Out of the Industry Innovation

July 25, 2009

Case categories include: Strategy & Planning   

By Robert Sher

Why risk cash and time on innovating from scratch when you can find ready-to-go innovations in another industry? The fact that diverse groups of people can result in greater innovation was studied in Keith Sawyer’s book, “Group Genius.” He wrote, “In 2003 the consulting firm Accenture studied innovation in forty global companies in five industries and found that, on average, 45% of the innovation came from external sources.”

Paul Dijkstra, CEO of InterHealth Nutraceuticals, Inc. and James Herwatt, CEO of Cork Supply USA, have both brought out of the industry (but not out of the box) innovation to their companies. While new thinking and bleeding edge innovation has a sexy allure, the risks related to innovation can be reduced if the ideas have been tested and perfected in another industry.

Paul’s firm is a part of the dietary supplements industry, which is loosely regulated, and where little proof of effectiveness is required by law. Most producers have some claim of efficacy and market their products without clinical research to back up their claims.

InterHealth Nutraceuticals is an ingredients supplier, selling to supplement manufacturers and finished product formulators. Paul saw big opportunities to expand from supplying the pill-based supplement companies to makers of functional (nutrient added) foods and beverages, where product volumes were high and demand was growing rapidly. But the biggest hitters in this arena were heavily branded mega-firms who were wary of putting untested ingredients into their products. Paul understood this objection, and with his background in pharmaceuticals, he was able to bring the discipline of proving efficacy to InterHealth Nutraceuticals. In fact, the level of proof the big brands wanted was nothing compared to what he had done in the past to get buy-in for new dietary supplement ingredients.

CEOs should consider stepping into new lines of business, where their prior experiences become new innovation. Or hire in top leadership talent from outside your industry. Paul Dijkstra was a life sciences CEO before he stepped into the supplements business. Spending a lifetime in the same business can create myopia.

James Herwatt’s firm has been supplying most of the high end wineries with corks for years. Their cork manufacturing is very controlled and quality testing on each batch of corks is part of the process. With deep connections in the high end wine industry, Cork Supply USA looked to expand to oak barrel manufacturing (coopering), and first looked to acquire some competitors in this fragmented industry. Rather than buy into the industry and adopt the artisan like processes that are industry norms, he built his own facility, hired Master Cooper Jason Butler and his three coopers, and is differentiating himself through careful testing and quality assurance systems similar to those that helped him grow his high end cork business.

Buying a business or starting a new one and blending known best practices from your core business and the new business is a great way to bring fresh thinking to bear.

Both CEOs are innovating, but they're doing it by bringing into their business best practices from a related industry. This can be a low-risk, fast, and cost efficient way to steal the march on the competition.

Paul invested about 70% of his firm’s net profits into the development effort. He took a known base compound and tested how it behaved when it was heated or otherwise processed, as it would have to be purchased by functional food and beverage companies. Since he had a clear set of target customers and products in mind, he knew exactly what they'd need to know to move forward: That the active ingredient would remain effective when it was consumed.

In Paul’s case, he brought the market analysis and market sizing common to life sciences into play in a way that was beyond the norm for the supplements industry. He also brought the disciplined approach to drug development and the incremental development process of known substances, avoiding wild intuitive leaps of faith. He also brought a deeper level of thinking about partner needs that is common in life sciences businesses.

James understood that winemakers are at the mercy of many variables over the years as they try to make their wines match their expectations and keep them consistent over the years. The fewer variables they have, the more likely they are to achieve that goal. One big uncontrolled variable has been the oak barrels in which wine ages. Factors include where the oak is grown, how it is dried and seasoned, and how it is toasted. Toasting is when the inside of a new barrel is exposed to an open, wood burning flame to caramelize the sugars in the oak. Despite the critical nature of the barrel, wineries still rely up artisan craftsmen and their cooperage’s reputations for consistent production over the years. It doesn’t always work well.

Cork Supply USA already had an internal testing laboratory which managed cork quality and the effect of corks on the flavor of wine for years after bottling. There was no doubt that this approach to cork production paid off, and was an accepted norm for being a high value player in the cork business. James took this norm and practice and is applying it to the cooperage (named Tonnellerie O). His lab team uses a Gas Chromatography Mass spectrometry machine to quantify the levels of the nine main volatile compounds that most greatly influence the flavor in wine. Winemakers test oak barrels for two years before committing to pull production. James’ lab fingerprints those test barrels, so when the big order comes in two years later, the production barrels will have the same exact chemical characteristics. Tonnellerie O will be the first to be able to offer and verify such strict quality and consistency specifications.

Study other industries looking for applicable innovations. A few study hints:
• Pick related industries, perhaps broad industry categories or different business product categories in your industry. Spend time immersing yourself in those businesses, getting to know what they do, how they do it, and why it works.
• Look for companies, in any industry, with a similar value chain/process. For example, long and complex sales cycles (if that’s you), or R&D driven, or repair and service firms with brick and mortar presence.
• Look for businesses that are much smaller than yours, or much larger. Or much newer, or much older. How do they succeed?
• Look for CEOs whose experience is deep or varied, regardless of their current business. What is normal for them may be revolutionary to you. The Alliance of Chief Executives does this in carefully crafted group settings. Have deep discussions with fellow CEOs, even outside your group meetings, and spend the time to really drill down. A great technique practiced in Alliance groups to flush out new thinking is to ask the other CEO what they would do if they were running your business. The first thing they'll do is to reference the norms by which they run their current business, and try to apply them to yours. Just listen carefully.

Innovation is required to keep our top line and bottom line growing over time. There will surely be times when we have to place big bets on new discoveries. But plenty of proven ideas and techniques already exist, hidden from your current industry but waiting for you to discover them, if you’ll take the time to seek them out.

Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.