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We live in a world of ever-increasing complexity: in theindustry structures we occupy, the alliances we form andcompete with, and the products and services we developand deliver to ever-smaller niches. This complexity is driv-en by the search for commercial advantage, for better-dif-ferentiated ways to deliver value, or by customers’demands for customisation.

Some companies thrive on this complexity, innovatingcontinuously to resolve or marshal complexity to deliverextraordinary value to their customers and shareholders.Some high-impact companies even re-shape their indus-tries by finding and implementing ways to marshal com-plexity in completely new ways.

We call this capacity to innovate in order to exploit theopportunities associated with complexity “SmartInnovation”. Smart Innovators excel, firstly in understand-ing the complexity in their environment and operationsand secondly in purposefully innovating to resolve or mar-shal the prevailing complexity.

We at Arthur D. Little have embarked on a journey. Wehave set out to understand Smart Innovation and SmartInnovators. We aim to identify the patterns of success andto develop the tools that will enable our clients to trans-form themselves into Smart Innovators. In this article wedescribe the starting point for this journey, while otherarticles in this edition of Prism highlight some earlyinsights.

Smart Innovation is the capacity to spot the opportunity incomplexity, then innovate to achieve a commercial advan-tage. The best proponents display superb insight to identi-fy opportunities early and then manage complexity effi-ciently to derive a competitive edge. They target theirinnovation precisely and then implement efficiently.

We see Smart Innovation displayed at all levels of busi-ness, from the strategic, in directing and shaping enter-

Smart Innovation – Innovate to seize the opportunity in complexity Richard Clarke

The world of business is

gripped by the quest for

innovation, but innova-

tion can lead to ever-

greater complexity.

Companies striving to

stay ahead of their com-

petitors thus need to

become Smart Innovators

by developing the ability

to spot the opportunity in

complexity.This article

explains how companies,

by developing this ability,

can gain access to the

best of both worlds.

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Smart Innovation

prises, to the tactical, in product or service development,delivery and support. The very best Smart Innovationaligns the strategic and tactical elements in such a way asto be difficult to emulate, and achieves an integrated effi-ciency that is hard to beat. We believe there are two keyelements to Smart Innovation: the ‘complexity opportuni-ty’ and the ‘innovation agenda’.

The complexity opportunity

Most organisations see only the threat in complexity – theproliferation of products, the sprawl of a supply base, mul-tiple manufacturing sites bickering for resources, confus-ing portfolios of businesses, accompanied by a gradualloss of clarity of objectives and purpose. These companiesexpress the conundrum as ‘how to simplify without sacri-ficing revenue and profit’. We believe there is an alterna-tive formulation – ‘how to seize and maximise the oppor-tunity from either eliminating or embracing complexity’.

Let’s consider elimination first, not because it is necessari-ly the better option, but because it is the more common.

Certainly there are opportunities from simplification andcomplexity reduction, through careful rationalisation at alllevels. This might be by focusing the business as a wholeand disposing of peripheral business units, or by formingsupply chain partnerships that allow concentration on justthe areas where you can add differentiated value.

Product rationalisation is the most commonly pursuedsimplification opportunity. Perhaps the most spectacularreduction in brand complexity has been Unilever’s moveto 400 from over 1,600. Procter & Gamble also started amajor initiative in the late 1990s to reduce the complexityof its product ranges, concerned by the danger of confus-ing the consumer. The mantra is to use customer valua-tion tools to focus on and choose the profitable niches –and cut the rest. Try not to worry too much about the nag-ging concern that a new entrant with a disruptive technol-ogy or innovation will start in those niches you have aban-doned.

Many other companies have pursued cost savings fromrationalising supply chains, manufacturing facilities andoperations, spares and support activities to the pointwhere there’s not much fat left. For these, embracingcomplexity, as opposed to eliminating it, may open upgreat opportunities for both revenue and profit. Startingwith the industry as a whole, are there parts of yourindustry characterised by profit-sapping complexity andconfusion? Is there a role for somebody to step in andchange the game? Does your business have parts of acomplex whole, so that adding a few more bits wouldenable you to combine them in different ways and offermore value? Could you make your customers’ life simplerby taking on more complexity yourself – and how muchmight that be worth?

Norwich Union, a financial services company that is partof the Aviva Group, purchased Oneswoop, a telephoneand on-line car sales operation. Bundling this with theirfinance and insurance offerings gives impetus to theirstrategy of becoming a one-stop shop for motorists.

Another example of simplifying life for customers bybundling complex systems and services is ‘power by the

Exhibit 1 The two key elements of Smart Innovation

Master theInnovation

Agenda

� Set innovationstrategy

� Implementefficiently

Exploit theComplexityOpportunity

� Eliminate� Embrace

SmartInnovation

Perhaps the most spectacular reduction inbrand complexity has beenUnilever’s move to 400from over 1,600. Procter &Gamble also started amajor initiative in the late1990s to reduce the complexity of its productranges, concerned by thedanger of confusing theconsumer.

The complexity opportunity: how to seize and maximise theopportunity from eithereliminating or embracingcomplexity.

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hour’. Emerging first in the provision of locomotives to rail-ways and aero engines to airlines, the concept is simple –the supplier is responsible for all aspects of support, serv-ices, spares, maintenance, overhaul and the underpinninglogistics. You the customer pay simply for an agreed levelof power over an agreed number of hours. This concepthas now been adopted by applications as diverse as high-powered computing and forklift trucks.

While there is indisputably a drive for products and servic-es that are easier to adopt and use, there is a continuingdemand for more (or better-chosen) functionality. Can youadd the complexity of that sought-after functionality whilesimultaneously simplifying the customer touch points?Philips’ new positioning “sense and simplicity” is all aboutoffering customers the functions they want in a way thatis easy to use.

Creating alliances increases complexity, but may offeraccess to unserved markets. In a recent case for a leadingfinancial services group in Venezuela, a team from ArthurD. Little immersed themselves in the lives of several low-income families to understand their real needs from notjust the financial infrastructure and the myriad informalsystems established among those outside the bankingsystem but also from the widest potential provision offinancial supporting services. Armed with this insight theteam explored opportunities for collaboration between ourclient in financial services, government and non-govern-ment organisations to create new products and servicesthat overcome the natural suspicion of a disenfranchisedcommunity. From this more complex array of co-ordinatedproviders we crafted exciting new service opportunitiesfor a win-win outcome.

Looking back into your supply, service and support chain,should you form an alliance that, although making your lifea bit more complicated, adds more value than cost? Ifyour business lies in the manufacturing, supply and logis-tics area, then how much complexity should youembrace? Flextronics’ answer is ‘all of it’, including detaildesign. Kodak has just announced the transfer of the man-ufacture of its digital cameras to Flextronics, which willalso take on most of Kodak’s Digital Product Centre in

Japan. Flextronics is therefore continuing its extensionfrom its core business of electronics manufacturing serv-ices. The move started when Flextronics licensed ARM’schip designs to allow it to offer higher value to customersby designing and supplying modules rather than justfocusing on manufacture. Furthermore, as a global manu-facturer with a diversity of manufacturing sites andprocesses, Flextronics is able to innovate faster thanmany of its customers, then transfer such innovationacross its global operations. Flextronics acknowledges thecomplexity of its operations, then leverages it globally todo better than companies working on a more regionalbasis. Extending this philosophy to design is the next logi-cal step.

If we consider the other imperative in today’s business,that of innovation, we can also see opportunities in com-plexity there. By accessing a wider and more diverse setof innovation resources outside the traditional companyboundaries you may be able to boost your innovation per-formance. More complex, certainly, but so much moreeffective.

The innovation agenda

In short, we believe that Smart Innovators spot and seizethe complexity opportunity. But Smart Innovators are alsomasters of innovation. They understand the alternativepaths open to them in their industry, they set an innova-tion strategy that supports their business ambitions andthen they execute superbly.

The innovation agenda clarifies for them the full set ofstakeholders they need to satisfy, covering not just theirbusiness aspirations but also identifying their stance oncorporate citizenship and sustainability. Smart Innovatorsare clear about how innovative they need to be and theyunderstand the trade-offs in choosing between innovationleadership, fast followership and later adoption. They dis-play the adaptability of the chameleon and its ability tocombine behaviours into the ideal for their circumstances,as we explained in the article The Chameleon Innovator inthe previous issue of Prism (p.p. 8-21). They understandwhen to be radical and when to be incremental, and why.

The innovation agenda: By accessing a wider and more diverse set ofinnovation resources outside the traditional company boundaries youmay be able to boost yourinnovation performance.More complex, certainly,but so much more effective.

Creating alliances increases complexity, but may offer access to unserved markets.

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Most importantly, they are explicit about where innovationgives them the most leverage, be it in business model, inproduct or service, or in delivery process.

Innovation can be derived from many sources, be it theinternal expertise with a deep knowledge of the business,the products and the processes, or perhaps the wider net-works of resources celebrated in ‘open innovation’. SmartInnovators clarify what they need from which source andthen build the capability to integrate the best contributionsfrom all their chosen sources into effective innovation.

Procter & Gamble are in the vanguard of open innovation.Using ‘connect + develop’ instead of ‘R&D’, they accessthe capabilities of massive resources outside the compa-

ny. They use a number of mechanisms to manage thecomplexity of the networks and the sheer diversity ofopportunities available to them. Proprietary networks aremanaged alongside open networks. With great clarityabout screening and selection priorities, P&G are drivingup their rate of innovation while reducing the cost. Theyare aligning their internal processes with an organisationalculture shift to allow them to make best use of open inno-vation. More complex, certainly, but also much highervalue.

Sometimes the opportunity for innovation arises whentwo pools of excellence merge, as in a recent case thatwe conducted for a global Scandinavia-based manufactur-er of capital goods. Having acquired a significant competi-

Amazon is often held up as an example ofgood practice. But let’s look again from theperspective of Smart Innovation across manyaspects of its business. Amazon is a fascinat-ing example of complexity harnessed to apowerful customer interface that deliversvalue to customers, partners and shareholdersalike. Let’s start with a most fundamentalquestion: is Amazon a retailer? Well, yes, butit is also a marketplace. Amazon allows com-petitors (e.g. other bookshops) to access cus-tomers through its web-interface. By doing soAmazon creates a marketplace attractive to awider community, offering wider but simpli-fied choice to customers. The customers’reviews enable exchange of market informa-tion and, indeed, Amazon remains ‘above’such debate. It doesn’t push product, it offersalternatives. So, viewed as a Smart Innovator,Amazon positioned itself as a new entity in itsindustry by embracing the complexity ofallowing others to sell through its portal, com-bining the role of retailer and market.

It would have been easy for Amazon to stick

to selling books, where it all started. Insteadthey have diversified, building on their brandvalue and the power of their portal, database,search engine and supply chain to deliver awhole range of products. But note thatthey’ve chosen products that can be boughtaccording to specification. They carefully limittheir exposure in products that might vary onefrom another or that customers might need toreturn because they don’t fit (either literally orwith expectations). So the Smart Innovatorchooses how much complexity to handle.

Product range? Not only do they offerAmazon’s stock, but also their partner suppli-ers’, tied together through an effective andefficient search engine and database tools ofsophistication and high performance. Behindthe scenes their processes assure promptdelivery, even to the extent of organising com-panies that supply in parallel with Amazon, forexample out-of-print books that can beordered and delivered alongside DVDs andgardening equipment.

The supporting services offer complex func-

tionality, like the recommendations of prod-ucts based on past purchases, organised intoa wish-list available to family and friends forchoosing gifts. Despite the complexity, thisSmart Innovator maintains a simple and con-sistent customer touch point. Payment andorder-tracking services then enrol other suppli-ers into the Amazon offer.

Note also the barriers to imitation. By movingearly and allying with other merchantsAmazon have reached critical mass wherethey attract enough customers to make theman attractive partner for other retailers. Bycombining the retailers’ offers they have madethemselves a simple one-stop-shop for cus-tomers. With wish-lists, recommendationsand simple pack-and-pay processes they main-tain efficiency for their customers. Their ambi-tion is the virtuous circle of more customersand more suppliers, with Amazon gaining amargin on all transactions.

Their innovation agenda is to be a leader, toexperiment continuously via many fast-feed-back tests of concepts with real customers,

all targeted on being the most customer-cen-tric organisation in the world. This agenda isclearly articulated by Jeff Bezos to audiencesboth inside and outside the company.

Delivering on this agenda is Amazon’s ‘serv-ice-oriented architecture’, which manages thescalability of their increasingly complex prod-uct range and their increasing merchant andcustomer base, and provides a software envi-ronment within which they can continue toinnovate. Amazon Web Services enables themto capitalise on contributions from otherdevelopers. Indeed, they have innovated intheir development management processes tokeep the process dynamic. So Amazon use aninnovation engine that draws upon a complexrange of influences, harnessed to their coreambition.

Hence Amazon exploit complexity across theirbusiness, from their core strategy, their prod-uct range and background processes all theway to how they innovate – Smart Innovationacross the organisation.

Amazon: Smart Innovation at work

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tor, our client needed to extract the best coverage acrossthe world of the best products that the newly mergedportfolio had to offer. We created a fundamentally newstructure of portfolio modules and platforms that resolvedthe complexity from the merger and, more importantly,provided a framework for future innovation to mesh seam-lessly with past product success. This enabled a refine-ment of business strategy, opening yet further opportuni-ties in business model innovation.

Excellent innovators set a clear innovation agenda thatproclaims their objectives, targets, methods and meas-ures for their innovation activity. Smart Innovators targettheir agenda on the complexity opportunity, and thenfocus on the efficiency of their implementation to deliverextraordinary results.

Smart Innovation as an overarching strategy

At the heart of Smart Innovation is the capacity to simulta-neously master the management of complexity and themanagement of innovation. This is not to say that themost innovative companies in the most complex environ-ments are ‘smarter’. Instead we see a particular skill inchoosing, for a given business environment, the requisitecomplexity and mastering that, coupled with the optimumchoice of innovation strategy driving masterful implemen-tation. As Einstein said, ‘Make things as simple as possi-ble, but no simpler.’

In the examples above we have shown how companieshave demonstrated Smart Innovation in different domains.For example, Norwich Union’s strategic shift from beingan insurance company to embracing the complexity of carpurchase, finance and insurance positions them to offertheir customers a one-stop shop. Philips’ focus on ‘senseand simplicity’ shows the new trend to product technolo-gy that offers capability without confusion. Flextronics andits competitors extend their operations to embrace moreof a complex supply chain – from all of integrated manu-facture, logistics and supply now to design. Kodakresponds to this opportunity for somebody else to handlethe complexity by handing off digital camera manufactureto Flextronics. P&G’s decision to open up their innovation

to the widest possible participation gives them a complexnetwork to manage, in exchange for truly global resourcesand insights and thus faster growth.

Harder to find are companies that have demonstratedSmart Innovation in an integrated way, across severalaspects of their business, or in a coherent way throughtheir value chain. One such is Tetra Pak. Most people seethe Tetra Pak package as the product. Instead Tetra Pakhave addressed complexity throughout the supply and dis-tribution system, all the way to the supermarket shelf.Tetra Pak’s founder, Ruben Rausing, sought a rational con-tainer shape and structure, coupled with an efficient fillingsystem that would then contribute to simplificationthroughout the logistics chain. The Tetra packages we seetoday, coupled with Tetra Pak’s filling and processingequipment, make life easier for users all the way throughthe supply chain. The focus on aseptic packaging and fill-ing allows less dependency on refrigeration. Tetra Pak isalso exploring how best to approach the recycling of theircontainers, so completing the loop.

How would you react to a company that changes its prod-uct range about twenty times a year? Each time newproducts will be designed and manufactured and soldanew. When those products are sold out, that’s it. Thereare no reruns of a proven product, no capitalising on suc-cess. Instead they embrace the complexity of starting allover again.

Zara, the fashion garment company, does just this. Thekey to their attraction to customers is the explicit exclusivi-ty that comes from short product runs. A challenge toclothing retailers is how to encourage the customer toreturn frequently for another sales opportunity. Zara’smodel embeds this at the core of their business model,because with the next product range different to the lastrepeat visits are ensured. Zara’s designers, all in-house,produce about 40,000 designs a year, of which 10,000 areused. Like Benetton, Zara makes use of dyeing late intheir process to allow rapid colour changes. Their supplychain is extremely responsive, delivering product to itsstores worldwide fifteen days after they are designed. Bychoosing relatively smaller suppliers of textiles than their

Excellent innovators set a clear innovation agendathat proclaims their objectives, targets, meth-ods and measures for theirinnovation activity. SmartInnovators target theiragenda on the complexityopportunity, and then focuson the efficiency of theirimplementation to deliverextraordinary results.

Harder to find are compa-nies that have demonstrat-ed Smart Innovation in anintegrated way, across sev-eral aspects of their busi-ness, or in a coherent waythrough their value chain.One such is Tetra Pak.

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competitors Zara also adds to their air of fashionability –and the complexity they manage. Zara demonstrate astrategy, a market position and a supply chain that make avirtue of renewal, manage the ensuing complexity andhave achieved a unique position in their industry.

Amazon continues to be an example beloved of enthusi-asts for e-commerce. Amazon’s innovations, whichincrease the complexity of their business in strategy, prod-uct range and value chain – while still providing the cus-tomer with a simple and consistent interface – are themark of a Smart Innovator with a consistent mastery ofinnovation and complexity (see box on page 14).

We have worked with various clients on questions ofchoosing the appropriate level of size and complexity intheir business, and helped them to design innovationpaths appropriate to their selected portfolio of productsand innovation stance. For example, we worked with aScandinavian automotive tier-one supplier to address theiroptimal size and complexity for success within their indus-try given their resources and history. By making the issueexplicit it becomes possible to debate issues of strategyand ambition, customer proposition and leverage and thesupporting business model. This top-down assessment ofthe complexity opportunity enables a co-ordinatedapproach to developing the business. Our work with themon product portfolios to give them the best match of inno-vation and complexity to meet customers’ needs was anearly example of Smart Innovation at work.

The journey towards Smart Innovation

The ideas behind Smart Innovation offer new perspectivesand highlight new opportunities for companies acrossmany industries and sectors. Smart Innovation is an over-arching concept, within which we are identifying insightsin all aspects of business from the strategic to the tacti-cal. Other articles in this edition of Prism demonstratehow Smart Innovators can claim the strategic high ground.

We also believe that measurement is a critical part ofSmart Innovation – to quantify potential and to measureprogress along the path to excellence. Therefore we have

developed tools to quantify both the complexity masteryand innovation management elements. We plan to reporton this work in later issues of Prism.

Smart Innovation is the capacity to spot the opportunity incomplexity, then innovate to seize that opportunity andachieve extraordinary business performance. We encour-age you to embark on this promising journey.

The author wishes to acknowledge the contributions fromCharles Boulton and Rick Eagar

Richard Clarke... has just completed his four year term as Global Leaderand Chief Executive Officer of Arthur D. Little duringwhich the firm has been pioneering development aroundSmart Innovation. Richard is now returning to ArthurD. Little's, Cambridge, UK office, from where he willpromote international development of the firm'sSustainability, Environment and Risk consulting services.E-mail: clarke.richard@adlittle.com

The ideas behind SmartInnovation offer new perspectives and highlightnew opportunities for companies across manyindustries and sectors.