Holden outerwear promotes innovation at the individual employee level by

Chapter 6

Innovation and Change

© 2016 Cengage Learning

What Would You Do?

3M (Minneapolis, Minnesota)

Should 3M continue to focus on using Six Sigma procedures to reduce costs and increase efficiencies, or should it strive again to encourage its scientists and managers to focus on innovation? Which will make 3M more competitive in the long run?

Over time, how much should companies like 3M rely on acquisitions for innovation? Should 3M acquire half, one-third, 10 percent, or 5 percent of its new products through acquisitions? What makes the most sense and why?

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3M Headquarters, Minneapolis, Minnesota

With 40,000 global patents and patent applications, 3M, maker of Post-it Notes, reflective materials (Scotchlite), and 55,000 products in numerous industries (displays and graphics, electronics and communications, health care, safety and security, transportation, manufacturing, office products, and home and leisure), has long been one of the most innovative companies in the world. 3M codified its focus on innovation into a specific goal, “30/5,” which meant that 30 percent of its sales each year must come from products no more than five years old. The logic was simple but powerful. Each year, five-year-old products become six years old and would not be counted toward the 30 percent of sales. Thus, the 30/5 goal encouraged everyone at 3M to be on the lookout for and open to new ideas and products. Furthermore, 3M allowed its engineers and scientists to spend 5 percent of their time, roughly two hours per week, doing whatever they wanted as long as it was related to innovation and new product development.

And it worked, for a while. A decade ago, the Boston Consulting Group, one of the premier consulting companies in the world, ranked 3M as the most innovative company in the world. In subsequent years, it dropped to second, third, and then seventh. Today, 3M doesn’t even crack the top 50. Dev Patnaik, of Jump Associates, an innovation consulting firm, says, “People have kind of forgotten about those guys [3M]. When was the last time you saw something innovative or experimental coming out of there?” So, what happened?

When your predecessor became CEO ten years ago, he found a struggling, inefficient, oversized company in need of change. He cut costs by laying off 8,000 people. Marketing, and research and development funds, which had been allocated to divisions independent of performance (all divisions got the same increase each year), were now distributed based on past performance and growth potential. Perform poorly, and your funds would shrink the next year. Likewise, with U.S. sales stagnating and Asia sales rising, management decreased headcount, hiring, and capital expenditures in the United States, while significantly increasing all three in fast-growing Asian markets. Six Sigma processes, popularized at Motorola and GE, were introduced to analyze how things got done, to remove unnecessary steps, and to change procedures that caused defects. Thousands of 3M managers and employees became trained as Six Sigma “black belts” and returned to their divisions and departments to root out inefficiencies, reduce production times, and decrease waste and product errors. And it worked incredibly well, in part. Costs and capital spending dropped, while profits surged 35 percent to record levels. But, product innovation, as compared to the 30/5 goal sank dramatically, as only 21 percent of profits were generated by products that were no more than five years old.

So, what should 3M do? From inception, 3M has been an innovator, bringing a stream of new products and services to market, creating value for customers, sustainable advantage over competitors, and sizable returns for investors. Thanks to your predecessor, 3M has lower costs, is highly efficient, and much more profitable. But it no longer ranks among the most innovative firms in the world. In fact, the use of Six Sigma procedures appears to be inversely related to product innovation. If that’s the case, should 3M continue to focus on using Six Sigma procedures to reduce costs and increase efficiencies, or should it strive again to encourage its scientists and managers to focus on innovation? Which will make 3M more competitive in the long run?

When people think of innovation, they tend to think of game-changing advances that render current products obsolete, for example, comparing the iPhone to text-based “smartphones.” Innovation, however, also occurs with lots of incremental changes over time. What are the advantages and disadvantages for 3M of each approach, and when and where would each be more likely to work? Finally, some companies innovate from within by successfully implementing creative ideas in their products or services. Sometimes, though, innovation is acquired by purchasing other companies that have made innovative advances. For example, although Google is generally rated as one of the most innovative companies in the world, most people have forgotten that Google bought YouTube to combine its search expertise with YouTube’s online video capabilities. Over time, how much should companies like 3M rely on acquisitions for innovation? Should 3M acquire half, one-third, 10 percent, or 5 percent of its new products through acquisitions? What makes the most sense and why?

If you were in charge at 3M, what would you do?

Technology Cycles

Birth of a new technology

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Technology reaches limits

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Exhibit 6.1 S-Curves and Technological Innovation

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Early in a technology cycle, there is still much to learn, so progress is slow, as depicted by point A on the S-curve. The flat slope indicates that increased effort (in terms of money or research and development) brings only small improvements in technological performance. Fortunately, as the new technology matures, researchers figure out how to get better performance from it. This is represented by point B of the S-curve in Exhibit 6.1. The steeper slope indicates that small amounts of effort will result in significant increases in performance. At point C in Exhibit 6.1, the flat slope again indicates that further efforts to develop this particular technology will result in only small increases in performance. More important, however, point C indicates that the performance limits of that particular technology are being reached. In other words, additional significant improvements in performance are highly unlikely. After a technology has reached its limits at the top of the S-curve, significant improvements in performance usually come from radical new designs or new performance-enhancing materials. In Exhibit 6.1, that new technology is represented by the second S-curve. The changeover or discontinuity between the old and new technologies is represented by the dotted line. At first, the old and new technologies will likely coexist. Eventually, however, the new technology will replace the old technology. When that happens, the old technology cycle will be complete, and a new one will have started.

“High-Tech?”

Technology cycles involve advances or changes in any kind of knowledge, tools, and techniques…not just “high technology.”

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Innovation Streams

Patterns of innovation over time that can create sustainable competitive advantage.

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Companies that want to sustain a competitive advantage must understand and protect themselves from the strategic threats of innovation. Over the long run, the best way for a company to do that is to create a stream of its own innovative ideas and products year after year.

Exhibit 6.2 Innovation Streams: Technology Cycles over Time

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Exhibit 6.2 shows a typical innovation consisting of a series of technology cycles. Recall that a technology cycle begins with a new technology and ends when it is replaced by a newer, substantially

better technology. The innovation stream in Exhibit 6.2 shows three such technology cycles. An innovation stream begins with a technological discontinuity, in which a scientific advance or a unique combination of existing technologies creates a significant breakthrough in performance or function. Technological discontinuities are followed by a discontinuous change, which is characterized by technological substitution and design competition. Technological substitution occurs when customers purchase new technologies to replace older technologies. Discontinuous change is also characterized by design competition, in which the old technology and several different new technologies compete to establish a new technological standard. Because of large investments in old technology, and because the new and old technologies are often incompatible with each other, companies and consumers are reluctant to switch to a different technology during a design competition. In addition, during design competition, the older technology usually improves significantly in response to the competitive threat from new technologies; this response also slows the changeover from older to newer technologies. Discontinuous change is followed by the emergence of a dominant design, which becomes the new accepted market standard for technology.

Dominant Designs

Discontinuous change is followed by the emergence of a dominant design. Dominant designs emerge in several ways:

Critical mass

Solves a practical problem

Independent standards bodies

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© 2016 Cengage Learning

Emergence of Dominant Design

Emergence:

indicates there are winners and losers.

may lead to technological lockout (when a new dominant design makes it difficult for a company to sell its products).

signals a shift from design experimentation and competition to incremental change.

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Managing Sources of Innovation

Innovation begins with creativity, the production of novel and useful ideas.

Two factors can significantly affect innovation:

Creative work environment

Flow

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When we say that innovation begins with great ideas, we’re really saying that innovation begins with creativity. Creativity is the production of novel and useful ideas. While companies can’t command creativity from employees (“You will be more creative!”), they can jump-start innovation by building creative work environments, in which workers perceive that creative thoughts and ideas are welcomed and valued.

Work is challenging when it requires hard work, demands attention and focus, and is seen as important to others in the organization. Researcher Mihaly Csikszentmihalyi said that challenging work promotes creativity because it creates a rewarding psychological experience known as “flow.” Flow is a psychological state of effortlessness, in which you become completely absorbed in what you’re doing and time seems to fly. (You begin work, become absorbed in it, and then suddenly realize that several hours have passed.) When flow occurs, who you are and what you’re doing become one. Csikszentmihalyi first encountered flow when studying artists. He said, "What struck me by looking at artists at work was their tremendous focus on the work, this enormous involvement, this forgetting of time and body. It wasn't justified by expectation of rewards, like, 'Aha, I'm going to sell this painting.'”

Exhibit 6.3 Components of Creative Work Environments

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A creative work environment requires three kinds of encouragement: organizational, supervisory, and work group encouragement. Organizational encouragement of creativity occurs when management encourages risk taking and new ideas, supports and fairly evaluates new ideas, rewards and recognizes creativity, and encourages the sharing of new ideas throughout different parts of the company. Supervisory encouragement of creativity occurs when supervisors provide clear goals, encourage open interaction with subordinates, and actively support development teams’ work and ideas. Work group encouragement occurs when group members have diverse experience, education, and backgrounds and the group fosters mutual openness to ideas; positive, constructive challenge to ideas; and shared commitment to ideas. Freedom means having autonomy over one’s day-to-day work and a sense of ownership and control over one’s ideas. Numerous studies have indicated that creative ideas thrive under conditions of freedom. To foster creativity, companies may also have to remove impediments to creativity from their work environments. Internal conflict and power struggles, rigid management structures, and a conservative bias toward the status quo can all discourage creativity. They create the perception that others in the organization will decide which ideas are acceptable and deserve support.

Experiential Approach to Innovation

Assumes that innovation occurs within a highly uncertain environment and that the key to fast product innovation is to use intuition, flexible options, and hands-on experience to reduce uncertainty and accelerate learning and understanding.

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Experiential Approach to Innovation

The experiential approach has five aspects:

Design iteration

Product prototype

Testing

Milestones

Multifunctional teams

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Companies that want to create a new dominant design following a technological discontinuity quickly build, test, improve, and retest a series of different product prototypes. By trying a number of very different designs or making successive improvements and changes in the same design, frequent design iterations reduce uncertainty and improve understanding. Simply put, the more prototypes you build, the more likely you are to learn what works and what doesn’t. Also, when designers and engineers build a number of prototypes, they are less likely to fall in love with a particular prototype. Instead, they’ll be more concerned with improving the product or technology as much as they can. Testing speeds up and improves the innovation process, too. When two very different design prototypes are tested against each other, or the new design iteration is tested against the previous iteration, product design strengths and weaknesses quickly become apparent. Likewise, testing uncovers errors early in the design process when they are easiest to correct. Finally, testing accelerates learning and understanding by forcing engineers and product designers to examine hard data about product performance. When there’s hard evidence that prototypes are testing well, the confidence of the design team grows. Also, personal conflict between design team members is less likely when testing focuses on hard measurements and facts rather than personal hunches and preferences.