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Listen closely. There's a new conversation under way across America that may well change your future. If you work for Procter & Gamble Co. (PG) or General Electric Co. (GE), you already know what's going on. If you don't, you might want to stop what you're doing and consider this:
The Knowledge Economy as we know it is being eclipsed by something new -- call it the Creativity Economy. Even as policymakers and pundits wring their hands over the outsourcing of engineering, software writing, accounting, and myriad other high-tech, high-end service jobs -- not to mention the move of manufacturing to Asia -- U.S. companies are evolving to the next level of economic activity.
What was once central to corporations -- price, quality, and much of the left-brain, digitized analytical work associated with knowledge -- is fast being shipped off to lower-paid, highly trained Chinese and Indians, as well as Hungarians, Czechs, and Russians. Increasingly, the new core competence is creativity -- the right-brain stuff that smart companies are now harnessing to generate top-line growth. The game is changing. It isn't just about math and science anymore. It's about creativity, imagination, and, above all, innovation.
What is unfolding is the commoditization of knowledge. We have seen global forces undermine autos, electronics, and other manufacturing, but the Knowledge Economy was expected to last forever and play to America's strengths: great universities, terrific labs, smart immigrants, an entrepreneurial business culture.
Oops. It turns out there are a growing number of really smart engineers and scientists "out there," too. They've learned to make assembly lines run efficiently, whether they turn out cars or code, refrigerators or legal briefs. So U.S. companies are moving on to creating consumer experiences, not just products; reconceiving entire brand categories, not merely adding a few more colors; and, above all, innovating in new and surprising arenas.
The U.S. has a lead in this unfolding Creativity Economy -- for the moment. The new forms of innovation driving it forward are based on an intimate understanding of consumer culture -- the ability to determine what people want even before they can articulate it. Working in what is still the largest consumer market in the world gives U.S. companies a huge edge. So does being able to think outside the box -- something Americans still do better than most. But Toyota Motor Corp. (TM) has a feel for U.S. consumers, and Samsung Group can be pretty creative, too. Competition will surely be intense.
A New Dance
For managers, the biggest challenge may be making the leap from their Six Sigma process skills to new ways of thinking. For corporations, transforming themselves will require new sets of values and organizational principles. Have you heard of design strategy? It's probably the Next Big Thing after Six Sigma. How about consumer-centric innovation? It may be the most powerful way to raise a company's innovation success rate. Do you know what innovation metrics your company needs? Have you heard of CENCOR (calibrate, explore, create, organize, and realize)? It's the post-Six Sigma dogma GE is spreading far and wide among its managers. Are B-schools on top of all this change? Not really, but Stanford University is starting a "D-school" -- a design school where managers can learn the dynamics of innovation. Teaching elephants to dance is never easy, but that's the task ahead if you want your company -- and your career -- to prosper.
You're thinking "this is all hype," aren't you? Just another "newest and biggest" fad, right? Wrong. Ask the 940 senior executives from around the world who said in a recent Boston Consulting Group Inc. survey that increasing top-line revenues through innovation has become essential to success in their industry. The same BCG survey showed that more than half of the execs were dissatisfied with the financial returns on their investments in innovation. They should be. By one measure, from innovation consultant Doblin Inc., nearly 96% of all innovation attempts fail to beat targets for return on investment. No wonder innovation frustration is the talk of corner offices.
BusinessWeek is joining this growing conversation about getting creative by launching a new online Innovation & Design portal -- www.businessweek.com/innovate -- to present the best research and thinking on the subject. Take a look at the interactive self-assessment feature developed by Larry Keeley's Doblin Inc. There are six innovation metrics available. Keeley is the guru of the evolving field of innovation science. Some compare him to W. Edwards Deming, who revolutionized the field of quality measurement.
There is, in fact, a whole new generation of innovation gurus. They are not the superstars of the '90s, such as Clayton Christensen, who focused on what might be called macro-innovation -- the impact of big, unexpected new technologies on companies. The new gurus focus more on micro-innovation -- teaching companies how to connect with their customers' emotions, linking research and development labs to consumer needs, recalibrating employee incentives to emphasize creativity, constructing maps showing opportunities for innovation.
When creative mojo gets going, it can explode into innovation. An example: the mundane mop. Cleaning used to be done with mops and water. Design Continuum Inc. in West Newton, Mass., researched cleaning for P&G and observed that water tends to slop dirt around, while dry rags pick it up (thanks to electrostatic attraction). Ergo, the Swiffer. In the design-speak of the Creativity Economy, this is paradigm shifting. Design Continuum helped P&G shift the cleaning paradigm. Now the Swiffer may become P&G's newest $1 billion brand.
Think out-of-the-box consumer experiences, and you get the idea of paradigm shifting. Old paradigm: corner coffee shops. New paradigm: Starbucks (SBUX). Old: radio. New: satellite radio. Old: crowded electronics stores. New: Apple Computer (AAPL) stores. Old: grungy, smelly circuses. New: Cirque du Soleil. Old: any airline. New: JetBlue Airways (JBLU). Old: Macy's (FD). New: Target (TGT). Old: Earth-toned Birkenstock sandals. New: colorful beach "Birkis."
The evolution of the economy toward creativity has been underway for some time. Steve Jobs, of course, has turned Apple into the paragon of the creative corporation. Companies throughout the world are deconstructing Apple's success in design and innovation, and learning the lessons.
Today all kinds of blue-chip CEOs are signing on to creativity. A.G. Lafley, P&G's CEO, and Jeffrey R. Immelt, GE's CEO are at the core of the new movement. Lafley started it when he took over in 2000, but Immelt's conversion to creativity when he became chief executive in 2001 is giving the shift to creativity more momentum. Because of GE'S size and scope, when it moves, the economy moves with it. The vocabulary of business may be changing as well. It's hard to imagine former GE boss Jack Welch saying: "Creativity and imagination applied in a business context is innovation," as Immelt recently did. Or "we're measuring GE's top leaders on how imaginative they are. Imaginative leaders are the ones who have the courage to fund new ideas, lead teams to discover better ideas, and lead people to take more educated risks," as he added. That's a sea change from rewarding GE managers for a career of floating from operation to operation, massaging the process for incremental improvements.
Lafley sits on GE's board, so two of America's most powerful and effective CEOs now meet regularly, talk about creativity, discuss which of the new breed of innovation gurus is offering the best advice, and exchange notes on what works and what doesn't. When the history of the transition from the Knowledge Economy to the Creativity Economy is written, these two will probably get much of the credit.
To understand why the creativity movement is becoming so important, you need to go back to its roots at P&G. By harnessing the power of design, P&G has transformed itself from a stagnant brand manager into a model of innovation efficiency that outperforms industry rivals.
Before Lafley, P&G's volume growth was basically flat. The company cared more about how its products functioned than it did about how customers felt about them. "P&G had the best chemical engineering and marketing operations in the country," says Patrick Whitney, director of the Institute of Design at Illinois Institute of Technology. "It didn't care about the user experience." P&G could tell retailers to stock eight kinds of Crest, and they did. As power shifted to big retailers, P&G couldn't do that. "It had to create new products, and to do that, P&G had to get closer to the consumer," says Whitney.
Lafley turned to design. In 2001 he established a new executive post: vice-president for design, innovation, and strategy, naming Claudia B. Kotchka, now 53, to fill it. She and Lafley knew they couldn't change P&G's culture without fresh eyes from the outside. So they made a major decision: Even as P&G began laying off thousands of top executives, middle managers, scientists, and others, it quadrupled its design staff. For the first time it hired a legion of designers who had worked at other companies and in other industries.
In a second crucial decision, Kotchka dispatched designers to work directly with R&D staffers to help to conceive new products. This changed P&G's entire innovation process, making it consumer-centric rather than driven by new technology. To open up the company further, P&G started hiring different kinds of consultants. Among them were Design Continuum; ZIBA Design in Portland, Ore.; Chicago's Doblin Inc.; and IDEO in Palo Alto, Calif.
Here's how it works at P&G: Kotchka contacts P&G's divisional heads, asking for a list of possible opportunities designers might address. Recently, the head of home care said it was time to look at bathroom cleaning. Kotchka brought in IDEO with the goal of helping out. IDEO and P&G's designers went out and observed people cleaning bathrooms around the world. In South America they saw women using brooms to clean walls and showers effectively and built a prototype combining a small hand cleaner with a long pole. P&G tested the idea via a survey. People hated it.
But P&G hung in there. What is fast becoming the Holy Grail of innovation -- the "unmet, unarticulated" needs of consumers -- didn't show up in the survey. Instead, P&G relied on the informed intuition of designers and tested the idea again, using working prototypes. People loved the real thing. P&G then broke down the walls of its Mr. Clean brand, reached in and used the Mr. Clean detergent for the new product. The Mr. Clean MagicReach was introduced in April -- with a four-foot detachable pole. Mundane as this example may be, it shows how design strategy can generate innovative new products and sales.
To build a design infrastructure, Lafley also established what he calls his innovation "gym," a place to train managers in the new design thinking. And he created a Design Board of non-P&Gers who provide an independent perspective on products, brand extensions, and marketing.
Jeff Immelt inherited one of America's most successful companies. GE's incredible process culture, which brought so much to the bottom line in the '90s, was no longer enough to maintain its leadership in the 21st century. Like Lafley, Immelt needed to create an innovation culture quickly. One of his major goals was to raise GE's average organic growth to 8% from the 5% of the past decade. The skills Jack Welch prized -- cost-cutting, efficiency, the continual improvement of operations -- couldn't deliver that.
Immelt launched a series of what he calls Imagination Breakthrough projects, investing more than $5 billion in 80 initiatives that take GE into new markets, product areas, and industries. He told his managers to connect with consumers, learn to take risks, and place big bets. GE is already reaping major benefits from previous bold moves. Its latest quarterly profit surge of 24% is due in part to reframing the idea of power generation. The company expanded it from gas turbines to wind and solar, which paid off.
Also like Lafley, Immelt is pushing to change the corporate structure to spur creativity. He appointed Beth Comstock to the newly created position of chief marketing officer in charge of generating innovation and creativity. He's bringing in many of the same design and innovation gurus Lafley uses so effectively. And GE being GE, has its new acronym, CENCOR, for its innovation process.
Call it CENCOR, creativity, or imagination, GE is doing it. Comstock recently held a "China market discovery" session, bringing together some 90 people for three days. Outside innovation consultants pushed the envelope. "We forced the group to get outside itself, to look at China with new eyes," says Comstock. The effort appears to be working: Sales to China soared in the latest quarter.
What is the methodology of the new design strategy that Lafley, Immelt, and others are adopting? The basics are simple. They start with observation -- going out and directly seeing customers shop at malls, families eating in restaurants, or patients being treated in hospitals. Gap Inc. (GPS) and others have found that social shopping -- in pairs and threesomes -- is the norm in its stores, so it's making dressing rooms bigger. Trying out lots of ideas fast by making models or videos (prototyping) is the next step. This lets managers visualize concepts, make decisions on which to improve and which to discard, and launch products faster.
Storytelling is very important. Designers have found that placing a potential new product within an emotional story that connects with consumers raises the chances of success. The design of the new line of MINI_motion watches and driving shoes, for example, captures the story of the Mini Cooper's cool urban driving experience. It's about the driver, not the car.
The final ingredient in design strategy is building an organizational process that does these things all the time. This kind of change can be wrenching for a company, but the payoffs are enormous. "You can build a kind of culture of routine innovation through design thinking," says one of the pioneers of the new discipline, David Kelley, co-founder of IDEO and head of the new D-school at Stanford.
So watch out, consultants. A whole new cadre of advisers is out to lead CEOs into the Creativity Economy. They speak a language different from Establishment consultants' (more anthropology, less technology) and advise differently (more hands-on workshops, fewer companywide surveys). Mainstream consultants, such as BCG, are building their innovation expertise, but they'd better hurry.
The new gurus have emerged from the depths of the late '90s meltdown and the shock of Asian competition to show CEOs a path beyond the Knowledge Economy to an even higher-value-added business model. They say they have found a way to play a high-margin game in a low-priced world, a means of differentiating products in a commoditized marketplace and a methodology for staying ahead of Asian rivals. They are the keepers of creativity in a world awash in technology, the champions of innovation in a globe drowning in commodities. Meet seven of them and many more on our new site.
There's a lot of talk about America becoming a 97-pound weakling. But the naysayers don't get the strength inherent in a truly Creative Economy. This revolution has barely begun, and building creative, innovative companies is the great task ahead. In the stories that follow, you'll find the tools, methods, and metrics to help make it happen.
By Bruce Nussbaum
With Robert Berner in Chicago and Diane Brady in New York