Web Extra: Extended Interview with Michael Treacy

By Allan Alter  |  Posted 09-16-2003

Viewpoint: Michael Treacy

CIO Insight You say any company can achieve double digit growth, that there's no excuse, even in hard times. How is it possible though under difficult conditions?
Michael Treacy: Well, the piece that everyone has to recognize is that the growth of the market you compete in is only one of five ways in which a company can grow. During good times, if you're in a growing market, then you rise with the tide. During bad times, you sink with the tide. But there are four other and important ways you can grow a business. You can grow a business, first and foremost, simply by holding the base of customers that you've already got. You can grow a business by taking market share. You can grow a business by moving into adjacent lines of business, or, fourth, by moving into entirely new and unrelated lines of business. So, just because the market isn't growing doesn't mean that your company can't grow.

Because you can pursue one of these other approaches.
Exactly.

So if it is possible to grow by a different approach, why is it that most companies fail to achieve double-digit growth?
Well, most companies fail to achieve it because they don't look at growth as a portfolio problem. What I mean by that is, most companies produce a static, deterministic, and limited growth plan. They identify the four or five initiatives they're going to put in place to establish growth. They bet everything on those four or five initiatives. If they succeed, that's great. If they fail, they're out, they'll miss their goal.
The companies that grow steadily at double-digit rates do two things that are very different. First, they look for growth in each of those five areas. Second, they recognize that every growth initiative is uncertain. To manage the uncertainty, you need to have a diversified portfolio of initiatives, and you need to balance the portfolio toward the kinds of growth initiatives that are most appropriate to your market. So, if you're in a high churn market, you might focus more on base retention. If you're in a market that's reaching a level of maturity, you might be more focused on adjacent growth. But all the firms that do it right basically have an abundance of initiatives managed in a portfolio, and that's how they get the double-digit growth.

Can you give an example of a company that does this well, and an example of a company that does this poorly?
Certainly. Let's take a well-known example for the readers, which is Dell Computer. Dell's core market is personal computing, the growth rate in that market reduced dramatically in 2001. It has remained a single-digit growth market, but except for one two-quarter period, it hasn't interrupted Dell's spectacular growth because they were able to do all the other components of the growth portfolio so well.
Importantly, they have shifted into a series of adjacent markets, including storage, printers, services, network devices. They continue to be aggressive at taking market share. So even in a flat market they can continue to grow. And they happen to be very, very strong at base retention. And so even as their core market growth rate has declined, they've been able to keep up the engine of growth. It did take them a couple of quarters through to recognize it and adjust their growth strategy.
If you want to see an example of a firm that has done it miserably, look no further than fiber-optics maker Corning. Corning is a company that for ten years in the 1990s bounced between $3 [billion] and $4 billion of revenue. Then the telecom bubble hit. It created enormous demand for both their fiber cable and their flat-screen technology. In fact, they saw a growth of 24 percent and then 50 in successive years. It ballooned the size of the firm.
But their growth was built, quite frankly, on being lucky and in the right place at the right time. They didn't use that good fortune to establish a broad-based growth strategy. As soon as the telecom bubble burst, they sank right back down to $3-4 billion of revenue, but, worst of all, they had to declare a loss equal to the last 20 years of profits.

You argue that in 2003 achieving double-digit growth requires focusing less on process innovation and more on product innovation. Is that correct? Why is it so, and what's going on that's causing the sea change?
Yes, it is the case. Across all of information technology, there's a tightening of information systems budgets, and one can ask why. Well, one of the reasons, of course, is that across the board companies have tightened their belts because there was a recession, there was slow growth, and everybody was focused on trying to maintain profits during a slow period. But the budget belt got tightened more severely in the information systems space. We're now starting to see budgets in marketing and other places loosen, but we're not seeing the information systems budget loosen very much. Why?
I think very simply because information systems has lost real credibility with the executive team in many organizations. Information systems made major investments in broad-based enterprise applications and solutions that have not paid off. ERP's impact on company performance is at best murky. CRM is a very troubled investment in that people are not seeing a return. Supply chain integration has turned out to be a very, very difficult investment to pull off.
And, therefore, what we're seeing is, first and foremost, that the investments that have been made in trying to innovate how companies do business are not paying off. And that's reducing the investments being made in information systems in general.

Still, you're saying it's not just that IT is not paying off. There's more of an emphasis on product innovation. Again, in 2003, why is this more important?
What's happening is companies have not just a mandate but an absolute requirement to innovate, because if you don't deliver better value, you die. And so there's an urgency, a necessity for companies to figure out how to improve the value proposition that they deliver to their customers, while simultaneously improving the value proposition they deliver to shareholders, which is more typically called profits. So I've got to simultaneously deliver better value and deliver better profits. I have to innovate to be able to do that.
Now for the last ten, 15 years, where we've poured the money into innovation has been in innovation in how our companies do business. We've been innovating in our operating model design. And I think the recognition is that we've overinvested in that form of innovation. We are not seeing the results we expected. We're disappointed in that form of investment.
So what corporations have done is they've refocused on their traditional form of innovation, which is product innovation. R&D budgets have not declined, not for one quarter, during this recessionary period. Companies continue to increase their investment in product innovation because there is a mandate, an absolute requirement that they innovate. And if I can't get that innovation to occur in how I do business, then I'm going to innovate in what it is that I sell.
And both sides contribute to the company's value proposition. The information systems investments can be used to lower cost and, therefore, lower prices. They can be used to speed up cycle times and, therefore, improve innovativeness in a number of ways. But when that's not paying off, I've got to look to other means, and where companies I think are turning their attention is toward product innovation. It's a return to kind of a root/core/basic strategy.

Does this mean shifting your revenue growth portfolio away from retention and taking market share away from competitors to other parts of the portfolio such as market expansion, adjacent markets, and new lines of business?
No. With only one exception, innovation through information systems and innovation through product innovation both can impact a wide range of the growth portfolio. Here's the one exception.
The organizational innovations through information systems can have a very profound impact on base retention. Why? Because, essentially, customers stay with you because you continue to offer best value. There's this myth out there that customers stay because of loyalty. Customers stay with you because each time they purchase, they determine this is still the best value for me. And there are a number of ways that information systems investment in customer service and other areas can help ensure that the company has the best value every time.
There are limited ways to invest in product innovation to ensure that the company always has best value every time, and then retains its customer, and those limited ways have to do with incremental evolutionary innovations in product.
So they both have some impact there, but I would argue that the information systems world actually can have a very big impact on base retention because one of the big advantages as an incumbent you have is better information about your customer than the competitors. So you should be able to engineer a better value proposition than the competitor.
In the area of share gain, let's take one marketplace. Let's take the consumer packaged goods industry. What consumer packaged goods has finally come to understand is that you cannot build market share through marketing and promotion mechanisms. That at best what will happen is you can maintain market share parity using those techniques, but if someone is essentially out-advertising you, out-promoting you, than it's a relatively simple thing to match them in what they do, wrestle them to the ground, and stop any share erosion.
If you want to move market share in consumer packaged goods, you must create fundamental innovation in product. It's the only thing that consistently drives market share in an industry like consumer packaged goods. It's the only thing that consistently moves market share in pharmaceuticals. And across a broad range of industries what companies are waking up to is basic fundamental innovation in product is the best way to move market share.
The exception to this is a services business, in which case your information systems investment in core services-say, you're in financial services, your information investment in banking services is, in fact, your fundamental innovation, your fundamental tool for creating share gain and value innovation. So where it's a services business, the IT community has a major role to play in driving market share. Where it's a product-oriented business, research and development is what's going to fundamentally drive market share.
When it comes to market positioning, both have a role to play-

By market positioning, do you mean market expansion?
Market expansion. Market position or market expansion. Here, far and away the more important innovation is in product innovation because-let me be careful because we're going to have the very same services and product split. So if there's a market segment that your analysis demonstrates is going to be a new and fast-growing segment and we need to position ourselves in that segment, what do we need to do? We need to do the fundamental innovation in product or service that's going to allow us to stake a claim to that market segment before other people crowd in and try to take some places. That's going to require either an innovation in information systems to build that core service or in R&D to build that core product.
And so they actually have a role to play, each of them have a role to play in each of the different areas of growth.

And your decision on which area of growth to emphasize is going to depend on your particular company's strengths, weaknesses, the marketplace, what customers are looking for. It's going to be a very individual, case-by-case analysis.
It is, but I just realized something in this conversation. It's actually a very important distinction in information systems investment. And that is that if we look at a product firm, all of the innovations that information systems brings about in a product firm are essentially innovations in how we do business. There are innovations in how we handle a customer, how we handle all the things that wrap around the product.
But if we're in a services business, like a bank, insurance firm, FedEx, people like that, in those kinds of businesses we really do need to distinguish the role of information systems in innovating how the company does business from the role of information systems in innovating in what the company sells.
And I would argue strongly that, as I said earlier, there's a return to focusing on product innovation-I should more broadly have stated there is a return to focusing on innovation in what the company sells. So I don't think in financial services, for example, there's been any abatement of investment in information systems to drive innovation in core products and services. I do think there's been abatement or a lessening of investment in the CRM and other kinds of systems that are more organizational innovations. And I apologize, but that's a very important distinction.

Are you dismissing loyalty too quickly? Aren't there companies that manage to lock in clients?
Loyalty is an outcome, not a characteristic of a customer. In other words, we do want to make customers loyal, but loyalty is not an innate characteristic of a customer. Customers are loyal to one thing: they're loyal to best value. They're not loyal to you, their supplier. They're loyal to the best value they can get in the marketplace. And, therefore, if you want to make customers loyal, or in my terminology you want to retain them as base clients, what you must focus on is delivering best value.
Now as the incumbent you have three significant advantages over the person who doesn't have that client as their own. First, you should have better information about the client than your competitor because you're in a relationship with them. Second, I should have an economic advantage versus my competitor. Why? Because my customer has incurred in some cases a small and in other cases a very large switching cost if they're to move from me to somebody else.
Third, I have an influence advantage over that customer. I have more of an opportunity to get the customer to use the criteria for evaluating me and the other guy that I would like them to use. So if I happen to be the low-priced product in the marketplace, I'm going to emphasize those criteria and try to get the evaluation skewed toward the characteristics of product that I'm best at versus the other guy. So, information, economics, and influence are the three leverage points that an incumbent has that makes it easier for them to sustain best value than the competitor.
GE Medical Systems provides an excellent example of how information systems can be used to innovate in what a company sells and thereby create a base retention strategy that's very powerful. GE Medical Systems is in the business of selling ultrasound machines, CAT scanners, MRIs and other very expensive imaging devices. They compete against Siemens, Hewlett-Packard, the spin-off of Hewlett-Packard, and companies of that ilk. And, quite truthfully, in any given year, any one of those companies might have the best point solution product because they're hop-scotching each other and leapfrogging each other in terms of innovative design.
GE has taken a deliberate strategy of broadening what it is they sell to their customer beyond product to include a very substantial suite of services. So they have software that allows the images that their products create to be captured and transferred into electronic medical records. They have evolved further into a broader set of clinical patient management systems. They've evolved even further now and linked patient management records into financial systems for health care organizations. So they're going all the way through into reimbursement.
In other words, GE has taken a focused approach that says: To our principal clients, hospitals and large physician groups, we will sell not only these expensive, high-end pieces of equipment, but we will sell the application software that will allow that hospital or that provider group to manage the flow of information from the equipment all the way through the reimbursement process.
And products can be swapped in and swapped out with a little bit of operator training. As we all know, information systems applications have a much higher switching cost and, therefore, can't be swapped in and out so easily. GE's strategy of broadening its offering from product to product-plus-profoundly-innovative-services has, in essence, raised substantially the switching cost to their client, and they have exploited one of the three advantages of incumbency, which is the economic advantage of switching costs.

So, in effect, they've locked in their customers.
They have very much locked in their customers. It's very much a one-way street once you start to implement GE's services solutions.
If you look at the auto industry, which is one of the biggest investors in these loyalty management systems, it turns out the incumbent, the company that made the car that you drive, actually is not very well positioned to have much more information about your family than any of the competitors can have. They don't really learn much more about you other than perhaps your service records through the dealers. There isn't much of a switching cost that they can build up and, therefore, an economic advantage. At your next car purchase, it really isn't any cost to you to buy a different brand than the brand you've bought before. And they really have extraordinarily limited ability to influence your judgment on what to buy because we so much distrust dealers and auto manufacturers.
So the very high churn rate within the auto industry is endemic to the structure of the industry. They aren't able to pull those three fundamental levers of incumbency-information, economics and influence-and, therefore, it turns out the fact, pick a company, the fact that Nissan sold you your last car gives them virtually no advantage in whether they'll sell you their next car.

Unless it's the dealer, and the loyalty may not be to the car manufacturer. It might actually be to the dealership.
That's exactly right. And if you look at the sophisticated dealers that do it well, they absolutely play the information game in spades, and they do create an economic advantage for themselves because they introduce small switching costs simply because they're so easy to do business with, that you know that it would be painful to move to some other place. You're 100 percent right.
Then, last, if you look at the dealer strategy of people like Mercedes-Benz and BMW though the lens of information, economics and influence, you completely understand how they've used that dealer system to kind of pull those levers. You're 100 percent right.

So what they should be doing then is supporting the dealer in building that lock-in.
Beyond supporting, they should actually build the tools for the lock-in and own them themselves and let the dealer use them. But it's very important that they own the means of locking in the client.

Who's they?
They being the factories, the OEMs. So it's extraordinarily important that these are franchise systems, not the result of encouraging independent innovation. And if you look at the Ford-GM dealer system, part of the problem those dealer systems have is they don't have compliance to the core factory approach to 'here's how you run a dealership.' So what you find is that there's one Ford dealer who's a big discounter, and the next guy is all love and kisses and service-oriented, and the third guy's got another thing. And that's a disaster.
When you go to a BMW or Mercedes or a number of other dealers, you find a consistency and uniformity of approach. Why? Because all the means of locking in customers have been engineered, designed and built by the factory not by the dealer.

So, in other words, it's coming out of Mercedes. So what's their strategy at Mercedes and what could other car manufacturers learn from them here?
Well, you know, first and foremost, all the car guys' base retention strategy is 95 percent of the chips are placed not on the dealer, they're actually placed on product innovation. So let's start with that, that the vast majority of their mentality and their thinking is if I simply produce the world's best car in the price range and segment that the buyer's at, that's why they'll repurchase my car. And they're right, that is the majority of reasons. That incumbency can still only play a small role in getting you to repurchase the same vehicle, but it can still play a role.
And so what are doing? They're building sophisticated systems to capture information about prospects and customers. So once you've been in a Mercedes or a BMW dealership and shown a sincere level of interest in an automobile, you're in their system, and you're getting special marketing to you that other people aren't getting. You're getting routine kind of contact points with the company.
One of the most important things that they've done, and GM actually pioneered this but hasn't figured out how to leverage it the way Mercedes and BMW are, is they're building these in-car tracking devices so they know where you are all at all times. Like the GM OnStar, in Mercedes it's called the Tele Aid system. And what they're able to do with that is actually gather a remarkable amount of information about your driving habits and your uses of that automobile. I mean, every time that car moves, they know it, and they know where it moved to.
It isn't clear to me either what the privacy limits are in their use of information, but I am absolutely clear that that information is powerful for purposes of building a profile on this customer so that the next time they're up to buy a car, you can more effectively respond to what their real needs are. There's a direct analogy to the Harrah's Entertainment system here and what they could do.

Let's go back to product information. One thing you say is that CIOs and companies must get better information with which to diagnose the growth you've already achieved, the gaps in that growth, and how you're going to close those gaps with new initiatives.
Exactly. In other words-

What kind of information are you talking about, first of all?
Well, first of all, it's the information about the growth portfolio. So we need to be able to drill down business unit by business unit and, in some cases, geography by geography, and understand how much of our growth is coming from base retention. Are we, for example, retaining 85 percent of our revenue from last year? Is it 88 percent? Is it 92 percent? It's very important information. We need to know how much of our growth is coming from share gain and how much of our growth is coming from market positioning or market growth. We don't have basic account reporting information now with which to make judgments about where the gaps are against our stretch objectives and, therefore, where there needs to be more focus.
So if I said to you that Nextel Communications, for example, experiences a 23 percent churn rate, that 23 percent of its clients go away every year, it means that they can only rely on approximately 77 percent of the revenue from last year to be in their coffers for this year, would you tell me that's a good thing or a bad thing? The answer is, well, I don't know because we don't know what expectations are.
Companies need to start building reporting systems for revenue that are far more sophisticated than what we're doing today to give their management much deeper, more granular, surgical insight into what's actually driving the revenue result that they're obtaining month to month and quarter to quarter, and that's the starting point for where information systems should get involved. We should, in conjunction with the controller's department, build those reporting systems that give much deeper insight into what's happening on revenue growth.

Are there any other kinds of systems, besides reporting systems on revenue growth and where revenue is coming from, that people need in order to diagnose and identify gaps in growth?
Well, the other area is actually an area where we can innovate around how companies conduct themselves, or innovation and operating model. If you look at the investments companies have made in big enterprise systems, there's a very mature investment that's been made in ERP at this point in time. CRM investments are probably the next most mature, supply chain management's perhaps the least mature of the three.
The area that's gotten very little attention in organizations is product lifecycle management. There's very few firms outside of automotive, aerospace, some of the heavy engineering-oriented industries that have made substantial investments in improving, in using information systems to improve how a company creates innovative product. And there are still a lot of opportunities in that area.
There are opportunities to speed up the cycle time, the whole time-to-market concept of how we go from concept to marketplace. There are significant opportunities to improve the way companies make judgments and decisions about their product portfolio management, you know, where they spend their dollars on product innovation. And there are tools and investments that can be made in improving the overall level of inventiveness, if you will, the degree to which a company is able to bring out breakthrough products on a consistent basis.
Now the high-tech industries-pharma, information technology, aerospace-those guys have made these investments because they know they live and die on product. The auto industry's done it because they've just had such a profoundly complex process for how they design and bring to market a new product that they've had to make the investment. But a broad sweep of other industries have made very little investment in improving how companies create innovative products, and that's a very important way that information systems can start impacting growth strategies across the board.
Let's drill down a little bit further into this. If we're thinking about product development, it's going to start with research. What do we do differently here?
Well, for starters, there's a revolution that's slowly fomenting in research, and it is the following. Research can become a structured process. To date, what most senior executives believe is that research depends upon unstructured creative insight on the part of very high potential people. It is, in essence, the Albert Einstein model of research, or university model of research. We put enough very smart people into a highly unstructured situation, we pour in enough money and other resources, and we have some statistical probability that some good things will come out the other end. That process simply can't survive. That is no way to conduct corporate research.
Now that's a model that Thomas Edison essentially established. It was his version of a research lab. Now importantly, Thomas Edison built a corporate research concept in which he was the central element of virtually every component of research that took place in this very broad organization. We took that idea, industrialized it mostly leading up to World War II and then for 20, 30 years after World War II. We industrialized that process so that you didn't have to have one Thomas Edison in place, you could somehow have a hundred junior Thomas Edisons, and you would achieve the same result. So we saw big research labs develop in all sorts of companies.
But the process is still highly unstructured, and it's unstructured because what's missing is a methodology for innovation. How do you put structure to the process of creating breakthrough thinking and breakthrough ideas? And this is where of all people the Russians actually have a leg up on us because they have a methodology that's was invented 50 years ago, refined over a very long period of time, and it's actually been proven as a structured approach to increasing and improving the inventiveness.
TRIZ is a Russian acronym for the theory of inventive problem-solving. It was created about 1950, it was first created by a man named Genrich Altshuller from Azerbaijan Altshuller's key insight was that, to improve the innovation process, do not study inventors, study inventions. So don't try to understand how an Albert Einstein works, try to understand instead the pattern of invention within any area of science or research or engineering.
So he took a very large database of patents, more than a million of them, and he analyzed them to understand the trends in innovation. Out of that came 11 fundamental trends of innovation that point you toward where the next innovation's going to occur in your business, in your marketplace. He identified patterns that anybody can use to foretell where technical or product innovation in an area is going.
So as an example, one of the trends is a trend toward "dynamization." That is to say, all products that start out static and solid end up being dynamic. There's a trend in that direction. I wouldn't say all products, but many products. So here's this trend because I know this-

Can you give me an example?
The particular example I'm going to use is measuring devices. How do we measure distances? The first thing you have is what? You have a ruler, like a yardstick from grade school or a one-foot ruler. That's a solid object, no dynamization in the thing at all.
But the next evolution is you put a joint into a solid device, and then you make it multijointed. A multijointed ruler is what a carpenter carries around with these fold-up wooden rulers that they used to carry around in the old days. The next trend in dynamization is from solid you go to flexible. Guess what? That's a tape measure. You then go to powder, then to liquid, then to gas, and eventually to a force field. What's a force field? That's the use of laser measurement devices. So you see a ruler, a carpenter's multijointed ruler, a tape measure, a laser measuring device. It's a classic example of the evolution of a technology along the dimension of dynamization.

And that's just one of many possible paths down which product evolution can flow.
Exactly. And between all of the different trends and subtrends, there are identified more than 250 of these trends.

If you're a CIO and you're hearing this, where do you use technology to help companies use TRIZ to develop innovative products?
And let me give you one more thing on TRIZ, and then I'll come back to that question. So one of three powerful insights about TRIZ is that if you're going to innovate in any product area, you should plot where that product evolution has gotten to on the relevant trends in technology, because that basically will point you toward where the next innovations will occur, and it will substantially reduce your search for finding those next innovations. So that's idea No. 1. I'll give you three ideas, and then we'll come and talk about technology.
Idea No. 2 within TRIZ is to look at functional requirements as the central mechanism by which you invent and come up with new insights. So, as an example, a company wants to take a paper-making machine, which is a multi-hundred-million-dollar machine, and they want to reduce the capital cost of that equipment, let's say they want to cut it in half or they want to cut it in a quarter. It turns out that the stated problem is, I want to reduce the cost of my machinery.
The key functional problem that is driving the cost of a paper machine it turns out is one thing, and that is that for every pound of paper you produce, you have to use 1,000 pounds of water. So the majority of the capital cost has to do with moving water and applying it and drying it and squeezing it out and doing all the things you do to water, that the key problem is the movement and removal of water in the paper-making process.
How many ways can you remove water if you look at the problem functionally? If you look through all the different sciences, how many different ways can you remove water? Well, it turns out you could squeeze it out, you could boil it out, you could do a whole bunch of things. When you look through all the different sciences, you can find at least 42 ways to remove water.
And so by looking functionally, you open up your eyes to looking across all scientific disciplines for the answer. You're just interested in moving water. You don't care what field, whether it's physics, chemistry, biology has an insight for removing water. So that's the second big idea: You look functionally across all aspects of businesses, sorry, all aspects of the requirement.
And then the third big concept in TRIZ is essentially how you-and I won't go into the details-but it is how you ground your innovation in an understanding of what produces value in a marketplace. Because there are obviously a lot of ways you can innovate that don't add value, there are a limited number of ways to innovate that really make a profound difference in the use or value of the product. And so those are the three basic ideas.
There's a big insight in TRIZ about the evolution of technical innovations. There's a big insight in TRIZ about 'look functionally and across all scientific disciplines,' and there's a big idea in TRIZ about how you identify and connect the functional improvements in a product you're creating to things that really deliver value in a marketplace.
Now what role does information technology have to play in this? Well, what I ask you is, what role did information technology play in Six Sigma? Because TRIZ is to research and development, TRIZ is to product innovation, what Six Sigma has been to operations. It is a structured, disciplined approach to driving consistent year-on-year improvements in productivity in a process and functional area of the business. Six Sigma has impact on operations, TRIZ has impact in innovation.
And to the extent that information technology has found an important role for itself in Six Sigma, I think information technology will find an important role for itself in TRIZ. But the challenge is that TRIZ is very early, in this country it's very early in its evolutionary cycle.

Right, but where do you think IT is going to contribute to TRIZ?
I think it's going to play a huge role, and the reason is that TRIZ is essentially an approach to structuring what is today a very unstructured process of innovation. And anywhere you can bring structure and process, information systems has a role.

Help me see this.
Okay, I'll give you one instance, just one simple instance of its role. If you are looking at innovating across a range of sciences in a product that's important to you, let's say that you are a company that makes soap, just for argument's sake, and you want to innovate in the soap business. One way the information systems can play a role is, if you plot and analyze where a bar of soap is in its technical innovation today, it will point you toward, in all those different dimensions of evolution of science, where to look next for innovations in other fields that might apply to the soap business.
How do you actually go look? Well, one of the ways you go look is with a huge patent search engine. There's a simple application, needs a lot of investment to make it work effectively, but there is a powerful, powerful tool that can be given to the research community, which is a patent search engine tuned to the kind of patent searches you need to do. There are a limited number of companies out there that actually have products like that in the marketplace that can help you do patent searches. You use a typical Google-type search, you're going to come up with garbage. It's a very specialized process. That's just one example of where it could be done.
Second example: TRIZ itself as a methodology is still so new that effective tools to provide a kind of a tool bench for someone practicing TRIZ don't yet exist, but the methodology's complex enough that I am quite certain that those kind of assistance tools are going to grow up as well. That's going to be in the field of application software, if you will. We're going to see TRIZ work benches and things like that evolve. They're not here yet.
So it's a little hard for us to see the role of systems right now because you're at the very early evolutionary cycle of this methodology in this country. It would be like us sitting there at the very beginning of Six Sigma saying, well, where does systems play a role, and the answer is, well, it's going to, but you're just not going to be able to see it at the very beginning of an evolutionary cycle. No one has enough foresight.

So you're saying that structuring research is going to be one of the things we're going to be doing differently that IT can help. Besides TRIZ, is there anything else?
Sure. Yeah, the other things, I mean, remember that's what's typically called the fuzzy front end of product innovation, you know, that conceptual stage, that's where TRIZ kind of applies, the real invention conceptualization. But once you have a concept you believe in and you're starting to take it into commercialization, now there's a whole series of tools, mostly around this product lifecycle management (PLM) space, that can have real impact.
And so if you look at the kind of tool set that's evolved-EDS has a product lifecycle management group, IBM has a relationship with Dassault Systèmes SA where they have some software, and then there's some point solutions, smaller players out there that are kind of losing share to those two big guys.

Tools like this have been around for a while, but what should a CIO be doing here?
Well, if the CIO is in one of these product technology-intensive industries like aerospace and pharma and automotive, the likelihood is what the CIO should do is just continue to evolve what they've got. They're already heavily invested in this stuff. But in the majority of industries there is very little investment that has been made to improve the product innovation and product commercialization processes.
And so a lot of these tools don't have any use in consumer package goods at the moment. They don't have any use in medium-technology industrial products like electronic components, plumbing components, you know, building materials. You just don't see that. You might see a standalone CAD system so people do some drawings, so they've automated the blueprint process, but that's it.
And there's just an enormously sophisticated suite of software that's out there to be used. Now some of it may need some adaptation to the different environments from shipbuilding to sports equipment design, but there's a tool set out there that's on the shelf, very sophisticated, and it's not being applied by a whole bunch of companies.
That said, I would strongly argue that CIOs approach this by trying to cherry-pick at first the point solutions that are going to be the highest impact right away. I'd be cautious about kind of taking on a big enterprise approach to this software because enterprise approaches, in general, haven't had a very happy ending for most CIOs. So I'd be looking at what is a very broad suite of software these folks have developed and saying what in there are the things that could really make a difference in unlocking some bottlenecks in our innovation process right now.

What do product development lifecycle products cover?
They cover everything from product conceptualization at the front end, with some surprisingly sophisticated tools for that…and that's all the stuff that links, if you will, to the TRIZ discussion you and I just had, because TRIZ is all about structuring a process for identifying, conceptualizing, and defining kind of new inventive products that have some science underneath them. It moves into product engineering, which is taking that concept and getting the detailed drawings designed. It links into sourcing. It then evolves into manufacturing-

Sourcing from vendors?
From vendors, exactly. And you can see how there's a loop back there because, especially as companies outsource more and more of their design to their vendors, they get subassembly people to do more of the design as well, then you start sharing and collaborating with these systems across organizational boundaries. It moves into manufacturing engineering which is, 'Okay, I got the drawings but how am I going to make this thing,' and that then moves into an area around kind of production asset decisions, deciding on what kind of machinery you need to have in place and how to run the production line stuff.
And eventually it loops all the way around, this product lifecycle management stuff loops all the way around to service and support issues. Why? Because if we're getting a lot of break fixes in the field on some product, that information needs to be looped back into the design community.

Okay, so the bottom line is companies outside the industries that traditionally use these tools need to begin looking at them and cherry-pick the spot solutions that are going to meet their particular bottleneck.
Exactly. And the two vendors, it's really come down to a duopoly this industry. The two really driving this are EDS's PLM Solutions and IBM's Dassault relationship. I mean, those guys are really starting to dominate this market.

You hold up the pharmaceutical industry as a good example of using IT for product development.
That's right.

Specifically, what is it that pharma companies do, and how do you use IT to improve the productivity here and to accelerate the rate of adoption?
Well, it's a long discussion, but let me go back to the basic science of research and pharmaceutical. The basic approach of pharmaceutical research for the last 30 years has been that you create a very large number of chemical compounds, and then you put them through filters to see what works. The first filters that you put them through are very simple kinds of chemical tests, and then eventually they go into animals and eventually they go into humans, and you're testing for both efficacy and safety.
The early phase of that, which is doing chemical testing, if you will, to see their reaction and interaction with different chemical models that are supposed to be, in essence, models of what will take place in the human body, that process used to be a bench science process where literally somebody with a test tube and a dropper was doing one chemical test at a time. They've automated that process now to the point where they do batch testing of thousands upon thousands of chemical compounds using highly automated systems. And so they've automated and routinized that part so that they're now able to look through hundreds of thousands of compounds. That has been a gigantic breakthrough for the industry.
The next thing the pharmaceutical industry has done in the discovery end, and it's very important, is there's an enormous amount of knowledge that comes out of this whole process, the insight they have about the interaction with various chemical compounds and all the rest. The second area they've made huge strides is in managing that knowledge. Because you can imagine how often you could, in essence, rediscover the same thing in pharmaceuticals two laboratories away from each other. And so these guys have very, very sophisticated systems for knowledge management when it comes to the kind of chemistry of their products. So they're doing a ton of stuff on the discovery end, and the goal there is to make them more inventive. Give these people the tools and processes to make them more productive and, therefore, more inventive.
On the other side then, how does one use technology to also accelerate the adoption, the rate of adoption? Because when you invent a product, you've got a 17-year patent life, but that's from the date you filed the original patent. You've typically got seven to nine years of marketing life to the product. You've got to make hay while the sun shines. And so a number of things are being done on this front.
One of the most important, and, in fact, probably the most important, is using simple information systems, tools, and techniques to create more communications to doctors who are early adopters of new innovations. So the industry has sorted out who the docs are who adopt early, who are the docs who adopt late. They're using videoconferencing, teleconference, e-mail, a hundred other kinds of simple technologies to stay in very close contact with these docs. They're even doing things like in late-phase trials, where the drug hasn't yet been approved, but they're still kind of doing safety testing and things like that.
They're very sophisticated in what doctors they're involving in those research trials, in how they're helping those doctors promote their research and their information among their peers. So there's a very sophisticated-the term they use is viral networking, viral marketing, and these guys are all over the idea of how you use technology to accelerate viral marketing around your product, so by the day the product is announced for sale, the market is not just ready but hungering for your product.

You've said many companies that are attempting adjacency strategy fail miserably, but some succeed. I imagine IT can be both helpful and dangerous. IT's helpful, in that perhaps it can be a competency that is your lead into an adjacent market. Dangerous, in that it can trick you into thinking you have what it takes to move into an adjacent market. How do you think intelligently about technology when you consider or execute an adjacency strategy?
Well, the simple question you have to answer, and it's 75 percent of the issue in adjacency, is what is it about what I do and my capabilities that will give me an immediate and practical advantage in this new market? If you have a really compelling answer to that, then the likelihood is you're going to succeed with an adjacency.
But there's a second question, and the second question is the one that often doesn't get asked and sometimes can be fatal. And the second question is, what are all the other minimum standards of competition that I must meet within that new market and do I have what it takes to do that?
So the guys that failed on the second one-the classic example is the defense industry moving into commercial markets-oftentimes they possessed a technology, some product innovation like GPS satellite systems, where they said, boy, we have an immediate and practical advantage over the rest of the world. Look at this technology, how brilliant it is.
The problem with those guys is that while they did have an answer to that, they didn't understand the standards of competition in any market they were going to be in, and, therefore, they didn't meet the minimums in all the other stuff. So they didn't know how to distribute their product, they didn't have an after-market service capability, or worse, they had a manufacturing capability that was used to producing dozens, not millions, and they were used to having price points at hundreds of thousands, not hundreds of dollars.

So it sounds like the danger is not so much misuse of the IT you have but the lack of technology you need to have to compete on all those other areas.
That's right. What usually is found out is that the information systems support in the more core business is actually woefully inadequate for meeting the standards of competition in this new market, and that there are gaps that I was completely unaware of. I'm caught flat-footed-'Oh, my God, this is how it has to be done in this market'-and those little gaps become disasters.
Let's look at Microsoft going into the gaming marketplace. Microsoft is a classic mass marketer, but what's happened in consumer electronics is it's moved way beyond mass marketing into some very sophisticated niche marketing kind of strategies that companies like Sony are very, very good at. And Sony, whether it's in the music business or the television business, they really are at the forefront of understanding how you manage channels of distribution, how you do niche marketing to different customer segments, and how to really mine out this whole marketplace. By the way, a Pepsi, a Procter & Gamble, all these guys are very good at that stuff.
Microsoft isn't. Microsoft may not be a monopolist, but they sure as hell behave like a monopolist. And so they don't have sophisticated consumer information bases like a P&G or a Sony does. They don't have the sophisticated systems for managing multiple complex channels of distribution. And so when they go out there to distribute the Xbox, guess what, they're almost naked when it comes to these kinds of marketing techniques because they don't have the information systems support or the marketing know-how to attack that market from a niche perspective.

You've talked about total solution companies, and you say they need to focus on knowledge management and risk management. Let's talk about that. What needs to be accomplished? What do you mean by knowledge management or risk management here with these kinds of companies and what should CIOs make sure gets done?
And I'm going to shift the word from knowledge to expertise management, and there's an important but subtle shift. Expertise would be my word.
If you're a total solution provider, if you're the kind of company that is, essentially the biggest total solution market evolving now is going to be all this business process outsourcing. So these are people who are basically able to go to the client and say, 'Look, I know you have this, you think you have a product need. Let me ask you a question, well, why do you need the product, what's the problem behind the product that you're actually trying to solve? Why don't I go in and just solve your problem rather than just deliver your product?' That's a total solution provider. They're people who focus on customer problems.
And the only way that you can wrestle that problem away from the customer and make a dime on it is because you have superior expertise to the customer in how to solve that problem. And so the outsourcing of, oh, HR benefits would be an example where, if people simply have dramatically higher levels of expertise than the client does, they create economies of scale and they get to outsource the business.
Just as a product over time becomes obsolete, just as a superior cost position over time becomes obsolete and just an average cost position, the same thing happens with expertise. So you have to constantly drive your expertise deeper and broader because if you just show up to do the same thing three years later, they're going to say, there are 12 companies that can do that, I'm not going to pay a premium for that.
So by expertise management, it's how do I guide and manage the broadening and deepening of that expertise and take the old expertise and make sure that we automate it so that we can deliver it at a very efficient price.

If your company has a low-cost strategy, how are you going to use IT for product development?
I think if we substitute for product development the word service innovation, I think it's gets clearer. Most low-cost players are kind of in the service space anyway. So what you're really talking about is, if you're a low-cost player, how do you continue to evolve your operating model so that you can assure you stay at the low-cost position, and that's how do you continue to innovate, and essentially it comes down to two core processes. One is the supply-chain process, whether that's moving airplanes or moving bags of Wheaties, and the other is in the customer service cycle.

One thing I want to clarify: Earlier, you corrected me and said instead of knowledge management, we'll be talking about expertise management. What is the difference?
Well, you know, knowledge is just one piece of expertise, the know-how to do something. Let's just take employee benefits management. To have the expertise to better manage employee benefits, one piece of it is you've got to have the knowledge, but the other thing is I've got to have the people in place, I've got to have the apparatus, I have to have the systems. So in employee benefits management, a big part of it is the interaction with the employees, and doing that in a very efficient way, and creating systems so that they can self-manage their benefits, and do all that. That's all part of expertise, but that's not part of knowledge.

It's know-how, not know-about.
Yes, exactly right. Yeah.

If a management team doesn't know what information you need, what analysis to make, what decisions to come by, how to assign responsibilities, how to follow up the results, to grow a business by 10 percent, how do you get started? How does the CIO start to address this?
The starting point is always better information. So the starting point, if you're to build a discipline to be able to know that you can grow at 10 percent rates, is that we have to be able to take the budget statement that people now get, which is typically one line for revenue, 15 lines for expense, and we need to be able to explode out that revenue line so that it is delivering to us diagnostic information about where our growth is coming from.
So take CIO Insight magazine, it's a very simple example. We need to be able to understand, if we look at revenue this quarter, this month, how much of that is from base retention? How much is from share gain, from the bad guy? How much is from market positioning or market growth? So your starting point is to say, how much is coming out of each of these different areas, and track that month to month, quarter to quarter. That's step one. Step two is now I have to create for myself stretch objectives in each of those areas.
Or take a manufacturing company. The first thing is to understand how much of my revenue this quarter or this month is coming from clients where I'm getting same or better share of wallet that I got last quarter or last month. How much have I lost because I've got clients who've reduced their share of wallet they're spending on me versus the bad guy? That's base retention.
And, number two, I've got to look at where have I made share gains, and how much revenue has share gain contributed to my business. Number three, I've got to look at how much the market has grown, how much that's contributed. Once you've got that data in place, then the next thing you do is you establish stretch objectives for the management team in each of those areas.
So, if we're in a market where we're getting about 15 percent churn, which says that I can count on 85 percent of last year's revenue as this year's revenue, how do I move 85 to 90? The first thing I have to do is establish a stretch objective. The next thing I have to do is put in place the tactics, a multitude of tactics that are going to get me from 85 to 90. And that whole system of 'let's put proper baseline information in place, let's create stretch objectives, let's identify tactics, and now then let's measure performance against stretch objectives' simply doesn't exist for revenue.
And the starting point that is so missing is solid information with which to be able to track and evaluate what the sources of revenue are that are driving the performance you're seeing month to month.

It sounds like what you need is a combination of reporting systems, as you've said before, but also analytic and business intelligence systems.
Precisely. Yes, it's a classic-and incentive systems as well. It's a classic reporting, planning, controlling, and incentive-creating set of systems required in that area, that's exactly right.

And then you have the information to get started on your strategy and on innovation product development.
But it doesn't take that much. I mean, I've worked with companies where within a year these guys have really moved the needle on growth because they built a disciplined approach to how they look at the problem.

And then you can obtain the double-digit growth on a continuous basis.
Absolutely.

We talked a lot about the systems that need to change and what you need to invest in, very helpful. But if you're the CIO, how does IT, your own organization, or the business for that matter, need to change? Here we're talking about the organization and the people, not just the technologies you've invested in and the processes you have.
Tough question. Well, I'll start with a very basic change that needs to take place. For at least 30 years, the IT community, the IT profession has been associated with the issue of cost control, cost management and productivity, and the truth is we know a lot about how to do that because we've been at that game a long time, and we understand the whole game of cost containment and how you essentially use systems to drive cost reductions and productivity improvements within business.
The IT profession now needs to become as proficient in their depth of understanding about how organizations drive growth. The average senior IT executive could deliver an entire lecture and an entire course of study on what companies have to do to manage costs. How much time could a CIO fill discussing what IT has to do to drive growth? The answer, not much. Just as their executive team doesn't have the discipline for how to drive growth, they don't have the understanding that is the foundation of that discipline. Most CIOs don't have that knowledge either.
And so not a surprise that we don't have a whole lot of IT investments that are correctly oriented toward growth because we don't have a whole lot of understanding on how to deliver growth. So I'd start with just that as the most basic and fundamental one.
Beyond that, you know, I'm a big believer that architecture and enterprise are like your underwear, they're an important thing but they're not something you should parade around the office. And that what people should be parading around the office is point solutions and impact and results. And the IT community should be quietly doing the stuff in the background that creates good architecture, that creates good integration, but that that activity isn't sucking up a lot of resources and sucking up a lot of air time. The CIOs need to be out there talking about point solutions that deliver real results and real impact.
The growth area is an area they can find those in spades. There are lots of places where we can put in place small, inexpensive point solutions that really make a difference to the growth trajectory of the business, and the IT profession has to get focused on finding those, putting more resources into those areas.

You emphasize point solutions rather than enterprise solutions. Why is that?
I do because you know what an enterprise solution is-an enterprise solution is three things to me, two of which are bad. This is like Bear Bryant on passing the football. You pass the ball, three things can happen, and two of them are bad.
Here's the problem with enterprise solutions. They contain three things. Number one, they contain some really powerful, useful, high-result, high-impact point solutions, that's part of an enterprise solution. The other thing that's in an enterprise solution is all sorts of low-impact, low-value, low-result point solutions. Why? Because they're part of the overall family of what it is we're going to do when we do an SRM or an ERP or an ABC.
And the third thing they are is an enormous tax on all that activity, an overburden of coordination, architecting, over-building, because we have this compulsion for neatness within the systems profession.
And so, when you buy an enterprise solution, you buy three things. You buy some really good powerful point solutions that are contained within the enterprise solution. You buy some really lousy point solutions. And you buy an overburden of architecture and integration.

But don't you later on have the burden of integrating after the fact?
Yeah, of course you do. But we live in a ridiculously fast-moving world where both the needs of the business and the possible solutions that are out there are changing dramatically every three to five years. So how much value is there in the perfectly integrated architected solution in a world in which everything gets thrown up in the air every three to five years?
See, the problem is the information systems profession has this compulsive neatness streak to it, has this deep fantasy about everything being integrated to everything, but it has no value in a dynamic world. And so what we've not yet reconciled ourselves to is, how do we create enough neatness to be able to continue to proceed with great point solutions but not have neatness become an objective in itself?

The same problem they had in the total quality movement.
Oh, exac