Making innovation work: without sustainable innovation, companies are doomed. But how can invention and creativity be systemized?

The U.S. economy, often depicted as a three-legged stool--manufacturing, services and invention--looks increasingly like it has but one leg to support itself. Manufacturing has been outsourced, and services are not far behind. That leaves invention and innovativeness to generate wealth and shareholder value going forward. How are companies performing? Thirteen of the top 20 companies awarded U.S. patents in 2004 are based outside the U.S. In the next 10 years, companies from China and India are likely to muscle onto this list.

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Of course, patent awards are only one measure of innovation. Even licensing revenue, which typically represents only 2 to 3 percent of corporate patent assets, is a fraction of the value from new products and services. Still, as economist Paul Romer of Stanford University has made clear, "while things such as land, machinery and capital are scarce, ideas and knowledge are abundant. They build on each other and can be reproduced cheaply or at no cost at all." One of the U.S.'s great strengths has traditionally been its ability to leverage such ideas. The country's recent growth rate of 4 percent--now projected to be closer to 3 percent, but still two to three times higher than the economies of Western Europe or Japan--with the highest improvements in productivity in three decades is a direct result.

But can U.S. companies sustain that level of growth--and their status as inventors and innovators? Results of a recent Conference Board survey suggest that challenge is a top-of-mind issue for business leaders. Two-thirds of the world's top chief executives reported planning to radically alter their companies over the next two years due to pressures from market and competitive forces. Central to their mission? Inculcating innovation into their business models to drive growth.

Business leaders know that their companies must differentiate themselves with new products and services. In his recent book, The World Is Flat: A Brief History of the Twenty-first Century, Thomas Friedman made the case that the global market is now an even playing field. Information and capital are fungible. Location does not matter, and knowledge and money go where they will be most rewarded. In such an environment, innovation is increasingly critical. But the question remains: How can organizations systematize the innovation process? How should they make it work?

To understand the pragmatic issues involved, Chief Executive and Accenture, the global technology services company, held a roundtable discussion where CEOs and experts shared methods and practices that over time translate innovation into shareholder value. At the onset, the group agreed that innovation needs to be a sustainable discipline. As Robert Suh, chief technology strategist for Accenture, said, "Organizations need to understand that innovation isn't something that just sits in a corporate role or a centralized role. It is the responsibility of the whole organization."

Suh cited Accenture research showing that most product and service innovations happen in the field, where employees are in regular interactive contact with customers. The McDonald's Big Mac, a runaway hit, was not created at the corporate level. It came from the field. Others agreed that whether a company's offerings are products or services, innovation is a matter of getting close to a company's customers. The resulting intimacy can help identify unmet needs.

For example, when GE's Medical System unit installed high-tech equipment in a new heart hospital in Tampa, it offered more than state-of-the-art digital technology. It built a system of services around the technology. In turn, GE got valuable advice and insight on workplace design and hospital facilities that informed subsequent medical equipment.

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But ensuring that ideas generated from the field are adequately captured is not easy. Believing that all employees must and can innovate for their customers, CDW CEO John Edwardson insists on having his people "get out and visit other people" as often as possible. He also has asked a few CEOs at different companies to mentor younger people at his company.

Pushing decision making further down the organization also forces productive ideas to bubble up. When CDW built a new distribution center in Las Vegas that was 10 percent bigger than its facility in Vernon Hills, Ill., the company gave a volunteer team of 55 people who moved to Nevada wide latitude to come up with better ways of doing things. Edwardson said the number of units shipped per man is 2.25 times greater than its Vernon Hills facility, a feat achieved partly by the team sorting out inventive procedures that no one at corporate would have devised on their own.

Roundtable participants agreed with the corollary idea that the innovation process itself should be customer centered rather than driven by technology. The world is replete with technological solutions in search of a market. In addition, the traditional inside-out R & D-based product innovation has evolved beyond products and sometimes beyond services. In fact, "experiences" have become services on steroids. They are the new mantra for marketers--with Starbucks the prime poster boy for successfully creating a customer "experience" from an astonishingly mundane product.

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Entire sub-industries have grown up attempting to create business models that transform products and services using psychographic positioning. Needless to say, it is not for everyone and can be fraught with peril if it misfires. The Segway personal transporter, for example, was an innovative--even startling--breakthrough. But it became linked with users attempting to make grand eco-sociopolitical gestures, and the pricing was ill-suited to its intended market. The company had expected to sell between 50,000 and 100,000 units in the first year, but after 21 months only 6,000 units had been sold. Such washouts underscore the fact that there is no shortage of good ideas, but customers must also see the value proposition.

Building an Innovation Pipeline

Companies such as IBM, Medtronic and Toyota have exacting processes to capture and vet new ideas. Often, teams of Ph.D.s will gather 100 or more new ideas that must pass through a gauntlet of applicability thresholds and profitability checkpoints. A mere handful of winning ideas survive. "While we consider ourselves an innovative company," said Emerson CTO Randall Ledford, "we are not so egotistical to think that innovations come from inside the company. As a matter of fact, most ideas come from the bottom up."

Emerson uses a vetting process it calls "phase gate" to evaluate its innovation portfolio. It consists of three steps or processes--stage gate, stage gate light and stage gate express--that allow the company to analyze the potential of a product or service. But Ledford, who started his career at Bell Labs, cautioned that this approach, which is consistent with Emerson's financial discipline, is not always appropriate. "Large, breakthrough innovations such as the invention of the transistor or laser [both by Bell Labs] tend to capture the imagination," he said. "But small companies are unlikely to succeed trying to do big things. In fact, trying for a breakthrough innovation may be beyond their capability. It's often better to be competitive by staying just a little bit ahead of the competition."

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At Steelcase, CEO Jim Hackett reported pursuing a competitive edge by developing "intelligent" microprocessor-equipped chairs that measure contour and fit and compare chair usage over the course of a day. The device is said to adjust for stretching because the human spine needs to bend for blood flow. Instead of sliding and sitting up constantly the chair can actually do that for you, based upon user history. Battery-powered chairs can also adjust for such factors as fatigue and weight changes. Such NASA-like prototypes for an everyday object like a chair may appear far-fetched at first, but who would have believed 20 years ago that one could charge seven dollars for a cup of coffee with a name one can barely pronounce?

The Productivity Question

Roundtable participants also discussed the related question of innovation's link with productivity. Has the U.S. been able to translate innovation into steady productivity gains? Is it able to keep up in an increasingly competitive world or will it be forced to reexamine its process? "We stepped up innovation in the last 20 years quite dramatically," observed Diane Swonk, senior managing director and chief economist with Mesirow Financial. "We went from productivity growth of 1 percent in the 1980s, which was low, to 2 percent in the late 1990s, and then to 3 percent by the 2000s. We accelerated productivity growth during a recession, which has never happened before. Part of this is due to global competition.

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"We don't have the luxury to be lazy anymore," continued Swonk. "The U.S. is very productive because we are a major trigger for innovation in the world, due in part to our large and sophisticated capital markets, especially our highly developed venture capital market," continued Swonk. "This is really the root of innovation--being able to fund smart people who are able to do creative things."

But how secure is this strength? Swonk worries that longer-term policy issues such as the federal budget deficit and increased defense spending could have consequences that innovativeness may not be able to overcome. She also has concerns about education and skills shortages. "We are the world leader in college education, but we don't educate skilled workers," she noted. "Nor do we educate children from kindergarten through grade 12 effectively, because for a long time we didn't have to. We could give them UAW jobs that didn't require much education. People are getting bonuses for signing on at McDonald's in New Orleans. Companies such as McDonald's are compensating by putting icons on the cash registers so you don't even have to know how to read English to take an order."

'We're in a transition right now," added Emerson's Ledford. "Today, Asian and other offshore markets are doing most of the grunt work. But guess what? That's going to change. Those guys are coming up the learning curve very quickly. We all know that 20 years ago the U.S. had the best graduate schools that attracted the cream of bright foreign nationals," he said. "Five years ago, half of the foreign nationals graduating from U.S. schools wanted to stay in the U.S. That is less true today and will be less true tomorrow. The Second Law of Thermodynamics will take effect, forcing a new equilibrium. Coupled with currency and inflationary problems, we could be in for a rough patch."

Accenture's Suh sees a trend in Asian and some European companies adopting newer technologies faster than their U.S. counterparts because they don't have as many legacy issues to worry about. "Most advanced mobility solutions are coming from Japan and Korea," he said. "They leapfrog the legacy technology and will bear the fruit in the form of productivity gains.

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"There's definitely a difference in adoption rates, which will have an impact on long-term competitiveness," Suh said.

How Do You Innovate?

Several roundtable participants were lukewarm on the so-called "customer councils" idea of assembling customers and asking direct questions about product improvement. "People tend to tell you the same thing they tell competitors," noted Emerson's Ledford.

So how does one try to jump ahead? The key, say participants, is to identify and ultimately satisfy unmet or unarticulated needs. Ledford offered the example of Texas Instruments. Fifteen years ago, TI approached high schools in every state for permission to observe how high school math teachers taught graphing, calculus and advanced math. Armed with what they observed, the company designed a graphic calculator that emulated the way teachers taught. "Now if any of you have a high school student who comes home with a list of required supplies, you'll notice that there's no generic 'graphing calculator' item on the list," he said. "It specifies the TI 83. Think about that. TI took the trouble to observe how people taught math and built the product accordingly.

"It's our job to make the product flow seamlessly into the lifestyle--not to force the person to adapt to the product," he asserted. "I have this saying: 'The challenge of making fool-proof products is that the fools are so ingenious.' They will find a way to break them. How many companies design a product, put it into the field, and get complaints? Walk around with a guy and see how he does his job. Innovation is finding a better way."

In finding a better way, CEOs must build and maintain a culture that encourages innovation. Roundtable participants weighed various means of encouraging the right kinds of innovative behavior. Financial incentives were viewed as secondary in importance to personal recognition. Some such methods were as simple as hosting celebratory dinners for employee innovators where spouses are included. CDW's Edwardson said he always looks for opportunities to recognize innovators in front of their peers.

"I do keggers and pizza parties when a department has made something happen," he said. "It isn't a thank you in front of a bunch of people. It's a personal conversation. It's these little things that make people feel good about what they do."

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RELATED ARTICLE: WHO'S WHO 

* Daniel R. Bryant is managing partner, Sheridan Road, Chicago, Ill.

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* John A. Edwardson is chairman and chief executive, CDW, Vernon Hills, Ill.

* Harry Gambill is president and chief executive, Trans Union, Chicago, Ill.

* Arthur Gensler Jr. is chairman, Gensler, San Francisco, Calif.

* James Hackett is president and chief executive, Steelcase, Grand Rapids, Mich.

* Edward M. Kopko is chairman, president and chief executive, Butler International, Ft. Lauderdale, Fla., and chairman and chief executive, Chief Executive Group.

* Randall Ledford is chief technology officer, Emerson, St Louis, Mo.

* Robert Suh is chief technology strategist, Accenture, Wellesley, Mass.

* Diane Swonk is senior managing director and chief economist, Mesirow Financial, Chicago, Ill.