Creativity & Exploration is always at the cost of production

I. The Old Thinking

“Creativity and exploration is always at the cost of production”

Part a. Illustrations

Illustration 1. The PC "TOY": The Minicomputer Makers' Global Killer

During the mid-80's, minicomputer companies were high-growth, high-margin companies. They were regarded by investors, the business press, and academia as among the world's best-managed organizations. Indeed, Digital was one of the most prominently featured companies in the McKinsey study that led to the book In Search of Excellence

As medium and large businesses demanded ever-increasing amounts of computing power, this dynamic industry supplied it at rapidly decreasing prices. DEC and others did so by aggressively investing large amounts of capital in small to large, radical, and risky technology projects. Not even IBM could impede their successful march to industry dominance.

The Stealth Attack

At the same time, a few startups had introduced very simple, low-power computers. 'Just a toy,' declared DEC's founder. And he seemed to be right: PCs were purchased by individuals, mainly for games. Should DEC invest money, time, and energy in low-margin products that their customers don't want? Or should the company stick to higher-performance initiatives that promised up-scale margins and growing volumes, such as DEC's super-fast Alpha microprocessor?

The Aftermath

DEC had achieved its peak profits and some of its highest margins ever ... one year before the missile-like attach of the PC industry hit from below, severely wounding every minicomputer maker. Several minicomputer manufacturers failed and none established a viable position in the desktop personal computer value network.

Inference from the illustration

Those who were responsible for the downfall of the big giants who backed off from exploration/ risk taking keeping the cost of production in mind, were not those business models which had efficient operations and so on. They were just classic examples of “disruptive technology”
What is a "disruptive technology"? Christensen coined the term in his best seller, The Innovator's Dilemma, published in 1997, and it has since become the hottest buzzword in business today. It's nothing new. Japanese automakers used disruptive technology in the 1970's to seize market share. A disruptive technology is often an inferior product or service, but one good enough to win wide swaths of market share."

“The business model these days is more than ‘build a better mousetrap’. Firms need to build a ‘different mousetrap’. If they don't do it, a competitor will and will drive them out of the market."
-------------------------------------------------------------------------------------------

Illustration 2. The Rise and Fall of Disk Drive Manufacturers

An Era of Sustaining Technologies

In the late 70's, the market for disk drives consisted of large mainframe computer makers. These customers demanded an aggressive improvement in capacity of more than 20% a year, above the minimum required capacity of 300 MB. The leading and most innovative 14-inch drive makers (namely IBM, Memorex, EMM, and Ampex) competed vigorously, maintaining the industry's aggressive rate of R&D investment that had led to dramatic improvements in capacity and cost

The Stealth Attack

During those years, a few startups developed 8-inch drives with less than 50 MB capacity, but only minicomputer startup companies could use them. Because these drives were easy to make, and because mainframe customers did not want them, profits margins and sales volume were extremely low. New entrants struggled to find a viable market for these drives and mostly only minicomputer startups were interested in them. The decision for IBM and other established drive-makers is whether to divert scarce engineering and financial resources to this small new market and risk eroding their market share of the high margin, high-growth 14-inch market. Alternatively, they could wait until the market was big enough, and then invest aggressively to capture it.

The Aftermath

Unexpectedly, 8-inch drive makers sustained a capacity increase of more than 40% a year. Their products soon met the needs of mainframe computer makers, while offering advantages intrinsic to a smaller disk, such as reduced vibration. Within four years, 8-inch drives had taken over the mainframe market. Although one-third of the 14-inch makers had introduced 8-inch models-with very competitive performance-every independent 14-inch drive maker had been driven out of the industry by the end of the '80s. And of the 17 disk drive companies existing in 1976, all but IBM had failed or had been acquired by 1995. The 8-inch manufacturers, however, were no wiser to the disruptive technology phenomena and found themselves fighting a losing battle several years later against the 5.25-inch drive.

Inference from the illustration

Innovation was looked at as an exception rather than a rule. They had absolutely no openness to novel ideas and solutions of managing competition, as they worried about diverting scarce resources to another domain

Radical Innovation happens in big corporations, but it's the exception rather than the rule. Making it sustainable and routine requires visionary leadership, markedly different management techniques, and an entrepreneurial team that can "manage chaos," say six Rensselaer management professors. In their new book, Radical Innovation: How Mature Companies Can Outsmart Upstarts (2002), the Rensselaer team lays out a manifesto for managing corporate innovation:

“So, Yes, Creativity and exploration is always at the cost of production, but no creativity and exploration would be at the cost of survival. This is when business becomes vulnerable.”

------------------------------------------------------------------------------------

Part b. The Vulnerable

In "Am I Vulnerable" (2002) - a survey designed by Rensselaer Management professors at the Rensselaer Institute of Entrepreneurship, executives are asked the following six questions to determine whether their organizations are vulnerable to "stealth attacks" of new technology:

* Has your company lost relatively low-value customers in small market niches or low-end market segments?
* Does your organization wait to target new opportunities until they are "big enough to be interesting"?
* Does it appear that greater and greater improvements in your products or services seem to be valued less and less by your mainstream customers?
* Have innovations that you believe to be critical to the future of your business been shelved or discarded because of market shares or financial constraints?
* Does poor initial performance of a new product or service lead to its abandonment?
* Have new entrants exploited opportunities where uncertainty over market size and customer needs resulted in inaction by your company?

If the answer to any one of these questions is yes, the company could be a prime target for disruption. A fatal threat to market shares can begin as a low-quality, low-margin product that customers do not want or cannot use yet.

“Companies that ignore these disruptive technologies for fear of not being able to manage the costs of production may find they grow in capability to meet mainstream needs.”

------------------------------------------------------------------------------------

Part c. Stealing the Thunder

Why do companies allow upstarts to steal their thunder? Consider the following:

Rice is one of the six Rensselaer management professors who have followed top-secret research projects at 10 major corporations. Funded by a significant grant from the Sloan Foundation in partnership with the Industrial Research Institute, the research examined radical innovation at Air Products, Analog Devices, DuPont, GE, GM, IBM, Nortel Networks, Polaroid, Texas Instruments, and United Technologies.

The researchers found that creating the culture of entrepreneurship within a big corporation was no easy task, but sustaining that culture was a real management conundrum--an unnatural act. It's impossible to predict manufacturing costs, sales figures, market response, and profits for a product that doesn't exist. Traditional management and marketing techniques just don't work when applied to radically new technologies but established firms are learning some new tricks.

Information is the life-blood of an organization. Modern corporate dynamics are such that vital information does not quickly appear-if at all-on the corporate radar screen. The gap in vital information must be replaced by anticipation. In the words of the great hockey player Wayne Gretzky,

"....skate to where the puck is going to be, not where it has been.”

------------------------------------------------------------------------------------
II. The New Thinking

“Creativity and exploration is ‘not necessarily’ at
the cost of production”

Part a. Illustrations

Illustration 1. All in the Campaign- Intel Inside

We live in an age in which the pace of technological change is pulsating ever faster, causing waves that spread outward toward all industries. This increased rate of change will have an impact on you, no matter what you do for your living. It will bring new competition from new ways of doing things, from corners that you don’t expect. If you run a business, you must recognize that no amount of formal planning can anticipate such changes. Does that mean you should not plan? Not at all. You need to plan the way the fire department plans. It cannot anticipate where the next fire will be, so it has to shape an energetic and efficient team that is capable of responding to the unanticipated as well as to any ordinary event. INTEL was shaken when flaw was identified in its memory chip and media blew up the issue. Comments like “Bug in the Pentium FPU” (FPU stands for floating point unit, the part of the chip that does the heavy duty math). Major news papers started reporting the story with headlines as “Flaw undermines accuracy of Pentium chips” to “The Pentium proposition: To buy or not to buy.”

IBM had stopped its shipments of all Pentium based computers. All hell broke loose again. IBM’s action was significant because, well, they are IBM. Although in recent years IBM has not been the power they once were in the PC business, they did originate the “IBM PC” and by choosing to base it on Intel’s technology, they made INTEL’s Microprocessors preeminent. For most of the thirteen years since the PC’s inception, IBM has been the most important player in the industry. So their action got a lot of attention. After this incident, a lot of activities turnaround the way of Intel’s way of doing business. They were under the perception that their product as good. Quality levels were very good and their product specifications met all criteriae. After all, they had designed and conceived these products and along the product came the implicit right and obligation to decide when the product was good and when it was not. Nobody ever questioned that they had the right to do that and generally they were on target. A year or so later, as it reflect, two long term forces did work for them, creating the conditions in which a tiny flaw in a microprocessor’s floating point unit could mushroom into half a billion dollars worth of damage in less than six weeks. A few years back, they had introduced a major marketing campaign, the “Intel Inside” program. It was the biggest campaign the industry had seen. Its aim was to suggest to the computer user that the microprocessor that inside his or her computer is the computer users knew instinctively that the identity and class of the computer were determined more than anything else, by the microprocessor within. This was obviously very good for them. It gave them distinction, identity and helped build computer users community awareness of them and their products.

Inference from the illustration

If Intel was one of those companies which feared overrunning of production costs and hence gave up on the battle, it never would have been what it is today. Research shows that the logo “Intel Inside” became one of the most recognized logos in consumer merchandizing, up there with names like coca-cola and Nike. The trouble they had faced was not only they didn’t realize that the rules had changed.

“Marketing campaign despite the loss of business for Intel saved them from heavier losses in future. What was worse for them was, they didn’t know what rules they now had to abide by.”

------------------------------------------------------------------------------------
Illustration 2. Total Quality Management and Six Sigma- The Savior

GE has practiced Six Sigma and has changed GE forever. The hard numbers behind GE’s Six Sigma initiative tell just part of the story. From an initial year or so of break – even efforts, the payoff has accelerated. $ 750 million by the end of 1998, a forecasted $ 1.5 billion by the end of $ 999, and expectations of more billions down the road. GE’s operating margins for decades in the 10 percent range continue to hit new records quarter after quarter. The number are now consistently above 15 percent, and even higher in some periods. GE leaders cite this margin expansion as the most visible evidence of the financial contribution made by Six Sigma.

Motorola – the very existence and success of the electronics leader is tied to ix sigma. In the 1980’s and early 1990’s, Motorola was one of many US and European corporations whose lunch (along with all other meals and snacks) was being eaten by Japanese competitors. Motorola’s top leaders conceded that the quality of its products was awful. Six Sigma gave Motorola an extra muscle to drive what at the time seemed like an impossible improvement. It provided a 10X improvement every 2 years. Only after two years after launching Six Sigma, Motorola was honored with the Malcolm Balridge National Quality Award. The following are the achievements between Six Sigma’s beginning in 1987 and 1997:

- Five-fold growth in sales, with profits climbing nearly 20 percent per year.
- Cumulative savings based on Six Sigma efforts pegged at $ 14 billion
- Motorola stock price gains compounded to an annual rate of 21.3 percent

Allied Signal began its own quality improvement activities in the early 1990 and by 1999 was saving more than $ 600 million a year; thanks to the wide spread employee training in and application of Six Sigma principles. Not only were Allied’s Six Sigma teams reducing the costs of reworking defects, they were applying the same principles to the design of new products like aircraft engines, reducing the time from design to certification from 42 to 33 months. The company credits Six Sigma with a 6% productivity increase in 1998 and with its record profit margins of 13 percent. Since the Six Sigma effort began, the firms’ market value had – through fiscal year 1998 – climbed to a compounded 27 percent per year. Allied Signal’s Six Sigma leadership has helped it earn recognition as the world’s best diversified company (from Forbes Global Edition) and the most admired global aerospace company (from Fortune).

A telecommunications products company used Six Sigma design techniques to enable greater flexibility and faster turnaround at a key manufacturing facility. At the plant, several specialized products are built on a single production line. Since each customer’s orders may require different circuit boards, the need to avoid retooling was critical. Working through the alignment of customer needs, product design and process specification, retooling was dramatically reduced. The plant was also able to institute parallel processing so that if one area of line was not functioning, work – in – process could be easily rerouted without adding to cycle time. Under the new plant design, customer orders are transmitted electronically, where “virtual design” applied to speed quick response. Altogether, these innovative changes improved overall cycle time from days to hours, as well as improving productivity and resource management.

Inference from the illustration

All the above examples drive home a point that Total Quality Management is driven by six Themes:

Theme 1 – Genuine focus on the customer. Here the customer focus becomes the top priority. The measures of Six Sigma performance begin with the customer. Six Sigma improvements are defined by their impact on customer satisfaction and value.
Theme 2 – Data and fact driven management. It takes the concept of “Management by fact” to a new, more powerful level. Despite the attention paid in recent years to measure improved information systems. Knowledge management etc. It should come as no shock to you to hear that many business decisions are still being based on opinions and assumptions. TQM brings in discipline by clarifying what measures are keys to gauging business performance; then it applies data and analysis so as to build an understanding of key variables and optimize results.
Theme 3 – TQM success has been convincing leaders and managers – particularly in the service based functions and industries that mastering processes is not just a necessary evil but actually a way to build competitive advantage in delivering value to customers. There are many more people to convince with huge dollar opportunities tied up in those activities.
Theme 4 – Proactive management. Being truly proactive, far from being boring or overly analytical, is actually a starting point for creativity and effective change. Reactively bouncing from crisis to crisis makes you very busy – giving a false impression that you are on top of things. In reality it’s a sign of a manager or an organization that’s lost control.
Theme 5 – Boundary less collaboration. ‘Boundaryless-ness’ is one of Jack Welch’s mantra’s for business success. Year’s before launching Six Sigma, GE’s chairman was working on break down barriers and improve framework, up, down and across organizational lines. TQM expands opportunities for collaboration as people learn how their roles fit into the “Big Picture” and can recognize and measure the interdependence of activities in all parts of a process thus supporting team work.
Theme 6 – Drive for perfection; Tolerance for failure. No company will get anywhere close to Six Sigma without launching new ideas and approaches – which always involve some risk. If people who see a possible path to better service, lower costs, new capabilities etc (i.e. ways t be closer – to – perfect) are too afraid of the consequences of mistakes, they’ll never try. The result: stagnation, putrefaction, death.

“Hence, turning averse to creativity and exploration by not adopting new methods of work and sticking on to older ones fearing the
cost of production shoot-up is certainly a folly.”

------------------------------------------------------------------------------------
Part b. The Vulnerable
How have these companies kept away from being vulnerable?
Fortunately the techniques include a significant dose of risk management. The bottom line, though, is that any company that makes Six Sigma its goal will have to constantly push to be ever – more – perfect ( Since the customer’s definition of “perfect” will always be changing), while being willing to accept – and manage – occasional setbacks.

“If you are going to fail, make it a safe failure”

------------------------------------------------------------------------------------
Part c. Stealing the Thunder
How can successful companies keep upstarts from stealing their thunder? Consider the following:

Sooner or later, something fundamental in the business world will change. We can talk of a strategic inflection point, and organizations go through these. There are cases of products getting screwed up, and products getting introduced prematurely. But change is one thing which is constant. Strategic inflection point is a time in a life of a business where its fundamentals are about to change. That change means an opportunity to rise to new heights. Strategic inflection points can be caused by technological change, but they are more than just competition. They are full scale changes in the way business is conducted, so that simply adopting new technology or fighting the competition as you used to may be insufficient. A strategic inflection points can be deadly when unattended to companies that begin a decline as a result of its changes rarely recovers their previous greatness.
Creativity and innovation is the DNA of any organization.
“Only the Paranoid Survives.”

--------------------------------------------------------------------------------------
REFERENCES/LINKS

· Am I vulnerable? (2002). Integral. Disruptive Technologies. http//www.disruptivetechnologies.com/ami.html

· Jones, D. (2000). Will business schools go out of business? USA Today, May 23.

· The pc "toy": The minicomputer makers' global killer. (2002). Integral. Disruptive Technologies. http ://www.disruptivetechnologies.com/dt_examples/dtedec.html

· Pocket pal diary. (2001). Myron Manufacturing Corporation.

· Radical innovation outsmarting the upstarts. Rensselaer Alumni Magazine. Dec 2000, p.5.

· The rise and fall of disc-drive manufacturers. (2002). Integral. Disruptive Technologies. http//www.disruptivetechnologies.com/dt_examples/dte-drives.html

· Thomas, J.P. & Waterman, R.H. (1982). In search of excellence. New York: Harper & Row

· Professor of Finance and Dean, Bureau of Business Research American International College Springfield, MA 01109

· Only the Paranoid Survives, By Andrew Groove.



--------------------------------------------------------------------------------------------------------------

TERMS INTRODUCED

· Disruptive Technology - A disruptive technology or disruptive innovation is a term describing a technological innovation, product, or service that uses a "disruptive" strategy, rather than an "evolutionary" or "sustaining" strategy, to overturn the existing dominant technologies or status quo products in a market. Disruptive innovations can be broadly classified into low-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption, whereas a lower-end disruptive innovation is aimed at mainstream customers who were ignored by established companies. It has been systematically shown to the research community that most disruptive innovations are in a minority compared to revolutionary innovations which introduce an innovation of higher performance to the market. Examples of true disruptive innovations, i.e. innovations that are lower in performance and lower cost, succeeding are rare. Occasionally, a disruptive technology comes to dominate an existing market by either filling a role in a new market that the older technology could not fill (as cheaper, lower capacity but smaller-sized flash memory is doing for personal data storage in the 2000s) or by successively moving up-market through performance improvements until finally displacing the market incumbents (as digital photography has largely replaced film photography). By contrast, a "revolutionary technology" introduces products with highly improved new features into the market. This is the innovation that most often replaces the incumbent [automobile - horse drawn vehicle]. In addition, a "sustaining technology or innovation" improves product performance of established products. Sustaining technologies are often incremental; however, they can also be radical or discontinuous.



· Radical (Innovation = Creativity * Risk Taking). The term innovation may refer to both radical and incremental changes in thinking, in things, in processes or in services (Mckeown, 2008). Invention that gets out in to the world is innovation. In many fields, something new must be substantially different to be innovative, not an insignificant change, e.g., in the arts, economics, business and government policy. In economics the change must increase value, customer value, or producer value. The goal of innovation is positive change, to make someone or something better. Innovation leading to increased productivity is the fundamental source of increasing wealth in an economy. Radical innovations can have a widespread and sometimes revolutionary impact on our lives and are said by some to account for technological progress. However, as you saw with the example of the telephone, most radical innovations are actually an accumulation of much smaller improvements, often carried out by many different individuals and organizations over time. Apparently radical innovation actually involves much incremental innovation – technical modifications to an existing product, process or system and sometimes known as evolutionary innovation.

· Floating Point Unit - A floating point unit (FPU) is a part of a computer system specially designed to carry out operations on floating point numbers. Typical operations are addition, subtraction, multiplication, division, and square root. Some systems (particularly older, microcode-based architectures) can also perform various transcendental functions such as exponential or trigonometric calculations, though in most modern processors these are done with software library routines. In most modern general purpose computer architectures, one or more FPUs are integrated with the CPU; however many embedded processors, especially older designs, do not have hardware support for floating point operations.

Inflection point - In differential calculus, an inflection point, or point of inflection (or inflexion) is a point on a curve at which the curvature changes sign. The curve changes from being concave upwards (positive curvature) to concave downwards (negative curvature), or vice versa

Strategic Inflection Point - The time at which an organization takes a decision to change its corporate strategy to pursue a different direction and avoid the risk of decline. The term was coined by Andy Grove of Intel to describe the period of change that affects an

organization’s competitive position. It also concerns the ability of organizations to recognize and adapt to change factors of major significance.


Andrew Grove (author of Only the Paranoid Survive) defines a strategic inflection point as a changing of the rules of the game resulting in a massive shift in the way business is conducted. As an example, consider the impact the PC and the Internet had on changing the way business is done in many different companies and industries.

--------------------------------------------------------------------------------------------------------------

courtesy: shenaz