Soundview Executive Summary, "BEST PRACTICES ARE STUPID: 40 Ways to Out-Innovate the Competition"

by Stephen M. Shapiro

Subject Area: Innovation

THE SUMMARY IN BRIEF

What if almost everything you know about creating a culture of innovation is wrong? What if the way you are measuring innovation is choking it? What if your market research is asking all the wrong questions? It's time to innovate the way you innovate.

Stephen M. Shapiro is one of America's foremost innovation advisers, whose methods have helped organizations like Staples, General Electric, Telefonica, NASA, the U.S. Air Force and USAA. He teaches his clients that innovation isn't just about generating occasional new ideas; it's about staying consistently one step ahead of the competition.

In Best Practices Are Stupid, Shapiro offers counterintuitive yet proven strategies for boosting innovation and making it a repeatable, sustainable and profitable process at the heart of your company's culture.

Shapiro shows that nonstop innovation is attainable and vital to building a high- performing team, improving the bottom line and staying ahead of the pack.

IN THIS SUMMARY, YOU WILL LEARN:

How to innovate both successfully and efficiently.
How to bring in the right mix of people to unleash your team's full potential.
How to define challenges more clearly.
How to increase your employees' creative output.
How to innovate through process, strategy, people and technology.

· OVERVIEW

· INNOVATE THE WAY YOU INNOVATE

· The only way to survive is to stop treating innovation as a one-time event. Innovation must be a continuous, never-ending process. The second you rest on your laurels, you can be certain that someone will catch you for breakfast.

· So what can an organization do to not get eaten by the competition?

· The answer to that lies in a basic understanding of the three levels of innovation.

· Level 1: Innovation as an event. This is where most companies find themselves. They conduct brainstorming sessions or hold random contests to generate new ideas. If a good idea is produced, there is some value added to the organization. However, there is generally a huge amount of work that needs to happen between an idea's generation and its realization.

· Level 2: Innovation as a capability. The organization puts in place structures and processes to define problems, generate and evaluate solutions, and develop action plans to implement those solutions. The result is a realistic deliverable based on an organizational challenge or opportunity.

· Level 3: Innovation as a system. The ultimate level involves creating an environment where innovation is embedded in everything you do. With embedded innovation, people innovate to deal not only with "problems or challenges" that are presented to them, but with everything they do. This creates exponential and ongoing value.

· Where do you begin? The first step is to create an environment where creativity is encouraged and where solutions are implemented in response to specific challenges. Once this is mastered, you can more easily move on to innovation as a system: the holy grail of innovation.

· Although people believe that Charles Darwin suggested that it is the survival of the fittest, his perspective on "natural selection" was that it is not physical shape, but rather the ability to adapt that is critical.

· This is the goal of innovation. The smartest organization will not survive. The company with the most money can quickly fall from grace. But the organization that adapts and evolves to address ever-changing market conditions will thrive in the long run.

· Asking for Ideas is a Bad Idea

· A large European retail bank that was suffering from eroding market share thought it had a great idea to solve this emerging problem. Its executives decided to get input from all of the employees on ways to improve and grow the business. In order to collect employee ideas, they implemented an enterprise-wide electronic suggestion box. They believed that this would help them tap into previously undiscovered innovations. Sounds like a great idea, right? Wrong!

· They received thousands of ideas. Evaluators looked at every one and, in the end, none were implemented. The company's entire innovation program lasted a total of 18 months, at which point it was shut down and deemed a huge failure.

· In an attempt to be more innovative, many companies start by asking employees for their ideas. This is a bad idea! The ideas that are submitted tend to be impractical and of low value, and end up only creating an overwhelming amount of unproductive clutter in the system.

· This points to one of the most important yet underconsidered measures in the innovation process: the "signal-to-noise ratio."

· The signal-to-noise ratio is an engineering term that is used to quantify how much a signal is corrupted by noise. Many online discussion forums use the term to describe the ratio between useful information and spam or false/irrelevant information.

· In innovation, the signal is composed of solutions that are implemented and create value. The noise is made up of all of the ideas that never come to fruition and the useless suggestions that don't matter and don't create value.

· Suggestion boxes are cluttered with noise, and the amount of time required to sift through bad ideas to get to the gold is huge. Even when you do find a good suggestion, the amount of effort required to rally the troops to implement the idea can be significant.

· My suggestion? Throw out your suggestion box!

· Expertise is the Enemy of Innovation

· Unilever, the giant consumer goods company, wanted to develop a toothpaste that would whiten teeth without using the traditional methods of bleach or abrasives. The toothpaste experts didn't have a solution. Recognizing the limitations of their own knowledge, they asked themselves, "Who makes whites whiter?" They quickly realized that a different Unilever business unit made laundry detergents that whitened clothes without bleach. What they learned was that most detergents use a blueing agent to make whites appear whiter. Armed with this information, they created their "Signal White Now" (and other brands) toothpaste. Instead of using harsh bleaches and abrasives, the toothpaste has a blue dye that runs through the middle and creates the immediate optical illusion of white teeth. Toothpaste experts were seemingly unable to solve this problem on their own. This breakthrough solution was discovered only when people with different specializations were brought together.

· While this might seem surprising, it is not uncommon. Expertise can indeed be the enemy of breakthrough thinking. The more you know about a particular topic, the more difficult it is for you to think about it in a different way. Your solutions will most likely be "been there, done that" ideas that are limited to your area of expertise. If you want breakthroughs, you need to bring together people from a wide range of disciplines, backgrounds and experiences.

· This idea was confirmed by research completed by Lee Fleming, a business administration professor at Harvard Business School. By analyzing 17,000 patents, he discovered that the breakthroughs that arise from multidisciplinary work "are frequently of unusually high value - superior to the best innovations achieved by conventional approaches."

· His research highlights the pros and cons of each method. He learned that teams composed of people with similar backgrounds have a great number of successes yet yield fewer breakthroughs. On the other hand, cross-disciplinary teams have a higher failure rate, yet their innovations are more radical and have the potential to create incredible value.

· Is there a way to get all of the benefits associated with diversity without any of the negative effects?

· Yes. It is called open innovation.

· Open innovation is an innovation process where you engage people outside your organization to help solve challenges. One common form of open innovation occurs when you post your challenges on a website and get responses from a diverse group of outside experts.

· The Goldilocks Principle

· Remember the story of Goldilocks? She enters the house of three bears. After sampling their porridge, she decides to go to sleep. She finds the papa bear's bed too hard, the mama bear's bed too soft and the baby bear's bed just right. The same is true when defining challenges. They can't be too big (broad and abstract, e.g., asking for "new ideas") or too small (overly specific, e.g., an extremely technical problem that can be solved only by one discipline). They must be "just right"-framed in a way that maximizes the likelihood of finding a workable solution.

· When framing challenges, you must adhere to the Goldilocks Principle.

· PROCESS

· CHALLENGE-DRIVEN INNOVATION

· It is quite common for a company to ask its employees to find ways to increase revenue. This is a lofty goal and posing this type of general challenge usually results in fluffy solutions. Instead of asking people to solve broad problems, ask specific questions that will likely result in an implementable solution. For example, are there specific markets that you have not yet penetrated? Are you missing out on customer segments that present a greater opportunity?

· When a cell phone company wanted to improve customer service, instead of simply asking people how to improve the customer experience, the company analyzed call data and found that there were 10 primary reasons why people dialed in to the call center. One of the most common reasons had to do with a specific billing issue. The solution? It was concluded that the best way to improve customer service in the call center had nothing to do with the call center itself. Instead, it involved a change in the tariffs associated with the particular issue. This one small change resulted in dramatically reduced call volumes and higher customer satisfaction. The only way that this solution could have been found was by asking a more specific question backed up by data.

· A critical step in trying to find solutions is to clearly define the challenge. The way a challenge is framed will impact the way it is solved.

· What Do Cisco, LG Electronics and GE Have in Common with American Idol?

· American Idol, even after all these years, remains one of the most popular televisions shows. Why? Partly because it is entertaining and partly because the show is able to uncover previously undiscovered talent.

· It is this latter reason why many organizations are employing the American Idol approach to innovation. Their objective is to uncover some truly amazing ideas that were previously hidden.

· In the innovation space, these events are sometimes referred to as "innovation tournaments," a term coined by Christian Terwiesch and Karl Ulrich from the Wharton school in their book Innovation Tournaments. With a tournament, there is always a winner, although it is not necessarily winner-takes-all.

· Cisco, LG Electronics and GE have all used this "find a winner" model as a way to discover ideas.

· The Cisco I-Prize tournament guaranteed $250,000 to the best submission. LG Electronics held tournaments to design a revolutionary mobile phone with $20,000 going to the best design. GE is currently using a similar approach for its "ecomagination"challenges.

· But sometimes simply selecting the "best" submission is not the best approach. Sometimes it is better to select the "right" solution. That is, instead of crowning a winner for the sake of naming a champion, you only offer a "bounty" when someone provides a workable solution to a real and specific business problem. This "pay for solution" model outsources the risk associated with complex problem solving.

· Two well-known innovation bounties were the Netflix Prize and the Ansari X Prize. Netflix paid the $1 million bounty only after a team was able to improve their video recommendation engine by 10 percent. The Ansari X Prize awarded $10 million dollars to the first team that could "build and launch a spacecraft capable of carrying three people to 100 kilometers above the Earth's surface twice within two weeks." Winners only got paid when they could produce results that met specific criteria.

· Tournaments are great for getting a broad set of ideas in an undefined space. Bounties, on the other hand are great for hunting down practical solutions.

STRATEGY

INNOVATION STRATEGY AND CUSTOMERS

Imagine you are a hearing aid manufacturer and you want to develop the next generation of product. You conduct surveys and focus groups, and discover that nearly 80 percent of the hearing-impaired population, despite the recommendations of their health care providers, refuse to wear hearing aids, mainly citing cost as the key reason. What do you do?

The obvious answer is to find ways of producing a lower-cost hearing aid. Or is it?

Oticon, a large global manufacturer of hearing aids, wasn't convinced. It realized that is market research only gathered information at a "conscious" level: what the consumers said to it in focus groups and surveys. But the company wanted deeper insights. So it employed a number of techniques for tapping into the subconscious minds of potential customers.

It eventually discovered the real reason people did not want to wear a hearing aid: It made consumers feel flawed, stigmatized and old, especially those individuals with early stages of hearing loss in their 40s and 50s.

Although making the devices even smaller or nearly invisible might seem like the right answer, further research found that this would only reinforce the consumers' negative feelings, as it confirmed in their minds that a hearing aid was something to be ashamed of.

Based on these new insights, Oticon took a very different route: It made large yet fashionable hearing aids that looked more like earrings and were offered in bright colors and patterns, from the colors of one's alma mater to zebra stripes. During a trial study of people who wore the device for a few weeks, some users said their friends mistook their hearing aids for Bluetooth headsets. In the end, the product was a hit with consumers and even won several design awards.

What Oticon learned was that what consumers say in surveys and focus groups often contradicts what they actually think and feel, and how they will ultimately act. The key is to tap into the subconscious minds of your customers because it is the subconscious mind that really drives behavior.

Best Practices Are (Sometimes) Stupid

Innovation is about adaptability, your ability to change in order to stay one step ahead of the competition.

When you copy someone's best practice, you are not staying ahead; you are playing a game of catch-up. By the time you implement someone else's best practice, they are onto the next practice. Replication is not an innovation strategy. Your differentiating capability, in particular, must be unique and distinctive, and not based on what others are doing.

When Progressive Insurance wanted to compete with the "big boys," it did not use best practices; it created the Immediate Response Vehicles, something unique to the industry.

You also need to understand why a company chose that practice. For example Google's 20 percent free time to experiment was not an innovation strategy, but was a retention strategy. Equally important it to recognize that what works for one organization may not work for you. 3M's 15 percent rule works for them because their culture embraces it. A more command-and-control company may find their strategy wastes resources and yields few results.

Having said that, I am not against best practices altogether. I am just against using them blindly as the innovation strategy for your "differentiating" capabilities.
Here are a few places where best practices can be useful:

Core and Support. These capabilities should run like a well-oiled machine with high quality and low cost. But these capabilities will not help you stand out in a crowded marketplace.
Best Practices from Outside Your Industry. You can get some incredible innovations from companies that are not your competition. In fact, I encourage you to "steal with pride" from companies outside your industry. For example, Southwest Airlines did this when it benchmarked an Indianapolis 500 pit crew to improve plane turnaround time. Hospitals have gained new insights by studying the check-in process of hotels. And a mail-order office supply company improved the return of empty toner cartridges by applying Netflix's DVD subscription process. Sometimes these cross-industry best practices can be revolutionary.
Innovation. Although you want to focus your innovation efforts on your differentiating capabilities, unless you are an innovation company (like IDEO or InnoCentive), how you innovate is probably not a differentiator. For example, if you are an insurance company, you want to apply innovation to your claims processing if claims processing is a differentiator. But the innovation process is only a core capability. There is no point in your inventing new innovation methods. Therefore, you should use innovation best practices wherever and whenever possible.

Best practices are not an innovation strategy. Copying the competition will only help you achieve parity. Only when you fully understand your innovation targeting strategy can you determine where best practices are useful and where they are truly a waste of time.

MEASURES

INNOVATION MEASURES AND MOTIVATION

If you want to go faster, stop focusing on speed. If you want to be more creative, stop measuring creativity. Paradoxically, when organizations hyperfocus on their goals, they are less likely to achieve those goals.

I call this the performance paradox. It occurs when overly focusing on a future goal (e.g., beating the stopwatch) may be the very thing that prevents you (and your team) from hitting your targets.

In the early 1900s, Robert Yerkes and J.D. Dodson developed the aptly named Yerkes- Dodson law. The premise is that performance increases relative to motivation (they called it "arousal") only to a point, after which performance drops. Then, as you become "overmotivated," performance paradoxically decreases.

The key is to find the sweet spot of optimal performance. And this usually involves a focus on the activity, not the target or goal.

Not all tasks are equal. Physically demanding tasks often require higher levels of motivation. This explains why professional athletes are inclined to be more goal driven.

On the other hand, creative activities require low levels of motivation to hit peak performance.
Studies reveal that creativity often diminishes when individuals are rewarded (externally/extrinsically motivated) for doing their work. Why? The desire to achieve the goal overtakes the personal interest in the endeavor.

If a reward - money, awards or even praise - becomes the reason for engaging in an activity, the endeavor will ultimately be viewed as less enjoyable in its own right and the focus will shift to getting the task done quickly with minimal risk.

We also know that the best ideas are generated with a quiet mind while relaxing, meditating or showering. Stress, goal-obsession, and deadlines activate the judgmental part of the brain that kills creativity.

Creativity is a process that cannot be forced.

You Get What You Measure, but Will You Get What You Want?

In business, there is an old adage, "You get what you measure." But the big question is, will you get what you want? Too many innovation-measurement systems are designed in a way that inadvertently creates undesirable behaviors. They measure the wrong things, resulting in poor results.

In general, there are four types of innovation measures:

Activity/Capability Measures. These measure the activity associated with participation in your challenges and the overall innovation program (e.g., number of registered solvers, number of submissions per challenge, percentage of time invested in innovation.)
Solve-Rate Measures. These subjectively measure how well you solved your challenges (e.g., percentage of challenges partially solved, percentage of challenges completely solved, potential value of solutions).
Implementation Measures. Finding solutions to your challenges is not enough. You need to implement the solutions in a cost-effective and timely manner (e.g., percentage of solutions implemented, time to market, implementation costs, percentage of on-time product launches).
Value Realization Measures. These measure the actual value accrued (e.g., increase in revenues, reduction in costs, percentage of revenue from innovations introduced in last six months, overall Return On Investment).

Of course we want our innovation efforts to result in value - the last measure - as this is where the rubber meets the road. But sometimes value realization can take years or, in the case of pharmaceutical companies, decades. Therefore, you need the first three measures as a way of monitoring progress with your program in the short term. These are leading indicators that can help predict long-term success.

The first category is useful in measuring trends over time for things like community engagement, effectiveness of internal communications and quality of challenges. But sometimes measuring activity can be misleading.

When working with clients, one of the most common activity measures is the number of solutions submitted for a given challenge. But this often leads to misleading results. Which is better: getting one hundred solutions or getting only two solutions? Although most people intuitively think that one hundred is better than two, this is not necessarily true. As pointed out earlier, it is not the absolute number that matters but rather the proportion of good solutions to bad solutions. If you received one hundred solutions where only two of them were exactly what you needed and the other 98 were duds, this would be worse than getting just two that were right on the money.

The key is to make sure you understand the unintended consequences of your measurement system, especially when it comes to activity measures. If used properly, these measures can help you drive higher solve rates.

Diagnosing Performance

But higher solve rates do not always lead to greater value. High solve rates with low value can indicate problems with your innovation program:

Poor implementation. You are unable to convert solutions into finished products/services.

Poor commercialization. Your solutions do not meet the needs of the market/customers and therefore do not generate revenue.

Poor relevance. Your challenges, although solved, are not important enough to "move the needle" of the organization's innovation efforts.

Measures are important for helping track your innovation efforts, and they can help diagnose potential issues, but it is important to measure the right things. Simply shifting what you measure can significantly impact the results.

Peter Drucker once said, "If you can't measure it, you can't manage it." Yes, measures play an important role in innovation. They give a snapshot of performance, they provide early detection of potential issues and they drive behaviors. The key is to use the right measures in a way that helps, rather than hinders, innovation.

PEOPLE

ORGANIZATION, LEADERSHIP AND CULTURE

The desire for similarity has inherent advantages. When people think the same way, act the same way, speak the same way and use the same language, things get done more quickly.
But is this ultimately good for the business?

For relatively simple tasks, homogeneous teams consistently performed more efficiently than heterogeneous ones. When you are surrounded by a bunch of "yes-men" and "yes- women," you agree quickly and get things done. However, in situations involving high- difficulty tasks, diverse groups consistently perform more effectively. That is, people who think differently can innovate better as a group.

This makes sense if you really think about it. Developing something new requires a wide range of thinking. Innovation demands diversity of perspectives, disciplines and personalities. Having a group of people who think the same way only gives you more of the same. Having people on your team who get along well may seem easier, but it will rarely lead to new and innovative ideas.

Instead, consider the mantra, "The person you like the least is the person you need the most."
Someone who is different from you may, at times, seem annoying. But consider that this person is quite complementary to you. They have skills and perspectives that could provide balance and help you become more effective and innovative. They will challenge you - a crucial factor in business success.

If you only hire people who "fit the mold," you will most likely hit a growth plateau at some point.

The 'Top Down' Philosophy Should Be Left to Convertibles

Charles Koch, CEO of Koch Industries, one of the most successful companies in the world, believes that central control is a "fatal conceit" for organizations. For the past 50 years, Koch has continually chipped away at the command-and-control style of management. In its place, he asks employees to run their businesses as if they owned them. When someone is brought in specially to do a job, he or she is immediately given the authority to spend money and move people when and where he or she chooses. Decision making within Koch is decentralized as far as possible to those with the best local knowledge and information. This approach must be working, as Koch Industries has grown more than 2,200-fold since 1960 and is outperforming the S&P 500 by nearly 3,200 percent.

Koch Industries is involved in many hazardous businesses, like asphalt, paper, pulp, oil and gas. Therefore, a number of years ago, not satisfied with industry-average accident and injury rates, it set a goal of moving to the top tier in the industry. Instead of having a few safety engineers scout the company for unsafe conditions, it made safety the responsibility of each and every employee. Employees were given rewards both for uncovering unsafe conditions and for discovering new ways to conduct business more safely. This initiative resulted in 35 to 50 percent improvements each year in the number and severity of accidents across the company. Within one year the company had moved from the middle of the pack to one of the best safety records in its industry.

CREATIVITY

TECHNIQUES FOR STIMULATING CREATIVE THINKING

The best way to quickly find solutions to your challenges is to identify someone who has already solved the problem - but in a different context. That is, someone from another industry, discipline or practice who might have the same problem.

Previously, I mentioned how a toothpaste manufacturer developed a novel concept for whitening teeth by using the same blueing agents that are used in laundry detergent to whiten clothes.

Another toothpaste innovation comes from GlaxoSmith-Kline (GSK). Its "Aquafresh iso- active" toothpaste is based on an idea from a GSK cleaning product that comes out as a gel but foams upon use (in the mouth), much like gel shaving creams. This formulation removes 25 percent more bacteria than regular toothpaste and has proven to be a market success.

Adapt Your Product to a Different Environment

Although label maker manufacturers sell their products primarily through office supply stores, the products' uses are unlimited. One such manufacturer, in an effort to expand is reach, made a list of 200 different possible customer segments: hospitals, authors, farmers, computer technicians, tollbooth collectors or hotel concierges. Then, each day, the manufacturer would choose one from the list and develop a list of possible marketing opportunities. Although sometimes a slight product adaptation was needed, in many cases it was simply a matter of changing the marketing materials.

Although innovation can be useful for creating new products. But sometimes the best innovation is about taking something that already exists and adapting it for a new environment. How might you sell your products/services to a totally different customer market than you normally do? Make a random list of potential targets and "force" an association between your existing product and that market's needs. Then find ways of marketing and packaging your product to meet those needs.

How can you take a product that has no market potential and turn it into a cash cow? Consider Arm & Hammer. Baking soda is a commodity. And because few people bake from scratch anymore, getting people to buy more baking soda for baking is a losing proposition. What do you do? Find new uses. Arm & Hammer turned its simple baking soda into an empire of product extension. Refrigerator fresheners made of 100 percent baking soda supported with clever packaging. Carpet fresheners made of nearly 100 percent baking soda enhanced with a mild fragrance. Laundry wash booster, toothpaste, pot and pan cleaners, polishes and more. The company took a simple product and extended it in previously unimaginable ways.

Although not always advisable to stray too far from your core audience or product, adaptive innovation can sometimes provide an extra revenue boost without your needing to invest heavily in new products.

Predict What the Competition Will Do Next

On Dec. 22, 2001, Richard Reid was caught with plastic explosives in the soles of his shoes. That's why we now have to walk barefoot through airports while our shoes are scanned.
Enron had its meltdown. What was done in response? Stringent rules like the Sarbanes- Oxley Act were implemented. When our financial institutions started to falter, $700 billion dollars of taxpayers' money was spent to sort out the mess.

These are examples of a "reactionary" approach to innovation. Wait for something to happen and then try to devise a response.

Most organizations use creativity to help them determine what to do next based on current information. They brainstorm ideas, select the best solutions and then implement the most promising ones.

But in these rapidly changing times, creativity can be even more valuable for determining what the marketplace and your competitors will do next. Or, if you are the government, it may help determine what banks and terrorists will do next.

When is the last time you had a brainstorming session where you asked the following questions?

What are we most afraid our competition will do to us?
Who is not a competitor now but might be in the future?
What shift might happen in the buying habits of our customers that might make our product less appealing?

The list of outside-in questions can be endless - and valuable. In your next brainstorming session, try the following:

Brainstorm your own list of questions, building on those above.
Determine which ones you want to tackle first.
Brainstorm, using a variety of creativity techniques, to identify "possible" outcomes.
For those that are deemed plausible, brainstorm a list of "triggers" for each. These are market conditions that tell you that the given scenario is moving from "possible" to "plausible."

This approach blends creativity with scenario-based planning. It helps you move from reactive solutions to proactive solutions. And in today's volatile world, this might just be the key to your long-term survival.

RECOMMENDED READING LIST

If you liked Best Practices Are Stupid, you'll also like:

Escape Velocity by Geoffrey A. Moore. Executives will discover a pragmatic plan for a critical challenge: how to move beyond past success and drive next-generation growth from new lines of business.
Serial Innovators by Claudio Feser. What does it take to exist beyond the average company's lifespan of 15 years? Learn how to build a company that is adaptive, innovative and can survive well into the future.
The Reinventors by Jason Jennings. Based on a study of more than 22,000 companies, this summary reveals how to pursue never-ending radical change.

The Author

Stephen M. Shapiro is an expert on innovation, a popular speaker and the author of Personality Poker. He previously led a 20,000-person process and innovation practice during a 15-year tenure at Accenture.