Five Traits of Innovative Companies

This post is based on a Business Week podcast – December 2008, where Rajesh Chandy (Prof of Marketing, Univ of Minnesota, Carlson School of Management) discusses his study on business innovation in 759 companies in 17 major economies, highlighting the five ingredients of successful companies.

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He and his fellow researchers, Gerard Tellis of the University of Southern California and Jaideep Prabhu of Cambridge University, find that the most important factor in a company’s inventiveness is its corporate culture.

Corporate culture is key

Their research uncovered five attributes that these innovative companies generally shared.

Results suggest that:
1. Among the factors studied, corporate culture is the strongest driver of radical innovation across nations; culture consists of 3 attitudes and 2 practices.

2. The commercialization of radical innovations translates into a firm’s financial performance; it is a stronger predictor of financial performance than other popular measures such as patents.

Culture:
1. Future market focus: the extent to which managers focus on the customers and competitors of the future rather than those of today. e.g. One is that the chief executives at these businesses are more focused on the future than typical CEOs. And how do the researchers know this? By toting up the number of “will” sentences in the chiefs’ communications, as in, “We will prosper if we think ahead.”

This was the most important factor they found.

2. Willingness to cannibalise current products for future business

3. Tolerance for risk – simply the extent the managers take calculated risks

Practices:
4. Incentives for enterprise – actively reward innovation activities

5. Role of product and process champions – individuals empowered to make things happen

What does not seem to make a difference:

• Government policy – company culture much more important. Governments tend to copy each other so there is no long term advantage.


• National culture – again company culture matters more.


• Geography – ditto

Quote:
“Happy families are all alike; every unhappy family is unhappy in its own way.”
A quote from the first line of Leo Tolstoy’s "Anna Karenina".

This applies to companies too. Innovative firms tend to look like each other and look to each other, including across industries, for role models which may make them look similar.

The full paper "Radical Innovation Across Nations: The Pre-eminence of Corporate Culture" can be downloaded from - here

New book on Technological Innovation Management

NESTA recently hosted a book launch for a new book called "The Management of Technological Innovation", by Mark Dodgson, David Gann and Ammon Salter.

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The book aims to provide an up to date MBA level text book on the management of technological innovation, and it slots in before their more advanced and adventurous innovation book Think, Play, Do: Technology, Innovation, and Organization.


The books' DNA comes out of the Tanaka Business School at Imperial College, London, with all three authors being either faculty members or, in Mark Dodgson's case, a visiting professor. "The Management of Technological Innovation" uses more than fifty up to date case studies from around the world to demonstrate their points, making this a relatively easy book to learn from and dip in and out of - remember, however, that this is a text book and it is not really an "easy" read; it is still peppered with references and the bibliography, which is useful in its own right, is 28 pages long.

Strategies for knowing where to innovate

Most organisations know that they want to be innovative, but where should they innovate? To know were to innovate (assuming one has limited resources and can not innovate perfectly everywhere...) organisatons need to know what their strategy is.

One of the tried and tested frameworks for strategy development is Professor Michael Porter's five competitive forces that shape strategy, which he has recently updated.

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Porter's original paper was published in the Harvard Business Review in 1979, titled "How Competitive Forces Shape Strategy" - in the January 2008 edition of the HBR he has updated the original article, titled "The Five Competitive Forces Shape Strategy", to include more modern case studies and to generally make it more relevant to today. His original thesis, however, has not changed.

Porter's analysis indicates that the same five forces still shape competition today, namely:

• The threat of new entrants
• The bargaining power of buyers
• The threat of substitute products or services
• The Bargaining power of suppliers
• Rivalry among existing competitors

So where to exert one's efforts in innovation and where is it a waste of time/money or even counter productive?

Porter's article lays out a framework within which to undertake the strategic analysis ...

Colin Chapman – British automotive designer, innovator and entrepreneur

Colin Chapman was one of the greatest innovators in motor sport's history, but he did more more than just motor sport.
Born May 19, 1928, Richmond, Surrey, England
Died 16 December, 1982

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Colin Chapman studied structural engineering at University College, London, which led to the RAF and a stint with the British Aluminium Co. He was best known for his eponymous Formula 1 team which won 7 World Championships and the Indy 500 between 1962 and 1978; he was an accomplished racing driver himself.

During that time his lightweight mid-engined cars redefined motor racing; amongst his innovations were monocoque design, stressed engine/gear box construction, the introduction of aerodynamics into the sport and he led the team who “discovered” ground effect while working on wind tunnel models at Imperial College. Lotus was testing active suspension when he died.

He was also largely responsible for the creation of Cosworth, the legendary engine design and manufacturing company, as well as nurturing many of the defining talents of the British motor sport scene.

Chapman was a businessman who introduced major sponsorship into racing, set up Lotus Cars in 1952 to design, modify and manufacture relatively affordable leading edge sports cars, as well as building boats (he believed that changing the way they were built would enable Lotus to make them more efficiently); the company still leads the way in innovative automotive design and manufacture today.

Why are companies interested in Innovation?

A quote from Steve Wunker, Partner at Innosight:

“...people know that innovation is profitable but it's profitable because it's hard.”

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Four basic company styles of Innovation Management

In an IBM podcast, called “Innovating On Your Own Terms” from September 2007 researchers talk about their results from a couple of studies specifically focused on Innovation.

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The first of over 700 CEO’s observed that there were three dimensions to Innovation:

• Business model innovation
• Operational innovation
• Ideas that are turned into new product and service revenue streams

IBM and Innosight, along with the American Productivity and Quality Council (APQC), followed this up with research into 200 companies in 14 countries. They looked at two aspects of innovation:

• A set of metrics that would help companies work out whether they are innovative
• To find out how companies actually do innovation

One rather strikingly obvious observation they make is that “People are interested in Innovation because it is profitable, but it is profitable because it is hard.”

What they found is that there is no one way to Innovate. They identified four different approaches depending on the corporate DNA:

• A marketplace of ideas – an example of this is Google
• The visionary leader – an example of this is Apple, although the visionary leader does not necessarily have to be the CEO
• Innovation through rigor – examples of this are Samsung, Procter & Gamble and Goldman Sachs
• Innovation through collaboration – essentially Open Innovation companies

They point out that companies can get themselves into trouble by trying to emulate an archetype that they are fundamentally not.

For more details of the research and company types the podcast (about 12 mins long) and transcripts are available from IBM.

If a company wishes to take part in the programme they can by contacting the APQC.

A short description of Open Innovation

Open Innovation is a powerful concept that in recent years has come to the forefront of the management of innovation. While different names are used to describe it – for instance P&G, the highest profile users of the idea, call their programme “Connect and Develop" – Henry Chesbrough coined the term in his seminal book “Open Innovation: The New Imperative for Creating and Profiting from Technology” published in 2003. Chesbrough’s innovation was to create and publish a common language for people and companies to describe to the world and each other what they do. This common vocabulary has enabled people to examine and implement ideas much more quickly and coherently than was the case before Chesbrough wrote up his ideas.

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Closed Innovation, which pertained for most of the 20th Century, is where ideas are dreamed up and developed within corporate R&D labs and sold to a grateful market place. Closed Innovation follows a linear path from idea to market.

The concept of Open Innovation, conversely, is that by looking outside their own boundaries, companies can gain better access to ideas, knowledge, technology and markets than would be the case if they relied solely on their own resources. A relatively uncomplicated concept which makes many people dismiss it as too simple or that it merely describes what they have been doing for years. Indeed in IBM’s 2006 Global CEO study Academia and Internal R&D came at the bottom of a list of eleven key sources for innovation, with Employees, Business Partners and Customers topping the list

So why is Open Innovation such a powerful concept? It is undoubtedly true that most companies will have been doing some aspects of Open Innovation long before 2003 but the world has truly changed over the last few years making Open Innovation both easier to undertake and more essential. The list of reasons is long and includes; globalisation; the spreading of education (especially higher education); the world wide web; the creation of on-line knowledge market places and communities, such as Yet2, Innocentive and Your encore; the rapid rise in Venture Capital leading to a 100 fold increase of technologically advanced start ups and small companies; the increasing proportion of R&D being done by small companies relative to large ones; increasingly rapid technology development and obsolescence; rapidly increasing technological complexity; the relative decline of corporate R&D (great labs such as AT&T’s bell labs used monopolistic cash flows to develop ideas such as transistors as gifts to the world) etc etc.

Open Innovation involves culture change; looking outside intelligently for ideas; changes in staff incentivisation; the building of networks, and networking and collaboration skills, different leadership styles; all the while retaining the internal capacity to both know a good idea when ones comes through the door and to be able to develop it for the market – Open Innovation is not an excuse to close down all internal R&D – it is essential to retain the expertise that it brings, just to deploy it differently and perhaps to grow it more slowly relative to the size of the company’s overall growth.

How important is R&D to economic growth?

In October 2007 Professor David Edgerton, Hans Rausing Professor at the Centre for the History of Science, Technology and Medicine, Imperial College London gave a lecture at the R&D Society on the subject of whether there is a direct link between national R&D expenditure and economic growth.

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This is Prof Edgerton’s introduction to the lecture from the R&D Society web site:

“One of the great problems we have with science and technology is that elite discussion (let alone public understanding) is based on sometimes dubious assumptions rather than on the basis of evidence. A good example is the underlying assumption that national R&D spending correlates with national rates of economic growth. It does not, as I will show. But this is not an argument for the unimportance of R&D. Rather it suggests that R&D must be thought about in less nationalistic ways, for which there are other compelling reasons. Avoiding the naïve economics of R&D is essential to good policies for R&D. At the same time we need to recognise more clearly that doing R&D is far from the only way of changing either the world, or the performance of the British economy.”

My very short synopsis of his hour long talk is:

Essentially he said that there is and never has been a correlation between R&D spend and growth - and that the concept of targeting a R&D to GDP ratio spend was nonsense. He is not anti-R&D, just that it does not equal growth; it may equal enhanced productivity. It may be that the observation that high income per capita equals high R&D spend is more effect than cause.

He said that the ideas have been well known to government for forty years; they originated with Bruce Williams, the economic advisor to the Ministry of Technology in the time of Zuckerman and Blackett era in the 1960s. (David Edgerton expands on the theme in his book “Warfare State: Britain, 1920-1970”; the key page is 253 and this can be previewed on Google Book search).

This makes rather a mockery of the EU’s 2000 Lisbon agenda objective to raise EU wide R&D expenditure to 3% of GDP. Why?

He applied his thesis to climate change. If government really wanted to make a change it could regulate a maximum car engine size, ban high energy light bulbs etc, in fact do a huge number of things with current technology and processes, but these are politically unacceptable, so promising to spend on R&D definitely delays anything happening for decades - masterly inaction.

… thought provoking stuff.

Some of my thoughts:
One reason why increased R&D expenditure may not be good for the paymasters is that there may only be so many people in any one economy who can do research and understand how to apply it successfully. If too many of these people are doing R&D there will then not be enough left to exploit it, hence no positive impact on economic growth. If the economy applies relatively less people to R&D and more to commercialization of the knowledge generated from what R&D is done, then the economy will benefit and grow.

Just after hearing this talk I heard a radio report of recent findings that the UK's cancer cure rates were at the bottom end of the Western world outcomes. An interview with a medical academic on the reasons why followed; the academic repeated the mantra about every other sentence (or so it seemed) that of course we need to do more R&D to solve the problem - my immediate response was "no, no, no - other countries have the answers, all we need to do is to find out what works and do it. More R&D is not the answer to this problem - it has already been done". So while I am all for doing R&D on cancer cures, in this case we need to make better use of what R&D has already been done by others. Using the idea that "R&D turns cash into knowledge and innovation turns knowledge into cash" what we need in this case is more innovation to turn knowledge into better cancer outcomes.

Perhaps wealthy countries can afford R&D and offer the results as “a gift to the world”.

The difference between R&D and Innovation...

I recently heard the following entrepreneur's description of the difference:

R&D is where cash is converted to knowledge:
Innovation is where knowledge is converted to cash

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Problems with labels

I have labeled all the posts in this blog, but my experience is that Blogger has a long term problem with labels coming and going. Labels may not show up in the label list – sometimes they show up and then go missing. Hitting the “Label” link below a post, however, does bring up the whole lot.

Sometimes the label does show up in the list, but the counter is wrong. Hitting the "Label" either in the list or at the end of a post still brings up all of the posts with that label. All the labels seem to be affected like this on and off now.

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The value of external networks

In the February 2008 edition of the Harvard Business Review there is a feature article on research into the performance of star fund managers after they move firms. Analysis shows that most stars’ performance decreased after moving, but women stars did not. This difference in performance was in large part put down to the women’s external networks being portable to their new jobs.

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Below is a summary of the article which shows that an individual's network may be a key component of their success and that companies ought to be aware of this when looking to hire in stars. Are they stars where they are because of their internal networks, which are likely not the be very useful at their new employer, or because of a portable personal network? If you are hiring them explicitly because of their internal network - how good is it really?

"How Star Women Build Portable Skills"
by Boris Groysberg

“In May 2004, with the war for talent in high gear, Groysberg and colleagues from Harvard Business School wrote in these pages about the risks of hiring star performers away from competitors. After studying the fortunes of more than 1,000 star stock analysts, they found that when a star switched companies, not only did his performance plunge, so did the effectiveness of the group he joined and the market value of his new company. But further analysis of the data reveals that it’s not that simple. In fact, one group of analysts reliably maintained star rankings even after changing employers: women. Unlike their male counterparts, female stars who switched firms performed just as well, in the aggregate, as those who stayed put. The 189 star women in the sample (18% of the star analysts studied) achieved a higher rank after switching firms than the men did.

Why the discrepancy? First, says the author, the best female analysts appear to have built their franchises on portable, external relationships with clients and the companies they covered, rather than on relationships rooted within their firms. By contrast, male analysts built up greater firm- and team-specific human capital by investing more in the internal networks and unique capabilities and resources of their own companies. Second, women took greater care when assessing a prospective new employer. In this article, Groysberg explores the reasons behind the star women’s portable performance.”

The full article is free on HBR’s web site.