A significant portion of America’s current global economic leadership traces back to the innovativeness of its people and companies. America has played critical roles in world-changing breakthroughs, ranging from the invention of the telephone to the incandescent light bulb to the commercial Internet.
Unfortunately, innovation has taken a backseat in recent years as many companies have struggled in challenging economic times. Many companies have seen their cash coffers swell — even innovation poster child Apple Inc. is sitting on more than $80 billion in liquid assets — as it searches for compelling growth opportunities.
The ferocious pace of change in global markets means that American companies need to re-focus on innovation, or face the consequences.
What does ”Innovation 3.0” in the headline mean? Most companies historically were the result of an innovation. In other words, an entrepreneur came up with an idea, and then formed a company to exploit that idea. The company’s reason for being was to scale that initial idea. In the 20th century, some companies became the source of innovation. That is, scale, access to unique resources and long-term perspectives allowed some companies to invest in research and development programs that would be out of reach of an individual entrepreneur.
Consider DuPont Co.’s creation of materials such as neoprene and nylon in the 1930s. Over the last few decades, however, these kinds of corporate labs have fallen into disrepute, at least partially driven by an increasingly obsessive focus on near-term financial performance. Venture capital organizations stepped into the void, helping to birth companies like Apple, Google Inc. and Facebook Inc. The innovation muscles at all too many large companies have atrophied.
Innovation Change Stimulates Change
Two changes create the possibility of an Innovation Renaissance in America. First, innovation understanding is developing and spreading rapidly. Decades of academic research and fieldwork by leading-edge practitioners have resulted in a detailed understanding of what works and what doesn’t and much of this has been distilled into actionable processes and tools.
Second, innovation is significantly more accessible than it was even a decade ago. Freely available tools and new communications mechanisms allow innovators to create fully functioning businesses with real revenue for hundreds of dollars. The impact of this change is most obvious among Internet companies, but the rapidly decreasing cost of 3-D printing technology promises similar changes in the world of physical products.
These shifts will allow forward-thinking companies to move beyond scaling or creating innovation to integrating and amplifying it.
Companies like Walgreens Co. and Citigroup Corp. are building modern versions of the corporate lab, with leaner teams that leverage innovation’s increasingly accessibility to drive the creation of new businesses and business models.
And a range of companies — notably consumer packaged goods icon The Procter & Gamble Co. — have demonstrated how to plug their unique capabilities into entrepreneurial ecosystems, helping nascent ideas realize their full potential. In sum, companies that augment vibrant internal innovation engines with connections to outside entrepreneurs have the potential to emerge as true innovation powerhouses.
A New Mandate and Mindsets
The shift to this new model of innovation starts with leadership making it a corporate-wide mandate. That doesn’t mean that everyone should feel obligated to create the next iPad. Rather, it means that everyone should be looking for new ways to solve old problems.
After all, innovation is as simple as something different that has impact. Making it clear that innovation is everyone’s business creates conditions where its various forms can flourish. Further, the need to master innovation extends beyond corporate campuses. Consider how many individuals increasingly turn to new communications medium such as Facebook and Twitter. A corporate-wide innovation capability conditions employees to adopt and adapt to these new technologies.
Behind any kind of corporate-wide mandate should be clear explanation of and training in the mindsets that power innovation success. The following four people are among those who provide useful guidance to would-be innovators:
A.G. Lafley. P&G’s chairman and chief executive officer from 2000 to 2009 is widely and appropriately credited with re-igniting that company’s innovation engine. He emphasized the importance of investing to understand customers better than they understood themselves. Lafley reminds innovators to draw energy from the marketplace.
Mike Tyson. The great American philosopher, movie star and, of course, boxer, once said, “Everyone’s got a plan, until they get punched in the face.” No matter how much you study, there’s guaranteed to be something wrong with your first idea. The key is figuring out how the idea is wrong. Innovators need to take their punches, starting the process of trial-and-error iteration that typifies successful innovation.
Thomas Edison. “The Wizard of Menlo Park” had a role in creating the phonograph, incandescent light bulb and the modern motion picture industry. He is also credited with having said, “Genius is one percent inspiration and 99 percent perspiration.”
Innovation is an active, not an academic, activity. Too many innovators think truth comes from the Microsoft Office suite of products, but there’s a big difference between a beautiful business plan and a beautiful business. Innovators have to get out and learn from active experimentation.
Robert N. Anthony Sr. Anthony (editor’s note: the author’s grandfather) is one of about 80 members of the Accounting Hall of Fame (who taught his grandson his first accounting lesson at the age of seven). His lesson relates to a core principle of accounting, the “dual-aspect concept.” Just like every accounting transaction balances out, every corporate strength has a corresponding weakness. Companies seeking to drive innovation have to organize and act in different ways. Otherwise they fall into Einstein’s definition of insanity: following the same behavior but expecting different results.
The final piece of the puzzle is making sure that there are systems and structures that allow these mindsets to work their magic. While building a factory that can reliably create new growth businesses is no easy task, a critical element is developing robust portfolio governance systems that feature distinct measurement and management approaches for different kinds of ideas.
Investors know that diversification generally reduces risk, because diverse assets have unrelated risks. Naturally, investors use different mechanisms to measure and manage different types of assets. After all, investing in a three-person startup is much different from investing in a commodity like gold. Both investments require discipline, but they are distinctly different types of disciplines.
Though most executives understand this in their personal lives, they frequently fail to apply the lessons to their companies. Sometimes companies treat all growth efforts the same way. Often that involves subjecting ideas to a rigorous evaluation and qualification process before investment. While that kind of approach works very well in circumstances where answers can be determined analytically, it often comes up short for new growth ideas targeting nascent or non-existent markets.
That’s one lesson P&G learned in the early 2000s. The company had adopted a stage-gate process to manage innovations, and the process was increasing the predictability and reliability of the company’s innovation efforts. However, the process seemed to be short-changing more expansive ideas: P&G’s success rate was going up, but the size of initiatives wasn’t.
It was a good start, but it meant that the company wasn’t paying adequate attention to the more disruptive and transformational opportunities. Hitting growth targets required both predictable success and larger ideas.
At this point, companies can sometimes veer in the other direction, applying no discipline to more “out of the box” ideas. This shift rests on the flawed assumption that more expansive innovation efforts are just random and unpredictable. Of course, something that hasn’t been done before by definition has uncertainty. But even the wildest innovators follow a disciplined approach. It is typically a different discipline from the discipline that characterizes managing more certain ideas.
Over the last decade, P&G has built sophisticated innovation management systems that are capable of maximizing the potential of different types of ideas. P&G has four explicit growth strategies: commercial (efforts to increase trial and usage of existing offerings); sustaining (incremental improvements to existing offerings); transformational (step-changes that reframe a category); and disruptive (new brands or business models).
Today, each of these growth strategies is measured and managed in different ways. P&G has enough of a process bent that it even went as far as to create a process manual for transformational and disruptive ideas. The manual is a step-by-step guide to creating these kinds of businesses. It includes overarching principles as well as detailed procedures and templates to help teams describe opportunities, identify requirements for success, monitor progress, make go/no-go decisions and more
Finance’s Role
If innovation at most companies were made into a Hollywood movie, the financial executive would most likely be cast as the dastardly villain. All too frequently, finance is portrayed as the innovation skeptic, a Scrooge-like figure that clamps the purse strings closed and refuses to take any risk at all.
That’s not really fair. In fact, the finance function can be innovation’s biggest friend. Some of the negative behaviors projected on finance are actually positive ones. For example, good financial procedures make it hard for employees to spend money profligately.
A recent study highlighting what led startup companies to fail concluded that the number one failure mechanism was “premature scaling.” Capital should be scarce in an idea’s early days to encourage iteration and active learning.
Another source of frustration comes when finance grills an innovator about the numbers. “They don’t get it,” the innovator fumes. “This is innovation. The numbers aren’t meaningful.” That’s a mistake. Innovation can and should be fun, energizing and creative, but it needs to produce a financial return. Finance should be pushing for at least a sense that there is a conceivable path to profits.
On the flip side, finance should recognize that early-stage projections for uncertain ideas are nothing more than educated guesses. Pushing for — and making decisions around — decimal-level projections for an early-stage idea is foolish. Only large existing markets can be measured with any degree of accuracy, and those markets are often the worst places to innovate.
Beyond playing the healthy skeptic, finance can enable innovation in three ways.
First, finance can help innovators with business modeling activities. While most people think the hero in innovation stories is the white-lab-coated scientist, business model innovation has been behind many recent success stories.
Consider Amazon.com’s ability to have negative days working capital, Zara Inc.’s inventory management acumen or the billions that Qualcomm Inc. earns through licensing revenue. Mastering business model innovation means delving deeply into pricing models, inventory management, capital structure and more.
While these areas are second nature to finance executives, they are not always top of mind for innovators used to focusing primarily on features and functions.
Secondly, finance plays a critical role in allocating and protecting resources for innovation. The portfolio governance approach described above fails unless there are different budgets for each type of innovation — a single pool of funding often leads companies to using a single approach.
Jeann Low, chief financial officer of Singapore Telecommunications Ltd. (SingTel), has a useful metaphor for this notion. She describes having separate growth “envelopes.” When it is time to discuss a disruptive project, she takes out the disruptive envelope, looks at how much money is in it and uses the appropriate questions to determine how much to invest.
Finally, finance can help a company identify and acquire startup companies that can hypercharge a corporation’s innovation efforts. Highly innovative companies recognize that they should balance organic and externally driven innovation efforts.
Perhaps the most prolific acquirer of modern times is Cisco Systems Inc., which has truly turned the art of acquisition into a science. The company has acquired more than 150 companies over the past decade. Many of the acquisitions are relatively small companies where Cisco is really acquiring a promising management team or technology. As such it has very defined processes to ensure post-merger integration goes smoothly.
Corporate Decisions Pivotal
The innovation potential that exists in countries like China, India, Indonesia and Singapore is palpable. These markets feature both vibrant startup communities and large companies that increasingly recognize they need to shift from being lean-and-mean fast followers to true innovation powerhouses.
Will the surging energy in emerging innovation ecosystems create new markets that amplify American ingenuity, or lead to America losing its unique position in the world?
Decisions made by corporate leaders over the next three years will be pivotal. Companies that bury their heads in the innovation sand will feel the impact of this decision; those that recognize and act appropriately can spearhead an American Innovation Renaissance. It’s possible, and financial executives have a key role to play.
Scott D. Anthony ([email protected]) is managing director of Innosight Asia-Pacific where he leads the firm’s Asian consulting operations and its venture-capital investment activities. He’s author of The Little Black Book of Innovation (Harvard Business Review Press, 2012) and author or coauthor of several other books.