TIMnovate

In Innovation Management, we describe the American retailing giant Wal-Mart’s business model in detail. (See, for instance, our discussion of Wal-Mart founder Sam Walton’s business values, pp. 129-30, and Wal-Mart’s competitive model, p. 266). 

Wal-Mart’s “everyday low prices” were built on leveraging economies of scale, low-price Chinese suppliers, advanced satellite-based IT systems for inventory and shelf management, and ‘float’ – paying suppliers in 90 days, while selling their goods within 7. The latter ‘float’ is a three-month interest-free loan, which on Wal-Mart’s annual  $351 b. annual sales (now second to Exxon-Mobil in revenues), is worth about $4 b.

But in 2006, Wal-Mart’s earnings per share barely rose, its market value at end June is roughly the same as a year ago, and its share price, under $50, is far below its 2000 peak of $68. “Is the world’s biggest retailer in trouble?” asks The Economist, in its Feb. 15th issue. 

The answer is, No! Having innovated on the supply side (cost and efficiency management) Wal-Mart is now innovating on the demand side – on the products it sells. On June 20, Wal-Mart announced that having abandoned plans to start its own bank, it will instead offer a series of financial services to its customers, through Wal-Mart Money Centers (check cashing, bill payments, int. money transfers). Also, Wal-Mart will issue a Wal-Mart MoneyCard, a prepaid Visa card, which will cost $8.95, for buying gas, and for shopping online. Financial services is a new growth area for Wal-Mart. Faced with a decline in same-store sales in April, and a failure of its effort to sell more upscale (higher-priced) items, Wal-Mart grappled with a traditional strategic dilemma: Sell more (goods and services) to same (customers), or – Sell same (goods and services) to more (customers). The choice: More to same. According to Business Week (June 20, 2007), the new younger generation,  Gen Y, is more open to handling its financial transactions with companies that are not real banks. “In a decade Gen Y might think that Wal-Mart is as much a bank as Bank of America,” notes Business Week.   

“More to same” strategies require strong innovation management skills. Observers will  watch Wal-Mart closely to see if its core competency in innovation is as high as its core competency in operations management. 

Blarney Castle, Ireland: What brings an Israeli – and millions of tourists – to this 15th C. castle? 

A strange and highly improbable story that is attached to it.

Over 400 years ago, Queen Elizabeth I (the “Virgin Queen”) lost patience with Lord Blarney, owner and occupant of the castle, because he sweet-talked her endlessly, without ever doing what she wanted.  

“He’s talking Blarney!” she said, exasperated. [See below].
—————————————————————————————————–
Baloney? Or Blarney?
Baloney: When you tell an unattractive women that she is beautiful.
Blarney: When you tell the same woman that her wisdom and experience enhance her striking features. 
—————————————————————————————————–

Some 200 years ago, a marketing genius invented a legend that if you kissed the Blarney Stone atop the castle, you instantly acquire the ‘gift of the gap’ – the ability to talk blarney. 

Now millions (including Winston Churchill) come here for that purpose. Clearly, it worked for him, right? 

What can we learn from the Blarney Stone? Mainly, the truly amazing power of a great story.  

At Blarney Catsle, we watched people laugh and chatter, imagining themselves as eloquent as Churchill after kissing the stone.  We saw how they suspended their disbelief and cynicism and surrendered to a compelling fairy tale. We realized too how this tiny nation of only 4 m. people survived famine, hardship and oppression, and kept alive their history, values and culture, in part by their story-telling skills. We understood why Ireland produced so many great writers, all of them wonderful story-tellers – Jonathan Swift (Gulliver’s Travels), J.M. Synge (Playboy of the Western World), Sean O’Casey (Juno and the Paycock), G.B. Shaw (Man and Superman), James Joyce (Ulysses), and W.B. Yeats (Innisfree). 

But mostly, we understood how Ireland has transformed itself from one of Europe’s poorest, perpetually poor, nations, into one of the richest, through an improbable story first told in 1988: “We will become the choice site in Europe for investment by the world’s leading global companies.” Remember: an improbable story that is believed by a critical mass of people becomes a self-fulfilling prophecy.

Finally, we asked: Israel too was born as a result of an improbable story – returning to our ancestral homeland after 2000 years. After all, wasn’t it Herzl who said, If you will it – it is no Blarney!

Stories, like business models, sometimes need renewal.   

So – what is Israel’s story today?     
____________________________________________________________________
Further reading: Kate Sweetman & Shlomo Maital. “The Power of Stories”,  Int. J. of Technology & Innovation Management Education, vol. 1 2006.  

ACTION LEARNING
Reader, ask yourself:
     •  What is my story? Do I have one? Does it inspire and energize me and those I love? 
     •  What is my organization’s story? Does it have one? Does it inspire and energize me and all those whom I lead? 

In 331 B.C. 23-year-old Alexander of Macedon advanced toward Persia. In the previous two years, he had conquered Egypt and the Mediterranean coast, then Syria, and now moved toward Persia to face the Persian emperor Darius. Alexander crossed the Tigris and Euphrates Rivers with his forces, while Darius mustered a large army. The two armies met and fought at Gaugamela, near the modern-day northern Iraqi city of Mosul. [The name Gaugamela comes from “gahmal”, or camel in Hebrew and Arabic, because supposedly the battle occurred near a camel-shaped hill.]

Alexander’s forces were vastly outnumbered. Some accounts say Darius’ army had a million soldiers. But the difficult logistics of feeding such an army suggest it was smaller, perhaps 100,000. However, Darius had 200 scythed chariots – chariots with fearful rotating knives on each side that could cut opposing soldiers and cavalry to pieces. Alexander had mustered a force less than half that of Darius, with no chariots.  

It appeared hopeless. But Alexander defeated Darius by several remarkable innovations. Here are just two of them:
 
•  The box or “mouse trap”: After Gaugamela, scythed chariots were never used again in battle. Alexander found a simple solution. He arranged his soldiers, carrying six-meter-long spears known as sarissa, into three-sided boxes, with spears facing inward. The Persian chariots rode into the mouse-trap box – and the horse pulling the chariot bolted and stopped when facing the spears ahead of it. It was then a simple matter for the Macedonians to annihilate the stationary chariot rider and his steed.
 
•  The tactics: Darius lined his forces up conventionally, with scythed chariots in front, then infantry, in a long row, with cavalry on the flanks. Darius was in the center. But Alexander placed  his cavalry at 45 degree angles on the flanks. He led the cavalry on the right, while his general Parmenion led the cavalry on the left. At the start of the battle Alexander led his cavalry in a slow trot parallel to the Persian lines – for the Persians, a puzzling move. Then, suddenly, Alexander turned  left toward the Persians, forming his troops into a kind of arrowhead and driving right toward the center of the Persian lines, toward Darius and his Royal Guards. The Persians had expected a conventional frontal battle, with front lines of each force engaging each other. They were perplexed and confused by Alexander’s innovation. Darius fled in panic – and the battle for him was lost.

 •  The leadership: While Darius fled, abandoning his troops to save himself, Alexander behaved differently. Seeing Darius fleeing, he began to pursue him. But Alexander got a message from Parmenion, on the left flank, saying that Parmenion’s cavalry was about to be annihilated by the Persians. Alexander had a tough choice: Capture and kill Darius and win the Persian Empire, or rescue his embattled general and troops. Surely, the driven, ambitious young Alexander would chose the Empire. But no – he chose his men. He broke off the fight, and returned to rescue Parmenion and save his cavalry.

There is rarely a strong innovation story, without some element of leadership. By showing that his soldiers meant more to him than the Persian Empire, Alexander won their loyalty forever – and earned the title Alexander the Great. Darius was soon murdered by a rival, who then declared fealty to Alexander.  

Alexander the Innovator, in 12 years, conquered most of the world known to the ancient Greeks. His empire reached as far as the Punjab in India. He never lost a battle. He died at age 33 of malaria, West Nile fever, encephalitis or heavy drinking, or a combination of them. 

“You and I, we will change the world,” go the words of a popular Hebrew song. But how many of us truly believe this is possible?

More than at any time in history, there is tremendous need for world-changing innovators. Why? Because globalization and the ideology of free markets have led to sharp shrinkage in public services and to an enormous increase in the gap between rich and poor. Unless addressed, this gap will be (and in some ways is already) threatening for world stability. Innovators can and must address desperate, pressing social problems: hunger, illness, poverty, stagnation, inequality.

A social innovation is an idea that addresses and solves a pressing social problem and meets a social need. Here is one example. Mohammed Yunus, a Bangla Deshi economist, won the 2006 Nobel Peace Prize for launching Grameen Bank, a bank that provides micro-finance loans to poor villagers. In 1974 Yunus went out to a village to find out why villagers were starving, and learned that lack of credit was keeping villagers in poverty. He lent them $27 – and got it all back, to his surprise. Those $27 changed the villagers’ lives. He went on to start a bank that made small loans to villagers in many countries, to replace usurious interest rates of 100% or more. As of 2006: 
 
•  Total number of borrowers is 6.67 million, and 97% of those are women   
•  2,247 branches (as of May, 2006) covering 72,096 villages, with a total staff of over 18,795   
•  Loan recovery rate is 98.85%  
•  Since inception, total loans distributed amount to US$ 5.72 billion. Out of this,  US$ 5.07 billion has been repaid.

Yunus, a social entrepreneur and innovator, changed the world. And he is not alone.

Rick Aubry is President of Rubicon Programs, an American organization founded in order to provide the homeless with housing, training and employment in one of its businesses. For instance, Rubicon Bakery distributes desserts to 2,000 supermarkets across the U.S. Rubicon has generated jobs for some 40,000 people, since 1973, funding half of its $16 m. annual budget from revenues generated by its businesses. Aubry says, “Social enterprise 2.0 must impact to a magnitude 100 times that of achievements to date”, because the needs are so great.

America’s Public Broadcasting System, and its series New Heroes, showcase social entrepreneurs. (See www.pbs.org/opb/thenewheroes/).  

“A social entrepreneur identifies and solves social problems on a large scale,” notes the PBS series. “Just as business entrepreneurs create and transform whole industries, social entrepreneurs act as the change agents for society, seizing opportunities others miss in order to improve systems, invent and disseminate new approaches and advance sustainable solutions that create social value. Unlike traditional business entrepreneurs, social entrepreneurs primarily seek to generate “social value” rather than profits. And unlike the majority of non-profit organizations, their work is targeted not only towards immediate, small-scale effects, but sweeping, long-term change.”

PBS reports that an Indian doctor, Dr. Venkataswamy, instead of retiring at 65, mortgaged his home and opened a hospital to perform free or low-cost cataract surgery on poor Indians. (A million or more villagers are blind due to cataracts, a condition easily curable by lens-replacement surgery – but not affordable to the villagers). In his first year, Dr. V. performed 5000 surgeries. Social entrepreneur David Green showed Dr. V. how to reduce the cost of a cataract lens from $150 (unreachable for Indian villagers). Their company, Aurolab, makes products used by eye care institutions and ophthalmologists in more than 120 countries. The factory produces hundreds of thousands of lenses each year — 10 percent of the world supply — at $5.00 a pair. The company turns a profit of thirty percent on its investment. With the revenue stream produced by Aurolab, Dr. V. has been able to open five new eye hospitals in southern India.

An outstanding example of social entrepreneurship is Nicholas Negroponte’s OLPC “one laptop per child” project. The project will mass-produce laptops, aiming at a $100 delivery price, within the means of millions of children in developing countries. (See www.laptop.org). Where they have been provided, such laptops have fundamentally changed the way children are educated. They have changed the world.
  
I expect we will see social entrepreneurs proliferate worldwide. Members of Generation Y, the generation following Generation X and the baby-boomers, seek to find meaning in their lives, more so than their parents and grandparents.  Many will do so by trying to do good for others, far more than trying to do well for themselves. In doing so, they will change our world for the better – and fill the huge gap now created by incompetent bureaucrats and shrinking public resources.   They will use the principals of innovation to become not Bill Gates – but Muhammad Yunus or Nick Negroponte or Rick Aubry or Dr. Venkataswamy.   

Shall we try to join them? 

     -David Bornstein. How to Change the World: Social Entrepreneurs and the Power of New Ideas.

My wife, a school psychologist and expert on early childhood, reads widely. I find that the research that crosses her desk is far more interesting than much of the management fluff that crosses mine. And often, far more relevant.

For instance, take the research monograph by Michelle Chouinard. She studied how and why children ask questions.  Among other things, she studied transcriptions of 24,741 asked by four children, tracked from age 1 1/2 through about 5, in 229 hours of conversations with their parents. The pace of the questions was machine-gun – for “Adam”, the top interrogator, 198 questions an hour (3 per minute!!). The average was about 2 per minute, or 108 per hr. 

We know that 90% of what we learn is learned by age 5. We also know that sustained competitiveness In organizations derives from the ability to learn. So – what can organizations, and innovative managers, learn from kids? And how, as mature leaders, can we return to the skills we had as five-year-olds?

Here are five findings, along with a self-test question and implications for innovation.

1.  “Children know when they’ve received those answers [they seek] and they continue to pursue them if they haven’t received them.” (p. 101)

Do you pursue your ‘why’ questions, to get to the bottom of things? Or do you stop before you really find the answer, out of politeness? (Do you use “why” predominantly, or mostly how, when and where?)  

If the answer is no: You’re not yet a five-year-old.

2. “When children encounter a ‘problem’, …questions are the tool  they use to get information; when they have [it] they can solve the issue at hand. (p. 105)

In tackling a problem, do you ask strings of questions, including ones that may seem to others ‘dumb’? Are you reluctant to reveal lack of knowledge by asking? 

If the answers are ‘no’ and ‘yes’,  you’re not yet a five-year-old.

3. “When the task gets harder, children switch strategies and find another dimension to ask about. Children are skilled at using whatever information they have at hand to efficiently generate a question and resolve a problem.” (p. 95).

Do you ask incisive creative questions that can point to solutions and innovations?
Mathematicians say 90% of solving a hard problem is formulating the question. 

If the answer is no, you are not yet a five-year-old. 

4. “Children recognize that the first question did not get the information they needed, and ask again.” (p. 88). “When adults do fail to answer, children persist in trying to get the information they requested.” (p. 43). “Children continue to ask questions until they get the information needed… and once they accomplish this they stop asking the question.” (p. 28).

Do you accept unsatisfactory answers – especially from superiors? Or do you insist on getting a straight answer, and persevere until you do?

If the answer is no – you are not yet a five-year-old.

5. “The number of questions is [not] the key; asking the right question is”. P. 89. (Children were given a box, asked to find out what was in it, and then turned loose to ask questions). 

Can you frame a penetrating question that ‘unlocks the door’ to the problem?

If you can, you’re a five-year-old. 

One of the 7 key principles employed by Leonardo da Vinci was “curiosita” – endless permanent curiosity about the world, and the drive to ask questions about how it works. Children have this. Adults tend to lose it. Innovators desperately need it. 

So – managers, return to your childhood. Your five-year-old will show you how. 

Business Week’s 2007 “Most Innovative Companies” list has been published. The rankings are done annually by Boston Consulting Group, based on a global survey of senior managers. There are several noteworthy surprises. (See below).

* Walt Disney Co. soared from 43rd in 2006 to 8th, partly because of its launch in Russia and its pioneering efforts to stream ads in Internet videos. This is one of the most dramatic rises in the innovation rankings in history. Built on creativity, Disney appears to have gotten back its creativity DNA.
* Despite a bad year, Wal-Mart rose to 11th from 20th, because of its supply-chain innovations, widely-admired globally.
* 3M, once the gold standard of innovation, ranked 3rd in 2006,  ranked only 7th in 2007, falling four places.

What happened to 3M? On the face of it – nothing. In 2006, 3M’s revenues, at $22.9 b., rose 8%, but its profits, totaling $3.9 b., rose fully 20%. Its head-count grew by 9%, to 75,333, and above all, 3M’s famous “margins” (note its widely-cited slogan, will [this innovation] make 3M margins? – a 3M religion) were stellar: 17% net margin (net profit as % of revenues) and 39% return on shareholders’ equity. 

In 2005 3M CEO James McNerney left to become CEO of Boeing (a $61.5 b. company). McNerney came to 3M in 2000, from GE, having failed to succeed Jack Welch. He brought to 3M a relentless drive for greater efficiency. This included Six Sigma. The result was to fatten 3M’s profits – and endanger its future.

In our book Innovation Management, Seshadri and I note that sometimes, value creation (driven by innovation) and cost reduction can be bitter enemies. 3M seems to be a living example. Wall Street loved McNerney’s bottom-line impact. But  MIT Professor thinks innovation projects at 3M “took a backseat” once Six Sigma settled in. “The more you hardwire a company on TQM,” von Hippel notes, “the more it is going to hurt breakthrough innovation.”

Buckley, a Ph.D. chemical engineer, is “opening the money spigot”, according to Business Week (June 11 issue), to get the creative juices flowing again, hiking spending on R&D, acquisitions and capital spending. 3M’s R&D budget will grow 20% this year, to $1.5 b. Moreover Buckley is funneling cash into 3M’s 45 “core” technologies. Buckley is refocusing 3M. McNerney invested in 3M’s innovative skin cream Aldara. Buckley sold the pharma business, including the cream, for $2 b. 

The bottom line? “We feel we can dream again,” says a 3M senior manager. Look for 3M to rise in next year’s global innovation tables.
 

Source: Business Week June 11 issue

This is a brief tale about innovation in New Zealand.
 
According to Richard Taylor, founder of the New Zealand-based Weta Workshop, New Zealanders have to be innovative – in a rural setting, you have to be able to improvise and make things with your own hands, because you are far away from people who will do it for you. 

Taylor, as a child, loved sculpting; he made sculptures with mud from riverbanks. Later, he made a living by making sculptures for weddings out of margarine.  That passion ultimately evolved into Weta Workshop, a film and television effects facility that created Gollum, the  Tolkien character in Lord of the Rings that won an Academy Award for special digitized effects (its lifelike image, partly because WETA found a way to actually show blood corpuscles beneath Gollum’s skin, known as ‘subsurface scattering’). Weta also created the amazing modern version of King Kong.

The name ‘weta’ comes from a huge New Zealand bug, in turn named after the Maori word Wetapunga, or “God of ugly things”. 

Film producer Peter Jackson hired Taylor, and the WETA team, to do special effects for his Lord of the Rings trilogy. That film too was an innovation – filming three movies at once, in the New Zealand mountains, during a 15-month period, in adapting Tolkien’s Lord of the Rings masterpiece for the screen. The opening installment alone grossed $870 m. worldwide. 

Jackson knew he would need the Gollum character for his third movie, (The Return of the King, 2003) – but the technology for it did not yet exist. Yet he contracted with WETA, hoping the digital-effects industry would provide a solution in time.  Thanks to Taylor, it did. Gollum, a truly ugly thing, is based on a real person, Andy Serkis, and his voice, features and movements. Gollum was created by digitally ‘painting out’ Serkis and replacing him with Gollum – done frame by frame.  And every frame of Gollum’s performance (and there were a great many) took four hours to compute!  

The key elements that embody all pathbreaking innovations are all there in Gollum – risk taking, improvisation, vision, dreams, creativity. It is remarkable how the character Gollum assumes lifelike reality on the screen. And equally remarkable how in remote New Zealand a former margarine sculptor has revolutionized the way movies are now made.                                                         

A  recent BBC Program, called 1Xtra, “Can’t Knock the Hustle” featured an interview by Alvin Hall with Sean Carter, better known as the rapper JayZ.
 
Sean was born and raised in the Bedford-Stuyvesant projects, in Brooklyn, and dealt drugs when he was 16. Today his nine rap albums sell millions, and he has personal wealth of $320 m. – wealth driven by JayZ’s remarkable skill at platform innovation. He recently completed a world tour.

Here is how he did it. JayZ built his empire on ‘platform innovation’- leveraging a innovation into an entire platform, or range, of products and services – with common sense and intuition. For more sophisticated theory, readers are referred to the fine book by Annabelle Gower and Michael Cusumano, Platform Leadership: How Intel, Microsoft and Cisco Drive System Innovation. 

“I did not have lofty goals,” says Carter. He got his name, JayZ, because, he says, as a youth he had an older demeanor and was called, as a result, Jazzie Do, in street slang. Later, he shorted it to JayZ. He fell into rap by accident. When he was 9,  one of his friends, on the street, was able to speak in rhyme, extemporaneously, for 15 minutes. JayZ was impressed and wanted to learn to do it too. He did. Meanwhile, as a 16-year-old he dealt drugs.  

He got into rap by chance, and cut an album. Most artists look for an artist’s contract from a major music company. But JayZ started his own company, Roc-A-Fella Records. They pressed CD’s, 300 at a time, in Brooklyn, then sold them on “H” St. near a hot-dog stand out of their car trunk. He forged a distribution deal – the major companies distributed JayZ’s rap tunes, which were a hit, leaving most of the profit with JayZ.

I was not afraid, he said. He could always return to dealing drugs. His street trade taught him the basics of selling and dealing with people. 

Once, at a concert, JayZ and his team noticed many of the participants were wearing “Iceberg” T-shirts bought at a concession booth. He approached the company and offered them a tie-in deal. They refused, scorning the rap artists. So JayZ started his own clothing company in 1998. He bought two sewing machines and installed them in their dingy offices, so rundown they had to leave at 6 pm because the rats came out at dark.

The first year, Roc-A-Wear sold $90 m. in apparel! The company then nearly crashed, because of disorganization. “Truth trumps intelligence,” JayZ says. We missed shipments, payments… he says. He knew he needed help. He brought in a top strategic investor: Russell Simmons, godfather of hip-hop entrepreneurs and founder of the company DefJam. Today Roc-A-Wear has plush offices in the Fashion District in Chelsea, Manhattan. And JayZ has become DefJam’s CEO. 

What is platform innovation? JayZ has used his own celebrity as an innovation platform, with clear tight synergies. He has a Sports Bar, 40-44, in Chelsea, which sells his own vodka brand Armadale, displays JayZ clothing and plays JayZ music. He has an endorsement deal with Reeboc, whose JayZ sneaker line is the fastest-selling in the company’s history. He has an endorsement deal with HP, and the JayZ-based campaign to sell laptop computers has them flying off the shelf. He is on the Board of Directors of the NBA team New Jersey Nets. JayZ’s strategy is not unlike that of Martha Stuart, who has leveraged her own celebrity and brand image into enormous market success, despite a stint in jail. And his personal wealth today is estimated at $320 m. – not bad for a poor black kid once trying to survive on the mean streets of Brooklyn. 

A 16th C. collector of proverbs named John Heywood wrote down this one:  Two heads are better than one. Now, in the 21st C., thanks to the Web, we can say: A million (10 million?) heads are better than one.  

A new book by Don Tapscott and Anthony D. Williams,  Wikinomics: How Mass Collaboration Changes Everything, emerged from a $9 million research project, showing how the Internet enables masses of people to participate in the innovation economy through social networking. In fact, social networking may be a far more powerful innovation than nanotechnology or WiFi.   

The name Wikinomics comes from Wikipedia (pronounced: weekie-peedia), the on-line user-written encyclopedia. Wikipedia, in turn, comes from the Hawaiian word for speed, wiki wiki, also  the name of the fast shuttle buses at Honolulu Airport. The name was used by Ward Cunningham for the first wiki site, in 1995, devoted to solutions to recurring problems found in computer programming. Larry Singer built Nupedia, in 2001, the first open-content peer-reviewed free encyclopedia; Wikipedia was created for writers contributing content to Nupedia. Sanger was astonished at the explosion of Wikipedia content and the number of users. 

How can businesses leverage this remarkable innovation? Writing in the latest issue of Forbes, Rich Karlgaard discusses the user network created by Cirrus, a maker of low-cost airplanes. Cirrus owners are dedicated fans of the product – so much so, they initiated an Internet message board, and began posting complaints.

Dedicated fans? Complaints? What Cirrus understood, and what many companies fail to understand, is that only users who truly care about the product take the trouble to post complaints – and  such postings are worth their weight in gold, providing data and information not available otherwise. COPA (Cirrus Owners & Pilots Association) members have launched, according to Karlgaard, a COPApedia, user-generated Cirrus encyclopedia modeled after Wikipedia. Cirrus gains invaluable information from it, for R&D, and it costs them nothing. “It learns about future wants, price points and likely sales volume”, notes Karlgaard. All Cirrus has to do is tune in and listen – and not fight back.

There is a major lesson here. Innovative companies can acquire great innovations from their own versions of COPApedia – provided they have the vision and patience to join them, rather than fight them.  

And, as Heywood said nearly 500 years ago: Better to bow than to break. Better to bow to the wisdom of thousands of users, than break their wisdom by battling it.