Thursday, December 28, 2006

The Innovation Index Weekly Report

The Innovation Index stayed essentially flat at 73.74 for the week ending December 27, up 11% for the year from 66.36 (click to see the complete Index)


The Innovation Index began the month of December at 74.70, and is now at 73.74, or down about 1% for the month.

Weekly Advances

Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG), Hewlett Packard (NYSE: HPQ), IBM (NYSE: IBM), and Wal-Mart (NYSE: WMT) each gained 1% for the week. HPQ is up 46% for the year, while IBM is on a late rally in December and is now up 20% for the year. HPQ is having an outstanding year in 2006 on the heels of many innovations driving growth. IBM is also coming on strong with solid revenue growth and margins growth for the year. GOOG is up 8% for the year and is poised to return to double-digit growth in 2007 based on their innovation pipeline. WMT is in the black now, up 1% for the year. AMZN is still down 15% for the year, however is recovering from the lows. AMZN is poised to rebound in 2007.

Weekly Declines

Apple (NASDAQ: AAPL), Dell (NASDAQ: DELL), eBay (NASDAQ: EBAY), Intel (NYSE: INTC), Research In Motion (NASDAQ: RIMM), Starbucks (NASDAQ: SBUX), and Target (NYSE: TGT) declined last week. RIMM led the declines with 4% for the week. RIMM has been oscillating the last three weeks between +6% and -6%. RIMM posted excellent quarterly results last week; however, investors are wary of the overall stock appreciation for the year. AAPL also went down 4% last week. AAPL is now down 11% in December, however up 9% for the year. EBAY shed 3% last week, and is now down a whopping 31% for the year. Can EBAY rebound next year? TGT dropped 1% last week, although is up 6% for the year. TGT is bound to benefit from the holiday shopping, and will provide a great start to the New Year. Couple of bell weathers INTC and DELL each lost 1% last week; INTC is down 20% and DELL down 17% for the year. What innovations did INTC and DELL introduce in 2006 that will impact their 2007 growth and lead a rebound?

Weekly Neutrals

3M (NYSE: MMM), Cisco (NASDAQ: CSCO), GE (NYSE: GE), Microsoft (NASDAQ: MSFT), P&G (NYSE: PG), Southwest Airlines (NYSE: LUV) were even for the week. CSCO is on a roll in 2006, up 56% for the year. What important innovations have driven CSCO in the driver's seat again in 2006? Is CSCO gaining market share? GE, MSFT and PG are each showing double-digit percentage growth in stock price for the year.

Yearly Leaders and Laggards

Research In Motion (NASDAQ: RIMM), Cisco Systems (NASDAQ: CSCO) and Hewlett Packard (NYSE: HPQ) are the top three performers on the Innovation Index for the year gaining 94%, 56% and 46% respectively. eBay (NASDAQ: EBAY), Intel (NYSE: INTC) and Dell (NASDAQ: DELL) are the bottom three performers on the Innovation Index for the year losing 31%, 20% and 17% respectively. AMZN has moved upward from the bottom three performers due to the slight rally in December.

I released story on Starbucks (NASDAQ: SBUX) brewing new innovations last week. The story is included below under References section. SBUX is now up 16% for the year. SBUX has had an impressive growth in the last five years, and when the engine is firing on all cylinders, there is no stopping for SBUX in 2007. Expect another 10% or higher growth for SBUX in 2007.

The Innovation Index is poised to end the year with gains around 11% to 12%. This would equal the stock performance of S & P 500 for the year. The Innovation Index is poised to beat the NASDAQ. However, Dow Jones Index appears to hold its lead over the Innovation Index for the year.

The Innovation Index Yearly Report

I am planning to post an annual report of the top 18 Innovators of The Innovation Index during the second week of January, 2007. The report will include insights gained from the top 18 Innovators, top Innovations introduced during 2006, lessons learned, 2007 projections, and observations on Disruptors challenging the top 18 Innovators.

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About The Innovation Index

The Innovation Index introduced in December, 2006 is a weighted stock price compilation index of the top 18 Innovators in North America.

The alphabetical list of the top 18 Innovators of The Innovation Index along with their stock ticker symbols are presented below:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
Apple Computer, Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)
References:

Wednesday, December 27, 2006

Innovation Insights of 2006

Chuck Frey of InnovationTools today posted the top innovation lessons learned for 2006 from the top innovators and readers of InnovationTools.

Chuck asked his readers to respond to the following question:

"What is the most important lesson you learned regarding innovation during 2006?"

Chuck also invited me to post a response to his question (my insights are included below).


I have included herewith a selection from the many innovation lessons learned from the article:

Use customer communities to innovate

One of the take-aways that surprised me most from my new book, Outside Innovation, was the fact that online customer communities were one of the key ingredients for success in 80% of the dozens of organizations I studied. Forward-thinking execs actively monitor the online communities in which their customers and prospects "hang out" to spot new patterns and behaviors. Savvy product developers invite lead customers to participate in closed communities in order to pick their brains about the problems they're trying to solve, the outcomes they're trying to achieve and the work-arounds they've already improvised. Smart business people engage their most insightful customers as co-designers, co-creators and co-inventors, encouraging them to share their ideas, their creations and their solutions with other like-minded customers.

Innovators both empower and harness the collective wisdom of their most inventive customers, often by amplifying customers' creativity by encouraging them to strut their stuff to gain recognition from one another and from the company's own thought leaders and subject matter experts.

-- Patricia Seybold, author, Outside Innovation

I discussed the new innovative business of co-creation in "Co-Creation driving Innovation" and "People Innovation."

Companies are gaining momentum in breaking down barriers to innovation

One key thing I learned this year is that companies of any size are further along in revamping how they approach innovation than I thought. That said, even the early majority of firms are finding they lack the champions and the internal entrepreneurs needed to dream up and execute bold ideas. Companies have been operationally-minded for so long that even with emphasis on innovation, they aren't able to bust the bureaucracy and execute quickly. You can dream up a great idea, but if it takes months of hassles and delays to get approval from your boss, her boss, and your bosses boss, forget about it. So we're still finding a lot of structural resistance to this new world order but I do see progress when senior management is onboard.

-- Robert Tucker, author, Driving Growth Through Innovation

Companies must build systems and processes to create innovations through creativity and entrepreneurship. There are many key innovation ideas from Six Ways to find Innovation, Unblocking Creativity and Innovation, and successful practices from the top innovators of The Innovation Index and their practices: 3M - The Innovation Machine, Toyota's Innovation Factory, Innovations Brewing at Starbucks, and Innovations Driving Growth at GE and P & G.

Never forget the power of questions

Never forget the power of questions. In a recent interview Google CEO, Eric Schmidt, said “We run the company by questions, not by answers.” Innovative leaders put the emphasis on questioning, not telling. Ask fundamental, challenging questions and encourage others to do the same. For example: “What business are we in? Why do customers buy our services? What is our real added value? Is there a better way to do this?” The style and type of questions matter. Don't ask aggressive, inquisitorial questions, such as: “What went wrong? Why did you screw up?” Instead, ask broad questions, like these: “What lessons can we learn? What are the opportunities for us here?”

-- Paul Sloane, Destination Innovation

Creativity begins when you question everything. Question is the fundamental building block of Creativity and Innovation. Google successfully acquired YouTube while answering key innovation questions about the growth of on-demand video and entertainment when you put millions of people in charge. And Google continues to grow by constantly taming ambiguity and chaos and questioning the status quo.

Here are my insights gained from the top innovators and some disruptors from The Innovation Index:

Five rules for successful innovation

Successful business innovations that drive growth require:

1. Vision to create new products, business models or processes that make a difference and create new markets
2. Systematic processes and rigor that stimulate creativity and learning to execute on the vision
3. Reward and recognition system for teams to take measured risks and experiment
4. Focus on clear and present customer needs, the market facts, and the intangible
5. Growth-oriented leadership that is decisive, inclusive, focused, takes risks, and has market expertise

Download Apple's Innovation Strategy and Learn how Steve Jobs made Apple the #1 Innovative company in the world.

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Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

If you enjoyed reading this Creativity best practice, I recommend the complete list of Creativity Innovation Best Practices.

For further insights and lessons learned on innovation in 2006, please visit Chuck's InnovationTools Blog.

Saturday, December 23, 2006

Innovations Brewing At Starbucks

Imagine this:

A Card that brought in greater than $2.17 billion in revenue since 2001.

A Card that gets renewed or in this case reloaded over 38 million times and counting.

A Card that customers "hang on to" literally, and carry around in their wallets (and are even proud to show it).

A Card that will find over 15 million new card owners this holiday season (possibly one of the top holiday gifts).

A Card that will bring in more than $170 million in sales, and more than 10 percent of the company's revenue in a quarter.

A Card that revolutionized the gift card industry which is worth $24.8 billion, and growing $6 billion each year.

This must be a credit card!

NOT!

Welcome to the world of coffee and the Starbucks Card!

Starbucks Corporation (NASDAQ: SBUX) is one of the top 18 innovators in The Innovation Index. SBUX is up 18% for the year owing to the many innovations it brews each year including the highly successful Starbucks Card that it introduced five years ago and catalyzed the industry of gift cards (as of the last Innovation Index weekly report). Starbucks is on an exponential growth tear for the last five years, having grown revenue from $2.6 billion to $7.8 billion in the last five years, with CAGR of 24.10%. How does Starbucks do this? Besides opening new stores at every major intersection where there is a shopping center, at exclusive mall locations, grocery stores, in office complexes, even residential complexes both locally and internationally, and very soon perhaps in residential neighborhoods (if Starbucks has its way), Starbucks has literally created a world of exclusive coffee drinkers overnight who can't have enough of their $2.50 lattes. All these growth has also created complaints against Starbucks from the organic lobby and coffee growers over the world complaining of unfair trade practices.
Starbucks latest quarterly earnings grew to $2 billion, up 21% from $1.659 billion in the year ago period. The report reveals many innovations driving revenue growth of over 20% year over year:

1. Starbucks opened 1,040 new stores, including opening of and planned stores in Egypt and Cairo. Further, the innovator is planning to open 2,400 stores in fiscal 2007, and around 700 stores overseas. Starbucks has perfected the innovation process around selecting a new store location, opening the store in record time, and generating superior margins and cash flows within two years.

2. The quarterly Company-operated retail revenues increased 22% to $1.7 billion, from $1.4 billion for the period year period. The increase was primarily attributable to comparable store sales growth of 5% for the quarter compared to the year ago period. The increase in comparable store sales was due to a 4% increase in the number of customer transactions and a 1% increase in the average value per transaction. This was led by innovations across the beverage menu as well as food offerings - increased selection, price changes, and better packaging.

3. Specialty Services revenues increased 16% to $309 million, compared to $267 million for the prior year period.

4. Licensing revenues increased 21% to $223 million versus the prior year period. This was primarily due to higher product sales and royalty revenues from the opening of new licensed retail stores and, to a lesser extent, growth in the licensed grocery and warehouse club business.

5. Foodservice and other revenues increased 5% to $86 million, versus the year ago period. This increase was primarily due to growth in the U.S. foodservice business, partially offset by lower entertainment revenues which included revenue from the sales of Ray Charles' Genius Loves Company CDs outside of Starbucks retail stores in the fourth quarter of 2005.

It is evident that new revenue growth is not just created by opening of new company operated stores, but by higher sales at existing stores, specialty services, licensing, foodservice and entertainment sales.

Starbucks Innovation pipeline in 2006 and beyond

Starbucks is literally planning to transform the Coffee Vending industry, expand reach in Canada and U.K., and accelerate roll-out of warm breakfast offerings in the U.S. with various partners as per the "innovation pipeline" announcement in October, 2006.

Gerry Lopez, president of Global Consumer Products Group at Starbucks, announced that Starbucks wants to "transform coffee vending with its plans to offer superior hot latte and cocoa beverages through the Starbucks hot vending initiative" in partnership with PepsiCo. Lopez also announced an expanded relationship with Kraft to distribute coffee in Canada and the United Kingdom as well as plans to roll out Starbucks™ Coffee Liqueurs to Canada later this month in partnership with Beam Global Spirits & Wine, Inc.

Innovations beyond the stores

"Through the Starbucks hot vending initiative, Starbucks aims to transform the hot coffee vending experience by creating a new, high-quality hot drink segment within the estimated $900 million ready-to-drink beverage category in the U.S. The planned introduction of Starbucks hot vending will mark a significant advancement within the vending industry. Unlike any other coffee vending experiences in the market, the Starbucks vending platform utilizes proprietary heat-on-demand technology, developed by PepsiCo, which will offer customers yet another convenient way to enjoy Starbucks on-the-go."

Why is this hot vending initiative innovative? "Through research and product testing, Starbucks and PepsiCo learned that the common complaints about existing coffee vending included lack of consistent, high-quality coffee, as well as issues with messy and hot-to-hold cups. To tackle these obstacles, Starbucks and PepsiCo developed this revolutionary approach to hot coffee vending. With a simple swipe of a payment card (or with cash), a high-quality, hot latte or hot cocoa is served up in a ready-to-drink package in less than a minute. Utilizing proprietary packaging, each hot beverage will come in a convenient 9 fluid ounce recyclable steel can with an insulating label, designed to keep the beverage warm, enjoyable, and still comfortable to the touch." Starbucks is planning to recreate the quality and experience of drinking coffee at a Starbucks location with the convenience of savoring it anywhere, and paying for it with cash, Starbucks Card or with a major credit card such as MasterCard®, Visa®, American Express® or Discover®. Hot beverage offerings will include Caffè Latte, Vanilla Latte, Caffè Mocha, Caffè Mocha Light, and Hot Cocoa. Expect Starbucks to hit another home run with this innovation and create another revenue jump in 2007.

Distribution Innovations

"Starbucks also announced the expansion of its relationship with Kraft to distribute Starbucks® coffee to a wide variety of retail channels across Canada and the United Kingdom. This will mark the first time Starbucks® coffee will be available through these channels in the U.K. For Canada, the expanded relationship with Kraft will allow Starbucks to further strengthen its presence within grocery and other channels.

Since 1998, Kraft has been Starbucks strategic partner in distributing Starbucks® coffee to a wide variety of retail channels including grocery, drug, mass merchandising and club stores in the U.S. Expanding into two new countries allows Starbucks to build on the success of the relationship and allows the Company to leverage Kraft’s extensive distribution network."

Starbucks formula is to create a world of coffee drinkers through massive distribution. It is innovations such as the expanded partnership with Kraft that will bring Starbucks even closer to a store near you, and generate higher sales for Starbucks in 2007.

Niche Product Innovations

"Starbucks Coffee Company and Beam Global Spirits & Wine, Inc. are rolling out Starbucks™ Coffee Liqueur and Starbucks™ Cream Liqueur (in Canada). The mixable and versatile liqueurs, which will be positioned beyond the traditional cordial profile, are the first of their kind to feature 100 percent Starbucks® coffee, which is then blended with the finest spirits. These products will be available wherever wine and spirits can be found, not at Starbucks retail stores."

As if coffee drinking was not sufficient, now Starbucks wants to participate in the booming liqueur industry in partnership with established brand such as Beam. Watch out Kahlua. Starbucks is about to invade your decades long hold on the coffee liqueur. And why not? Customers will want more Starbucks coffee in their liqueurs too.

Innovations within Starbucks Stores

"Because Starbucks is committed to providing its customers with the most innovative beverage, food and merchandise offerings found anywhere, the Company announced an expanded warming rollout for food.

Noting that “great coffee deserves great food,” Michelle Gass, senior vice president for Category Management at Starbucks, revealed plans to greatly accelerate the Company’s roll out of its Warming program for food, including breakfast sandwiches, in its Company-operated retail stores. The Company began testing a warm breakfast sandwich assortment in 2004 and closed that fiscal year with 97 stores offering Warming. That number has grown to approximately 640 stores today and the Company has projected that by the end of fiscal year 2008, there will be approximately 6,500 stores offering Warming.

“Food is becoming a central part of the Starbucks Experience and a key driver for our growth,” Gass said. “During the last four years, we’ve seen growth of our food sales outpace our total store sales growth. We attribute this to our focused effort to provide higher quality food options, for different day parts, that can meet the high standards that we place on our beverages.””

In 2006, Starbucks introduced new whole bean coffee and packaging, Starbucks® Pike Place Blend and Starbucks® Anniversary Blend for a limited time throughout the U.S. and Canada to commemorate the Company’s 35th anniversary. Starbucks has launched more than 20 new beverages in the last two years with the most recent addition, the Maple Macchiato.

Starbucks is expanding beyond coffee, and this has to make the food industry queasy. Although today, Starbucks is offering breakfast and lunch sandwiches, and brand new beverages such as Maple Macchiato and various health food bars in its own stores, it is a matter of time before Starbucks offers the ready food and sandwiches to regular grocery and convenience stores. After all, the hot vending machine will already provide Starbucks shelf space and entry into convenience stores. What will happen to Starbucks revenue growth? Are we witnessing the beginning of a new food disruption in the making? It is innovations such as Warming which complement coffee that create higher same store sales growth each quarter.

Innovations in Entertainment

The Starbucks Hear Music™ Coffeehouse are created for specific markets, "not only through the architectural design, but also with music selected by the Hear Music content team with regional preferences in mind. The unparalleled combination results in a compelling third place destination for customers to connect over coffee as well as explore, discover, personalize and buy quality music in a warm and inviting environment."

The Starbucks Hear Music™ Coffeehouse "offers customers the ability to browse through the extensive physical CD inventory, which includes a music selection that has been hand-picked by the Hear Music content team to appeal to the local and regional tastes (of a particular location). Customers can also explore a digital inventory of more than one million digital tracks featured on the more than 25 Hear Music™ media bars throughout the store."

Failed Innovations

Starbucks recently announced that it is leaving the Jewel food stores in Chicago area beginning early 2007. Dominick's, Jewel's primary competitor, is planning to add more Starbucks stands in their stores. Perhaps the relationship between Starbucks and Jewel soured due to distribution margins or product placement or both. Starbucks does not always win on all the new initiatives. However, as is evident, even here when Jewel food stores is no longer going to carry Starbucks cafes (and their terms), Dominick's is already planning to add more Starbucks throughout its stores.

Bottomline

Starbucks is one of the top 18 innovators on The Innovation Index. Starbucks has become a pervasive coffee brand throughout the world, and the company is cleverly exploiting the Starbucks brand to launch new innovations in complementary and adjacent industries accounting for the solid revenue growth. The world according to Starbucks begins with a fresh hot Starbucks Caffè Latte made at your neighborhood Starbucks store, or from a hot vending machine at the convenience store using your very own Starbucks Card, a delicious breakfast sandwich or a health bar loaded with almonds (made by Starbucks), another trip to quench that caffeine thirst in the afternoon from the Starbucks store next to your workplace (and another Starbucks sandwich or brownie snack), listening to your favorite music created on a CD burned at the Starbucks Hear Music™ Coffeehouse as you drive to work and back and while you relax, and finally a late evening postprandial Starbucks™ Coffee Liqueur. Starbucks wants you to become that frequent customer who spends upwards of $10 each day on a combination of their handcrafted coffee beverages, sandwiches, cookies and music. Starbucks monthly allowance anyone?

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Thursday, December 21, 2006

The Innovation Index down 1% for the week

The Innovation Index yielded to year-end profit-taking and news of a slowing U.S. economy, and was down 1% for the week ending December 20, 2006 closing at 74.00 (click on the image to view the Index). The Innovation Index is up 11% for the year, now trailing S & P 500 by 1% and Dow Jones Index by 4%. The Innovation Index is up by 3% over NASDAQ.

For the first time, I am including the Innovation Index summary since January 1, 2001 for reference. Since 2001, The Innovation Index is up 120%, whereas the S & P 500 is up 11%, NASDAQ is up 6%, and Dow Jones Index up 17% (click on the image to view the Index). This is a clear indicator that it pays to stay with the Innovation Index innovators for the long term, and importantly, new innovations take time to create markets, market share growth, and resulting revenue and profit growth. Case in point: Apple Computer (NASDAQ: AAPL) which is up 1,039% since 2001 to lead all the innovators in the index, thanks in large part due to iPod, Apple's best innovation.

The big mover last week was General Electric (NYSE: GE), up 7% in one week, and now up 7% for the year. What a great time to stage a rally. Amazon.com (NASDAQ: AMZN) and Hewlett Packard (NYSE: HPQ) were each up 4% for the week. AMZN is recovering nicely from the year lows, and is now down 16% for the year. HPQ is on a tear this year notching gains of 44% for the year. Research In Motion (NASDAQ: RIMM) made up for the 6% drop the previous week, by gaining back 6% for the week. Microsoft (NASDAQ: MSFT) is up 12% for the year on the back of many innovations announced this year including the recent Vista, Office 2007 and Exchange 2007, handily beating Google (NASDAQ: GOOG) only up 6% for the year, who used acquisitions such as YouTube to spur innovations. GOOG has cooled down as the year winds down. Will MSFT beat GOOG again next year, or will GOOG rebound? Apple Computer (NASDAQ: AAPL) dropped 5% last week, followed by 3% drops each by Google (NASDAQ: GOOG), Southwest Airlines (NYSE: LUV), and eBay (NASDAQ: EBAY) contributing to the fall in the Innovation Index.

Research In Motion (NASDAQ: RIMM), Cisco Systems (NASDAQ: CSCO) and Hewlett Packard (NYSE: HPQ) are the top three performers on the Innovation Index for the year gaining 102%, 57% and 44% respectively. eBay (NASDAQ: EBAY), Intel (NYSE: INTC) and Amazon.com (NASDAQ: AMZN) are the bottom three performers on the Innovation Index for the year losing 29%, 19% and 16% respectively. Dell (NASDAQ: DELL) joined Amazon.com at 16% loss for the year, with another 1% drop last week.

I released story on Southwest Airlines (NYSE: LUV) flying high with innovations last week. The story is included below under references section.

Where will the Innovation Index close for the year? Will there be a Santa rally? My earlier projection that the Innovation Index will be up 15% for the year is going to require a significant rally. I will keep my fingers crossed. We had GE moving up 7% for the week. Are we going to find more rallies such as GE's before the year comes to a close?

Download Apple's Innovation Strategy and Learn how Steve Jobs made Apple the #1 Innovative company in the world.

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About The Innovation Index

The Innovation Index is a compilation of the top 18 Innovators in North America.

The alphabetical list of the top 18 Innovators of The Innovation Index along with their stock ticker symbols are presented below:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
Apple Computer, Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)Wal-Mart Stores, Inc. - (NYSE: WMT)

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

References:

Southwest Airlines Flying High With Innovations

Saturday, December 16, 2006

Southwest Airlines Flying High With Innovations

Southwest Airlines (NYSE: LUV) is one of the top 20 Innovators in The Innovation Index. Southwest Airlines (Southwest) revenues have soared in the last three years from $5.9 billion in 2003, to $7.6 billion in 2005, with expected revenue of about $9 billion in 2006. Southwest stock is down 3% for this year as reported in our weekly Innovation Index report. However, the stock moved up 2% last week, and is bound to move higher before the New Year rolls in because of falling oil prices, increased holiday travel, share repurchase program, and new business growth driven by innovations. Barron’s and Fortune also rated LUV a buy last week, and expect solid performance from Southwest for 2007.


"We are very excited about our near-term growth opportunities and pleased with our earnings momentum. Our year-to-date earnings are up 77.9 percent. Therefore, assuming continuance of the current healthy revenue environment, we expect to easily exceed our 15 percent 2006 annual earnings growth goal," said Gary C. Kelly, CEO of Southwest in the earnings press release in July, 2006. Kelly affirmed that: "Our People are the reason Business Week named Southwest one of the World's Most Innovative Companies and why I am confident we will overcome tomorrow's cost challenges and make our airline even stronger than it is today."

Southwest provides the best overall value in low cost airline travel. Southwest may not offer all the frills, but does offer clean all leather seats with reasonable leg room, along with basic compliments including pillows, blankets, snacks, juice, soda, and water on all flights. The best available feature is no charge for changes on full-fare reservations. Southwest serves 63 cities in 32 states, operates more than 3,150 flights a day and has more than 32,000 employees system wide. It boasts the highest number of passengers enplaned domestically, and has the lowest customer complaints of any domestic airlines.

What are the top ten key innovations that make Southwest Airlines soar higher, drive new growth, and perform better than the competition? Here is my list of the top ten innovations at Southwest:

1. New destinations

In 2006, Southwest began offering direct services from Denver and Washington Dulles airports.

Southwest began serving Denver in January 2006, and currently offers more than 32 daily nonstop departures to nine cities, with direct and connecting service to an additional 44 cities. The addition of Denver service has been a huge hit for Southwest travelers, and in the coming years is poised to become a top ten major airport for Southwest business.

Southwest recently began serving Washington Dulles International Airport in October of this year. Previously, Southwest only served Baltimore airport. The addition of a low cost service out of the nation's capital will add topline revenue in 2007 and beyond. The travelers are expected to buy out all the travel Southwest has to offer out of Dulles for the foreseeable future.

2. Low fare sales

Southwest leads all airlines in the most low air fare sales offered throughout the year, but especially around holiday and peak travel seasons. Whereas most airlines look at peak travel seasons to maximize profits, Southwest leads by offering low fares to lure customers into flying frequently.

The following are just a few examples of the low air fares that Southwest offered during this peak holiday season:

$49 one-way fares between Baltimore/Washington and Cleveland; between Reno/Tahoe and San Jose; and between Philadelphia and Raleigh Durham.
$99 one-way fares between Birmingham and St. Louis; between Nashville and Detroit; and between Boise and Las Vegas.
$109 one-way fares on Tuesdays and Wednesdays for travel between Columbus and Phoenix; between Kansas City and Sacramento; and between Los Angeles and San Antonio.

3. New nonstop services

Southwest recently announced the addition of 33 new nonstop flights in 26 city-pairs across the nation, including brand new nonstop service between Baltimore/Washington and Pittsburgh, between Cleveland and Orlando, between Dallas Love Field and Birmingham, and between Reno/Lake Tahoe and San Diego. Southwest Airlines earlier also launched new nonstop service between Detroit Metro and Orlando and an additional nonstop between Denver and Orlando. Air travelers want to fly nonstop between the cities of their choice, and Southwest provides them the freedom to travel nonstop at economical prices.

"Southwest Airlines is an efficiency machine -- we strive to make the most effective use of our resources," said Gary Kelly in a press release for new nonstop service. "Through optimization, innovation, and efficiency, we are adding these new flights, which reaffirm our commitment to our Customers to grow our service."

4. New vacation packages

Southwest Airlines Vacations recently added Hawaii vacations to the family of 43 U.S. package destination hot spots. Southwest does not have planes flying to Hawaii. However, when Southwest realized that many of their vacation travelers chose Hawaii as a top destination, Southwest created this partnership and codeshare service with ATA Airlines. This relationship allows Southwest Airlines Vacations to offer air-inclusive vacation packages to the Hawaiian Islands of Oahu (via Honolulu) and Maui. In addition, Southwest Airlines Vacations also offers a land-only package to Kauai and an air-inclusive vacation packages to Hawaii's Big Island (via Hilo).

"We are excited to expand our product offering and offer travelers Hawaii vacation options," said Rich Basen, Vice President and General Manager of Southwest Airlines Vacations. "Prior to adding Hawaii to our vacation destinations, 22 percent of our Customers told us that their next vacation would be to a destination that we did not serve at that time. Travel packages to Hawaii were on the top of their lists. This opportunity allows us to combine Southwest Airlines' famous low fares and Customer Service with the well-known hotel, transportation, and attraction discounts offered with our vacation packages. We believe our Customers and travel agents will be very pleased."

5. Cultural Leadership

Southwest recently launched the Washington Dulles International Airport service with Station Leader Brian Fairbanks and Marketing Manager Craig Keish leading the charge. Besides providing the work history of both Fairbanks and Keish in the press release, Southwest brought out the people facing side of leadership that they bring to the table. Fairbanks has been with Southwest since 1990. In the press release, Southwest talked about the ten things their customers should know about Fairbanks and Keish:

Brian Fairbanks:
1. Enjoys SCUBA diving.
2. Has 38 cousins.
3. Is 25 percent Chippewa Native American.
4. Lived in Germany for two years while in the U.S. Army.
5. Has had perfect attendance for 15 years of work.
6. LUVs to play softball.
7. Has lived in nine states.
8. Plays the guitar.
9. Originally went to school to be a history teacher.
10. Is a self-proclaimed computer geek.

Craig Keish:
1. Was a Southwest intern for three years in Albuquerque.
2. Has lived in seven different states because his father was in the military.
3. Loves the Ohio State Buckeyes because his family is originally from Ohio.
4. Went to college at the University of New Mexico and threw javelin on the track team.
5. Attended New Mexico State for his first year of college and played football for the Aggies.
6. LUVs green chili and puts it on everything from pizza to hamburgers.
7. Was the "I" in DING at the first Philadelphia parade.
8. LUVs football, college football in particular.
9. Works with his fiance's mom.
10. LUVs to vacation in Maui.

It is this type of sharing of cultural values and leadership that makes Southwest a favorite among travelers.

6. DING!
Southwest leads all airlines with an innovative service named DING! introduced in February, 2005. DING! is a messaging cum communication service that brings fare specials directly to the customer's computer desktop; only DING! customers can benefit from these great fares. Southwest is the first airline to innovate customer relationship and communication, and creating”direct link” to customers’ computer desktops. Southwest upgraded the DING! service in 2006 that now allows subscribers to receive spectacular fare specials from up to ten of their favorite airports.

"DING! updates are a big hit with airfare bargain hunters and Southwest's loyal Customers alike," said Anne Murray, Southwest Airlines Senior Director of Online Marketing. "DING's! new flight specific offers create even lower fares, giving Customers the independence to take an unplanned getaway."

"The popularity of DING! is evident," Murray said. "More than $130 million in DING! fares have been booked since its introduction in February 2005."

7. Excellent Quality of Service

Southwest leads all airlines with the lowest complaint rate, and the "warm, friendly, and often funny" quality of service. Recently, the airlines Cargo business received the 12th straight Quest for Quality Award by Logistics Management magazine by placing first in On time Performance, Value, Customer Service, and Equipment and Operations. Southwest's overall score ranked first among all of the Air Carrier award winners. When a traveler flies Southwest, their service is always consistent.

8. Fuel Price Hedging

Southwest had the foresight that fuel prices were going to go higher, and hence began hedging against the rise of prices so that the effective price of fuel remains lower than the current street price. In second quarter 2006, although jet fuel costs per gallon increased 39.2 percent to $1.42 per gallon at Southwest, it was still lower than the industry average of over $1.65 per gallon. Further, Southwest is 73 percent hedged for the remainder of 2006 at approximately $36 per barrel, which is 50% less than the average street price; 65 percent in 2007 at $41 per barrel; 38 percent in 2008 at $40 per barrel; 34 percent in 2009 at $44 per barrel; and 12 percent hedged in 2010 at $61 per barrel. Southwest has effectively hedged and insured their business with years of price protection on fuel thereby maintaining profitability and sound financial health -- most airlines suffered when the fuel prices went up, and some even sought bankruptcy. Southwest is not resting on fuel hedging along; it is planning to install Aviation Partners Boeing Blended Winglets on up to 90 Boeing 737-300 aircraft with 59 firm orders and 31 options beginning in 2007. This will further conserve the fuel costs.

9. Boarding Process re-engineering

The innovative efficiency of Southwest's boarding process is key to Southwest's successful business model over the last 30 plus years; whereas initially, many airline competitors thought the Southwest way of boarding as boarding cattle and quite rudimentary, and ridiculed the whole process, Southwest has proved that by limiting aircraft time on the ground, it has been able to maintain an enviable ontime record at a significant cost advantage over its competitors. And travelers are happy with the process since it saves them time as well. Southwest is not resting on their laurels though. This year, Southwest conducted a limited test of several boarding methods to see how much time is required to "turn" the aircraft if Customers are holding an assigned seat for 200 separate departures at San Diego airport. Southwest ultimately wants to measure the combined success of assigned seating, customer satisfaction, ontime performance and efficiency on its business model.

"We want to make sure that we have studied all the possibilities and aspects of assigned seating before we make any change to what has been a very successful formula for the past 35 years," said Gary Kelly, Southwest's CEO. "This evaluation is an important step to determine the feasibility of assigned seating, but this is only a test."

10. Aircraft savings

Southwest is looking at new ways to save costs as it acquires new aircrafts for newer destinations and services. Southwest has been actively exploring the used aircraft market for additional 2006 aircraft and acquired one 737-700 during the third quarter, its initial foray into saving costs yet providing great safety. Southwest also signed an agreement to acquire another previously owned 737-700 aircraft. Cost savings resulting from buying used aircrafts has an impact on the earnings growths, and would definitely help Southwest meet their 15% earnings growth target for the year.

Bottomline

Southwest Airlines is one of the top 18 innovators in The Innovation Index. Whereas most airlines are struggling to stay afloat, much less become profitable, Southwest is soaring high by consistently showing profits, creating double-digit earnings growth and producing new innovations over the last several years. It is technology innovations such as DING! that bring Southwest that much closer to its customers who leverage the communication and messaging service to buy more tickets. Southwest.com is quite possibly the easiest to use airlines reservation service in the market. Expect Southwest to continue its run of innovations and strong growth in 2007 and beyond.

Download Apple's Innovation Strategy and Learn how Steve Jobs made Apple the #1 Innovative company in the world.

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Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

References:

Southwest.com Press Releases

Thursday, December 14, 2006

The Innovation Index Weekly Report

The Innovation Index Report for the week starting December 5, 2006 and ending December 13, 2006

The Innovation Index dipped slightly by 1.21 points, or 2%, to 74.40 points for the year. The Innovation Index is up 7.82 points or 12% for the year from 66.58 points. It still beats S & P 500 by 1% and NASDAQ by 4%. However, Dow Jones Index remains at 14%, thereby upping the Innovation Index by 2% for the year. Would the Innovation Index come back and beat Dow Jones Index for the year? There are still two full weeks before the year comes to a close. (click on the image to view the complete index)

The reason for the weekly drop in the Innovation Index was owing to premature sell-off on Research In Motion (NASDAQ: RIMM) to the tune of 6% for the week due to couple of downgrades. Although as I report today, RIMM is up almost 4.6% and will make amends for last week's drop, and will possibly rebound for the rest of the year. Dell (NASDAQ: DELL) was also down 3% for the week. Expect a rally for Dell as Christmas and Holiday shopping goes into full gear. Dell is bound to benefit from the holiday sales.

The surprise mover of the week is Southwest Airlines (NYSE: LUV). Holiday travel is supposed to go up with good weather likely on the forecast. Oil prices have dipped and hence will fuel some profits; Barron's and Fortune released reports rating Southwest a Buy. Enough to raise the profile by 2% for the week. There is further upside in Southwest for the rest of the year.

Research In Motion (NASDAQ: RIMM), Cisco Systems (NASDAQ: CSCO) and Hewlett Packard (NYSE: HPQ) are the top three performers on the Innovation Index for the year gaining 91%, 56% and 38% respectively. eBay (NASDAQ: EBAY), Amazon.com (NASDAQ: AMZN) and Intel (NYSE: INTC) are the bottom three performers on the Innovation Index for the year losing 27%, 19% and 19% respectively.

I released stories on Innovations Driving Growth at three of the top 18 Innovators last week: General Electric (NYSE: GE), Proctor & Gamble (NYSE: PG) and 3M (NYSE: MMM). The stories are included below under references.

Where will the Innovation Index close for the year? Will there be a Santa rally? My projection is that the Innovation Index will be up 15% for the year.

The next Innovation Index report will be released on December 21, 2006.

Download Apple's Innovation Strategy and Learn how Steve Jobs made Apple the #1 Innovative company in the world.

Download Now

About The Innovation Index

The Innovation Index is a compilation of the top 18 Innovators in North America.

The alphabetical list of the top 18 Innovators of The Innovation Index along with their stock ticker symbols are presented below:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
Apple Computer, Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

References:

Innovations driving growth at General Electric and Proctor & Gamble

3M - The Innovation Machine

Wednesday, December 13, 2006

My Story and My Fight against Osteoporosis

In 2005, I was diagnosed with advanced Osteoporosis, a disabling condition of the bones, also called metabolic bone disorder, where the bones become brittle due to lack of calcium absorption and lose their density. My symptoms included decreased bone strength, extreme pain in lower back and hip joints, and lack of mobility. I just went to the doctor complaining of pain, decreased strength and mobility. A serendipitous Bone Density Scan (typically not even conducted in people my age) showed that I had Osteoporosis of the lumbar spine, and Ostopenia in couple of other areas. Even my doctor was surprised by the findings. I also discovered I had Arthritis in my knee joints, and suffered from ACL tear in the knee. I was only 37 at that time. I took medical leave from work to first tackle the mobility problem, and determine a sustained plan with my physicians to overcome the Osteoporosis. After advice from specialists at PAMF and USF, sustained physical therapy over six months at local physical therapy centers, strong faith in God, support from Osteoporosis foundation, parents and family, disability benefits for a few months, and healthy diet that now includes adequate calcium, I was able to establish a baseline and regain some of my strength. Importantly, I am somewhat mobile again. Whereas before I even had to use a walking stick to help me with stability and mobility, I could not sit in one place in one position for more than a few minutes without pain, I could not even drive for more than half an hour, now I am able to walk some distance without pain, I am able to sit in positions without much discomfort, and I am able to drive for extended periods (at least couple of hours). I still cannot jog or run or jump or bend forward or bend with my knees or hold heavy objects without intense pain. I sometimes by habit may bend abruptly forward only to realize a lasting pain for a few hours. But I don't give in to pain. I overcome the pain. I am very thankful to God, the therapists and the doctors that I have been able to overcome the mobility problem and regain my strength. Now, I am trying to build myself from within literally with good calcium-rich diet and moderate exercise that typically includes light walk in and around the house, in the backyard, and around my neighborhood.

I learned that Osteoporosis cannot be overcome overnight. It is perhaps like a Diabetes or Blood Pressure or High Cholesterol where maintenance is required over the lifetime. I also learned that it can possibly get worse. It is even called the "silent disease" that can be debilitating with multiple fractures that can essentially make a person bed-ridden for lengthy intervals. So far, I am lucky. And I have God to thank. Most people don’t know they have Osteoporosis until they break a bone. I just need to repeat the Bone Density Scan test every year to confirm on whether Osteoporosis is spreading or maintaining, or by some miracle, perhaps even reversing. There are treatment options available; however, not recommended for men my age yet. Perhaps the medical research will get better, and there will be something available for men by age so that there are no implications of taking something over more than twenty or thirty years. Or better yet, with adequate calcium diet and light exercise, with increasingly weight-bearing training, I may be even able to reverse this condition in a few years. I am hopeful. I am a believer. And I have faith in God. If Lance Armstrong can fight cancer, and come out fully recovered and then go on to win Tour De France several times, I can do better in my fight against Osteoporosis. I also have two young kids who are growing and who provide me every incentive every day of the week to become active, get better physically, and play with them. I have my friends from college and Bay Area who share my passion for Football (we have been playing Fantasy football for the past ten plus years), and bonding with them gives me hope, warmth and confidence. At times, I realize that friends may distance themselves because they perhaps don't know how they can support someone during a time such as this. However, just knowing that they are there and I can even enjoy their company even through the occasional email and phone call at times is enough. I miss the running around and jumping and physical activities with my kids. However, I am very thankful that I am able to walk again, do fun activities with my kids by walking around, and able to take one step at a time, in my fight against Osteoporosis. And best of all, I have only become stronger from within, have become more confident of my abilities, and am determined to reverse this bone disease.

Last week, I was able to go out with my daughter on a Field Trip with her school friends to the Bear Factory in San Francisco. I even chaperoned my daughter and her best friend throughout the trip. We took the BART on the way to the Bear Factory. Then we took a small walk to the local Muni, and then took the Muni to arrive at the final destination. I even got lost as I stopped on the way to buy a camera from local Walgreens, and could not find the way to the Factory. I walked painfully a few blocks and had enough strength to walk back to the Factory (which incidentally was round the corner). The trip tested my limits. I was limping on the way back as I was walking back from Muni to the BART, and in particular climbing down the stairs of the BART station to take the train to Fremont. I was in real pain. The Field Trip tested my resolve to the fullest. But the smiles on my daughter and her friend's faces, and the abundance of fun they had as they made their first bears after selecting the type of the bear, stuffing them with cotton, getting them hand stitched, and dressing them with cool clothes of their choice was an experience that has no equal. A similar experience was when I took my son and his friends to the Field Trip at the Tech Museum in San Jose. Not only the IMAX movie was great as we sat together and enjoyed the climbers of Mt. Everest, but also some of the tech exhibits including the Sphere (this is a huge sphere where you can see Earth, various planets, weather patterns and more - a must see innovative exhibit at The Tech). Experiences like this drive me to do more, one step at a time, and help me build my confidence to fight against Osteoporosis.

Osteoporosis is a disease of the bone, not a disease of the mind. A disease of posture, not a disease of intellect. A speed bump, definitely not a dead end. And when I realized that, I have not looked back. I recently enrolled and completed Professional Certification on Leading Management Teams online with Cornell University. I am a member of the Fremont Technology Advisory Committee for the entire Fremont School District seeking bold new technology initiatives for all the schools. I worked in the capacity of Vice President at an E-Learning company leading their Interactive Learning business. I enjoy playing Bridge with my son and on the computer because it is a card game that engages the mind, and just like chess, has infinite possibilities. I even play Ping-Pong with my son and my daughter (albeit with limited movement) and enjoy every moment of it. And I began this blog on Creativity and Innovation because it is a subject that is near and dear to me. The passion to create new innovations built with creativity and ingenuity driven by a great team in unexplored markets is what keeps me up at night. And the learning that one can have from all the great innovators of our times is infinite. I am actively looking for full-time occupation at an established corporation for the long term where I can lead my creative energies as a team leader, and create new and exciting software and service products built with creativity and innovation.

I came to USA in search of a dream in 1987. I came here in search of greatness, in search of opportunity to excel in what I do. My father sent me here with my sister while I was only 18 and gave me the opportunity to learn and grow, and create a career that will make him and the family proud. I went to school initially at University of Oklahoma, and then the University of Texas at Austin. I graduated with Bachelors degree in Electrical Engineering with emphasis on Computer Engineering and Science. I studied hard while I was in school, obtained scholarships that provided me relief in non-resident tuition, and worked my first job as Computer Lab manager teaching students programming languages that provided me money for room and board. I met my wife to be while she was doing her Bachelor's in Accounting. My father also studied in the USA back in 1957, when he was only 21. He graduated with his MBA from Stanford University and later worked here for a few years. My father and my mother got married in Washington D.C. He went back to India since his father passed away, but later came back and studied at Harvard University. Eventually, he settled back in India. Now, my father and mother visit us (my sister and my family) every year in Summer. Their biggest incentive to come back is the grand children that they dearly adore. I am proud and thankful of the opportunity that my father gave me to come to the USA, and that USA has given me at such a young age when I went to school here, the scholarships and beliefs of professors who I studied under, and work occupation by managers who believed in my ability to deliver. As I tell my friends back in India that USA perhaps leads the world in integration of culture, values, work, lives and religion. And I plan on living the dream of my father where I can excel at work, family, kids, friends and relationships, and create new opportunities.

I thank you for reading my story, your belief in me and my resolve, and your encouragement to climb higher. I am a believer. And remember to thank God for great health, happiness and peace.

Update:
Check Osteoporosis Foundation for further information, and learn more about Osteoporosis

3M - The Innovation Machine

3M (NYSE: MMM) is one of the top 18 innovators in The Innovation Index. In an earlier blog post on "Failures and Stumbles driving Innovation", we talked about how 3M has created its own Innovation Machine to stimulate growth over the last hundred plus years. 3M stock is even for this year, currently off by about 9 points from the 52-week high.

"Our company has, indeed, stumbled onto some of its new products. But never forget that you can only stumble if you're moving." Richard P. Carlton, Former CEO, 3M Corporation, 1950

In a news story this week in the Boston Globe titled "In some cases, nothing succeeds like failure", Gustave Manso, a Brazilian-born finance professor at MIT Sloan School of Management claims: "To induce employees to explore new ideas, you have to tolerate early failure and reward long-term success." Manso believes that "the challenge is to craft incentives that will make creative people comfortable with thinking big and taking risks."

The Globe story cites Manso's favorite on experimentation and intra-entrepreneurship, a story that has become both a model and a fable among the innovators: "Spencer Silver, a researcher at the St. Paul technology company 3M, discovered a new kind of light adhesive in 1968 that initially was shelved because it couldn't compete with more robust glues and had no obvious commercial application. A decade later, his colleague Art Fry recognized that the adhesive, which stuck lightly to surfaces and was readily repositioned, would be perfect for the best-selling product 3M eventually launched as the Post-it Note."

3M - Failures to Innovation Machine

3M is quite possibly the most innovative company of our times that even CEOs of other visionary companies admire. 3M is best known for its household brands such as Post-it Note, Scotchgard, Scotch tape, and many more. 3M initially failed in its mining business, and eventually stumbled onto most of the successful innovations that we know 3M for, including Post-It, Masking and Scotch tape. "Although the invention of the Post-it note might have been somewhat accidental, the creation of the 3M environment that allowed it was anything but an accident," according to Collins and Porras, authors of Built to Last. 3M institutionalized such mechanisms to drive Innovation as the "15 percent rule" - technical people spend up to 15 percent of their time on projects of their own choosing or initiative, "25 percent rule" - each division should produce 25 percent of annual sales from new products and services introduced in the previous five years (which later increased to 30 percent), "Golden Step" award - given to those creating successful new business ventures originated within 3M. More growth mechanisms were created to stimulate internal entrepreneurship, test new ideas, create unplanned experimentation, share new ideas, develop new innovation, cross-fertilize technology, ideas and innovation, stimulate innovation via customer problems, speed product development and market introduction cycles, provide profit sharing, and promote "a small company within a big company feel" by creating small autonomous business units and product divisions -- over a dozen business processes to stimulate creativity, innovation and growth -- in early 1990 3M had over sixty thousand products and over forty separate product divisions.

Incentives for Innovation

Manso wants to create incentives such as "slow-vesting stock options, golden parachutes, debtor-friendly bankruptcy laws, and, in academia, tenure" to motivate the employees to innovate without worries about failure and job insecurity.

"Incentive schemes that motivate exploration are fundamentally different from standard pay-for-performance incentive schemes used to motivate effort," Manso wrote in an abstract this fall. "The optimal compensation scheme that motivates exploration exhibits substantial tolerance (or even reward) for early failure."

In Blocking Creativity and Innovation on this blog, we talked about creating a system that unblocks innovation and creativity by building new processes, creating an innovation culture and rewarding and recognizing the innovators.

Five takeaways stimulating Innovation

Authors Collins and Porras summarize their findings from 3M and provide five takeaways to drive Innovation at any business:

1. "Give it a try--and quick!" - Essentially echoing on having a process to try out a lot of stuff, and keeping what really works. The key here is to do something. Keep on trying something new.


2. "Accept that mistakes will be made." - Learn from the mistakes quickly, and move on. Failures are part and parcel of what creates new innovation. Don't repeat the same mistakes.

3. "Take small steps." - Experiment, but on a small scale. When something looks promising, go all out and seize the opportunity. This way one can do plenty of inexpensive experiments that create a funnel of would-be innovations.

4. "Give people the room they need." - Without entrepreneurship, there is no experiment. Without experiment there is no success or failure. People need some time, incentives, job security and room to experiment.

5. "Mechanisms - build that ticking clock!" - How do you harness creativity and build innovation? It cannot happen simply by chance. Companies need to create practices and tangible mechanisms to experiment, try out new ideas and innovate.

Bottomline

3M this year has launched many new innovations in the marketplace thereby solidifying its position as a top innovator of technology governed by systematic processes and excellent manufacturing.

For instance, in November, 3M introduced a new connector for microSD cards which has the smallest form factor available, and yet provides excellent connection and locking mechanisms. 3M opens up the removable flash memory card market for phones, digital cameras, gaming and more.

Earlier, in an effort to broaden the market share in the auto industry beyond the professionals, 3M went direct to consumers, the do-it-yourselfer and car enthusiasts, with a new line of consumer care car products. 3M introduced three ready-to-use product solutions that range from better appearance and shine, to increased performance and repair.

3M is also driving Hydrogen Fuel research along with the Department of Energy, and is innovating MicroTouch capacitive TouchSense System.

These are just a few examples of the new innovations at 3M that are both practical and ingenious, solving the innate customer need and creating new markets and growth. As with all innovations, at times it addresses a ready market that creates immediate revenue growth, at times it creates a new market entry in an emerging market that is about to happen.

3M is one of the top 18 innovators in The Innovation Index. Although the stories of the planned failures stimulating growth at 3M are passed along by various authors who study the innovations at 3M from inside, or by company employees who go on to become innovators themselves, it would be great if 3M were also to publish an annual list of the top initiatives that failed and lessons learned from these. The rest of the industry can greatly benefit from such wisdom. Then again, perhaps this is giving away too much information to competitors.

Download Apple's Innovation Strategy and Learn how Steve Jobs made Apple the #1 Innovative company in the world.

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Monday, December 11, 2006

Innovations Driving Growth at General Electric and Proctor & Gamble

General Electric (NYSE: GE) and Proctor & Gamble (NYSE: PG) (P&G) are two of the top 18 Innovators in North America representing the The Innovation Index list of companies. GE stock is even for the year and down 11% since the new CEO took charge, while P&G stock is up 9% for the year and is near its all time high. Fortune magazine interviewed the CEOs of these two innovators in the December 2006 issue. GE has a daunting revenue challenge each year: create $15 billion or higher in new business each year or about the size of Nike's total revenue; on the other hand P&G needs to carve out $7 billion in new business each year, comparable to IAC Interactive's total revenue. Large numbers indeed. Fortune article explores in-depth on how these companies create innovations driving growth in the billions of dollars each year.

Selected references:
What drives this new business growth at GE and P&G?

GE's CEO Jeffrey Immelt and P&G's CEO A.G. Lafley focus on "growth" and "sustained excellence" that create new innovations in technologies, products, leadership and globalization -- key ingredients for new revenue growth.

The strategy at GE emphasizes sound business processes driving creativity and innovation, and is rooted on the following three pillars:

1. Focus on key technologies:
"Immelt wants GE to "own" certain technologies -- renewable energy, energy efficiency, nano-technology" and applications in medical imaging. GE wants to capitalize on the emerging market trends and assume leadership in those it goes after.

2. Growth-oriented leadership:
"After a study of fast-growing companies, GE managers are now evaluated on five criteria -- external focus, decisiveness, inclusiveness, risk taking, and domain expertise." This has the making of an innovation factory that encourages calculated entrepreneurship led by domain managers while taking into consideration company policies and processes.

3. Business portfolio:
"Immelt has jettisoned much of GE's insurance business, while bulking up in health care, water, security, and other areas." GE wants to focus on the core businesses where it is in the position of market leadership, and position itself for organic growth.

There are similarities between the Innovation strategies of GE and P&G. For instance both companies have divested non-core businesses. Both emphasize strong leadership and innovation accountability. Both are focused on new products driving current and future growth.

The strategy at P&G is buoyed by the following three pillars driving new innovations:

1. Brand mix:
"Lafley has divested such stalwarts as Crisco, Jif, Pert Plus, and Sure, while spending big to buy Clairol, Wella and Gillette (including Braun and Duracell)." The driver at P&G is focus on the core and the critical few products that create pervasive, global brand and market leadership.

2. Global top team:
"P&G does more than half its business outside the U.S., so Lafley has recast his top executive group to be 50% non-American." P&G has taken bold steps to talk the talk and walk the walk by making it a truly global multi-national company thereby driving growth internationally.

3. New products:
"Lafley has shifted P&G's focus from inventing all its new products to developing others' inventions at least half the time." For instance, Mr. Clean Magic Eraser was successful because of a product found in an Osaka market. Do you buy, build or partner to create new innovations? P&G does all of the above, but has also gotten smarter on leveraging existing ideas and inventions from partners and turning them around on a dime to create new markets.

In a Q & A with senior editor Geoff Colvin, P&G CEO Lafley had this to say on Innovation:

"We've got to grow market shares and move into adjacencies and create new categories of business. So the name of the game is innovation. We work really hard to try to turn innovation into a strategy and a process that's a little more consistent, a little more reliable, so that we can build a portfolio of innovations and the yield we need to get that $6 billion or $7 billion a year."

GE CEO Immelt agrees with Lafley on the core principles that drive growth and innovation. He adds: "It's important to make growth a process...Just like A.G (Lafley), I want a pipeline of innovation. Some projects will fail. But the goal for a company like ours or P&G is using size as an advantage. Most people just assume that big companies are slow and lethargic, and only a small company can grow. But if you get good processes, you can make size an advantage."

Both Lafley and Immelt believe that "narrowing the focus makes a difference." Rather than doing too many projects at once (read few dozen), their companies focus on key innovations in markets that they can literally own (less than a dozen). Further, R&D and Leadership centers are distributed globally and reengineered to take advantage of the new technologies and global business trends. And in particular, new global partnerships are formed to co-create innovations. Lafley admits: "We did have to kill not-invented-here. We have to make 'reapplied with pride' just as important a part of the culture as 'invented here.'"

In response to globalization and competition, and its impact on the economy, Immelt argues that "it's all about innovation and technology." He gives an example of the jet engine business at GE, where GE is the world market leader, and spends $1 billion annually on R&D. Immelt states that "we can go toe to toe with anybody, and we'll be able to do that for a very long time." However, in other areas such as appliances, he believes that GE has to take steps to make profits and hence manufacture overseas. The key though is readiness, willingness and motivation to compete for the future according to Immelt. Lafley adds that both companies offer retraining, early retirement, and employee benefits to provide best opportunities to employees who get impacted by globalization. And at times Lafley believes one needs to be creative in dealing with this area.

GE and P&G are two of the top 18 innovators in The Innovation Index. Together, they do over $230 billion in annual business, a number larger than GDP of many countries of the world. And yet, they must find new ways of innovation to grow at least 10% each year, or add about $23 billion in new revenue. Leaders Immelt and Lafley provide us the blueprint of creatvity and innovation that drives huge revenue growth each year at their companies.

Download Apple's Innovation Strategy and Learn how Steve Jobs made Apple the #1 Innovative company in the world.

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Wednesday, December 06, 2006

The Innovation Index

Introducing The Innovation Index

The Innovation Index is a compilation of the Top 20 Innovators in North America. Most of these Innovators are prestigious companies including GE, 3M, HP, IBM, and Proctor & Gamble who have created numerous innovations and shaped our lives over the past fifty plus years; some leaders are better known by their innovative product brands - Blackberry by Research In Motion, iPod and iMac by Apple, online shopping by Amazon.com, Windows and Office by Microsoft, Microprocessor powered by Intel; the list also includes leaders whose creativity and brands have become synonymous to markets: networks by Cisco, computers by Dell, marketplace of traders by eBay, hot coffee and cappuccino by Starbucks, fashionable clothing by Target, lowest price shopping by Wal-Mart, low airline fares by Southwest Airlines, and search nirvana by Google.

Selected references:
Leading eBook on Creativity and Innovation in Business
Creativity and Innovation Best Practices
Creativity and Innovation Case Studies
The Innovation Index
Top 50 innovative companies in the world

The alphabetical list of the Top 20 Innovators of The Innovation Index (for 2007) along with their stock ticker symbols are presented below:

3M Company - MMM
Amazon.com, Inc. - AMZN
America Movil - AMX (added end of December 2006)
Apple Computer, Inc. - AAPL
Cisco Systems, Inc. - CSCO
Dell Inc. - DELL
eBay Inc. - EBAY
General Electric Co. - GE
Google Inc. - GOOG
Hewlett-Packard Co. - HPQ
Intel Corporation - INTC
International Business Machines Corp. - IBM
Microsoft Corporation - MSFT
Research In Motion Limited - RIMM
Southwest Airlines Co. - LUV
Starbucks Corporation - SBUX
Target Corp. - TGT
The Proctor & Gamble Company - PG
Wal-Mart Stores, Inc. - WMT
Yahoo! Inc. - YHOO (added end of December 2006)

For 2008, six Top Innovators were changed. The alphabetical list of the Top 20 Innovators of The Innovation Index for 2008 and their stock ticker symbols are presented below:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
AT&T Inc. - (NYSE: T)
Best Buy Co., Inc. - (NYSE: BBY)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Costco Wholesale Corporation - (NASDAQ: COST)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Merck & Co., Inc. - (NYSE: MRK)
McDonald's Corporation (NYSE: MCD)
Microsoft Corporation - (NASDAQ: MSFT)
NIKE, Inc. - (NYSE: NKE)
Research In Motion Limited - (NASDAQ: RIMM)
The Proctor & Gamble Company - (NYSE: PG)

For 2009 through 2011, there were no changes (key reason was I was heavily involved in Startup activities and still am).

For 2012, the new Innovation Index comprises of the following American Innovators:

Amazon.com, Inc. - (NASDAQ: AMZN)
Apple Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Costco Wholesale Corporation - (NASDAQ: COST)
eBay Inc. - (NASDAQ: EBAY)
Facebook - (NYSE: FB)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Intuit Inc. - (NASDAQ: INTU)
Johnson & Johnson - (NYSE: JNJ)
McDonald's Corporation (NYSE: MCD)
Microsoft Corporation - (NASDAQ: MSFT)
NIKE, Inc. - (NYSE: NKE)
Proctor & Gamble Company - (NYSE: PG)
Priceline.com - (NASDAQ: PCLN)
Starbucks - (NASDAQ: SBUX)
Verizon Communications - (NYSE: VZ)
Whole Foods Market - (NASDAQ: WFM)

The Innovation Index Report will incorporate the following objectives and will be released quarterly:

1. Report, analyze and project the stock performance of the Top 20 Innovators in North America every week, and compare their performance to S&P, NASDAQ and Dow Jones.

2. Compare and contrast best practices, initiatives, new products, successes, strategies, stories, leadership and insights on Creativity and Innovation at the Top 20 Innovators.

3. Showcase Disruptors challenging these Top Innovators, their disruptive innovation strategy, and their current and potential impact on the Innovators' customer base and market share.

A potential "The Disruption Index" could also arise once the market of Disruptors grows, and they become identified and accounted for. For example, The Disruption Index could include Juniper Networks and highlights about how it is disrupting Cisco Systems, Advanced Micro Devices' and its challenge versus Intel, and Yahoo!, the once crowned Internet Innovation King now in a Disruptor's role vis-à-vis Google.

How are the Top Innovators performing (2006)?

In one word: Surprising. (click on the image to obtain a larger view of The Innovation Index) The number one Innovator by stock performance this year is not Google, nor Apple - the top two innovators in the world. Rather it is an Innovator that knows a thing or two about causing disruption in the business segment of mobile devices by its ubiquitous wireless email service: Research In Motion - RIMM. The Blackberry, called "crackberry" by its cult-like business users who are so hooked on the e-mail that they can't even go to sleep without it being on, has fundamentally changed how the business world communicates via wireless email with total ease and security. What is also surprising is eBay (EBAY), the darling of the Internet boom, is showing the highest negative return so far this year out of the top 18 Innovators. eBay is sure to answer back next year with a host of new planned innovations. Cisco Systems (CSCO) is on the rebound this year notching gains over 50% for the year; bell-weather, Hewlett Packard, is also showing impressive gains of about 40% for the year. Are they innovating and executing better this year? Dell (DELL), Intel (INTC) and Amazon.com (AMZN) are all showing double-digit negative returns for the year. Are Disruptors challenging their leadership positions? Would they be around as Innovators next year in the index?

Overall, The Innovation Index shows a solid return of 14% for the year, beating the S & P 500 and NASDAQ, and in a virtual tie with the Dow Jones Industrial Index average. The Innovation Index is currently at 75.61 points, up 9.03 points for the year. Only 5 out of 18 companies in The Innovation Index are showing negative returns. Seven Innovators are showing double-digit returns; while the venerable companies including GE, Wal-Mart and 3M are showing less than 5% return – I will be exploring under the hood as to why this is the case. I believe though that in the longer term, in as much as the index continues to include the most innovative companies in the world founded on creativity and ingenuity driving business innovation, The Innovation Index will outperform the respective market indices. On the other hand, The Disruption Index could be even more spectacular in annual returns owing to smaller yet high growth companies carving out significant market share.

2006 Innovation Index performance:

The Innovation Index closed 2006 with 18.01% return, beating the major U.S. indices.

2007 Innovation Index performance:

The Innovation Index had a banner year, and gained 66% in 2007. The Innovation Index easily crushes the major U.S. indices including the S & P 500, NASDAQ and Dow Jones. S & P 500 was up 4% for the year, NASDAQ was up 10% for the year and the Dow Jones Index was up 6% for the year.


For now, watch this blog for updates on The Innovation Index, the Top 20 Innovators in action, and their Disruptors in hot pursuit. Check Innovation Index reports below for detailed analysis, highlights, correlations, stock performance, and more.

2007 Top Innovators Update

America Movile, S.A. de C.V. (America Movil) (NYSE: AMX) and Yahoo! Inc. (NASDAQ: YHOO) were added to The Innovation Index (for 2007). With this addition, The Innovation Index now represents the Top 20 Innovators in North America. The Innovation Index will begin 2007 at 69.38 points with the addition of AMX and YHOO.

2008 Top Innovators Update

Six new Innovators have been added to The Innovation Index for 2008 and 2009:
AT&T Inc. - (NYSE: T) (52 week change: UP 18.71%)
Best Buy Co., Inc. - (NYSE: BBY) (52 week change: UP 6.30%)
Costco Wholesale Corporation - (NASDAQ: COST) (52 week change: UP 32.82%)
Merck & Co., Inc. - (NYSE: MRK) (52 week change: UP 34.66%)
McDonald's Corporation (NYSE: MCD) (52 week change: UP 34.22%)
NIKE, Inc. - (NYSE: NKE) (52 week change: UP 29.88%)
2008 Innovation Index Performance
Top 20 InnovatorsTicker31-Dec-0731-Dec-08% Change
3M Company MMM84.3257.54-31.76%
Amazon.comAMZN92.6451.28-44.65%
America Movil AMX61.3930.99-49.52%
AppleAAPL198.0885.35-56.91%
AT&TT41.1628.50-30.76%
Best BuyBBY52.5128.11-46.47%
Cisco SystemsCSCO27.0716.30-39.79%
Costco WholesaleCOST69.6052.50-24.57%
eBayEBAY33.1913.96-57.94%
General ElectricGE36.7416.20-55.91%
GoogleGOOG691.48307.65-55.51%
Hewlett-PackardHPQ50.4836.29-28.11%
IntelINTC26.5014.66-44.68%
IBMIBM107.6984.16-21.85%
MerckMRK57.6130.40-47.23%
McDonald'sMCD58.5162.196.29%
MicrosoftMSFT35.4619.44-45.18%
NIKENKE64.0051.00-20.31%
Research In MotionRIMM113.4040.58-64.22%
Proctor & GamblePG73.0561.82-15.37%



The Innovation Index
108.2766.35-38.72%
S&P 500^GSPC1,468.36903.25-38.49%
Dow Jones^DJI13,264.828,776.39-33.84%
NASDAQ^IXIC2,652.281,577.03-40.54%

2009 Innovation Index Performance

Innovation Index 2009 Annual Performance

Innovation Index Reports

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References:

BusinessWeek: The World’s Top 25 Most Innovative Companies

BusinessWeek along with the Boston Consulting Group surveyed and ranked the top 25 Innovative companies in the world for 2006 and 2005. I have compiled the list of the Top Innovators in North America for the past three years. This list only includes the North American companies that are publicly traded.

Updated: February 19, 2008

Creativity Innovation Archives