EXECUTIVE FORUM
BREAKING AWAY: A NEW MODEL FOR INNOVATION
We’re in a time of evolutionary change. The reins of leadership are waiting for those who have the courage to take them up and build the kind of culture where innovation thrives.
If there was ever a time when innovation needed to be a prime directive, it’s today. The demand for earth-shattering breakthroughs and innovation projects that drive sustainable growth is greater than ever. In fact, “innovate or die” has become the anthem for the 21st-century corporation. One executive asked us, “Is the business world in a death spiral?” While we hesitate to say yes, the truth is many companies are facing a bleak future if they don’t embrace innovation. That being the case, why have so many companies fallen behind the innovation curve?
The reason is threefold. First, for decades the word innovation has been misused, abused, and even held up as a shield against taking risks. Much of the problem lies in the fact that there is no common language through which to discuss innovation. Because of this, true innovation is often lost in innovation-speak where people say one thing and do something else. If you can’t talk about it, you can’t do it.
The second issue is the lack of an adaptable internal framework for planning for and generating innovation ideas. Innovation isn’t one-size-fits-all, but too often that’s what the company wants—a process that provides measurements and predictable outcomes when innovation is, by its very nature, difficult to pin down.
Finally, there’s the matter of risk. No one wants to be on the wrong end of the spreadsheet—especially not alone and especially not today. Risk is inherent with innovation, but if failure is not an option, then too often people find very creative ways to avoid it. Bill Ford calls this the “clay layer,” where innovation is often sabotaged to avoid personal risk.
As a leader of innovation your job is to overcome each of these challenges—the confusion, the resistance, and the fear of risk—and clear the way for real innovation to flourish. So how do you overcome these obstacles and become the type of leader who can drive, lead, and harness innovation for the benefit of all? You begin by opening your mind to a new vision of innovation—one that everyone can understand and share.
Re-Imagining Innovation
We asked more than 50 CEOs and top executives to define innovation—and got more than 50 different answers. None of the answers were right or wrong, they were just different. It’s this difference in thinking about what innovation is that makes talking about it, maximizing it, and sometimes even doing it so confusing. To be true innovation, a product, service, or company must have three elements: it has to be unique, it has to bring real value to the customer, and it has to be commercially viable or worthy of exchange—in other words, the company has to benefit too. When you define innovation in these terms it not only makes talking about innovation more understandable, it also makes evaluating projects and ideas more precise. If what you’re considering doesn’t have all three essential elements, it’s not innovation. If this sounds like a tough standard to uphold, it is. It’s not easy to continually come up with something that is one of a kind and a win-win for customer and company. If you know where to look, however, innovation—large and small—is all around you.
The Four-Level Innovation Model
While most people think of innovation as lightbulb big, the truth is, opportunities for innovation can be found in every facet of a company. This elegantly simple model provides not one but four types of innovation that can lead to growth (see Table 1). Defined as transformational, category, marketplace, and operational, each level, while remarkably different from its fellows, is a viable and valuable resource for innovation. The most powerful innovators use a combination of innovation types to get the most from every discovery.
TABLE 1. THE INNOVATION MODEL
Transformational Innovation
Transformation is the granddaddy of innovation. It comes along rarely, and it is so big and powerful that others continue to build on it for generations to come. In fact, that’s one of the hallmarks of transformational innovation—it’s a disruptive breakthrough that changes society and the way people live so much it becomes very difficult to thrive without it. Imagine life without the automobile, the incandescent light bulb, or the Internet. We wouldn’t want to.
It would be amazing to be at the helm of one of these life-altering breakthroughs, but unfortunately they usually take decades to evolve into something commercially viable, and their early stages carry a great deal of risk. The Internet took more than 30 years to evolve into the conduit for everything from shopping to civil unrest. Mobile technology has the same potential but it’s been years in the making.
Even though transformational innovation may not be the stuff of a reliable innovation pipeline, working innovators need to be aware of it. Identifying a transformational innovation in the making yields an opportunity to build on that innovation, using the platform it offers as the basis for further innovation at the category or marketplace levels. For those who recognized the coming tidal wave of the Internet, there was enormous opportunity to form new category empires, spawning enterprises like eBay, Amazon, Google, and Yahoo—and fantastic profits. While these successes have been meteoric, let’s not forget that for each major success, there have been many failures. That’s the way it is for transformational innovation. It’s a high-risk proposition. If you don’t believe us, think about Webvan, the online home grocery service that went from multibillion-dollar expectations to bust in record time, or Pets.com, or … Well, you get the point.
Category Innovation
More evolutionary than revolutionary, category innovation originates at the industry level and builds on proven transformational innovations like the Internet. Breakthroughs at this level are often found in the new application of existing ideas, products, services, or markets served, rather than in the creation of entirely new inventions. Category innovation is primarily market-driven and geared toward meeting customer needs. That’s what animal health company Merial did when it turned a newly discovered molecule into Frontline, a product that revolutionized the pet industry.
For as long as anyone could remember, dealing with fleas had been a messy and less-than-effective process. The shampoos and flea powders that dominated the market didn’t work for more than a few days. Frontline changed that. Pet owners could protect their animals for an entire month simply by applying a drop of liquid on the back of the animals’ necks. Fleas died within twelve hours and the reproduction cycle stopped. Merial was looking at a category killer.
There was, however a small problem. At the same time Frontline was being launched, another company was introducing its own product based on a different molecule. Each offering had unique benefits, but it was likely that only one would survive. If the company relied solely on the science, it was anyone’s win. What Merial needed was another breakthrough idea, and it emerged at our next level, marketplace innovation.
Marketplace Innovation
The singular function of marketplace innovation is to bring new life to existing products through innovation. This most often means building or expanding into new markets in engaging new ways. For Merial, this meant marketing a new method of flea control that could be sold at a premium price. Because people have strong emotional attachments to their animals and might be reluctant to try a new product, Merial had to educate pet owners about the advantages of Frontline in a way that immediately built trust.
“While Frontline wasn’t a prescription product, we wanted people to view it as a professional product,” Bruno Jactel, Merial’s chief marketing officer, told us in an interview. “To accomplish this, we adopted a two-pronged approach, pushing product through respected distribution channels like veterinarians, while at the same time pulling the consumer through direct marketing. This was something unheard of in our industry. It was an enormous success, not only for the company but for vets, clinics, pet stores, and pharmacies as well.”
The results were staggering. Frontline was originally projected to be a $200 million product. By 2000, it was growing by 15 to 20 percent a year, and by 2007 it hit the billion-dollar mark—something no other product of its kind had ever achieved.
Operational Innovation
Our final level is the only one that is more internally than externally focused. In other words, Operational Innovation is more about the how of business than the what. In the simplest terms, operational innovation is about doing things faster, cheaper, and better. Whatever form it takes, running a forward-moving, continually evolving company is essential to success. That said, like all levels of innovation, operational innovation must benefit the customer as well.
Nordstrom’s, world renowned for its customer service, used an operational innovation to change how it handles inventory, producing important process efficiencies and at the same time making more products easily available to customers. It was late 2009, and the recession had taken its toll on Nordstrom’s, as it had on most retailers. Looking for ways to streamline without hurting customers, the company melded website and store inventory into one transparent shopping experience—something that’s rare in the retailing world. With this new system, a shopper could see the entire Nordstrom’s inventory and determine if an item was available at a nearby store. If so, a few mouse clicks would reserve it for pickup the same day. If it was in a store 300 miles away, an associate would ship it. If Nordstrom’s hadn’t linked its entire inventory of both online and in-store merchandise in this way, sales like this would never happen. The result of this operational innovation was an 8 percent increase in same-store sales in 2010 versus an 11.9 percent decrease the year before.
Risk and the Four Levels
This thought process of looking at innovation as multi-leveled offers a framework for thinking about innovation that works in any industry or for any size business or department. With this open, fluid approach, the question is not Can we innovate? but How do we decide what to innovate? Or more precisely—What are we willing to risk?
If there’s one thing we all know, it’s that innovation is risky. Coming up with ideas has never been as big a challenge as knowing which to back. Some innovations are safer than others, and understanding how to assess risk is critical in charting any innovation strategy. When it comes to risk and the four levels, there’s a simple rule of thumb: the more factors that are known (like market size, technology, and costs) and the more direct control you have over the outcome of these factors, the lower the risk. So it stands to reason that transformational innovation—where you’re not sure you even have a product or a market—is highly risky, while operational innovation—where you basically control all the factors—holds minimal risk. Knowing which level you’re working at will give you a snapshot of risk, but to really get a handle on what’s at stake you have to determine exactly what you do and don’t know in three critical areas.
The Three Ws
When most people see three Ws strung together, they automatically think of the World Wide Web. From now on though, whenever you see these letters, we want you to think innovation—or more precisely, who, what, and why. Imagine if you will three circles, each representing a different facet of innovation. The first holds customers, or those who will buy your offering. The second encompasses what you are developing—your products or services and everything needed to deliver them, whether it’s science, technology, process, or capabilities. The third circle is the why: why does the innovation you’re considering make business sense? It’s here that you think through costs, resources, timelines, and the potential upside to decide for (or against) pursuing the innovation. The more you know about each circle, the more you lower risk and increase reward.
It’s elegantly simple. In fact, most companies already have the capabilities to use this concept. They just don’t bring all the elements together. Instead, they treat these elements as separate entities through marketing, research and development, engineering, and finance. Not only does this split vision add to the risk of innovation, it can sometimes actually kill it. What you’re looking for isn’t separate accountability but synergistic alignment. By looking at the three circles together and knowing that each supports and flows into the others, you get a truer picture of risk on which to base decisions. When the three circles align so that they intersect, it takes you to that sweet spot where innovation has the greatest chance for success.
When Martin Glenn joined Birds Eye in 2006, he was faced with rising costs from a bad crop of peas, expensive cooking oils, and soaring milk prices that cut into its creamed spinach profits, and it was clear that the food manufacturer needed to make some serious changes. In his first months as CEO, Glenn went through the usual exercises of examining costs and looking for ways to extend lines and open up new markets. No matter where he looked, he kept coming back to one thing—fish.
The Britain-based company’s audience is serious about its fish fingers. Research showed that customers were happy with the cod fingers Birds Eye had given them for 50 years, and they weren’t about to change. Glenn discovered, however, that another fish—Alaskan Pollock—was more plentiful than cod and reproduced much more quickly. Switching would not only save the company money, it would be better for the environment. It made both business and scientific sense, and it also aligned with research on social concerns. What was missing was buy-in from consumers who were not only perfectly happy with what they had but had expressed unwillingness to change.
The company was faced with the perception that cod was a superior fish. This was partly due to familiarity. People don’t like to risk change if they’re happy with what they have. Also, the public had been told for years that cod was the best. People believed what they believed. To change their minds the company launched advertising and public relations campaigns that touted the environmental sustainability and health benefits of Alaskan Pollock. This wasn’t just any old fish, but a special fish from the icy, fresh waters of a special place. Within months, consumers were engaged and confident that they were getting something better than ordinary cod.
When the company embarked on its innovation of fish fingers, it had two of the three circles aligned—a product that met market needs (if not expectations) and a business case that improved profitability. What was missing was the customer, so the company took the necessary steps to bring that third circle into alignment. This focus on cultural adoption took the company from being 5 percent in the red to 5 percent in the black, a 10 percentage point swing in just one year.
From Theory to Practice: The Leadership Imperative
The one constant we’ve seen in innovation greatness is someone at the top who believes in innovation, has the courage to champion it, and the desire for everyone involved to win—not for power, domination, or ego but for customer and company. To bring innovation to a new level in your company you have to help everyone in the company expand their vision of what innovation is and develop an organizational structure that allows for risk and functions within the culture and structure of your business. The action you take today, however small, brings you one step closer to being a part of true innovation. To get there make sure
- The innovation vision is clear and everyone personally understands the strategy needed to drive it.
- Everyone knows what winning looks like. Set goals people understand and can achieve. Small successes lead to big successes.
- People can directly connect their contribution to the company’s top-line growth.
- All levels reward success and celebrate failures that lead to learning.
- People are empowered to discuss and debate issues openly. Feedback is used to advance performance, never to punish.
- Team members support one another’s initiatives.
- Top management walks the talk—without support even the best teams falter.
When these become practice and not just theory, you’ve taken the first step in building a vibrant innovation future. Innovation can’t happen in a vacuum. Like raising a child, innovation takes a village of dedicated, talented, empowered individuals working as one. You can begin by opening the debate, asking questions, and talking about what can be. As you implement, support, and encourage an innovation strategy in your company, remember that victories inspire and build buy-in. With each success more people will want to join the team, and that’s when innovation can take hold and lead to something we all want—sustainable growth.
Jane Stevenson is vice chairman, Board and CEO Services, at Korn/Ferry International. Acknowledged by BusinessWeek as one of the “100 Most Influential Search Consultants in the World,” Jane is a pioneer in the field of innovation leadership, recruiting many of the first chief innovation officers and CEOs focused on growth through innovation. The architect of leading-edge offerings for boards and top executives, Jane is frequently consulted to discuss trends and issues relating to best practices in innovation and general management.
Bilal Kaafarani is chief innovation officer and group president of R&D with Yildiz Holding. As a global innovation executive who has worked at P&G, Kraft, FritoLay, and Coca-Cola, Bilal has experienced what is written about in Breaking Away first hand. Bilal was honored by Businessweek as one of the world’s “Top 25 Masters of Innovation.” He has had the unique opportunity to work with some of the best brands in the world, and to experience the benefits and liabilities of many leadership styles and environments.
Jane and Bilal are coauthors of “Breaking Away: How Great Leaders Create Innovation That Drives Sustainable Growth—And Why Others Fail” (McGraw-Hill, 2011). They would also like to acknowledge Diana LaSalle for her invaluable collaboration on this project.