CHAPTER THIRTY
The Innovative Organization
IT IS WIDELY BELIEVED that large companies cannot innovate. This is simply not true: Merck, Citibank, and 3M are but three examples of highly innovative corporate giants. But it is true that to innovate successfully, a company has to be run differently from the typical “well-managed” business, whether large or small.
The innovative company understands that innovation starts with an idea. Ideas are somewhat like babies—they are born small, immature, and shapeless. They are promise rather than fulfillment. In the innovative company executives do not say, “This is a damn-fool idea.” Instead they ask, “What would be needed to make this embryonic, half-baked, foolish idea into something that makes sense, that is feasible, that is an opportunity for us?”
But an innovative company also knows that the great majority of ideas will turn out not to make sense. Innovative ideas are like frogs’ eggs: of a thousand hatched, only one or two survive to maturity. Executives in innovative organizations therefore demand that people with ideas think through the work needed to turn an idea into a product, a process, a business, or a technology. They ask, “What work would we have to do and what would we have to find out and learn before we can commit the company to this idea of yours?”
These executives know that it is as difficult and risky to convert a small idea into successful reality as it is to make a major innovation. They do not aim at “improvements” or “modifications” in products or technology. They aim at innovating a new business. And they know that innovation is not a term of the scientist or technologist. It is a term of the businessman.
For innovation means the creation of new value and new satisfaction for the customer. Organizations therefore measure innovations not by their scientific or technological importance but by what they contribute to market and customer. They consider social innovation as important as technological innovation. Installment selling may have had a greater impact on economics and markets than most of the great advances in technology in this century.
Innovative companies know that the largest market for a successful new idea is usually unexpected. In developing dynamite, Alfred Nobel was trying to find a better military explosive. But dynamite is too unstable to be used in bombs and shells; instead it was used for removing rock and replaced the pick and shovel in mining, railroad building, and construction. IBM built its dominance of the large-computer market by realizing that the greatest demand for computers would come not from science and defense—the two uses for which the computer had been designed—but from such mundane applications as payroll, billing, and inventory control.
Innovative companies do not start out with a “research budget.” They end with one. They start out by determining how much innovation will be needed for the business to stay even. They assume that all existing products, services, processes, and markets are becoming obsolete—and pretty fast at that. They try to assess the probable speed of decay of whatever exists and then determine the “gap” that innovation has to fill for the company not to go downhill. They know that their program for innovation must include promises several times the size of the innovation gap, for not more than a third of such promises, if that many, ever becomes reality. And then they know how much of an innovative effort—and how large an innovative budget—they need as the very minimum.
“But,” says the chief executive of a highly successful innovative company, “then I double the size of the effort and of the budget. After all, the competition is no dumber than we are and may be luckier.”
Smart companies know that money does not produce innovation; people do. They know that in innovative work, quality counts far more than quantity. They do not spend a penny unless there is a first-rate person to do the work. Successful innovations rarely require a great deal of money in the early and crucial stages. But they do require a few highly competent people, dedicated to the task, driven by it, working full time and very hard. Such companies will always back a person or a team rather than a “project” until the innovating idea has been proved out.
But these organizations also know that the majority of innovative ideas, however brilliant, never bring “results.”
So they treat innovative work quite differently from the existing, ongoing business in respect to planning, budgets, expectations, and controls.
Typically innovative companies have two separate budgets: an operating budget and an innovation budget. The operating budget contains everything that is already being done. The innovation budget contains the things that are to be done differently and the different things to be worked on. The operating budget runs to hundreds of pages, even in a middle-size company. The innovation budget even in the giant business rarely runs to more than forty or fifty pages. But top management spends as much time and attention on the fifty pages of the innovation budget as on the five hundred of the operating budget—and usually more.
Top management asks different questions about each budget. On operations it asks, “What is the least effort needed to keep things from caving in?” And “What is the least effort needed to give the best ratio between effort and results? What, in other words, is the optimization point?” But for innovations, top management asks, “Is this the right opportunity?” And if the answer is yes, top management asks, “What is the most this opportunity can absorb by way of resources at this stage?”
Innovative companies know that returns on innovation behave radically differently from returns in the ongoing business. For long periods, years in many cases, innovations have no “returns"; they have only costs. But then returns should increase exponentially: An innovation is unsuccessful if it does not return the investment several hundredfold, for the risks are simply too great to justify a lower return.
To expect from innovative efforts the steady 10 percent rate of return and 10 percent growth rate—the yardstick of the “sound financial manager”—is foolishness. It is expecting both too much and too little. Innovative companies therefore keep such efforts out of the return-on-investment figures for ongoing businesses and do not use these figures to measure the soundness of an innovative idea and its progress, or the compensation of people working on them. The oldest rule, probably formulated by du Pont sixty years ago, is that the new will not be included in the figures for the ongoing business until its end result—the new product or service—has been on the market for two or three years and is past its infancy.
Yet, innovative companies closely control these efforts. One never hears talk of “creativity” in innovative companies—creativity is the buzzword of those who don’t innovate. Innovative companies talk of work and self-discipline. They ask, “What is the next point at which we should review this project? What results should we expect by then? And how soon?” When an idea fails to meet the targets two or three times in a row, the innovative company does not say, “Let’s redouble our efforts.” It says, “Isn’t it time we did something else?”
Above all the innovative company organizes itself to abandon the old, the obsolete, the no longer productive. It never says, “There will always be a market for a well-made buggy whip.” It knows that whatever human beings have created becomes obsolete sooner or later—usually sooner. And it prefers to abandon its obsolete products itself rather than have them made obsolete by the competition.
Every three years or so, the innovative company therefore puts on trial for its life every product, process, technology, service, and market. It asks, “Knowing what we now know, would we now go into this product or service?” And if the answer is no, the company does not say, “Let’s make another study.” It says, “How do we get out?”
One way might be to stop putting additional resources in and keeping the product or service only as long as it still gives a yield—I coined the term cash cow for this twenty years ago. Or, the Japanese are past masters at this, one finds uses and markets where the old technology or the old product is still genuinely new and confers competitive advantage. Or one abandons. But one does not pour good money after bad. Organized abandonment of the obsolete is the one sure way for an organization to focus the vision and energies of its people on innovation.
We clearly face a period in which the demands and opportunities for innovation will be greater than at any time in living memory—as great perhaps as in the fifty years preceding World War I, during which new technical or social inventions, almost immediately spawning new industries, emerged on average every eighteen months.
Telecommunications, automation of manufacturing processes around the microprocessor, the “automated office,” rapid changes in banking and finance, medicine, biogenetics, bioengineering, and biophysics—these are only a few of the areas where change and innovation are already proceeding at high speed. To compete in this environment, companies will need to muster large sums of money to boost their research budgets, even in a severe depression. But what will be required above all are the attitudes, policies, and practices of the innovative organization.
(1982)