How Innovation Really Works

Sales and marketing were once disciplines ruled by emotions. But somewhere along the way, we recognized that they were based on definable pipelines and applied technology to manage those pipelines. Today you can put a corporate dashboard in place to manage them and tweak the settings to try to boost your results.

What if we applied the same thinking to innovation? After all, innovation, like marketing and sales, is a pipeline. In one end go raw concepts and notions. Out the other end come actionable ideas that can move the business forward. With the right technology, could you manage this pipeline the way you manage a sales pipeline?

Research shows that you can.

Dylan Minor, assistant professorship at the Kellogg School of Management, has analyzed five years of data from 154 public companies covering over 3.5 million employees that have used an idea management system called Spigit. For the millions of employees of these companies, the idea management system functions a little like Facebook – people can post ideas, get votes, deliver or respond to feedback, and develop the ideas into innovations that make a difference to the company. The innovation teams at these companies use them to track and process all the ideas and whether the company committed to putting them into practice. Some companies use this software for process innovation; others develop new products; others seek efficiencies and cost savings.

Once you put innovation into a system like this, you can track everything. We know how many innovation challenges the companies are running, how many people are suggesting ideas, and how many ideas they suggest. We know how many people are participating in other ways – by voting or making comments, for example. And we also know how many of those ideas get through the endpoint of the challenge, which is where the company’s management determines which ideas to pursue further. Linear regression was used to analyze every potential measure the system includes over every 3-month time period when the system was active within the company.

But what was learned from analysis of all this data is that innovation is, indeed, a science. And surprisingly, the variables that make for a successful innovation program are independent of whether the company is seeking disruptive or incremental innovations. It doesn’t matter whether they’re asking for process or product innovation, what industry the company is in, or even, for the most part, whether the company is large or small.

The key variable that we identified across all the companies in the analysis is the ideation rate, which is defineed as the number of ideas approved by management divided by the total number of active users in the system. Higher ideation rates are correlated with growth and net income, most likely because companies with an innovation culture not only generate better ideas, but are organized and managed to act on them.

After reviewing dozens of variables that could potentially affect ideation,  four factors that drove the ideation rate were identified.

Scale – more participants. To succeed, an innovation program needs lots of participants. It’s the wisdom of the crowd: a large mass of participants will always out-ideate a small group of smart people. On average, companies generate one idea for every four participants in the system.

Frequency – more ideas. To get to a set of promising ideas whose implementation would make sense, you need to sift through a lot of candidates. To succeed, a company needs to create frequent idea challenges for its employees. These challenges reinforce a culture of innovation and generate more ideas going into the pipeline. While there is a great deal of variation based on the types of ideas and the companies reviewing them, on average, it takes five idea candidates to generate one idea that the company judges to be worth implementing.

Engagement – more people evaluating ideas. It’s not enough to get some people suggesting ideas. You need lots of other people figuring out whether those ideas are worth working on, or what it will take for them to become better. A successful idea management system is a ferment of commentary, with lots of feedback.

Diversity – more kinds of people contributing. You might think the most productive innovation system would be full of engineers or other problem-solvers. You’d be wrong. A successful system needs contributions from all over the organization, especially staff who are close to the front lines: sales staff, support workers, or people in close touch with the company’s manufacturing processes, for example.

When a program like this is working, it churns out actionable innovations at a steady and predictable pace. What’s that like?

One large industrial manufacturer has put an innovation management system to good use. The company has mastered frequency and scale: it has run 15 challenges in the last year with over 2,000 active participants. Hundreds of ideas have poured in, generating thousands of comments. In 12 months, the company selected over 50 ideas to implement.

For example, the company challenged its employees to find ways to serve customers better. Among the problems that surfaced was the difficulty of inspecting a particular aircraft part overnight. The inspection process typically took eight hours. The company’s customers – airlines – found this frustrating because sometimes planes land late and need to take off early.

As the service techs understood, the problem wasn’t actually the inspection. It was the process of threading the camera inside the aircraft part to inspect it. That took seven hours. The subsequent inspection took one.

An administrative assistant at the company who was familiar with the airlines’ complaints responded to the challenge. She had recently seen the Tom Cruise movie Minority Report. She posted an idea, wondering, “Why can’t we send a robotic spider into the part, like the ones in the movie?”

While a lot of people reviewing her suggestion found it silly, the company’s Chief Technology Officer was intrigued. He tried putting a miniature camera on a remote control set of robotic legs and walking it into the part. It worked. He then turned the secretary’s idea into a standard practice. Now the inspections takes 15% as much time as they used to, and the airlines are a lot happier.

A single idea like this is impossible to predict or optimize for – just like a single sale is impossible to predict. But when you treat ideas systematically with an appropriately designed system, you can manage the pipeline of those ideas. That pipeline engages the employees who best know how to solve the problems of the business, and generates a predictable stream of innovations. Those innovations drive the business forward. Our research shows how to generate that steady stream of ideas.

Once everyone is thinking about ideas – and imagining that their cool concept might actually move the company – you get the while company effectively engaged in innovation. And in the Internet era, with the pace of innovation always accelerating, understanding the science of innovation could make all the difference in your ability to compete.

Avoiding disproportionate holiday sales

 

The retail industry has been disrupted in practically every way imaginable. It’s about time that retailers also rethink their approach to the holiday shopping season. It no longer makes sense to rely on disproportionate revenue from the holiday season to make up for softness in sales during the rest of the year.

Customers don’t want retailers to dictate their shopping schedule. Wealthier shoppers have become used to buying the products they want when they want them, whether that’s shouting out an order to Alexa, discovering an item while browsing through Pinterest, or using their mobile phone to buy a bunch of stuff during their morning commute. More price-sensitive shoppers are also changing their habits. RetailNext says that December traffic and sales are moving into January, which suggests that some shoppers are learning to wait for post-season sales. More and more shoppers across the retail spectrum are only frustrated by deals restricted to a certain timeframe (such as on Black Friday) or buying mode (such as in-store specials only).

More customers are in shopping mode all the time. In the book Absolute Value, Itamar Simonsen and Emanuel Rosen describe the new purchase decision process that has arisen from information about products being so ubiquitous and readily accessible. They argue that people no longer initiate shopping when they identify a need. Instead they now regularly engage in “couch tracking” — that is, keeping track of what they learn about products from reviews, friends, and news items on an ongoing basis. As such, customers’ preferences may be formed well in advance of any specific plan to purchase. Therefore it doesn’t make sense for retailers to try to influence product or brand decisions only during discrete windows of time.

For every person who is attracted by the excitement of shopping during the holiday rush is another who is turned off by the hassles and crowds. By insisting on driving traffic to stores on certain days when the customer experience is crowded, cluttered, and competitive, retailers are likely to drive some people to shop online where they end up more susceptible to distractions from other content and activities and lures from other retailers. And customers’ frustration with in-store shopping only increases at the end of the holiday shopping season, just when retailers want to prompt additional purchases or lock in last minute ones. Bain has found a clear drop in Net Promoter Scores in the second half of December from the first half of the month.

An over-emphasis on the holiday season doesn’t make sense from the retailer perspective either. The large fluctuations in demand wreak havoc on supply chain, labor management, and accounting. Anyone whose worked for or with a retailer knows the toll the holiday season takes on corporate culture, with employees expected to work long hours, endlessly trying to keep their finger on customers’ pulse and scrambling to make last minute changes. Given that demand can ebb and flow with uncontrollable factors like weather and other retailers’ actions, their efforts are often futile, thus increasing both frustration and costs.

Moreover, most non-price holiday promotions have become less effective. Retailers used to be able to bow special offers such as free or expedited delivery and free or reduced-price gift cards to entice purchases during the holiday period. But now that these incentives have become expected by customers, retailers have had to resort to price promotions only — and these only produce a race to bottom to see who can offer the lowest price which is neither sustainable or profitable.

With an over-dependence on the holiday shopping season, retailers are missing out on opportunities to generate demand over a longer period of time. According to Harris more than 3 in 4 millennials choose to spend money on a desirable experience or event over buying a product. And millennials aren’t the only ones trading dollars they once spent at retailers to other businesses. According to Fortune, Kevin Logan, U.S. chief economist for HSBC, notes that purchases of clothing and shoes as a share of discretionary spending has dropped overall, while spending on recreation, travel, and eating out has been trending up for more than a decade. A year-round approach would likely help retailers compete with restaurants and other experiences which people seek out throughout the year.

Also given that Millennials are just as likely to buy something for themselves as for someone else during the holiday season, retailers should encourage self-gifting year-round. They may be able to inspire more purchases than they would by waiting for the discrete holiday occasion.

The National Retail Federation reports that 54% of consumers start researching holiday purchases in October or before.  Although retailers might interpret this as a reason to start holiday marketing and promotions earlier, doing so unnecessarily limits the relevance of their outreach. Without a holiday-specific message during fall months, they might capture wider demand. And by delaying and scaling back their holiday promotions, they offset the chances of creating deal-fatigue.

For an industry that relies on news to drive store traffic, a reduced focus on the holiday season might seem risky.  The holidays predictably prompt shoppers to visit stores. But retailers can — and should — use other ways to create news and generate traffic, including promoting new products and brands, offering exclusive access or services, and celebrating other holidays. Different kinds of news will help retailers differentiate themselves, and as a result, they may pique even more interest than an expected holiday message.

Less emphasis on holiday season sales spikes may also concern analysts who rely on monthly comparable store sales to gauge retailers’ performance, since a longer-term, but less timely, measurement such as quarterly sales growth would be a more accurate indicator.   But moving away from monthly comp store sales reports makes sense regardless.  Since in the U.S., the “official” start of the holiday shopping season is dictated by the date of Thanksgiving – a holiday that is always celebrated on the fourth Thursday of November — a monthly approach to measuring holiday sales can be greatly skewed if the fourth Thursday is early or late in the month.  And comp store sales provide a limited view of performance, since they don’t account for store closures and the way e-commerce sales are factored into them varies among retailers.

The technology and analytics now exist for retailers to better predict what people want and when they want it, so they should use these capabilities to move away from the traditional seasonal approach.  It’s almost as antiquated as mono-channel retail — and just as limiting. By adjusting their marketing, sourcing, and inventory management, retailers can free themselves from the daunting task of fulfilling unpredictable demand during an intense period and instead provide a more customer-centered experience for their shoppers.