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DRIVING SUCCESS:
HOW YOU INNOVATE
DETERMINES WHAT
YOU INNOVATE
Innovation Is the Power to Redefine the
Industry
For any organization, innovation represents not only the opportunity to grow and survive but also the opportunity to significantly influence the direction of the industry. Apple Computers took the industry by surprise when it launched iTunes and iPod, not so much because these were innovations that nobody had ever thought of before in the PC arena. Instead, it was the strategy of combining technology change and business model change into a one-two innovation punch. And the iTunes/iPod combination is only starting to generate new concepts; one of the latest is an iPod special edition with U2 (the famous rock band), which opens up rich partnership opportunities with content providers. Apple has put its mark again on the direction of the PC industry—a mark that will be tough to erase.
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As innovation leaders like Apple, Toyota, Dell, Nucor Steel, Sony, and others have shown, making important changes to key parts of the dominant business model or the essential technology can redirect the competitive vectors of an entire industry. Innovation provides the opportunity for a company to put its mark on the evolution of busi- ness. By setting the rules of the game in their industries, these com- panies have taken a leadership position and play the game that favors them the most.
Innovation is not only a weapon in competitive markets; it has proven itself as an important source to redefine philanthropy and government under the umbrella of social innovation and social entrepreneurship. The idea of micro-credits, with Grameen Bank as the best-known example of these, has dramatically changed the stan- dard of living of thousands of people who were trapped in a vicious circle where high-interest loans captured all the value from their work and kept them in poverty. Micro-credits are very small loans, as small as $30–$40, that offer individuals the chance to start or grow a business. Used to foster economic improvement for individuals, families, and regions, they are commonly made available in emerg- ing countries and struggling economies. Micro-credit entities improve the risk profile of these loans through careful selection, social control, and diversification. Lower risk translates into better interest rates and the possibility for these people to significantly increase their standard of living.
While achieving a leadership position is not easy, maintaining it has consistently proven to be much more challenging. The ability of innovation to influence the direction of an industry does not in itself guarantee success for the innovator. Unleashing an innovation and expecting the market to reward the company with sustained growth and success is a common mistake. 1 For example, Boeing launched the highly successful 777, and established the norm for commercial airplanes in the 21st century. However, Boeing has not been able to maintain dominance of the industry, and Airbus has challenged its
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There were a myriad of factors contributing to the decline, includ- ing soft demand in some regional markets and a strong dollar weakening overseas markets. But Coca-Cola’s major problem was that global demand for Coke was sagging. One of the first signals was in the 1980s when Snapple took the U.S. by storm. Coke’s sales volume fell 2 percent in the U.S. (the most mature market). Elsewhere in the world, growth slowed. The markets were chang- ing with local brands springing up to fit local tastes. The beverage industry was changing, with greater value placed on novelty. It used to be that all a beverage had to do was to refresh. New demands emerged: keep me growing from the kids; keep me going from the young adults; and keep me interested from the adults. To survive and grow required the ability to systematically innovate and deliver new products. For Coca-Cola, this meant moving away from a single core product and becoming a total bev- erage company. Coca-Cola realized that it needed new products to match new trends in beverage tastes. This was a fundamental change in business strategy because historically its strength was having one hugely successful core product. Competitors had chipped away at that strength by intro- ducing the new beverages. Most notably, Pepsi had beaten Coca- Cola to market with nearly every big product innovation in recent years, from diet cola in the 1980s to cola with a lemon twist in 2001 (with Cherry Coke and Vanilla Coke being the exceptions in Coca-Cola’s favor). Coca-Cola responded with a shift away from its traditional Atlanta- based operating mentality. The company’s strategy under Doug Daft, CEO from 1999–2004, had been to catch up quickly by employing what we label as a Play-to-Win innovation strategy—a strategy that relies heavily on a combination of incremental and breakthrough innovation. The company began to employ innova- tion on both its technology and business models. Coca-Cola under- took the difficult task of creating an innovative culture across the company. To support that, the company created new organizations (referred to as innovation centers ) and new innovation processes—
The Innovation Imperative: Driving Long-
Term Growth in Top and Bottom Lines
According to Peter Drucker, “Innovation is the effort to create pur- poseful focused change in an enterprise’s economic or social poten- tial.” 5 That statement very accurately positions innovation as the agent for change and a crucial tool for every CEO. True enough, but it does not capture the fundamental importance of innovation to competitive survival.
More recently, James M. Kilts, then chairman and CEO of The Gillette Company (currently co-chairman of P&G after the acquisition
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no easy task for a company that, historically, had grown through narrow focus and standardization. Now the company was operating in a decentralized environment that had been unthinkable in pre- vious years. The new mandate changed to “Think Local, Act Local.” Coke Japan had been creating products and campaigns at a blinding speed, calling on Atlanta only for final approval and fund- ing. Likewise, operations in Mexico had developed and launched a new milk drink and managed it by themselves. Coke has identified 32 possible beverage occasions each day. In addition, several new types of beverage types emerged: sports, water, teas, health, and the mom and kids categories. Coca-Cola’s portfolio of brands has grown to include Dasani bottled waters in the U.S. (and the U.K. although with some PR problems), Qoo juice drinks in Asia, and a guarana-flavored drink in Brazil. These new products are the direct result of a shift in the basis of compe- tition in the industry. Coke continues to play catch-up in the market, and Daft stepped down after just five years. Performance is mixed. What will happen to Coke? Will the new approach to innovation it created be suffi- cient to pull itself out of its problems and into the lead? Stay tuned; a lot depends on how well Coke manages and sustains innovation.
FIGURE 1.1 INNOVATION PRODUCES VALUE VIA TOP-LINE GROWTH. 8
This real- life example is taken from a leading electronics company. The company could not achieve sufficient revenue growth through expansion of current product sales and mergers and acquisitions to sat- isfy its growth needs. Closing the growth gap required innovation.
Exactly what type of growth is created by innovation depends on the needs of the company and its competencies. Innovation can result in revenue growth, a stronger bottom line, improved customer rela- tionships, more motivated employees, enhanced performance of partnerships, and increased competitive advantage.
How to Make Innovation Work: How You
Innovate Determines What You Innovate
Right now, your company is perfectly designed to yield the innovation that it is currently producing. This is not a trick statement. Because every company has a unique combination of innovation strategy, orga- nization, processes, culture, metrics and rewards, each company’s
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Target Growth Gap
Base Revenue
Today Five Year Target
? New Products Currently in Pipeline Traditional Mergers and Acquisitions Market Expansion
Sources of Future Revenue
Revenue (Millions)
innovation products will be different. What Apple develops would not come out of Dell or IBM. Likewise, what Toyota produces may be copied by General Motors or Ford, but they could not come up with Toyota’s basic innovations (the specific type of lean manufactur- ing that swept the auto industry or the current hybrid automobile technologies). Each company creates its own type of innovation by adding its own special touches (for example, culture, specific knowl- edge, unique rewards)—although the basic ingredients for innovation are all the same. Less innovative firms are that way because they chose it—either consciously or by letting inertia decide for them. Changing the innovation results requires proactive management.
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A company in our field research illustrates the transition from a company built around a breakthrough innovation to a company that consistently delivers innovation. This company with more than 15,000 employees (1,000 of them in R&D) grew out of a break- through innovation in packaging. As the growth associated with this initial and highly successful innovation began to top off, the company started to think carefully about how to use innovation for further growth. The problem was that the approach which pro- vided the initial innovation—unguided funding of lots of exploratory concepts—currently was not generating a portfolio of innovations that could fuel sufficient growth. The company thus redesigned its approach to innovation. While preserving the entrepreneurial, go-for-the-breakthrough culture, the company created structures and processes to better support innovation and improve its yield. It created a chief technology offi- cer (CTO) in charge of innovation; it installed clear metrics to better track and manage; it created portfolio management tools to balance innovation efforts; it implemented stage-gate processes to govern investments; and it established platforms where marketing and R&D work collaboratively in creating innovations. The company successfully implemented an approach that allowed the company to walk the fine line between disciplined flexibility and bureaucracy.
Research Bites: Transitioning from the First Breakthrough
Innovation to an Innovative Company
Table 1.1 presents the responses of two very different companies to several basic questions about innovation and illustrates the range of perspectives that we have seen. Company B suffers from not having periodic diagnostics that highlight their shortcomings. It does not even believe that innovation can be measured. However, it continues for- ward with its innovation program believing that it is acting correctly.
Table 1.1 Different Perspectives on How to Execute Successful Innovation
Company A Company B
What efforts is top manage- Top management praises Top management talks ment putting in place to and follows carefully about innovation but support innovation? most innovation efforts. punishes failure. Does everybody devote part Innovation may happen Quarterly financial targets of his or her daily attention anywhere within the are the main focus. to having a better business company. model? Is it clear to everybody how The company has a clear The company wants to the company intends to focus, for instance “to grow through innovation. innovate? enhance human-machine interfaces.” Does creativity or bureau- People have the freedom Every process has oper- cracy crowd out innovation? and the support to ating procedures that research their ideas. cannot be changed. What are the reasons, if any, We fail to capitalize on There is a lack of talent why innovation is not as all the ideas that are and effort from employees. effective as you would want generated. it to be? How does your company Through interest groups Innovation is focused on leverage its internal talent and alliances with clear the R&D department and and its access to external objectives. its collaborations. talent? How do performance meas- Measures are intended to We don’t believe that inno- ures and rewards affect help managing projects. vation can be measured. innovation?
A list of all of the advice on innovation that has been written would stretch from the earth to the moon and back again. However, long lists are not much help for the business team with the responsi- bility for making things happen. Our research keeps bringing us back to a short list of the most important aspects of innovation that should therefore receive senior management attention. In companies that
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innovation produces best in class results, key success is tied to how well the CEO and the senior management team do the following (these are known as the Seven Innovation Rules ):
- Exert strong leadership on the innovation strategy and portfolio decisions. Clear direction from the top of the organization permeates throughout the organization to moti- vate, support, and reward the activities that encourage inno- vation as well as the innovations themselves.
- Integrate innovation into the company’s basic business mentality. Innovation is not a rabbit you pull from a hat on special occasions; it must be an integral part of the way a company operates every day.
- Align the amount and type of innovation to the com- pany’s business. Innovation may or may not be the key to success for your overall business strategy; you have to deter- mine the types and amounts of innovation needed to support the business strategy—and more is not necessarily better.
- Manage the natural tension between creativity and value capture. A company needs strength in both. Creativity without the ability to translate it into profits (for example, execution and value capture) can be fun but it is unsustainable; profits without creativity is rewarding but only works in the short-term.
- Neutralize organizational antibodies. Innovation neces- sitates change, and change stimulates explicit routines and cultural norms that act to block or negate change.
- Recognize that the basic unit (or fundamental building block) of innovation is a network that includes people and knowledge both inside and outside the organiza- tion. A successful organization excels at fusing its internal resources with selected portions of the vast resources of the world’s capitalist economy.
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balance of the innovation portfolio. These decisions must be commu- nicated throughout the organization to enable managers and mem- bers of the innovation network to execute.
It is not by chance that leadership is our first innovation rule. The most important aspect of business is people, and business is mainly about managing people. It does not matter who you ask, whether it be employees at startups or at very large firms—they all will point toward their managers as setting the innovation pace. As a startup manager in our research put it: “Most importantly, I’d say success is really a people issue; it is finding the people who can understand the high level (strategy) and the need to execute on it, and then be able to evolve as the company does.”
Innovation management depends on the leadership at the top. The team at the top must want it to happen and trust its people to make it happen. It cannot be an espoused theory where top managers preach it but don’t believe it. Innovation has to be a theory in action; top managers must be committed and follow their commitment with actions.^10 Then the other managers throughout the company will be motivated to follow suit.
What do we mean by leadership? It is not some grand concept of leadership—the change agent that achieves the improbable objec- tive. Rather, we mean day-to-day leadership, a type of leadership that happens through commitment, example, and solid decisions rather than grand statements. 11
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In two surveys designed to better understand the innovation process, we asked respondents to evaluate the relevance of various innovation competencies. The survey was administered in 1997 and then again in 2002 to senior technology officers in the United States, Asia, and Europe. Top management support ranked as the most important competency in both years with increasing impor- tance within the five years.
Research Bites: The Relevance of Top Management
Support
Create a Portfolio of Technology and Business Model Innovation
Typically, when people think about innovation, they think of techno- logical innovation. However, business model innovation is just as important and just as powerful in driving business success and revolu- tionizing industries. Business models describe how the company cre- ates, sells, and delivers value to customers, and it includes in the description the supply chain, targeted customer segments, and the customers’ perception of the delivered value.
A classic example of a business model change is Dell Computer, a company that radically changed the business model of the customer interface in retail personal computer sales. Dell focused its efforts on changing the business model for PCs. The company sold directly to consumers, providing new value proposition (such as customized PCs) and significantly changing the supply chain and cost structure. This was an innovation of major proportions, one that continues to influence the direction of the PC industry.
Knowing how to change business models and technology together and individually is the mark of a successful innovator. The Innovation Matrix shown in Figure 1.2 illustrates the interplay between technology and business model innovation. In Chapter 2, “Mapping Innovation: What Is Innovation and How Do You Leverage It?” we describe the Innovation Matrix in detail.
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Innovation Matrix
New^ Semi-Radical Radical
Near to the Existing^ Incremental Semi-Radical
Near to the Existing
New
Business Model
Technology
FIGURE 1.2 THE INNOVATION MATRIX.
nature, innovation requires resources, competencies, and experience that reside in different parts of the organization and in outside orga- nizations. It also requires coordination and synchronized efforts across these departments to move an idea from the abstract world to a tangible product. Establishing solid internal and external collabora- tion is a requirement for innovation. Microsoft continues to work this critical issue as it pushes to make .NET a commercial reality. Microsoft has always relied heavily on partnerships to assist in devel- oping products, and the new, aggressive .NET initiative will require higher levels of collaboration.
While external collaboration is essential for success, a company cannot outsource innovation completely. Some fundamental product development activities can be outsourced, as well as activities in idea generation and commercialization. But outsourcing innovation com- pletely means relinquishing control of the technology a company uses (product, service, process, and enabling) as well as the business mod- els that it uses to compete (such as the supply chain). Some of these elements are crucial to the survival and existence of the company. Knowing which are crucial and which can be managed with the assis- tance of a partner is an important part of structuring innovation within any company.
3. Match Innovation to Company Strategy
A company’s business strategy is focused on winning. And innovation is a fundamental element of long-term success. However, in any given quarter or year, innovation is not necessarily a key source of competi- tive advantage. The importance of innovation rises and falls with time depending on the confluence of several factors including the timing of the last innovation, the nature of the competition, and the overall business strategy.
The amount and type of innovation must match the company strategy. Deciding which innovation strategy best fits the external
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competitive and market situation and the company’s internal condi- tion is the responsibility of the senior management team and ulti- mately rests upon the CEO. The experience of Durk Jager, former CEO at P&G, highlights how things can go wrong if the CEO chooses the wrong innovation strategy. It is a fundamental manage- ment decision for which top management must take responsibility— as Jager learned. 12
There must be clarity and alignment in the organization around the selected innovation strategy; it has to fit the business situation and it has to be clear (meaning, it has to be measured and recognized with proper rewards linked to performance) throughout the organization. All too often, this fundamental first step is overlooked, and compa- nies find themselves with poorer-than-expected results. For example, in the late 1990s, BP Exploration and Production looked long and hard at its success rate with innovation and discovered that significant effort was being placed in the wrong areas. The company was spend- ing in strategic areas that would not and could not provide an ade- quate return on investment. The team shifted its emphasis to ownership and application of specific innovation platforms that would support the business strategy.
Keep in mind that more innovation is not necessarily better. Some proponents of innovation have been carried away in their apparent zeal regarding innovation; they have recommended that all businesses need significant, continual doses of innovation, especially radical, game-changing innovation. This is simply not true. Every organization that intends to survive beyond the next two product life cycles needs healthy infusions of innovation and must invest to get them. This does not mean that an organization needs constant block- buster or breakthrough innovations. It is hard to imagine an organiza- tion that could effectively harness a constant supply of breakthrough radical innovations, each of which would cause significant change in its business and technology base. That level of change may bedevil the competition, but it would also break the back of the innovating
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zeal crowding out commercial realities. The Newton failed not because the concept of PDAs was wrong but because the way it was executed was too little, too soon. Later PDA introductions provided much more value to the consumer and have been highly successful.
Traditional thinking is littered with misconceptions about how to manage creativity and innovation. The following example presents an alternate mental model for managing innovation.
Business Manager: Artist or Movie Director?
Many people cannot imagine how to manage the creative compo- nents of the innovation process. They wrongly assume that structure and process are the natural foes of creativity. They feel that imposing any structure on creative people will ruin the results. However, struc- ture can, in fact, enhance creativity if built and used in the right way.
People who believe creativity cannot be managed often have a mental model of creativity requiring artistic talent—such as pos- sessed by a painter like Rembrandt. Perhaps they envision the busi- ness manager—equipped with standard project management tools, standing at the artist’s side providing advice, suggestions, and impos- ing a process, as he attempts to paint a masterpiece: First, don’t get too caught up in the details in the beginning, just use broad brush strokes to capture the basics. Once we agree on that, you can go back and add the detail. And don’t use too much of that blue you have there because the marketing folk called and said that it clashes with the intended site where they want to hang this painting. Finally, no matter what, I need a first iteration done by mid-month, and your next chunk of budget is contingent on hitting that deadline and giving me results that I like.
Clearly this intrusive approach would result in a terrible painting or, more likely, an artist who stomps out the door and refuses to paint. Trying to manage the creative aspects of innovation using the “painter
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in front of the canvas” mental model is unlikely to meet with success. Managing the creative process in innovation is better captured by the comparison to the balancing act of the movie director.
A movie director must manage the individual needs and tem- peraments of many different people from actors, camera operators, and stylists, to the movie’s financial backers and the senior manage- ment of the studio. Also, the director has to anticipate the desires of the targeted market, keeping the process focused on the important factors and creating a differentiated product. The director needs to know when to stick to the script and demand perfection, and when to improvise, throwing out the script in search of something better. The director has a schedule and budget that must be met because his/her performance is being assessed, and funds are allocated on the basis of results achieved against the budget and schedule goals. However, the director has to know when to stop, suspend the plan, and spend the extra time to get a particular aspect right—even when it was not budgeted or scheduled. Then he or she has to make up the lost time and budget elsewhere. Directors face innumerable logisti- cal and technological issues. The director needs to balance all of these—movie stars, budgets, scripts, stakeholders, schedules, and technology—staying deeply involved in all aspects and producing a blockbuster movie. The movie director’s role is an apt metaphor for the job of an innovation manager.
Making Innovation Work describes how to develop an organiza- tion that combines freedom and discipline, where both creating and commercializing (value capture) innovative ideas happen at high, sustained levels. To balance and drive both these processes simulta- neously is a considerable challenge and requires management of the inherent tensions between the creativity and value capture (in other words, commercialization). Many companies get one component working only to realize that their success in that area is frustrating their attempts in the other. Without management intervention— for example, providing a clear innovation strategy, well-designed
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