1. How to Build Innovative Companies What was once central to Cos – price, quality, digitized analytical knowledge work – fast being shipped off to lower- paid, highly trained ees offshore What is unfolding is commoditization of knowledge Increasingly, new core competence is creativity (right-brain stuff) Means of differentiating products in commoditized marketplace

2. How to Build Innovative Companies New forms of innovation based on intimate understanding of consumer culture – ability to determine what people want even before they can articulate it See ‘The Dangers of Being Customer-Led,’ from Hamel and Prahalad, “Seeing the Future First,” Fortune, 9/5/94 Are b-schools on top of all this change? Stanford is starting a ‘D-school’ – a design school where managers can learn dynamics of innovation

3. How to Build Innovative Companies 3M succeeds by interpreting what customers really want 3M’s hottest product today is ultrathin plastic film on virtually every flat-screen display – film enhances image clarity and brightness Therefore screen doesn’t need as much power, which means portable devices can get by w/ smaller rechargeable batteries Masking tape – 3M’s first hit – came out of similar inquiry In 1925, 3M sandpaper engineer was visiting auto-body shop where workers were complaining about difficulty of painting two- tone car wo/ colors running together Engineer went back to lab and figured out how to put sticky backing on paper Latest iteration of 3M’s optical film is privacy filter – allows light to pass through straight to viewer, but keeps anyone w/ side view of screen from seeing anything but black display

4. How to Build Innovative Companies In 2001 Arthur Lafley, P&G CEO, established new exec post: VP for design, innovation, and strategy Quadrupled design staff, hiring designers who had worked at other cos and in other industries Dispatched designers to work directly w/ R&D staffers to help conceive new products Changed P&G’s entire innovation process, making it consumer- centric rather than driven by new technology Started hiring different kinds of consultants Holy Grail of innovation: unmet, unarticulated needs of consumers Established ‘innovation gym’ – place to train mngrs in new design thinking Created Design Board – non-P&Gers who provide independent perspectives on products, brand extensions, and marketing

5. How to Build Innovative Companies Before P&G started paying attention to design, it concerned itself primarily w/ how functional product was Now, functionality not enough – “We want to identify customer desires, rather than needs. What gives you the ‘wow’.” Using designers is part of P&G’s commitment to identifying unarticulated wants that it can transform into products Before Lafley became CEO, P&G essentially brought in designers at end of development process to improve product or upgrade packaging cosmetically Now, designers work w/ R&D staff from beginning, helping to conceive products See Business Week, “The Best Products of 2006”“The Best Products of 2006”

6. How to Build Innovative Companies GE’s Imelt pushing to change corporate structure to spur creativity Newly created position of chief marketing officer in charge of generating innovation and creativity Methodology of new design strategy Start w/ observation Try out lots of ideas fast by making models or videos (prototyping) Placing potential new product within emotional story that connects w/ consumers increases chances of success Build organizational process that does these things all the time Lessons from P&G and GE Change mngrs: hire more anthropologists and social psychologists and fewer engineers Change incentives: link bonuses to new ideas, customer satisfaction, top-line revenue

7. How to Build Innovative Companies Organizational design creates core competence in innovation which creates competitive advantage – hard to imitate?

8. How to Build Innovative Companies