Marina Gorbis's Blog, page 1568

Why Weight Watchers Can't Ignore the Call to Go "Free"

"Free" product competition strikes again and the latest casualty is Weight Watchers, whose CEO recently left the company in the midst of the onslaught of free weight loss and fitness applications. Finding a killer strategy under these circumstances can be an elusive quest, as Weight Watchers has clearly discovered. In response, most companies hunker down and do more of the same — throw in a price cut, tweak a product feature, launch more advertising — and hope for the best. Yet, they often ignore the one obvious strategy that could give them a serious break: Meeting "free" with "free."

Using "free" as a first response to free product competition makes sense because it immediately creates a direct rival to the free entrants' products. This pushes back the assault and, with the right customer targeting, can protect the more valuable segments of the business. At the very least, it can buy time while management sorts out the right comprehensive response. And it just may permanently stall the new entrant.

Too often, established companies fail to marshal their many advantages to mount effective responses of this type. Advantages typically include an established customer base, brand equity, market knowledge, and financial resources. Nevertheless, our look at the reactions of 34 incumbent firms to "free" entrants across 26 product markets showed that launching a "free" strategy is too often a last resort, if undertaken at all (See my article, "Competing Against Free," with co-authors Jeff Dyer and Nile Hatch, in the June 2011 issue of Harvard Business Review).

Think about a classic case. Digital encyclopedias such as Microsoft's Encarta and later, Wikipedia, virtually destroyed the market for the venerable print edition of the Encyclopedia Britannica. Had the owners of those assets reacted immediately with a free or deeply discounted version of their encyclopedia (in digital form) to the segments adopting the digital versions, they may have been able to buy time for a successful transition to a new business model. Instead, the company was finally sold at a deep discount under financial distress. One of the first acts of the new owner was to finally launch free digital versions of the encyclopedia.

Or consider another recent battle, the one that free Internet radio company Pandora waged against satellite radio company SiriusXM's online and mobile offerings. While Pandora's user base soared to nearly 100 million users, SiriusXM posted only a tepid, quasi-free response (a 30-day free Internet trial). But if in reaction to Pandora, SiriusXM would instead have launched a free, advertising-supported version of their content for online and mobile, they might have permanently delayed Pandora's IPO by denying them the ability to grow users. Pandora's future success is anything but assured, but they've managed to carve out significant share in a space that SiriusXM should have owned.

The story is the same with Weight Watchers. Facing competition from free smartphone applications such as MyFitnessPal and activity trackers like Fitbit, Weight Watchers might have launched a similar set of free offerings, making them accessible on-line and through smartphone apps, and used the presumed growth in the user base to drive more volume toward key revenue products and services. Instead, MyFitnessPal's user base has climbed to over 30 million users and Weight Watchers is scrambling.

Meanwhile, Quicken did the right thing when they bought Mint.com, a free threat to their personal finance software. They neutralized the threat and entered the market with "free" all in one move.

A big obstacle to launching a free product, of course, is the worry that it will hurt revenues at best, and possibly destroy the business at worst. Yet, entrants are making "free" work in the same markets that incumbents are in by up-selling, cross-selling, bundling, or advertising to earn revenue. If it's working for one company, it can work for another. By launching "free," established companies create a perimeter that can protect core revenue products from the onslaught of a free product competitor. Is it the right move for every company dealing with the threat? Of course not. But for many companies, and for Weight Watchers too, it may be the best chance to stake a claim on the unfolding future of their market.

To Move Ahead You Have to Know What to Leave Behind

Decisions are the most fundamental building blocks of successful change in our organizations, our teams, and our careers. The faster and more strategically we stack those blocks, the faster and more successfully we achieve change. Yet, change efforts often stall precisely because those decisions don't happen.

The question is why?



Avoid Changing By Addition. The Latin root of the word "decide" is caidere which means "to kill or to cut." (Think homicide, suicide, genocide.) Technically, deciding to do something new without killing something old is not a decision at all. It is merely an addition.

When an executive announces that her business will change to become a luxury service provider, technically it is not a decision until she also states that they will not provide low cost services to price-sensitive customers anymore.

When a sales manager declares that his strategy this quarter will require his salespeople to spend more time strengthening existing customer relationships, he has only made an addition until he also declares that they should spend less time on something else like hunting for new prospects.

Your palms might be sweating at the mere thought of telling your team to ignore some group of paying customers or to not spend time hunting for new business, even if you really want to see the change happen. Research has shown that making tradeoffs is so mentally exhausting that most people try to avoid them whenever possible. That's why a manager who is no stranger to long hours and hard work will escape the discomfort simply by piling on new change objectives without killing any of the current priorities.

But this change-by-addition approach can be a death blow.

Avoid Trickle-Down Tradeoffs. When team leaders fail to decide which old directions are going to be sacrificed in service of the new direction, the tradeoff doesn't magically disappear. It simply slides down the ladder. Instead of the team leader leaning into the discomfort and deciding once that the team is going to spend this quarter strengthening existing customer relationships, and not actively hunting for new prospects, each team member now has to decide for themselves whether to call on an existing customer or go find a new one every time they pick up the phone, open their email, or hop in the car.

Trickle-down tradeoffs create two major problems for change efforts. First, they undermine team alignment toward the change. It is highly unlikely that each team member will independently arrive at the same conclusion about what to do and what not to do. Part of the team will choose to move in one direction while the other part moves in another direction — the very definition of misaligned.

Second, psychologists have shown that making tradeoffs depletes our overall mental capacity and causes us to make poorer judgments in completely unrelated situations. This phenomenon is why otherwise healthy eaters end a long afternoon at the mall of choosing between stylish shoes and comfortable shoes by feasting on a hearty dinner of French fries and Cinnabons. They have no mental energy left to make good dieting decisions.

Similarly, when your team has to spend a long morning making tradeoffs it leads to long afternoons of either staring at the wall and web-surfing, or making poor choices for their customers, their workloads, and their budgets.

To Lead Is To Decide. Making change decisions is a cognitively and emotionally taxing activity that the average person will go to great lengths to avoid. While I have discovered some techniques for increasing the consistency and reliability of our decisions, there is no proven way of completely eliminating the discomfort of making tradeoffs. That might be a key element of what makes great leaders great. Great leaders and change agents have come in all shapes, sizes, colors, genders, and personality types.

But the one thing they all seem to have in common — the one thing that distinguishes them from ordinary people — is their willingness to decide when others could not.

Strategic Humor: Cartoons from the September 2013 Issue

Enjoy these cartoons from the September issue of HBR, and test your management wit in the HBR Cartoon Caption Contest at the bottom of this post. If we choose your caption as the winner, you will be featured in next month's magazine and win a free Harvard Business Review Press book.

"Ann, you can see by the number of books behind me that I know what I'm talking about."

P.C. Vey

Aaron Bacall

"Although our quarterly earnings dropped by twenty five percent, I feel compelled to point out that our Facebook likes have doubled."
Crowden Satz

"The kazoo isn't the only instrument I play."
P.C. Vey

"Smithers, your input is vital here — it's what we make fun of."

Teresa Burns Parkhurst

And congratulations to our July-August caption contest winner, Gretchen Newby of Chevy Chase, Maryland. Here's her winning caption:

"Owing to recent cutbacks, I can offer you only 2 1/3 wishes."

Cartoonist: Susan Camilleri Konar

NEW CAPTION CONTEST

Enter your own caption for this cartoon in the comments field below — you could be featured in next month's magazine and win a free book. To be considered for the prize, please submit your caption by Monday, August 12, 2013.

Cartoonist: Paula Pratt

If Your Leader Departs, Preserve the Company's Story First

We've all heard some version of this story: a brash and charismatic leader creates a runaway business success. The press can't get enough of him. And people can't seem to buy the products fast enough. The board and shareholders, enjoying the dizzying ride, are happy to look the other way if some of his antics sometimes seem... unconventional.

And then disaster strikes.

The leader dies, or gets ousted, or just gets bored, or gets old and decides to step back. After the initial shock, the company resolves to soldier on. A professional manager with an impressive resume is brought in. And the mantra is "our success is due to more than one person. This is a team effort."

And things actually go okay at first.

But as time passes, it becomes clear that something is wrong. You can feel the momentum waning. Key talent gets poached, and new products don't seem to have that old snap. The whispers begin that the company has lost its way. The press piles on. The share price plummets. The company stumbles, and is either gobbled up by a competitor or it just slowly drifts off to sleep and eventually disappears. I'm sure you have several recent examples of companies that are somewhere along this trajectory in your head right now.

If this scenario is really as common as it seems, why don't we know more about how to prevent it? After all, given the potential value to shareholders of solving a problem like this, you would think that corporate boards would think of almost nothing else.

But they are focused on the wrong thing. When looking for a replacement for a charismatic leader, they look for someone with an impressive résumé instead of someone who understands the power of story. You can survive losing a leader. But if the underlying story the leader was living gets lost, you are in deep trouble.

Charismatic leaders are charismatic because they are the living embodiment of an inspiring and universal human narrative. Branson and Kelleher are mavericks thumbing their noses at convention. Dorsey and Page are the boy geniuses inventing the future. The companies these innovators run make useful products and services to be sure. But they also make something even more important for their customers — they make meaning. These companies embody a story that everyday people can find inspiration in for their own daily lives. It is this deeper narrative that creates real loyalty and authentic evangelism. Preserving this narrative shouldn't be an afterthought; it should be a company's first priority.

Some companies succeed at this, some don't. And some, like Ford Motor Company, have managed to do both.

When Henry Ford developed the assembly line, he ushered in the era in which middle-class Americans, not just the wealthy, could buy an automobile. In an instant, Ford's narrative and America's — freedom, ingenuity, self-reliance and optimism — were bound tightly together. And this powerful narrative didn't die with Henry. In fact, it flourished under a series of leaders who understood the story and kept it alive with successive waves of innovation and improvement.

But starting in the 1990s, and through much of the 2000s, Ford strayed from its core narrative. The professional managers in charge weren't students of story. They were students of spreadsheets, and short-term profitability. This resulted in a series of distracting acquisitions, and products that were drab, uninspiring, and poorly made. For those with a desire to dig deeper, this book chapter is particularly illuminating.

Blame was placed on a number of things: high pension costs, changing tastes, and a weak economy, to name a few. But the last statistic in this article from the early 90s hints at a different story: American car buyers, embarrassed and disgusted at the state of Ford and other American car companies, were turning in droves to imported cars, particularly from Japan — cars built and sold by companies that were acting more American than American car companies. Ford worked to address the quality issues but this takes time, and time was ticking away. As the crisis deepened, Ford began to hemorrhage money, posting astonishing losses by the mid-00's. Some began to whisper about what had once seemed unthinkable: the end of the road for Ford.

It wasn't until 2006 that Bill Ford (Henry's great grandson) and the board of directors found a leader that understood the Ford narrative and knew how to act Ford-like again. Alan Mullaly, an aviation engineer from Boeing was a guy with the right stuff. He and his team set about building higher quality products (a baseline necessity), and, notably, taking public responsibility for missteps.

But the breakthrough moment came when Mulally and his team opted not to take any of the auto-bailout money that the U.S. government was offering. This excellent video summarizes the whole story. Ford under Mulally started to feel American again. Suddenly, the company was recognizable again to American consumers. It was like an old friend emerging from a coma. You could feel confidence in the company returning. And the revenue followed.

Mulally, undoubtedly a talented leader and manager, was the instrument of Ford's resurgence, for sure, but Ford's success is really about something deeper — a return to that central narrative that is so inspiring to millions of Americans: "Americans innovate. Americans take responsibility for their actions. Americans don't take handouts." It's not the person that inspires us, it's the narrative.

This core narrative is what allows us to apply that meaning to our own lives. It makes us proud (or embarrassed) to drive a Ford. That narrative doesn't have to be lost when the leader is gone, so long as the narrative is well understood, codified and preserved, and made actionable by people at every level of a company.

This codification takes focus and discipline. This is not about creating a mission statement by committee and carving it in a wall somewhere. It is about unearthing the authentic narrative that drove the company to its current success, and will also motivate the company's actions moving forward. And it is about working with people throughout the enterprise to apply the story to their area of specialization: product development, HR, sales, and, yes, marketing.

Companies that anticipate the need for a successor to a charismatic founder or leader should take the time to do this work in advance. Take the time to understand the narrative that the leader is living — what they really symbolize. Codify the narrative and share it with prospective candidates. Work with them to explore ways that the company can act upon the narrative in the future. Build a map of iconic first actions that the incoming leader will undertake that support and extend this narrative. By recruiting a leader who is truly committed to understanding and advancing this core narrative, companies will set themselves up for an easier transition and greater future success than those that do not.

Chewing Gum Helps You Sustain Vigilance in a Long Task

At the beginning of a 30-minute computer-based vigilance task, the average reaction time of participants who were chewing gum was about 70 milliseconds slower than that of non-chewers, but by the end, it was about 100 milliseconds faster, suggesting that chewing gum can stem a decline of vigilance over a long task, says a team led by Kate Morgan of Cardiff University in the UK. Gum chewing has been shown to increase blood flow to the frontal-temporal region of the brain.

Advertising's Big Data Dilemma

The proposed merger of ad industry giants Omnicom and Publicis, forming the world's largest advertising firm, promises to change the face of Madison Avenue forever.

So long, Don Draper. Hello, Hal 9000.



It's understandable why two giants of traditional advertising would pursue such a consolidation — to better do battle against Google and Facebook, relative newcomers to the ad game but already upending the entire business dynamic by using Big Data analytics to create highly targeted ads.



But an algorithm can never truly master the art of persuasion.



Traditionally, the heart of any successful advertising agency has always been its creative department. During the heyday of Madison Avenue, in the late 1950s and into the 1960s, a wave of young art directors and writers used wit, energy, and style to usher in the era referred to as the Creative Revolution.

Consider one of the classic examples from the period: in 1955, a minor brand of cigarette aimed at women smokers tapped the Leo Burnett agency to revamp its brand. Burnett and his team might well have turned to the data available at the time on female smokers. Instead, they recognized an opportunity to tell a new story, one that tapped into the cultural zeitgeist, a sense of confusion and loss about American masculinity. The advertising campaign featured a rugged cowboy on horseback, an uncompromised man struggling not with a demoralizing bureaucracy but with the forces of the natural world. He smoked a cigarette "designed for men that women like." The Marlboro Man was born.



This is the art of persuasion. Great marketing and advertising campaigns are exquisitely attuned, not to past behavior, nor to individualized needs and desires, but to the larger cultural zeitgeist. Great advertising speaks to our deepest fears and desires, it answers to our nascent yearnings. Perhaps most importantly, it acknowledges that the majority of our decisions are social: we do things within the context of our communities and we get swept away by the mood of our times. From Volkswagen's "Think Small" print ads to Apple's groundbreaking "1984" television commercial — directed by Oscar-award winner Ridley Scott — to Nike's "Just Do It" slogan, persuasive advertising campaigns have left an indelible mark on our public imagination.



Big Data analytics simply can't address us with this kind of depth, the full context of our lived reality. Take a recent example with Boston potholes. An app called Street Bump was designed to collect smartphone data from the city's drivers. The idea was to collect information about pothole repair at a low cost. Unfortunately, the app had difficulty distinguishing between bumps in the road, manholes, and potholes, and, as a result, the Office of New Urban Mechanics received an overwhelming amount of false positives. Even more problematic, by relying only on feedback from the app, Boston was not receiving any information from neighborhoods where the residents didn't own smartphones. This skewed the objectivity of the data received.



This kind of "skewing" is always happening with data. Despite what we are told, data is never objective, never free of bias. Kate Crawford, researcher at Microsoft, calls this problem "Big Data fundamentalism — the idea that with larger data sets, we get closer to objective truth." Aggregator sites, seemingly objective, are designed with built-in assumptions. They assume that the frequency of your clicks is the same as your level of interest or the degree to which the material "moves" you. But only our fellow humans will ever really understand what we care about. Our care — our deeply felt investment in the world — is always context dependent.



What is the role of Big Data in the future of advertising? Data analytics plays a part in informing a successful marketing strategy. According to the chief executive of one of the industry's major data marketing companies, advertisers can determine, in milliseconds, whether someone looking for a car is a "luxury" or "used car" buyer, and based on that information, they can determine whether to even display an ad or not. If your problem frame is simple and straightforward — "I want to reach a consumer who buys luxury cars in order to entice them to buy my luxury car — these types of targeted ads could do very well for you.



But what if your problem frame is not straightforward? What if, like Marlboro or Nike, you are trying to illicit a new emotional response from your consumers? What if, like Volkswagen, you feel that your product could thrive in an entirely different kind of market? What if, like Apple, you are trying to lead, not follow the decisions of your consumers?



To address a more complex problem frame, you need a more complex piece of technology. In these situations, an algorithmic business model based on Big Data analytics — if this, then that — is not going to provide you with the greater insight or perspective. It certainly isn't going to create a strategy or a campaign. For any of the above, you are going to need the human mind.

Responding When Your Expertise Is Challenged

Deepa Purushothaman, principal at Deloitte Consulting LLP, explains why it's important to understand how you're perceived. 

Move Beyond Enterprise IT to an API Strategy

For the vast majority of organizations, the IT function's focus has been inside the enterprise. They might allow some occasional website browsing by employees (though many sites are banned), and perhaps an inbound website or intranet for customers to enter an order. The focus, however, has been on protecting a walled garden of information transactions.

We think the emphasis should instead be external. Toward this end, we increasingly see sophisticated organizations competing in an "API economy" in which application programming interfaces are the primary approach to inter-organizational collaboration and information exchange. APIs, which are specifications or protocols for how to exchange information or request online services from an organization, are already booming in online businesses. As more companies realize that information is key to their product and service offerings, and that they need an ecosystem to provide those offerings, APIs will grow further in popularity. Many of today's ecosystem members are coders and app developers, and APIs are how they interface with a provider organization.

Netflix provides a great example of the role of APIs in a successful information-oriented business. Correlation is not causation, but there seems to be a close correlation between the growth of Netflix's stock price and the rise in the number of API calls it gets. The latter figure is close to 50 billion per month now (from about 2 billion three years ago), which is a powerful indicator of how open the company has become. Netflix makes movie and TV content available through a variety of devices, from iPhones to PlayStations to many "smart" TVs. The company also makes available other information content to many sites, including its catalog, recommendations, and ratings. All of this content makes its way to sites and devices outside of Netflix through the magic of APIs.

Other companies with strong API-based ecosystems include Salesforce.com, Facebook, Twitter, Google, and eBay. All have seen fantastic growth. They all needed API-based ecosystems because consumer demands are hard to predict and they use a wide range of devices. Opening up APIs lets organizations outsource innovation by allowing third-parties to experiment with their information assets and share revenue streams. They can also control usage when necessary by limiting access to partners they choose.

However, there are other sectors that have not yet opened themselves up to ecosystems with APIs. Health care IT, for example, is a largely closed industry; health records systems like EPIC and GE Healthcare IT are protected environments, largely closed to external ecosystems. One exception to this pattern is athenahealth, a Boston-based software-as-a-service health records system company that is trying to engender a health information ecosystem. Called "More Disruption Please," the movement has elicited a few development partners, but CEO Jonathan Bush would like to see more. RunKeeper, a tracker of fitness activities, has had somewhat greater success in building an ecosystem, but it's more about fitness data than health information.

Of course, an API strategy is not a binary decision — to use them or not to use them. There are public (open to everyone) and private (open only to certified developers or partners) APIs. There are free APIs (Google's, for the most part, although they charge under certain circumstances) and flat fee or revenue-sharing ones (Apple's, for the most part). There are information and services that you want to give your ecosystem access to, and those that you probably should keep to yourself. In short, your organization needs to debate the various elements of an API strategy, and then you need a set of governance mechanisms to enforce it.

So if your enterprise IT is only focused on the internal enterprise, you're already falling behind in the API economy. You need to start building an ecosystem, and APIs are the way to do it.

Reinventing Corporate IT
An HBR Insight Center





It's C-Suite Problem
Avoiding the Schizophrenic IT Organization
Platforms Are the New Foundation of Corporate IT
The Future of Corporate IT Looks a Lot Like Google

Jeff Bezos Brings His Low-Margin Ways to Newspapers

Way back in the first decade of the new millennium, when Craigslist seemed like the biggest threat facing newspapers, founder Craig Newmark paid visits to lots of media companies and media conferences. Yes, his site was definitely taking classified advertising away from papers, he would say. But newspapers were still spectacularly profitable, he'd add, and might be just fine if they weren't so intent on preserving those profit margins.

These days, it's an open question whether newspaper companies can maintain any kind of a profit margin at all. The New York Times seems to have turned the corner toward a modestly profitable future in which circulation revenue pays most of the bills. But The Washington Post, which billionaire Jeff Bezos agreed to buy yesterday, had been losing money since 2008.

So Newmark was definitely right that newspapers need to learn to accept much lower profit margins. But switching from a high-margin business to a low-margin one is really hard. High margins sound like a good thing, and they can be. They're evidence of what Warren Buffett — himself a long-time newspaper investor and major shareholder in the Washington Post Co. — dubbed a moat, which keeps competitors out and customers in. But when disruptive innovation threatens to breach a moat, high-margin companies usually find themselves especially ill-prepared to fight back.

That's partly because, as Clayton Christensen, Stephen Kaufman, and Willy Shih wrote in the 2008 HBR article "Innovation Killers," standard financial metrics make new investments look much less attractive than existing business lines. It's partly because managers of well-moated companies tend to turn complacent — or just don't need much skill to run such a business in the first place. (Buffett, in his latest Berkshire Hathaway shareholder letter, tells of a newspaper publisher who confessed, "I owe my exalted position in life to two great American institutions — nepotism and monopoly.") And finally, the owners or shareholders of high-margin businesses tend to see those margins as their due, and are thus unwilling to countenance lower-margin strategies. One of the things that bothered the newspaper industry most about Newmark, in fact, was that he didn't seem interested in making much of a profit at all.

The result of all this was that, while the decline of American newspapers (especially the big regional papers) was probably inevitable in the age of the Internet, the reluctance and at times inability of newspaper companies to transition from high-margin business models to low-margin ones has made things much worse. Layoffs and other cutbacks meant to preserve profit margins have only sped the decline in revenue, while bold new investments have been few. And for the most part the margins have declined anyway. Profits of more than 20% of revenue used to be common at newspaper companies. In 2012, the Pew Charitable Trusts said in its latest State of the News Media report, "the operating margin for Gannett was 9.9%, New York Times 5.4%, McClatchy 15.1%, E.W. Scripps 6.9% and A.H. Belo 8.1%. The Washington Post operated at a 9.2% loss."

Those are (apart from the Washington Post's loss, of course) still pretty healthy margins by the standards of many industries. Amazon.com, which Bezos founded in 1995 and has run ever since, has an operating margin of just 1.5%. In a time of great change and disruption, Bezos has turned low margins — usually a sign of competitive weakness — into a competitive advantage. And while not much else is clear about what his ownership of the Washington Post will be like, a willingness to countenance low margins will surely be part of it.

That's happening across the industry as papers change hands. Some of the buyers are still financial investors like Buffett, who figures that if he gets in at a low enough price and concentrates on small-market papers with a monopoly of local news, he'll make money even in a declining industry. But that's rare. Private equity firms, which have long focused on buying into declining industries, have apparently deemed the decline of newspapers too precipitous for their tastes. Most of today's new owners appear to be looking for something out of the investment beyond profit. Sometimes that's political influence and hometown boosterism, as with the local developer and hotelier who bought San Diego's daily paper. Sometimes it's the opportunity to try out a new business model, as at the Orange County Register in California. And sometimes it's just too early to tell, as with Bezos at the Post and John Henry's acquisition a few days ago of the Boston Globe. One thing that unites all of these acquirers, though, is that don't seem to have bought in expecting a 20% annual return on their investment. And that's progress, of a sort.

The Innovation Mindset in Action: 3M Corporation

In three recent blog posts we looked at the innovation mindset in individuals, profiling game changers Jerry Buss, Peter Jackson, and Shantha Ragunathan. These three innovators share common qualities, which we call the innovation mindset, a robust framework which can be applied at the micro (individual) as well as macro (organizational) levels: they see and act on opportunities, use "and" thinking to resolve tough dilemmas and break through compromises, and employ their resourcefulness to power through obstacles. Innovators maintain a laser focus on outcomes, avoid getting caught in the activity trap, and proactively "expand the pie" to make an impact. Regardless of where they start, innovators and innovative companies persist till they successfully change the game.

Take, for example, 3M Corporation. 3M was awarded the US government's highest award for innovation, the National Medal of Technology. Over a 20-year period, 3M's gross margin averaged 51% and the company's return on assets averaged 29%. 3M has consistently been highly ranked, often in the top 20, in Fortune magazine's annual survey of "America's Most Admired Corporations." How do they do it?

Innovative companies provide forums for employees to pursue opportunities.

One of 3M's strengths (PDF) is how it treats promising employees: give them opportunities, support them, and watch them learn and thrive. 3M provides a rich variety of centers and forums to create a pool of practical ideas that are then nurtured into opportunities and provided the necessary resources for success. Scientists go out into the field to observe customers to understand their pain points. Customers also visit Innovation Centers set up specifically for the purpose of exploring possibilities, solving problems, and generating product ideas. Scientists share knowledge and build relationships at the Technical Council, which meets periodically to discuss progress on technology projects, and the Technical Forum, an internal professional society where 3M scientists present papers— just two of 3M's fruitful forums.

Arthur Fry, a 3M employee, attended a Technical Council where Spencer Silver spoke about trying to develop a super-strong adhesive for use in building planes; instead, Silver accidentally created a weak adhesive that was a "solution without a problem." Fry, who sang in a church choir, had the niggling problem of losing the bookmark in his hymnbook. Fry noticed two important features of Silver's adhesive that made it suitable for bookmarks: the note was reusable, and it peeled away without leaving any residue. Fry applied for and received funding to develop a product based on Silver's accidental discovery. Thus was born the Post-it note.

Innovative companies create an environment that fosters the right tension with "and thinking."

One critical balance at 3M is between present AND future concerns. Quarterly results are important but should not be the sole focus; staying relevant is also important but cannot come at the cost of current performance. 3M has several mechanisms to sustain this "and thinking." Employing the Thirty Percent Rule, 30% of each division's revenues must come from products introduced in the last four years. This is tracked rigorously, and employee bonuses are based on successful achievement of this goal. 3M also uses "and thinking" in their three-tiered research structure. Each research area has a unique focus: Business Unit Laboratories focus on specific markets, with near-term products; Sector Laboratories, on applications with 3-to-10 year time horizons; and Corporate Laboratories, on basic research with a time horizon of as long as 20 years.

Innovative companies create systems, structures, and work environments to encourage resourcefulness and initiative.

Reporter Paul Lukas best expressed the resourcefulness of 3Mers: "A 3M customer identifies a problem, and a 3M engineer expresses confidence in being able to solve it. He bangs his head against the wall for years, facing repeated setbacks, until management finally tells him to stop wasting time and money. Undeterred, the engineer stumbles onto a solution and turns a dead end into a ringing success."

Richard Drew is just such an engineer. Running some Wetordry sandpaper tests at an auto-body shop to improve paint removal, he noticed that the painter was not able to mask one section of a two-tone car while painting the other. The tapes available at the time, back in the 1920s, either left a residue or reacted with the paint. Drew assured the painter that 3M could solve the problem and worked on it for two years, eventually receiving a memo from senior management instructing him to get back to work on the waterproof Wetordry sandpaper. Drew did, but he continued working on the tape project on his own time. The result: Scotch tape.

3M has a rich set of structures and systems to encourage resourcefulness:

Seed Capital: Inventors can request seed capital from their business unit managers; if their request is denied, they can seek funding from other business units. Inventors can also apply for corporate funding in the form of a Genesis Grant. (The Post-it was funded by a Genesis Grant.)
New Venture Formation: Product inventors must recruit their own teams, reaping the benefit of 3M's many networking forums as they seek the right people for the job at hand. The recruits have a chance to evaluate the inventor's track record before signing up. However, if the product fails, everyone is guaranteed their previous jobs.
Dual-career ladder:: Scientists can continue to move up the ladder without becoming managers. They have the same prestige, compensation, and perks as corporate management. As a result, 3M doesn't lose good scientists and engineers only to gain poor managers, a common problem in the manufacturing sector.

Innovative companies focus on the right set of outcomes. They tailor what is measured, monitored, and controlled to suit their focus, and strike the right balance between performance and innovation.

3M has created measurement and reward systems that tolerate mistakes and encourage success. 3M rewards successful innovators in a variety of ways: the Carlton Society, named after former company president Richard P. Carlton, honors top 3M scientists who develop innovative new products and contribute to the company's culture of innovation, and the Golden Step is a cash award. 3M also has a rich tradition of telling the
stories of famous failures that subsequently created breakthrough products— such as the weak adhesive that inspired Post-It notes— to ensure a culture that stays innovative and risks failure for unexpected rewards. Another
3M failure story from its early days, still repeated inside the company: 3M's initial business venture was to mine corundum, a material they planned to use to make grinding wheels. Instead, what they found was inferior abrasive. After much experimentation came their first breakthrough product: Wetordry sandpaper.

Innovative companies have strong mechanisms to ensure a continuing focus on expanding the pie, by effectively converting non-consumers into consumers, and providing richer solutions to current consumers. In the process they transform their industry, community, country, and sometimes even the world.

3M uses a research and development focus and a unique "15% rule" to ensure continuing effort on expanding the pie. 3M spends approximately 6% of sales on research and development (PDF), far more than a typical manufacturing company. This has resulted not only in new products but also the creation of new industries. David Powell, 3M's vice president of marketing, affirms R&D's importance: "Annual investment in R&D in good years— and bad— is a cornerstone of the company. The consistency in the bad years is particularly important."

William McKnight, who rose from his initial bookkeeping position to eventually become chairman of 3M's board, best explained the logic of the 15% rule: "Encourage experimental doodling. If you put fences around people, you get sheep. Give people the room they need." 3M engineers and scientists can spend up to 15% of their time pursuing projects of their own choice, free to look for unexpected, unscripted opportunities, for breakthrough innovations that have the potential to expand the pie. For example, some employees in the infection-prevention division used their "15% time" to pursue wirelessly connected electronic stethoscopes. The result: In 2012, 3M introduced the first electronic stethoscope with Bluetooth technology that allows doctors to listen to patients' heart and lung sounds as they go on rounds, seamlessly transferring the data to software programs for deeper analysis.

The innovation mindset is a game-changing asset for companies as well as individuals. Innovative companies like 3M use creative "and" thinking and resourcefulness to pursue promising opportunities and strategically meet outcomes, all the while "expanding the pie." Such organizations create the structure, systems, and culture to enable their people to think and do things differently in order to achieve extraordinary success.