Seven rules for managing, profiting from innovation

Sunday, May 14, 2006
St. Louis Post-Dispatch Business E5
"Seven rules for managing, profiting from innovation"


In 1967, "plastics" was the one word of career advice for Dustin Hoffman in "The Graduate." Today, "innovation" is the one word of advice for every business in the United States.

Innovation drives change. It is the foundation for increasing sales and margins. Companies that innovate successfully will thrive. Companies that don't innovate will face unbearable pressures from both innovative domestic competitors and low-cost competitors in China and other emerging countries.

However, most companies are weak at innovation. Moreover, they don't have the knowledge, organizational structure or processes to become more innovative.

Management teams that want their company to survive and thrive should start with "Making Innovation Work: How to Manage It, Measure It, and Profit from It" by Tony Davila, Marc J. Epstein and Robert Shelton (Wharton School Publishing, 2006). Davila and Epstein are academics with extensive consulting experience, while Shelton is a business consultant who has served as managing director at both Arthur D. Little and SRI International. As the subtitle promises, their seven rules provide the foundation for managing, measuring and profiting from innovation:

1. Exert strong leadership on innovation direction and decisions. The authors surveyed senior technology officers on the relevance of various technology competencies in 1997 and 2002. Top management support was No. 1 in both years, and was even more important in 2002.

2. Integrate innovation into the company's business mentality. Some companies think innovation involves only technology and new products. They tend to benchmark innovation practices from 3M and Apple Computer. But business model innovation (including process innovation) is equally important. So also look at Wal-Mart in purchasing and logistics and Dell Inc. in direct sales.</li>

3. Match innovation to business strategy. Innovation for the sake of innovation doesn't work. Instead, you first need a compelling strategy. That means having a clear vision of where you want to go and three to five key moves for getting there.

"Dealing with Darwin" by Geoffrey Moore, the focus of my last column, addresses this point. It shows how to develop an innovation strategy that reflects your customers' needs, competitive realities and internal capabilities.</li>

4. Manage the natural tension between creativity and value capture. Radical innovations involve major changes in both technology and the business model. Incremental innovations require only moderate changes in technology, the business model or both. Each radical innovation provides the platform for a series of incremental innovations that create value.</li>

Balance radical and incremental innovation. Too many radical innovations indicate a disconnect between the innovators and operators. Ideas aren't fully exploited, and not enough value is captured. But rampant incrementalism indicates a conservatism that leads to decline. </li>

5. Neutralize organization antibodies. Tension between operations people and innovators is understandable. Innovation means change, and change disrupts daily operations. 

Innovation makes life more difficult for operations people. Hence, the long-term value of innovation must be clearly demonstrated and communicated to people at all levels. Yet, even with great communications, some executives and managers will refuse to recognize the importance of innovation and act to undermine it. They must either change or leave.

6. Cultivate an innovation network beyond the company. The individual is not the basic building block of innovation. Instead, innovation requires an open, collaborative network of people. The network should extend across departments within the company. It also should extend beyond the company and include customers, suppliers and outside experts. 

Kill the "not invented here" mentality. Large internal R&D departments no longer are the answer. Procter & Gamble has soared since Alan Lafley became chief executive in 2000. One reason is that he set a goal of increasing the volume of innovation ideas coming from the outside from 10 percent to 50 percent.</li>

7. Develop a balanced scorecard with four types of metrics to track performance and reward innovation:</li>

 

  • "Iinputs" are leading measures of project success. They include your innovation strategy, innovation systems, and the people, money and other resources used in innovation.
  • "Processes" measure current activities. They include tracking the performance of both individual projects and your portfolio of projects.
  • "Outputs" are lagging variables which describe the quality, quantity and timeliness of innovation efforts.
  • Finally, "outcomes" measure the value created or destroyed by each project and the innovation effort as a whole.



Performance measurement is crucial. It leads to more successful projects, because what gets measured gets done. It allows improvement of all aspects of the innovation process. Finally, by documenting the value created, it generates support for future innovation efforts.

Develop different performance metrics for incremental and radical innovation projects. Incentives for incremental projects should reflect outcomes and performance measures and use cash rewards based on clear formulas. Radical innovation projects should stress recognition, use stock rather than cash and rely more on qualitative performance measures.

Where should you start your innovation efforts? Have your senior executives take the "Innovation Climate" survey provided in the book's last chapter. Respondents must give two responses to each of 36 scales: where the company is today and what it should strive for.

You may well find large gaps between your current and desired innovation scores. But look on the bright side. The bigger the gap, the easier it will be to develop a consensus to follow the seven rules detailed in "Making Innovation Work."



Bill Finnie, a business consultant and adjunct professor at Washington University, writes about the do's and don'ts for success.

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The St. Louis Post-Dispatch and William C. Finnie share the copyright on this column. Individuals and their organizations may use these columns for their internal use. Publication for use outside of your organization, however, requires written permission from the St. Louis Post-Dispatch or William C. Finnie.