INNOVATION: Leading you up, up and away

One of the best car development teams ever, according to management thinker Peter Senge, was the group that came up with the Ford Taurus. ‘They did all sorts of great things,’ he says. ‘But they left the company within a year of the launch of the vehicle.’

Senge, a guru of organisational learning, insists this story does not imply criticism of the Ford Motor Company, which, since that success several years ago, has gone on to win accolades for its Ka and Focus models. Rather, he sees it as an example of a problem that is extremely common in large organisations. Successful teams that bend the rules and break through boundaries can be challenging to the hierarchies – and are therefore seen as threatening. The result is that the innovators within them can feel isolated and develop a siege mentality that culminates in their departure.

This, at least in part, explains why so many companies have so much difficulty with innovation. Clearly, it is one thing to include a commitment to innovation – whatever that really means – in your mission statement, and quite another to deliver on it.

After all, even such a celebrated innovator as James Dyson has trouble keeping the process going. Dyson, of course, came up with a range of products before his cyclone vacuum cleaner catapulted him to fame. But he has yet to come up with the other household appliances that were expected to follow. And the difficulties of the pioneering computer and electronics company Hewlett-Packard in living up to its innovative past have partly accounted for last year’s decision to appoint a dynamic young chief executive.

Companies that have no history of innovation have even greater problems, though. A large part of the issue is that innovators are not just rule-breakers and challengers of the status quo. They can, admits Senge, be ‘a pain in the neck’. Furthermore, he says: ‘They often don’t have great interpersonal skills and are not politically savvy.’

It is little wonder then that many organisations do not have much tolerance for innovators. But they face a ‘can’t live with them; can’t live without them’ dilemma. Innovation has risen so far up the boardroom priority list that many organisations recognise they have no choice but to put up with the iconoclasts.

Those boards that do not already realise the importance of this issue are constantly being bombarded with statistics and surveys warning them of the dangers of not paying attention to it. Financial directors will already have been made aware of figures from management consultancy Arthur D Little which suggest that companies which consistently innovate enjoy valuations a minimum of 15% higher than those of their non-creative peers.

These days, innovation is not seen solely as a means of doing better than the competition. It is portrayed as absolutely vital to survival. At the end of last year, for example, another consultancy, PricewaterhouseCoopers, released a survey under the catchy headline: Failure to invest in innovation could be the death-knell of many organisations.

PwC’s research backs up Arthur D Little’s shareholder value claims. It examined 800 companies in seven countries covering 26 industry sectors and claimed to reveal ‘an inextricable link between innovation and value creation’. A 10% increase in the proportion of turnover generated from products and services introduced in the preceding five years corresponds to a 2.5% increase in revenue growth, year on year, it says. ‘Moreover,’ it continues, ‘companies that generate 80% of their revenues from new products have typically doubled their market capitalisation in a five-year period.’

The implication is clear, says PwC’s Frank Milton: companies that do not take this approach are destined for serious trouble. With the march of e-business forcing companies to differentiate themselves through innovation, organisations are going to have to become a lot more innovative – in fact, they should seek to obtain at least half their turnover from products and services introduced within the last five years, he advises.

A report from yet another consultancy, Booz-Allen & Hamilton, contains more gloomy reading. Based on a discussion among European leaders at the end of last year, it confirmed the presence of a ‘technology gap’ between Europe and the United States – although it also pointed out that in some areas, noticeably mobile telephones, Europe was ahead. The report sets out Europe’s barriers to innovation – including the familiar complaints about its cautious mentality, its lack of qualified people, dearth of venture capital and unhelpful tax regime – and advised on what the European Union might do about overcoming them.

There is clearly a role for governments in creating the right sort of environment for enterprise – something that Britain’s New Labour appears to have recognised with the infamous McKinsey report on productivity and its claims to be boosting entrepreneurship with a range of measures. But there is no denying that some of the blame for the failure to embrace innovation must be placed at the doors of companies and their advisers.

Until recently, companies often relied on outsiders to do their creative work – calling in new product development teams or other ‘creative’ specialists to give them a boost when they are struggling to come up with new ideas. And consultancies, if they have sought to develop their clients’ capabilities in this area at all, have tended to talk of models and mechanisms such as the ‘innovation funnel’. Even now, Booz-Allen is promoting a concept it calls ‘the innovation engine’, which conjures up notions of raw ideas going in one end and fully-fledged products emerging from the other.

Nick Udall of Limited Nowhere, a consultancy that claims to take a different, more wide-ranging approach to innovation, says that the problem with this tendency is that it creates an ‘innovation dependency’. Innovation, he says, ‘is about learning from the process. If you haven’t captured how you’ve done it, it’s not repeatable’.

Furthermore, as the comment from PwC’s Milton suggests, there is such a concentration on the Internet and other facets of information technology among even the most traditional of companies that there is a danger of thinking that innovation is all about technology. (UK government ministers tend to be so taken up with this that they are constantly citing Microsoft as an exemplar of innovation, a case on which many industry insiders, not to mention the US Justice Department, may beg to differ.)

While technology inevitably has a key role to play in innovation – often through being an enabler, rather than the product or service itself – it does not provide the only means of innovating. In the US, for example, as traditional a business as the steel industry has been radically shaken up largely through the efforts of a pair of companies mainly operating in locations far away from the Rust Belt of the North-East and Mid-West. Technology has played a part because it has allowed the ‘mini-mills’ operated by North Carolina-based Nucor and Texas’s Chaparral Steel to run on scrap metal rather the raw iron ore which is used by the old fully-integrated mills operated by the big players. But much more important is the newcomer’s attitude of mind and a willingness to challenge conventional wisdom. In particular, they have demonstrated that a company does not have to be a declining commodity business if it pays a little attention to customer needs.

Nucor has recently encountered some growing pains. But at the heart of its ascent to become a highly profitable organisation and the country’s second-largest steel producer is a culture that encourages employees to work in teams and to try things – and that rewards them for doing so.

The importance of culture to innovation is just being realised by large organisations in the UK. Adoption of an open management style and redefinition of the role of the corporate headquarters away from direction and strategy planning to fostering a ‘climate for change’ were among the attributes of innovative companies cited by PwC in its survey.

Meanwhile, PA Consulting sees a role for corporate leaders in making it clear that innovation has moved up the corporate agenda and in establishing the environment in which it can flourish. In particular, the firm says executives can support innovation by not measuring it using the normal financial performance measures. This is especially important given that it is frequently said that even techniques designed to boost innovation can end up hindering it because they encourage organisations to evaluate ideas at too early a stage – thus filtering out some of the more original ideas that could have had the greatest potential in revenue terms.

As a result, PA Consulting suggests that companies should move from an approach that measures the amount spent on research and development to one where organisations assess the extent to which innovation is contributing to their growth. And even if organisations do not go this far – and many finance departments would no doubt struggle with the idea – they can still see hefty gains from loosening their hold over employees.

Another of Senge’s innovation examples concerns Xerox, the US copier maker that generally features in management texts on account of being caught out by its Japanese rival, Canon, back in the 1980s.

Two years ago, according to Senge, the company came up with a product that has already generated $2bn of sales. It was, he says, ‘a bet-the-company idea’ to come up with a fully digitised top-of-the-line machine. In making it a success, the team of engineers responsible for it fulfilled what was expected of them. But they did not stop there. Along the way, off their own bat, they saw an opportunity to build a machine that would not end up in a tip. Not only did they come up with a copier that had just 200 parts, compared with its predecessor’s 2,000, they made 98% of them recyclable. The result is that, in addition to producing a strong revenue earner, the engineers – through acting on their concerns about the environment – came up with a copier that the company claims has saved about $250m in costs.

This episode demonstrates the power of innovators to make a difference in unpredictable as well as expected ways. In modern companies, though, the pressure is so great that they can no longer rely on giving isolated teams such freedom. ‘Skunkworks’ (named after the secretive and highly successful special projects division at Lockheed-Martin, which operated outside the company’s command and control structure), or ‘hot groups’, as such collections of mavericks have variously been called, have come up with remarkable breakthroughs from the Macintosh computer to the atomic bomb. But these days innovation has to be much more widespread in the organisation. And if that were not enough of a challenge for the average company, Internet start-ups are siphoning off many of the employees most likely to be champions of innovation.

The dangers of not rising to the challenge, though, are made abundantly clear by

strategy guru Gary Hamel. For the past couple of years, he has been telling anybody who would listen that business is in the midst of a revolution in which incumbents are threatened by insurgents, the old guard by the vanguard and the ‘hierarchy of experience’ by the ‘hierarchy of the imagination’.

To cope with such an environment, businesses will not just have to foster innovation, they will have to innovate themselves by radically altering their business models. ‘Revolutionaries,’ he writes in his forthcoming book, Leading the Revolution, ‘recognise that competition is no longer between products or services, it’s between competing business concepts.’ The Internet figures strongly in his list of new concepts, but he also points to IKEA and Body Shop as having changed the basis of competition in their respective fields.

And he also describes how, even though Marks & Spencer has been a laggard in recent years, it was still capable of ‘non-linear innovation’ when it moved into selling sandwiches on a massive scale. In order to be able to butter enough pieces of bread without having everybody in the company at the task, it adapted the silk-screening process a supplier used to print patterns on bed linen – and so it took on the traditional sandwich shop.

But, as M&S’s continuing struggles demonstrate, in the current climate a company can never sit back. The new ‘innovation agenda’ involves doing everything that was done before and more, and that requires having innovators – or ‘activists’, in Hamel’s go-getting terminology – all over the business.

Helping companies achieve this is what Udall’s Limited Nowhere, an organisation that also includes Design Council executive Sean Blair, is all about. In just a few months, the consultancy has picked up a variety of clients that have tried the linear/mechanical approaches and want something more organic, says Udall. At the centre of the approach is finding the company’s sense of purpose, because this helps direct employees’ efforts.

‘If everybody in the company doesn’t have permission to innovate, then you’re scuppered,’ he says. ‘But you need to do it purposefully, or you’re also scuppered.’

Return to the Financial Director website