Cracking the Code of Effective Innovation by futurethink

Cracking the Code of Effective Innovation Organizational Size and Style Is Driving Innovation Success June 2007

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futurethink article: Cracking the Code of Effective Innovation

Executive Summary Innovation: A Buzzword that’s Broken There seem to be two different and contradictory facets in the world of innovation today. On one hand, innovation has become the latest buzzword in corporate circles. Business publications scream about the latest innovation in their headlines, the calendar is chock-full of conferences that showcase “best practices,” and a plethora of gurus litter the speaking circuit singing its praises. There is, however, a darker side to innovation. Just turn to the vast majority of organizations that are struggling to make innovation work. Listen to frontline managers who are being asked to innovate by their bosses and have no idea where to start. Just drop in at an organization where there’s palpable fatigue after numerous brainstorms have gone nowhere. The reality is that innovation efforts are impotent in most organizations. What Separates Successful Innovators from the Rest of the Pack? There are a few firms that have made innovation a true discipline. Companies like Google, Apple, Whirlpool, General Electric, and Procter & Gamble, among others, have demonstrated that there is a way to make innovation an integral part of how one does business. What do these companies do so differently from the vast sea of mediocrity and failed innovation efforts? What organizational capabilities do they possess that are so different from the rest? IDEAS CLIMATE

STRATEGY

PROCESS

To help answer these questions, we conducted an online survey over an eight–month period. 248 executives from a cross–section of businesses around the world rated their organizations along the four capabilities essential to innovation: Ideas, Strategy, Process and Climate (see appendix for details). Respondents answered 20 questions in this diagnostic, broken down by each of the four capabilities, to help identify their organization’s strengths and weaknesses. Each answer was assigned a specific score and the final score indicated the innovation capabilities of each organization. We also asked respondents to indicate their sector and size of their organizations. This report outlines the key findings from our survey. It provides a number of implications for organizations trying to tackle innovation today. For organizations that wish to be successful, it offers a framework to break down the “black box” of innovation into discrete and manageable tasks. It also provides cues on how organizations may better innovate by looking at how they’re currently structured.

futurethink article: Cracking the Code of Effective Innovation

How the Survey Was Conducted Respondents completed a 20-question survey on our web site which let them rate their innovation efforts across the four capabilities of IDEAS, STRATEGY, PROCESS, and CLIMATE. Each question touched upon a specific element within each capability and was written in the form of a statement (for example, “We have a core set of metrics in place to diagnose how and why our innovation efforts are being effective.”) Respondents chose to either agree, disagree, or neither agree/disagree with the statement. Each answer was assigned a specific score. Capability scores ranged from 0 to 5. These capability scores were added up for the total innovation score. This score ranged from 0 to 20. Respondents also specified the size of their business (in terms of number of employees), and their industry. This helped us look at innovation scores through both of these lenses. The total score indicates the strength of an organization’s innovation capabilities. The higher the score, the more innovative the organization is and the closer it is to making innovation a discipline. Low scores indicate that all is not well with innovation within the organization—it suggests that a company is not doing all it can to make innovation part of its everyday practice. We present the five key findings from our survey on the next page.

futurethink article: Cracking the Code of Effective Innovation

Key Findings

1 2

The overall state of innovation—the only way is up. The state of innovation in organizations today is in dire need of improvement. The average innovation score across all organizations was 8.3 out of a possible 20.

Organizations are taking the easy way out. Organizations are lopsided in the way they tackle innovation. They tend to focus on IDEAS and CLIMATE capabilities that are relatively easier to manage and control. They neglect STRATEGY and PROCESS—the more difficult and complicated capabilities required to successfully make innovation work.

Mid-sized companies are “stuck in the middle.” Organizational size plays a major role in the effectiveness of innovation. The smallest and largest organizations had the highest innovation scores. But mid-sized companies all fell below the average. To benchmark against best practices, our research suggests that an organization is better off comparing innovation models with similar-sized firms, rather than competition within its industry.

Two styles of innovation emerge. We see two very different approaches to innovation. One is an informal approach with a focus on generating ideas typified by small organizations. The other is a more formal approach that relies on a robust process for innovation, typified by the largest organizations. The most effective way to innovate would be to blend these two approaches, however, our research suggests that it’s easier said than done.

Surprising list of high and low performing sectors. Sectors that one would expect to be high-performers scored below the average. These include Computers, Electronics & Technology, Consumer Packaged Goods, and Healthcare. On the other hand, sectors that one traditionally thinks of as not innovative actually scored above the average. These include Education, Government, and Industrial Products. The following pages delve into the details of these findings.

futurethink article: Cracking the Code of Effective Innovation

I. The Overall State of Innovation—The Only Way is Up First, let’s take a look at the total innovation scores across all organizations [Chart 1]. The average innovation score was 8.30 out a possible maximum of 20. In other words, an average organization has only 42% of the capabilities needed in order to make innovation a discipline.

Innovation Scores 25 20

20 15 10

8.3

Average

Maximum Possible CHART 1

This low score underlines the reason why organizations are fundamentally struggling with innovation today. They simply are not doing all they should be in order to unleash innovation within their four walls. The upside is that there is significant room for improvement. If organizations better understand where they’re currently failing, they’ll be able to create more effective innovation programs.

Are You Lacking in Innovation Capabilities? You can tell you’re lacking in core innovation capabilities if you’ve experienced some of these symptoms: • Innovation is inconsistent. Innovation efforts go through fits and starts. Management has no control over how to make innovation activity a steady stream. • Innovation is serendipitous. Innovation success tends to be accidental in nature. When there is a success, an organization is not really sure how they managed it. Repetition is elusive. • I nnovation is mediocre. Value creation—if it occurs—tends to be less than spectacular. • Innovation lacks momentum. Even with the best intentions, innovation efforts tend to start with a bang and end with a whimper.

futurethink article: Cracking the Code of Effective Innovation

II. Organizations Are Taking the Easy Way Out Let’s see how organizations rated each of their innovation capabilities [Chart 2]. Sadly, the capability scores were uniformly low and none crossed even the midway mark. Of the four, IDEAS scored the highest at 2.21 (out of a maximum of 5). CLIMATE came next at 2.12. STRATEGY averaged at 2.00, and PROCESS came last at 1.97.

Average Capability Scores 2.25 2.20 2.15 2.10 2.05 2.00 1.95 1.90 1.85

IDEAS 2.21

CLIMATE 2.12

STRATEGY 2.00

PROCESS 1.97

CHART 2

A Clear Divide Between Capabilities This divide—IDEAS and CLIMATE on one end versus STRATEGY and PROCESS on the other—is an important finding. Why are organizations so lopsided in the way they tackle innovation? It’s because IDEAS and CLIMATE are relatively easier to manage and faster to get started, whereas STRATEGY and PROCESS are more difficult and complicated to successfully put in place. The table below illustrates the differences:

IDEAS and CLIMATE are easier because they...

STRATEGY and Process are more difficult because they...

Get immediate results

Take significant time to put into place

Can be run bottom-up (driven by frontline employees, practitioners, or managers)

Need to be driven with the commitment of senior leadership

Don’t necessarily require a lot of resources

Require resources (often significant)

Can be done via one-offs or experiments

Require wide organizational buy-in

futurethink article: Cracking the Code of Effective Innovation

Fun and creative solutions (via IDEAS and CLIMATE efforts) to “get innovative juices flowing” can certainly add value and kickstart innovation in the short-term. However, focusing on just these aspects is not going to be sustainable in the long-term. Think about what happens if an organization has a weak innovation STRATEGY and PROCESS: • Without a clear innovation strategy, efforts lack direction. STRATEGY addresses fundamental issues of how you chart organizational direction for innovation: How do you define it? Who owns it? How do you measure it? What will innovation achieve for the business? • Without an innovation process in place, ideas aren’t well managed. PROCESS provides the basic infrastructure for moving ideas and projects through the pipeline: Who is coordinating project management? How are you evaluating ideas? How do you catalog and define your pipeline? So, a word of advice for our readers—don’t underestimate what it takes to effectively innovate. Building an innovation competency is not an easy or simple task. What’s critical is that you must tackle the “more serious” and long-term aspects of innovation in order to be successful.

Wake-Up Call For Leaders STRATEGY and PROCESS are driven and owned by senior management. Our data shows that these innovation capabilities are sorely missing within organizations. The problem with innovation, therefore, may lie at the top of the pyramid. This should serve as a wake-up call to leadership—if you’re looking for reasons why innovation isn’t working in your organization, you may not have to look far.

futurethink article: Cracking the Code of Effective Innovation

III. Mid-Sized Companies Are “Stuck in the Middle” Our research suggests that organizational size plays a major role in the effectiveness of innovation. Innovation scores start high with the smallest organizations and begin to dip as organizations get bigger [Chart 3]. At a certain inflection point, the scores begin to rise again. Organizations with 0-500 employees scored the highest (9.07 out of a possible 20), followed by organizations with 50,000+ employees (8.54). The lowest innovation score was for organizations with 5000-10,000 employees (6.84). When it comes to who’s successful at innovation, this is not a question of David versus Goliath, it’s really a case of David and Goliath.

Total Innovation Scores – By Organizational Size 0 – 500 500 – 1,000 average

1,000 – 5,000 5,000 – 10,000 10,000 – 50,000 50,000 + 0

CHART 3

Size Matters It’s not surprising to see that the smallest organizations are the most innovative. They tend to be entrepreneurial, and their size necessitates innovation. If they do not innovate, they won’t survive. However, the innovation scores of the giants are not what one would traditionally expect. Many of us think that the large behemoths are the last places to expect innovation. They’re perceived as places where rules trump risk-taking, and bureaucracy is stronger than bravura. However, one look at conglomerates like General Electric, Whirlpool, and P&G, and you can see that they can certainly be shining examples of innovation. The reason is that large companies have the resources and scale required to innovate successfully. The curious finding, of course, is that mid-sized companies’ innovation scores fell below the average. This is, at first glance, a surprising piece of information. One would expect these organizations to have the “best of both worlds”—a potent combination of entrepreneurship and resource-availability. However, our research indicates that mid-sized companies are instead awkwardly “stuck in the middle.” Why is this so?

futurethink article: Cracking the Code of Effective Innovation

Our hypothesis is that a mid-sized company is at a tricky stage in its growth. It has to contend with a number of issues that pertain to deciding between a small company mentality versus that of a larger one: • Should we continue to cling to our entrepreneurial spirit? • Why are we not moving as fast as we used to? • Is it time to put significant operational processes in place? Simply put, there comes a time for a mid-sized company to make a difficult decision about the kind of organization it wants to be when it grows up. And as it vacillates between two opposite models, innovation efforts suffer. The smallest and largest organizations do not have such a problem—they generally know what they’re good at, and can rely on their distinctive strengths.

JetBlue: Growing Up Is Hard to Do? On May 11, 2007, JetBlue founder David Neeleman stepped down from his position as CEO of the company, handing the reins to President Dave Barger, an industry veteran. Company officials stressed that this move had nothing to do with the airline’s meltdown earlier in the year when hundreds of passengers were stranded because of cancelled flights. This is what Alison Eshelman, Manager of Corporate Communications at JetBlue had to say: “David’s talents are entrepreneurial, and therefore perfect for the Chairman position, which will free his time and energy from day-to-day operations to identify creative opportunities and focus on the broader scope and direction of the company. This move is a natural evolution as the company grows from a start-up to a major player.”1 JetBlue’s transition illustrates the growing pains that midsized companies can face as they move from an entrepreneurial to an established mindset.

futurethink article: Cracking the Code of Effective Innovation

IV. Two Styles of Innovation Emerge Our research indicates that while the smallest and largest organizations are both effective innovators, they adopt two very different approaches to innovation. An analysis of how the capability scores vary by organizational size provides additional insights. The breakdown of the STRATEGY and CLIMATE scores [Chart 4] show the same pattern as that of overall innovation scores, with the smallest and largest organizations faring better than the mid-sized ones:

Strategy Scores - by Company Size 0 – 500 500 – 1,000 1,000 – 5,000 5,000 – 10,000 10,000 – 50,000 50,000 + 0

0.5

1.0

1.5

2.0

2.5

Climate Scores - by Company Size 0 – 500 500 – 1,000 1,000 – 5,000 5,000 – 10,000 10,000 – 50,000 50,000 + 0

0.5

1.0

1.5

2.0

2.5

CHART 4

futurethink article: Cracking the Code of Effective Innovation

So, is there any difference between the innovation profiles of small and large companies? A look at the other capabilities shows that they both have unique strengths and remarkably different ways of innovating. Let’s take a look at how the IDEAS capability scores differ by size [Chart 5]. You will see that this capability erodes as an organization gets bigger. The smallest organizations are distinctive in the sense that they are much more creative and generate better ideas. They are more in tune with their customer needs, hold brainstorms with clear objectives that result in a pool of interesting ideas, and are constantly encouraged to explore perspectives outside their industry.

IDEAS Scores - by Company Size 0 – 500 500 – 1,000 1,000 – 5,000 5,000 – 10,000 10,000 – 50,000 50,000 + 1.8

1.9

2.0

2.1

2.2

2.3

CHART 5

So, if large organizations are so lackluster when it comes to IDEAS, how do they have above-average innovation scores? The answer lies in their PROCESS capabilities [Chart 6]. Clearly, the giants in the industry catch up with the smallest firms in terms of having systematic methods/pipelines to track their ideas, objective evaluation tools to kill “bad” projects, and a funnel-approach to manage their portfolio of innovation projects.

Process Scores - by Company Size 0 – 500 500 – 1,000 1,000 – 5,000 5,000 – 10,000 10,000 – 50,000 50,000 + 0

0.5

1.0

1.5

2.0

2.5

futurethink article: Cracking the Code of Effective Innovation

Two Ways to Innovate...And Never the Twain Shall Meet? Clearly, a pattern has emerged into two very different innovation styles. One is an informal approach with a focus on generating ideas, typified by small organizations. The other is a more formal approach that relies on a robust process for innovation, exemplified by the largest organizations. The table below illustrates the difference between the two styles of innovation. The low innovation scores of mid-sized companies indicate that they haven’t figured out a way of blending these two styles.

An Informal Approach to Innovation

A Formal Approach to Innovation

Typified by small organizations

Typified by large conglomerates

Focus on IDEAS

Focus on PROCESS

Resourceful

Resources

Entrepreneurial

History and experience

Chaos

Order and structure

“See what sticks”

“Power in the paperwork”

Compare Size, Not Industry Our research should help readers rethink a common practice in organizations today—that of comparing and contrasting with competition when it comes to innovation. If you’re looking for ways to innovate more effectively, it will be more useful to look at how companies your size—regardless of industry—are innovating. Best practices in similar-sized firms should yield more practical insights and lessons to adopt than those within your industry.

How Will Google Manage Its Growth? The stupendous growth of Google will be an interesting case study as to how it sustains its innovation model. The company is hiring at a frenetic pace. As of 2006, the company has 10,674 employees, up 88% since 2005. What’s more, Google is planning to double its staff in 2007.2 So far, Google has stayed true to its unique start-up style of innovation—disruptive chaos, small project teams, rapid beta-testing, bottom-up innovation, and more. The question whether the “Google way” will continue to be viable as the company grows.

2 Bourgeault, Gary. Alphamarketer. “Microsoft’s Ballmer Calls Google’s Hiring Pace ‘Insane.’” (March 15, 2007).

futurethink article: Cracking the Code of

Effective Innovation

V. Surprising List of Higher and Lower Performing Sectors Let’s take a look at innovation scores by sector [Chart 7]. Again, the scores were uniformly low across all sectors. Aerospace & Defense scored the highest (9.42 out of a possible 20), followed by the Education sector (9.25). The lowest performing sectors were Computers, Electronics & Technology (7.53) and Financial Services (7.87).

Innovation Scores – By Industry Aerospace and Defense Education Travel and Transportation high-performers

Media and Entertainment Government Industrial Products Consumer Packaged Goods Automotive low-performers

Healthcare Financial Services Computers, Electronics Technology 1

average

CHART 7

futurethink article: Cracking the Code of Effective Innovation

A closer look at Chart 7 will show you a surprising list of higher and lower performing sectors. For example, Computers, Electronics, & Technology, Consumer Packaged Goods, and Healthcare all fell below the average. These are sectors that one would expect to be high-performing. On the other hand, sectors like Education, Government, and Industrial Products performed better in our survey than the average. These sectors aren’t what one would naturally consider innovative. It is our belief that this is due to two possible reasons: 1. High benchmarks set the stage for low scores. One reason is that the perception of the state of innovation within our organizations is relative to high-performing competitors. Sectors like Consumer Packaged Goods and Computers, Electronics & Technology have well-known and very successful innovators. Respondents who took our online questionnaire could have scored themselves low with respect to these star performers. This could explain the lower than average scores.

2. If at first you don’t succeed… Sectors like Consumer Packaged Goods and Computers, Electronics & Technology have traditionally been ahead on the innovation curve. They’ve had a longer history of attempting to incorporate innovation in their everyday. These firms have felt the pain of innovation—they have a very real and practical understanding of the hurdles that innovation presents. This could have led to lower scores from these respondents. On the other hand, firms that have just begun their efforts (typically from the sectors that scored higher than average in our survey) are still perhaps “enamored” by innovation. They haven’t got their hands dirty yet and haven’t yet fully discovered innovation obstacles. This could have led respondents from these sectors to score higher than average.

futurethink article: Cracking the Code of Effective Innovation

In Conclusion This report doesn’t contain all the answers you need to make innovation a discipline—but, it certainly asks the right questions to help you uncover the right way to progress. At futurethink, we’re always focused on the “how-to” of innovation. So, if you’re struggling with your innovation efforts, here are three key things you should consider doing right away:

Diagnose your innovation efforts. Take a step back and see where your innovation efforts are strong and weak. Our innovation diagnostic at www.getfuturethink.com/innovation/diagnosis.php can provide a helpful beginning. It will help you understand where you currently stand, and where you need to set priorities.

Research five similar-sized firms. Go completely outside of your industry and look for successful innovators that are the same size as your organization. What are they doing successfully that you can adopt into your practices?

Get a meeting with those that matter. Flailing around with too many random brainstorms? Begin talking about “STRATEGY” and “PROCESS” with the relevant people in your organization. Ownership must finally come from the top, but the conversation about the important things in innovation can start from anywhere.

We’re certain this report will provide readers with a number of practical learnings to make innovation more effective within organizations. We also wish to thank all the respondents who took our survey—the truth is sometimes bitter, but it’s the best way to begin an authentic and powerful innovation program. This White Paper is part of futurethink’s ongoing research effort to help organizations stay on top of the sometimes puzzling, often times frustrating, and ultimately rewarding world of innovation. For more information about our comprehensive suite of research offerings, please visit www.getfuturethink.com.

futurethink article: Cracking the Code of Effective Innovation

APPENDIX Four Capabilities For Effective Innovation Over the past four years, we have studied successful innovators across a variety of sectors and organizational structures. This has led us to develop a framework that lays out four key capabilities that organizations need to effectively innovate. Our survey touched upon the following capabilities:

ideas

1. IDEAS. The best innovators develop a stream of diverse and original ideas that are based on their business objectives. Organizations that demonstrate high IDEAS capabilities do so in the following ways: 1. Think Forward. They look to the future to leverage larger trends. 2. Enhance. They make meaningful improvements to existing solutions. 3. Discern. They identify unmet needs of customers. 4. Break the Rules. They go beyond industry paradigms. 5. Partner. They collaborate with third parties for fresh ideas.

strategy

2. STRATEGY. Successful innovators lay a clear foundation that sets common innovation objectives. Organizations with high STRATEGY capabilities are comprised of the following elements: 1. Define. They identify what innovation means to their organization. 2. Aim High. They craft a vision for where innovation will take them. 3. Select Governance. They choose an ownership model to drive efforts. 4. Establish Metrics. They select a set of metrics to measure the health of innovation. 5. Mobilize. They chart specific initiatives to move innovation forward.

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futurethink article: Cracking the Code of Effective Innovation

process

3. PROCESS. Successful organizations know how to move their best ideas forward. They effectively allocate resources towards select ideas and focus their energies to move them quickly towards launch. An organization with high PROCESS capabilities incorporates these elements: 1. Coordinate. They ensure that innovation projects are facilitated consistently. 2. Invite Ideas. They create simple mechanisms to capture ideas from diverse sources. 3. Streamline Projects. They use a funnel approach to manage ideas from project to launch. 4. Be Objective. They rely on consistent criteria and tools to identify the best ideas.

climate

4. CLIMATE. The best organizations make innovation efforts sustainable and organic for the long-term. They do this by cultivating a nourishing work environment that supports innovative behavior across all levels within the organization. Organizations with high CLIMATE capabilities ensure that they do the following: 1. Lead by Example. They get senior management to play an active role in innovation. 2. Experiment. They cultivate a climate of smart risk-taking. 3. Share. They create comfort around works-in-progress. 4. Fuel Thinking. They encourage new and alternative perspectives. 5. Energize. They discover meaningful ways to hire, train, reward and recognize their workforce.

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futurethink article: Cracking the Code of Effective Innovation

Survey Methodology futurethink’s innovation capability questionnaire is available at www.getfuturethink.com/innovation/diagnosis.php. It lists all the questions, scoring methodology, sector and size selections. The data from this survey represents 248 respondents who took the questionnaire from 8/16/2006 to 4/30/2007. As part of the analysis, duplicates and extreme scores (all 5s or all 0s) were deleted from the record set. The response breakdown is as follows:

Organization Size 0 – 500

No. of Respondents 119

500 – 1,000

1,000 – 5,000

5,000 – 10,000

10,000 – 50,000

50,000 +

Sector

No. of Respondents

Aerospace and Defense

Automotive

Computers, Electronics and Technology

Consumer Packaged Goods

Education

Financial Services

Government

Healthcare

Industrial Products

Media and Enterntainment

Note: The “50,000-100,000” with “100,000+” records were combined for analysis. This is indicated as “50,000+” in the report.

Notes: The following records were combined as part of this analysis: • “Computers and Technology” with “Electronics.” This set is indicated as “Computers, Technology & Electronics” in the report. • “Consumer Packaged Goods” with “Other Consumer Goods”. This set is indicated as “Consumer Packaged Goods” in the report. • “Financial Markets” with “Banking” and “Insurance”. This set is indicated as “Financial Services” in the report. • “Healthcare” with “Pharmaceuticals”. This set is indicated as “Healthcare” in the report. The following industry records were omitted from the sector analysis: Chemical and Petroleum, Energy and Utilities, Real Estate, Retail, and Telecommunications. 61 respondents chose “Other” as an industry selection. These records were omitted from the sector analysis.

Travel and Transportation

Other

Training

Research

Workshops

White Papers

Research

Innovator Interviews

Snapshots

Research

Training

Research

Ft Fieldtrips

Tools

Training

Tools

Ag Pb Ac

Resource Lists

Case Studies

Idea Generation

Advanced Guides

Program-Building

Advisory Calls

Research

Tools

Training

Vw Fr Video Webcasts

Futurist Reports

Sb Eg Ch Kn Skill-Building

Essentials Guides

Cheat Sheets

Keynotes

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