Friday, February 25, 2011

The Proverbial Funnel

The funnel metaphor is often used to describe the “flow” at the front end of innovation systems and stage-gate processes. The image of the funnel was perpetuated in the 1960s by the consulting firm Booz, Allen & Hamilton after its new product development study with Sam Johnson and Johnson Wax Company. Almost 50 years later Henry Chesbrough described what many of us had already sensed: that the era of “open innovation” had arrived. This should have led most of us to conclude that the funnel was no longer tenable. The realities of the dynamics of open innovation poked permanent holes in the notion of upstream “funnels” and downstream “pipelines.” Funnels and pipes with holes in them do not work. Yet the proverbial funnel persists. 

One reason for this persistence may be that symbols and mental models linger until better ones come along. In this case, a better one hasn’t come along yet. Another reason may be the associated notion that it takes a lot of ideas in the beginning to arrive at a good one in the end. That the flow of innovation starts with a wide diameter at one end of the funnel—taking in lots of ideas—and a narrow one at the opposite end where one works on only a few good ideas. A third reason that the funnel persists may be the over-riding concern among managers to conserve resources, which reinforces the need to narrow the number of ideas or concepts that can be worked on, given the reality of scarce resources.

The notions that one should select from a large set of options—the larger the set the better the selection—and the need to conserve resources may be worth re-examining. The first notion may be simply inaccurate and mistaken. The second one may be sound logic but overlooks how precious a resource a complete and compelling opportunity actually is.

The word “opportunity” comes from the Latin opportunus—a word associated with the mythological Portunus, the god of harbors (portus). According to the dictionary, Portunus governed local conditions (wind and tide) near the harbor. Imagine entering or leaving the harbor under sail, the normal mode of power at the time. Sailing under favorable wind and tide conditions and at the right time can prove to be the difference between success or ending up on the rocks.

Opportunities also derive much of their essence from timing and surrounding conditions. This is why the expression “window of opportunity” works for well. Like conditions in a harbor, the “window” can open or close depending upon which way the tide is running and how strong, and which way the wind is blowing and how strong. What makes an opportunity compelling, therefore, has to do with whether the time is right and the conditions are favorable. 

“The overwhelming majority of successful innovations exploit change.” This is how Peter Drucker described what makes for compelling opportunities. This is often overlooked, partly because innovators are usually regarded as the ones who make change. But this is only partially true. Innovating is first about diagnosis, then prognosis. It is about spotting and understanding opportunities that emerge from the flow of change. As such, innovators are change spotters before they become change makers. Successful innovators are among the first to spot changes. Their ability to diagnose and decipher the opportunities lurking within changes happening around them is their “core competence.”

Knowing what innovators are looking for—compelling and complete opportunities (see accompanying article Anatomy of an Opportunity)—and how to recognize them, is one thing. Knowing where to look for opportunities is another. Assuming that change is constant and happening all around us, how does the innovator know where to look for a compelling opportunity? How do they know what changes to attend to and which ones they can ignore?

Drucker gave us an answer to this question years ago. He pointed to seven sources of innovation and ranked them in order of their predictability and reliability. The first and most reliable source of innovation he listed was The Unexpected, whether an unexpected success or failure. The second he called The Incongruity—a difference between the way things are and the way things should be. Third on his list was what he called a Process Need. Customers have jobs they need to do and steps by which they accomplish those jobs, needs can and do arise within the context of the steps. Completing the top tier of Drucker’s list of the more reliable sources of innovation are Changes in Industry or Market Structure, particularly those changes that catch everyone off-guard, not unlike the unexpectedness of the first and most reliable on his list. 

What is worth noting about Drucker’s list is how immediate—present, available and accessible—each of the more reliable sources of innovation actually are. It is not about some clever and counterintuitive analysis, nor does it require a super creative brain. These sources of innovation are right under our noses; they are the signals and symptoms that present themselves, especially to the knowledgeable and experienced among us. 

Several years ago I conducted an experiment with a colleague at Hewlett-Packard, which was inspired by Drucker’s observation that the most reliable sources of innovation comes from the unexpected. Over the course of a couple of days at HP we asked several respected and veteran engineers to think back over the course of their work in the past year. We asked them if they could list a circumstance that piqued their curiosity and wonder—anything unexpected, surprising, curious or unexplained—which, if they were given the time and space, they would want to explore. In every instance, each of these engineers came up with at least two or three items. It could be that compelling opportunities are sitting there, waiting for us to discover them. All it may take, at least initially, is a little time and space, which may be well worth it, given that a compelling opportunity may be our most precious and scarce resource.

Instead of filling the funnel with lots of ideas, perhaps it makes more sense to spend less of our time and energy generating ideas, and more of our time and energy diagnosing the present manifestations of where the unexpected is showing up, and dig deeper there to understand the needs we find underneath.

Anatomy of An Opportunity
What makes for an opportunity? The answer depends on how we understand the anatomy and physiology of what an opportunity is.

An opportunity is a value proposition. It is propositional because there may be evidence to suggest there is opportunity, but it is as yet unproven. Every opportunity remains a proposition until it is transformed and embodied into an innovation, which is then tested in the field under actual conditions. When it becomes an innovation is is no longer an opportunity.

The anatomy of a complete opportunity has four essential elements: there is a customer need and a means to satisfy that need, it provides value to the customer and has profit potential. The need and the means to satisfy it are arguably the two most important variables in the anatomy.

The third element­—a proposed value that ranks relatively high in the hierarchy of what is important to customers—is always relative. Knowing where it ranks is important in understanding whether there is opportunity there or not. The fourth element is profit potential. Satisfying the need must cost substantially less to deliver than what the one is willing to pay to have his need satisfied.

Any potential entrepreneurial opportunity is incomplete until all four parts are present and cohere: a need, a way to satisfy it, a relative value, and a way to produce and deliver the satisfaction at a cost substantially less than the customer is willing to pay. Having a complete opportunity, however, doesn't necessarily mean you have a compelling one. ❑

These articles were originally published in Innovating Perspectives in March 2010. For this and other back issues of our newsletter, please visit our website at or call (415) 460-1313.

Monday, February 21, 2011

Options at the Gate

Using a stage-gate framework has become a basic method for new product development efforts. Staging investments based upon progressive results makes sense especially when the risk of failure is greater in developing new products than in improving current ones. Stages acknowledge the learning curve an idea must traverse as it develops into a concept, then into a working model, and then into a standard product made in a reliable and reproducible way. Putting up formal gates between these stages enforces a discipline on the new product development process and provides explicit places where efforts are reviewed and given a Go or No-Go decision. Clear expectations and well-chosen gatekeepers at each gate prevent flawed projects from progressing further than warranted; however, there are no guarantees.

While stage-gate frameworks are necessary, they are not sufficient. Designations of stages and gates represent only one component of what is required for a more complete and sustainable innovation system. Other major components include portfolio diversification and management, a consistent options creation engine, and a “learning commons.”

These three components, along with the application of stage-gate disciplines, can make a company’s innovation efforts more systematic and sustainable. When approached and defined as a complete system, a company has a much better chance to avoid expensive and wasteful re-learning and can steadily improve its innovation capability–perhaps the only true sustainable competitive advantage. When the innovation system is sponsored and governed explicitly a company can improve its financial returns and recover its entrepreneurial roots.


When initiating stage-gate processes, many discover that while they have improved both the discipline of project teams and their own spending confidence on a project-by-project basis, they have done little to diversify the risks. Stage-gate works well when applied to defined projects with explicit milestones and stage-limited budgets. However, stage-gate management is not portfolio management. Having a deliberately diversified array of projects spreads the risk and can enhance learning across projects. While a company may have more projects in the earlier stages and fewer in the later stages, hedging risk by spreading the bets is simply a wise move.

In addition, as is now becoming increasingly recognized, it pays in the long run to allow some room for learning to occur from the adaptation and refinement of projects as they develop. If portfolios are too full and staff is spread too thinly across too many projects execution (or filling orders) trumps development and learning suffers. This increases the chances of wasteful re-learning. It also makes sense to engage some of the same gatekeepers in portfolio management and reviews. This overlap enables improved discernment for both the gatekeepers and the portfolio-keepers.

Options creation

Another vital component of the innovation system is having a consistent effort at the “front end.” Stage-gate processes often get extended into the front end, seducing many into thinking that the front end is simply another stage. In fact the front end of innovation is less a stage and more a field. Michael Kennedy demonstrated in his book, Product Development for the Lean Enterprise, that this front end field is where more gains can be made at less cost and in less time than in the later stages of the development process. Kennedy says, “The cost of examining an alternative significantly increases over the life of the project because of the broad impact of changes in the later stages of design. In a set-based approach, the alternatives are explored early in the process when costs are less. The result is more innovation in less time and at much less cost.” Without viable “ready” options at the front end, companies often keep investing in projects that are no longer compelling.

Over the past 30 years of consulting with companies about their innovation systems we have seen companies repeatedly cut, slow and even stop their front end efforts. Often they say they have too much to digest in their pipeline. Then 18 to 24 months later, they look ahead only to realize they don’t have a sufficient set of ready alternatives for what’s next. Gearing up again inevitably requires some time and these delays in turn often cause over-compensating “fast track” efforts in an attempt to catch-up. In the process, the new options created end up being incomplete and un-compelling.

Companies that have learned this lesson keep their front-end efforts sustained even in difficult economic climates. Instead of shutting down these efforts when resources are severely constrained, these companies become more deliberate in aiming their front-end options creation engines on well-considered targets. Hewlett-Packard calls these Markets of Interest. At Kimberly-Clark we called them target arenas. Whatever these target areas are called, when company leaders are able to effectively communicate to their employees where innovations are needed and why, we have consistently seen responses from the innovator community that are vigorous and robust.

Learning Commons

The stage-gate process is an indispensable tool for specific projects, but it doesn’t provide for an often-neglected component of a complete innovation management system. That is a learning commons. A learning commons is enabled by knowledge management software and systems to provide for the sharing of explicit knowledge. There are many promising IT options, but IT is only half of the solution. The other half is the human system, because learning occurs in and through people, or more precisely, in communities of practice. As Ikujiro Nonaka and Hirotaka Takeuchi observed in book, The Knowledge Creating Company, it’s not what a company knows that makes it successful. Rather, it is the company’s ability to create new knowledge, and this can only be done if it is constantly up-to-date on what it already knows! 

Collaborative project post-mortems and debriefings are but two routines which when conducted regularly can add both new process and content knowledge to a company’s learning commons. When fresh first-hand experience is spoken, heard and captured, an organization can share it more widely with others in the organization. In the sharing, additional learning is stimulated, which can be reapplied in a succeeding context. Here is where information and knowledge often become easily confused. While information can be shared easily and efficiently, knowledge is not so easily shared. Unlike data and information which can be received, knowledge must be understood if is to be received. As the old adage goes, “tell me and I will forget, show me and I may remember, involve me and I will understand.” Experience, community and context are all a part of gaining understanding.

When the oral tradition gets translated into the written form and made distributable, only half the job is done. The other half is translating what is written into the understanding of people without whom nothing gets done. This second translation requires dialogue, collaboration, face-to-face time and presence, and patience.

Gate 0

When innovation efforts are viewed as a system, each part making an essential contribution to other parts and all parts contributing to the whole, it becomes clear that in the stage-gate process, Gate 0 is a place in the system that can have the greatest influence on the entire system. Creating a fresh batch of Gate 0 ready options for gatekeepers to have in mind at each gate makes every GO decision a stronger commitment. The decision was made with alternatives in mind. When these options are informed with deliberate targets and understanding from the learning commons, leaders can be confident that the projects being advanced in their pipelines are the right choices.

A next step in the evolution of effective innovation management is to view the new product development process as not only a process, but also as a system. Viewing it as system is especially helpful when looking at the course of concurrent and successive efforts in development. In his book, Management: Tasks, Responsibilities, Practices, Peter Drucker said “a business enterprise has two, and only two, basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.” Investing in a management system that supports innovating is a wise and lasting investment; perhaps one of the best investments a company can make in the long run.

This article was originally published in Innovating Perspectives in May 2010. For this and other back issues of our newsletter, please visit our website at or call (415) 387-1270.

Wednesday, February 9, 2011

Drifting Dreams?

“To accomplish great things, we must not only act, but also dream;
not only plan, but also believe.”
— Anatole France
(Winner of the 1921 Nobel Prize in Literature)

Back in August I was listening to a National Public Radio talk show debating the merits of owning versus renting a house. It was a standard call-in format with Alyssa Katz, author of the book, Our Lot: How Real Estate Came to Own Us. What she said regarding the “American Dream” in the aftermath of the housing and mortgage debacle has stuck with me.

According to Katz, most people now equate the American Dream with owning their own home. However, the American Dream originally meant having meaningful employment. Meaningful employment connotes a means through which one can both provide for one’s family and make a contribution to the needs of the broader community and society. Just as individuals, and perhaps whole societies, can unwittingly allow their dreams to drift, so too can companies.

When a company first starts out it is often fueled by a cause. The cause frequently either corrects an incongruity between the way things are and the way things should be or it fills a process need. In his classic book Innovation and Entrepreneurship, Peter Drucker cites incongruities and process needs as the second and third most reliable sources of innovation, respectively. (The first is the unexpected success or failure.)

Dreams of entrepreneurial-stage companies are inseparable from the challenges and intrinsic satisfactions of “advancing the cause.” While extrinsic rewards may be enticing and necessary, they are seldom sufficient to meet the demands of a start up effort. An underlying passion fueled by the higher octane of addressing a cause is typically necessary to stir and sustain the commitment of innovators. Yet often when the effort has achieved some success and finds itself growing, the rich octane of recognition and success can make the original dream drift away from the underlying “cause.”

And as with all causes—vocational or phenomenological—there are effects, some of which are unintended. One of these derives from the effect of a company’s success more than its cause. When a company begins to defend its success more than pursue its cause it has probably crossed a line, often unwittingly. The vocational baton unconsciously passes to another—a David not a Goliath. Innovations from baton-less companies may be new and different, but they are no longer compelling, at least in the context of what society needs. Wants, perhaps, but not needs.

Is the drift our society has made with the American Dream quietly and subtly going on with the dreams and underlying “causes” of many companies? While much innovation may be new and different, how compelling is it? Are attempts at so-called “cause marketing” but symptoms of this drift? Driven to defend their “share,” a company’s home (or “core”) can become empty and confused with the house of its success rather than the foundation of its cause.

When an American’s dream attaches itself to a house, with or without a mortgage, some degree of spirit dissolves. So also with a company: when its collective dream morphs in the mirror of itself or its peers, something is lost: a something that just may be its entrepreneurial vocation.

As innovators, are we allowing our dreams to drift? Are we more comfortable staying close to “home” with the momentum of success than getting out into the weather of cause and effect—vocational and phenomenological?

Here is to a new year’s resolution for innovators: look for the underlying cause (and effects) that might just drive the creation of new value, look not simply for what is wanted but for what is needed.

This article was originally published in Innovating Perspectives in January 2011. For this and other back issues of our newsletter, please visit