How to Build Innovative Companies

1. How to Build Innovative Companies • What was once central to Cos – price, quality, digitized analytical knowledge work – fast being shipped off to lower-paid, highly trained ees offshore • What is unfolding is commoditization of knowledge • Increasingly, new core competence is creativity (right-brain stuff) • Means of differentiating products in commoditized marketplace

2. How to Build Innovative Companies • New forms of innovation based on intimate understanding of consumer culture – ability to determine what people want even before they can articulate it • See ‘The Dangers of Being Customer-Led,’ from Hamel and Prahalad, “Seeing the Future First,” Fortune, 9/5/94 • Are b-schools on top of all this change? Stanford is starting a ‘D-school’ – a design school where managers can learn dynamics of innovation

3. How to Build Innovative Companies • 3M succeeds by interpreting what customers really want • 3M’s hottest product today is ultrathin plastic film on virtually every flat-screen display – film enhances image clarity and brightness • Therefore screen doesn’t need as much power, which means portable devices can get by w/ smaller rechargeable batteries • Masking tape – 3M’s first hit – came out of similar inquiry • In 1925, 3M sandpaper engineer was visiting auto-body shop where workers were complaining about difficulty of painting two-tone car wo/ colors running together • Engineer went back to lab and figured out how to put sticky backing on paper • Latest iteration of 3M’s optical film is privacy filter – allows light to pass through straight to viewer, but keeps anyone w/ side view of screen from seeing anything but black display

4. How to Build Innovative Companies • In 2001 Arthur Lafley, P&G CEO, established new exec post: VP for design, innovation, and strategy • Quadrupled design staff, hiring designers who had worked at other cos and in other industries • Dispatched designers to work directly w/ R&D staffers to help conceive new products • Changed P&G’s entire innovation process, making it consumer-centric rather than driven by new technology • Started hiring different kinds of consultants • Holy Grail of innovation: unmet, unarticulated needs of consumers • Established ‘innovation gym’ – place to train mngrs in new design thinking • Created Design Board – non-P&Gers who provide independent perspectives on products, brand extensions, and marketing

5. How to Build Innovative Companies • Before P&G started paying attention to design, it concerned itself primarily w/ how functional product was • Now, functionality not enough – “We want to identify customer desires, rather than needs. What gives you the ‘wow’.” • Using designers is part of P&G’s commitment to identifying unarticulated wants that it can transform into products • Before Lafley became CEO, P&G essentially brought in designers at end of development process to improve product or upgrade packaging cosmetically • Now, designers work w/ R&D staff from beginning, helping to conceive products • See Business Week, “The Best Products of 2006”

6. How to Build Innovative Companies • GE’s Imelt pushing to change corporate structure to spur creativity • Newly created position of chief marketing officer in charge of generating innovation and creativity • Methodology of new design strategy • Start w/ observation • Try out lots of ideas fast by making models or videos (prototyping) • Placing potential new product within emotional story that connects w/ consumers increases chances of success • Build organizational process that does these things all the time • Lessons from P&G and GE • Change mngrs: hire more anthropologists and social psychologists and fewer engineers • Change incentives: link bonuses to new ideas, customer satisfaction, top-line revenue

7. How to Build Innovative Companies Organizational design creates core competence in innovation which creates competitive advantage – hard to imitate?

8. How to Build Innovative Companies