Innovation: Are You Focused on the Perfect over the Optimal?

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1 Executive Agenda : Are You Focused on the Perfect over the Optimal? Design hotel rooms on a single platform as automakers design cars? Sounds crazy. But Accor, a European hotel chain, adopted this plug-and-play approach and reduced its construction and refurbishment costs by 50 percent. 1

2 Not long ago, The Accor Group, a European leader in hotels, was looking for a way of distinguishing its brands among travelers by reimagining the décor of its rooms. Instead of a predictable experience, it wanted guests to enjoy almost infinite variation in room design. The challenges were many, not least that the physical layout of the rooms could not be altered. And another thing: The hotel chain wanted to pursue this innovative concept in branding while reducing its costs of construction and refurbishment by 50 percent. A model existed for such an undertaking, and it came not from the hospitality industry but from the automotive business. Companies such as Volkswagen and PSA Peugeot Citroën are masters at design differentiation on a common platform. The Volkswagen Tiguan, for example, is built on the same platform as the Audi SUV. But the model of a common platform is not restricted to the factory floor. Rather, it is a process that extends across the value chain. It begins with a broad concept, continues with a multifunctional team overseeing design and development, building and testing prototypes, and finally rolling out a new automobile. The result is a kind of plug-andplay approach to building an entire car. We applied the same approach to hotel rooms. Figure 1 illustrates our hotel value chain from concept rooms, design, and prototypes to reference rooms and launch. Franchisees use an online room configuration tool to choose room designs and expedite assembly. Rooms are customized using plug-and-play modules of wall treatments, colors, patterns, furniture, accessories, and more (see figure 2). Figure 1 Accor applied an automotive concept to the hotel industry Automotive industry Concept car Product design and development Process setup and prototypes Production tests First series cars launch Online configurator Hotel industry Concept rooms architects competition Product design and development co-concept Prototypes technical solutions Production tests reference rooms First series hotels launch Online configurator Source: A.T. Kearney analysis 2

3 Figure 2 The room customization tool facilitates room design, assembly, and personalization Source: Accor website; A.T. Kearney analysis This innovative approach to room design has been a huge success. We did not look at innovation as a succession of grand themes and big ideas vision, principles, leadership, or culture as many people do. Talking about it this way can lead one to pursue the perfect rather than the optimal. Instead, we viewed the project as the practical work of innovators as we endeavored to achieve optimal innovation. Getting to Optimal Our work began by calculating the total value of ownership by assigning a monetary worth to intangibles such as innovation, decision making, and supplier relationships (see sidebar: What s an Intangible Really Worth?). Audi was one of our benchmarks. Its premium cars are valued for their elegance, sleek design, and technical advancement. Because many car buyers aspire to own an Audi for these ethereal features, it increases the total value of ownership for the Volkswagen Group, Audi s parent. We formed a multifunctional project team, knowing this would be a challenge to established order. In a multifunctional team, the governance model is a cadre of the devoted led by a core 3

4 leadership group that transmits clear expectations for the different functions. The central issue is how to maximize the organization s knowledge. These teams manage to be open minded while sustaining a focused vision. They are, in a way, arbitrageurs, searching not for 100 percent along one dimension but for the optimal among all dimensions. They work in parallel as much as possible to improve time-to-market and provide broad expertise. Multifunctional teams are, in a way, arbitrageurs, searching not for 100 percent along one dimension but for the optimal among all dimensions. This approach is in direct opposition to the method favored by dedicated product-development functions in large conventional organizations. Their belief is that product teams will get new ideas to market fastest. But while such teams expertise is usually deep it also tends to be narrow, which can produce an overdeveloped strength along one dimension resulting in, say, a marketing culture at a cosmetics company or an engineering culture at a carmaker. Product teams tend to take apart complex problems by dealing with their elements in sequence. A new idea begins with a design that is refined in response to market tests. The design then goes to the finance department to see if the refinement alters the cost structure of the new product. If the answer is yes, everyone goes back to the starting point, repeating everything, hoping that this time there will be no broken links in the chain. While this approach is logical, it rarely sparks inventiveness. is most easily accomplished in small structures, with their limited number of functions staffed by a few people. Everyone is in the same place with the same perspective. What s an Intangible Really Worth? It is common for conversations about innovation to include discussions of new products in terms of total cost of ownership. Total value of ownership (TVO) is a more expansive measure, one that attempts to assign monetary value to benefits not easily quantified. It is the sum of what we call the margin-enhancing dimensions of a product over time. TVO has gained traction in the past decade among IT managers as a tool for understanding return on investments in digital technologies as it quantifies certain intangibles such as decision making, innovation, and vendor relationships. Qualcomm, a leader in advanced wireless and services, is explicit about its reliance on a TVO metric, as are many consumer product companies, where producers make a science of understanding brand loyalty and its place in the market s valuation of a product. For example, cookware manufacturers exhibit a willingness to use DuPont s higher-end nonstick finishes despite the cost and production headaches they entail because their durability creates an association in the customer s mind with quality.1 For companies such as Qualcomm and DuPont the sum of these intangibles is the value of ownership. 1 See Wouters, Anderson, and Wynstra, The Adoption of Total Cost of Ownership for Sourcing Decisions: A Structural Equations Analysis, Institute for the Study of Business Markets,

5 The marketing folks can talk to the technical folks and everyone can talk to finance with fewer organizational games to play. This is largely why so much innovation in information and biotechnologies has come out of small companies in the past 15 years. But innovation exists in large incumbents, too. At Samsung, for instance, collaboration across the entire value chain is the modus operandi. Danone assembles senior teams from around the world to manage innovation (and, by the way, to retain top talent). The task for these larger companies is to replicate in a complicated environment the innovation that seems to come naturally to small companies. Bringing Multi to Function Three things differentiate multifunctional innovation teams from all others: Solidarity of purpose. The rules of the game are designed to favor the pursuit of innovation, not the goals of a siloed function (see sidebar: Breaking Loyalty to Function). Rule number one is that a team member s first loyalty must be to innovation, and to closing the gaps between and among functions. The close collaboration and shared deadlines of a multifunctional team shorten decision making. And when the team deliberates and makes a decision collectively, the decision cannot be revisited because of sour feedback from someone s boss. That s a rule, too. Leadership. Technical expertise alone is not enough to earn leadership on a multifunctional team. Leadership must be seen as legitimate and that s often a matter of personal style rather than technical credentials. Communication skills may trump everything else. Helping team members overcome their fears is a necessary part of winning legitimacy as a multifunctional project leader tasked with changing the way people think. Winning battles together is how project teams develop coherence and a shared sense of intention. Revolutions are not created amid tranquility. Talent. It s tough to make the talent argument that you need the best people for your innovation team to functional directors who consider themselves already short-staffed, especially at a time when head count is a touchy subject. But when a project is necessary to Breaking Loyalty to Function A prerequisite for optimal innovation is to break all loyalty to function. This is not an easy task as it requires unlearning the reflex to be best in class along one dimension and instead pursue the optimum among all dimensions. Typical project teams are all about function. In functions, or silos as they are commonly called, talented people work in the furtherance of their narrow conception of organizational good. Silos are an unhealthy monoculture formulated to do one thing very well. They are antithetical to a dynamic workplace. Optimal innovation requires collaboration across all functions. Yet collaboration with other functions can be as challenging as collaboration with other companies a greater one, in fact, when organizational politics intrudes. The mental barriers are high where real cooperation is not the norm, where teams are not used to stage gates, process rules, supplier management, decision committees, and commitment to success along multiple dimensions. In such environments, working collectively may be novel and subtly discouraged. 5

6 growth then how can time given to it be judged anything less than a priority? Instead of hoping for a couple of hours a week, multifunctional project leaders develop rules that formally measure the time given to the project. Members of a multifunctional innovation team will not come back to their old job in the same way they left it. Indeed, they may not come back to their old job at all. Further, multifunctional project teams are among the best talent-development programs an organization can devise. Smart team members who work with peers from other functions will pool their knowledge and take it to their next assignments. They will become among the most valued members of their organization. The satisfaction they derive from their experience as innovators will deepen a sense of attachment to their organization and help immeasurably in their retention. Here s the big implication of working this way: Members of a multifunctional innovation team will not come back to their old job in the same way they left it. Indeed, they may not come back to their old job at all. In short, multifunctional collaboration is a pragmatic lever of organizational transformation, with the emphasis on pragmatic. Figure 3 Accor reduced its construction costs by 50 percent 100 Cost $ millions 95 Illustrative -45% -50% (40%) 20 (44%) 30 (60%) 25 (56%) Bathroom Bedroom 0 Historic cost Cost to date Probable cost Source: A.T. Kearney analysis 6

7 Collective Knowledge With the large exception of the automotive industry, most industries have a weak tradition of including suppliers in new-product development, limiting their involvement to a request for proposal or competitive tender. This is a lost opportunity to leverage outside innovation. In an optimal innovation system, suppliers are an essential part of the team. Accor s big idea compelled it to push into new relationships with traditional and non-traditional supply sources. Still, establishing new relationships was not easy. A hotel room is a complex assemblage of systems consumer electronics, plumbing, lighting, bedding, furniture and the innovation we were pursuing would only increase complexity. The hospitality industry simply isn t big enough for suppliers in some categories to develop industry-specific innovations. Under the stress of achieving its stretch goal including cutting construction costs in half our project-management team arrived at a new understanding of the role suppliers play in innovation and included them in the process almost from the beginning. The team overcame its not-invented-here syndrome, a mental barrier to innovation. The Lessons of Optimal Big companies are often tremendously innovative when confronting crisis, responding to constraints with adrenalin-fueled activity rather than the paralysis of fear. The frustration is that in the absence of crisis, they tend to revert to the norm. One way to tap the adrenalin and creativity of crisis without actually having one is to establish stretch targets that seem unrealistic, if not a little crazy. We set stretch targets at Accor what else would you call taking a plug-and-play approach to room design and reducing construction and refurbishment costs by half (see figure 3)? The stress of working toward a seemingly unreachable goal generated an extraordinary level of cooperation and, ultimately, the highly imaginative set of responses that led to our success. Accor is in a better position today as a result, not only because of the immediate wins of an inventive approach to room design, or because construction costs were halved, but also because the lessons of optimal innovation, once learned, last forever. Authors Eric Sauvage, head of organization and transformation, Paris Christophe Alaux, chief operating officer, Accor France, senior vice president, Mercure Europe Charles-Etienne Bost, principal, Paris charles-etienne.bost@atkearney.com Kevin McDermott, Collective Intelligence, New York kevinmcdermott@collectintel.com 7

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