The most dangerous gap: Radical, category-breaking innovation is what is needed today by companies who wish to remain number one in their industry. While some companies can do it consistently, most can't. (Knowledge Management).

At one time, all a company needed to do was improve. If it did this continuously (and that was hard enough), it could expect to be successful. Those days are long gone. The information explosion, the global economy -- all the things you'd have to have been in a coma to have missed -- have conspired to change the rules.

Gary Hamel, in his article "Strategy as Revolution," concludes that "pursuing incremental improvement while rivals reinvent the industry is like fiddling while Rome burns" (Harvard Business Review, July-August 1996). And Michael Bloomberg believes that "what's likely to kill you in the new economy is not somebody doing something better, it's somebody doing something different" ("Winning at the Intersection of Fear and Opportunity," Business Week, January 11, 1999).

So what is the new imperative? In one of its management accounting issues papers, The Society of Management Accountants of Canada says that innovation is "fundamental to the quest for profitable, sustainable growth" (Collaborative Innovation and the Knowledge Economy, Management Accounting Issues paper 17). Peter Drucker, probably the most insightful management guru ever, deems it the one business competence needed for the future. Fortune magazine's advice to companies who want to be named to its "Most Admired" list? Innovate, innovate, innovate. Innovation currently accounts for more than half of all growth. And it is enormously profitable. A study done on the rate of return for 17 successful innovations showed a mean return of 56% compared with an average ROI of 16%.

Companies are catching the wave on to this sea of change. In an Ernst & Young study, European and North American companies called innovation the most important criterion for success in the future. Even technology firms that presumably are leading this charge consider "making innovation happen" the industry's single biggest problem.

Jack Welch, CEO of GE and seen as the world's greatest living manager, obsesses about his company's ability to "break the glass" -- that is, continue to innovate. He worries whether his company has "the right gene pool" and whether people who join big companies even want to break the glass.

What is innovation anyhow?

The commonly held view is that innovation is creativity -- new ideas and knowledge creation. That's why companies spend mega-bucks for courses where people play with brightly coloured blocks to get their creative juices going. But it isn't just that. It goes beyond idea generation to putting those ideas into action. Steve Wynn, CEO of Mirage Resorts -- one of Fortune's most admired corporations -- points out that "the challenge is getting the steady stream of good ideas out of the labs and creativity campfires, through marketing and manufacturing, and all the way to the customer." In other words, while you need to keep the pump primed with lots of great ideas, it will be for naught if they don't see the light of day.

Management expert Rosabeth Moss Kanter has long maintained that "a good new idea means little -- except risk -- without...excellence in execution" ("Follow-up and Follow-though," Harvard Business Review, March-April 1990). So, if you have a lot of off-the-wall thoughts, you're creative; if you can turn them into something of value, you're innovative.

In addition, in today's fast-moving, category-breaking business environment, building a better mousetrap may be effective, but it's not innovation. Innovation is using supersonic waves to push mice back to their native habitat; it's developing a whole new way to get rid of them. It is not about marginal improvement on an established product.

Accordingly, Fortune magazine maintains that only non-linear -- that is non-obvious, non-incremental -- innovation will produce long-term wealth creation. Radical innovation, the kind inconsistent with your present strategy, is no longer an option but an imperative. Geoff Yang, a Silicon Valley venture capitalist with one of best track records in the business (300% annual ROI), agrees. "To come up with concepts for new products, CEOs have to encourage breakthrough thinking," he said in the article "Make Your Company an Idea Factory" by Lori Ioannou (Fortune, June 12, 2000).

So, to be innovative, the idea has to be creative and implemented. To be competitive, it has to be a great leap forward. Otherwise, close but no cigar.

Organizations and innovation

Some organizations have a marvelous history of innovation; not just the breakthrough kind that put them on the map, but a continuing stream.

3M, for example, produces 30% of its revenue from products that didn't exist four years ago.

Companies that innovate successfully understand the need to be radical. Hewlett-Packard makes both laser and ink jet printers, products that naturally compete. However, rather than trying to avoid the competition, HP encouraged the two divisions to cannibalize each other's markets. The result? It is the leader in both laser and ink jet printers.

Similarly, Jack Welch's success is at least partially attributable to his radical innovation. When he became CEO of GE in 1980, he figuratively blew up what was at the time the most successful company in the United States. He demanded every GE business be first or second in its field. With that strategy, GE today is consistently one of the most admired -- and profitable -- companies in the world. But Welch has now realized that the innovation imperative requires a new mindset. GE no longer wants its member companies to be first in their field. To be more open to innovation everywhere, it expects them to be players -- and not necessarily the dominant one -- in many markets.

Some companies can innovate successfully and are rewarded handsomely for it. But it is a fragile thing. Compare Fortune's picks for most innovative companies in 1999 to those in 2000. In 1999, they were Home Depot, Intel, and Fortune Brands in that order. A year later, it was Enron, Nokia, and Home Depot. (Editor's note: At the time of publication, Enron --formerly the seventh biggest U.S. company in terms of revenue and regarded as a technological innovator by Wall Street -- admitted to overstating its profits for four years and has declared bankruptcy.) Only Home Depot stayed within the top three and it dropped from first to third. Needless to say, none of these companies stopped innovating, but it is clear that staying on top of the innovation game is as hard as getting there in the first place.

While some organizations seem to have the magic bullet, most don't and they know it. The American Management Association conducted a survey of 500 chief executives. These executives, like the companies in the Ernst & Young study cited earlier, named innovation as the top answer to the question "V/hat must one do to survive in the 21st century?" But only 6% thought they were doing the great job necessary for today's economy, and there have been many failures.

Procter & Gamble, for example, has had a long history and is credited with revolutionizing business with its use of brand marketing. But its last major breakthrough was Pampers in 1961. They went from innovation to merely improving--Tide has had over 60" new and improved" versions. The company has fallen seriously behind its petitors. It had become known as the land of the "Proctoids" -- a place that squelches entrepreneurs, creative types and freethinkers -- where troublemakers don't belong. In 1999, the new CEO, Durk Jager, promised to act aggressively to fix this problem. He said, "The core business is innovation. If we innovate well, we will ultimately win. I we innovate poorly, we won't win." Seventeen months later, he was out of a job, with the industry consensus being that he had pushed change too fast for the Proctoids.

Other companies struggle with innovation. Motorola resisted going from analogue to digital and lost its commanding lead in cellular phones. McDonald's stuck to its successful formula too long, resulting in creative inertia and a string of innovation flops like the McLean Burger and the "adult" Arch Deluxe. Levi Strauss stopped innovating and destroyed its brand name to such an extent that its estimated market value has gone from $14 billion to $8 billion, while The Gap has gone from $7 billion to $40 billion in the same time period.

As much as organizations want to innovate, they're not great at it. In fact, a study of 46 leading-edge companies in the United States, Canada, Europe and the Middle East found that companies unintentionally kill innovation. They hire creative people and then prevent them from using their skills. The Financial Post calls this inability to innovate "the single most dangerous gap in business today"(October 25, 2000). So, here we are knowing that innovation is the next competitive edge, but generating and sustaining it has daunted many a talented and determined manager.

Even though having a great idea is, in and of itself; an accomplishment, the true test for any organization is getting it to market. The more we rely on innovation for success, the more we understand how tough that road is.

Frances Horibe is the best-selling author of Managing Knowledge Workers: New Skills and Attitudes o Unlock the Intellectual Capital in Your Organization (John Wiley & Sons, 1999.)