Innovation Under The Golden Arches - What is McDonald's Up To?

Idris Mootee often spots trends in innovation that have somehow have ended up under the radar of the mainstream media. His recent piece, McDonald's innovation in Europe, caught my eye because this latest move by McDonald's is less an iterative change or a nod to cultural differences than a wholesale rethinking of their overseas business and perhaps their worldwide business model.

What McDonald's is doing is (finally) catering specifically to the tastes of the countries in which they operate by offering such staples as porridge for breakfast in the U.K. and soup in France. Denis Hennequin, president of McDonald's Europe, the first non-American to hold the post, is behind all of these new innovative ideas and he has his chefs in Munich cooking up even more to come for the 41 European countries McDonald's Europe serves.

One wonders if this is a reaction to the increasingly skeptical way in which those around the world view all things American. Where once The USA was the golden land and all things American were lapped up with enthusiasm, a confluence of events in recent years has led to a healthier view of America and American companies' role in world affairs - that is as a player, not necessarily THE player.

Or perhaps the alarming rate of obesity with its loose links to consumption of fast food has provided the wake-up call. Either way, we're seeing fast food chains innovate in a variety of ways to combat this change in worldwide eating habits, competitive pressures and a recessionary climate.

While fast food chains in the US struggle with consumers tightening their pocketbooks, overseas McDonalds is taking a more innovative approach and perhaps they are once again leading the pack.

... the whole fast food industry is ripe for a complete makeover, not a botox job. It needs to redefine its customer experiences and take a hard look at what "fast food" means. Fast food doesn't need to be "junk food". I think everyone in the industry better start looking at what is needed to transform this industry.

In other ways, McDonalds is bringing a new customer experience to the fast food customer, though, perhaps lagging a bit behind popular chains like Starbucks. While fast food has long been a staple of budget minded young people. McDonalds is just now testing wireless internet access and linger-friendly environments with comfy seating and larger tables. Could McDonalds replace Starbucks as the "office away from the office" for the budget minded set?

Whether all of McDonalds new innovations take hold remains to be seen. The various scenarios being tested seem to focus on two trends - targeting and addressing the needs of a younger market... one more wired and more health conscious; and integrating McDonalds more into the culture of the countries in which it operates. Both are tried and true strategies, so in that way, the approach is not innovative. But as I have mentioned before, innovation isn't necessarily about "new to the world" inventions, but often is achieved by applying existing knowledge in a new way.

Why not spend money on a Patent?

Success rates for new products, including patented ones, are shockingly low. For even the world's largest and most sophisticated companies, the numbers are about 25% - certainly below what most managers and owners would like.

There are several references that give the failure rates for new product introductions. The normal range is typically from 70 to 80%. These sources include:

1. Various studies cited by Advertising Age,[i]
2. A study[ii] by Linton, Matysiak & Wilkes, Inc. of the top 20 food companies reviewing 1935 new products,
3. A Booz Allen Hamilton study[iii] on new product management that claims one out of seven product ideas yields a successful product,
4. Boston Consulting Group vice presidents and directors James Andrew and Kermit King claiming 60 to 85% in an article[iv] titled 'Boosting Innovation Productivity',
5. Some college textbooks[v] claim 80%.

A study[vi] by the Product Development and Management Association titled 'The PDMA Foundation's 2004 Comparative Performance Assessment Study (CPAS)' shows 40% rather than the higher 70-80%. The PDMA figure appears to be based just on the post-commercialization or post-launch failure rate. It does not include all products that go into the development pipeline, rather just those that make it to the launch pad. Including all the steps from idea generation, the PDMA study failure rate is over 80%.

Companies stay alfloat because the products they sell, including new products, rarely rely on patented subject matter. Companies derive about a quarter of their sales and profits from new products, only some of which are patented. The other three quarters of a company's sales and profits come from yesterday's breadwinners that still have years left in their product life cycles.

So what happens if a company stops innovating? In most cases, it will slowly die. Companies operating in a competitive marketplace need to continually introduce new products or products that are better, faster, or cheaper in order to stay in business. They don't need to overdo it with innovations, but there is a need to have something in the works. Companies that are leaders in innovation become the pacesetters for the rest of the industry. The other players are forced to keep up or get knocked out of the never-ending race.

Another factor that stimulates the corporate innovation process is the tantalizing prospect of huge profits from world-beater innovations. For the few innovations that become blockbuster commercial hits, the rewards can be great. Companies that come up with such innovations and exploit them well can end up dominating their industry categories and raking in huge profits.

Does this mean small businesses need to come up with ideas and file patents on them? Let's look a little closer at the numbers as they apply to small businesses rather than Fortune 500 companies.

Only about one quarter (1/4) of the products that go into the development process end up being successful. This is a deplorably low figure that applies across a wide range of industries. The data comes mainly from well-established companies, typically the top ones in the various industries. In other words, one in four successes is currently accepted as the best that can be done in terms of converting ideas introduced to the development process into successful products.

What happens in the case of start-up companies? For these companies which are usually quite small, there is a whole other set of failure rate data involved. U.S. and Canadian statistics reveal that only about one third (1/3) to one half (1/2) of new companies remain in business for at least 3 to 5 years.[vii]^,[viii]. About a third of them make a profit during that time, another third break even and the remaining third lose money. Many of the companies that close their doors within the first few years do so because of business failures. Running a profitable business is obviously not easy.

Let's multiply the survival probability for a start-up company with the new product success probability. This makes the overall likelihood of success for a start-up company successfully developing and commercializing an invention or new product small. The math looks like (1/3 to 1/2) x 1/4 = 1/12 to 1/8 overall likelihood of success. Since the probabilities are not entirely mutually exclusive, the more forgiving 1/8 figure will be used. Determining what influence one of these variables might have over the other is beyond the scope of this article. In any event, a 1 in 8 or 12.5% chance of success seems somewhat risky which is why venture capitalists and finance people generally have a hard time dealing with start-up companies based on a new product idea. However, a well managed start-up company with a highly successful product can generate a phenomenal return.

From these numbers, it appears that the vast majority of patents are not worth the paper they are printed on. Here are five reasons a small business should look twice before calling a patent agent:

1. It usually costs between $5,000 and $20,000 to obtain a patent. These costs include the fees paid to the patent offices in one or more countries and those fees paid to the patent agents, many of whom are attorneys. These do not include the internal costs for having your key people sitting in the patent agent's office or working on the patenting aspects.

2. It normally takes about two or three years to obtain the patent and can take much longer if there are problems. Some innovations become worthless in three years, much less than the 15 to 20 years covered by a typical patent.

3. A patent gives a complete disclosure as part of the requirement for obtaining it. In other words, your competitors know exactly what you are doing and how you are doing it. This is especially so with recent changes to the U.S. patent rules that publicly disclose the entire contents of the applications 18 months after application, regardless of how long it takes for the application to get processed.

4. Most patents don't offer any real protection since they are often narrowly defined and easily circumvented.

5. The patents become extremely expensive when they become litigated. Usually the patent owner is the one who initiates the litigation. This is because, in practice, a patent is little more than a right for the patent holder to sue an infringing competitor. These costs can run into the hundreds of thousands or millions of dollars. After years of expensive and complex litigation, the infringer often does not end up paying much, if anything, to the patent owner.

Spending the same time, money and effort on your up front marketing would be a much better approach for most small businesses. Up front marketing does not include promotional and sales expenses but does include going out to determine what the real market is for the proposed or actual product. It includes focus group testing, trial selling, surveys, tradeshows, etc.

Look before you leap when you have an idea that might be patentable. At least you should do the math first.

Peter Paul Roosen has an engineering background and is co-founder of Atomica Creative Group , a specialized strategic product marketing firm. He has co-authored Overcoming Inventoritis: The Silent Killer of Innovation now available.

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[i] Brock, D. (1997). Getting the most out of your new product introductions. Partners in Excellence. http://www.excellenc.com/articles.htm

[ii] Linton, D.B. (1997, July 1). Market study results released: new product introduction success, failure rates analyzed. Frozen Food Digest 12(5), 76.

[iii] Dean, B. (2005, March 28). Case study: Incorporating focus group research into the product development process. DM News, Article 32310. www.dmnews.com/cms/dm-news/e-commerce/32310.html

[iv] Andrew, J.P. & King, K. (2003, April). Boosting innovation productivity. BCG opportunities for action, April 2003. http://www.bcg.com/publications/publication_view.jsp?pubid=847

[v] Friedman, H.H. (2000). Product policy; new product development. http://academic.brooklyn.cuny.edu/economic/friedman/mmproductpolicy.htm

[vi] Adams, M. & Boike, D. (2004, July). PDMA foundation CPAS study reveals new trends. Visions, XXVIII:3, 26-29; and: The PDMA Foundation’s 2004 comparative performance assessment study (CPAS). PDMA Foundation. www.pdma.org/cpas.php

[vii] Knaup, A.E. (2005, May 1). Survival and longevity in the business employment dynamics data. Monthly Labour Review 128:5, 50-57.

[viii] Baldwin, J., Bian, L., Dupuy, R., Gellatly, G., Statistics Canada (2000, February). Failure rates for new Canadian firms: New perspectives on entry and exit. Minister of Industry / Statistics Canada Catalog no. 61-526-XIE. www.statcan.ca/cgi-bin/downpub/freepub.cgi

Practical reasons for strengthening member to member network ties

Here is mini article we put together for the Burnaby Board of Trade. Practical reasons for strengthening member to member network ties:

1. Relationship: It's easier to call or email a fellow member and start building a relationship. Having membership in common creates a good starting point. Plan to meet at an event. It is almost always preferable to do business with someone you know and have developed a relationship with than it is to place your trust with a complete stranger.

2. Consistency: Developing a relationship with a group of people that you see on a regular basis has its advantages. You become familiar with their products, quality, needs and also the various shortcuts that can be taken to achieve your desired ends. For example, if you use a local printer for your stationary needs, they will likely keep your artwork on file so that re-orders are relatively easy.

3. Complementary: Member businesses are diverse and may complement your business, becoming good referral partners. This will allow you to be a better resource to all your contacts and clients.

4. Community: Because of the closer ties, people will be more compelled to go the extra mile. It is a natural to put in a little extra effort to help a friend or someone you know.

5. Accountability: Fellow members can usually be more easily held to account than firms that you have no ties with outside of the immediate transaction.

6. Activity: Business and people that are actively involved in an association tend to be more connected to the business community and interested in connecting with people than those who are not involved in such networks.

7. Productivity: Working more closely with fellow members can lead to productivity enhancements in your business. Sharing relevant information and developing informal mentorship relationships are a couple ways to do this.

8. Cost: It often costs less to do business with someone who you know through an association. Check out the current list of members who offer a discount to fellow Burnaby Board of Trade members as one way.

Innovation and The Vancouver Olympics

Next Up: Vancouver. For many Canadians, watching our athletes perform in China is only half the attraction of the Beijing Games. Sure, it's great to see Canadian athletes pick up medals but with the 2010 Winter Olympics scheduled for Whistler, there's more than just an interest in sports.

Expected to give a big boost to business and spotlight some of the rapidly growing, B.C. based companies, the Winter Olympics and how to capitalize on them is of top concern to many executives in the area. A number of executives from a variety of companies traveled to Beijing this year to assess the opportunities.

While it's the sport and spectacle of the Olympics that will be in the public spotlight for the next 17 days, a cadre of B.C. business leaders is headed to Beijing with more than secondary interest in the behind-the-scenes activities.

Game organizers and those responsible for ensuring the events go smoothly, as well as local tourism departments, will be watching to see how well the games are orchestrated. Number crunchers will attempt to quantify the costs and benefits of bringing the games to British Columbia. Business, large and small are looking at Beijing as a jumping off point for the high profile coverage they can expect to obtain when the Olympics make their way to Canada.

Many 2010 sponsors are also in Beijing, or on their way, to honour their obligations as supporters of the Canadian Olympic team, and to learn about ways they can roll out their own hospitality programs a year-and-a-half hence.

"We're hoping our presence there will help our profile as a company," said Doug Horswill, senior vice-president for environmental and corporate affairs at B.C. mining firm Teck Cominco Ltd.

The bad news for local businesses is that the Beijing Olympics disappointed. The anticipated surge of activity failed to materialize. One Chinese business owner put it succinctly:

"Everybody thought the Olympics would be great for business," he said. "It turned out differently."

A combination of tight security, high prices and the big unknown of China combined to keep tourists away. Will this also be true in 2010? Canada, an established, industrialized, capitalistic country isn't quite as exotic as China and most probably won't elicit the same level of concern from tourists, but the two big unknowns, the world economy and the security situation, i.e. any new terrorism or conflicts could impact how much benefit the Olympics will bring to British Columbia.

Investing in Olympic licenses and developing Olympic related promotions is expensive and risky. Huge sums of money are spent every 4 years to create tie-ins for the few weeks of Olympic season in the hope of lasting benefit.

What can innovators do to maximize the exposure and reduce the risk? Our take is simple. Integrate Olympic based activities into the business plan. Think both inside and outside the box. Create solid, programs that mesh closely with your company's mission statement and overall business strategy. Team up with closely related athletes or activities - think long term relationship.

The 2010 Olympics my only run 17 days but the benefits could last quite a bit longer.

Moving From Marketer To Content Creator Drives Sales In a New Era

Often lost in the discussions about innovation is the role that enlisting consumer, especially key influencer, support is in determining the success of a new product. Despite hours spent in labs and on exacting market research, many an innovative discoveries fail because of ineffective launch strategies.

Identifying and building relationships with opinion leaders is something we try to do in all of our projects from well before the product launch. This is, of course something that the software industry does on a regular basis, enlisting developers in the early stages and releasing beta versions for testing.

In the consumer products arena however, this is used somewhat less often and frequently results in lower visibility and ultimately less success. In an age when consumers are easily accessible through the internet, it seems almost irresponsible to ignore this opportunity to involve them in the early stages of development and create an active community of supporters prior to launch.

An article, How to sell Vodka, discusses how one company, using limited resources, created a hot new product by using the power of the internet and word-of-mouth marketing to build a winner in the distilled spirits category.

"We can't do things with more money or more people. Our aspiration is to find people - customers - who are discoverers and disseminators."

In an era when budget cuts force companies to look for creative ways to market products, innovators are changing focus from top down marketing to content creation.

"We have gone from being a marketer to being a content provider," Phillips said, and he wasn't referring to the contents of a cocktail glass. "Our job is to create photos and tools and content that others can use to build our brand."

How to implement or even initiate this strategy leaves established marketers scratching their heads and grasping at straws. This is, perhaps why it is often the purview of smaller, quicker, younger companies filled with entrepreneurs not MBAs.

Working the web, filled with social networks, blogs and message boards can be a daunting task for the uninitiated. Navigating the realm of social marketing in search of key influencers requires an understanding, not of strategy, but rather of tactics of the web that may be unfamiliar to mainstream marketers.

But that's where the innovators of the product adoption cycle reside these days - on the internet.

Word-of mouth marketing is rapidly replacing aspirational marketing as the tactic of choice for rapidly growing companies. Yes, celebrity endorsement still has the power to drive sales, but a positive review from a well-known blogger can often add legitimacy to a product claim. Viral marketing campaigns and well-executed online PR campaigns reaching key influencers often perform just as well as a mass media ad buy, particularly in smaller fragmented categories. Original content, particularly amusing YouTube videos can raise awareness faster than broadcast ads (though reposting those on YouTube works well too) as they rapidly spread from user to user.

As companies, large and small, scramble to refocus established marketing departments in the new era of Web 2.0, creative strategies evolve to become personal. Content creation becomes the goal. And it is, of course, not your "father's" content. Hipper, of course, but more honest and interactive as consumers play a greater role in influencing product design.

Innovation Going Green - B.C. Government Helps

By now, those of us involved in innovation, no wait, everyone, whether involved in innovation or not, knows that green inventions are the hottest new thing. It seems that the Canadian Government knows too... at least in B.C.

As I've written about before:

Canadian companies are very reliant on the Natural Resource Sector - the drill it, mine it, chop it mentality.

So, it's not terribly surprising that this government effort is focused on energy. The B.C. plan offers a 30% tax credit to early-stage investors in companies engaged in the research and development, commercialization and/or manufacture and processing of clean technologies in British Columbia and employing B.C. workers.

"Innovative clean technology reducing GHG emissions will play a key role in helping to grow B.C.'s green economy," said Technology, Trade and Economic Development Minister Ida Chong today. "The tax credits will lever up to as much as $25 million annually in venture capital to support clean tech companies that can offer exciting employment and investment opportunities to British Columbians."

The goal is, obviously to get on the cleantech bandwagon. Moving from old line energy producing industries makes sense as a diversified economy is in the best situation to ward of the impact of the possibility of unemployment driven by the almost certain recession soon to come.

British Columbia is already home to the third largest Cleantech cluster in the world, growing at an annual rate of 11% a year. Naikun Wind Energy Group Inc., which plans a wind farm off the coast of British Columbia, had one of the best ROI in Canada in the cleantech field.

Companies in British Columbia conduct research and development in a variety of fields including: transportation, energy efficiency, wastewater clean air and fuel cell development. More are in early stage development or searching for investment capital.

And, with the increased interest in green, that is sure to continue.

There are now close to 100 cleantech companies listed ion the TSX Venture Exchange, (The TSX Venture Exchange is Canada's public venture capital marketplace for emerging companies). Market value of these companies is more than $13 billion. But hard times could be coming.

The creaky economy and the booming successes in 2007 has led to a slump in 2008 in the TSX Venture Exchange. Entrepreneurs and established companies are struggling to maintain the growth rate enjoyed over the last few years. Investors are leery of banking on new technology in an era when consumers and businesses are hunkering down and payouts may be years in the coming.

Will this tax incentive make a difference?

We think it will. As evidenced by the Abenga Solar case in the U.S. tax credits can make a big difference. Without tax credits, a clear sign of support from the government, funding for risky, new technology projects can easily fail.

In an already tight credit environment, tax credits can make the difference between private funding of a project or not. Investors clearly see the benefits of investing in a field supported by those government entities charged with economic growth.

What Canada Can Learn From Israel About Innovation

I've written before about our concern that Canada is experiencing an innovation void.

In my opinion, Canadian companies are very reliant on the Natural Resource Sector - the drill it, mine it, chop it mentality. This could be holding them back from innovating. To fully embrace a culture of innovation Canadian companies need to learn from their counterparts to the South and take more chances.

Recently we posted an interview with Mark Krupnik who earned a PhD in applied mathematics from Technion - Israel Institute of Technology. Now, I ran across an article in the Globe and Mail that looks deeper into what makes Israelis so innovation focused and what is holding Canada back.

Interestingly, it's not lack of innovation that seems to keep Canada consistently behind those countries with reputations for not only developing, but also commercializing innovation.

Our national output of discoveries is impressive. University of Toronto professors, as just one example, are third in publication totals world-wide, exceeded only by Harvard and Tokyo. But the commercialization record of Canadian universities is modest. Our best performers generate far less revenue than their U.S. or Israeli counterparts. And, when it comes to turning discoveries into popular products and services, our outputs are underexploited.

Israel by comparison has strong connections between researchers and business and government support and direction - all focused toward the future. Israel, unlike Canada, is a country virtually devoid of natural resources and so, perhaps has a greater incentive to develop an array of innovative industries to support its economic growth.

On the other hand, in less than a generation they have been able to go from exporting primarily agricultural goods to exporting primarily technology. Can Canada, or should Canada take the same route, de-emphasizing our export of natural gas, timber and oil and focusing solely on technological innovation? Probably not, but a future focused innovation strategy has its benefits.

In Israel, as in most countries leading the innovation parade, there are close connections between those involved in pure research and business leaders that can take these products to market. Funding for new research is backed by and encouraged the government and generous grants, both public and private are available for good ideas with good foreseeable, as well as unforeseeable commercial application.

In Canada by contrast, while innovation is heralded as a way in which to fuel our economic engine, the focus, too often has been on incremental changes to our major existing industries. One might consider that giving lip service to true innovation.

To truly take its place in the roster of countries leading innovation in the 21st century, Canada needs to refocus and rethink about the connections between industry and government. It needs far seeing entrepreneurs, as well as, leaders in established industries to advocate a change of course as T. Boone Pickins has in the U.S., rattling an industry entrenched with and supported by the current presidential administration.

Until Canadian companies re-evaluate the roles they play in innovation and our path toward the future, unfortunately Canada will lag behind.

Predicting the Future - Interviewing Retalon's Mark Krupnik

Retalon develops and markets inventory management and forecasting tools that helps Gillette, InterTAN (Circuit City), Danier Leather and other retailers and distributors accurately predict demand. The net result is improved overall profit margins and performance. This is achieved by optimizing the price, quantity and discount levels over time.

We interviewed Retalon's co-founder and president Mark Krupnik who has earned a PhD in applied mathematics from Technion - Israel Institute of Technology. He has worked as a forecast scientist and project manager at Stirling Douglas Group, and later at NCR (Teradata) after it acquired Stirling. Retalon was founded in 2002. We managed to catch up with Mark in Toronto to find out what he had to say about innovation and how he and his technology-based company approaches the subject.

What are some of the ways you quantify success in innovation at Retalon?

We have three different indicators that would tell us about success in innovation. All three indicators need to work together.

1. We should like it ourselves. Our people need to feel like they are involved in something big and interesting. We should be excited about it. This is less quantifiable than our second indicator.

2. We have a proof of value exercise that mathematically gives higher gross margins for a retailer. Our business is in helping retailers optimize their ordering processes to manage price, quantities and discounts to their benefit. We use before and after comparisons to determine success for our customers. We do this by taking a piece of data for the past few months and comparing it to the next period. This is highly quantifiable.

3. We track the number of converts. When you bring new technology, the more people who buy in, the more people like it, the better. This is not as quantifiable.

What type of internal systems or strategies does Retalon use to foster innovation?

Our company has very strong ties with universities and consultants. We work with Ryerson, University of Toronto and the University of Waterloo. Also consultants from Lakewest, IBM, CGI, etc.

Our approach is that we try to go to a customer and seek to understand what they need. Sometimes they cannot express it clearly enough because they only understand the existing technology. Then we go through the university and consultant group, gather the research and match it with the customer needs.

We have two independent streams: the customers and the university & consultants. By staying on top of the research, we know what technical possibilities there are that can be applied to the customer needs. Likewise, we can use customer needs to give more direction to our research efforts.

Who does Retalon look to as being leaders in successful innovation?

I don't want to offend any particular company, but we divide innovation into two groups:

1. Strategic - something that is completely new and that others don't see. Examples include Apple, Google and RIM (Blackberry).

2. Tactical - technological development. They innovate methods and are kind of predictable. Examples include Adobe and Agile.

Do you have an example or two of best practices Retalon has learned from other companies?

For best practices, we like Microsoft and Google. The user interfaces give small numbers of options or features. Exactly the right stuff at the right time. We imagine the same interface as to what will be next. If you are our customer, you will find the next thing in your dynamic needs. The options and features change proactively but they represent what you would need at each stage of your work.

We have good things to say about IBM. There is something from IBM that I have on my wall that describes the five stages of innovation.

Five stages of adopting of an innovation:

1. People deny that the innovation is required.

2. People deny that the innovation is effective.

3. People deny that the innovation is important.

4. People deny that the innovation will justify the effort required to adopt it.

5. People accept and adopt the innovation, enjoy its benefits, attribute it to people other than the innovators, and deny the existence of stages 1 to 4.

(Editor's note: sometime after the interview, Mark emailed the above 5 stages quote to us.)

It is sad but reality.

What areas would Retalon like to improve?

We would like to put more structure into the innovation process. It does not need to be a contradiction. Innovation is creative, yet we need to set boundary conditions. We don't want to kill the creative process but, simultaneously, we want to put some structure into it. It is a delicate balance.

The marketing is one of the important factors to dictate where we should draw the line.

We would like to again thank Mark for taking time to share his views and Retalon's approaches to innovation.