Seduced by analytics and big data, companies are overlooking the compelling power of qualitative judgement. Alessandro Di Fiore calls for a re-think.
This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.
In 2001 Peter Drucker wrote that “businesspeople stand on the threshold of the knowledge society”. In such a society, a company’s competitive advantage derives from a long under-developed asset: the capability to generate and apply insights and qualitative judgements to innovation. Consider Apple, which has been built thanks to insights rather than analytics. Steve Jobs’ resistance to quantitative research is well known.
The trouble is that most companies use a number-driven approach to innovation. Companies invest heavily in developing analytical skills. In recent years, investment has poured into analytics and big data to increase organisational analytical power. Innovation processes have been re-engineered, or over-engineered, with stage-gate processes equipped with financial evaluation tools to support the go/no-go decisions and the release of resources at each stage. In their search for numbers, analysts look for benchmarks, from which they can extrapolate impressive-looking business cases and forecasts. Before you know it, the decision has been taken and the company committed to a me-too innovation.
The result is that qualitative perceptions don’t get an airing. Strategy and innovation should not be a mere exercise of analytical power, but a qualitative process in which the analysis serves insights born out of individual observation and reflection, rather than the other way round.
Tell me why
Why do business leaders struggle so much with incorporating qualitative judgement into their innovation decisions? Our research uncovered two main causes.
First is what can be called Schumpeter’s bias. We all pay lip service to Schumpeter’s vision of the lone and creative entrepreneur. This image is so entrenched that people unconsciously tend to believe that the magic of an insight is not replicable. Many business leaders believe that we depend on “individual” genetic talent. But scientific evidence of the last 30 years proves just the opposite.
A famous study on identical twins aged between 15 and 22 years found that while 80 per cent of IQ differences were attributable to genetics, only around 30 per cent of the performance on creativity tests could be explained that way. Many of the traits we assume to be genetically determined are in fact the product of one’s environment. That’s a tremendously significant finding in support of the idea that we can work on learning and improving our creativity.
Of course, not every child will be a Leonardo da Vinci, nor will every young manager be a Steve Jobs. But people who point to that fact are missing the one really important truth about creativity: there’s Creativity as in genius (the big C) and creativity as in attitude, thinking ability and mind-set (the little c). We tend to confuse these two quite different types of creativity.
For example, if you dig into the back-story of Apple, you’ll soon realise that it wasn’t all about Steve Jobs. He, actually, was wrong a lot of the time. If it had been entirely up to him, Apple would have never opened the App Store. What made Apple great was the combination of Jobs’ genius with the little c of the people he worked with and who weren’t afraid to express their own ideas. Jobs thought that as well — not, perhaps, in his first spell at the company, but certainly in his second. When asked what he thought was his most important creation, Jobs, rather than mentioning the iPod or iPhone, said it was Apple, the company. He claimed that “making an enduring company was both harder and more important than making a great product.” Arguably, little c creativity is more critical in business than the big C.
The second element at work is discomfort with qualitative judgements. Measuring is comforting. Companies, mostly large ones, need to maintain some kind of control over processes, and playing the management-by-numbers- game, makes decision makers feel more confident. Moreover, the act of measurement is generally seen as a guarantee of unbiased results. Enraptured by the Holy Grail of quantitative analysis, business leaders are so obsessed by numbers that they rarely question their guidance. Preoccupied with issues such as predictability and control, they have become increasingly suspicious of qualitative perceptions.
However comforting it might be to stick with what you can measure, leadership isn’t about feeling comfortable. It’s about catching opportunities as they occur, even when the numbers suggest otherwise.
Consider the story of Nespresso by Nestlè, which has become Europe’s leading brand of premium-portioned coffee. Nespresso machines brew espresso from coffee aluminium capsules, a type of pre-apportioned single-use container of various, high-quality coffees and flavourings. The Nespresso brand took off when it stopped targeting offices and started marketing itself to households. Behavioural evidence on how households would respond to the new concept was poor and suggested that consumers’ intentions to purchase did not meet quantitative threshold requirements set by market research protocol at Nestlè. Jean-Paul Gaillard, a young marketing head of Nespresso at the time, believed strongly in this idea and thanks to his skilful interpretation of the data convinced the company to take the risk. If he had only listened to quantitative research, the concept would have never got off the ground.
Six rules to improve qualitative judgement
Sound qualitative judgement is behind most market-beating innovations. So, what can you do to support that? The solution is to embrace a view of qualitative judgement as a core capability and invest to build it throughout the organisation. I have devoted the last few years to researching how companies can turn foggy insights into successful business models. In some cases, I worked together with leaders and their teams in their quest for insights, while in others I bore witness to courageous leaders trusting qualitative judgements and turning powerful ideas into successful products and businesses.
Drawing on my research, I have developed six rules to improve the qualitative judgement of innovation in your organisation:
01 Democratise insight generation
Companies believe that innovation insight generation is the responsibility of a few, highly-qualified professional people. There is a widespread autocratic view, which conceives that only “the elected” ones are entitled to come up with ideas. Often, I’ve seen companies creating corporate units of 20-50 people (equally often called Future Business or Ideas Lab) to look for insights to shape the company’s future.
Interestingly, companies embracing the credo of Lean Six Sigma are the successful ones. In reality, two worlds — manufacturing effectiveness and innovation insight generation — which apparently seem so remote, share the same philosophy for success. In the Lean Six Sigma world everybody is responsible for the search and implementation of ideas to improve operational performance; responsibility is pushed down to the widest and lowest possible level in the organisation.
Best practice demonstrates how powerful it is to unleash the innovation insight-generation power of your workforce. Facebook organises Hackathons, all-night work events every six to eight weeks. The goal is to dream up new, potentially innovative ideas. Even Facebook interns can present their ideas directly to Mark Zuckerberg and top managers who decide in a few minutes which one should go forward, and which one should be stopped. Timeline, Facebook’s completely redesigned homepage, and the iconic Like button started as Hackathon ideas.
Consider how Elica, the global leader in cooker hoods, transformed its product from a dull and hidden home appliance to an emotional, fascinating design object. Headquartered in an isolated town in the Italian Apennines far from Milan’s design district, Elica faced resistance to creativity and new insights from people who were more traditionalists than “change-the-world” evangelists. In an effort to build a culture that would result in a constant flow of new products, Elica pushed down the responsibility for insight generation to the lowest organisational level.
Participation in training sessions, idea jamming sessions and design experimentations was extended to all employees. Many inspirational stories emerged. Franco Mascara, a blue-collar employee working in the prototype unit, came up with an innovative idea for removing vapour condensation. While frying potatoes at home, he noticed that, despite a powerful engine, the hood did not stop the moisture from condensing on the rack. Annoyed, but confident about his inventiveness, he designed a flat disc to be inserted under the rack, and made it move in a circular motion using the power of the hood’s upward air. Eureka! The disc absorbed and stored the vapour leak. Presented to the family owner, it was transformed into a formal R&D project. Later, the product was patented and Mascara’s name listed among the inventors. The product was then incorporated in all hoods for the Chinese market where there is a greater need to filter out the oil vapour due to local cooking habits.
02 Train the masses
Do you want insightful employees? All people have innate creative thinking abilities, but it is up to managers to reignite or nurture them. The best companies deliver insight skills training programmes to their staff — no one excluded — to develop a fully democratic and popular skill throughout their organisations.
But in what tools and methods should we train our employees? Innovative entrepreneurs develop their winning value propositions or products through observation and probing a few customers. It is not a data crunching game. Their sparks are generated by “explorations in depth” of a small number of customers or non-customers.
Take Geox, the leading footwear brand in Italy and the second worldwide. Geox was built on an initial, ground-breaking insight generated by “a day in the frustrations of your customer” lived in first person by Geox’s founder, Mario Poletti Polegato. Frustrated by his overheated feet during a business trip in Reno, he carved holes in the rubber soles of his sneakers, which immediately gave him some relief. Back to Italy, Polegato started to experiment with this new concept of breathable shoes in the workshop of a small footwear company. In a few years, he successfully built a company around an idea that was dismissed by the rest of the industry as ridiculous.
Geox’s founder, as well as many other innovative entrepreneurs (Michael Bloomberg, Scott Cook of Intuit and so on), highlights an important managerial lesson. All you need to do is to put yourself in your customers’ shoes (literally in the case of Geox) perhaps only a few times, but in depth. This also implies you should train people across groups, functions and levels on how to explore the needs and aspirations of customers to create innovation insights.
Unfortunately, a global survey I have done in collaboration with the Young Presidents’ Organisation (a global network of about 20,000 CEOs and entrepreneurs) revealed that only 15 per cent of companies train broadly on explorative tools related to customers.
Of course there are exceptions. P&G is a case in point. Under the leadership of A.G. Lafley, in the early 2000s P&G started an innovation journey which led the company to become a “community of explorers”. Driven by a democratic approach, P&G widened the responsibility for the generation of strategic insights from a few professionals to the mass of the organisation thanks to a significant investment in training. P&G created an internal “Innovation College” with ten to twelve different courses. Over the years, thousands of people went through training with an impact not only on innovation and insight generation skills within the company, but also on the attitude and propensity to innovate of the corporation as a whole.
03 Explore in the first person
Most companies rely on market research professionals — internal or external — to carry out customer explorations. The results are poor — 80–90 per cent of new products fail every year.
A potentially better approach — one used by many successful innovative entrepreneurs — is to explore the needs and aspirations of the marketplace for yourself.
Neuroscience studies demonstrate how insight generation at individual level is the result of four factors: motivation, creative thinking ability, skills and knowledge. The latter is essential for the creative process. To be effective, a deep understanding of the subject matter is essential. The direction of customer explorations — based on the explorer’s expertise and instinct — should be steered, diverted from, focused and accelerated in a path similar to the ancient diviner in search of water. So, if you are looking for innovation insights, who else should run customer explorations other than you and your staff? You are the person able to walk away with relevant insights and act on them.
At GE, for instance, managers are pushed to get out in the field. Meetings with the company’s customers, as well as “dreaming sessions” with a subset of them, have proven successful in enhancing the observational research capabilities of managers. No skill is more critical that the ability to understand the customer and sense the market. GE CEO Jeffrey Immelt spends at least five days a month with customers. Today, everybody has a smartphone or a tablet. The availability of such devices and easy-to- use digital research apps has made it possible to internalise ethnographic researches at a fraction of the external cost. Arena, the global swimwear leader, leverages new technologies to enable its workforce to keep a regular eye on the market. With a user-friendly app installed on their devices, the company’s managers and sales people videotape consumer behaviours in a retail store or in a swimming pool, post the video on a bulletin board, and add a comment. Sharing insights spurs on-going discussions inside the organisation. The central marketing and design function moderates discussions, ensures that no ideas are lost, picks the most promising insights and connects them seamlessly to the product development cycle.
04 Routinise insight practices
Often, failure is rooted in a common mistake: companies generate insights through sporadic projects. Successful business stories have demonstrated that insight generation practices need to become a habit in order to develop a long-lasting capability. By making it a mandatory routine, the system cannot reverse back after the “strategic innovation or insight generation” project of the year.
Intuit is a great example of how to do it. To fully embed customer explorations in the organisation, Intuit has routinised the practice in the company’s operating system, and incorporated it into the job descriptions of both executives and employees.
This is useful not only for large companies, but also for small businesses. At Davide Oldani’s Michelin-starred restaurant D’O in Milan, there are no professional waiters. Although it may sound strange for a high-end gourmet restaurant, the practice of waiting tables has been routinised in the job description of the cooks. With weekly turns, the cooks take orders directly from clients, establish direct communication with them and understand their needs in the context of use. Cooks are clearly better positioned than waiters to passionately describe and explain the menu. The insights of the cooks are then transferred into the menu innovation session which is held every season. The rotation system has contributed to building a committed workforce always in search of insights for better dishes.
05 Embed qualitative judgement in processes
Promising insights don’t turn into successful businesses on their own. You can develop the best insight generators, but then the organisation must be able to leverage all of these insights. Innovation should be a process in which analysis serves insights. Without a systematic approach to integrating qualitative judgement in procedures, the organisation will smoothly and inevitably revert to a comfortable number-driven approach.
Let’s take the example of Corning, the world leader in specialty glass and ceramics, and its stage gate innovation process. The first ideation stage is when insights progress to concept. To advance to the second stage of experimentation, most companies require a number-driven business case. But, at Corning the progress is based on eight qualitative questions:
1. What, if any, are the key megatrends driving the opportunity?
2. Is the opportunity potentially large?
3. Is the problem significant — requiring a step-change in cost or capability?
4. What is the hypothetical value proposition?
5. Is Corning’s approach unique?
6. Is there a possibility for significant differentiation?
7. Does it fit Corning’s material and process expertise?
8. Are the required resources available?
Net Present Value, Discounted Cash Flow, and so on, are not part of the eight question list. Opportunities that score well against the eight questions are regarded as more likely to lead to the development of a successful new business. Only at a later stage does the spreadsheet makes its entrance at Corning. This is a compelling example of how quantitative tools should serve and follow qualitative judgement rather than the other way around.
In other cases, companies rely on a set of simple rules to make decisions, rather than on complicated quantitative models supporting resource allocation processes. In the September 2012 issue of the Harvard Business Review, Donald Sull and Kathleen M. Eisenhardt (“Simple rules for a complex world”) demonstrated that complex models carry a high risk of paralysing the decision-making process. Moreover, they sharply reduce the scope of people to exercise their qualitative judgement, which in turn leads to less effective outcomes. Developing a simple, yet specific, set of rules to facilitate informed decisions is key.
Lego, the iconic Danish toy brick company, has successfully experimented with this approach in its innovation process. It started by adopting more disciplined procedures to manage the new product development pipeline. Designers were compelled to gather early market insights, use consumer and ethnographic data, and test ideas against past experience. They gradually learned how to go beyond the simplistic view of looking at the numbers without questioning “why?”, by using a pre-defined set of rules to inform their decisions. In an effort to balance the need for controlling complexity with the importance of giving developers enough freedom to think creatively, Lego approved a one-page document of rules for each designer to follow. It detailed clear guidelines about the colours, shapes and reuse rate of each new line. Lego has successfully reaped the benefits of its new approach to innovation: by 2011, new products accounted for 60-70 per cent of its sales.
06 Hot-house homeless insights
Frequently, it is an individual who takes the lead in developing an insight, typically the owner of the idea, usually with little or no direction from the organisation. Unfortunately, in the majority of cases, the strong identification of the idea with its owner makes it politically vulnerable; few people have a stake in it and there are no clear processes on how to fund and advance it (unless it is a CEO’s idea).
In some firms the environment can be so unkind that people simply squash their value-creating insights out of fear. Individual-born qualitative insights have no natural organisational protection and direction. Consequently they tend to die on the vine. How can your organisation effectively protect and nourish such homeless insights? Best practices indicate that companies should create an organisational hot-house for insights, in particular for those entering the risky frontend phase. Organisations that have adopted the model of an “insight nursery” have successfully protected high risk/reward ideas, and speeded up the innovation process.
Individual-born qualitative insights have no natural organisational protection and direction. For example, Samsung Electronics has taken such an approach. It has established a Value Innovation Programme (VIP) Centre dedicated to the review of discontinuous innovation ideas. Open 24 hours a day, the Centre has 20 project rooms, 38 bedrooms, a gym, traditional baths, and table tennis tables. Anyone with an insight can pitch it to the VIP Centre and on average around 90 projects cycle through each year. If selected, the insight receives organisational protection from the Centre, which provides a home to nourish it in the initial stage. The VIP plays a pivotal role in assembling an innovation team composed of engineers, designers and marketers from the divisions. They are supported part-time by the Centre’s specialists, who are experts in the tools and processes of strategic innovation and customer research. A VIP project results in a detailed concept, including the value proposition, design blueprints, and the technical and cost specs. When proof of concept is completed, the project progresses to the standard product development process. Since its creation, the VIP Centre has been credited with generating a series of slick products, including Samsung’s Bordeaux TV, which has been instrumental in making Samsung a category leader in the TV business.
Building a qualitative judgement capability requires a significant shift for most companies, which are deeply ingrained in number-driven innovation. The pathway should reflect the starting point. The first step should be an assessment of the company’s current capability and its positioning on the Insight Driven Organisation Matrix. Then, companies should agree on its critical axes of change which might reflect some or all of the six presented rules.
Finally, they should agree on an appropriate ambition level and develop a shared roadmap to attain it. For many companies, to develop such a capability will remain a source of frustration. For the best ones, however, it will represent an exciting journey. Figuring out how to harness the power of qualitative judgement as a driver of innovation and growth could represent the ultimate competitive advantage in today’s knowledge society. Why wait?
The Insight-Driven Organisation Matrix
The Insight-Driven Organisation Matrix gives you a way to assess how far your business is from extracting its full value potential and the gaps that need to be addressed are. Start by considering how broad the responsibility for the generation of innovation insights is in your organisation. Then, assess the degree of standardisation of the learning tools, techniques and practice routines that maximise the effectiveness of your insight generation activities. In which quadrant would you position your organisation? Although this matrix does not offer a universal prescription, our research shows that companies moving toward the upper right — taking responsibility for idea generation to the lowest and widest possible level, and standardising learning and training practices across the organisation — excel at insight generation and qualitative judgements. This may sound obvious, but only a few organisations actually do it, and even fewer are successful.