Making Innovation Work

Innovation in Companies

Making Innovation Work There are no secret formulas when it comes to innovation – every company has to determine its own strategic path. Nevertheless, the way in which you combine strategy, processes, metrics, incentives and leadership is paramount.

Executive Summary Innovating effectively within a company involves realizing that how you innovate determines what you innovate, the author argues. In this article, Prof. Dávila takes a look at the key elements in creating successful innovation “mixes:” networks, processes, measures, incentives and leadership, and explains why these areas need to be tailored to fit specific circumstances. Companies often fall short in the area of innovation because they do not fully understand the relationships between these different dimensions. When this happens, only the company’s leadership is to blame.

Often innovation has an unwarranted aura of mystery around it. For many, sustaining creativity and the flow of new products seems to require alchemy and mystifying transformations. Seemingly, only the chosen ones or those companies with great luck can achieve sustained levels of meaningful innovation. The cold, hard reality is that innovation is a process that can be managed. It requires more operational expertise and leadership than luck. Innovation is not a rabbit you pull from a hat on special occasions; it must be an integral part of the way your company is organized and operates every day. The key to successful innovation is to realize that how you innovate determines what you innovate. The way in which you combine your strategy, processes, metrics, incentives and leadership determines the types of innovation you will develop. Different mixes create different types of innovation. One combination will deliver incremental innovations to existing products and services. Another combination of those same elements will deliver a radical innovation that could redefine your industry. Determining this combination is the responsibility of the leadership team; they must set the goals and align the elements of innovation to achieve the desired results. Most importantly, the leadership team needs to develop and implement an innovation strategy. Is the company going to compete through faster and better incremental innovations, like Toyota did in the '80s and '90s? Or is it going to place significant bets on new technologies and radically new business models, much like startup firms do? Will the company aim to deliver both technology innovation and business model innovation, like Apple did with iPod and iTunes? Determining the balance in the portfolio of innovation investments – from incremental to radical innovations – and the types of innovations – from business models to technologies – is a major responsibility of the management team. Once leadership establishes the goals and defines the innovation portfolio (including specific direction on the changes to the business model and to the technologies), management (including the organization, processes, metrics and rewards) can be tailored to fit the task at hand. Innovation is not a one-size-fits-all proposition.

Networks: The Basic Building Block Antonio Davila Associate Professor of Accounting and Control, IESE Business School

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The primary unit of innovation is not the individual. Rather it is the network of people that extends inside (e.g., R&D, marketing, manufacturing) and outside the company (including customers, suppliers and strategic partners). These innovation networks need to operate efficiently, quickly and effectively for investments to pay off. IESE Alumni Magazine / APRIL - JUNE 2006

A company's IT infrastructure is pivotal to move innovation from the generation of the idea all the way to capturing value in the marketplace.

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Flors II. Hernández Pijuan. Ed. Polígrafa.

IESE Alumni Magazine / APRIL - JUNE 2006

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Figure 1

ILLUSTRATIVE MEASUREMENT SYSTEM

INPUTS

PROCESS

• Supportive strategy, structure and systems

• Balanced innovation portfolio

• Employee commitment to innovation

• Effective project execution

OUTPUTS

OUTCOMES tomaDECISIONES

• Product performance

• Sales growth

• Sales growth to existing customers

• Profit growth • Value captured

• New customers • Access to talent

• Quality of innovation pipeline

• Technology leadership

• Partner's value added

• Process improvement

People that need to work together are increasingly separated by distance-partners in different physical locations, offices within the same business unit in different countries, or people telecommuting to work. In this world of remote interactions, a company’s IT infrastructure is pivotal to move innovation from the generation of the idea all the way to capturing value in the marketplace. The on-line revolution has made it possible for companies to tap into their customers, suppliers and partners for real-time collaboration in the innovation process. Boeing used electronic collaboration in the development of its newest fleets of airplanes, the 777 and 787. Eli Lilly posts requests on the web to solicit solutions to product development problems that it faces. BP created innovation groups that cut across the hierarchy to solve challenging problems, to bring together people from different divisions to share experiences and transfer knowledge, and to put together the best people to solve a unique problem. The existing organization did not provide the right resources or the right perspectives to solve these problems; it was too limited. Successful innovation requires a greater breadth of resources and perspectives than are found in a single organization. New products at Logitech, one of the most innovative companies in IT hardware, come from internal ideas that get careful analysis, ideas that engineers develop from interacting with other companies through trade shows or visits, and from acquisitions of companies with great products. Designing the organization to include healthy amounts of external resources is crucial for sustained innovation.

Translating ideas into value does not just happen, it needs management and processes. How does the company develop new ideas? IDEO uses a structured approach where people with different backgrounds brainstorm about problems. How does the company match ideas and resources? Corporate venture capital divisions not only invest in strategic startup firms but also scout the company for radical ideas. How does the company select which ideas to fund? Portfolio management helps in making sure that incremental ideas, which usually look more attractive from a financial perspective, do not crowd out radical innovations - riskier but with a larger upside. How do ideas become value? Stage-gate processes combine the need for exploration with the urgency of moving to the market.

Measures: Illuminating the Pathway In many companies, measurement is a big part of the problem with innovation. Generally too few of the measurements management uses are linked to the innovation strategy or the portfolio. But be careful not to confuse quantity with quality. Having the right measures does not mean having many measures. Designing, monitoring and interpreting an innovation performance measurement system that correctly drives performance is one of the marks of a leading company.

Balance the Processes that Deliver Creativity and Capture Value

A good management information system measures the whole innovation chain from the quality of the idea generation process, through the selection process, all the way to value creation. Figure 1 provides an example of an “innovation scorecard” for top management. The scorecard reports a few relevant measures – avoiding the temptation of reporting everything you measure – based on a clear model of how innovation happens in the organization.

The following tale of two companies illustrates an important aspect of innovation processes. Both of the companies we studied had a person in charge of managing product development. One of them saw her job as making sure that managers followed the script described in the procedures. The other saw her job as using each project to improve the way product development was done. Managers in the first company saw the procedures as bureaucracy to be fought. Managers in the second saw them as crucial to manage effectively. Guess which company had the better innovation track record?

To design the measurement system, first managers need to understand their innovation model – how are we going to generate innovation from having the right ideas to capturing their value. Creating the right innovation model and then measuring its performance is crucial. Look at the innovation inputs, processes, outputs and outcomes you need to meet your objectives. Then populate those four categories with measures that make sense for your company’s innovation portfolio, processes for creativity and value capture, culture and overall business strategy.

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IESE Alumni Magazine / APRIL - JUNE 2006

Xxx Companies often fail to sustain a meaningful level of innovation because they do not understand the casual linkage between the different parts of the innovation management processes – strategy, portfolio, processes, measurement and rewards.

Rewards for Innovation If rewards are wrongly designed, you won’t get the desired results. At a telecom company a customer service representative designed a software package that allowed her to increase productivity by a factor of 10 times. When her supervisors found out, she was punished for not following defined procedures. Similarly, a person at a software firm decided to develop software that would be a great enhancement for the main product. Management said that was a great idea but only gave a token amount of funding to the effort. In addition, the person was still responsible for meeting all her other performance objectives. These are extreme examples, but the reality is that for most companies, rewards for innovation are badly managed. People involved with innovation (and almost everything else) respond to economic and social incentives. But you have to be careful what type of incentives you use. One company linked bonuses to the percentage of sales from new products, and new products started to roll out at unprecedented speed. The only problem was that all these “new” products were actually just incremental innovations to existing products; nobody wanted to risk their bonuses on an uncertain radical new product.

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it have processes to implement new strategies emerging from top management? Does it have processes to bring to top management attention new opportunities? Companies often fail to sustain a meaningful level of innovation because they do not understand the causal linkages between the different parts of the innovation management processes – strategy, portfolio, processes, measurement and rewards. They fail to recognize that how they innovate determines what they will innovate. These are failures of leadership that lead to disjointed efforts with mediocre to poor innovation results. While there is no silver bullet for innovation –, no simple formula will work for every organization –, there are powerful combinations of the basic elements that every company can apply. The real challenge is finding the combination that fits your company’s needs and characteristics.

This resulted in what we call rampant incrementalism – a phenomenon where the organization spends too much of its innovation resources on incremental improvements and shortchanges investment of potential breakthrough innovations. The net result is an eroding competitive position. Leadership must ensure that rewards are tailored to the type of innovation the company is striving to achieve. Incremental innovation is more amenable to traditional financial incentivesbased on negotiated targets and with a well-defined link between performance and rewards. Radical innovations are different; financial incentives cannot be based on targets but on a fair assessment of the effort and results once the impact of the innovation can be evaluated.

Learning: Getting Better at Innovating Competitive advantage boils down to the ability of a company to learn better than others. Does it have processes that reflect what the company knows? Does it have processes that encourage a constant improvement of what it knows? Does IESE Alumni Magazine / APRIL - JUNE 2006

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