The great innovation debate.

Improving quality and slashing costs will not be sufficient for U.S. firms to hold their own in the global economy. Nor can the country's position as an innovation leader be taken for granted. CE gathered business leaders and competitiveness scholar Michael Porter to examine steps CEOs need to take.

The collapse of the Soviet Union, the financial crisis in Asia, the U.S.'s admirable record in job creation, and a stock market piercing the stratosphere have excited giddy assertions that the U.S. has entered a "new economic paradigm." Has declinism of the early 1980s been replaced with triumphalism of the late 1990s? Although confident, most U.S. CEOs do not share the belief that economic growth and low inflation will continue indefinitely. The consensus of opinion at a recent summit of CEOs, university presidents, labor leaders, and political leaders held by the Council on Competitiveness at MIT, is that the U.S. faces a challenge to maintain global leadership through innovation. CEOs and other leaders agree that the education system will be the nation's single greatest vulnerability over the next decade. The decline of homegrown science and engineering graduates could seriously diminish the pool of talent available to industry. Leaders are similarly concerned about the future of the national research base. With federal and corporate spending on basic research having declined in part due to defense cutbacks, many express concern whether the seed corn for future innovation is being consumed. Overall, however, leaders were optimistic about the nation's capital availability, market vitality, and access to international markets.

A similar if slightly more optimistic consensus was reached at a CE gathering - cosponsored with the Council on Competitiveness, QI International, and Personnel Decisions International - held prior to the summit, of CEOs and Harvard professor Michael Porter, who has worked with the Council on its Competitiveness Index and is providing the intellectual leadership in its forthcoming Innovation Index: The Index is an attempt to benchmark the nation's capability to foster commercial innovation in all its forms. In a preview of his Summit remarks, Porter assessed U.S. innovative capacity from the '80s to the turn of the century. Among other topics, Porter, the author of Competitive Strategy, Competitive Advantage, and the forthcoming Competing for Prosperity: The Microeconomic Foundations of Development, discussed why innovation matters. The U.S. cannot support high wages and profits through producing standard products or services with standard methods, he argued, noting that innovation also holds the key to solving many pressing social challenges, namely, health care and the environment.

Participating CEOs disagreed with Porter on how U.S. business and industry compare. Whereas companies concede that R&D spending is less on "R" and more on "D," CEOs maintained that companies are much more efficient in terms of yield. Participants also questioned whether the benefits from the enormous sums spent on information technology are accurately reflected in current productivity measures. But as other nations race to improve their capacity for innovation, CEOs agreed that immediate steps need to be taken to improve the climate for innovation.

THE PORTER POSITION

Michael Porter (Harvard Business School): At a time when the U.S. is widely perceived around the world to be the winner of the competitive race, it seems odd to talk about concerns. But we on the Council on Competitiveness worry. It's our job to worry. In 1983, when President Reagan appointed me to the President's Commission on Industrial Competitiveness, it was easy to worry, because clearly something was very wrong. And it was easy to mobilize energy and effort toward the question of the overall vitality of the U.S. economy. But today we have a very different situation - in some sense a very dangerous situation.

I'd like to make the case that perhaps the single most important of the sub issues behind the long-term health of our economy is the issue of innovation. In the '80s, it was pretty clear that the issues of U.S. competitiveness were issues of cost and quality thrust upon us principally by Japanese competition. Although we were seen as leading in technology and innovation at that time, we were unable to commercialize that or get it into the marketplace quickly enough. We were also confronted with trade and budget deficits. How quickly the U.S. mounted a rather multi-faceted public and private assault on these competitiveness issues is remarkable.

But there's a new issue: How do we sustain our leadership in innovation? How do we continue to be the place where the new products are created and put into the marketplace? The place where the new processes for providing services, for building products, for delivering services are actually put in place?

Why is this the issue now? We've learned that the prosperity of any nation increasingly depends not so much on having capital or labor or physical resources, but on productivity, which is the value produced per unit of labor, per unit of capital, or per unit of other input. It's the ability of a company to actually create value. You can assemble inputs from anywhere fairly easily. The question is not the inputs, it's what you're able to do with them.

Productivity depends on how you compete, not what you compete in. The distinction between low-tech and high-tech businesses has been rendered completely obsolete. There are no longer low-tech industries, only low-tech companies, companies that don't have the capacity to apply cutting-edge technology. Whether making textiles or delivering parcels, one can apply enormous technological horsepower to virtually any business. And the prosperity of our nation depends on whether companies across the economy can actually employ advanced technology and ideas to become more productive and unique.

Twenty or 30 years ago, investment and inputs were not as mobile, trade did not account for such a big share of the overall economy, and we were more of a closed system. Today, we're part of this global economy, and that has powerful implications. It says that to have high wages, which is what we want, and to sustain and improve those high wages over time, we're going to need productivity advantages over other locations. If we're going to get paid more than folks in Taiwan, we're going to have to be more productive in combining inputs to make valuable goods and services than folks in Taiwan.

But other nations are getting pretty good at the basics. They have skilled people and good infrastructure, and yet people in those locations are willing to work for much lower wages. So we can't count on inefficiency of other locations. That's all getting better. The only way then to justify our premium wages is by continuing to be more productive. In the modern global economy, these other nations can source technology fairly quickly by buying machines, licensing technology, tapping databases on the Internet, and employing other mechanisms. Technology moves very quickly, so coming up with one idea every five or 10 years is not enough anymore.

Today multinational companies can and do choose to do things anywhere they want. Where is a multinational going to build a plant, or establish an R&D laboratory? They will find the most productive location, and that's where those investments will go.

Prosperity in the U.S. is more and more and more dependent on our capacity to be innovative and do unique things other countries can't do. Because if they're not unique, those other countries will be able to do them more cheaply. And it won't be foreign companies that make those decisions; it will be local companies - your companies. If you can make a standard product more efficiently in another location, you will, and that's going to affect the prosperity of Americans.

We have to be a moving target in America. Not only is innovation going to determine our standard of living in future years, but it will hold the key to addressing a lot of the social challenges we're most worried about. For example, the only way we're going to address environmental issues is through innovation - we're not going to be able to shut down development.

If we look at why we're so successful today and why we have been so successful in the past in commercial innovation, there's an extraordinary history of investment that's been going on for decades. The problem we face now is that we're in an era where companies have been focused heavily on efficiency. Companies across the country are doing less R and more D. They've gotten a lot more efficient in innovation, but it's not clear whether they've built the capacity to truly increase the capacity for innovation.

There's a tendency in this country to view science and technology and innovation as a problem, not necessarily a solution. In the health care debate, evidence is compelling that the drag investment that we make has the highest ROI in cost saving of anything we could do. Yet people see it as the enemy. We have all kinds of controversies in all kinds of fields about whether innovation is good.

How can we create among the leaders of the country, our political leaders, our corporate leaders, and our university leaders, the clarity of purpose that will allow us to regain a national commitment to this topic? Have we got in place the conditions that 10 or 20 years from now will sustain the capacity we enjoy today? Innovation is more than just science and technology. It's a function of a variety of environmental influences in an economy. The quality of the inputs, the human resources, the research infrastructure, the information infrastructure that you have in place all have a big impact on innovation. Access to capital has a big impact.

So part of it has to do with having inputs that support advances in knowledge, and part has to do with having insight into market needs, which comes from having demanding local customers. For example, the U.S. has a tremendous advantage in innovation in IT because our users of IT are so far ahead. Therefore it's easy for our software companies to understand market needs.

Innovation tends to occur where you can colocate a bunch of players - suppliers, related businesses, service providers, university institutions - that can interact with each other in unstructured ways. These places - what we call clusters - are where innovation happens, whether it's the pharmaceutical concentration in New Jersey or the mutual fund companies in Boston.

There's a context of rules and incentives that have a lot to do with whether companies are willing to make the investments required in innovation. Innovation not only requires R&D, it requires associated investments in capital goods and market development.

One of our strongest findings is that you've got to compete at home to compete abroad. If you're in an intense competitive battle locally, you have a better chance of winning the battle internationally than if you're sitting fat, dumb, and happy, dominating your local market. Our great American success stories all follow that pattern. So that means we've got to preserve the vitality of that competitive process.

Looking at the environment for innovation, clearly the U.S. has some enormous strengths with human talent, managerial skill, the university system, and a risktaking culture. But we see disturbing things in the human resource base in the U.S., such as the capacity of our schools, public and private, to produce people with strong training in science and math.

Looking at the R&D personnel in the labor force, an area where the U.S. used to have quite a strong position, the U.S. is now very much in the middle. Why? One reason is that we're not graduating enough new engineers. We used to make up for that by bringing in immigrants. But now people who came here to work or study are going back because they're finding interesting opportunities in their home countries and because immigration policy stands in the way.

Furthermore, the U.S. is no longer the country spending the most as a percentage of its GDP on R&D. Today, there are only two countries that aren't growing R&D: the U.S. and the U.K. Executives tell me, "We're much more productive at R&D now than we used to be." And there have been tremendous gains in efficiency of R&D in the U.S. economy. But executives also tell me, "We don't do much R anymore in companies. We put all the R&D into the product divisions. We're focusing on cost reducing and getting new models out quickly." One CEO who didn't want to be named said, "We're beyond the danger point in terms of our internal capacity, from a science and technology point of view. We're relying heavily on universities and outside partners. We're cobbling this together; we're much more efficient. But where are we going to go five or 10 years from now?"

Universities tell us they're under enormous financial pressure. They've had to turn increasingly to strong, tight links with corporations to fund their R&D budgets. They say, "We're doing less R and more D. We've shrunk the time horizon of our research efforts."

Where's the R? The R has traditionally been financed by the federal government through the NSF, federal laboratories, and all kinds of programs. There was kind of a run up in the Reagan years when we had a big defense build up, Star Wars and a variety of programs.

But now we're consistently spending less as a percentage of our GDP on research. The irony is that the big ticket items are Medicare and Social Security. Research is peanuts, less than 1 percent of GDP, and yet it's being squeezed, because there's a lack of consensus that this is something we have to preserve.

As we compare with ourselves historically and with other countries, our current rate of investment is low. The rate of gross investment in capital equipment is low. The rate of net investment after depreciation is low. The rate of R&D spending is being cut back. The chemical industry's R&D spending today in the U.S. is about 75 percent of what it was six or seven years ago.

As a collective, all of this is telling us something. We have a strong case to argue that with less investment, less spending, fewer engineers, less people getting math Ph.D.s, and less investment in capital equipment, we are going to maintain a really unique innovative capacity in the world economy.

THE CHALLENGERS

William Sommers (SRI International): At Stanford Research Institute, we're doing a lot of work in computer sciences. We are paying $100,000 a year in a not-for-profit research environment, which is a tight money environment, for Ph.D.s in computer science. We're getting about one-third the supply we need. There is a severe shortage of computer science people.

The second indication of these government numbers that is equally troublesome to me is DARPA, which has always been the 20-year-out agency in defense and has spent a lot of basic research money in areas that have benefited the economy. Their typical time horizon now is from five to seven years. It has pulled the time horizon back to do demonstration projects for the military, as opposed to long-range research.

Porter: In health technology we seem to have a real consensus, and that budget has been the one place it's going up. In the physical sciences, math, computer science, all those areas, we're spending less; we have fewer graduates. There's a severe shortage of skilled people. Some of you in from California, the numbers on Silicon Valley are just harrowing - 300,000 short of skilled folks.

Michael Dan (Brinks Holding Company): R&D is a major concern. But to be successful running a service business in a service economy, we have to put the R&D money as close to the customer as possible to be successful. In my judgment, the amount of money that's being spent on R&D has actually increased dramatically. But the measurement of that investment is more difficult today, which could cause a problem when we look at your statistical averages.

David Carson (People's Bank): Federal R&D expenditures were driven by Star Wars and by a defense economy, not by what's good for the world. You're missing the wonderful thing that's happening in the American economy. What we now have is a real free economy, and we have money running to where the people want it. We have it in health care, pharmaceuticals, and IT - none of which is supported by the federal government. There are no R&D expenditures by the federal government of any significance for the growth of the software, the infrastructure of the information world of the 21st century. We have a government that is mired in the middle or maybe the early part of the 20th century. We have an economy, we have a business community that is focused on the future. This is bad economics.

I happen to sit on one of the advisory boards of the Federal Reserve, and I've challenged Alan Greenspan on this. And Alan has admitted that they don't have the numbers to measure what's happening in the economy today, let alone what's happening for tomorrow, but they know it's better than that trap. [Points to Porter's charts.]

Porter: Ironically, federal government investment created the Internet. Every biotechnology company in America will tell you that they wouldn't exist except for the National Institutes of Health. It's great to celebrate the market. I teach at Harvard Business School; I'm not a socialist. [Laughter] What I'm saying is that we take all this as a given and we can't assume it.

Carson: I don't believe you. And most of the world does not believe the Harvard Business School,

John Yochelson (Council on Competitiveness): Notwithstanding the point about being close to the customer, when you start totaling up who does R&D, it's 90 percent manufacturing companies. And as they become a smaller part of our economy, some of the best students from Carnegie Mellon, MIT, or Cal Tech are bid into the service economy. That relationship between the service sector and the R&D is much more attenuated. There's a lot of deep concern about whether we're going to be able to develop the quality of scientists and engineers we need.

Yet we passed around a survey at the beginning of this dinner, and the results show that this group is very optimistic about the U.S.'s innovation environment. When asked to predict the outlook in 10 years, five out of 28 of you marked stronger in all four areas: talent pool, research base, capital availability, national market vitality, and international market access. The consensus was that the research base and the international market access would be stronger. There was moderate uncertainty about the question of whether our own market would be sustained and the area of the talent pool.

William Mayer (Development Capital LLC): If we tell Michael, "This is all a bunch of crap," then we can all go home, but it's more provocative to say, "Well, maybe he's right, so let's try to put that through our brains." I'm curious about the lag lead time if none of this gets turned around. Assuming you are right, when will this show up in general numbers? And how long will it take to reverse it?

Porter: These are decade-type trends. What's come through my studies of work-force trends in the U.S. is that we've got to get our minds on work-force issues. It's not jobs that are the problem anymore, it's that we are rapidly running out of employees.

We know how many employees are going to enter the work-force for the next 10 or 15 years - almost none. Our growth rate of employment is less than 1 percent. That's going to demand that we integrate all the underemployed populations, like the minority populations, into the workforce in order to grow at just 1 percent. So we're all used to thinking that the problem is creating jobs, but that's not the problem anymore. We're trying to search for some objective sense of what our capacity will be, five or 10 years from now, to produce higher quality goods and services more productively. It's a long-term issue.

Robert Brady (Moog): Government-funded R&D expenditures used to be very inefficient. A lot was produced, but it was produced very expensively. And the question is: Have the processes become more efficient as the expenditure levels have come down?

Our company supplies about 50 percent of the positioning flight controls for satellites. And all of that technology, in which the U.S. is dominant, was developed for use on strategic missiles. So folks who say that nothing useful in a commercial sense has emerged from the expenditures on defense are making a mistake.

It seems to me that the question of how the U.S. is doing will turn out in the end to be an industry-by-industry question. Most of the innovation in high performance industrial machinery - whether we're talking about metal-cutting machinery in Japan or blow molding in Germany - is in other countries. If we're smart, we have our R&D troops who are serving those industries located in those countries. So the question comes back to, in how many industries does the U.S. currently have a strong position? And can it be maintained?

Richard Keyser (W.W. Grainger): Since it's not likely that government funding is going to come back, the answer really lies in how we create the culture inside our institutions - both academic and business - in this country. In the academic institutions, one obstacle is the barrier between the disciplines, particularly in the sciences. The real progress today is made at the intersection of physics and biology, different disciplines that are very rigidly kept separate. We're seeing movement now in some of our institutions to facilitate interaction between disciplines. And that's where we're going to make progress and create new efficiencies.

In our companies, in industry, it has to do with the climate that we create to allow innovation. And real innovation at the basic level probably doesn't necessarily relate directly to customers - this is a statement of a heretic, I guess - but it doesn't really relate to what customers are saying. But it has to be insulated from that. You need to not subject it to incremental financial analysis, not subject it to what the customers are saying they need today. But let it go far enough to understand whether it's going to work, and then if it works, you put more into it. That's largely application, but it's the creation of business models that are different. And you have to know when to kill them off. But you can't let the organization kill them off before you understand whether they're going to work.

Merck, for example, isolates its basic research from the marketplace, and it understands what it's got before it decides whether to pursue it or not. And there's a tremendous amount of productivity locked up in both the academic world and in industry, if we create a climate that unleashes it.

Arnie Pollard (CE): Michael, if one granted most of the theses suggested by your data, what sorts of things would you suggest we need to do?

Porter: Well, that's an excellent question that we're not prepared to answer. [Laughter] As you can tell, there is a tremendous controversy about the diagnosis. We've been focusing most of the effort so far in diagnosis. Now, if we get to a specific sector, we have some sector studies, and so the folks in health technology had some specific ideas, and the folks in other sectors have specific ideas.

Overall, I believe we have to create some mechanism for kind of sustaining a fairly active rate of public investment in basic R&D because I don't see any other way it's going to happen. I would vote for the National Science Foundation-type mechanism, which uses a kind of peer review and disseminates research funding based on merit rather than programs in the Commerce Department targeted to individual companies. I think we need to be investing in our university base and so forth.

I had this kind of heretical view that although our capital markets are efficient, it's not clear that they are effective in the long run. It's not clear that we have a capital market that is actually building businesses over a five- to 10-year horizon. We can have a big debate about that.

Our focus really is to take the temperature, and so I've taken a strong advocacy position. What we're trying to gather and assess now is really how can we understand where we stand. This group is a very different group than the membership of the Council on Competitiveness, who include Hewlett-Packard, Merck, Pfizer, and other heavily weighted in technology companies. If we had all those folks sitting around the room, they would have a very different gut reaction from some of you.

Dean Mefford (Viskase): On the manufacturing side, we still spend a lot of money on R&D, but some of what we used to classify as R&D may be getting classified more in marketing and sales. So you have to be a careful when pulling out numbers.

Also, a lot of us have become global companies and a lot of the new innovation and technology in machinery and equipment is coming out of Europe today. That's driven by the fact that social costs are so high in Europe, so they do everything possible to eliminate people in their operations. That's what we'll get to if we want to adopt some of their philosophies of government, health care, and so forth. But that's why they've got 13 percent unemployment over there, and we're looking for workers.

You have to be careful with some of these issues and simply not get carried away with the fact that the numbers that you're getting out of annual reports and so forth tell you something different. We're seeing a whole sea change in how we do and how we classify things. Maybe we aren't spending so much less than we used to but are simply accounting for it in a different place on our P&L today.

Porter: The point is very well taken. We would have to argue that the way we account has been trending in a different way than the way other companies in other countries account. Conceptually, we would have to say that we keep score in a different way now relative to the Japanese or Germans.

Mefford: Another factor you have to keep in mind is that many of us have learned how to do strategic alliances. A lot of R&D comes out of those strategic alliances that again may not get accounted for as R&D work. Yet it's being done. If the Europeans are better at chemical technology in certain areas, that's probably where we're going to do the R&D work in a strategic alliance with that particular company.

It doesn't make any sense for us to do R&D in this country when it's already been done. All we want to do is improve upon it. That's a little bit of the Japanese model, but it's still the most cost-effective way to return money to shareholders.

M. Farooq Kathwari (Ethan Allen): Are innovation and R&D necessarily the same? Innovation comes because of an attitude, because of necessity. In the '80s, we had trouble, and we became innovators. We have seen the cycle that you become innovative, you become fat, and you become sloppy. And the question becomes how will that take place in the next 10 years?

Sam Cassetta (Smartphone): I recall testifying in front of Congress in 1993 concerning this worldwide network that DARPA had, which later became the national infrastructure test bed, which then became the information superhighway, which then became, of course, the Internet. A lot of good things have come out of DARPA. I feel the innovation is coming from this country, and not from overseas. You only have to look on the Internet to find out where the real knowledge is coming from.

Keyser: I'm struck by the questions about the data. One of the things we find in looking at different kinds of history of measurements is that constraints in one period lead to new measurement systems in future periods. So we didn't have a lot of capital around 1933 or so. We had lots of labor, and that's what got the SEC and all the measurement systems around capital, and we got a lot more efficient around capital. I wonder if what you are saying is what I'm seeing in some companies - they realize it isn't capital that's the basis of competitiveness, but it's the innovation and the knowledge and the know-how. What we're really seeing, both on a company basis and on a macro basis, is a compelling need to measure it better in order to have this message. Because we see the shortage now in the history through all series of measurement systems - shortage that creates a spurring of measurement systems.

David Squier (Howmet): Earlier you pointed out that there's a shortage of domestic engineers and scientists willing to stay here in the U.S. To me there's an over supply of high-paid lawyers and investment bankers. [Laughter] How do we create a balance?

Yochelson: There is an interesting point that scientific and technical people within companies are not rewarded as well as people in marketing and management. Large companies have been losing technical talent because people want to do startups. Many of our Council members have been looking at the kinds of pay incentives that will keep skilled technical people in house, rather than seeing them go off and do other things.

We didn't share with you a list of fixes that Mike and others in the Council leadership and myself have been involved with. And after we get through the diagnostic, we are going to look at a series of fixes on things like the talent pool and on capital availability, for example, valuing knowledge assets differently in the services area. You can write it off if it's bricks and mortar, but from an accounting point of view, hiring 35 really talented people may be different. It will take time to rebuild the kind of consensus that Mike and many others feel has dissipated. We are hoping that having a range of interesting and influential people on board will help us recreate that balance.

A Who's Who of Roundtable Participants

Martin V. Alonzo is chairman, president, and CEO of Montpelier, OH-based Chase Industries, Inc., an approximately $500 million manufacturer of brass rods and steel tubing.

John W. Bachmann is managing principal of St. Louis-based Edward Jones, a $1,135 billion international financial services firm.

W. Marston Becker is chairman and CEO of Farmington, CT-based Orion Capital, a $1.6 billion specialty property and casualty insurance company.

J. Carter Beese, Jr. is managing director/international of Baltimore-based BT Alex. Brown Inc., a subsidiary of Bankers Trust New York Corp. and an investment banking institution with $27.8 billion in assets.

John C. Bogle is senior chairman of The Vanguard Group, Inc., a Malvern, PA-based manager of no-load mutual funds and investment portfolios, with assets of $330 billion.

Robert T. Brady is chairman, president, and CEO of East Aurora, NY-based Moog Inc., a $456 million manufacturer of precision motion controls for aircraft, satellites, and industrial automation.

David E. A. Carson is chairman and CEO of Bridgeport, CT-based People's Bank, a multiservice financial institution with managed assets of more than $10.1 billion.

Sebastian E. (Sam) Cassetta is chairman and CEO of Stamford, CT-based Smartphone Communications, Inc., a provider of customized online packages of entertainment and business information.

Parker O. Chapman is CEO of Baltimore-based Monumental Investment Corp., the parent company of The Poole and Kent Organization, a privately held mechanical contractor with annual revenues in excess of $400 million.

Michael T. Dan is CEO of Darien, CT-based Brinks Holding Co., a $1 billion global security transportation and cash management firm.

Robert M. Devlin is chairman and CEO of Houston-based American General Corp., a diversified financial services organization with assets of $81 billion, providing retirement services, life insurance, and consumer loans.

Dee Gaeddert is president of St. Paul, MN-based QI International, a management consulting firm.

Mario Giacone, Jr. is co-chairman and president of East Rutherford, NJ-based Computing Concepts, Inc., a $125 million provider of PC systems integrators and training solutions and an owner-managed branch of MicroAge.

Martin Jones is CEO of Old Greenwich, CT-based Domecq Importers, a $250 million importer of distilled spirits.

M. Farooq Kathwari is chairman, president, and CEO of Danbury, CT-based Ethan Allen, Inc., a $571.8 million international home furnishings manufacturer and retailer.

Richard L. Keyser is chairman and CEO of Lincolnshire, IL-based W.W. Grainger, Inc., a $4 billion distributor of maintenance, repair, and operating supplies.

Theodore E. Martin is president and CEO of Bristol, CT-based Barnes Group Inc., an approximately $650 million manufacturer of precision springs and custom metal parts for industria, aerospace, and transportation markets.

William E. Mayer is chairman of the Chief Executive Group and managing member of New York City based Development Capital LLC, an active value investment company.

Callum McCarthy is CEO, North America, of New York City-based Barclays Bank, a commercial and retail banking institution with assets of $364 billion, providing asset management and other financial services.

Dean A. Mefford is president and CEO of Chicago-based Viskase Corp., a $600 million supplier of cellulosic casings and producer of specialty plastic films.

Michael Porter is a professor of business administration at Harvard Business School, a leading authority on competitive strategy and international competitiveness, and author of 14 books, including The Competitive Advantage of Nations and Capital Choices.

Peter M. Ramstad is chief financial officer of Minneapolis-based Personnel Decisions International (PDI), a global multi-service human resources consulting firm.

Edwin L. Russell is chairman, president, and CEO of Duluth, MN-based Minnesota Power, a $935 million diversified company.

John J. Shalam is chairman and CEO of Hauppauge, NY-based Audiovox Corp., a $500 million marketer of electronic parts and equipment.

Donald J. Shepard is chairman, president, and CEO of Baltimore-based Aegon USA, Inc., a $66 billion financial services company marketing life and health insurance products, annuities, and investment products.

William P. Sommers is president and CEO of Menlo Park, CA-based SRI International, a $250 million not-for-profit research, development, and technology commercialization organization.

David L. Squier is president and CEO of Greenwich, CT-based Howmet Corp., a $1 billion manufacturer of investment cast components for the jet aircraft and industrial gas power generation markets.

Marcy Syms is president and CEO of Secaucus, NJ-based SYMS Corp., a $347 million chain of off-price apparel stores.

Richard Vissers is CEO of Wilmington, DE-based CTS, Inc., a $500 million software company specializing in bulk fare, business-to-business travel.

Ronald D. Watson is chairman and CEO of Princeton, NJ-based Custodial Trust Co., the commercial banking affiliate of Bear Stearns & Co. and a provider of security custody services for large institutional investors, with over $100 billion in assets under custody.

John R. Whitmore is president and CEO of New York City-based Bessemer Trust Company, a bank holding company with assets under supervision of $18.4 billion.

John N. Yochelson is president of the Washington, DC-based Council on Competitiveness, a non-partisan forum of chief executives from the business, university, and labor communities working to sustain U.S. economic leadership.

RELATED ARTICLE: Theories of Creationism 

Translated to the corporate environment, Darwin's theory of evolution suggests that organizations unable to evolve will be outpaced and rendered extinct. In the competitive corporate jungle, such displacement is swift - measured in months rather than generations. In short, no matter how esteemed a company's history, those who do not remember how to create will be condemned to repeat their failings in the pages of business school case studies. And yet, for many large firms, cultivating a creative environment proves elusive.

To find out what corporations - or their CEOs - can do to develop an environment that nourishes creative performance, CE talked with Alan G. Robinson, co-author of Corporate Creativity - How Innovation and Improvement Actually Happen, who says that while almost all creative acts are unplanned, environment plays a role in spawning new ideas. "Once companies realize how creativity really occurs, they can take specific practical actions that will dramatically improve creative performance," explains Robinson, who outlines six elements that - once instilled in a corporate culture - an spur creativity:

1. Serendipity. While potentially fortunate accidents happen to the average person at least 15 and 20 times a day, says Robinson, serendipity is the result of an individual's ability to recognize and act upon these incidents. "You don't need to do anything to stimulate such 'accidents,' because they happen anyway, but you can train people not to overlook them." A customer's query to an alert delivery person at the Chicago Tribune, for example, led to the lucrative sideline of the paper becoming a distributor of The New York Times.

2. Self-initiated activity. "Most creative acts in companies are the result of the natural human drive to explore and create, or employees having the intrinsic motivation to tackle problems," says Robinson. Corporations can unleash this creative urge by adopting an effective system for responding to employee ideas that will: reach everyone in the company, be easy to use, have strong follow-through, document ideas, and be based on intrinsic motivation.

3. Diverse Stimuli. Robinson credits this element for the box office smash film Babe, which was inspired by an Australian film director chancing upon an audio book review of the book The Sheep Pig while on a plane. "Most stimuli will be found by employees themselves," adds Robinson. "What's important is the opportunity to bring these stimuli into the company and put them to use."

4. Within-company communication. 3M's Scotchguard and Kodak's 3-D technology are two products whose successes depended largely on unanticipated exchanges of information. Ways to promote such interaction include taking measures - such as forming an innovation center - to bring employees together who might otherwise never meet and also to ensure that each employee understands the organization well enough to tap its resources and to repond to requests for information from other employees.

5. Unofficial activity. "Innovations often begin without official support," says Robinson, who notes that key connections are often made during that time. "When something is unofficial it is very easy to cross boundaries." Efforts to legitimize and encourage unofficial activity range from 3M's specification that employees should spend 15 percent of their time in such pursuits to Hewlett-Packard's policy that lab supplies may be freely used by researchers.

6. Alignment. "Ask yourself, 'What are the two key goals that every employee is working towards in my company?'" suggests Robinson. "Most companies can't answer because they're poorly aligned." Intangible and challenging to achieve, alignment is the degree to which the interests and actions of every employee support the organization's key goals. In addition to the establishment of key goals, alignment requires commitment to initiatives that promote the goals and accountability for actions that affect them. Once established, strong alignment enables a firm to be consistently creative.

- Jennifer Pellet