In the past, large companies typically turned to a highly “vertically integrated” innovation model, in which most of their new ideas stemmed from internal sources; an archetypical example is the old AT&T, whose Bell Labs conducted groundbreaking research, and, together with Western Electric, developed many of the ideas and products that now define our networked world. (See “Innovation at Bell Labs,” by Edward H. Baker.) More recently, companies have turned to a wider range of sources for ideas, from suppliers and customers to outright acquisition of companies with good ideas in their own pipeline.
All these laudable efforts have led many companies to say, at least anecdotally, that coming up with new ideas is not as big a problem as selecting and converting them to development projects, and the survey results and interviews validate this hypothesis. Darlene Solomon, chief technology officer of measurement company Agilent Technologies, and CEO Bill Sullivan use the term cloud of innovation to refer to the large number of early-stage ideas available for potential investigation. Most of those ideas, Solomon says, “aren’t yet sufficiently formulated for businesses to decide to take them to product. There are always more ideas we want to invest in than we can realistically move through the life cycle, but it is these fragile ideas that seed future breakthrough products.”
Still, considering that 57 percent of respondents say their company is just marginally effective at idea generation, and a similar proportion say their company’s culture does not support efforts to come up with new ideas, it is clear that many companies have much to learn about the best processes for generating ideas. Moreover, companies’ level of effectiveness at this early stage of innovation turns out to be a strong predictor of financial performance. The 25 percent of survey respondents who said their company was highly effective at both ideation and conversion also reported outperforming their industry peers on three important financial measures: revenue growth, market cap growth, and earnings as a percentage of revenue. The same held true for companies whose employees said their culture supported early-stage innovation efforts. (See Exhibit 2.)
However, our survey also revealed that there is no correlation between financial performance and the particular processes companies use at the idea-generation and idea-conversion phases. Overall, companies continue to depend on a set of long-standing, reliable methods for coming up with new ideas. The most common method, by a substantial margin, was “direct observations of customers,” ranked number one by 42 percent of all respondents. “Traditional market research” was a rather distant second, at 31 percent. We also looked at the kinds of external networks companies turned to at the ideation stage; again, the most common was talking to customers, followed by working with channel partners. Finally, when asked what internal mechanisms their company used, most respondents pointed to “innovation champions” — people assigned to coordinate the capture, development, and internal promotion of new ideas — followed by “cross-functional collaboration” among different business units.
Another noteworthy survey finding is the limited use of open innovation in idea generation. In the past decade or so, the concept of open innovation has generated a great deal of buzz, and a small but growing number of companies are seeking out new ideas from a variety of sources outside their conventional domains, including innovation contests and social networking. However, less than 15 percent of all companies ranked mining social media for ideas and using open innovation as important. We see indications of why some companies see value in the techniques while others are left cold. Companies in more consumer-oriented industries, including software and Internet, computing and electronics, consumer, telecom, and some healthcare sectors, are twice as likely to employ social media in their search for new ideas than are companies in sectors with more highly engineered products and services, such as auto, industrials, aerospace, and chemicals and energy, where these methods seem to have less efficacy.