Cracking the code of innovation

This article originally appeared in Business Standard

Innovation doesn't come easily to most large companies. Yet some big players in nearly every industry are able to turn out one successful new product after another.

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Take consumer goods. Unilever, already a leader in the category, launched more than 10 times as many new products in 2012 as it did a few years ago. Unilever's average value per project increased 75% over the past few years while time to market decreased between 25% and 50%. The company is quick to adapt new products to consumer tastes when necessary. For example, an initiative in its Hindustan Unilever unit encourages employees to buy new products at steep discounts and then provide quick feedback, thus acting as in-house beta testers.

Or look at automobiles. In many companies in India, there's a marked timidity in the pace and scope of adding new features. Mahindra is an exception: a look at its recent vehicle launches—the e2o, the XUV500 and Centuro—shows the company's commitment to understanding what's possible with new technologies (and thinking) and what consumers will benefit from.

What do such companies know that their competitors don't? To find out, we asked nearly 450 executives around the world, including India, about their companies' skills—or lack of skills—relating to innovation. Our respondents represented enterprises in nearly every major industry and ranging from $100-million to more than $10-billion in size. Two-thirds said their companies made innovation one of their top priorities. Yet less than one in four believed their companies were effective innovators. The survey also revealed dramatic differences between innovation leaders and everyone else. Top-quartile companies grew at an average annual rate of 13%, compared with 5% for other companies. They also enjoy far greater employee loyalty, and are better than their peers at making and executing decisions.

When we drilled down to discover what made these leaders good at innovation, we found an entire system built around five components:

  1. The leaders set a clear, specific strategy for innovation
  2. They build an organisational culture that nurtures new products and processes
  3. They create effective processes for idea generation, development
  4. They know how to manage a diverse portfolio of innovations-and that has the appropriate size, shape, and speed
  5. They are effective at scaling new business ideas, supporting them with the right level and type of resources.

The leaders outperformed the laggards on all these capabilities, not just one or two—a sure indication that they are taking a systematic approach to innovation. Kraft, for example, has added rigour to its idea development process, setting consistent hurdles for projects and tying its decisions more tightly than ever to the economics of each project. In 2011, it generated $600 million in sales from a comparatively small group of innovations. Dainik Bhaskar's unconventional market-entry strategy is another case in point, especially of creating effective processes for idea generation and development. A few years ago, the media group decided it was not content with the traditional limited-sample-size market research, test marketing and then gradual scale-up model and, instead, invested to train 1,400-plus market research enumerators. With these enumerators, the group used a two-round consumer contact to design and launch its product in heavily competed markets, going straight to number-one on day one in the Ahmedabad market with a Gujarati daily.

We learned something else, too. Nearly all the leaders seem able to marry right-brain style creativity and imagination with hard-nosed, left-brain business analysis in every phase of their innovation systems. Many companies tend to separate these two activities, asking the creatives to come up with new ideas and the commercial types to analyse those ideas (and, often, to shoot them down). Turns out it's far more productive for companies to build integrated teams that bring together people with both orientations and skill sets.

Using this "both brain" approach, teams can work together from idea conception all the way to testing and scaling an innovation. For example, a successful portfolio of innovations always needs to include a balance between incremental and radical innovations. To create that balance, companies have to give their creative people more leeway on radical innovations—and not allow analysts with spreadsheets to kill the ideas prematurely.

Creative and commercial types can then work through the twists and turns of idea development together, rather than giving up whenever one group hits a bump in the road.

Statistical analysis of our survey results showed that two elements of an innovation system are likely to be critical: innovation goals and strategies on the one hand and portfolio management on the other. The element we thought might be most important—idea generation—was not a major determinant of top innovation performance.

We suspect that's because ideas are only the seeds of innovation. Put good ideas in a bad company and they die. That's why so many acquisitions of innovative companies fail: new ideas get buried in the acquirer's bureaucracy and creative people from the acquired company get frustrated.

Innovation is a complex process. Companies need to create an innovation system that includes all five of the factors we identified. But innovation can't be a purely logical, left-brain enterprise. Companies that cultivate both kinds of thinking—left brain and right brain, creative and commercial—to inform their innovation initiatives are likely to outstrip their competitors in creating great new offerings.