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Manage Innovation, Don’t let it manage you!

Lovely article from BCG (as usual) below for convenience and you can find the original PDF here. I recommend perusing the site as there are plenty of gems.

Directing Digital Innovation at PepsiCo

Is digital innovation delivering real bottom-line business impact to your business? Too often, we see companies generate an abundance of innovation activity, experiments, prototypes, and spin-outs—only to struggle with having these ideas sponsored, integrated, and scaled. In this article, we share lessons on how to direct digital innovation to maximize business impact.

The stakes are high. We examined the financial results of more than 70 large companies1 recognized as the world’s most innovative. Compared with their industries’ averages, top performers had higher net margins (11.8 percent), better ROI (5.7 percent), and increased revenue growth (17.1 percent). It’s no wonder that CEOs are rating innovation as one of their top priorities2. The pressure is on at all companies to be more innovative—and one of the hottest areas of innovation is digital innovation.

A lot has been written on what it takes to get digital innovation right3. Aspects for consideration include process, culture, teams, partnering, and technology. In our research, which included case studies of 15 digitally innovative companies, we identified one other characteristic. Rather than just collecting ideas across the organization and “letting a thousand flowers bloom,” these top-performing companies direct their innovation efforts to the areas of greatest impact and business priority. They then lift and scale the resulting innovations across the business.

 PepsiCo—A Digitally Innovative Company

Take PepsiCo, a global food and beverage leader with $65 billion in revenues and more than 22 billion-dollar brands, such as Frito-Lay, Tropicana, and Gatorade. PepsiCo is regularly recognized among the top innovative companies in the world and has a spectacular five-year growth rate4—10.7 percent, compared with the industry average of 2.3 percent.

We consider PepsiCo to be a digitally innovative company because it applies digitization to every part of the business, including the following:

  • Products and Services. While PepsiCo is primarily a physical-products company, it also wraps digital services around its products. For example, PepsiCo’s Touch Tower, a digital fountain, can dispense more than 100 flavors of drinks from a benchtop unit with a touch screen. Digital services allow PepsiCo to advertise, run loyalty programs, collect and analyze real-time data, and conduct A/B testing of new products.
  • Processes. PepsiCo relies on efficient core processes, including merchandizing and distribution, which are supported by traditional enabling processes such as finance and sales. One digital process innovation is an iPad app—Facts on Demand—that shows store-sales performance of PepsiCo products at any time. The app is location based so that, during a visit, a salesperson can compare a store’s sales with those of others nearby and show the results to the store manager.
  • Customer Experience. PepsiCo is also changing the way it interacts with customers via its interactive social vending machine. Customers can buy products, collect loyalty points, and even send gifts by e-mail or their social-media profiles, while PepsiCo learns about its customers, their locations, and their connections.
  • Strategy. PepsiCo is continually exploring new business models and ecosystems, in particular in technology, media, and communications. For example, the company was an official launch partner for iTunes Radio.

These examples show that for PepsiCo, digital innovation is not about a standalone digital product or a separate digital business. Digital innovation is practiced in every part of the business, and it is impacting the bottom line.

Directing IT Innovation at PepsiCo

To achieve this kind of innovation, PepsiCo has many R&D centers and centers of excellence around the world. Within the IT function, the Business and Information Solution (BIS) innovation team, led by David Bernard, leader of Global Innovation Strategy & Services, is responsible for identifying breakthrough and emerging opportunities that could have a significant impact on PepsiCo’s growth.

At the start of each annual business-planning process, the team partners with business unit CIOs and line managers to identify strategic business capabilities—high-impact, long-term opportunities with potential to create competitive advantage for PepsiCo. These opportunities are referred to as “leverage points.” In 2013, they included product and life cycle management, insights and advanced-analytics solutions, and merchandizing.

Next, the innovation team evaluates points of opportunity in each unit to identify two to three “sticky business challenges,” or challenges that it has not overcome on its own by traditional means. Then the team looks at emerging technology (such as social media, sensors, advanced analytics, security, cloud, and customer-centric design) to facilitate the selection of a small number of challenges it can help solve.

One challenge was to ensure optimized merchandizing solutions for stores with varying layouts in different locations; the solution was an enhancement to PepsiCo’s Facts on Demand iPad app that adds augmented reality to assist in merchandizing PepsiCo products. With this innovation, the iPad provides a 360-degree panoramic visualization of what proven PepsiCo merchandizing solutions would look like in a specific store. The iPad app enhancement is now being employed in various markets to help salespeople serve merchants with the right products displayed in the most effective ways.

In short, the BIS innovation team applies significant effort to find high-priority problems, directing innovation to where it can deliver the greatest impact, now and in the long term.

To implement innovations, PepsiCo operates a portfolio of initiatives spanning three “horizons.” Horizon 1 is for initiatives in which the company understands both the problem and the solution, such as the augmented reality example above. The team runs the full process through into business case and implementation. Horizon 2 is for initiatives in which the problem is understood but the solution is not known. In these cases, the team creates experiments and prototypes, often involving partners to pitch ideas around the specific problem. Horizon 3 is for areas where PepsiCo doesn’t yet understand either the problem or the opportunity, around which the team may do some preliminary research and evaluation of new technologies. Initiatives flow between horizons over time.

PepsiCo continues to evolve and mature its innovation capability as it looks to new opportunities and partnerships to help scale its efforts. Key objectives of the innovation center are stronger engagement and collaboration and active sharing of knowledge, ideas, and processes across PepsiCo. By directing innovation to key areas of high priority and impact, it is increasingly being built into business strategy and plans across the organization.

Flipping the Switch on Innovation

Too often, in their rush to be innovative, companies end up generating hundreds of ideas across the business—by means of innovation platforms or competitions, for example. This then requires a mammoth ongoing process to select, prioritize, fund, stage gate, and evaluate the ideas. Even when an idea is selected, there are few guarantees that the solution will significantly affect business strategy and fit within agreed-upon priorities.

But rather than starting with a bunch of ideas, PepsiCo and other innovative companies we have studied employ a different approach: they flip the innovation process to first define high-priority problems where innovative solutions could deliver maximum impact. While they still use many of the same processes to innovate, they start at a different point. (See the exhibit.)

exhibit
Maximize Your Impact from Digital Innovation

There is a lot of pressure to be more innovative, particularly by exploiting digital opportunities. Directing digital innovation to target your company’s areas of highest priority and impact is one way of focusing your efforts and delivering real bottom-line impact.

Not all companies are at the stage of PepsiCo. To maximize the business impact from your digital innovation efforts, consider the following questions:

  • What are your highest-priority problems to which innovative solutions could deliver the greatest impact?
  • Where should you initially focus innovation efforts across the business—strategy, processes, products and services, or customer experience?
  • What is your process to lift and scale your successes across the company?

Multi-Generational Business

Should board of directors be mindful of the demographics of their own businesses and of their customers? Probably…

Generations

Simplify a Complex Age

In 1981, Peter Drucker delivered a lecture at New York University titled “Managing the Increasing Complexity of Large Organizations.” Drawing on lessons from the auto industry, banking and beyond, he offered provocative prescriptions for coping in a world in which “the real challenge is to decide what you are doing” in the face of tremendous “technological change or market change.”

But, as was his wont, Drucker didn’t just provide answers. Speaking slowly, through his thick Viennese accent, he asked questions: “How do we organize the new within the old?” “How do you organize your entrepreneurial within the managerial?” “How do you maintain the cohesion” at a multinational corporation with far-flung operations spanning myriad cultures?

This was no mere rhetorical device. As I’ve explored previously, Drucker was always asking pointed questions—and, in turn, prompting people to challenge their assumptions, reframe problems and consider different angles.

More than 30 years after Drucker’s talk at NYU, the level of complexity confronting us has only continued to increase—or at least it feels to most managers like it has increased, given the outdated models and processes that most businesses tend to use (as both Steve Denning and Roger Martin have eloquently explained).

With that in mind, here are six questions—all of them straight out of Drucker’s writing—that I believe he would now pose to any manager trying to cope with, in his words, “the complexities of size, markets, products and technologies.” You should ask the first two from the standpoint of your overall organization. You should ask those who work for you the second two. And the final two you should ask yourself.

1. What does the customer value? This “may be the most important question,” Drucker advised. “Yet it is the one least often asked.” This insight is especially relevant in an age where customers have more power and choice than ever before. Unless there is a relentless quest to figure out what they want and need—and the only way to do this is “to go out to look, to ask, to listen,” Drucker said—it is easy to be left behind in relatively short order. Think BlackBerry, for example. “What is value to the customer,” Drucker wrote in his 1999 book Management Challenges for the 21st Century, “is always something quite different from what is value or quality to the supplier.”

2. What is our business, and what should it be? “Nothing may seem simpler or more obvious than to know what a company’s business is,” Drucker pointed out in his 1973 landmark Management: Tasks, Responsibilities, Practices. Yet “the right answer is usually anything but obvious.” This is particularly true in an era in which market structures can change with astonishing rapidity and new horizons are continuously opening because of technological advances. One of the reasons for Amazon’s great success, I would argue, is that it is constantly honing its answer to “What is our business?”—although doing so requires an extraordinary amount of discipline. Why? Asked seriously, “the question causes controversy, argument and disagreement,” Drucker noted. “It requires judgment and considerable courage. The answer rarely follows what ‘everybody knows.’ … It should never be made quickly; it can never be made painlessly.”

3. What is the task? No one ever would have asked this question to a 1950s blue-collar laborer. That’s because “in manual work,” Drucker observed, “the task is always given”: A car rolls down the assembly line, and someone bolts on the fender. But today, when knowledge work is predominant, tasks can be far more difficult to define. There is often no specific way for a knowledge worker to tackle an assignment. He or she typically has enormous discretion over what steps to take (and which ones not to take), and in what order to take them. Even outputs can be fuzzy when the “work product” is what lies between people’s ears, not what emerges from their hands. The key to improving knowledge-worker productivity, Drucker wrote, begins bottom-up, “with asking knowledge workers themselves: What is your task? What should it be? What should you be expected to contribute? And what hampers you in doing your task and should be eliminated?”

4. What are your ideas for us to try to do new things, develop new products, design new ways of reaching the market? More than ever, it’s imperative that all employees make innovation a priority, not just the R&D staff or the “new products” team. To be sure, not everyone has equal capacity for driving “change that creates a new dimension of performance,” as Drucker put it. “There are clearly people who are more talented innovators than the rest of us,” he acknowledged. But each person in the organization, from top to bottom, needs to adopt an innovative mindset. One way to foster this, Drucker counseled, is for senior executives to hold a session a few times a year with 25 to 30 more junior employees from across all functions. As Drucker scripted it, “the senior opens the session by saying: ‘I’m not here to make a speech or to tell you anything. I’m here to listen. I want to hear from you what your aspirations are, but above all, where you see opportunities for this company and where you see threats.’” Such gatherings, Drucker added, “are one of the most effective ways to instill entrepreneurial vision throughout the company.”

5. Who in this organization depends on me for what information? “Each person’s list will always include superiors and subordinates,” Drucker wrote in a 1988 Harvard Business Review essay called “The Coming of the New Organization.” “But the most important names on it will be those of colleagues, people with whom one’s primary relationship is coordination.” This notion rings even more true now, as traditional command-and-control structures slowly give way to more fluid and flexible arrangements at a growing number of enterprises. Asking this question—and making sure that the information you deliver to your peers comes in the right form and at the right time—is a central part of what Drucker termed taking “information responsibility.” After determining who depends on you for information, the follow-up question is also crucial: And on whom, in turn, do I depend?

6. What would happen if this were not done at all? There’s never been a more apt moment to ask this question, what with every manager these days struggling to preserve his or her most precious resource—time. In his 1967 classic The Effective Executive, Drucker recommended that everyone keep a detailed time log, tracking how minutes and hours are actually spent. Mark down events as they occur; don’t rely on your memory. After three or four weeks, analyze what you’ve recorded and ask what the result would be if a certain activity weren’t undertaken in the first place. “If the answer is nothing would happen,” Drucker wrote, “then obviously the conclusion is to stop doing it. It is amazing how many things busy people are doing that never will be missed.”

From HBR.org & Rick Wartzman