Principle 1: Start at the Top

There is no substitute for leading by example. Ultimately the most important factor in promoting an innovation mind-set is the behavior of management—a CEO and other senior managers who understand that employees must be encouraged to take risks. This doesn’t mean abdicating control over the process. CEOs need to understand how long-term trends in technology and the market can profoundly change their companies, and use that knowledge to direct innovation efforts. And management must communicate to all employees its commitment to innovation as a business value. Employees have to know that management perceives risk as part of the cost of keeping the company vital and that innovators will not be punished when their ideas don’t pan out.

Jack Welch, former CEO of GE, understood this aspect of his job, as Ken Pickar, who worked for Welch at GE, told Henry: “I remember with great clarity how Jack Welch killed a new lighting product development and told the head of the lighting division of GE how he wanted all the people who took a chance to be rewarded. He said to the division president, ‘You will be measured on how well you treat these people.’”²

It’s also an obvious truism that all breakthroughs and opportunities start from an idea producing no revenue and only costs. CEOs who have only today’s profits as their goal will destroy new opportunities. Inevitably, breakthrough products from competitors that started with insignificant revenue but then grew rapidly will blindside the company and take over the industry.

Principle 2: Know How to Manage Exceptionally Creative People

Exceptionally creative people are different from most workers, and it’s difficult to manage them in an industrial environment, because performance timetables are foreign to their way of thinking. One example is Robert Koch, a 1905 Nobel laureate in medicine for discovering the effect of bacteria in infectious diseases. Koch was described as follows by Paul Ehrlich, another famous researcher and a 1908 Nobel laureate:

[Koch] was deeply engrossed in problems which the foremost scientists had struggled in vain to solve. By astute and unflagging application, he was able to provide answers so authoritative as to earn him the admiration and unqualified respect of his contemporaries. And perhaps it was propitious that his genius and energy were given free rein to pursue his trailblazing ideas, undisturbed and unimpeded—a genius and an energy that in so an exceptional a way combined to form his personality.³

The contributions of these exceptionally creative individuals can be enormous if you can build a bridge between their ideas and the creation of commercial value. Creative people can discover entirely new ways of producing desired results but are rarely capable of bringing them to practical ends without a bridge of proper support and follow-up to commercial value. The spark of creativity can ignite truly innovative products or services if proper attention is paid to their work and continuing activities. But if you mismanage them, lacking effective means of helping direct their creative thinking, they can also be destructive, acting as critics voicing unpopular opinions.

In sum, individuals who create breakthrough ideas are those who challenge existing ideas and seem to act against what is considered common understanding or even common sense. Almost by definition, they will go against the grain of the existing culture.

These extremely valuable individuals are so rare that no organization can depend on their presence alone for its long-term success. The challenge in managing innovation includes learning to benefit not only from these individuals but also from others, who are perhaps less gifted but still creative and committed to the organization.

The need to manage extraordinary people is only the start. Transforming their ideas into commercial value can be the greater management challenge, and certainly the costliest and riskiest one. This process has always been hard. Consider the example of producing ammonia commercially using the process invented by Fritz Haber in 1909. The production of ammonia was one of the greatest challenges of the time. Ammonia is the basis of more than half of the fertilizer produced in the world as well as the basis of gunpowder. The big German chemical company BASF acquired the rights to Haber’s invention, but it discovered that producing a commercial product was much harder than it had anticipated. It took another level of engineering genius to build a viable factory:

It took several years and the ingenious work of Carl Bosch chief BASF chemist and engineer and . . . the collaboration of Krupp and other firms before a BASF factory for the commercial production of ammonia was erected in 1913 . . . [It was] perhaps the most difficult and brilliant feat of chemical engineering ever achieved. Carl Bosch shared the Nobel Prize for this work in 1931.⁴

This experience illustrates the hard work of developing important technology solutions from concept to product. Deciding when and how to undertake such massively risky investments is a key aspect of innovation management.

Management must also consider the wisdom of investing in an existing product to preserve its market share, weighing it against the danger of sticking too long with an aging product line. You need to decide what portion of corporate resources to reserve for new product development as opposed to incremental improvements in current offerings. And there is yet another aspect to the process: innovation management calls for sensitivity to human needs and motivations as well as a full understanding of corporate capabilities and goals.

Principle 3: Establish a Culture That Motivates Innovators

Companies consist of people interacting with each other. Although the corporate environment shapes some of their behavior, at bottom it derives from recognizably human urges, needs, and insecurities. When people have to deal with risky (and potentially career-ending) innovations, these psychological drives come to the fore.

How, then, can you create and sustain an environment of excitement and creativity that keeps innovation flowing? Most students of organizational psychology stress that employee motivation and commitment are crucial to the success of innovative organizations. If you want to motivate employees to think and behave in a way that serves their own narrow interests while being constructive and valuable employees, you can learn a great deal from the work of Abraham Maslow. Maslow’s hierarchy of needs has been challenged, but his ideas can still have profound implications for managers.

Maslow visualized his hierarchy as a pyramid with five ascending levels of human wants and desires, from the most basic necessities of life up through emotional, social, and intellectual or spiritual concerns. The bottom level includes physiological requirements such as food, shelter, and other necessities. Safety, in the form of personal security, employment, family, and health, comes next, followed by needs for love and belonging. Esteem is the fourth level, and at the peak is full self-actualization through the lofty pursuits of creativity and morality.⁵

Even the most basic level of the pyramid can be connected with aspiration and motivation if you correlate physiological needs with a fair wage and pleasant working conditions. It’s at the higher levels, however, that we find the most fertile ground for increasing the effectiveness of innovation management.

Maslow’s pyramid ranks the need for esteem as the second-highest driver for achievement. That’s certainly been the case in our experience. We believe that prestige through achievement is a more effective motivator than bonuses or immediate financial rewards.

In our own cases, Henry and his team developed a blockbuster transistor product at RCA, and their accomplishment was recognized, not with a bonus but with an award presented publicly by the head of the solid state division. For his later accomplishment in pioneering semiconductor lasers and devices enabling optical communications, Henry was awarded the RCA Sarnoff Medal, which is given annually for the single most outstanding corporate technical achievement. Norman’s team developed a simulation of a picture tube system that fully modeled all the electrostatic and magnetostatic elements of the picture tube. Ultimately millions of picture tubes around the world were designed using this simulation system. His team too was awarded the RCA Sarnoff Medal. In addition, Norman’s work with the team developing new technologies to measure human vision led to the team receiving an Emmy. These examples stand out in our memory far more clearly than any bonus we have received.

RCA, under legendary CEO David Sarnoff, respected engineers and innovators. But the management of the various business units helped define their cultures. The new and fast-growing divisions, such as the solid state division, had a much more forward-looking culture than the old established units with slow-growing businesses like electronic tubes. And, of course, RCA Laboratories had a unique innovation culture of its own.

If there was a common RCA corporate culture in the technology businesses, it was one in which innovators were not rewarded with big bonuses when they succeeded—or fired when they failed. If a project didn’t work out, the engineers usually moved on to the next project. Hence, engineers were not worried about the risk in starting new projects, although senior product managers were much more at risk when big projects failed.

As a result, turnover among engineers was low. People joined RCA right out of engineering school and expected to make their careers there, either moving up the corporate ladder to the management ranks if so inclined, or becoming senior engineering specialists who were paid at rates similar to those of middle managers. If engineers found management roles less interesting than innovation or not financially worthwhile, as many did, they could support a comfortable lifestyle and enjoy their work without the pressure to assume those roles.

RCA employees in the research laboratories and in the solid state division, where Henry and Norman started their careers, had a sense of belonging, of being connected as part of a community. They felt they were part of a greater whole and that each person’s contribution was essential. The loyalty to the company engendered high employee retention rates. People are less likely to abandon ship when it would mean letting down the friends they would leave behind.

The big corporate research laboratories have largely disappeared. But there is still much to be learned from their history of successfully managing innovation in the corporate setting. Of these, the David Sarnoff Research Center (RCA’s central research laboratory in Princeton, New Jersey, also frequently referred to as RCA Labs) was one of the pioneering institutions and is famous for many breakthrough innovations, such as the inventions of color television and LCD displays, to name just a few of their well-known accomplishments. The center had a system designed to encourage individual creativity within the constraints of corporate product needs. For example, the David Sarnoff Research Center paid particular attention to building esteem. Employees derived great status from their technical achievements. Successful scientists and technologists were the royalty of the Labs, and the best people enjoyed immense prestige.

Self-actualization, the highest value in Maslow’s hierarchy, was another cherished ambition at the Labs. The greatest honor for staff scientists and engineers was to be named a Fellow of the Laboratories, which entitled an individual to work on projects of his or her choosing. Management work seemed like drudgery by comparison, and the scientists often turned down promotions to the managerial ranks.

Another important characteristic was the organization’s total team orientation. In large part, it grew from the nature of the work. Most projects, if not all, were multidisciplinary, calling for expertise in areas such as physics, electrical engineering, chemistry, and materials science. It took a team to move a product from concept into a product division, and everyone recognized that only team players were likely to succeed.

Everyone wanted to be on such a team, validating Maslow’s concept of the need for belonging. Even theoretical scientists wanted to see their work incorporated into practical applications. For example, RCA television picture tubes were based on electronic models devised by theoretical physicists. It didn’t matter how small an individual’s contribution was; annual achievement awards were given for joint teamwork so that everyone shared the credit for successes.

This focus on community and teamwork produced a culture of collaboration. “What was most remarkable at the Labs,” said one newly hired scientist, “was that if I needed help on a project or idea, all I had to do was walk down the hall to another lab and start to chat. People always found time to help.”

The culture also supported young people who wanted to push their ideas from concept to production. Corporations that put their trust in emerging talent, instead of relying exclusively on experienced managers protecting their profit margins, are on the road to success.

Principle 4: Establish a Common Language and Process

At SRI we use a language and process that is simple and yet extraordinarily effective in assisting management and teams to understand and develop their innovation concepts. Curt Carlson and Norman originally developed this process. Curt, as CEO of SRI, then refined and implemented it at SRI, as well as at many companies throughout the world, to great success.⁶

To follow the process, you start by expressing innovation concepts—not only those for creating ventures, as you saw in chapter 5, but also for any initiative—as value propositions. Value propositions are an effective way to understand, analyze, and decide on allocating resources for initiatives of any kind, ranging from defending a budget request for a new item to developing a justification for acquiring a company.

A value proposition is a hypothesis you have about the value your concept will provide your customer. It includes the elements N, A, B, C.

• Need—the important market and customer need or pain that an innovation will address (every initiative always has a customer, even if the customer is your manager)
• Approach—the technical and/or business solution that addresses the market and customer need
• Benefit—the benefit to the customer that the solution will provide, specified as quantitatively as possible
• Competition—the competitors or alternatives to the proposed solution

The NABC method provides a powerful way to think about and present any innovation concept. When you’re giving your value proposition, try to tell a compelling story. Just giving N, A, B, C in order would make for a boring story. Instead, see to it that all the elements are covered at some point in your story. Dag Kittlaus was a master storyteller when he first presented the Siri venture to the venture capitalists. That is one of the first indications of a great CEO.

Value propositions, as we have defined them, express innovation concepts in the same form that venture capitalists might expect in a presentation. Venture capitalists don’t use the mnemonic NABC, but they ask the same questions. Whether you’re starting a new venture or continuing to build new products within a company, or selling a new idea, NABC will serve you well.

Let’s look at an example. When we begin value proposition development, we almost never have a clear idea of all the elements at once. For example, when we first began to think of a value proposition for Siri, we started with a market need (N) of easing the consumer ability to perform search by using a natural language query. But in that case the competitors (C) would include major search companies like Google, and it seemed unlikely that we would be successful going head-on against them.

We then approached the value proposition from another angle, and began to create a value proposition, with NABC, around the need (N) to eliminate multiple clicks for accessing web services on an iPhone. Our technical approach (A) was to create a “do engine” that would give answers and not links, using natural language and AI. Our business model, still under (A), was to generate revenue from web services, who paid for Siri to bring consumers to them. The benefit was zero clicks (B), which could easily be translated into increased numbers of customers and therefore increased revenue. Competitors (C) included major players like Google and Microsoft, but they were more focused on providing a search engine than a do engine. The development of the Siri value proposition prior to launching the venture was iterative and constantly needed refinement. That is the nature of value proposition development. Therefore, we call this an iterative innovation process.

The NABC method differs in an important way from other methods of innovation management. For example, let’s compare it with the stage-gate method, which is often used by enterprises around the world.⁷ In the stage-gate method, a venture or product concept passes through stages of milestones, with gates allowing only the venture or product development that achieves these milestones to pass to the next stage.

The stage-gate method is flawed for two reasons. First, it assumes a linear flow from discovery to business case, development, testing and validation, and final delivery. Second, it requires a filtering process at each gate.

In contrast, the NABC method assumes that innovation is nonlinear, requiring constant iteration of each element of the NABC. For example, of the seventy ventures SRI created over the past eighteen years, virtually all of them needed constant iteration of the value proposition, refining different elements of NABC to achieve success. If we had used the stage-gate method, virtually all of the successful ventures would have been filtered out at an early stage.

Principle 5: Create Centers of Innovation

Many companies have established business development units to identify key strategic innovations of potential benefit to them. Their task is to operate as “scouting units” to assess opportunities in the market that can be evaluated and digested by senior managers and help prevent the company from being surprised by unexpected developments. A group like this might uncover opportunities such as licensing new technologies from other companies or acquiring companies of potential strategic value. Staffed by experienced personnel, the groups can provide extremely valuable information, but senior management has the responsibility for deciding how to act on the information generated. The value of business development units is no greater than the senior management attention they receive.

Once decisions are made regarding acquisitions, new technology, or new products or services, the home for the innovation would either be part of an existing product division or a new product division would be created.

Companies can use the model of creating new product divisions when management is supportive of a new product concept, has decided to bring the new product to market, and recognizes that it may not be consistent with the capabilities of existing divisions. For example, Apple, under Steve Jobs’s leadership, successfully took this approach to create the Macintosh.

Senior management needs to be prepared to provide long-term support to the new product divisions, just as Steve Jobs did. As a counterexample, consider Motorola’s X Products Division, which was created to build iconic new products such as the Razr. The highest risk for the X Products Division was that it would take major resources to fund this kind of unit. When Motorola began to have hard financial times, the X Products Division was the first to go because it wasn’t a near-term source of revenue or profitability.

Principle 6: Encourage Innovation at All Levels

You might not think of production workers as sources of innovation, but experience shows that good ideas can come from unexpected sources. When a new technology enters the production phase, it enters a new world of discovery as well as unanticipated problems. Problems you believe to be solved on a small scale may generate issues as production is scaled up. As a result, product delays are common when you’re launching high-volume products. This is why companies effective in bringing new technologies to the mass market make it a point to have the people involved in innovation actually work with the factory workers to get products into the market fast and at an acceptable cost. There should be no such thing as just handing off a complex new technology to new teams and expecting flawless execution.

Henry learned this lesson when he had to take the new 2N2102 transistor into mass production. While he was getting the production line started, he worked from 10 a.m. to midnight, straddling two production shifts to train the hourly factory workers in the new process.

His experience produced an important lesson in motivation and innovation management. Once the production line was set up, using the same processes he had developed in the laboratory, the transistor production yields were about 30 percent, meaning that three out of ten devices worked properly—a poor figure in today’s high-tech industry, but quite good for a first run in the early days.

After several shifts, however, as the production line started to ramp up volume, yields plummeted to as low as 10 percent—clearly catastrophic, because the manufacturing costs at that level of yield would make the devices too expensive for the market. Henry decided to systematically analyze each of the steps in the process to find out where it was going wrong. He enrolled the hourly workers to help with the analysis.

It became clear that the operators were not following the process steps to the letter, because some of the steps were ambiguous. The workers had taken the initiative to create variations to increase productivity, based on their own interpretation of the manufacturing process. But they could not determine at what point it was critical to follow a step exactly in order to maintain yields. Without realizing it, they were compromising the integrity of the process. The more they increased output, the more the yields dropped.

Henry’s solution was to appoint lead operators for each step of the process to develop a program to carefully monitor the composition and temperature of the chemical baths and maintain a high level of cleanliness throughout. Once he explained a particular process and the idea behind it to the workers, they quickly adjusted the product steps. In fact, he made important changes in the process as a result of observations made by these workers. Many had not finished high school because they had to go to work to support their families. But they were very quick studies, and remarkably adaptable.

In only four weeks, yields were exceeding 70 percent, and the production line was manufacturing commercially viable products. In large part it was because the operators were being treated as partners in the enterprise and continued to contribute to process improvements. They were appreciative of the collaborative attitude and relished the opportunity to participate in an adventure in innovation.

Principle 7: Innovate Continuously

It’s fair to ask how relevant these lessons are in the second decade of the twenty-first century, in a totally different industrial environment. In-house R&D labs and slow-moving corporations with big business units—these ideas from the early years of the electronics revolution sound almost quaint now.

Clearly the business processes of the past would be inadequate to deal with the speed of change in the digital world. Back then it took years to make each new model of a hardware product or software product. That’s an eternity in the current hyperactive globalized market. We’re used to seeing new cell phones appear every year, with twice the speed, power, and features of previous models. And we see the next generation of smaller, more capable, less expensive tablet computers every few months. Increased global competition has only magnified the challenge of keeping up with the accelerated rate of innovation.

Yet the fundamental nature of the challenge has changed very little. Corporations wanting to promote innovation still must maintain an organizational structure that motivates innovators and incorporates appropriate checks and balances as well as investment levels that allow innovations to reach the market.

That kind of commitment to creativity must originate in the ranks of the top executives, all the way up to the CEO. Executives need to pay attention to innovation management, because the future of their companies may depend on it and because only they can commit the resources and create the culture necessary for its success.

They must move swiftly, because driving innovation within a company in the digital age means continuously transforming the way people think and act and reshaping the company to be an ever more flexible organization. Not only must you create new products in an adaptable manner—responsive to the day-to-day pressures of business needs and market trends—but you must also produce them in that way. Product design and development is far more flexible today, allowing products to reach the market much faster.

Intellectual activities are now the core resource for product development. The old definitions of employee specialization are breaking down. Innovation is no longer the job of small, elite teams of brilliant inventors. Companies have learned that segregating R&D groups into think tanks isolates them from reality. And there simply isn’t time to wait for the slow transfer of projects across internal organizations. Instead, companies are building more-flexible organizations, with minimal boundaries between disciplines. Within this environment, employees work together in innovation teams that form quickly when needed and dissolve when their job is done. Welcome to the world of agile and flexible organizations.