8:05 am - 9:05 am: In a session dedicated to the topic of sustainable innovation, Charles Holliday, chairman and CEO of DuPont (pictured at left), and William McDonough of William McDonough + Partners discussed how to “rethink everything” when it comes to sustainable innovation. Dramatic innovation can happen if you can find a way to totally abandon existing norms and look to solve problems from an entirely fresh perspective. In the case of DuPont, it’s possible to do this while benefiting both shareholders and the planet.

Marc Gunther of FORTUNE started off the panel discussion by asking both Charles and Bill to characterize the economy on a scale of 1 to 10. 10 describes an economy that is perfectly sustainable, where we are not depleting resources; 1 means we are destroying the world at a rapid rate. On this scale (1-10), where are we?

Bill: Very low on this scale. In a perfect world, we would have a perfect flow of “nutrients” for continuous re-use. We would have fecundity on a “massive scale.” Everything should be in closed loop, where we are not losing energy from the system. Designers are inherently optimistic people, we wake up every morning hoping to make the world a better place.

Chad: One more step to the left (i.e. closer to 10 than to 1). Currently, Corporate America perceives short term as a few months and long term as 5-10 years. We need to change this perspective. Short term = 100 years. Long term = 1,000 years. We need to start some momentum on this topic.

What are the most pressing issues for companies to address?

Chad: Business & government need to set the rules of the road. Businesses wonder if they “get credit” for their environmental efforts. If they don’t credit, they don’t want to risk anything. Creativity of U.S. business can respond, if the rules and incentives are in place. The most common complaints/issues are around water. We will feel it over the next 25 years. We need to take steps around water depletion. Our country has been slow to appreciate greenhouse gases. On the positive side, there is currently less debate about the science involved, and more debate about the right steps to take.

Bill: To build on what Chad said… We need to start from the “perfect state,” and then work backwards. The presumption is that there will be legislation of some kind, such as carbon-trading. The only constant = high-speed change. We need to avoid high-speed retrenchment. The sustainability impetus can drive the leadership position. Business might as well be ready.

Where are the biggest opportunities in terms of sustainable energy?

Bill: Think of the sun as the energy source, and combine it with the organic chemistry of earth. We can combine these two with water to produce “biology.” This is the big-picture perspective. Look at what Dupont is doing, changing its focus to biology and biotech. We happen to be focusing on China now. The government there is trying to set up a level playing field. Competition from Latin = “strive together.” Business and government should “compete” (i.e. strive together). We need to think of using energy and biological materials in super-intelligent ways.

What are some of the interesting things happening at DuPont?

Charles: DuPont is known for making materials like nylon, lycra, etc. from traditional petrochemical sources. The company started down the biological path 15 years ago. We can get the cost down, and functionality up by taking this biological approach. We are working on the development of the first plant ever where you can make everything out of biological inputs like corn — in Tennessee. The same fundamental building blocks are being used to make bio-fuels. Same research time and, in same cases, the same research labs. It’s the right step.

The big question — how do we take more and more products made out of oil, and find ways to make them out of renewable, biological materials (e.g. corn)?

Chad: It’s a case of market opportunity lining up with technology. There is a special job in DuPont known as the “opportunity broker,” who is in charge of finding these opportunities — so that it’s not a lot of luck in lining up technology and opportunities.

What’s the catalyst for these new initiatives?

Chad: $70 oil is the driver and the attention-getter. If there’s a concern about availability of oil, the issue becomes even more important. Oil will retreat, but not back down to $18.

How do you market these bio-products? In terms of price, function, or “green consumption”?

Charles: The value to the customer. In the area of carpets, for example, we have partnered with Mohawk to help us with this value proposition.

Are people willing to pay more for “green”?

Charles: People say they’re willing, but only if it’s very close in price. If the prices are very different, we notice that they are not as willing.

In the “green building” area, the Rouge plant in Dearborn for Ford Motor Company is an interesting example. How do you persuade Ford or Toyota to do something radical? Explain the idea behind the Rouge plant.

Bill: Rouge is a 1,000,000-square foot auto assembly plant to make the Ford F-150. It’s the largest green roof in the country - 10.5 acres of green habitat. 17 species of bird nesting. When I brought up this idea to Bill Ford, he knew that people within the company wouldn’t be excited about it - “I’m sure they didn’t give you much time. Take twice the amount of time they told you to take.” I opened up the discussion by saying, “This product is for the birds.” Ford had $48 million for the project. I told him this could be done for $13 million. That’s all the proof he needed. “Next!” We sold it purely based on the numbers.

Why isn’t there more grass growing on roofs now?

Bill: There is. Designers are now embracing green roofs. We just need really cheap, really lightweight technology. We got it from the East Germans, based on a plan for a roof to camouflage airplanes from NATO. Rouge started from Herman Miller. Herman Miller adapted the “cradle” approach. The Herman Miller chairs you see on stage have no PVC in them; all of them are dis-assemble-able. Chair = “technological nutrition of American creation.” We started with Herman Miller, then went to Ford. The real value is that Herman Miller gets its customer back. Here’s an example of what I mean: Shaw Carpet (a Berkshire Hathaway company) has a 1-800 number. They will come and collect your carpet. There’s a value proposition here: you need a new carpet, and they know it. If they pick it up for you, they can sell you a new carpet.

Dell will pick up your old PC for you. Why? They want to sell you the next PC, not so much because they are “more green.” If know that you will be responsible for product throughout its life, you will approach the design and building of it differently.

Charles: We must re-engineer the entire system, not just the “end of the pipe.” Example with Tyvek. We are re-designing systems so that they are fundamentally different and better.

Is the green-grass roof important, or does it just lead to nice PR and a cool ad?

Bill: The idea is surprisingly big. We are creating habitats. We are using photosynthesis and “solar income,” not oil. The Ford roof is stable. A traditional roof has “thermal shock.” We made it so that an air-conditioned auto plant is 70% cheaper than a similar non-air-conditioned plant. That’s a powerful idea.

If it’s that easy and that obvious - why has it been so hard for Ford to say that it’s different in how we build cars?

Bill: Here’s some historical perspective. I grew up in Japan. In 1947, could anyone have ever imagined that a giant Japanese auto plant might be located in a place like Mississippi? Of course not, Japan was still recovering from the war and was an enemy of the U.S. It was arrogance on our part - “there’s no way.” We are suffering from residual arrogance even today. The same thing in architecture keeps us from moving forward - arrogance. Creative people have to solve problems, experiment and have failures. When you innovate, you don’t slide from success to success. You lurch. When I first talked to Ford about the green roof, there was a lot of arrogance. On Day 1, one Ford designer told me, “I’m not talking to an eco-architect about eco-initiatives. Here at Ford, we tar over skylights.”

Sustainability and innovation are linked. DuPont exists since 1802. The company has a huge # of patents. What are the components that go into innovation? Are the best ideas from 25-year-old scientists, or from scientists with 25 years of experience?

Charles: We need to focus on building a “living system.” There’s a whole business unit here that is focused on “building living systems.” We model things as a living system. What Wal-mart has done with their new (energy-efficient) demonstration stores is very important. We try out 1,000 new products each year. A third of sales derive from products less than 5 years old. Annual sales = $30 billion. Need more than just ideas to get to innovation. Have to be flexible to get to the “interesting things.” 50% intended, 50% found along the way. Diversity is also important. We combine biologists and chemists together, for example. We look for all kinds of diversity. The real clear goal is innovation through all this diversity.

How do you balance innovation with quarterly financial needs?

Charles: With a broad breadth of products, you can have a balance. Blend short-term developments with long-term innovations.

Are most product ideas internally generated?

Charles: We partner with NGOs. They bring us problems and possible solutions. We’re very comfortable with joint ventures - we’re working with Samsung now. We have over 50 joint ventures now.

(To Bill) You have worked with a lot of different companies. As you pointed out, arrogance is a barrier. What are takeaways of best practices to create innovation?

Bill: I’m not a scientist, I’m an artist. You need leadership from the top as well as grassroots support. We’re doing the Google HQ now. There are seven types of people and how they react to innovation: (1) vigor and passion (2) thrilled to be engaged (3) OK, but want to do well (4) could care less (5) finding it really annoying (6) “Sixes” are the passive aggressives. Too much to think about. Try to deep six it from rear. We line up and shoot them out back (7) Active aggressive - will tell to face. These are most valuable - they will bring real business discipline to business case. You need a blend of 1,2,3 and 7. All the monkeys are in the middle. You need real argument and real debate.

9:05 am - 10:00 am: In this panel discussion, a group of four high-profile innovation executives discussed the role of the Chief Innovation Officer. William T. Edwards (AMD), Jack Lord (Humana), Cheryl Perkins (Kimberly-Clark, pictured at left) and Amy Radin (Citigroup) discussed how the role of the CIO is making a real contribution at the intersection of marketing, R&D and general management. They discussed which skills and experiences are important for the CIO, as well as they pitfalls and challenges facing the CIO.

The moderator for the event, Jane Stevenson of Heidrick & Struggles, led off with a broad perspective on the new CIO position. The CIO is the newest office in the C-suite. There is, as yet, no normative data on the position. The CIO is at the intersection of R&D, marketing, and product development. CIOs come from very different functional areas. Quote: “Insanity is defined as doing same thing over and over again, without new results.” Is the CIO position an antidote to this concept?

Please give a quick biographical sketch, explain your overall organizational structure, and explain how CIO fits into this mix. I’d like to get a sense of your passion for the role.

William Edwards: My career has been a random walk. The only common thread has been variety: a variety of company types, a variety of company sizes within the tech sector. I’ve had every title from Chief Strategy Officer to Chief Innovation Officer. The CIO is not just about technology, not just about marketing, not just about M&A. The key: how do you change the organization? I started off in engineering, went to BCG as a strategy consultant. Usually, the CIO is a “pseudo-Renaissance” person. The role usually evolves organically, it’s just now that we can describe it. We can describe it, but how do you do it? It changes. A lot of ambiguity, judgment, timing are all part of the job.

Amy Radin: My focus at Citi is innovation within the global consumer segment. I came to the role 12 months ago. My functional background is in marketing, especially credit cards and retail banking products. I am leading the integration of the Internet to impact the business model. I started off by building a small team within the cards unit. Then we moved it to a new product silo. The key challenge now is organic growth, not M&A-fueled growth. The real focus is on disruptive innovation - the types of things that are “new to market” and “new to Citi” in focus.

Cheryl Perkins: Kimberly-Clark has changed over time, from a paper goods company to a consumer products company, and now to a healthcare company. We need to innovate differently. Look at the brand equity, look at where we can extend it, look at current product & technology capabilities. Incremental innovation = line extensions. Advanced innovation has a strategy component to it. The only thing constant is change. Design is a big thing. There needs to be a constant ebb and flow of capabilities.

Jack Lord: I’m a forensic pathologist by training. Humana has morphed over the past 45 years, from a financial services company to a company that embraces both financial services + healthcare. I’ve had the title since 2001. I was originally hired as the chief medical officer. Humana is becoming a consumer company, we needed to adapt. so we eventually came up with the CIO title. Every year is different. It’s the Chinese New Year’s calendar (the year of the dog, rabbit, monkey). What year is it this year? There is a fundamental belief that healthcare has to change, due to the current disequilibrium between users and experts. How do we empower consumers? Our work had involved R&D. M&A. and ICE (integrated consumer experiences)

To achieve real innovation, does it happen by degree, or is it a complete breakthrough?

Humana: “Improvise” is a fancy word for “steal” and “copy.” The basic concept is to bring new ideas into healthcare. People are great shoppers, and so the question is: how do we bring this skill to healthcare? It’s very important to find talent: people who can handle ambiguity and are passionate for change.

Citi: Innovation can be small and sustaining and it can be breakthrough. Ask people about breakthroughs - they were not necessarily started or planned that way. Talent acquisition is key for us. Diversity is key. Trying things is key. If looking into the Great Beyond, there is no substitute for experimentation. Borrowing from other industries and sectors is a help - if it works here, it might work in financial services.

Do you need the support of the CEO?

Humana: I like to think of it as a “mind-meld” with the person responsible for the organization.

Cheryl: Not just the support of the CEO, but the support of top leadership. We need to make innovation a key concern at the top.

AMD: The support of the CEO is necessary, but not sufficient. You need to work 1-2 layers down. You need to include “outcasts” in any team. What is the interface between the core and the fringe? You need to make sure that the “antibodies” don’t kill the innovation. How do you know when the right time is? If you wait too long or go too early, there’s risk. This requires judgment and timing. Who should be the recipient and owner of the innovation? I sometimes play a “mother hen” role. I like to empower people to become heroes.

Citi: I spend a lot of time working on the proper engagement model. We need to think about how to integrate innovation projects back into the business. Most people really hate change. Need to engage constituencies internally.

Cheryl: The engagement model needs to be modeled for the maturity of the business.

Is there a specific methodology when it comes to innovation?

Cheryl: There’s an overall framework that’s tailored. One area within the company might use a different methodology than another area within the company. A good example: emerging markets vs. North America.

Humana: Having executed one thing well gives you a “passport” to do more. Gaining credibility allows you to build more structure into the process. There must be an “aspirational” part of the enterprise that is leading and driving change. It builds on aspirations, as well as relationships with leadership. What comes out of the innovation pipeline needs to become newsworthy to customers or business.

Is innovation a social art — or is it a science?

Cheryl: There are right/left brain relationships and interconnections. It’s not an either/or proposition, but an “AND” proposition. Innovation needs to be the glue within the organization.

Citi: Great innovation comes from understanding customer needs (real or anticipated) and then acting on them in a really amazing way. But it’s also about execution. It’s tough - there’s no norms around process, measurement when it comes to innovation.

Humana: The people part is very important. We need to create an environment where people have comfort. Must align beliefs. Must believe you can fly. Co-creation is a big part, both when it comes to people within the enterprise and customers outside the enterprise. Again, co-creation is key. We think in terms of a genie bottle: Allow the “best you” possible to come out of the bottle.

AMD: There are three parts to consider: (1) How do you install passion? (2) How do you put together teams that are not homogeneous (”I love it when people ask me: You’re putting those people together?”). If you can work it, this is very powerful (3) How do you impact organizational behavior and group dynamics. This is a huge component: people, how they interact, and the dynamics. I realize this is now very important - the organizational behavior aspect to it.

There are some consistent themes that I’m hearing. What are the highest-impact ingredients?

Amy: Having a vision and being willing to stick with it, but walking a fine line between being stubborn. You need to walk a tightrope of listening to internal constituents, but not letting antibodies get you away from your vision.

Cheryl: When it comes to innovation, think in terms of “glue” and influence & collaboration. Real value creation comes from the intersection of different areas. Real success comes when people take ownership of it. The inspiration piece is important. Talent is important. We look for people like OBGYNs, anthropologists and psychologists to give us new perspectives.

It sounds like a chess game. Which piece do you move - and when?

Humana: People leading the innovation effort need to be experts, they need to understand every aspect of the business. This gives them credibility. It’s all about situational management. Think of the example in football of the linebacker coming up to line, reading the eyes of the quarterback, and knowing how to react to the play. Approaches may be fundamentally different across various groups.

How do you spend the majority of your time?

Cheryl: There’s no recipe. Corporate budgeting is a big focus now. But after January 1, I will be looking back outside and looking at possible partnerships.

AMD: I would like to spend 80% of my time “outside.” Actually, I have two offices - one on “corporate row,” and one deep down in the trenches, almost like a cubicle. In the last month, I have been spending time on corporate row for budgeting. There’s no template, a lot of ad hoc.

Humana: Executing on your vision. Having something big “work” gives you instant credibility within the organization. As tempo picks up, you can go “outside.”

Citi: The focus has been internal, building processes and governance. External focus = benchmarking. How do you go about doing it? There’s no rulebook, no job description. As the role matures, a lot more emphasis will be placed on external relationships. You need to monitor what’s inside, before you can look outside.

How do you balance the need for having accountability for quarterly results vs. needing to get trials out into the marketplace?

Humana: Building a lot of external relationships, getting different types of talents onto the same team. There is an abundance of resources - “I will fire anyone who talks about resource constraints.” There needs to be respect for the parsimony of resources used that are needed to drive innovation.

Cheryl: You need a balanced portfolio, and you need a commitment for a certain amount of funds. Then you can think about how to deploy these funds. You manage the portfolio to get the right balance.

Citi: Money is not the issue. If you have less, you will make smarter decisions. Build small-scale, get in & out fast, and learn. Separate the winners and losers.

AMD: People like to blame quarterly earnings. Money is not the problem. Everyone wants more. People want more resources, more time, more money, more people. To reduce failure percentage. have to be upfront with your employees: it’s OK to fail. Then, you need to act on it. Failure has to be a learning experience, not something that puts you into purgatory. Otherwise, there will be risk aversion. You need a balanced portfolio - big/small, short-term/long-term, etc. Think about proving things with a minimum of resources. Risks taking should be acceptable - it will not kill a career.

Humana: In the past six years, we have increased our market capitalization by a factor of 10. Organic growth accounts for 50%. This is the cumulative effect of aspirations and beliefs. It’s almost like being a spiritual leader within the enterprise.

Cheryl: You need to think beyond products or services. You need business model innovation. Need to learn quick. Need new businesses for a boost in growth.

AMD: Having done it in several companies, I’ve learned that “facts are our friends” (not anecdotal evidence or assumptions). Language can kill you. For example, the term “learnings” means different things to different people. English language can be a hindrance. Need new terms to get all people on the same page. Multiple times, I’ve actually created glossaries. You have to use the right words. Sounds simple, but it is crucial.

Cheryl: Each company must define “innovation” for itself. You can use frameworks, glossaries, etc. You must be willing to evolve.

3:15 pm - 4:00 pm: A group of Internet luminaries - Bradley Horowitz (Yahoo!), Steve Berkowitz (Microsoft) and Kevin Rose (Digg, pictured at left) - discussed how to bring innovative new Internet offerings to the mass market. Moderated by Business 2.0 veterans Om Malik and Erick Schonfeld, the panel discussed the most innovative Internet trends, why they’re important, and how companies can leverage these new opportunities.

To lead off the discussion, Erick Schonfeld explained the Web 2.0 phenomenon in layman’s terms. It is no longer a “static” Web. Instead, Web 2.0 is a “dynamic” Web. Within Web 2.0, there are certain key themes. It’s all about people and the power of the users (e.g. Digg, Yahoo! Answers); about the evolution of the Webtop (= Desktop + Web); and the emergence of the Web as an important publishing medium (e.g. YouTube.com).

How do you bring the Next Net to the masses and how do you find the new opportunities?

Horowitz: Yahoo! touches half a billion people a month. The key is lowering the barrier to participation. In a world where everyone thinks they’re Steven Spielberg, how do you create valuable metrics? At Flickr (now a Yahoo! property), one attempt has been the concept of “interestingness.”

Berkowitz: “The audience is the key.” If want to sell advertising, you need to aggregate the audience. As a result, Microsoft is attempting to turn everything into platforms that can be syndicated. It’s about building a monetization platform and building an analytics platform. The goal is to build out a set of platforms. “IT is about community + content.”

Kevin Rose: There are only 17 people at Digg, all trying to do one thing really great. We’re taking a traditional news model and taking power out of the editor’s hands and giving it to the community.

Om Malik: The proliferation of broadband is critical. When bandwidth goes up, things change. One example is YouTube.com. Think of the cell phone as a computer in a pocket. 1.5 billion people have cell phones in world, but all of these do not have computers.

How do you spread out to the masses?

Kevin Rose: We’re trying to expand Digg from technology to other news areas. We actually receive more submissions now on non-tech stories rather than tech stories. It is part of a shift from a tech-only focus to things like sports & politics — two topics where “people get very fired up”.

How are leading-edge services bleeding into the mainstream?

Horowitz: All of the growth at Yahoo is organic. This is the right way. Yahoo is #1 or #2 in 17 different Internet categories. Every site will benefit from community. As a thought experiment, what would “social weather” look like? Maybe I’m in New York for this conference, and my friend is in California. When we’re talking about weather, there’s a social aspect to that.

Berkowitz: The Web has moved from technology to “technology enabling an experience.” We must think of Web 2.0 from a consumer perspective. It’s going to be about the desktop AND the Web, not EITHER/OR. We currently have 30 million Windows Live home pages.

Om Malik: There are now two generations that have grown up with the Internet. In 5 years, two generations will have experienced broadband.

Horowitz: My Yahoo has been extraordinarily successful. A user can put GigaOm right next to the Wall Street Journal. Yahoo recently purchased an online karaoke company (Bix). Yahoo must empower people with the power to make choices, such as by using a “Wisdom of crowds” technology. Maybe if you see a huge upsurge in Flickr uploads, you can see that it resulted from a U2 concert in a certain city.

As consumers become users, companies become “transparent.” How do you let go and make money?

Berkowitz: “We are the retail space of the mall.” Our brand (Microsoft) is the best location for people to go to. Trust & reliability are key factors.

Horowitz: The issue of transparency is key. In the Flickr community, when a new user from Philly enters the site, the user is told that three other Philly users are online. This is powerful. We have to take Web 2.0 to the extreme; Stewart Butterfield says reciprocity important, even if it might hurt your site in the short-term. As an example, consider the example of Flickr, which faced potential criticism over whether users should be allowed to “slurp” over Flickr photos to another rival site. The final solution was based on reciprocity: you can move the Flickr photos to another site, but only if that other site has a similar policy.

Who owns the data? If I can take my data anywhere, how do I make money as a company in the tech sector?

Horowitz: There is no need to create a walled garden to keep users in.

What is your competitive advantage then? What is the barrier to entry?

Kevin Rose: Right now, there are 300-400 clones of Digg. In order to deal with this reality, we are working on Digg Labs. Some features will fail, others won’t. If your site has new features, you can keep your users. (here, Rose demonstrates a cool Digg Swarm feature to the audience, which sees stories aggregating to each other like viruses in real-time).

(question from the audience) Community is a critical success factor. What was conscious about building the Digg site. If you build it, will they come? Or do you need to market it? How do you reach a critical mass?

Kevin Rose: We’ve never spent a dollar on marketing. It grew organically. One Webmaster noticed that, “Hey, I got a big spike in traffic from Digg.” That led others to the site, and it spread informally like that. Users become evangelists with skin in the game. What can you do to encourage that?

Day 1, 4:30-4:45 pm: Stanley Bing, a columnist for FORTUNE who writes the “While You Were Out” column that regularly appears on the last page of the magazine, offered a hilarious send-up of the business innovation trend, complete with PowerPoint slides and impeccable comic timing. As best as possible, I’ve tried to capture some of his presentation below, but as with any comedy, you really have to be there to understand the absurdity of a corned beef sandwich or Rubber Ducky graphic on a PowerPoint slide about innovation…

Consider the basic equation: Innovation = Constant Change = Pain. There are various sources of this pain — meetings where nothing gets done, the constant demand for ideas, the competition for mental shelf space, creativity (”this is a pain”), initiative, the obnoxious pressure for gratuitous change and… consultants. Innovative organizations are over-run by consultants, but consultants always come with body bags.

Innovation takes an emotional toll — anxiety/depression; feelings of inadequacy; triumph of shallow change agents; disrespect for process; idiotic disregard for tradition; promotion of wrong people; marginalization of true experts. “If don’t buy the flavor of the day, you’re a Luddite.” “If you don’t adopt the newest innovation, you’re all going to die!” According to the media, all innovation is going to kill the existing business model.

Take a look at the great innovators throughout history… Hannibal, Gutenberg, Galileo, George Washington (”invented guerilla warfare, which led to the Vietnam War”), Louis Pasteur (”invented germs”), Albert Einstein (”invented the theory of relativity, which led to the atomic bomb”), and Bill Gates.

What is the true value of innovation? Like any new toy, the value, both real and perceived, declines over time. With innovation, there are benefits as well as liabilities. The liabilities include creativity, dysfunction and stupidity, and change for change’s sake. There are alternatives to harmful and pointless innovation: pleasant stasis, gradual change, periodic invention of helpful things, knowing where everything is located all the time; a business plan that is comprehensible to everybody and… a corned beef sandwich.

The conclusion: Innovation has its place (i.e. “around San Francisco”). “Innovation leads to organizations run by children and idiotic crazies.” Any questions?

4:45 pm - 5:20 pm: In the final session of the day, Bradbury Anderson, Vice Chairman and CEO of Best Buy, shared his views and insights about innovation in a one-on-one interview with Geoffrey Colvin of FORTUNE.

Best Buy is under pressure from competitors like Wal-Mart and Dell, so how is it still thriving?

The key for Best Buy is finding the “latent data in the system” and using it for innovation. For example, Best Buy has been very successful in using a proprietary customer segmentation strategy that enables it to customize its stores to meet certain customer needs. According to Best Buy, there are five key customer segments that must be served (e.g. young males who like to hang out with their buddies; women with children). No store serves more than two customer segments.

Best Buy has also been receptive in listening to the suggestions of its front-line workers in the retail stores. (NOTE: See the Gary Hamel presentation for an earlier example, when one employee suggested a new, more accurate forecasting system). There is more worry at HQ than at the stores about innovating with the suggestions of these workers. The classical view has senior management as the “good sons who stayed home” and the innovators at the grassroots level as the “prodigal sons.” By listening to the grassroots, there is the risk of causing tension here. There is, at times, a “passive resistance” that gums up the works and slows down innovation.

At the end of the day, though, “retail is a place where you see the most innovation.” The status quo just doesn’t work

How is Best Buy leveraging the power of its front-line employees?

Best Buy has educated its front-line people about how the business works. The goal is to eliminate the “tremendous waste of human capital” that takes place at other companies. After all, a 57-year-old CEO has no idea what customers want, but young employees do

What are some examples of experimental retail concepts at Best Buy?

Some of the five customer segments mentioned above just don’t fit. Specifically, Best Buy has experimented with a “Studio D” concept store for older females intimidated by technology. It has also experimented with “Escape,” a very fashion-oriented, trend-oriented store for youth who love fashionable gadgets,

For the holiday season, Wal-Mart is cutting prices on consumer electronics across the board. Wal-Mart is also adopting a customer segmentation strategy that mirrors the strategy at Best Buy. Is that a threat?

Yes, that’s an aggressive move. If the name of the store is “Best Buy,” it means that we must actually be the “Best Buy.” In terms of the new customer segmentation strategy at Wal-Mart, “I wish they didn’t do it, but, yes, I was flattered when they did it.”

11:10 am - 12:00 pm: In a panel discussion moderated by Mark Johnson of Innosight, Anand Pillai (HCL Technologies), Mary Kay Haben (Kraft), Daniel Scheinman (Cisco) and Sophie Vandebroek (Xerox, pictured at left) discussed how to hardwire innovation into the fabric of an organization. As they explain, it’s important to create a high-performance culture that inspires people to feel safe to take risks. At the same time, however, this culture needs to enforce a certain amount of rigor and structure. The bottom line: any organization must find the appropriate balance between left-brain thinking and right-brain thinking.

Mark Johnson led off with a quote from Peter Drucker: “Some theories of the business no longer work and become obsolete.” As proof, consider that the average lifetime of a company in the S&P 500 was 55 years in 1950; every decade since then, this lifespan has shrunk. According to the Economist Intelligence Unit, between 2005 and 2010, business model innovation will become even more important. Companies can no longer stay in place and hope to be successful.

Johnson then set up the debate of “core” versus “disruptive” innovation. In the core business, the “knowledge-to-assumption basis” is very high. As a result, you can be very deliberate in your innovation approach. But how does an organization innovate when the knowledge-to-assumption ratio is very low? It usually requires fundamentally turning the company on its head. You may need new metrics, such as “return on learning investment,” in order to get at disruptive innovation.

Johnson followed with another quote: “The test of an intelligent person is being able to hold two opposing ideas in your head at the same time and still function…” How do we do both? That is, how do we do both “Core” innovation and “Disruptive” innovation? How do you balance right-brain and left-brain thinking, while still meeting financial targets? More importantly, how do you manage shareholder expectations when things don’t work immediately as planned?

Question #1 to the panel from Mark Johnson: What are the innovation questions that are front and center in your respective organizations?

Anand Pillai: How can we sustain innovation over a long period of time instead of going in spurts?

Sophie at Xerox: Innovation = creativity + entrepreneurship. There are five principles to create an innovative environment: create an inclusive & diverse team; dream with the customer; open up your innovation process (reach out to millions of people); don’t be afraid (from Chinese proverb: “in crisis, there’s opportunity”); have fun.

Dan Scheinman: Innovation comes from community. In his time at the company, Cisco has done 30 M&A transactions. Great quote: “The road to truth is lined with annoying bastards”. Three simple observations; (1) Innovation is occurring within communities (Cisco learned this when it did the Linksys deal); (2) Innovators are much more likely to be fired than promoted (3) Innovation is being democratized.

Mary Kay Haben: After 25 years at Kraft, she is now the SVP of Open Innovation. The company has set up a website for innovators: InnovateWithKraft.com. The company has also established processes for hunting for specific ideas and has been thinking about how to move trademarks and patents to the outside. Question: How do you think about win-win partnerships (”something in it for everyone”)?

Question #2 to the panel: How do you harness these ideas of innovation?

HCL Technologies: Change the mindset of ownership from customer ownership to employee ownership; “passion is a disease” (you can spread the disease, which is a good thing); make sure there are innovation champions coming out of the process.

Kraft: Can one person do both core innovation and disruptive innovation? It’s very difficult, because the typical manager spends all of his/her time on core innovation; you probably need to “separate out” the disruptors to let them work in a new environment.

Sophie at Xerox: There are three types of innovation: sustainable in the core; disruption of the core; and moving into entirely new markets.

Scheinman at Cisco: It takes lots of courage to let disruption come from outside. The problem at the end of the day: HR promotes politicians, not disruptors. Organizations have a tough time finding innovators. Companies need to “fail a lot.” Just remember to “fail forward.” Failing once doesn’t teach you anything - you must fail several times to really learn.

Mary Kay Haben at Kraft: One brief example: Kraft organizes luncheons when employees discuss something that fails. The company can use this learning to turn failure into a success.

Cisco: John Doerr and Andy Grove were “branded by failure” — that’s what made them. If you don’t fail in horrible, colossal ways, you will never be great. Informally, Cisco embraces failure. Need to come up to these people and say, “You’re great. What did you learn? Let’s go forward.”

Question #3 to the panel: How do you find these innovators?

Sophie at Xerox: It’s tough to find them. Xerox is experimenting with an incubation fund and even taking steps like building a presence in Second Life. The company organizes annual research conferences and attempts to reach out & empower teams.

Anand at HCL: Once you find them, give them a different career path that is linked to innovation specifically. These people should be given the charter to drive new businesses.

Question #4 for the panel: What is the impact of “Antibodies” on the innovation process and how can individuals fix the process so that companies can focus on adaptability and flexibility?

Anand Pillai of HCL: The company has tried several approaches to innovation, such as the creation of the Chief Innovation Officer position and the creation of innovation champions. There is a better, third way, though.

Kraft: There are huge opportunities for “innovation incentives.” Remember - “the bottleneck is at the top of the bottle.” The organization struggles with the issue of how to get employees and managers to put enough “skin in the game” so that will be able to get resources allocated efficiently. Incentives need to be at the top, too, so that the innovation processes can be put into place.

Question #5 for the panel: How do you manage Wall Street expectations, when every company is under pressure to produce quarterly results?

Cisco: Do the best job possible, and set expectations as low as possible. (laughter) In the venture business, 15% pays for everything. One big home run pays for everything. So, don’t be afraid to fail, don’t be afraid to risk. You must scream about your successes. In the case of Cisco, these successes are Scientific Atlanta and Linksys.

Question #6 to the panel: Is it better to create a bottoms-up or a top-down innovation process? How much can you do without the CEO being fully on board?

HCL Technologies: CEO must be on board. The innovation process can not be fully top-down. The CEO must lead by example, though.

Xerox: The CEO must be on board. In the case of Xerox and CEO Anne Mulcahy, there was a headcount reduction, but the company didn’t touch R&D. This shows the company’s commitment to R&D and innovation.

Cisco: You need the CEO on board before the troops will embrace innovation.

2:20 pm - 2:40 pm: Eric Jackson, the VP of Innovation and Research at consulting firm Gap International, described how organizations can create an environment for innovation. Most organizations do not have an innovative mindset that pervades their culture and need help in creating the right environment for innovation. As Jackson pointed out, there are five key organizational characteristics that can be adjusted to promote creativity and innovation.

You need to create a “culture” where innovation flourishes. A good analogy involves seeds and soil. You need to get good seeds, but you also need the soil in which they are planted. An Environment for Innovation = seeds + soil. An organization needs to have two parallel missions: (1) Creating Innovation (2) Creating an Environment for Innovation. It’s possible to create an environment for innovation. First ask yourself, though: Where does an environment for innovation reside? The answer: In the minds of the workforce.

How can we get people throughout the organization to:

(1) Think something other than what they already think?
(2) See what they don’t normally see?
(3) Expand their thinking to include new possibilities that do not yet exist?

There are Five Factors for creating an environment for innovation. You can think of the following five factors as special elements for the soil:

(1) PURPOSE (= mission, what the organization is about);

(2) OWNERSHIP (= what’s yours in the organization?);

(3) INTERDEPENDENCE (= contributing to other projects);

(4) AFFINITY (interpersonal relationships, connections between people);

(5) RISK (= celebrate your failures).

Less than 24 hours to go before the kick-off of the Fortune Innovation Forum in New York! It should be an exciting event filled with a long lineup of A-list speakers - as well as a stellar list of equally-distinguished participants, some of whom have already contributed original content to this blog. Anyway, I’ll be live-blogging the event from New York City’s Time Warner Center over the next two days, so if you have photos, blog entries or commentaries that you’d like to send my way, please feel free to contact me during the event. I’ll try to point out the most illuminating of these over the next two days. Then, after the event, I’ll try to provide a capsule analysis of the highlights of the Fortune Innovation Forum, along with photos from the event. See you there!

[image: A View from the Time Warner Center]

08:50 am - 10:05 am: Gary Hamel, a visiting professor at London Business School and author of Leading the Revolution, spoke on the topic of Continuous Management Innovation to kick-off the conference. According to Hamel, management innovation - more so than product innovation or technological innovation - is likely to result in long-term sources of competitive advantage. Unfortunately, most companies do not have the type of corporate DNA that makes them really good at innovation.

Hamel started off with a provocative question: What’s the future of management within your industry? In other words, what will be the types of cover stories on FORTUNE magazine in 2015? Most people don’t have compelling, broad visions of management. Have we reached the “End of Management,” much as Francis Fukuyama once argued that we have reached the “End of History”? Are we really only able to “tweak at the margin”? Is everything else just incremental innovation? NO!

The bottom line: We need to think more boldly about management. A good theoretical model is the “innovation stack” which consists of the following components:

(1) Industry architecture innovation (e.g. satellite radio, iPod platform)
(2) Business model innovation
(3) Product & service innovation

(4) Operational innovation.

As you move up the stack (from #4 to #1), the returns to innovation grow. It’s very hard to get any type of real lead advantage at the operational level or even the product level. Management innovation enables companies to cross fundamentally new performance thresholds. To think of “management,” organizations need to think in terms of “management practices” and “management processes.” Organizations need to re-think “how management gets done.”

The first great management innovation was the first R&D lab with Thomas Alva Edison at General Electric. The lab took advantage of advanced management practices to push R&D forward. The next great example was General Motors and Alfred Sloan. The basic idea was to “division-alize” the company into groups like operations, marketing, etc. During the 1980s, the real story at Toyota was radical management innovation. Toyota realized that it could leverage the problem-solving capabilities of its workers. It took Detroit nearly a generation to catch up. Also, consider the example of P&G building and managing the world’s great brands. The great innovation at VISA was to let banks compete and collaborate as part of a global organization; More recently, consider the example of open-source movement (e.g. LINUX) and creating complexity through a disparate army of global volunteers.

Innovation in management allows organizations to do fundamentally different things. Just like business, the military is also now investigating sources of management innovation. As the military recognizes, it is impossible to build a long-term advantage through purely technological innovation. Management is more important than weaponry.

The best management principles are usually “contrary” to the prevailing wisdom. For example, Microsoft is still scratching its head about the open-source movement. In one year, Japanese automaker Toyota accepts 540,000 new ideas from employees - something that Detroit automakers can’t match. Hamel recently reviewed business magazines (e.g. FORTUNE, Harvard Business Review) over past 75 years - there was almost nothing on management innovation.

STEP (1) Commit yourself to a worthy problem; It’s no longer the case that a rising tide lifts all boats; entire industries have fallen behind (music companies, major airlines, French vintners, US automakers, Broadcast TV, Phone companies, Wall Street, Pharmaceutical companies). Coca-Cola missed every major change; Microsoft missed every opportunity.

CHALLENGE #1: How do you create a company that is as nimble as change itself? The world is becoming more turbulent and challenging the resilience of companies; Look at the declining tenure of the average CEO. It takes a major event (like the major drop in revenue at IBM) to convince companies to change. Two kinds of stories of emerge — companies that changed at the margin and companies that embraced deep change. “Transformation is innovation that is tragically delayed.” According to Eric Schmidt at Google: For every Google, there are 100 companies that have failed. Google must create a “cauldron of creativity” that gets the companies “more at-bats” than its competitors. The problem with Google from Microsoft’s perspective - a new management model at Google. Among the innovations at Google - giving workers 10%-20% free time to work on new projects, keeping average team size extremely small (3-5 people each), lateral communication (separate Web sites, threaded communication), peer review of projects, continuous, real-time communication across company. Google is “building an evolutionary advantage.”

Intensifying competition is a problem. There are no longer barriers to entry (in the form of capital, regulatory requirements); low-cost competitors lurk around the corner; falling entry barriers; customer power is rising (zero search costs, falling transaction costs). The major impact of the Web has been the transfer of bargaining power to customers. In Britain, customers take advantage of YouSwitch.com - consumers can see side-by-side comparisons of switching costs.

CHALLENGE #2: How do you create a company capable of everywhere, all-the-time innovation? Hamel’s approach: go to the front lines and find out: HOW serious are you about innovation? Have you been trained as a business innovator? Where is innovation represented in your personal performance metrics? Where do you get experimental capital to advance a new idea? How do your company’s management processes reinforce innovation as a core value? One interesting example - WL Gore. (”the world’s most innovative company”) The management model matters. There are no titles at WL Gore and nobody is a boss of anybody else. No human being can give another human being a task at the company. Everything must be agreed to, bargained about. Employees get 10% time to work on interesting projects.

Companies must battle against knowledge leveling. Products and services are commoditized. Now it is knowledge that is being commoditized. Forces at work: offshoring, consultants (bringing knowledge from “fast” to “slow” competitors), industry consortia, strategic alliances, IT outsourcing.

CHALLENGE #3: How do you create more value per capital than any other company in your ecosystem? Apple iPod - “designed in California, made in China.” Where is the value created here - in California or in China?

(With apologies to Maslow’s Hierarchy) Gary Hamel’s hierarchy of human capabilities - obedience -> diligence -> intellect -> (all of these three are being commoditized, they can be purchased in India and China). Next… Initiative -> Creativity -> Passion. (passion = employees give 120% effort, Creativity = employees give 100% effort, Initiative = employees give 80% effort, Intellect = employees give 60% effort, Diligence = employees give 40% effort, Obedience = employees give 20% effort. The answer is clear - get people to be more creative and more passionate. How engaged are workers in the USA. According to a recent study, only 20% of employees are “highly engaged.” Does this mean that we need to invert our leadership model - in order to get more people engaged? Example: Whole Foods, Whole People, Whole Planet. Whole Foods goal: Build a company based on love, rather than fear; Build a company that is really a community — companies relies on small teams that are decentralized; executive compensation limited to 14x average employee to avoid disparities. In rest of corporate America, CEO pay is 300x average employee.

STEP (2) Deconstruct your management beliefs. Ask yourself the 10 things you believe about management. It takes a crisis to change a large company & it takes a new leader to effect this change — these are the two primary beliefs of workers. As Hamel points out, this sounds like a management plan for a place like Zimbabwe - have a coup and decapitate the leader. If power is concentrated at the top, then a relatively small number of people can hold the company “hostage” to its needs and demands. The problem is that management is often dealing with a mental model of the industry that is 5, 10 or even 15 years old. Example: Microsoft missed the boat on the Internet and on Internet Search.

Of these beliefs, how much is timeless truth? How much is true, but regrettable? How much is untrue, yet unchallenged (e.g. “it’s better to be a fast follower”)

STEP (3) Search for powerful new principles

What problem was management designed to solve? This is the historical model: efficiency and replication. Yet, this is not the problem that we are facing today: How do we make companies adaptable and innovative?

So… ask yourself: What is your management DNA? Five core principles of management DNA: standardization, specialization, hierarchy, planning & control, extrinsic rewards (e.g. financial compensation). Yet, all five of these are toxic to Adaptability and Innovation.

So what are the new principles to build the future of management? Must look at life itself for clues to evolution. Variety and Experimentation. Just as life constantly reproduces genetic material, companies must experiment with dozens of new ideas at any time. Evolution doesn’t have a CEO. “The next billion-dollar thing never starts off as a billion-dollar thing.” You can’t start off with something big. Intel learned this. Google has learned this. The NYSE has out-performed the performance of companies on the NYSE. Ironic, eh? The “market” is very good at re-allocating resources. In most companies, there is a monopsony (vs. monopoly) of new ideas, meaning that there is a single buyer of new ideas. You must go up the chain of command to get your idea heard. Angel investors in Silicon Valley vs. The Bill Gates VC firm. Which model would win? We can learn, too, from constitutional democracies (which absorb wave after wave of immigrants, etc.). Democracy compounds from the bottom, not from the top. Democracy was founded on the concept of activism - how to engage each member. Power is highly-distributed. Faith/religion is also very resilient. Faith is very enduring, faith gives meaning. We can also learn about resilience and innovation from cities. Dense connectivity and the ever-present chance of surprise within cities.

The key: HIGHLY RESILIENT SYSTEMS (Markets - flexibility, Life - variety, Cities - connectedness, Faith - meaning, Democracy - activism). We are dealing with 19th century management principles in a world of 21st century consumers.

STEP (4) Learn from positive deviants. We will learn not much by looking at “global leaders” and benchmarking. Need to be able to learn in new places. Innovation always begins at the fringe. (Sailors, bikers, Goth, and only then the middle Class: butterfly tattoo)

Examples of Deviants: (1) Grameen Bank in Bangladesh, which gives small loans to women; (2) Web and the democratization of the tools of creativity (throughout history, enormous amount of creativity has gone to the grave unnoticed). YouTube.com and video production. Technorati and blogs. Hackers, mash-ups. Yet, many companies do not use these tools of business innovation. Whirlpool is a good example of a company empowering its employees for innovation. (3) Markets for opinions (e.g. Intrade - can bet on prospects for peace in Middle East or on just about anything else); wisdom of crowds; the market doesn’t price a company’s stock only from input of 5-6 people!

Must be experimental. Do not have to be Immelt (GE) or Lafley (P&G) to be a big innovator. Example of Best Buy - it took only $100 for radical management innovation to take place. A single employee recognized that sales forecasts were not as good as they could be. Predictions only 90% accurate, at maximum. This single worker asked colleagues across Best Buy to predict sales - this was 99.9% accurate. Whose wisdom really matters here - that of management, or of the line worker?

Final thought: Management Innovation is just as important as product or technological innovation.

10:05 am - 10:40 am: In a thirty-minute on-stage interview, David Kirkpatrick of FORTUNE spoke with Robert Nardelli, the Chairman, CEO and President of Home Depot.

Home Depot has re-defined what a home improvement retailer is, thanks largely to the efforts of Nardelli, who started his career at GE. According to Nardelli, innovation has taken a number of different forms: investment in management training; investment in new technology (e.g. self check-out technology to reduce queue times by 30% and cordless scan guns); innovation in merchandise presentation and innovation in the merchandise itself.

At one point, Home Depot was opening a new every store every 48 hours; now, the company is opening a new store every 72 hours. However, the growth story has changed at the company. “What got us to $40 billion in revenue, won’t get us to $100 billion.” Home Depot quickly moved from $10 billion to $20 billion to $40 billion in annual revenue - but $100 billion is a whole new issue. It will require wide-scale innovation.

For years, the business model was: “Stack it high, watch it fly.” To be cynical: Get a customer lost in the store, and hope he/she spends more. Now, the push is for more customer-friendly stores: more reflective lighting, better flooring, better signage, better point-of-sale service.

The goal at Home Depot: 15% growth each year. At this rate. the company will double in size every five years. The focal point must be product innovation. A new program, called ORANGE WORKS, holds enormous potential. The idea is to stimulate a “quantum leap” in product innovation. Home Depot does not want to compete only on price, it wants to compete on value and differentiation.

Trivia: Home Depot sells 1 out of every 2 fans in America. Instead of selling the same fan it has always sold, the company went in for better design, and better energy-efficiency. The price point moves from $69 to $199, once you factor in better design. From turbine blades at GE to fan blades at Home Depot! The new fan blades are 30% more efficient as a result of contouring. As a result, the ceiling fan moves from a decorative piece to the centerpiece, a real topic of conversation.

As a result of distinctive, innovative merchandise - the average ticket has moved from $40 to $60. This gives the company “lift.” Twenty bucks may seem like small change, but factor that in over 1.3 billion transactions a year. That’s $20 billion or more.

Bob Nardelli: “If you’re going to be in retail, there’s no better place to be than home improvement.” The company is now in an environment where customers are “pulling”. In the previous environment, the company was “pushing” product. It’s always easier if customers “pull.”

There are several mega-trends that Home Depot is tracking:

(1) Outdoor living. Here, the company is moving from resin-based (plastic) products to higher-quality substances like teak, realizing that people want to have a quality outdoor living experience.

(2) Safety/security. The traditional model of home safety is the kitchen fire extinguisher (”4 seconds to find; 4 seconds to discharge”). The new model is aesthetically more pleasing. It’s all stainless steel, plus offers more functionality, can be operated by a single hand. It’s branded under “Home Hero” and is based on collaborative work with the New York Fire Department after 9/11.

(3) Aging in place. Here, the company is asking for input from AARP. Nobody likes to be reminded about age. A new product: Grip-Trim. Instead of metal grab-rails, this wood-like product is more aesthetically-pleasing and not “demeaning” like silver guard-rails. Think of an arm-chair on a toilet (fold it down when needed, fold it up when not needed). This is much better than metal guard-rails around the toilet.

(4) Eco-options

(5) Smart homes

“ORANGE WORKS will give a 2x bounce” - ORANGE WORKS is a new strategy for innovation at Home Depot. ORANGE WORKS enables Home Depot to control the innovation process. Instead of just being the first-mover for the first 18 months or so, Home Depot will have exclusive rights to inventions resulting from ORANGE WORKS.

Ideas can come from anywhere. Bob Nardelli: “Innovation and Technology have never let me down.” Whether it’s power engines at GE or home furnishings at Home Depot, innovation is critical.