Sample text for Innovation : how your business can get it, use it, and drive it / Curtis R. Carlson and William W. Wilmot.

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Chapter 1: The Essence of Innovation: How Frank Hit a Home Run

“Innovation is now the primary driver of growth, prosperity, and quality of life.”1
Paul M. Romer, Stanford University

If you ask a group of people the simple question “What is innovation?” it’s likely you will get a wide range of responses, such as

•a new technological breakthrough, such as the discovery of the transistor

•a new invention, such as a one-wheel scooter

•a new business model, such as a no-frills airline

•a new production process, such as a lower-cost way to make computers

•a new creative design, such as a sleek, sexy automobile

Innovation certainly requires creativity, invention, and often the other ingredients listed above. But none of these alone is an innovation.

Innovation is the process of creating and delivering new customer value in the marketplace.2 Until this happens, you may have invented something but you still don’t have an innovation. A new system of delivering products, such as selling books via the Internet, once established, is an innovation. It provides new customer value because it allows consumers to conveniently select and buy a large selection of books from home. Of course for an innovation to be viable, it must be affordable and also provide a sustainable profit to the company.

Many people have invented revolutionary new products but have been unsuccessful at getting them into the marketplace. Philo Farnsworth invented television in 1927, but it was David Sarnoff who created tele- vision broadcasting to bring black-and-white television to the consumer in 1939.3 He developed a successful business model that put together televisions, cameras, broadcasting stations, program content, and advertising. Farnsworth invented a device, while Sarnoff was the innovator who put all the pieces together to create an industry.

Sometimes the new customer value of an innovation may seem small, such as a better way for a nurse to administer a medical procedure or a better way to keep notes, such as 3M’s Post-it notes. At other times an innovation has revolutionary, worldwide impact, such as Wal-Mart’s approach for mass product distribution and sales. Regardless of the magnitude of impact, all innovations provide additional customer value, with customer value defined as a product’s or service’s benefits minus its costs. Customer value includes not just tangible product or service benefits, such as that provided by a higher-resolution computer screen, but also intangible needs, such as service, convenience, and personal identity.

Consider convenience. The Apple iPod Nano can contain thousands of your favorite songs and can be attached to your key chain, allowing you to carry your music conveniently in your pocket. By addressing multiple aspects of customer value—product, convenience, service, experience, and emotion—companies such as Apple, Disney, Lexus, and Starbucks create significant customer value and can thus charge a premium.

The phrase customer value is thrown around so often that it may sound like just another buzz phrase. Yet the failure to think through the process of creating successful innovations by providing value to the customer is one reason that so many talented—and sometimes brilliant—people experience so much frustration. They can’t find a way to be successful because they don’t understand all the pieces that must be in place. This also explains why people in management often fail to act on potentially important new products and services. In the mind of many managers, far too many employees with allegedly innovative ideas are seen as a bother. They feel that employees don’t understand the practical realities of the company’s business and can’t demonstrate to management why customers would care enough to buy the supposedly wonderful new widget. These managers have no process in place to engage employees and turn them from bothers into superstars of innovation.

That was certainly the case with Frank Guarnieri, a brilliant researcher who was full of new ideas but felt that he was banging his head against the wall. I* was vice president in charge of new ventures when Frank visited me in my office. Frank hadn’t been with us very long and we had never really gotten to know each other. His meeting with me was a final test to see if he could get some help with his idea. With dark hair and eyes radiating intelligence, Frank spoke with an unusual accent, a combination of “Brooklynese” and some obscure form of erudition, pronouncing words with unique emphasis. He exuded passion and sincerity, and I immediately felt that he was someone to listen to.

Frank asked, “Do you know anything about biology?” When I told him no, he rolled his eyes slightly. Frank was probably thinking that this meeting was going to be another waste of time. He had come to see me because I was his last stop before walking out the door. As I learned later, that was supposed to happen just after he saw me. I was the last box to be checked on the way out.

Not knowing any of this, I asked Frank what he was up to. He told me he had an idea and that he was having a hard time getting anyone interested in it. I asked him what it was. He said, “Do you know that proteins are huge molecules made up of many tens of thousands of atoms?”

“Yes,” I said.

“Do you know why?” he asked.

I said, “No,” and again I saw a slight eye roll.

He told me that proteins had to be huge because they had a small spot, called a binding site, where they did their work when interacting with other proteins. All those atoms in the molecule were needed because the binding site had to be very specific in what it did. Otherwise, proteins would incorrectly interact with one another and our bodies wouldn’t function. “That makes sense,” I said, not fully understanding the implications of what he was after.

*This section is in the voice of coauthor Curtis R. Carlson when he was at SRI’s subsidiary, the Sarnoff Corporation.

Frank went on to say that if something goes wrong with one of your proteins, you have an illness, and you need a drug to fix the defective protein. The problem is that drugs are tiny molecules compared with proteins. They must attach themselves to exactly the right place on a particular protein to do their job. And to make this harder, if the drug attaches itself to any other protein in your body, it may cause a side effect. These two criteria make it incredibly hard to develop drugs. You must fix the broken protein and not interact with any others. Drug development is like walking into a football arena with 100,000 unknown spectators and trying to find the one person who will best connect with you and no one else. This is why a new drug can take a billion dollars and fifteen years to develop. It is truly like finding a needle in a haystack.

This was fascinating, so I asked, “What’s your idea?”

He said, “By calculation in a computer I can design small molecules that will attach themselves to just the right place on a protein to fix the problem.”

“Wow,” I thought, “this is a very important problem.” On my checklist of whether we should support a project, Frank had just hit the jackpot. If he could do this, it would be a huge contribution to medicine. The question was “Could Frank really do this?” What he was describing was a very difficult calculation—maybe impossible.

I asked Frank to explain his approach, but we didn’t get very far. Like many brilliant people, Frank assumed others knew as much as he did. I certainly didn’t. And as is often true at this point, his idea raised more questions than it answered. For example, I asked Frank about competing approaches. He didn’t know of any direct competition, although I knew from past experience that there is always competition.

At this point I had to go to a meeting. Frank asked, “What should I do next, write up a 100-page report and come back in a month?”

“No,” I said, “Why don’t you come back at seven tonight and bring answers to the four questions that define your value proposition.” I wanted Frank to know that I would support him by acting quickly too.

“What are the four questions?” Frank asked.

I said, “What is the market need? What is your approach to addressing this need? What are the benefits per costs of your approach? And how do those benefits per costs compare with the competition?” I told him we referred to these four questions as a “value proposition” or, in short, “NABC” for need, approach, benefits per costs, and competition. “They are the fundamentals; it doesn’t make sense to write up a big report until we can explain them in simple language to a knowledgeable person.”

Frank said, “Okay.”

Before Frank left I asked him one last question. I wanted to know, if I became his partner and worked with him to develop his idea, whether he would agree to be the project champion and do the work necessary to make his idea a success.

Frank asked, “What does it mean to be a champion?”

I went through the standard catechism of commitment, teamwork, corporate responsibility, engagement in the process to create a compelling value proposition, and perseverance.

Frank said, with eyebrows raised and some skepticism, “Really. What is the probability of success?”

I answered, “If you will do these things, the probability, in my experience, is very high—in some situations close to 100 percent.” Frank still looked a little doubtful, so I said, “I understand that this is a lot to sign up for on day one, so why don’t we get started. But I will ask you again in a week or two if you are the champion, and if you say no, that is the end of the project.”

He said, “I understand,” and we started.

Frank created his first value proposition and brought it back that evening. As expected, his initial attempt was confusing and incomplete. They always are. Spelling out an idea so that a busy person “gets it” quickly is one of the toughest challenges in the early stages of a new innovation, no matter how incremental. And this was clearly not an incremental innovation. It takes dozens of revisions—or iterations—to make a value proposition clear. But it was a start, we had begun, and Frank was on to something. He came back again and again, and each time his ideas were expressed a little more clearly. Frank introduced me to another terrific colleague, John Kulp. This was a big step forward. Now we had two people who had real knowledge in the field—plus me. I contributed knowledge of the disciplined process we had to go through and what the answers to our four questions needed to look like when we were done.

Over time we gathered other critical colleagues.4 Frank talked to hundreds of people, interacted with potential clients and strategic partners, and constantly improved and refined his NABC value proposition. It was quite an experience: Every “expert” in the field told Frank that his ideas were impossible. They ignored him, rejected him, and sometimes insulted him. But Frank was always respectful and persevered.

I never had to ask Frank again if he was the champion. His passion took over and, after his first value proposition pitch, he was on his way. He didn’t quit.

It took Frank and his team over a year of challenging work. When we started the process, I had asked him what his goal was. He said, “My goal is a research project with funding of a few hundred thousand dollars a year, but I would like to do much better than that.”

I said, “I think we can.” Frank eventually became a founding member in an exciting new company, Locus Pharmaceuticals,5 with a multimillion-dollar research program and with some of the best people in his field. Just as important, he learned many of the skills and the disciplines needed to create successful innovations over and over again.

Since its formation Locus has made remarkable progress. At one point Frank and his colleagues asked for $40 million in new capital and they eventually decided to take $80 million—this at a time when most companies were having trouble attracting $10 million in venture capital. The reason for the excitement was that Locus was doing something important that had never been done, designing a new drug completely in a computer. This development has the potential of removing many tens of millions of dollars from the cost of drug development while reducing the development time by years—a transformational innovation.

Locus now has several potential blockbuster drugs that are close to clinical trials in cancer and inflammation—two vitally important areas of medicine. These amazing achievements were set in motion with the many iterations of Frank’s first value proposition and a discipline of innovation that resulted in the creation of Locus Pharmaceuticals. Although Locus still has a long way to go before their drugs are proven to be safe and effective, a critical milestone has been reached in the history of drug development. Frank and his teammates hit a home run.

When I became CEO of SRI International in 1998, I joined an or- ganization with an impressive history of innovation—an organization renowned for creating world-changing products and services. SRI’s achievements have created industries. In addition to the list of achievements given in the preface, SRI has made many contributions across a wide spectrum of societal needs: From medical ultrasound imaging, to the foundations of credit cards, to over-the-horizon radar, to economic development in dozens of countries around the world (we received the Royal Order of the North Star from the King of Sweden for economic developments in Sweden), to programs to help disabled children learn better, to innovations such as the 911 call system, the term “stakeholder,” and the fundamental business concept of SWOT (strengths, weaknesses, opportunities, and threats).

Despite this enviable history of achievement, SRI had stopped growing in the 1990s. The discipline of innovation that provided Frank and his organization with the skills to be successful and thrive in today’s knowledge world wasn’t part of the organization’s DNA. As was the case at SRI and in organizations around the world, the process of innovation being used was obsolete. Here was an extraordinary organization whose researchers had produced many life-improving innovations, and yet it was losing ground. In our fast-paced age, if SRI wanted to thrive, it would have to create higher-value innovations more rapidly. But how?

Library of Congress subject headings for this publication:
Technological innovations -- Management -- Case studies.
Organizational effectiveness -- Case studies.
Creative ability in business -- Case studies.
Industrial management -- Case studies.
New products -- Case studies.