23 January 2008

Without Profits, Innovation Goes Nowhere in Corporate World

Commitment, investment and time are essential in innovation process

Apple Computer’s Steve Jobs holds an iPod Shuffle at an Apple event in San Francisco, September 12, 2006. (© AP Images)

By Andrzej Zwaniecki
Staff Writer

Washington -- Companies continuously must question their knowledge and experience to nourish innovative thinking and must rigorously manage innovation to generate profits, according to experts.

Most major companies are creative and some are inventive, according to an annual international survey of senior executives conducted by the Boston Consulting Group (BCG) and BusinessWeek magazine. Less than 20 percent of respondents said they did not have great ideas.

That is good news because innovation can help companies acquire new knowledge, enhance brand image and boost employees’ morale. But unless creative ideas and inventions generate profits, argue James Andrew and Harold Sirkin of BCG in their book Payback: Reaping the Rewards of Innovation, innovation is a losing proposition for most corporations.

Only those companies that can turn their ideas into sales and profits can be called truly innovative, Andrew told America.gov. Shareholders of such companies fare better than the rest of the pack because stock of the most innovative corporations tends to outperform the shares of their peers.

However, more than half the respondents in the 2007 survey said that they were not satisfied with financial returns on their companies’ investments in innovation, “[w]hich means they do have ideas but don’t know how to turn them into money,” Andrew said.

He said most companies have the right attitude about innovation. In the survey, two-thirds of respondents said innovation is among their top three strategic priorities, and two-thirds said they were going to increase their spending on innovation in 2007, compared with 2006.

CORPORATE CULTURE AND TAKING RISKS

The most innovative companies -- Apple, Google, Toyota, General Electric (GE) and Microsoft, which were ranked as the top five for 2007 by survey respondents -- have certain cultural characteristics in common. They encourage taking risks and embrace, balance and manage risk. They have leaders committed to innovation and are willing to support it with resources.

However, the most innovative companies do not hesitate to kill the ideas that are unlikely to bring financial payback and withdraw their commitment from processes, technologies or products that have outlived their prime.

Andrew said that sometimes management believes in innovation but does not know how to change corporate culture to nourish it and ensure workers support it.

Also, companies fail to benefit from innovation when their innovation strategies are at odds with their business strategies, innovation initiatives are isolated, the process is fragmented and disjointed, the business built around past innovations monopolizes resources and demands for quantifiable measures of progress confound the goals of innovation, according to Andrew.

Another expert, Cynthia Barton Rabe, a former innovation strategist for Intel, says knowledge and experience -- which are the cornerstones of an organization’s success -- may stifle innovation if they limit fresh approaches. She argues in her book The Innovation Killer that the tendency of team members to reach unanimous decisions, even if those decisions are not necessarily the best, or to make decisions based purely on expertise or the opinions of those in authority compound the problem.

To break the mold of the existing mindset and release the flow of innovation, Rabe suggests bringing in outsiders who are not weighed down by the expertise of a team, its politics and the accepted ways of doing business. Those outsiders should have psychological distance from the team and expertise somewhat related to the project, but otherwise they should have broad-based knowledge.

WATCHING THE CASH FLOW

According to Andrew, there is no sure way to select ideas with the greatest potential financial payback. Therefore, at the beginning, companies must be willing to deal with a large number of ideas and look at them as a portfolio of possibilities with different sets of risks and rewards. They also have to have a rigorous and disciplined process for advancing swiftly the most promising ideas and eliminating the least promising as quickly and cheaply as possible.

Andrew said companies can manage that process and measure the progress by means of a cash curve -- a cash-flow chart that factors in prior-to-launch investment; speed of developing the idea, commercializing it and bringing it to the market; time to ramp up the production to the target volume; and support costs such as marketing and servicing.

Apple proved with iPod that innovation can be managed successfully. Not only did the company keep its startup costs down by contracting out engineering work, but it was able to ramp up production quickly when iPod caught on in the market.

In general, companies should not spend too much time creating, developing and commercializing an idea because the process can become too costly and the idea obsolete.  For example, Motorola, together with its partners, spent so much time and money to turn the concept of a satellite phone called Iridium into a marketable product that many of its potential customers were lured by mobile-phone companies and the venture itself went bankrupt.

The 2007 BCG/Business Week Innovation survey is available on the Boston Consulting Group Web site.