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Innovation Complexity
By Dave Ramsey

In 2006, Aptimise was formed as a combination of 2 firms. While there was a difference in focus, one focused on business organization systems and leadership, the other on intellectual property (patents), both had the same end goal for clients – increase competitive advantage using innovative solutions.

Near the end of 2007, Aptimise re-analyzed the market, our capabilities, and the issues facing our potential customers. If we were to continue to use innovative solutions to business problems, then we had to not only create unique solutions to common problems, we needed to help our clients use innovation in their own operations. But with every strategy, there are obstacles to overcome, tactics that need to be developed in order to overcome or find a way around the obstacle. If we were to help clients with using innovation as a competitive advantage we needed to have some tools to help them identify, overcome and/or work around the obstacles that they were sure to encounter.

Companies have strong motivation to include innovation in their strategy. Introduction of distinctive products and methods is often the easiest way to compete for shelf space, protect market share, or repel a rival’s attack. This thought process is a key activity integral to our consulting on intellectual property practice. In fact we have developed the unique ability to create a design-around that will allow a client to overcome a competitor’s patent. But innovation has a price that companies need to be aware of.

Innovation brings the initial challenge of ideas. Where is the next bright idea going to come from? Furthermore, once that idea is found, can it be profitable. Peter Drucker in his book Innovation and Entrepreneurship said that bright ideas were the hardest and riskiest sources of successful innovation. We believe that while this is true, the capability for developing breakthrough ideas can be learned and may be easier than it first seems.

Ideation International has developed software that incorporates the disciplines of TRIZ, a scientific method for innovation developed in 1948 that is just now coming to prominence. In TRIZ the highest level of innovation, breakthrough innovation, can take several years before the product or service truly develops revenue. The easiest or lowest level of innovation is Level 2 or Level 3 innovation (see chart). These innovations come from improvement of an already existing system; either a minor improvement at Level 2 or an essential improvement of the system at Level 3.

The second challenge is that because most innovation comes from low level innovation, a company can easily continue to innovate and add new products. The challenge occurs from the fact that the additional complexity that the innovation brings to their operation can easily overwhelm the operation. Marketers easily justify the addition by citing the protection of existing or the addition of new revenue, but as each new addition is added, the costs resulting from the increased complexity begin to outweigh the revenue. The faster the company innovates in new offerings, the weaker its results become.

Aptimise offers Lean and Six Sigma management techniques as part of our operations improvement processes. What is unique about our recommendations however is that neither technique is recommended as a one-method-only cure. Lean looks at the operation activity and attempts to remove waste, six sigma looks at the same operations and attempts to remove variability that contributes errors to an operation. Neither takes a look at the service/product offerings as a source of excess cost. Aptimise recommends the use of Lean and Six Sigma techniques as tools to be used in conjunction with other activities such as re-engineering, culture change or employee development.

A couple of examples come to mind; in the first case, a large sophisticated high-tech manufacturer was frustrated because it continually was unable to reduce its inventory of parts and components. The company instituted highly refined lean manufacturing techniques to streamline production and labor productivity rose to the highest levels of possible. Additional effort was given to the consistent application of Six Sigma techniques and quality targets are routinely made and achieved. In spite of all this however, the company continues to be stuck at turning its entire inventory 7 times per year instead of the goal of 12 times per year. In order to satisfy customers and stay ahead of competition, the company continued to add to its product lines. The SKU’s now number in the thousands. In order to make all the products, the company has to stock over 400,000 parts from hundreds of vendors. Furthermore, in order to satisfy demand and avoid emergency shutdown to accommodate product changeover, the company has to stock some of each of the end products. The resulting inventory is finished goods and is so great that lean cannot begin to address the problem regardless of the lot size that production runs.

In a second case, an automaker decided to offer tinted windshield glass as an option. The marketers estimated that 40% of the customers would buy the option for $120 while the supplier would charge $8 per unit. Labor for installing tinted glass seemed no different than labor for installing non-tinted glass. The revenue seemed to far outstrip the direct labor cost. But it didn’t turn out that way. The tinted windshield, when coupled with the other options, led to a large number of increased costs that didn’t show up on the initial analysis. A list of these costs encompasses the following; adjusting work flows, new quality control tests, changing of fork-lift routes, additional items in bills-of-material, additional purchasing costs, worker walk and reach time increases due to checking build sheets, and the list went on. The addition of one additional product offering mushroomed into complexity and cost that prevented the possibility of any profitability. Furthermore, it lead to quality issues that in turn added cost on top of cost.

A Solution to the Problem

To solve the problem of increasing complexity, it is necessary to have a well defined policy for innovation. As part of the innovation process, Aptimise begins with the customer and the way the client views the customer’s needs. In most instances, we find that the company places too much weight on the value that buyers place on having many choices. Such a mistaken assumption or incorrect belief leads to product proliferation of the kind previously illustrated.

Through the use of rigorous tools such as Quality Function Deployment (QFD), Aptimise helps our client challenge the belief that “more variety” is necessary to please the customer. The challenge is to get our client to answer the question “What would your company look like if it made/sold/delivered only one product or service?” The next task is to then identify what that one product/service would be. This exercise leads to the setting of a baseline against which product complexity can be judged. Determining the baseline allows accurate decisions to be made regarding the reduction of complexity and clutter.

Towards More Innovation

The reduction of complexity allows room for innovation.

It may seem that I am advocating a series of actions that will simply lead to a vicious cycle of innovation followed by complexity followed by simplification and then more complexity and so on. However, to break the cycle before it starts, we recommend two actions that act as barrier to the creation of the cycle; 1.) Raise the hurdle rate on innovations/new products. 2.) Focus on innovations that are Level 4 and Level 5 on the innovation hierarchy.

Raising the hurdle rate makes it more difficult for marketers to justify the addition of another product. The additional increment forces a deeper investigation into the true potential revenues and costs for the product. Additionally, it forces discipline into the innovation process. No longer will there be a willingness to accept a product simply because it is new.

The second recommendation forces the company to focus on the tools used in their innovation process. To achieve a the high level of innovation required by Level 4 and Level 5, the rigor and mindset that is gained through the use of innovation tools such as I-TRIZ from Ideation International must be learned and/or developed. To aid in the required development, we recommend the creation of a well-defined innovation program that trains the organization on the creation of innovative ideas that lead to products meeting Level 4 and Level 5 requirements.

For more information on innovation, the development of Innovation Strategy and I-TRIZ, contact Aptimise through Dave Ramsey, dramsey@aptimise.com.