Thursday, November 5. 2009Is optimization the enemy of innovation?
Last week I delivered a keynote on the first day of our Premier Business Leadership Series event in Las Vegas. My topic: Innovate and Optimize. People often say optimization is the enemy of innovation. I disagree. Moreover, you can’t have one without the other, particularly right now.
Optimizing for its own sake without considering how you will innovate is foolhardy. Innovating without any thought to how you will improve your practices is the nail in the coffin. It’s like two governing bodies that play off each other. How do you create the balance between the two?  Optimization is not just about cost cutting and doing things on the cheap. Optimization is also about operations research techniques, price optimization, customer profitability, those things that move your business forward. Don’t let your CFOs drive your optimization focus as cost cutting initiatives. For a majority of businesses, optimization just means cost cutting. While that might help the outlook in the immediate term, it can be devastating in the long run. Again, innovation and optimization need to work together. What you need is optimized innovation. That theme resonated well with people at PBLS. It’s what they want their peers and business leaders to hear. I got many comments saying, “I’m glad to hear somebody stand up and say it’s not just about cost cutting.” I also got a lot of feedback on understanding how innovation fits within an organization. It’s not just about creating something new and cool. Like Peter Drucker (who would have turned 100 this month) says, you need to deal with your current business, what’s core to your business and where your business needs to be. Your efforts to innovate need to make sense in all three phases. Photo by Casito Comments
Display comments as
(Linear | Threaded)
You are right. Optimization and Innovation are indeed linked.
Customers would like their supplier to optimize, reduce costs so that they can bring the price point down and commercialize their innovative products.( or innovatively position their products) Customers would like their suppliers to come up with innovative products so that they optimize their costs/deliveries for their customers, optimize their own operations. Customers would like suppliers to optimize their costs, deliveries so that they can further optimize their costs/deliveries to their customers, optimize their operational performance. Customers/suppliers need not be two external organization. They could even be 2 different groups within the same organization ( e.g. R&D innovating / optimizing products, processess for the benefit of Sales Organization ) Jim,
People who say optimization is the enemy of innovation would soon change their minds if they knew what SAS software that has optimization can do for them. It's much more a matter that to innovate, they have to optimize. Otherwise, obviously, things are done suboptimally. The words "optimize" and "optimization" are often bandied around as a vague desire to do things better, but I want to describe what really is involved in optimization; the techniques to use to achieve beneficial results- these techniques are built into a variety of SAS software, or allow you to decide what to do, to manage a business or government, and to know whether what is done will actually be better, if not the best that can be done. Often mathematical models are formulated and attacked by numerical optimization algorithms, an intimidating prospect to some at first but made easier with SAS. As Jim correctly points out, simply cutting costs in one thin sliver of all business operations may not be the best thing to do- in fact it could be exactly the opposite of what should be done. For example, a supply chain may involve procurement, manufacturing, inventory control, distribution, and ultimately sales, and any numerical parameter of any of these aspects influence what should be done across the breath of the supply chain. Consider the ramification of deciding to buy less raw material to cut costs or, on the other hand, you manage to procure it at a cheaper rate. A change in the procurement cost of some raw material or the amount available may significantly influence what is the optimal quantity of a product that should be manufactured, possibly carried in inventory, which in turn determines how much is sold to customers, and what is the minimum price they can be charged in order you make a profit. If they are charged more, perhaps other customers can be too, and that influences how much should be manufactured, different than before, which means more raw material has to be bought, and so on. You get the picture- *the big picture*, and also taking into account resource (commodity, people, money, space, …) availabilities, capacities, demand, ... other constraints. It's most important to identify who are a business' best customers, but there is really no way to do that, proven mathematically, without using Operations Research and numerical optimization. Numerical optimization precisely determines how much the total objective will be changed when one of the parameters is changed. This sensitivity analysis is useful when there is uncertainty, especially in demand, very important to be sure, but in other values as well. Here's a quick read about SAS Optimization: http://www2.sas.com/proceedings/forum2008/199-2008.pdf If you want to learn more about SAS/OR: http://www.sas.com/technologies/analytics/optimization/or/ Here are a few of the SAS Solutions that have optimization as crucial computational components: SAS Marketing Optimization: http://www.sas.com/solutions/crm/mktopt/fact.pdf SAS Demand Management Analytics for Hotels and Hospitality Companies: http://www.sas.com/industry/hospitality/hotels/revenue_management.html SAS Inventory Optimization: http://www.sas.com/reg/wp/ca/3520 SAS Regular Price Optimization: http://www.sas.com/industry/retail/rev_opt/reg_opt.html SAS Size Optimization: http://www.sas.com/industry/retail/merchandise/size-optimization.html SAS Service Operations Optimization: http://www.sas.com/solutions/service/ SAS Service Parts Optimization: http://www.sas.com/industry/mfg/spo/index.html You'd be shocked how many companies, sometimes very large, still do management by tinkering with spreadsheets, by managing inventory by kicking boxes, or by saying there are customer driven focusing only on sales numbers. I'm left absolutely aghast that often the decisions of central concern to their business are not done using proper optimization techniques, but "by the seat of the pants"- that's just where they will be kicked by their more scientifically run competitors. Trevor Kearney Manager, Numerical Optimization R&D. SAS, Cary NC. As a long-time analytics practitioner (and member of both the American Marketing Association, and the Institute for Operations Research and the Management Sciences) I have witnessed firsthand the yin and yang contained in the relationship between innovation and optimization. I have heard a few ideas that can help bring them together.
One of these ideas is about clarifying the terms being used within the organization. According to the Cambridge Dictionary the root term innovate means to “introduce changes and new ideas.” In contrast, renovate means to “repair and improve something,” which as you point out, this is generally where optimization plays. Advocates of optimization often argue that to improve something (renovation) often involves changes and new ideas (innovation). However, it may more useful for those interested in helping their organizations to improve performance to take a different tack, and to speak of optimization as a kind of renovation. I know “renovation” doesn’t sound as important as “innovation,” but is often just as important in business success. An example can help here. A few years ago I was hired by the marketing organization of a very large pay TV provider. My group's charge was to develop consumer insights to aid the innovation embodied in bringing new products to market. These new products were things like video on demand, and integrated communications services (e.g. email + voice). So, for both product design, and marketing of new products our advanced analytics process was seen as an aspect of innovation. The organization quickly learned however, that the existing processes around sales, installation, and service were in need of repair and improvement in order to provide a positive experience throughout the customer lifecycle for the new products. Take sales and installation for example, where the skill requirements for delivering integrated bundles of digital TV, voice, broadband, and home networking are immense compared to analog cable TV. Consequently, while the marketing launch of the new products was a smash success, the initial sales-to-install ratio was less than 60%. Initially, only a little over half of the sales were converted to paying customers! As you have already guessed, this is where renovation (optimization) was quickly applied in order to: 1. understand the root causes of order failure within the order taking and fulfillment process; and 2. optimize the allocation of technicians to work orders based on products ordered, skill level, geography, and schedule. Success (increase in revenue generating units, and profits per customer) was only possible by joining product innovation with renovation of some basic elements if the customer experience already in play. Cost cutting was not the objective, rather the optimal allocation of customer-facing resources in required to deliver on the promise of innovative new products. Thanks for starting the dialogue. I'm interested in how others have experienced the complementary nature of innovation and renovation. |
ABOUT THIS BLOG Jim Davis, Senior Vice President and Chief Marketing Officer for SAS, is responsible for providing strategic direction for SAS products, solutions and services and presenting the SAS brand worldwide. Additionally, he oversees a number of operational units including Publications, Education, and Alliances and Channels. In this blog he writes about the larger issues that affect a global business, and what it takes to be competitive in the 21st century. Read more about Jim.Calendar
Syndicate This BlogQuicksearchCategoriesTagsThe blog content appearing on this site does not necessarily represent the opinions of SAS. Your use of this blog is governed by the Terms of Use. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
This post was mentioned on Twitter by DavidBThomas: Is optimization the enemy of innovation? SAS Sr VP and CMO Jim Davis on one of the key themes from #pbls http://bit.ly/4omylR
Tracked: Nov 06, 04:08