Developing Innovative Organizations

Innovation rarely, if ever, just happens. It requires imagination, coordination and a sense of purpose. Sad to say, a great many boardrooms lack some or all of those qualities. So it’s not that surprising that some companies find it hard to innovate.

Before we look at how you – as chief executive or as an ordinary manager – can create an environment where innovation will flourish, we should first demolish several common and highly pervasive myths.

The first is that innovation is the province of specific departments, notably research and development. Experience across a wide range of companies shows that, in reality, even technological innovations depend for their success upon innovation in other functions such as marketing and production. Innovation is a process that properly involves everyone in the company, from shop floor to boardroom.

The second myth is that the essence of innovation is having ideas. Not true. It is quite probable that everybody in your firm has at least one valid idea the company could conceivably make us of.

The problems lie in drawing them out of people in a manner in which they can be properly evaluated, in making sure the inevitable filtering mechanism within the organization does not reject the really viable ones, and in bringing them to fruition. More precisely, innovation is about putting the right idea into practice at the right time and selling it in the right way.

The idea is merely the starting point, and there are a great many hurdles to jump before it becomes a successful innovation. As we discussed briefly earlier, the paradox is that, in spite of the abundance of ideas inside and outside the company, top management in most companies actually receives far too few viable ideas for innovation.

Another common myth is that continuous innovation is the province primarily of the high-tech industries. In reality, the mature industries of ten show the greatest opportunity for innovation. Wherever established ways of doing things have become heavily ingrained, the regular march of progress is almost certain to throw up better ways.

Radical new approaches to steelmaking, for example, now hold out the prospect of enabling that beleaguered industry in the US and Europe to compete on more equal terms with developing countries where labor and energy costs are low. Similarly, a growing number of companies in distribution have used advances in information technology to seize a strong hold on specific markets.

In many developed countries, for example, a Hospital Corporation has locked out most of its competitors in the area of pharmaceutical supply by providing hospitals with a computerized ordering service. The service not only reorders drugs automatically, so the hospital pharmacy is never out of stock, but saves on the hospital’s staffing costs. Most of these hospitals are now dependent on the Hospital Corporation for almost all their supplies.

The fourth common myth is that most companies need to innovate only in order to get out of trouble. The company that waits that long is in deeper trouble than it imagines. As the hospital example above demonstrates, innovative choices facing tomorrow’s company are to seek competitive edge through effective use of innovation, or to risk being outflanked by a faster-moving, more innovative competitor. Could your company afford to be shut our of a large part of its market?

The fifth and last myth is that innovation is cheap. It is almost always more expensive than initially estimated. Moreover, most innovations take a while to pay off, and during that time they are likely to be a drain on profits or cash flow or both. It is therefore of little value to pay lip service to innovation without providing the resources to fund it not just in the ideas and investigation stages, but beyond into implementation and the long haul to market viability. That seems obvious, you may say. Yet, along with inadequate market research, insufficient funding is the most common reason for the failure of product innovations.

What Management can do

If innovation is to become part of the fabric of a company’s culture, it has to be taken seriously by everyone. Employees have to be aware that top management is committed to innovation as a means of progress and competitive advantage.

You will therefore need to establish a clear policy and objectives for innovation. It’s no use just telling people to innovate blindly. To be really useful, innovation has to operate within defined objectives. Top management needs to spell out to employees where the company is now; where it wants to be in terms of size, type of product and kind of organization; and the kind of innovations it requires to take it there.

The employees (and also the suppliers, if you have the confidence to involve them in this way) also need to know that their contribution is genuinely wanted. The limitation on corporate funds obviously limits the number of ideas the company can pursue. But involvement in innovation is a many-staged affair. At every stage of implementation, new, usually minor but sometimes quite significant innovations need to be made. Without all these smaller innovations by ordinary people, the big ideas either will not work or will not work half as well.

You need to keep plugging away at the innovation theme. Keep reminding people that innovation is important, and they will keep responding to the challenge. But if you slacken the message off, they will assume you have lost interest. So echo it whenever possible in company literature.

Most people like to work for an innovative company—particularly the bright youngsters you most want to attract. When shoe manufacturer C. & J. Clark let the least dismayed when the development project failed. On the contrary, it was delighted at the flood of high-caliber job applications it received from television viewers who were impressed that a company in such an apparently low-technology industry could give a thirty-two-year-old man the chance to lead a major projects. The program certainly also had a good effect in encouraging people inside the firm to push for further innovations.

The innovation policy sets out the main ground rules for managing innovation. Among other things, it should spell out where the company wants to be in the innovation stakes. Does it want to be the leader, with all the benefits that entails in terms of high market profile? Or does it want to be a less exposed follower?

The problem with being an innovation leader is that it is expensive. Not only do you have all the development costs, but you also have to overcome the acceptance barriers within the market – again, often a costly exercise. “Innovating second” allows you to watch your competitors remove the bugs and make the market aware of the product or service, before you launch into the same market having learnt from his mistakes. “Innovating last” is a recipe for failure, because the key players in the market will normally by then have an unassailable position. Few companies have the financial and sales muscle of an IBM to allow them to take over a substantial portion of a mature market simply on the strength of the brand name.

While it pays to innovate first sometimes, if only to maintain the organization’s sense of pride in its ability to develop successful new ideas, the drain on resources may be enormous. One option we recommend is that the innovation policy spells out the circumstances in which it wishes to innovate first and those in which it wishes to innovate second. The aim is to seek a balance between the two that allows your company to retain its reputation as an innovation leader without bankrupting itself through rushing headlong into uncertainty on too many fronts.

Andrew Robertson, a researcher at the Polytechnic of Central London, describes these two options as offensive and defensive innovation, pointing out that defensive innovators spend on average only half as much on fundamental research and 60 per cent on applied research as offensive innovators. He also points out that

. . . many managers seem to believe that ‘first to market wins’. In most cases this is a myth. The exceptions are to be found in a handful of large-scale process industries like industrial chemicals, where an original process which cuts costs and improves quality can compel competitors to consign their older process plants to the mothballs. Two examples: the plate-glass industry revolutionized by Pilkington’s float-glass process, and the chemical industry, where Standard Oil of Ohio’s acrylonitrile process caused similar upheavals

The choice of whether to innovate first, or offensively, is therefore primarily strategic, and relates both to the threats and opportunities the company foresees and to the resources it has to meet them. You can’t normally advance in all directions. First top management has to take those strategic decisions, then it has to communicate them in policy terms as guidelines for people lower down the organization to search out specific opportunities.

One other thing the policy document should make clear is that, where the company innovates second, or defensively, it will only in the rarest circumstances be willing merely to imitate. However good someone else’s idea may be, it is always capable of improvement. Ensuring that it is improved should be a matter of pride – and that, in this context, is far from an irrelevant consideration, for pride is a major component in the motivation of the typical person to generate and participate in innovation.

(By Peter Frans – Principal Consultant)

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