business news in context, analysis with attitude

The first in a series of previews of the FMI MarkeTechnics Show

As technology becomes ever more important to retailers and manufacturers, the need to put it in context and make it work for all parties is critical. Over the next month, in preparation for the annual Food Marketing Institute MarkeTechnics conference, MNB will present an exclusive series of interviews that will preview the people and issues that will be the focus of the event.

FMI's MarkeTechnics will take place this year in San Francisco, from February 29 through March 2.

This week, it seems appropriate to start with Henry Chesbrough, Ph.D., executive director of the Center of Technology Strategy and Management at the University of California at Berkeley's Institute of Management, Innovation & Organization. In a general session scheduled for Monday morning, March 1, Chesbrough is scheduled to address "The New Imperative for Creating and Profiting from Technology" - specifically a comparison of open vs. closed innovation processes.

Which seemed like a pretty good place to start…

MNB: You speak of open innovation processes vs. closed innovation processes. What exactly is the difference, and how does the comparison relate to the retailing business model?

Henry Chesbrough, Ph.D.: The key differences in the open innovation process from the earlier closed innovation process lie in where the sources of innovation are found. In closed processes, firms look largely inside their own four walls for new innovations. In open processes, internal sources are just one area to examine. Other areas include university research, suppliers, specialist boutique firms, customers, third parties, and international companies and markets.

In retailing, this means that each firm must continue to monitor itself and its current competition, but must also scan much more broadly to identify innovation opportunities and threats. For example, the extent to which store brands can co-exist with regional and national brands on the shelf, and in which categories, is something that must be carefully managed. New food retailing formats must be considered, whether it be a "store within a store" or the surprisingly rapid penetration of Wal-Mart into foods, or the impact of newer formats like Trader Joe's.

MNB: There are two shortcomings commonly ascribed to the food retailing business the inability to break down the silos between varying functions within a business, and the tendency to think tactically instead of strategically. It sounds like you believe that technology, when properly employed, can address both these issues.

Henry Chesbrough, Ph.D.: If I have conveyed that impression, then I have miscommunicated. I strongly believe that technology must be managed in order to create value for a company. I do believe that new technologies provide the opportunity to develop new processes and new formats. For example, the introduction of radio frequency identification tags (RFIDs) by itself will not make much difference to retailers. However, if the retailers can engineer their inventory control systems, supplier coordination systems, and even customer checkout systems to incorporate RFIDs, there could be tremendous improvements in inventory turns, lower stock-outs, lower customer wait times, and so forth.

MNB: How can a business that is constantly putting out fires and dealing with immediate threats from competition (like Wal-Mart) think with a venture capital mindset ? And assuming that they should, are there ways that you can suggest in which they can build this approach into their organizational structures?

Henry Chesbrough, Ph.D.: Wal-Mart is a daunting competitor that is already making a big impact, and I think that its impact will grow in the future. Retailers should understand that Wal-Mart is far more than a chain of storefronts; it is an operating system that is highly optimized to increase inventory turns, reduce waste, cut costs, and deliver in very high volumes. How can retailers compete against this impressive machine? While each retailer must develop their own answer, all of the answers will require innovation. Some retailers will compete by being much closer to their customers, and using their knowledge of the customer to have the right merchandise in the store at a fair price. Other retailers may customize part of their service, offering delivery, or late hours, or inviting other stores into their premises to enrich the shopping experience.

The venture capital mindset is one that plays poker, instead of playing chess. In emerging categories, the nature of the game being played is that no one knows in advance how it will all turn out. The solution is not to simply wait and see; rather, the solution is to make small bets in promising areas to learn more faster, so that retailers can capitalize on new trends before the Wal-Marts respond to them. Organizationally, retailers will need to set aside funds for these experiments, and they will need to monitor them with different criteria than the criteria they use to manage the vast majority of their business.

MNB: Global distribution of knowledge, when applied to the retailing business, sounds like it could create an environment that allows for a more collaborative relationship between retailers and manufacturers, as opposed to the more skeptical/hostile relationship that often exists today. True?

Henry Chesbrough, Ph.D.: True. And I would go further. Retailers can and must improve their collaborations with suppliers. They must also engineer improvements with their customers as well. And these may come together in certain product areas. In cosmetics, for example, companies like L'Oreal are developing personalized products for skin care, or custom colors for customers based on their profiles. This mass personalization is a strategy that could advantage a retailer with extensive customer knowledge over a Wal-Mart, and deliver more value to the end customer.

MNB: The new issue of Fast Company has a cover story about Apple Computer. The point they raise is that while Apple has been a product/service innovator, it has not been a business model innovator...which has meant that while it creates ideas, other companies are able to quickly crowd it out of any sort of leadership position. Do you buy this distinction between product innovation and business model innovation? And if so, how do you manage the two?

Henry Chesbrough, Ph.D.: I strongly subscribe to the view that there is an enormous difference between product innovation and business model innovation. I have a classic example in my book about the original Xerox Model 914 copier that illustrates the difference. More recently, I regard Microsoft as being a brilliant business model innovator, particularly in relation to Apple, Lotus, VisiCorp, Ashton-Tate, Novell, WordPerfect, and many of its other competitors in the software business who all were at one time bigger than Microsoft.

MNB: Finally, you talk about the imperative for creating or profiting from technology. Is there any choice? And how long is the life expectancy for the retail business that doesn't make the right moves fast?

Henry Chesbrough, Ph.D.: You raise a good point here. I don't see any real choice for retailers but to innovate, if they are to survive and prosper in the coming years. Your readers may see this as very risky, and in a sense they are right. Most innovations fail. But in another sense, they are wrong. The most risky course is not to innovate. Companies that don't innovate, die.
KC's View: