August 1 2001 by Amy Cortese
Tom Kelley is a sort of litmus test for what corporate America is obsessing over. As general manager of the famed design shop Ideo, which has helped create products like the Palm Pilot and the Polaroid I-Zone instant camera, he has met with hundreds of prospective clients. Typically, the executives come looking for help in designing a new product, leapfrogging the competition, or getting to market faster. But these days, Kelley says, “they all want to talk about innovation.” And the more senior the executive, he says, the more they want to talk about it. “In the last couple of years, it’s like someone flipped a big switch.”
Innovation is an American tradition, but never before has it been such a hot topic across boardrooms. What has changed is the pace of change. Businesses today operate in a 24/7 wired world where ideas are communicated around the globe with unprecedented speed. “You have to run faster and faster just to stay in place, and you have to innovate faster just to keep up,” says Chris Meyer, vice president and director of the Center for Business Innovation at Cap Gemini Ernst & Young, which is headquartered in Paris, but has offices worldwide.
If the past few years have taught CEOs anything, it’s to expect the unexpected. The dot-com revolution may have fizzled, but the Internet is a force that will continue to profoundly influence every business. The economic slowdown has only served to intensify the spotlight on innovation, as more companies realize that the only way to succeed in bad times as well as good is to constantly reinvent themselves with new products, new ideas, and new energy. “Never mind what the economy as a whole does, [innovation] is what’s going to pull you out of it,” says Kelley, who recently authored the book The Art of Innovation.
Becoming an innovative company involves more than just flipping a switch. It requires a culture of innovation, a willingness to take risks, and the guts to question assumptions, in the opinion of executives who have made innovative changes. It takes inspired leadership, and sometimes it takes luck. Why are some companies consistent innovators? What is their secret sauce? There is no one recipe for success, but innovative companies share some fundamental traits.
Most innovative officers display a passion for their business that borders on obsession. This fervid belief is essential to overcoming the inevitable dissenters and roadblocks that arise when challenging conventional notions. Think Steve Jobs, creating what he called his “insanely great” Macintosh computer, the antithesis of the boring beige IBM PC clones. Or Jake Burton Carpenter and Mike Sinyard, the pioneers, respectively, of the snowboard and the mountain bike-two sports that were initially dismissed as limited to a group of fanatics. But snowboarding and mountain biking came along at the right moment, the height of the fitness boom and the desire to stretch physical limits.
To be an innovator requires a willingness to challenge widely held assumptions, whether about a market (people will not want to slide down a ski slope on a plank) or within a company itself (we don’t do it that way here). John Chambers of Cisco Systems saw the power of the Internet and rode it to great success by providing the switches that underpin the network. But he also possesses the pragmatism to cannibalize his own successful products when a more promising technology comes along.
The worst reason for doing something is because that’s the way it’s always been done. “Those people are just coasting into oblivion,” says Kelley, who in 20 years, with his brother, built Ideo from a small firm into what is regarded as today’s leading design consultancy. He adds: “You have to treat life as an experiment if you want to have a culture of innovation.”
There’s another trait that defines innovative companies: an unwavering focus on the customer. The best innovators identify with customers and see things from their view. At Specialized Bicycle Components, the mountain-bike manufacturer, for example, employees are avid cyclists and use their lunchtime rides to test the latest idea or product around Specialized’s Morgan Hills, CA, offices near the Santa Cruz Mountains. Southwest Airlines, a no-frills, low-cost carrier that is one of the wild success stories of the industry, has developed almost a cult following among its customers for its passenger-friendly service.
That customer perspective can make or break companies. Take Intuit, maker of the popular Quicken and TurboTax personal finance software. “Software is just a means to an end,” says Scott Cook, chairman and co-founder of Intuit. “The customer just wants his taxes done.” That simple focus on the customer has helped Intuit stay ahead of behemoth Microsoft, which is known for cramming its software programs with numerous, sometimes superfluous, features.
Then there are Donna Dubinsky and Jeff Hawkins, who could be poster children for innovation. When they designed the Palm Pilot personal organizer, the market was littered with previous attempts to create handheld organizers, including their first product, the Zoomer. But they went back and listened to customers and heard a surprising message: People wanted a simple device that could do a few basic tasks well, like calendars and note taking, rather than a bewildering assortment of features. So the partners returned to the drawing boards with a simple but clear vision. The resulting product busted open the market for handheld organizers and launched one of the most successful products in high-tech history.
After their company was acquired by 3Com, Dubinsky and Hawkins went on to found Handspring. Handspring’s Visor builds on the Palm technology, but the duo has improved upon their original design, in part by accommodating a diverse range of add-on components. Once again, a laserlike focus on customer needs-not engineering tricks-proved a winner.
The most important hallmark of innovative companies, however, may well be happy employees. When employees are treated well and provided with a pleasant, even playful environment, they are motivated to do their best, as Southwest Airlines can attest. And forget the notion of the lone creative genius: Teams are a critical organizing principle for innovation. Even Thomas Alva Edison, America’s most important “lone” inventor, worked with a team of 14.
Still, it is the leaders at the top who inspire and empower teams to innovate. Here are three who have led their companies to a higher plane.
Stelios Haji-Ioannou, easyGroup
It was on a Virgin Atlantic flight in the early 1990s between his native Athens and London, where he now resides, that Stelios Haji-Ioannou got the idea that launched his empire. He happened to sit next to a friend, who offered him an opportunity to invest in a Virgin franchise, an airline which had just one plane at the time. Haji-Ioannou researched the deal, but declined the Virgin opportunity. He decided to enter the airline business on his own terms instead. “Europe was being deregulated and I thought, if anyone is going to do this, it’s me,” he recalls. Thus easyJet Airline was born. Since its maiden flight in November 1995, easyJet has grown to 35 routes, many of them short hops, between 16 European destinations. It has 22 Boeing 737 aircraft, has ordered 29 more, and aims to double the size of the company by 2004. With more than 5.6 million passengers a year, it has quickly become one of Europe’s leading low-cost airlines.
From easyJet’s instant success, Haji-Ioannou started a series of “easy” companies, offering everything from travel to Internet access to financial services. The theme that ties together these diverse businesses, which are all loosely held by Haji-Ioannou’s London-based easyGroup holding company, is a focus on eliminating unnecessary costs and providing consumers with a better deal.
The cost savings come in large part by using the Internet to streamline operations. EasyJet, for example, only sells directly to consumers, cutting out middlemen like travel agents, and almost 90 percent of its reservations are made online. Ticketing is paperless, as are much of the company’s internal operations. EasyJet saves money in other ways, too. It operates out of smaller airports, which are less costly and less congested, and it eschews free food service. Those policies help keep costs down. In the first six months of the current fiscal year, ending May 31, easyJet had revenues of $207 million. Revenues were up 43 percent but there was a $10 million loss, which the company attributed to seasonal factors and the rising cost of fuel.
Haji-Ioannou brings that budget-consciousness to each of his ventures. With his chain of Internet cafÃ©s, called easyEverything, he set out to bring “Wal-Mart economics” to what has until now been a cottage industry. “Everyone who has tried Internet cafÃ©s in the past had done it on a small scale, or as an adjunct to some other business,” says Haji-Ioannou with his characteristic bravado. “No one has had the guts, or craziness, to scale it up.”
Haji-Ioannou’s easyEverythings are indeed on a grand scale: there are 21 cyber cafÃ©s, open 24/7, with a total of 8,635 PCs, an average of more than 400 PCs per cafÃ©. Taking a page from the airline industry, prices are yield-managed, depending on demand. Typically they are some of the lowest around-as low as a $1 per hour of Internet time.
The economies of scale are paying off. The first easyEverything cafÃ©s are already turning a profit. The glitzy cafÃ© opened last November in Times Square. The first in the United States and, with 800 PCs, the world’s largest Internet cafÃ©, it is reported to be breaking even.
Haji-Ioannou admits to being inspired by Virgin’s Richard Branson, but he has a strict policy that contradicts Branson’s. The CEO forbids brand proliferation for the sake of brand proliferation, as he says Virgin has done with ventures like Virgin Bride, a bridal shop. The fact that Haji-Ioannou plans to take all of his companies public “filters out the crazy ideas,” he explains.
Haji-Ioannou was never shy about taking on challenges. In 1992, after working for his father’s shipping company in Greece for a few years after college, he founded his own shipping business, Stelmar Tankers, as well as a nonprofit group called the Cyprus Marine Environmental Protection Agency. Its goal is to encourage environmentally sustainable practices in the shipping industry. Following easyJet and easyEverything, there came easyRentacar and easyValue.com, a comparison-shopping site. Says Haji-Ioannou: “I’m always excited about the next thing.”
At the moment, that would be easyMoney, an Internet-based consumer finance company that was expected to be launched in late summer. The company will initially provide credit cards and then personal loans, with the application process handled entirely online. The differentiator? Providing customers with information to make a more educated choice and-most important-reasonable interest rates, something Haji-Ioannou feels is missing. “I’m looking forward to picking a fight with the big banks that are overcharging consumers,” he says with glee. Barclays, look out.
Oh yes. Haji-Ioannou is 34 years old.
Specialized Bicycle Components
Mike Sinyard’s business philosophy can be summed up by a black hearse that he brings to biking events his company sponsors. Along the side of the hearse, painted in huge letters, are the words “Innovate or Die.” That credo is the driving force behind the success of the mountain biking pioneer. “We’ve had a lot of fun with that,” says Sinyard, Specialized’s 51-year-old founder and CEO, “but what it means is if we don’t create new things to satisfy customers, we’ll die.”
Sinyard has blazed his share of trails, both on the mountain and in the business world. In the early 1980s, he was part of the early mountain biking community, a ragtag collection of youths riding road bikes retrofitted with fat tires and other embellishments to suit the steep dirt trails of Mount Tamalpais in California’s Marin County.
A couple of enthusiasts were custom building a small number of off-road models in their garages, but Sinyard was the first to mass-produce the new-fangled, fat-wheeled bikes. His Stumpjumper, a cross between a high-tech road bike and a sturdy mountain bike, debuted in 1981. While big bike manufacturers like Schwinn stood by, the mountain biking craze took off. Today, off-road bikes account for about two-thirds of all bike sales, and Specialized has about a quarter of that business. In testament to his vision, Sinyard’s very first Stumpjumper sits in the Smithsonian.
But that wasn’t the end of it. Specialized has stayed ahead of the competition with constant innovations, whether a new suspension system, puncture-resistant tires, or a better water bottle. Sinyard has created an environment where creativity flourishes. For starters, he hires biking enthusiasts, and they become the company’s best source of product ideas. Through its sponsorship of the Festina Professional Road Cycling Team, Specialized tests its product innovations with the pros. “It’s more than a sport,” says Sinyard, “it’s a lifestyle.”
It’s all part of his goal to make Specialized “the best cycling brand in the world.” But he cautions that “being the best does not necessarily mean being the biggest.” With $200 million in revenues and over 400 employees, Specialized manages to retain a small-company feel.
Sinyard is a believer in creating small teams and giving them autonomy. “Smaller groups of people feel like they own the direction” of a project, he says. That belief was behind his decision to create the S-Works unit, an elite team of engineers charged with designing “dream bikes” without regard to cost or product schedules. The theory is that the new technology will eventually trickle down to more affordable models, keeping the company in the forefront. For example, the Specialized FSR suspension system, considered the industry’s most advanced, was created by the S-Works team, and is now being integrated into bicycles at lower price points. The team’s new lightweight helmet, which Sinyard guesses “weighs as much as a package of rice cakes,” is due out this fall.
Like the trails he rides, Sinyard’s path has not been without bumps. He grew up in San Diego, where he learned skills from his machinist father that would later help him create Specialized. While backpacking around Europe after college, he met a woman in Italy who introduced him to bicycle manufacturers, and he began importing hard-to-find parts. But it was the experience on Mount Tamalpais and his intuition that mountain biking was more than a fad that really launched the company. In the beginning, recalls Sinyard, progress was slow. “The acceptance of the mountain bike beyond the small group of enthusiasts was not clear.”
But the company was lean and overhead low, allowing Sinyard to indulge his passion. After three years, mountain biking began to take off, and although the big bike manufacturers eventually jumped in, Specialized was ahead of the pack. The black hearse is there to remind Sinyard of what got him there-and what he hopes will keep him ahead.
James F. Parker, Southwest Airlines
James Parker has big shoes to fill. As the new CEO and vice chairman of the board at Southwest Airlines, he replaces the longtime CEO Herbert D. Kelleher, who was largely responsible for nurturing Southwest’s quirky culture, which prizes fun and customer service. Kelleher, who co-founded Southwest in 1968 and will retain the title of chairman, presided over Southwest’s growth as CEO from 1978 to the present. During that time the airline grew from a small regional carrier to the fifth largest in the country, with a market capitalization of $14 billion, more than the value of United, American, and Delta combined. In its early days, the Dallas airline battled and persevered over established carriers who were intent on shutting down the upstart. Its legendary no-frills culture and customer focus have earned it numerous awards and accolades, including top billing in Fortune’s annual list of the best employers, awards for customer service and on-time performance. Kelleher was this magazine’s Chief Executive of the Year in 1999.
Parker’s transition is likely to be as smooth as an unremarkable landing. Parker, like the rest of the company’s management team, is a Southwest veteran. He started working with the airline in 1979 as outside counsel, joining in 1986 as general counsel. He fostered innovation and battled competition side by side with Kelleher in the company’s early days, and later helped negotiate labor contracts.
And why mess with a successful formula? Parker says he plans no major change of course for Southwest, but more business as usual. Except that at Southwest, business is anything but usual. In an industry that customers love to hate, Southwest’s focus on service has inspired awesome loyalty among its passengers. It had the fewest customer complaints of all airlines for the past nine years.
Just as important is the TLC it lavishes on employees. In 1973, for example, the first year it was profitable, Southwest set up an employee profit-sharing plan. Today, employees are the largest group of shareholders, owning 9 to 10 percent of Southwest shares. “Part of our culture is an intense focus on customer service and employee satisfaction,” explains Parker. The result is a highly motivated work force. “All of our innovations have come as a result of our employees responding to a need.”
Take the 10-minute turnaround of airplanes, a feat still unmatched by competitors. That innovation was born out of employee ingenuity in challenging circumstances. In the early 1970s, Southwest was facing a cash crunch and was forced to sell a plane to make payroll, leaving it with just three aircraft. Rather than cut back on scheduled flights and lose revenues, employees figured that if they could reduce the turnaround time between flights to just 10 minutes, they could fly the same amount of flights despite having one less plane. “We set a new standard for efficiency and probably saved the airline,” says Parker. (Turnaround time has crept up, but is still competitive at 20 minutes.)
Similarly, the company’s introduction of ticketless travel in 1994 allowed it to bypass the chokehold of its competitors’ reservation systems, and paved the way for Internet-based flight reservations in 1997. Last year, 30 percent of Southwest’s passenger revenue, or $1.7 billion, was generated through the Internet.
Southwest’s worst battles might lie behind, but the softening economy, erratic fuel prices, and changes brought on by the innovative culture will keep Parker busy. The CEO is taking it all in stride. “I view this as being the most exciting company in the most exciting business in the world,” he effuses.