CHAPTER 2
Leading Innovation

Proctor & Gamble wasn’t a fun place to work in the early part of this decade. The company was struggling on all fronts. Growth had stalled, its brands were aging, and once-loyal customers were fleeing to lower-priced store brands. The business press was full of articles about how P&G’s leadership and stodgy culture were to blame. Analysts who covered the company for Wall Street seemed to relish pointing out that Procter hadn’t had a breakthrough product since 1963, when Head & Shoulders shampoo was introduced, and couldn’t seem to innovate no matter how hard it tried. In 2000, P&G’s board of directors ousted the CEO and replaced him with a company insider who was determined to get the company growing again—fast.

A.G. Lafley’s weapon of choice: innovation on all fronts. He shifted attention from commodity businesses in food and beverage, to higher-growth, higher-margin, lower-asset-intensive businesses such as health care, personal care, and beauty. He made a major commitment to accelerating growth in developing markets. And he put the word out that he wanted everyone to be involved in innovation. He began conducting annual innovation reviews in each business unit, and set stretch goals for internally generated growth. He and his senior team began giving out modest rewards in the form of stock options for creative ideas, and celebrated innovators and their achievements on P&G’s internal website.

In a departure from “the way we’ve always done it,” Lafley forced Procter to encourage the flow of ideas between divisions, to break down the silos, to share expertise. Divisions received as much credit for sharing good ideas as they did for receiving them. In the biggest rethink of all, P&G began looking outside the company for ideas. Before, P&G’s attitude had been, “not invented here.” In other words, if the idea came from outside the company, it couldn’t possibly be any good. Part of its new approach to innovation was to open up to new ideas and connections, and to collaborate with creative people outside the company: from universities, backyard inventors, customers, manufacturers in other countries, and even other industries. In the two years after making these improvements, the company’s stock price doubled, its new-product hit rate climbed from 70 percent to 90 percent, and growth reached unprecedented rates.

Under the skilled direction of Al Lafley, Procter & Gamble implemented an innovation process. Under his leadership, P&G became an Innovation Vanguard firm. The company demonstrated that there are new ideas out there just waiting to become growth vehicles. Today, the company has no limitations on how and where it will grow in the future.

I believe you can effect a similar transformation in your firm. You can use innovation as a tool in your company to drive growth, fight commoditization, and transform your culture. This chapter discusses what leadership needs to do—indeed must do—to effectively tap this wellspring of potential, and keep the momentum going far into the future. The key is to design and implement an organized process for innovation. This new approach to innovation must be directed from the top and engage the total enterprise. It must be centered on adding new and unique value to the customer via new products, services, and business models. So what’s stopping you? There’s something we need to discuss, and ah, it’s a tad delicate. It’s the leader’s attitude about innovation.

The Leader’s Quandary

CEOs face a quandary when it comes to innovation and you need to know about it lest it become a stumbling block to your own efforts. Your chief understands that the company must innovate, or else tomorrow the cupboard of new growth opportunities will be found bare. Surveys in recent years have CEOs listing innovation as one of their three top priorities.

But they also know that time is short in the top spot—about three years according to recent research. While executive compensation has zoomed upward in recent years, so too have stakeholder expectations and the impatience of more active boards of directors.

Unless the CEO is able to raise the company’s stock price in the near term, there’s the strong possibility that he or she won’t be around to see the payoff from new ways of delivering innovation. This preoccupation with short-term results leads to attention deficit disorder in the helm, and a strong desire to rely upon the usual methods we discussed in Chapter 1 of further cost-cutting, growing through acquisitions, etc.

Managing the Present or Inventing the Future?

Columbia Business School professors Michael Tushman and Charles O’Reilly, in their book Winning Through Innovation: A Practical Guide to Leading Organizational Change and Renewal, argue that in industry after industry, leading firms almost always become losers. The reason: as firms become successful, they inevitably start to handle higher and higher volume, upon which they must focus like the proverbial circus clown with the pie plates spinning. And the only way they can handle this increased throughput is by establishing structures and bureaucratic control systems to ensure that those plates keep spinning.

“That’s good news for today but bad news for tomorrow because with structure, bureaucracy and systems also comes inertia,” say the authors. The older the organization, the more its leaders project an arrogance about the way they do things—that it’s the right way, the only way, and deviation is detrimental. This thinking rewards increased conformity and dedication to the status quo. It puts blinders on envisioning tomorrow, or spotting threats.

“For companies to be successful over time, leaders will need to be ambidextrous,” say Tushman and O’Reilly. Leading in the 21st century calls for managers who can maintain consistency and encourage continuous improvement in current products, services, processes, and strategies. At the same time, they must encourage the flexibility and experimentation that help the firm create or respond to radical shifts in the market environment.

Leading in the global economy calls for executives who can manage the present while concomitantly managing the future. Maintaining focus on consistent execution and short-term results will continue to be the order of the day. But at the same time, firms must ensure that the often overwhelming obligations of day-to-day execution do not crowd out attention being paid to radical shifts in the competitive environment.

To do this, our study of Innovation Vanguard firms finds that they have put processes in place that virtually force them to devote attention and resources to inventing the future. What does this process look like? To answer that question, let’s turn our attention to designing and building such a process in your firm.

Six Essentials of Leading Innovation

A popular adage in recent management theory goes like this: managing is doing things right, while leading is doing the right things. What are the right things with regard to innovation? The six most important leadership functions in building an all-enterprise innovation capacity are outlined in the box at the top of the next page.

Leadership Strategy 1: Innovation must be led from the top.

There’s really no way around it. Innovation must be supported from the very top of the organization if you are to get the level of buy-in you need from the organization. Your chief will be tempted to make innovation one of seven or ten or even more top priorities, to have it be a subset of this or that initiative, an adjunct to this or that program, to make it 30 percent of a certain vice president’s position.

One chief executive of a major energy company recently proclaimed he wanted to create a culture of innovation and then urged everyone to submit cost-savings ideas. This is but one example of how the chief “doesn’t get it” about what innovation is or how to make it happen. The chief has come up through an organization that prized operational efficiency alone, so his own knowledge of innovation is limited.

If this is the case, your first job is to educate your chief. Meanwhile, my suggestion is that you resist these cost-saving-idea temptations up front, kindly and gently of course, but firmly for they will derail your effort and you will gain nothing for your organization or yourself. You will be tempted to “go along to get along” with some highly vocal and influential proponents of the status quo in the chief’s inner circle of advisors. They will argue vociferously

that incremental, superficial changes will be enough to make lasting change and move the growth needle—but they don’t know what they don’t know. The experience of the Vanguard companies and many others should alert you to the stakes at even the earliest stages.

Because of its complexity, innovation needs to be the top priority of senior management in your company while a new approach is conceived and implemented. Because an innovation initiative affects every job, fiefdom, department, sphere of influence, etc., it affects everyone. The top team must take the lead and establish innovation goals. The top team must figure out how to involve people in contributing ideas and break down the silos that prevent collaboration and experimentation. And the top team is the one that needs to establish milestones and metrics to gauge progress along the way.

As you look at the task before you, it may seem daunting. People around you seem stuck in their ways of operating, in their perceptions and experiences, in their fixation on today. There’s fear of change because it presents a threat that could impact their security. The resistance is palpable, but subtle, and you may not even be sure where pushback is coming from.

Perhaps you see a lack of buy-in on the part of your chief. If you do, this could be the biggest initiative killer you’ll face. So this chapter is about what you must have or win from your chief, and the top team, the top 20 percent of managers in your firm or division to make a go of it. You should also know that the biggest threat to your success is right there in plain view—your fellow senior managers.

“When we first started it was amazing,” Whirlpool’s chief innovation officer told BusinessWeek. We had no idea how motivating this would be. But some of the senior leaders had a harder time getting excited about innovation. It was a big change, and people at the top felt they had a lot more to lose.” A third of each senior leader’s pay is tied directly to what comes out of the innovation pipeline. And that’s been in place for three years. “That was a tipping point for us on innovation.”

Leadership Strategy 2: Design and implement an innovation process.

An innovation process spells out how you intend to embed and systematize innovation in your firm, and how you will turn it into an ongoing, measurable, manageable process. It defines how you will organize the search for tomorrow’s opportunities and what is expected of everyone in the organization.

In addition, an innovation process describes the kind of culture you intend to establish vis-à-vis innovation. It spells out how innovation will be measured and rewarded, how ideas and proposals will be assessed. In short, it describes your unique approach to innovation, and it puts it in writing for all to see, understand, and use to guide their actions and behavior.

Except in small- and mid-sized organizations, coming up with such a blueprint should not be tasked to the top team; rather, it is best handled by forming a voluntary team of committed managers. I always think of anthropologist Margaret Mead’s famous quote, “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.” If the leader is not directly involved in creating this blueprint, it’s essential that he or she show ownership and widely endorse the design team’s work, and their recommendations, which must be disseminated throughout the organization as coming from the top.

If you are the leader of your organization, you don’t have to come up with this strategy yourself. In fact, to try to do so would be a mistake. But you do need to encourage the process and be the catalyst behind its success by virtue of the importance you personally place on it. The role of the leader is to ensure that the strategy gets developed and put in place.

Your innovation process should:

• Establish a common definition of what innovation means in your firm.
• Spell out the behaviors you want to encourage.
• Spell out the growth goals your innovation process will help you reach.
• Provide a process in every area of the firm to channel people’s ideas.
• Outline a plan to overcome your unique organizational barriers to innovation.
• Embed innovation in your organization.
• Appoint a leader to be in charge of innovation.

Let’s explore these components of an innovation process.

Define Innovation in Your Firm

Articulating a common definition is at the heart of developing an innovation process and an excellent starting place for the task force charged with improving innovation capability. In Chapter 1, we defined innovation as product, process, or strategy; nevertheless, your task force will want to define it for your business.

One company defined it as “The freedom to think differently and to create ideas, initiatives, products, and services that add value to current and future business.” Another firm, an apparel company, took pains to expand people’s past definition as being confined solely to new products or product improvements. “Innovation is the ability and willingness to look at better ways of doing things; new products that improve how people work or live or dress; new, easier, more efficient ways to deliver those products to market; new, more profitable ways to produce or procure those products or run the company.”

Do people in your organization know the difference between a breakthrough, a substantial, and an incremental idea? They should. Moreover, it’s important to let managers and rank-and-file employees alike know that they aren’t limited in their ideas to merely hatching incremental process improvements. After all, it was a cashier at Home Depot who was responsible for an innovative new inventory control system, a flight attendant at Virgin Atlantic Airlines who came up with the idea to start a new bridal registry company. So it’s essential to get everybody in the company to be aware of what breakthrough ideas look like, smell like, and taste like, and the outrageously positive things they do for the company’s fortunes.

Your definition of innovation should also indicate your aggressiveness toward breakthroughs or toward incremental innovation. This aggressiveness will depend on your “industry clock speed”—the rate of change your industry is experiencing and the pace at which products, services, and even business models are becoming obsolete. In addition, your growth goals and strategic plans must be factored in.

Spell Out Behaviors You Wish to Encourage

It is not enough to simply give lip service to innovation by altering your mission statement or vision statement. It’s essential that everyone in your organization understand what new behaviors and approaches you are calling for.

At one brewing company, when the new CEO took the helm, he appointed a team that made innovation a new value at the company. Associates in the company were encouraged to challenge the status quo, seek to find new ways of doing things, involve a variety of people with diverse backgrounds, and demonstrate advocacy. “Build upon others’ ideas and take action on suggestions for improvement. Ensure that others are encouraged and rewarded for expressing different views. Recognize creativity in others.”

Spell Out the Growth Goals

At Borg-Warner, the goal became growth through innovation in product leadership. Instead of providing ever-cheaper parts for the automotive industry it primarily serves, in 1996 CEO John Fiedler reorganized the company and adopted an innovation process. “We’re going to become a $5 billion organization by 2004,” Fiedler told his people. “Our goal is to achieve $600 million in new cross-business activity, whether it’s engines and transmissions working together or any of our divisions.”

When I interviewed Alan Bauer, a senior vice-president at Ohio-based Progressive Insurance, I asked him about working for a visionary boss, Peter Lewis, who took over a $6 million company from his father, and turned it into a $6 billion concern 20 years later. “Peter always had straightforward objectives for management,” Bauer comments. “To grow as fast as possible, always subject to profitability at a given level. We’ve not grown through category expansion, or through acquisitions, we’ve grown because Peter urged us to grow through innovation.”

Provide a Process to Channel People’s Ideas

If asked today, how would managers in your firm respond to the question: “If I work for you and I have an idea, what do you want me to do with it?” Would they be able to talk about the process with ease and comfort, or would they hem and haw and backpedal? Would they have top-of-mind examples to share? The answer to this issue is to establish an idea management system that is right for your firm, which we’ll discuss in Chapter 4, “Fortifying the Idea Factory”

Plan to Overcome Organizational Barriers to Innovation

Every organization has barriers. These barriers can be internal, having to do with cultural impediments. They can be external, having to do with marketplace resistance to change, costs associated with adopting new ideas, or even barriers springing from resistance from channel partners.

Borg-Warner, under CEO John Fiedler, figured it had to come up with almost a billion dollars in new product ideas to remain a top-tier supplier. The firm hired Baltimore-based Business Innovation Consortium (BIC) led by David Sutherland, an innovation consultant and founder of BIC, to formulate an enterprise-wide process. BIC zeroed in on two organizational barrier issues: (1) No process to deliver new ideas on a consistent basis, and (2) the company’s six business units were so autonomous that there was little chance for ideas to bounce back and forth between them.

Sutherland believed that the best way to smoke out barriers (and to devise an innovation process) was to galvanize around a high-profile project, overlay a “basis” innovation process, and observe how the system behaves. So the firm organized an Innovation Summit, a three-day idea-fest held in the old Dodge mansion outside Detroit. On the final day of the confab, senior leadership of the $3 billion company showed up to hear presentations of the top four ideas, then retreated to discuss. An hour later, they emerged to endorse one that they funded on the spot and moved into the next steps of the innovation process.

To overcome the “functional and divisional silo” barrier, two company-wide councils were established—one for sales and marketing and one for technical people—that would meet regularly to exchange ideas. Simon Spencer, a senior Borg-Warner engineer, became the first Innovation Champion responsible for leading efforts to improve the company’s greatest weakness, coming up with tomorrow’s opportunities. Result: instead of being totally focused on “how many widgets GM, Ford, and Chrysler need,” says Spencer, “Borg-Warner is paying greater attention to what lead users are doing and thinking, and intensely studies regulatory bodies for hints about future requirements.”

Like Borg-Warner, your company has internal and external barriers that act as friction in its innovation engine. A big part of designing an innovation process is properly assessing your internal capabilities, as well as those in the external marketplace, and designing your process to overcome them.

Embed Innovation in Your Organization

Any company that wants to complete the task of making innovation a way of life—”the way we do things around here”—needs to launch an innovation initiative. As an initiative, it will have similarities to other initiatives your company has no doubt launched, but will have important differences too.

The quality initiatives, reengineering initiatives, enterprise resource planning initiatives, and many others that companies have launched during the past 20 years give us many insights into successfully launching an innovation initiative. For example, initially, Quality had a special staff with a lot of responsibility and attention from decision makers. Over time, Quality became accepted as part of the baseline responsibilities of each functional area and manager.

Initially, the innovation team is responsible for piloting the initiative in a part of the organization and for training people in the new system. At some point, this responsibility can be shifted to the training department and handled as part of the regular curriculum, but not at first.

Appoint an Innovation Leader

As more and more companies embrace systematic innovation, many are appointing a new class of senior manager to take charge of the design and implementation of new approaches to creating opportunities and delivering growth. According to one of the first-ever surveys of some 50 CIOs conducted by Trek Consulting in Boston, Massachusetts, 92 percent were the first to hold position, 78 percent of CIOs are members of senior management, and respondents were equally divided between those that headed a department versus those that had no direct reports at all, or only a few. “While companies have long had VP-level scientists running research and development, or marketers steering new product development, these innovation chiefs are a new hybrid breed,” observes journalist Jena McGregor of BusinessWeek Online. Marketer, technologist, strategist, and consummate business person, the CIO’s role is primarily about influencing—and most especially the senior team. What Perkins, formerly of Kimberly-Clark, calls “engagement.” Without it, your initiative has scant chance of taking off, of becoming embedded, of surviving over the long pull.

Advanced Micro Devices, Intel’s key competitor in the manufacture of computer chips, appointed Billy Edwards to lead its innovation efforts. Edwards’ diverse experience (he was formerly a consultant with BCG and once headed up strategy at AMD), gregarious personality, and penchant for disrupting traditional ways of thinking fit the bill. “Being CIO is not just about technology or marketing or M&A,” Edwards commented to an interviewer. “The key thing is how do you change the organization?”

At Humana, CIO Jonathan Lord, MD, is one of the ones with staff—in Lord’s case, 150 people. Lord’s team seeks new innovations for Humana’s core insurance products (read: they try to discover new ways of adding unique or exceptional value), and the unit drives “a hodgepodge of corporate initiatives” from ethnographic consumer research to scoping out external partnerships and even arranges mergers and acquisitions. “The basic concept is to bring new ideas into healthcare,” Lord told one publication. Humana, like other health insurance providers, sees consumers driving the next phase and the company believes they will make choices on differentiated value propositions. It is Jonathan Lord’s responsibility to anticipate what will make them vote for Humana, and before Lord was appointed CIO, there was no organized new product development process.

The chief innovation officer title, which is most often used, might strike some as a bit pompous and overstated, or the latest fad title in a long line of title fads (chief knowledge officer, chief information officer, etc.). In recent years, especially in the United States, chief innovation officers are beginning to appear with some regularity. At one of the Vanguard firms, the CIO had the following job responsibilities:

• Accountable for delivering innovations
• Accountable for developing organizational innovation capability
• External alliances, partnerships, and service providers
• Core and emerging technologies and platforms to deliver total solution experiences
• Talent management for innovation function
• Accountable for creating intellectual assets

Here are some observations from the former CIO of EDS Corporation:

“It’s energy, passion, strong ability to collaborate and be able to influence things and people that are not under their control. You have to be able to influence the executives. But you also have to be likable and approachable by employees. Someone who is the CEO’s fair-haired child may not necessarily be someone who employees can identify with.

“You probably don’t want to put the person who was in charge of your Quality Initiative, because if that’s a role their personality is well adapted to, they may have a rigid mindset, and they’re probably not going to be successful in innovation. Innovation is a lot more abstract, so you have to have someone who not only deals with the abstract well—A lot of your strategic planning, strategic thinkers are good at that—but [your innovation leader] has got to be able to implement, and therefore, they need an implementation mind-set. It’s a rare beast who can have great vision and also implement that vision. You typically have people who are visionary, but are not very effective at implementation. Or they have great implementation skills but someone else has to vision around it. So you need someone, and it’s those rare few that are qualified. Innovation leaders have to have an ability to influence, to manage the political landscape.

“Searching for the person in your organization uniquely qualified to take on the role of chief innovation officer may not be easy, but finding the right individual is critical. After hosting the world’s first Chief Innovation Officer Leadership Summit in 2007, I came away with the distinct impression that this position will likely spread as the need to innovate purposefully and smartly continues to gain importance.

“As innovation delivery rises from its traditional tactical homelands of R&D and marketing and becomes the domain of the CEO and the senior team, it makes sense to have someone held accountable for driving results, and the cultural change needed to produce those results. One caveat, however: it seems that if anything can be made faddish, it will. I was working with the accident and health division of a global insurance giant, and the head of the division, who’d launched an innovation initiative said he happened to be watching CNBC when the chief innovation officer of his company was interviewed. It was the first he’d heard that his firm even had a CIO!”

Leadership Strategy 3: Spread responsibility for making innovation happen.

Leading innovation springs from the realization that it is much too important to be left to the top team. Just as the CEO and his or her senior colleagues can’t effectively handle the innovation piece, neither can any single department. Instead, leadership must deputize everyone in the organization into the idea-hunting posse and idea-implementing process such that responsibility is diffused throughout the organization.

Ironically, it’s the traditional monopolists of innovation—marketing and R&D—who most resent others in the organization getting involved. At one mid-sized New England utility that launched a customized suggestion system, as long as the ideation was confined to incremental process improvements, the marketing department had no problem with “making innovation everyone’s responsibility.” But they got bent out of shape when the program extended to new products and services the utility might offer customers. Similar squawks were heard from the R&D head at a multinational consumer products company. The purchasing team had attempted to enlarge its mandate to include suggesting new product ideas arising from their partnering relationship with suppliers.

To spread responsibility for embedding innovation throughout your organization, management must:

• Spell out expectations regarding innovative behavior.
• Publicize and promote the kind of behavior you seek.
• Create a curriculum of innovation.
• Provide basic training in creativity.
• Provide more advanced innovation training to select groups.

Spelling Out Expectations

It’s truly amazing what can happen when employees are invited to “be innovative” as part of daily work. The challenge to leadership is to continually find new ways to spur employees at every level and in every part of the organization to think boldly and creatively about what such thinking might produce. It’s the role of leadership to push people to see beyond their narrow job functions.

The notion of institutionalizing innovation is new. Involving rank-and-file employees in the process is downright radical. But so was Total Quality Management when it first appeared on the scene, and now we take its precepts for granted. Slowly but surely, companies are beginning to look for a new set of competencies and behaviors from their people. Competence in one’s specialty, whether finance or logistics or purchasing, is no longer enough.

Until only recently, specialist thinking has dominated organizations. “A lot of times the best marketing ideas don’t come from marketing,” notes Jon Letzler, division president of Atlanta-based apparel maker Russell Athletic. “I came up through marketing and my experience has been that marketing people think they own the interface with the customer.”

Letzler might have added that the finance people think they have a monopoly on finance, logistics on logistics, etc. This “silo thinking” has permeated organizational thinking since Frederick Taylor taught the world that specialization equated with efficiency. To a point, Taylor was right, but efficiency and innovation are different kettles of fish.

To respond effectively to turbulent external forces, companies need employees capable of generating ideas that don’t come from their specialty cookbooks. The competencies and behaviors that are becoming most important for firms to nurture and reward center around the creative process: how to come up with novel ideas, that, when implemented, become novel solutions.

Publicizing Innovative Behavior

When that 12-person team in the logistics department comes up with an idea that increases safety, that’s news you want to spread. Leaders of innovation get the word out. When your sales rep in Seattle spots a new type of packaging and is instrumental in getting an 18-month exclusive license that puts you out in front of competitors, that’s innovation.

Obviously, people deep within the organization who seldom if ever come in contact with a real live customer are more apt to come up with process ideas. Sales, marketing, and customer service people are more apt to come up with product or business model ideas, but not always.

Creating a Curriculum of Innovation

Because innovation is such a new field, in most organizations today there’s still a great deal of what might be called “innovation illiteracy.” Employees and managers alike simply don’t understand enough about the way the organization works, the needs of customers, what its goals are, and what the numbers mean, to know how to meaningfully contribute to the company’s strategic success.

Moreover, how can employees and managers make appropriate and useful suggestions for improvement of the innovation process if they don’t know the difference between a process improvement and a strategy idea? How can employees know whether to suggest that a new venture team do X, if they can’t easily find out? How can employees have profit-producing ideas when they don’t know how profit is measured?

Company leaders often assume that rank-and-file employees can’t understand financial information. Yet, after even cursory exposure to the numbers, companies that have offered training almost universally find that employees of all backgrounds and educational levels can learn, are interested in learning, and are in a much better position to contribute. Knowledge of the company’s financial and growth objectives makes employees feel that their work—and their ideas—are part of a larger whole. By showing employees where and how they can impact the numbers, they get ideas on how they can personally contribute.

Providing Basic Training in Creativity

When basic training in creativity, problem solving, and the steps in the innovation process are part of an overall strategy that has the support of senior management, employee creativity begins to open up. They realize not only that ideas are important, but that their ideas are important. They also begin to see that, as with most things in life, “if it’s gonna be, it’s up to me.” It’s one thing to have an idea and want to submit it to a suggestion system or a supervisor or somebody else who will run with it. Without training, that’s where they want to believe it ends. “I’ve come up with this idea and I gave it to my manager, done.”

But it isn’t done. The problem is that there is neither time nor motivation on the part of the organization to sort through other people’s ideas. Their manager is probably just as overworked and busy as they are. That’s why teaching the basics of innovation literacy gives people the tools and the training to sort through their own ideas and better gauge the potential of the idea before going further. Then, if it meets the criteria, they themselves can champion the idea more effectively, and if it’s a simple idea affecting their own work, they are empowered to simply go ahead and do it.

Providing More Advanced Innovation Training to Select Groups

After teaching the building blocks of innovation, select employees must be introduced to new approaches to driving growth through innovation. Pursuing new markets, the latest customer listening techniques, idea management, strategies, rapid prototyping, and new venture incubating as practiced by leading firms should be taught. The purpose of such programs is more than the sum of their parts. Employees become entrepreneurs. They think like real world entrepreneurs for the company’s future.

Quite a large number of organizations teach problem-solving techniques, while others teach creativity. These courses are generally heavy on ideation and creativity, but gloss over what we’ll call the “business case,” in other words, how an idea will contribute to the company’s objectives. The result is this: most employees and even managers don’t have a clue as to how to make their ideas happen.

Training for your most promising employees must center on the innovation process: how to take ideas, develop them, and move them to the goal line of implementation. This requires marshaling resources, networking, building the buy-in, and so forth. To do these things—the creative coupled with the innovative—requires that leadership be dispersed as widely as possible, as this kind of activity is impossible to dictate from above.

Leadership Strategy 4: Allocate resources and decide on levels of risk.

Organizations have three essential resources to allocate: time, money, and talent. And no matter how progressive the system, allocating resources is, at root, a leadership function. You are either going to spend $8 million to build that prototype to test the market’s receptivity, or you are not. You are either going to pull key people away from regular line functions to be part of a cross-functional team that will work on the new strategy innovation, or you are not.

Innovation-adept companies aren’t roll-of-the-dice risk-takers, they’re risk-managers. Because they go about opportunity invention in a systematic, organized fashion, they don’t “shoot from the hip” or act “on the chairman’s whim.” And while they suffer losses and go down unproductive boulevards in pursuit of growth, their losses are not catastrophic.

Such firms recognize that their risk-managers are not the enemy, but rather that they play a vital role in understanding the true extent of the firm’s possible exposure, rather than allowing for unpleasant surprises later. Risks are dealt with at various decision points in the stages of each idea development. If the idea is for a currently served market and is not radical in nature, it can be developed and analyzed in stages through a process many companies now rigorously adhere to and that will be covered in Chapter 7: “Producing Powerful Products.”

While leaders must ultimately be the ones to allocate resources, in Innovation Vanguard companies, a process is in place that rationalizes the task of deciding which ideas to fund, which people to involve, and how much time will need to be devoted. The CEO’s role becomes not so much the venture-capitalist-in-chief as an orchestrator of the overall process.

Leadership Strategy 5: Establish innovation metrics.

Look around your organization and chances are you’ll find dozens of measuring systems in place: ROI, net earnings, growth, IBIT, EVA—it’s quite a list. These yardsticks all measure past performance not future potential. They are lagging indicators, whereas innovation metrics are leading indicators. Other systems measure efficiency, cost reduction, market share of existing products and services, etc. And of course, individuals and groups are measured via performance reviews that may or may not include yardsticks of innovative results.

There’s no question that measuring anything is tricky, and measuring “innovation” is even trickier. So tricky in fact that some seasoned executives who are pro-innovation maintain that measuring business growth and profitability are good enough indicators of a company’s efforts in this regard, and that measuring innovation can backfire, giving you “innovation for innovation’s sake.”

For most firms, however, establishing new metrics will be essential. Without them, you don’t have a clue as to how well you are doing. Executives in the Innovation Vanguard companies agree that the way you measure innovation progress (or lack thereof) determines the type of innovation you get, and the degree of magnitude as well. If a manager, team or department is being measured (and rewarded) on short-term objectives for example, its vision will likely be short term as well. This can cause it to relegate longer-term ideas to the back burner permanently. Metrics tend to determine whether your company’s focus will be on incremental innovation or on breakthroughs; on products or processes or business model changes. Here are some guidelines on metrics:

• Measure percent of revenue from new products and services.
• Avoid creating disunity.
• Measure the pipeline.

Measure Percent of Revenue from New Products and Services

The most popular form of measuring innovation progress is to plot percentage of this year’s sales revenues that come from products/services introduced in the past (generally four or five) years. In recent years, leading firms have often boasted in their annual reports about the high percentage of revenue derived from products introduced during the past four or five years. 3M, which makes products ranging from Scotch Tape, asthmatic inhalers, liquid crystal display screens and 50,000 other items, has long maintained a policy that each division create 25 percent of its sales from products introduced within the past five years.

The evidence for doing so is based on solid research. “The proportion of new products and services is a key indicator of corporate success (a correlative link, not directly causal) both in terms of revenue enhancement and total shareholder returns,” concludes the PricewaterhouseCooper study of 399 global companies we reported on in Chapter 1. What the PWC data clearly suggests is that if a company makes it a goal to increase the proportion of turnover from new products and services, then, over time, that firm is likely to benefit from a higher growth rate than competitors that do not.

Avoid Creating Disunity

In 1992, 3M’s CEO Livio DeSimone raised the products metric even higher. He decreed that 30 percent of sales were to come from products less than four years old. But do such decrees and measurements actually lead to increased turnover? Or do they create more look-alike products, line extensions, and micro-improvements that satisfy quotas but don’t turbocharge growth?

Certain innovation researchers quote an unidentified 3M senior executive who told them that when managers needed to meet DeSimone’s new products quota, they would often do the equivalent of simply changing the color of the product from red to green. The policy “put so much pressure on research and development to turn out new products that the research labs had a natural reluctance to devote time to improving older products.” In 1996, according to these researchers, “3M began to quietly downplay this policy.”

Did they really? Since 3M is an Innovation Vanguard firm, we wanted to find out more. A spokesperson told us the company still holds to the 30 percent new in the four-year yardstick. “We do measure replacement products [as opposed to entirely new products],” she observed, “and we want replacement products to be less than half these new products.” As far as downplaying the policy, not true, according to her sources.

“We also aim at changing the mix of our new products with more emphasis on products truly new to the world, instead of line extensions. When we began this effort, two out of three new product sales dollars came from replacements. Today, the opposite is true; completely new products are producing two out of three sales dollars.”

By a completely new product, 3M means something on the order of Post-it Notes; it is original to the marketplace. By line extension, 3M mean new forms of Post-it products, such as new designs and formats, different colors, and additional sizes.

While 3M refined its metrics to create alignment around the need for breakthrough as well as incremental and substantial innovation, some companies strive to develop a portfolio of new product types and degrees. This helps diversify risk and provides a balanced investment approach to innovation.

For companies just setting out to establish innovation metrics, the key measure of success is not just avoiding disunity, but motivating behavior change on the part of key business unit leaders such that they make innovation a priority. Again, 3M’s pioneering experience, at least for manufacturing sector firms, indicates how complex it is to encourage innovation.

Here’s how Paul Guehler, 3M’s senior vice president of research and development, describes the issue: “Let’s say you pay on division profit sharing, and [unit executives’] year-end bonuses are based strictly on profit growth. Well, they are not going to do anything to develop new products, because they don’t want to take a hit on profits, so that doesn’t work. But if you reward strictly on sales growth, then the tendency is to forgo profits and drive growth in an unprofitable manner. So you have to have a balance in your formula that rewards growth and profits, and you’ve also got to factor in new businesses into the equation, and you also have to be able to fund entire new businesses from existing profits.”

Clearly, as Guehler’s many years of experience indicate, designing metrics that motivate and don’t have untoward consequences is a key responsibility of leadership and needs to be well thought-out and deemed to be fair and clear, lest it become a problem later.

Measure the Pipeline

Measuring product turnover is essential but is still rear-view mirror measuring. The vast majority of organizations today measure existing and past business activity, not future business activity, such as the number of new and promising ideas in your new product pipeline.

PWC’s research indicates that successful product innovators are also those who are most able to innovate more broadly across processes and business models. Yet the study also found that almost none of the companies studied had mechanisms for relating their output measures back to the internal drivers of those measures (such as launch rates, success rates, time-to-market rates). The highest performers in the survey use a balanced scorecard to measure their innovation performance, both in terms of outcomes and also in terms of the processes that led to those outcomes. “Innovation is complex and dynamic and measurement systems need to reflect this.”

Leadership Strategy 6: Reward and incentivize innovation.

The question any manager or individual contributor asked to innovate immediately asks is, why? Why should I try to put forth a new idea? Why should I volunteer to be part of this special team when I am already overwhelmed with work? And why, when “failure” could adversely affect my career?

Your innovation process should address these issues squarely, which means thinking through how you will address and how you will reward and encourage innovation.

Whatever you come up with as rewards, remember this: The rewards for risk-taking must always outweigh the fallout from failure. Rewarding innovation specifically sits within a wider context of how other behaviors are rewarded.

What you reward is what you get, the old saying has it. With innovation, it’s really no different. Reward compliance and conformity and you get compliance and conformity. Reward execution (flawlessly achieving short-term objectives), and you’ll get that. Reward optimization versus pioneering and that’s what you’ll get.

Here are two guidelines for rewarding innovative behavior:

• Reward innovative behavior intrinsically and extrinsically
• Reward through recognition.

Reward Intrinsically and Extrinsically

Million-dollar ideas from individual contributors not on a bonus plan should be rewarded financially. But beyond this deserved extrinsic reward is the intrinsic one—expressing our innate desire to create and to improve our circumstances. In innovation circles, it is a widely accepted notion that what motivates people to want to “bring new ideas to life” are not extrinsic rewards (those coming from the outside) but intrinsic (coming from inside ourselves). It’s often illustrated with a story that we fear will strike you as mean-spirited.

An old man lived near an elementary school, and every day after school some kids would stand on his lawn and shout epithets at him: “You stupid old geezer; you wrinkly old prune”—and worse. The man came up with a plan. One day he walked out while the kids were screaming at him and said, “If you kids come back here tomorrow, I’ll give each of you a dollar.”

Now this was a surprise, and they came back even earlier the next day, and showed even more enthusiasm in their name-calling. As promised, the old man again paid his tormentors and said, “If you come back tomorrow, I’ll pay each of you a quarter.” The kids still thought that was a pretty good deal, so they showed up the next day and let him have it again. Then he said, “If you come back tomorrow, I’ll give each of you a penny.” The kids could hardly believe their ears. “A penny?” they said. “Forget it.” And they never came back again.

This classic story has a lot to say about rewarding innovation because it addresses the issue of why people do what they do. What in fact constitutes a reward? Commonly we think of money, recognition, stock options, the usual things. But what is often overlooked or misunderstood entirely is that people want to create. Simply being invited to be a player in a new project is a reward in itself.

Reward Through Recognition

When it comes to rewarding innovation behavior, leaders have a lot more ways of doing so available to them than many realize. Simply showing enthusiasm when someone brings up an idea and offering to “look into it further” is a type of reward in itself. When a senior person or company publicly lauds the accomplishments of an individual or team, this is a “reward” of sorts. Such a visit had a lifelong impact on 3M researcher Roger Appledorn. The president of the company dropped by the newly hired scientist’s laboratory one morning. Appledorn, years later, could still recall what the man said to him: “Son, I hear you’re doing something interesting, tell me about it.” That visit kept motivating Roger for nearly four decades, and even more importantly, it taught him how to motivate others.

Listening and showing interest is a big part of the job of encouraging innovation. It’s amazing how the little things can be huge when it comes to encouraging the type of behavior we’re after. One simple way is to visit with the people in the organization in their offices to talk about their work, their progress, their ideas, their passion.

Designing Your Firm’s Approach to Innovation

Leadership is critical to innovation, as this chapter demonstrates. By wrestling with the issues and thinking through the questions this chapter has raised, you’ll be able to start sketching the design of a process that is uniquely right for your firm. Gaining the buy-in from your chief, as well as your fellow leaders and managers is essential to success.

As an innovation leader, you may have a vision for how innovation can best be supported and maintained in the future, but without the participation and support of those nearest you, you won’t get the traction you need.

That’s why it’s best to spread the responsibility for co-creating this design, and engendering plenty of communication. Leading your firm towards a new approach to innovation requires that people embrace change. Without the support of the chief, you won’t get very far. Even with the support of the chief, you’ll only get so far without gaining people’s emotional buy-in and engagement. What you are doing will invariably change the culture of your organization, which is why culture itself is the subject of our next chapter.