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Strategy Talk: How Can I Make My Company More Innovative?

Ken Favaro

Ken Favaro is a contributing editor of strategy+business and the lead principal of act2, which provides independent counsel to executive leaders, teams, and boards.

 

Dear Ken,

I see companies trying more and more approaches to innovation, such as venture capital arms, incubators, university partnerships, online crowdsourcing, global hackathons, and more. It’s all a bit bewildering, and I don’t know where to start. As a newly appointed CEO, I recognize the importance of innovation, but I worry about doing a bunch of stuff just because others are doing it. Indeed, I wonder if it’s even possible for large companies to be innovative, or whether that’s the job of entrepreneurs and small businesses working outside the stifling walls of giant corporate bureaucracies.

—Inquisitive Innovator

Dear Inquisitive,

You are right to be wary of initiating a slew of innovation activity. It could very well be a giant waste of money, time, and energy. But you are also right to recognize the importance of innovation. It is the lifeblood of all companies. Without it, they get stuck in a zero-sum game, in which their gain can only be another’s loss. Fortunately, it is possible for big companies to be more innovative, if they instill three essential behaviors.

1. Start with specific problems that demand novel solutions. Every day, thousands of entrepreneurs pitch their startups to venture capitalists. Almost always, the first question the entrepreneurs hear is: “What problem does your new business idea solve?” This is because venture capitalists know that all innovations are born as a novel solution to an important problem. But this is true for big companies, too. For example, Ford’s moving assembly line solved the problem of how to democratize the automobile; the iPod and iPhone became the unexpected answer to making Apple’s iMac the center of consumers’ digital lives; and the first cloud computing service solved the problem of how to generate profit from Amazon’s huge army of servers supporting an unprofitable e-commerce business.

Anyone in a leadership position should be responsible for finding innovative solutions to problems that fit his or her pay grade.

Too often, however, large companies start innovation in the wrong place, with big mandates (“We will become more innovative”), stretch goals (“20 percent of our revenues in X years will come from new products”), new techniques (design thinking, open innovation), new roles (chief innovation officer, chief design officer), or new departments (an innovation center or corporate ventures unit). This creates aimless activity because it is not grounded in how innovation actually happens. And that creates a black hole where resources go in with little real innovation coming out.

2. Make innovation the job of every leader. I am often asked, “Who are the most innovative companies?” And I always start my answer by saying that people innovate, not companies. Then I ask them to look at companies with leaders who get their hands dirty when it comes to innovation. Consider the examples above: Actively involved leaders at the top of large, established companies gave us the first moving assembly line, the iPod and iPhone, and the first cloud computing service.

But it’s not just leaders at the top who need to be innovators. A good rule of thumb is that anyone in a leadership position should be responsible for finding innovative solutions to problems that fit his or her pay grade. For example, product heads should be responsible for finding innovative solutions to specific product challenges, not the product development team. Functional leaders should be leading functional innovation efforts, not the operational excellence department. If you have business units, their leaders should be in charge of innovating their strategies and business models, not corporate planning. And yes, the CEO needs to be front and center in driving enterprise-level innovation, not just the chief strategy or innovation officer.

A related issue at many large companies is that people are asked to innovate for problems that are above their pay grade. This creates a situation in which ideas are coming to, rather than from, the leaders who are ultimately responsible for implementing those ideas. And that dooms your company to incrementalism, because it’s only natural for a leader to want proof — financial, market, or otherwise — that someone else’s idea will work before they agree to support it. Knowing that, people will bring you only those ideas for which doing NPV analysis or customer research is possible. These might include a better car, but not an entirely different way of building it; or a better MP3 or mobile phone, but not one that changes the way music is bought and sold; or how to make your server farm more energy-efficient, but not how to turn it into a profit-making juggernaut. None of these innovations could have been proven with financial analysis, market research, or anything else.

3. Replace the call for ideas with a hunt for precedents. If true innovation is novel solutions to specific problems, new ideas are its feedstock. And ideas are inspired by precedents that are connected to the problem you are working on. For example, by offering monthly subscriptions for movie rentals by mail, Netflix solved the problem of customers having to run to a store or else pay a penalty for late returns. The idea was sparked by the model of monthly gym membership fees. Likewise, Google’s PageRank cracked the problem of how to show the most relevant online search results first. It was inspired by the protocol of ranking academic publications based on their number of citations.

The more precedents your leaders have to work with, the more likely they’ll find the ones that lead them to new thinking, novel ideas, and breakthrough innovation. You can find precedents by looking into your own experience or doing research or by asking colleagues, your organization, or a “crowd.” Whatever your source, instead of calling for ideas, present the problems that frame your innovation needs, help people think about those problems in the broadest possible way, and ask whether they know of anyone who has ever solved any part of these problems. They may have to search far and wide, but chances are, there are highly relevant precedents out there that will help your leaders innovate.

These three behaviors are more natural in startups and small companies. In large, complex organizations, such behaviors can be difficult to sustain — and that’s why so many big companies struggle with innovation. As the CEO, it’s up to you to instill and reinforce the behaviors in everything your company does to be more innovative. Whether it’s a venture capital fund, accelerator, new product process, or anything else, focus everything it does on helping your company find new solutions to big, specific problems that demand innovation. Be sure that every problem has an accountable leader, and that it matches his or her pay grade. And ask your leaders to generate their own ideas by hunting for precedents that are connected to the problems they are working on.

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Strategy Talk: How Can I Make My Company More Innovative?