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10 CONCLUSION:APPLYINGTHEINNOVATIONRULESTOYOURORGANIZATION
CombiningCreativitywithCommercialSavvy
"Thekeytothewholegameistoinnovateandtomakeaprofit." KevinRollins,CEO,Dell1 IfaCEOoveremphasizesinnovation,itcanspelldisaster.DurkJageratProcter&Gamblefoundoutthehardwaythattoomuchemphasisoninnovationcandisplace thefocusontheprofitabilityofthebusiness.Jager'soverzealouspursuitofinnovationcreatedsignificantdisruptionsintheorganizationandthebusinessfaltered:The profits,companymorale,andthesharepricealldeclined.

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A.G.Lafley,theCEOwhoreplacedJageratP&G,didnotabandontheemphasisoninnovationandhassuccessfullymovedP&Gtowardsignificantlyimproved innovation.UnderLafley,thecompanycontinuestoshiftitscenterofgravitytowardhighergrowth,highermarginbusinessessuchashealthcareandpersonalcare.It increaseditsemphasisoninnovation,increasedthespeedofgettingnewproductstomarket,andreduceditsoverrelianceonincrementalinnovations.Lafleysaidthat Jagerattemptedtoomuchtoofast,andindicatedthatthepushtowardhigherlevelsofinnovationalienatedsomepeople.Hesaid,"Wedon'twanttobepushing somethingoutofanivorytowersomewhere."2 Lafleyhasslowedtherateofchangeandregainedprofitability.Hehasdemonstratedthathehasafirmgraspontheinnovationandtheoperationalsideofthebusiness, andhehasledpeopleinthecompanytorecognizethatinnovationandprofitabilitycancoexist.Executingtoimproveinnovationrequiresgoodoperations. Lafleyslowedtherateofinnovationtoregainprofitabilityhowever,itispossibletoachieveveryhighlevelsofinnovationandnotupsettheprofitofabusiness.Inthe rapidlychangingworldofthefashionbusiness,whereeachcompanyintroducesnewproductinnovationsseveraltimesayear,GiorgioArmanihasbeensteadily profitablefor30years.Marginsforhisreadytowearfashionsareamongthebestintheindustry,andhehasdiversifiedintonewlineswithoutcheapeninghisbrand. Hehascombinedcreativitywithcommercialsavvyandledhisindustry.3 SirRichardBransonhaskepttheVirgingroupprofitable,growingandmaintaininghighratesoninnovation.InOctober2004,heannouncedplanstoenterspace tourismwithanewcompany,VirginGalacticunveiledanewonlinemusicstoreandanairlineinNigeriathatwillbecomethenation'sflagcarrier.Atthesametime, VirginRail'snewhighspeedtiltingtrainswerebeinginauguratedontheLondontoGlasgowrun.Hehasdemonstratedthatnewventurescanbelaunchedwhile existingbusinessescanbeprofitablymanaged.

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SmartExecution
Successfullyexecutingimprovementstoinnovationisrelativelystraightforward.ThesevenInnovationRulesprovidethebasisforeffectiveexecution: 1.Exertstrongleadershipdefiningtheinnovationstrategyanddesigninginnovationportfolios,andencouragetrulysignificantvaluecreation. 2.Matchinnovationtothecompanybusinessstrategyincludingselectionoftheinnovationstrategy(PlaytoWinorPlayNottoLose). 3.Makeinnovationanintegralpartofthecompany'sbusinessmentality,andensurethattheprocessesandtheorganizationsupportacultureofinnovation. 4.Balancecreativityandvaluecapturesothatthecompanygeneratessuccessfulnewideasandgetsthemaximumreturnonitsinvestment. 5.Neutralizeorganizationalantibodiesthatkilloffgoodideasbecausetheyaredifferentfromthenorm. 6.Createinnovationnetworksinsideandoutsidetheorganizationnetworks,notindividuals,arethebasicorganizationalbuildingblocksofinnovation. 7.Implementthecorrectmetricsandincentivestomakeinnovationmanageableandtoproducetherightbehaviormanycompanieshavedisincentivesorpoor incentivestoelicittheappropriateinnovationbehavior. CEMEX'sCEOandseniormanagementteamtookahard,honestlookatthecompany'soverallhistoricperformance,analyzedthespecificperformanceofits innovationsystemsandorganization,andidentifiedtheirvisionoftherolethatinnovationneededtoplayinthebusinessesinthefuture.Theyselectedtheoverall portfolioof

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investments,definingthemixofbusinessmodelschangeandtechnologychange.Byusingthediagnosticoftheinnovationsystemsandculture,themanagementteam identifiedgapsintherolethatinnovationneededtoplayversustheroleithadplayed.Theysawareasofunderperformanceinthecompany'ssystemsandorganization, andidentifiedthepartsoftheircultureincludingtheleadershipstylethatwouldneedtochange.Thentheydevelopedanexecutionplanthatdefinedthechangesthat neededtooccur,theteamsthatwouldleadthechanges,andthescheduleforcompletion.

TheRoleofLeadership
ThelessonfromthemostinnovativecompaniesisthatleadershipparticularlytheCEO'sleadershipisthecrucialdifferenceincreatingandsustainingsuccessful innovation.MarcBenioff,chairmanandCEOofSalesforce.com,saidthatitistheCEO'sroletoleadthecompanytodevelopnewmodelsbusiness,technology,and leadershipmodelsthatwilldriveinnovationtofuelgrowthandprofitability.HehasusedthisapproachtoleadSalesforce.comtoquicklybecomeaninnovativeleader intheroughandtumblecompetitionofthesoftwareindustry. Therearethreeinitialactivitiesthattheleadershipteamshouldundertaketosetthecontextforanychangetoinnovation.

LeadershipMustDefinetheInnovationStrategyandLinkIttotheBusinessStrategy
Theleadershipteamshoulddesigntheinnovationportfoliosandidentifytheroleofbusinessmodelsandtechnologychangetoleadtotrulysignificantvaluecreation. UponsucceedingJackWelch,GE'sCEOJeffreyImmeltcriticallyreviewedthecompany'sbusinessplansandidentifiedtheneedfornewlevelsandtypesofinnovation ineachbusinessarea.Immeltidentifiedtherolethatinnovation

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wouldplay.Heidentifiedthelevelofincrementalinnovationsneededtomaintaintheircurrentbusinesses.Heidentifiedthenewbusinessmodelsandtechnologiesthat GEneedstosystematicallydevelopwithinthenextdecade,andprescribedincreasedlevelsofsemiradicalandradicalinnovationtospurgrowthandcreateentirely newlinesofbusiness. Facedwithlagginginnovationandadepressedstockprice,Kraftoneoftheleadingpackagedfoodscompanylaunchedanewinnovationinitiativeledbyan InnovationLeadershipTeamconsistingoftheCEOandfiveseniorexecutives.Amongotheractivitiesaimedatgivingnewimpetustoinnovation,theInnovation LeadershipTeamoversawthedevelopmentoftheportfolioandtheallocationofresourcesforinnovationefforts.Thisputtheleadershipinthedriver'sseat,andsent strongpositivesignalstotheorganizationaboutmanagement'sdesiredemphasisoninnovationandtheircommitmenttotheinitiative.

InnovationMustBeAlignedwiththeCompanyBusinessStrategy,IncludingSelectionoftheInnovationStrategy
Hereagain,theleadershipteamplaysapivotalrole.AlthoughfewcompaniesinJapancomeanywhereclosetomatchingGE'simpressiverecordofinnovationand growth,SanyoElectrichasbeencomparedfavorablytotheU.S.conglomerate.Theconsumerelectronicsmakerhasrecentlytransformeditselffromanindustryalso ran,bestknownforlowprices,toatechnologypowerhousefocusedonbusinesseswhereithasglobalmarkets.ThetransformationwasledbytheCEOandchairman thePlaytoWininnovationstrategyresultedinastringofnewandimprovedproductsthatraisedoperatingprofits21percent. In2004,Sanyohadtransformeditselfintotheworld'slargestmakerofdigitalstillcameraswith30percentofthemarket.Thecompanyledtheglobalmarketinoptical pickupskeycomponentsinDVDandCDplayerswith40percentmarketshare,andSanyo'srechargeablebatteriesdominatedthemarketandwereinhalfthe

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world'scellphones.YukinoriKuwano,Sanyo'schiefexecutive,alongsideofSatoshiIue,chairman,weresuccessfulbecauseofselectivityaboutwheretoplaceits resources."Unlessyouchoosewhattofocuson,youwillnotbeabletosurvive,"saidKuwano.Inaddition,KuwanoandIuedirectedtheportfolioofinvestmentsand identifiedtheareasthatwereripeforinvestment."Thatistheinterestingthingaboutmanufacturing,"saidKuwano,"Assoonasthetechnologybreaksthroughoras soonasyouchangethebusinessmodel,(somethingthatappearedtohavenofuture)canstageacomeback."Sanyo'sleadershipselectedthePlaytoWinstrategy,and 4 identifiedtherolesofbusinessmodelinnovationandtechnologyinnovationineachofitsbusinessareas.

LeadershipMustDefineWhoWillBenefitfromImprovedInnovations
Itisleadership'sresponsibilitytomakeitverycleartotheteamwhoarethetargetsforvaluecreationfrominnovation.Otherwise,thecompanywillnotbealigned. Innovationalmostalwaysfocusesonmaintainingorincreasingprofitabilitybydeliveringvaluetotheconsumer.Dell'sCEOKevinRollinssays,"ThetruetestofR&D valueis'Doesitmakeaprofit,anddoesitbenefittheconsumer?'You'vegottohaveboth."5 Gillettelearnedthehardwaythatitisnotalwayseasytodelivertherightvaluetotheconsumer.Gillettewronglyappliedthe"bladeandrazor"strategytoitsDuracell batterybusiness.Buildabetterbattery,theyreasoned,andconsumerswouldtradeup.Therewasjustoneproblem.Mostconsumersdidnotwantbetterbatteries theywantedcheaperones."Gillettemadeamajorerrorinbringinginnovationsthattheconsumerdidnotwant.Itwasaflawedstrategy,"saidGilletteCEOJimKilts.6 Innovationcanhaveseveralotherrecipients.In2004,Kraft'sbigfocuswasoninnovation,notonlytopersuadeconsumersofsuperiorperformanceofitsproductsbut alsotomaintaintherelationshipwithpowerfulglobalretailerssuchasWalMart,Tesco,andCarrefour.

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RogerDeromedi,CEOofKraftFoods,said,"ThesuccessofWalMartrequiresustodomoreintermsofbringingtrueinnovationtotheconsumer.Ifyouarenot bringingthattotheretailertoday,thenwhatdotheyneedyourbrandfor?"7 WallStreetalsocanseevalueininnovation.Inthe1990s,DowChemicalfoundthatitspatentandintellectualpropertyassetswerenotrecognizedbyWallStreet. DowsenttheclearmessagethatitwasspendingwiselyonR&Dandinnovation,thatitwascreatinginnovations,andthatitwasastrongercompanyforittodayand inthefuture.WallStreetsawthepotentialvalueofinnovationtothecompany,andstockpricessubsequentlyincreased. Innovationcanalsobeimportanttothenetworkofsuppliersandpartners.Inthe1990s,amajorautomobilemanufacturerwasconsideredthemostinnovativebythe tieronesuppliers.Themanufacturer'sinvestmentininnovation,itsuseofinnovationplatformstospurincrementalandmoreaggressiveinnovations,anditsheavy relianceoninternalandexternalinnovationnetworksmadeittheperceivedleader.Thesupplierspreferentiallybroughttheirinnovationstothatmanufacturerbecause partneringwiththatcompanywasmorelikelytoresultinaprofitablenewproduct. Finally,innovationcanalsobeapowerfulforcetoattract,retain,andenergizethebestemployeesforacompany.Themostinnovativecompaniesareoftenrecognized asthebestcompaniestoworkfor.Google'sreputationforinnovationmadeitamagnetforthebestandthebrightest.

DiagnosticsandAction
Afterthesethreeinitialsteps,theleadershipteamshouldassessthecompany'sinnovationcapabilitiesanditscurrentsituation. Leadershipneedstoensurethatinnovationisanintegralpartofthecompany'sbusinessmentality.CarlyFiorina,HP'sformerCEO,saidaboutinnovation,"You institutionalizeit.Itisamindsetanda

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setofcapabilities.Itisabouttechnology.Alsoinventingdifferentbusinessmodels."8 Fiorinawasabletostatetheconceptofleadershipcorrectly,butapparentlyher boardthoughtherexecutionfellshort. Siemens'CEOHeinrichvonPiererlaunchedawiderangingmanagementinitiativemeanttoinstillinnovationandtheneedtochangeaspartofthebusinessmentality. InvestmentanalystsidentifiedalinkbetweenSiemens'strongperformancebetween2000and2004andtheinitiative.CalledTopTotalOptimizedProcessesitis 9 creditedwithchangingthecultureofthecompany. Ithasresultedinasteadyflowofnewproductsandthecreationofmanagerswhoareabletoeffectivelyuse innovationtosolvetheoperationalproblems. Likewise,theleadersinGoogle,Nokia,and3Mcreatedaculturewhereinnovationisbuiltintothewaythecompanythinksandacts.Innovationisawayoflifein thosecompanies.Ingrainingitinthebusinessmentality,throughleadershipandlearning,haskeptinnovationasanintegralpartoftheirsuccessformula. MarcBenioff,CEOofSalesforce.com,requiresthatallnewinitiativesandproductsbereviewedusingtheV2MOMmanagementtool.TheV2MOMtool,developed duringhistimeatOracleandusedatSalesforce.comsinceitsfounding,derivesitsnamefromthefiveelementsofthetool:10 Vision:Whatdoyouwant? Values:What'simportantaboutit? M ethods:Howdoyougetit? Obstacles:Whatispreventingyoufromgettingit? M easures:Howwillyouknowwhenyougotit?

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TheexecutivecommitteedevelopsacompanywideV2MOMannually.Subsequently,everydepartmentandindividualdevelopsitsownthatsupportsthecompany V2MOM.Thetoolisusedtoaligntheentireorganizationfromindividualstothecompanylevel.BenioffbelievesthattheCEOshouldsetthecontextforinnovation andshouldsupplytheoverallmandatetoallowtheorganizationtotakerisksthisprovidesthebasisforincrementalaswellassemiradicalandradicalinnovations. Beforelaunchinganinitiativetoimproveinnovationbyusingpreselectedtools,itisimportanttoconductadiagnosticassessmentoftheinnovationprocessestoassess theeffectivenessofthekeyelementsthatmaintaininnovationinthebusinessmentality:thecompany'sunderstandingofthestrategy,processes,andorganizational structuresthatsupportinnovation.TheP&Gseniormanagementteamlaunchedadiagnosticbeforeestablishingitsplanstochangeandimproveinnovationinthe company.Thistypeofdiagnosticprovidesleadershipwithfreshunderstandingofthecurrentstateofthecomponentsofinnovation,gapsinactualversusdesired performance,andpriorityareasforchange. Diagnosticsvaryinscope.Thediagnosticshouldfittheneed.Iftheleadershipteamneedstocharacterizegeneralperformanceandbroadareasforimprovement,it shouldrelyonhighleveldiagnosticsthataddresssomeofthemajorcomponentsofinnovation,suchasoverallperformanceagainstgoalsandstaffidentificationof perceivedproblemareas.Ifthemanagementteamislookingforspecifictargetsforeveryaspectoftheinnovationprocess(forexample,ideation,ideaevaluationtools, selectionparameters,teaminteractions,projectmanagement,andeffectivenessofthestrategy)itshouldrelyondetaileddiagnosticstargetedtotheseobjectives.Some typicaldiagnosticareasareincludedinTable10.1.11

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Table10.1Diagnostics Strategy Strongstrategicalignmentbetweeninnovationinitiativesandbusinessstrategy. Widelyunderstoodinnovationstrategyandclearmanagementsupport. Strong,welldevelopedinnovationplatforms. Veryclearunderstandingofcustomerneeds. Clearandstrongapproachtovaluinginnovationprojectsbasedonincremental,semiradical,andradicaltaxonomy. Processes Strongmarketinformationandcustomerinsightsgathering. Visioningandideagenerationprocesses. Effectiveideascreeningprocess. Goodprojectmanagementdiscipline. Fast,fluidinnovationprocess. Goodprocessimprovementconstantlyunderway. Resources Businessandtechnologydepartmentsalignedandcollaboratingoninnovation. Strong,crossfunctionalteamsusingmostappropriatestaffratherthanjustusingstaffthathappenstobeavailable. Activelyhiringstaffwithnontraditionalperspectives. Effectivelybuildingcorecompetenciesandpartnershipstomeetinnovationneeds. Organization Anincentivesystemthatrewardspeopleforinnovation. Highdegreeofconstructiveinteractionandcooperationacrossfunctions. Explicitseniormanagementresponsibilityforinnovationresults. Effectiveleadership.

Becausetheinnovationcultureofacompanyissuchanimportantpartofthebusinessmentality,leadershipsometimesincludesanassessmentoftheInnovationClimate todetermineemployees'perceptionofhowwellinnovationisingrainedinthebusinessmentality.Understandingtheperceptionsofinnovationacrosstheorganization

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andtheculturalnormsassociatedwithinnovationcanbecriticaltounderstandingtheobstaclestoinnovation.TypicallyanInnovationClimatesurveydiagnosticisused acrossandthroughalllevelsoftheorganization. OneleadingconsumergoodscompanyusedanInnovationClimatediagnostictounderstandhowwellinnovationwasingrainedinitsbusinessmentality.Theleadership teamhadalreadylaunchedadiagnosticregardingtheadequacyoftheinnovationstrategy,processes,resources,andorganization.Ithadawealthofinformation regardingeachofthosefunctionsandhadidentifiedseveralareasthatwouldbenefitfromimprovement. However,someintheleadershipteamwantedtodigalittledeeperandunderstandtheculturalhealthofinnovationinthecompany.Duringthepastfewyears,there hadbeeninstancesofsignificantfrictionbetweenthebusinessandtechnologyfunctionsregardingwhatinnovationsweremostimportanttothebusiness.Theleadership teamwantedtounderstandwhatwasbehindthatfrictionandensurethattheimprovementstheywereabouttoundertakewouldnotbeundonebecauseofsome overlookedculturalissues.TheyfieldedanInnovationClimatesurveyacrossthecompanywithaparticularfocusonthebrandmanagementandtechnologyareas wheretheacidicconflictshadoccurred. TheresultoftheInnovationClimateassessmentwassobering.Mostpeopleinthecompanyfeltthatdespitespendingheavilyoninnovationandhavinggoodprocesses, resources,andstrategy,seniormanagementdidnottrulysupportinnovation.Asaresult,peopleintheorganizationespeciallythemarketingdepartmenthad adoptedtheattitudethatinnovationwasanicetohaveelementbutwasnotcrucialtothecompany'ssurvival.Thetechnicalcommunityhaddevelopedasubculture thatfavoredincrementalchangestoexitingproducts.Thediagnosticdemonstratedtothe

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leadershipteamthepowerofcultureitsportfolioofinvestments,clearinnovationstrategy,andthestronginnovationsystemshadnotbeenenoughtointegrate innovationintothebusinessmentality.Somethingwasmissingfromtheculture,anditstoppedmeaningfulcollaboration.Theleadershipteamidentifiedthemissing elementsincludingstrongerseniorinvolvementininnovationdecisionmakingandselectedthepriorityareasthatneededtochange.Theylaunchedaninitiativeto changetheprevalentmentality,reestablishacultureofcollaboration,andimprovetheinnovationclimate.Inaddition,theycommittedthemselvestoperiodicallyreassess theInnovationClimatetoensurethattheyweremakingsustainedprogress. Figure10.1presentsanexampleofanInnovationClimatesurvey.Appliedacrossthecompany,thesurveyrequirestherespondenttoidentifytworatingsforeachof theidentifiedelements: Companybestpracticeforthatelement(whatlevelshouldthecompanystrivefor) Actualcompanyperformanceforthatelement Thisinformationidentifiesimportantemployeeperspectivesaboutwhatisdesiredinthecompany'scultureaswellashowwellthecompanyperforms. GErealizedthat,givenCEOImmelt'sstrongfocusoninnovation,thecultureinGEneededtobechanged.ThetrainingcenterinCrotonville,thebastionofculture managementinGE,addedfivenewleadershiptraitstotheidealizedGEjobdescription:externalfocus,clearthinking,imagination,inclusiveleadership,andconfident expertise.TheseadditionsreflectGE'srecognitionoftheneedtochangeitscultureviatraining.

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1. 2. 3. 4. 5. 6.

Managementislookingforshortterm profits. Managementexplicitlylooksfor innovation. Managementhashightoleranceof innovative"mavericks." Planningfocusesonrationingresources.

<+++++ <+++++ <+++++ <+++++

++++> ++++> ++++> ++++> ++++>

Managementispreparedtowaitfor bigpayout. Managementdoesnotexplicitlylook forinnovation. Managementhaslowtoleranceof innovative"mavericks." Planningfocusesonidentifying opportunities. Managementistolerantoffailure. Leadersputstrongemphasisonthe managementofpeopleandtheir interactions. Companyoffersacareerladderwith appropriatepowerandtitlesfor innovators. Stickingtothecorporatenormis valued. Itisveryfuntoworkhere. Managementhashightolerancefor uncertainty. Informalhorizontalcommunications withintheorganizationarethenorm. Managementdiscouragestheuseof independenttaskforcesforspecial purposes. Managementactivelyseeksand considersrecommendationsfrom manylevelsoftheorganization. Decisionprocessisshortand informal. Noincentivemechanismfor innovationexists.

Managementisnottolerantoffailure. Leadersputlittleemphasisonthe managementofpeopleandtheir interactions. Companyoffersnocareerladderwith appropriatepowerandtitlesfor innovators. Departurefromthecorporatenormis encouraged. Itisnofunworkinghere. Managementhaslowtolerancefor uncertainty. Formalverticalcommunicationswithin theorganizationarethenorm. Managementencouragesthesystematic useofindependenttaskforcesforspecial purposes. Managementdecideswithoutmuchinput fromotherlevelsoftheorganization.

<+++++

<+++++

++++>

7.

<+++++ <+++++ <+++++ <+++++ <+++++

++++> ++++> ++++> ++++> ++++>

8. 9. 10. 11. 12.

<+++++

++++>

13.

<+++++ 14. 15. Decisionprocessiselaborateandformal. <+++++ Specificincentivemechanismfor innovationexists. <+++++

++++> ++++> ++++>

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Theorganizationalcultureisplanningoriented (analysis/paralysissyndrome). Managementhasanopenattituderegardingexternalalliances, supplypartnerships,andacquisitions. Managementexpectspeopletobetotallydevotedtothe developmentofthecorporation. Themanagementphilosophyfavorsdecentralization.Decisions aremadeveryclosetowheretheactionis. Fewresourcesareavailablefornewventures(intermsof budget,personnel,time,andsoon...) Individualprojectchampioningisencouragedandrewarded. Individualaccountabilityisthenorm. Innovativesuccessesofthecompanyareneitherpublicized nordiscussed. Innovationbudgetismuchlessthanthecompetition. Companyisabletomakebalancedchoicesbetweenglobaland localpriorities. Managementhasaclearvisionoftheroleandfocusof innovationinachievingitsobjectives. Projectfailuresaresystematicallyreviewedandanalyzedfor lessons. Productandservicemanagersareverymuchattunedtothe market. <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ ++ ++> ++ ++> ++ ++> ++ ++> ++ ++> ++ ++> ++ ++> ++ ++> ++ ++> ++ ++> ++ ++> ++ ++> Theorganizationalcultureisactionoriented. Managementhasanopenattituderegardingexternal alliances,supplypartnerships,andacquisitions. Managementencouragespeopletoworktowardstheir personaldevelopment. Themanagementphilosophyfavorscentralization.Decisions aremadebythehierarchy. Resourcesaregenerallyavailablefornewventures(interms ofbudget,personnel,time,andsoon...) Teamwideprojectchampioningisencouragedand rewarded.Teamaccountabilityisthenorm. Innovativesuccessesofthecompanyarewidelypublicized anddiscussed. Innovationbudgetismuchmorethanthecompetition. Companydoesapoorjobofbalancingglobalandlocal priorities. Managementhasnotdefinedaclearinnovationstrategyand focus,relyinginsteadonentrepreneurship. Projectfailuresareburiedandnobodytalksaboutthem(too painful). Productandservicemanagersarefarremovedfromthe market.

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16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

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Productandservicemanagerstendtounderestimateand underusetechnology. Outsiders(customers,experts)areneverassociated directlywiththeinnovationprocess. Highvalueideasareplentiful. Managementsetsreasonableresultexpectationsonnew projects. Ourinnovationknowledgeisinferiortothatofour competitors. Ourknowledgeofrealcustomerneedsisinferiortothatof ourcompetitors. ThepeopleIworkwithhaveverylittleconfidenceinthe directionourcompanyisgoing. ThepeopleIworkwitharehighlyselfmotivated. Theseniormanagementgroupisworkingatcross purposesalotofconflictexists. <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ <+++ ++ +++ +> +++ +> +++ +> +++ +> +++ +> +++ +> +++ +> +++ +> +++ +> 12 Productandservicemanagerstendtounderstandanduse technologywell. Outsiders(customers,experts)participatesystematicallyin theinnovationprocess. Highvalueideasarescarce. Managementsetsunrealisticresultexpectationsonnew projects. Ourinnovationknowledgeissuperiortothatofour competitors. Ourknowledgeofrealcustomerneedsissuperiortothatof ourcompetitors. ThepeopleIworkwithhavehighlevelofconfidenceinthe directionourcompanyisgoing. ThepeopleIworkwitharenotatallselfmotivated. Theseniormanagementgroupisworkinginconcertvery littleconflictexists.

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28. 29. 30. 31. 32. 33. 34. 35. 36.

GEalsorealizedthattheyneededtopayparticularattentiontothebalancebetweencreativityandvaluecapture.Thiscriticalbalanceallowsthecompanytogenerate successfulnewideasandgetsthemaximumreturnontheirinvestment.UnderJackWelch,GEhadbecomeveryproficientatoperationalexecutionbuthadlostsome importantpartsofitsabilitytocreatenewproducts.WhenhebecameCEO,ImmeltsawthatGE'svaluecaptureandcommercial

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executionhadbecomestrongerthanitscreativity.Hehadinheritedacompanythathadbecomeextremelyskilledinoperations"Onethatcouldstoponadimeand deliverresults,"saidBobCorcoran,thecurrentdirectorofGE'slegendarylearningcenter,Crotonville,andalongstandinghumanresourcesmanageratGEMedical Systems,thebusinessImmeltranbeforebecomingCEO."Nowthequestionishowtodevelopthetopline(definedasnewproducts,marketsandlinesofbusiness)."13 ThisimbalancethreatenedImmelt'splanstoaggressivelygrowGEviainnovation,andhelaunchedaninitiativetoreinvigoratethecreativityfunctionsandincreasethe rateofideaanddealflow. Leadershipteamslookingatthebalanceofcreativityandvaluecaptureneedtolookcarefullyattheprojectmanagementsystemsusedinthecompany.Therearefour verydifferenttypesofinnovationmanagementapproachesstagegatesystems,venturecapitalmodels,technologyinnovationmodel,andtimedrivensystemsand eachhasitsowncreativityandvaluecapturebiases.

StageGateSystems
Incrementalinnovationprojectsoftenrelyonsomeversionofstagegateprocess(Figure10.2depictsastagegateprocess),wheretheprojectisdividedintostages andagategovernsthetransitionfromonestagetothenext.Thesequentialstageshaveanembeddedcauseandeffectstructureinwhichthesuccessinexecutinga particularstageisaprerequisitetomovetothenextstage.Themeasurementmodelprovidestheinformationrequiredtotracktheevolutionofaprojectthroughoutthe courseofthestagegateprocess.Exxonhasusedagateprocesssincethe1980swithgreatsuccess.AccordingtoExxon,it'sbeenthebestinitiativeithasundertaken inadecadeithasshapedthewayitdoesbusiness.

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Theproject'sprogressisputunderthemagnifyingglassateachgate.Themeasurementsystemenablesmonitoringtoensurethattheprojectstaysontrackandislikely tomeetorexceedtheoriginalexpectations.AtCintas,everydealnomatterhowsmallisperiodicallyscrutinizedbyadispassionateexecutive,accordingtoCEO RobertJ.Kohlhepp.ACEOorotherrankingexecutivewhohasnoqualmsaboutpullingtheplugifadealsmellswrong.14Alternately,continuingaprojectthatwill createacompetitortoanexistingbusinessrequiresadispassionatedecisionmakerfocusedonthelongtermsuccessofthecompany.HP'sexCEOLouPlattnoted, "Wehavetobewillingtocannibalizewhatwearedoingtodayinordertoensureourleadershipinthefuture.Itiscountertohumannature,butyouhavetokillyour businesswhileitisstillworking."15 Properlyimplemented,stagegatesystemstendtoproducebalancedcreativityandvaluecapture.Thebeginningoftheprocessfocusesoncreativityandtransitions seamlesslytovaluecaptureviacommercialization.However,itisoftenthecasethatculturalbiasesagainstcreativitycreepintothesystem.Theresultisanincreasein thedegreeofscrutinyandrigorofanalysesintheearlypartofthestagegateprocess.Whenthathappens,creativitycanbestrangledbecausegoodideasthatdonot haveclearfinancialpaybackareconsideredlessworthyanddiscardedortreatedassecondtieropportunities.However,somesemiradicalandradicalideasdonot haveclearmarketsidentified,reliablecostestimates,orhighlyreliablefinancialprojectionsattheirinception.Thesepotentiallyattractiveideascanbediscardedinfavor ofincrementalinnovationsthathaveclearerperformancemeasures.Whenthishappens,thestagegatesystembecomesveryefficientatvaluecaptureand commercializationofincrementalinnovationsbutitlackssufficientqualityandquantityofcreativeideasbecausetheyweredroppedintheearlystages.Thisimbalance ofcreativityandvaluecaptureresultsinrampantincrementalism,oneofthebestindicatorsofanoutofbalanceinnovationsystem.

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FIGURE10.2STAGEGATESYSTEMSANDINVESTMENTANDABILITYTOINFLUENCEPROFILES.

TheVentureCapitalModel
Thismodelreliesonaventureteamtointerpretthefuzzymeasurementinformationandmakedecisionsateachstageoftheinvestmentprocess.Itiswidelyusedto managesemiradicalandradicalinnovations.TheSpaceShipOneventureteamworkingoncommercialspaceflightmadedecisionseventhoughtherewerenocredible estimatesofthemarketsizeordemographicsforcommercialspacetravel,andtherewerestillmajoruncertaintiesinthetechnologyandbusinessmodel. Theventureteammembersbringtogethertheirexperienceandtheirinstinctaboutthetechnologyandmarketwiththequalityofpeopleintheprojectandtheir progress.Theroleofthemeasuresistocapturethemostrelevantaspectoftheprojecttostimulatediscussion.Itistherichnessoftheinterpretationoftheinformation thataddsvalue. Intheveryearlystages,whentheambiguityanduncertaintyarethehighest,concretemilestonesareimportantmeasuresofsuccess.

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Arethetechnologyprototypesproducedonschedule?Havethekeyelementsofthebusinessmodelbeencharacterizedandtestedwithkeystakeholders? Inthelaterstagesofdevelopment,theneedtocharacterizethetargetmarketbecomesgreater.Themeasurementsystemfocusesonidentifyingandcharacterizingthe specifictargetsegmentthatwilldrivetheinitialgrowth,therobustnessofthetechnologytomeettheneeds,andthecoststructureofthebusinessmodel(customer acquisitioncosts,customersupportcosts,manufacturingcosts). Theventuremodeldealsfairlywellwithcreativityitallowsconsiderationofradicalnewideasinallstagesofdevelopment.Itespeciallyfavorscreativesolutionsinthe earlystagesofdevelopment.Inthelaterstagesofdevelopment,itrequiresmorerigorofanalysisandusesfinancialmeasurestoguidedecisions.However,theventure modelcanbebiasedtowardcreativityitlackstherigorofvaluecapturecommercializationcontainedinthestagegatesystems.Itisoftenbeneficialtoblendastage gatemethodologyintothelaterstagesoftheventurecapitalapproachtoensurethenecessarybalancebetweencreativityandvaluecapture.

TheTechnologyInnovationModel
Thetechnologyinnovationmodeldescribesradicalinnovationthatisdrivenfromthetechnologygroupwithinacompany.Typically,theinitialworkisunstructured andreliesonensuringthattechnologistshavetimetospendontheirownprojects.3Mensuresthatresearchershave15percentfreetimetoexplorenewideas.Google andGenentechallots20percentforexploration. Theroleofthemeasurementsystemintheearlystagesislimitedatmost,ittracksinputstotheprojectincludingtimeandexpenses.Theinitialstagesrelyonthe intrinsicmotivationandingenuityoftheparticulartechnologistorteamoftechnologistsandthevisionofmanagement.Thereisnosignificantplanningatthisstage

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intangiblesliketrust,reputation,and"believingintheteam"becomemoreimportantinkeepingpeoplefocusedandmotivated.Astheinnovationcomesintosharper focusthroughexperimentationandprototyping,themeasurementmodelbecomesmoresophisticated,parallelingtheventurecapitalmodelpreviouslydescribed.

TimeDrivenSystems
Formanyincrementalinnovationprojects,thekeyphraseis"scheduledriven"nomatterthecost,"wemustmeetschedule."Timeasameasureispopularbecauseit isuniversallyunderstood,simpletomeasure,andresultsareobviousaprojectissimplyontimeoritisnot.Projectsthatfallshortareusuallycutorsignificantly changed.Onemajorcarcompanyexecutivereportedthatinhiscompanymeetingtheschedulewassignificantlymoreimportantthanmeetingbudget.Typicallyprojects werealways6070percentoverbudget,butthiswasacceptableiftherewasnotascheduleslippage. Howeverappealingthissimplicityis,timebasedsystemsareinherentlybiasedtowardcapturingvaluetheydonotleadtooptimumuseofcreativity.Timebased systemsfavorgettingthejobdonefastandencouragespreadoframpantincrementalism.Inaddition,timebasedmeasurementsfocusonoutputs,notoutcomes.Tobe trulyeffective,systemsmustincorporateallfourtypesofmeasures:Input,process,output,andoutcome.Usingtimeastheonlymeasuremayappearexpedient,butit runstheriskofleadingtobaddecisions.Allthingsconsidered,timebasedsystemsareinherentlyunbalancedandshouldbeavoided. Theleadershipteamneedstoneutralizeorganizationalantibodiesthatkilloffgoodideasbecausetheyaredifferentfromthenorm.Oneleadingenergycompanydidnot curtailtheorganizationalantibodiesduringitsinitiativetoimproveinnovation.Theantibodiesshowedinseveraldifferentforms.Middlemanagerswhoresistedthe changes

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didnotprovideadequatestaffingandtheinnovationinitiativewasunderstaffed.Inaddition,severalmanagerssenttheirsecondstringteammembers.Theoriginal projectschedulewasaggressive,signalingtheimportanceandurgencyoftheinitiative.However,scheduleslippageoccurredalmostfromthefirstday.Inaddition, managersoftenmissedkeymeetingswhereimportantimplementationdecisionsweremade.Allofthesediminishedtheeffectivenessoftheinitiativeandsignaledtothe organizationthattherewassignificantresistancetotheinitiative.Ifthatwerenotenough,somekeyplayersinthecompanybegantonaysaytheeffort,castingdoubton itseffectivenessandvalue.Alloftheseantibodiescouldhavebeeneffectivelycounterediftheseniormanagementteamhadsteppedforward,demandedappropriate actionsbeingtaken,andsquashedthebadbehavior.Unfortunately,thatdidnotoccurandtheinitiativefailed. Leadershipshouldalsoensurethattheorganizationcontainsstronginnovationnetworksinsideandoutsidetheorganization.Networks,notindividuals,arethebasic buildingblocksofinnovation.HP'sformerCEOCarlyFiorinasaid,"Wefocusourinnovationwherewecanmaketheuniquecontributionandleadatthehighbar,and wepartnertherest."16CocaColaestablishednetworksthatstretchedthroughouttheglobalenterpriseandfocusedthemontheirinnovationplatforms.Tobeeffective, thenetworkshavetobepopulatedwithamixtureofdifferenttypesofpeople:ideagenerators,projectmanagers,bigpicturepeople,technicalexperts,andbusiness strategists.Leadershipshouldassessthecaliberofthepeopleinthenetworkandthewaytheycollaborate.Oneconsumergoodscompany,priortolaunchingamajor innovationinitiative,conductedaskillsinventoryofitsinnovationnetworksandcompareditagainstthetechnicalandbusinesschallengesitfaced.Inaddition,it assessedthecollaborationanddegreeofalignmentamongthepeopleinthenetwork.Thisprovidedthemwithaclearindicationofthenetworks'strengthsand identifiedareasforimprovement.

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Finally,leadershipshouldensurethatthecompanyhasthecorrectmetricsandincentivestomakeinnovationmanageableandtoproducetherightbehavior.CEMEX's managementteamcreatedabalancedscorecardtodrivethecompany'sinnovationteamstowardthegoalstheyset.TetraPakhasmadeinnovationabasicpartofthe companyfromitsinception.Ithadneverreliedonmeasurementtohelpmanageitsinnovations.However,TetraPakhadevolvedintoacomplexcompanywithabroad portfolioofinnovations.Asaresult,itrecognizedthatitneededtoaddsomeadditionalincentivestohelpmanagetheinnovationprocessandtoprioritizeits investments.Thenewmetricsandincentiveshelpedthecompanyshortentimetomarketperformancebymorethan20percent. Thereareseveralrulesgoverningmetricsandincentivesthattheleadershipneedstoensurearefollowed: Understandthestrategyandbusinessmodelofinnovationforyourcompany,andbuildameasurementsystemforinnovationthatistiedtoboth. Knowwhatyouwanttoachievewitheachmeasurementsystemateachleveloftheorganization.Therearethreeoptions:communicatethestrategyandthe underlyingmentalmodels,monitorperformance,andlearn. Tailortheinnovationmeasurementsystemtomatchthemixofincremental,semiradical,andradicalinnovation. Ensurethattheincentivesprovidethemotivationtodrivetheinnovationstrategy. ChevronTexacorecognizedmanyyearsagothatmetricsandincentiveswerecrucialtoinnovationandchange.Itinstitutedaformalprocess(verysimilartoastagegate process)forallprojectsandinnovationactivities.Theprocessincludestherequirementto

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establishclearmetricsthataretailoredtothespecificproject.ChevronTexacotrainsallofitsemployeesonhowtousetheprocess,anditholdseveryteam accountableformanagingaccordingtothemetrics.Finally,thecompanyusesthemetricstolearnandimproveitsperformance.Thisapproachcoupledwithstrong, alignedincentiveshasserveditwellthroughouttheyears,andChevronTexacoconsidersitoneofitsstrengthsinexecution.

OrganizingInitiatives
Therearetwobasictypesofinnovationinitiatives.Finetuninginitiativesaredesignedtoprovideselectivemodestimprovements.Manycompaniesundertakefine tuningexerciseseveryonetothreeyearstomaintainthevitalityoftheirinnovationcapabilities.Redirection/revitalizationinitiativesaremoreaggressive,andtheir scopeincludessignificantchangestotheirinnovationcapabilities.Theyoccurlessfrequently.Companiesundertakethesetypesofinitiativeswhenthesituationrequires moredrasticaction.

FineTuning
Finetuningfocusesonimprovementofselectiveportionsoftheinnovationstrategy,portfolio,processes,organizationandculture.Finetuningoccurswheninnovation isworkingrelativelywell(forexamplethegapbetweenthedesiredandactualperformanceisrelativelysmall),butimprovementsarerequiredtoimproveperformance andenhancecompetitiveness.BostonScientificundertakesperiodicassessmentofitsinnovationprocessestoidentifytargetsforimprovement.Southwestconstantly tunesitsinnovationcapabilitiesitispartofitsculture.

Redirection/Revitalization

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Redirection/revitalizationinitiativesarefocusedonmajorimprovementstobroadsectionsoftheinnovationcapability.Redirectionorrevitalizationisrequiredwhenthe innovationsystemsandorganizationarenotdeliveringthecorrecttypesofinnovationstoadequatelysupportthebusinessstrategy(suchaswhenthegapbetweenthe desiredandactualperformanceisrelativelylarge).CEMEXundertookthistypeofinitiativewhenitwantedsignificantlyhighergrowthratesfrominnovation.Around 2000,Toyotarecognizedthegrowingimportanceofinnovationintheautomobileindustry.Itlauncheditsredirection/revitalizationinitiativetocapturethehighgroundin thehighlycompetitiveautoindustry.

GeneratingInnovationValue
Everyseniormanagementteamknowsthedrill:defineagoal,identifytheproblemareasthatlimitattainingthegoal,understandtheirrootcauses,developaplan,send thesignaltothecompanythatthisisimportant,andthenworkoutthemillionsoflittledetailsthatcompriseexecution.Innovationisthesame.Thereisnothingtoitbut thebasicblockingandtacklingthatallmanagementrequires. WhathasfrustratedmanyCEOsisthatoncetheyhaveexecutedimprovementstotheirinnovationcapabilitieswhetherfinetuningorredirection/revitalizationthey don'tgettheresultstheyhopedfor.Admittedly,sometimescompaniesblowtheexecutionofinnovationimprovements,butthisisusuallybecausetheyfailtoneutralize theorganizationalantibodiesthatalwayscomeoutwhenchangeisunderway.Remembertheenergycompanywediscussedearlierthatfailedtoneutralizethe antibodies.

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Farmoreoften,companiesfailbecausetheydonotunderstandthecausallinkagesbetweenthepartsofinnovation.Theylauncheffortstofixsomeelementof innovationanddonotaddresstherootcauseoftheproblem.Ahouseholdproductsdivisionofaleadingconsumergoodscompanytriedtofixtheirpoorlyfunctioning innovationeffortbyincreasingthecollaborationbetweentheR&Dandmarketinggroup.Theworkingrelationshipbetweenthosegroupswasrancorousandproduced suboptimalresults,buttherealproblemwasthatleadershiphadnotclearlyidentifiedtheinnovationstrategyanddefinedtherolesofbusinessmodelchangeand technologychangeforthedivision.Withoutthatleadership,eachgroupmadeitsowninterpretationofwhatwasimportantandtherelativeprioritiestobeassigned. Anothercompanyimprovedtrainingoninnovationinthehopesthateveryonewouldimprove.However,itdidnotaddressoneofthekeyelementsthatneededtobe changedtheculturalbiasinthecompanyagainstsemiradicalandradicalinnovations.Throughmanyyearsofleadership,thecompany'sculturehadgrowntofavor theincrementalasopposedtothesemiradical.Thecompanywasbrilliantatexecution,butitkilledoffideasthatwereanythingbutincremental.Trainingeverybody aboutthetoolsforsemiradicalandradicalinnovationwouldneverproducetheresultstheCEOdesired. Thereisnosilverbulletforinnovation,nooneformulaorstructureforinnovationthatwillworkforeveryorganization.ThesevenInnovationRulesprovidethebasisfor executingimprovedinnovationthatcreatesvalueandgrowth.

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