The Buzzword of the Decade Is "Innovation" Businesspeople everywhere are increasingly realizing that innovation is the key to continued success. Financial restructuring has run its course. Applying “me too” information technology to conventional problems is a requirement merely to stay in the game. Operational excellence, while always important, is now delivering ever-diminishing returns as we address smaller and smaller opportunities.
Today the big wins come from:
? Companies like Dell Computer or eBay that create new business models. ? Businesses like Wal-Mart that redefine their business processes. ? Companies with revolutionary, highly differentiated products like Texas Instruments’ DLP display technology. ? Companies with extraordinary and hard-to-copy management systems like Nordstrom and Southwest Airlines.
And the business press is well aware of the importance that executives are now placing on innovation. Business Week is devoting a major story in every issue this year to profiling great innovators of the past and present. In the same vein, Fortune recently ran an insert titled “What CEOs Have to Say About Innovation.” And no recent issue of Harvard Business Review or Sloan Management Review has been published without at least one article about innovation. In fact, the publisher of Trends has just launched Innovation@Work Magazine, the only publication devoted solely to helping executives manage innovation more effectively.
So what’s behind the trend toward making innovation the focus of business strategy? All companies around the world, but especially technology companies, must learn to handle the “innovation process” in an increasingly effective way because of three unstoppable trends:
1. Shorter life cycles for manufacturing processes, service offerings, and tangible products are driving a rapid price erosion of up to 30 percent per year and a slide into commodity businesses. The personal computer industry is a recent example of this rapid evolution. In the future, cellular phones might be another. 2. Deregulation, in industries like telecommunications and transportation, or re-regulation in industries like healthcare, constitutes another powerful factor for change requiring innovative solutions. For example, pharmaceutical companies are squeezed between government-driven healthcare cost-containment measures and the $600 million on average of bringing a drug to market. 3. Technology-intensive companies, recognizing that much more development activity takes place outside the company than inside, must be relentlessly curious about external sources of technology. They need to be adept at scanning, identifying, acquiring and internalizing relevant expertise that may exist in competitors, universities, and government laboratories or along the supply chain. The technology-intensive company must thus learn to be more effective at tapping into and assimilating the flows of technical expertise across borders and technical disciplines.
That last trend regarding the free-flow of intellectual capital and the mechanisms for generating intellectual capital brings us to the macro question of innovation and its impact on the standard of living and quality of life that we have to look forward to as Americans.
Thomas Friedman, writing in the New York Times recently, identified a growing crisis facing America: the risk of the United States losing its economic and technological pre-eminence. According to Friedman, the “post 9-11” concern with homeland security has had an unexpected and chilling effect. By making it more difficult for foreign students and workers to come to America, he writes, “One of America’s greatest assets ? its ability to skim the cream off the first-round intellectual draft choices from around the world and bring them to our shores to innovate ? will be diminished, and that in turn will shrink our talent pool.”
By implication, we could “lose a whole generation of foreigners who would normally come here to study, and then would take American ideas and American relationships back home. In a decade we will feel that loss in America’s standing around the world.”
Add to that loss the fact that today, half as many U.S. students earn undergraduate degrees in science and engineering as do the proportional number of students in China and Japan. Furthermore, our government’s investment in basic research in physics, chemistry, and engineering is waning. It’s no wonder then that U.S. firms are already moving substantial research and development to India and China.
Friedman concludes “We are actually in the middle of two struggles right now. One is against the Islamic terrorists in Iraq and elsewhere, and the other is a competitiveness-and-innovation struggle against India, China, Japan, and their neighbors.”
So, how do we address this second challenge? Friedman seems to think that we need some sort of government-driven “industrial policy,” probably resembling that of Japan. However, the proven way to maximize competitiveness is to employ aggressive, innovation-based business practices and provide incentives that accelerate organizational learning and creative destruction.
We are convinced that free markets, a healthy dose of venture capital, and a managerial focus on innovation will triumph over these challenges.
The managerial shift from an obsession with operational effectiveness to differentiation through innovation is a crucial part of this response. There are many examples that make this point.
To see how important an emphasis on innovation can be, consider the fates of Westinghouse and GE. They both toiled in the same businesses ? in media broadcasting, power generation, industrial equipment, and financing. But GE became one of the most successful businesses of the last century, and Westinghouse went bankrupt.
Thomas H. Davenport and Laurence Prusak, in their book, What’s the Big Idea?, argue that the differing fortunes of these two companies’ were a direct result of their different styles for achieving “business improvement.” GE maintained a high standard for innovative business and management ideas.
Westinghouse, by contrast, did not foster an environment for innovation, but rather pursued business plans that involved financial analysis, acquisition and divestiture, and a too-late-to-be-effective approach to quality.
Under Jack Welch, GE established an environment that increasingly welcomed creative thinking. It did not just talk about ideas; it applied them in the practice of its day-to-day business. Welch assembled a group of advisors, including academics, consultants, and employees, who came to be known as “idea practitioners.”
These people were a link between ideas and action. Without the “idea practitioners,” Davenport and Prusak observe, the ideas would have just stayed ideas and would never have been put into practice.
Idea practitioners possess key skills of “translation, harmonization, and timing.” They can tell whether an idea needs modification to work inside the firm. They also have the capacity to harmonize key themes that exist externally as well as internally, as well as knowing the right timing to adopt an idea into an organization.
Business strategists Gary Hamel and Liisa Valikangas suggest adopting a “resilience strategy” and a new aspiration: “zero trauma.” This implies an ability to dynamically reinvent business models and strategies as circumstances change ? while avoiding the chaos of surprises, reorganizations, and write-offs.
While there is no simple recipe for building a resilient organization, consider the four “starting points” Hamel and Valikangas offer in the Wall Street Journal:
1. Conquer denial. Executives should expect that their businesses will face critical challenges. If such challenges come as a surprise, this suggests that the executives are blinded by denial. How do you avoid the denial trap? Managers must regard every strategy as temporary. Look for signs that the strategy isn’t working under changing market conditions. Rising customer acquisition costs, lack of differentiation, slowing growth rates, and a lackluster pace of performance improvement are typical warning signs. 2. Value variety. As the business environment becomes less predictable, companies should try to come up with a myriad of new strategic options. Test the most promising by creating prototypes, performing simulations, and partnering with forward-thinking customers. Take risks, but become adept at making lots of small strategic risks, rather than a few, costly large ones.3. Liberate resources. Don’t let opportunities slip away. The recipients of a company’s asset allocation can function as a powerful discouragement for innovation. Unproven strategies need more support than proven ones do. Markets can better determine where resources should go than hierarchies. Companies should establish internal markets where employees with a discretionary budget have the chance to “invest” 3 percent or 5 percent of those funds in innovative strategic ventures. Under this system, money would naturally go to the most intriguing new ideas. 4. Embrace paradox. Modern business still holds sacred the 100-year-old notion of optimization. But flawlessly executing an out-of-date business model won’t help a company’s future. Renewal should come as a response to opportunity, and companies must encourage new business values. Companies must be willing to experiment and to take chances, while also holding the line on costs.
An accelerating pace of change demands an accelerating pace of strategic evolution. Any company that can overcome denial, generate new strategic options, and realign its resources faster than its rivals will enjoy a decisive advantage. This is the essence of resilience. And it will prove to be the ultimate competitive advantage as companies are challenged to change more profoundly and more quickly than ever before.
Additionally, Hamel believes that dynamic innovation is a job for everyone, at every level of the organization. In fact, he notes “despite all the aphorisms to the contrary, change does not start at the top. As I began to look at how some really large companies had dramatically changed their identity and their sense of direction, more often than not it was not something that started at the top. It was started by people low down who lacked any kind of formal power.”
Hamel also believes “we’ve drawn a false dichotomy between Old Economy and New Economy, which is not very helpful. Every New Economy company is busily working to adopt the virtues of Old Economy companies. They’re all trying to learn how to build a global infrastructure, how to build a world-class brand, how to achieve operational excellence, how to build up scale and size. Those are all things companies have been doing for the last 100 years.”
On the other hand, “all those Old Economy companies are being forced to learn how to continually reinvent themselves, to exploit the imagination of every employee, to substitute markets for hierarchies, and so on. Where we’re headed is a synthesis between the virtues of New Economy companies and Old Economy companies.”
And to achieve this synthesis, innovation has to be on everyone’s agenda. As Hamel recently told a newspaper interviewer, “If you went back to the 1950s and asked somebody where quality comes from, they would have said either from the artisan or from the inspector. It either came from somebody with magical hands making luxury goods, or from somebody at the end of a production line weeding out the bad products.
“W. Edwards Deming and a few others in the mid-‘50s asserted that it needn’t be this way. We can make quality everyone’s job and improve quality enormously. Of course we now take that for granted and so it’s hard to understand how radical that thought was. And today the challenge is not quality; the challenge is innovation. So we need to do for innovation what we did for quality.”
Looking ahead, the Trends editors expect the following developments to emerge from this trend:
? First, innovation will be the new battle cry across a broad spectrum of the business landscape. Senior managers must face the reality that even the most profitable business model doesn’t stay profitable forever. The only way to stay successful is to keep inventing new products, and to keep reinventing existing products. For example, Coca-Cola is losing market share in the beverage industry; its response, wisely, is not just to spend millions on a new marketing campaign to fight Pepsi-Cola for an extra 1 percent of the static cola market; instead, it is putting its weight behind efforts to win the non-carbonated beverage market, where the greatest growth is occurring in its industry.? Second, companies that are able to integrate innovation into their strategies and operations will flourish. They will achieve a level of success disproportionate to the cost of that innovation. By contrast, firms that fail to innovate will vanish. ? Third, consultants and other individuals who have a proven track record in fostering and initiating innovation will rise to the top of the corporate hierarchy. With the new corporate emphasis on innovation, people who can generate new ideas and bring them to market will make the biggest contribution to the bottom line ? and they will be rewarded for their talents.
References List :
1. For more information on our publication Innovation@Work, visit us at: www.innovationatwork.com 2. The New York Times, April 22, 2004, "Losing Our Edge?" by Thomas L. Friedman. ⓒ Copyright 2004 by The New York Times Company. All rights reserved. 3. What’s the Big Idea? Creating and Capitalizing on the Best Management Thinking by Thomas H. Davenport, Laurence Prusak, and H. James Wilson is published by Harvard Business School Press. ⓒ Copyright 2003 by Accenture and Laurence Prusak. o The audiotape or CD summary of What’s the Big Idea? is available from Audio-Tech Business Book Summaries. Ask for catalog #6031. 4. The Wall Street Journal, September 16, 2003, "Zero Trauma ? The Essence of Resilience," by Gary Hamel and Liisa Valikangas. ⓒ Copyright 2003 by Dow Jones and Company. All rights reserved.
