PREFACE

For most of the twentieth century, innovation was the territory of large organizations. Schumpeter argued that innovation should naturally happen within them. Innovation required significant amounts of resources—amounts that only large organizations had. Commencing in the 1960s with the first venture capital efforts, the wall between smaller organizations—particularly startup companies coming out of universities—and innovation began to come down. The idea that scientific progress could hit the market through newly formed companies with venture fund- ing rather than partnerships with established companies started to take hold. A different channel for breakthrough innovation—in- novations with the potential to change industries and/or invent new ones—was created.

The growth of the Internet as a new field for social and busi- ness interactions in the 1990s fueled this channel for breakthrough innovation. By the time early online opportunities emerged, the venture capital model had been perfected and was ready to fund breakthrough innovation. The combination of a new funding vehicle and the Internet gave the competitive advantage to fast-moving startups. Leveraging a technology that changed how people relate to each other, these companies took advantage of business opportunities that opened up in almost every industry.

For nearly twenty years, high-growth startups have had much of the limelight when it comes to breakthrough innovation, dwarfing the efforts of established companies, which are seen as slow and unable to catch up. Yet large companies dominate most markets today, and their share grows. Their ability to execute has become their recipe for success—winners simply execute better.

Their operations are managed more efficiently, and a constant flux of incremental innovations—small, regular improvements to products and processes—keeps them in the lead. The business unit structure, invented a hundred years ago, has proven itself to be an effective organizational design—especially when it comes to scale and operational efficiency.

More importantly, the complexity of the business world and society at large means that innovative solutions are increasingly complex. Core ideas might be simple, but deploying effective business models requires access to resources, knowledge, networks, and execution power. Few innovations are successful as stand-alone propositions. Rather, they demand an ecosystem of complementary products, technologies, and services to be built around them. For example, Better Place struggled when it attempted to build an infrastructure for electric cars. Energy is an intricate interface of production, transportation, and retailing that is hard to break, and changing the structure of an industry requires access to an entire network that will force it. Such access is often only available to large companies. Organizations that can mobilize many actors to implement solutions that address the challenges we face as a society are best suited to handle the level of complexity involved in innovation going forward.

This is not to say that startups will not contribute to innovation. On the contrary, they are best suited to develop a particular set of breakthrough innovations. Much like the typical corporate R&D lab approach popular in the mid-twentieth century, startups will survive, and will likely still be best equipped to develop breakthrough innovations focused on specific markets. Even the once dominant lone-inventor model—superseded and made largely obsolete by big labs—continues to exist and is successful in certain niches.

A MYTH IN NEED OF DEBUNKING

The fact that many large organizations focus on incremental innovation—to reduce costs by an extra cent out of every unit and capture an extra inch of market with improved products and operations—has grown together with a myth: established companies cannot come up with the kind of breakthrough innovations that upset existing markets, create new industries, and generate extensive growth. The same myth ascribes the unique ability to develop breakthrough innovation to startup companies. Breakthrough innovation is the Achilles heel of large companies, the argument goes, and the statement is apt for quite a number of them.

The benefits of pursuing operational excellence and incremental innovation can be liabilities for breakthrough innovation. Efforts to execute better often have the unintended consequence of reducing the likelihood of breakthrough innovation. In other words, the same organizational design that is good for improving operational excellence and developing incremental innovation can get in the way of breakthrough innovations that many leaders want. This, in a few words, is the innovation paradox.

It is hard to argue against efficiency, supply chain optimization, zero defects, and lower costs. As long as industry structures remain stable, a strategy focused on execution and incremental innovation is difficult to beat. But when new entrants or even aggressive incumbents redefine industries with breakthrough innovation, these execution-focused strategies are frequently deadly. The let’s-hope-my-industry-stays-the-same “strategy” adhered to by certain companies is blind to the threat of someone else starting a whole new game of chess while they perfect their game of checkers.

As companies pursue breakthrough innovation, they typically invest larger and larger amounts of resources into the same places that have given them incremental innovation—the type of innovation they understand. In the process, what companies seldom realize is that they are more often than not limiting their own ability to develop breakthrough innovation. When breakthrough ideas are managed as incremental, they become incremental.

This book is about the paradox that arises when investments that are supposed to make companies more innovative actually end up making them less able to get the breakthroughs they are after. It is about operational excellence and incremental innovation as both sources of competitive advantage and seeds of breakthrough innovation failure. It is about recognizing that the organizational structures best adapted to efficiently execute a strategy based on the current environment can, at the same time, block the kind of transformation that comes with radical changes in the environment. The innovation paradox explains why managers feel the need to drastically change how innovation is managed, but can’t seem to break away from the demands of incremental changes. It is also about defying this paradox.

DEFYING THE INNOVATION PARADOX

It seems counterintuitive. The same organizational structure, systems, culture, and practices that make some companies great on many dimensions can at the same time be the ones that limit their continued success. Shouldn’t the best-equipped organizations also be able to compete effectively in creating growth? If the answer to this question is yes, then why is it often so hard? In most cases, the problem is not a lack of ideas or inspiration; it is a flawed design of how innovation is managed.

Many leaders have successfully designed their companies for better execution through improved performance management and accountability. In doing so, they better control their costs, and they incrementally improve their processes and products—but they seldom get the type of significant, breakthrough growth that disrupts current markets and creates new ones.

Yet various companies succeed in defying the innovation paradox. IBM reinvented itself after facing a near certain death. Apple revolutionized the mobile device market after having been dismissed as a relic of the past. Nespresso created a totally new market—coffee by the cup—now worth several billion dollars as part of the food giant Nestlé. 3M has consistently developed new markets since its birth more than one hundred years ago. These companies are merely the most visible part of an iceberg of established companies that succeed at bringing breakthrough innovations to the market. They prove that it can be done.

Louis Pasteur said that luck favors the prepared mind, and Picasso believed inspiration existed, but it had to find you working. Breakthroughs need both luck and inspiration, but companies designed to facilitate them are more likely to be successful than those just betting on luck and persistence. Chapter 1 explores the different faces of innovation and how each requires a distinct management approach. The management structure for developing incremental innovation by setting demanding targets is very different from the structure that facilitates strategic discoveries—breakthrough innovation that emerges from the bottom of the organization. The concept of the Startup Corporation provides a way to design and operate organizations so that innovation is fostered at all levels, and managed effectively when breakthroughs occur. It is based on the belief that people with breakthrough ideas are found not only at the top but throughout the company, as well as in employees’ outside networks. Not every company is like Apple under Steve Jobs, a leader who envisioned breakthroughs. Most established businesses have many visionaries within their fields and networks. The challenge is to bring these visionaries together to create a breakthrough.

Breakthroughs take time to mature, and they bring with them an uncertainty that companies largely focused on operational excellence often are not used to managing. Their return on investment (ROI) is harder to visualize, and many times no past model on which to base predictions exists. Breakthrough innovation includes deep collaboration and partnerships with outsiders such as universities, suppliers, future customers, and anybody with experience and expertise in the field. Its management balances access to a rich network and to the capabilities of the organization to execute. Chapter 2 explores the strengths of the business unit in promoting incremental innovation and its challenges to embrace breakthrough innovation efforts.

The Startup Corporation model identifies the fundamental traits of successful startup companies that large organizations must replicate to create both the space and the support for fostering breakthrough innovation. The model combines different organizational solutions to manage the breakthrough innovation process. Chapter 3 describes how startup companies manage innovation, and chapter 4 translates these ideas to established companies.

Companies use many tools to manage breakthrough innovation, and while some tools are designed to work best for certain stages of the innovation process, they do not necessarily reinforce others. Real solutions often encompass the combination of various tools and structures. Chapter 5 describes these different tools, while chapter 6 looks at ways to integrate them to effectively build a successful breakthrough innovation effort.

Breakthrough efforts are part of existing organizations that also work to deliver value from their current strategies. Embracing these two types of innovation requires an organization with a unique culture. Culture shapes people’s reactions to issues as diverse as relying on outsiders for ideas, learning from (rather than punishing) failures, taking calculated risks, and going after hard but rewarding challenges. To foster innovation, culture must provide innovators with the resources necessary for developing ideas and supporting discovery. Chapter 7 discusses ways to foster innovative cultures.

Leaders of innovative organizations trust their people more than many would consider reasonable. They trust them to take calculated risks for learning fast and cheaply; to combine internal and external talent; and to accept failure. Chapter 8 deals with leadership for breakthrough innovation. Chapter 9 examines strategy, incentives, and management systems that provide the foundations for breakthrough innovation. Chapter 10 offers a few parting words to keep in mind.

WHY THIS BOOK?

The Innovation Paradox is the result of our constant attention to and interest in the management of innovation. It builds on the ideas of the 2006 book that we wrote together with one of the most knowledgeable people in this field, Robert Shelton. Making Innovation Work: How to Manage It, Measure It, and Profit from It has been translated into many languages, and a revised edition was recently released (2013). That book focused on implementing innovation strategies, and the root of its success was its presentation of innovation as a process that needs to be managed. Innovation is unique in several aspects—such as the relevance of creativity and the role of luck—but it still needs structure. Making Innovation Work provided frameworks and concepts to think about innovation strategies, cultures, measurement and incentives, and process design. It gave the infrastructure that translates creativity into value.

Though readers find that book helpful in developing processes for improving incremental innovation, they tell us that they continue to fail at implementing breakthroughs. These leaders, focused largely on execution and incremental innovation, want to know how they can spark breakthrough innovations that result in dramatic growth. Do they need to hire a creative genius who can see the future to lead the company? Why does it seem so easy for startups to develop products and services capable of causing major shifts in the market, while established companies often seem to find it impossible? Is it the people? the organizational structure? the systems? the culture? Is it a combination of all of these factors? The book in your hands addresses these questions.

We have spent a large part of our careers working with companies on the management of innovation. Our perspective has always been that cultures, leadership styles, structures, systems, and processes are what make things happen in organizations. This book is the result of our work and builds on previous academic and managerial concepts about breakthrough innovation. Many colleagues have provided valuable concepts and documented remarkable practices to help us better understand the many types and facets of innovation. These managers are leaders of organizations large and small, global and local, high-tech and low-tech, with R&D budgets big and little, and their companies often top the lists of innovative organizations. We have been privileged to work closely with these leaders and thank them for their significant support.

Though the two of us are located on separate continents and have worked in different industries, our experiences have been complementary. We have navigated distinct streams of working with managers, as well as researching and speaking with academic and managerial audiences. We have known each other for two decades, and our professional lives have crossed many times. We have co-written articles and co-edited books together, and have run conferences and consulting projects together. This book reflects not only the common themes in our professional lives, but also the pleasure of working with people that you respect, learn from, and—perhaps most important—enjoy.

To complete this project, we have relied on the experiences of hundreds of managers and academic leaders. Though we are unable here to thank each of them individually, we are grateful for their willingness to share both successes and failures. In addition, numerous colleagues have shared their knowledge, providing us with inspiration and guidance. Robert Shelton, our co-author in Making Innovation Work, has been a source of good discussions, great ideas, and constant encouragement. Jean-François Manzoni contributed immensely with helpful insights on innovation, especially concerning leadership and culture. We also want to thank the people who have supported the elaboration of this book. Pilar Parmigiani has generously shared her ideas. Nicolas Albert is a superb developmental editor, and our book is much improved due to his excellent work. Neal Maillet, our editor, and the entire team at Berrett-Koehler Publishers have been very helpful and a pleasure to work with.

We dedicate this book to our families, who always support us in our crazy lives as we attempt to better understand our societies and to add our small contribution to making the world a better place. The more you see established companies, nonprofit organizations, and startups, the more you appreciate their importance in coordinating the contributions of millions of people. Their managers are a crucial link to the well-being of our society. We also dedicate this book to them and their efforts to improve the practice of management.