001

Table of Contents
 
Title Page
Copyright Page
Dedication
Foreword
Acknowledgments
Introduction
Still Crazy about Innovation—After All These Years
Becoming an Innovation Superstar
 
PART I - WHAT’S WRONG WITH INNOVATION TODAY
 
CHAPTER 1 - The New Economy: Different for Good
 
A Better Beer, a Better Burger
Would You Like Something to Drink?
The Darkest Hour
Not Your Father’s Economy
The Great Recession: A Tipping Point
Beginning of the End, or End of the Beginning?
Failure is Not an Option
Chapter Takeaways
 
CHAPTER 2 - The Wheels Keep Falling Off
 
56 Reasons Why
Getting to Ten
Nick’s Pick #1: The Wrong Focus
Nick’s Pick #2: Lack of Sponsorship
Nick’s Pick #3: Process Driven to the Hilt
Nick’s Pick #4: A Risk Centered Process
Nick’s Pick #5: Customer Be Damned
Nick’s Pick #6: No Resource Commitment
Nick’s Pick #7: Bail, Don’t Fail
Nick’s Pick #8: Not Really Open
Nick’s Pick #9: Innovation Socialism
Nick’s Pick #10: Lack of Systemic Innovation
It’s Not Always about Money
When Process Takes Over: What’s Wrong with Innovation Management Systems?
Chapter Takeaways
 
CHAPTER 3 - The Danger of Safety
 
Play the Game to Win
The Fear of Failure
Keepers of the Magic Lexicon
IBWA—Innovation By Walking Around
The System and the Solution
The Attack of the Organizational Antibodies
Diffusing the Bomb
Fire in the Belly
A Short Primer on Smart Risk
Chapter Takeaways
 
CHAPTER 4 - What’s Mything in Innovation Today
 
Myth #1: “If You Build a Better Mousetrap, Will They Beat a Path to Your Door?”
Myth #2: “But I AM Connected to My Customers”
Myth #3: “Open Is the Answer”
Myth #4: “The Product Is the Technology”
Freudian Slips: Psychoanalyzing Your Company’s Innovation
Time for Transition
Chapter Takeaways
 
PART II - INNOVATING YOUR WAY TO BUSINESS EXCELLENCE
CHAPTER 5 - Anatomy of an Innovation Superstar
 
What Does It Mean To Be an Innovation Superstar?
Bones of an Innovation Superstar: Customer, Process, Culture
Dissecting the Anatomy
Does “Fixing the Culture” Make You a Superstar?
The Customer Anatomy
The Process Anatomy
The Culture Anatomy
The Right Team
Chapter Takeaways
 
CHAPTER 6 - Creating Net Customer Value
 
One More Time: Invention and Innovation
What Is Net Customer Value?
Customer Value in Tiers
The Innovation Cycle and the Customer Experience
Finding the Soul of the Customer: Using Experiential Sliders
The Webb Triangle
A Darwinistic Approach to Net Customer Value
Chapter Takeaways
 
CHAPTER 7 - Carpet Time
 
How to Do Carpet Time
Carpet Time for Adults
Making the Most of Carpet Time
Carpet Time Tools: Innovation Safaris
Carpet Time Tools: Listening Posts
Carpet Time Tools: A Few More Bright Ideas
Carpet Time Tools: Poster Board Sessions
Adobe Sets an Example
The Inverted Pyramid Syndrome
Chapter Takeaways
 
CHAPTER 8 - The RealOpen Innovation Framework
 
A Prescription, Not a Diet
Open Innovation
What Is RealOpen?
What Is an Innovation Platform?
Find
Forward or Forget
Fast Forward
Forge
The Webb Triangle
Innovation Scenario Tactics
Chapter Takeaways
 
CHAPTER 9 - Creating a (Digital) Innovation Culture
 
Focus Upon Others, Not Thyself
The Innovation Focus Model
Focus, Leadership, Communication, and Eating Your Own Cooking
Before and After
Culture and the Innovation Superstar
Getting the Team Right
The Critical Role of Leadership
Towards a Digital Culture: Digital Innovation
Chapter Takeaways
 
CHAPTER 10 - Dancing with the Innovation Superstars
 
Warming Up on the Dance Floor
Snap-On Tools
Sierra Nevada Brewing Co.
Hewlett-Packard
The Nielsen Company
Now You, Too, Can Be a Superstar
The RealOpen Service and Software Offering
Chapter Takeaways
 
About the Author
About The Innovation Playbook Web Site
Index

001

I would like to dedicate this book to my amazing family: my beautiful
wife Michelle, my daughters Taylor, Madison, and Paige, and my son
Chase. I would also like to acknowledge the ongoing support of my
identical twin brother, Charles Arthur Webb.

Foreword
Everyone talks about innovation. As companies, it’s our underpinning of success and growth. As consumers we demand it—and with increasing speed. As innovators, we thrive on the prospect of launching something game-changing.
But delivering on that need, demand, and passion with consistency and true benefit is what spells the difference between a one-time wonder and a company positioned for long-term success.
How do you ensure that you have a pipeline of eurekas? A steady supply of business propositions strong and relevant enough to capture the attention, imaginations, hearts, and intent-to-buy of your key audiences? And how do you ensure that they come quickly enough, since the window for market-leadership success, even for the most revolutionary innovations, continues to grow shorter as the world grows more interconnected.
It’s a delicate balance and an interesting interplay of managed creativity.
As outlined in the pages that follow, winning the innovation game calls for a series of highly choreographed elements that must play out with symphonic precision and elegance, firmly directed and fueled by passionate talent.
At Procter & Gamble, we’ve seen the extraordinary benefits—to the company and to our customers—of delivering in-market innovations that support our mission of touching and improving lives. Some of our most notable innovations have been:
• First disposable razor
• First synthetic detergent
• First fluoride toothpaste proven to fight tooth decay
• First commercial disposable diaper
• First fast-acting treatment for osteoporosis
• First in-home teeth whitening system
We’ve also seen the challenges, throughout our 173-year history, of keeping those ideas coming and, most critically, of ensuring that they are relevant.
One of our core learnings has been the need to remain connected to our customers—and to appreciate that you are never connected enough. When we’ve stepped back to evaluate the failure of an innovation or a new market introduction, the root cause has almost always been no understanding of what people really want and need. We often thought we knew. We tried to show them. And in the end, they showed us.
What those experiences also taught us is that a game-changer has to do more than deliver on today’s need. It also must deliver on tomorrow’s. We learned that once you understand the need, you must pull out all stops to find a solution, package it in a way that captures heads and hearts, and deliver on the value equation. Plus get it to market fast. Because if you’re working on it, chances are very high someone else either already is or will be very soon.
Nicholas Webb, in The Innovation Playbook, offers core elements that all of us can incorporate and learn from to help build success.
At P&G, we’ve been working on our orchestra for some time. We’ve built a team of experts in consumer research, R&D, and marketing. We’ve made innovation part of everyone’s job, regardless of what their job is. We try to ensure that our culture supports playing to win, but at the same time we must manage failure as part of the race. We also build innovation partnerships, through our Connect+Develop process, with experts, companies, and innovators outside P&G all over the world. And we try to have everyone connected so that ideas flow, grow, and improve. We appreciate that this must be an orchestra of precision. We have hit some sour notes, and we’re still learning. We always will be.
But we also keenly appreciate why we continue to practice, and how sweet the melodic sound of success can be. As our Chief Technology Officer Bruce Brown likes to say: “The answer to the challenges we face is always the same. The answer is innovation.”
 
CHRIS THOEN
Director, External Innovation & Knowledge Management,
Global Business Development,
The Procter & Gamble Company

Acknowledgments
This book would not have been possible without the help of Peter Sanders, Jennifer Dean and Stephen Orsatti. I would also like to especially thank the amazing team at Brightidea, including Matthew Greeley the CEO of Brightidea, Paul Tran, Director of Strategic Initiatives and Marketing Manager, Stefanie Mainwaring. I would like to thank Ken Grossman at Sierra Nevada. Also, the team at Snap-on Tools. Lisa Underkoffler, the Principal Product Manager at Acrobat .com. Dr. Geoffrey Moore for his kind permission to allow us to share some of his amazing work. Ann Marie Dumais, senior vice president of new product introductions at Nielsen Company. One of the best patent attorneys in the country Robert M. Siminski. I also would like to thank Jim Austin, Director of Life Sciences, Decision Strategies International, Inc. Terry Fadem, Managing Director, Corporate Alliances, University of Pennsylvania School of Medicine Paul J. H. Schoemaker, Research Director, Mack Center for Technological Innovation at The Wharton School for allowing me to share their amazing work in the area of scenario planning. Last but certainly not least, I would like to thank Hewlett-Packard Corporation for allowing us the opportunity to share their HP garage material. I would especially like to thank Silvi Steigerwald Innovation Strategist HP Software & Solutions and Art Beckman Innovation Program Lead HP Software & Solutions.

Introduction
The innovation headlines speak for themselves.
• For almost 90 percent of CEOs, generating organic growth through innovation has become essential for success in their industry. (Source: Boston Consulting Group.)
• Of more than 900 CEOs surveyed, less than half are satisfied with the financial returns on their investments in innovation. with the financial returns on their investments in innovation. (Boston Consulting Group.)
• The global innovation success average, across all geographies and all industries, is only 4 percent. (Dolphin Group, BusinessWeek.)
• Businesses today have no shortage of ideas; rather, they lack the ability to determine their value in a systematic, timely, and cost-effective way. (Microsoft white paper: Innovation Process Management.)
• According to a global survey published by the Boston Consulting Group, 74 percent of companies contacted planned to increase spending on innovation and 90 percent of them consider innovation “essential for success” in their industries. However, less than half were satisfied with the financial returns on their investments in innovation.
• Improving competitive advantage, increased revenue growth, and faster innovation are among the top 10 issues for CIOs. (Gartner Group CIO Survey.)
• The failure rate of innovation is huge, or you could say the success rate—4 percent—is pathetic. (Larry Keeley, Doblin Inc.)
Are we, as stewards of our own capitalistic future and fate, doing what we need to do to stay on top of the competitive heap? Or are we locked in an inexorable race to the bottom?

Still Crazy about Innovation—After All These Years

Over the past 20 years I’ve had the privilege of working as a CEO for several successful medical device companies and now as a Certified Management Consultant in the area of innovation management. I’ve also had a career as a successful inventor with over 35 US patents. I have invented products, started, run and sold companies, and turned my experiences into value for many others in the corporate and university research spaces who have sought to do the same. So I believe that my innovation industry vantage point is somewhat different than that of the average person. Different how, you ask? Different because I see the realities and practicalities of all stages of business, from sitting across from a buyer, to bringing a product to market, to promoting a new invention.
I also understand from my discipline as a management consultant, the realities—good and bad—of the innovation process within organizations. What is interesting to me, and is also the major thesis of The Innovation Playbook, is the fact that great organizations develop great technologies, and as we’ve seen there is a lot of evidence of that.
Now for some people that proclamation may seem too simplistic. But it’s true. We must also look at the other side of the coin—what about the organizations that can’t develop new things? Those companies that go down in flames despite their best efforts? Or spend millions on R&D, only to bring a minor tweak to market or to end up buying technology through expensive licenses—or worse, end up doing nothing at all?

Don’t Buy “The Diet”

In fact, the best way to look at the innovation space is considering that it’s very much like dieting. It seems every week there is a new book on innovation, and likewise, there’s a new book on dieting. And what is that book? It’s the latest tool. The South Beach Diet. The Grapefruit Diet. The Beverly Hills diet. And on and on.
What is the usual result of these diets? Weight gain. The bottom line is most diets don’t work. Why don’t they work? Because they are taking a fractional approach while embarking on a global challenge. We don’t get skinny or become thinner as a result of using fractional tools that focus only on fatness. In fact, the biggest cause of obesity in America is the focus on fatness. According to a recent Harris poll, 80 percent of Americans are overweight.
So what does this have to do with innovation? Weight loss focuses on fatness, and innovation focuses on risk. And, to paraphrase the great behavioral psychologist Dr. Dennis Waitley, we move towards the thing we think about most often.
Could it be that innovation is a philosophy? A culture? A philosophy and culture focused on delivering insanely cool products to valued customers, instead of process orientation designed to address the internal needs of risk management?
I believe the answer is absolutely yes. Organizations year-by-year, month-by-month, continue to buy more innovation-diet books that involve more bureaucracy, more risk mitigation, and ultimately greater failure. Studies are suggesting that almost 95 percent of consumer products fail, yet most companies have tried desperately to control that—ironically—by using risk management systems. Why? Because of a certain focus—the focus on risk, just like the fat focus phenomenon.

It’s All about the Customer

In researching this book, I was surprised to learn there are more than 170 different so-called new product development or innovation management systems. The reason there are so many systems is that most systems don’t work. The message of this book is that great companies develop great technologies, and those great companies don’t focus on risk. They focus on customers instead. More specifically, they focus on the net value they deliver to their customers. That’s where success lives.
But more than focusing on customer net value, great organizations understand that great innovation is systemic. It’s cultural. Innovation has to do with the organizational climate, and organizational focus. It has to do with the people a company hires, the way it treats employees, the way it lives within the global and local community. I’ve found through my research that the best companies in innovation are championed by the best people. These people create systems that reward smart risk and their ultimate focus on a daily basis is on delivering systematic customer value.
Why am I so critical of the Grapefruit Diet approach to innovation management? It’s not just that the Grapefruit Diet approach doesn’t work—and believe me, it doesn’t. In fact, most approaches designed to increase access to external innovation and speed time to market and improve commercialization are wrong. The ones that are right are only right for some companies because, like weight loss, in order to have a successful innovation system, you need to begin with a great philosophy, which is like a holistic philosophy of health for an individual.

... Really, Net Customer Value

When it comes to innovation, we need to have a holistic philosophy of net customer value. I’ll spend a good bit of time in this book describing what I mean by that—especially in Chapters 6 and 7. Then we’ll look at some specific tools that can be deployed in today’s fast moving, flexible environment in a prescribed way in order to address the issues that face current organizations. These tools will help you get things done by combining the best of your internal resources and those on the outside in the industry at large.
The first problem and a major pitfall in innovation today is the use of a cookie-cutter approach towards improving innovation. Some companies are excellent at accessing external innovation, yet extremely bad at taking those technologies to market. Some companies have a very good new product development function, but are very bad at deploying it. I could go on and on. The problem is that innovation requires a broad array of skill sets. But those skill sets can be easily built in as long as the right philosophy—and culture—of innovation exists.
In fact, years of being in the innovation business have made it clear to me that achieving superstardom in the innovation space is a matter of three things, and these things must be taken in balance: a customer focus and an effective process that keeps innovation moving along, all supported by a healthy innovation-focused culture. I’ll get back to the superstar idea in a minute.

“There’s No More Room to Suck”

In researching this book we found some of the greatest companies delivering some of the greatest products and technologies to the market had no new product development system at all. I’m not suggesting that systems are always bad, but to suggest that they are always going to add to customer value is obviously dead wrong. Again, the Grapefruit Diet says “just eat grapefruit” and “don’t worry about fitness,” “don’t worry about a balanced diet,” “don’t worry about a holistic approach towards wellness”—just eat grapefruit and everything will be okay.
That’s what’s being propagated in the innovation space, and it’s bad. It’s bad for two reasons: First, it’s a fractional solution distracting us from the focus of creating customer net value. Second, quite simply, there is no more room to suck. By that I mean if you’re bad, everyone knows you’re bad. In days past you could create a mediocre product and, frankly, the community you served didn’t have a great means to communicate with one another, certainly not in real time. But the Internet is the great equalizer. It provides a tremendous opportunity to propagate positive viral marketing but at the same time, unfortunately, it provides an opportunity for real time, derogatory feedback for people who are unhappy with your service. The importance of being great and delivering true customer value has never been greater. Throughout the book you’ll be shown the importance of digital media and their impact on the role of innovation.
Another important component in the world of innovation is speed. The world has speeded up to the point where, frankly, it’s hard for most CEOs and most organizations to keep up. But the ability to keep up with what’s going on and deploying solutions is the difference between success and failure.
Speed does rule the day. If your organization does not have fast-track methodologies that deliver technologies and products to market before your competition, you will put your business in great jeopardy. Speed does rule the day, and again, we’ll talk about this more as we go through case studies that show how speed was the secret weapon that delivered technologies before the competitors were able to.
When the economy is good and competition is slight, it’s easy to be involved in—consumed by—process orientation, where company teams get together, pontificate, test, and evaluate every process out there. But unfortunately, there is no more opportunity to allow process orientation to rule the day within your company. Process orientation has become an infectious disease within most organizations.

Becoming an Innovation Superstar

Indeed, there’s a certain je ne sais quoi that separates true excellence from all the rest. You’ve probably heard about it in Tom Peters’ book, In Search of Excellence. You’ve probably also heard about it from Jim Collins in his book, Good to Great. “It” is found in attention to customers, attention to customer service, attention to details, and attention to execution.
But if you take a broader view of the excellence story, it all boils down to innovation. Product innovations. Service innovations. Innovations that bring quality. Innovations in employee satisfaction, which brings all of the above. Most people think only of “technology” or “product” when they think of innovation. Innovation is clearly not limited to product or technology, or the next bright shiny object to come rolling off the assembly line. Innovation is broader, deeper, and more visceral than that. In fact, I believe all that makes the Peters’ and Collins’ companies great is really, bottom line, innovation, and behind that, innovative thinking and culture.
And it doesn’t stop there. Innovation is really about customers. What customers want, but also what they need or don’t even know they want. Henry Ford once said: “If I had asked the market what they wanted, they would have said a faster horse.” True innovators are so close to their customers they know what they need—and how to deliver exceptional value to satisfy that need—even more than the customers do.
So with these ideas in mind, here are a couple of core definitions.
Innovation is about being truly connected to customer needs and lifestyles, so that you can deduce their needs and apply technologies and ideas to their solution.
Innovation Superstars are connected to their customers; furthermore they have the right balance of process and culture to consistently deliver excellent customer value quickly and thus to stay ahead of the competition and achieve leading market share in their industries.
Much of the rest of The Innovation Playbook examines the moving parts that support these definitions.

Why Apple Shines

You’ll hear about Apple over and over again in innovation books. And I’ll refer to Apple too, but won’t dwell on their already visible successes. Apple is a perennial superstar, not because the company lets their customer tell them what they need, but because they understand the needs so well and deliver really cool stuff to meet them. Apple has a culture of innovation second to none, which allows it not just to lead—but to control—its market, in a way few companies have ever been able to pull off. In fact, Apple is number one on BusinessWeek’s annual innovative company rankings, and it moved up 15 places to reach number 56 in the Fortune 500—an impressive, but hardly a surprising, move.
Apple isn’t recreating the wheel with each new product. What makes a company like Apple innovative isn’t that it creates something completely new each time, but that it is able to create designs, devices and functionality so that their products are popular with consumers and successful financially.
Obviously, not everyone can match Apple’s success. But if you can just match Apple’s mind-set, you’re well on your way. That’s really what The Innovation Playbook is all about.

Plays in The Innovation Playbook

The Innovation Playbook is organized in two parts. Part I: What’s Wrong with Innovation Today highlights the importance of innovation in today’s world and explains why so many of today’s organizations can’t get it done.
Chapter 1: The New Economy: Different for Good examines why innovation is the key to survival in today’s fast-paced business world.
Chapter 2: The Wheels Keep Falling Off highlights the many reasons thrown around to describe why innovation doesn’t work in today’s organizations. I distill that long list of reasons down to ten “Nick’s Picks” to explain why innovation doesn’t work and to begin to describe what to do about it.
Chapter 3: The Danger of Safety is a full frontal attack on one of the great ills in the innovation world today—the obsession with risk and risk management.
Chapter 4: What’s Mything in Innovation Today explores four other common myths about what innovators and innovative organizations should do.
While Part I concerns itself with the ills and ailments in the innovation space today, Part II, Innovating Your Way to Business Excellence, lays out in six chapters the Nick Webb solution to achieving excellence in your business or organization through innovation.
Chapter 5: Anatomy of an Innovation Superstar. Here I jump right in with a description of the magic combination of customer focus, process, and culture that separates true innovation superstars from the rest of the pack.
Chapter 6: Creating Net Customer Value takes apart the crucial concept of net customer value, including my “value strata” set of standards of excellence; then I’ll describe how, as an organization, to go about achieving it.
Chapter 7: Carpet Time tells you how to get close to your customers and to establish the “conduits of connectivity” necessary to really understand net customer value.
Chapter 8: The Real Open Innovation Framework. In this chapter I lay out a framework and a toolbox I call “Real Open.” It is used to find new ideas from external and internal sources, filter those ideas, and move them through the development process at utmost speed. These tools are set up to be adapted to the specific needs of any given organization; it is emphatically not a one-size-fits-all solution, unlike so many others out there.
Chapter 9: Creating a (Digital) Innovation Culture. Here I describe the key cultural components in an organization that support good innovation, and give some tips for how to get there, with particular emphasis on using today’s digital media tools to support innovation.
Chapter 10: Dancing with the Innovation Superstars. Finally, I give some case examples of companies that have made it and how they did so. Then I describe how you can become a superstar using the Certified Innovation Superstar certification and training program.
There you have it—I’ll leave it to you to read the Playbook, get down on the field and practice, and kick some real business butt! Remember, no pain, no gain, but let me tell you from experience—the rewards for making it all happen are simply amazing.

PART I
WHAT’S WRONG WITH INNOVATION TODAY

CHAPTER 1
The New Economy: Different for Good
Most of the time, when you think about the term innovation, you think in terms of significant breakthroughs in technology—nanotechnology, biotechnology, energy, and so on. But the truth of the matter is that innovation is really about creating ways of delivering meaningful net customer value. And especially in today’s challenging and competitive economic times, net customer value really rules (or should rule) the innovation universe.
Okay, you ask—what is net customer value? It’s a fair question, and I’ll come back to this concept again and again throughout The Innovation Playbook. Net customer value refers to the benefit customers receive from a product—real and perceived—relative to its cost. It’s a hard thing to measure, but, like good architecture or good wine, you’ll know it when you see it (or drink it).
Problem: It isn’t so easy to see customer value (or taste it), right? Part of the reason net customer value is hard to quantify or measure, and part of what makes it such an important thing to understand for a business is that it’s a multisensory experience. The best way to explain is by example.

A Better Beer, a Better Burger

One of the greatest restaurants on the planet, in my opinion, is a West Coast hamburger eatery—a fast food restaurant, if you will—called In-N-Out Burger. Now, In-N-Out Burger knows really special things about innovation. They know innovation really is about touching people. What does that mean? Touching people is about the fact that we are multisensory beings. We have a sense of smell. We have a sense of vision. We taste things. We feel things. It’s about the combination of those senses that creates a visceral determination about that experience. In-N-Out Burger is a perfect example of a company that understands this concept.

The Eyes, the Ears, the Nose Have It

To illustrate, In-N-Out Burger has specially designed exhaust fans that send out the smell of its mouth-watering fare in multiple directions for several blocks. Anyone on the West Coast knows if you drive anywhere near an In-N-Out Burger, you’ll quickly pick up the scent of delicious food, which is no accident! They not only want you to see the restaurant but also feel it from a sensory point of view. But they also know that, in order for you to want to eat something there, the restaurant also has to be visually inviting.
So they created a simple, clean, and ultra-fresh environment that really indicates the quality and cleanliness of the food. They pay a lot of attention to the appearance of the restaurants, actually employing full time people to clean and pick up trash on the grounds. This might not seem like such a big deal, but if you want to eat something, it had better be visually inviting, so they create a simple, clean, and ultra-fresh environment that really communicates the quality and cleanliness of the food.
The fact that, when you’re at an In-N-Out Burger, you don’t see any trash on the ground may not seem like a big deal, but unfortunately, many other restaurants don’t see that as a big deal either. Obviously, as consumers of food, we have a lot of options. When we inhale something that’s clean, when we inhale something that smells great, we know that is part of an overall experience we, as multi-sensory beings, are going to enjoy.
But In-N-Out Burger goes far beyond that. For example, when you pull up to the restaurant drive-thru you’ll see that the speaker is the size of a manhole cover. Why is that important? Most drive-thru restaurants have really small speakers, so communication between a customer service person and the customer is extremely tenuous and cryptic. This results in mistakes and increased pressure on the customer who must yell into the speaker, and stress and fatigue for the employees.
Such attention to detail shows In-N-Out Burger understands a very basic concept for the business: In order to get accurate orders and communicate properly back to customers, they needed a large speaker. I remember when early In-N-Out Burgers had something akin to a megaphone mounted on a pole—even this provided a tremendous benefit and would be considered an innovation.
But it continues to even get better. When you go to the restaurant and start to place an order, you have an intelligent and articulate person taking the order. They’re able to communicate clearly what you’re ordering and verify that they got it right in a super-friendly way that adds to the feeling of a good customer experience.
It continues from there. As you navigate the drive-thru, there’s a gigantic plate glass window. Now that’s not there so the employees can look out at the cars—it’s so you can look into the kitchen—for three important reasons. First, they want you to see the cleanliness of the kitchen and their staff. The staff comes in impeccably clean, and if their clothing becomes soiled on the job, they have to change immediately. The second thing you see is a clean eating area. Picked up, wiped down, no food left lying around.

Magical Theater

Thirdly and finally, there’s one other magical theme in the theater, and it is performed every day in every In-N-Out Burger across the country. They have one of their employees, behind this gigantic plate glass window, producing french fries by hand. None of that frozen food service stuff—they actually press freshly peeled potatoes through a french fry press by hand. Now why’s that important? Because you know for a fact that those french fries were just made. They came from fresh potatoes. That is a tremendously important value perception for you. That the environment is clean is also an extremely important value perception.
Now when you get to the pick-up window to collect your box, you’re greeted by another clean, well-dressed, intelligent, articulate, smiling employee. “Let me make sure you’re order is right. Have a great day.” They make sure you have enough napkins and the right condiments and straws for the kids. You feel as though they really care and that they’re paying attention to detail.
But the essential magic really is, not surprisingly, that they have created a simple, delicious hamburger. They produce great products. Their hamburgers are good. Their french fries are good. Their milk shakes are good. They realize that they have to produce all of these things right to create the perfect customer scenario—which they rightly recognize as being the perfect scenario for success. A great environment, a clean environment, a quality environment, and a tasty environment are all necessary elements of the total experience—all are prerequisites—to get you to come back.
In-N-Out Burger is, in my opinion, a perfect example of a wonderful innovator. They understand that their omni-directional fans will deliver an appealing aroma that is very pleasing. They create, externally and internally, a visually clean and pleasing environment. They also know you can hear them and they can hear you through an amazingly simple but ingenious intercom system (in how many other drive-thru fast food places have you seen such a thing?) that insures a wonderful communication dialog that is not stressful. (Like you might expect from a waiter in a fine restaurant.)

One Plus One Is Three

They know that when you pull up to the window, you’re continuing to build on what I call the service cycle. They know that you’re adding more and more ingredients to your overall opinion of them, as you take in things visually, as you smell, as you listen and talk, as you pay and eat, as you observe. This is all part of what innovation is about—the ability to look, the ability to feel, the ability to sense an environment in a way that adds real value to the customer.
In-N-Out Burger is a perfect example of masterful innovation and, as a result, they’re one of the most successful restaurant chains on the West Coast. But there’s far more to the story than innovation as it pertains to the creation and implementation of ideas and technologies. Like most of our examples, In-N-Out Burger pays their employees more than most restaurant chains—particularly fast food chains. They also treat and train their employees extremely well.
Remember, great companies develop great technologies. Great companies also add value every step of the way, from employees to their community to their valued customer. While the innovations may seem to be simple, “gee-I-should-have-thought-of-that” ideas, InN-Out Burger is definitely a world-class innovator.

Would You Like Something to Drink?

It’s interesting to me to see how many resources go into trying to create and replicate these processes and systems when it really has to begin with creating a great company. Another great example is a company called Sierra Nevada Brewing Company, located in Chico, California and founded by a gentleman named Ken Grossman. Here’s a guy who loved beer, and he loved it so much that his goal was to create the best product in the world. The truth of the matter is—as hard as that challenge is, the real challenge is to try to scale up that commitment.
So many companies have lost their competitive edge in the process of trying to go from a hand-crafted, customer-connected product to one that really has to be McDonald-ized and distributed worldwide. But Grossman’s commitment continued. So he hired great people, and he treated them extremely well, and he continued to grow his business with one principal goal: Make the best beer in the world. In the meantime, he made it a point to honor everyone he touched, from his local community to his global community, including his employees, and especially his valued customers.
What’s interesting about Sierra Nevada is that they’re now the sixth largest brewery in the country. As a beer connoisseur myself, I have to say their beer is absolutely exceptional. If you know and love beer, you will love Sierra Nevada. If you’re not a gourmet beer person, you too will love Sierra Nevada.

Great Companies Care

In fact, several large brewers across the country have tried to do what I call McDonald-izing the process of what Grossman has done—make lots and lots of products but maintain an ongoing commitment to developing new products and staying connected to the customer. Sierra Nevada, for example, has made a commitment to being a sustainable and globally environmentally conscious company because of Grossman’s commitment, like that of all great companies, to be a good global and local citizen.
As a result, his brewery has the second largest solar array of any company in the state of California—second only to Google—producing some 80 percent of the brewery’s electricity requirements. Not only does this ultimately help his bottom line, but it also shows his commitment to sustainability and community. But if you work there—if you’re lucky enough to work at Sierra Nevada—it gets even better.
Like all companies I talk about in this book, they’re great to their employees, because great companies care about their employees as much as they care about their customers and their global and local communities. If you work there, part of your compensation package is—you guessed it—a massage. You also get, with every paycheck, something they call a “beer buck.” Each beer buck allows you to get a case of the exquisite beer they produce.
When you take the tour of Sierra Nevada Brewery, you see something that seems to be lost at so many companies—an amazing sense of pride. I can only describe that, consistent with all of the great companies we talk about in this book, there’s such a pride in what Grossman does. You see it in the cleanliness of his operation. You see it in the efficiency and just the passion of every employee he has working there. They absolutely love working for him, they absolutely love working for Sierra Nevada, they’re proud of their brand, and, not surprisingly, they love beer.
They also have a great restaurant called the Sierra Nevada Tap Room. It has tasty food, and often, even in a small town (albeit a college town) like Chico, you have to wait hours to get in. But wait many people will, because it is such a great experience. Grossman understands that, and the food and the entire restaurant experience is emblematic of his pride and his commitment to being multisensory.
From the design of his bottles to the variety of beers he produces, Grossman has earned his success. From the very select and conscientious way he distributes his beer to his commitment to the global and local community and to his beloved employees, again, that’s how Grossman has earned success. I would say Grossman is another example of someone who has become bulletproof by doing the right thing for all people in his sphere of influence.

The Darkest Hour

Sierra Nevada and In-N-Out may be making it on the basis of understanding—and delivering—net customer value. But there’s no doubt that business conditions during the “Great Recession” were a huge wake-up call for virtually every business and organization in the country—in the world, for that matter. The severity of the recession and its effects on employment, corporate profits, and general business morale hardly bear additional coverage here.
But the way I see it, the most recent downturn was really a symptom of economic maladies that had been building up for a long time. As Warren Buffett put it so well: “When the tide goes out, you see who’s been swimming naked.” And we sure saw a lot of naked swimmers: Eastman Kodak, Blockbuster, Circuit City (which I’ll talk more about below), GM, and Chrysler, just to name a few, and not to mention entire industries like the U.S. financial services industry.
Yes, there were colossal failures and near-failures. Sure, at the time of this writing, Eastman Kodak and Blockbuster are trying to hang on, but their business models have essentially been reduced to shreds by, in the first case, a failure to keep up with technological changes, and in the second, a failed business model. But outside these big names, there are signs of failure everywhere in businesses large and small, and even entities in the public sector. What happened? How did these organizations lose their way, often knowing full well that better technologies and more competitive business models were emerging and, frankly, knowing that customers wanted something else?

Will the Great Pumpkin Return?

What’s different about these failing companies that make them fail? What lessons are there to learn? I believe companies that continue their R&D spending during downturns will be better positioned to grow when the economy comes back. I also believe economic downturns force a better focus in R&D efforts—at least for those companies that get it.
But I also believe that a great many companies fail to get it, doing R&D for R&D’s sake, or worse, letting R&D efforts languish in order to reduce short term expenses. These companies in particular are vulnerable because they’re relying solely on the resurgence of the economy—the next “up” cycle—to bring them back. I call this the “Great Pumpkin Syndrome”—one may recall the images of Peanuts’ Linus waiting in the pumpkin patch for the Great Pumpkin that never came. I believe those organizations that simply wait for the return of an economic Great Pumpkin will find themselves similarly waiting in vain by the pumpkin patch while others around them succeed and prosper.
Do Recessions Kill R&D Spending?
One might justifiably wonder what the economic downturn did to R&D expenses at U.S. and global corporations. Companies, of course, used the downturn as a reason to cut spending in a lot of areas, including R&D. As the economy climbs out of the recession, the next question is: “Will corporations that did cut R&D restore it?”
At the time of this writing, the facts are still arriving. Statistics published by the Battelle Memorial Institute indicate that U.S. research and development spending decreased in 2009, but it is expected to rebound in 2010 with the economy. According to their report, overall U.S. R&D spending is expected to rise 1.7 percent in 2010 to $395.9 billion after accounting for inflation. In the industrial sector, 2009 R&D spending in the United States actually fell 4.8 percent to $275.3 billion from $289.1 billion in 2008, but is expected to rise to $283 billion. Globally, R&D spending is expected to increase 4 percent to $1.16 trillion from 2009’s $1.11 trillion and 2008’s $1.12 trillion.
The real news may lie in the behavior of specific corporations and economic sectors. In the first nine months of 2009, Microsoft Corp. and International Business Machines Corp. cut R&D spending by 5.7 percent and 9.3 percent, respectively, while Apple increased R&D spending by 19 percent. Pfizer Inc. and Johnson & Johnson each cut their R&D spending by more than 10 percent. But there was a big surge in R&D among certain drug and biotech companies. According to a table published by BusinessWeek, Merck & Co., Gilead Sciences., Biogen Idec, and Monsanto increased theirs by more than 10 percent—in some cases, by as much as 30 percent. I’d not only say these companies are keeping a clear eye on the future, but they’re probably also getting their research done at a reduced cost. Not a bad idea, in my view.

Not Your Father’s Economy

One thing that we all must realize, in the wake of the Great Recession, is that the economy—and the role of innovation in the economy—have both changed, and changed for good. The biggest change is really in change itself: Everything changes faster.
What do I mean by this? The cycles of change, the ups and downs, are getting swifter, and may hit with little warning. Economic and business boom-bust cycles themselves are getting shorter. But more than that, technology and product cycles—the length of time a technology lasts in the marketplace—are getting shorter. Customer preference cycles are getting shorter—new things go out of style more quickly. So the key questions are: How are companies adapting to this? How should they be adapting to this? Should they spend more on R&D? Should they spend it more wisely? Should they spend it faster? We’ll examine those questions, but first, a little more on the ups and downs today’s businesses face.

A Faster Roller Coaster

Not so long ago—in the twentieth century and before—boom-to-bust business cycles may have been 20 years long, or longer. Although the cycles in those days were quite pronounced, with the Great Depression representing the granddaddy of them all, they were less frequent. They were pronounced because there was little that central banks, governments, or business leaders could do about them. Moreover, important safeguards like banking and securities laws hadn’t yet been put into place. So people—and businesses—were literally wiped out in those days without ever knowing what hit them.
Today’s business cycles are more frequent, generally shorter, and generally turn faster. More potent economic management through monetary and fiscal policy tends to reverse the cycle more quickly. But the biggest change over the years is the change in the speed of business—the rapidity in which business decisions are made and products and services are developed and sold. The pace of information about those products, as well as the economy as a whole, has become so much more rapid that entire sectors of the economy can change on a dime, in much the same way in which the latest military conflict or supply change can change the energy industry.

Technology and Product Cycles

Put simply, new technologies of yesteryear last longer than their counterparts of today.
Railroads, the great new technology of the nineteenth century, had a huge impact on business and commerce nearly everywhere. Their dominance as a transportation technology lasted more than 100 years. Fast forward to radio. As a major communication and advertising medium, its dominance ran for 40 years until eclipsed by TV. Fast forward to PCs and their key components. Seen a 3 1/2-inch floppy disc lately? Then there’s VHS video. Dial-up Internet service. The Internet itself—how long do products last these days before they must change or evolve?
The obvious answer: not very long. In almost all industries—even industries where the product doesn’t change (like coal mining) but the process does—companies must deal with change, and rapid change at that. Not only does the speed of business make change happen faster within the enterprise, but the quantity and facility of rapid communications between customers and businesses have also played a role. The Internet has increased customer awareness, expanded feedback, and provided a medium for customers to share experiences with each other—all serving to level the playing field among large corporations and much smaller companies in many aspects of their business. The Internet has also increased pricing transparency, enabling customers to make price comparisons at a speed that was unheard of 30 years ago.
There are two upshots. First, combining the availability of product information, price information, and peer review of many key products, customers have become far more conscious of the net customer value they might expect to receive from a purchase. Second, competitors can copy or imitate even the most breakthrough technologies very rapidly. Trendy or market-leading products risk becoming obsolete almost instantly, and as the world becomes a global marketplace, competitive pressure is both wider and faster.
This isn’t an economics book, but it’s clear that innovation must respond to this environment. And it may not be enough to respond. True innovation success—and I’ll argue this point in good times or bad—means that successful organizations must drive the environment. The good ones will pace the change, not just respond to it, in good times and bad.

Creative Destruction

The process of natural business and technological evolution and destruction was appropriately labeled “creative destruction” by economist Joseph Schumpeter. The forces of creative destruction, especially during economic downturns, tend to speed the passing of older, less efficient businesses and technologies (especially without the intervention of policymakers, as exemplified by U.S. automakers). The dot-com bust hastened the demise of legacy phone switching technologies, independent bookstores, and the Oldsmobile, not to mention thousands of Internet applications that probably served little to no economic purpose. As a result, corporate investments, which aren’t so safe to begin with, become even riskier in a crisis if they are producing legacy products and services vulnerable to change.