The 5 Requirements of a Truly Innovative Company
Can you think of any business topic that’s been hotter for longer than innovation? Trouble is, it’s hard to think of any business challenge where real progress has been harder to come by. By now, your company probably has a new business incubator, an idea wiki, a disciplined process for mining customer insights, an awards program for successful innovators, and maybe even an outpost in Silicon Valley — all fine ideas — and yet, most likely, it still struggles to meet its growth goals and seldom thrills its customers. And it’s not just your company. In a McKinsey poll, 94% of the managers surveyed said they were dissatisfied with their company’s innovation performance.
By comparison, think of the long strides many businesses have made in reengineering their supply chains, boosting product quality, and rolling out lean six sigma. These efforts have paid huge dividends. And yet when it comes to innovation, the gap between aspiration and accomplishment seems as big as ever. What’s the problem?
Over the past two decades, we’ve led dozens of innovation projects and have talked to thousands of managers about the challenge of building a high-performance innovation “engine.” What we’ve observed is that in most organizations, the innovation powertrain is missing several critical components.
Imagine a car motor that lacks a transmission, timing belt, water pump, or starter. The engine may be otherwise well built, but without just one of these components, it will be essentially worthless. So it is with innovation. However much brainstorming your employees do, it will come to naught if they don’t have access to the seed money they need to prototype and test their ideas. Likewise, no matter how slick your company’s online idea market, it won’t yield many high-value ideas if your associates haven’t been taught to think like innovators.
No single innovation tool or method will deliver consistent, profitable breakthroughs, and neither will a hodgepodge of misaligned or poorly integrated practices. It takes a systematic approach to build a systemic capability — whether that is Amazon’s logistics prowess or the near-flawless service you receive as a guest at a Four Seasons hotel. So it is with innovation. Skills, tools, metrics, processes, platforms, incentives, roles, and values all have to come together in one supercharged, all-wheel-drive, race-winning innovation machine.
So what are the parts of the innovation engine that most often get left out? Here’s our list of the top five:
1. Employees who’ve been taught to think like innovators
We’re a bit dumbfounded that so few companies have invested systematically in improving the innovation skills of their employees. The least charitable explanation for this oversight is that despite evidence to the contrary, many senior managers still assume that a few genetically blessed souls are innately creative, while the rest can’t come up with anything more exciting than suggestions for the cafeteria menu.
We understand how a CEO might come to such a conclusion. Every day, senior executives get bombarded with ideas — and most of them are either woefully underdeveloped or downright batty. After a while, it’s easy to believe that all those dopey ideas must be coming from dopes, rather than from individuals who haven’t been trained in or given opportunities to practice innovative thinking, and who work within a system that hasn’t been properly designed to foster it.
Much has been written about where innovation comes from and what distinguishes an innovative mind. Our research and experience suggest that inquiry is at the heart of it. Innovators have an inclination and a capacity to examine what others often leave unexamined. So if you want innovation, individuals must to be taught to do four things:
- Challenge invisible orthodoxies. Within any industry, mental models tend to converge over time. Executives read the same trade magazines, go to the same conferences, and talk to the same consultants. After a while, they all think alike. Innovators, by contrast, are contrarians. In their quest to upend industry rules, they learn how to distinguish “immutable laws” from “ingrained beliefs.” They exploit the unhealthy reverence incumbents have for precedent.
- Harness underappreciated trends. Innovators don’t spend much time speculating about what might Instead, they pay a lot of attention to the little things that are already changing, and that are gathering speed. To be an innovator, you don’t need a crystal ball: you need a wide-angle lens. You have to be tracking trends your competitors haven’t yet noticed, then figuring out ways of using them to upend traditional business models.
- Leverage embedded competencies and assets. Innovation gets stymied when a company defines itself by what it does rather than by what it knows or owns — when its “concept of self” is built around products and services rather than around core competencies and strategic assets. Innovators see their organization, and the world around it, as a portfolio of skills and assets that can be endlessly recombined into new products and businesses. They are masters of recombination.
- Address “unarticulated” needs. Customers have their own orthodoxies, so asking them what they want seldom yields a fundamentally new insight. Instead, you have to observe them, up close and over time, and then reflect on what you’ve learned. Where are we creating needless frustrations? Where are we wasting our customers’ time? Where are we making things overly complex? Where are we treating customers like numbers instead of people? To be an innovator, you have to be a relentlessly curious anthropologist and a keen-eyed ethnographer.
With a bit of training, and some opportunities for real-world practice, just about anyone can significantly upgrade their innovation skills. Whirlpool Corporation’s strong innovation performance in recent years owes much to the fact that the company trained more than 15,000 of its employees to be business innovators. Any innovation program that doesn’t start by helping individuals to see the world with “fresh eyes” will almost inevitably fall short of expectations.
2. A sharp, shared definition of innovation
To manage innovation in a systematic way, you have to have a widely understood definition of innovation. Without this, it’s impossible to know how much “real” innovation is going on and whether it’s paying off. Just as critically, you can’t hold leaders responsible for innovation if no one can agree on what’s innovative and what’s not.
Coming up with a practical definition of innovation is harder than it sounds, particularly if the goal is to rank every new initiative or product by its “innovativeness.” When Heinz puts ketchup in a new squeeze bottle, is that innovation? When Comcast rolls out a new “triple play” pricing scheme, is that a breakthrough? When Whirlpool launches a washing machine that dispenses just the right amount of detergent, is that a game changer? While most people can distinguish between a genuine breakthrough (like the original iPhone) and a near-trivial product enhancement (like a new shade of Post-It® notes), it’s tougher to get agreement about all the shades of gray in between.
In our experience, it can take several months for a company to hammer out its definition of innovation. As a starting point, it is important to look back over a decade or two and identify the sorts of ideas that have produced noticeable margin and revenue gains.
For a product or service to be counted as innovative at Whirlpool, it must be unique and compelling to the consumer, create a competitive advantage, sit on a migration path that can yield further innovations, and provide consumers with more value than anything else in the market. This definition may seem somewhat generic. What makes it useful, though, is the understanding that has developed over time as these criteria have been used to determine which ideas are truly innovative and which aren’t. With use, the definition has gotten tighter, and differences of opinion have narrowed. It’s also important to periodically review the definition: did the products that got rated as highly “innovative” actually yield above-average returns?
Having a practical, agreed-upon definition of innovation makes it easier to set goals for innovation, to allocate resources to innovative projects, to plan a cadence of innovative product launches, to target advertising on high-value breakthroughs, and to measure innovation performance.
3. Comprehensive innovation metrics
Companies measure just about everything that has an impact on the bottom line, yet strangely, they often shy away from measuring innovation. Granted, it is difficult to measure. Historical benchmarks are of limited value when a product has no antecedents, and it’s hard to pin down the future value of an idea that exists only as a concept.
Nevertheless, there are ways of measuring innovation performance. A comprehensive dashboard should track:
- Inputs: the investment dollars and employee time devoted to innovation, along with the number of ideas that are generated internally each month or sourced from customers, suppliers, and other outsiders.
- Throughputs: the number and quality of ideas that enter the pipeline after initial screening, the time it takes for those ideas to move from concept to prototype to reality, and the notional value of the innovation pipeline.
- Outputs: the number of innovations that reach the market in a given period, the percentage of revenue derived from new products and services, and the margin gains that are attributable to innovation.
- Leadership: the percentage of executive time that gets devoted to mentoring innovation projects, and 360-degree survey results that reveal the extent to which executives are exhibiting pro-innovation behaviors.
- Competence: the percentage of employees who have been trained as business innovators, the percentage of employees who have qualified as innovation “black belts,” and changes in the quality of ideas that are being generated across the firm.
- Climate: the extent to which the firm’s management processes facilitate or frustrate innovation, and the progress that is being made in removing innovation blockages.
- Efficiency: changes over time in the ratio of innovation outputs to inputs.
- Balance: the mix of different types of innovation (product, service, pricing, distribution, operations, etc.); different risk categories (incremental improvements versus speculative ventures); and different time horizons.
Once you’ve established the metrics and a baseline, you’re in a position to set specific, unit-by-unit innovation goals, and to fine-tune the innovation engine. Recently, for example, Whirlpool’s Chairman and CEO, Jeff Fettig, set a goal for the company to double the value of its innovation pipeline over the next two years. Executives realized that to do this, they would need to reallocate some of the company’s innovation resources from late-stage product enhancements to early-stage product breakthroughs. Without a set of comprehensive metrics, Whirlpool wouldn’t have been able to set such specific innovation goals, to proactively rebalance its innovation spending, or to measure the results of those actions.
4. Accountable and capable innovation leaders
What percentage of the leaders in your company, from project managers to executive vice presidents, are formally accountable for innovation? What percentage have innovation-related targets that affect their compensation? If it’s anything less than 100%, innovation will be marginalized. Too often innovation is seen as the province of specialized units like R&D or corporate business development, rather than being the responsibility of every leader at every level.
Obviously, it makes little sense to hold leaders accountable for innovation if they haven’t been trained and coached to encourage innovation within their own teams. For a leader, this means:
- Being adept at using innovation tools.
- Creating frequent opportunities for blue-sky thinking.
- Avoiding premature judgments when evaluating new options.
- Demonstrating an appetite for unconventional ideas.
- Recognizing innovators and celebrating “smart failures.”
- Personally mentoring innovation teams.
- Freeing up time and money for innovation.
- Hiring and promoting for creativity.
- Working to eliminate bureaucratic impediments to innovation.
- Understanding and applying the principles of rapid prototyping and low-cost experimentation.
In our experience, most leadership development programs give scant attention to these innovation-enabling attitudes and behaviors. Through selection, training, and feedback, companies must work hard to create a cadre of leaders who are as adept at fostering innovation as they are at running the business.
5. Innovation-friendly management processes
A car is more than its engine. Mate a 500 HP engine with a set of nearly bald tires and most of that power will get wasted. Again, the same is true for innovation. No matter how laudable a company’s innovation practices are, if its entire management model hasn’t been tuned for innovation, little of the engine’s power will reach the bottom line.
If, for example, a company’s budgeting process is inherently conservative and makes it difficult for first-line employees to get funding for small-scale experiments, any investment in innovation skills will be wasted. If its product development process places too much emphasis on removing risk from new launches, few new-to-the-world products will make it to market. If its assessment and compensation system doesn’t reward innovation performance, it will end up with managers who are more bean counters than trailblazers. If it lacks a financial reporting system that tracks innovation investment and staffing, no alarm bells will ring when an innovation project gets sacrificed on the altar of quarterly earnings.
The point is, any process that significantly impacts investment, incentives, or mindsets needs to be re-engineered for innovation. Over the past decade, Whirlpool has done exactly that. Its HR leaders, for example, built an innovation-focused assessment exercise into the company’s MBA hiring process. Candidates who get invited to the company’s headquarters participate in a multi-day project designed to test their capacity to think creatively. On-campus interviews also feature an innovation exercise. Whirlpool’s investment process has also been tuned for innovation. Each year, the company devotes a board-sanctioned share of its capital budget — typically around 20% — to projects that are deemed to be truly innovative.
Over the past couple of decades, virtually every company has comprehensively overhauled its operating model for efficiency and speed. Global supply chains have been optimized, business processes have been outsourced, and huge investments have been made in new IT tools. Thus far, though, few companies have devoted anywhere near this level of effort to retooling their management practices for innovation.
Taking a systemic view
Retooling an organization for innovation is a daunting task. When Whirlpool’s then-chairman, Dave Whitwam, committed himself to building a culture of innovation in 1999, he told his colleagues that the journey would take at least five years, and that during that time innovation would remain his top priority. He made it clear that this wasn’t going to be another program du jour. Moreover, he clearly understood the scope of the challenge. “Ultimately,” Whitwam warned his colleagues, “every job and every process will change.” In our experience, there aren’t many CEOs who think that systemically about making innovation a ubiquitous capability.
Typically, when we’re invited into an organization to review its innovation efforts, we find a jumble of tools and methods that are not only incomplete, but also poorly integrated. Individually, each piece makes sense — the crowdsourced idea contest, the internal venture fund, the customer sentiment analysis, the stage-gate product development process — but the whole is less than the parts. It’s as if a dozen different executives wandered into an auto parts store and each came back with something they thought would be useful in constructing a car. While you can’t build an engine without all the necessary bits and pieces, it’s the integration of those components that turns a parts bin into a smooth-running machine. That’s why the innovation skills a company instills in its employees have to be consistent with its particular definition of innovation, which has to match up with the innovation metrics it selects, which have to be woven into the performance management system. Likewise, all of the ancillary innovation processes must mesh with this set of core components.
No matter how committed, a CEO can’t single-handedly reconstitute a company for innovation. The entire top team has to be on board. Beyond this, the re-engineering efforts need a strong C-suite leader to be responsible for the design and construction of the company’s innovation engine. We call this the “innovation architect.” He or she is a bit like the lead engineer on a car program, whose job is to make sure that all the pieces come together in one coherent system. In the case of innovation, this means making sure that innovation is measured in the right way, that employees at all levels have been trained as business innovators and have access to the right insights and tools, that customers and suppliers are plugged into the company’s innovation platform, that innovation projects are adequately funded and monitored, that hiring and promotion criteria help to strengthen the company’s innovation “gene pool,” that innovation values get continually reinforced, and that the company’s innovation pipeline is robust enough to meet the company’s growth objectives.
In recent years, a number of companies have appointed a “Chief Innovation Officer” to oversee major new growth initiatives. In our conception the responsibilities of the innovation architect are broader, including not only business development but competence development as well. The ultimate goal is a company where innovation is “built in,” rather than “bolted on” — where it is instinctive for every individual, and intrinsic to the organization itself.
If your company is really serious about building an innovation engine, then it needs to upgrade everyone’s innovation skills, agree on what counts as innovation, establish comprehensive metrics, hold leaders accountable for innovation, and retool its management processes so they foster innovation everywhere, all the time. These can’t be isolated initiatives; they must work in harmony.
Do all this and you’ll have a company that can win, and win again, in the twenty-first century’s creative economy.
Originally published at hbr.org on April 27, 2015.
Aksel Bratvedt is an all-around business professional born and raised in Norway but presently resides in London.