About the Author
Tony Davila is a faculty member of Stanford's Graduate School of Business. Building on his doctoral work at the Harvard Business School, he works with both large industrial companies and Silicon Valley startups to design management control and performance measurement systems that drive innovation. He has been published in Harvard Business Review, Research Policy, and other leading journals.
Marc J. Epstein has been a visiting professor and Hansjoerg Wyss visiting scholar at Harvard Business School and a distinguished research professor at Rice University's Jones Graduate School of Management. He has been a senior consultant to leading corporations and governments for over twenty-five years, specializing in strategy implementation, innovation, governance, accountability, and performance metrics. Epstein has also served as a professor at Stanford Business School and INSEAD.
Robert Shelton is managing director of Navigant Consulting's Innovation practice. His client list is a "who's who" of innovative Fortune 500s, including leaders in the electronics, energy, health care, automotive, consumer goods, software, and aerospace industries. Shelton has served as vice president and managing director with Arthur D. Little and as managing director of the Technology and Innovation Management practice at SRI International (formerly Stanford Research Institute). His work has been referenced in media ranging from The Wall Street Journal to CNN Financial News.
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MAKING INNOVATION WORK: HOWTO MANAGE IT, MEASURE IT, AND PROFIT FROM IT
Much that is held as common wisdom regarding how successful innovation is managed is wrong. It seems that somewhere along the line, the correct set of rules of innovation have been misplaced, distorted, or simply misinterpreted. This is not to say that organizations are not innovativeobviously many are. But how and why these companies are innovative is very different than what many managers think.
This book challenges the prevalent misconceptions about innovation, and lays out the tools and processes necessary for an organization to harness and execute innovation.
The following chapters show that, contrary to popular belief:
Innovation does not require a revolution inside companies. What it does require is thoughtful construction of solid management processes and an organization that can get things done.
Innovation is not alchemy, with mystifying transformations. It's much more like the basic blocking and tackling of other key business functions.
Innovation is not primarily about creativity and having a "creative culture." Many companies find that coming up with good-to-great ideas is the easy part; the hard stuff is selecting the right ideas and implementing them.
Nor is it solely about processes and stage-gate tools. These do count, but tools and processes alone are not effectivethey must be coupled with an organization, metrics, and rewards that can make things happen.
Innovation does not focus exclusively on cool new technology. Developing new business models and new strategies are every bit as importantsometimes more.
Innovation is not something that every company needs in large quantities. Innovation must match the opportunity and the competencies of the organizationsometimes, with good timing, a little goes a long way.
Making Innovation Work provides three new, important perspectives for senior managers:
Innovation, like many business functions, is a management process that requires specific tools, rules and disciplineit is not mysterious. Execution is simple once it is clear how the pieces fit together. Company executives typically complain that they cannot get innovation accomplished in their organizations. Making Innovation Work presents an integrated framework, formal processes and tools that all managers can use to create top- and bottom-line growth from innovation. The book describes how to use these standard management tools (such as strategy, organizational design and structure, management systems, performance evaluation, people, and rewards) to dramatically increase the payoffs from innovation investments.
Innovation requires measurement and incentives to deliver sustained, high yields. Remember the saying, "You can't manage what you can't measure"? That certainly holds true for innovation, but many managers have only paid lip service to this crucial aspect. Many companies measure the wrong things and provide incentives for behavior that corrodes the systems and processes that support innovation. Making Innovation Work shows how to use metrics and incentives to manage every facet of innovation from creating the ideas, through selecting and forming the prototype innovations, and all the way through to commercialization. The book has metrics and incentives that can be used by companies of all sizes, complexities, and in all types of industry.
Companies can use innovation to redefine an industry by employing combinations of business model innovation and technology innovation. This book shows how to integrate changes in the existing business model and technology to redefine the competitive environment of an industrythe way Apple Computers did with the sequential introduction of iPod (a technology change) and iTunes (a business model change). Most companies are significantly better at one or the other, but few have a truly integrated capability for both significant business model and technology innovation. Making Innovation Work presents a unique framework that allows management to harness the power of both business model innovation and technology innovation and by combining them, create competitive advantage, grow, and significantly affect the direction of the industry.
The truth is that there is not much that is truly new about innovation. The basics have not changed for centuries. However, we have become smarter about managing innovation. By analyzing what has worked really well and what has not, Making Innovation Work provides new insights into how to execute innovation. It breaks things into manageable pieces that can be applied in any company.
Two ideas shape the foundations of this book:
Innovation is a necessary ingredient for sustained successit protects your tangible and intangible assets against the erosion of the market.
Innovation is an integral part of the business, and as such it has to be managedit is not a "nice-to-have" element or something that occurs on its own.
Innovation is imperative to grow your top and bottom lines. Innovation produces changes that are essential to survival of the company.
Innovation is not about secret formulas; it is about good management. The book identifies the seven Innovation Rules of good innovation management:
Strong leadership that defines the innovation strategy designs innovation portfolios, and encourages truly significant value creation.
Innovation is an integral part of the company's business mentality.
Innovation is matched to the company business strategy including selection of the innovation strategy (Play-to-Win or Play-Notto-Lose).
Balance creativity and value capture so that the company generates successful new ideas and gets the maximum return on its investment.
Neutralize organizational antibodies that kill off good ideas because they are different from the norm.
Innovation networks inside and outside the organization because networks, not individuals, are the basic building blocks of innovation.
Correct metrics and rewards to make innovation manageable and to produce the right behavior.
We have spent our lives working on innovation. This book is the result of years of research in the field as well as through surveys grounded on a thorough analysis of the academic and practical literature and extensive experience working with companies to enhance the value they create from innovation. Specifically, we have identified what companies need to do to become more innovative and to improve performance in innovationand we understand why some companies fail at innovation. As part of our analysis, we examined the practices of leading companies in a range of industries through extensive surveying and numerous company interactions. In addition, we have talked with and helped senior managers in the companies in a variety of contexts and deeply researched their management practices.
Corporate CEOs that we've interacted with repeatedly mention their dissatisfaction with the innovation in their organizations. In some cases, incremental innovation crowds out larger innovations, leading to an unbalanced portfolio that rewards short-term at the expense of long-term survival. Sometimes these managers blame bureaucracy; in other instances, culture is the identified culprit. However, they all perceive selected elements of their organizations as working against the kind of innovation that is necessary to compete today. Some managers have even given up on their organization; they feel that their only hope is to buy innovation outside the organization and leverage their market power to generate value. For many, that could be a fatal mistake.
There is no silver bullet for innovation, no one formula or structure for innovation that will work for every organization. However, our research has shown that there are clear ways in which companies can improve their innovation results, create value, and grow.
Because the "how" of innovation is all-important in determining results, this book does what books focused on innovation strategy cannotMaking Innovation Work provides the context, framework, tools, and operating guidelines to actually make innovation happen better in your organization. And it provides the approaches to tailor innovation to a company's particular situation, business strategy, culture, technological acumen, and appetite for risk.
Making Innovation Work goes beyond ideas and inspiration to offer practical, tested advice on how to create value from the innovation investment on the level of day-to-day processes, as well as at the strategic level. It describes how to maximize your company's value by integrating the different types of innovationincremental, semi-radical, and radicaland creating a balanced portfolio of innovations. And the book covers the entire chain of innovation tools from A through Z, so it is possible to troubleshoot your company's situation and identify what needs to be improved to maximize value for your company's particular situation and need.
Objective of This Book
Where is your company?
Evaluating the innovation state of your company
Assessing the options going forward
How to design an innovation strategy
Adapting an innovation strategy that fits your company
Creating a balanced innovation portfolio
How to manage innovation
Fighting organizational antibodiesfrom bureaucracy to not-invented-here syndrome
Leveraging technology to design the innovation processes
How to measure and reward innovation
Designing measures that encourage innovation
Incentives and recognition for innovation success
A Word About the Book
The seven Innovation Rules are guiding principles for executing innovation in any company, business unit, non-profit organization, or government entity. You can attain the goals embodied in the Innovation Rules by using the standard management toolsstrategy, structure, leadership, management systems, and people. Because organizations are complex, no single tool is sufficient to reach any one of the goals. Every one of the Innovation Rules requires several tools as shown in Figure I.1. Black indicates that the topic is analyzed to significant depth in the chapter, gray indicates that the topic addressed to some extent, and white indicates that the topic is only slightly touched upon.
INNOVATION RULES AND MANAGEMENT TOOLS.
For example, the first goal, Exerting Strong Leadership, requires that the CEO and the management team focus primarily on defining the innovation model, selecting the innovation strategy, and enabling the correct culture. Leadership has special responsibility for managing those three tools.
Leadership needs to define the role of business model innovation and technology innovation for the company (such as by defining the Innovation Model). Both are important to successful innovation, but often a company does not have the full set of capabilities required to deliver effective combinations of both. Without a clear, accepted definition of the innovation model and an understanding of the importance of both business model innovation and technology innovation, a company will not be able to create industry changing innovations or avoid being blindsided by innovations that they cannot effectively counter. For example, overreliance on technology innovation led to HP's inability to match Dell's business model change selling PCs and servers via the Internet.
In addition, effective leadership requires a clear decision on the innovation strategy, selecting either a Play-toWin (PTW) or a Play-Not-to-Lose (PNTL) strategy. A company can execute one strategy or the other, but it cannot do both effectively. Without a clear decision on the roles of technology change and business model change in that strategy, the execution becomes muddled and resources are not properly allocated. For example, the R&D department might decide to produce major breakthrough technologies for new products, consistent with a PTW strategy, while the business unit managers have decided that they need to provide strong support for existing products. The product managers are focusing on the ability to stay even competitively, consistent with a PNTL strategy. This conflict results in costly inefficiencies and nasty internal fights. Selecting the strategy and ensuring alignment in the organization is leadership's responsibility.
Managing the innovation model and selecting the strategy are keys to short- and medium-term success; however, preserving the beneficial elements of the existing culture of the company and changing the deleterious elements is the key to long-term success. Leadership needs to be involved in the cultural aspects of innovation. A company that does not monitor its innovation culture and make improvements to selected portions will see its competitive advantage wither over the long haul. This is what happened to Polaroid as the company found itself stuck with an innovation culture that was mired in old mindsets and practices. And Polaroid is not alone in this regard; maintaining the correct culture is a challenge for every successful company. Success often creates cultures that are unwilling to change. Leadership should be held accountable for the innovative culture of the company, and the leaders should be judged on how effectively they contribute to capabilities for long-term, sustained innovation as well as short-term growth.
Defining the innovation model, selecting the strategy, and guiding the evolution of the culture must be the major responsibility for the senior management team. No one else can shoulder that responsibility as effectively.
Leadership's secondary focus should be on metrics, rewards, and organizational learning. Leadership should oversee the development and implementation of metrics and rewards to ensure that they support the company strategy and culture. Measurement precedes management (as in 'what gets measured gets managed') and rewards reinforce acceptable behavior. Leadership should also be held accountable for oversight of organizational learning and change because a company must be able to meet changing conditions and new challenges.
Finally, attaining the leadership goal requires a lower level of involvement (oversight and guidance) on the innovation organization and the processes. Otherwise, these elements could significantly hinder the innovation effort. However, the CEO and the senior executives do not need to be intimately involved in designing and operating these elements of innovation. That is primarily the job of others, using the guidance and direction from the selected strategy and the portfolio.
This is one example. The following chapters describe how to achieve each of the seven Innovation Rules using the standard management tools.
Execution of innovation is actually not any more difficult than other management activities, such as manufacturing or financial control. However, there are many half-truths and myths surrounding innovation that have made it appear more complex than it is. Making Innovation Work replaces the myths and half-truths with clear direction on how to manage and execute innovation in any organization.