Trends: Idea Markets

By Ken Yamada  |  Posted 10-01-2001

Trends: Idea Markets

Since the start of the year, the number of people laid off from American companies has topped 1 million as orders for everything from automobiles to computers and, most recently, airplane tickets have sputtered in what Princeton University economist Paul Krugman recently called the country's new "fear economy."

But at Whirlpool Corp., where appliance sales have eased and a 10 percent reduction in headcount is under way, executives aren't just ordering employees to focus solely on the bottom line. They're also challenging workers to keep dreaming—and communicate those ideas over the company's new intranet. Employees who post winning new ideas there for new products, services or improvements in business processes are rewarded with coupons that can be redeemed for gifts from a company catalog.

Whirlpool executives are also moving forward with plans to create Web-enabled appliances, including a washing machine that can tap into the Net to get customized instructions enabling it to clean specific types of stains in different types of fabrics. Says company spokesman Steve Duthie: "Innovation is what will give us the edge in the future."

Whirlpool is not alone. A growing number of companies, from Montreal-based Bombardier Inc. to Estee Lauder, are trying to battle the malaise of the current business climate and gird for the long term by creating "idea markets" that use in-house information networks to stimulate and manage innovation—and put the brightest new ideas into the hands of the people who can turn them into new products and services the most quickly. The theory: Continuous innovation can lead to profits with staying power.

For some, these electronic idea markets have already paid off. Royal Dutch/Shell Group uses them to create new technologies for finding new oil reserves and develop more efficient production methods. Companies such as Memphis-based Buckman Laboratories International Inc., a specialty chemicals firm, use them to harness the expertise of the company to untangle individual customers' problems, fast—and thus better justify product prices. Whirlpool and Procter & Gamble are using idea markets to push new projects into the product development pipeline at more than twice the normal pace.

To encourage employee participation in these idea exchanges, many companies are rewarding employees who dream up winning ideas with stock options and promotions. At Whirlpool and Royal Dutch/Shell, backers of ideas chosen for pilot programs are asked to help manage them; executives at Voyant Technologies Inc., a Westminster, Colo.-based Internet voice conferencing firm, give special awards to the authors of new ideas, and even give recognition to ideas that don't quite make the grade. (Runners-up are given an award named for Elisha Gray, the man who applied for a telephone patent a few hours after Alexander Graham Bell.)

Call it the innovation imperative. More than ever, senior executives today face pressure to encourage creativity and new thinking within their ranks. A sober look at the operating margins of the S&P 500 over the past eight years suggests that the over $100 million spent on new information technology during the period has had little impact on the competitive position of most companies (see chart, page 37). "Most of the technology-powered, efficiency-based strategies that companies used during the 1990s to prop up their share prices have simply run out of steam," says Gary Hamel, a visiting professor at the London Business School and founder of Strategos, a Menlo Park, Calif.-based consultancy.

Sustaining Creativity

McKinsey & Co. Director and Senior Partner Richard Foster says the problem isn't innovation so much as the inability of most companies to sustain it. In his recently published Creative Destruction: Why Companies That Are Built to Last Underperform the Market, Foster argues that unless companies—even the best-run—find a way to innovate continuously, they will be unable to sustain their market-beating performance for more than 10 to 15 years (see chart, this page). In 1982, for example, management experts Tom Peters and Robert Waterman Jr. cited Amdahl, Texas Instruments, Eastman Kodak and Maytag as top innovators in their business classic, In Search of Excellence. But 12 years later, in Built to Last, James Collins and Jerry Porras found the elixir of success in a predominantly new cast of visionaries—and cited Dell, Cisco, Charles Schwab, Southwest Airlines, Starbucks, Enron, Gap and the University of Phoenix as the newcomers. Now that list, too, is being shaken up amid the current downturn as a new set of rivals waits in the wings. "Companies may chance upon a good idea that will give them an advantage for a while," says Hamel, a leading voice in the innovation movement. "But sooner or later they cede the advantage to a competitor who has chanced upon an even better business idea." The answer? "Management is going to have to change, and IT is going to have to change to support ubiquitous innovation," he says.

The growth of in-house information networks has kicked off a vast new innovation movement across the corporate landscape. Borrowing from the principles of the quality movement of the 1960s and early 1970s, the advocates of the fledgling innovation movement seek to use the Web and idea markets to make innovation, like quality before it, a capability around which their companies can be organized. The idea: The Web is a platform that's very well-suited to harvesting a lot of ideas continuously—and cheaply. In-house information networks, used properly, can cultivate, test and develop hundreds of experiments and ideas at any one time—be it a new product idea, a new service or a new market. Says Math Kohnen, director of Royal Dutch/Shell's idea market initiatives: "New ideas aren't just the job of R&D. Now, innovation is everyone's responsibility."

For early adopters, idea markets have already beefed up the bottom line. Royal Dutch/Shell boasts six teams of six employees each called Game Changers that meet every week at the exploration and production divisions in Houston and in Rijswijk in The Netherlands. There, they consider ideas that have been pitched via the company's intranet. For the past two years, the teams have been fielding employee suggestions this way. Last year, the teams rounded up more than 1,000 ideas from employees—everything from ways to reduce company paperwork to using laser sensors to discover oil.

The exercise has paid off: Of Shell's top five business initiatives in 1999, four emerged from the Game Changer teams. Now, those projects are bringing in millions of dollars. Shell's new "Light Touch" oil discovery method, for example, helps explorers by sensing hydrocarbon emissions released naturally into the air from underground reserves. The laser technology helped locate some 30 million barrels of oil reserves in Gabon last year. Says Hamel: "Innovation is becoming to U.S. corporations in the early years of this new century what the quality movement was to companies in the 1960s and 1970s—a way to build better widgets, make higher profits and stay at the forefront of your industry for decades. Executives are just beginning to wake up to the possibilities."

What's taken so long? It's not that innovation is hard to define: Mid-century economist Joseph Schumpeter described innovation as the first commercial use of a product or a process that hasn't previously been exploited. Trouble is, someone can be a great inventor but still be unable to sell their inventions—or even get their ideas heard or developed. But information technology—with its potential to push authority out to employees, form networked communities of workers and encourage new ideas to bubble up from the edges—can change all that.

Perception Gap

Two reasons online knowledge sharing has taken so long to fly have been lack of commitment from top executives and difficulty in getting workers to share their ideas. Case in point: knowledge management, which caught fire, then flamed out a few years ago when executives couldn't get buy-in from the troops. "There was also the problem that few people really understood what it was," says Adrian Slywotzky, a management expert and a vice president at Mercer Management Consulting Inc.

Many executives still wonder. According to a new CIO Insight survey to be published in November, many executives give lip service to the benefits of knowledge sharing, but still find so-called knowledge management hard to implement, much less comprehend. Of the IT and business executives polled in September, about one quarter said they didn't consider implementing a knowledge-management system because there was no budget for one. Roughly another one quarter said they decided against it because they were "not sure what a KM system would do for the company."

But more and more executives appear to be figuring it out. In a recent Conference Board survey of 200 execs at 158 large multinationals, 80 percent of the respondents said they had knowledge-sharing projects in the works, and many already had appointed chief knowledge officers and enlisted consultants. All told, says market researcher International Data Corp., consultants pulled in $1.8 billion in knowledge management services last year. By 2003, that number should top $8 billion, the muffled economy and continuing skepticism over KM notwithstanding.

Backers of the innovation movement point out that the quality movement suffered similar skepticism when it was first being pushed in the late 1960s by noted quality consultants J.M. Juran and W. Edwards Deming, who believed that poor products and service—and high defect rates—were the result of poor management rather than inferior employees. Japan's embrace of this idea, thanks largely to Deming's teachings after World War II, inspired the pursuit of the perfect assembly line and sparked the country's rise as a major industrial power, allowing Japan, for a time, to become the dominant manufacturer of such products as cars and consumer electronics. Indeed, it wasn't until Japanese auto companies began stealing major market share from Detroit's Big Three in the early 1980s that most U.S. companies began to sit up and take notice—and start to adopt with fervor many of the principles espoused by Deming and Juran nearly two decades earlier.

The innovation movement takes a page from the quality movement. Deming and Juran advocated quality circles, the pre-Web system still used regularly by hundreds of companies to gather ideas about how to boost quality and to make the quest for zero defects everybody's business. The innovation movement seeks to make idea creation everybody's job, but it uses the Web and managed intranets to involve wide circles of workers to generate new ideas in search of a hit—on the theory that the more ideas being generated continuously, the higher the chance of innovation.

In addition, the quality movement anchors its philosophies in its own set of metrics and teaches workers to use statistical process controls to measure error rates so that defects can be continuously corrected. In a similar effort, the innovation movement aims to use a new practice called "operational process controls"—otherwise known in some circles as benchmarking—to determine the impact of new ideas on cycle time and time to market as well as on cash flow, IT systems and, ultimately, profits and revenues. "The problem that many executives have had with this whole area of knowledge sharing or knowledge management is that it's been mostly an intellectual dialogue—but it stops when it comes to figuring out how to tie knowledge sharing to its impact on business," says Dave Allman, founder of Knowledge Advantage, a Harrisburg, Pa.-based consultancy.

But that's changing. A variety of software products with such names as Collaborative Strategies and iCohere can be used to help collect, distribute and analyze new ideas—and track their progress from inception to final outcome. Raytheon CIO Rebecca Rhoads says she is pushing for a new collaboration and messaging infrastructure to speed up decision-making, grant employees easier access to key data and provide the network platform that could support a companywide idea market.

Either way, reorganization is the mandate. "Just as in the quality movement, companies must change their organization," says Hamel. "They must become horizontal rather than vertical in scope. They need to structure around projects rather than strategic business units, their boundaries must be open and not closed and their leadership must become enablers of innovation rather than stewards of existing assets" (see Viewpoint, page 40).

How do idea markets work? Managers solicit ideas and pick the most promising, then typically pass the projects off to established business units. Sometimes they create and fund internal start-ups that use Web communications and collaboration to deliver new products and services. The payoff for the innovators: bonuses or stock options—much like they would get if they worked at a Silicon Valley start-up in the mid-1990s. Experts say dozens of traditional corporations are just starting to adopt the approach. At Whirlpool, for example, no proposals are rejected out of hand. Instead, all ideas are subjected to rigorous evaluation sessions centered on how customers might react to them, with Whirlpool employees sometimes replacing outside focus groups. Ideas that make the cut get funding to go to the next level. "The trend now is to decentralize operations, to build idea factories. This is a way to preserve the best of the old start-up mentality, but bring it inside," says Clayton Christensen, a Harvard Business School professor.

Consider P&G's knowledge market, called Corporate New Ventures. It is armed with $200 million in seed money and a direct line to the office of the CEO. Ideas bubbling up from P&G's far-flung workforce of 110,000 people are routed to a CNV innovation panel via My Idea, a Web-based corporate collaboration network. CNV teams then put the ideas under the microscope—using the Web to analyze markets, demographics and cost information to make sure a new idea is feasible.

In most idea markets, once a team decides to go ahead, a project is launched within days. The CNV people have the authority to tap any resources in the company to bring a product to market, including the brainpower of the company's engineers, scattered in 23 sites worldwide. The program already has delivered results. One of CNV's first efforts, a cleaning product called Swiffer, got pushed out the door in just 10 months—less than half the usual product development time. Swiffer, a disposable cleaning cloth that generates electrostatic charges to attract dust and dirt—and which has since generated more than $100 million in sales for P&G—was dreamed up during a novel, Web-based collaboration between P&G's paper and cleaning-agent experts. CNV's first chief, Craig Wynett, pulled them together to start talking in person and via the Internet. He challenged them to think more broadly than just about detergents and diapers. Over time, the collaboration moved to the in-house intranet, and resulted in new ideas, some of which corporate executives decided to green-light. Says Wynett, now general manager of future growth initiatives: "It was an exercise in speed, in breaking down the company's division-by-division territories to come up with new ideas."

Yet creating effective knowledge markets isn't as simple as setting up a traditional skunk works. Perhaps the biggest challenge is cultural. Bosses need to tolerate failure. "There's an inability by most companies to deal with failure, which is why corporate decision-makers are hesitant in some companies to seek change and innovation, or even start thinking about idea markets as a way to foster more innovation," says William Gartner, professor of entrepreneurial studies at the University of Southern California's Marshall Business School (see "The Creativity Dilemma," page 44).

Punishing Hoarders

Also critical: Bosses and employees need to buy into the notion of idea-sharing. In some cases, companies have found they need to tie compensation and recognition schemes around their idea-market initiatives in order for them to get off the ground. Buckman Labs has put together a knowledge market called K'Netix that is designed to generate fast answers to customer service queries via 54 Net-based discussion groups. At first, employees were so reluctant to share their ideas that CEO Robert Buckman had to monitor the intranet for a time, issue "friendly reminders" to individual employees who refused to participate and then start rewarding those who got with the program. Early on, Buckman realized that unless there were solid incentives, managers weren't going to share what they knew via the intranet. "They had information, but they feared giving it up," Buckman said. "They felt they wouldn't get credit for their ideas, so I reorganized the system so that sharing got rewarded and hoarding did not."

Today, Buckman Labs is proof positive that it was worth the effort. Idea-sharing at the chemicals firm has led to both innovation and faster response to customers on service queries. Revenues, which hit $400 million last year, have been growing about 5 percent annually in recent years, a slightly faster rate than its rivals can claim. Buckman points to a 53 percent increase last year in the share of sales from products less than five years on the market, which he considers a good measure of innovation. And he cites as proof statistics on employee productivity: Since 1992, sales per salesperson have gone up by 51 percent and sales per employee have increased by 34 percent. Operating profit per employee jumped 93 percent in the same period. All this has helped it to compete successfully with much larger and better-funded companies. "I don't think we'd be a player today if we hadn't done those things," says Buckman, who has since been elevated from the company's CEO to chairman of the executive committee of Bulab Holdings Inc., Buckman's parent company.

But nobody says idea markets are easy—especially Buckman, one of the first to experiment with the concept. "It took us years to develop our idea market," he says. "It isn't a project, it's a journey." Adds Hamel: "This is not about saying, 'Okay, we get it and six months from now we've solved it.' This is like quality. You show me a company that truly mastered quality in less than three or four years and I'll be surprised. It just doesn't work that way."

Ken Yamada is an Oakland, Calif.-based technology writer whose work has appeared in the The Wall Street Journal, Red Herring, New York Newsday and a variety of computer trade publications. Comments on this story can be sent to editors@cioinsight.com.

The Decreasing Corporate Lifespan

The Decreasing Corporate Lifespan

Average lifespans of companies listed on the S&P index for the years cited.

60 Years in 1958

35 Years in 1978

25 Years in 1998

10 Years in 2018

SOURCE: MCKINSEY & CO.

Resources

Resources

BOOKS

Creative Destruction: Why Companies That Are Built to Last Underperform the Market—And How to Successfully Transform Them
by Richard Foster and Sarah Kaplan. Doubleday, 2001

Intellectual Capital: The New Wealth of Organizations
by Thomas Stewart. Bantam Books, 1998

PAPERS

Top 10 Innovation Themes
by David Y. Choi and Liisa Välikangas.
Strategy + Business, 2nd Quarter, 2001

WEB SITES

www.km-forum.org
The Knowledge Management Forum