Instead, I am now writing a blog with a slightly different focus with my colleague Milo Jones on geopolitics, strategy, disruptions, and intelligence. Find it here: http://silberzahnjones.wordpress.com.

Foreword: Rudy Provoost, Chief Executive Officer, Philips Lighting

Chapter 1 · Arteconomy: stimulating creativity and innovation through art

Chapter 2 · A technology intelligence system to enable open innovation at VIB

Chapter 3 · A showcase in show business: Studio 100 outperforms the competition through product leadership Addressing every aspect of children’s entertainment

Chapter 4 · Belgacom Mobile: IT-enabled process innovation in turbulent industries

Chapter 5 · Breaking into an established market through a process of experimentation: the case of GreenPan

Chapter 6 · How to survive your own business model innovation: the story of Bongo

Chapter 7 · The sagacity of Sigasi: financing an innovative start-up with limited resources

Chapter 8 · Winning the disruptive technology game: the case of Alcatel Access Network Division (A.N.D.)

Chapter 9 · The benefits of open innovation in low-tech SMEs: the Quilts of Denmark story. The fight against commoditisation

Chapter 10 · Growth by necessity and design: the balancing act of new business platforms at Cronos

Chapter 11 · Going Beyond the Pill: Business Transformation through Corporate Venturing at Janssen Pharmaceutica

Epilogue · BIC’s innovation journey. An interview with Billy Salha, General Manager Europe, BIC

The Balancing Act of Innovation is a hands-on book for practitioners and proposes to learn from the practitioners: how successful companies do it. The book shows innovation in its diversity and contains case studies about Alcatel Lucent, Janssen Pharmaceutica, Studio 100, and many more. The foreword brings an inspiring vision on innovation by Rudy Provoost (CEO of Philips Lighting), and the book ends with an exclusive interview of Billy Salha, General Manager Europe of BIC. The book intends to help companies discover their own road to innovation!

Date: 17 January 2011

Location: Living Tomorrow, Vilvoorde (Brussels)

Programme:

3.30 pm  Welcome coffee

4.00 pm  Handover first copies of the book to the authors –  Hilde Vanmechelen, LannooCampus

4.10 pm  Welcome – Philippe Haspeslagh, Vlerick Leuven Gent Management School, Dean

4.20 pm  Introduction of the book by the authors – Philippe Silberzahn, EM Lyon Business School, Professor & Walter Van Dyck, Vlerick Leuven Gent Management School, Professor

4.40 pm  Panel debate: “How to boost innovative performance?”

• Tom Aelbrecht (Director Venturing & Incubation, Janssen Pharmaceutica)
• Jo Daris (General Manager, Studio 100 Animation)
• Wim De Veirman (CEO, GreenPan)
• Pieter Geeraerts (General Programme Manager KPNGB Managed Network Services, Alcatel Lucent)
• Moderator: Olaf Du Pont (University of Gent)

5.30 pm  Q&A

5.45 pm  Walking dinner

Amazon link here.

It is well known that Nespresso’s business model is mostly based on selling capsules on which Nestlé is able to make a very high margin. This margin is significantly higher than for the traditional filter coffee, Nestlé’s main business. This is in fact the same model as that of ink jet printer manufacturers: you buy a printer at a very low price; it usually barely covers the cost of the printer. The manufacturer makes its margin not on the printer, but on the cartridges, which are (relatively) very expensive.  This model comes from the razor and the blades model invented by Gillette. This model is not without benefits for some users, in particular for those who have limited needs in terms of quantities. In that case, the high relative cost for one page matters less than the low absolute one. What is interesting in the case of Nespresso is that Nestlé has been able to position the product in the premium segment, so they are able to sell the machines at a high price as well, thus having it both ways…

This positioning helped fuel the success of the product and drove its exceptional profitability. It was reinforced by the creation of the Nespresso Club, adding a sense of exclusivity, and the use of actor George Clooney in the ads. In addition, the Club provides valuable customer information for Nestlé, another innovation for a company that had until then always sold only through distribution channels.

Of course, the idea of a high-quality coffee at home quickly attracted competitors such as Senseo, a partnership between coffee house Douwe-Egberts and home appliance manufacturer Philips, or Tassimo. However, despite their success, and quite unlike what Pr Clayton Christensen would predict, these lower end competitors have not been able to really to “go up” and threaten Nespresso’s position in the higher end of the segment.

This could change thanks to the entry of a new type of competitor having a different strategy: Ethical Coffee Company (ECC). ECC’s idea is quite simply to create capsules that are compatible with Nespresso machines, yet cheaper. This is a strategy that has already been successful for printers and that manufacturers were not able to successfully counter. ECC, which like Nestlé is based out of Switzerland, assures that they have found a way not to violate Nespresso’s patents and produce perfectly legal compatible capsules. ECC’s threat should be taken seriously by Nestlé because its founder is no other than Jean-Paul Gaillard, the man who successfully launched… Nespresso back in the early 1990s. Gaillard is the manager called “Yannick Lang” in the infamous and controversial Nespresso case study from IMD written by Joyce Miller and Kamran Kashani. In addition, ECC has raised €20 million in private capital and is already in production.

ECC’s capsules are legally compatible with Nespresso machines, but 20% cheaper. In addition, they can be completely recycled, a very important point as the use of aluminum capsules by Nestlé has long been criticized by environmentalists. Each Nespresso user has probably experienced a growing sense of unease when throwing away the capsules. Lately, Nestlé has undertaken a recycling program but the way it is organized does not seem to be environmentally friendly.

What can Nestlé do? Moving “downwards” is difficult for two reasons. First, because the success of Senseo and Tassimo in the mid-range market means competition is solidly present, with big brands that have strong experience of the business and the distribution network, and for which the segment is core. So expect strong resistance here. Second, because ECC’s entry will quite likely successfully occupy the “value” segment of the capsule market. Third, because it is always difficult for a firm to move downwards, regardless of the competition: margins are lower but the cost base is the same, a sure crash. This would mean hurting the brand, a key issue as the brand, more than the quality of the coffee, is what drives Nespresso’s success since the beginning. It is difficult to imagine Nestlé introducing “value” (ie low end) coffee machines or selling the capsules in supermarkets (which would instantly mean losing 25% of the margin), sitting next to Tassimo’s.

The question is whether Nespresso’s positioning can be sustained. One can certainly expect a “Clooney fatigue”, not to mention the risk, shown recently by Tiger Woods, of associating a brand with a star who is also a human being, and as such subject to image problems. Despite all the talk about experience, Club exclusivity, and choice of over dozens of coffee types, what customers want is a nice cup of coffee, and too much complexity risk turning them off. Even a visit to a Nespresso shop can be an unpleasant experience when facing the snobbery of the clerks. Last time I went there, I felt like a peasant visiting the castle.

Can Nestlé move upwards? One could imagine Nestlé introducing diamond plated Nespresso machines at €1,000 and partnering with some luxury house. Despite the fact that times of economic recession are usually not appropriate for such positioning, this would smell classic “retreat in the high-value segments”, giving away lower segments to the competition, and putting itself into a corner eventually, something that GM has experienced with SUVs.

Clearly, Nestlé seems concerned. The Swiss firm recently sued a French Web site comparing prices for “disparagement” because the site had contended that Nespresso’s capsules where expensive and environmentally unfriendly. This is surprising because these are two well recognized facts. Nespresso is clearly positioned in the high-end of the market and Nestlé gets good margins on it. This is not a crime and nothing to be ashamed about, simply a positioning that has help fuel Nespresso’s success. Similarly, the environmental unfriendliness is still very common in manufacturing, and Nestlé has made efforts recently to address this question, albeit insufficiently. The trial seems to reflect more on Nestlé’s disarray and lack of strategic clue than anything else. Let’s hope the company will find better ways to deal with its strategic problem. ECC is now sold in France through the Casino supermarket chain. Let the consumers decide…

My previous post on the Nespresso innovation story here.

Toynbee is the author of “A study in history“, the landmark book on the history of civilizations. The book comprises 6,000 pages, no less. Fortunately, a professor decided to write an abridged version, which allows normal people like you and me to grasp the virtuosity and knowledge of Toynbee for only… 1,200 pages in two volumes. What does Toynbee write? According to him, a civilization grows when its elite is creative enough to attract inside and outside constituents. The civilization breaks down when the elite gives way to, or transforms itself into, a dominant minority. When this happens, the driver of the civilization becomes control, not attraction, and its unity ends.

Interestingly, Toynbee observes that the consequences of the breakdown are not felt immediately. The civilization can continue to exist and keep a momentum if only because the logic of control brings an overall efficiency in its working. To summarize, the three key points of Toynbee’s thesis are:

1. The source of breakdown is the loss of the creative capacity of the elite;
2. The consequences of the breakdown are not felt immediately;
3. When losing its creative capacity, the elite gives way to a dominant minority working on a logic of control.

It is tempting to try to apply Toynbee’s thesis to the corporate environment. In doing so, we can define the creative capacity as the ability to successfully create and introduce new products and services (renew its engine of growth). We can define growth in terms of overall economic performance.

With this in mind, let’s map a few companies on a two-by-two diagram as represented below:

Area #3 represents firms that are creative, but non performing. This can typically be startups not yet in the growth phase. This can also be older firms such as the Xerox PARC in the 70s. Area#2 represents firms that are creative and performing at the same time, the ideal situation. Area#4 represent the lost causes, such as Polaroid. Area#1 is the one we are interested in: it represents firms that are not creative yet are (still) performing. Here we find for instance Microsoft, which still produces astonishing profits yet whose new products such as XBox or MSN have all been failures (most are structurally loss making are survive only because cash cows such as Office and Windows, dating back to the 1990s, subsidize them).

The second point of Toynbee’s thesis concerns the delay that exists between the breakdown and its effects. What, for instance, is the cause of General Motors’ bankruptcy in 2009? Clearly, this comes at the end of a long decline that visibly started back in the early 1970s. It could be the entry and success of the Japanese cars in the US at that time. But we suspect this would be more the symptom than the cause. In fact, some researchers (Santos, Spector and Van der Heyden) attribute GM’s breakdown to a decision made by its new CEO back in… 1958. That year, the divisional managers of the company stopped being part of the company’s policy (ie executive) committee. This marked the end of the interweaving between strategy and operation. From then on, the disconnect between the two grew: strategy became increasingly detached from the field, while operations only sat at the receiving end of decisions made “upstairs”. Instead of being fully engaged in policy decisions, divisional managers were told what to do and how to do it. The creative interweaving of strategy and operation was broken. The control by head office was even accentuated in 1965. This is the time when GM opened the door first to Volkswagen, then to the Japanese, and started experiencing product flops such as the Vega.

The third point of Toynbee’s thesis concerns the transformation of the elite from a creative to a dominant minority. Any growing organization must put in place management systems if it wants to avoid chaos, and to ensure proper performance. However, these systems gradually rigidify the management of the firm. Things that were done informally when the firm was still small and entrepreneurial now require planning and approval. Installing a resource planning system such as SAP only reinforces this trend. In parallel, the firm recruits managers able to run these management systems. These are not entrepreneurs, but more administrators. Quite logically, they are graduate from business school’s MBA programs, the A in MBA standing for “Administration” indeed. On the institutional level, the firm, especially when it becomes a public company on a stock market, becomes increasingly sensitive to institutional pressures. Financial analysts, but also investment bankers, lawyers, industry experts and management gurus all begin to exert growing influence on the thinking and actions of the management team at the expense of the old guard of engineers and entrepreneurs. Predictability, in finance, new products and development, becomes important.

There is no way a growing firm can avoid putting some of these management systems in place: growth and size must be managed with formal systems. The real question, of course, is how such systems can be implemented without asphyxiating innovation. Because when you have a radically new idea, it is often not possible to build a business case for it the way one does for an incremental project. I recently met with a senior manager of a mid-size high-tech company (3,000 people) who described me in details how the entrepreneurial spirit is disappearing: originally a science-based firm, innovation is no longer chaotic and random:  it is now properly driven by the business units which are duly reporting on the demands from customers. Any new business idea has to demonstrate (you read it right: demonstrate) profitability and return over a short period, and the company is now essentially driven by its six-sigma initiative. Creativity has given way to control, and this has been accompanied by corresponding changes at the top as well as at the middle-level of management. Needless to say, the company is doing very well on the stock market.

Of course, applying a theory from one field to another has always limitations, but Toynbee’s thesis applies fairly well to such case. We understand better how a company breaks down and why it doesn’t how immediately.

As the case suggests, the cause of the breakdown and of the loss of creative capacity somehow is to be sought in the people the company recruits. We  all know that it is accepted wisdom, and a wisdom taught in our business schools, that once a company starts growing, entrepreneurs must give way to experienced managers to take the company to the next level. While this may look like common sense, it is also the surest way for the creative team to give way to a dominant team. What the application of Toynbee’s thesis to the organization suggests, therefore, is in fact to question the governance and recruitment practices in our firms. What type of managers do we want if the necessary efficiency is not to kill innovation? Henry Mintzberg, one of the most respected management researchers, has long shared his skepticism on the issue. In “How productivity killed American enterprise”, he wrote: “An OECD report in 2005 noted a ‘significant decline’ in the intensity of American research and development. America built its economy on its capacity to innovate—to explore. American engineers had been admired throughout the world. By 2008, when the MBAs and financial types and lawyers had taken control of corporate America, so much of that exploration had metamorphosed into exploitation.“

This of course also touches on the question of management education. How can we train future managers to become creative agents rather than controlling agents in the firms they join? Most of today’s courses in the MBA programs are, implicitly or explicitly, based on a logic of control. Clayton Christensen, a leading expert in innovation, agrees with Mintzberg. According to him, the decline of Sony, not so long ago the poster child of innovation in consumer products and now a struggling follower, is rooted in the retirement of Akio Morita, its founder, in 1980. An engineer, Morita was replaced by armies of MBAs trained in deliberate marketing and management techniques. The last disruptive product Sony introduced was in the late seventies. All its products ever since have been followers, with various levels of success and brilliance, but followers nonetheless. It is perhaps time to seriously think about the education, the selection and the recruitment of our firms’ managers.

In the interview, McNamara tells the story of his encounter with his former enemies during his 1995 visit to Vietnam. Much to his surprise, he realizes then that Vietnamese were first and foremost nationalists before being communists. Hence, that the conflict could in fact be framed as a nationalistic fight for union and independence, something Americans could actually have been sympathetic to. He also realizes that there is nothing that the Vietnamese dislike more than the Chinese, thus showing the fallacy of the fear of a great Chinese plot in South-East Asia, and more generally of that of a grand union of communist countries against the western world. A knowledge that Richard Nixon and Henry Kissinger will use to their advantage in their opening to China to counter the Soviet Union.

Framing the conflict in terms of a moral fight of good versus evil and asserting the inevitability of the domino theory also raised the stake of the conflict considerably for the US, making it more difficult to withdraw and limiting their margin for maneuver. It’s difficult to give up when the freedom of the world is supposedly at stake, but much easier when it’s framed as a civil war in a distant country.

The concept of frame of course also applies to the corporation. It is especially important in periods of uncertainty and turbulence caused by disruptions. Disruptions bring about profound change that require corporations to review the way they perceive and analyze their environment. Any corporation use a frame that is the result of past experience and of what the corporation has learned about its successes and failures. The more the corporation has been successful, usually the stronger the frame and the more difficult to change. For instance, raised in technological excellence, telecom operators denied the significance of internet telephony on account that it was not working well. GM discounted the importance of the Japanese cars in the seventies from the height of its market share. Kodak reacted to the emergence of digital photography by inventing a… digital film (APS) simply because the company was unable to imagine a world without films, and as a result tried to ‘cram’ the new technology into the old, to use Clayton Christensen’s expression. More recently, music majors reacted to peer to peer by framing it exclusively as acts of piracy, and as a result limiting their action to the legal option, instead of taking an open view on the undermining by the Internet of their very reason to exist on the marketplace.

More generally, enabling an organization to change with its environment requires changing its frame. The question, of course, is how to define the new frame and how to adopt it. Some researchers such as Sarah Kaplan show that this can be achieved by organizing ‘framing contests’ between different possible frames within the organization. The chosen frame will be the result of this contest, the process of which creates the conditions for the frame to be properly adopted and used. See a previous post I wrote on Framing here.

During this period, the project went through severe technical problems several times, a few failed launches, and wrong markets with wrong business models. For instance, one of the first commercialization attempts targeted restaurants. The idea was that a small espresso machine would be appealing to them. Wrong analysis. A small machine saves space but the unit cost of a cup of coffee is much higher than that of a large, heavy-duty machine. But most restaurants have enough space and care a lot about unit cost. Hence the failure. Initially launched within Nestlé, the project is hosted in a separate unit after some time as a result of the widespread skepticism – to say the least – about it within the company. Simply put, nobody believes in it. This is because the product doesn’t fit the company’s business model, which is essentially to sell light products such as coffee or snacks in packages through supermarkets. Nespresso, on the contrary, involves producing and selling a coffee machine and selling coffee cups to machine owners. In addition, the project requires an important budget at the expense of other units who face stiff competition and can’t afford to reduce their own budget for such an uncertain project. Despite the failures, the project carries on thanks the political skills of the team. Until then managed by pure Nestlé lifers, the real break for the project came when Nestlé recruited an outsider – Jean-Paul Gaillard, to lead it. Gaillard was known at that time for having successfully launched Marlboro‘s line of clothes. He had no knowledge of the coffee business but knew how to launch a radically new business unit that broke from the company’s main line of business. He also came from a different culture from the the traditional, rather conservative and low profile Nestlé culture. Nestlé is a very very well managed company that produces profits year after year like a Swiss clock, so the length of the Nespresso innovation process cannot be explained by saying that Nestlé is not well managed. Market studies were negative, nobody wanted the product, but Gaillard ignored them and finally launched the product with the high-end, consumer positioning we know today

And it worked. The Nespresso Club, another innovation, added to the premium positioning and helped with word of mouth and direct marketing. Yet another innovation for Nestlé, the opening of shops, owned by Nestlé. The overall project shows many innovations and significant risk taken by the company. It also shows the persistence of Nestlé, or rather of some Nestlé managers, in the face of persistent skepticism and negative market feedback: 21 years of failures, and each and every year the company soldiers on. 21 years, for a coffee machine! But 21 years giving way to one of the most successful and profitable products in the history of Nestlé. In the first semester of 2009, at the heart of the world recession and despite competition from Senseo and Tassimo for instance, Nespresso sales grew by 25%.

Hence Burgelman’s model of intrapreneurship identified two types of projects: those resulting from the official strategy, and those resulting from the autonomous action of middle management sometimes in opposition to the official strategy. The model was further developed when combined with the work of Hannan and Freeman on the ecology of organizations in the 1970-1980s. According to this view, industries evolve through a mechanism of variation (creation of diversity), selection, and retention (reduction of diversity through mortality). Applying this model from the industry to the inside of an organization, Burgelman showed how a firm could manage this ecology of projects, the basis for maintaining an innovation edge. Thanks to this, the firm is not dependent on the official strategy and preserve the ability to create real options on different strategies.

Then Burgelman moved on to the main topic of the conference. Often, disruptions in an industry are described as being originated by entrepreneurial firms. However, cases show that startups are not often successful in their efforts and are successfully fended off by incumbents. However, their efforts do not go unnoticed and open the way for existing firm in other, adjacent industries, which “recognize” the opportunity and attempt a disruption, but from a much stronger base. The typical case in point is Apple with the iPod. Apple’s growth was constrained in the PC segment, but the firm could leverage its expertise in software and design to succeed where Napster had failed after the music industry’s lawsuits. Burgelman tried to formalize the conditions under which a cross-boundary disruption can be successful: an initial attack by a relatively weak startup fails, but still manages to undermine the incumbents; a stagnant existing industry stuck in business models undermined by a disruptive technology; and a potential new entrant limited in its growth but having relevant assets that can be exploited to cross the boundary.

Still in the case of Apple,the theory does not apply so well to the iPhone: it cannot be said that mobile telephony was stagnant with irrelevant business models and slow moving industry participants. Indeed, if the iPhone has been very successful, it can hardly be said that Apple changed the rules as it did in the music indusry where it essentially set the price for digitized music. Proof that this is an area where predictions are difficult, Burgelman, in his Strategic Entrepreneurship Journal article on the topic was skeptical about the chances of success for Apple, observing that Microsoft was better positioned and, with 10% of the smartphone market, already ahead. Since then, Apple has been able to gain a significant market share and Microsoft presence in mobile phones has all but evaporated even though a come back is in preparation at the time of writing. Another example of potential disruption in a completely different industry was given by Burgelman with Wal-Mart possibly moving in the low-end health-care provision. This is a question that Christensen has explored in the innovator’s prescription, his latest book on disruptions in the US healthcare system.

In his monumental piece "Capitalism, Socialism and Democracy", still an essential read sixty years later, Schumpeter explains that innovation is not the capitalist system's distinguishing feature: other civilizations or political systems have been innovative in sime areas as well (think of space technologies in the former USSR or Law in ancient Rome). The real distinguishing feature of the system is its inherent ability to democratize innovation by making available new products to the masses. This is achieved both through its ability to organize efficiently but also and more importantly through the ability to decrease costs. In other words, the symbol of capitalism and innovation is not so much the start-up as Wal-Mart, the low-cost supermarket that saves Americans' mostly low-income customers about $50 billion a year. For these customers who struggle to make ends meet, it's something.

Schumpeter thus summarized the argument:"The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses… It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort. . . . the capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses." (source)

Unlike what The Economist explains in their must-read article "The Silence of the Mammon", I don't think defending this system in the name of this formidable wealth creation and affordability is defensive or smacks appeasement. On the contrary, it's a perfectly valid argument as it does not pretend to bestow other responsibilities to this system than it is supposed to have.

A multi-part, multimedia, multi-continent forum, this event will expand and possibly overturn established thinking about what innovation is, where it comes from, and how to make it work. Some of today’s top global innovators will examine and iterate on the genesis of good ideas, the great challenges of the twenty-first century, the question of whether we live in a flat world, the costs and benefits of crowdsourcing, the power of social entrepreneurship, the role of government in catalyzing innovation, leveraging failure, finding innovation in a crisis, organizing the teams of tomorrow, the phenomenon of reverse innovation, the future of open innovation, and how old economy actors are being disrupted in the new economy. Whether the impetus is to improve customer relationships, develop new products and services, explore untapped markets, or improve efficiency, companies today must implement more than just an R&D strategy to survive and thrive. Regardless of geography or industry, an organization lives or dies by how it innovates.

Featured speakers

• Amar Bhidé, Professor, Kennedy School of Government, Harvard University
• Tim Brown, CEO, IDEO
• Ed Catmull, President, Pixar and Disney Animation Studios
• Clayton Christensen, Professor, Harvard Business School
• Jared Diamond, Author, Guns, Germs, and Steel
• Judy Estrin, President, JLabs
• Kris Halvorsen, Chief Technology Officer, Intuit
• Jacqueline Novogratz, Founder, Acumen Fund
• Michael Porter, Professor, Harvard Business School
• Paul Saffo, Visiting Scholar, Stanford Media X

The conference will take place at the Haas School of Business, University of California at Berkeley, USA.