Category Archives: Procurement Innovation

Achieving Innovation Part I

Yesterday we discussed the results of the Boston Consulting Group’s  “Innovation 2006” survey and report that determined that not only do 72% of executives consider innovation a top-three strategic priority, but that innovative companies outperform the Global S&P 1200 median by 300 basis points with annualized increased profit margins of 3 percentage points higher.

We also discussed the top three commonalities of innovative companies as evidenced by the report:

  1. Innovative Culture
  2. Deep Customer Understanding and Focus
  3. Market Focused

and how these were all people-focused. Innovative companies focus on their employees, customers, and the people in the market they operate in. They are run by innovative leaders who run an innovative culture that promotes creativity, learning, research, and development.

However, as we indicated, this is only the start. As I pointed out in my Purchasing Innovation Series on e-Sourcing Forum [WayBackMachine], innovation is not easy to manage, or to measure. Furthermore, it requires appropriate process and technology support.

For some additional insight here, we are also going to focus on the other characteristics of the five most innovative companies identified by the report:

  1. Apple Computer
  2. Google
  3. 3M
  4. Toyota Motor
  5. Microsoft

The characteristics displayed by these companies include:

  • Innovative Business Model
  • Continuous Investment in Innovation
  • Skillful Blend of Design and Technology
  • Steady launch of “paradigm shifting” products
  • Lengthy track record of successful innovation
  • Institutionalized Capabilities
  • Ongoing and successful expansion into new areas
  • Speed
  • Products that allow “lock-in”
  • Staying Power

Tomorrow we’ll discuss each of these in turn to uncover some “secrets to success” that you can use to become more innovative.

What makes an innovative company?

This summer, Boston Consulting Group released their “Innovation 2006” study where they determined that innovation remains a top strategic focus for many companies, with 72% of the 1,070 executives in 63 countries and all major industries ranking it a top-three strategic priority. Furthermore, they demonstrated that innovation does translate into superior long-term stock-market performance: the 25 most innovative companies (as defined by the survey respondents) had a median annualized return of 14.3% from 1996 through 2005, a full 300 basis points better than that of the S&P Global 1200 median. Furthermore, innovators increased median profit margins by an annualized 3.4 percentage points per year over the ten year period, vs. 0.4 percentage points for the median Standard & Poor’s Global 1200 company. In addition, they maintained revenue growth on pace – 9% per annum – with the index median.

There were a number of interesting results and insights in this study, which I’ll discuss further in a later post, but the insights I’m going to focus on are the attributes of an innovative company. The survey the report is based on asked respondents to rank the most innovative companies, and the results, in order were:

  1. Apple Computer
  2. Google
  3. 3M
  4. Toyota Motor
  5. Microsoft
  6. General Electric
  7. Procter & Gamble
  8. Nokia
  9. Starbucks Coffee
  10. IBM

In addition, it asked the executives why they thought the company was innovative, and summarized the results for the top five. The following commonalities shine through:

  1. Innovative Culture
  2. Deep Customer Understanding and Focus
  3. Market Focused

One of the statements about Apple quoted in the article was “every single person in the company contributes to Apple’s innovation success every day“. One of the statements about Google that was quoted stated “Google has built reinvention and creativity into the core values of the company.” And one of the statements about 3M was “3M gives its employees time to work on, develop, and test their ideas” and “has a high tolerance for error“.

Quotes about Apple included “Apple is very focused on the user experience and how design impacts that experience.” One of the quotes about Microsoft was “They’re not always first, but they listen to customers or they wouldn’t have the market share they have.”

Quotes about Apple also included “Apple is telling its customers what’s next. It’s not following the classic ‘market-led’ innovation path that inevitably leads to incrementalism and ‘me-too’ innovation … Customers trust Apple and view it as a lighthouse guiding them on what to adopt next. If Apple has it, it must be useful.” Quotes about Microsoft also included “Microsoft has a complete and total ability to capture and retain an immense customer base.”

These quotes demonstrate the prevalence of an innovative culture, deep customer understanding and focus, and (core) market focus of innovative companies, since even their peers pick up on it.

However, what’s even more substantial, in my view, is the commonality all these traits posses – they are all people focused. Innovative companies focus on their employees, their customers, and the people who constitute the market in which they operate. They realize that innovation comes from people, that these people need to be supported, and everyone with an idea should be heard. They encourage creativity and free-thinking, even if it means that company employees will wander down the wrong path now and again. After all, the harsh reality is that experience is one of our greatest teachers, and learning from (small, contained) mistakes is a heck-of-a-lot better than not learning at all.

So what makes an innovative company? The answer should be clear now – innovative people supported by innovative leaders in an innovative culture that promotes creativity, learning, research, and development. That looks for answers within and without. That listens to its customers, its partners, market analysts, and works with them to define tomorrow’s product and tomorrow’s market.

Thus, the first step to becoming innovative is to decide you want to be innovative and develop an open, collaborative, and supportive culture. If this is beyond you, then I’d start questioning your ability to succeed in the marketplace of tomorrow, especially considering that over 90% of survey respondents indicated that they consider organic growth through innovation necessary for success in their industry. (And if this goes against every grain in your being, then maybe you should consider nominating your company for a Weasel Award next year, after all, you just might be weaseling your employees, customers, and shareholders out of an opportunity for future success.)

The Road to Innovation

In a recent issue of APICS Magazine you will find “The Road to Innovation” (registration required) which consists of an interview with Elbert “Burt” Rutan, president of Scaled Composites LLC and a leading innovator in aviation, whose accomplishments include the production of Voyager – the first airplane to fly nonstop around the world without refueling – and SpaceShipOne – the first privately funded craft to reach space and winner of the 2004 Ansari X PRIZE.

Burt Rutan makes some very good points about the nature of innovation in the article. In addition to traveling the road less traveled, you need to take risks and you need to be aggressive. You’re more likely to get your money’s worth when you take a few risks.

However, achieving innovation isn’t easy. It requires the right mindset, the right processes and hard work in addition to risk-taking and aggressiveness. This week we’re going to discuss some characteristics of innovative companies and some metrics you can use to measure your innovative achievements.

Magic & Logic II (Procurement and Marketing)

As defined in Part I, this summer the Value Framework Initiative co-sponsored by CIPS (Chartered Institute of Purchasing and Supply), the IPA (Institute of Practitioners in Advertising), and the ISBA (Incorporated Society of British Advertisers) released a report entitled “Magic & Logic: Re-defining sustainable business practices for agencies, marketing, and procurement”.

This report “identifies best practice methodologies that can be used jointly by agencies, marketing, and procurement to work together in their efforts to produce ‘profitable ideas that make profit’. Knowing that profitable ideas result when all three parties recognize the ‘magic/logic’ distinction and vigorously pursue the improvement of both with an appropriate balance”, this report is designed to be a guide for marketing, agencies, and procurements to get more out of their relationship.”

The report also notes that “Procurement can help marketing deal more effectively by disciplining the process and aiding marketing in the identification of precisely what it is they are seeking. They [Procurement] can bring consistency to briefing, standard contracts, fee structures, and reporting, and insure that third party supplies are purchased effectively. They [Procurement] can help control the relationship, maintain consistency in their organization’s dealings, measure effectiveness and outcomes, and help quantify, as well as increase, the value of the relationship (which is not cost, but ROI).” Furthermore, “Procurement can also help the agencies increase their value by working with the agencies to improve their management and processes, thereby increasing the value of the services offered by the agency. Procurement is also the entity that is best suited to identify the win/win during negotiations.”

The report concludes with detailed recommendations for agencies, marketing, and procurement alike, and what I would like to point out are the recommendations for procurement which are:

  • make the effort to understand what you are buying when you buy agency services; understand that quality of outcome is highly correlated with cost and return on investment is a better measure of success,
  • be more open about your agenda … after all “a failure to communicate creates a vaccuum that will be filled by lies, poison, and drivel“,
  • look for ways to work with agencies to help them be more efficient, and
  • help marketing be more disciplined.

The reason I want to point these out are that these are best practices that hold true when working with any third party service provider, procurement outsourcing agencies included! The same maxim holds true for services and direct materials: cheaper is not always better. Quality and return on investment (with the ultimate goal of value) should be your metrics of choice.

Open and honest communications will in turn inspire open and honest communications from your potential provider. (And if it does not, find another provider.)

Finally, you are always in a position to assist third parties in improving their efficiency, just like you are always in a position to help your own organization become more efficient. With the possible exception of engineering/production, no other division needs to be anywhere near as efficient, value conscious, and metric focussed as procurement in order to get business done and look good. Marketing looks good if they boost brand recognition. Sales looks good if they boost sales. Finance looks good if they find ways to trim the buget. But unless procurement measures, manages, and shows value in everything it does, it tends to get overlooked because it will otherwise be looked upon as the division that spends money, not the division that saves it.

Magic & Logic I (Procurement and Marketing)

For readers on this side of the Atlantic, I’d like to point out an interesting report released over the summer by the Value Framework Initiative co-sponsored by CIPS (Chartered Institute of Purchasing and Supply), the IPA (Institute of Practitioners in Advertising), and the ISBA (Incorporated Society of British Advertisers) entitled “Magic and Logic: Re-defining sustainable business practices for agencies, marketing, and procurement”.

This insightful report, authored by Marilyn Baxter, who conducted in-depth interviews with 24 senior respondents with decades of relevant experience at large enterprises (with names like Coca Cola, Honda, Unilever, Fallon London, Lowe London, Proximity, and Willott Kingston Smith), identifies best practice methodologies that can be used jointly by agencies, marketing, and procurement to work together in their efforts to produce “profitable ideas that make profit“. The societies came together and commissioned this report because they found that there was a general lack of alignment between agencies, marketing, and procurement in all but the market leaders. Knowing that profitable ideas result when all three parties recognize the “magic/logic” distinction and vigorously pursue the improvement of both with an appropriate balance, they wanted to provide their members and the community at large insight on how to be more successful.

Magic is defined as the production of brilliant ideas that grow brands and businesses while Logics is defined as project management, financial management, and other non-magical processes that support the innovation effort and the “magic” it produces.

The agency controls the realm of magic, needed by marketing, and procurement controls the realm of logic. The fusing of the three is necessary to ensure that marketing receives maximum value from the agency relationship. Furthermore, the agency can itself benefit from the involvement of procurement.

The agency market is more crowded than ever and agencies are being pressured to be more competitive. However, despite historical indicators to the contrary, successful agencies are run just like any other successful business and the best agencies are those that offer a differentiated product, focus on results, maintain confidence, maintain a high degree of professionalism, and have disciplined business processes that enable them to get their top-line income right and achieve better bottom line profits.

Successful agencies also have strong leaders with clear goals, coherent values, and a strong business focus. They care about cost and efficient use of their resources (the logic) as well as innovation (the magic). They put the quality of their people at the heart of their business, forming a “service/value/profit” chain. The leaders know they are in business to create value, quality, and great ideas.

However, agencies are not alone in their need to improve. Marketing clients have to improve their ability to assist agencies in developing the best possible profitable ideas for them. This includes being professional, disciplined, and well-organized at all times, knowing what they want, committing to quality and expecting to pay for it, regarding agencies as partners, and engaging procurement in the development of efficient, valuable, constructive and productive relationships.

Procurement can help marketing deal more effectively by disciplining the process and aiding marketing in the identification of precisely what it is they are seeking. They can bring consistency to briefing, standard contracts, fee structures, and reporting, and insure that third party supplies are purchased effectively. They can help control the relationship, maintain consistency in their organization’s dealings, measure effectiveness and outcomes, and help quantify, as well as increase, the value of the relationship (which is not cost, but ROI).

Procurement can also help the agencies increase their value by working with the agencies to improve their management and processes, thereby increasing the value of the services offered by the agency. Procurement is also the entity that is best suited to identify the win/win during negotiations.

This extensive report concludes with a number of detailed recommendations for agencies looking to improve the value of their offerings, marketing organizations looking to get more value out of their agency relationships, and procurement organizations seeking to help both parties work together more effectively. It also includes some great appendices that define signature practices of the most profitable client/agency relationships from a financial, workflow, relationship, and value perspective and profitable performance characteristics. All in all, it’s a great read – and I’m not going to give away the ending here to encourage you to add it to your reading list (and maybe take a copy with you on your next flight).