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.

Michael Michalko, an internationally acclaimed creative thinking expert and the author of two bestselling books (Thinkertoys and Cracking Creativity), joins the Business Innovation Insider for a special Q&A on creativity and innovation. Below, he details 12 creative problem-solving techniques that can be deployed by just about any business organization. In addition, he shares a number of interesting stories of serendipity, creativity and innovation at FORTUNE 500 companies.

Q: What are some of the most effective creative-thinking techniques that any CEO can learn to implement?

Michael Michalko: Simply put, the key to increasing creativity in any organization is to make it start acting like a creative organization. Suppose you wanted to be an artist: You would begin behaving like an artist by painting every day. You may not become another Vincent Van Gogh, but you’ll become much more of an artist than someone who has never tried. Similarly, a CEO’s organization will become more creative if the organization starts acting the part. Following are some suggestions to encourage you and your colleagues to start becoming more creative today.

(1) ONE-A-DAY. Ask each person to try to improve one aspect of their job each day, focusing on the areas within their control. At the end of the day, people should meet and ask each other what they did differently and better than it was the day before.

(2) BRAINSTORMING BOARD. Put up a bulletin board in a central area and encourage people to use it to brainstorm ideas. Write a theme or problem on a colored card and place it in the center of the board. Provide pieces of white paper on which people can write their ideas to post on the board. Suppose you have difficulty closing a particular sale. You could describe the sale situation on a colored card, post it on the brainstorming board and ask people to post their ideas and suggestions.

(3) IDEA LOTTERY. Have a monthly “idea lottery,” using a roll of numbered tickets. Each time a person comes up with a creative idea, he or she receives a ticket. At the end of each month, share the ideas with the staff and then draw a number from a bowl. If the number on anyone’s ticket corresponds to the number drawn, he or she gets a prize. If no one wins, double the prize for the next month.

(4) CREATIVE CORNER. Provide a special area for people to engage in creative thinking. Stock the area with books, videos on creativity, as well as learning games and such toys as beanbags and modeling clay. You might even decorate the area with pictures of employees as infants to suggest the idea that we’re all born spontaneous and creative.

(5) LET’S DO LUNCH. Encourage weekly lunch-time meeting of three to five employees to engage in creative thinking. Ask meeting participants to read a book on creativity; each person can read a different chapter and share ways of applying creative thinking to the organization. Invite creative business people from the community to speak to the group. You could ask them for ideas on how to become more creative in your business.

(6) BRIGHT IDEAS NOTEBOOK. Present each person with a notebook. Call the notebook the “Bright Idea Notebook,” and ask everyone to write three ideas in the notebook every day for one month on how to improve your business. At the end of the month, collect all the notebooks and categorize the ideas for further discussion.

(7) STUPID IDEA WEEK. Make idea generating fun. Have a “Stupid Idea” week and stage a contest for the dumbest ideas. Post entries on a bulletin board and conduct an awards ceremony with a prize. You’ll enjoy the camaraderie and may find that the stupid ideas stimulate good ones.

(8) CREATIVITY BY COMMITTEE. Establish a “creative-idea” committee made up of volunteers. The goals of the committee should be to elicit, discuss, and implement employee’s ideas. The committee can record the number of ideas on a thermometer-type graph. The company should recognize and reward people according to the quantity and quality of their creative contributions.

(9) IDEA QUOTAS. Thomas Edison guaranteed productivity by giving himself and his assistants idea quotas. His own personal quota was one minor invention every 10 days and a major invention every six months. A way to guarantee idea production is to give each employee an idea quota of, say, five new ideas a week.

Increasing your idea production requires conscious effort. Suppose I asked you to spend three minutes thinking of alternative uses for the common brick. No doubt, you would come up with some, but my hunch is not very many. The average adult comes up with three to six ideas. However, if I asked you to list 40 uses for the brick as fast as you can, you would have quite a few in a short period of time.

A quota focused your energy in a competitive way that guaranteed fluency of thought. To meet the quota, you find yourself listing all the usual uses for a brick (build a wall, fireplace, outdoor BBQ, and so on) as well as listing everything that comes to mind (anchor, projectiles in riots, ballast, device to hold down newspaper, a tool for leveling dirt, material for sculptures, doorstop and so on) as we stretch our imagination to meet the quota. By causing us to exert effort, it allows us to generate more imaginative alternatives than we otherwise would.

(10) TICKET OF ADMISSION. Require everyone to bring one new idea as their ticket of admission to any group meeting. The idea should focus on some aspect of their job and how they can improve what they do.

(11) CHANGE “YES, BUT..” to “YES, AND..” Someone offers an idea in a meeting, and many of us are tempted to say “Yes, but…” To change this mind set, whenever someone says “Yes, but…” require the person to change “Yes, but…” to “Yes, and…” and continue where the last person left off.

(12) THREE WAYS. Employees shouldn’t waste time thinking of reasons why something can’t work or can’t be done. Instead, they should think about ways to make something work, and then get it done. Ask employees to think of three job-related goals, targets, or tasks they think can’t be accomplished. Then ask them to figure out three ways to accomplish each of them. Then do the same thing yourself.

Lastly, don’t forget to thank people for their ideas. Design your own “Thank You For Your Great Idea” cards and distribute them freely to contributors. Ask the CEO to sign each card with a personal message. Stock up on instant lottery cards and include one or two in each card to show your appreciation.

Q: When choosing from an array of creative-thinking techniques, how does one know which technique is appropriate for a certain type of problem?

Michael Michalko: There is an African story about a Nigerian God walking down a road wearing a top hat that is colored red on one side and blue on the other. On the left side of the road, the farmers saw a God wearing a blue hat; on the right side, the farmers saw a God wearing a red hat. When the farmers went to village in the evening, some said, “Did you see the God with the blue hat?” And the others said, “No, no, he had a red hat on.” And they got into a fight. The fight lasted for several years. The color of the hat became more important than the God.

It is the same with creative thinking techniques. You can produce ideas with both the left brain and right brain techniques. It does not matter what side of the road you are on. The God is still a God, no matter what the color of the hat. If a farmer had been standing in the center of the road and looked at the God straight on, he would have seen that the hat was both blue and red.

All my creative thinking techniques do the same thing. They change the way you think about the problem by giving you different ways to focus on the information and different ways to interpret what you’re focusing on. This enables you to look at the same information as everyone else and see something different.

As an example, suppose you’re the CEO of a power company and have a problem of power lines collapsing under the build-up of ice during winter storms. You could use the linear (left-brain) technique SCAMPER which is a check list of 100 idea-spurring questions organized around the brainstorming principles of Alex Osborn, a pioneer teacher of creativity. The principles are: Substitute something; Combine it with something else; Adapt something to it; Magnify or Modify it; Put it to some other use; Eliminate something; Reverse or Rearrange it.

You’ll discover ideas popping up almost involuntarily just by thinking about power lines and the principles of SCAMPER

Or you could use the intuitive (right brain) technique THOUGHT WALK. This is a technique where you ask each person to take a “thought walk” and come back with two or three objects (or a list of objects) that interested them during your walk. (For example, children skipping rope, a pebble, a bag of jelly beans, a drinking fountain, and so on.) Study the objects and list their characteristics and then build ideas around the characteristics by forcing associations between the characteristics and the your subject.

In real life, engineers in a NW power company faced this problem of ice on power lines. They looked for ways to safely and efficiently remove ice from power lines during ice storms. They decided to take a Thought Walk around the hotel. One of the engineers came back with a jar of honey he purchased in the gift shop. He suggested putting honey pots on top of each power pole. He said this would attract bears and the bears would climb the poles to get the honey. Their climbing would cause the poles to sway and the ice would vibrate off the wires. Working with the principle of vibration, they got the idea of bringing in helicopters to hover over the lines. Their hovering vibrated the ice off the power lines.

Q: What is your favorite example of a FORTUNE 500 company that used a creative problem-solving approach to develop a new product or service?

Michael Michalko:: DuPont developed and manufactured Nomex, a fire-resistant fiber. This material revolutionized thermal-related professions. The one problem with it was its tight structure which made it impervious to dye. Potential customers (it could be used in the interior of airplanes, professional racing and plant operations if it could be dyed) would not buy the material unless DuPont could manufacture a colored version.

A DuPont chemist working on the problem enjoyed looking for connections and associations between unrelated subjects. He recalled stories his grandfather used to tell him about building mine shafts to mine gold. He forced associations between a mine shaft and Nomex. To excavate minerals, miners dig a hole into the earth and use props to keep the hole from collapsing. Expanding on this thought, the chemist figured out a way to chemically prop open holes in Nomex as it is being manufactured so it could later be filled with dyes. This procedure made Nomex a huge commercial success.

Leonardo Da Vinci wrote how he “connected the unconnected” to get his creative inspiration in his notebooks. He discovered that the human brain cannot deliberately concentrate on two separate objects or ideas, no matter how dissimilar, without eventually forming a connection between them. He suggested that you will find inspiration for marvelous ideas if you look into the stains of walls, or ashes of a fire, or the shape of clouds or patterns in mud or in similar places. He would imagine seeing trees, battles, landscapes, figures with lively movements, etc., and then excite his mind by forcing connections between the subjects and events he imagined and his subject. Da Vinci would even sometimes throw a paint-filled sponge against the wall and contemplate the stains.

Da Vinci wondered about how sound traveled. One day he was thinking about sound while sitting on the rim of a well. He noticed a stone hit the water at the same moment that a bell went off in a nearby church tower. He noticed the stone caused circles until they spread and disappeared. By simultaneously concentrating on the circles in the water and the sound of the bell, he made the connection that led to his discovery that sound travels in waves.

It is not possible to think unpredictably by looking harder and longer in the same direction. When your attention is focused on a subject, a few patterns are highly activated in your brain and dominate your thinking. These patterns produce only predictable ideas no matter how hard you try. If, however, you change your focus and think about something that is not related, different, unusual patterns are activated. If one of these newer patterns relates to one of the first patterns, a connection will be made. This connection will lead to the discovery of an original idea or thought. This is what some people call “divine inspiration.”

This is what happened to NASA engineer James Crocker when the Hubble telescope failed and embarrassed NASA. In the shower of a German hotel room, NASA engineer James Crocker was contemplating the Hubble disaster while showering and looking at the shower head that could be extended to adjust to the user’s height. He made the connection between the shower head and the Hubble problem and invented the idea of placing corrective mirrors on automated arms that could reach inside the telescope and adjust to the correct position. His idea turned the Hubble from a disaster into a NASA triumph.

One company wanted to create a compact, standardized potato chip that could be packed tightly without crumbling. Until then, the only way to protect potato chips was to fill the bag with more air than product, which wasted millions in storage and shipping costs. They made a connection between raking leaves and potato chips. When you try to pack dry leaves into a plastic bag, you end up packing a lot of air. But when the leaves are wet, they are soft, malleable, and pack very tightly. This inspired their idea to wet and form dried potato flour in cylinders which became the popular snack — Pringles.

Another company brainstormed for a more effective way to display expiration dates on packages of perishable food. It was autumn and one of the participants noticed a tree with colored leaves. Leaves change color in the autumn. Forcing a connection between changing colors with expiration dates triggered the idea of “smart labels” that change color when the food is exposed to un-refrigerated temperatures for too long. The label would signal the consumer–even though a calendar expiration date might be months away. Our notion of expiration dates was changed by making a connection with something that was unrelated (autumn) which triggered a new thought pattern which led to a new idea.

In coordination with the upcoming FORTUNE Innovation Forum in New York City, the Business Innovation Insider is pleased to present an open letter to participants of the event from innovation and creativity consultancy Play.

*****

Hello.

Please allow me to introduce myself. I am Play.

I am a leading innovation and creativity consultancy that has the unique pleasure of being your host in the Innovator’s Studio at the FORTUNE Innovation Forum on Wednesday and Thursday this week.

You are coming to the Innovation Forum to learn and you won’t be disappointed.

I have created an experience that will challenge the way you think about creativity and innovation in the world of business. You will get to use all of your senses as you interact with the Studio, engage your peers, and quietly reflect on the role that you can play in driving innovation through your organization.

I won’t give away all the details of the Innovator’s Studio – you’ll have to see it in person – but I would like to tell you a little more about myself.

I am not your average company. My symbol is a red rubber ball because it represents a state of mind that is essential for innovation. I have twenty one professionals in Richmond, Virginia. Eight more in Mexico City. Dozens of partners around the globe. And thousands of professionals that have worked with me as clients. Ask around.

I could ask my professionals to tell you about themselves, but you will get to meet them all in the Innovator’s Studio. And besides, I am much bigger than the sum of my parts. The network that I have created is out to change the world, and I feel great about my progress so far. I can’t wait for you to join me.

I think that you would be hard-pressed to find a business leader that doesn’t think innovation is important. To me it is beyond important. It is a way of life. Unfortunately, there is a wide chasm between talking about innovation and creating a culture of innovation in an organization. In fact, I would warn you that you shouldn’t even start talking about innovation until you are prepared to follow through with action.

That’s where I come in. I believe in something that I call the 5M Model of Systemic Innovation:
Mood. Mindset. Mechanisms. Measurement. Momentum.

The Innovator’s Studio will give you an opportunity to creatively explore each “M” and develop ways to bring innovation to life in your organization.

There is so much that I want to explain to you. I could go on and on, but I think I would rather wait until we meet face to face. See you in a few days.

In the meantime, feel free to drop me questions or comments here, and check out my website: Look At More Stuff.