Innovative Firms

No single innovation tool or method will deliver consistent, profitable breakthroughs, and neither will a hodgepodge of misaligned or poorly integrated practices. It takes a systematic approach to build a systemic capability—whether that is Amazon’s logistics prowess or the near-flawless service you receive as a guest at a Four Seasons hotel. So it is with innovation. Skills, tools, metrics, processes, platforms, incentives, roles, and values all have to come together in one supercharged, all-wheel-drive, race-winning innovation machine.

So what are the parts of the innovation engine that most often get left out? Here’s our list of the top five:

  1. Employees whoever been taught to think like innovators

We’re a bit dumbfounded that so few companies have invested systematically in improving the innovation skills of their employees. The least charitable explanation for this oversight is that despite evidence to the contrary, many senior managers still assume that a few genetically blessed souls are innately creative, while the rest can’t come up with anything more exciting than suggestions for the cafeteria menu.

We understand how a CEO might come to such a conclusion. Every day, senior executives get bombarded with ideas—and most of them are either woefully underdeveloped or downright batty. After a while, it’s easy to believe that all those dopey ideas must be coming from dopes, rather than from individuals who haven’t been trained in or given opportunities to practice innovative thinking, and who work within a system that hasn’t been properly designed to foster it.

Much has been written about where innovation comes from and what distinguishes an innovative mind. Our research and experience suggest that inquiry is at the heart of it. Innovators have an inclination and a capacity to examine what others often leave unexamined. So if you want innovation, individuals must to be taught to do four things:

Challenge invisible orthodoxies. Within any industry, mental models tend to converge over time. Executives read the same trade magazines, go to the same conferences, and talk to the same consultants. After a while, they all think alike. Innovators, by contrast, are contrarians. In their quest to upend industry rules, they learn how to distinguish “immutable laws” from “ingrained beliefs.” They exploit the unhealthy reverence incumbents have for precedent.

Harness underappreciated trends. Innova­tors don’t spend much time speculating about what might Instead, they pay a lot of attention to the little things that are already changing, and that are gathering speed. To be an innovator, you don’t need a crystal ball: you need a wide-angle lens. You have to be tracking trends your competitors haven’t yet noticed, then figuring out ways of using them to upend traditional business models.

Leverage embedded competencies and assets. Innovation gets stymied when a company defines itself by what it does rather than by what it knows or owns—when its “concept of self” is built around products and services rather than around core competencies and strate­gic assets. Innovators see their organization, and the world around it, as a portfolio of skills and assets that can be endlessly recombined into new products and busi­nesses. They are masters of recombination.

Address “unarticulated” needs. Customers have their own orthodoxies, so asking them what they want seldom yields a fundamentally new insight. Instead, you have to observe them, up close and over time, and then reflect on what you’ve learned. Where are we creating needless frustrations? Where are we wasting our customers’ time? Where are we making things overly complex? Where are we treating customers like numbers instead of people? To be an innovator, you have to be a relentlessly curious anthropologist and a keen-eyed ethnographer.

With a bit of training, and some opportunities for real-world practice, just about anyone can sig­nificantly upgrade their innovation skills. Whirlpool Corporation’s strong innovation perfor­mance in recent years owes much to the fact that the company trained more than 15,000 of its employees to be business innovators. Any innovation program that doesn’t start by helping individuals to see the world with “fresh eyes” will almost inevita­bly fall short of expectations.

  1. A sharp, shared definition of innovation

To manage innovation in a systematic way, you have to have a widely understood definition of innovation. Without this, it’s impossible to know how much “real” innovation is going on and whether it’s paying off. Just as critically, you can’t hold leaders responsible for innovation if no one can agree on what’s innovative and what’s not.

Coming up with a practical definition of innovation is harder than it sounds, particularly if the goal is to rank every new initiative or product by its “innovative­ness.” When Heinz puts ketchup in a new squeeze bottle, is that innova­tion? When Comcast rolls out a new “triple play” pricing scheme, is that a break­through? When Whirlpool launches a washing machine that dispenses just the right amount of detergent, is that a game changer? While most people can distinguish between a genuine breakthrough (like the original iPhone) and a near-trivial product enhancement (like a new shade of Post-It® notes), it’s tougher to get agreement about all the shades of gray in between.

In our experience, it can take several months for a company to hammer out its defini­tion of innovation. As a starting point, it is important to look back over a decade or two and identify the sorts of ideas that have produced noticeable margin and revenue gains.

For a product or service to be counted as innovative at Whirlpool, it must be unique and compelling to the consumer, create a competitive advantage, sit on a migration path that can yield further innovations, and provide consumers with more value than anything else in the market. This definition may seem somewhat generic. What makes it useful, though, is the understanding that has developed over time as these criteria have been used to determine which ideas are truly innovative and which aren’t. With use, the defini­tion has gotten tighter, and differences of opinion have narrowed. It’s also important to periodically review the definition: did the prod­ucts that got rated as highly “innovative” actually yield above-average returns?

Having a practical, agreed-upon definition of innovation makes it easier to set goals for innovation, to allocate resources to innovative projects, to plan a cadence of innovative product launches, to target advertising on high-value breakthroughs, and to measure innovation performance.

  1. Comprehensive innovation metrics

Companies measure just about everything that has an impact on the bottom line, yet strangely, they often shy away from measuring innovation. Granted, it is difficult to measure. Historical benchmarks are of limited value when a product has no antecedents, and it’s hard to pin down the future value of an idea that exists only as a concept.

Nevertheless, there are ways of measuring innovation performance. A comprehensive dashboard should track:

Inputs: the investment dollars and employee time devoted to innovation, along with the number of ideas that are gener­ated internally each month or sourced from customers, suppliers, and other out­siders.

Throughputs: the number and quality of ideas that enter the pipeline after initial screening, the time it takes for those ideas to move from concept to proto­type to reality, and the notional value of the innovation pipe­line.

Outputs: the number of innovations that reach the market in a given period, the percentage of revenue derived from new products and services, and the margin gains that are attributable to innovation.

Leadership: the percentage of executive time that gets devoted to mentor­ing innovation projects, and 360-degree survey results that reveal the extent to which execu­tives are exhibiting pro-innovation behaviors.

Competence: the percentage of employees who have been trained as business innovators, the percentage of employees who have qualified as innova­tion “black belts,” and changes in the quality of ideas that are being generated across the firm.

Climate: the extent to which the firm’s management processes facilitate or frustrate innovation, and the progress that is being made in remov­ing innova­tion blockages.

Efficiency: changes over time in the ratio of innovation outputs to inputs.

Balance: the mix of different types of innova­tion (product, service, pricing, distribution, operations, etc.); differ­ent risk cate­go­ries (incremental improvements versus speculative ventures); and differ­ent time horizons.

Once you’ve established the metrics and a baseline, you’re in a position to set specific, unit-by-unit innovation goals, and to fine-tune the innovation engine. Recently, for example, Whirl­pool’s Chairman and CEO, Jeff Fettig, set a goal for the company to double the value of its innovation pipeline over the next two years. Executives realized that to do this, they would need to reallocate some of the company’s innovation resources from late-stage product enhancements to early-stage product breakthroughs. With­out a set of comprehensive metrics, Whirlpool wouldn’t have been able to set such specific innovation goals, to proactively rebalance its innovation spending, or to measure the results of those actions.

  1. Accountable and capable innovation leaders

What percentage of the leaders in your company, from project managers to execu­tive vice presidents, are formally accountable for innovation? What percentage have innovation-related targets that affect their compensation? If it’s anything less than 100%, innovation will be marginalized. Too often innovation is seen as the province of specialized units like R&D or corporate business development, rather than being the responsibility of every leader at every level.

Obviously, it makes little sense to hold leaders accountable for innovation if they haven’t been trained and coached to encourage innovation within their own teams. For a leader, this means:

  • Being adept at using innovation tools.
  • Creating frequent opportunities for blue-sky thinking.
  • Avoiding premature judgments when evaluating new options.
  • Demonstrating an appetite for unconventional ideas.
  • Recognizing innovators and celebrating “smart failures.”
  • Personally mentoring innovation teams.
  • Freeing up time and money for innovation.
  • Hiring and promoting for creativity.
  • Working to eliminate bureaucratic impediments to innovation.
  • Understanding and applying the principles of rapid prototyping and low-cost experimentation.

In our experience, most leadership development programs give scant attention to these innovation-enabling attitudes and behaviors. Through selection, training, and feedback, companies must work hard to create a cadre of leaders who are as adept at fostering innovation as they are at running the business.

  1. Innovation-friendly management processes

A car is more than its engine. Mate a 500 HP engine with a set of nearly bald tires and most of that power will get wasted. Again, the same is true for innovation. No matter how laudable a company’s innova­tion practices are, if its entire management model hasn’t been tuned for innovation, little of the engine’s power will reach the bottom line.

If, for example, a company’s budgeting process is inherently conservative and makes it difficult for first-line employees to get funding for small-scale experiments, any investment in innovation skills will be wasted. If its product development pro­cess places too much emphasis on removing risk from new launches, few new-to-the-world products will make it to market. If its assessment and compensation system doesn’t reward innovation performance, it will end up with managers who are more bean counters than trailblazers. If it lacks a financial reporting system that tracks innova­tion investment and staffing, no alarm bells will ring when an innovation project gets sacrificed on the altar of quarterly earnings.

The point is, any process that significantly impacts investment, incentives, or mindsets needs to be re-engineered for innovation. Over the past decade, Whirlpool has done exactly that. Its HR leaders, for example, built an innovation-focused assessment exer­cise into the company’s MBA hiring process. Candidates who get invited to the company’s headquarters participate in a multi-day project designed to test their capac­ity to think creatively. On-campus interviews also feature an innovation exer­cise. Whirlpool’s investment process has also been tuned for innovation. Each year, the company devotes a board-sanctioned share of its capital budget—typically around 20%—to projects that are deemed to be truly innovative.

Over the past couple of decades, virtually every company has comprehensively over­hauled its operating model for efficiency and speed. Global supply chains have been optimized, business processes have been outsourced, and huge investments have been made in new IT tools. Thus far, though, few companies have devoted anywhere near this level of effort to retooling their management practices for innovation.

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