With intensified competition, economic challenges and changing technology, there is increased pressure on companies to become more innovative in their quest to achieve greater growth and profits. Why is it so important for companies to innovate? What do companies that survive and thrive for years and years do differently? Studies conducted by Jim Collins and Jerry Porras between 1988 and 1994 on the subject of organizational longevity concluded that one difference was that, “Visionary companies display a powerful drive for progress that enables them to change and adapt without compromising their cherished core ideals.”¹ Organizations that are innovative in how they accept change, evaluate their overall business, develop talent, keep their eye on the future, and use technology to their advantage will have the greatest opportunity to succeed.

Organizations must know if they are truly making innovative moves or just knee-jerk reactions out of desperation to reach greater growth and profits. Many companies wrongly conclude that when growth and profits start to slow their only alternative is to restructure, diversify, merge, buy another company or invent new blockbuster products. The real problem might be in an organization’s inability to know the true meaning of innovation. When organizations innovate from the outside instead of looking within, they increase the odds of missing opportunities that might exist in their own back yards, taking on unnecessary risks, and of making costly mistakes. This article will examine the different avenues that companies have used in their attempts to achieve innovation in hopes they can be applied to produce greater growth and profits. The article will review the following four innovation strategies and their corresponding risks and rewards: managing innovation, innovating from within, diversifying, and merging and buying other companies.

1. Managing the innovation process

Business history has proven that companies which invent blockbuster products are not guaranteed to reap the financial rewards their inventions offer if the right management processes are not in place. Both Xerox and Bell Labs invented breakthrough products but let their potential slip away while allowing other companies to reap the financial rewards. One reason was that Xerox and Bell Labs isolated their R&D departments from the rest of the company. Also, these companies’ business models made it difficult to allow new products to be brought to market and become commercially successful.

Organizations must use a collaborative approach and build innovative alliances throughout the company. Without using this approach, strong resisters in positions of power can block innovation initiatives. It’s like building an airplane; each team performs its function without losing sight of the end goal, successfully putting the airplane together. Innovation needs to be embedded throughout the organization, with each division doing its part while staying focused on the primary goal.

Managing an innovation process cannot take place without reliable data that can be turned into insightful knowledge relating to the company’s business model, products, overall industry and customers’ needs. Getting reliable data has proven not to be an easy task for most companies. Not all industry changes occur rapidly, and it is the gradual ones that are the most troublesome to spot and the most difficult to respond to effectively. Meaningful information can be obtained from within and from suppliers, competitors, customers, consultants, trade associations and from unexpected sources. Having the right knowledge will be a valuable piece in managing the innovation process and assuring that the organization is on the right track.

2. Innovating from within

In Business Week’s 2009 State of Innovation issue [May, 2009], the magazine lists Apple, Hewlett-Packard, and Toyota Motor as being among the most innovative companies in the world. This is an interesting fact, considering that none of these companies was the first to invent the products that made them so successful.

How were Apple, Hewlett-Packard and Toyota Motor able to innovate in such highly competitive industries? Each understood what business they were in and the potential it offered, kept on top of their industry trends, and continuously monitored their current and potential markets. These companies were innovative in their vision and focused on improving what they did best. They knew how to gather and turn the right kind of knowledge into innovative ideas that would allow them to make the right decisions. Innovative companies are better prepared to recognize and take advantage of opportunities that would otherwise pass most by. In Chris Zook’s book, Profit from the Core,² he states that “nine out of 10 companies that had sustained profitable growth for a decade had focused on their core businesses.” He examines the importance of knowing your core business and the full potential it offers, and maintains that the more an organization moves away from its core, the more risk it takes on, and the greater the chance of failure.

Organizations must evaluate if it is the competition, lack of industry opportunity or a failure to innovate from within that is causing them to stagnate and not grow. Toyota is a company that has successfully demonstrated the rewards from innovating in a hyper competitive market while staying within its primary business. In 1989, Toyota entered the luxury car market with its Lexus brand. Toyota started by using its mission statement as the foundation for the kind of car it would build: “To attract and attain customers with high-valued products and services and the most satisfying ownership experience in America.” Toyota was innovative enough to realize that its current customer base would not provide it with the insights and knowledge to successfully meet the needs of its new market. Instead, Toyota went directly to luxury car buyers to learn what kind of car and overall experience they wanted when buying a high-end automobile. Today, Lexus is one of the best selling and most respected luxury cars in the world. J.D. Power and Associates [6-2009] ranked Lexus number one in its 2009 Initial Quality Study.

A good example of straying from the core is General Mills, which over the years diversified into toys, shoes, apparel, ovens and even submarines, all in hopes of achieving greater growth and profits. Their results fell short of exceptions. Today, General Mills is well focused in doing what it does best, which is “nourishing lives” with some of the most respected and innovative food products in the world. The company and its shareholders have been handsomely rewarded for their efforts. From January 1 through November 28, 2008, the stock, including dividends, was up 13.85 percent, being one of only 19 companies in the S&P 500 to generate a positive return during this period. It was not until General Mills realized the potential to innovate its core business that it obtained the growth and profits it was looking for.

General Mills also realized that innovation was more broad based than just inventing new food products or purchasing other food companies like Pillsbury. The company scrutinized its cost structure, focusing on manufacturing, warehousing and shipping its various products. Upon analyzing the full scope of its operations, it discovered that trucks carrying its refrigerated products were only half full when leaving the warehouse, resulting in higher transportation costs. For this reason, General Mills developed an alliance with Land O’ Lakes, which had different refrigerated food products that served the same market, and the companies aligned their distribution systems. This resulted in both companies using the same warehouse and trucks to transport their products. This arrangement reduced transportation costs for both companies in their refrigerated food division.³ Innovation offers many exciting opportunities for organizations which are capable of expanding their innovative thinking.

When arrogance, compliance, poor leadership or an unwillingness to change keeps an organization from facing the reality that a situation is deteriorating, there will be a strong tendency to keep doing business as usual. This behavior can cause companies to make superficial changes that will do more harm than good and become the enemy of innovation. For example, Circuit City, which spun off CarMax, stopped selling appliances, let their best sales people go, and closed over 150 stores, all in hopes of bringing back its glory days. Several business experts suggested that Circuit City needed to let go of the past and reinvent itself with a new vision and identity. Instead, Circuit City kept doing business as usual, holding on to its past and forcing itself to compete head to head with Best Buy, the industry leader. Circuit City is no longer in business and Best Buy is still the industry leader.

Companies that make these kinds of superficial changes are using a band-aid approach, preventing them from tapping into the creativity and innovative thinking that exist within. In reality, they are clinging to a past that offers a false sense of hope that things will get better. In John Kotter’s book, A Sense of Urgency,⁴ he examines the differences between false urgency and a healthy sense of urgency. He goes on to explain that a false sense of urgency is filled with unproductive activities and energy, anger and anxiety that will destroy creativity and innovation. On the other hand, a healthy sense of urgency will cause an organization to come together, accept the needed change and make sure the innovative initiatives get implemented productively.

Still, it would be mistake to think that actions, new ways of thinking and new behaviors alone will automatically produce innovation. Without a sincere, coordinated effort it will be difficult to cultivate innovation throughout the whole organization itself. Studies at MIT’s Sloan School of Management suggest that innovation is a process that must be managed in order to produce the best results.⁵ One way to accomplish this is by implementing processes so that each department views itself as being a member of a company-wide innovation team. The processes must promote teamwork and nurture and reward the exchange of ideas. Companies which have the discipline and management tools to establish innovative priorities will be in the best position to implement innovative thinking throughout the organization.

3. Innovating by diversifying

When companies diversify because they perceive that their industries are too competitive, are stagnating, prospects for growth look dim, or profit margins are shrinking, they might be headed for trouble. Many organizations have attempted and failed to profit from diversifying into businesses unrelated to their core. In addition to General Mills, Kmart, Sears, and Mobil are all examples of companies that diversified for the wrong reasons and paid a costly price. When organizations diversify under pressure to achieve greater growth and profits, they tend to cut corners and can miss warning signs of trouble ahead.

The track record of companies which tried to innovate by diversifying into unknown industries is not very encouraging. Even General Electric, with a great track record for being able to diversify into different industries, had its problems when it entered into the investment business by buying Kidder Peabody. Several years later General Electric was more than happy to sell Kidder Peabody to Paine Webber.

When diversifying by purchasing another company, analyzing balance sheets, financial projections, market forecasts and book value play an important role; however, innovative companies look a little deeper. They know what they do better than their competition, their talents, knowledge base and overall strengths.⁶ Innovative organizations know how their strengths will make their diversification strategy increase growth and profits. This is what separates organizations that are able to innovate through diversification from those companies which try to diversify unsuccessfully in the name of innovation but are really just making knee jerk reactions.

3M is a company with a long history of developing innovative products internally. This 107-year- old company understands that inventing innovative products does not just happen by chance. 3M put long-term processes in place that keep innovation alive and well within the very core of its being, vision and mission. At 3M, innovation is a way of life and doing business.

4. Innovating through mergers

Several studies suggest that up to 80 percent of all mergers fail to add shareholder value.⁷ Big mergers tend to make it harder to do in-depth due diligence and increase the likelihood of negative surprises. Once the merger is done, the real work begins of integrating different cultures, knowledge bases, technologies, customers, and business models. The list can be endless.

Many mergers take place because of their innovative prospects for growth and profits. Companies need to tap into the knowledge base that exists in both companies and understand how they will use it to become more innovative. Just acknowledging that the potential exists will not lead to innovation. Knowledge bases must be nurtured, given direction and managed.

The merged organizations which know their focus and what changes are needed to turn their vision into reality will be on the right track. Companies that create an innovation agenda with a map of how to get to where they want to go will be in a better position to make their own opportunities for innovation. Unfortunately, several case studies on mergers and innovation have shown this is not the norm.

For most organizations, the problem appears to lie in understanding just how broad-based, interwoven, collective and yet simple innovation can be. The trick is for companies to define just what type of innovation is appropriate and workable within their given situations. This can include managing the innovation process, knowing the value of the company’s core, diversifying, or merging for innovation. In most cases, companies must be willing to take risks, change, learn and break away from the status quo without losing their identity.

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