Wednesday, April 21, 2010

Strategic Planning Analogy #320: Efficient Nothingness

Once upon a time, there was a man named Joe. Joe was the CFO of a large retail company. Joe wanted to make his retail company the most cost efficient retailer that ever existed. He made it his life mission.

Joe discovered that two of his company’s biggest costs were buying/managing inventory (having stuff to sell) and servicing customers (helping people buy the stuff). Therefore Joe eliminated these costs. First, he stopped buying inventory. That saved a ton of money on inventory. No more costs to acquire it, distribute it, or stock it. He didn’t need to invest in shelves or displays, either. Eventually, the stores became completely empty.

Then Joe eliminated the door to the store. “I never saw a positive return on investment directly related to doors, so why have them,” said Joe. Without doors, customers could not enter the empty stores. Joe loved it, because now he did not have to spend any money serving those customers.

About the only cost left at the store was rent. Therefore, Joe negotiated with the landlord to have rent set as a percent of sales. Now that sales were $0, his rent would also be $0. At last, Joe had achieved his dream—the most efficient store.

A couple of big priorities in business these days are efficiency and innovation. Therefore, it is not surprising that there are many looking for efficiency in innovation.

Joe found a way to create efficiency in retailing. He got rid of all the management headaches and eliminated all the costs at the store. There was only one problem…he also eliminated every opportunity for that retailer to make a profit.

Efficiency is not the same thing as effectiveness. An efficient path to nowhere is not valuable. Getting to nothing faster and cheaper still leaves you with nothing. Joe had no costs, but also no profits.

The same is true when looking for efficiency in innovation. The ultimate goal is not efficiency…it is effectiveness. An efficient process for innovation that does not create great innovation is not very valuable.

The principle here is to not confuse process with outcome. Yes, a process is essential, but it is only useful to the extent it creates the proper outcome. If greater efficiency does not improve the output, it hasn’t helped much, if at all. Sometimes greater efficiency can even destroy output, as we saw in the story.

Profitable retailing requires two things: stuff to sell and a way to sell it. Eliminate those two (for the sake of efficiency) and retailing has no longer has reason for existing. Similarly, innovation requires two things: a great idea and a way to bring it to market. Destroying these, in the name of efficiency, makes the innovation process worthless.

On April 19, 2010, published an article about CFOs and efficiency. The article was reporting on a study conducted by The Boston Consulting Group regarding innovation. Not surprisingly, the study found that 85% of finance executives say innovation is an important part of their company’s strategy.

One of the most interesting parts of the study is that while 22% of finance executives say they are the biggest driving force for innovation at their company, only 3% of non-CFO’s see them that way.

Why the disconnect between CFOs and the rest of the executives? I believe it is due to confusion between process and outcome. CFOs are rarely responsible for the two key outcomes of innovation: Innovative Ideas and Bringing the Idea to Market. I doubt that most executives see the CFO as the “go-to” guy for a great innovative product idea or as the key player to bring a new, innovative product to market. How can you be the “diving force” of innovation if you do not do at least one of those two things?

Driving an empty semi-trailer does not make one a driving force (even if empty trailers get better fuel efficiency). The trailer needs to be full of innovation in order to make the trip worthwhile.

The CFO in the story was very proud of his efficiency actions, even though they destroyed the retailer’s profitability. In real life, CFOs need to make sure they do not fall into the same trap with regards to innovation.

Typical CFO innovation activity, like measuring the innovation process (from beginning to end) or helping control how much money flows to an innovation project, have their place—but this is not innovation! This is like the scorekeeper at an athletic event. Just because the person is keeping score accurately does not make them an athlete who is the driving force behind winning games.

I’ve read about executives taking pride in cutting lots of cost out of their innovation system. Well, nobody likes wasting money, but don’t get too proud of that fact if it is choking off future innovation.

True innovation, almost by definition, is going to be disruptive to the status quo. This applies not only to the status quo in the marketplace, but to the status quo of how things get done at your company. Most companies have a bias towards rejecting threats to the status quo. So if you really want innovation, focus on ways to fight this bias. That will be far more beneficial than efficiently monitoring a system biased against innovation.

The monitoring itself can be a detriment to innovation. Studies have shown that if a new innovative idea gets high visibility too quickly, it can choke it before it has a chance to take root. Non-monitored incubation time at the beginning can be a good thing.

Therefore, if you really want a great (rather than efficient) innovation process, I recommend the following.

1) Have access to innovative people
Great ideas usually come from those who are good at coming up with great ideas. You could have 100 people watch an apple fall from a tree, but it took a great thinker like Newton to find the notion of gravity in that observation. Even if these other people had better measurement tools when observing the apple, they still did not see the concept of gravity. Get access to people like Sir Isaac Newton, who find the innovation in common observation.

2) Have access to people comfortable with breaking the status quo
Not everyone is comfortable being the rebel who breaks the rules. Bringing innovation to market is hard enough by itself. Don’t make it even harder by putting it in the hands of non-rebels. I worked with a company once on an innovative new concept. The idea part worked great, but then it was handed over to a status-quo guy who was not a rebel by nature. The forces of the status quo took over and the innovation never saw the light of day.

It may not feel comfortable handing over the project to a rebel who likes breaking YOUR rules. You may not want them as your next door neighbor. But you do want them fighting your wars to get the innovative idea around the obstacles which can prevent success.

3) Empower the people in #1 and #2
Getting the right people is half the battle. The second half is empowering them so that they can actually do what they are good at. They need power. That power can take the form of freedom to think, access to funds, access to other resources in the company (knowledge, people, systems, etc.), the ability to make decisions, the ability to experiment (and sometimes fail).

There was an article in the June 2008 edition of the Harvard Business Review which looked at about 125,000 instances of strategy execution from over 1,000 companies. What they found was that the most successful implementation came from companies that got two things right: decision rights and information flow. In other words, if you want successful implementation

a) Give clear powers for decision-making and let everyone know who has them for each type of decision. Take the second-guessing, passing-the-buck, and bureaucratic red-tape out of the equation. (This provides the power to act without always looking over your shoulder and re-justifying everything all the time)

b) Let information (and the people who have it) flow freely throughout the organization so that everyone is acting based on the proper knowledge. Don’t horde knowledge; be generous with access. (This provides the power of access to the tools that will improve the intelligence of your actions).

These two factors were found to be far more important than getting the organizational chart right or getting the motivational incentives right.

4) Only after this, do you worry about measurements and efficiencies
We need policemen to catch the criminals, but we do not want to live under a police-state, where everyone is assumed guilty until proven otherwise. Innovation measurement and efficiency tools are similar. Use them to catch the really bad behavior (innovation criminals, or really bad concepts), but don’t create a police-state.

Great outcomes are more important than efficient processes. In fact, you can make a process so efficient that it chokes the outcomes. If you want great innovation, it is more important to have innovative thinkers and operational rebels with access and power than it is to have efficient measuring processes.

I am not advocating that it is okay to use ANY means to achieve your ends. Engaging in illegal/immoral/unethical behavior is not the right path to innovation. The banking industry came up with a lot of innovative financial tricks recently which helped bring down a global economy. Some feel that the means to that innovation fell into the illegal/immoral/unethical realm. Bad means will eventually come out and you will pay the price.


  1. Gerald, this story reminds of my female students. They walked in my office and started complaining about their exam results. The surprising part of the story is that the student who scored A started complaing by saying "how come I studied for two hours and got an A; in contrast my friend (who was accompanying her) studied for 20 hours and scored C+?" My reply was that I was not interested in the process of studying; rather in the outcome in the exam paper. No university professor would chase his students to check their studying effort or process and grade them accordingly.
    Your lovely post reminded me of this story, Gerald.

  2. I love your story of the students who lose sight of the true goal.

  3. Dear Gearald, I am glad you loved my comment. I am flattered even though the credit goes to you. It was the inspiration of your post that reminded me of the story.