Capturing the Innovation Premium
June 1 2002 by Jennifer Pellet
Innovations are ubiquitous-yet elusive. While new products, services and value propositions spring up daily-as businesses continually seek ways to create new markets or reinvent old ones-innovations that can deliver true value remain a scarce and much-coveted commodity. At the same time, the ability to innovate effectively is growing increasingly critical to success, and even survival, in today’s competitive markets.
In fact, 83 percent of executives worldwide believe their companies will be more dependent on innovation in the future, according to a recent Accenture survey. “Research tells us that successfully innovative companies are more likely to generate growth rates of 20 percent or more than their less innovative counterparts,” says Michael Sutcliff, managing partner in charge of finance and performance management at Accenture. “And while it can be difficult to measure the effect on the bottom line, innovative companies are often more attractive to customers, talent and suppliers.”
Yet creating a company with both the continuous capacity for innovation and the ability to build value by implementing new ideas and programs effectively is not easy, agree CEOs who participated in a roundtable discussion held in partnership with Accenture. “You have to keep moving forward, but you can’t move forward so fast that you forget the basics,” said John Catsimatidis, CEO of Red Apple Group, who pointed out that in driving innovation, all CEOs face the challenge of tempering vision with pragmatism.
“You really need a process with a business mind leading it,” agrees David Berges, CEO of Hexcel, noting that knowing when to pull the plug on a losing proposition is just as essential as the ability to generate new ideas. “You need to have a pipeline of new products and a regular review process.”
Successful innovation requires not only unleashing the creativity of everyone within the company, he adds, but also managing the resulting flood of ideas. For CEOs that means making it a top priority, redefining business processes to make innovation part of everyday life and taking an active role in the process.
Unlock new ideas
Michael Sutcliff (Accenture): I don’t think I’ve ever run into a CEO who told me his or her company had a shortage of ideas. But I’ve run into many who reported a shortage of ability to get the ideas executed and deliver money to the bottom line. So CEOs must think about the difference between innovation and innovation delivered on a regular basis.
Are we talking about breakthrough innovation or incremental innovation? Most companies need both. They need some recurrent innovation on their existing models and they need the strategies to enter new markets or to change their competitive positioning. But how do you create a management team that has both the short-term entrepreneurs who engage in that hand-to-hand combat every day in your existing market and the long-term entrepreneurs who have the ability to make a substantial change in the way you compete? How do you unlock the innovation in your existing employees?
At BP, they use “action learning tasks”-a program that focuses on asking employees from across the organization to come together and take personal ownership of solving one of their challenging long-term business problems. In the BP program, if someone brings an idea for anything from a simple process improvement to entering a new business, that idea gets accelerated through the management team and they get a yes or no decision within 30 days. And if the decision is yes, it’s implemented in the next 30 days.
BP enjoyed about a thousand new ideas a month for a year. While the vast majority were turned down, out of those 12,000 they found about 200 they thought were just absolutely incredible. And all 200 were implemented within a year.
We all know the story of how Dell created the direct pool model for the computers, which was undeniably a big innovation. Recently, we worked on a project with them where they posed the question, “What would happen if we could actually operate with zero inventory?” Together we came up with the solution that allows them to operate with less than two hours of inventory around the world and save hundreds of millions of dollars. So, while one big idea is great, constant improvements on the idea and the ability to actually keep innovating over time is where most companies find the real value.
We believe that innovation is about tapping into the existing potential in our organizations and our people, and discovering the real benefits-the new products and services, new business models, new ways of working and the efficiencies or the new values that our customers have-that we should focus on serving. Companies can think about innovation in terms of unique strategies to create a new competitive differentiated position. They can think about it in terms of new product and service design, and in terms of creating new business models.
J.P. Donlon (Dilenschneider Group): Tom, when you were at Dana Corp., did its program of compelling each employee to come up with two ideas a month pan out?
Thomas Dattilo (Cooper Tire & Rubber): It did in part. It worked in the sense that it concentrated people on thinking about ideas, but as a pure measurement ultimately it had to be dropped because people were just trying to hit the target. There’s a tendency to find a way to come up with two ideas per month, whether they’re good, bad or in between.
I think you have to try to create the sense of one organization as opposed to a “we” and a “they.” Instead of saying, “Bring us your ideas,” it should be an organization that thinks, “Our ideas are ours, and we’re one company trying to accomplish one thing.” That might seem like a slight difference, but it’s an important one and it’s very difficult to do in a big company.
J.T. Battenberg (Delphi): We hook up the 17 tech centers we have around the world, which are all 24/7, so they can talk and share ideas and concepts and design around the clock. So there’s a feeling there of culture, of oneness, of team.
We also have a recognition system. We recognize the top 1 percent of our 16,000 engineers based on their contribution to innovation-innovation that reaches production or has an impact in the industry. In addition to monetary rewards, we hold a black-tie event so that they and their families are recognized and entertained for a weekend. It’s international, and we hold it in a different country each year.
David Berges (Hexcel): In my experience, if you want growth from new products you need to spend time reviewing the ideas being generated in the R&D labs. You need a regular review that says, “Let’s put a team with marketing and sales and customer interaction together and develop a business case. Is it real or isn’t it?” If it’s not real, you shut it down and redirect the resources.
If technology leaders are working in a vacuum, they’ll tend to give incremental increases or cuts to all of the programs rather than make the big moves that need to be made. So the senior leadership-business managers who understand business cases-need to look at 10 projects and shut down three and accelerate three.
Victor Viner (Volaris): To us, innovation is something a bit different. We’ve taken an industry that basically operates in a black box, and we’ve created transparency. Using our intellectual capital from the space, we started providing advice to our clients. Then we took this advice, modeled it using technology and built software, which we’re now licensing to the same people we’re competing with, the large global I-banks, to increase our reach. So it’s kind of a hybrid business model.
One of the things that we’ve done is take our people who are selling to our clients, the marketers, and have them work with our quantitative team. We want the people who are designing the models and the algorithms and putting the software together for a user interface to be able to talk to the people who are talking to our customer. We even bring our customers in on beta programs to help us in the design.
Paul Saueracker (Minerals Technology): We spend about 4 percent of our sales on R&D, and we use a modified stage gate process. We do a portfolio review with the integration of R&D, marketing, sales and operations to determine whether we move an idea to the next stage in the development process or not.
Howard Cohen (GTECH Holdings): My company was very innovative at the beginning of its life. It created algorithms and systems to create the online lotteries around the world. But when I joined GTECH I found the company no longer considered itself an IT company, but rather a lottery company. And innovation stopped because we now have to wait for the customer to tell us what to do versus create something either within our core lottery business competency or outside of that.
So we had to change the whole paradigm within our company to make sure that our employees understood that we’re an IT company. Then we needed to look at our core competencies and how we could leverage them to really become a growth company again. The company is now moving in that direction.
The hardest thing for me has been to convince the core people. Everyone inside the company was resisting. You can’t just bring in 4,600 new people, so you’ve got to find some people who believe that we can actually be different. So we’ve been working on finding individuals who can help lead the company in this new direction. We looked for internal champions and, where we had to, brought in external champions. We don’t want to break what we have, but over the next three to five years we want to change the profile of our company, which will change the multiple and the earnings and deliver good shareholder value.
Paul Henkels (Henkels & McCoy): We’re in the construction business, so our innovation is not in technology as much as in implementation. We find that we don’t need to be innovative ourselves, but we have to recognize a good technology that comes and how to implement it better. Technology companies might laugh at this, but we feel that we should have to reinvent ourselves every 15 years.
Sutcliff: It’s important for a company to recognize that not all inventions have to come from within the organization. Intel’s got a corporate venturing group that basically tries to buy innovation through the venturing process. They’ve decided there will always be a group of players who will come up with the next generation and do enough testing to prove that it’s viable. What they won’t have is distribution presence in the market. So Intel will let them get to the point where it becomes a proven commodity, and then its venturing program will basically buy the innovation.
Cohen: That’s a good point. We had a philosophy that everything had to be created within. We’re very vertically integrated, and we are now starting to look at our competitors as potential partnership opportunities as well as at opportunities to license some of our technology to either competitors or people outside of our space. That’s changed the internal thought process within the organization. They’re much more competitive and action-orientated because they understand there’s competition on the outside as well as the inside. We realize that you’ve got to find partners on the outside whom you’ve got to buy or partner with because you can’t do it all yourself.
Dattilo: Maybe because I’m so process-oriented and our industry has kind of forced us into that approach, I strongly believe that everything starts from how you establish your organization in the first place. Are you centralized or decentralized? Do you have a lot of layers of management or just a few? I personally strive for a decentralized organization with few layers because that encourages innovation and continuous improvement for the customers and for the shareholders.
Our belief is that if you start with that and require continuous improvement every year, then all these other things that we talk about-having joint ventures or pursuing a particular innovation-are kind of a natural outflow of that system. The process will help you determine that. Again, that’s not easy. It’s incredibly hard. But our idea is that you start with that and then everything flows from it.
Donlon: Do incentives work?
Saueracker: We don’t provide incentives per se, but we provide great recognition for people who bring new ideas-especially those that are eventually commercialized. People receive a letter complimenting them on the fact that they submitted an idea. They’re quickly told the outcome, such as if it’s moved to the next stage or has been banked because other higher priority ideas have come along. We recognize them through the company newsletter or rewards like a special dinner, a $1,000 bonus, or, if it’s a major innovation, with stock options. And we include not only the inventor but also the whole team who worked on it. We find company and peer recognition really motivates people.
If we find something that’s truly unique, we build a patent portfolio around that invention and carefully select those countries where we think that patent would have the greatest value to us. We also choose countries not to patent in because the value of the patent in that country does not justify the expense of obtaining one there. For example, when we have an invention in the paper area, we will work in North America, Europe, Brazil, which is a major paper producing country, and even China. But we’ll also choose not to act in countries where we think there’s only one paper mill there. We’re not worried about them.
Dattilo: We’ve always had an internal debate as to whether we patent something or keep it as a trade secret, because if you patent it then the world knows. It’s very rare that a good engineer can’t get around almost every automotive-related patent.
Gail Montgomery (Nutrition 21): We’re in a marketplace that doesn’t recognize patents very well. In the world of dietary supplements, there are few patented products and a lot of pirating. Part of my challenge is to figure out how to reposition that patent portfolio and establish a value by being able to monitor and enforce them. We’ve had some success with enforcing a patent, which is fairly unique in the world of dietary supplements. But it’s not easy in our space, because the premiums attached to patented technology are not as high as they are in the pharmaceutical arena.
Still, we make a heavy investment in it. We do probably several patents each quarter, which, for a company our size, is a fairly high level of innovation.
Cohen: We’ve started to look at alliances and partnerships, and we had to slow the effort down because first you have to protect your intellectual properties or they’ll just be taken from you. That was one of the issues we’ve had.
Battenberg: We’re fortunate in that a lot of our technology gets obsolete pretty quickly. You might be able to steal something but in four or five years, if not sooner, it’s going to be obsolete. So we worried about it a lot for a long time. But, quite frankly, I don’t worry about it much anymore.
Viner: We are very careful when we license to someone we’re competing with to make sure that we’re giving them a solution rather than just a piece of technology. By the time they’re there, it will be, to some extent, obsolete, and we’ll be on to the next one. But we’ve used patent protection. As a small company, we don’t put much credence in it. So we also made sure that we already had enough in the pipeline so that if they wanted to reengineer it we could still survive and do well. In our experience they’d rather buy it than build it.
Carl Anderson (Doremus Advertising): The real challenge is how many patents actually come to market, because that’s where the rubber meets the road. Mid-size and large organizations that we’re working with recognize that R&D has to be aligned with the deliverable, so they’re bringing marketing into R&D and having them work closely together.
Sutcliff: Nokia is a good example. The R&D process at Nokia actually crosses the entire company from original design all the way through distribution. A lot of companies have flirted with banking and selling intellectual property portfolios. Interesting research I saw recently said that if a patent was not brought to market in the space of 12 to 18 months it probably never would be, no matter how many times you license or resell it. Of course, there are case studies where it’s made a lot of sense. But a lot of people have also spent significant amounts of money on it and not generated any return.
Ed Kopko (Butler International): I think there’s big innovation and then there’s everyday process improvement and core innovation. And you’ve got to empower the lower parts of your organization around the process in order to take advantage of that. Many things can be solved if you tell people and give them the permission. So rather than just chase the big innovations all the time, we should also make sure we unleash the smaller quick hits, the low-hanging fruit.
We created an extension of our quality initiative, called the Free Up program, which said, “If you’re seeing something stupid or done the wrong way, please free up that activity and get rid of all those stupid ideas.” Every single quarter, religiously, we highlight teams who have implemented “free up” ideas that either saved time or improved customer satisfaction. It unleashed innovation at the lowest levels of the organization.
Cohen: How did you get the lower-level people to tell their superiors that this was not a good idea?
Kopko: First, by creating the visibility from the CEO’s chair to say that this is allowed and encouraged and by recognizing people for having the courage to do it. Second, we cataloged all the ideas into a database so that we could actually share them, which meant that middle management couldn’t knock them down easily because it was a very open system. The first year it was challenging, but it’s gotten a lot easier.
Viner: In a smaller setting there are too many opportunities, so it’s more about discipline and focus. My job is really to make sure everyone stays on focus because there are always opportunities for us, and if we don’t have discipline we’re just going to get off track. We let everybody go off the charts riding the space that we’re in, but they’ll come up with all kinds of solutions to problems that no one even realizes they have but there’s no market for. So we, as the senior management, really have to just keep laser focusing them.
Kopko: I’m going to take the opposite approach and say that it isn’t focus that is important. We’re a service company, and innovation has to happen every moment of the day. We have to create empowerment and have a million innovative ideas going at every moment of the day. A lot of discussion was focused on the big, earth-shattering ideas, changing concepts that create new markets and give you powerful positions. But I think it’s the sum of those little million ideas that truly will make a great company. And instead of putting up as heroes those few big ones, it’s important to try to create the heroes out of the little guys who are doing little things every single day. You can stymie people if they think, “Innovation is a big idea and I’m not capable of actually coming up with one ever.” So I think it’s about smaller ideas and empowering your people to do as many as possible.
Anderson: I think the best ideas aren’t in the office. We’ve just instituted a program with Blackberries, which we call creative leashes, where we demand that every employee spend at least one half-day a month out of the office thinking about new things, with a focus on our vision. We also really support sabbatical programs for people so they can regenerate and come back with a fresh perspective. So I think it’s the environment you create, what you support and what you encourage and live by.
Ron Burns (J. Walter Thompson): I think the CEO needs an absolute belief system that comes from the heart, the soul and the stomach that innovation truly does play a role in the organization. The feeling that “the more I practice, the luckier I get.” That attitude from the CEO will pervade the organization, and rewards and recognition in the systems are all part of it.
Dattilo: Everything is cultural. In a large organization where you have people all over the world, you can’t keep them razor sharp and focused. The systems and the processes and the culture of your organization have to do it. If you have a culture that demands and requires continuous improvement, people will have to innovate to continuously improve so they don’t stay in that comfort zone, which to me is a negative thing. We’ve changed the company pretty significantly and have been able to convince most people that the pain of staying the same is a lot worse than the fear of change. The system that we have today is pretty solid. And as long as we can keep on doing that, then we’ll be successful.
Anderson: It all starts with vision from our level. We’ve got to set the direction and course and understand the competitive frame, the opportunities, the marketplace, and where we ultimately want to take the organizations and then build a culture around that.