Focusing Innovation Programs
Business history is replete with examples of organizations that have expended tremendous efforts on innovation programs that when brought to fruition had little direct value in the marketplace. The failure of Polaroid's "instant movie camera" in competition with video cameras, the limited success of Kodak's disc camera when it had to compete with improved electronic 35mm photography, the ill-fated venture of Exxon into the world of office machines, and Xerox's office automation system illustrate the fact that poorly conceived innovation projects lead to poor results. In fact, the improper focusing of innovation programs can be almost as dangerous to an organization as a "sit still" innovation policy.
Polaroid's instant movie camera was an incorrect response to a correctly understood customer need. Where Polaroid failed was in letting the response be driven by internal capability and not understanding competitive response and technological capability. Since they had instant film technology, it was natural for them to build on it. However, video technology was improving too quickly, and the window of opportunity closed before Polaroid could improve instant movie film technology to the point of customer acceptability.
The failure of Kodak's disc camera was slightly different. Again, the market demand for simple, quality photographs was understood. The failure was in the strategy Kodak chose to take advantage of the opportunity. Kodak's primary business is film. Through the disc camera, they were attempting to develop proprietary film technology that would give them an advantage over competitors like Fuji. They also failed to understand the impact of the integration of electronic circuitry onto chips. This made the automatic 35mm camera a reality, bringing a higher-quality image to the mass market.
Exxon's mid-1970s venture into word processors was doomed by a failure in the understanding of the technology. Exxon correctly identified office automation as a significant opportunity. Also, they correctly understood that they shouldn't attempt to develop a product internally. In purchasing Vydec, they misjudged how fast the technology was going to move and what it would take to stay in the game. In addition, the culture of a petroleum company and that of a word processor company are and need to be vastly different. The cultures were too different for the venture to last.
Xerox's first office automation system effort was based on a misjudgment of the time frame of the opportunity. They correctly understood that office automation was a significant opportunity, but they misjudged how fast the opportunity was going to develop. They became technology and innovation driven. They wanted to be advanced and different. As a result, their concepts and technologies were years ahead of the market; many are now being utilized by successful companies.
On the other hand, many organizations have better understood the overall market and the environmental driving forces and have succeeded by targeting their innovative efforts more effectively. The development of aspartame by the NutraSweet Company, of the Walkman by Sony, and of a truly laptop computer by Compaq illustrate how product innovations can be successful. The commitment of Motorola, Black & Decker, and Ford to improved production processes has provided each with markedly enhanced competitive positions, while the skyrocketing growth of Dell Computers and Wal-Mart shows that new procedural approaches can also produce impressive results.
The point is that innovation effort is valuable if it is properly targeted. Contrary to the emerging opinion that incremental innovation in manufacturing processes is a panacea for all industries, the truth is that there is no innovation strategy that is appropriate for all companies in all situations. What is needed is a method for effectively analyzing the overall environment in which an organization operates, and for developing an innovation program that matches the needs of the customers, the realities of technological progress, the impact of competition, the desires of stakeholders and the capabilities & capacities of the organization.
Innovation in products and services, in processes and in operational procedures is essential to the success of any organization. Whether the innovation is incremental, distinctive, or breakthrough should be determined by the future needs of the market. Effective targeting must include analysis of developing customer needs, emerging technologies, the total competitive environment, internal capabilities, and basic organizational goals. An efficient organization has both formal and informal mechanisms to properly align these elements and convert the analyses into productive innovation programs.
Paul Schumann & Donna Prestwood
Wednesday, January 7, 2004
Monday, December 22, 2003
Some Thoughts on Innovation
"Business has only two basic functions: marketing and innovation. Marketing and innovation produce results. All the rest are costs."
Peter Drucker
Innovation in marketing is also essential. Therefore business has only one basic function - innovation. Innovation is the basis of all competitive advantage: the means by which organizations anticipate and fill customer needs and the method by which organizations utilize people and technology.
Innovation either endows resources with a new capacity to create wealth or creates a new resource. In an organization, resources are capital, people, knowledge, facilities & equipment, and strategic relationships.
Innovation is the process of implementing new ideas, of turning creative concepts into realities. Innovation can manifest itself as new, different or improved:
Innovation can cause change or it can exploit change; systematic innovation which exploits change is generally the most effective.
Systematic, purposeful innovation will create an effective and efficient organization. Systematic, purposeful innovation begins by identifying the changes occurring in a market. This is followed by understanding the opportunities and threats that will result from these changes, developing a strategy to take advantage of the opportunity and avoiding or minimizing threats, assessing the organization's capability to implement the strategy, and developing an organization which can effectively and efficiently innovate.
If this systematic, purposeful innovation process is followed, the organization will benefit by becoming market driven. It will do what is appropriate for the market and it will anticipate the market. As a result, the organization will become more effective and efficient. Society will benefit because the organizations within it that create wealth, create jobs and meet societal needs will be more sharply focused on the proper targets.
The purpose of business is innovation, which, when properly focused, creates wealth as defined in the broadest sense. The creation of wealth benefits all.
Paul Schumann & Donna Prestwood
"Business has only two basic functions: marketing and innovation. Marketing and innovation produce results. All the rest are costs."
Peter Drucker
Innovation in marketing is also essential. Therefore business has only one basic function - innovation. Innovation is the basis of all competitive advantage: the means by which organizations anticipate and fill customer needs and the method by which organizations utilize people and technology.
Innovation either endows resources with a new capacity to create wealth or creates a new resource. In an organization, resources are capital, people, knowledge, facilities & equipment, and strategic relationships.
Innovation is the process of implementing new ideas, of turning creative concepts into realities. Innovation can manifest itself as new, different or improved:
- Products
- Processes
- Procedures
Innovation can cause change or it can exploit change; systematic innovation which exploits change is generally the most effective.
Systematic, purposeful innovation will create an effective and efficient organization. Systematic, purposeful innovation begins by identifying the changes occurring in a market. This is followed by understanding the opportunities and threats that will result from these changes, developing a strategy to take advantage of the opportunity and avoiding or minimizing threats, assessing the organization's capability to implement the strategy, and developing an organization which can effectively and efficiently innovate.
If this systematic, purposeful innovation process is followed, the organization will benefit by becoming market driven. It will do what is appropriate for the market and it will anticipate the market. As a result, the organization will become more effective and efficient. Society will benefit because the organizations within it that create wealth, create jobs and meet societal needs will be more sharply focused on the proper targets.
The purpose of business is innovation, which, when properly focused, creates wealth as defined in the broadest sense. The creation of wealth benefits all.
Paul Schumann & Donna Prestwood
Tuesday, December 16, 2003
Innovation Strategy: Creating Competitive Advantage ... for Awhile
An innovation strategy is only good for a finite amount of time. One of the worst mistakes an organization can make is to assume that because an innovation strategy has been successful it will always be successful. In reality, the environment shifts -- customers' needs change, competition gets smarter, technologies improve, and the organization itself evolves -- and over time the strategy becomes obsolete. Time is relative. It depends upon the dynamics of the industry.
An innovation strategy is a complex pattern as represented by the innovation map. There are nine different types of innovation and therefore at least nine different principal foci of strategic intent, and there are even more complex secondary and tertiary patterns. The innovation map is a powerful tool for creating and depicting innovation strategies.
Once an innovation strategy has been selected, there is the establishment of a competitive advantage and an immediate vulnerability. On the competitive battlefield, an innovation strategy is like a decision to attack. Each movement creates the opportunity for a response. Each innovation strategy has included within it the seeds of its own destruction. This implies that strategies should be living concepts that link markets, organizational capabilities, business objectives, and stakeholder desires.
An innovation roadmap is the path an organization takes to move from one pattern of innovation to another. The creation of an innovation roadmap requires the integration of strategy, resources, enablers and culture.
Donna Prestwood & Paul Schumann
An innovation strategy is only good for a finite amount of time. One of the worst mistakes an organization can make is to assume that because an innovation strategy has been successful it will always be successful. In reality, the environment shifts -- customers' needs change, competition gets smarter, technologies improve, and the organization itself evolves -- and over time the strategy becomes obsolete. Time is relative. It depends upon the dynamics of the industry.
An innovation strategy is a complex pattern as represented by the innovation map. There are nine different types of innovation and therefore at least nine different principal foci of strategic intent, and there are even more complex secondary and tertiary patterns. The innovation map is a powerful tool for creating and depicting innovation strategies.
Once an innovation strategy has been selected, there is the establishment of a competitive advantage and an immediate vulnerability. On the competitive battlefield, an innovation strategy is like a decision to attack. Each movement creates the opportunity for a response. Each innovation strategy has included within it the seeds of its own destruction. This implies that strategies should be living concepts that link markets, organizational capabilities, business objectives, and stakeholder desires.
An innovation roadmap is the path an organization takes to move from one pattern of innovation to another. The creation of an innovation roadmap requires the integration of strategy, resources, enablers and culture.
Donna Prestwood & Paul Schumann
Wednesday, November 26, 2003
Is Creativity Possible?
(As unlikely as it may seem, this is a true story.)
Is there any hope?
I was forced, once again, to examine this question on my way to the Austin airport. I was traveling to IBM Japan in Yamoto, Tokyo, and Yasu to lecture on creativity, innovation, and professionalism.
The taxi driver, reminiscent of those in large, northeastern seaboard cities, knew everything. He asked me who I worked for and what I did. After I told him that one of the things I did was to teach creativity and innovation, he told me that he thought what I was trying to do wasn't possible.
He said that creativity within a corporation wasn't needed and certainly wasn't wanted; that creativity and control were mutually exclusive capabilities. Numerous cases have proven, he thought, that the creative person can't exist within the bureaucratic structure of a large company. "Steve Jobs, Steinmetz, and Edison," he expounded," would not have been able to create the things they did in a large successful company. Look, even Jobs couldn't exist in his own company after he created it!"
I had been rushing for several days, perhaps even weeks, trying to juggle a hectic travel schedule and many assignments in Austin to complete. Travel for two weeks to Japan, at least for me, is a stressful event, even as pleasant as the lectures may be. There are many things to consider before dropping into an Asian culture 8,400 miles from Austin, even if it has been westernized. The last thing I wanted to do on my way to the airport was to defend my life's work.
"Big businesses thrive in times of stability," the taxi driver continued. "Government has loosened the controls now so that more change is possible. Big companies can't respond to the change! Look at the top one hundred companies of a hundred years ago", he continued, "how many of them are still in the top 100? Even companies of the Fortune 500 of the 1950's haven't fared well." He adjusted his examples as he looked in the rear view mirror and estimated my age. "Even you would remember those companies. You might wonder, vaguely remembering their names, what happened to them?"
I really wasn't interested in engaging in a meaningful conversation but I was beginning to feel intimidated by this taxi driver. I wondered if he had seen my presentation on Integrating Innovation Into Strategic Planning where I begin with exactly the point he was making. "No one is safe", I assert, using the fallout statistics of the Forties 100 and the Fortune 500 companies.
I nodded assent, and agreed with the cab driver's analysis. He continued, not giving me a chance to add anything to the discussion.
"Big companies don't even want creative people," he asserted. "They're too different. They don't fit in. You can tell a creative person by their characteristics," he continued. "Creative people are iconoclasts. If you want to find out if someone is creative or not, look to see how he, or she, spends their leisure time. If they're doing things differently, the unusual twist, then they're probably creative."
Now baited to the point of responding, I told him that there were no characteristics that were deterministic of creative ability. "People are creative in a variety of different ways, and there are no characteristics that enable predetermination," I replied.
He wasn't about to buy this.
"Not everyone is creative," he stated categorically. "It's a characteristic you're born with. It's determined by your genetics and your early experiences in life. Only under extreme duress affecting your basic functions, the lower Maslow levels, like survival, can most people be creative," he stated bluntly.
Now I really began to wonder. Was this a setup? Did someone, knowing that I would call a cab to go to the airport, put this person in my life? I began to think of Candid Camera. Was Allen Funt lurking in the trunk? So contrary to my philosophy and understanding of people, and organization management, were this cab driver's views that I knew it was hopeless, in the remaining minutes or so to get to the airport, to change his views.
Nevertheless I attempted a retort. "Everyone is creative," I said. "They were born that way. It's what distinguishes humans from other animals. Everyone is creative in their own way. We just have to learn to tap the creative ability we have."
The cab driver certainly wasn't buying in to my assertions. He went back to a discussion of how successful, large companies operate. "Small companies create all the new jobs," he explained. "Large companies just keep things the same." "As a matter of fact," he said, "large companies don't really want creative people. They will just reduce the productivity of the bureaucracy. Seems to me," he con-cluded, "that you really can't teach creativity, and even if you could, I can't understand why a company would want it taught."
Mercifully we had arrived at the airport. I paid my fare and rushed to get away from this cab driver. I had to be on time, and produc-tive. I had schedules to meet. People depend-ing upon me. I couldn't take a hike to the west coast, board a freighter for Japan, stop along the way, and work for my passage as the cab driver had suggested a creative person would do. It was 8 a.m. on Thursday, and by 2 p.m. on Friday (actually Thursday because of the date line), I would be in Japan.
Is there any hope? Are we destined to at-tempt to perpetually improve our productivity by efficiencies of scale, control of capital and expense, and reduction of risk? Are we going to continually drop in the eyes of Ameri-can executives? Or, are we going to find ways to be creatively productive? Can we break through the traditions of our thinking that limit the vision of our accomplishments?
Is there any hope? Of course! You are the hope. You are the greatest resource that any organization has.
We are not predestined to anything, suc-cess or failure. We have the future in our hands. If we can, collectively, figure out how to integrate creative productivity into our work and our organizational behavior, we will be ever more successful in the future than we have been in the past.
Is there any hope? Can you be creative and work for an organization? The answer to this question, the answer you have in your mind, the one you believe to be true, will determine your fu-ture and that of our country.
Happy Thanksgiving!
Paul Schumann
(As unlikely as it may seem, this is a true story.)
Is there any hope?
I was forced, once again, to examine this question on my way to the Austin airport. I was traveling to IBM Japan in Yamoto, Tokyo, and Yasu to lecture on creativity, innovation, and professionalism.
The taxi driver, reminiscent of those in large, northeastern seaboard cities, knew everything. He asked me who I worked for and what I did. After I told him that one of the things I did was to teach creativity and innovation, he told me that he thought what I was trying to do wasn't possible.
He said that creativity within a corporation wasn't needed and certainly wasn't wanted; that creativity and control were mutually exclusive capabilities. Numerous cases have proven, he thought, that the creative person can't exist within the bureaucratic structure of a large company. "Steve Jobs, Steinmetz, and Edison," he expounded," would not have been able to create the things they did in a large successful company. Look, even Jobs couldn't exist in his own company after he created it!"
I had been rushing for several days, perhaps even weeks, trying to juggle a hectic travel schedule and many assignments in Austin to complete. Travel for two weeks to Japan, at least for me, is a stressful event, even as pleasant as the lectures may be. There are many things to consider before dropping into an Asian culture 8,400 miles from Austin, even if it has been westernized. The last thing I wanted to do on my way to the airport was to defend my life's work.
"Big businesses thrive in times of stability," the taxi driver continued. "Government has loosened the controls now so that more change is possible. Big companies can't respond to the change! Look at the top one hundred companies of a hundred years ago", he continued, "how many of them are still in the top 100? Even companies of the Fortune 500 of the 1950's haven't fared well." He adjusted his examples as he looked in the rear view mirror and estimated my age. "Even you would remember those companies. You might wonder, vaguely remembering their names, what happened to them?"
I really wasn't interested in engaging in a meaningful conversation but I was beginning to feel intimidated by this taxi driver. I wondered if he had seen my presentation on Integrating Innovation Into Strategic Planning where I begin with exactly the point he was making. "No one is safe", I assert, using the fallout statistics of the Forties 100 and the Fortune 500 companies.
I nodded assent, and agreed with the cab driver's analysis. He continued, not giving me a chance to add anything to the discussion.
"Big companies don't even want creative people," he asserted. "They're too different. They don't fit in. You can tell a creative person by their characteristics," he continued. "Creative people are iconoclasts. If you want to find out if someone is creative or not, look to see how he, or she, spends their leisure time. If they're doing things differently, the unusual twist, then they're probably creative."
Now baited to the point of responding, I told him that there were no characteristics that were deterministic of creative ability. "People are creative in a variety of different ways, and there are no characteristics that enable predetermination," I replied.
He wasn't about to buy this.
"Not everyone is creative," he stated categorically. "It's a characteristic you're born with. It's determined by your genetics and your early experiences in life. Only under extreme duress affecting your basic functions, the lower Maslow levels, like survival, can most people be creative," he stated bluntly.
Now I really began to wonder. Was this a setup? Did someone, knowing that I would call a cab to go to the airport, put this person in my life? I began to think of Candid Camera. Was Allen Funt lurking in the trunk? So contrary to my philosophy and understanding of people, and organization management, were this cab driver's views that I knew it was hopeless, in the remaining minutes or so to get to the airport, to change his views.
Nevertheless I attempted a retort. "Everyone is creative," I said. "They were born that way. It's what distinguishes humans from other animals. Everyone is creative in their own way. We just have to learn to tap the creative ability we have."
The cab driver certainly wasn't buying in to my assertions. He went back to a discussion of how successful, large companies operate. "Small companies create all the new jobs," he explained. "Large companies just keep things the same." "As a matter of fact," he said, "large companies don't really want creative people. They will just reduce the productivity of the bureaucracy. Seems to me," he con-cluded, "that you really can't teach creativity, and even if you could, I can't understand why a company would want it taught."
Mercifully we had arrived at the airport. I paid my fare and rushed to get away from this cab driver. I had to be on time, and produc-tive. I had schedules to meet. People depend-ing upon me. I couldn't take a hike to the west coast, board a freighter for Japan, stop along the way, and work for my passage as the cab driver had suggested a creative person would do. It was 8 a.m. on Thursday, and by 2 p.m. on Friday (actually Thursday because of the date line), I would be in Japan.
Is there any hope? Are we destined to at-tempt to perpetually improve our productivity by efficiencies of scale, control of capital and expense, and reduction of risk? Are we going to continually drop in the eyes of Ameri-can executives? Or, are we going to find ways to be creatively productive? Can we break through the traditions of our thinking that limit the vision of our accomplishments?
Is there any hope? Of course! You are the hope. You are the greatest resource that any organization has.
We are not predestined to anything, suc-cess or failure. We have the future in our hands. If we can, collectively, figure out how to integrate creative productivity into our work and our organizational behavior, we will be ever more successful in the future than we have been in the past.
Is there any hope? Can you be creative and work for an organization? The answer to this question, the answer you have in your mind, the one you believe to be true, will determine your fu-ture and that of our country.
Happy Thanksgiving!
Paul Schumann
Monday, November 17, 2003
Drowning in a Sea of Information
It seems that two researchers at the University of California at Berkeley's School of Information Management and Systems estimated that people generated 5 million terabytes of information last year (San Jose Mercury News, 10/29/03). According to their study, that's double the amount generated in 2002. They estimated that in 2002 we created 800 megabytes of information per person, enough to fill 30 books. According to Hal Varian, one of the researchers, "We're drowning in a sea of information. The conclusion from an unnamed wire service reporter was, "The moral of the story? Delete, delete, delete."
It is true that we live in a vast sea of information. And to every generation we're sure it seemed like it was too much to handle. Without context, models and yes, even paradigms, that vast sea of information is just noise. An older person once told one of us that Bach just sounded like noise to her. Yet to us Bach's music is beautiful, sometimes even transcendently so. On the other hand, when we listen to much of youth's popular music of today, it just sounds like noise. It all has to do with context, models, paradigms and values.
Deleting the information is not the answer, at least not the answer that moves us forward. Progress is made by building on the information created by others and combining with our new information.
Information comes in four forms - noise, data, knowledge and wisdom. The goal is to extract data from the noise, transform that data into knowledge and from the knowledge, create wisdom. Each step along the way requires human creativity. This pyramid of information and our human creativity can use some help. We need better tools, models and paradigms of work to enable us to reach the hyper productivity promise of the information technologies. Yet we seem to be stuck, trying to use a hammer on every problem as if the problem was a nail.
Our advice, "Create and elevate."
We'd welcome comments from you about real advances that aid every day work in escalating information from noise to data to knowledge to wisdom (beyond word processors, spread sheets, presentations, data bases etc). Write us at comments@theinnovationroadmap.com.
Paul Schumann & Donna Prestwood
It seems that two researchers at the University of California at Berkeley's School of Information Management and Systems estimated that people generated 5 million terabytes of information last year (San Jose Mercury News, 10/29/03). According to their study, that's double the amount generated in 2002. They estimated that in 2002 we created 800 megabytes of information per person, enough to fill 30 books. According to Hal Varian, one of the researchers, "We're drowning in a sea of information. The conclusion from an unnamed wire service reporter was, "The moral of the story? Delete, delete, delete."
It is true that we live in a vast sea of information. And to every generation we're sure it seemed like it was too much to handle. Without context, models and yes, even paradigms, that vast sea of information is just noise. An older person once told one of us that Bach just sounded like noise to her. Yet to us Bach's music is beautiful, sometimes even transcendently so. On the other hand, when we listen to much of youth's popular music of today, it just sounds like noise. It all has to do with context, models, paradigms and values.
Deleting the information is not the answer, at least not the answer that moves us forward. Progress is made by building on the information created by others and combining with our new information.
Information comes in four forms - noise, data, knowledge and wisdom. The goal is to extract data from the noise, transform that data into knowledge and from the knowledge, create wisdom. Each step along the way requires human creativity. This pyramid of information and our human creativity can use some help. We need better tools, models and paradigms of work to enable us to reach the hyper productivity promise of the information technologies. Yet we seem to be stuck, trying to use a hammer on every problem as if the problem was a nail.
Our advice, "Create and elevate."
We'd welcome comments from you about real advances that aid every day work in escalating information from noise to data to knowledge to wisdom (beyond word processors, spread sheets, presentations, data bases etc). Write us at comments@theinnovationroadmap.com.
Paul Schumann & Donna Prestwood
Monday, November 10, 2003
Biotech Bubble
We're blowing another bubble that is almost sure to burst. The media, money, state and city governments are chasing trendy biotech. "Smell the hype in almost every state. Economic development officials are certifiably mad," writes Al Lewis, The Denver Post, in a syndicated column a few days ago.
We remember the dot com bubble only a few years ago when you couldn't get money or media attention unless it was a dot com. It seemed like all the money went into these startups. Now you can't get any money because so much was lost in that bubble and the companies remaining are requiring continued investments to keep them going.
Karen Bernstein, Co-founder of BioCentury Publications is quoted by Lewis as saying "The bigger the bull market, the bigger the bear market that follows. I don't know if there is anyway to escape the cycle." Of course there is but we don't seem to have the patience for it. We can escape this vicious cycle by looking to the future, investing in proportion to the state of development of the technology and making sure that we've got the resources and the culture to support the long-term development.
Technology takes a long time to mature. Look at all the technologies that are driving a part of our economy now - the Internet, computers, telephones, satellites, wireless, fiber optics, etc. They're all more that 40 years old. And, we're still not sure that we're getting the payback at the national economy level for all of our investment in those technologies.
Some economists have suggested that it takes about 75 years for a technology to mature. The first twenty-five years, there is no impact on our productivity. The second twenty-five years, there is actually a negative impact on the economy as we invest in the diffusion of the technology and all the changes that accompany the new technology. It's in the last twenty-five years as technology experiences widespread proliferation that the increases in productivity are felt in the national economy.
To keep away from the bubble, we should adapt a balanced approach. In order to get productivity out of the information technologies, we should be investing and searching for innovations that enhance productive use of information. This requires a broader definition of innovation that just technology. It requires innovation in processes and procedures - the way we work, down to the fundamental definition of what work is.
In order to have technologies for the future, we need to invest in the new technologies now, but in proportion to what can reasonably be expected of them without being guided by short-term gains, or forcing developers to sell commercialization of nascent technologies. "Once the scent of IPOs hits the air, momentum investors and market manipulators will follow" writes Lewis.
If the goal is economic productivity, you have to ask yourself the question "How is biotech going to be the cornerstone of an economy - like steam and electricity was and information technology may be?" It seems to us that if economic productivity is the goal, biotech, nanotech and information technologies have to merge in someway - a formidable challenge.
Paul Schumann & Donna Prestwood
We're blowing another bubble that is almost sure to burst. The media, money, state and city governments are chasing trendy biotech. "Smell the hype in almost every state. Economic development officials are certifiably mad," writes Al Lewis, The Denver Post, in a syndicated column a few days ago.
We remember the dot com bubble only a few years ago when you couldn't get money or media attention unless it was a dot com. It seemed like all the money went into these startups. Now you can't get any money because so much was lost in that bubble and the companies remaining are requiring continued investments to keep them going.
Karen Bernstein, Co-founder of BioCentury Publications is quoted by Lewis as saying "The bigger the bull market, the bigger the bear market that follows. I don't know if there is anyway to escape the cycle." Of course there is but we don't seem to have the patience for it. We can escape this vicious cycle by looking to the future, investing in proportion to the state of development of the technology and making sure that we've got the resources and the culture to support the long-term development.
Technology takes a long time to mature. Look at all the technologies that are driving a part of our economy now - the Internet, computers, telephones, satellites, wireless, fiber optics, etc. They're all more that 40 years old. And, we're still not sure that we're getting the payback at the national economy level for all of our investment in those technologies.
Some economists have suggested that it takes about 75 years for a technology to mature. The first twenty-five years, there is no impact on our productivity. The second twenty-five years, there is actually a negative impact on the economy as we invest in the diffusion of the technology and all the changes that accompany the new technology. It's in the last twenty-five years as technology experiences widespread proliferation that the increases in productivity are felt in the national economy.
To keep away from the bubble, we should adapt a balanced approach. In order to get productivity out of the information technologies, we should be investing and searching for innovations that enhance productive use of information. This requires a broader definition of innovation that just technology. It requires innovation in processes and procedures - the way we work, down to the fundamental definition of what work is.
In order to have technologies for the future, we need to invest in the new technologies now, but in proportion to what can reasonably be expected of them without being guided by short-term gains, or forcing developers to sell commercialization of nascent technologies. "Once the scent of IPOs hits the air, momentum investors and market manipulators will follow" writes Lewis.
If the goal is economic productivity, you have to ask yourself the question "How is biotech going to be the cornerstone of an economy - like steam and electricity was and information technology may be?" It seems to us that if economic productivity is the goal, biotech, nanotech and information technologies have to merge in someway - a formidable challenge.
Paul Schumann & Donna Prestwood
Monday, November 3, 2003
The Evils of EVA
The Myth of Shareholder Value and Its Relationship to Innovation
EVA or Economic Value Added is touted as a measure of the true economic performance of a company and a strategy for creating shareholder wealth. EVA measures the residual wealth of a company when its cost of capital is deducted from its operating profit.
EVA = Net Operating Profit After Taxes (NOPAT) - Cost of Capital
Stern and Shiely, fathers of EVA, in their book The EVA Challenge, describe EVA in the following way. "Economic Value Added is a measure of the true economic performance of a company and a strategy for creating shareholder wealth. It is also a method of changing corporate priorities and behavior throughout a company, right down to the shop floor. Properly implemented, EVA frees the measurement of corporate performance from the vagaries of accounting conventions and aligns the interest of managers with those of shareholders, ending a decades long conflict of interest."
When we first learned about EVA in the mid-1990s, we immediately became alarmed because of its negative impact on innovation and the potential for abuse. A rationalization of a corporation from executives to all employees and the supporting infrastructure, processes and culture on the basis of EVA principles would inherently reduce the emphasis on innovation. EVA based measurements and incentives explicitly discourage risk taking and focus on today's profit while minimizing the capital invested. EVA is not about the future and innovation is always about the future, so the conflict is inherent.
Moreover, innovation in a corporation is not the only thing that suffers when the EVA concepts are embraced and abused. In addition organizations that wholeheartedly applied EVA have not demonstrated long term financial performance gains. In 2001 Marvin Runyon, Postmaster General, stated, "Joel Stern know this subject matter better than anyone. He adapted EVA so that we could use it to incent management at the United States Postal Service to greatly improve performance. We stopped losing billions and started turning profits." Yet, in 2002 ABC News reported that a "newly released federal audit showed the postal service used questionable bookkeeping analysis to change the perception of its performance." The audit showed that 80,000 postal managers received $805 million in bonuses while the service was losing $2 billion over the last two years. ABC News continued, "when it lost $2 billion between 1998 and 2000 officials found it hard to justify bonuses, so postal executives decided to find a way." Using EVA the executives turned the $2 billion loss into a $1.7 billion gain.
Even Coca Cola, an early adopter of EVA, has had difficulties. Responsible Wealth reported that "Although Coca Cola stock lost 22% of its value in 2001 (compared to a 12% loss for the S&P 500), and 6,000 Coca Cola employees (21% of the company's workforce) were laid off just a year earlier, Coca Cola CEO Doug Daft enjoyed a 47% compensation increase in 2001, to more than $74 million."
Al Ehrbar, author of EVA: The Real Key to Creating Wealth, writes "EVA is the framework for complete financial management and incentive compensation system that can guide every decision a company makes ... that can transform corporate culture, that can improve the working lives of everyone in an organization by making them more successful, and can help them produce greater wealth for shareholders, customers, and themselves." As you can see from the previous paragraphs, EVA works in regard to "themselves".
The pressure to conform is tremendous. For example, listen to what C. B. Rogers, Jr., Chairman of Equifax stated in 1996, "At the monthly meetings, (of Equifax's 29 business units), we separate them (business unit managers) into value creators and value destroyers. You don't want to be a value destroyer. Its a terrible term, but that's what you are doing."
EVA focuses on shareholders. Shareholders are only one of the many groups that make up the stakeholders of an organization. We believe that any approach to wealth creation that fails to take into account the entire stakeholder universe of an organization is doomed. Moreover, a organization's strategy for wealth creation must incorporate three other elements: Opportunities/Threats in the Market; the Current Capabilities of the Organization; and its Capacity for Change.
A successful Innovation Roadmap will include all four elements!
Peter Drucker has written, "Business has only two basic functions: marketing and innovation. Marketing and Innovation produce results. All the rest are costs."
We go even further, to state that innovation in marketing is also essential! Therefore business has only one basic function -- Innovation.
Innovation is the basis of all competitive advantage: the means by which organizations anticipate and fill customer needs and the method by which organizations utilize technology.
Innovation either endows resources with a new capacity to create wealth or it creates a new resource.
Paul Schumann & Donna Prestwood
The Myth of Shareholder Value and Its Relationship to Innovation
EVA or Economic Value Added is touted as a measure of the true economic performance of a company and a strategy for creating shareholder wealth. EVA measures the residual wealth of a company when its cost of capital is deducted from its operating profit.
EVA = Net Operating Profit After Taxes (NOPAT) - Cost of Capital
Stern and Shiely, fathers of EVA, in their book The EVA Challenge, describe EVA in the following way. "Economic Value Added is a measure of the true economic performance of a company and a strategy for creating shareholder wealth. It is also a method of changing corporate priorities and behavior throughout a company, right down to the shop floor. Properly implemented, EVA frees the measurement of corporate performance from the vagaries of accounting conventions and aligns the interest of managers with those of shareholders, ending a decades long conflict of interest."
When we first learned about EVA in the mid-1990s, we immediately became alarmed because of its negative impact on innovation and the potential for abuse. A rationalization of a corporation from executives to all employees and the supporting infrastructure, processes and culture on the basis of EVA principles would inherently reduce the emphasis on innovation. EVA based measurements and incentives explicitly discourage risk taking and focus on today's profit while minimizing the capital invested. EVA is not about the future and innovation is always about the future, so the conflict is inherent.
Moreover, innovation in a corporation is not the only thing that suffers when the EVA concepts are embraced and abused. In addition organizations that wholeheartedly applied EVA have not demonstrated long term financial performance gains. In 2001 Marvin Runyon, Postmaster General, stated, "Joel Stern know this subject matter better than anyone. He adapted EVA so that we could use it to incent management at the United States Postal Service to greatly improve performance. We stopped losing billions and started turning profits." Yet, in 2002 ABC News reported that a "newly released federal audit showed the postal service used questionable bookkeeping analysis to change the perception of its performance." The audit showed that 80,000 postal managers received $805 million in bonuses while the service was losing $2 billion over the last two years. ABC News continued, "when it lost $2 billion between 1998 and 2000 officials found it hard to justify bonuses, so postal executives decided to find a way." Using EVA the executives turned the $2 billion loss into a $1.7 billion gain.
Even Coca Cola, an early adopter of EVA, has had difficulties. Responsible Wealth reported that "Although Coca Cola stock lost 22% of its value in 2001 (compared to a 12% loss for the S&P 500), and 6,000 Coca Cola employees (21% of the company's workforce) were laid off just a year earlier, Coca Cola CEO Doug Daft enjoyed a 47% compensation increase in 2001, to more than $74 million."
Al Ehrbar, author of EVA: The Real Key to Creating Wealth, writes "EVA is the framework for complete financial management and incentive compensation system that can guide every decision a company makes ... that can transform corporate culture, that can improve the working lives of everyone in an organization by making them more successful, and can help them produce greater wealth for shareholders, customers, and themselves." As you can see from the previous paragraphs, EVA works in regard to "themselves".
The pressure to conform is tremendous. For example, listen to what C. B. Rogers, Jr., Chairman of Equifax stated in 1996, "At the monthly meetings, (of Equifax's 29 business units), we separate them (business unit managers) into value creators and value destroyers. You don't want to be a value destroyer. Its a terrible term, but that's what you are doing."
EVA focuses on shareholders. Shareholders are only one of the many groups that make up the stakeholders of an organization. We believe that any approach to wealth creation that fails to take into account the entire stakeholder universe of an organization is doomed. Moreover, a organization's strategy for wealth creation must incorporate three other elements: Opportunities/Threats in the Market; the Current Capabilities of the Organization; and its Capacity for Change.
A successful Innovation Roadmap will include all four elements!
Peter Drucker has written, "Business has only two basic functions: marketing and innovation. Marketing and Innovation produce results. All the rest are costs."
We go even further, to state that innovation in marketing is also essential! Therefore business has only one basic function -- Innovation.
Innovation is the basis of all competitive advantage: the means by which organizations anticipate and fill customer needs and the method by which organizations utilize technology.
Innovation either endows resources with a new capacity to create wealth or it creates a new resource.
Paul Schumann & Donna Prestwood
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