How to Spot Winning Innovation

0:04Rachel Warren:One of the things that I have clearly learned is that the organizations that are most effective in growing and growing through innovation reframe failure as learning. They create an environment where experimentation is encouraged and where people are not afraid to bring their ideas to the table and in fact they are encouraged to bring new ideas to the table.

0:37Lorraine Marchand:That was Lorraine Marchand, author of No Fear, No Failure, Five Principles for Sustaining Growth Through Innovation. I'm Motley Fool producer Matt Greer. Now, Motley Fool contributor Rachel Warren recently talked with Marchand about those five principles and about the keys to successful and enduring innovation. Hello, everyone, and welcome back to Motley Fool Conversations. I'm Motley Fool contributing analyst Rachel Warren, and today I'm delighted to welcome Lorraine Marchand, author of the book No Fear, No Failure, to the show. Lorraine is an acclaimed innovation consultant, educator, and corporate leader with over three decades of experience in new product development and strategic growth.

1:16Lorraine Marchand:She is widely recognized for her expertise in the life sciences and healthcare sectors, particularly in navigating high cost of failure environments, and her work has centered on how organizations and investors can take smarter risks by reframing uncertainty rather than avoiding it. Lorraine has served as the executive managing director and general manager of IBM Wantsum Health, now Meritiv, overseeing data and AI strategy. And previous leadership roles include positions at Bristol-Myers Squibb, Cognizant, LabCorp. She has co-founded four healthcare and life sciences companies, serves on the Healthcare and Pharmaceutical Advisory Board at Columbia Business School, and has advised a myriad of Fortune 500 companies including Johnson & Johnson and Hewlett-Packard.

1:58Lorraine Marchand:Lorraine, welcome to the show. So glad to be with you today.

2:01Rachel Warren:Well, thank you, Rachel. It's my pleasure and honor to be with you today.

2:04Lorraine Marchand:I want to start off our conversation talking about your book, No Fear, No Failure. And, you know, there are so many, I think, incredible takeaways from this book that apply to the lessons that we as investors are trying to learn and to make smarter and better investing decisions. One of the kind of core elements of your book is you talk about what you call the five C's of innovation. I would love if you could walk us through some of the core themes of your book, but also what are the five C's and how do they apply to businesses that we are evaluating as investors?

2:36Rachel Warren:Well, thank you for that question. Very fundamental. And throughout the course of my career, as well as the 120 interviews of executives that I conducted for this book, that really led me to the creation of the five C's because I was on a mission to better understand what was holding back innovation driven growth at organizations. and if we could put the magic in a bottle, what would that bottle contain? At the same time, these are areas that we can also diagnose that aren't going so well. The first C, Rachel, of course, has to be culture. And one of the things that I have clearly learned is that the organizations that are most effective in growing and growing through innovation reframe failure as learning.

3:26Rachel Warren:They create an environment where experimentation is encouraged and where people are not afraid to bring their ideas to the table. And in fact, they are encouraged to bring new ideas to the table. So culture is very critical. And I like to emphasize the mantra that I teach as a leader of innovation, try, fail, learn. Our second C is focused on chance. And chance is all about this idea of investing in risk. And I'm sure your listeners are very familiar with the golden ratio, 70-20-10, which Sergey Brin applied very aptly at Google, showing that the 10 % that the company invested in blue sky, blue ocean, innovation, transformation, not really sure how it was going to work out, actually resulted in the company's 70 % of the company's growth five years later.

4:30Rachel Warren:And what I've observed and learned is that most companies that lead with innovation, that are on a very positive growth trajectory, follow some sort of similar type of algorithm. Maybe not exactly, but something similar. And the part that goes along with that investing financially is it's really important to invest in your people. And so applying the resources, investing in talent, doing the kinds of training, put together programs where individuals know that you're really serious about wanting to make change and invest ahead of the market, if you will. The third C is all around change. And the most forward types of organizations have figured out an algorithm for helping to encourage change, for helping to people embrace change.

5:24Rachel Warren:And here we can get pretty tactical. It's really simple things like delete something first. My very favorite one. People get overwhelmed when they have a desk full of bright, shiny objects, and they're all supposed to be very exciting and they're all going to lead to fantastic growth. It can't be possible. So as a leader, it's really important that we help our teams reprioritize because they can get overwhelmed. So take something off the plate before you ask them to do something new. And the second one that I think so many of us learn through COVID, avoid crisis-driven change. Be watching the patterns, be looking around corners, and change before you have to.

6:06Rachel Warren:And companies that really lead with this one are in the annals of the HBR for companies that are still around. We can talk about Ecolab, Veolia. There are a lot of companies that have really withstood the test of time because they know this one quite well. The fourth and my very favorite, of course, is Customer First. And what I've learned, I'm sure that you've seen it as well, so many companies talk about putting the customer first, and yet it's very easy to start to practice inside-out thinking in the echo chamber, believing that we know what's best for the customer, reinterpreting what we hear from the customer through a lens of what we want to push forward because it's of strategic importance or we've got shareholders waiting.

6:54Rachel Warren:And so we sort of twist things around to some extent and we can end up getting very distanced from the customer. Had some of my own experience with that at IBM Watson Health. And then the fifth and really a very important one is this idea of collaboration. And I think when collaboration first hit the corporate scene, I like to say that it was a behavior on a tent card in the cafeteria. and your KPIs were all around, oh, are you a nice colleague to get along with? Fortunately, it's evolved and it's now a strategic business imperative because the data shows us that when you unite product with services, with functions, and with other stakeholders in the organization, all around a common set of strategic objectives and all aligned around the customer, you can really achieve breakout growth.

7:49Rachel Warren:So when you're evaluating companies to invest in, my mantra is look at the culture, look at what their investment strategy is, what their portfolio approach is. How do they handle change? Are they collaborative and how are they organized and are they organized to unite around breakout growth? And then how do they really treat the customer? How do they talk about the customer? What do the customers say about them?

8:17Lorraine Marchand:Yeah, and I think that's so important. And these five C's that you've outlined, there are so many applications across industries. Of course, you have an extensive background in the life sciences that you've advised a wide range of companies. Of these five C's, so customer culture, collaboration, change, and chance, which one do you find that legacy companies tend to struggle with the most? And which do you find tends to be maybe the most easy for those companies to adopt?

8:45Rachel Warren:So culture for sure, because that's a big one. But I think that at the end of the day, the one that really hits home for the companies that when they fail to follow it through is the customer first. And, you know, the reason I say that is because we're all so aware of how Blockbuster failed to understand changes in the marketplace, changes in customer interest and customer behavior, Kodak, Nokia, Motorola, Borders. And so I think one of the first telltale external signs that we have of a company that's starting to falter is when we see that they are failing to listen to the customer, to listen to the marketplace demands.

9:30Rachel Warren:So it's just that that is one that's easier to spot, Rachel. All of them are important, but sometimes as an investor, it's really hard to get an inside look at what the culture is like. but you can start to spot where their customer misses.

10:12Lorraine Marchand:will be in. One of the things that you noted in your book that stuck out to me was that many organizations and investment teams mismanage risk because they treat failure as something maybe to be avoided instead of a source of essential learning. And I think there's a lot of lessons to be gleaned here for individual retail investors too. Something we talk about a lot at The Motley Fool is the importance of mindset when it comes to long-term investing. So maybe you could dig a bit into how to distinguish strategic risk from reckless risk and how that fear of failure can undermine good decision making?

10:47Rachel Warren:Yes. Well, that's a terrific question. And even my own investment approach includes some of that 70-20-10, right? We've got to get into some of the 20%, which might be private markets. We've got to get into some of the 10%, which might be net new high-tech startups. So I'm a big advocate of that. But, you know, back to your question, which was around how do we identify strategic risk from reckless risk? Very, very important to be able to do that. So reckless first. If we find that you are failing to deliver, that customers are complaining, that there are operational issues that are making your organization less efficient, that is not the kind of failure that we're going to celebrate, right?

11:36Rachel Warren:Those are operational, very practical types of misses that you need to fix. So we're not going to put those in the category of saying that that failure is okay. You know, the strategic failure is when you take a chance on a new market or maybe you're leading with a new product. And we're not exactly sure whether it is going to resonate with customers, but we have to give it a try. Or a new market that you're going into, a new country. So I think those are more on the lines of where we're investing in new strategies, markets, bringing new ideas to the table that would drive top line growth. And then those areas where it's all about delivery, performance, operation that maybe are a little bit more bottom line growth oriented.

12:20Rachel Warren:That's not where we want to take a lot of risk.

12:24Lorraine Marchand:Your background includes work at IBM Watson Health, Bristol-Myers Squibb. What, in your experience, is the biggest capital allocation mistake that large cap companies tend to make when it comes to innovation?

12:37Rachel Warren:Well, if I can share a cautionary tale at IBM Watson Health, we all remember Jeopardy, the Jeopardy game, when Watson Health beat the humans at Jeopardy. And I think what happened at that point was Watson Health and the engineers got quite ambitious and enthusiastic about the promise of this technology. They had some big ideas and big bets that they could revolutionize health care. And in one case decided that they could jump ahead and develop a cancer diagnostic. And in this case, they worked to co-create a cancer diagnostic with MD Anderson, a very well-known health care system in Texas. And in fact, MD Anderson sunk$62 million into the co-creation of this diagnostic, which for a hospital system is a lot of money, right?

13:34Rachel Warren:A lot of capital that went into it. And ultimately, unfortunately, it didn't work. And when you take the five C's and you try to analyze and understand what broke down here, it was the engineers did not understand MD Anderson's current processes, their workflows, the data, the limitations of the data. At the time, so much of the data that the doctors were aggregating were handwritten notes. And the fact is natural language processing wasn't as advanced as it is today. And yet IBM, because they were somewhat complacent in their growth and very ambitious, ignored some of these warning signs and moved very quickly, believing that they would be able to bring this product to market.

14:24Rachel Warren:And the other thing is, it's important to have one reference customer, but I always tell my students that you have to have at least 100 different customer interviews in order to confirm that there's a market and a need for what it is you're advancing. So I don't believe personally that developing a tool or a solution with just one customer based on their particular use case is ever going to be enough. And so what happened is when it didn't work at MD Anderson, for all the reasons I described, there was also nowhere else to go because the use cases and the model was all designed and developed around this one entity.

15:02Rachel Warren:And as you know, in health care, you talk to one hospital system, you've talked to one hospital system. They likely don't have much in common with any other hospital system. So I think it's this lack of proper planning, research, business fundamentals that is what hangs up companies that are a little bit overly ambitious.

15:23Lorraine Marchand:Yeah, that's a really interesting sort of cautionary tale, as you noted. I mean, looking whether from your own experience or just observing the public markets, I mean, you talked about a really prime example of a move towards innovation that was not successful. What are some examples of a successful push towards innovation, whether it's digital transformation or otherwise, that you have seen?

15:43Rachel Warren:Well, I mean, it's hard to talk about innovation success without pointing to some of the magnificent seven these days, I'm sure. So, NVIDIA is a company that, you know, with its GPUs and its chip systems and all of its innovation, I mean, they have wrapped themselves around the customer, all of their use cases, extending and expanding what it is they're offering to solve additional needs. And we see the results that that is bringing to bear. I mean, they are a major player when it comes to infrastructure now that is enabling AI. And it's hard to talk about anybody that's advancing any kind of tool or solution in AI that isn't very dependent and integrated with NVIDIA.

16:30Rachel Warren:So they have invented along with, beside, through, and with their customer. And I think that has really been critical to their success.

16:42Lorraine Marchand:The Civil War and Reconstruction was a pivotal era in American history.

16:47Rachel Warren:When a war was fought to save the Union and to free the slaves.

16:51Lorraine Marchand:And when the work to rebuild the nation after that war was over turned into a struggle to guarantee liberty and justice for all Americans.

17:00Rachel Warren:I'm Tracy.

17:01Lorraine Marchand:And I'm Rich.

17:02Rachel Warren:And we want to invite you to join us as we take an in-depth look at this pivotal era in American history.

17:09Lorraine Marchand:Look for The Civil War and Reconstruction wherever you find your podcasts.

17:39Lorraine Marchand:dive into that methodology a bit for me?

17:41Rachel Warren:Yeah. So the idea of intelligent failure is it's the right kind of wrong because we learn from it. And I think it's very important in innovation that we're not just looking at financial metrics, which I've alluded to, but that we also have learning objectives. Because if we have learning objectives, then we will know what are the other aspects of this experiment that we want to help us to learn from to advance our business, our market, our understanding of the customer, our operational acumen. And so we always need to be thinking about a couple different learning objectives. It also helps us diversify some of the risks, because if we're not just focused on the binary outcome of whether this is going to measurably improve revenue or growth, but we're allowing ourselves to say, well, we're going to learn a lot about a new market, or we're going to find out about how this new technology works, or whether it really matters to our customers.

18:39Rachel Warren:That way, you can bring all those findings back into the company, and they might lead you to pivot and move in new directions, but it's investing in your teams and their understanding. And, you know, one small example, Rachel, is a company called Ecolab. I'm very fond of them because they're 150-year-old hygiene company. And during COVID, they have a field team of 3 ,500 engineers. And all they do is go into the field every day, watching customers, observing them, talking to them, understanding what their pain points are. Really, really powerful. And to me, one of the main reasons that Ecolab continues to be innovative and growing today is that approach that they take.

19:23Rachel Warren:But during COVID, they visited their hospital customers and they noticed that the patients were standing outside waiting. And they found out that one of the reasons they were waiting is that they were waiting for sanitizing sprays to dry so that the hospital staff could let the next person into the hospital. So armed with this information, they demanded faster drying sprays. They chose a cohort of hospitals, and within two weeks, they had sprays that were drying in seconds over minutes, getting patients into the hospitals in seconds over minutes. Happy customers, revenue growth, and then they scaled from there.

20:04Rachel Warren:So I think a great example of being on the ground, seeing a problem, a small cohort to make sure that this was real and that you were solving a need and that they were willing to pay for it, you know, before we scaled. So to me, that's a classic example.