As Published In August 2005

The Elements of Excellence
By Carol Hildebrand and the staff of CXO Media

Leadership, process improvement, and cost cutting are keys to business survival.

As the past several years have shown, cuts in IT spending do not necessarily translate to a reduction in business expectations.

As CIOs wrestle with stringent budgets, they also face a new challenge: figuring out how to reduce costs while using IT to drive competitive advantage.

Good managers realize that cost-cutting alone won't work—technology innovation is a team sport, and it demands strong partnership from business decision-makers. Smart companies bet on increased technology leadership, inside and outside of the IT department. By fostering IT leadership that builds closer relationships with business peers, innovative companies can create an atmosphere that seeks to blend, rather than isolate, IT. By working with business leaders to closely tie technology initiatives to business goals, IT leaders find that projects that do get the green light have a direct and discernible business value. The most-innovative leaders do this while also rigorously keeping an eye on the budget, choosing technologies that can not only save money, but also drive business innovation.

How much of your role is concerned with innovation?

Significant aspect of my role	59%
Minor aspect of my role	28%
Dominant aspect of my role	6%
Not an aspect of my role	6%
Not answered	1%

Where do innovative ideas come from?

Interaction with CXOs and business unit leaders	28%
Industry or market forces/ trends and competitive pressure	22%
Interaction with internal users	17%
New technologies	14%
Interaction with external customers	12%
Directive from the CEO	7%

Who leads innovation initiatives?

CIO/IT and business units share responsibility	35%
CIO/IT department	22%
CEO	20%
Business units	17%
COO	6%

Who is accountable for innovation results?

CIO/IT and business units share responsibility	42%
Business units	29%
CEO	12%
IT	8%
COO	5%
Not answered	4%

Sound hard? It is. It's also worth the effort.

Leadership
Leading by Learning

Two very different chief information officers, on opposite sides of the globe, in different industries, took a similar approach when they started their new jobs. Both of these CIOs clearly understand that people drive technology adoption and that technology must serve business strategy, or else it is nothing more than a distraction and a waste of money.

Jennifer Allerton, CIO, Roche Pharmaceutical Division

When it costs an average of US$900 million to develop a new product, it's important to get it right. For Jennifer Allerton, who took on the role of CIO of the Pharma division of Swiss pharmaceutical giant Roche two years ago, a key part of such a huge venture is making sure IT systems and business applications work seamlessly and globally, so she launched an effort to transform IT from its previous regional focus into a globalized group that is closely linked to business goals. Her key moves in this effort included the following:

Reorganization. Allerton consolidated IT into four business-focused areas (research; lifecycle and licensing; sales and marketing; and supply chain, finance, and human resources) as well as an infrastructure-oriented one (infrastructure, operations, and services).

Standardization. For Roche workers, globalization means they can use the same systems with the same terminology and the same framework in the same time frame. "It means they can understand what else is happening in the research department or in the lifecycle department and really work together in a global way to develop and market drugs," notes Allerton.

Specialization. Roche depends on Oracle Clinical, a specialized application for the pharmaceutical industry. At Roche, Oracle Clinical is used in conjunction with a huge—6-terabyte—database containing all the clinical trials Roche does with its patients. The information is stored in a randomized way that allows the company to analyze the results of trials and ascertain the effectiveness of its new drugs.

Investment choices. IT decisions at Roche are less about saving money or reducing costs than they are about delivering significant value to the development of new drugs. For example, Allerton's team is consolidating 14 worldwide data centers into 4, a decision based not only on cost savings but also on improving overall quality by simplifying and standardizing common processes.

Communication. When Allerton arrived at Roche two years ago, she decided not to make any decisions during her first 100 days. "I decided I was going to get to know the business and the company, and I needed the space to do it," says Allerton.

Payoff: "I think the fact that informatics really does have a seat at the business table now is my biggest accomplishment as CIO," says Allerton. "There's no question about it—although we're all sorts of techies and geeks, we really are seen as key business partners, and I think that's our greatest achievement."

Cherri Musser, CIO, GMAC Financial Services

What CIOs Know The CIO magazine survey on IT-enabled innovation was designed to gather information about the ways IT is contributing to innovation and how IT departments go about making these contributions. The survey was conducted online, November 1 to November 30, 2004. A select group of CIOs recognized by CIO's editors and industry leaders for their reputation of excellence in effectively managing IT were invited to take the survey. Results shown here are based on the responses of 83 IT executives. In terms of company size, 49 percent of the respondents were from organizations with more than 1,000 employees. A broad range of industries was represented in the study, including manufacturing (11 percent); finance (10 percent); insurance (6 percent); federal, state, and local government (9 percent); and wholesale/retail/distribution (7 percent).

As CIO of supply chain at General Motors, Cherri Musser successfully streamlined many parts of GM's order-to-delivery (OTD) program, designed to reduce the time to order, build, and deliver automobiles. In her new role as CIO of GMAC Financial Services, Musser should have ample opportunity to use her expertise. Key moves Musser made in both positions include the following:

Listen to customers. One of Musser's first acts in her new capacity at GMAC was to talk to people at collection centers, administrative offices, and regional offices around the world. "It's been fun, because they're pleased that someone wants to see how they work and you can spot a lot of things you can do that would make their lives easier. I saw, in a lot of detail, the importance of straight-through processing and some areas where we can make quick fixes and achieve improvements," says Musser.

Pick your technology risk. Under Musser, GM began using J2EE and Java to create a three-tier architecture for the delivery of its business-to-consumer (B2C) Web services. By adopting new Web architectures more rapidly, GM was able to deliver a scalable, worldwide solution, rather than having different marketing organizations within the company each doing their own thing. "Without taking a leading-edge approach, we never would have been able to get a single instance of our shop-and-buy site for all countries in which GM operates," says Musser. "Some people might say I've been too aggressive, but I think you need to be aggressive, because the technology is really enabling us to go a lot faster in our delivery of new capabilities to the business these days."

Streamline supply chain processes. The task: Streamline a process that encompasses more than 140 manufacturing locations, 50 countries, and more than US$45 billion in supply chain inventory. Musser assembled a cross-functional team composed of representatives from sales and marketing, logistics, and the production control group. "We put all those together and said, 'We're going to take a consumer's view, look at it from order to delivery, and drive the cycle time down on a global basis,'" she explains.

Using this approach, Musser's team was able to

• Reduce order lead time by 60 percent
• Increase delivery date reliability to 90 percent
• Increase materials availability to 99.9 percent
• Ship 99.5 percent of all outbound vehicles damage-free
• Reduce logistics costs by 14 percent
• Reduce product and material constraints by 98 percent
• Reduce work-in-process inventory costs by 18 percent

Move from custom-built to off-the-shelf. "In the past, we were paced by the need to go build everything in-house, but there are so many more commercial products available now than what we had years ago, and that enables us to go much faster," says Musser. For example, GM had typically built its own custom configurators, but as part of the OTD process, Musser decided to go with an off-the-shelf one from Oracle.

What Leaders Read Here's what the Society of Information Management recommends for students of its Regional Leadership Forum, a nine-month professional development program sponsored by the society. Books/Alternative Media Artful Persuasion, Mills Doing Business Internationally, Walker, Walker & Schmitz Finding Your Own North Star, Beck First Break All the Rules, Buckingham & Coffman Geeks & Geezers, Bennis & Thomas Good to Great, Collins The Heart Aroused, Whyte (Audiotape) The Heart of Change, Kotter The History of Information, McFarlan & Chandler How to Read a Book, Alder Instructions to the Cook, Glassman & Fields King Lear, Shakespeare Leadership Moment, Useem Leading at the Edge, Perkins Leading with Soul, Bolman & Deal The Lexus and the Olive Tree, Friedman Management Challenges of the 21st Century, Drucker Managing Transitions, Bridges Man's Search for Meaning, Frankl Meditation: A Guide to Relaxation, Eswaran & Frances (Audiotape) The Nibble Theory and the Kernel of Power, Jamison The Old Man and the Sea, Hemingway Orbiting the Giant Hairball, MacKenzie Republic, Plato 7 Habits of Highly Effective People, Covey Theft of the Spirit, Hammerschlag Thinkertoys, Michalko The Wisdom of Teams, Katzenbach & Smith Working with Emotional Intelligence, Goleman The Zen of Listening, Shafir

Source: Reprinted from Profit: The Business of Technology, August 2004

Business Process Improvement
Balancing Money, Technology, and Business

Profit talks with David Thompson, Oracle's CIO and a passionate advocate for the benefits of grid computing and business/IT alignment.

Profit: How do you make sure your technology implementations reflect business processes?

David Thompson: Because we drink our own champagne and use our own products internally, we function as an important beta-testing site. As such, we work heavily with business folks to leverage business processes in the software. We go through our business processes and look at each for their functional benefits and possibilities for revenue growth or cost-cutting. The benefit to our customer base is that we are constantly providing feedback to management and getting the IT perspective into product rollouts.

Profit: Are there any particular technologies you see right now that are driving business improvement?

DT: One thing I've seen is our use of grid technology. Our grid infrastructure lets us leverage commodity hardware, use Linux, and get the scalability of a mainframe while improving application performance and flexibility. We've also reduced costs dramatically—just on the server side, we've saved US$18 million a year since we consolidated servers.

Profit: Anything else?

DT: Another thing I see real value in is IT portfolio management. We use an Oracle tool, and we've found it to be very useful for categorizing project requests and helping manage workflow and resource utilization. It certainly helped in the merger of PeopleSoft and Oracle, because we were able to look at all the projects from the big picture and manage them together. Portfolio management is a good way to put businesspeople in the driver's seat, and it allows IT to articulate the value of IT—not only the cost of ongoing maintenance but also making funds available and letting businesspeople direct the work of IT by choosing projects with the highest priority to them.

Profit: It sounds as if portfolio management really helps technology people work as a team with the business side of the house.

DT: It does. It's the key to good conversations with our business partners, because we have a way to articulate what we're doing for them and the value it's driving. And it works both ways, too. We have to understand the business value and have the necessary data to show the business value of all of our IT projects. It helps our IT folks identify more with business goals when they can see a direct link between their work and business goals.

Minding the Money
Where to Spend Smart

The collapse of the tech bubble left CIOs with a new mandate: They've had to figure out how to get more from their investments—while still maintaining the innovation that businesses depend on. This requirement is reflected in several tech trends:

Infrastructure overhauls. CIOs are streamlining existing infrastructures for better performance and responsiveness, a trend that's reflected in increased interest in infrastructure software purchases. "A lot of CIOs are trying to make what they've got work and are going back to a centralized model," says Dr. Ed Yardeni, chief investment strategist at Akron, Ohio-based money management firm Oak Associates.

CIOs Predicted Spending

Source: CIO Magazine

Shared services. By centralizing IT services and itemizing the cost of IT work for each departmental budget, CIOs can optimize spending and provide clarity to the business side of the house. "By having centralized teams leverage pooled resources across multiple projects, business leaders know the value of what they get for their money," says Thompson.

Self-service. By putting transactions directly into the hands of individuals whenever possible, companies can save time and money, in addition to eliminating bureaucracy. "In any real-time enterprise, self-service is key to helping customers complete a task quickly and at their own pace," says Thompson. "It allows us to keep costs in line and help customers and workers be more productive and well informed," he adds.

Security. This technology area reflects the reality of doing business in an ever-connected and online world, where IT must stay on its toes to keep up with inventive cybercriminals. "One area that really stands out above all is security software," says Yardeni, noting, "It comes in consistently above 50 percent [of survey respondents] and is now about 60 percent."

Outsourcing. It's here to stay, but companies are picking and choosing implementations rather than opting for wholesale IT outsourcing. "You can leverage lower-cost resource pools in areas that are not core competencies," says Thompson. "Many organizations have gotten very savvy at staying close to the business but keeping overall costs down by outsourcing selectively."

Spending Poll: Comparative Numbers

When Yardeni first started tracking IT spending for CIO magazine back in late 2000, CIOs were budgeting for double-digit growth, the internet was king, and technology was the economic star of the country. Fast-forward a year, and my, how things changed. "By 2001 we were in low single digits of projected percentage growth in spending," says Yardeni. "The reality of mathematics is that nothing grows in double digits without swallowing up the planet Earth. It just couldn't continue."

The past five years have had a lot of volatility, but CIOs have not seen a return to their big-spending days. "Once IT recovered, it didn't recover much," says Yardeni. "In mid-2002 we were at 6 percent projected 12-month growth rates. It's a muted volume compared with what we were seeing."

Finding Leaders from Within Talent Search Looking to build innovation into IT? Here's the key ingredient: people who are capable of leading projects and communicating with the business side and who possess business as well as technical knowledge. Trouble is, that package is not always easy to find. "It's a huge issue," says Martha Heller, managing director of the CIO practice at Z Resource Group, an executive recruiting firm in Westborough, Massachusetts. "Most CIOs will tell you that in terms of staffing, hiring people with leadership skills and a knowledge of business is their No. 1 challenge." This becomes particularly true as business executives sponsor more IT projects. As they gain IT knowledge, they expect corresponding business expertise from the IT staff. In terms of actual skills, Heller says that she hears the following as top priorities: Leadership Project management Critical thinking Relationship building Global experience Vendor/contract management Compliance/regulatory knowledge The question is, where do you find IT people with such a varied skill set? Short answer: "Many CIOs are growing their own," says Heller, who is also former managing director of the CIO Executive Council, a professional organization for CIOs in Framingham, Massachusetts. She says that companies are going about this in several ways. Many have worked with consultants to put together customized leadership programs for high-potential IT employees. Others have built in-house leadership development programs, and others have chosen formal mentoring programs. Still others are working with local universities to influence them to include a technology quotient in their MBA programs. Heller likes the idea of a management career track within IT that emphasizes business skills. "Right now in senior managers, CIOs are looking for a half technical and half business skills balance," she says. "But flash-forward three to five years, and business skills are going to be more important. Everybody involved with technology is going to have some responsibility for understanding the business. They have to." Martha Heller can be contacted at mheller@zrgroup.com. Succession Planning Karen Armon, CEO and founder of Alliance Resources LLC, a Fortune 100 consulting firm specializing in executive development, thinks that business leaders pay too little attention to leadership in the long term. What they need, she says, is to take a page from major league baseball and create a farm team for future leaders. "It's an on-purpose way of doing succession planning," she says. "It's a coordination between the executives that are already there and their legacy." It also will create a deep bench for leadership in a company, which enables the company to go from strength to strength in terms of strategy and leadership. "The farm team is the process, and the bench strengths are the capabilities you have," says Armon. "It helps you think ahead: Who have you hired who's on the bench and who you can work with?" Case Studies Business Process Improvement: Integration OGMA-Indústria Aeronáutica de Portugal, S.A. Alverca, Portugal When it came to business process improvement, Antonio Sobral, chief information officer for Portugal's leading aircraft maintenance company, OGMA, had two goals: He wanted to overhaul the company's IT infrastructure to improve company performance, and he wanted to save money in doing so. The big hurdle: He had only four months to do it. "I had the objective of restructuring our IT infrastructure and applications in a short period, and we did," says Sobral, who led the initiative. Along the way, Sobral also implemented what he thinks is one of the most integrated ERP systems in Europe, with financial and analyzing modules, engineering, maintenance, manufacturing, production and purchase planning, logistics and purchasing processes, budget and planning management, and management information systems. His team is also implementing warehouse management, human resources manufacturing scheduling alerts, and quality and workflow modules. Running such an extensively integrated system pays off big in terms of business value, he says. "The quality of our information is very important," he says. "If we didn't have an integrated system such as this, it would be much more difficult to achieve our goals." "The results of our migration have been incredible," says Sobral. "It's enabled us to provide much lower costs, higher performance, high availability, easy scalability, and hardware-vendor independence." Source: Reprinted from Oracle Magazine, November/December 2004 Business Process Improvement: Supply Chain Grupo Bimbo Mexico City, Mexico One of the secrets of Grupo Bimbo's IT success is letting other companies make the mistakes and learning from them. "We have a strategy of being a fast follower," says Francisco Javier Gomez, CIO at Mexico City-based Grupo Bimbo, an international baking company with 74 plants in 14 countries, more than 70,000 workers, and 26,000 trucks serving more than 26,000 delivery routes. "We watch the evolution of new technologies and the mistakes other companies make when first implementing them, to learn how to avoid those mistakes and implement solutions more quickly." It's a strategy that's paid off well. "Our business doesn't change as fast as others do," says Gomez. "It's a very high-volume, low-margin business, so we carefully evaluate new technologies and then implement them fast without disrupting the business at all." A good example of Gomez's strategy is Grupo Bimbo's deployment of Oracle E-Business Suite, which it initiated in 2001 to serve as the foundation for all of its new systems. "Implementing Oracle E-Business Suite has really helped us gain greater efficiencies between our supply chain and customer demand," says Gomez. "It's given us greater efficiency, reduced our costs, and eliminated a lot of waste." That kind of success and confidence is important, especially in a low-margin business such as baking, where eliminating waste and maximizing opportunities are critical to increasing profits. Gomez has built on that success with his current implementation of the Oracle Corporate Performance Management module, which will help improve supply chain flow and help the company target its inventory more effectively. "Our bread is typically on the shelf for only two days, so we need to be very precise in our operations," says Gomez. "Grupo Bimbo pioneered just-in-time bakery production in 1946, and we continue to refine it today." Building on the company's Oracle foundation, Gomez sees additional business intelligence and management capabilities as key to helping keep the right amount of the right products on the store shelves at the right time. "We are currently implementing Oracle Corporate Performance Management to help us stay close to our customers, give us better market segmentation, and enable us to customize our plants for our current needs, to generate increased revenue." Source: Reprinted from Oracle Magazine, November/December 2004

Tracking Innovation By Margaret Terry Lindquist Geoffrey Moore's insight into innovation and corporate culture upends conventional wisdom. Geoffrey Moore broke new ground in the high-tech world when his book, Crossing the Chasm, which would have been considered successful had it sold 5,000 copies, surpassed sales of 300,000. Why the surprising success? Why did a book on high-tech marketing cause a groundswell of support? Moore attributes the success partly to the effectiveness of exactly the practice the book advocates—word-of-mouth marketing as a way of gaining mainstream adoption of new ideas. But it's his new book, Dealing with Darwin, scheduled for publication in December 2005, that explores his latest thinking on the role of innovation in enterprises and how managers can both encourage innovation and make sure employees are working from their strengths. Profit spoke with Moore on the topic of innovation and corporate culture. Profit: What is the single most important thing companies can do to foster innovation? Geoffrey Moore: People like to innovate spontaneously, which tends to diffuse innovation's overall impact, so I think the most important thing that companies can do is to help people focus their innovation efforts on a single vector so that they get really extraordinary differentiation from them. When that happens, customers set the company's offerings apart and give them preference in sales cycles and in price negotiation. That's the economics of innovation. The part of innovation that's on core, that's focused on your competitive differentiation—you want to innovate far enough that you really leave your competitor behind. Management can help people understand that it's actually more important to go further down a particular dimension of innovation than to play the field. It's the tendency, I think, to let innovation bubble up and to play the field. That's because innovation literally happens at the edge. You can't centrally plan it. You want to let it happen rather than make it happen. When you actually go to commercialize innovation, however, it's very important that you then prune the bush and that you get the remaining parts of the innovation, the ones you're going to really take all the way to market, properly aligned, and you find ways to reinforce them again and again. Innovation after innovation after innovation, but in service to customer intimacy or in service to operational excellence or in service to product performance. Profit: So is it really about creating a good environment for innovation rather than creating innovation itself? Moore's Culture What's the best book you've read this year, and why would you recommend it? The Molecular Biology of the Cell. It's actually a textbook. It's like 1,450 pages long, and it's only about the cell, so I hesitate to recommend it to anyone but the most obsessive autodidact. If something happens outside a cell, it's not in this book. What's fascinating to me is that it's installing in my head a whole vision of how order can emerge out of chaos without intelligent design. And the book you're looking forward to? The next Harry Potter book, largely because Jim Dale, the guy that reads the Harry Potter books on tape, reads them so well. The book you wish you'd written? One of my favorite writers is a Canadian author named Robertson Davies. My favorite trilogy of his begins with a book called Fifth Business, which I really enjoyed. The book you've practically memorized? I've read Shogun four or five times and I'll probably read it two or three more times just for fun. I just love reading Shogun. You're immersed in a world, and I love the ethic of that world. Even though its ethic is chilling in some respects, I love it. Learn More Moore's newest book, Dealing with Darwin, focuses on how to continue to innovate in an established enterprise. It's scheduled for publication in December. Watch Moore's archived video presentation on innovation at the CIO Summit—visit oracle.com/executive for more information. GM: Yes, and there are two parts to the environment. People always focus on the first part of the environment, which creates the freedom and the relaxed sense of collaboration and the permission to experiment. Everybody focuses on that largely because it's often not there. It is a very important ingredient, but I'm trying to get people to focus also on the second part, which is the editing function. We now need to create a focus on a particular vector of innovation and then double down and overinvest along that vector. Profit: Do you need different skill sets among your employees for the first phase and the second? GM: It's not so much a different skill set as it is management intervention. You can't ask the innovator to edit his or her own innovations. The innovator is going to be in love with the innovation if it's any good. Various innovators are going to be in love with various directions of innovations. Your first thought might be that you'll try to keep them all happy and let everybody innovate a little bit. That does keep them a little bit frustrated, but reasonably happy because everybody gets to follow the innovation path that they're excited by. But what happens when you take the end result of that effort to the marketplace is that the market doesn't see enough differentiation in any one dimension to set your offering apart from those of your competitors. So as a result, when it comes to pricing the offer or purchasing the offer, they put you in a price competition, which then diminishes margins and extends your sales cycles. Whereas if you could have the management intervention, which says, let's take a dimension of this innovation and go so far down this path that a rational competitor either cannot or will not follow us, then the market has a genuine choice. If they pick you, they're not going to consider your competitor and so then you have a much more privileged sales cycle and a much more privileged price negotiation. Profit: How does this drive into the next cycle of innovation? GM: What happens is that now you've relocated your offer in a different mental space, if you will. It's almost like a different dimension of the category. Once you're there, what'll happen is you'll want to do innovations that help secure and expand that position. You then have to interact with your customers and partners and say, "OK, what did we miss? Now that we're over here instead of where everybody else is, what more should we do?" The first vector is a big risk. Then the subsequent vectors are much more incremental, based on the success of the first one. There's an easy way to think about this. It's kind of a thought experiment. Ask somebody if they can picture a Chevrolet automobile—not a Corvette, just a Chevrolet automobile from the last ten years. The answer is always certainly not. There's just nothing to remember. But if you said, can you picture a Hummer or a Chrysler PT Cruiser or even a 1957 Chevrolet or a Corvette or a Ferrari or a MINI Cooper, the response is likely to be "Yes, I can picture those things." That's the point about innovation, which is that Chevrolet has done a lot of innovating in the last 10 years, but nobody can experience it. As a result, people don't pay a premium for their cars. Profit: How do you differentiate beneath the surface? GM: Suppose you looked at business model differentiation. Dell has got a highly distinctive business model. HP and IBM and Compaq—back when it was independent—and Gateway, they all said, "Dell's done some very smart things; we're going to copy them and we will neutralize their competitive advantage." What happened instead is Dell went so far down the path of what you would call Dell Direct—in other words, no retail distribution channel, built-to-order methodologies, supply chains that were very much geared toward very fast cycle time, much lower inventory, therefore, in their supply chain—a difference of weeks of inventory, which allowed them to make much faster changes and also not get stuck with the price-eroding commodities. In addition, their Web site for a small business, a consumer, or a big business all give very different experiences. And because of all of those things, when the other guys said, "We have the same tools, we can catch up, we have volume purchasing, we can do what Dell does," they couldn't. As a result, Dell is experiencing record earnings and everybody else is on the ropes. Profit: Why can't they do it? GM: Well, if we go back to Dell and look at its patent portfolio, Dell has very few product patents. It does not focus on product innovation at all. It focuses on process innovation. They have a much lower R&D budget, but their real R&D is process R&D. They have an enormous number of initiatives all oriented toward getting some greater efficiency or effectiveness out of their processes. When you go to HP and you look at where the best people are being hired, they're being hired in engineering, not in their supply chain processes or their go-to-market processes. Not to say they don't have good people, but if you have to say where their key hires are, they still hire for product engineering. That's their "it factor" of innovation. The problem is, mature markets don't reward product engineering anywhere near as much as growth markets do. Dell is playing a game that is, for a mature market, a much smarter game. They're saying, no, the product's a commodity. The differentiation is in the process. They have an enormous number of process patents to bear witness to their emphasis. Profit: So the real key is making that core-versus-context decision and getting yourself so far along in terms of your core that nobody else can touch you? GM: Exactly. In order to do that, you have to extract resources from context because if you're going to overfund something, you've got to take it from somewhere else. Back to that issue about innovation, you'll find that the key challenge for management comes when they essentially enter the innovation sphere—you don't want to block out the portfolio from the outset. You don't want to say, "Hey, if you're not innovating on operational excellence around here, we don't want to talk to you." You want to create an environment where there is a certain amount of freedom to innovate on vectors that we're not currently pursuing—just to keep the lens open, if you will. But there's that active editing process, just like when you develop a book. You go through an active editing process where the editor says, "You know what? There are probably four or five books in here. Let's pull one out." This is where management has a role to play because they, rather than the innovator, have the ability to say, "OK, we're going to place a much bigger bet on this type of innovation." You may be focused on some other innovation, but if you can align with this one, come with us. If you can't align with us, then understand you're going to get potentially underfunded, because this is the one that we're going to overfund. Profit: How difficult is it for companies to make that call? GM: Part of it is the culture. Look at Chrysler. Chrysler has come out with a lot of cars that are highly distinctive. They came out with the Dodge Viper; they came out with this Chrysler 300 that looks like an [old-time] gangster car. They have the PT Cruiser; they have the Spitfire, which is this sort of hot-rod-like thing. I think in that case it was led by a single high-risk executive, Bob Lutz, kind of like Steve Jobs with the iPod. One way companies make the right call is to have a passionate senior executive, kind of the way [Akio] Marita sponsored the Walkman at Sony. Everybody said, "How can you have a tape recorder with no record button?" He said, "Trust me on this one." So in other words, one way to solve it is just to be a charismatic, courageous CEO. Profit: What's the model like at companies that are failing at the innovation game? GM: Most companies do a much more collective and collaborative decision process, and that tends to cause people to pull back from risk. You get excited about something, but I don't get that excited about it. I get excited about something, but you don't get excited about it, so we end up compromising in the middle. That's how you create the differentiation-less innovation, which is another word for waste. What I'm trying to do is to put this problem directly and squarely on the table and make people realize that until you've made a definitive bet, you've actually failed to innovate in any economically meaningful sense. In other words, abstaining from the act of pruning in this particular situation is a failure. So then it's critical that companies make those standards clear. One problem is that those standards have not been made clear in the past. I think people have always said that if some innovation is good, more innovation is better. This model says "No, that's not true, not if it's not on the same vector." Margaret Terry Lindquist is the editor-in-chief of Profit: The Business of Technology.