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Driving Innovation in Top and Bottom Lines

 

Innovation is the key element in providing aggressive top-line growth and for increasing bottom-line results. Companies cannot grow through cost reduction and reengineering alone. Most of the past attempts at diversification have been largely unsuccessful in creating the required top-line growth.
Companies turn to innovation to produce growth when these conventional approaches fall short. The combined forces of market expansion, anticipated mergers and acquisitions, and expected increased sales from products in the commercialization pipeline failed to produce the required revenue growth to meet targets.

A leading electronics company could not achieve sufficient revenue growth through expanding current product sales and mergers and acquisitions to satisfy its growth needs. Closing the growth gap requires innovation.
Exactly what type of growth innovation creates depends on the needs of the company and its competencies. Innovation can result in revenue growth, a stronger bottom line, improved customer relationships, more motivated employees, enhanced performance of partnerships, and increased competitive advantage.

  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, organization, processes, culture, metrics, and rewards, each company’s innovation products is different. What Apple develops would not come out of Dell or IBM. Likewise, General Motors or Ford might copy what Toyota produces, but they could not come up with Toyota’s basic innovations (the specific type of lean manufacturing that swept the auto industry or the current hybrid automobile technologies). Each company creates its own type of innovation by adding special touches (for example, culture, specific knowledge, and 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.
A sample company illustrates the transition from being a company built around a breakthrough innovation to being 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 breakthrough 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 that provided 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 officer (CTO) in charge of innovation, installed clear metrics to better track and manage, created portfolio-management tools to balance innovation efforts, implemented stage gate processes to govern investments, and 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.
A fundamental tenet of innovation of which many appear to have lost sight is that how you innovate determines what you innovate. In other words, the results of innovation are not a lottery—this is not a matter of luck. Alternatively, innovation is not a commodity system that you plug into to get what you need, as with the electricity grid.

The elements of innovation—leadership, strategy, processes, resources, performance metrics, measurement, and incentive rewards—and how they are arranged (organizational structure and culture) have a huge effect on the quantity and quality of innovation that an organization achieves.
The implication is that it is nonsensical to ask for more or better innovation without first looking at how the company innovates.
What, then, are the key drivers for innovation success? Why do some companies prosper while others languish with decreasing margins, few successful new products, and eroding market share?

The Rules of Innovation
A key to successful innovation is a periodic health check to determine exactly what needs attention. This requires the attention of the CEO. Continually tinkering with all parts of innovation is unlikely to meet with success. Achieving results with limited time and resources requires the ability to focus on the parts of the innovation effort that need the most attention.
What is surprising is how few companies have effective diagnostics for their overall innovation activities. Without solid innovation diagnostics, knowing where to start is hard. Innovation processes are intertwined, and without discerning diagnostics, separating the symptoms of your problems from their causes is difficult. In addition, without periodic diagnostics, a sense of complacency builds because there is no focus on maintaining the right mix of innovation.

A list of all 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 responsible for making things happen. Our research keeps bringing us back to a short list of the most important aspects of innovation that should receive senior management attention. In companies where innovation produces best-in-class results, key success is tied to how well the CEO and the senior management team adhere to the Seven Innovation Rules:

1. Exert strong leadership on the innovation strategy and portfolio decisions. Clear direction from the top of the organization permeates throughout the organization to motivate, support, and reward the activities that encourage innovation, as well as the innovations themselves.

2. 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.

3. Align the amount and type of innovation to the company’s business. Innovation might or might not be the key to success for your overall business strategy; you have to determine the types and amounts of innovation needed to support the business strategy—and more is not necessarily better.

4. Manage the natural tension between creativity and value capture. A company needs strength in both. Creativity without the capability to translate it into profits (for example, execution and value capture) can be fun but is unsustainable; profits without creativity is rewarding but works only in the short term.

5. Neutralize organizational antibodies. Innovation necessitates change, and change stimulates explicit routines and cultural norms that block or negate change.

6. Recognize that the basic unit (or fundamental building block) of innovation is a network that includes people and knowledge both inside and outside the organization. A successful organization excels at fusing its internal resources with selected portions of the vast resources of the world’s capitalist economy.

7. Create the right metrics and rewards for innovation. People react to positive and negative stimuli, and your company’s innovation is no exception. You will never achieve the level of innovation that you need if people do not have the proper rewards.

These innovation rules are interdependent; mastering one or two of them is a step in the right direction but won’t take the organization far enough.
In the following sections, we describe the seven rules in more detail.

1. Exert Strong Leadership on Innovation Direction and Decisions
Strong leadership from senior management is essential to achieving success in innovation. Steve Jobs of Apple, Bill Gates of Microsoft, A. G. Lafley of Procter & Gamble (P&G), and Jorma Ollila of Nokia are all examples of CEOs who drove their management teams and their companies to the highest levels of innovation performance.
In a recent Financial Times survey, the most important factors in selecting new investments were the strength of the management team and the demonstrated strength of the business model. Technology was a close third. Other data showed the following:
• Ninety-five percent of the survey’s respondents said they were looking for management strength as the most important factor in making new investments.
• Seventy-two percent said that the prospective company should have market dominance in its industry sector (for example, demonstrated strength of business model).
• Sixty-eight percent said they were looking for technology leadership in a new portfolio company.

The CEO and senior management team must make decisions on the innovation strategy, level of risk, amount of investment, and balance of the innovation portfolio. These decisions must be communicated throughout the organization to enable managers and members of the innovation network to execute.

Leadership is our first innovation rule not by chance. The most important aspect of business is people, and business is mainly about managing people. Regardless of whether you ask employees at startups or at large, established firms, they all will credit their managers with 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. Innovation cannot be an espoused theory, with top managers preaching it but not believing it. Innovation must be a theory in action; top managers must be committed and follow their commitment with actions. The other managers throughout the company then will be motivated to follow suit.
What do we mean by leadership? It is not some grand concept of leadership as the change agent that achieves the improbable objective. We mean day-to-day leadership, which happens through commitment, example, and solid decisions instead of grand statements.

Create a Portfolio of Technology and Business Model Innovation
Typically, when people think about innovation, they think of technological innovation. However, business model innovation is just as important and just as powerful in driving business success and revolutionizing industries. Business models describe how the company creates, sells, and delivers value to customers, and it includes in the description the supply chain, targeted customer segments, and customer perception of the delivered value.
For a classic example of a business model change, we can look to 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 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 highlights the fact that not all innovations are created equal. Three types of innovation exist: incremental, semiradical, and radical. Achieving radical or semiradical innovation requires a different mix of business model and technology change than incremental innovation.
Incremental innovation always firmly embraces the existing technologies and business model. Although some elements might change slightly in the incremental innovation, most stay unchanged. Semiradical innovations include little or no changes to the levers of one of the innovation drivers—either the technology or the business model. Radical innovations include changes to levers in both the technology and business model, but usually not to all six levers of innovation. Innovation always involves combining something old and something new from the technology and business model levers.
Creating a portfolio of incremental, semiradical, and radical innovation is essential to sustained innovation and growth. As with a financial investment portfolio, getting the balance out of whack decreases the return on investment and increases vulnerability. The senior management team bears the responsibility for creating a balanced portfolio of incremental, semiradical, and radical innovations, and for creating the appropriate business model and technological options.

2. Integrate Innovation into the Business Mentality
To thrive, innovation must be an integral part of the business mentality. This is not a “nice to have” element; it is essential to the continuation of the organization. 3M has said that innovation equals survival and has made it part of the company’s culture. Recall how Gillette CEO Kilts characterized it: “Build total brand value by innovating … faster, better, and more completely than our competition.” Kilts has placed innovation at the heart of Gillette’s business and competitive mentality. The recent merger of Gillette and P&G, two companies that appear committed to win through innovation, promises to be an interesting marriage.

Innovation encompasses two established activities. The first is traditionally thought of as technological: research and development (R&D) or new product development. The second is strategic: defining the business model. As we describe later, focusing on only one of these will not produce successful, sustained innovation. Success depends on integrating the business model and technology change into a seamless process.

A seamless process does not imply that innovation should be contained within one organizational unit—quite the opposite. By its very nature, innovation requires resources, competencies, and experience that reside in different parts of the organization and in outside organizations. 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 collaboration 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 developing products, and the new, aggressive .NET initiative requires higher levels of collaboration.

External collaboration is essential for success, but a company cannot outsource innovation completely. Some fundamental product-development activities can be outsourced, as can activities in idea generation and commercialization. But outsourcing innovation completely means relinquishing control of the technology a company uses (product, service, process, and enabling) and the business models 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 assistance of a partner is an important part of structuring innovation within any company.

3. Match Innovation to Company Strategy
A company’s business strategy focuses 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 competitive advantage. The importance of innovation rises and falls, 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 competitive and market situation and the company’s internal condition is the responsibility of the senior management team. Ultimately, these decisions rest with 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 management decision for which top management must take responsibility, as Jager learned.

Clarity and alignment in the organization must surround the selected innovation strategy; it must fit the business situation and be clear throughout the organization. In other words, it must be measured and recognized, with proper rewards linked to performance. All too often, this fundamental first step is overlooked, and companies 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 it was expending significant effort in the wrong areas. The company was spending in strategic areas that would not and could not provide an adequate return on investment. The team shifted its emphasis to ownership and 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 strive for 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 blockbuster or breakthrough innovations, though. It is hard to imagine an organization 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 might bedevil the competition, but it would also break the back of the innovating organization, considering the huge costs of developing such a flow of innovations, coupled with the huge tensions and destabilizations created in the organization by the constant, radical change.

Therefore, as with most good things, innovation is best in the right proportions. Those proportions are different for each company; no turnkey solution or one-size-fits-all program exists. Each company needs to decide how much innovation it can handle at a point in time and how much more it needs in the future. Then it must evaluate the dynamics of getting from the current set of possibilities to the desired future position.

4. Manage the Natural Tension Between Creativity and Value Capture
Innovation differs from many other business-management concerns in one important way: It involves managing large amounts of creativity. Specifically, innovation requires processes, structures, and resources to manage significant levels of creativity (developing new concepts and ways of doing things) while executing (transforming creative concepts into commercial realities). From about 2000 until 2012, Apple seems to have found the right formula for managing creativity and value capture. Its spate of new products and services—OS X, iPod, iTunes, and the new iMac— demonstrated that it can come up with important new ideas and bring them to the market profitably.
However, in the 1980s, Apple did not fare as well. Its innovation and new product activities in Cupertino were well financed, and many new ideas were advanced. Despite spending hundreds of millions (or quite possibly billions) of dollars, Apple came up with precious little in the way of successful commercialization during that period. The Newton (originally an operating system designed by Mac to run on its MessagePad line of PDAs) is the best-remembered innovation of that era, a classic example of creative 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 were 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 components 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, structure can enhance creativity if built and used in the right way.
People who believe that creativity cannot be managed often have a mental model of creativity requiring artistic talent, such as possessed by a painter like Rembrandt. Perhaps they envision the business manager equipped with standard project-management tools standing at the artist’s side providing advice and suggestions—and imposing a process—as the artist attempts to paint a masterpiece: “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 folks called and said that it clashes with the site where they want to hang this painting. Finally, no matter what, I need a first iteration done by midmonth, 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 in front of the canvas” mental model will not likely meet with success. Managing the creative process in innovation is better captured by comparing it to the balancing act of the movie director.

A movie director must manage the individual needs and temperaments of many different people: actors, camera operators, stylists, the movie’s financial backers, the senior management of the studio, and more. The director also must 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 in search of something better. In addition, the director must adhere to a schedule and budget because his performance is being assessed, and funds are allocated on the basis of results achieved against the budget and schedule goals. However, the director also 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 has to make up the lost time and budget elsewhere.

Directors face innumerable logistical and technological issues.
The director needs to balance all of these—movie stars, budgets, scripts, stakeholders, schedules, and technology—and stay 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 organization that combines freedom and discipline, where both creating and commercializing (value capture) innovative ideas happen at high, sustained levels. Balancing and driving both of these processes simultaneously is a considerable challenge and requires managing 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 processes, and strong leadership— creativity crowds out commercialization, or vice versa. These two elements are the necessary ingredients for innovation, but they do not coexist easily.
Samuel J. Palmisano, former president and CEO of IBM said “We treat innovation as if it were magical, not subject to guidance or nurturing, much less planning. If we study history, however, we know that’s simply untrue. There are times, places, and conditions under which innovation flourishes”.

Including creativity in the innovation equation has kept many managers baffled and perplexed. How can you manage creativity? Won’t you stifle creativity if you apply management processes? There’s nothing magical about creativity. The creative aspects of innovation can be managed, measured, and directed, as shown by the creativity and innovation practices of many leading companies. The real challenge is managing creativity and value creation side by side without compromising either.
A natural tension exists between being creative and delivering value from being creative. Too much emphasis on delivering value through execution can stifle the creative processes, and vice versa.

Unstructured creative processes can displace effective value management, yielding a factory of great ideas but insufficient commercial successes. Innovation does not mean ignoring business imperatives, but it does mean being aware of the processes within your organization that kill creativity.15 To achieve this, managers need to be aware of which managerial practices act as a stimulus to creativity and which practices inhibit it. Commercialization processes also need to be managed to produce high- quality results fast, to turn the best creative concepts into marketable products and services.

Case Study: When Creativity Displaces Commercialization
Company: Xerox PARC
A company can focus too much energy and resources on creativity. Xerox PARC (Palo Alto Research Center) is a good example of this phenomenon. In the 1970s and 1980s, Xerox was a hotbed of creativity. PARC displayed a very high energy level, with some brilliant minds collaborating on all kinds of groundbreaking innovations. Xerox PARC’s innovation efforts produced thousands of ideas and hundreds of prototypes across a broad range of computers and information services. However, something was out of balance. Although creativity flourished, PARC did not seem able to capitalize on it. Many ideas languished and never made it to commercialization. Others were developed, but their commercialization was not successful. Overall, creativity flourished but did not produce commensurate commercial success. What happened?

It appears that Xerox paid undue attention to creativity and effectively reduced its commercialization capabilities (in other words, capturing value from the innovations). The company appeared to be so engaged with its creativity that it lost sight of the goal. With creativity crowding out concern for commercialization, Xerox found itself unable to realize the full potential value from many of its investments. Of course, Apple CEO Steve Jobs licensed a small part of what he saw when he toured PARC and turned it into a major force in the world of personal computers. Subsequently, Xerox has worked hard to restore the balance between creativity and value capture and get innovation back on track.

If either commercialization or the creative processes or mindset dominates, the company is stuck with poor innovation. Many companies have been frustrated in operating side by side creativity and commercialization.

5. Neutralize Organizational Antibodies
To achieve innovation success, a company must overcome the organizational “antibodies” that inevitably attack and defeat innovations. Typically, the more radical the innovation and the more it challenges the status quo, the more antibodies emerge and the stronger they are. Along the same lines, the greater the past successes of a company, the greater are the organizational antibodies. When people have experienced success for a long time, they tend to become complacent and resist change.

To innovate, senior management must create a culture that has the capability and the courage to change, explore, and innovate, while at the same time remaining stable enough to deliver on its innovations.
Part of an innovation-friendly culture is recognizing that what brought success in the past will not necessarily do so in the future; core capabilities can become core liabilities if they do not adapt and change. This requires a culture that is open to questioning assumptions and to debating alternatives to the current approach to business. Managers must also understand that only by taking risks (preferably small risks whose cost of failure is low), closely observing results, learning from them, and trying again can innovation occur. Hewlett-Packard used to foster risk taking with many methods, including holding wakes for failed projects. At these wakes, the team mourned the failure, praised the effort, recognized the learning that came with the effort, and focused on the living—the current and next projects that needed attention. As in a real wake, the message was, “This is life, and things work this way. You have to keep going forward.”

A culture that fosters innovation embraces communication not only within the members of the organization, but also with external constituencies. Customers have proven to be a valuable source of insight, but so have suppliers, universities, competitors, or companies in other industries. The Not Invented Here (NIH) syndrome, in which a company routinely rejects external ideas because they were not created inside the company, is a sign of an arrogant culture. Where this is arrogance, strong organizational antibodies exist. In addition, fostering a culture of risk taking and learning requires careful attention to metrics and rewards.

6. Cultivate an Innovation Network Beyond the Organization
The primary unit of innovation is not the individual; a person is not the basic building block. Instead, it is the network that extends inside (R&D, marketing, manufacturing) and outside (including customers, suppliers, and partners). Innovation requires developing and maintaining this network as an open and collaborative force. This is no easy task, considering the complexities of relationships, differing motivations, and differing objectives. Managing effective partnerships within the company and with customers, suppliers, consultants, and everyone who can help you be innovative comprises a core competency of innovation.

Examples abound of companies that use this to their advantage. For example, 3M has always maintained a robust network of contacts in a wide range of technological areas. The company regularly contacts the network to get new ideas and build teams for new initiatives.

Networks are important, but without a blueprint of what kind of network is needed, an organization might end up with a set of high-maintenance, low-value networks. The concept of innovation platforms provides the required framework for the network. Integrating innovation into the business and establishing networks inside and outside the company requires innovation platforms. The platforms focus on an area of competition (such as Nokia’s Mobile Office concept) and address the range of potential incremental and breakthrough innovations. The innovation platforms cut through the normal organizational boundaries. They include networks of people inside and outside the company who have pertinent knowledge on the platform area, including customer insight, supply chain knowledge, and technical expertise. leading companies such as Coca-Cola, Canon, DuPont, and Johnson & Johnson have used innovation platforms to harness the right resources inside and outside the company and make innovation an integral part of their business without disrupting the overall organization.

Some companies choose to isolate innovation efforts from the organization to avoid its antibodies, through stand-alone departments or incubators. These approaches can succeed, but only if they establish and maintain a rich network with the critical resources in the company and with outside partners. However, these stand-alone or incubator innovation initiatives often fail because, in an attempt to isolate the innovators from organizational antibodies, they sever critical links with key resources and ideas.

7. Create the Right Metrics and Rewards for Innovation
Corporations establish rewards to drive performance. Often these rewards focus on meeting budgets and avoiding risk. Rewards of this type cause managers to invest in safe products that pose little chance of a big loss but also little chance of a big profit. These rewards totally block any motivation to explore riskier paths. The companies reward the speed at which low-risk products are created and marketed, even if they are hoping for radical new ideas. The outcome is little appetite for risk and an overdose of incremental ideas. Interestingly, managers get frustrated with the outcome, blind to the behavior that the organization is explicitly or implicitly rewarding. A badly designed measurement or reward system mutes the rest of the rules, even if optimally designed.

The question then becomes, what should your company measure, and what type of rewards would best motivate employees to get the innovation results you need? Before we answer these questions , let us ask two more: What are most companies measuring now? And what are the results?

In some companies, the measurements are a big part of the problem. Generally, too few of the measurements used are linked to innovation strategy. Furthermore, many companies we investigated are using metrics that are actually counterproductive. A new study has identified that U.S. firms view earnings per share (EPS) as the key metric.17 The study identifies managers’ willingness to forgo investments that would produce a positive net present value if it would interfere with meeting a company’s quarterly EPS targets. In essence, managers are willing to burn economic value to meet earnings goals. For these types of companies, it is clear what metric is driving behavior—and it is not innovation related.
One company mentioned that it uses the number of products launched as a metric to evaluate and reward innovativeness. What behavior would you expect this metric to motivate? Product development managers at the company told us that, to meet their targets and get their rewards, they focused on achieving many small product improvements. They said that more radical innovation is difficult and takes a long time. Instead of “gambling” on achieving a more radical innovation—that is, spending the considerable time and money required for semiradical and radical innovation research and development—they focused on the less risky, shorter-term gains from incremental innovation.

The product development managers’ approach is understandable and justifiable, from an individual employee’s point of view. In the three or more years it might take to achieve a truly radical innovation, they would have to forfeit their reward and resist considerable organizational pressure due to their perceived “nonperformance.” Then if they achieved a breakthrough innovation, they would be rewarded exactly the same as if they had produced an incremental improvement to an existing product, even though a radical innovation would return value to the organization magnitudes greater than an incremental innovation.

Organizational structures are often a barrier to innovation. R&D teams can develop powerful ideas, but the business units might not want to sell the product because they cannot see how it fits within their core product mix or their capabilities. Therefore, the R&D department cannot get access to the funding to develop its best breakthrough ideas to the point that the potential commercial return is clear. In other companies, product ideas are generated in the marketing departments of the business units. The department then contracts with the new product development and R&D groups to move the idea from concept to commercial reality. Within this structure, there is no reward for developing breakthrough innovations in the R&D department because employees are measured solely on how well they perform in response to each contract. Also, money is unlikely to be available for scanning or exploring new possible radical innovations.

The clear conclusion is that organizations need systems in place that provide the proper measurement, motivation, incentives, and rewards to foster innovation that is aligned with the innovation strategy. Organizations also need to create an environment where taking risks on breakthrough innovations is recognized as valuable to the company. This recognition will help modify a unilateral short-term focus on results and move to a more balanced view that encompasses a long- term perspective. To achieve truly valuable breakthroughs in the long term, it is necessary to accept (and learn from) failures in the short term. Such a perspective does not imply providing total freedom to product development managers. Instead, companies must implement a carefully designed system that encourages innovation, along with a structured process to guide the development of ideas.

Leadership was our first innovation rule because it is where a company needs to start. Metrics and Rewards is our seventh and last innovation rule because it closes the circle and creates the motivational and behavioral links to all the other innovation rules.

 

In today’s economies, core competencies have short life cycles. Whether pursuing profits or investing in nonprofit objectives, organizations cannot expect to survive without innovation. Without innovation, their fate is determined; the only question is whether a company will suddenly lose out to a competitor who comes up with a radical innovation or whether the company will slowly fall behind competitors that are constantly pushing the envelope. By embracing innovation, companies can redefine their industries, create new ones, and achieve a leadership position that shifts the rules of the game in their favor.

 

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