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Three Questions Every Innovation-Minded CEOs Should Ask

Growth was hard enough before the world economy hit speed bumps in 2008. With industries colliding, competitors springing up in every corner of the globe, and the pace of change intensifying, companies have had to work harder and harder to maintain their competitive position, let along improve it.

Consider Microsoft. A decade ago the only threat to the company seemed to be the prospect of a breakup orchestrated by the U.S. Justice Department. The company has grown steadily over the past decade, from $15 billion in revenues in 1998 to $60 billion in revenues in its most recently completed fiscal year. It has entered new markets, like mobile, video gaming, and home entertainment. Its reward? A stock price that has essentially treaded water and widespread concern that there is no way the company can counter the threat posed by Google.

Or think about beleaguered newspaper companies. The emergence of the Internet in the late 1990s seemed to be an obvious threat to most companies. Yet by 2002 most newspaper companies had launched successful Web sites and enjoyed operating margins approaching 30 percent. Today the industry is fighting for its very survival. Three short years ago Lee Enterprises purchased Pulitzer””a company two-thirds its size””for roughly $1.5 billion. Today, the combined entity is worth about $150 million.

In today’s difficult market conditions there is an overwhelming pressure to focus almost exclusively on near-term actions at the expense of initiatives that promise prosperity several years down the road.

But Schumpeter’s gales of creative destruction have never blown fiercer. Smart executives know that adopting a series of short-term strategies is tantamount to corporate suicide. They know that achieving material, organic growth through innovation is no longer an interesting experiment but a strategic imperative. Companies that don’t develop the ability to improve what they have and create what they don’t face the prospects of dwindling growth, tumbling profits, and ultimate destruction.

Meeting the innovation imperative can seem like an insurmountable task. After all, innovation feels fuzzy, unpredictable, and fraught with failure.

The good news for innovation-minded executives is that decades of research have highlighted clear patterns and principles to improve the predictability of innovation. Further, companies like P&G, Dow Corning, Johnson & Johnson, General Electric, IBM, Cisco, W.L. Gore, Google, and many others are showing that innovation doesn’t have to be random. In fact, innovation can be managed like a process with defined inputs, outputs, and performance measures.

Innovation remains a complicated subject. But we have found that addressing the following three questions can help Chief Executive Officers focus their effort.

1. Does my company have an Innovation Strategy?

To paraphrase baseball legend Yogi Berra, “If you don’t know where you are going, you might not get there.”VbCrLf Unfortunately, too many companies approach innovation this way. They tell a group of people “It’s innovation time!”VbCrLf and expect great results. That rarely works””especially when times are tight and frivolity is tough to tolerate. Instead, companies need to have an innovation strategy that details clear targets and tactics.

Targets help internal innovators know what they are shooting for. A reasonable starting place is to imagine what success looks like five years in the future. What are your target revenues and profits? Then think about the sources of growth. How much can you reasonably expect your core business to contribute? What contribution can you reasonably expect from what is already in your development pipeline? One tip here: make sure to risk-adjust your pipeline. If you assume all of your projects will succeed, you are being wildly optimistic. Finally, calculate the gap (and it will almost always be a gap) between where your projections suggest you will be and where you want to be. That gap is your target for new innovation efforts.

One cable broadcaster conducted a gap-calculating exercise in late 2006 on the heels of record-breaking financial performance. The company had all of its executives come up with a set of reasonable estimates for key variables that drove the financial performance of the business. It had executives detail what were plausible ranges for each of those variables in 2011.

It fed the ranges into a simple simulation model, and found that there was a frighteningly high chance that it could miss its projected 2011 earnings by close to $500 million, an event that would have devastating consequences.

The effort brought great clarity to the company’s innovation efforts, highlighting the need to allocate resources to innovation and specific strategies on which the company needed to focus.

After gaining alignment on the target, detail the tactics that are on and off the table. A lot of peoples think creativity and chaos are friends. They aren’t.  The best way to spur innovation is to carefully consider what you definitely want innovators to do, what you’ll consider, and what you definitely don’t want innovators to do.

One way to make the tactical options tangible is to fill in the figure to the right (from Chapter 1 of The Innovator’s Guide to Growth). The figure represents the “goals and boundaries”VbCrLf of innovation. Note how the figure includes a diverse set of elements, such as steady-state revenue, channel, business model, and brand. Customize the vectors for your context, and gain consensus about what’s clearly in bounds, what’s on the fringes, and what’s clearly out of bounds.

Finally, make sure you have allocated sufficient resources to bring your strategy to life. Innovation doesn’t happen by accident. People have to spend time, and of course money, nurturing new growth efforts.

For example, Procter & Gamble spends up to $100 million a year on a “Corporate Innovation Fund”VbCrLf that allocates money to ideas that would otherwise slip through the corporate cracks. It has a small group called FutureWorks to create tomorrow’s brands. Each business unit allocates specific financial and human resources towards innovation efforts.

2. Are we using the tactics the market uses to achieve our Innovation Strategy?

Long-time McKinsey Director and current Innosight Board Member Richard Foster notes that to outperform the market, companies have to change at the pace of the market, without losing control. In Foster’s words, companies have to master the ability to create new businesses, operate existing businesses, and trade declining businesses.

Create: Creating new growth businesses is a clearly a critical part of mastering innovation. There are different flavors of creation. At one extreme are incremental improvements to current offerings. At the other extreme are entirely new growth businesses. Companies that are adept at innovation balance their creation activities between different types of innovation.

Because creating new growth businesses often requires doing things that run counter to an organization’s culture (see: Innovation Mindsets), CEO involvement is critical. Without strong leadership, it is easy to default back to “tried and true”VbCrLf behaviors that feel comfortable, but stand in the way of successful innovation.

CEOs needs to help determine strategic priorities, actively intervene to make sure teams don’t succumb to the “sucking sound of the core,”VbCrLf problem solve at critical junctures, and make decisions about projects to ramp up or shut down.

Critically, CEOs and their team need to hone their ability to use intuition and judgment while making these decisions. “If you use the spreadsheets to try to discriminate and predict which businesses will succeed and fail you’ll be utterly off,”VbCrLf Intuit Founder and Chairman Scott Cook says. “Because the failures had just as pretty spreadsheets as the successes.”VbCrLf

Instead, Cook and his team push project teams to test ideas in the marketplace in four weeks. The short time frame forces teams to focus in on critical assumptions and design “good enough”VbCrLf solutions.

For example, one team was working on an idea that would act as a matching service between accountants who had too much work at a given time and accountants who had some extra capacity. “I said, ‘That’s a nice theory but this won’t work unless you have both demand from accountants with too much work and supply from accountants who are good but for some reason are sitting on their hands’,”VbCrLf Cook said.

In three weeks, the team built a functional prototype and did a test mailing to about 50,000 accountants to test demand. They learned that there were indeed competent accountants who had excess capacity, supporting further investment in the idea.

Of course, companies can grow through acquisitions as well. Large acquisitions generally make us (and many academics) nervous. But small acquisitions to move into new growth spaces or to develop new capabilities can be powerful innovation levers. Consider Best Buy. In 2002, the electronics retailer paid less than $5 million to purchase Geek Squad, a 50-person company that helped consumers and small businesses deal with the increasing complexity of installing and managing home networks, high-end televisions and the like. It rolled the offering out to its network of retail stores. In 2007, analysts estimated that Geek Squad contributed more than $1 billion in revenues.

Operate: Innovation can’t happen if core operations aren’t under control. Why not? If your core business is out of control, at some point a fire will burn so fiercely that you will divert attention from innovation efforts to put that fire out. For example, in September a beleaguered newspaper executive said, “I know I need to focus on innovation for my company’s long-term viability. But if we don’t cut costs, we aren’t going to be able to make payroll at some point over the next 12 months.”VbCrLf

Generally speaking, when your core business is in control you are rarely surprised by financial performance. Your revenues and profits are growing at least at the average for your industry. And you don’t regularly scramble to respond to innovations launched by competitors. Note, this does not mean that your core business must be thriving. Sometimes your core business will be in structural decline, and that’s fine””as long as you are managing that decline well.

Trade: Trading involves shedding underperforming assets to free up resources and mind space for innovation. For example, General Electric decided in early 2008 to sell off its consumer appliance business. That decision was surely gut wrenching for a company that is tightly associated with dishwashers and ovens. But appliances accounted for a small percentage of GE’s overall revenues, and had diminished growth prospects. Selling those assets off freed GE up to focus on other innovation efforts.

At first blush, it seems like past financial performance should dictate which assets to shed. We have a different perspective. Companies should make decisions based on future potential, not past performance. It is worth holding on to a poor performing business that has “headroom”VbCrLf for profitable growth or could create strategic options to build new businesses.

3. What is my personal commitment to innovation?

We have a simple trick we use to determine how committed a company is to innovation. It doesn’t involve reading strategy statements, analyzing funding decisions, or reading press releases. It involves looking at the CEO’s calendar. If the CEO is spending an hour a month on innovation, we know the company is not truly committed to innovation.

There are simply too many challenges standing in the way of the innovation-seeking company for the CEO to play a hands-off role, particularly in the relatively early stages of a company’s innovation journey. The CEO has to actively pick and nurture the right innovation leaders, break processes, decide which ideas to nurture and which to sell, and manage external expectations.

P&G Chairman and CEO A.G. Lafley literally wrote the book on innovation (“The Game-Changer”). He will alternatively describe himself as the co-chief innovation officer, the chief external officer (as it relates to innovation), Dr. No (helping to make prudent decisions to shut a project down), and an innovation cheerleader.

Lafley actively participates on the board of P&G’s Corporate Innovation Fund, and regularly conducts innovation and strategy reviews with each of P&G’s business units. Importantly, he spends a significant amount of time making sure he gets the right leaders into the right roles. In a recent interview, Lafley described his belief that future leaders of the consumer packaged goods titan will need the ability to be good operators and good innovation leaders.

“You’re going to have to be more collaborative and open. You’re going to have to be more curious,”VbCrLf Lafley says. “You’re going to have to be more courageous, because this is a riskier business. You’re placing bigger bets with a lot more uncertainty and, often, unknowns.”VbCrLf

Innovation Mindsets

Outside-in: Innovation is irrelevant if no one pays for it. Companies have to put the customer and the problem the customer can’t adequately solve today in the center of the innovation equation. Further, companies must realize that they simply can’t have a monopoly on good ideas. They need to tap into the ideas of customers, partners, suppliers, channels, and even competitors.

Intersections: A British economist in the 1950s found that close to 80 percent of century’s biggest innovations came at the “wrong place.”VbCrLf For example, a Swiss watchmaker discovered the process for the continuous casting of steel. Bringing together different divisions or functions, or engaging with external experts can help companies see things they might otherwise miss.

Good enough: One reason why companies perceive innovation to be expensive is that they needlessly pursue perfection””as they perceive it. Often, customers will be delighted by something that a company perceives to be just “good enough”VbCrLf in terms of quality, particularly if lowering the performance bar allows a company to make an innovation cheaper, more accessible, or easier to use.

Embracing failure: The odds that a new growth strategy is perfectly correct out the gates are astronomically low. Companies have to embrace the idea that their first idea is wrong. They also have to recognize that shutting a project down early is not a bad outcome. Far better to fail fast and cheap then to pour millions of dollars into a fatally flawed strategy.


* * *

Growth-seeking companies have long grappled with a series of “or”VbCrLf statements. We can be creative or disciplined. We can be agile or reliable. We can focus on innovation or operational effectiveness. Success in the Innovation Economy requires destroying the “or.”VbCrLf Creatively disciplined. Reliably agile. Efficiently innovative.

CEOs have a critical role to play in this transformation. By setting innovation strategies, ensuring their company changes at the pace of the market without losing control, and being personally involved in innovation, CEOs can bring greater predictability and reliability to their company’s innovation efforts, helping them deliver the growth they seek.

Scott Anthony is president of Innosight, an innovation strategy consulting firm based in Watertown, Mass., and lead author of “The Innovator’s Guide to Growth”VbCrLf (Harvard Business Press, July 2008). Scott is the co-author (with Harvard Professor Clayton Christensen) of “Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change”VbCrLf (Harvard Business Press, 2004). Scott’s most recent work has included the book “The Silver Lining: An Innovation Playbook For Uncertain Times”VbCrLf (Harvard Business Press, forthcoming Spring 2009). He has written articles in publications such as the Wall Street Journal, Harvard Business Review, BusinessWeek, Sloan Management Review, Advertising Age, Marketing Management and Chief Executive, is a regular contributor to Harvard Business Online and serves as the editorial director of Strategy & Innovation.

Prior to joining Innosight, Scott was a senior researcher with Clayton Christensen, managing a group that worked to further Christensen’s research on innovation. Previously, he worked as a consultant for McKinsey & Co., a strategic planner for Aspen Technology, and a product manager for WorldSpace Corporation. While at McKinsey, he co-authored a publicly released report on the United Kingdom’s economic prospects.

Scott received a BA in economics summa cum laude from Dartmouth College and an MBA with high distinction from Harvard Business School, where he was a Baker Scholar.


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