Mysteries of innovation: there are right ways--and wrong ways.

Remember just five years ago, when everyone believed innovation was best defined as a big new blowout that set an industry on its head? Some successes notwithstanding, the outcome has been disturbingly flat. "All too often, we get into companies that have spent hundreds of millions of dollars to launch certain things, wrecked their balance sheets, wrecked their organizations, wrecked their morale, and you ask them the first basic question--why?" said Dennis Shaughnessy, chairman of FTI Consulting, at a roundtable session on innovation sponsored by IBM. It was one of a series held Nov. 16 at The Breakers in Palm Beach, Fla.

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FTI is a restructuring specialist that has worked with Enron, World-Com and others guilty of innovation hype. "What drove you to do this?" Shaughnessy continued. "What in the market said this was going to be a better way of doing it? We are amazed by the lack of answers we get to that question."

Now, though, with the dot-com dust cleared, a more cautious concept of innovation is emerging. "Innovation could be thought of in a much broader way; it's almost every single thing you do in an organization," said Robert Greifeld, chief executive of The Nasdaq Stock Market. "It's setting up markets in the formerly Communist world. It's lean manufacturing, cost reduction, increased productivity, Japanese quality styles. It's new methods and new processes."

Or, as some CEOs put it, innovation is anything that creates value. In other words, eBay may not have invented electronic auctions, Southwest wasn't the first to coin no-frills air travel, and Apple didn't invent portable digital music devices. However, these companies grasped the value of the ideas and implemented them in the right way, at the right time.

For one thing, this means that innovation succeeds when a company is led by a chief executive who can envision what is needed in the marketplace, or identify the internal operational strategies that are necessary to deliver a valuable product to customers efficiently and inexpensively. By doing this, a CEO is setting down a marker for innovation that transforms it from an amorphous freewheeling activity into one that runs parallel with the company's goals.

But the executives agreed that, while knowing what customers like is important, relying solely on what customers say they want can be a recipe for failure. "I operate under the Henry Ford model," said Robert Carter, chief information officer at FedEx. "He said, 'If I listened to what people said they wanted, I would have designed a faster horse.'"

"The most important thing is staying ahead of the customers' needs, and trying to identify what will bring value to them and what will have commercial value," added Suzanne Hogan, chief operating officer of Lippincott Mercer, brand strategy consultants.

While the CEO must point the company toward areas of innovation that match the company's strategic direction, the job of producing new and inventive ideas and products should be spread throughout the company. To ensure that innovative concepts are recognized, no matter where they emanate from, some companies are creating innovation boards whose chief task is to link great ideas with a business plan. Siemens Communications, a unit of the German-based giant, adopted this approach more than two years ago. "The company's four top senior executives are at this meeting, and everybody in the company can throw their creative thought into the circle of discussion," said CEO Andy Mattes. "If we think there's anything to it, we pair up the idea with a business executive. They are asked to produce a business case and come back to us with a report that details whether there's a market for this; what is its half life; and what is the business value that we can generate?"

If it passes that stage, Mattes said, the innovation is funded and a development team is formed. But equally as important is what he called "stop criteria," or benchmarks that must be met in order to keep going. "Just as important as providing seed money is to kill things, to say, 'Great idea, didn't work, next idea,'" Mattes added. "From our experience, that discipline has been harder to instill than giving the seed money."

There was consensus that innovation hinges on corporate culture. CEOs must communicate clearly that it is everybody's job to generate fresh ideas. That point should be made both formally and informally. "There's informal innovation going on all the time at the shop floor, or at the developer or marketing level, where young people are constantly sharing ideas about how we could do things better," said Clare Hart, chief executive of Factiva, an electronic content provider. "It is important for the CEO to be walking around, talking to people, understanding what they are thinking, because giving someone an audience sometimes just motivates them for months to go forward with a creative idea."

Hart added that in her industry, CEOs have to consider hiring more young people and trusting them to help spur new ideas, because "part of innovation is linked to lack of experience--like the child who will find 14 ways to get downtown versus an adult who will find three. We have to bring in new people--Gen X-ers and Gen Ys--who don't have preconceived views."

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There was also strong agreement that chief executives must not punish employees when they fail at innovation. If the company supported an employee's efforts initially and throughout the development process, then there should be no repercussions if an idea doesn't bear fruit. Allowing "punishment" would stifle innovation. "When CEOs accept failure, people are willing to take risks," said Leonard Harlan, president of Castle Harlan, a private equity firm.

Some attendees argued that CEOs find it difficult to manage the process of innovation because they are hamstrung by a lack of dependable benchmarks for determining the value of innovation. "We're very good in this age of measuring things; technology allows us to do that," said Marc Chapman of IBM's Strategy and Change consulting practice. "Many of us are driven by quarterly targets and goals. Yet when you get into the area of innovation and you ask, 'Do you feel like you have the right measures and metrics?' the answer coming back is usually no."

Further compounding the challenge is that the job doesn't stop when a new product or service is dreamed up--it has to be developed commercially. To launch an innovation, CEOs increasingly must forge partnerships with third parties to distribute and cross-promote the new product as well as to develop peripheral hardware, software and content.

More and more, the CEO must do this well before the innovation is released into the marketplace. The iPod's success, for example, was assured because Apple CEO Steve Jobs first negotiated contracts with the music companies to supply content at a reasonable price. "There is a new business model, where you are looking for alliances in very early phases," said Paul Zeven, chief executive of the North American unit of Royal Philips Electronics. "Here, the CEO plays an extremely important role because he makes these strategic alliances." Innovation just isn't as simple as it used to be.