The Hindu Business Line : The challenge of innovation

This data only confirms what we have perceived in over two decades of consulting and line experience - there is widespread dissonance between what is expected of innovation, and the actual results. Managers believe innovation is important, they aren't happy with their organisation’s experience with innovation, and they don’t know how to fix it.

Why is it that even when individual managers believe that innovation is so important, the organisation seems unable to rise to the challenge? What should be the CEO’s role in driving innovation? Most organisations swear by the first mover advantage, but is this really critical? What should be the relationship between corporate and innovation strategy? How do organisational policies on culture, diversity, and performance appraisal impact innovation? Does the external environment like our education and financing system place limits on innovation in India? Can there be a quintessentially Indian model for innovation that goes beyond American “big-idea” or Japanese “kaizen’?

When we set out to write this book two years ago, we were looking for answers to many such questions on innovation that we had faced during our working and consulting careers. We had found several tools and frameworks around individual aspects of innovation such as stage-gate processes and creativity enhancement. But there was a gap when it came to an integrated perspective, especially from the point of view of the Chief Executive Officer: linking innovation with strategy, designing performance appraisal systems to stimulate innovation, and understanding how culture and the education system could influence the outcomes of innovation initiatives.

To help answer these questions, we went back to basics. Through the Paradigm Innovation Survey — an in-depth survey of over 100 Indian managers (including 40 CEOs) and arguably the first of its kind — we explored the issues and challenges that organisations face in innovation. These insights into the state of innovation today, especially in India, led to an integrated framework that can help managers build an innovation system that achieves the desired impact.

Innovation is important …

The belief in the importance of innovation is justified. Every manager understands the ‘S’ curve, which takes its name from the curved shape characterising the performance of a product or a business over time. The ‘S’ curve first slopes gently, reflecting the initial slow growth as the new business creates its space in the marketplace, followed by a rapid take-off as the idea gains traction.

But all good things must come to an end, and the ‘S’ curve of a product or a business will inevitably plateau. This could be due to changing customer preferences, societal trends, or competitive factors. A sharp decline then follows as the old success formula becomes increasingly irrelevant in the new world. Accepting this cycle is important: plateauing and decline is to be expected, indeed, anticipated, as part of the growth process. It can be arrested to some extent by rejuvenating the product, keeping it up to date with competition, and so on. But sooner or later, a new product, or a new business will be needed.

The factors that go into innovation are spread across the organisation

Business history clearly illustrates the fate of erstwhile market leaders who fell behind as competitors came in with new products and services, or business models that rewrote the rules of the game. Interestingly, most of the market leaders were considered innovative in their heyday, but took their eyes off innovation somewhere along the way.

The data bears this out as well. Christensen and Raynor (in their book The Innovator’s Solution) highlight the difficulty of achieving sustained growth. In the long-term studies mentioned by them, less than 10 per cent of comp anies were able to sustain the growth that creates above-average shareholder returns for more than a few years. Further, of the companies whose growth had stalled, only 4 per cent could successfully reaccelerate. Given that nearly 70 per cent of mergers and acquisitions fail to deliver value, growth needs the organic route – in other words, innovation in new products, processes, and business models.

… but challenging!

One clear takeaway from our research into innovation (including both extensive literature survey and talking to scores of managers), is that the concept of innovation appears to have so many facets that viewers risk getting focused on only one element.

“Innovation is differentiation, a new product, a new creative ad film, a new promotion.” — Brand Manager, consumer goods company.

“Innovation is a mindset, an attitude, challenging old mental models, new ideas and ways of doing things.” — HR Manager, services company.

“We are very innovative – we have over 200 registered patents” — Head of R&D, chemical company.

(Source: Paradigm Innovation Survey, 2006)

Our interviews with managers across different sectors and across levels brought home the very real danger (and many organisations are guilty of this) of viewing innovation in a linear and unidimensional fashion. Innovation is treated as being synonymous with either individual creativity, or research and development and patents, or new product development processes such as stage-gate, or some other individual element on the innovation continuum. Each of these is indeed important, but there is much more to innovation.

In our view, successful innovation is an outcome of a happy alchemy of many complex, interlinked variables, including strategic, cultural, economic, and infrastructural factors. It is the variability in these factors, and the fact that they interact in so many different and complex ways, that lends innovation its unpredictability. The reaction is different for each organisation. It depends on the organisation’s business environment, its choice of strategy, its size and maturity, its culture, the type of people staffing it and sometimes, even geographical location.

We believe that innovation is best viewed as a complex adaptive system rather than as only creativity, R&D, or commercialisation. This can make innovation difficult. The Innovation System Map outlines some of the factors that go into successful innovation – what strikes you is how spread out they are across the organisation.

Successful innovation depends on linkages between very different parts of the organisation, and as any practising manager knows, these linkages are not easy to build. On the contrary, organisations tend to build their own silos – and if HR, production, and marketing all have their own narrowly defined innovation strategies, the outcome for the organisation as a whole is likely to be below expectation

Even companies that have done well by traditional measures of innovation, such as patents registered, face a challenge. Consider the table above: on the left you have a list of companies with the most patents registered, and yet a quick glance reveals that only one of them appears on the list on the right – that of the most innovative companies. One argument could be made that being on the list on the right was not a desired outcome for the patent-creators – and that the public face of innovation is not the same as the very real, tangible effects of patent creation. However, if patents are to result in products or processes that create value, then surely this must also percolate into the perception (and share valuation!) of the organisation.

From the point of view of the innovating organisation, then, what really counts is how the innovation improves its own performance. A product innovation could create new markets or improve market share in existing markets; a process or business model innovation could alter competitive dynamics in its favour. If an organisation is to take innovation seriously, it has to find an emphatic answer to ‘What’s in it for me? ’. Rather than be treated as synonymous with an idea (the beginning), or an outcome (the end), innovation occupies a wider canvas, incorporating the entire gamut of activities starting from conceptualising a problem, engineering a solution, and finally, exploiting it successfully to create value.

Further, innovation needs to have a discernible impact on moving the organisation towards its objectives. Otherwise, the result will be an outpouring of ideas that could be creative yet useless in achieving the overarching organisational goals.

“After three years of innovation investment, the CEO wants to know what we have to show for it. And I don’t have an answer.” — Head of Innovation at a software company

Source : Paradigm Innovation Survey, 2006

We believe that this could be a significant reason why CEOs have a vague feeling of dissatisfaction with their return on innovation investment: despite a stream of creative ideas, they fail to see an appropriate impact. Successful innovation is a balance between the right brain and the left brain – the bubbling up of ideas that drive business-unusual, not business-as-usual, and a relentless thrust on seamless execution that propels these ideas forward to creating value. It is difficult to say which is more important. A great idea is useless if it never gets off the ground. On the other hand, a perfectly implemented but inconsequential idea will make only a marginal difference to the topline or the bottomline.

We strongly believe that there should be no cookie-cutter approach to success in innovation: instead, each organisation should introspect deeply about what makes sense for it at that point in time and shape its innovation strategy accordingly. Instead, we recommend that each organisation evolve its special innovation system, which can be viewed as three gears: goals-cum-strategy, culture, and processes-cum-competencies. Strategy provides the background to understand what type of idea is right for the organisation at that point in time. Then, ideas need to be generated and thrown up – this is where the organisation culture plays an important role. Only ideas that have a strategic fit should be chosen. Finally, processes and competencies need to be in place to ensure the execution of the chosen ideas.

The three gears cover a wide ambit of functions and activities. Keeping them perfectly meshed so as to keep the innovation engine humming smoothly is certainly a challenge, but one that needs to be met head on if an organisations is to survive and grow.

Adapted from Innovative India: Insights for the Thinking Manager, Parmit Chadha and Radhika Chadha published by Penguin India in July 2007.

(Parmit Chadha is Director, Strategic Decisions Group, a California-based strategy consulting firm.)

(Radhika Chadha is Principal of Paradigm, a boutique consulting firm specialising in growth and innovation.)