Moved to a new address

The blog is now located at MarketingInnovation.typepad.com. New design, better tools, and excellent content! Come on over and let me know what you think.

Back from Vacation

We're back from vacation, and ready to resume blogging! Also, we'll be moving to a new address: marketinginnovation.typepad.com. Look for content over there starting Monday, August 28, 2006. We'll be attempting to migrate all our content that is here over to there in the meantime. (Where are open blogging standards when you need them?)

Investing in Complementary Innovation

I came across an interesting article by Nicholas Carr on BoozAllenHamilton's Strategy+Business website. In it, he argues that while sticking to your core competencies is often good advice, there exist important exceptions to that rule. His fundamental premise is that products (and services) don't exist in a vacuum; they exist as part of an "ecosystem" of complementary offerings. Printers and ink and paper and computers and digital cameras, for one example. Automobiles and financing, for another. Carr points out that innovating in these "complements" makes sense for several reasons. They can increase demand for your core offering. They help you develop new skills, and perhaps open new markets. You may gain a key competitive advantage. He poses "Five Good Questions" about "uncovering and evaluating innovation opportunities in complements":

1. What complements are currently constraining demand in our core markets?
2. What new product might boost demand for our core offerings?
3. Would our customers buy more if they had better information?
4. Would we learn valuable lessons by innovating in complements?
5. Do we have competitors whose fortunes are tightly tied to the price of complements?

All in all, a very intriguing look at ways to innovate in any company.

Innovation at Coke

The current issue of BusinessWeek has an excellent story about how Coke is innovating under the guidance of Mary Minnick. She holds the incredible title of President of Marketing, Innovation and Strategy for Coca-Cola worldwide. Here are my takeaways from the article:

• She's a Coke "lifer", which shows that Outside Intervention isn't always required to uncork innovative thinking.
• Her mission is to make "Coke more exciting, innovative, and relevant" (emphasis mine)
• She told her team to "stop thinking in terms of existing drink categories and start thinking broadly about why people consume beverages in the first place".
• "Like Henry Ford said, 'If I'd asked the consumer what they wanted, they'd have said a faster horse,' she told her troops. (In other words, lead your customer, as I mentioned in an earlier post.)
• She engaged bottlers (her channel) to gain their insights and cooperation in introducing new products.
• She's shaking up the culture at Coke and setting a higher standard. What had passed for innovation in the past "had been incremental line extensions that too often didn't really move the needle".
• While in charge of Coke's Japanese operations, she introduced over 100 new products a year, some with very short product lifecycles (months). Sounds like she's bringing some "Long Tail" thinking to Coke.
• Here are her four key items from the "PLAYBOOK: Best Practice Ideas" sidebar in the article:
• Anticipate the Customer
• Retool Tired Brands
• Engage Partners
• Don't Fear Failure

In the 1980's, when Robert Goizueta took over as CEO, he found his team focused solely on winning market share from Pepsi, and not making much headway. He realized that breakthrough thinking was required, and so challenged Coke to increase it's share of total fluid intake, not just soda. Coke responded, and took a pretty commanding lead against Pepsi. Today, it seems that Coke is at another such juncture, and it looks like Mary Minnick is taking some steps that are just as bold and innovative as Robert Goizueta's actions. Interesting reading.

If I Ran AOL...

...I'd be a very happy guy. Here's what's going on in a nutshell (some more detail here). People have been signing up for broadband Internet access in droves, either cable or DSL. A few years ago, AOL had about 30 million subscribers, each paying about $20 a month for dial up access. AOL customers found themselves paying $40 a month for broadband AND $20 a month for AOL. They started asking themselves, "Why am I doing this?" and so many of them answered, "For no good reason" that AOL now has about 18 million subscribers. For a while, AOL deluded itself by thinking it was a "content" company -- that the features that came with AOL were so special that they were worth charging a premium to get. They were wrong. The content is everywhere. Now they think that they'll be an advertising company. I think I have a better idea. I'd make AOL a communications company. I'd use the Firefox browser and Thunderbird email programs (both of which AOL owned lock, stock and barrel in earlier incarnations) in conjunction with AOL Instant Messenger (AIM) and an Internet phone/videophone program to form the core of my AOL service. I'd make them look and feel like the AOL mail that my customers have come to know, but add in more extensions and customization features. I'd integrate them into a single, interoperable platform with a common address book. I would develop this as an open source software platform that anyone could develop offerings for. This base would all be free of charge, and everyone who wanted an AOL.com email address could have one -- especially any of those 12 million people who've left. For many of those 30 million subscribers, AOL was nothing more than an access company. That role is now taken by another part of TimeWarner, namely TWC, the cable business. So switch all access-related business to TWC -- including dial-up -- and charge reasonable rates for it. (For TWC's RoadRunner Internet cable subscribers, there is a travel feature that gives you dial-up access when you travel. In one of the only benefits of the AOL - TimeWarner merger, the dial up network that RoadRunner uses is the AOL network.) Next, I'd recognize that I owned a LOT of servers. I'd use them to offer a lot of value-added services for my AOL people. Personal websites, online communities, photo storage and sharing. Hey, I might even have a Warner Brothers music and movie site with downloads! I'd form partnerships with other content and service providers to tap into the AOL network. These would carry modest fees. I'd also think about developing AOL On-the-Go tablets (like the Nokia 770 Internet tablet) that offered seamless connectivity wherever I was. This could be a partnership with Nokia, or it could be an open source project that let people develop software and services around the platform. More partnership opportunities like this exist in the hardware space, as Apple has found with the iPod, iTunes Music Store, and the zillions of companies making iAccessories. These partnership opportunities would position AOL at the crossroads of all Internet trends. AOL would be access-provider agnostic, which would benefit them greatly. They'd be an enabler of countless service opportunities for start-ups and established companies alike. It would be like creating a whole new, open ecosystem for Web 2.0. And AOL would be leading it rather than being a footnote to history. What about advertising? I think advertising is a subsidy of a business rather than a business in and of itself. Most advertising is annoying and ineffective. I think that Google has done a very good job to rake in lots of money while maximizing the effectiveness and minimizing the intrusiveness of advertising. But Google is a search company, and they link the ads they serve to the content that you are looking for, dramatically improving relevance. My AOL would be a communications and services company, and (at this point), I can't see how advertising can reach Googlian levels of relevance. It would not be a key element in my business model. P.S. This link to the parent of AOL (AOL LLC) shows that they already have many of the pieces. It's just a matter of deciding what they're in business to do, and executing.

What is a strategy, and why do you need one?

Good questions -- glad you asked! Let's take them in order. What is a strategy? Broadly, a strategy is a plan for setting long term goals and putting in place the actions (tactics) for achieving them. A corporate level strategy would include the following types of items (this is not an exhaustive list): • Mission of the company (why it exists); • Vision for the company (what is the desired future state); • What products and/or services to offer, now and in the future (a roadmap); • How to make money (business design); • Growth targets (if any); A marketing strategy fits within an overall corporate strategy. It is the process of: • Determining who your customers are (or should be); • What is important to them; and • What sets you apart from your competition. Why do you need one? Most people think of strategy at one of three main points in the lifecycle of a business: The start-up phase; when things are stagnating; or when growth has run amok. A strategy provides focus to a business -- which is particularly important at each of these stages. Strategies are developed as part of a discrete planning process. Take that mission and vision thing to heart -- that will provide the illumination for the strategic plan. It will help you see the customer needs; the changing environment; competition (existing, emerging, and potential); trends in technology; and forces affecting people and hiring. Once the company strategy is in place, the marketing strategy can be developed. How to position your offerings, how to generate awareness of and demand for them, and what you need to deliver a complete solution to the customer will come from that strategy. The most important part is the execution. There are far more great strategic plans than there are corporate success stories. Putting the right actions into place, and then measuring the right performance elements, and adjusting based on this feedback are essential to the bottom line -- where the money hits the bank account. I recently had the opportunity to meet with executives at OVO Innovation (www.ovoinnovation.com), who make some very interesting software to help the innovation process. Their motto is "Innovate on Purpose" (TM)-- what a great thought! Many businesses are reasonably successful without a well-defined strategy. Just like innovation, it can happen without a process. However, a good strategy can help you become successful on purpose.

Market Research and Innovation

Innovation, by definition, is doing something new. This makes traditional methods of market research (focus groups, surveys, mall intercepts, and so on) pretty useless. (And a waste of money.) Customers, particularly satisfied customers, don't know what they don't have. If you ask them what they want, more often than not they'll say, "Nothing! Keep up the good work!" You will continue doing what you've been doing AND be able to claim that you are "customer driven". Then a competitor does something innovative, and the same "satisfied" customers buy their product, leaving you scratching your head. "What could I have done?", you lament. More than likely, your competitor was watching how customers use products, or services, and noticed certain accomodations that they had to make, or work arounds to get the product to do exactly what they wanted. When my team at IBM was developing the Young Explorer workstation for kids in conjunction with the Little Tikes company, we watched dozens of kids for hours as they used the computer. A key observation -- they liked to use it with a friend. So we designed a bench sized for two people. We could have surveyed our customers (day care centers and hospitals, mostly) for years and never gained that insight. One of the keys to marketing innovation successfully is anticipating unmet or latent needs. The best way to learn that is to watch your customers use your product, and figure out how you might make that experience better. Or cheaper. Or more convenient. Or...you get the picture. It isn't all about adding technology or features. Lead your customer. P.S. Another pertinent lesson is one that I came across in a book by Harry Beckwith titled "The Invisible Touch": Don't strive to satisfy customers, strive to delight/energize/captivate them. He offers this test: How do you want a customer to respond when a prospective client asks them "How do you like [insert your company here]?" Do you want them to say, "I'm satisfied."? I didn't think so.

Introduction to Open Source Software

I've been an advocate of open source software for some time. I think that there are applications that are part of the Information Technology infrastructure that benefit from being "open source". The more fundamental a part of the infrastructure, the more I believe it benefits from having the source code be open. "Open Source" means that the source code (the actual lines of computer code) are available to anyone. That means that programmers can get the code and change it -- as long as they agree to share their code with everyone else. Many people refer to the people who contribute to any given Open Source project as a "community". And it is. It is governed by a committee for each project who decide what to admit to the next release. It is under the voluntary control of this committee. Most average people don't care -- they aren't programmers. They typically license a piece of proprietary software and run it. (They may think they "buy" it, but they don't. They license it under terms that most people don't read and simply click the "Accept" button and move on. But beware: there are occasionally unscrupulous terms in those agreements - particularly in downloaded software. It pays to read the terms, even if it requires many quarts of coffee.) But they should care about open source software. Key parts of the computing experience -- browsing, email, and document creation -- are infrastructure. These applications touch everyone who uses a computer. They benefit from a large, international community of programmers who make these programs work better, exchange information better, and make for a more secure and enjoyable user experience. But Open Source software can be kind of weird. The products are something that are usually very low cost -- sometimes no cost -- supported by an often invisble "community" of programmers around the world. There isn't a company with an 800 number that they can call for support. There is an active online support program, but it isn't very friendly to "newbies". This is a very cutting edge model. There are many successful open source projects but the only ones that truly work (in my opinion) have been for large scale, infrastructure-level programs. These include (on the desktop computer):

• Operating Systems (Linux and its many distributions, currently the most notable and usable of which is Ubuntu);
• Browsers (Firefox)
• E-mail (Thunderbird, these last two from the Mozilla Foundation)
• Office Suites (OpenOffice, almost fully compatible -- 99+% for most people -- with Microsoft Office)

For most folks, this is what they need. All these programs are free, and supported by a large enough community around the world that it will not likely grow stale or unsupported. All have major install bases. I use all these programs, and strongly encourage you to try Firefox. I would try Thunderbird next (maybe earlier if you use Outlook Express), and then OpenOffice. Ubuntu is for those of you who want to break completely free of Windows and constant security updates -- and it includes these other programs, too. The last three programs are also available for Windows and Mac operating systems. They conform to open standards for information exchange. How does this open source stuff work? For such infrastructure software, the open source movement has been likened to the National Building Code. No one "owns" the building code, but many people contribute ideas, and the best are integrated and published. Builders then conform to the standards, and homebuyers benefit. So it is with open source software. No one "owns" it, but many people contribute ideas, and the best are integrated and published. And the people who use computers benefit. Viva la Open Source!

The Long Tail Starts Wagging

There's a new book out called "The Long Tail : Why the Future of Business Is Selling Less of More" by Chris Anderson. (It is a longer version of an article he wrote in 2004 for Wired magazine.) The main premise is that, when consumers have the opportunity for virtually unbridled choice, they choose to buy very specialized items that may only interest them. The author drew this conclusion by looking at sales data from places like Amazon and Rhapsody (Real Networks' online music service), where over half of all sales come from items well down the popularity list (hence the name of the book -- these items are well down in the "long tail" of the distribution.) It should be pointed out that these items are far more profitable than the mass-market items up toward the top of the list, because these niche items have no marketing nor overhead. The conclusion of the book is (in my words) that we're moving to an economy of niche producers selling to niche consumers. It's like the Middle Ages with broadband. Back then, the village had a niche-type ecosystem, with specialized professionals selling to villagers who had specialized needs. They were, of necessity, geographically constrained in their distribution network. The Internet (and FedEx/UPS/DHL/etc.) obliterates geographical constraints. So, what underlying phenomenon allows the eBays, Amazons, iTunes and myriad other outlets to empower small purveyors of niche items to succeed? I think it is the fact that the internet can provide enough information about a product or service that a consumer can purchase without seeing the whole product in person. A page of a book, or a clip of music. Or a description and photo of the product and the ability to email the vendor with questions. The Web enables producers to be discovered via search (as long as they are in the proper "marketplace" -- like the village bazaars of old). The ramifications for the distribution industry (which is really what the retail business is -- a final depot for goods before they reach their ultimate user) are profound, eBay, Amazon and iTunes are all aggregators -- perhaps eBay is the best example. There are hundreds of thousands of "stores" on eBay that sell pretty much anything. Pretty much everything, actually! Obviously, even the largest Giga*Mart can only stock a very small fraction of what is available, so your choice is limited to what they think they can sell the most of -- not necessarily what you actually want. If this "Long Tail" trend becomes the norm, how are companies that specialize in mass production and blockbuster distribution going to grow and generate returns on stockholder investment? It will be very interesting to see the money move to companies that figure this out.

The Customer Buy Cycle

How do you get your customers to buy your product? That's a question that everyone in business wrestles with. Many people assume that advertising is the answer. It's not. Most people who've tried it know that. To gain some insight, let’s look at the purchase process from your customer's perspective. Every purchase decision goes through three basic steps in your customers’ mind, what we call the Customer BuyCycle:

• Awareness,
• Consideration, and
• Conversion.

Stage 1: Awareness. People must be aware of your offering and the fact that it comes from you. But, in reality, very few people are actually in the market for what you sell at any given time. They don't have a need for you -- yet. Stage 2: Consideration. When someone does have a need, they begin to consider options. They begin to look for sources of a solution. They may search the Yellow Pages, or (more likely) Google. You want to be on the "short list". Stage 3: Conversion. This step is when they convert from a prospect to a customer -- they decide to buy. Good marketing gets the right messages about your product out to your target market to create awareness and gain consideration; a good sales process takes consideration and converts it to a sale. (NOTE: For “big ticket” items, this process can take months or years; the other end of the spectrum is the “impulse buy”, in which the three steps happen virtually instantaneously.) It is very difficult for a vendor to move someone from awareness into consideration. That's why advertising so rarely "works" -- if you define "works" as generating revenue. Advertising is part of your marketing mix, and is almost exclusively to gain (and maintain) awareness. Advertising "works" if customers immediately think of you when events conspire to create a need for your services. Why do we call it a "cycle"? Because it happens again and again. Here's a tip: Great customer service can help you bypass the first two stages in future (repeat) purchases! Lesson: Understanding the way people make purchase decisions can help you better focus your marketing and sales investments. P.S. New products or new companies (and especially new products from new companies!) face a big battle in creating awareness, much less consideration and conversion. That is one reason that a niche approach to marketing is widely perceived to be the recipe for success for start-ups. Solve one particular problem very well, and you will “own” a market niche that you can expand from.

Driven to Innovate

I just returned from a quick trip out to the NC mountains. On my way back, I passed a tractor-trailer with a transport company's logo on the side, along with the slogan "We Do It Right the First Time". It struck me as an odd phrase. Doing things right the first time was a huge push in manufacturing in the '80s and '90s, when the Total Quality Management movement was in full swing. There are pretty much only three ways to goof up a shipment: get the right stuff there late, get the right stuff there on time but broken, or get the wrong stuff there. My initial thought was that if there was an endemic goof up problem throughout the logistics industry, it would be news, but the right stuff almost always shows up at the right place at the right time. Why would you make this your slogan? So I set off to do a little research on this apparent silliness. What I got was (another) eye opener on innovation. The short answer to the question is "customer service". Here's the story: The truck is owned by Benton Express, a regional carrier in Atlanta, GA serving the LTL (Less than Truck Load) delivery needs of businesses throughout the Southeast. Some quick facts:

• It is a family-owned company, founded in 1934 and run by the third generation.
• They have over 600 employees, about 300 trucks and twice as many trailers, and revenues of about $50 million.
• They started out delivering movie reels to theaters. The only option up to that point was for theater owners to go to the rail station for pickup and delivery. A rail strike cemented their hold on the market -- when the strike was over, the theaters wanted to continue doing business with Benton.
• Deregulation of the trucking industry in the '80s opened the door for then to move into general commerce.
• Clete Cordero, VP of Business Improvement, said this in an interview on eTrucker.com: “You rarely see a trucking company go out of business because of lack of freight. It’s usually too much freight, too cheap.”

So they innovate. They have a Voice over IP (VoIP) phone system throughout the company with a single handset that is in every location. They use software from 1MAGE Software, Inc. to do business online (here's a link to a case study), which differentiates them. There's a great quote from Mark Headrick, Director of Information Technology in that case study: "The thing is, we don't just move freight – we actually supply information. Anybody could ship the cargo." Probably true for a lot of businesses -- anyone can do [the commodity part]. The trick is to find ways to innovate that customers care about and are willing to pay for. The eTrucker article ends this way: " 'Our mission is to be the best LTL carrier for our customers, doing it right the first time,' [CEO Chip] Matthews says. Given that its competitors are many times larger than Benton Express, innovation is a necessity, he says." Once again, I'm amazed at innovation in unlikely places, and how companies use it to break out of the commodity, price-war style of business they face. I still am not sure whether or not the trucking industry has a problem (I couldn't find any industry data on on-time delivery or claims numbers to compare with Benton) but it is apparently important enough that Benton Express has taken it to heart.

What can Small Businesses Learn from GM?

A lot. The simple answer is "passion", and that is tied to innovation. Passion is kind of a funny word to use with respect to business, and suggestions that "passion return to the boardroom" or the like are (appropriately) met with grins. But there is a role for passion in business. I got to thinking about this topic over a year ago, when GM (and Ford) bonds were cut to "junk" status. GM's market share is sliding toward 20%. Toyota is poised to pass GM as the world's largest automaker. The current news is that one of GM's biggest shareholders is pushing for an alliance with Nissan and Renault, who are both led by Carlos Ghosn. How did this come about? What went wrong? I think it is a matter of outlook and training. The difference between passion for your business, and mere competence. GM is led by Rick Wagoner, who has a bachelor's degree in economics from Duke and an MBA from Harvard. Mr. Ghosn was educated as an engineer. Hmmm. Cars are designed and built by engineers. For all their stodgy image, engineers dream, design, develop, and make the things we buy. I once heard engineering described as "the art of the possible". If you can imagine it, it can be built. Great cars are inspired and built by great engineers. That's where the passion comes in -- from eating, sleeping, and breathing cars. Managers may be competent -- gifted, even -- in business-related activities, but let's not confuse that with passion for the business they are in. Management skills should be built on top of the skills at the core of the business (as Mr. Ghosn demonstrates) and driven by passion. Two years ago, my family took a long driving trip through the American West for two and a half weeks. We put a couple thousand miles on our rental vehicle, a Chevrolet Classic. It was disappointing at best. (The car, not the trip. We had a wonderful time. This country has some absolutely breathtaking natural beauty.) Yes, the Classic started every time, ran when it was supposed to, protected us from the elements, and went where it was pointed, but those are the commodity elements of a car. I can't remember any distinguishing features, and the reputation of Chevrolet is certainly not why I rented it. It was an uninspiring product (and a lousy advertisement for GM). Last year, GM lost 10.6 billion dollars. Much of the blame has been placed on onerous pension and healthcare costs, and management has proposed that GM use it's cash hoard to preserve the current business until those costs go away, and then start reinvesting. It is also selling off 51% of GMAC (the financing arm) to raise $14 billion in more cash. This is not an innovative strategy. It is not a strategy for winning, or growing. It hasn't even stopped the loss of market share. I have no doubt that GM hires and retains huge numbers of enormously talented engineers. My guess is that very few of them are proud of the Classic. I can imagine that, if pressed, they would say that they wanted to do a much better car, but the "bean counters" and/or "marketing" prevented it. Once I would have dismissed this as whining and blame shifting. Experience suggests otherwise. Successful organizations tend to manage what made them successful rather than what will continue to make them successful. They look in the rearview mirror instead of through the windshield. Risk is avoided. Innovation is stifled. The status quo is preserved. They get "stuck". Passionate people are rarely satisfied with the status quo. They want to do more; to make things better; to help their customers solve more problems. They innovate -- and they innovate in innovative ways! Perhaps the best thing that could come out of this proposed alliance for GM is to get an engineer -- and hugely successful manager -- to run the show. Hopefully, this will lead to an explosion of new products -- maybe from fewer nameplates (I hesitate to call them "brands"). The seeming resurgence of Cadillac gives one hope. Another example of how dramatic the role innovation and passion play can be found in the personal computer industry. When was the last time a truly innovative product came out of HP or Dell? (I'm hard pressed to think of one.) Where are the innovative PC's coming from? (Apple.) Are Mark Hurd and Kevin Rollins passionate about PCs? Is Steve Jobs? I think the answers are obvious. In small and mid-sized companies, it is likely that the person running the company is passionate about the business. They "eat, sleep, and breathe" it. The company grows. Employees are excited about coming to work. Customers look forward to doing business with the company and using its products. Observers say good things about the company. They are all passionate as well. Alas, they may also fall victim to the same process of getting "stuck". Fortunately, small and mid-sized businesses are more nimble than Fortune 500 companies like GM. If you recognize that you are falling into this pattern, it is easier to break out of it -- easier to introduce innovation. Easier to get "unstuck". Lesson: The inspiration for innovation will come from people who are passionate about their business. Good management will capture that and turn it into a forward-looking strategy. We can all learn from GM. P.S. There are a number of great books written about this subject. Three of my favorites are: • "The Innovator's Dilemma", by Clayton Christensen; • "The Innovator's Solution", by Clayton Christensen and Mark Raynor; and • "Blue Ocean Strategy", by W. Chan Kim and Renee Mauborgne. P.P.S. In a January, 2005 interview, Kevin Rollins, CEO of Dell, called the iPod a "fad". Take a look at Apple vs. Dell's share price in the last two years.

Heinz Plays Catch-up

A front page article in the June 28, 2006 Wall Street Journal talked about how the H.J. Heinz Co. is trying to win back the business of McDonald's in the US. Some highlights of the story:

• Heinz had been a supplier to McDonald's until a tomato shortage in 1973, when Heinz made a decision to support its "glass bottle" customers instead of McDonalds. McDonald's was apparently none too happy, so they decided to end the relationship with Heinz, developed their own ketchup, and outsourced production.
• A company called Golden State Foods -- who started as a supplier to Ray Kroc (McDonald's founder) with a handshake deal -- currently is the dominant ketchup supplier to the restaurant company in the US. According to the article, "McDonald's sees no reason to switch."
• McDonald's uses 250 million pounds of ketchup per year in the US.

Michael Hasco is Heinz' VP of Global Accounts has the job to win McDonald's business. Here are some of the things he's tried or is trying (starting at one end of the value chain and moving to the other):

• A special seed business that creates "proprietary tomatoes"
• Heinz process for breeding that creates "better tasting tomatoes"
• A tracing system for its crops in the event of illness or tampering
• Different packaging to reduce the need to refill dispensers as often
• "A ketchup pot that attaches to a French fry cup that would make it easier for customers to dip fries while eating in cars."

The emphasis on this last point is mine. I think that much can be learned by watching how your product is used, and modify your offering to enhance the customer experience. Here (again!) is an example of innovation that has little to do with the core attributes of the product, but can significantly affect the decision for someone to buy it. Two major lessons:

1. Innovation in the customer experience can differentiate your product.
2. Once someone is established as a loyal supplier, it is very difficult to dislodge them.

I don't know if the ketchup pot or any of the other innovations will help Heinz replace Golden State. It may very well be Golden State's business to lose. P.S. Here is a link to a list of patents that involve condiment cups and food scoops. Twelve of them.

Southwest Makes Hurricanes Work for Me!

Last week, we here in Raleigh got a big charge when the Carolina Hurricanes won the Stanley Cup. Most residents felt a surge of civic pride, whether they followed hockey or not. A couple days after the win, I got an email from Southwest Airlines' customer loyalty program, known as "Rapid Rewards". I already thought that Rapid Rewards is one of the best loyalty programs in the airline business, primarily because of its simplicity (and thus, the fact that I might actually earn and use the "Rewards".) Here's the plan: Every one-way Southwest flight counts as a "credit". Earn 16 credits, you get a free round trip ticket. That's it. You get a regular ticket, usable to anywhere at anytime. The email I got from Southwest was titled "A Win for Carolina Means A Win for You", and told me that, "in recognition of Carolina's big victory, we slipped 2 bonus points past the goalie and into your Rapid Rewards account." WOW! The airline industry is another one whose products are almost a pure commodity. The innovation here has nothing to do with the product per se: They are not touting the meals, seats, planes, crew, price, boarding process, or anything else directly related to flying. What they are doing here is reinforcing their reputation, their brand, if you will. I estimate the cost of these free credits to be about $37.50 - about one-eighth of an average $300 round trip. That, of course, assumes I cash them in, which I will likely do, since it is so easy. And when I do, it will more than likely be on a trip with my wife, or even the entire family. I'm encourged to fly Southwest more often to get to the next award level. I would have to say that this is one of the most innovative marketing moves I've seen by an airline. Lesson: marketing innovation doesn't always involve your product. You can do timely, unexpected acts of generosity that will more than pay back the investment. Here's another example of how it can work: My wife and I go to lunch about once a week at Zest Café on Six Forks Road in Raleigh. We've gone there for about five years now -- we're regulars, I guess you'd say. (They have the best catfish sandwich in the world!) Around Christmastime last year, we went to the register to pay, and the owner, Marvin, was manning it. He looked at the bill, stuck out his hand, and said, "Merry Christmas!", and put the bill away. That was a wonderful Christmas present, and we told lots of friends about how much we enjoy Zest. Small investment, not related to the product, but really enhanced our impressions and their reputation.

Innovation in Low Places (Low Tech, That Is)

I firmly believe that innovation can happen anywhere, not just in the high dollar world of high tech. This past weekend, I got reinforcement in an unlikely guise: a bag of mulch. In the previous post (A New Brand Model for Innovation), we discussed three layers of product differentiation, and if you had asked me a week ago where mulch fit in, I would have said "commodity". How could you possibly differentiate mulch?? The Corbitt Manufacturing Company of Lake City, Florida has figured it out, and has received a patent as well. The particular product we bought is called No-Float Mulch ("Stays Where You Put It"), and received US Patent 5,301,460. One problem facing mulch customers was that the stuff would float and run off in heavy rains. H.C. Corbitt sought to rectify this, and developed a new process for "pulverizing wood product" and a new composition resulting from the process. (Briefly, there is a "shredded fine portion, a bulky portion, and a stringy binding portion", combined in a certain ratio.) The fact that it is made from cypress certainly helps (cypress doesn't tend to float as well as other woods). No-Float costs a bit more than regular mulch, but it is probably a wise investment if it doesn't need to be replaced as often. And it certainly is an inspiration to the innovator in me!

A New Brand Model for Innovation

The concept of a "brand" has become pretty confused. Once a simple mark on the rump of a cow, it has become so diluted as to be nearly meaningless. People are equating "name recognition" with "having a brand". We don't see it that way. We developed a 3-layer model for product (or service) differentiation that defines "brand" -- and helps guide your efforts to innovate. The 3-layer model starts with a foundation -- the COMMODITY level. All products and services have a commodity element. This is the basic level of performance expected by potential customers. For instance, all vacuum cleaners suck. If all you are interested in is basic dirt removal, you will likely buy the cheapest vacuum cleaner you can find. Price is the basis for competition at this level, and opportunities for innovation are geared toward reducing costs. Next up is the FEATURE layer. In our example, if you are interested in something more than mere suction, then you've entered that level. This is where vacuum cleaners start to differentiate along a variety of performance vectors: power; attachments; filters; bags; wet/dry; ease-of-use; self-propelled; quality; handheld; battery operated; headlights; robotics; and so on. Customers will research and compare various offerings before buying -- and will pay more for the features that are important to them and improve upon the commodity element. Product and service innovation happens most often in this level. The ultimate layer is the REPUTATION layer. This is where a company has established trust and formed an emotional bond with existing and potential customers that engenders loyalty, drives repeat business (without consideration of competitors!), and commands premium pricing. When these characteristics are met, a "brand" exists. "Hoover" is a brand. "Oreck" may be a brand. Dyson, by all accounts, makes a terrific vacuum cleaner but isn't a brand (yet). There are two very important aspects to a brand. First, it must be earned over time -- you can't invent a brand or wish it into being. No amount of promotion will make a brand: Only customers can make a brand. The second aspect is that a brand is very fragile -- they can be broken quickly (and may be impossible to repair). A brand must be managed and cared for or it will become tarnished or meaningless. (Think "Oldsmobile".) This model is simple, but has profound implications for innovation. Innovation can:

• Give cost advantages at the commodity level;
• Lift products and services out of the commodity level;
• Create new features and benefits for customers (and create new customers, too!); and
• Drive the development of a reputation that can become a source of competitive advantage -- a brand.

P.S. For those so inclined, there's a very complete story on the evolution of the vacuum cleaner at the American Heritage website (thanks, Peter!)

Innovation Gone Awry: #1, Where Less Would Have Been More

I really like innovative products. However, sometimes the engineers go a bit overboard and indulge in what I call BWC Design -- BWC stands for "Because We Can". There are cases where capability does not lead to improved utility or usability, and today's example is one of them. We bought a new cordless phone system this weekend. It is (deep breath) the "AT&T 2.4 GHz Cordless Telephone/Answering System E2727B". (No extra marketing dollars wasted on product naming on this one!) The E2727B has two features that I find innovative. One of those features, however, falls into the BWC category. Feature one: The extension handset doesn't need to be plugged into a phone line. While the technical sophistication behind this innovation is virtually non-existent, the convenience of being able to place the extension handset anywhere within six feet of an outlet is very nice. Kudos to AT&T! Feature 2A (the cool part): The answer machine part of the E2727B automatically sets the time stamp by using the Caller ID information on an incoming call. That is really nice -- no more pushing and holding the button while setting the machine for "Monday, May Twenty-Second, Nine Twenty Six AM". I set the thing up, called it on my cell phone and *Voila!* -- the time stamp is set! Feature 2B (the uncool part): Before I describe the BWC feature, I would like to mention that this answering machine holds 15 minutes of messages. Now here's the feature: the time stamp includes the year. That's right -- it says "Monday, May Twenty-Second, Nine Twenty-Six AM, Two Thousand Six". At first, this seems pretty harmless, if a bit silly. I don't collect an archive of my incoming phone messages ("Hi, it's me. Give me a call when you get a chance.") such that I need to remember what year the message is from. And even if I were so inclined, I only can collect 15 minutes of these archival recordings. (Maybe they should have included a USB cable so I can connect the machine to my computer, and off load the messages. Sort of like a digital camera. No, put in a memory card instead. Wait maybe a wireless connection to my PC! But I get carried away.) The irritating part is that, in order to make the auto-time-stamp-setting feature work properly, you must make sure that the year is set correctly after a power outage. Otherwise, the day function is wrong. So while my phone will properly set itself for the remainder of this year, after that I will lose the convenience, or suffer through day-of-the-week integrity issues. In this case, I think that sacrificing the day-of-the-week function would have been a big gain. Perhaps some usability testing should have been done -- who keeps messages for more than a day? Who forgets the date such that they need both the date and the day of the week to be announced. For the AT&T E2727B design team, I recommend that "less is more". Less info, more convenience. P.S. And the engineering money could be spent on a better name.

Core competencies: What are they and will they guarantee success if I have one?

I was recently at a two-day strategic planning retreat for a company, and we were exploring the current business model for the company. I had proposed that the current design was tired, and perhaps there were other models for furthering the company's mission than what was being done today. One of the other directors, a former CEO of the company, said, "But we're doing what we're good at -- it is our core competency!" That's a common mistake -- assuming that what you are good at is a "core competency". The phrase "core competency" was introduced in 1990 in a Harvard Business Review article called (cleverly) "The Core Competency of the Corporation" by Gary Hamel and C.K. Prahalad. They did give three tests to see if what you've got is a "core competency": 1. It provides customer benefits, 2. It is hard for competitors to imitate, and 3. It can be leveraged widely to many products and markets. Merely being good (even great) at something is NOT a "core competency" if it doesn't meet those three tests. Many companies have offerings or processes that pass the first two tests, but not the third. An example of a company that does have a core competency is Dell Computer -- at least for now -- and that is supply chain management. They have honed their supplier processes (and the terms and conditions under which they buy PC components) to an art form that allows them to turn over inventory at a rate at least 10 times higher than their nearest competitor. This allows them not only to have lower profit margins, but to thrive at those lower margins. (They recently took a hit on the stock price because they cut prices aggressively in the second quarter. They still make billions of dollars.) However, every silver lining has its cloud, and here is Dell's: They have optimized this competency for the PC industry (where they assemble finished goods out of standardized components) with a specific fulfillment model (they don't build until you've ordered, thus avoiding tying money up in inventory). Strategies must evolve as the market environment changes. Dell has been extraordinarily successful over the last 20 years, and particularly the last five or six. But, as TI's CEO recently said in an article on thestreet.com: "We're leaving a PC world where the ratio of equipment to people was one-to-one and going to a world where you have up to 10 devices per person," said [Rich] Templeton, pointing to the cell phones, MP3 players and portable game devices that many people now own.

At the same time, said Templeton, emerging markets such as India, China and Russia are adding billions of new consumers to the market "overnight," as those nations join the global economy.

This combination of more devices per consumer and more consumers overall will allow TI to continue to outgrow the semiconductor industry as it has for the past four years, said Templeton.

To me, this means that Dell's core competency in the PC market might not play as well in the emerging market dynamics of what's been called the "Post-PC Era". To summarize, there are two lessons about core competencies that I've learned throughout my practice and career: 1. Just being good at something doesn't a "core competency" make. 2. Core competencies aren't a guarantee of perpetual success.

iLove my iMac!

I am a switcher. A couple weeks ago, I bought one of the new Intel-based, dual core, 2.1GHz, Apple iMac, with a 20" diagonal screen. That's bigger than my first couple of TV sets, and whole lot nicer. That's it in the picture. That's the whole computer -- no other boxes. The CD/DVD slot drive is on the right edge (out of sight in this picture), and it will create both CDs an DVDs. It is running Mac OS X 10.4, also known as "Tiger". Other than a version of Microsoft Office.X that I had for the other two Macs in the house (an iBook and a Mac Mini), I only needed to download Firefox. OK, "need" is a strong word, since Safari is a great browser, but I *like* Firefox. An interesting thing about Microsoft Office.X -- this is the student and teacher edition, which is apparently available to anyone who is, was, teaches, or has, a student -- is that they let you install it on three different computers. Legally. This is totally unlike Office for Windows PC's, which allows you to install it on only one PC. This is the main reason I started looking at other operating systems -- alternatives to Windows. As I got more PC's in the house, the prospect of paying $400+ for legal versions of MS Office was ludicrous. So I found Open Source software, and the very good OpenOffice (which is free, almost totally compatible with MS Office, and available for Windows, Mac, and Linux), and thus started a four year tech journey that culminated with this purchase. Back to the iMac...I tried Microsoft Entourage for email, but that was awful, so I switched to Apple Mail. Very nice, with some substantial usability improvements over the version in Panther (the previous OS X version before Tiger). I've set up my Palm Tungsten T5 to sync with iCal and Address Book, and it does it wirelessly via Bluetooth, which is built in to both machines. The point here is that everything you'd need to use a computer comes with this machine. Here's what you get with the machine:

• iPhoto for digital photography;
• iTunes for music (of course);
• iCal for calendars;
• Mail for, well, mail;
• Safari for browsing;
• iChat for AIM compatible instant messaging (and video conferencing with the built in camara - the little black dot at the top center of the iMac in the picture);
• TextEdit for preparing documents (compatible with MS Word);
• and a ton of other little things, all nicely done.

I've moved all of my old ThinkPad files over to the iMac (and they all work)! And my old eyes love the new screen! It is stunning. (And no need for anti-virus software or anti spyware spyware, either!) And the iMac blends pretty much automatically into the home network -- all I had to do was enter the WEP code for wireless networking (which is built-in as well). The only small problem I had was receiving some emails from a colleague that hd attachments that came as a "winmail.dat" file. (Only one sender has this problem, and I receive a lot of email.) I found a utility called TNEF's Enough that takes care of the problem. In addition to Firefox, I've also downloaded Skype (an Internet phone/IM program) that works flawlessly. All told, I am delighted with the purchase, and highly recommend what Walter Mossberg of the Wall Street Journal calls the "best desktop PC on the market today".

Book Recommendations: Strategy, and Linux

I've recently read two excellent books and wanted to pass along my recommendations. The first is "Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant" by W. Chan Kim and Renee Mauborgne (Harvard Business School Press, 2005). The authors propose an analogy of "oceans" for markets -- one is red (stained by the bloodletting in fierce competition) and the other blue (serene and uncharted). The central premise is that most markets (PCs, table wine, airlines, etc.) naturally converge and companies compete on the same set of factors. In their words, the "structural conditions are given and firms [are] required to compete within them." The same levers of competition are available to and exercised by all players, and the result is basically a zero-sum game: One company's growth must come at another company's expense. (This is not strictly true in markets where the overall market size is growing, but the point is that most markets stop such growth at some point, and this "red ocean" model takes hold.) Firms are forced to either differentiate (thus commanding a price premium) or pursue low cost (thus forgoing differentiation). Blue oceans are formed by creating new value for new customers, and simultaneously pursuing low cost and differentiation. This is done largely by looking at non-customers, examining why they don't buy, and creating new levers of competition to reach them. Again, from the book, "value innovation is based on the view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players." They go on to give a set of tools and examples. It is easy to read and follow; offers compelling insights; and I have added these to my strategy toolkit. Powerful stuff. The second book is "Windows to Linux Business Desktop Migration" by Mark R. Hinkle (Charles River Media, 2006). I've been an avid follower and user of Linux as a desktop operating system for about four years now, and think that the level of maturity of Linux -- and particularly the key business applications like browsers, email, and office productivity -- make it a compelling option for business use. Mark has put together an excellent guide for the manager looking to either implement or even just experiment with a pilot. The business logic is sound, and the descriptions of how to get up and running -- and then become productive -- are well done. (I should note that Mark is a friend of mine, and has helped me immeasurably get the most out of my Linux desktops, so I can personally recommend the advice in this book.) Linux can be a daunting change for people used to the Windows environment, and Mark's book brings the good, the bad, and the ugly to light. Perhaps most importantly, the book includes a copy of Knoppix, a version of Linux and a collection of applications that can be run from a CD without installing anything. That's a great way to work with the content in the book and get a firsthand look at the polish and function of Linux applications. I continue to refer to this work as I use Linux (currently Ubuntu 5.10), and highly recommend it. (NOTE: this book, teamed with Maria Winslow's "The Practical Manager's Guide to Open Source" (Open Source Migrations, 2004), would make a great start for a core library of books on free and open source software.)

Article on Trade Secrets

I just had a short article published in Peter Kusterer's NvestNtech newsletter on trade secrets as a way to protect innovation in your company. I think that trade secrets (as opposed to patents) are an often overlooked and underutilized method of intellectually property protection, particularly for business methods. Here's a link to the full article on my website: Trade Secrets Article

Article: Do-It-Yourself Patents

This article in the April issue of the IEEE member's magazine "Spectrum" tells how "one inventor dispensed with lawyers". While not the route for everyone, the law does permit individual inventors to file patent (and trademark) applications on their own behalf -- a practice known as "filing pro se". One excellent point he makes is this: "Most patents to be held invalid were drafted by attorneys, so a lawyer is not a silver bullet against risk. Among other problems, attorneys can fail to understand the invention adequately and thus make claims that are too broad or too narrow." As an inventor myself, and being very familiar with patents and patent searching, this is a process that has its pros and cons. PROS:

• You can save a considerable sum of money. Most patent attorneys will charge in the $10,000 - $15,000 range to obtain a US patent. This will cover drafting the claims, writing the specification, handling the interaction with the US Patent and Trademark Office (USPTO), and paying the filing fees.
• You can directly control the content.
• You can perform prior art and freedom to operate searches by yourself, using the tools at the USPTO website, or other sites, like Free Patents Online. This can help you determine if your idea (or one close enough to it) has already been patented. If so, you can save yourself the time and expense of filing an application only to have it be rejected. These searches are not usually done for an ordinary filing by an attorney; you can request them for an additional fee.

CONS:

• This is a time consuming process, and requires considerable attention to detail and deadlines. The USPTO has strict requirements about the format of drawings and claims, to name two.
• You should not only have excellent writing skills, but have a detailed understanding of how to draft claims. These are the legal meat of a patent, and must be written correctly in order to be enforcable. Remember that a patent simply gives you the right to exclude other people from using your idea; the legal term for their illegal use of your idea is "infringement". You must prove that they violated what you claimed about your invention in order to win a case; clearly, writing those claims requires both attention and skill.
• You may ultimately want or need a lawyer to work with you, and many of them will want to start from scratch using their preferred approach.
• If you want to file internationally, the workload increases dramatically, and an attorney's experience might be very welcome.

The article is very detailed and gives sound advice and good references. It is definitely worth considering filing patents by yourself, but the best approach might be to find an attorney who will work carefully with you.

Dell 's Alien Strategy

I've puzzled over the recent announcement by Dell Computer that it was acquiring Alienware, a maker of very high performance personal computers prized by gamers and other power users. In an industry characterized by commodity products, why not just use Dell's logistics expertise to put the exact same parts that Alienware uses into a Dell-branded box? Two reasons: first, the Alienware brand is very strong in this segment and Dell's is not. ("Alienware has tremendous brand appeal with consumers and creative business professionals," said Michael Dell, chairman.) This allows the company to have significantly higher profit margins than Dell -- perhaps as much as 10 times higher -- on an average selling price (ASP) that is about 3 to 4 times higher than Dell's. Second, Dell's operational prowess applied to Alienware's business is far more profitable than to the same components in a beige box from Dell. Alienware is only a tiny fraction of Dell's $60 billion size, so it is reasonable to expect that they aren't getting the same terms and conditions on components as Dell is. A reasonable assumption for their inventory turnover is 10-20 times per year. Dell turns inventory 100+ times per year. The key formula is that total profit is the product of profit margin and inventory turns. Now it makes sense. Alienware's great brand will bring great margins, and Dell's operations will dramatically increase turns. That drops a lot of money straight to the bottom line. Factor in Dell's marketing muscle, and the growth prospects are even brighter for Alienware products. Caveat: Alienware will have to work hard to maintain its brand reputation and not let Dell's recent image woes tarnish it. A brand is a reputation -- hard to build and easy to destroy. Alienware will have to consistently produce products with amazing performance, unique design, and superb support to keep their core audience loyal.

Welcome to Netanium

We'll be discussing innovation marketing in this blog, ranging from strategy issues to examples of excellent (and not so excellent) marketing. Innovation is what fuels the economy, but many great ideas fail -- not because they aren't good ideas, but because they were improperly brought to market. I'm an engineer by training, and truly appreciate innovative technology. I had the great opportunity to work in a variety of new market development and strategic planning positions at large companies and small, where I conceived and developed many of the ideas that have formed the basis of my consulting practice. I believe that marketing is a "lens" that works two ways: first, it makes the capabilities of a company relevant to the market, and second, it finds unmet needs in the marketplace and brings them into the lab. Both roles involve focus. Engineering and marketing people often enjoy an adversarial relationship. Marketing complains that engineering don't understand what people want, and engineering complains that marketing didn't understand how great the technology was. Both of these situations can be improved by getting a better lens and improving focus. We will be looking at examples of strategy and marketing in companies of all sizes and in all industries. Even though my passion is technology, I have enjoyed working with clients in many diverse fields. I firmly believe that there are fundamental lessons in strategy and marketing that apply across the board, without regard to size, offering, or industry. I welcome your comments to my posts, and look forward to a great conversation!