Successful entrepreneurs do not wait until the “the Muse kisses them” and gives them a bright idea; they go to work.
Systematic innovation means monitoring seven sources for innovative opportunity. The first four sources lie within the enterprise, whether business or public-service institution, or within an industry or service sector. The unexpected—the unexpected success, the unexpected failure, the unexpected outside event; the incongruity—between reality as it actually is and reality as it is assumed to be or as it “ought to be”; innovation based on process need; changes in industry structure or market structure that catch everyone unawares. The second set of sources for innovative opportunity involves changes outside the enterprise or industry: demographics (population changes); changes in perception, mood, and meaning; new knowledge, both scientific and nonscientific.
The lines between these seven source areas of innovative opportunities are blurred, and there is considerable overlap between them. They can be likened to seven windows, each on a different side of the same building. Each window shows some features that can also be seen from the window on either side of it. But the view from the center of each is distinct and different.
Continuous improvements in any area eventually transform the operation.
The next policy for the change leader is organized improvement. Whatever an enterprise does internally and externally needs to be improved systematically and continuously: product and service production processes, marketing, service, technology, training and development of people, using information. Continuous improvements in any area eventually transform the operation.
However, continuing improvement requires a major decision. What constitutes “performance” in a given area? If performance is to be improved, we need to define clearly what “performance” means. For example, a major commercial bank decided that the way to improve performance in its branches was to offer new and more advanced financial “products.” But when the bank introduced the new products in its branches, it rapidly lost customers. Only then did the bank find out that to customers, performance of a bank branch means not having to wait in line for routine transactions. The bank’s solution was to concentrate the tellers at the branches on the simple, repetitive, routine services, which require neither skill nor time. The new financial products were assigned to different groups of people who were moved to separate tables, with big signs advertising the products in which each table specialized. As soon as this was done, business went up sharply, both for the traditional and the new services.
Change leaders should starve problems and feed opportunities.
The first—and usually the best—opportunity for successful change is to exploit one’s own successes and to build on them. Problems cannot be ignored. And serious problems have to be taken care of. But to be change leaders, enterprises have to focus on opportunities. They have to starve problems and feed opportunities.
This requires a small but fundamental procedural change: an additional “first page” to the monthly report, one that should precede the page that shows the problems. It requires a page that focuses on where results are better than expected, whether in terms of sales, revenues, profits, or volume. As much time then should be spent on this new first page as has traditionally been spent on the problem page. Enterprises that succeed in being change leaders make sure that they staff the opportunities. The way to do this is to list the opportunities on one page and then to list the organization’s performing and capable people on another page. Then one allocates the ablest and most performing people to the top opportunities. The best example, perhaps, is the Japanese company Sony. It has built itself into one of the world’s leaders in a number of major businesses by systematically exploiting one success after the other—big or small.
Every organization needs one core competence: innovation.
Core competencies are different for every organization; they are, so to speak, part of an organization’s personality. But every organization—not just businesses—needs one core competence: innovation. And every organization needs a way to record and appraise its innovative performance. In organizations already doing that—among them, several topflight pharmaceutical manufacturers—the starting point is not the company’s own performance. It is a careful record of the innovations in the entire field during a given period. Which of them were truly successful? How many of them were ours? Is our performance commensurate with our objectives? With the direction of the market? With our market standing? With our research spending? Are our successful innovations in the areas of greatest growth and opportunity? How many of the truly important innovation opportunities did we miss? Why? Because we did not see them? Or because we saw them but dismissed them? Or because we botched them? And how well do we do in converting an innovation into a commercial product? A good deal of that, admittedly, is assessment rather than measurement. It raises rather than answers questions, but it raises the right questions.
Core competencies meld customer value with a special ability of the producer.
Leadership rests on being able to do something others cannot do at all or find difficult to do even poorly. It rests on core competencies that meld market or customer value with a special ability of the producer or supplier. Some examples: the ability of the Japanese to miniaturize electronic components, which is based on their three-hundred-year-old artistic tradition of putting landscape paintings on a tiny lacquered box; or the almost unique ability GM has had for eighty years to make successful acquisitions.
But how does one identity both the core competencies one has already and those the business needs to take and maintain a leadership position? How does one find out whether one’s core competence is improving or weakening? Or whether it is still the right core competence and what changes it might need? The first step is to keep careful track of one’s own and one’s competitors’ performance, looking especially for unexpected successes and for unexpected poor performance in areas where one should have done well. The successes demonstrate what the market values and will pay for. They indicate where the business enjoys a leadership advantage. The nonsuccesses should be viewed as the first indication that the market is changing or that the company’s competencies are weakening.
There is no loss to the customer by eliminating activities that do not add value.
Activity-based costing provides the foundation for integrating into one analysis the several procedures required to create customer value. With activity costs as a starting point, the enterprise can separate activities that add value to customers from those that do not, and eliminate the latter. The chain of value-creating activities uncovered during value analysis is the starting point for analyzing the underlying process of value creation. Process analysis seeks to: improve the features of the product or service, restructure the process while reducing costs, and maintain or improve quality.
Process analysis in an automobile company involves designing and redesigning components and subfunctions in order to carry out each function at predetermined cost targets. For instance, the basic function of an automobile is to provide transportation, but secondary functions include comfort, fuel efficiency, and safety. Each of the functions and subfunctions require components or services that create value for the customer. Each also contributes to the quality of the automobile as well as to the cost. A process team is formed from personnel who perform the value-chain activities. This team often includes suppliers and customers. The task of the team is to identify the functions the product or service is to perform and to analyze the components or services that go into each function with the objective of achieving value and quality objectives while meeting cost targets.
A valid definition of the specific knowledge of a business sounds simple—deceptively so. It takes practice and regularity to do a knowledge analysis well. The first analysis may come up with embarrassing generalities such as: our business is communications, or transportation, or energy. These general terms may make good slogans for a salesmen’s convention; but to convert them to operational meaning—that is, to do anything with them—is impossible. But with repetition, the attempt to define the knowledge of one’s own business soon becomes easy and rewarding. Few questions force a management into as objective, as searching, as productive a look at itself as the question: “What is our specific knowledge?” No company can excel in many knowledge areas. A business may be able to excel in more than one area. A successful business has to be at least competent in a good many knowledge areas in addition to being excellent in one. But to have real knowledge of the kind for which the market offers economic reward requires concentration on doing a few things superbly well.
A degenerative disease will not be cured by procrastination. It requires decisive action.
There are, indeed, quite a few CEOs who have successfully changed their theory of the business. The CEO who built Merck into the world’s most successful pharmaceutical business did so by focusing solely on the research and development of patented, high-margin breakthrough drugs, then radically changed the company’s theory by acquiring a large distributor of generic and nonprescription drugs. He did so without a “crisis” while Merck was ostensibly doing very well.
We can’t rely on miracle workers to rejuvenate an obsolete theory of the business. And when one talks to these supposed miracle workers, they deny vehemently that they act by charisma or vision. They start out with diagnosis and analysis. They accept that attaining objectives and rapid growth demand a serious rethinking of the theory of the business. They do not dismiss unexpected failure as the result of a subordinate’s incompetence or as an accident but treat it as a symptom of “systems failure.” They do not take credit for unexpected success but treat it as a challenge to their assumptions. They accept that a theory’s obsolescence is a degenerative and, indeed, life-threatening disease. And they know and accept the surgeon’s time-tested principle, the oldest principle of effective decision-making. A degenerative disease will not be cured by procrastination. It requires decisive action.
