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Chapter 15: Driving a Culture of Innovation

Innovation doesn't just happen. It requires a culture that fosters an open exchange of ideas among employees, management, customers and other stakeholders. New ideas matter, but senior leaders must champion an organization-wide process for gathering, evaluating, and funding the ideas that will make the biggest impact on the bottom line.
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Building the Strategic CFO
Chapter 15:
Driving a Culture of Innovation

Part 1: Introduction

Part 2: 5 Keys to Driving Innovation

Your company is full of great ideas — ideas for streamlining internal processes, for improving existing product lines, for enhancing your connections to customers, maybe even for breakthrough technologies or entirely new products or services. But if you want to maximize the opportunities these ideas represent, you need a system to capture, evaluate, and prioritize them, and then to effectively execute on the most promising ones. In short, you need a culture of innovation.

A recent study of mid-market companies by Plante Moran quantified the value of weaving innovation into the fabric of an organization. The study looked at how successfully companies brought new products to market, and identified four levels of innovators, from Accidentals — companies that initiate new products, services, or processes reactively, essentially on an as-needed basis — to Superstars, who bring consistent discipline, strategy, and process to their innovation efforts. In Superstar organizations, leadership is engaged, innovators are rewarded, and special teams often lead the innovation process. As a result, more than 23% of the revenue at these companies is driven by new products — more than double that of Accidentals.

Innovation, however, does not have to be defined solely based on the development of new products. “I define innovation as ‘something different that has impact,’” says Scott Anthony, managing partner of strategy and innovation consultancy Innosight LLC. “Innovation is different from invention or the creativity that precedes it.”

This definition encompasses not only the common notions of breakthrough or disruptive technologies but also improvements large and small in any aspect of a business: A new billing process that cuts the payment-received time by 30% is a valuable innovation, for example, as is an improvement to a current product that boosts sales or enhances customer satisfaction and loyalty.

From the Whiteboard to the Bottom Line

The goal in creating a culture of innovation is to be able to link the generating of good ideas to the bottom line. “The struggle is how to build a culture of creativity and make sure that it’s actually going to lead somewhere,” says Kimberly Manuel-Dickens, Innovation & Product Development Leader at GE Capital Americas. “Nobody’s going to have a whole lot of appetite for creativity without returns in the end.”

Companies often struggle, however, trying to determine how much discipline will yield results without stifling creativity. When it comes to innovating, a certain amount of failure is inevitable. One useful metaphor is to think of your portfolio of potential innovations in the same way that a venture capital company regards its portfolio of start-up companies: Only 14 to 25 percent will succeed, but the successes will more than make up for the failures.

There are many ways to create a process that captures and then executes on the most promising ideas, but most innovation efforts incorporate these basic elements:

Leadership Buy-In: A great litmus test for gauging whether your company has a culture of innovation is to ask whether employees feel that it’s permissible — in fact, even encouraged — to challenge the status quo. If not, it may be time to gather the C-suite and have a frank discussion about policy and culture to make sure everyone is fully on-board. Organizations that are comfortable with a command-and-control hierarchy often stumble on this. Leaders can play a valuable role here by fostering more cooperation through cross-functional teams (including within the C-suite itself), encouraging greater workforce diversity (by many criteria, including age, gender, nationality, work style, and previous work experience) and by signaling that there are no sacred cows: new ideas won’t wither in the face of long-held assumptions. Additionally, companies should consider ways to offer incentives for innovative thinking. These don’t have to be tied to compensation: often, simple recognition or the opportunity to execute a good idea, via a stretch assignment, are the rewards that best motivate employees. Additionally, leaders should encourage their teams to keep the lines of communication with customers and vendors open, actively soliciting ideas from them and systematically passing them along within the organization.

An Idea Pipeline: Bringing ideas to light can be as simple as hosting regular brainstorming sessions. “I would bring 15 people from various functions, and I would ask them, ‘What’s your pain? How can we make your job easier?’” says Stephan Liozu, who served as president and CEO of Ardex Americas, the U.S. division of the German specialty cement manufacturer. The results of these conversations would be systematically added to a database of ideas (there are even formal “idea management systems” available that function similarly to CRM systems). Underscoring a point made earlier, that “innovation” does not have to mean “breakthrough product.” An Ardex sales staffer came up with a great packaging innovation: “He said, ‘Customers take our cement and transfer it from the bag it’s sold in to a bucket,’” Liozu recalls, “so why don’t we just sell it in a bucket in the first place?’” Now they do.

Once the pipeline is primed, companies have to decide which ones are most worth putting resources against. At Ardex, Liozu set up cross-functional peer groups to screen, rate, and recommend ideas for further review, but this task could also be handled by a committee comprised of senior managers. Ideally, your pipeline should be filled at every stage, from initial ideation through to finished projects. As ideas move from one stage to the next, funding is allocated according to strategic priority, likelihood of success, and horizon. Some ideas will be killed along the way.

A System for Budgeting and Measuring Success: An intriguing conclusion of the Plante Moran study was that the amount an organization budgets for innovation is not as important as the fact that it budgets at all. Budgets, it turns out, bring accountability. Just how those funds are allocated depends on the current business situation. It’s wise to develop an innovation portfolio in which various projects have differing timelines; some you hope to implement immediately, while others may be years in development. Vijay Govindarajan’s well-known “Three Box” model offers a framework for dividing ideas into immediate opportunities to improve current business (Box 1), stretch opportunities created by challenging the assumptions upon which Box 1 is based (Box 2), and those that are completely outside current business and require long-term investment (Box 3). If the business is going well, you can afford to devote a majority of your innovation bandwidth and funding to Box 3 possibilities. But if your core business is bleeding, you might spend 80% of your funds on ideas you can launch immediately.

As for how to measure the return on innovation efforts, it can be done, but it may require a different set of metrics. Steve Liguori, Executive Director, Goal Innovations & New Models, GE, offers some useful advice on how leaders should gauge the pay-off from the company’s innovation efforts in this accompanying video interview.

Above all, consider that a strong commitment to a culture of innovation does not have to be a complex undertaking. “The key principle [to any innovation process] is K.I.S.S.: Keep It Simple, Stupid — and then make it very operational,” says Liozu. Choose fast over big: Prototyping and test-marketing of products, for instance, can provide critical feedback for go/no-go decisions further downstream. Innovation expert and University of Michigan Ross School of Business professor Jeff DeGraff points to the early days of Domino’s Pizza, which expanded its number of locations very quickly and ran promotion after promotion until discovering the winning formula for each geographic territory, growing by more than 200% a year for almost a decade and easily overtaking market leader Pizza Hut.

As Manuel-Dickens notes, “Even if your innovation process doesn’t spit out 1,000 new products, that’s okay: You are developing a new muscle, and every time you do the ideation, the processes that come after it, and finally develop the idea, you’re building that muscle for the time when you really need it.”

Additional Resources

From Idea to Action

How can a company decide how much to invest in which new idea? By deploying an innovation framework that begins with understanding customer needs and market opportunities and ends with smartly focused pilot tests. In this piece from GE, find out about the best practices that can be applied at each step.

Don’t Sweat Your R&D Budget
An annual survey from Booz & Co. of innovation practices among companies reinforces the previous finding that it’s not the size of your R&D budget that counts, but how your approach to innovation complements your overall strategy—or doesn’t. Find out more here.

A Process to Guide Big-Ticket Investments
When a technology-improvement effort demands a major financial commitment, companies can proceed with confidence by having different groups of senior executives and managers apply their expertise at various points in a well-defined process. Learn how GE guided a customer-focused innovation in just this way.

The Four W’s of Idea Management
Your company can benefit from a formal “idea management system,” but before you choose from the dozens available, ask yourself four critical questions.

THE PLUS

BUILDING THE STRATEGIC CFO
Chapters in the CFO action series presented by Build and GE Capital:

Chapter 1: Own the Big Picture

Chapter 2: Create More Time

Chapter 3: Build a Better Team

Chapter 4: The Great Communicator

Chapter 5: Big Data, Big Results

Chapter 6: Think and Act Sustainably

Chapter 7: The Leading Edge

Chapter 8: Think Global, Whether You Are or Not

Chapter 9: Building a Risk-Intelligent Culture

Chapter 10: How to Win the War for Talent

Chapter 11: Technology & You

Chapter 12: The Art of Strategic Influence

Chapter 13: Building the Customer-Centric Organization

Chapter 14: Talent Management as a Strategic Priority

Chapter 15: Driving a Culture of Innovation

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