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 / Summer 2007 / Issue 47(originally published by Booz & Company)


Innovation Agility

A company can be much more productive by instilling a flexible risk ethic, making people accountable not for compliance with process rules, but for results. But that’s doable only when the company has confidence in the system, in the people, in the capabilities that have been put in place, and in the project’s leadership. For Western companies, that means reinforcing the shift in authority embodied by the chief engineer: He or she presumably has the experience, knowledge, and authority to manage risks flexibly and to determine the trade-offs necessary to keep the project on track. You may need to set up a council of engineers, to establish the backup that even the best engineers may need when considering risks and trade-offs.

Getting Started
Some companies facing this unfamiliar way of organizing product development may start with a pilot project. Choose a manageable development project such as a new component, not an entire new product platform on which the future of your company rests. Find a chief engineer — a natural leader — to head up the project. Provide him or her with the tools and the authority needed to begin creating a system for capturing and institutionalizing the knowledge gained in the course of the project. Give the chief engineer freer rein to work collaboratively with suppliers. And most importantly, give him or her the power to rethink and transform the business goals of the project — from profit to value.

We have also seen companies succeed through a more comprehensive effort, driving changes systematically across their organization. Either way, the first task is to develop a value-based goal — and then the kind of structure, people development process, knowledge capture process, and approach to risks that will reinforce that goal. Within a year, you should know if you have succeeded, because success will breed success: More of your talented and ambitious engineers will work toward building the technical expertise and business savvy that could give them a chance at becoming a chief engineer. The functions will strive to align themselves more tightly with successful product programs. The value of the knowledge captured will become apparent in succeeding programs. And suppliers will sign on, knowing you’re on their side.

Finally, the transformation will become part of your corporate culture. 

Toyota’s Stretch Goals
by Matthew May

No one at Toyota was shocked when company president Katsuaki Watanabe announced to Wall Street and the rest of the world in the latter part of 2005 that he had ordered his research chief, Masatami Takimoto, to find a way to cut in half the price difference between Toyota’s hybrid cars and similar gasoline models without compromising any of the current quality standards, features, or performance. Watanabe’s comment: “I assume Mr. Takimoto must be racking his brains about how to do that.”

Toyota has for decades strategically set ambitious objectives in just this way — deliberately pitting seemingly incompatible goals against each other. Why? Because these competing targets cannot all be met without innovative thinking. The artful setting of opposing “stretch goals” builds a creative tension that fuels innovation by requiring a harmonious resolution.

For example, when Lexus Chief Engineer Ichiro Suzuki announced in 1987 that the secret vehicle under development for the U.S. luxury market must best, not match, the iconic BMW 735i in every rated performance category — speed, weight, styling, acceleration, noise, handling, comfort, and fuel efficiency — the army of more than 5,000 designers, engineers, and technicians reacted unanimously: impossible! Greater speed and acceleration conflicted directly with fuel efficiency, noise, and weight, because higher speed and acceleration required a more powerful engine, which in turn is bigger and heavier, thus making more noise and consuming more fuel. A smooth, quiet ride (associated with heavier weight) conflicted directly with better handling at high speed. And at the time, luxury styling didn’t have today’s streamlined look, so refinement and high-speed stability conflicted directly with aerodynamic drag. In short, the targets were thought to be individually attainable, but collectively unachievable.

Yet when the Lexus LS400 made its debut in 1989, it was five decibels quieter, 120 pounds lighter, and 17 miles per hour faster (according to Car and Driver) than its designated rival. It also got four-plus more miles to the gallon, and had better handling, acceleration, and comfort, while retailing for $30,000 less. Suzuki’s willingness to maintain tension among various competing targets, combined with his refusal to compromise, had made a difference.

Similarly, when Toyota began to develop a futuristic gas–electric hybrid vehicle in the early 1990s, senior leaders employed a new and unique internal design strategy: Pit Toyota’s various design centers against one another in a competition for the best design. The winner, as judged by a panel, would be awarded the project. That winner, the Prius, eventually made its production debut at the 1997 Kyoto conference on global warming.

The strategy proved so successful in generating an innovative product that today Toyota’s three major design facilities — located in Tokyo; Newport Beach, Calif. (near Los Angeles); and Brussels — compete to design every new model. Kevin Hunter, who currently heads the Newport Beach–based design studio, a subsidiary called Calty Design Research Inc., confirms the value of the competition: “It sets up a competitive edge. There’s much more of an intense focus and awareness when you know that nothing is being handed to you, that you have to win the business. You have to do your most excellent work. You have no choice: You have to deliver a perfect proposal.”

This stretch goal approach contains its own inherent challenges. In 2005, Toyota recalled more vehicles than the 2+ million it sold in the U.S., a factor attributed to its product development strategy. Because Toyota’s component subsystems are used across many models, when a glitch occurs, it affects multiple products at once. The rush to beat other design centers has apparently led to some of these glitches. Toyota is now developing ways to balance its stretch goal system with its own deliberate and distinctive quality consciousness.

Matthew May ([email protected]) is a former senior advisor to Toyota University, the author of The Elegant Solution: Toyota’s Formula for Mastering Innovation (Free Press, 2006), and the director of the innovation firm Aevitas.

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  1. Matthew A. Clark, editor, Mastering the Innovation Challenge: Unleashing Growth and Creating Competitive Advantage (s+b Books, 2006): An omnibus of approaches for improving and expanding a product development or R&D core function.
  2. Jon Gertner, “From 0 to 60 to World Domination,” New York Times Magazine, February 18, 2007: Incisive introduction to Toyota’s unique culture and its view of the future, particularly with hybrids.
  3. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Smart Spenders: The Global Innovation 1000,” s+b, Winter 2006: What Toyota has in common with Christian Dior (plus Apple, Adidas, Petrobras, Samsung, Google, and 87 other high-leverage innovators). Click here.
  4. H. Thomas Johnson and Anders Broms, Profit Beyond Measure: Extraordinary Results Through Attention to Work and People (Free Press, 2000): Based on methods developed at Toyota and Scania, this book describes how to substitute ingrained awareness for rote metrics.
  5. Matthew May, The Elegant Solution: Toyota’s Formula for Mastering Innovation (Free Press, 2006): Inside look at the creative process that implements 1 million ideas each year.
  6. James M. Morgan and Jeffrey K. Liker, The Toyota Product Development System: Integrating People, Process and Technology (Productivity Press, 2006): For engineers; dense and detailed.
  7. Taiichi Ohno, Toyota Production System: Beyond Large-Scale Production (Productivity Press, 1988): Shusa-style wisdom from one of the originators of the Toyota production system.
  8. For more articles on innovation, sign up for s+b’s RSS feed. Click here.
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