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Robert W. Lane |
Avoiding Commodity Hell: How John Deere is Driving Growth through Innovation
Industrial Research Institute Annual Meeting
Rancho Mirage, California
Remarks by Robert W. Lane
Chairman & Chief Executive Officer
Deere & Company
May 7, 2007
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Good morning. It's a pleasure to join you in this beautiful oasis in California, and to have the opportunity to share my thoughts on growing a business through innovation.
No group more than you recognizes the critical role innovation plays in ensuring the sustainability of a company. As chief technology officers and leading research engineers, you appreciate the need to be rethinking and renewing constantly. As a chief executive officer, I want you to hear again how much your ability to innovate is valued.
Innovation, of course, means different things to different people. But few will argue with the proposition that innovation changes key aspects of human life, as evidenced by a man whose invention coincidentally was patented this very day, the 7th of May, in 1888. That's 119 years ago today!
A junior bank clerk by day in Rochester, New York, this young man spent his evenings experimenting with different types of emulsion used in the complicated and cumbersome process of photography. As most of you know, the cameras then were as big as microwave ovens and photographic emulsion-covered glass plates had to be exposed and quickly developed before they dried out. Determined to simplify the photography process, he eventually invented a dry plate emulsion formula, which allowed plates to be exposed at leisure. You've no doubt guessed that I'm speaking of George Eastman, whose innovative thinking brought photography to the masses through his Kodak box camera.
Well, about 50 years before Eastman patented his invention, a struggling blacksmith named John Deere innovated as well when he created the first commercially-successful, self-cleaning steel plow. John Deere's invention allowed farmers to more easily cut through the sticky soil of the Midwest prairie, instead of having to stop every few feet to clean the traditional cast iron plow blade. This "self-scouring plow," as John Deere called it, helped open the frontier to agricultural development 170 years ago.
Today, John Deere's company is helping to open another frontier: the developing world. As people in emerging markets become more affluent, they want to eat better, wear finer clothes, drive cars, and travel. John Deere products and services are not only helping to feed and clothe the world, but we are also helping to provide renewable energy, build much-needed infrastructure such as roads and bridges, and even beautify and maintain public spaces and private land.
John Deere the inventor infused in us an appreciation that continuing innovation, often breakthrough innovation, is necessary to sustain the long-term viability of an organization such as Deere & Company which is now 170 years old.
Regardless of your business, we all operate in a world today that demands differentiation and there's little question that innovation is a critical driver in a competitive global marketplace. Although not entirely sufficient for success, our business requires innovation, both technical and otherwise, to achieve and sustain strong economic performance.
So, using the company I'm privileged to lead as an example, allow me to share some thoughts this morning on how innovation is driving John Deere's growth, in hopes you may find some of the ideas helpful in solidifying your company's future. Ultimately, effective innovation at John Deere depends on four key pillars:
- a sustained investment,
- a disciplined approach
- a broad perspective, and
- aligned talent
Sustained Investment
Let's first examine how John Deere values innovation. At our business, we fully embrace and aggressively invest in innovation. Our aspiration is to distinctively serve customers — those linked to the land — through a great business. A necessary condition to accomplish this is a steady stream of innovative products and services. Lacking this can lead us into what has been called "commodity hell." Continuing with tired products usually prevents us from earning the margins we need from our customers, and performing at an exceptional level.
To help us avoid commodity hell, we're investing in R&D for the long run, in good times and bad. As an example, over the past 15 years, in a variety of business climates, R&D has consistently run in the range of 4 to 5 percent of net sales, generally high for our industry. Currently, the Deere R&D spend is at a rate of nearly $2 million a day.
It takes a clear recognition of R&D's value to fund it in the troughs of your business cycle. I'm sure there were skeptics who wondered if John Deere would continue to invest in R&D during the dark days of the agricultural recession in the 1980s. It was courageous leadership, based on our fundamental principles, that saw Deere through a period where every other major agricultural equipment company failed, was restructured, or taken over. After the dust settled, John Deere emerged as a more dynamic, flexible organization, actually gaining market share, and on track for improved financial results.
In the late 1990s, a better farm economy, plus rapid international expansion, propelled Deere's earnings to new highs. But even today, with the progress we've made since that time, we're still not a great business, in terms of proven sustained performance. We've seldom earned our cost of capital for more than a few years in a row, but we are now started on the right path for changing that.
In late 2000 we introduced a concept called Shareholder Value Added. Subsequently, we unveiled a three-pronged strategy of exceptional operating performance, disciplined growth, and aligned high performance teamwork. Executing this strategy, we aggressively attacked our two biggest barriers to exceptional operating performance: too many assets and not enough margins. We have focused intensely on our business model, making needed improvements from supply management to manufacturing to order fulfillment. (I might add this process in itself took superb effort from our employees and a huge amount of innovation, but not the kind to talk about today!)
By focusing intently on asset management and customer demand, we've made fundamental changes in operations to drive out excess costs and inventories. The result has been 27 straight quarters — every quarter for about 7 years - where trade receivables and inventories in relation to sales have declined, compared with the same quarter of the prior year.
We've made good, solid progress to the point where our exceptional operating performance is now producing the cash needed to keep funding growth initiatives, including aggressive R&D — R&D that is necessary to grow and sustain the business, while simultaneously returning cash directly to shareholders, including doubling the dividend in the last three years.
Disciplined Approach
Nevertheless, while we're investing the cash generated from this exceptional operating performance into energized growth initiatives, we recognize that growth through traditional channels isn't going to be enough. We are putting plans in place to accelerate our innovations, and we believe they reflect a disciplined, thoughtful, and strategic approach, which is the second pillar.
In support of its overall business strategy, Deere recently introduced a multi-phased framework called the Business Growth Process, or BGP, which is designed to help the entire enterprise achieve sustained, profitable growth from a mix of new innovative offerings, as well as enhancements to our existing products and services.
I tend to agree with those who say you're not really committed to innovation unless you're willing to see some innovations fail...or as the legendary chairman of Coca Cola Roberto Goizueta once said, "You can stumble only if you're moving."
The need for a significant level of innovation — and hence, differentiation — has led us to develop a complementary process to BGP, which focuses on both speeding up and improving the quality of our innovation.
The Accelerated Innovation Process, or AIP, is being implemented to help us conceive, evaluate, and propose ideas much more quickly. Then, as appropriate, we advance the ideas with higher potential, sideline merely good ideas for later consideration, and discard the ones that show less promise.
We begin with the enterprise strategy and aspirations, which provide key "innovation spheres" or realms in which we have both the right to and the ability to participate. An example is renewable energy, which I'll touch on in a moment.
In the next phase, opportunity identification, we are using ideation sessions, analyzing mega-trends, and working closely with our marketing organizations as well as strategic partners and suppliers to define ideas that can truly break through. To understand the opportunity, we must thoroughly understand the customer and what he or she will pay for. We aim to avoid technology for technology's sake. Yet it's important to appreciate and even anticipate the possibilities afforded by technology trends since customers can't easily value what they don't know.
Then we prioritize the opportunities and begin to deliver on the most promising. This process requires a much greater alignment between our engineering resources and divisions' marketing organizations. It also creates higher visibility of opportunities across business units and to senior management so that resources can be assigned effectively. Finally, AIP introduces a set of tools and metrics to ensure that we are using consistent approaches throughout the enterprise.
In the short term, executing on our ambitious growth plans will come at a price, without any immediate offsetting benefits. Without counteracting improvements in our existing business, this would drag down our economic profit temporarily as we encourage ideas that do not have instant payback. I like to think of it as "good cholesterol." Hence, it's exceedingly important, as I mentioned in the first pillar, that the engine of exceptional operating performance is delivering.
A minute ago, I noted that some of the innovative growth ideas for John Deere may involve the exciting "sphere" of renewable energy. For example, as the world's farmers begin growing more crops for fuel, rather than just for food, this has implications for our equipment. We will likely need to re-design combine headers, rotors, and engines in order to handle denser, 300-bushel-per acre crops in an optimized manner. Product reliability, a longtime hallmark of our equipment, will need to increase all the more to handle such workloads in the same amount of time.
In this time of uncertainty when the renewable energy industry is just emerging, we will follow multiple paths, such as corn- and sugar-based ethanol, cellulosic ethanol, biomass, biodiesel, and wind, hedging our bets and in some cases, leading the charge. But under the guidance of BGP and in particular, our Accelerated Innovation Process, we'll be doing so with the help of a detailed roadmap. These processes are critical to integrating enterprise technology strategies with market needs and business resources to produce effective innovation.
Broad Perspective
The third pillar of effective innovation is a broad perspective. At John Deere, we are expanding our horizons and redefining what innovation means to our company. Traditional ways of achieving change may no longer work.
Our commitment to an ambitious mix of innovative and traditional growth pushes us to move beyond our core of mechanization, which got us to where we are today. In addition, we're also focusing our innovative efforts on automation and "smart" machines like sensor technology for our construction equipment that, with the touch of a button, automatically adjusts the loading bucket to get the biggest possible scoop....or telematics technology to monitor the productivity and overall performance of equipment, thus increasing uptime and alerting operators to potential problems before they happen.
Along the same lines, we often define innovation in one of two ways. First, innovation of a sustaining nature, which generates incremental improvements and second, that of a truly breakthrough nature, which has the potential to be disruptive to an industry, customer behaviors, and even the company that came up with the idea in the first place!
Sustaining innovation or incremental improvement builds on existing knowledge and existing markets, without challenging underlying assumptions. Customers can easily articulate sustaining innovation. It's comfortable for most businesses. These important innovations involve making accretive changes over time to sustain the growth of a company without making sweeping changes to product lines, services or markets in which competition currently exists.
Breakthrough innovation knocks down barriers that hold things back. It can be a real game-changer! It requires the ability to discover knowledge of uncertain markets and technology. It results in dramatic improvements in the performance of a product or service and the creation of new, highly differentiated products and services. Not only might breakthrough innovation require a "leap of faith", but customers rarely can articulate this form of innovation.
Henry Ford described it well when he said, "If I had asked what people wanted, they would have said 'faster horses'." Breakthrough innovation is often outside the comfort zone of companies. It can be disruptive to the company, sometimes requiring different manufacturing techniques, supply chains, skill sets, sales channels, marketing strategy and service models.
In the past, many companies, including ours, have struggled to achieve breakthrough innovation because it was perceived to be "solutions looking for a problem" - that is, focusing primarily on the edges of the technology envelope, creating things because they were possible, not because they were necessary.
Now engineers and management at John Deere believe that "necessity is the mother of innovation." It needs to be the driver. The most practical and stimulating approach starts with a clear understanding of customer needs, both articulated and especially, unarticulated. That foundation can help us discover entirely new technology solutions.
As a case in point, let's look at John Deere's AutoTrac, the automated tractor guidance system that differentiated our company a few years back when tractor sales were sluggish. Unlike navigation systems for your car, which guide you to a location, AutoTrac was so precise when introduced, it could guide a tractor and implement to within 30 centimeters of its last pass through a field. It virtually eliminates overlap, thereby saving fuel and chemical costs, as well as wear and tear on the machinery. Operator fatigue is reduced and productivity is increased.
AutoTrac answered key customer requirements — the need to hold down input costs, and get more work done with fewer people and less stress. Yet those customers couldn't articulate this innovation until they saw it. Now they tell us that AutoTrac has changed the way they do business, by saving them literally thousands of dollars in operating costs each year. The operator is in the cab, more to ensure the safety of other farm workers and to turn the machine at the end of the row, than he is there to drive the machine. Instead, he likely is on the Internet checking commodities prices, or on the phone "cultivating" a buyer for the crop.
In retrospect, AutoTrac has proven to be a breakthrough technology because it has allowed farmers to work in ways they've never worked before. It's a great example of defining the customer value proposition by first, understanding the unarticulated customer needs, then merging the needs of the market with the potential of technology, and finally creating a family of products and services that solve problems in new and very different ways. AutoTrac also proved to be a game-changer for certain parts of the industry, putting manufacturers in positions of having to play catch-up to meet changing customer expectations.
Sometimes one innovation leads to another that may have been unforeseen, and you have to be alert to the possibilities. For instance, since its introduction, we have continued to innovate with AutoTrac and are now able to control our vehicles within two centimeters of the last pass.
Such tight tolerances make it possible to irrigate large fields with highly-efficient tape systems rather than drip or spray systems. Before AutoTrac guidance, this was not possible because the implements would drive over the tape and tear it. Now the equipment avoids the tape by operating in alignment with planned rows. Tape irrigation dramatically reduces water use and the costly run-off of nutrients. John Deere recognized this new "open door" and walked right through it last year when we acquired the leading tape irrigation supplier, Roberts Irrigation Products.
It's important to note here that redefining innovation goes beyond products and services - it affects the entire value chain. We consider innovation a creative collaboration between ourselves and our business partners. Our growth strategy includes tapping into various outside resources, including suppliers, partner research universities and other sources. As I've mentioned, this will require a better understanding of customers and some intelligent risk-taking, but also, earlier involvement of suppliers in product and service development.
As IRI members will understand, another way to explain innovation is the sum of invention plus commercialization. Invention is both strategy- and idea-driven, and considers market and technology trends, customer needs and novel technologies. The commercial element takes into account the company's financial goals and the market viability of the product or service.
Introducing innovative products and services is a balancing act between the right time and place. It's necessary to be ahead of an identified need, but not so far ahead that the customer has difficulty making the connection. Advanced marketing is truly a necessary part of the equation. As shown earlier, the close ties between engineering and marketing can only get closer if you are going to innovate effectively.
One important caveat before leaving this point of redefining innovation: John Deere realizes that good ideas come from multiple sources. We invite external input. In fact, we invite IRI members to help invent the innovations of the future. We encourage you to come forward with ideas about robotics, communications, software, artificial intelligence, telematics, electrification, energy storage, or biomass processing. We're open for it!
Aligned Talent
So far, we've talked about the importance of investing in innovation, the need for a disciplined approach, and broadening the definition of innovation. Frankly, none of this is possible unless you have the right people working well together, which is the final pillar of effective innovation I'll discuss this morning.
At John Deere, a commitment to innovation means a commitment to aligned talent. You'll remember earlier, I mentioned our three-pronged strategy: exceptional operating performance, disciplined profitable growth, and the glue that holds it all together, aligned, high-performance teamwork.
I often tell our employees that although products can be copied, it is very difficult for competitors to duplicate an aligned, high performance team. Talent that works well together is the ultimate competitive advantage, and companies that prosper and grow are those that listen to, engage and guide their employees.
In an effort to create an aligned, high performance team at John Deere, our salaried employees create annual performance plans with objectives that support unit, division and enterprise goals. Likewise, we have developed what we understand is a "best-in-class" compensation system that rewards good performance with good bonuses, and great performance with outstanding rewards. As a result, John Deere people are working together like never before, with a clear purpose in mind.
Such collaboration is critical since innovation is more of a team sport, less of a solo sport. Innovation isn't as likely without people working together across cultural, geographical or organizational lines to make it happen. To give you an idea of how serious we are about innovation at John Deere, each senior officer reporting to me is required to have a breakthrough innovation-related performance management objective, and compensation at year-end will be impacted based on whether the goal is met.
We believe that attracting, developing and retaining the best global talent, from all backgrounds, is what will enable John Deere to build the strongest high performance team. And the day-to-day results those team members achieve, their unrelenting attention to quality and to customer focus, are what ultimately will fund our growth aspirations and make innovation sustainable.
In fact, people have to work in an environment that helps them reach their full potential. Ours is a culture of respect. We desire to create an environment where individuals can feel comfortable challenging the status quo, voicing their opinion and seeking ways to help each other be successful.
At John Deere, we have two expressions that support this environment. The first is: "No smoke, no mirrors, no tricks...straight down the middle." The second is: "Bad news early." These sayings demonstrate how everyone is accountable for first, acting with integrity, and second, for addressing and solving issues head-on. This kind of culture breeds trust. And trust helps open minds, engages people and ultimately fosters innovation.
In the end, innovation starts with an idea, undeveloped, but with great potential. The past experience of John Deere the man as a blacksmith had shown him that polishing the tines of pitchforks made them slip easily in and out of hay. He asked himself, "Why not apply the same thinking to a plow blade?" Today, our company is innovating in this same spirit.
For this initial spark called innovation to continue to make a real difference in our world today, it is up to us to persuade ourselves and our managements to value it, to execute it in a disciplined way, to broaden our perspectives about it, and to support it with the right talent.
I close now, knowing that in nurturing innovation from a shapeless idea to a prized customer solution, we at John Deere, and maybe you in your business, have the opportunity to propel a good business to a great business, thus delighting all with a stake in our company, and contributing to the quality of life and human flourishing for all.
We have a terrific set of speakers waiting in the wings who I'm confident will offer thoughtful and provoking discussion on the wonders of innovation. Enjoy the stimulating conference and thank you for listening.
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