The Innovation Blog

I've just returned from an incredibly stimulating four days with one of the worlds premier packaged goods companies.  As with many of our clients, their ultimate objective is to transform their innovation efforts and culture in ways that will dramatically enhance their ability to stimulate growth.

As we are finding time and again, one of the critical stumbling blocks to innovation is the lack of a common language regarding innovation -- basic terms that are shared by all within the enterprise to discuss what they are working on, how to classify it, and therefore how to make resource decisions between options.

In our experience, and again in this session, it has been proven that an enterprise needs at least five basic definitions in order to succeed.  These five definitions must form the common language for discussion of innovation, goal setting and decision-making.  The five key definitions are:

1. Innovation what is it?  Is it new products and services, or is it more.  Do we expect innovation in core processes? business models? go-to-market strategies? etc.  
2. Incremental (or sustaining, or core) innovation.  The base level.  How do we define the minimum ante?  And therefore, what do we expect from riskier, larger opportunity efforts?
3. Breakthrough Innovation.  Larger opportunities that will significantly grow our business or our franchise with the customer?  Efforts in this area require different approaches, different decision tools, and normally, different resources.
4. Transformational innovation.  How do we differentiate the really huge, long-term types of innovation that truly transform not only our business, but the world?
5. Platforms.  Because platforms are often part of the differences in definitions, we need to understand what we mean by a platform.

One of the great things about being an innovation consultant, working with Fortune 500 firms is that I get a chance to participate in conversations and debates over things like this with a wide variety of smart and experienced people.  So I always learn something new.  That was the case again last week.  The experience has helped me to add clarity to my thinking about innovation terms, and hopefully to help others by sharing some of that learning.

The key to innovation definitions is not what others in the world say or think.  It is about creating a language that works for the unique organization in which you are operating.  It's not enough to create these definitions, they must be recorded, leadership must be aligned around them, and they must be communicated.  Most importantly they must be useful distinctions that fit your unique needs.  So here is my latest thinking based on these conversations:

1. Innovation

Business Innovation is the process of envisioning and successfully implementing new ways of doing anything that creates value for an enterprise and its stakeholders.

There are several keys in this definition that I hope will be useful to you.  First of all, it involves strategy and creativity ("envisioning" requires both).  Second, it is not innovation until it is successfully implemented.  Until then, it's just creative thinking or a nice idea.  Third, it must create value for someone important to the enterprise (stakeholders can be the enterprise itself, its employees, shareholders, customers, consumers, etc.).  Finally, it is a process.  There are five phases or steps in business innovation (discussed in separate blogs -Our Process >).

The next three definitions are critical to resourcing, decision-making, and creating portfolios of innovation.  To be useful, they must be:

1. Simple and easy to understand
2. Clearly distinguish one level from another
3. Useful (test them out with your own people using some list of your own projects or examples from the marketplace.  Refine them until they actually help distinguish differences)
4. Shared broadly within your organization

2. Incremental Innovation

Not all innovation achieves the same goals for an enterprise.  And unless everyone understands that there are different levels and that different levels require different resources and approaches, the enterprise will find itself "innovating" but not growing at rates it desires.  Incremental, sometimes called "sustaining" or "core" is the base level.

My recent experience helped me clarify, and simplify my own definition:  

Innovations that keep your existing offering competitive.

• Sustains (or minimally enhances) market share
• Targets primarily existing customers of your business or the category
• Extends current platforms
• Usually addresses needs the market can currently articulate

3. Breakthrough Innovation

• Creates new market share
• Targets new customers or new usage occasions
• Leads the market with needs that are clearly emerging, but may not yet be articulated by the target
• Creates a new platform (this is less part of the definition than a key criteria for most business innovation.  Breakthrough is risky and resource intensive.  To be worthwhile, it should have fertility and long-term usefulness)

4. Transformational Innovation

The third level.  Some innovation is generally recognized as "paradigm shifting".  New products, services or ways of doing things, that once the market recognizes, they will never go back to the old way of doing things.  They transform the world, our behaviors and create new purchase habits.  Electric light bulbs, automobiles, etc.  Because transformational are easier to recognize after the fact, it is difficult to plan for or to pursue them.  However, it is useful to recognize them in the conversation.

• Creates a new market
• Creates new spending
• Creates a new industry or category

Most strategies will lean toward a break between expectations for incremental and those of breakthrough or transformational.

5. Platform

At its basic level, platform thinking seeks to leverage some investment over time and multiple revenue streams.  That investment may be technological, channel, manufacturing process or equipment, markets or brand equity.  There are many examples.  The point is, to be attractive, higher risk, more expensive efforts require leverage -- in terms of longevity and/or revenue streams.  This will frequently help distinguish between incremental and breakthrough, because incremental generally leverage some existing investment (platform), whereas breakthrough generally require some new investment (platform).

A family of related offers that leverage an initial investment, technology or assets across an envisioned roadmap of revenue streams.

They must:

• Be BIG -- whatever is big for you in terms of revenue.
• Leverage a clear asset or investment
• Be Fertile -- you must be able to envision a developmental roadmap that unfolds over time, creating multiple families of incremental derivatives
• Have long-term viability
• Further the Vision and Strategy of enterprise

There are many more definitions that are useful, and many variations on these themes out in the world.  The key is to adopt or create those that best work for you, then align all your stakeholders around them and communicate them to everyone who participates in innovation.

Innovation clients frequently ask us how to make better decisions when pursuing breakthrough innovation.  Decision making in pursuit of breakthrough and transformational innovation is significantly different that which is for sustaining or incremental innovation (where frames of reference, past benchmarks, etc. exist).  There are five key decision points along the journey.  At each point, beliefs, assumptions, SWAGS, etc. will get tighter, and more useful.  

Today I'm going to address the second decision point.  Once you have had full range of beginning ideas, and selected a manageable number to fully describe and turn in concept outlines, how should you decide which ones to take into a more rigorous process of creating "Business Visions"?  The creation of Business Visions involves significantly more thought, time and effort.  It involves an escalation of resource commitment, and therefore is deserving of some thoughtful selections from within the existing range of possibilities.  And it is early in the game.  So what criteria to use?

The Creative Realities "SNIFF" Test©.

Five criteria should be considered at this stage.  All five require the use of judgment, rather than any real metrics.  Because for "breakthrough" innovation, there is no frame of reference, no empirical data, etc.  Here are the criteria to consider, we recommend using a 5 point scale to make judgmental evaluations of each:

Strategy:  How well does this fit with our strategy and further our Vision?

Need: How well does this address an important consumer/customer need?

Impact: Opportunity Size. Have we envisioned a sizable enough market with money to spend? 

Feasibility:  Can it be done technically within our timeframe?

Feel:  Most important -- What does your “Educated Gut” say?

As you consider these criteria, it is easy to simply select those few that have the highest average ratings on these criteria.  But before you do, look at what the ratings are telling you.  Used properly, they can identify the key areas of strength and weakness.  Before you make your decision, consider each criteria and ask yourself "How could I make this concept stronger in this criteria?  And how would that affect the other criteria?  Problem-solve your way to the strongest form of the idea before you make the decisions.  Then make them in an informed manner.

Take a "SNIFF".  What does it tell you?

SNIFF Test ©2010 Creative Realities, Inc.

What if Henry Ford got it wrong?

I’m an innovationist.  I make my living helping companies innovate.  Most of my blogging will be about practical tips and techniques from a practitioner’s experiences on the road to innovation.  This thread will be different.  This is intended to be thought provoking about sustainability, technology, technological roadmaps, techonomy (http://techonomy.com/videos/ look for the video "techonomy – the philosophy"), sustainable innovation, and other related subjects.

Let’s begin with a definition of innovation:  “Business innovation is the process of envisioning, and successfully implementing new ways of doing anything that creates value for a company or it’s customers.”

The Absurd Wish:  For the purposes of this blog thread, I’d like to have some fun, and hopefully intrigue you to thinking more about sustainability and the role of innovation, by beginning with what many will call an “absurd wish.”  In a nutshell, my wish is for a world where “cars poop.”  Before you completely bail out on me, consider this quote from Albert Einstein… “If at first an idea does not seem absurd, there’s no hope for it.” 

That’s good advice for innovator’s seeking really breakthrough or transformational innovation.  If all we wish for are things we can understand or envision today, we simply won’t be pushing very far from what is easy, feasible and incremental.

So I wish for a world where cars poop.  Why would I wish that?  Let’s go back to Henry Ford.  Henry is credited with saying “If I asked them what they wanted they would have said ‘faster horses’.”  That statement is commonly used to help people understand that in talking with customers or consumers, you have to look well beyond what they say and can wish for.  Most of us are grounded in what we know, and find it difficult to see very far beyond that.  That’s true, and a helpful thought for most Voice of the Customer (VOC) activities. 

You get what you play for.  So what if Henry did get it wrong? What if we look at “Faster Horses” differently.  In Henry’s time, the existing paradigm was that most locomotion, most vehicles were based on horse power (funny how we still use that term today).  The horse was the “engine” of locomotion; the carriage or cart was the vehicle.  So if you wanted to go faster, you needed a faster horse.  Henry’s answer was to break the paradigm and make vehicles based on the internal combustion engine more useful and available to the “common man.”  That's what he "played for" and it worked well for him, and for a long time, it worked well for everyone.  But today, all that internal combustion is contributing to a range of little issues like pollution, global warming, tensions over oil resources, etc.

Something to think about:

Maybe we should have, or should begin to play for something different.  What if we look at “faster horses” differently?  What if we rephrase that to “biological engines.”  Steam engines were also at play during those times.  But they quickly became relegated to trains and ships.  The automotive industry pursued a century of innovation around creating motion by igniting fuel oil.  What if that century had focused on creating more efficient, smaller steam engines?  And what if rather than burning coal, or oil, etc., the innovation roadmap had been on the road to biological reactions that cause enough heat to create steam?  Where would we be today?  Think about it.  I’ll share some new technologies later that might hold some of the answers.

Sooner or later, no matter how obviously brilliant your idea, someone is going to ask "how big is it?"  And in too many situations, this question will be asked way too early in the process (but that's a subject for another day).   As a result, I'm even hesitant to provide folks here with a way to answer the question.  Because providing a financial estimate too early in the process is more often a Kiss of Death than a useful bit of information.  Why?  Because if the topic under discussion is an incremental innovation, everyone probably already knows the answer (whatever 1-2% more of the existing sales would be).  In the case of breakthrough innovations, the answer is a much more subjective question because there is no existing frame of reference for the answer.  New ideas have new markets, new customers, new value propositions, new purchase behaviors, etc.  So at best, providing financial information is a S.W.A.G. (Silly or Scientific Wild Ass Guess).  Breakthrough innovation should be looked predominantly through a strategic lens in the early stages.  Stay Loose until Rigor Counts!

But sooner or later, continued development of even Breakthrough ideas will require some sense of "is this going to be worth it from a sales point of view or not?"  That's where S.W.A.G. comes in.  We've done a lot of work with S.W.A.G.s over the years, and recently while surfing the net to stay current on the existing school of thought on this, I ran across a posting from Christian Buckley of Red Hill Partners on The "Defendable Swag".  Basically, he raises six important questions, and frames the question for people who are seeking venture capital.  His logic runs very closely to our experience.  So I've taken the six questions and turned them into a nifty little spreadsheet in Excel that allows us to work with our client teams to think through a defendable financial estimate or S.W.A.G. 

Here's a summary of Chris' questions and our financial estimation formula.  Remember, for breakthrough, with no frame of reference, you're going to have to look for a place to begin with some logical support.  It may be some similar product or service in an adjacent world, or some other financial metaphor or analogous world.  Once you have that, you're ready to start Swagging!  In my view, using a multi-level thought process helps make this approach "defendable."  Here it is:

1. What is your Total Applicable (or Available) Market -- TAM.  You're looking for the big segment here.  Large enough that there is usually some form of data available.  If not for your exact market category, then for the one you are using as an analogy/stalking horse.
2. What is your SAM (Served Available Market).  That portion in which you are actually competing either with someone else, or alternative, "lead user" ideas (ideas developed informally to solve the problem because your product isn't available to them).  In the formula, assign it a percentage of the TAM.
3. Geographic Reach.  We have used this two ways.  In the normal case, you may be limited to the U.S. market and your information is Global.  So determine what percentage of the global market is represented by the U.S. for this or a similar category, and use that percentage to modify the global data.  Recently, we went exactly the other way.  We had TAM and SAM data for the U.S., and we had a useful analogy for the Global markets we expected to play in, so we inserted a formula that "plussed up" the U.S. data.  Depending on what your TAM database is, you may wish to place this above the SAM percentage in your formula, using this as you maximum modified TAM and then reducing that by a competitive number.  Either way, the thought process helps you understand your potential.
4. Primary distribution within that reach.  There's an old saying in retailing:  "You can't sell from an empty shelf."  That's how distribution affects the next part of your calculation.  In packaged goods, we use percent ACV - All Commodity Volume.  ACV is the term that represents the total annual sales volume for retailers in a geographic area.  It's not just about your product category.  It helps account for big stores versus little stores, etc.  So in packaged goods when we talk about distribution as a percent of ACV, what we're really describing is that percentage of the total "shelf space" we will reach in a geography with our distribution partners/system.  
5. Who are your key Partners for sales and marketing within those channels.  Good question.  It will be important to know and plan this, especially as you look to scale your business.  Do you have the necessary relationships to scale by developing the needed channels of distribution.  It's a great question when preparing a venture capital brief.  We don't include this in our SWAG number.  We would consider it more as a discussion point.
6. Anticipated Share.  Christian uses the question "What will it cost you to capture 10 to 20 percent of that market?  Again great question.  It goes to other parts of our financial model.  For our purposes, identifying how big the revenue could be for this innovation, we're more concerned with adjusting our numbers by a reasonable percent share.  Emphasis on the word reasonable.  Unless you are a monopoly, your consumer/prospect has other places to go.  Be reasonable here.  10-20 percent is normally as big a share as you should plan on for your base.  Then you can apply Christian's question to later business plans indicating the size of additional investment needed to capture larger shares.

So the formula becomes:

• TAM x % = SAM
• SAM x % Geographic reach = Geographic SAM
• Geographic SAM x % Distribution (or ACV) = Total Solution Opportunity
• Total Solution Opportunity x % Share = Your Anticipated Business Volume

We add another level to our SWAG to estimate "ingredient" products/services.  We call it "Client Interest."  So if the Anticipated Business Volume is for a total product or service, and we are providing a piece of that, we need to again reduce our SWAG by understanding what piece we provide.  Are we 50% of the Value/Cost or is our interest limited to 5-10% of the finally delivered product/service?

Remember it's called a SWAG for a reason.  As your innovation process progresses, your guesses need to get more rigorous and better supported by new information.  In the meantime, it's an "educated guess" and it's a nice defendable SWAG because of the thought you put into it.