16 February 2009

Innovate Out of Recession

In times of recession, what can companies do to not just only survive but to grow? The answer is simple - innovation. It is about how you can do more with less. We cover a systematic innovative thinking method and suggest ways to innovate out of recession.

Understand Your System

Our success is determined by the formula profit = sales – costs. To increase profit, we either increase sales or reduce costs. Doing both has greater impact. In recession time, most people think that sales will be down and there is nothing much you could do about it and so they just try to cut costs.

Challenge the Assumption

A basic rule of Innovation is to challenge the assumptions. “Recession means less revenue” is pre-conceived assumption. This need not be so. In any phase of economic cycle, the boom or the gloom, there will always be some people making money even while others are loosing money. “Recession as opportunities” becomes the basis and goal for our innovation. We will discuss ways to increase revenues in the later part of this article while we address the cost issues first. Nevertheless, we must see recessions as opportunities for doing better and building a stronger company. We must have this positive outlook and a can do attitude before any innovation can be created.

Costs Cutting the Short-term Way

1. Across the Board Cut.
A typical practice in cost cutting, in the name of fairness, is to reduce cost proportionally throughout the company, such as a 10% across the board cut. All salaries and all budgets are to be reduced proportionally. However, a proportional cut may benefits the poor performers and penalize the contributors and really making it unfair. If we are not able to tell who are the better performers than it reveals a weakness of the company.

2. Cut Staff.
When recovery come, we lack ability to ride the rise.

3. Cut training.
When business is good, there is no time for staff to upgrade. When business is bad, the company could not afford to send staff for upgrading. The staff is perpetually learning, if ever, on the job. Does management ever think of the frequent fire-fighting and problems could be due to lack of training and incompetence of staff?

4. Cut Marketing & Sales.
This practice is like a self fulfilling prophecy.

Perhaps such thinking we have of training and marketing and sales have to do with our lack of understanding of marketing or misused of training. Training has been used as rewards for performance rather than a necessity for improving the competence of staff for better performance. We are always suspicious of the effectiveness of training and marketing and hence we think they are costs item to be eliminated when we cannot afford. Again, this strategy reveals that we did not do a good job on training and marketing in the first place.

The Smarter Cost Cutting Ways

In the above discussion, we have implicitly introduced an Innovation Operator called Take-out (also known as Cut, Minus, Remove or Exit). Another Innovation Operator is Segment (also known as Divide, Refine or Specialize). We pointed out earlier that across the board cost cutting could be bad – it is like cutting away fats and muscles at the same time where we only want to cut the fat. A better way is to segment the Cost Items into greater details, i.e. refine the cost cutting. The possible refined cost items to be cut could be Dead Weights, Loss making Customers and Loss making offerings of our products & services. (We shall use offering to represent products or services henceforth).

Remove Dead weights

Dead weights are activities or jobs that are not directly contributive to the providing of our offerings. Features in our offering that customers do not see it as important but cost us much to deliver them should be cut. Dead weights are not as apparent as wastes because they have the appearance of busy-ness and and hence of usefulness.

Customer Profitability Curve

If we plot a curve of with profit on the y-axis and our customers on the x-axis with decreasing order of profitability, it is very likely that there are customers that give us negative profit (i.e. loss). These are the loss making customers that we could not serve. Such customers should be dropped properly by introducing them to other vendors who could serve them better.

Loss Making Offerings.

We could also plot a curve of the profitability of our products and services. Loss making products and services should be dropped or packaged with other to see if there is possibility of making a profit. Resources tied up could be freed for innovating new offerings.

Irregularize the Cut

A blockage to creativity is our tendency to make things uniform. For example, the windscreen wipers we find in our cars used to be 2 of equal shape and size. Our housing loan in the past has been of equal monthly payments and of fixed interest-rate over the lifespan of the loan. Now we have more innovative loan offer to attract borrowers. The payment and the interests changes with time. The more expensive cars have a larger windscreen wiper on the driver side giving the driver a larger view during raining. Hence, the next powerful Innovation Operator we want to use is “Irregularize” (also known as distort, randomize, make non-uniform, mess up, or create a dependency or relationship between two or more attributes). We should apply this operator to our salary and have management takes a greater percentage cut than the lower paid operation staff.

To find out more ways for reducing costs, we now must look at the context or the environment where our business operates.

Study the Context - Our Operating Environment

A system, like our company, does not exist by itself. It exists within a context, or the environment. In the environment, we find, the customers, our suppliers, our competitors, the political, social, economic, technology, the natural environment and legal framework (PESTEL for short). We have mentioned the loss-making-customers in our context earlier.

There are many opportunities that exist in our context and we should study them carefully. Very often, the solution to our problem exists in our context. As an example, the best way to remove the smell from our fingers after eating durian is to wash our hands in a bucket of water containing the durian crusts.

In the context, we can find the great opportunities and threats of course. Let us take a detailed look at the elements in there. Firstly, let looks at our customers.

Customers Psychology

Customers make buying decisions at three levels with increasing degree of loyalty. Firstly the rational level that goes for performance and utility values i.e. better, faster, cheaper, safer and easier. Secondly at emotional level that goes for look and feel, lifestyles and status. Thirdly at the significance level that goes for meaning and enhancement of life, service to the community and protection of environment. We should reposition our offering to engage the customers’ emotion and sense of significance.

We have a good example here locally, a company called Breadtalk. There are many bakeries around, but Breadtalk is different. We can know it from their mission and vision statements. It is not just about bread but about the hip lifestyle. Starbuck is more than just coffee but addressing the third space of social interactions. Apple iPod is not just about mp3 player. It is about music on the go with only the songs you like at 99 cents each and the mp3 player is just a means of delivery. Can we do like wise to our offering and look beyond functions and performance that addressing only the rational mind of our customers?

Look Beyond Existing Customers – The Dimension of Space

We can take a spatial or distance view of customers. We can classify them as existing customers, potential customers on the edge and non-customers. Potential customers on the edge could be our customers but due to some factors which we need to find out, like prices, distance, ease of use or time that prevent them from being our customers. We can examine those factors, the non-consuming context (please refer to the books of Clay Christensen for details), that prevents them from becoming our customers.

We can also look at opportunity of converting the non-customers to become our customers.

What innovation can we make in our offering that will bring them in? We will look into this in later part of this article that cover the meaning and scope of innovation specifically. Let us go back to cost cutting.

We can use two other Innovation Operators to help do cost-cutting or look for future revenue opportunities. They are the Outsource (à) and the Adopt(ß) Operators.

Outsource to Context/Environment Save Cost

Another good way to reduce cost is to outsource certain parts of our operation. Things that others can do better than us, we should outsource to them to build for us. Overtime, the people in our context or our industry, improve and could catch up or even overtake us in providing the offerings. Geoffrey Moore in his book “Living on the Fault Line” spoke of the degradation of our core into context over time. He recommends us to outsource context and insource core.

Adopt or Insource from Context/Environment to Save Cost or Increase Revenue

Adopt or In-source is to take over the function formerly provided in our context. This is the opposite of outsourcing. It could be a cost-saving action by taking back what we give outsider to do or it could be a revenue generating opportunity by providing offerings that are available in the context-environment. This leads us now to cover Innovation as a subject matter per se and showing how we can increase revenue or save costs in our offering, our production and delivery process.

Innovate for Increasing Revenues or Savings

Innovation vs Creativity

Innovation is more than creativity. Creativity is about coming with new and original ideas. Innovation is about converting new intangible ideas into tangible business offering that provide value. Creativity for new breakthrough ideas is only the first step. The subsequent steps are the development and the commercialization. There are two aspects of Innovation namely the invention and the process to make and commercialize the invention that results in business values and profits.

Myths of Creativity

Nevertheless, innovation begins with creativity. Many people have very wrong ideas about creativity and thereby limit their creative ability. Here are the Creativity Myths that need to be debunked so that we can be confidence that all of us are inborn with creative ability are able to be have creative ideas.

Myth #1 Quantity gives Quality

Most people believe that quality ideas come from quantity of ideas. This is wrong application of statistical analysis for population into ideas. The quality of ideas has more to do with the thinking methods rather than the quantity. In fact, quantity of ideas only leads to waste effort in evaluation and selection of better ideas. The creative thinking methods should lead our thinking to break away from our thinking inertia, blind spots and prejudices that blind us from seeing the breakthrough ideas.

Myth #2 Creativity is a Gift

Most people believe that creativity is a gift and people are born with or without creativity. Creativity has been wrongly associated with Fine Arts only and drawing is certainly a gifted talent. Study has shown that creativity increases with the subject’s IQ (Intelligence Quotients) until about 120 and after which there is no strong correlation. Normal people have IQ of about 100-120. Hence, we can conclude that normal people are creative. We can believe we are creative and are able to give ideas. The only requirement is that we must know how.

Myth #3 Less Restriction means More Creativity

It is conventional belief that the lesser the restriction, the greater the ability to be creative. Studies have shown that it was wrong. Ideas generation seems to be associated with restrictions. People need to be guided in their ideas generation process.

Myth #4 Innovation Belongs To The R&D Department

Most people in corporate believe that innovation belongs to those people working in the R&D department and their job need no innovation. However, there are many wonderful innovations that come from the people not in the R&D Department. The famous Tamagotchi was invented by former housewife Aki Maita.

Myth #5 You Are More Creative When You Are Alone

Evidences show that great inventors like Thomas Edison collaborated with other people for coming out with great innovations. While the world is flat, we find values creation tends to center on clusters such as the Silicon Valley, the Boston & New York areas in the US.

Myth #6 Creativity Comes From Relaxing

Ideas generation need to take place in an undisturbed and stress free environment. However, ideas generation is a systematic and intensified activity. Edison’s famous quote - “Genius is one percent inspiration, ninety-nine percent perspiration”.

With the myths on creativity debunked, we are now confident that we are able to have creative ideas and all we need is to learn a thinking method to guide us where we can just exert our effort in systematically working through it. We have actually covered a subset of the Innovative Thinking Method which I called BVITS (Business Value Innovative Thinking Symbols). The steps start with defining the system, followed by defining the context, and then applying the operators like Take-out, Segment, Outsource, Adopt, and so forth on the elements in our system and our context generating many ideas, which are better known as provocative propositions.

The Attitude for Ideas Generation

Most creativity method teaches us to suspend evaluation. That is not positive enough and is not energizing for ideas generation. We must take on a more positive and support role. When an idea, a provocative position is made, we not only don’t criticize it, we come out with reasons to support and justify the ‘crazy’ ideas. There is not such thing as a useless idea; we only need to find the situation and the person that will find the ideas useful.

Never Be Satisfied With Just The First And Only One Answer

A simple rule of thumb for creativity is “never to accept the first answer or solution”. We must ask whether we have considered other solutions or possibilities. We must go for 2nd and 3rd answer.

Innovation is More than a Product

We need also to enlarge our understanding of the meaning of innovation. Most people think of innovation as just a product or a service. A typical way of growth is to extend our product sales to become a service-sale that engages our customer as at a closer level of relationship.

Product to System to Platform

We should extend our concept of innovation much further. From a product, we can produce a system of products and then go on to be a standardized platform where others can build additional products and thereby increases the market size for our category of products. From our service, we can go on to create a new customer experience. This is where the “Blue Ocean Strategy” of W. Chan Kim and Renee Mauborgne can help. The customer experience is a function of multiple factors such prices, functions, emotional appeals, ease of use and so forth as described in the paragraph of Customer Psychology. We must create a new experience curve that is differentiated from our competitors and thereby create new market without competitors. Please read the Book for details. The book tells us about the six path framework, the product utility and life-cycle matrix to find the factors and then applying ERRC (Eliminate, Reduce, Raise and Create) operators on the chosen factors to create a differentiated strategy curve for a new blue ocean customer experience of uncontested market.

Branding and Message.

Innovation could occur in just the marketing message. We could create a new catchy tagline for our Brand. We have much examples like toothpaste for teeth protection or whiter teeth or gum that clean the teeth. Our product could be the same, but we can create a new branding by just looking at the new and special benefit that our offering could bring. We can look an our offering from a new angle. A very powerful message can be created by coming out with a metric of measure to allow our customer to decide for themselves what the good values are. In the computing field, there is the rating of MIPS, Clockspeed in GHz. In the digital camera world we have the megapixels. Photography professionals will tell you the quality of a photo is not just dependent on the megapixels-size of a camera nevertheless megapixel-size is such an easy can catchy metric. When our offering is particular strong along a particular dimension of value, then we can come out with such a metric or index to allow our customers to compare and then choose our offering.

Innovation within the Company

Innovation can also occur within our company. The common one is in process innovation when we develop a new process that is a lot more efficient or effective than the old process. We can also have innovation in our strategies such as doing new things that our competitors cannot follow. There could be innovation in our organization structure or management model. We know of innovative companies like Google and 3M that are organized and operated differently than the conventional ones. Much improvement can be made even by re-organizing our workspace. Depending on the nature of our work, we could have different work arrangement such as arrangement of tools for the production floor or greater meeting and contact space for the knowledge workers to exchange ideas.

Partners & Category Supply Chains

Innovation can occur in our relationship with our suppliers. Toyota is famous for involving their suppliers early in their planning and to even transfer technology to their suppliers to make them better. Very often, the competition does not occur among firms selling similar products but occur among supply-chains. We can recalled the history of how VHS defeated Betamax in the video recorder game and more recently the Blu-ray DVD over HD DVD.

Business Model - The Rules Of The Game

Much greater competitive advantage can be obtained by considering our company’s Business-Model. The Business Model is the way we make, deliver and earn our business values or simply how we make money. We have the famous success story of Dell Computers’ direct sales model and make to order business model out performing its industry.

Social-network & social innovation

Innovation can come from the new value of social-interactions. The success of Facebook is a good example. Earlier successes include the hotmail providing free email. New Web 2.0 technology open up new opportunities of making money. The use of internet forums, fans club help create better and cheaper support for our customers that increases royalty. The use of open-innovation where we engage our customers and suppliers to participate in helping us to innovate, to test, to evaluate and to enhance our new offerings.

The Dimension of Time – the Life Cycle & Trends

One of the most important factors in our business is future trend. Not only we need to know where we are, we need to know where the trend is going. Moreover, we need to pick the right new trend to follow. Geoffrey Moore’s Category Maturity Life Cycle (CDLC) & Technology Adoption Life Cycle (TALC) described in his book “Dealing with Darwin” tells us much. It tells us what we need to do at different stages of our offerings life cycle. If we introduce a new disruptive product, we must know how to cross the chasm. It teaches us how we can create Tornado to ensure our product make the rise to reach the main street and grow in the growth market. When we are at the mature market, we pursue innovations that engage our customers better and at the same time we go for operation excellence to scale up, minimize costs, increase quality and value. Then come the time of obsolesce and declining market. If we plot our offerings on the CDLC, it can tell us where we need put our effort. Do we have offering in the beginning stages, the main street, or do we just have offering in the dying stage of the CDLC?

Watching the trend and identifying where our offerings stand on the curve are key to understanding our business over time. If there has been a very real shift in our economy or market, doing what we have always done give the impression of productivity but actually produces very little value for the new changed market. We can recall the sad stories of type-writer manufacturers loosing out the rise of PC, the film & analogue camera manufacturers loosing out the digital ones. We must always be on the alert to examine and face up with the realities of our offering in this ever and frequent changing world. We must be sure to change and innovate before we become the dinosaurs of our market.

Imaging a Booming Time – The Invert Operator

The most common Innovation Operator for all creativity techniques is the Invert Operator (also known as Reverse, Take the Opposite or make a U-turn). Instead of the economic recession, we now Imaging we are having an economic boom. We make a list of what we shall be doing during boom time, such as upgrading equipment, expanding, develop new things etc. We then prioritize the list and see how can we achieve the growth effects without increasing much costs.

Innovation Must be Built in the Culture

Innovation is not a one-off affair. We know that the market catches up fast with our innovation and will neutralize our differentiated advantage created by our innovation. Innovation strived best in an innovative culture. Culture is how decisions are made, how things are done and the actual behavior in an organization. It involves the mission and vision that the company is pursue in and the values that are hold dear by the people. It also involves the review and rewards systems. Culture is not what is said but what is done. Trust, Integrity, Openness, Risk taking Attitudes and action towards failure, the allocation of Time & Resources and management support all help in developing the innovative culture.

Conclusion

There are much to share about the BVITS innovation methods and the business of innovation, but due to limited space, we only cover some key items. More details of the BVITS method can be found at http://www.bvotech.com/BVITS.htm.

Defeat this recession with a positive attitude and confidence that you can come out with innovative answers to that will grow the company. Look first at our System and then the Context of our business. Apply the Innovation Operators of Take-out, Divide, Outsource, Adopt, Irregularize, Invert, Multiply, Combine, Intensify and Drop-In to the components of our system and context over the dimension of Time, Space and Properties. We can then come out with lots of ideas, called Provocative Proposition, that challenge our thinking inertia and in the process, we may discover solutions for having breakthrough profits by increasing our sales and at the same time reduces our costs. We believe we can do it – we just need to learn it and systematically apply it.

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