low-cost option, and its major competitor is Nokia in Finland, not just Motorola.

The media channels that bring information and entertainment into our homes are becoming increasingly global; markets are forming around interests and themes more than geographic location. As fantasy is beamed around the world, everyone is forming his or her own visions of the ideal fashion, car, home interior, and lifestyle experiences. Harry Potter and Michael Jordan transcend geographic limitations. There is an air-conditioned Starbucks in the Forbidden City in Beijing, and there is an Eiffel Tower in both Paris and Las Vegas.

The interplay between the innovative, empowered individual and the forces of global commerce have never been more important. The emerging economies are not threats but sources of endless opportunities. What they all point to is two directions for business strategy. Companies can either choose to be the cheapest, or they can choose to be innovative. This book talks about the latter, because in every market, only one company can be the cheapest, and the competition to be the low-cost provider is fierce. Unlike the lose-lose economics between low-cost competitors, innovation is a win-win that lessens competition among companies by differentiating products, allows producers to increase their prices, and delights customers by providing greater value to them. As companies determine their core values and capabilities, they establish unique brand identities that connect company to consumer. Competing up the price ladder enriches people and companies. It is well demonstrated that people will pay for products they value. As the SET factors continue to shift, the companies that can most effectively read market trends will win.

Surfing the Waves of Innovation

The marketplace emphasis on innovation is not going to go away. It is here to stay, and the rules are not as obvious as in the era of mass consumption and predictable markets. This is very much a hands-on, learn-by-doing world. The people who are having success in this new environment are working hard but having fun. They see the current world as an opportunity, not as an insurmountable challenge. They are surfing the biggest waves with a healthy respect for the forces under the surfboard, but they have overcome the fear of failure and have become the new breed of innovators. These individuals have mastered the process of pragmatic innovation.