The Role of CEOs in Innovation

 Of the 10 most valuable information technology providers in the world today, only one is a company not born and based in the United States: the German software developer SAP. By this measure, the climate for generating economic value from technological innovation appears stronger here than in the rest of the developed world.

But U.S. dominance is not destiny. Manchester, England, by the late 18th century, had fostered an innovative network of inventors, capitalists, skilled labor and interdependent suppliers and competitors who dominated textiles until World War I. By the 1920s, they could no longer compete against labor costs in India and the Far East. Failing to develop innovative methods of production or more competitive new products, successive rounds of cost cutting only prolonged the English industry’s inevitable decline.

Today in the U.S., where labor costs are higher than in many less industrialized countries, innovation is the key to avoiding a similar fate. Innovation is more than investing in research and development to generate something new. It is as much about driving market adoption of new products and services and new ways of doing business. At the macroeconomic level, productivity and living standards don’t rise until innovations become routine.

For a CEO, remaking a company to stay ahead of the curve often means overcoming a form of protectionism within the enterprise: comfort with familiar ways of doing business, which is a formidable obstacle to innovation within well-established firms. You can’t adapt to the future if you are unwilling to let go of the past.

When I became CEO of Wang in 1993, the company was under Chapter 11 bankruptcy protection and had lost its market position in email, word processing and office automation. There was no way to rebuild the company into what it used to be. Only by shedding these underperforming businesses were we able to free up cash to invest in a more competitive business model and build a business bigger than the one we had before.

What makes continuous innovation so difficult is the tension between the impulse to avoid risk and the payoff that comes from risk-taking€¦quot;the need to reap value from yesterday’s investments while nurturing others that may not bear fruit for some time, the desire to satisfy today’s customers and not missing out on what tomorrow’s may need. Another challenge is simply avoiding the “group think” of a management team in the grip of conventional wisdom.

Innovation springs from the ability to think and act differently. CEOs must constantly get their organizations to ask, How is our market changing? Are we changing with it? Better still, how can we reshape the market to our advantage? Can we invent the future we want€¦quot;rather than merely settle for the future we get handed to us by others?

To get the right answers, you have to increase your company’s exposure to unconventional thinking. Breakthrough innovation occurs when insight is shared across boundaries between disciplines and organizations to solve familiar problems in unfamiliar ways. How open is your environment to new ideas from the bottom of the hierarchy, or from outside?

The best management teams I have seen lead successful transformations follow the rule of thirds. That is, one-third are people who were in their roles before. One-third are recruited from outside. And one-third are promoted from within. This changes the organizational dynamic so more conversations start out with, “What if€¦?” instead of, “We can’t do that, because€¦”

Every CEO has to create incentives for entrepreneurship and tolerance of some degree of failure. The flip side of this is throwing too many resources at innovative ideas without subjecting them to rigorous market discipline. Just look at the excesses of the recent speculative bubble. It left a hangover of risk aversion that many are still trying to shake.

Ultimately, a CEO shapes the mentality of his or her company. Following conventional wisdom prevents the risk averse from breaking out of the pack, away from the safety of the herd mentality. But if you force your company to think and act differently from the rest, the market will reward you handsomely.

Joe Tucci is president and CEO of Hopkinton, Mass.-based EMC, an $8.1 billion maker of data-storage hardware and software.