Archive for June, 2011|Monthly archive page

Drive innovation by unlocking middle management

For many companies across a variety of industries, the rate of product innovation is a major driver of competitiveness and shareholder value.  When high levels of R&D spending and new innovation strategies do not turn into product wins, leaders will naturally question how innovation is spawned, cultivated and commercialized.  While idea generation and marketing are crucial, one important way to increasing innovation may lie with the R&D process itself.  New research on the drug industry from the consultancy Booz & Co. suggests that midlevel managers may hold the key to improving the odds of innovation success.

Despite dramatically rising R&D spending over the past decade, drug companies have little to show for it.    Moreover, increased pharma consolidation has saddled large firms with bloated R&D departments that suffer from cumbersome bureaucracies and diseconomies of scale.  A variety of process, structure and collaboration strategies have been tried to improve R&D productivity – the ratio of R&D inputs to product outputs.  Unfortunately, most of these initiatives have not met expectations.  Not surprisingly, one industry leader dubbed the past 10 years the “lost decade.”

Booz studied R&D productivity in 15 leading academic-based pharmaceutical firms.  The study concluded that breakthrough innovation and problem solving occurs when individual scientists connect their own subject matter expertise to similar work being undertaken by their peers. One example of this was when Albert Einstein credited the discovery of his theory of relativity to his discussions with his peer, the engineer Michele Besso. 

Typically, organizations attempt to generate rich scientific interactions by executive decree, through traditional networking activities or by changes in their management systems, such as new measurement tools or reward schemes. Unfortunately, these strategies often fail to meet expectations, for a variety of reasons.  For example, in large companies the R&D leaders who set priorities and control resources are often too far away from the action:  the most creative scientists; high potential opportunities in technology adjacencies and; the mechanisms that generate deep and regular collaboration. Furthermore, even the most cutting-edge innovation strategies will suffer if the people implementing and managing them can not (or do not) exert the right kind of leadership.  I’ve witnessed these subtle organizational barriers in such diverse industries as consumer goods, software, telecom, aerospace and healthcare.

According to Booze, firms should focus on elevating the performance of middle managers in order to trigger serendipity-based innovation.  This key group has the mandate and ability to identify, connect and manage the crucial interactions between scientists, product developers and customers.  Business leaders can optimize middle management performance through a variety of measures, such as:     

Enable and empower midlevel leaders

  • Remove overlapping roles and responsibilities to avoid duplication and political strife while ensuring key activities are being executed;
  • Ensure senior, middle and project managers have the appropriate authority and autonomy to avoid decision making paralysis;

Optimize information rights and collaboration

Enhance the function

Improving middle management productivity is a tall order for any organization, but especially for those in dynamic, knowledge-intensive sectors. To be successful, senior leaders will need to adopt an innovation approach that combines talent management, organizational design and cultural tweaking.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Social media powers retail banking

Despite a late start, retail banking is beginning to dip its toe into social media.  The promise of higher revenues, lower costs and better risk management are too compelling for managers to remain overly cautious.  How banks connect, serve and organize around their ‘connected customers’ on sites like Facebook, Twitter and YouTube will have important strategic and organizational implications.

Social media is having a major influence on many industries and firms.   And for good reason.  These new models of collaboration, community and communication are transformational in terms of impact and reach.  For perspective, Facebook boasts over 350M members worldwide.  And, over 21M people use Twitter to communicate and source news. 

Connected customers have different expectations around their banking experience.  In general, they want their online accounts to be more user-friendly, providing increased transparency and a single point of contact for all products and information.  Furthermore, these customers look for powerful recommendation engines to aid product selection as well as to provide real-time service.  Finally, they want the access and flexibility to bank when and how they want to without being tethered by technological or organizational limitations. 

Despite the potential, bankers have been hesitant to fully embrace these new opportunities due to valid concerns around customer privacy, reputational risk and security.  In addition, organizational barriers such as data silos, competing internal priorities and low IT flexibility continue to bedevil planning. Importantly, banks remain challenged to effectively convey key brand values like trust, appreciation and approachability within a digital environment, particularly one powered by social media.

How can managers use social media to better serve customers and improve business performance?

Deepen relationships

According to our research, up to 40% of connected customers go beyond the confines of their primary bank to visit external blogs, video channels and online forums.  Yet, most banks continue to utilize their web sites for simple transactions and one-way information distribution.  Connected customers want the physical branch experience mated to social media-delivered tools and collaboration.  This deeper, trust-based relationship would include richer, one-to-one or many-to-many interactions (generating rich market insights as well), customer referral engines, product comparisons and 3rd party financial information.

 
Some banks are already leveraging social media to deepen relationships.  Wells Fargo provides a variety of blogs on relevant topics such as personal finance and environmental sustainability as well as a specially designed blog for students.  WF also maintains corporate pages on Facebook and videos on YouTube, while allowing customers to contact them through Twitter.  

Interestingly, the Spanish bank BBVA has built a personal finance management tool that aggregates all account information and transactions in one easily accessible place.  Within the tool is a powerful analytics engine that proactively sends out customized promotional offers driven off a customer’s banking behavior and needs.

Reduce costs, risks

Through leveraging social media, marketers can significantly reduce expenses and uncertainties associated with customer acquisition, retention, customer service and new product launches.  By it’s very nature and ubiquity, social media is a highly efficient marketing and service channel that can lower communication costs, improve segment targeting and deliver customized offers.  For example, banks can use moderated blogs and internet forums to test market new products or inexpensively cross-sell other products.  At the same time, collaboration tools in Twitter and Facebook can be used to deliver faster, more expert customer support. Currently, Deutsche Bank and BBVA use video chat to connect financial advisers and customers without the need for a physical bank infrastructure. 

Even the right strategy and technology is insufficient to ensuring a winning social media plan.  Banks will need to make certain their marketing programs are consistent and integrated across all channels.  As well, powerful customer analytics are required to ensure effective segment targeting and program effectiveness.  Finally, like any new initiative all the key elements – product design, pricing and messaging – will have to be optimized for maximum customer appeal.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Great service does not always lead to customer loyalty

Conventional wisdom says that consistently providing service excellence will deliver high levels of retention.  According to new research from the Harvard Business School, this is not always the case.  Companies that offer high levels of customer satisfaction may still experience loyalty problems if competition offers even better service.  In fact, the research suggests that the customers you think are your most loyal are likely to be the first to jump ship when a challenger to your service superiority enters the market.

The researchers, Harvard Professors Dennis Campbell, Frances Frei and doctoral student Ryan Buell explored the link between service levels, customer loyalty, and competitive strategy in the U.S.banking sector. The 2002 to 2006 study analyzed data collected from a large U.S.domestic bank that competed in more than 20 states.

The study’s findings confirmed some earlier research on the impact of corporate and service strategy on retention.  In a nutshell, companies who generate high customer satisfaction scores remain at risk when competition raises the service stakes.  Conversely, the research indicates that firms rated low in service quality are relatively immune to premium competitive service offerings. 

The reasons for these counter-intuitive findings have a lot to do with the customer expectations established in part by the incumbent provider. The longer a firm has held a service advantage in a local market, the more sensitive are its customers to it service levels relative to those of competitors.  Given their higher expectations, service-driven customers are more willing to try other firms and products that trumpet and deliver service excellence.

Despite these conclusions, managers should be mindful of throwing out the service baby with the bath water when setting strategy.  The study found that even though high-end customers can be fickle, a company can still attract and retain customers in a variety of markets with a superior customer experience.  There are a number of ways to do this:

Avoid complacency

Firms can avoid resting on its service laurels by staying abreast of customer needs, focusing on continuous improvement initiatives and proactively investing to significantly enhance their customer experience.

Consider each product category separately

Customers will trade off price and service depending on the product they are seeking and the importance they attach to it.  In general, customers – in the long run – purchase the goods that represent their ideal combination of price and service. As such, delivering more service than is needed (or is willing to be paid for) would be sub-optimal.

Understand that service sensitivity varies by market…

According to the researchers, there are considerable differences in the type of customers you attract and retain between markets.  This variance suggests that managers should tailor their service and marketing strategies depending on local market conditions, competitive threats and customer needs.

…But be wary of too much customization

Local market service strategies come with considerable costs in terms of operational complexity and brand dilution.  Firms need to carefully weigh the pro and cons of service customization for each market.

Make it difficult to leave

If high service levels by itself won’t ensure loyalty maybe raising a customer’s switching cost or providing loyalty-based incentives would do the job.  For example, managers could offer discounts for long term contracts, extend warranty periods or launch high-value loyalty programs.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Making Open Innovation work: the case of 3M

Open Innovation is a proven paradigm for generating higher levels of innovation in products, processes and capabilities.  As opposed to the “closed” nature of many company’s R&D efforts, OI looks to open up a firm’s innovation process to outside ideas, collaboration and partners.  Because technical knowledge is widely distributed and dynamic, organizations will not be as innovative when they rely entirely on their own research.  Instead, managers should actively search out and buy or license technology, patents or inventions from other companies, individuals or research institutes. At the same time, technology not being used in a firm’s business can be offered outside the company.  OI is not only about big science projects.  One of the most common applications is problem solving for challenging technical issues. 

Many market leaders like GE, Cisco, Adobe and P&G have successfully used OI to improve their products, reduce R&D costs, solve difficult technical problems and accelerate time to market.  One of the best exploiters of OI is the manufacturer, 3M.

In 2010, 3M was voted the World’s third most innovative company in a survey by consultant Booz & Co.  How does 3M use a paradigm like OI to regularly create successful new products and capabilities?  Fred Palensky, 3M’s Chief Technology Officer, shared some insights in a recent edition of strategy+business magazine:

  • 3M stresses internal sharing of new innovations.  New technologies and capabilities that are developed in one R&D centre must be shared – cross pollinated – across product lines, markets and technology platforms;
  • Cross pollination is enabled by a cultural trait known as “dual citizenship.” Employees are responsible both to their market and department as well as the global 3M technical community. Key people are often moved around to different sectors, roles and geographies enabling them to share ideas and skills while bringing them a holistic view of the business. 
  • 3M encourages regular collaboration with outsiders. For example, 3M’s R&D labs are presently collaborating with universities and business partners in over 300 projects.   To better address user needs, 3M has developed 30 customer technical centers that bring users directly into the product development process.

Palensky attributes 3M’s innovation success to culture, not structure or process.  OI has been practiced for years and is part of the firm’s DNA. According to Palensky, OI works because “everyone has skin in the game.” In particular, employees must spend 15% of their time outside of their area of responsibility, collaborating, visiting customers or brainstorming.

In our experience helping firm’s germinate innovation, strategizing on OI is a lot easier than making it work.  The following are some of our best practices:

Cultural considerations are paramount

Within closed R&D organizations, the “not invented here” phenomena is very strong.  Overcoming this requires managers to regularly reinforce a culture of external collaboration, information sharing and trust and back it up with reward schemes.

Management systems must align

Key elements like structure, information rights, roles & responsibilities and measurement systems must be congruent with an external-facing, sharing-based philosophy.

Seek and ye shall find

Serendipity is most likely to occur when a range of technical problems is exposed to a large number of diverse participants. Sufficient resources, time and mandate must be designed into the OI process: innovation discovery & synthesis, partner identification and relationship management.

Governance is critical

OI programs must be carefully designed to protect intellectual property, designate decision rights and reward distribution in advance.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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