Innovation at the Frontier

Stephen Wunker and George Pohle 11.12.07, 12:00 AM ET

Before a company can become the next Apple or Google it must understand its own innovation architecture.

On Wall Street Innovation Rules. Just look at Google’s three-year sprint to $200 billion in market capitalization and Nintendo’s miraculous makeover. Thanks to an innovative new videogame console, Nintendo has become Japan’s third most valuable company. Now bankers say that innovative little Facebook is worth up to $15 billion despite its short operating history.

But for each of these success stories there are thousands of others struggling to replicate the “innovative” DNA enjoyed by outfits like Apple and Google. Why do innovation efforts fail? We might expect individual innovations to fail—innovation is risky. However, that does not explain why companies often pull the plug on broad campaigns to accelerate innovation, sometimes after only short periods of time. Frequently, companies try to copy outstanding innovators, but the efforts never catch on, quickly become moribund and end up engendering cynicism.

Research by IBM Global Business Services, Innosight and the benchmarking organization APQC has shown the fallacy in the assumption that successful innovation will come simply by replicating the approach used by successful innovators. A survey of 90 companies across a variety of industries and 14 countries shows that the sourcing, shaping and implementation of ideas at innovative firms tends to conform to a small number of innovation archetypes. These different “builds” represent a self-reinforcing combination of culture and operations. Google is representative of one of those models, but only one. Because there is no single archetype of innovation, companies get into trouble by trying to replicate characteristics that are not “natural” to their own business. Instead, firms should recognize the benefits of the innovation model they inhabit, compare themselves to others using a similar approach and borrow selectively from other categories.

IS YOUR COMPANY BUILT FOR INNOVATION? IF IT IS, it’s likely to fall into one of the following four innovation archetypes.

1. The marketplace of ideas

In the marketplace archetype, employees are charged with creating new ideas, shopping them around to gain support and implementing them rapidly to test feasibility and market acceptance. It is an environment that is somewhat chaotic by design.

Google typifies this model. The company emphasizes hiring bright, creative people and tells them that up to 20% of their time may be spent pursuing personal ideas. While the firm has portfolio guidelines— currently 70% of projects focus on core search and ads, 20% on extensions to search such as news and 10% on speculative ideas—there is a highly decentralized system to determine which projects move ahead. Employees create ideas, post them on internal Web bulletin boards and discuss merits, risks and nearterm action plans.

Those ideas that generate the most support through this process move into rapid prototyping. Product requirements are kept as simple as possible so that features may evolve as users provide feedback. Early versions are quickly released for internal use, then for beta release through the Web site’s Google Labs.

Google is not alone in fostering a bottom-up approach to innovation. Others, including 3M, Best Buy and cable television companies like Viacom, take this tack. People are lauded for coming up with ideas, trying them quickly and learning from experience. Failure is expected and even rewarded, as long as it improves the company’s understanding of technology or the market.

Because the marketplace model relies on highquality input of ideas, these firms tend to seek opportunities from many sources, including close interactions with clients and partners. Once they vet ideas, firms in this archetype tend to have a relatively short time to market and launch many new businesses. This speed to launch is due partly to the companies’ preferences for validating ideas in the marketplace rather than with detailed upfront analysis.

2. The visionary leader

The visionary leader model revolves around a senior executive who understands the future better than customers may, motivates employees to zealously pursue that vision and keeps generating ideas that are unexpected and profound.

Steve Jobs of Apple is the paragon. His visions have included creating one of the first personal computers, commercializing the graphical user interface on the first Macintosh, bringing design to computing with the iMac, and developing the iPod. While the firm has created many innovations, it tends to launch only a few key products at a time and in fact spends less on R&D than the industry average.

Apple’s big ideas often have not started with Jobs. A little-known product designer named Tony Fadell thought up the iPod, for instance. Jobs’ great talent is the ability to spot high-potential concepts, champion them and inspire teams to pursue them.

Other visionaries include Henry Ford, who once famously said, “If I’d asked people what they wanted, they would have asked for a better horse.” Ford innovated both in product design and production process, designing unthinkably inexpensive cars produced in a very new manner.

Sony’s Akio Morita closely observed consumers as they went about their daily lives. Morita believed that markets that did not yet exist could be accurately measured and analyzed, so he relied on his observational insights to design some of the company’s most successful new products. His thinking about how Sony’s technology could improve consumers’ experiences led to such game-changing products as the Walkman.

Sometimes the vision does not involve an end product or process but instead focuses on a new method of approaching the customer. Harrah’s Chief Executive Gary Loveman, for instance, came to the company after teaching service management at Harvard Business School. He decided to use data analysis to target the ideal customers for his gaming business. He then united his company to pursue that goal, with impressive results.

This model goes beyond executive inspiration. These organizations typically construct formal mechanisms that are designed as conduits for making operational the ideas of the visionary.

3. Systematic innovation

Most companies aren’t Google or Apple. Their culture, their people and their environments are very different— causing them to take another route to innovation: They create processes designed to produce results systematically.

It is easy to believe that such efforts only generate bureaucracy, endless meetings and me-too products that yield tepid growth. After all, if companies have similar processes and similar people, they will likely create similar outputs. However, it’s possible to use such rigor in mold-breaking ways.

Samsung provides an example. Over the past 15 years innovation has helped set the company apart from fierce competitors. This vast company creates more products in a year than any visionary could possibly conceive and it does so within a Korean company culture not historically inclined toward bottom-up idea generation.

The firm succeeds through a mix of executive prioritization and team processes. Samsung’s leadership prioritized design as a critical competency in 1993 and significantly increased the design budget to support the emphasis. It developed Design Centers in London, Los Angeles, San Francisco, Tokyo and Shanghai to look for emerging customer trends. It created an Innovation Design Lab as an in-house school for promising designers, and it sends people on internships in industries as diverse as fashion and cosmetics to gain new ways of thinking.

The company invests about 10% of its revenues in R&D—a very high figure for the industry—and it devotes 15% of its R&D team to looking at needs and lifestyles ten years from now. The firm unites its disparate businesses through leveraging a common core of semiconductor components, a field in which it holds a strong position. Importantly, senior management strives to create a culture of perpetual crisis that forces the company to look seriously at competitive threats and develop new growth businesses.

One key is breaking down barriers between internal groups and then facilitating rapid innovation to meet competitive challenges. For example, more than 2,000 people a year cycle through its Value Innovation Program (VIP) Center outside Seoul, where designers, engineers, planners and programmers gather for days—or months—on end to hammer out detailed specifications for new products.

The center was established to bring together critical team members at the start of a project. These cross-functional teams work long days in windowless rooms to shape ideas and resolve differences, returning to their ordinary jobs only after the task is completed. Fifty “value innovation specialists” facilitate the work. The teams strive to break down stale cultural norms and encourage junior members to challenge senior staff. Output is rapidly prototyped and tested.

Systematic organizations conceive of innovation in both strategic and tactical terms. Strategically, they pay relatively high levels of attention to the landscape in which the innovation is to take effect. Tactically, they focus on project execution, seeking efficient and fast implementation.

In addition to Samsung, Procter & Gamble and Goldman Sachs typify this approach.

4. Collaborative innovation

The models explored thus far rely primarily upon internally generated innovation to create growth. Another archetype is more externally oriented, featuring companies that team with outside partners to evaluate a wide range of opportunities, rapidly select the ones to trial and often implement the ideas through these partners.

Vodafone illustrates this model. Its strength lies in its global brand and its customer service. However, its network equipment is supplied by outside firms such as Ericsson, its customers are often acquired by thirdparty dealers such as Carphone Warehouse and its software applications are sourced from a range of third parties. Vodafone has even partnered in owning wireless networks, whether in the U.S., with Verizon, or in Bahrain, with the Kuwaiti firm MTC.

Vodafone excels in understanding customer needs, outlining what they’re looking for and seeking the appropriate solution from its partners. It then performs quick but thorough quality control and plugs the innovation into its network. If the solution proves off the mark, the firm can swap in an alternative relatively easily. Its technology infrastructure facilitates this flexibility, as does its large idea pipeline.

Collaboration organizations gather “innovation intelligence” by building formal relationships with other firms that can help them not only shape the innovative concept but also actively implement the solution. For example, most movie studios are collaboration organizations, partnering with independent producers to generate ideas, with technology companies to create special effects, and with advertising agencies to promote new releases.

Another more recent example is social networking Web site Facebook, whose popularity has soared since it opened its platform to outside developers. Today thousands of programmers around the world have given Facebook a broad menu of applications featuring everything from fantasy sports to photo sharing. Such alliance-friendly organizations work to develop a performance vision shared by their partners.

By understanding which archetype a firm inhabits, leaders can gain perspective on what actions will best foster innovation. Of course, there is no single formula for successful innovation. But research shows that most firms can’t easily change the method in which they innovate. It’s like trying to change your genetic makeup with plastic surgery. A more fruitful approach is to embrace your innovation archetype and improve upon it.

Excerpted from a recent issue of Strategy & Innovation. For more, go to www.forbes.com/strategy&innovation. Stephen Wunker is a partner at Innosight. He can be reached at swunker@innosight.com. George Pohle is the global leader of IBM Business Strategy Practice. He can be reached at pohle@us.ibm.com.