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Leading the creative charge: by treating innovation as a legitimate business process, CEOs are encouraging the development of new ideas from a variety of sources -- and managing the risk that goes with it. (Innovation & the CEO).

* It's messy expensive, fraught with uncertainty and, well, just plain hard.

But innovation is also more essential for growth -- and even survival -- than ever. As we move from a period of economic exuberance to an era of greater uncertainty, companies are more likely to want to tighten belts and avoid risk than to pursue new ideas and opportunities. Yet savvy CEOs know that cost-cutting alone will not suffice and that future growth rests in the pursuit and execution of innovation.

Hiring smart people who come up with good ideas -- as evidenced by the dot-corn graveyard -- is but a small piece of the puzzle. "Innovation by itself is not worth much," notes Michael May, managing partner of Accenture's Strategy & Business Architecture service line. "The key is in being able to translate innovations into commercial reality very quickly."

Unfortunately, that's not easy. For every phenomenally successful product or market innovation -- Starbucks coffee, anyone? -- there are hundreds of abysmal, and costly, failures. For every big idea that transformed a company -- think Sony Walkman -- there are dozens of tales that illustrate the folly of pursuing an unworthy venture for too long and at too great a cost.

"Innovation is inherently risky," says Kathleen Eisenhardt, professor of management science and engineering at Stanford University and co-author of Competing on the Edge: Strategy as Structured Chaos (Harvard Business School Press, 1998). "If you ski fast, it's fun, exciting and creative, but you can also wipe out. That's the price you pay."

Finding that elusive balance between allocating resources and managing risk is one of the principal challenges CEOs face in driving innovation. To err too heavily on one side or the other is to court disaster, believes Eisenhardt's colleague, Robert Sutton, a professor of organizational behavior at the Stanford Engineering School and author of Weird Ideas That Work: 11 1/2 Practices for Promoting, Managing, and Sustaining Innovation (Free Press, 2001). "Organizations in nearly all industries need to devote the lion's share of what they do to cashing in on the services, products and business models that they have," says Sutton. "But if they only do that, they end up trapped in the past and in trouble. So for CEOs, the question is, what is the right mix of routine work versus innovative work?"

The answer? While much depends on the industry and the company, it's also essential to look more deeply at the time frames of the various innovations in question.

"First, you need to understand the role that innovation plays in the success of your business within your industry," says May. "Then you want to look at your time frame. Are you talking about a 10-year industry dislocation that might provide an opportunity, or something that's six months away in terms of how quickly you can commercialize it?

"Sometimes," May adds, "it's better to hit singles on a consistent basis than to focus on the big hits. At the same time, you clearly don't want to be investing so much in the present around innovation that you miss the next major dislocation out there. So you want a very distinct policy around the mix you have going on at any one time."

"Managed chaos"

There is no magic bullet for successful innovation. But nurturing a corporate culture that values innovation and accepts risk is no longer enough. It's now essential to create an innovation management system that evaluates new ideas, culling and implementing the keepers and discarding the rest.

While "innovation management system" might seem like an oxymoron, research suggests that companies consistently successful with developing and implementing ideas -- 3M, Intel and Disney Corp. are just three examples -- have found ways to organize what is essentially a chaotic process: Disney holds monthly "gong show" forums where anyone within the company can come and pitch an idea for a new attraction. At 3M, inventors compete for $50,000 "Genesis Grants" to develop prototypes and market tests. Each firm simultaneously emphasizes structure and strict procedures with its proven product and service lines.

"Intel is positively obsessive about its religion of 'copy exactly,' where every plant has the same pipe in the same place painted the same color, but when you switch to experimental stuff they have a different set of guidelines," says Sutton. "At Disneyland, everything from the way park employees greet visitors to the way the rides are operated is scripted and orchestrated to be consistent, but down the street at Disney Imagineering it's a different story. These processes are so opposed that it's important for CEOs to make that distinction clear, because you don't want any variance when it comes to building cars or cranking out soft drinks."

Studies suggest that the ability to drive out variation on one side of a business while amplifying it on the other affords a valuable competitive edge. In a research project looking at the innovation efforts in the U.S. and European computer industry, Eisenhardt found that what successful companies had in common was a balance between the structure necessary for stability and the "managed chaos" required for innovation. Meanwhile, companies that failed at innovation tended to fall into one of two camps: overly bureaucratic or too chaotic.

"Creating a climate inside an organization where innovation is allowed to take place, and running and managing a business where you are trying to reduce costs and produce and distribute products efficiently are to some degree diametrically opposed," says May. "A good CEO understands that and that he has to keep those two processes separate in people's minds, but at the same time extract the operations perfection out of his people as well as their ideas."

Recognition and reward

A clear vision and defined policies around innovation are fundamental parts of accomplishing that dual objective. Developing good ideas should be part of every employee's job description and be covered in performance reviews. "It's important to tie this to performance metrics, and it must permeate top to bottom," says May. "So if you're in the purchasing department and you see a way to innovate around using new electronic media, for example, that should be recognized and rewarded."

Idea-generating processes can be simple or elaborate, and no idea is too small for consideration. At Portland, Maine-based Banknorth Group, for example, CEO William Ryan runs a "Stupid Rules" contest inviting employees to identify corporate rules that are, er, stupid. If the company agrees and the rule is abandoned or altered, the employee receives a small cash prize. One recent entry contended that keeping people waiting in the cold until the bank doors were unlocked at 8 a.m. was both inhumane and unnecessary. Banknorth checked FDIC requirements and found that it could let people in before the bank's official opening time. The new policy? Early arrivals are let in and offered a cup of coffee, says Ryan.

At the other end of the spectrum, BP's Mid Continent Performance Unit worked with Accenture to create a two-pronged program that would help it meet its aggressive production goals. Since it was implemented in November 2000, the Action Learning Process, which puts together cross-functional teams to solve complex business problems, has resolved four long-standing business issues. A second program, the Quick Hits Process, has generated some 230 ideas from employees, of which more than 50 have been introduced into the company.

Customers, too, should be looked to as an invaluable source of ideas. "The ability to listen to customers is crucial," says Patrick Barwise, a professor at the London Business School. "The best early-warning signs of threats and opportunities tend to come from talking to your most demanding customers about their problems and experiences."

Barwise points to San Diego-based software firm Intuit's formal process of "listening posts" that pick up customer insights. "Dissatisfied customers -- and customers who have defected, in particular -- are very valuable in identifying areas where you need to improve performance," he notes. "But you need a process to capture those insights."

For companies with the technology and prowess to mine databases, the Internet can be a useful source of customer feedback, adds May. "Today, we can look at what people are buying and what is important to them in real-time Internet interactions and identify immediate shifts in preferences. As people come to a Web site, for example, we can ask what they would like to see and feed that information back to the product development area, where its feasibility as a new feature can be tested."

Inventive approaches

Beyond nurturing a corporate culture that embraces failure and continually seeks creative approaches, successful innovators must be skilled implementers, able to collect, evaluate and execute new ideas. Ideally, critiques should be a standard element of monthly meeting agendas, and there should be a system in place to follow through on execution -- and to evaluate and pull the plug.

"Companies that are successful at this bake it right into their normal management process," explains May. "These companies cultivate a free exchange of ideas and resource allocation that allows them to identify ideas, surface them to the top and take the ideas in stages so that they're not betting the company on each one. They have planned trigger points that the ideas pass through, which helps them determine whether an idea will become commercial and allow it to be cut off if it doesn't work."

Knowing when to pull the plug is one of the toughest challenges innovators face. Often, the members of the team charged with bringing a new venture to fruition -- and therefore best able to assess its progress -- become too emotionally invested in the effort to be objective. Firms like General Motors and Steelcase address this by incorporating checkpoints at which innovations are examined by designated evaluators, with costs weighed against potential return.

Health-care giant Novartis Pharmaceutical developed a more creative approach. "They know it's a common problem for the team of scientists to get obsessed with a compound and come up with reasons why research should continue," says Sutton. "So they guard against that by putting a few thousand dollars for each scientist on the team on the table that they can take if, at any time, they decide to kill the project. Basically, they're paid to stop a failing course of action."

At Ideo, the Palo Alto, Calif.-based design firm that helped create products like the Palm Pilot and the Polaroid I-Zone, the possibility of failure is inculcated into the company's culture. Ideo's very mantra, "Enlightened trial and error outperforms the planning of flawless intellects," reflects the expectation of failure -- and CEO David Kelley loses no opportunity to reinforce that. When the company grew to a point where its team of 200-plus designers needed to he broken up into more manageable units, Kelley wasn't about to take the conventional route of announcing a restructuring and reassigning his people. Instead, he called staffers together and asked a handful of top designers to give a pitch about why employees should join his or her studio. "Almost every employee got his or her first choice -- and the two who didn't were paid a few thousand to change their minds," says Sutton. "So they had perceived choice."

But rather than stand up and give the boilerplate post-reorganization speech about a rosy future ahead, Kelley's message, reports Sutton, was: "The only thing I'm sure of is, just like the products we've built, this is the first iteration and what we've done is wrong. But this is the best we can do right now. It's like one of our product prototypes, so what we will have to do is keep tweaking it until it gets better and better -- or possibly abandon it if it doesn't work at all."

Kelley's speech brings out a final trait common to successful innovators: words backed by action. His continual reinforcement of the company's commitment to innovation is only effective because it's not just rhetoric, says Barwise. "People are very cynical about top management and more responsive to what they do than what they say," he asserts. "If they say, 'We value innovation,' and then the only people who get promoted are the ones who cut costs and the only conversation you have with top management is about quarter financials, that's what [employees] will respond to. They're not impressed by rhetoric."

While there is no defined formula, a strong and well-articulated vision, coupled with a clearly delineated innovation management system, is a hallmark of consistently successful innovators. "The role of innovation has to manifest itself in the CEO agenda and resonate in the way the company motivates and manages itself," May says. "CEOs who do this well are definitive in terms of the management process and the management system around innovation. They set the tone for the whole organization."

RELATED ARTICLE: The Power of One

To Tom Dattilo, uniformity is a dirty word. "To encourage creativity, innovation and free thought, you have to discourage uniformity," asserts the CEO of Findlay, Ohio-based Cooper Tire & Rubber, a $3.2 billion manufacturer of automotive components. 'The CEO sets the tone for the organization. And if you want a culture that generates ideas, you need to discourage centralization, have a minimum number of management levels and push responsibility down so that every individual plant, division and department is essentially entrepreneurial."

Rather than mandating company-wide procedures and processes, Dattilo urges each Cooper Tire facility to develop ways to streamline operations and improve customer satisfaction. 'We don't want some comer office essentially dictating what the processes of the company ought to be," he explains. "We want the individual operations to try different things, find their best practices and institutionalize those -- not because someone told them to, but because they are best practices."

This decentralized approach to unlocking innovation is new to Cooper Tire, introduced as part of a company-wide reorganization that began in January 2001. "We had grown dramatically," notes Dattilo, who joined the company in early 1999, when it was poised to purchase Standard Products Company -- a move that expanded the company to more than SO facilities in 13 countries, nearly doubling its size. "And we needed a structure that would better fit the new organization."

For Cooper Tire, that meant instilling what Dattilo dubs a "culture of continuous improvement," in which each facility develops its own lean organization plan, striving to refine systems and identify approaches that will improve results and eliminate waste from the system. Ideas proven to have merit are then shared with the rest of the company during "lean results" discussions at monthly meetings.

Ideally, Dattilo says, the end result is an "organization of one," where individual facilities and functions operate in an entrepreneurial style united around a single purpose. "I want that whole facility working together with a common purpose -- to satisfy customers, to increase the value for shareholders and to improve operations," he says.

To instill that spirit of collaboration, he emphasizes communication both within company facilities and between employees and management. "You need to make sure that traditional management are out on the floor a lot and don't think of themselves as big shots," says Dattilo, who leads by example, often visiting the plant floor in Cooper facilities. "I believe everyone who works here ought to have met the CEO -- and not just from afar, but face-to-face, shaking hands and looking each other in the eye."

While he views communication from the top as a critical element of driving innovation, Oattilo guards against over-involvement in the process. "You have to set up the process and get the hell out of the way," he says. "Most CEOs are aggressive, can-do, hands-on people, so it's a very natural reaction to want to do things yourself. But micromanaging in a big company is a scenario for disaster. Because if you, as the CEO, know and are involved in every single thing going on, then there isn't enough going on."

A former executive editor of Chief Executive, Jennifer Pellet is a New York City-based freelance writer who contributes to a variety of publications, including Entrepreneur and Women's Work.
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Copyright 2002, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:chief executive officers
Author:Pellet, Jennifer
Publication:Chief Executive (U.S.)
Geographic Code:1USA
Date:Jun 1, 2002
Words:2665
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