The secret to competitiveness—competition

A study by the McKinsey Global Institute¹ recently examined labor productivity in Germany, Japan, and the United States in nine representative manufacturing industries: autos, auto parts, metalworking, steel, computers, consumer electronics, processed food, beer, and soap and detergent. Adjusted both for differences in product quality and for fluctuations in the business cycle, the results are illuminating—not only for the facts they debunk or establish, but for the explanations that lie beneath them. The inescapable conclusion: global competitiveness is a bit like tennis—you improve by playing against people who are better than you.

Several key findings emerged from our research:

• Japan leads in five industries: autos, auto parts, consumer electronics, metalworking, and steel.
• The US leads in four—computers, processed food, soap and detergent, and beer—and has closed much of the gap in autos.
• Remarkably, Germany leads in none and is a distant third in six—including autos and auto parts, where it is often cited as exemplary.
• Because more Japanese are employed in producing food than in steel, autos, auto parts, and metalworking combined, the weighted average of Japanese worker productivity across these nine case studies is actually lower than that in the US and only a little higher than Germany’s. With US worker productivity used as an index of 100, Japan measured 83; Germany, 79.

Exhibit 1 presents an overview of these comparisons. Additional detail is provided in the nine individual industry summaries (see pp. 32–40).

Large gaps

Some of the individual industry productivity gaps are surprisingly large. Japan still leads the world in steel productivity, by almost 50 percent. Productivity in the US food industry tops Japan’s by nearly 70 percent. And the German beer industry, even adjusted for differences in quality, trails that of the United States by more than 50 percent.

Such disparities are worth noting. With technological knowhow and capital freely mobile between Germany, Japan, and the US, and with their workers enjoying similar levels of educational attainment and health, it would seem reasonable to expect that by 1990—45 years after the end of World War II—productivity in industries in these three countries would be close. To understand why that is not the case—and to discover whether the large productivity gaps offer any opportunities for the laggards to catch up—we investigated the causes of the productivity differences within each of our nine industries.

Conventional explanations, such as different manufacturing technologies and economies of scale, do play some role in explaining the gaps in metalworking, steel, food processing, and beer. But elsewhere these factors do not go far in accounting for the gaps. Nor can the differences be attributed to the education and skill of front-line workers, which are more or less equal across the three market economies. Nor does the cost of raw materials—which varies little from one country to another—have much effect. High productivity, it seems, flows chiefly from the ability of managers to invent new and ever more efficient ways of making products and from engineers’ proficiency in designing products that are easy to make (see Exhibit 2).

Whether in the food industry in the US or the auto industry in Japan, managers and engineers do not arrive at these innovations because they are smarter, work harder, or have a better education than their peers. Rather, they do so because they must. They are subjected to intense global competition, where constantly pushing the boundaries of productivity is the price of entry—and of survival.

The converse is equally true. Most of the lower-productivity industries have been protected by governments from the rigors of global competition. The nine industries in the survey speak with one voice: global competition breeds high productivity; protection breeds stagnation (see Exhibit 3 and Exhibit 4).

The degree of "global exposure" depends on the laws and regulations governing trade and investment, and on the structure of the market for corporate control. Of the three countries, the US was the most exposed to trade, transplants (foreign direct investment), and foreign mergers and acquisitions. Although the Japanese heavy manufacturing and consumer electronics industries are not significantly exposed at home through trade or the capital markets, they are substantially exposed in other markets through trade and foreign direct investment.

The low-productivity Japanese manufacturing industries, by contrast, have virtually no exposure to global competition. The same is true of Germany, for whose manufacturers competition is largely confined to Europe. The European Community’s voluntary restraint agreements with Japan provide substantial protection for the automotive and metalworking industries, for example. In addition, procedural barriers make transplants difficult to establish in traditional industries in Germany. And finally, the shareholdings and voting-right proxies of the main banks in Germany result in a capital market that is virtually closed to foreign mergers and acquisitions. As a result, German manufacturers primarily compete regionally, not globally. The pressure to innovate is low.

Innovations

Foreign direct investments, not trade, play the pivotal role in moving innovations around the world and boosting productivity

What of the innovations themselves? The mechanism for transferring productivity improvements from company to company and nation to nation is significant. Foreign direct investments—transplant factories—play the pivotal role in moving innovations around the world. In fact, foreign direct investment has been far more powerful than trade as a force for improving productivity, especially in Germany and the US.

Transplants from leading-edge producers have several important influences. They:

• directly contribute to higher levels of domestic productivity;
• prove that leading-edge productivity can be achieved with local labor and many local inputs;
• put competitive pressure on other domestic producers; and
• transfer knowledge of best practices to other domestic producers through the natural movement of personnel.

Exhibit 5 compares the impact on productivity of transplants and trade. Another characteristic of foreign direct investment is that it has provoked less political opposition than trade because it creates jobs instead of destroying them. This makes it likely to grow faster than trade in years to come.

Japanese automobile assembly transplants in the US have been important in stimulating US producers, especially Ford, to improve their productivity. Computer transplants from the US have had a similar impact in parts of Europe. With their substantial production presence established right from the beginnings of the industry and building up to a production share as high as 56 percent in 1990, they are largely responsible for the fact that Germany’s productivity in computers is nearly equal to that of the US and Japan. Furthermore, multinational soap and detergent companies, including Colgate-Palmolive, Procter & Gamble, and Unilever, have substantial production facilities in almost all markets, rendering national boundaries virtually irrelevant.

Competitive threat

Big differences in productivity in international industries mean big opportunities for those companies that can achieve high productivity levels

While productivity gaps point to real opportunities for trailing industries to learn and adopt best practices, they also point to a profound competitive challenge. Big differences in productivity in international industries mean big opportunities for those companies that can achieve high productivity levels. Using foreign direct investment, such leading-edge global producers could not only take huge market share and profits from local industries, but actually raise standards of living in the host countries. Their higher productivity eventually translates into higher wages, better jobs, and increased job security for workers in the transplant factories and the surrounding areas.

Government protection, and even local consumer loyalty, are not durable foundations for long-term economic health or the survival of unproductive regional companies. Eventually the battle will be won by the most productive.

About the Authors

Bill Lewis is Director of the McKinsey Global Institute and Hans Gersbach, Tom Jansen, and Koji Sakate are consultants in the Washington, DC office. This is an edited version of an article that first appeared in the Wall Street Journal on October 22, 1993.

via mckinseyquarterly.com

______________________________________________________________

If you're not irate in the first 10 minutes of reading, if I don’t provoke you to revolutionize your management and leadership from think to execute, if you aren’t teetering on the brink of reaching for the Maalox, if you don’t innovate like a banshee, then I have failed you. 

To learn more about how Jim Woods and Innothink Group’s uncanny abilities can increase your competitive advantage and top line growth contact us for a consultation. 

Jim Woods CEO & President, InnoThink Group

A leading strategy, innovation and hypercompetition consultancy.

www.innothinkgroup.com

            719-649-4118      

 

How leaders kill meaning at work

Senior executives routinely undermine creativity, productivity, and commitment by damaging the inner work lives of their employees in four avoidable ways.

As a senior executive, you may think you know what Job Number 1 is: developing a killer strategy. In fact, this is only Job 1a. You have a second, equally important task. Call it Job 1b: enabling the ongoing engagement and everyday progress of the people in the trenches of your organization who strive to execute that strategy. A multiyear research project whose results we described in our recent book, The Progress Principle,¹ found that of all the events that can deeply engage people in their jobs, the single most important is making progress in meaningful work.

Even incremental steps forward—small wins—boost what we call “inner work life”: the constant flow of emotions, motivations, and perceptions that constitute a person’s reactions to the events of the work day. Beyond affecting the well-being of employees, inner work life affects the bottom line.² People are more creative, productive, committed, and collegial in their jobs when they have positive inner work lives. But it’s not just any sort of progress in work that matters. The first, and fundamental, requirement is that the work be meaningful to the people doing it.

In our book and a recent Harvard Business Review article,³ we argue that managers at all levels routinely—and unwittingly—undermine the meaningfulness of work for their direct subordinates through everyday words and actions. These include dismissing the importance of subordinates’ work or ideas, destroying a sense of ownership by switching people off project teams before work is finalized, shifting goals so frequently that people despair that their work will ever see the light of day, and neglecting to keep subordinates up to date on changing priorities for customers.

But what about a company’s most senior leaders? What is their role in making—or killing—meaning at work? To be sure, as a high-level leader, you have fewer opportunities to directly affect the inner work lives of employees than do frontline supervisors. Yet your smallest actions pack a wallop because what you say and do is intensely observed by people down the line.⁴ A sense of purpose in the work, and consistent action to reinforce it, has to come from the top.

Four traps

To better understand the role of upper-level managers, we recently dug back into our data: nearly 12,000 daily electronic diaries from dozens of professionals working on important innovation projects at seven North American companies. We selected those entries in which diarists mentioned upper- or top-level managers—868 narratives in all.

Qualitative analysis of the narratives highlighted four traps that lie in wait for senior executives. Most of these pitfalls showed up in several companies. Six of the seven suffered from one or more of the traps, and in only a single company did leaders avoid them. The existence of this outlier suggests that it is possible for senior executives to sustain meaning consistently, but that’s difficult and requires vigilance.

This article should help you determine whether you risk falling into some of these traps yourself—and unknowingly dragging your organization into the abyss with you. We also offer a few thoughts on avoiding the problems, advice inspired by the actions and words of a senior leader at the one company that did so.

We don’t claim to have all the answers. But we are convinced that executives who sidestep these traps reduce their risk of inadvertently draining meaning from the work of the people in their organizations. Those leaders also will boost the odds of tapping into the motivational power of progress—something surprisingly few do.

We surveyed 669 managers at all levels of management, from dozens of companies and various industries around the world. We asked them to rank the importance of five employee motivators: incentives, recognition, clear goals, interpersonal support, and progress in the work. Only 8 percent of senior executives ranked progress as the most important motivator. Had they chosen randomly, 20 percent would have done so. In short, our survey showed that most executives don’t understand the power of progress in meaningful work.⁵ And the traps revealed by the diaries suggest that most executives don’t act as though progress matters. You can do better.

Trap 1: Mediocrity signals

Most likely, your company aspires to greatness, articulating a high purpose for the organization in its corporate mission statement. But are you inadvertently signaling the opposite through your words and actions?

We saw this dynamic repeatedly at a well-known consumer products company we’ll call Karpenter Corporation, which was experiencing a rapid deterioration in the inner work lives of its employees as a result of the actions of a new top-management team. Within three years of our studying Karpenter, it had become unprofitable and was acquired by a smaller rival.

Karpenter’s top-management team espoused a vision of entrepreneurial cross-functional business teams. In theory, each team would operate autonomously, managing its share of the company’s resources to back its own new-product innovations. During the year we collected data from Karpenter teams, the annual report was full of references to the company’s innovation focus; in the first five sentences, “innovation” appeared three times.

In practice, however, those top managers were so focused on cost savings that they repeatedly negated the teams’ autonomy, dictated cost reduction goals that had to be met before any other priorities were, and—as a result—drove new-product innovation into the ground. This unintended, de facto hypocrisy took its toll, as a diary excerpt from a longtime Karpenter product engineer emphasizes:

Today I found out that our team will be concentrating on [cost savings] for the next several months instead of any new products. . . . It is getting very difficult to concentrate on removing pennies from the standard cost of an item. That is the only place that we have control over. Most of the time, quality suffers. It seems that our competition is putting out new products at a faster rate. . . . We are no longer the leader in innovation. We are the followers.

This employee’s work had begun to lose its meaning, and he wasn’t alone. Many of the other 65 Karpenter professionals in our study felt that they were doing mediocre work for a mediocre company—one for which they had previously felt fierce pride. By the end of our time collecting data at Karpenter, many of these employees were completely disengaged. Some of the very best had left.

The mediocrity trap was not unique to Karpenter. We saw it revealed in different guises in several of the companies we studied. At a chemicals firm, it stemmed from the top managers’ risk aversion. Consider these words from one researcher there:

A proposal for liquid/medical filtration using our new technology was tabled for the second time by the Gate 1 committee (five directors that screen new ideas). Although we had plenty of info for this stage of the game, the committee is uncomfortable with the risk and liability. The team, and myself, are frustrated about hurdles that we don’t know how to answer.

This company’s leaders also inadvertently signaled that, despite their rhetoric about being innovative and cutting edge, they were really more comfortable being ordinary.

Trap 2: Strategic ‘attention deficit disorder’

As an experienced leader, you probably scan your company’s external environment constantly for guidance in making your next strategic moves. What are competitors planning? Where are new ones popping up? What’s happening in the global economy, and what might the implications be for financing or future market priorities? You are probably brimming with ideas on where you’d like to take the company next. All of that is good, in theory.

In practice, we see too many top managers start and abandon initiatives so frequently that they appear to display a kind of attention deficit disorder (ADD) when it comes to strategy and tactics. They don’t allow sufficient time to discover whether initiatives are working, and they communicate insufficient rationales to their employees when they make strategic shifts.

Karpenter’s strategic ADD seemed to stem from its leaders’ short attention span, perhaps fueled by the CEO’s desire to embrace the latest management trends. The problem was evident in decisions at the level of product lines and extended all the way up to corporate strategy. If you blinked, you could miss the next strategic shift. In one employee’s words:

A quarterly product review was held with members of the [top team] and the general manager and president. Primary outcome from the meeting was a change in direction away from spray jet mops to revitalization of existing window squeegees. Four priorities were defined for product development, none of which were identified as priorities at our last quarterly update. The needle still points north, but we’ve turned the compass again.

At another company we studied, strategic ADD appeared to stem from a top team warring with itself. Corporate executives spent many months trying to nail down a new market strategy. Meanwhile, different vice presidents were pushing in different directions, rendering each of the leaders incapable of giving consistent direction to their people. This wreaked havoc in the trenches. One diarist, a project manager, felt that rather than committing herself to doing something great for particular customers, she needed to hedge her bets:

The VP gave us his opinion of which target candidates [for new products] may fit with overall company strategy—but, in reality, neither he nor anyone in our management structure knows what the strategy is. It makes this project a real balancing act—we need to go forward, but need to weigh commitments very carefully.

If high-level leaders don’t appear to have their act together on exactly where the organization should be heading, it’s awfully difficult for the troops to maintain a strong sense of purpose.

Trap 3: Corporate Keystone Kops

In the early decades of cinema, a popular series of silent-film comedies featured the Keystone Kops—fictional policemen so incompetent that they ran around in circles, mistakenly bashed each other on the head, and fumbled one case after another. The title of that series became synonymous with miscoordination. Our research found that many executives who think everything is going smoothly in the everyday workings of their organizations are blithely unaware that they preside over their own corporate version of the Keystone Kops. Some contribute to the farce through their actions, others by failing to act. At Karpenter, for example, top managers set up overly complex matrix reporting structures, repeatedly failed to hold support functions (such as purchasing and sales) accountable for coordinated action, and displayed a chronic indecisiveness that bred rushed analyses. In the words of one diarist:

Last-minute changes continue on [an important customer’s] assortments. Rather than think through the whole process and logically decide which assortments we want to show [the customer], we are instead using a shotgun approach of trying multiple assortments until we find one that works. In the meantime, we are expending a lot of time and effort on potential assortments only to find out later that an assortment has been dropped.

Although Karpenter’s example was egregious, the company was far from alone in creating chaotic situations for its workers. In one high-tech company we studied, for example, Keystone Kop–like scenarios played out around the actions of a rogue marketing function. As described in one engineer’s diary, the attempts of many teams to move forward with their projects were continually thwarted by signals from marketing that conflicted with those coming from R&D and other key functions. Marketers even failed to show up for many key meetings:

At a meeting with Pierce, Clay, and Joseph, I was told that someone from marketing would be attending our team meetings (finally). The meeting also gave me a chance to demonstrate to Joseph that we were getting mixed signals from marketing.

When coordination and support are absent within an organization, people stop believing that they can produce something of high quality. This makes it extremely difficult to maintain a sense of purpose.

Trap 4: Misbegotten ‘big, hairy, audacious goals’

Management gurus Jim Collins and Jerry Porras encourage organizations to develop a “big, hairy, audacious goal” (BHAG, pronounced bee-hag)—a bold strategic vision statement that has powerful emotional appeal.⁶ BHAGs help infuse work with meaning by articulating the goals of the organization in a way that connects emotionally with peoples’ values. (Think of Google’s stated mission to “organize the world’s information and make it universally accessible and useful.”)

At some companies, however, such statements are grandiose, containing little relevance or meaning for people in the trenches. They can be so extreme as to seem unattainable and so vague as to seem empty. The result is a meaning vacuum. Cynicism rises and drive plummets. Although we saw this trap clearly in only one of the seven companies we studied, we think it is sufficiently seductive and dangerous to warrant consideration.

That company, a chemicals firm, set a BHAG that all projects had to be innovative blockbusters that would yield a minimum of $100 million in revenue annually, within five years of a project’s initiation. This goal did not infuse the work with meaning, because it had little to do with the day-to-day activities of people in the organization. It did not articulate milestones toward the goal; it did not provide for a range of experiments and outcomes to meet it; worst of all, it did not connect with anything the employees valued. Most of them wanted to provide something of value to their customers; an aggressive revenue target told them only about the value to the organization, not to the customer. Far from what Collins and Porras intended, this misbegotten BHAG was helping to destroy the employees’ sense of purpose.

Avoiding the traps

Spotting the traps from the executive suite is difficult enough; sidestepping them is harder still—and wasn’t the focus of our research. Nonetheless, it’s instructive to look at the one company in our study that avoided the traps, a creator of coated fabrics for weatherproof clothing and other applications. We recently interviewed its head, whom we’ll call Mark Hamilton. That conversation generated a few ideas that we hope will spark a lively discussion in your own C-suite. For example:

When you communicate with employees, do you provide strategic clarity that’s consistent with your organization’s capabilities and an understanding of where it can add the most value? Hamilton and his top team believed that innovating in processes, rather than products, was the key to creating the right combination of quality and value for customers. So he talked about process innovation at every all-company meeting, and he steadfastly supported it throughout the organization. This consistency helped everyone understand the strategy and even become jazzed about it.

Can you keep sight of the individual employee’s perspective? The best executives we studied internalize their early experiences and use them as reference points for gauging the signals that their own behavior will send to the troops. “Try hard to remember when you were working in the trenches,” Hamilton says. “If somebody asked you to do a bunch of work on something they hadn’t thought through, how meaningful could it be for you? How committed could you be?”

Do you have any early-warning systems that indicate when your view from the top doesn’t match the reality on the ground? Regular audits to gauge the effectiveness of coordination and support processes in areas such as marketing, sales, and purchasing can highlight pain points that demand senior management’s attention because they are starting to sap meaning from your people’s work. In Hamilton’s view, senior executives bear the responsibility for identifying and clearing away systemic impediments that prevent quality work from getting done.

Hamilton’s company was doing very well. But we believe that senior executives can provide a sense of purpose and progress even in bad economic times. Consider the situation that then–newly appointed Xerox head Anne Mulcahy faced in 2000, when the company verged on bankruptcy. Mulcahy refused her advisers’ recommendation to file for bankruptcy (unless all other options were exhausted) because of the demoralizing signal it would send to frontline employees. “What we have going for us,” she said, “is that our people believe we are in a war that we can win.”⁷ She was right, and her conviction helped carry Xerox through four years of arduous struggle to later success.

As an executive, you are in a better position than anyone to identify and articulate the higher purpose of what people do within your organization. Make that purpose real, support its achievement through consistent everyday actions, and you will create the meaning that motivates people toward greatness. Along the way, you may find greater meaning in your own work as a leader. via Mckinsey

About the Authors

Teresa Amabile is the Edsel Bryant Ford Professor of Business Administration at Harvard Business School. Steven Kramer is an independent researcher and writer.

______________________________________________________________

If you're not irate in the first 10 minutes of reading, if I don’t provoke you to revolutionize your management and leadership from think to execute, if you aren’t teetering on the brink of reaching for the Maalox, if you don’t innovate like a banshee, then I have failed you. 

To learn more about how Jim Woods and Innothink Group’s uncanny abilities can increase your competitive advantage and top line growth contact us for a consultation. 

Jim Woods CEO & President, InnoThink Group

A leading strategy, innovation and hypercompetition consultancy.

www.innothinkgroup.com

            719-649-4118      

via mckinseyquarterly.com

 

How Can You Find the Most Promising New Opportunities? Hold an Innovation Tournament or Just Ask

"To be sure, there is little incentive for employees to create the NEXT BIG IDEA if, which is generally the case, their reward is limited to mild appreciation while supervisors and leadership receive effusive praise.  When I consulted with Pitney Bowes we had a program for rewarding employees with a percentage of the saved or earned profits. This created tremendous inducements to reduce costs and moreover establish competitive advantage." Jim   

Financial innovation is often blamed for having landed the global economy in a mess, but it has also been said that innovation will get us out of the present downturn. Still, companies can be forgiven for feeling that spending time and money thinking about the "next big thing" is a frivolous exercise. After all, every dollar counts these days, and CEOs and their executive teams are busy enough just getting their companies through the day-to-day demands of the recession.

It needn't be that way, according to Christian Terwiesch and Karl Ulrich. As the two Wharton professors of operations and information management point out in their new book, Innovation Tournaments: Creating and Selecting Exceptional Opportunities, if done with greater focus, identifying new opportunities shouldn't be seen as a luxury, but a necessity. They note that creativity and process-driven rigor can actually go hand in hand when it comes to vetting and managing new ideas. One way to do this, they explain, is by making new ideas compete with one another in numerous rounds of vetting -- that is, by running them through "innovation tournaments" -- so that the strongest and most promising ideas make it to the final round.

Rich rewards await companies that make the leap. Among the innovative firms that the professors cite is the U.S. pharmaceutical giant Merck, whose cholesterol-reducing drug Zocor, launched in the early 1990s, has delivered gross profits of $10 billion on an investment of around $500 million.

Below, in this edited transcript from a recent interview, Terwiesch and Ulrich discuss how companies can indeed find exceptional opportunities, regardless of the economic climate. Let the games begin.

Knowledge@Wharton: Before we talk about your book, let us begin with a general question about innovation. Companies often equate investment in R&D with the metric that shows how much they value innovation. Is this true? If so, or if not, what really makes a company innovative?

Terwiesch: It is true that a vast majority of companies think this way, yet both on a case-by-case basis as well as on large aggregate financial data, we show that there is no clear systemic relationship between how much you spent on R&D versus how financially successful you will become afterwards. It's not about how much you spend; it's how you manage the innovation process.

Ulrich: But R&D spending itself is what people tend to measure with respect to innovation. It's actually a pretty incomplete measure. We would like to consider innovation as broader than just R&D. Some of what happens in R&D, you wouldn't really think of necessarily as innovation. So, having said that, it's the best proxy we have for measuring innovation.

Knowledge@Wharton: Your book is about innovation tournaments. A logical question to start with would be what exactly an innovation tournament is, and how can companies use such tournaments to identify exceptional opportunities?

Ulrich: A tournament is an organizational problem-solving process in which a large number of opportunities are identified and then systematically evaluated and filtered until only a few exceptional ones remain. A tournament, like its counterpart in sports, is one in which you have a large number of candidates who enter a competition, but only very few emerge as truly exceptional. The challenge is how to evaluate the candidates without going out of business, without spending a lot of resources.

Terwiesch: It's like the TV show, American Idol. You start with many aspiring winners. You have a round of filters. And at the end, depending on whether you like their singing, you have some remarkable personalities left. That's a powerful metaphor to think about tournaments.

Knowledge@Wharton: You offer some interesting examples in the book of products like Zocor. How have companies used this process in examples like those?

 

Terwiesch: When we started our collaboration with Merck, we noticed that we were absolutely clueless about all the medical and chemical details that were associated with the products flowing through their [R&D] pipeline. At some point, we made the link to the American Idol metaphor and thought about the system as an overall process and then applied our operations management mindset on how to manage this process to obtain optimal performance.

Ulrich: Everyone uses tournaments in everyday life. They're used in society. They're used in organizations. For example, if you're hiring a chief executive, you'll use a tournament structure to do that. So while we obviously didn't invent the idea of the tournament in innovation, what we've observed is that there's almost no science as to how to manage them. Since they are so expensive yet so important, we felt that the time was right to bring some structured thinking to the process of managing a tournament.

Knowledge@Wharton: Your book offers unusual examples about the context in which tournaments are effective. For example, Pixar used it for Cars, one of its blockbuster movies. Could you tell us about that example?

Ulrich: We think of Pixar as the epitome of a creative company. We don't often think of creative industries as having structured processes. But Pixar embeds an intensively creative micro-level activity within a fairly structured macro-level activity. Every year, Pixar considers about 500 pitches on average for new animated motion pictures. Then, over a series of years, the 500 will be winnowed down to the critical few that Pixar will make into films. Pixar decides which opportunities to pursue based on one-sentence pitches. For Cars, the pitch, if I remember correctly, was: "A hot-shot race car named Lightning McQueen gets waylaid in Radiator Springs, where he finds the meaning of friendship and family."

Terwiesch: What has interested us in [the film industry] is that the dollars, the big budgets, are spent towards the end of the tournament. Once the movie is actually produced and when the animation is done, that's when the money is spent and that's where the senior executives devote their attention. But, the upfront decision process is often very unstructured. Think about innovation like a gold mine. Even if you have the best miners in the world, and they do a good job with their shovels, it's almost impossible to get gold out of a location where there's just nothing to be found. Our goal has been to go into this at the front end and apply some structured thinking.

Knowledge@Wharton: What can companies do to stimulate more opportunity generation from its own people?

Ulrich: There's a great deal of variation in ability among different individuals in an organization. This isn't a very popular idea in most organizations because we like to think of opportunity identification as an egalitarian, open process. But it is critically important to identify individuals in an organization who are exceptionally good at this -- and to make sure that you're devoting enough resources to them. If you can do that, then you can be substantially more productive in generating both more opportunities and better opportunities.

Terwiesch: You can also leverage new technologies, especially on the web, which is ideal for idea management -- going beyond the good old brainstorming meeting where you have people sitting around a flip chart. By using web-based tools -- some of which we developed as part of our research for this book -- teams are substantially more successful in generating exceptional opportunities.

 

Knowledge@Wharton: How did the Red Bull energy drink come about? What does that experience teach about identifying innovation opportunities from external sources?

Terwiesch: As important as it is to generate ideas internally, there's nothing wrong with sourcing them externally, going around the world with open eyes and looking for opportunities that you then translate and apply to other markets. Red Bull, with the super success that it enjoyed initially in Europe and later on in the U.S., was not brewed by some big pharma company or food company; it was a local drink in Asia. The big commercial value was created in the case of Red Bull by identifying or understanding the value of this opportunity and putting it in another context, initially into the German and Austrian markets and then into the whole world.

Ulrich: In fact, it was a drink used by Thai truck drivers originally. On a visit to Thailand, Dietrich Mateschitz, an Austrian entrepreneur, sensed that the formula might appeal to club goers and youth throughout the world.

Knowledge@Wharton: As you tell in your book, he found that the drink was very effective in reducing his own jetlag, which is when he decided that there might be a market for it. It's a great story. In another vein, what can companies learn from the British Olympics Association about effective screening processes for innovation?

Terwiesch: We use the sports example partly because both of us are passionate athletes and partly because you see countries that are hungry for athletic talent. In their pursuit of Olympic gold, they have created fairly sophisticated systems -- very similar to the American Idol contest -- in which talent is screened across the country. Thousands of young people are screened for their physical ability, and then limited resources are deployed wisely so that a country only invests in the most talented athletes who have the biggest chance of winning gold. It is similar to the many ideas that are going around in companies.

Knowledge@Wharton: How should companies think about the short-term and long-term profit potential of their innovations?

Terwiesch: The short term is quite easy. We strongly believe in discounted cash flows. The opportunities that we call "horizon one" opportunities have relatively little uncertainty associated with them. If you are launching another flavor of Colgate toothpaste, you pretty much have a good mental model of what your sales are going to be, and so you can rely on standard financial models to deal with this. If you're thinking about future horizons, with a lot of uncertainty clouding the numbers, we would recommend that instead of just relying on a standard discounted cash flow model, you could think about the uncertainty resolution. What needs to be found out about the future and how this uncertainty can be resolved are two questions that need to be addressed before you start building fancy spreadsheet models.

Ulrich: In fact, we lay out a simple tool, which is just a listing of all the uncertainties that you face in addressing an opportunity. We recommend that you rank the tasks that you can take on based on how efficient they are at resolving that uncertainty. For example, you want to pick the task that's least expensive and resolves the most uncertainty and do those things first. That's a discovery-driven approach to mining the innovation opportunity.

Knowledge@Wharton: You say that some innovation tournaments are cascades while others are whirlpools. What do you mean by that and what are the implications?

Ulrich: If we go back to the American Idol example, it is almost a completely pure cascade in the sense that several hundred contestants arrive on day one, they are filtered, and once they've been eliminated, they're gone. Those who are voted out don't have a chance to proceed. Moreover, no new singers show up in the middle of the competition; if you weren't there on day one, you aren't going to be there in round four.

That's actually a little bit atypical. In a more typical innovation tournament, two things can happen. First, it's not unusual that an idea or an opportunity that's killed early on might re-emerge when the world has changed, or when the opportunity has been further developed. Second, it's also possible that a new opportunity will sprout up in the middle of the process because of something new that's been learned or as a result of developing some of the other opportunities. That kind of tournament resembles more of a whirlpool -- that is, it has more iterations and reflow than a cascade, where everything that starts in the beginning just flows in one direction.

Knowledge@Wharton: How should companies organize themselves for innovation?

Terwiesch: The decision you need to make is how to run your tournament and who is allowed to play in it. It's maybe helpful to distinguish two things that are happening in the tournament. One is the generation of contestants. The other is the referee or the people who decide who is allowed to go to the next round. Both these decisions can be done in the firm or outside the firm. A firm can rely on its customers, its suppliers or just the general public to generate ideas, or it can generate ideas in internally. Similarly, a company can rely on its marketing and its senior management to judge which ideas are moved forward or it can rely on early customer feedback. It can rely on, especially these days, on media like YouTube. QVC, the television-based shopping channel, is testing out a lot of its products, early on, on cable television. It can rely on the external world to do the filtering. The two key organizational decisions you have to make with respect to idea generation are: Are you doing it internally or externally; and [with regard to] the filtering and selection, are you doing it internally or externally? via knowledge.wharton.upenn.edu

____________________________________________________________________________

If you're not irate in the first 10 minutes of reading, if I don’t provoke you to revolutionize your management and leadership from think to execute, if you aren’t teetering on the brink of reaching for the Maalox, if you don’t innovate like a banshee, then I have failed you. 

To learn more about how Jim Woods and Innothink Group’s uncanny abilities can increase your competitive advantage and top line growth contact us for a consultation. 

Jim Woods CEO & President, InnoThink Group

A leading strategy, innovation and hypercompetition consultancy.

www.innothinkgroup.com

            719-649-4118      

 

How should we innovate the cities of our dreams?

 

The gleeful sense of aspiration coursing through cities today is more than mere “urban renewal.” The very assumptions about what makes a city a city are being challenged. We’re in a period of spectacular innovation and a dizzying demographic shift that 50 years from now might make the great migration to the suburbs look minor by comparison. Time was, and not that long ago, crime was swallowing cities whole. Today you can sleep in Zuccotti Park without being mugged. (Hell, you’ll hardly smudge your pajamas.) But the protests against economic inequality that are rumbling through our cities right now are also a sign of the dissonance that hums just below the surface of this new urban era. They’re a reminder that if the young people occupying Wall Street are going to keep our cities evolving, then the old model — gentrification by fiat — will need to change, as well.  How do you create an “Apple-like” culture that drives consumer growth?

This new column will focus on how we forge our new urban future and how we create cities that reflect our values. We will cover this intersection of innovation and inequality, of urban design and the problem of poverty, and how one might help solve the other. Cities today are cleaner, healthier, safer and greener. They’re also more expensive. But wealthier, snazzier cities needn’t be gilded jewel boxes for the 1 percent. Better transit, smarter development and improved amenities can benefit those who need them most. And there’s reason to be optimistic that they will, because the generation that will retrofit our old cities with new ideas is the same one that’s currently developing an instinctual aversion to economic unfairness.

In hindsight, we could have seen this new urban groundswell coming. Two or three decades ago, cities were suffering from a toxic stew of debt, crime, poverty and drugs. Corruption at many levels was often the status quo, and “Murder Capital of America” became a dubious buzz phrase that was passed from city to city like a baton. But by the early ’90s, for an amalgam of reasons that have been debated ever since, things began to shift. The crack epidemic receded. Cities got safer. “Friends” debuted.

By the time Rachel quit her job at Central Perk, young people with money and college degrees were inundating cities like a flash-flood. Blight withdrew, and entire neighborhoods were remade overnight. Some longtime residents were forced out by rising rents, while others quickly became millionaires as their property values soared. Among the new arrivals themselves, there was a hasty hashing out of the rules: whether development should trump preservation, whether you should pay a brokers’ fee, whether babies could be brought to bars. Some worried that cities like New York were losing their edge. Tiny culture wars erupted (Hasids vs. hipsters! bicyclists vs. drivers!) as everyone tried to figure out the new pecking order, the new urban way of life. You may read this article in entirety at via salon.com.

Speaking 

 

As the CEO and founder of InnoThink Group, Jim can help your organization enhance the strategic innovation and competitiveness of your business policy and strategy, with an emphasis on increasing top line growth.  

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How To Develop A Growth Mindset - Innovation on Low (or No) Budget

The Boeing 787 Dreamliner can seat up to 250 passengers and haul a half-million pounds. The Boeing (BA) jet has a range of up to 8,200 nautical miles and reaches a maximum speed of nearly 650 miles per hour. Its development required an investment of some $30 billion.

The new Big Dinner Box from Pizza Hut (YUM) can haul two medium pizzas, eight wings, and five breadsticks. It has a range of a few zip codes and reaches a maximum speed of what the delivery driver can get away with. Its development required, well, a different kind of cardboard box.

My point? How simple some innovations can be. You don’t have to have a monstrous research and development budget (or even a test kitchen, for that matter) to innovate. You just have to be alert to your customers’ needs and wants—and creative and responsive in addressing them.

Some innovations do require many years and billions of dollars to develop; witness the Chevy (GM) Volt, which took nearly four years and more than a billion dollars to go from concept car to street legal. (The verdict is still out as to whether it will become a commercial success.) Contrast that with Dr Pepper 10, a soda that targets men who don’t like the taste (or the idea, perhaps) of diet soft drinks. By using a different sweetener and throwing in a tad of good, old-fashioned high fructose corn syrup, Dr Pepper Snapple Group (DPS) came up with a formula that is showing such positive initial returns that the company is already expanding the concept to five of its other brands.

“A Better Way to Deliver Value”

The key to innovation is to not wring your hands about what you don’t have—a giant research budget and staff of PhDs—and focus on what you do have: a relationship with your customers.  Saul Kaplan, founder of the Business Innovation Factory, defines innovation in very simple terms: “a better way to deliver value.” In a recent interview, Kaplan explains what he means: “It is not an innovation until it solves a problem that a customer is having—it delivers value in the real world, solves a problem, and helps get a job done that a customer is trying to do. A lot of people confuse innovation with invention, and think that they just need new technology to solve a problem. But an innovation is not the same as an invention.”

He’s right. Inventions are almost always innovations, but innovations don’t have to be inventions. They just have to be a better way to deliver value. This Christmas, many personal-care product makers such as Procter & Gamble (PG) and Unilever (UL) are putting together gift boxes of toiletries as prosaic as deodorant and toothpaste. If that sounds like the contents of your medicine cabinet, it is. Still, by packaging their products as “affordable luxuries,” these companies are meeting consumers’ needs for simple, inexpensive stocking stuffers. That may not work so well in neighborhoods with circular driveways, but for the rest of us, it’s a gift we could really use. And while our gift-giver stretches his or her budget by (literally) getting a package deal, the manufacturers get to increase exposure and move more product.

Who would have thought a handful of personal-care items would make a great Christmas gift? Not me, but some enterprising packaged goods makers were paying attention to what highbrow cosmetic brands have done for years and have simply applied the concept to their own customers. That’s a helpful template for fostering creativity in innovation—combining two previously unrelated ideas into something refreshing and new. Dr Pepper found something refreshing by combining a diet soda and a regular soda and positioning it for people whose desires weren’t being fully met by either. P&G discovered something new by combining consumer staples with fashion thinking to create a simple, practical gift for challenging economic times. Pizza Hut combined a delivery box with a confectioner’s sampler so it could sell more of every kind of product it serves. You may read this splendid article in entirety via businessweek.com

How is your business doing? Speak to us about our guarantee that can increase your top line growth! 

Jim Woods is president and founder of the InnoThink Group. He is a no nonsense "tell it like it is" author, speaker, and a strategic management, innovation, commoditization and hypercompetition expert to business and government. He advises clients with an objective view of their competitive capabilities and defines a clear course of action to maximize their innovation return on investment to achieve profitable growth. To build your capability for ongoing innovation across your company or to secure a riveting speaker for your next event - Call 719-649-4118 or email us for more information on hiring Jim. Check Availability. 

To Begin Innovation Starts With Disruptive Hypotheses. Here's How To Create One

 The process hinges on three steps: Defining the situation, searching for cliches, and twisting those cliches around, according to Luke Williams.

A disruptive hypothesis is an intentionally unreasonable statement that gets your thinking flowing in a different direction. It’s kind of like the evolutionary biology theory of “punctuated equilibrium,” which states that evolution proceeds slowly and every once in a while is interrupted by sudden change. Disruptive hypotheses are designed to upset your comfortable business equilibrium and bring about an accelerated change in your own thinking.

The ability to ask, “What if?” is an essential part of every executive’s skill set.

Contrast this with the more traditional definition of “hypothesis,” which is a best-guess explanation that’s based on a set of facts and can be tested by further investigation. With a disruptive hypothesis, however, you don’t make a reasonable prediction (if I charge the battery, the phone will work). Instead, you make an unreasonable provocation (what if a cell phone didn’t need a battery at all?). The difference between prediction and provocation, to paraphrase George Bernard Shaw’s famous line, is the difference between “seeing things as they are and asking, ‘Why?,’ or dreaming things as they never were and asking, ‘What if?’” In our fast-changing world, when business certainties are no longer certain, the ability to imagine things as they never were and ask, “What if?,” is an essential part of every executive’s skill set.

What Do You Want to Disrupt?

To meaningfully differentiate yourself from everyone else in the same space, you have to define the situation in the industry, segment, or category that you want to challenge. Here’s what a list of what you want to challenge might look like:

• This is an area in which everyone seems to be stuck in the same predicament and nothing has changed in a very long time.
• This is an area where profit performance is average—it really should be more successful than it is.
• This is a category where growth is slow and everything seems the same.

Once you have a situation to focus on, describe it in one sentence: “How can we disrupt the competitive landscape in [insert your situation] by delivering an unexpected solution?”

Whether you choose to think about an industry, segment, or category is up to you and your business needs. For example, if you owned a boutique hotel in San Francisco, you might describe your situation in one or more of the following ways:

• How can we disrupt the competitive landscape of the Travel & Leisure industry by delivering an unexpected solution?
• How can we disrupt the competitive landscape of the Hotel segment by delivering an unexpected solution?
• How can we disrupt the competitive landscape of the Luxury Hotel category by delivering an unexpected solution?

That’s it. The important thing is that the high-level situation you choose is just that—high-level. It’s essential that you resist the natural urge to start thinking in terms of specific “problems.”

What Are the Clichés?

Now that you’ve defined your situation, what are the clichés—the widespread, hackneyed beliefs that govern the way people think about and do business in a particular space? If you pay attention, you’ll notice that clichés are everywhere.

Consider the multi-billion dollar video gaming industry. Video consoles were driven by several clichés. First, that the world is split into “gamers” and “nongamers.” Second, that gamers mostly care about faster chips and more realistic graphics. Third, game consoles are expensive. And fourth, that people play video games sitting down, barely moving anything but their fingers. With the Wii, Nintendo turned the gaming industry’s clichés on their head.

Searching for Clichés

Just being told, “Okay, get out there and find those clichés,” can be extremely daunting. So, here are a few tips that will help you jump-start the process. Start by getting online and identifying a handful of direct competitors in the industry, segment, or category you’re focused on. Group together those with similar characteristics (such as size and resources), strengths (such as brand name, distribution), and strategies (such as high quality). Select one or two competitors in each group that are pretty representative of the group as a whole. A total of three to six competitors are the ideal number to work with.

With the Wii, Nintendo turned the gaming industry’s clichés on their head.

Now, do a little research on each competitor and make a list of the clichés that keep everyone doing the same thing, competing the same way, or operating with the same set of assumptions. Keep your research activities quick and informal, intuitive and qualitative. To keep you from drowning in a sea of information, consider using the following three filters:

• Product clichés: What are the cliché features and benefits? What are the cliché product attributes that are advertised (convenience and reliability, for example)? Where are the cliché areas where the product competes (typical customers, typical geographies, and typical market size?).
• Interaction clichés: What are the cliché steps a customer experiences when buying and consuming their products and services? Is the interaction face-to-face? How frequently do customers purchase or use? In the rental car business, for instance, the prevailing interaction clichés include the following: face-to-face interaction with a service agent, completing a lot of paperwork, and renting vehicles by the day.
• Pricing clichés: What are the typical ways companies price their products and services and charge customers? Are they packaging products and services together or pricing them individually? Are they charging the customer directly or through a retail partner? Are they offering discounts or other incentives?

What Are Your Disruptive Hypotheses?

Now that you have a list of the clichés that are influencing the business situation you’re focused on, your next goal is to start provoking the status quo. To do that, you’ll take those clichés and twist them like a Rubik’s cube. You’re trying to find a way to rearrange the pieces, which in turn will provoke a different way of looking at the situation.

What Can You Invert?

If there’s an action, look at the opposite action. If something is happening over time, run the time scale backward. Whenever there’s a one-way relationship between two parties, try changing the direction 180 degrees.

What Can You Deny?

The denial method works by completely dumping key aspects of a cliché. Back to our rental car example for a minute, where the prevailing industry clichés include: See the customer. Complete a lot of paperwork. Rent by the day.

What would happen if you no longer needed to see the customer, you got rid of the paperwork, and you started renting by the hour? Well, you’d end up with something very much like Zipcar. The disruption? Don’t see the customer. No paperwork. Rent by the hour.

What Can You Scale?

What is scarce that could be made abundant? What is abundant that could be made scarce? What is expensive that could be free?

After going through these steps, you should be able to generate several hypotheses that will challenge your established way of looking at an industry and help you imagine radically new scenarios, ask unconventional questions, and discover unexpected advantages. The general rule is that the bolder your “What Ifs,” the fresher the perspective they offer. 

Now, while that’s a huge accomplishment, hypotheses aren’t really worth much all by themselves. In the next post, we look at the process process of taking hypotheses and gaining the customer insight necessary to turn them into business opportunities.

[This is a condensed version of the first chapter of Disrupt: Think the Unthinkable to Spark Transformation in Your Business. Click here to buy the book.]

via fastcodesign.com

Speak to us about our guarantee to increase your top line growth! 

Jim Woods is president and founder of the InnoThink Group. He is a no nonsense "tell it like it is" author, speaker, and a strategic management, innovation, commoditization and hypercompetition expert to business and government. He advises clients with an objective view of their competitive capabilities and defines a clear course of action to maximize their innovation return on investment to achieve profitable growth. To build your capability for ongoing innovation across your company or to secure a riveting speaker for your next event - Call 719-649-4118 or email us for more information on hiring Jim. Check Availability. 

What is disruptive innovation? Not Just Better!

via youtube.com

Make it simple! Make it affordable! Make it accessible. Consider, not making it better, but differently in order to create, "Blockbuster" businesses.

 

_________________________________________________________________________ 

If you're not irate in the first 10 minutes of reading, if I don’t provoke you to revolutionize your management and leadership from think to execute, if you aren’t teetering on the brink of reaching for the Maalox, if you don’t innovate like a banshee, then I have failed you.   

To learn more about how Jim Woods and Innothink Group’s uncanny abilities can increase your competitive advantage and top line growth contact us for a consultation. 

Jim Woods CEO & President, InnoThink Group

A leading strategy, innovation and hypercompetition consultancy.

www.innothinkgroup.com

719-649-4118

 

8 Rules For Creating A Passionate Work Culture

Several years ago I was in the Thomson Building in Toronto. I went down the hall to the small kitchen to get myself a cup of coffee. Ken Thomson was there, making himself some instant soup. At the time, he was the ninth-richest man in the world, worth approximately $19.6 billion. Enough, certainly, to afford a nice lunch. I looked at the soup he was stirring. “It suits me just fine,” he said, smiling.

Thomson understood value. Neighbors reported seeing him leave his local grocery store with jumbo packages of tissues that were on sale. He bought off-the-rack suits and had his old shoes resoled. Yet he had no difficulty paying almost $76 million for a painting (for Peter Paul Rubens’s Massacre of the Innocents, in 2002). He sought value, whether it was in business, art, or groceries.

In 1976, Thomson inherited a $500-million business empire that was built on newspapers, publishing, travel agencies, and oil. By the time he died, in 2006, his empire had grown to $25 billion.

He left both a financial legacy and an art legacy, but his most lasting legacy might be the culture he created. Geoffrey Beattie, who worked closely with him, said that Ken wasn’t a business genius. His success came from being a principled investor and from surrounding himself with good people and staying loyal to them. In return he earned their loyalty.

For the long-term viability of any enterprise, Thomson understood that you needed a viable corporate culture. It, too, had to be long-term. So he cultivated good people and kept them. Thomson worked with honest and competent business managers and gave them his long-term commitment and support. From these modest principles, an empire grew.

Thomson created a culture that extended out from him and has lived after him. Here are eight rules for creating the right conditions for a culture that reflects your creed:

1. Hire the right people

Hire for passion and commitment first, experience second, and credentials third. There is no shortage of impressive CVs out there, but you should try to find people who are interested in the same things you are. You don’t want to be simply a stepping stone on an employee’s journey toward his or her own (very different) passion. Asking the right questions is key: What do you love about your chosen career? What inspires you? What courses in school did you dread? You want to get a sense of what the potential employee believes.

2. Communicate

Once you have the right people, you need to sit down regularly with them and discuss what is going well and what isn’t. It’s critical to take note of your victories, but it’s just as important to analyze your losses. A fertile culture is one that recognizes when things don’t work and adjusts to rectify the problem. As well, people need to feel safe and trusted, to understand that they can speak freely without fear of repercussion.

The art of communication tends to put the stress on talking, but listening is equally important. Great cultures grow around people who listen, not just to each other or to their clients and stakeholders. It’s also important to listen to what’s happening outside your walls. What is the market saying? What is the zeitgeist? What developments, trends, and calamities are going on?

3. Tend to the weeds

A culture of passion capital can be compromised by the wrong people. One of the most destructive corporate weeds is the whiner. Whiners aren’t necessarily public with their complaints. They don’t stand up in meetings and articulate everything they think is wrong with the company. Instead, they move through the organization, speaking privately, sowing doubt, strangling passion. Sometimes this is simply the nature of the beast: they whined at their last job and will whine at the next. Sometimes these people simply aren’t a good fit. Your passion isn’t theirs. Constructive criticism is healthy, but relentless complaining is toxic. Identify these people and replace them.

4. Work hard, play hard

To obtain passion capital requires a work ethic. It’s easy to do what you love. In the global economy we can measure who has a superior work ethic, who is leading in productivity. Not many industries these days thrive on a forty-hour work week. A culture where everyone understands that long hours are sometimes required will work if this sacrifice is recognized and rewarded.

5. Be ambitious

“Make no little plans: they have no magic to stir men’s blood.” These words were uttered by Daniel Burnham, the Chicago architect whose vision recreated the city after the great fire of 1871. The result of his ambition is an extraordinary American city that still has the magic to stir men’s blood. Ambition is sometimes seen as a negative these days, but without it we would stagnate. You need a culture that supports big steps and powerful beliefs. You can see these qualities in cities that have transformed themselves. Cities are the most visible examples of successful and failed cultures. Bilbao and Barcelona did so and became the envy of the world and prime tourist destinations. Pittsburgh reinvented itself when the steel industry withered. But Detroit wasn’t able to do the same when the auto industry took a dive.

6. Celebrate differences 

When choosing students for a program, most universities consider more than just marks. If you had a dozen straight-A students who were from the same socio-economic background and the same geographical area, you might not get much in the way of interesting debate or interaction. Great cultures are built on a diversity of background, experience, and interests. These differences generate energy, which is critical to any enterprise.

7. Create the space 

Years ago, scientists working in laboratories were often in underground bunkers and rarely saw their colleagues; secrecy was prized. Now innovation is prized. In cutting-edge research and academic buildings, architects try to promote as much interaction as possible. They design spaces where people from different disciplines will come together, whether in workspace or in common leisure space. Their reasoning is simple: it is this interaction that helps breed revolutionary ideas. Creative and engineering chat over coffee. HR and marketing bump into one another in the fitness center. Culture is made in the physical space. Look at your space and ask, “Does it promote interaction and connectivity?”

8. Take the long view 

 

If your culture is dependent on this quarter’s earnings or this month’s sales targets, then it is handicapped by short-term thinking. Passion capitalists take the long view. We tend to overestimate what we can do in a year, but underestimate what we can do in five years. The culture needs to look ahead, not just in months but in years and even decades.

The writer Arthur Koestler said that a writer’s ambition should be to trade a hundred contemporary readers for ten readers in ten years’ time and for one reader in a hundred years’ time. Lasting influence is better than a burst of fame. Keep an eye on the long view.

Excerpted from Passion Capital: The World's Most Valuable Asset © 2012 by Paul Alofs. Published by Signal, a division of Random House of Canada Limited. Reproduced by arrangement with the Publisher. All rights reserved.

[Image: Flickr user PurpleMattFish]

via fastcompany.com

_________________________________________________________________________

If you're not irate in the first 10 minutes of reading, if I don’t provoke you to revolutionize your management and leadership from think to execute, if you aren’t teetering on the brink of reaching for the Maalox, if you don’t innovate like a banshee, then I have failed you. 

To learn more about how uncanny abilities can increase your competitive advantage and top line growth contact us for a consultation. 

Jim Woods CEO & President, InnoThink Group

A leading strategy, innovation and hypercompetition consultancy.

www.innothinkgroup.com

719-649-4118

Why JC Penney's 'Fair and square' pricing doesn't work. We like being shafted!: Bob Sullivan

Photo courtesy Business Insider

You might have seen recently that iconic retailer JC Penney is slumping badly. You almost certainly have seen the reason why: A massive, creative and aggressive new advertising and pricing campaign that promises simplified prices.

No more coupons or confusing multiple markdowns. No more 600 sales a year. No more deceptive circulars full of sneaky fine print. Heck, the store even did away with the 99 cents on the end of most price tags.  Just honest, clear prices.

Sounds like a sales pitch aimed at consumer advocates and collectors of fine print frustration, like me. As it turned out, it was a sales pitch that only a consumer advocate could love.

Shoppers hated it.

The campaign, which launched on Feb. 1, appears to be a disaster. Revenue dropped 20 percent for the first quarter compared to last year. Customer traffic fell 10 percent. Last year, the company made $64 million in the first quarter; this year, it lost $163 million.

Could we have a moment of silence please for what might be the last heartbeat of honest price tags?

Not only did Penney’s plain pricing structure fail to attract fair-minded shoppers –   business reporters wrote with seeming glee during the past few days that it “repelled” them.

Don't blame Ellen DeGeneres, the spokeswoman for the Penney’s plain pricing campaign. If only executives at the firm were familiar with the work of behavioral economist Xavier Gabaix and the concept of "shrouding," all of this could have been avoided.

Seven years ago, Gabaix and co-author David Laibson wrote a brilliant (if depressing) paper on shrouding and "information suppression" that should be required reading for all consumers and executives considering a harebrained new pricing strategy. The principle is simple, and shows why cheating is rampant in our markets and why honesty is rarely the best policy.

First, a definition of shrouding:

In days gone by, price tags were simple. An apple cost 10 cents.  A cup of coffee cost $1. But today, the consumer marketplace is far more complicated, giving sellers the opportunity to create confusion. Many items have follow-up costs that make the original price tag meaningless. 

Computer printers are the classic example. You might get a great deal on a printer, but if the ink is expensive, you lose in the end. In fact, Gabaix argues that it's impossible for consumers to intelligently shop for printers. No consumer knows how much ink costs -- the cartridges don't come in standard sizes, the amount of ink used to print varies and ink costs are unpredictable. That makes the true price of a printer "shrouded," in Gabaix's terminology. Not quite hidden, but not quite clear, either.  Advantage seller. It's easy for printer companies to lowball printer price tags and overcharge for ink, enabling them to print money.

If you think about it, shrouded price tags are everywhere. The hotel website might say "$99 a night" but you know the bill will be more like $120 or $130. Pay TV companies promise $30-a-month service, which ends up costing more like $50. And what happens when you buy a TV with a store credit card that offers an upfront discount but a complex interest charge? And so it goes.

Consumers complain about this constantly. That's the basis of the Red Tape Chronicles in fact. At its best, the maddening mixture of coupons, rebates, sales and fine print fees can feel like a game. At worst, it's being cheated. You'd think shoppers would love a chance to buy from a store that doesn't play these games, the way car buyers (allegedly) like shopping at no-haggle auto dealerships.

They don’t, says Gabaix, and Penney should have known better.

“I think it was an ill-advised move,” he said. 

All this price manipulation is really an information war, he says. Shoppers hunt for the tricks that let them save money. Stores hide booby traps that let them take money. It's a bad system, one I've labeled "Gotcha Capitalism." But it is the system we have now.

And it's simply impossible, Gabaix argues, to be the one company that attempts to bridge this information gap.  If a firm tries to educate consumers on tricks and traps, and tries to offer an honest product, a funny thing happens: Consumers say, "Thank you for the tips," and go back to the tricky companies, where they exploit the new knowledge to get cheaper prices, leaving the "honest" firm in the dust.

“Once you educate consumers on the right way to shop, they will seek out the lowest cost store, and that will be the one with the shrouded prices,” he said. “Once they are savvier consumers, you make less money from them.”

Gabaix calls this the "curse of debiasing." And it leads to this depressing conclusion: "Shrouding is the more profitable strategy."

To oversimplify for a moment, here's Penney's problem. They told the world that retailers only offer their best prices during crazy sales, and Penney stores would no longer host them. Sensible consumers apparently took that information to heart and decided to simply wait for such sales at other stores. As an added benefit, Penney lowered consumers' search costs, because they now knew they didn't need to bother driving to a Penney’s store anymore.

That's probably not what new Penney CEO Ron Johnson had in mind when he decided to spend his marketing budget on those witty DeGeneres ads. A former Apple Inc. executive who took the Penney’s job in November, he thought he was lifting the store out of the brutal commodity clothing market. He may ultimately succeed at that. But he won't do it by telling customers the firm's pricing is fairer than at other stores, Gabaix believes.

"It will be a very, very uphill battle," Gabaix said. "So, sorry for them."

There have been a few other celebrated efforts by companies to educate consumers that their higher prices are really lower prices after hidden fees. During the last decade, Intercontinental Hotels experimented with up-front pricing that included all fees on its website. Executives at the firm told the New York Times that customers left in droves, choosing competitors with lowball prices. 

More recently, Southwest Airlines has undertaken the most aggressive anti-shrouding campaign to date, picking on other airlines' baggage fees. The profitable carrier is holding its own with its "Bags Fly Free" campaign, but there are indications that the firm won't be able to resist all that free money forever. In what may be a sign of things to come, Southwest elected to leave AirTran's baggage fee structure in place after it acquired the competitor last year. 

Shrouding isn't the only reason Penney's pricing plan is flawed. The firm is also leaving a lot of money on the table by rejecting a phenomenon known as "price discrimination." Some people have more money than time, and some have more time than money.  Some shoppers don't mind spending hours to save $20; others would gladly give a store $20 to escape quickly. Smart retailers get money from both. By killing couponing, Penney has eliminated its ability to satisfy price discriminators.

And as others have pointed out, markdowns serve the age-old retailing trick of "anchoring." For some reason, even very smart consumers feel better paying $60 for something if you initially tell them it costs $100, and then reduce the price.

But the real problem is Penney's ill-fated attempt to cast itself as the only fair poker player in a game of cheats. Shoppers just aren't buying it. However unsophisticated consumers are, very few of them believe a pair of shoes bought at Penney's everyday low price will be cheaper than a pair of shoes bought at Macy's on clearance with a 25 percent off coupon.

Like it or not, hidden fees – and secret discounts – are here to stay. via redtape.msnbc.msn.com 

 

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