How Innovation Really Works

U.S. Companies are failing at innovation!

That bold statement was at the top of a letter I received, and it got my attention. I started to read about the reasons many organizations are struggling to innovate. It led me to the research by Anne Marie Knott, PhD. She’s a Professor of Strategy at the Olin Business School of Washington University. She was previously an Assistant Professor at the Wharton School. Her research is focused on innovation ranging from entrepreneurship to large-scale R&D. Her new book is How Innovation Really Works: Using the Trillion-Dollar R&D Fix to Drive Growth .

I followed up with her to talk about innovation, R&D, and what can be done about the current problem.

 

Companies Have Become Worse at Innovation

You say that companies have become worse at innovation despite the fact that it’s more important than ever. Why is this?

While companies have become worse at innovation, I don’t actually argue that innovation is more important than ever. It has always been the chief source of companies’ as well as the economy’s growth. I think the reason if feels innovation is more important is that companies’ R&D is only 1/3 as productive as it was in the past. Therefore, they need to do three times as much to generate the growth they used to enjoy–actually more than three times because each additional R&D dollar is less productive.

 

Research: Companies’ R&D is only 1/3 as productive as it was in the past.

 

What’s RQ?  

The catchy answer is that RQTM (short for research quotient) is the company equivalent of individual IQ—it’s how smart companies are.  The precise answer is that RQ is the percentage increase in revenues a company gets from a 1% increase in R&D investment.  So companies that have high RQs derive more revenue, profits and market value per dollar of R&D than low RQ companies.

 

How was it developed?

I didn’t set out to develop RQ (though I knew I needed such a measure from my time in industry).  I actually stumbled upon it while trying to solve an academic puzzle, in much the same way that Percy Spencer stumbled on microwave cooking while working on combat radar systems for Raytheon.

Once I discovered RQ, however, I went through a similar process companies go through with their R&D.  I worked out the theory to characterize how it related to growth; I tested alternative versions; then I validated that the current version matches theoretical predictions using 47 years of data across the full spectrum of US companies conducting R&D.

 

What are its implications?

RQ has a number of implications.  First, by tracking their RQ over time, companies can determine whether their R&D capability is improving or deteriorating.  If companies could have done this 30 years ago, it’s likely R&D capability wouldn’t have deteriorated so much.  Second, because RQ is derived from economic theory, companies can use RQ to determine how much an additional dollar of R&D should increase revenues, profits and market value—this helps them set their R&D budgets.  Third, RQ provides investors a way to value R&D, so now even Warren Buffet can invest in technology firms.  More importantly, when investors know how to value R&D, they won’t pressure companies to cut R&D in pursuit of current profits

 

Why Most Companies Fail at R&D

Why do most companies fail at R&D?
“Failing” probably applies more to projects than to entire R&D systems (which is where RQ applies), but if you’re asking why companies have gotten worse at R&D, I have a few thoughts.  I’m going outside the range of my evidence with this answer, but I believe the demise began with the “financial management” trend in the 1980s.  This was the idea that any company could be managed by anyone simply by controlling “the numbers” (think T. Boone Pickens and Carl Icahn). “The numbers” meant cost reduction in the case of operations and rank ordering investments by ROI (return on investment) in the case of new investment.  R&D can’t be managed that way.  A good R&D system has many longshots.  On average Industrial Research Institute (IRI) member companies report that it takes 125 funded projects to achieve a single commercial success.  The problem is that no “number” can identify the single success up front.  Companies have to carry portfolios of projects with the hope that that the “1 in 125” is in there.  If you throw out all the projects whose ROI can’t be quantified with confidence, you throw out all the lasers, geosynchronous satellites, and other exciting things we developed at Hughes.

 

“The most widely held misconception is that R&D should be more relevant.” -Anne Marie Knott

 

Your book walks through several misconceptions about innovation. Let’s talk about just one.

The most widely held misconception (80% of consultants and 90% of investment analysts/managers) is that R&D should be more relevant. This seems completely plausible.  After all, who wants to be “irrelevant.” The problem with that logic is best captured by the Steve Jobs quote, “A lot of times, people don’t know what they want until you show it to them.”  He’s entirely correct, as the iPod, iPad and most especially iPhone attest.  Work done by researchers at Duke supports his intuition.  Ashish Arora, Wes Cohen and John Walsh found that while customers are the most prevalent source of external ideas, those ideas have the lowest ability to increase sales.

 

“People don’t know what they want until you show it to them.” -Steve Jobs

 

Companies need more radical innovation. Would you share some context about this misconception?

Fuel a Lifelong Love Affair with Your Customers

The Transformational Consumer

It’s time to rethink what you sell. And your customers. Don’t forget to rethink your marketing, your competition. And, don’t forget your teams.

That’s the message from Tara-Nicholle Nelson, author of The Transformational Consumer: Fuel a Lifelong Love Affair with Customers by Helping Them Get Healthier, Wealthier and Wiser. She is the founder of Transformational Consumer Insights and the former VP of Marketing for MyFitnessPal, where she led the team that grew the platform to over 100 million customers.

 


“The best..measure of innovation is change in human behavior.” -Stuart Butterfield

 

The Growing Demographic

What are Transformational Consumers? How is this changing company strategy?

Transformational Consumers are a massive and growing group of people who see all of life as a series of projects to change their own behavior for the healthier, wealthier and wiser. They know that this behavior change will be hard, but they believe with all their hearts that it’s possible, and they believe that they can change anything about their lives if they can master their own habits and behavior.

So they are constantly on the lookout for products, services and content they think might help. They are early adopters, and they tend to have great influence on the buying behavior of the people around them.

I like to joke that if you have ever been vegan and paleo at different times in your life, you’re probably a Transformational Consumer. Most entrepreneurs are Transformational Consumers. The head of product for Airbnb once told me that they see both their hosts and their guests as Transformational Consumers.

One important takeaway here is that this is not a niche: over 50% of US adult customers we surveyed said that they use digital or real world products several times a week, or more often, in an effort to reach their healthy, wealthy, wise goals.

The power of this framework is that it offers businesses a lens through which to more powerfully understand the real-world journeys their customers are taking as they aspire to live better lives. And that shows you how to increase customer engagement, brand love, loyalty and repeat business, as well as reach new audiences. Once you understand your real-life customers’ real-world journeys, that surfaces limitless opportunities to innovate new products, features, services and even marketing messages and content that remove resistance points and trigger progress along customers’ paths.

 

Rethink Your Customer

How do companies go about rethinking their customer?

Your customers are not just the people who currently buy your product or your current social media followers. I urge companies to shift to the point of view that their customers are all the people out there who are struggling with the high-level, human problems that the company exists to solve.

Go out into the real world, do customer research, watch how people operate in real life. You can even start this process by just doing some online listening on the blogs and social media sites (not your owned channels) that your audiences frequent online (reddit, etc.).

Your goal is to understand and, ideally, visually map out your customers’ real-world journeys of going from having the problem you exist to solve to no longer having that problem. You need to know what stages they go through along their journey, what gets them stuck and unstuck, where they go to do research when they need to know or find something and what words and phrases they naturally use as they try to reach their goals.

 

 

Remove Resistance

Tell us more about resistance. How do you remove it?

Think about it: Anytime you try to level-up your life, whether it’s trying to reach a weight loss goal, to work out more, or to start a side business or meditate every day, there’s a force that pops up in all of us that Steven Pressfield and Freud both call Resistance. It’s the same force that creates procrastination, causes us to get distracted or to sabotage ourselves. It’s generally the force that makes it really, really hard to make behavior changes stick.

In your customers’ journeys toward their healthy, wealthy and wise goals, Resistance includes any sort of quit point, obstacle, friction or common point of failure. These are the things that get people stuck. There are tons of spiritual, emotional, psychological and neurological root causes of Resistance, but suffice it to say that people often know what changes they need to make; they just find it very difficult to actually make them.
This creates a major opportunity for companies to win the love of the people they serve by focusing on removing Resistance.

You can remove Resistance from your customers’ journeys by creating features and products that take friction out of their path, by reducing the difficulty or cost or number of brain cycles they have to go through to create the habits or changes they want, or by inserting progress triggers into their real-world journey.

For example, at MyFitnessPal, we learned during customer research that one of the biggest obstacles (points of Resistance) that people experience along their journey from living an unhealthy life to living a healthy one is the cost of eating healthy food and the difficulty and time involved in cooking healthfully. So every team in the company explored how they might help remove those Resistance points. When it came to content, for example, we created all sorts of recipes and meal plans for feeding a family healthy, home-cooked food on the same budget we learned people were spending on a fast food family dinner ($20). We also created all sorts of video, recipe and meal-planning content to reduce the time and increase the ease and deliciousness of our customers’ home cooked meals.

 


“If we can keep our competitors focused on us while we stay focused on the customer, ultimately we’ll turn out all right.” -Jeff Bezos

 

Rethink the Competition

The First Step in Solving Your Biggest Problems

 

This is a guest post by Mark Miller. Mark is the best-selling author of six books, an in-demand speaker, and the Vice President of High-Performance Leadership at Chick-Fil-A. His latest book, Leaders Made Here: Building a Leadership Culture, outlines a clear and replicable approach to creating the leadership bench every organization needs.

 

“A journey of a thousand miles begins with a single step.” -Lao Tzu

 

Take the First Step

I’m guessing much of your life and leadership is devoted to problem-solving.

If you aren’t trying to fix the problems you currently face, you are probably attempting to anticipate, and proactively respond to, problems on the horizon. Maybe the problem you are trying to address is how to continue to fuel your current success – a good problem to have, but a problem nonetheless. Problem-solving is a part of a leader’s ever-present reality.

I’ve been searching for years for ways to make my investment in this critical activity more fruitful. Today I’ll share some practices that have helped make our team’s problem-solving efforts more effective.

Let’s begin our deep dive on the topic with a mistake I’ve personally witnessed thousands of times. Before I share it, brace yourself for a blinding flash of the obvious! Are you ready?

 

“Problem solving is a part of a leader’s ever-present reality.” -Mark Miller

 

Don’t solve for symptoms.

15 Powerful Phrases That Will Make You A Better Leader

Powerful Phrases That Will Make You Better

Years ago, I was walking down a long office corridor in a nondescript office building. Visiting one of the largest companies in the area, I was being escorted to a conference room. What the purpose of that visit was, I really can’t remember.

But I do remember walking by one room. As I was passing by, I glanced in and saw a man at the front of a room filled with maybe twenty or so people. That would not be in my memory bank except for what I next heard.

 

“I’m sorry, I screwed that up and let you all down.”

 

That’s not something you often hear from the front of the room.

I froze, right in the doorway, wondering what he was apologizing for and what was going on. It took me a few seconds to realize that I had no business stopping to watch, so I willed my feet to keep walking.

In those few seconds, I don’t know the details of what happened. But I could discern that this was the boss, and he wasn’t holding back. He had made a mistake and was taking full responsibility for it.

It was impressive. I wonder what the others in that room thought. My guess is that they still talk about this boss of theirs.

 


“Words can inspire and words can destroy. Choose your words well.” -Robin Sharma

 

There are a few power-packed phrases that anyone can use to change the course of a conversation. Here are a few that leaders use to transform their teams:

 

“I’m sorry.”

As I said above, this one is powerful because it’s unexpected, and it demonstrates both self-awareness and personal responsibility. That’s not a boss who looks to throw the blame faster than a quarterback about to be sacked.

“Leaders who apologize demonstrate personal accountability.” -Skip Prichard

 

“Tell me more.”

It’s open-ended. It shows interest. It demonstrates listening skills.

 

“What’s working?”

Especially good if everyone is complaining. This one refocuses on what’s positive. You can build on what’s working before you get into what’s not.

 

“I’m proud of you.”

It sounds parental and maybe that’s where its power lies. But I’ve seen this one both as a giver and a receiver. When it’s sincere, it’s a powerful phrase because it is clear and concise.


“Next to excellence is the appreciation of it.” -William Makepeace Thackeray

 

“How can I be of help?”

I’m often surprised at the response. It may be that simply offering an ear helps enough, but often there are a few specifics that really make a difference and are easy to do.

What A Caterpillar Can Teach You About Growing Your Business

Master Near Constant Change

 

Many people think that businesses should develop a strategy and stick to it at all costs.

But Sid Mohasseb, serial entrepreneur, investor, venture capitalist, and former the Head of Strategic Innovation for KPMG’s Strategy Practice teaches an entirely different approach: It’s the ability to adjust your strategy, almost constantly, that brings success. The environment is uncertain and changing, and changing with it is vital.

Sid teaches that we must push for more and evolve from one approach to another.

I recently had the opportunity to talk with him about his new book, The Caterpillar’s Edge: Evolve, Evolve Again, and Thrive in Business.

 

Prepare for Constant Flux

Why a caterpillar?

The caterpillar evolves many times over before it becomes a butterfly. It changes form until it turns into a completely different species. The caterpillar teaches us the wisdom of constant and incremental evolution and offers the promise of flying.  To compete, to advance and to win, in our businesses and in our personal lives, we must evolve constantly and purposefully, always.

 

“Things do not change. We change.” -Henry David Thoreau

 

How is the game changing? And how do leaders prepare for the constant flux?

Innovation is constantly approaching from every corner of the world. The speed of change fueled by unprecedented technological advancements and constantly increasing customer expectations are challenging companies to “stay relevant” – competitive advantages are temporary. The game has changed from, “How do I gain an advantage and defend it?” to “How do I change to stay relevant?”

To win in a state of constant flux, leaders must shift their minds and change their actions. First, by realizing their addictions (old assumptions, orthodoxies, biases, etc.). Next, by aligning with uncertainty – no plans can be permanent and no decisions are certain. Leaders must learn to live with probability and a portfolio of related plans – always ready to take the path that offers the most likelihood of success. They should also appreciate the reality of their capabilities and aim to build the future in increments; success cycles must be shorter and capabilities (people & systems) have to be created accordingly. Last, leaders must constantly look for the next advantage and aspire for more “Aha’s.” They should look for and discover the next challenge or opportunity, always; innovate, always (create new value), and evolve, always.

 

“To win in a state of constant flux, leaders must shift their minds and actions.” -Sid Mohasseb

 

How to Embrace Change

Why do we so often refuse to deal with change and uncertainty?caterpillar-cover

The refusal is more natural than intentional. We refuse to deal with change because of our fears of unknown (what is on the other side of change) and comfort with the status quo (comfortable routines we are used to and have served us well in the past). Most people embrace change when they i) realize the severity of the problem they face and ii) gain trust that what they can change to is a better state. We often refuse to change because we believe that the status quo does not present a major danger and/or we don’t trust the alternative paths offered by our leaders.

At business school and later at work, we are trained to look for certainty to plan to and execute against – assuming reduced risk. In our personal lives, we are comfortable living with probability and operating in uncertainly – there is a 40% chance of rain, and we decide, based on our risk tolerance, to take an umbrella or not. In our professional lives, we are expected to be certain and execute with confidence in outcomes. People, on a personal level, can innately adjust to uncertainty. However, they are reluctant operating with uncertainty at work because corporations expect and reward the illusion of certainty.

 

“The only thing that is constant is change.” -Heraclitus

 

3 Categories for Leaders to Plan in a World of Change