Put Innovation to Work

Saturday, 13 June 2015
Photo: Mary Jane Grant

Put Innovation to Work

Follow these principles to generate and sustain growth.

Innovation has been consistently and quantitatively linked to revenue growth and improved profit margins two of the most critical deliverables for any enterprise.1 If innovation is so powerfully linked to performance, why do companies continue to fall short in the pursuit of innovation?

First, there is a huge gap between awareness and action. In a recent global survey, 84% of executives said that innovation is extremely or very important to their companies' growth strategy. However, only 29% said they were effective at setting priorities for innovation in the strategic planning process.2

Second, most companies' innovation efforts are saddled with lukewarm goals and stifling metrics. Three-quarters of executives in a global survey said their innovation efforts focus on primarily on smaller, incremental improvements, and two-thirds said short-term financial returns trump long term potential when projects are being evaluated.3

Third, even when companies believe they are pursuing innovation, they are usually doing the wrong things. Ingrained orthodoxies and wrong-headed processes actually hinder innovation. The result is a stream of missed or under-achieved opportunities, especially in breakthrough innovation, which can be six times as productive in terms of growth than a typical incremental change.4
Some companies are realizing their shortfalls and taking steps to correct them. Here's an example from Cisco Systems:

"The more we studied the issue, the more concerned we became, especially about our innovation decision-making processes. We were green-lighting only those ideas that produced immediate returns. In many instances this yielded gains in profit and market share. But it also meant that our company was missing opportunities."5

Transform your organization through innovation

If you want your company to thrive and grow and endure, you need to make innovation a priority and then you need to do the right things for innovation to succeed. Start by following these seven principles:

  • Look at innovation through the lens of growth and sustained value
  • Understand that innovation does not fit traditional management methods, and adapt accordingly
  • Diversify activities for different types of innovation – incremental, significant and breakthrough
  • Adopt a portfolio management approach
  • Use new and different processes, especially for breakthrough innovation
  • Make innovation management an explicit function with a senior person in charge and a dedicated budget
  • Evolve organizational design, management style and corporate culture to leverage the innovative capacity of the enterprise

Look at innovation through the lens of growth and sustained value

Innovation is the source of new growth and sustainable value for every organization. Innovation captures new efficiencies on the operations side and creates new opportunities on the market side. It engages employees in ways that bring meaning and enjoyment into work. An innovative organization is alive and growing - generating both today's profits and tomorrow's opportunities.
When you look at innovation through the lens of growth and value, you realize how integral it is to the enterprise's ability to survive and thrive. You stop dabbling in innovation as a part-time or stop-start activity, and you establish it as an explicit function with all the validity and resources of other functions such as marketing, finance or HR. Finally, you see innovation, not as a 'cost' but as a critical investment in competitiveness, growth and sustainable value. Innovation is the only thing that will keep your enterprise alive.

Understand that innovation does not fit traditional management methods, and adapt accordingly

The management methods that predominate today were invented in the early 20th century to meet the needs of large-scale manufacturing. Systems were designed for reliability and efficiency. Reporting relationships were embedded into a hierarchy that maximized control and minimized deviations from plan.

These systems, still in place in most organizations, are not neutral toward innovation. They are counter-productive to innovation. While they may be effective in running certain core operations smoothly, 20th century systems undermine the elements that are necessary to innovation - such as flexibility, imaginativeness, collaboration, openness, experimentation, self-directedness and more.
This does not mean that the organization and its methods need to be thrown over completely. However, to the extent that innovation is to succeed, new methods and structures need to be introduced. Over time, these new methods will prove themselves and may even be integrated into the traditional areas of the business.

Diversify activities for different types of innovation – incremental, significant and breakthrough

It helps to think of innovation along a spectrum - from incremental to significant to breakthrough. Incremental innovation supports today's revenue and profits through small improvements in products and processes. Significant innovation increases earnings in the short and medium term by injecting new products and services into the mix. Breakthrough innovation creates the long term future of the company by identifying and capitalizing on dramatic new opportunities.

All types of innovation are important, and every organization needs an innovation strategy, along with the appropriate systems and structures, to cover the spectrum. Most companies pursue mainly incremental initiatives, because these fit most easily with the predominant management style and structure. The problem with this approach is that having too few breakthrough projects puts the company's long-term survival at risk.
The spectrum of innovation presented here shows different characteristics at different points.

CharacteristicsThree Types Of Innovation
 IncrementalSignifiCantBreakthrough
Business goal Protect and maintain current revenue; reduce costs Grow medium term revenue Create new revenue streams
Marketing goal Meet current needs better Meet emerging needs sooner Meet unknown needs
Employee involvement All employees New product teams Special, diverse project teams
The action Do things better Do things differently Do different things
Theme Improvement Growth Transformation
The question What now? What next? What if?
Perspective Focus Foresight Insight
Tools Employee engagement Idea capture systems Trend-watching Cross-industry scanning Open innovation Strategic intuition Design thinking Open innovation

Incremental innovation addresses today's products and their related incremental enhancements, as well as today's processes and their continuous improvements. Virtually all the employees of a company can be engaged in innovation efforts of an incremental nature. The objective is to extract maximum value from the company's current products and maximum efficiency from its current operations. One author describing Toyota's approach says it this way:

"Defining innovation as an incremental process, the goal is to make things better on a daily basis... and it is taken to be an everyday task for which everyone is responsible. Toyota implements a million new ideas a year, and most of them come from ordinary workers."6
Significant innovation represents the medium term opportunities of the company, in the form of new products and services that fit within the current industry paradigm. The people most often involved in significant innovation are those engaged in new product development, research and development, marketing, and strategy development.

Breakthrough innovation represents the future opportunities of the company, the precise nature and source of which are largely unknown today. However, this quality of "unknownness" should not preclude the exploration effort. The objective is the creation of new and previously unimagined opportunities on a large scale.

While it is not necessary to have a large number of employees engaged in the process of breakthrough innovation, it is important to engage the right kind of people, usually in the context of diversified teams. To work in the field of breakthrough innovation requires a willingness to defer judgment; a propensity to try new and unconventional techniques; an insatiable curiosity; a higher level of tolerance for risk; and a passion for the process of discovery. In a recent HBR article, entitled "The Innovator's DNA," five skills were shown to distinguish the most innovative types: questioning, observing, experimenting, networking and associating.7

Adopt a portfolio management approach

Each type of innovation along the spectrum requires a distinctive management approach. The company needs to put in place the processes, systems and people who will reflect the relevant approach at the right point along the spectrum. Incremental innovation needs to capture a large quantity of ideas from a wide swath of employees, evaluate the ideas quickly and implement those with merit. Significant innovation requires an ability to anticipate the market and move ahead of competitors, with differentiated ideas and quickly adapted products and processes. Breakthrough innovation requires dedicated, diversified teams that are separate but not isolated from the core business; these teams need to report to senior management at a high level; and they must be evaluated by unique metrics.8

In addition to steering each type of innovation appropriately, management has to maintain an overall portfolio view of innovation initiatives. Incremental projects will be more plentiful, lower risk and lower return on a per project basis; in aggregate they should produce sizable short term returns. However, these incremental innovations are unlikely to deliver sustainable competitive advantage in the long term. Breakthrough projects will be fewer in number, with less certain returns; a few however will represent net new opportunities for the enterprise. They will help to create new sources of revenue that will sustain longer term growth. The management task is to assess the overall complexion of the innovation portfolio, and find the right balance, in relation to the company's overall goals and strategy.

In a recent global survey, companies with higher growth rates were more likely to say they pursue and measure innovation as a portfolio and that they use specific metrics to create a balanced portfolio.9

Use new and different processes, especially for breakthrough innovation

Research and experience are proving that popular tools such as brainstorming, focus groups and market surveys offer almost no value to the innovation process. Companies using these processes are lulled by the illusion of 'being creative' when nothing innovative is really happening.
However, exciting new approaches are generating impressive results in the marketplace. Three particularly effective approaches are design thinking, strategic intuition and open innovation.

Design thinking integrates creative thinking with constructive implementation. It is described as follows: "Design thinking relies on our ability to be intuitive, to recognize patterns, to construct ideas that have emotional meaning as well as functional... Nobody wants to run an organization on feeling, intuition and inspiration, but an over-reliance on the rational and analytical can be just as risky. Design thinking, the integrated approach at the core of the design process, provides a third way."10

The design process weaves creativity and evaluation together through stages that move from inspiration to ideation to implementation in an iterative, loop-back, non-linear fashion. It is not creativity first then implementation later, but creativity and implementation and evaluation linked in a holistic manner. To adopt design practices, managers have to handle diverse activities simultaneously, but there is evidence to say it is worthwhile. A study in Denmark found that companies that increased design activity and design-related training boosted revenues on average by 40% more than companies who stayed with traditional business methods.11

In open innovation, companies engage with parties from outside the firm at various stages of the innovation process. It has been shown to be very effective in leveraging an organization's own innovation efforts. While opening up the innovation process may seem risky and daunting, it can offer a significant pay-off. In one study, two-thirds of teams using open innovation said it increased the effectiveness of their projects "greatly," and on average these teams said they got results twice as quickly as they would have using conventional techniques.12 Proctor & Gamble is perhaps the best known for its open innovation system, and the company reports astounding results – a 60% improvement in R&D productivity; a doubling of the innovation success rate; an overall reduction in the cost of innovation; and an increase in the new product success rate from 20% to 50%. Today, more then 35% of all new P&G products have at least some elements that originated outside the company, and 45% of the initiatives in the current product development portfolio have key elements that were discovered externally.13

Strategic intuition, a process that has been used in many cases of extraordinary success across several disciplines, combines analysis with intuition. It dovetails into the strategic planning process, providing the missing link between analyzing a opportunity and creating a plan to pursue it. That link? New and valuable creative ideas.14

Current advances in neuroscience have disproven the old left-brain / right-brain model that said analysis and intuition were separate functions. According to the latest research, analysis and intuition work together all the time through a process called "intelligent memory." Intelligent memory is how the brain takes in and stores information. As new information comes in, your brain does a search to see how it might fit with other information already stored. When it finds a match, previous memories combine with new information and the result is a thought. When lots of different pieces combine into a new pattern, you feel it as a flash of insight or an idea - maybe even a big idea or an "aha!" The breaking down and storing process is analysis; the searching and combining process is intuition. Both are necessary for all kinds of thought and especially for big ideas.

Strategic intuition has four steps: gathering examples from history and a broad base of current sources (using intelligent memory and research to see and understand what has been done and is being done in different disciplines); presence of mind (a calm and open state of mind without expectations); a flash of insight (a clear idea for action that arises from combining previous examples in new ways); and resolution (the excitement and energy to act on the idea, even in the face of obstacles). This process explains why you get your best ideas (flashes of insight) not in formal brainstorming meetings but in the shower or while driving – when presence of mind is in play, casually trolling examples from your memory and imagination, without your focused awareness.

Flashes of insight generate important and truly novel ideas for strategy. There are associated methods to apply strategic intuition in planning, harnessing the individual and combined insights of entire teams.
Design thinking, open innovation and strategic intuition are exciting, effective and totally complementary processes that any organization can use to kick-start and elevate their innovation efforts.

Make innovation management an explicit function with a senior person in charge and a dedicated budget

Most companies treat innovation as an add-on. They ask for innovation from already overburdened managers who are accountable, not for innovation, but for other aspects of corporate performance. Not surprisingly, companies taking this approach get sporadic blips and rare bursts of innovation, occurring in a random and unpredictable fashion.

A recent global innovation survey asked respondents to rate their innovation performance and capabilities. Respondents at companies with a single person leading innovation were twice as likely to report higher innovation performance and capabilities than those at companies that didn't have such a person. Companies with innovation leaders were also three times more likely to be satisfied with the development of their product portfolios; and 2.5 times more likely to say they were satisfied with their companies' ability to convert ideas into concepts and offerings.15

Managing innovation is a complex task requiring a unique set of skills and processes that are generally inconsistent with those required to succeed at core business management. Companies that see innovation as a distinct discipline, and manage it accordingly, are proving the model via their successes.

Evolve organizational design, management style and organizational culture to leverage the innovative capacity of the enterprise

To manage innovation successfully, an organization has to be innovative about the process of management itself. John Chambers, CEO of Cisco Systems says it best, "We have made deliberate efforts to pioneer innovative management practices: designing and implementing unconventional approaches... Our efforts represent a commitment by decision-makers from across the company to consider alternative ways of doing business. It's as if we set up a virtual management laboratory, part culture initiative and part best practices, to make use of every asset Cisco has."16

References

  1. Barry Jaruzelski and Kevin Dehoff, "The Global Innovation 1000: How the Top Innovators Keep Winning," Strategy+Business, Booz & Company, Winter 2010
  2. Maria Capozzi, Brian Gregg and Amy Howe, "Innovation and Commercialization 2010: McKinsey Global Survey Results," McKinsey Quarterly, August 2010
  3. Accenture Newsroom, "Companies Make Innovation a Priority, But Management Shortcomings Hinder Results," Accenture, November 10, 2009
  4. Erik Roth and Kevin Sneader, "Reinventing Innovation at Consumer Goods Companies," McKinsey Quarterly, November 2006
  5. Inder Sidhu, "Cisco's Virtual Management Lab," Strategy+Business, Booz & Company, February 22, 2011
  6. Sheldon Laube, Chief Innovation Officer, PwC, "Evolution of Corporate Innovation Programs," PwC Innovation Blog, August 11, 2009
  7. Jeffrey Dyer, Hal Gregerson, Clayton Christenson, "The Innovator's DNA," Harvard Business Review, December 2009
  8. Vijay Govindarajan & Chris Trimble, The Other Side of Innovation: Solving the Execution Challenge (Publisher) 2010
  9. Vanessa Chan, Chris Musso & Venkatesh Shankar, "Assessing Innovation Metrics: McKinsey Global Survey Results," McKinsey Quarterly, November 2008
  10. Tim Brown & Jocelyn Wyatt, "Design Thinking for Social Innovation," Stanford Social Innovation Review, Winter 2010
  11. Venessa Wong, "How Business Is Adopting Design Thinking," Bloomberg Businessweek, April 26, 2010
  12. Corey Billington & Rhoda Davidson, "Using Knowledge Brokering to Improve Business Processes," McKinsey Quarterly, January 2010
  13. Larry Huston & Nabil Sakkab, "P&G's New Innovation Model," Harvard Business School Working Knowledge Series, March 2006
  14. William Duggan, Strategic Intuition, (Columbia Business School Publishing) New York, New York, 2007
  15. Wouter Koetzier and Adi Alon, "You Need a Chief Innovation Officer," Forbes.com, December 16, 2009
  16. Inder Sidhu, "Cisco's Virtual Management Lab," Strategy+Business, Booz & Company, February 22, 2011