SmartOrg Value Innovation

8/8/2019 SmartOrg Value Innovation

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VALUE INNOVATION: PASSPTO WEALTH CREATION

Here are practical ways to help your company grow profitably.

Thomas A. Dillon, Richard K. Lee and David Matheson

OVERVIEW: Although most managers will agree that innovation can be the passport to wealth creation, manyof their actual business practices and behaviors fail to support the activities crucial to value innovation. In par-ticular, many companies over-emphasize technologyinnovation and R&D, which, when used in isolation, areinsufficient to create new wealth. Through literaturereview and interviews with value innovators, a subcom-mittee of the Industrial Research Institutes Research-on-Research Committee has defined a value innovation process, providing a framework to develop a new product, service or business model that will have a strong, positive effect on enterprise value. The subcom-mittee also created a Value IQ instrument to helpcompanies understand their ability to value-innovate

and identify those areas where changes in behavior and company culture may be required.

KEY CONCEPTS: value creation, value innovation process, enterprise value, corporate culture, stake-

holder behavior, capability to innovate.Wall Street, institutional investors and shareholdersexpect CEOs and CTOs to think and act boldly, movefrom incrementalism and implement plans to drivesustained significant increase in enterprise value. Yetfew companies are meeting the challenge.

Well-known consultants and professorsincludingClayton Christensen ( 1,2 ), Gary Hamel ( 36 ), W. ChanKim and Renee Mauborgne ( 79 ), Constantinos

Thomas Dillon is senior vice president of Scientific

Applications International Corporation (SAIC), in San Diego, California, with responsibility for SAICs stateand local government business. Previously, he was vice president of General Atomics Defense Division, wherehe directed GAs business applying energy technology tonational security programs. As the U.S. Department of Energys principal deputy assistant secretary, nuclearenergy, he managed federal nuclear energy programswith an annual budget of $4 billion. He was also deputydirector and chief operating officer for the National Bureau of Standards (now NIST), a national laboratorywith a staff of 3,800. He received his Ph.D. in chemical physics from the University of [email protected] Richard (Dick) Lee is president and CEO of Value Innovations, Inc. (Vi), Castle Rock, Colorado. He is anemeritus memberof the Industrial Research Institute and currentlyvice chairman of IRIs Emeriti Committee. Vi isa consulting firm focusing on value innovation manage-ment and thinking processes that also develops browser-based software to manage these processes. Lee has beenthe vice president and general manager of divisions of Gould Inc. and McGraw Edison, the VP R&D at Phar-

maseal, the manufacturing arm of American Hospital

Supply, and the VP strategic business operations at Johns Manville. He received his Ph.D. in inorganicchemistry from the University of [email protected]

DavidMatheson is presidentandCEO of SmartOrg, Inc.,a Menlo Park, California supplier of value-based man-agement systems that help companies drive growth and profitability. He is a co-author of The Smart Organiza-tion (Harvard Business School Press, 1998), principal investigator in numerous studies on decision-making and

valuation in R&D and new product development, and author of several papers in Research Technology Man-agement and elsewhere. Prior to founding SmartOrg, hewas a principal at SDG where he led consulting engage-ments in strategy, R&D and product development forcompanies in the U.S. and Europe. His industry experi-ence includes high tech, utilities, consumer products, packaging, chemicals, oil and gas, equipment and materials manufacturers, and entertainment. Hereceived his Ph.D. from Stanford [email protected], www.smartorg.com.

Research Technology Management220895-6308/05/$5.00 2005 Industrial Research Institute, Inc.
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Markides ( 10,11 ), James Brian-Quinn ( 12 ), Jim and David Matheson ( 13), C. K. Prahalad ( 6,14 ), and Leifer etal.( 15) have researched creating value through valueinnovation and written excellent books and articles ontheir findings. They describe tools to stimulate valueinnovation and outside-the-box thinking, and provideexamples of companies that have demonstrated signifi-cant and sustained increases in enterprise value.

However, they have neither described the value innova-tion process nor published tools that allow a company todetermine its ability, or capacity, to value-innovate.

These authors agree on one fundamental principle: inno-vation is the primary source of wealth creation. Further-more, the greatest economic value comes frominnovations that directly impact customer value, providing exceptional value to the most importantcustomer in the value chain. Virtually every executiveand manager of every organization knows this principleanddesires to actupon it.Yetmany organizations behavein ways that conflict with this principle. The primary

challenge facing these organizations today is to act morein accordance with this fundamental principle by bridging the gap between the stated desire to createwealth and real actions that undermine the ability todo so.

Many organizations over-emphasize technology innova-tion, believing that it alone will create new wealth.Tracking the $275 billion annual R&D investment made by the top 1,000 global R&D investors ( 16 ) understatesthe total investment in innovation. For the most success-ful value innovators, the R&D contribution is only a portion of the investment and, in some cases, it may be

zero. Best Buy, Costco, Dell, Enterprise Rental Car,eBay, General Electric, Home Depot, Microsoft,Southwest Airlines, Starbucks, Virgin Group, WalMart,and Whirlpool are value innovators. They have signifi-cantly increased their enterprise value on a sustained basis. All of these companies have used technology toenable their business models.

For example, when we interviewed the Virgin Group in2000, it had just launched Virgin Mobile, one of the firstmobile virtual network companies. The company sold pay-as-you-go phones and bought capacity. In just four years, Virgin Mobile grew to more than 4 million

customers and reported EBITDA of 75 million onsales of 442 million in 2003 ( 17 ). At the time of its IPO in 2004, Virgin Mobile had a value close to1 billion. By providing exceptional value in the form of cellular phone service to the consumer, Virgin Mobilesignificantly increased the enterprise value of the VirginGroup.

Boards of Directors, CEOs and CTOs are responsible for increasing enterprise value but the CTO typically faces anumber of challenges:

Creating exceptional value for, butwith limited accessto, the most important customer.

The fact that technology innovation in isolation rarelyincreases company value ( 5,7 ).

Constraints on R&D spending ( 18).

Meeting increased demands from Wall Street toreduce the time required to introduce new products and services.

In 1999, the Industrial Research Institute s Research-on-Research (ROR) Committee formed a subcommittee toaddress these challenges within the context of creatingvalue through innovation. The goal: close the gap between the recognized principles of value innovationand the limited number of companies that take advantageof, and practice, them.

In this article we: Highlight the differences between value innovationand technology innovation.

Describe a practical value innovation process modelthat will help translate the principles of value innovationinto organizational reality.

Describe the first-generation Value IQ Instrumentdesigned to focus meaningful discussion on a company sability to value-innovate and identify where a companyneeds to modify itsculture and make behavioral changes.

Value Innovation, Technology Innovation andValue Creation

Value is one of the most powerful words in the lexicon of management arts and science. Shareholder value,customer value, value chain, and value proposition are just a fewexamples. It is almostuniversally accepted thatinnovation is our economy s value creation engine.

Our focus has been on value innovation, simply defined

as: creating exceptional value for the customer, mosteffectively when that customer is the most importantcustomer in the value chain. Continuing success indelighting the customer, in turn, drives sustained increase in enterprise value. With the proper process,value innovation can occur with or without technologyinnovation in any organization and at any time in a sus-tainable manner ( 7 ). It can take place in product, serviceand delivery; it leads technology innovation, and outputsusually cannot be patented unless a new process isinvolved.

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Value innovators: Are not necessarily first entrants to their markets. Create new aggregate demand through a leap in valueat an accessible price. Do not always followconventional practices for maxi-mizing profits.Technology innovation is the creation of a new productor service that increases the benefits and/or reduces thecosts of that product or service. Without a correspondingvalue innovation, this potential is unrealized. Sometimesvalue innovation and technology innovation are tightlylinked, as in the case of Research In Motion s Black- berry pagers, or Procter & Gamble s Swiffer Sweeper.Value innovators often create value through the use of another company s technological breakthrough; e.g.,Ampex invented videotape recording technology but itwas the Japanese electronic companies that capitalized on this technology by developing the products for theconsumer marketplace ( 19). Xerox s Palo Alto Research

Center (PARC), was the birthplace of technologies suchas laser printing, Ethernet, the graphical user interface,and ubiquitous computing, that transformed industries but created little commercial value for Xerox ( 20). Theoutput from technology innovation can generally be patented or otherwise legally protected.Radical innovation is defined as a disruptive technology(e.g., steam ships displacing sail, email reducing the costand delivery time of regular mail, cellular communica-tions displacing conventional land line phone service,etc.) that changes the business landscape significantly(15).

We use the term value in the sense of Figure 1, whichshows the exceptional value created for the mostimportant customer in the value chain, the consumer who, by way of example, likes his/her cup of coffee. Of course, themost successful value innovations will lead tovalues that are multiples of the firm s costs of goodsand/or services. This allows a price that is both far belowthe customer s perceived value (thus catalyzing sales)and far above costs (thus catalyzing profits).Ten years ago, would anyone have imagined paying$3.50 for a cup of coffee at one of the uncounted number of coffee shops across the United States? Today millionsare happy to do so. Starbucks is far more than just a largecollection of coffee shops; it has rapidly outgrown other established branded and popular chains like DunkinDonuts. How? Its real innovation is the completecustomer experience: choices of flavors, an attractiveand comfortable setting, etc. Basically, its living room is better than your living room.Figure 1 shows how Starbucks value innovation lookseconomically. The cost is the coffee, cups, facilities,wages, overhead, etc. The customer s willingness to payis a direct function of the value he/she places on the use,

or consumption, of the product and/or service. In theStarbucks case it is a measure of the pleasure and stimu-lating effects of buying a coffee, firing up the laptop tocheck the latest emails wirelessly, holding a businessmeeting in a relaxing environment, or checking today sheadlines while enjoying the beverage. The willingnessto pay is the total value created in the transaction,

sometimes called the economic surplus. Starbucks valueinnovation was to realize that the whole experience of drinking coffee translated into a strong willingness to pay a premium on a low-cost commodity product.

Setting the price of a product divides this economicsurplus between the supplier (in margin) and theconsumer (in that the willingness to pay is higher than the price). Value innovation requires creating enougheconomic surplus to support a price that makes businesssense and thrills customers with the benefits.

At aTypical

Restaurant($)

AtStarbucks Comments

ValueProposition

Commoditycoffee

Starbucksexpress

Willingnessof thecustomerto pay

Low High Willingnessto pay is adollar measureof totalcustomer perceived value.

Price $1.00 $3.50 Price of aVenti isa $2.00to $2.50 premiumover aregular cup of coffee.

Cost Approx.$0.50

Approx.$1.40

Starbuckscost of sales and related occupancycosts were41.3% of sales in4Q,2003.GrossMargin,approx.60%

Figure 1. The consumer s willingness to pay a

premium for a cup of coffee at Starbucks creates ahigh economic surplus and 60 percent margins.

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While technology innovation may be a means to createthis economic surplus (e.g., the case of new pharmaceu-ticals), it is only one of many means. Even in cases wheretechnology plays an important role, for example in Wal-Mart s back-end systems or Microsoft s operatingsystem, it is enabling the value innovation.

The Value Innovation Process

Based on a review of the literature, interviews withinnovative companies, and value innovation prin-ciples, the ROR team (see the Acknowledgement below)developed a process model that translates value innova-tion into organizational reality. Themodel is divided intothree primary sections, illustrated in Figure 2: Providing exceptional value to the most importantcustomer/increasing enterprise value. The five-stage value innovation process. The key cultural factors influencing the enterprise sability to value-innovate.

The drivers of the process, providing exceptional valueto the most important customer in the value chain, which

in turn fuels enterprise value, are shown in the model slower disk.

Enterprise value is delivered through an iterative business process, based on five stages (shown in thecentral disk). We visualize the disk as rotating, providingthe mechanism to drive value innovation and keep itfocused on the result. The stages are:

Business Intelligence. Value Modeling and Analysis. Decisions and Prioritization. Communications and Implementation. Value Validation.

The force in the model is created through the reinventionculture, shown in the upper disk. We visualize this disk as having great weight, which relentlessly drives further value creation when directed correctly through the business process. The ability and effectiveness of anorganization to value-innovate is influenced largely byits culture. Hamel has described the ten principles thataffect a company s ability to bubble up billion-dollar

Figure 2. The Value Innovation Process Model provides a framework a company canuse to develop a new product, service or business model that will give a strong boost tothe value of the enterprise. The central ring represents the five-stage Value Innovation Process itself. The success, or lack of success, gained from this process is in largemeasure influenced by the company s culture of reinvention, which overlays the processas suggested by the two vertical lines. Implement the process without changing theculture and the results are likely to be disappointing.

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ideas and provides many examples where companieshave been successful ( 4).

Based on our experience and findings, there must be: An authentic market for new ideas. Teams crossing all functions and comfortable withintense, detailed, high-energy debates where the focus ison the most important customer and the business envi-ronment. Systems thinking permeating all planning. Recognition of the difficulty of managing risk for economic outcomes and quantitative tools used toevaluate a broad range of ideas and scenarios. Trust, honesty and candor throughout the organiza-tion.

Consider Whirlpool, for example. In 1999, Whirlpoolre-assigned 75 people and tasked them with answeringthe question, What other rooms in the home canWhirlpool bring value to? The company installed a newinnovation system that defined innovation as a creativeidea focused on a customer touch point ( 21 ). Thiscustomer-centric focus, supported by 350 InnovationMentors, has led to the introduction of 25 new productsover thepast three years. In 2003, Whirlpoolunveiled theFamily Studio (a complete fabric-care and familyactivity center for today s home), the Personal ValetClothes Vitalizing System (for the closet) and Gladiator Garage Works (a set of garage storagesolutions). Whirlpool s launch rate of new products hasdoubled and its COO projects revenues of $0.5 billioneach year for the next three years from new products(22).

The Five Stages

The five stages are described below, and their objectives,top-level tasks, and best practices and instruments to be used listed in Table 1.

Stage 1. Business Intelligence. The first stage of theValue Innovation Process (VIP) calls for the identifica-tion of new business models and opportunities that willcreate exceptional value for the most importantcustomer. This high-level ideation process captures

inputs from multiple sources and builds on core compe-tencies to generate value propositions from which themost important customer will perceive high value in the product, service or delivery. Inputs to the VIP can comefrom multiple sources, including: the company ideation process, innovation mentoring ( 21), alliance partners,customers, vendors, and the general public.

Stage 2. Value Modeling and Analysis. This stagerequires that the value propositions developed in Stage 1 be validated through discussions with key customers.

Risks and uncertainties are identified and killer issues surfaced.

Stage 3. Decisions and Prioritization. Here, the risksand uncertainties identified in Stage 2 are quantified using focused market research and testing in the hands of the ultimate customer. A series of instruments areavailable to help the team with its decisions.

Stage 4. Communication/Implementation. After aGo decision following Stage 3, project teams areassembled for each value proposition and move intoaction. To maximize project success, the best projectleaders (future general managers) are selected, everyteam member is an A player, and each project ischampioned by members of the senior managementteam. For each project, the business opportunity isdescribed fully and communicated; the path forward isclearly articulated.

Stage 5. Value Validation. This is the last stage beforethe new business is launched. Only when it is clear thatthe new business opportunity or model, or the new product opportunity, creates exceptional value for a keycustomer and that success will increase the company s

value, will the new business be launched.

The Value IQ Instrument

TheValue Innovation Process is relatively easy to under-stand and describe. Reinvention of culture is harder. Yetcompanies must assess their reinvention culture thesource of all the force for value innovation. Areas whereimprovement is required must command management sattention. We have developed the Value IQ Instrument(Table 2) to provide management with the outputsrequired.

The Value IQ Instrument is based on The OrganizationalIQ, a highly developed instrument created by David and James Matheson ( 13) and adapted to include the valueinnovation cultural elements. The Value IQ Instrument builds on principles identified by Hamel as key contribu-tors to a vibrant value innovation process ( 4) and provides diagnostic questions for each principle. The ten principles used in the Instrument are: Open Culture Value Creation Passion

Do not let technoloalone assume the

mantle for innovati



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Table 1.Five Stages of the Value Innovation Process

1: Business Intelligence.Objective: Identify new businesses and business models thatcreate extraordinary value for customers.

Tasks Best Practices and Instruments

Forecast the market bycentering on the customer svalue proposition.Market Size Growth Profitability Lifetime value

Generate intellectual capitaloptions. Reinvent core competen-

cies outside scope of current business.

Develop and install anideation process thatencourages unique insightsinto the marketplace.

Exploit networks/alliance partnerships outside thenormal business sphere.

Landscape ideas intoprojects. Leverage current strengths

into new business opportu-nities.

World Event Mapping TrendAnalysis. Search for discontinuities. Search for high rate of

change. Consumer trends Social/cultural Transforming technology New business model

Instruments Value propositions Strategic positioning maps

(10) Value curves ( 8) Portfolio of businesses ( 8) Value IQ Instrument Clayton Christensen litmus

tests (1)

2: Value Modeling and Analysis.Objective: Validate extraordinary value for customers.


Develop models for valuepropositions. Quantify risk and uncer-

tainty.Analyze models and options. Complete value chain

analysis Risk quantification Uncertainty quantification

and forecasting Sensitivity analysisIdentify killer issues. Outside factors

Valuation Techniques Options analysis Market-based valuations,

Discounted Cash Flow, NPV, EVA

Probability assessment and debiasing

Value trackingInstruments Value curves ( 8) Value management systems Tornado diagrams ( 13) Monte Carlo analysis ( 13) Influence diagrams

3: Decisions and Prioritization.Objective: Embrace risk if payoff justifies; allocateresources for success.


Test concepts. Address all killer issues. Conduct focused market

research studies. Set up and conduct beta

testing, pilots and trials.

Find champion at or near CEOlevel.Use subject matter experts.Assess skills gap.

3: Decisions and Prioritization (continued)


Make decision early. Focus on decision quality. Make a clean Go/No-Go

decision.

Address and Manage Risks. Refine concept tests. Manage killer issues.

Commit resources aggres-sively. Avoid underallocation trap. Address make vs. buy

options. Identify innovation leader.

Protect priorities. Address and minimize

cultural resistance. Manage cultural issues.

Instruments Value IQ instrument Decision trees Spider diagrams Portfolio analysis Uncertainty tracking Expected value calculations

(24) Portfolio navigator Systems thinking

4: Communications and Implementation.Objective: Maximize success by leveraging resources.


Drive the Project. Clear direction, measurable

goals and deliverables. Focus and drive innovation. Communicate clearly,

broadly and often. Reward focus and speed. Attack ambiguity. Learn and refine; update

forecasts; track value progress.

Establish authority andaccountability. Project management

vibrancy.

Organize for success. Attract and retain the best.

Knowledge ecology ( 25)Value and uncertainty

tracking

Instruments Stage-Gate KM instruments Web-enabled instruments

Design for Six Sigma

5: Value Validation.Objective: Confirm value based on quantitative results and independent reviews.

Tasks Best Practices and Instruments Prove marketplace

response. Confirm exceptional value

created.

Go/No-Go Decision If a go launch new

business. If a no-go, go back to

Stage 1 or kill.

Conduct external audit of value proposition.

Use subject matter experts.

Instruments Beta test Blind test Tracking value

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Articulating Compelling Business Cases Organizational Learning Processes Catalyze Breakthrough Options External Focus Address the Full Company Value Chain Robust Decisions Incentives Implementing in the Face of Risk and Uncertainty

Each question or statement has an anchored scale based on a typical organization s pattern of behavior and avalue-innovating organization s pattern of behavior.

Representatives from more than 50 IRI member companies established the practical applicability of theValue IQ Instrument at two workshops in 2001 and 2002.These representatives were provided with the Instrumentand asked to rate their company for the five descriptorslisted under each of the ten principles. Instructions onhow to rate their company and then to generate scoreswere provided. For each principle, the lowest possiblescore is 15 and the highest possible score +15.

For each principle, workshop attendees were asked toline up against a wall at a position equivalent to their score for that principle. Photographs of these HumanHistograms were taken to record the distribution of scores for the principle, and each participant was asked to expound on their score. In all cases, illuminating dis-cussions ensued; the power of the Instrument lay in thosediscussions.

Participants found that the Value IQ Instrument provided some surprising insights into their companys ability tovalue-innovate. As a diagnostic instrument, it washelpful in focusing attention on the critical issues and fostering constructive conversation about value innova-tion in the participants organization. The instrument has been shown to be useful in translating value innovationfrom an exciting concept to a practical reality.

A successor ROR subcommittee took this Instrument,applied more rigorous academic standards to it, and tested it at scale for statistical validity.Readers interested in using the Instrument for academically valid measure-ments should consult Assessing Your OrganizationsPotential for Value Innovation, page 37, this issue ( 23).

Applying the Value IQ Instrument

How can CEOs and CTOs re-focus their thinking? Thereis no single prescription that fits all situations, but thereare a few crucial points. Fundamentally, it is important toremember that, Value innovation can occur with, or without, technology innovation in any organization and at any time in a sustainable manner with the proper process ( 7 ).

This means that CTOs should conceive of their role notmerely as the steward of the companys technology, butrather as the steward of one of several critical sources for value innovation. Their role is akin to a marriage broker,trying to find the right match between business opportu-nity and technology capability. Sometimes this marriage

may be driven by technology; sometimes the marriagewill be driven by business opportunity. Because of thenatural biases in a technology organization for theformer, the CTO should be especially vigilant to find and support marriages that start with a business opportunitycapable of delivering significant value to the mostimportant customer.

CEOs must encourage and support CTOs in thisre-defined role. The CEO should also encourage valueinnovation from all parts of the organization. Do not lettechnology alone assume the mantle for innovation;rather, let it be in service of value innovation from

whatever source.The Value Innovation Process Model and Value IQInstrument provide a rich framework for askingquestions about your organization and understanding the practical gap between value innovation and the organi-zational realities that prevent its realization. Use theseinstruments to diagnose your situationand identify direc-tions for improvement. For example: Use the IQ instrument in the finance, production,research, and sales organizations separately. Encouragefacilitators to focus on individuals rationale for ratings.

Compare IQ ratings among the various organizationsfor subculture issues. Identify the five most frequently cited barriers to valueinnovation. Identify the five most frequently cited value innovator strengths. Use the model to structure cross-functional teamscapable of implementing the models processes.

Text continues p. 35

An organizationsability to

value-innovate islargely influenced its culture.



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Table 2. The Value IQ Instrument

The Value Innovation Quotient or Value IQ is based on a concept introduced by David and Jim Matheson. Intheir book, The Smart Organization (13), they introduced a self-assessment instrument called the Organiza-tional IQ Test. They provide the content, a format, a methodology, and an interpretation scheme that is very

powerful.In developing the Value IQ Instrument, we referred to, and were stimulated by, the many papers and booksauthored by W. Chan Kim, Rene e Mauborgne, C. K. Prahalad, Gary Hamel, and Constantinos Markides. Weused the Value Innovation Process Model (described earlier in this article) as a starting point for the creation of the ten principles and the five questions or statements listed under each one.

We believe that this sort of self-assessment instrument is the best way to communicate value innovation best practices. Unlike the Mathesons carefully researched and developed Organizational IQ, the Value IQ is only inits infancy. It is being developed so that any organization/company can determine where it is positioned todayand identify those areas where cultural and/or process changes are required to increase success rates in cata-lyzing significant increases in enterprise value.

The next steps in developing the Value IQ Instrument are:

1. Have interviewers use the instrument within their own company and recommend changes based on the inputsreceived. (We recommend this be carried out before interviewing the target companies it will familiarize youwith the Instrument).

2. Refine the instrument based on the output from the interviews carried out with target companies.

Instructions: For each principle below, read the question or statement and review the descriptors provided for the conventional ( 3) and value innovation (+3) organizations. Rate your company using these descriptors on aseven-point scale ( 3, 2, 1, 0, +1, +2, +3). For example, the first descriptor under Open Culture is, Howempowered are people to question the value of activities? If the descriptor for the conventional organizationdescribes your company, then insert a 3 in the score column on the right. If your company is not described byeitherof the twodescriptors, then judge where it falls on theseven-point scale andinsert that number in thescore.When youhave completedscoring for thefive descriptors forOpen Culture, sumall thepositive numbers, repeatthe process for the negative numbers and enter these into the respective columns on a scoresheet. Add the total positive and total negative scores and insert into a Total Sum column, e.g., if the total positive score is +6 and thetotal negative score is 4, enter 2 into the Total Sum column. (The lowest and highest scores for each principleare 15 and +15 respectively.)

Repeat this process for the remaining nine principles.

Initially it will not be possible to identify where your company scores relative to a population of companies;however, a successor ROR subcommittee plans to develop a tool and build a database so that it will be possiblein the future ( 23).

Open Culture

Conventional Organization (3) Value Innovation Organization (+3) Score

A. How empowered arepeople to question thevalue of activities?

People are discouraged from questioning thevalue of a task. They fear or have experi-enced unresponsiveness or backlash.

Inquiring into how the task creates value is alegitimate way to question. Activities notadding value are modified or stopped.

B. How many alterna-tives are consideredin decision-making?How are perspectivesintegrated intodecisions?

Limited options are evaluated simulta-neously. Projects progress sequentially.Preferred alternative often dominated by politics. Few perspectives are represented.Additional ideas are discounted and rarelylistened to.

People are expected to explore alternativestrategies and plans. Detailed plans aredeveloped only for the selected strategy.Different perspectives are incorporated and diversity of thought is encouraged.The organization has developed a listeningculture.

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Conventional Organization ( 3) Value Innovation Organization (+3) Score

C. How open is theorganization toopportunities beyondthe current businessmodel?

The focus is on the improvement of the core business. Non-core businesses aredivested.

Unusual opportunities are approached with aHow can we ? rather than a Thiswon t work attitude. Organization isflexible enough to try, and fail often and honorably. The company encourages revo-

lutionaries.D. How easy is it to get

information?People must work hard to get information.

They feel out of the loop on critical issues.Information is used as a source of personal power, or, is kept in business silos.

People obtain information readily. There arefew secrets and channels of informationflow are abundant. People are encouraged and trusted to seek and use informationappropriately.

E. How is knowledgemanaged?

There is no formal approach. Informal practices exist leading to errant assump-tions or misinformation.

There are numerous communities of practiceand formal instruments to retrieve, sortand convey information.

Value Creation Passion


A. What is the drivingfocus within thecompany?

People are focused on achieving the businessgoals defined by their supervisor, usingthe skill sets and experience learned during their career. They are guided by thecompany s mission, vision and strategy.

People focus on their own jobs and lack anunderstanding of how the organizationultimately creates and captures value.

People are confident that they are contribut-ing to a cause that will make a significantdifference in the lives of customers and colleagues. People have the courage toleave some part of themselves behind and strike off for parts unknown and areencouraged to do so. There is a passionwithin the company to continuouslyreinvent itself. People know who thecustomers are and how the companycaptures value by serving them

B. How does thecompany carry out itsbusiness intelligence?

The company relies on sales and marketingto define the needs of existing customersusing conventional instruments (marketresearch, voice of the customer). Thecompany places value in competitiveanalysis and benchmarks its performanceagainst its competitors. The companyfocuses on customer segmentation, cus-tomization and retention.

People are encouraged to interface with non-traditional customers to generate or testnew models, concepts and ideas that could lead to new businesses, or entirely newways of doing business. The companyseeks to render the competition irrelevant by generating market space where there isno competition. The company searches for key value commodities that unlock themass market even if some existingcustomers will be lost.

C. How do people withinthe company think about shareholdervalue?

The company annual report opens with thewords, Our company is focused onincreasing shareholder value by listeningto our customers needs. There aregenuine efforts to improve service levels.The resulting increase in shareholder valueis incremental.

Everybody in the company is encouraged tochallenge the conventional wisdom and define ways to create major improvementsin enterprise value. The focus is onincreasing enterprise value by severalorders of magnitude.

D. Look for formalmeasures of valuecreation.

There are no measures of value creation, or,conversely, there are so many, people areconfused about what really is important

There are a few common measures of valuecreation that are used as the basis of decision-making and compensation. All people know the importance of value inno-vation and are constantly searching to provide exceptional value to the buyer.

E. Are peopleempowered toquestion activitiesthey do not believecreate value?

People feel discouraged from questioning thevalue of a task. There is a fear of politicalrepercussions and even loss of a job if onesteps too far out of the box.

People are confident in giving exampleswhere the conventional has been chal-lenged. Asking how the task creates valueis a legitimate way to question activities.Tasks not creating value are modified or abandoned. The company has manyValue Innovation Heroes.



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Articulating Compelling Business Cases


A. Examine the role of technologists instrategic businessplanning.

Technologists are responsible for definingimprovements in products or processes.Discounted cash flow calculations permita credible return calculation to justify

costs.

Technologists play a key role in usinganalysis and probabilistic techniques to permit company executives to manageinvestments in high-risk, high-reward

ventures.B. Examine reports

from technologyorganizations tocorporate.

Reports emphasize control of costs and achievement of major milestones.Emphasis is on the reduction of productioncosts or incremental improvements of current products.

Reports emphasize progress on the reductionof uncertainty in high-payoff projects.There is a quantitative link between uncer-tainty reduction and economic value to both the market to be served and to the firm.

C. Examine the logic of project justification.

Credibility of the logic is tied to clear returnsfrom incremental cost reductions or increased sales and profits from current product lines.

Justification logic provides an estimate of benefits to the served market. Risks and uncertainties in the logic are highly rated and treated quantitatively. These values inthe served market are then translated intoshareholder value creation.

D. Ask a complexquestion and observe

how it is answered.

Answers reflect judgments based on gutfeelings, experience or trusted company

norms. In some areas, responses are vagueor evasive.

The answer represents the broad perspectiveon the question and its full complexity.

The answer reflects the devil in the details.Gaps in logic or uncertainty are high-lighted and estimates of probability rangesare cited.

E. Examine the logicalchain connectingproject success toshareholder value.

Justification seeks to demonstrate marginalimpact on sales and/or gross margin.Logic assumes all sales and other market-facing channels operate as usual.

Justification identifies every logical step tocreation of value in the market. Allassumptions are documented and justified.All risk and uncertainties are estimated and treated qualitatively. Consequentialshareholder values are then calculated in arisk-discounted range.

Organizational Learning Processes


A. Does the companyencourage experi-mentation?

The company allows industry conditions todictate the realm of what is possible, probable and profitable.

Management starts the planning process byconsidering existing assets and capabilities.

The company challenges the inevitability of industry conditions. Management encour-ages people to consider starting anew inthe continuous search for value creation.

B. Look for formalchannels of commu-nication and ask people how muchthey use them .

The few channels that exist are viewed as notrelevant to creating value. Informalchannels are discouraged.

Stories exist about relatively modest changesor about failed attempts to change. Somestories convey pride in being unchanged.

Channels are abundant and not restricted.People are confident that the systems are amajor part of the company s success. Col-leagues are forthcoming and helpful.Informal networks and communities of practice abound.

There are many stories of successfulchanges, including those that created sig-nificant new value.

C. How effectively doesthe companyimplement a newproduct, service, orbusiness?

The company is cautious about the newlaunch. Each new piece of information isscrutinized and any bad news increases thelevel of caution.

Plans are directed from the top. Criticalinformation is not shared with all membersof the launch team.

Implementation plans are well defined and communicated to everybody involved. Nodetails are left to chance. Speed, best practices and a highly motivated team areused to implement the plan. Everybody believes the venture will be successful and will do whatever it takes to assure success.

D. Observe how peoplereact to new ideas,criticisms.

People are inflexible. They are unable tounderstand the new idea and regard it asdangerous and threatening. It is rejected with prejudice. There is little experimenta-tion with new approaches or organizationalstructures. Messengers generally are shot.

People are excited about the prospect of learning and growing. They are encour-aged to explore new ideas and find their value using informal small groups to helpthem.

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E. Look for formal orinformal activities tosearch for newapproaches, practicesand ideas.

The company lacks such activities and dis-courages people who would use thisapproach.

People are encouraged to seek opportunitiesfor continuous improvement.

People are given a percentage of their 40-hour work week to pursue new ideasand funding is available to support such

activities.

Catalyze Breakthrough Options


A. Examine the number,nature, and breadthof drivers used inidea generation.

Innovators generate new ideas on the basis of competitor intelligence, cost reductiontargets, perceived needs of existingcustomers. Focus is generally internal toexisting company or industry.

Innovators seek foresight to exploit externaltrends and discontinuities, seek to overturnexisting rules of the game, seek to createand satisfy new customer needs, leveragecompetencies in related domains. Innova-tors take a broad value chain perspectivewhen searching for new opportunities.

B. Examine theprocesses used togenerate new ideasand opportunities.

Open brainstorming, creative inspiration, and serendipity are the primary sources of newideas/opportunities. Most ideas come fromnarrow group of experienced staff.Generally a strong technology-drivenapproach.

Advanced creativity techniques are used tosystematically search new opportunityspaces, inside and outside existing busi-nesses. Innovators disrupt existingmindsets through experiential learning,scenario learning. Cross-disciplinarynetworks are employed to enhancediversity of thought and experience.

C. Examine theapproaches used toevaluate and valuenew ideas and oppor-tunities.

Ideas are evaluated on the basis of NPV or ROI using discounted cash flowapproaches. Uncertainty is generallyaccounted for by employing expected long-term values for model variables indeterministic models.

Breakthrough ideas are valued using a realoptions approach, or a probabilistic DCFapproach is used to determine a probability-weighted distribution of potential outcomes.

D. Examine the focusand nature of risk managementpractices.

Only technical and market uncertainty arerecognized. Processes to capture and sharelearnings are primitive. Rigid development processes don t allow for changes to the plan on the basis of organizationallearning. Transition to an operating unitoften occurs early in the life of the idea.

Organizational and resource uncertainty arerecognized and managed together withtechnical and market uncertainty.Processes and plans are flexible and allowfor changes on the basis of marketfeedback. Migration paths to envisioned futures are frequently reworked tomaximize learning and manage exposure.Partnerships are considered as an instru-ment for learning new competencies.

E. Examine the cultureand norms of theorganization.

In the existing culture, most ideas are intro-duced by experienced staff or managers.People are rewarded for behaving and thinking like their managers. Failure is penalized or avoided. Human resourcesare owned by business units and generalmanagers. Plans are made on an annual basis. The organization is risk-averse. Theculture is closed.

There is a significant effort to involvediverse voices from the geographic and organizational fringes in idea generation.People feel free to challenge the statusquo. People are risk-tolerant and aim tofail fast and cheap, maximizing and sharing learning broadly. Talent is freer tomove to new projects and planning isevergreen. The culture is open.

External Focus


A. Extent of experienceand perspective-expanding activitiesoutside the organiza-tion.

People focus on their existing jobs. Thecompany discourages external activitiesand budgets are restrictive.

People are expected to participate in activi-ties that broaden perspective. This isreflected in a budget for such activitiesand an influx of new ideas and suggested speakers.



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B. Knowledge of thebusiness environ-ment.

People understand their customers and business impact of their work but only inconventional ways. Competition is narrowlydefined as that within the same industry.

People have a broad view of forces changingthe industry, customers and competition.The competition becomes redefined withinthe context of future business opportunity.

C. Process of planningand decision-making.

Assumptions are built based on current business success and industry orthodoxies.

Assumptions are few; they are challenged and grounded in solid understanding of external forces. Planning processconsiders the convergence of trends.

D. Process of obtainingbusiness intelligence.

The company relies on sales and marketingusing conventional market research tech-niques. Competitive analysis is doneroutinely but usually focused on perceived needs of current customers.

People are encouraged to interface with non-traditional customers and to exploreemerging technologies. Business intelli-gence extends beyond market research toinnovative practices and technical innova-tion.

E. Measures of successwith external focus.

No measures. New ideas believed to comefrom within. Not invented here attitude.

Pipeline of new ideas. Unique unconven-tional partnerships.

Address the Full Company Value Chain


A. How is your companyaligned to supportmajor innovations?

Company is divided on the basis of marketsor geographies served. Functional areasare typically broken out within each business unit, nurturing a silo mentality.

Company is organized in teams whichinclude all the competencies required toachieve the overall goal.

B. Examine thestructure of technol-ogy participation incompany strategicdecisions.

Technologists participate in or even chair cross-functional teams to explore issues of product or process improvement.

Technologists are involved in formulatingoptions to improve market-facing valuechain elements (i.e., sales, distribution,service, etc.) as well as product-intensiveelements.

C. Examine the scope of a proposal for majorbusiness innovations.

Proposal focuses on cost and feature charac-teristics of a new product or service.Assumes marketing and distribution

channels will deliver.

Proposal examines and optimizes everyelement of the value chain and challengesall business-as-usual options.

D. Look for mechanismsto engage peoplebroadly in discus-sions focused onbusiness innovations.

Value chain elements innovate primarilywithin stove pipes. Cross-functionalteams are formed but primarily to build buy-in for plans drafted within stove- pipes. Respect for turf.

Regularly, every element of the value chainis reviewed for possible transforminginnovation. Cross-functional teams meet atthe front end of the brainstorming processto provide options for dramatic change.

E. Question managersabout interfaces con-necting elements of the value chain.

Managers respond with interface definitionsthat are clearly traditional. The responsesdo not reflect much concern with inter-faces but more compliance with companycourtesies.

All managers are examining interfacesamong and between value chain elementsas a high-priority concern. The expectationis they are dynamic and require substantialthought and negotiation.

Robust Decisions


A. Does the companylower risk of experi-mentation eventhough the bets beingmade are majordepartures from thenorm?

The company has a majority of managerswho believe it is better to be a fastfollower than a foolhardy risk taker.There s a minority who argue that tocapture new markets a company must be bold. The company makes many incre-mental low risk bets and a few major bet the farm bets.

Failure is seen as a weakness and oftenrewarded with demotions or termination.The bet the farm bets generally fail.

The company accepts the inevitable uncer-tainty around new business opportunities.It seeks to put prototypes in front of thecustomer as quickly as possible with theleast investment. Speed is everything. If the customer reaction is lukewarm, the project is shelved to release funds for thenext promising opportunity. Failure is rec-ognized as a natural consequence of this process and is rewarded just like success.(For every success there are many morefailures.)

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B. Does the companypromote division anddifferentiation?

Divisions are encouraged to be autonomous.Cannibalization of existing products isregarded as a problem, particularly bymanufacturing. Growth at market rates isaccepted and rewarded.

The company recognizes that cellular division drives innovation. It encouragesnew thinking, new business models and provides more opportunities for the entre- preneurial thinkers in the organization. By

keeping business units small, generalmanagers are much closer to the customer,and power is dispersed across a muchlarger cross section.

C. Ask how a recentstrategic decision wasmade.

Decisions are made without much consciouschoice. If there is a choice, the reasons for it are often unclear and undocumented.People are either unable to identify thetrue decision maker or they admit the realdecision process is at variance with thewritten process.

There is a systematic decision-making process in place which focuses on creatingvalue using best value innovation processes. People can explain that it was aconscious decision and they can point todocumentation. They can explain the process.

D. How does thecompany prioritize?

A prioritization process is defined and followed religiously. Financial metrics arerequired for all projects even in the

instances where the effort to generate an NPV is not worth the effort. Rigid adherence to the process fosters incremen-talism.

A prioritization process is defined and isfollowed. Flexibility is built into the process and while metrics are used, they

are only a part of the equation. It is recog-nized that flexibility is a requirement to bea value innovator.

E. The company has acontinuous value vali-dation process.

The company relies heavily on its sales forceto communicate the results. A commission program incents the sales force and therefore it has little interest in assuringthe new venture s success. It takes timeand effort that are not rewarded. Thecompany accepts that it s going to take along time before the new business or offering is successful.

The whole team is a part of the value valida-tion process. The process is well- defined and communicated to everybody. Objec-tions are regarded as an opportunity toimprove the business or offering. Incre-mental results are not tolerated and if sustained the plug will be pulled on thenew venture. After all, there s another oneto replace this one.

IncentivesConventional Organization ( 3) Value Innovation Organization (+3) Score

A. Reward systems. One size fits all. Yearly award ceremony. Flexible reward system that reflects differentmotivations. Appropriate rewards given ina timely manner. Customization encouraged.

B. Recognition for con-tributions to commu-nication channels orhelping others.

Contributions are limited and opportunitiesto contribute are few.

People regularly explain their recent contributions and feel they have been rewarded for them formally or informally.

C. Compensation,options and bonussystems.

Pay scales are based on job levels and HR procedures/rules. They are rigidly adhered to. Options and bonuses are reserved for senior management. Payouts are tied to

performance with little focus on value.

Pay is tied to performance with an over-riding emphasis on value. Entrepreneursare treated like heroes and are paid verywell (well above the norms). Bonuses and

options are awarded at all levels within thecompany. Under-water options arereplaced quickly.

D. Career path opportu-nities.

Promotions are based on experience and years in a position.

Promotions are based on demonstrated ability to achieve exceptional results.

E. What activities arerewarded?

Being a good employee (never late, do theright thing) and fitting in with the accepted way of doing things within the corpora-tion.

Good no-go decisions. Those that wereknown to be much higher risk and wereterminated effectively, or were successfuland generated exceptional value.



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The model emphasizes iteration and learning. Person-ally monitor improvements in the business case and risk management after each iteration.

Reuse the Value IQ Instrument to measure evolutionof the value innovation culture.

CTOs should be proactive leaders because this modelrequires creativity, discipline and analysis for success.They and their staff have natural aptitudes in these areas.

Our goal in this project was to close a perceived gap between broadly held (and espoused) beliefs about theimportance of innovation and the actual behavior of organizations. The policies, procedures and behaviorsthat foster value innovation can be measured and managed. Technologists can and should play a lead rolefor the enterprise in spite of the fact that success willrequire active engagement of the entire firm. Recently,the Council on Competitiveness published summaryfindings and conclusions from its year-long NationalInnovation Initiative ( 26 ). The Council defined

America s taskas follows: For the past 25 years, we haveoptimized our organizations for efficiency and quality.Over the next century we must optimize our entiresociety for innovation.

Acknowledgement

During the three years the subcommittee was inexistence, meetings were attended by the following rep-resentatives of IRI Member companies and IRI guests:

Ross Armbrecht (Systech), David Austgen (Royal DutchShell), AlanAyers(Energizer), Andrew Brown(Delphi),Ronald B. Campbell, Jr. (Emeritus, Xerox), Paul Croce(FM Global), Tom Dillon (SAIC), Ryan Dirkx (AtofinaChemicals), Dana Eagles (Albany International),Bertrand Fillon (Pechiney), Alan Fusfeld (The Fusfeld Group), Marc Gaddis (Schwan s Sales Enterprises),Susan Gaud (Kraft Foods), Nina Goodrich (Amcor PET), Larry Gollob (Georgia Pacific), Ed Hahn (AlbanyInternational), David Hume (Motorola), Kati Fritz Jung(Ralston Purina), Shaun Kennedy (EcoLab), Pertti Kark-

Implementing In the Face of Risk and Uncertainty


A. Review businessplans, how they aremade and imple-mented.

Plans focus on a negotiated or widelyaccepted set of assumptions, often conser-vative estimates. Often, these baselineassumptions reflect a wishful, sometimes

incorrect, belief about the future.

Plans focus on the major elements of risk or sources of uncertainty. Plans deal with both risk and uncertainty quantitativelyusing probability assessments. Uncertain-

ties, particularly marketplace uncertain-ties, are clear and primary focal points inthe plans.

B. Examine the processof setting budgets andestimating the payoff.

Budgets, schedules and primary results arerigid. There is a culture of sandbagging to manage expectations for success.

There is an open market for capital and it isclear that costs and schedules to addressmajor sources of uncertainty cannot be precisely predicted. Budgeting is flexiblewith managers accountable for early iden-tification of budget and schedule problems.

C. Create an openmarket for new ideasby monitoring com-mitments and

accountability.

All information relevant to a project becomesan implied commitment. This creates amajor barrier to candor and innovation.

Commitments and documentation are linked to achievable goals and managers are notheld accountable for uncertainties clearlyout of their control. However, managers

are accountable to accurately assesscurrent uncertainties and keep entire orga-nization informed.

D. Lower the personalrisk of experimenta-tion.

Managers and individual members of a teamare rewarded to confirm the plan.Departures from plan are regarded asfailures.

Plans build in margins for experimentation. Negative results are not scored as failures but as valuable information.

E. Examine the projectcontrol system forflexibility and trueinsight.

The system maintains discipline by definingmilestones and schedules. Rapid recon-figuration of objectives is difficult or impossible.

Project control systems give managementinsight into progress without rigidlylocking in milestones. Earned value isscored in a manner that reflects thenarrowing of uncertainties and unforeseen benefits. Excellence in implementationrequires a disciplined formal system suchas a stage-gate system.

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kainen (Nokia), Gary Kirker (ExxonMobil), Richard Lampman (Hewlett-Packard), Dick Lee (Emeritus,Value Innovations, Inc.), Joe Mantesse (Delphi),Michael Martin (Sunoco Products Company), WayneMiller (Sunoco), David Pellicionne (Armstrong World Industries), Terry Say (Vinings Industries), Jim Scinta(ConocoPhil l ips) , Bruce Scott , Pat Surprenant(Schwan s Sales Enterprises), Michael Silverman

(KBR), Gene Zeffren (Unilever). David Matheson(SmartOrg) was recruited to provide subject matter expertise and bring focus to our efforts. Many others par-ticipated in the Incredible Human Histogram sessionscarried out using the Value IQ Instrument at the IRI FallMeeting in San Jose, California in October 2001 and theWinter ROR Meeting in Ft. Lauderdale, Florida, inJanuary 2002.

References1. Christensen, Clayton. The Innovator s Dilemma. Harvard Business School Press, 1997.2. Christensen, Clayton. The Innovator s Solution: Creating and Sustaining Successful Growth. Harvard Business School Press, 2003.3. Hamel, Gary. Strategy as Revolution. Harvard Business Review, July August 1996, pp. 69 82.4. Hamel, Gary. Reinvent Your Company 10 Rules for making billion-dollar ideas bubble up from below. Fortune, June 12, 2000, pp. 98 118.5. Hamel, Gary. Leading the Revolution. Plume,a unit of thePenguinPublishing Group, 2002.6. Prahalad C. K., and Hamel, Gary. Competing for the Future.Harvard Business School Press, 1996.7. Kim, W. Chan and Mauborgne, Rene e. Strategy, Value Innova-tion, and the Knowledge Economy. Sloan Management Review,Spring 1999, Vol. 40, pp. 41 54.8. Kim, W. Chan and Mauborgne, Rene e. Value Innovation: TheStrategic Logic of High Growth. Harvard Business Review, Jan. Feb. 1997, pp 103 112.9. Kim, W. Chan and Mauborgne, Rene e. Charting Your

Company s Future. Harvard Business Review, June 2002, pp.77 83.10. Markides, Constantinos. Strategic Innovation. Sloan Manage-ment Review, Vol. 38, Spring 1997, pp. 9 23.11. Markides, Constantinos. All the Right Moves. Harvard BusinessSchool Press, 1999.12. Brian-Quinn, James. Intelligent Enterprise. Free Press, 1992.13. Matheson, David and Matheson, James. The Smart Organiza-tion. Harvard Business School Press, 1998.14. Prahalad, C. K. and Ramaswamy, Venkat. The FutureCompetition Co-creating Unique Value with Customers. Harvard

Business School Press, 2004.15. Leifer, Richard; McDermott, Christopher M.; O Connor, GinaC.; Peters, Lois S.;Rice, Mark; andVeryzer,Robert W. Radical Inno-vation: How Mature Companies Can Outsmart Upstarts. Harvard Business School Press, 2000.16. Armbrecht,F. M.Ross, Jr.and Whiteley,Roger L. IndustrialResearchInstitute s 6th Annual R&D Leaderboard. Research Technology Man-agement, Nov. Dec.2004, pp. 20 24.17. Nuttall, Chris. Branson to take VirginMobile public. Financial Times, July 1, 2004, p. 20.18. Ayers, Alan. Industria l Research Institute s R&D TrendsForecast for 2005. Research Technology Management, Jan. Feb.2005, pp. 18 22.19. Elkus, Richard J., Jr. Personal Communication, May, 2001.20. http://www.parc.xerox.com/ 21 . Cutler, Gale. Innovat ion Mentoring at Whir lpool . Research Technology Management, Nov. Dec. 2003, pp. 57 58.Family Studio, Clothes Vitalizing System and Gladiator GarageWorks are trade names of Whirlpool Corporation.22. Fettig, Jeff. Business Week On-Line, July 30, 2004. http:// www.businessweek.com/bwdaily/dnflash/jul2004/nf200407305925_PG1_db053.htm23. Aiman-Smith, Lynda; Goodrich, Nina; Roberts, David; Scinta,James. Assessing Your Organization s Potential for Value Innova-tion. Research Technology Management, March April 2005, pp.00 00.24. Boer, F. Peter. The Valuation of Technology Business and Financial Issues in R&D. Wiley, 1999.25. Brown, John Seeley. On Creativity, Innovation and Renewal.Jossey-Bass, 2002, Chapter 8.26. Clough, G. Wayne and Palmisano, Samuel J. Innovate America . National Innovation Initiative Final Report, Council on Competitive-ness, Dec. 15, 2004. http://www.compete.org/pdf/NII_final_report.pdf

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