by: Issues: May / June 2010. Tags: Innovation. Categories: Innovation.

It’s easy and in fact correct to think of innovation as a process. But if a company is to maximize and leverage innovation – to make it stand above the crowd – it must embed innovation in its culture, to make it the default position for how “things are done around here.” Innovation must become continuous and engage employees as well as customers. This article is a tall order made manageable for reinventing innovation.

For all the talk about the importance of innovation, very few companies have figured out how to make it happen in a sustained way. Many businesses come up with one big idea, but that’s not enough.

The kind of innovation needed to stay in business – continuous innovation — appears to be in decline: In 1957, the average life-expectancy of a company in the S&P 500 index was 75 years. Today, it’s just 15 years. A decade and a half from now, most of the companies in the S&P 500 will be ones we’ve never heard of.

The key to long-term success is to make innovation happen continuously. That’s where companies fall down. Intentionally or not, they become complacent. One big success can make an executive team afraid to take chances. But if it wants innovation to become an enduring process rather than a one-time event, it must innovate continuously.

This article will lay out some core principles for creating continuous innovation within a company, principles to ensure that the business will not only survive but thrive for many years to come. To cultivate ongoing innovation, it is crucial to hire the right people who think with the customers in mind. Integrating product, process and the customer into continuous innovation will make innovation happen – and happen smoothly — at any company.

Continuous innovation

To understand the importance of sustained innovation, we need only to look at businesses that didn’t practice it. Companies that once transformed the landscape and led their respective fields have seen their dominance erode over the years.

Polaroid revolutionized instant photography, but failed to capture much market share in digital picture-taking. Xerox, which once led the world of copy machines, has seen profits fall over the years as more nimble companies re-envisioned its business model.

The retail powerhouses of yesteryear — Kmart, Sears, and Montgomery Ward — didn’t stay ahead. Wal-Mart beat out its competitors, first by venturing into low-priced markets the others had failed to exploit, and then through the clever use of technology to manage inventory and conduct marketing.

There are several ways to ensure that innovation becomes an ongoing practice and that your company doesn’t fall by the wayside.

Creating the right corporate culture is a first step. It’s important that every employee understand that business is always going through cycles of creative destruction. Old-guard companies fear change. The Big Three automakers, for example, having put millions of cars on the road, rested on their laurels for too long. They stopped listening to customers and kept making what they knew how to make, just because they knew how to make it. After dominating the U.S. auto market for decades, they slid into decline as a result of poor decision-making and robust foreign competition.

For a company to survive today, employees have to know that when it comes to inventing, they’re never finished. The business may be beating the competition and making money hand over fist — but your leaders should still be on the lookout for what’s next. You should be inventing and re-inventing in house the next product or service that will knock out the one you make now. If you don’t, somebody else will.

At ING DIRECT, we observe the “Orange Code,” a list of guiding principles for how we think and work. One of them is “We are new here.” Another is “We will never be finished.” With these principles in mind, we waded into a supposedly mature retail banking market by using technology to give customers what they wanted. We acquired one million customers and $9.3 billion in retail deposits in our first two years of operation. Good result, but we know we’re not finished — we will never be. We must always be inventing what’s next.

Consider the example of Southwest Airlines. Like ING DIRECT, the low-cost regional air carrier entered a market perceived as mature when it launched in the 1970s. But it had an innovative way of doing business. Most airlines relied on a hub-and-spoke model, routing nearly all flights through a home-base city. Southwest adopted a point-to-point system. In doing so, it was able to keep its airplanes flying for several hours longer each day than most other airlines. It also pioneered unusual tactics like its no-reserved-seats policy.i Strategies like these have led to a market value greater than the next five airlines combined,ii and Southwest wins accolades from industry groups and customers alike. It also became an inspiration to low-cost startups the world over. The rewards for innovation have been huge.

Leaders should note that innovation — and thus success — cannot be bought. Since 2006, the top 15 U.S. banks have grown their market share by 13.1 percent. While this looks great at first glance, 80 percent of this growth came through acquisitions rather than organic growth. Growing by acquiring other companies can actually stymie innovation. It looks good in the short term on the balance sheet and makes everyone feel good about profitability. But it also makes employees feel like there’s no need to do it on your own if you can buy it.

The human factor

You can’t create a culture of ongoing innovation if you don’t hire the right way. To get people to think and behave as innovators, you need to foster an acceptance – even a search for — of unusual though desirable background traits and behaviours. It starts with recruitment. Managers shouldn’t see evidence of a past failure as a blot on a potential employee’s resume. In fact, the normal recruitment process is not the most effective way to get the brightest workers. The best people are found in unusual places — sometimes outside of your own industry, sometimes with an atypical education, so that they can bring ideas into the workplace that the typical MBA graduate cannot. Character and attitude are also important qualifiers. The best hires will likely be people who have diverse, real-world experience behind them and have something to prove to the world.

This somewhat unconventional approach to nurturing talent continues once an employee comes on board. First and foremost, it’s important to reward failure. Yes, you read that right. All of your employees, and especially your leadership team, need to know that there’s no penalty for fresh thinking. They have to feel safe taking a risk on a new idea, on turning the conventional wisdom upside down. Sometimes those bright new concepts will fail, but sometimes they’ll succeed brilliantly. So it’s essential that you keep rewarding your freshest thinkers. The workers in your organization must feel that they have the freedom to take risks.

Finally, dedicating a physical space where innovation can take place, such as a campus, will help ensure that it happens. A laboratory environment will facilitate the free flow of ideas and make it easy to discuss, recognize, and reward them.

Reengineer the customer

Just as a company should always be inventing new concepts, products and services, it should also be inventing the customer of the future. Company leaders who play it safe ask themselves, “What do we know how to make?” Company leaders who are a little bolder ask, “What does the customer demand right now?” And the most successful innovators of all ask, “What will the customer want next?”

The pitfall to avoid in this respect is supply-driven thinking. Supply-driven thinking focuses on what the company already makes. It takes the attitude that since we already know how to make a thing, that’s what we should give to the customer. Supply-driven thinkers might make minor improvements to existing products, but this approach is fundamentally too conservative. It puts the company first. When companies try to outsource innovation, the consultants often come up with supply-driven ideas in an effort to “improve” on existing products. Often these tweaks add only the most marginal value for customers, while the company incurs operational expenses with no additional revenue.

Consumer banking, unfortunately, offers a good example of the tendency to adopt supply-driven thinking. Tiny changes to existing products are marketed as innovations, drowning customers in complexity, urging them toward multiple accounts and numerous fees when something simpler would serve them better. Supply-driven innovation is a quick way to erode a company’s value.

Instead, leaders should engage in demand-driven thinking. Demand-driven thinking puts the customer first. It’s imaginative. Demand-driven leaders successfully put themselves in another’s shoes. The ideas they come up with are driven by what the market wants. Instead of waiting for the customer to tell the company what he or she wants, employees at the company should be figuring it out first.

Innovative companies don’t just invent products and services. To successfully market new goods requires reengineering the customer as well. You can’t just ask the customer what he or she wants. As Henry Ford, the first mass-marketer of the automobile, famously said, “If I had asked people what they wanted, they would have said faster horses.” Customers need to be educated and their opinions about what products they need must be molded. Innovation in the marketing department is just as important as innovation in the lab or on the factory floor.

Fast forward to a century from now and we have another example of a company giving people what they didn’t know they needed. In April 2010, Apple’s iPad first went on sale. It’s not a laptop, a television, or a smart phone. The company sold 500,000iii of the half-inch thick, 1.5-pound device in the first week in the U.S, boosting Apple’s share prices.

Just one year ago, no one could have told you that they wanted the category-busting iPad, which serves as an e-reader, a video-game console, a web browser, and more. Apple had to imagine the customers of the future and educate them on what they wanted. It’s an idea that goes back at least as far as the economist John Kenneth Galbraith wrote in his landmark 1958 book, The Affluent Society. He observed that whereas in times of poverty, human needs were clear, in a time of affluence, businesses had to “create” what the consumer wanted through marketing and advertising.

To be sure, markets that don’t exist can’t be analyzed. You can’t just crunch the numbers and predict a certain number of buyers at a certain price point. Truly innovative products are a leap into the unknown. That’s why you have to have a team willing to take the leap.

Innovation for all

You can innovate if you’re small and you can innovate if you’re big. The most important thing is for innovation to become institutionalized across all parts of the company. It has to be a part of the culture. Supply-chain management might seem like a corporate backwater to some — but it’s where Wal-Mart revolutionized its business and stayed ahead of the competition. Some managers might treat marketing like an afterthought, to be dealt with after a product is created. But in fact marketing should be treated as part of the process from the very beginning. Companies shouldn’t just think about innovative products. Innovation must be an initiative that integrates and encompasses the product, the process and the customer. From the manufacturing process to the customer experience, from supply chain to social networking, innovation must occur at every point across the board.

As the Ivey Business School Dean, Carol Stephenson, has written, “every organization has the capacity to become innovative.”iv> It’s not just for start-ups. Big, decades-old brands are just as able to become innovative as small and scrappy new companies–if they’re willing to make the commitment, devote the resources, and above all, face the truth. Innovation is for all.

  2. Stephen Klee, “‘Causing’ Innovation”