Insurers: Effective Innovators—Almost
June 16th, 2009 | Posted by innovWhat if we told you insurance is one of the most innovative industries we know? (Hold the smirks. We are serious.)
What if we went further and said that the insurance industry was poised to assume the leadership position when it comes to creating new products, services, and business models in our economy? You’d probably think we were trying to sell you a whole life policy.
Well, the fact that you don’t believe us—and again we are totally sincere about this—says a lot about the problem insurance companies have when it comes to innovation, a problem that we bet your industry may have as well. And therein lies a tale.
Let’s back up a step. We believe that innovation occurs when:
1. There is a significant need or insight.
2. A product, service, or business model meets that need.
3. There is clear communication that connects No. 1 to No. 2.
By this definition, the insurance industry is clearly innovative—at least when it comes to creating a product that fulfills a need. Consider some of the more obvious benefits available through one type of coverage: life insurance.
| A. Need or insight | B. Solution | C. Benefit |
|---|---|---|
| Your heirs need money while your assets are in probate. | Life insurance benefits are paid quickly. | Your heirs receive the benefits from your policy quickly. |
| You need a way to protect your assets from creditors. | Creditors cannot get at your life Insurance assets. | Your assets are protected. |
| You want to make sure your heirs aren’t saddled with any of your debts (including estate taxes and funeral expenses). | You can take out a life policy whose benefits are specifically designed to cover these costs. | Your loved ones are not burdened with expenses caused in your life or death. |
| You want to provide an estate for your loved ones, or to help fund a charity, after your death. | You can take out a life insurance policy and have the proceeds fund whatever you want. | You create the legacy you want. |
The table begs one obvious question: Did you know about these benefits? Probably not. The insurance industry often has two of the three key ingredients for successful innovation: the need and the idea. What is missing is the ability to communicate these ideas in a way that is relevant to increasingly busy people.
An aside: The fact that up until now the insurance industry has fallen down when it comes to innovation is ironic because innovation couldn’t happen without insurance. Every year, hundreds of new products are launched. Products that you put on your skin, your kids, your pet—services that require you walk up steps, get on new rides, and use heavy equipment. Business models that require you to write down your Social Security number and push “Send.” The fact is that most of these new ideas would never be launched unless the potential liability associated with each was covered by—you guessed it—insurance.
So, you would think that the insurers would be a master at communicating the benefits they offer. But the fact that they are not is, unfortunately, not unusual. Many times the best insights and products are overwhelmed by poorly executed communication. If you don’t agree with this, consider that perhaps the most successful insurance marketing in the past decade involves a talking duck and lizard.
There is nothing wrong with using a cute symbol to get someone’s attention.
But how many people could tell you a) the names of the companies employing either symbol, and b) what products they’re selling, and c) what specific benefits those products offer? Our research shows: not many. Your honor, we rest our case.
The good news is that it is incredibly easy to fix this part of the equation, particularly when you have a suite of products that are quite flexible and a CEO who believes change is necessary. For this reason, we believe the whole insurance industry is at a dramatic tipping point. Expect to see much more relevant and creative products soon. Why? Because we believe insurers are taking a cue from other industries and beginning to uncover meaningful and immediate needs that their products can readily serve. Once they figure out a way to communicate them effectively, watch out.
Two of the questions we always ask when people complain to us that their hot new innovation effort has yet to gain traction: “Do people know about it?” and “Do they think they need it?” Invariably we hear some variation of “Of course they do” in answer to the first question and “How could they not?” to the second. Let’s stop here for a second. Do you know that feeling you get in your gut when your IT department explains—using industry shorthand—a cool new technology? Think. What percentage of those words did you understand or care to understand?
Do you remember how you felt on your first day in chemistry class, when you were being passionately taught something that had no relevance to you at all? What if this is how you are making your customers feel? What if they don’t understand your product? What if the words you are using don’t resonate with them? What if they don’t see the benefits? What if they don’t think your product is worth their time?
Think back to our definition of innovation. It occurs when need + product (to fulfill the need) + communication (about how the product fulfills the need) are completely intertwined. If the communication fails, your whole innovation effort is severely crippled.
Next time, we will talk about how to communicate your innovation effectively.
Marketing in the Age of Turbulence
June 5th, 2009 | Posted by innovOf late, marketing has been over-identified with marketing communications, to its detriment. Great marketing operations find opportunities and develop and launch successful solutions, and if properly used, are the company’s growth engine.
I recently interviewed Philip Kotler, the well-known marketing guru at the Kellogg School of Management, Northwestern University, about the value of marketing in today’s turbulent environment. Who better to give us his insight on the subject than Philip, who has just recently published (with co-author John Caslione) a book called Chaotics: The Business of Managing and Marketing in the Age of Turbulence. Following are excerpts from our conversation.
Philip, in these troubled times, companies are cutting their marketing budgets—in fact, marketing is one of the first departments to be cut. Do you think it is a wise move to cut the marketing budget?
Yes, if the marketers cannot provide performance metrics for their expenditures. Marketers have had it easy in the past, getting lots of money for 30-second commercials without having to produce any evidence of their sales or profit impact. Advertising was a matter of faith, not reason. The plot was to get a large share of voice so that the brand was locked in the customers’ memories. Hopefully the message promised something distinctive and the customer who wanted that point of difference would automatically choose that brand.
My guess is that only 1 out of 10, maybe only 1 out 20, advertising campaigns really makes a financial contribution. That means that the average company has only 1 chance in 10 or 20 that its ad campaign will create a memorable and motivating message. I don’t like those odds.
Years ago, Will Rogers quipped, “If advertisers spent the same amount of money on improving their products as they do on advertising, they wouldn’t have to advertise them.” This theme was recently elaborated by Jean Claude Larreche in his new book Momentum. He claimed that heavy advertising spending is often on products that have little distinction. The company would be smarter to save that money and use it to build a better product.
Is cutting out the less-defensible parts of the marketing budget enough to do in difficult times?
No. I can even imagine where the proper step is to increase the overall marketing budget and spend more. A down period introduces as much opportunity as it does chaos. For example, customers are ready to switch to lower-price store brands and away from the more expensive national and international brands. Retailers such as Kroger (KR), Tesco (TESO), and others are strengthening their private brands and offering two or three private brands on the model of “good, better, and best.” Today, more people are fishing to solve the problem of having a good dinner with little cost. This is good news for companies that make fishing rods, nets, and bait. Some companies see cracks of sunshine in this otherwise gloomy picture.
Are there any marketing maxims that must be preserved even in bad times?
Yes. I would mention three:
1. Understand your target customers and solve their problems in a better way than your competitors.
2. Build your brand promise that is delivered by everyone in your business network (employees, distributors, suppliers).
3. Innovate continuously in your products, services, and supply chain.
What changes should marketing departments make in these times?
Most marketing departments are tactical, not strategic. They can do marketing research and marketing communications (ads, brochures), and have other skills for developing and launching a product. But they don’t really drive the company’s growth strategy. I know of a pharmaceutical company that only calls in a marketer when it wants to decide on the color for a new pill.
Where was the thinking done about what diseases the company should pursue, how big the opportunity is, should the solution be in the form of a pill, liquid, or patch, and so on?
I am not arguing that the marketing department should call the shots on growth strategy. I am asking for marketing to be a proactive collaborator in developing the firm’s growth strategy. Yet marketing for the most part remains busy with details.
The recent appointment of Chief Marketing Officers (CMOs) is a good sign. A CMO presumably joins the senior management group to help plan the company’s future. He or she brings in the voice of the customer into the company’s thinking and tries to get management to move from marketing to “consumering.” develops better ways to get customer insight; develops better metrics for measuring the impact of different marketing efforts; protects and enhances the company’s brands; and brings in new marketing technologies and skills to the marketing department.
What is preventing the marketing department from taking on a stronger leadership role?
Most marketers have been hired into a marketing department because they are right-brain trained—that is, creative. They are less well-trained in their left brain, the part that thinks about numbers, finance, and evidence. But they have to deal with managers who by and large are left-brain trained. (Anyone interested in this subject should read the recently published book War in the Boardroom: Why Left-Brain Management and Right-Brain Marketing Don’t See Eye-to-Eye—and What to Do About It by Al and Laura Ries). The key need then is to put into the marketing department some sharp left-brain people or two-brain people who can work with the other managers. Once department managers begin to deal with some two-brain strategic marketing managers, marketing will play a stronger leadership role.
What else are you busy thinking about?
In our newly released book, Chaotics: The Business of Managing and Marketing in The Age of Turbulence, John Caslione and I have built a Chaotics Management System for dealing with the increasing level of turbulence and disruption in the modern world. We talk about early warning systems, scenario planning, risk and uncertainty, new opportunities, and robust and resilient company departments. We offer a comprehensive way for managers to monitor the new economy and make better and quicker decisions.
Thank you for your time, Philip.
Readers, you can find out more about Philip Kotler’s new projects at www.chaoticsstrategies.com and www.upandoutofpoverty.com. I would love to hear from you. Please send your comments about marketing in the Age of Turbulence.
June 4th, 2009 | Posted by taxAfter last year’s curb on the 10-percenters, some clarity was sought in offshore dividends Over the past few weeks, I have been looking at the impact of the proposed 2009 Budget changes to income tax – notably the introduction of a top rate of 50 per cent and the removal of higher-rate tax relief for pension
contributions made by those with incomes of more than #150,000. I have also been reviewing the alternatives to pension investments, focusing on investments whose taxation treatment will beaffected by the Budget.
The increase to the Isa allowance will be welcomed, especially by those looking to contribute to investments other than pensions. Also, the retention of an 18% CGT rate, compared with the higher-income tax rates, has made capital growth-oriented investments and investments delivering the return in the form of a capital gain rather than income more tax attractive. Last week, I looked at the new rules on the receipt of personal dividends from offshore companies. After last year’s proposed changes – to give a 10 per cent tax credit to all dividends from offshore companies and then the removal of the credit for open-ended funds – it was important to secure clarity. However, this clarity clearly could not deliver a tax bonanza to funds invested in interest-bearing investments. So, it seems that a reasonable balance has been struck. Legislation has been proposed which aligns the categorisation and taxation of dividend-paying offshore funds with that of UK funds in relation to the extent to which the fund is invested in equities anddebt (interest-producing) investments. Currently, all distributions from offshore funds are received and taxed as dividends – the UK concept of an “interest distribution” does not exist for offshore funds. Since April 6, 2008, as I pointed out last week, individual shareholders with shareholdings of less than 10 per cent in non-UK resident companies have been entitled to a 10 per cent non-payable dividend tax credit. This tax credit resulted in tax freedom for non- and basic-rate taxpayers on “interest-fuelled” dividends and a 22.5 per cent rate for higher-rate taxpayers (32.5-10 per cent). However, this tax credit was withdrawn for offshore funds as some collective investment schemes were seeking to exploit the extension by placing their cash or bond-fund ranges offshore, with the intention of securing tax advantages by paying dividends funded by non-taxed interest which carried a 10 per cent tax credit. So, before the latest proposals, distributions made as dividends from offshore funds received by individual UK resident investors are currently taxed at rates of 10 per cent for basic-rate taxpayers and 32.5 per cent for higher-rate taxpayers, regardless of the nature of the investments underlying the fund. Where the distributions are from non-corporate offshore funds they may be taxable at different rates depending on thetype of fund and, in some cases, the nature of the fund income. Legislation in Finance Bill 2009 amends section 397A of the IncomeTax (Trading and Other Income) Act 2005 to extend further eligibility for the 10 per cent non-payable tax credit to individuals in receipt of dividends from non-UK resident companies, including offshore funds that are companies. However, where the offshore fund holds more than 60 per cent of its assets in interest-bearing (or economically similar) form, any distribution will be treated in the hands of the UK individual investor as a payment of yearly interest. This will mean that no tax credit will be available and the tax rates applying will be those applying to interest. This mirrors the current treatment of UK corporate investors with holdings in similar funds (in the UK or offshore), and also means that UK individuals will pay tax on interest-like distributions at the same rate as tax is borne by individual investors on interest distributions received from UK-authorised investment funds. This change takes place from 22 April 2009 but will not affect the tax treatment of UK investors in offshore funds, which are transparent for the purposes of tax on income as in such cases the investor is taxed on their share of the underlying fund income according to the type of income received and not on the distribution made. Finally, under current legislation, the definition of an investment in an offshore fund is based upon the regulatory definition of “collective investment scheme” as set out in the Financial Services andMarkets Act 2000, with modifications for tax purposes. The new definition of an offshore fund uses a characteristics-based approach which has been the subject of detailed consultation with the funds industry, as set out in the relevant consultation documents. There are also exceptions specified in the legislation to ensure that fixed share capital arrangements that do not mimic open-ended arrangements will remain outside the definition. This includes specific provisions for continuation votes and capital only arrangements. The new definition will apply from December 1, 2009. Copyright: Centaur Communications Ltd. and licensors
Brainstorming for Better Business
June 4th, 2009 | Posted by innovSeven thousand hospital patients in the U.S. health-care system die every year after receiving the wrong drug or dosage, and more than a million are sickened. To improve those numbers, Christi Zuber, the director of Kaiser Permanente‘s internal Innovation Consultancy, invited 75 nurses, doctors, patients, and vendors to the California hospital network’s Sidney R. Garfield Health Care Innovation Center in Oakland, Calif., in April 2007—not for a training session but for a brainstorm.
Brainstorming is a critical part of Kaiser’s innovation process—and one that shows results. For instance, as a result of this session, Kaiser launched a brand-new process for delivering medications that has led to a 50% decrease in nurse interruptions and a 15% increase in efficiency.
Taking this event as a guide, here’s a look at how Kaiser runs its idea-generating sessions.
The participants were settled into a large, nondescript room, sitting in teams of seven at round tables, each led by one or two Kaiser facilitators trained to brainstorm. “The first thing we do is frame the day’s challenge by telling some of the stories that came out of our research,” says Zuber. These stories illustrated four problems to be tackled: how to reduce nurse interruptions, streamline the medicine administration process, close the loops, and sanctify the activity.
The organizers also explain the ground rules of brainstorming laid out by Alex Faickney Osborn in his 1953 book, Applied Imagination, and still used today by innovation consultancies including Ideo, which Kaiser has worked with in the past. These include the need to focus on the quantity of ideas rather than quality, withhold criticism, welcome unusual ideas, and combine and improve on them.
Each team had previously visited a company in a different industry in search of ideas or practices that might be relevant to the problems, and as part of the brainstorm warm-up, each team recapped its findings. One team had visited a flight school, for example, and learned the idea of the “sterile cockpit,” an aviation term for the minutes before and during takeoff and landing when the pilots are only allowed to speak about flight matters. Such analogous research isn’t essential, says Zuber, “but we find it helps people start thinking differently.”
Then the idea-storm kicked off, with each team focusing on two or three assigned questions. Kaiser has participants write down ideas on Post-It Notes using Sharpies because, says Zuber, “if they use ball point pens, they write too much and it’s hard to read once its put on the wall.” (There’s no single right way to collect ideas in a brainstorm: Ideo uses Post-it Notes, innovation consultancy Gravity Tank asks for simple diagrams or sketches on 8 x 11 sheets, while Frog Design gives brainstorm participants very structured worksheets that, says Frog creative director Adam Richardson, “lead to more useful results.”)
Brief silences are inevitable. “But if it goes on too long, the facilitator might suggest going after the problem from a different angle, saying something like, ‘Let’s think about tools and technologies,’ ” says Kaiser innovation specialist Chris McCarthy. (A P&G silence-buster: Ask participants to think about bad solutions to the problem at hand, which ultimately stimulates thinking about what a good solution might be.)
After an hour, when the walls were papered with Post-It Notes, each team reviewed its ideas, selected the two or three they were most passionate about, and built a quick prototype to present to the entire group. (Kaiser combines brainstorms with rapid prototyping, a topic we’ll address in a later article in this “How To Innovate” series). The end result: 15 to 20 ideas promising enough for further development.
In 2008, Kaiser launched KP MedRite, a new process for medication administration based on three of those ideas. It includes an official step-by-step workflow process; a sash that would indicate “I’m delivering medication so please don’t interrupt me”; and a “sacred zone,” à la the pilot’s sterile cockpit, around the medication dispensing machines in which no unrelated conversations are permitted.
What can executives learn from Kaiser’s approach to brainstorming?
• Follow the Golden Rules
Focus on quantity of ideas rather than quality, withhold criticism, welcome unusual ideas, and combine and improve on them.
• Define the Problem—and Stay on Target
As Ideo’s Tom Kelley says, “a brainstormer without a clear problem statement is like a company without a clear strategy.” Often the most effective brainstorms look beyond the initial problem (say, medication errors) to focus on its root causes (nurse interruptions, etc.).
• Space Matters
You don’t have to have a state-of-the-art facility like P&G’s Clay Street Project to hold a brainstorm. A basic room with lots of wall space works just fine. Formal conference rooms can be a bit stuffy, but if that’s the only option, cover the table with objects or materials that will stimulate creative thinking.
• Build Your Team
Research shows that multidisciplinary teams are better problem-solvers, so invite people—aim for six to eight—who will bring a range of skills and perspectives.
• Learn from the Experts—Then Make Their Methods Your Own
Jump-start your brainstorming practice by working with an experienced innovation consultancy. Then adapt their methods to work in the context and culture of your company.
• Practice
Just as becoming a Six Sigma black belt takes considerable training, you’ll never become a champion brainstormer if you don’t practice regularly.
PENSIONS: Work Till You Drop – If You Have A Job
June 4th, 2009 | Posted by stockThe full S&P 500 Pension and OPEB report, including a full listing of issues and data is available at our web site.
I’ll start with the bottom line – pensions are severely underfunded and they aren’t getting better fast. Last year the S&P 500 was $63 billion overfunded, with companies making only minor contributions, shrugging off the Q4,’07 3% equity loss and projecting an 8% 2008 pension gain. The reality of the market however was devastation: a 37% loss for 2008 produced a 43% gap between what was expected and what was delivered. Funding went from $63 billion overfunded to $308 billion underfunded – a $372 billion turnaround in just one year. As a group, the S&P 500 went from 4% over funded to 22% underfunded. Only 21 issues were fully funded, with 29 between 90% and full, 54 between 80% and 90%, and 231 falling below the 80% mark. By comparison, at the end of 1999, when the market was 56% higher, 296 issues were fully funded. As 2008 came to an end corporations were faced with the potential of large cash infusions into their pension funds. With their 2009 expectation of low profits and concern over cash flow, they lobbied and received an executive order suspending the phased-in funding requirements from the Pension Reform Act of 2006 for one year. The result was that many companies were not required to shore up their funds after the massive market declines – basically doubling the bet on 2009.
Companies reacted to the decline by pulling money out of equities and into fixed income. The concept was safety, and the result will add some stability to the portfolios, but it will also reduce the overall returns, since over time equities do better than fixed income. Given the change, the slight drop in expected pension returns to 7.95% from last years 8.02% should actually be interpreted as a bullish statement by funds, and appears to imply that they expect a double-digit bounce back in the market. We suspect that there has already been a shift back to equities as the market has moved up, and that portfolios will experience more of a turnover this year.
So where does that leave us going forward – I have three sets of projection for 2009, none to them good. Remember that we are starting from a $308 billion deficit.
At this point in time, given the belief that (i) rates may slightly increase, (ii) that fixed income portfolios are properly positioned not to incur losses due to rate changes, (iii) a more normalized yield curve of utilized maturities and (iv) the hope that equity markets could prosper with a double-digit gain, it remains mathematically difficult to extrapolate an S&P 500 pension fund that will be anywhere near fully funded by year-end 2009. Given that I again expect to see calls for another postponement of scheduled funding in Washington later this year. My current baseline estimate calls for pensions to remain at the current level of funding, ending 2009 at $313 billion underfunded. My optimistic estimate, based on an S&P 500 level of 1100, which is still 25% below 2007’s close and interest rates 50-75 bps higher across utilized maturities, calculates out to a pension improvement, but underfunding remains solidly in the red by $168 billion. My gloomy forecast, based on a return to the March 2009 low of 676, combined with slightly lower interest rates, increases the underfunding to $496 billion – half a trillion dollars.
As Americans live longer, the gap between existing benefits and personal wealth will widen. Directly or indirectly, the U.S. Government is the insurer of last resort, whether it is via the PBGC or as the medical provider via social or entitlement programs. Pensions and OPEB have become engulfed as a social and political issue, with the key questions being coverage, expense and how to pay for it. Eventually, the government, in conjunction with the private sector, will be forced to address the situation and take the necessary painful steps. The concern is that neither the public nor the private sector has shown a tolerance for the pain associated with the type of action needed to address the problem. The longer the situation goes unaddressed or band-aided, the stronger the measures will have to be to solve the situation. In the end, individuals, either as taxpayers or consumers, will need to pay the bill, as well as live with the reduction in benefits and lifestyle.
The full S&P 500 Pension and OPEB report, including a full listing of issues and data is available at our web site.
Hollywood gets a fortune in tax breaks
June 3rd, 2009 | Posted by taxBy BEN NUCKOLS and MARTHA WAGGONER, Associated Press Writers
Publication: The Bismarck Tribune
New Mexico and New York commissioned studies by the accounting firm Ernst & Young that found the tax credits pay for themselves by producing more revenue than they sacrifice. The studies’ authors estimated that state and local governments in New Mexico brought in $1.50 in revenue for every dollar spent on tax credits, while state and local governments in New York state and New York city generated $1.90.
But many economists and policy analysts who have studied the issue independently contend that tax breaks for the TV and movie industry are rarely break-even deals for states, in part because the jobs created are often short-lived. Even the revenue departments in some states would agree.
Connecticut’s revenue department, for example, found in 2007 that every dollar in tax credits generated only 20 cents in new tax revenue. Connecticut gave away an estimated $70 million in tax revenue that year.
“The credit does not ‘pay for itself,”‘ Jennifer Weiner, a policy analyst for the New England Public Policy Center at the Federal Reserve Bank of Boston, wrote in a January report about Connecticut’s incentives. “Increases in economic activity spurred by the film credit generate some additional tax revenue for the state from a variety of sources. This additional revenue is likely to offset some, but not all, of the initial cost of the credit.”
The AP surveyed the 41 states, plus the District of Columbia, that offer rebates, grants or tax credits to cover production costs for movies, TV shows and commercials, and found they committed $1 billion last year alone. New York was the leader in 2008, giving away or pledging $275 million in tax credits to productions that shot in the state that year.
New York said the money bolstered the state’s economy with $2.2 billion in direct spending. The state had no immediate estimate of how much tax revenue that translated into.
Louisiana, one of the biggest incentive states, pledged an estimated $358 million in tax credits to filmmakers between 2006 and 2008, including $27 million for last year’s Oscar-winning “The Curious Case of Benjamin Button.” Now state lawmakers are considering more than $150 million in cuts to higher education.
Filmmakers have grown accustomed to shopping around for the best deal.
California, which is grappling with a projected $24 billion budget deficit, launched an incentive program this year to keep its homegrown business from migrating. Movie-star Gov. Arnold Schwarzenegger even pledged to make a cameo in the Warner Bros. blockbuster “Terminator Salvation,” now No. 2 at the box office, if producers shot it in California. The movie was made in New Mexico.
Little illustrates the competition between states better than Miley Cyrus’ new movie project, “The Last Song.” In April, North Carolina’s governor scheduled – then canceled the same day – a news conference to announce the movie would be filmed in Wilmington. The reason for the cancellation: the Walt Disney Co. was considering Georgia, which offers incentives of up to 30 percent versus North Carolina’s 15 percent.
Shooting is to begin in Georgia this month.
Determined not to miss out next time, legislators have introduce a bill in North Carolina – a state facing a $3 billion budget gap this year – to increase incentives to 25 percent of production costs.
Some states have started rethinking their show business giveaways. Wisconsin Gov. Jim Doyle wants to eliminate the incentives he signed into law a year ago. A legislative committee has instead proposed capping the annual payout – but only for two years – to help solve Wisconsin’s budget shortfall.
Michigan, which offers one of the most generous tax credits in the nation, equal to 42 percent of production costs, gave away $48 million in incentives last year and is expected to pay out $198 million in the 2010 fiscal year, which starts in the fall. And that’s in a state that faces an estimated budget shortfall of $700 million for 2010.
State Sen. Tom George said he supports Michigan’s incentive program because of the production activity it has drawn to his job-starved state. But he has no illusions about whether Michigan brings in more tax revenue than it gives away.
“We don’t get back what we pay out,” said George, a Republican who wants to cap the annual payout, either on a per-film or per-year basis. “We don’t even get back half of what we pay out. I don’t even know if we get back a quarter of what we pay out.”
The New Rules of Managing Innovation
June 2nd, 2009 | Posted by innovWhat do we do next?
Those of you who have followed this column over the past two years are aware we have written extensively about how companies like yours build and tune their innovation engine successfully.
And we have been heartened that you have told us directly—and through comments on the blog—that you have taken many of our ideas and put them into practice.
But, invariably, at the end of your comments, you say something like “O.K. What should I do next?”
Here, let’s talk about four trends that we see shaping innovation in the near term, and how you should respond. The rules of the game are changing quickly, and companies that take advantage of these trends give themselves an almost unfair advantage over the slow-footed or unaware.
• Trend No.1: Silos are FINALLY falling (but not in the way you may think
Close your eyes and dream with us. What if R&D, marketing, finance, planning, account services, and creative all got together for a day and were capable of birthing an idea? To some of you this dream might sound more like a nightmare along the lines of dogs breeding with cats—hard to watch and not going to happen—but to us it sounds like the future of innovation.
What some companies call departments and partners are too often emblems of inefficiency.
We consistently see that small, cross-functional teams are the key to driving industry-changing products, services, and new business models to market whether you work in a big company or a small one.
To ensure that silos are not an issue, some companies are even putting these teams in another building and saying, “you have one year to change our world—go!”
• Trend No.2: Outside-in innovation
We like the saying: “You can’t read the label when you are sitting inside the jar.” (In fact we like it so much, we used it as a theme for a column a while back.)
Why do we like the phrase? Because we believe it speaks directly to your ability to innovate.
Let us put it as bluntly as we can: If you have been with a company for more than six months, it is time you realize something. You are stuck in the jar. The way you think about new ideas is distorted by your own expertise and the corporate container you find yourself working within. As a result, it is extremely difficult for you to see the priceless ideas that are all around you, ideas that will become the very new products and services your competitor will use to steal market share and give your boss a reason to question the effectiveness of your whole innovation strategy.
One solution? Consider open innovation. A few years back, P&G (PG) CEO A.G. Lafley declared that 50% of their innovation must come through R&D, not from R&D. By doing this, he was helping create a culture of learners instead of knowers. He was pointing out that his people were often too close to a challenge to see opportunity. He was giving them permission to find expertise outside the company. This declaration resulted in an increased success rate, lower costs, and greater speed to market.
Whatever your challenge, there is an expert in a parallel industry willing to help you overcome it.
Let us give you an example of what we mean by a parallel industry. Consider something as seemingly pedestrian as furniture polish. It cleans, protects, and restores. Now, what other things do that? Well, lawn-care and skin-care products are the first two that come to mind.
Armed with this realization, how do you gain another perspective? You could forge all kinds of formal relationships with other companies, but you don’t have to do that. You can simply call an expert at a lawn-care or cosmetic company and ask to pick their brains.
We use parallel experts to solve specific technical challenges, increase excitement and momentum, shift perspective and keep us from making mistakes they made.
Remember: intelligence is learning from your mistakes.
Wisdom is learning from the mistakes of others. Leading innovators like P&G are wisely leading this trend. In Innovationland, wisdom always wins.
• Trend No.3: Social Media as an Innovation Tool
While many have been collecting friends on Facebook and followers on Twitter, we’ve been enthusiastically watching social media’s rise as an effective innovation tool. Innovation is about insights, ideas, and communication. Online communities are often a perfect place to find and test insights. Online influencers are redefining the focus group. Best yet, when your online influencers help you create new products, services, or business models, they become instant ambassadors of your brand, creating the spark effect that eludes so many companies.
Here’s the kicker: The emergence of social-media tracking tools give researchers and marketers alike a bevy of instant information to optimize targeting, messaging, and new product ideas. If you are a left-brained innovator, life is good. If you are not taking advantage of social media, you are missing an opportunity to create and launch better ideas faster.
• Trend No.4: War Games
CEOs are increasingly asking us for the fastest way to create revolutionary change within their companies. Typically the request is rooted in their greatest fear: “what if I am missing something that is going to put me out of business?”
The rapid pace of new technology has made leaders painfully aware that it is now possible for an upstart to change the rules of the game virtually overnight. Think Orbitz. think Dyson. think eBay (EBAY). (If you believe that Sears was worried about eBay 15 years ago, well you’re forgetting that there was no such thing as EBay 15 years ago.) Think Craigslist.
Growing out of this worry of being made obsolete is a closely guarded secret and a new trend in innovation: the use of war games.
In the past, war games have been an internal exercise, usually a modification of the popular SWOT (strengths, weaknesses, opportunities, threats) analysis. But what would happen if you paid a team of really smart people who knew virtually nothing about your industry to take an objective crack at building a product, service, or business model that would rock your world? What if these people used a rigorous innovation process and had access to all research and direct contact with every department head?
We call this Innovation War Games and it is exactly what more and more CEOs are secretly doing today. Worst case scenario: They sleep better at night. Best case, they are presented with an industry-changing idea that they can launch if they choose.
In order for your organization to capitalize on these trends will require you to ground them in a deep feeling of activism, meaning that every element of the process is rooted in a body of people who have such a passion for new idea, that they will find a way to get it done.
Your job as a manager will be to serve as a catalyst and coach, keeping everyone focused on the end goal (as opposed to the greater glory of their own department) and making sure you are doing whatever it takes to overcome the powers/inertia that hold back innovation.
The Market Rally: How High Can Stocks Go?
June 2nd, 2009 | Posted by stockPosted by: Ben Levisohn on June 02, 2009
On the heels of yesterday’s 3% gain, stocks are taking a well-deserved breather. The Standard & Poor’s 500 closed had finally busted though 930 — a significant point of resistance. January’s rally died in the low-930s. And the recent upswing topped out at 929, before trading sideways for most of May. But on the first day of June, traders pushed the S&P 500 through the resistance to a 942.87 close, up 39% from the March low.
Thanks to today’s pause, we have time to consider what comes next. Back on May 11, Greg Trocolli, a trader and the author of a technical newsletter for Opalesque, thought the S&P 500 would head straight for 1000 if it closed above 939. Well, we’re above 939. Barring any unforeseen bad news (the bane of every technician’s existence), the S&P 500 should trade 1000 soon.
But can it break through? MF Global’s Nick Kalivas puts the odds at around 33%. Working against the market are, you guessed it, fundamentals. After posting the worst earnings in history, the market seems to be pricing in renewed profits. A sustained push above 1000 would also require a return to something like normal growth. “I’m skeptical it will develop,” Kalivas says.
Still, the rally’s resilience has taken many by surprise and there’s a relatively clear technical path to, say, 1100 or so if the S&P 500 breaks 1000. But we’re nearing the point where the smart money will be coming out and the dumb money rushing in. But don’t take it from me. “We believe…that the risk/reward ratio for new purchases has become dicey,” says Alfred E. Goldman, chief market strategist at Wells Fargo: “Despite our bullish stance on the stock market and optimism about the economy, we advise investors to be a bit cautious.”
Good advice, in any market.
Now Comes the Great Corporate Deleveraging
June 1st, 2009 | Posted by innovAfter a bleak winter of tumbling stock prices, continual government intervention in financial markets, and contracting debt markets, economic “green shoots” have begun to appear. Stock markets around the globe have rebounded, U.S. financial institutions have received massive injections of private capital, and consumer sentiment has improved over the last few months.
It’s nice to see some optimism return to Wall Street and Main Street. But the June 1 General Motors Corp. (GM) bankruptcy filing serves as a stark reminder that the economy remains weak and recovery may be elusive.
Businesses large and small increasingly shifted their capital structures away from equity and towards a greater reliance on debt in the 1980s and 90′s. In reaction to the bursting of the dot-com bubble and the recession that followed, the Federal Reserve further primed the pump with a series of interest-rate cuts. According to data from Morgan Stanley (MS), total U.S. debt rose from approximately 150% of gross domestic product in 1980 to over 350% by the end of 2008. As financial institutions increased their leverage significantly above historic norms, obtaining credit was easy for even the riskiest corporate borrowers.
The party ended abruptly in early 2007 as the smallest cracks began to appear in the subprime mortgage market. As 2007 rolled into 2008, credit issues were revealed to be more significant and pervasive than initially imagined. If anyone expected a quick return to pre-2007 credit conditions, those hopes were dramatically dashed on Sept. 15, 2008, when Lehman Brothers filed for bankruptcy.
Since last September, we have seen government intervention in the economy on an unprecedented scale. While massive government aid has allowed financial institutions to remain solvent, the future for many remains uncertain. The release of the stress test results has clarified the capital issues that the banks needed to address.
While the greater transparency afforded by the stress tests has permitted the banks to raise a lot of new capital, it has certainly not eliminated the underlying credit crunch. According to data from Standard & Poor’s, approximately $800 billion in U.S. corporate debt matures in 2009. While that is a significant sum, the greater challenge lays ahead.
In order to understand the full extent of the problem, it is crucial to recognize that more than $1 trillion of corporate high-yield debt, often called “junk bonds,” will come due between now and 2015. High-yield debt is issued by companies that do not have investment grade credit ratings—essentially the riskiest, most highly leveraged businesses.
You get a sense of the task ahead when you consider that these companies—many struggling to regain their financial footing—will have to somehow repay or refinance this mountain of debt in the coming years.
All of this must take place during a period in which financial institutions have less lending capacity, just as the U.S. government borrows ever-increasing sums and investment-grade corporate borrowers refinance hundreds of billions of dollars of debt in the ordinary course of business.
It is difficult to assess the reduction in the banks’ lending capacity. But economist Tim Bond of Barclays Capital (BCS) has suggested that when the financial crisis has eased, bank capital will likely be reduced by about $170 billion and lending capacity will reduced by at least $1.7 trillion. Although U.S. corporate borrowers rely on banks for about only 30% of their debt capital, the reduction in bank lending capacity reflects the contraction across the broader debt markets.
For an economy that has grown for decades on ever-increasing indebtedness, it is clear that any deleveraging will have a significantly negative impact on all aspects of the economy.
Strong, well-capitalized companies will no doubt take advantage as more leveraged rivals struggle. On a philosophical level this is fine, but given its size, the deleveraging problem will not merely affect individual companies. Rather it will have a pervasive, negative impact on the economy, job creation, and long-term economic growth. Massive equity injections will be required not to expand these businesses, but simply to keep them alive.
For companies that are particularly highly leveraged or that operate in the hardest hit sectors, equity infusions will be insufficient—or in many cases unavailable—to avert more drastic measures. Most highly leveraged companies will need to sell assets or business units in order to survive. Some will have no choice but to be acquired or seek bankruptcy protection. Given the relative strength of the balance sheets of many Asian and Latin American companies, we are likely to see a new wave of cross-border acquisitions.
The bottom line: The strongest companies will survive and emerge stronger, but many will disappear, at least in their present form.
What are businesses likely to do as the great deleveraging unfolds? As we move beyond the initial stage of the credit crisis, we are likely to see many changes in the way companies manage their capital structures. Returning capital to shareholders, whether through share buybacks or dividends, will decrease and in some cases simply cease. Rather than working on tax-efficient ways to return capital to investors, corporate treasurers will be studying the intricacies of debt-for-equity swaps, sale-leaseback transactions, and offerings of convertible debt and equity.
Similarly, corporate directors will be following the lead of GM’s board as they seek to understand their fiduciary duties when approaching the “zone of insolvency” and the nuances of the bankruptcy code.
While it is likely that the very worst of the economic crisis is behind us, the road ahead will be long and difficult. One need only recall Japan’s “lost decade”—zero or negative economic growth from 1989 to 2002 as financial institutions struggled to rid themselves of toxic debt—to recognize that even with massive, sustained government action, deleveraging can be a long and painful process. As the recent stress tests have shown, the sooner we understand the shape and size of the problem, the quicker we will find the way forward.
Don’t rush to buy Cisco and Travelers on Dow Average Inclusion
June 1st, 2009 | Posted by stockConventional wisdom says there’s money to be made buying stocks added to a major trading index. This morning comes news that Cisco Systems (CSCO) and Travelers (TRV) will be added to the Dow Jones Industrial Average replacing bankrupt General Motors (GM) and teetering Citigroup (C). So rush out and buy Travelers and Cisco? Not so fast.
The basis of the index-addition effect is the buying power of billions and billions of dollars invested in index funds. But there’s not actually that much money invested in following the Dow, despite its power over headline writers and news anchors everywhere. In fact, a study done by Messod Daniel Beneish of Indiana University’s Department of Accounting and John Gardner of King’s College London found there was no such effect on stocks which entered the Dow, just those added to the S&P 500. Why? Simple — there’s not much money following the Dow relative to the trillion plus invested in the S&P 500. Just compare the exchange-traded funds, for example. The original ETF, the SPDR Trust (SPY), which follows the S&P 500, has $61 billion of assets while the DIAMONDS Trust (DIA), which tracks the DJIA, has just $7 billion.
Also, since the Dow has only 30 component stocks and changes are made relatively infrequently (2008, 2004 and 1999 most recently), there’s a certain — how to put it — “bias” of the index makers involved. In February 2008, they decided to add Bank of America (BAC) and Chevron (CVX). Those were two stocks in two hot industries way back then. Since then? Not so hot. BAC is down about 70% since then versus a 29% drop in the S&P 500. Chevron tailed the S&P 500 for a while but has since caught oil’s upswing so it’s only off 16%.
Now we’re seeing at least one more relatively hot performer added. Cisco is up almost 19% so far this year versus the S&P 500’s 4% gain. And while Travelers is down 6% — poor relative to the index — it’s done a lot better than some of its industry competitors. So be careful out there before you go following yesterday’s conventional wisdom.
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