The financial markets
responded to KPN’s May announcement with an immediate three percent
reduction in the value of KPN’s equity. Analysts cited a fundamental
concern that KPN’s profitability was overwhelmingly driven by cost
reduction. Further, the firm did not have the capacity to generate top
line revenue growth. Indeed, the equity was discounted out of concern that KPN could not indefinitely cost cut its way to profitability. In the first
five months of 2004, KPN shares were underperforming their European peers
by 20 percent.
Financial markets had recognised that KPN, in its drive to thwart
bankruptcy, had had to forgo its engines of innovation. Not only were its
growth platforms shut down during the lean years, but the processes that
generated, nurtured, and facilitated new ideas around growth had been
suffocated. By 2004, the company was alive, but its spirit had been sucked
dry. KPN was relegated to an innovation wasteland.
The story of KPN provides an example of the link between innovation and
culture. We like to think of innovative companies as the Microsofts and
Googles of the world, introducing new products or even disruptive business
models based on fresh ideas nurtured in an unencumbered ?if not
revolutionary ?environment. But the fact is that innovation has a place
in any organisation. It need not depend on the existence of the iconic
“relaxed, no-tie?environment. Rather, the appropriate cultural model for
innovation is unique to each organisation. It is a function of both the
innovation objectives of the firm, and the heritage of the firm itself
Like an individual, the innovation culture of a firm cannot simply mutate
to be something it is not. Rather, managers and employees must examine
themselves, and the way in which they interact with the system around them
in order to understand how they contribute to or inhibit innovation in the
organisation. They must demonstrate the leadership that is necessary to
harness the strengths imbedded in the organisation, and to take on its
All too often the word “innovation?is used synonymously with technology,
creativity, or even product development. Importantly, innovation can be
considerably more far-reaching than any one of these. Some are inclined to
believe that innovation is about the great idea, or the “silver bullet.?
While there are some examples of silver bullets, these typically end up as
one-time sensations, with limited market windows. Indeed, innovation in
its truest sense must be long-lasting, and not easily imitated. It is not
about a single insight or idea, but about a stream of ideas, strung
together in such a way that (1) creates discontinuous change in the
market, and (2) promotes a rhythm and pace of change in the market that
addresses existing and emerging customer needs, and changes the underlying
basis of competition.
The introduction of the Apple i-Pod is an example of innovation in its
highest form. The innovation is not the device itself. Rather, the
innovation is the device, i-Tunes, the relationship between i-Tunes and
the artists and labels, the interface, the streamlined payment mechanism,
the distribution model, and even the revenue model. The i-Pod is not a
modern-day Sony Walkman. It is much more. Through a series of innovations
along the digital value chain, the Apple i-Pod has redefined the business
model for distribution of music.
IKEA offers another nice example of innovation. In the 1950s and 1960s,
founder Ingvar Kamprad recognised that a large segment of consumers unable
to afford new furniture would be willing to trade off time for money. As
such, Kamprad introduced a co-production business model. In this model,
the consumer assumed responsibility for a significant portion of the value
chain. The consumer was self reliant in consultation and support; the
consumer had to pick goods from the warehouse; the consumer had to move
goods, and transport them to their destination; the consumer had to
assemble the product; and the consumer had to dispose of waste. In
conjunction with the model, Kamprad oriented the organisation around the
consumer and the cost of the product. Product was designed to that price
point that the market would bear; goods were flat-packed for easier
transport and handling; stores and catalogues were configured to support a
family experience. Over time, Kamprad assembled an entire activity system
to support his consumer insight.
Innovation is an integrated system of activities resulting in a business
model designed to create and capture new value, and to manage the risks of
disrupting the status quo. While Apple and Steve Jobs represent precisely
the atmosphere that we traditionally associate with an innovative company,
IKEA is dramatically different. IKEA is low-tech, and maintains a retail
model that relies extensively on stripped down operations. While IKEA
design stands out, the company is thrifty, and its operations are highly
structured. Clearly, innovative environments can take many forms.
for Successful Innovation
Innovation does not happen by chance. It requires an appropriate balance
of insights, discipline, and culture.
Insights draw upon an understanding of the overall context surrounding the
firm. This includes external developments in markets, regulation,
macro-economic trends, competition, and so forth. Insights also draw upon
internal developments in capabilities, intellectual property,
technologies, tangible and intangible assets, and so forth. These
insights, in turn, give rise to ideas ?ideas that the firm should be in a
position to exploit in order to promote its own growth agenda.
Innovation is also highly dependent upon discipline. It simply is not
enough to be able to generate ideas. In fact, most firms that struggle
with innovation report that there is no lack of ideas in their respective
pipelines. To the contrary, there are typically an excess of ideas.
Rather, firms report that their difficulty is that they are largely
unsuccessful in commercialising ideas. They are unable to take emerging
ideas and transform them into business-relevant concepts that are ready
for market. Firms report a lack of structure in their processes result in
a systematic failure to innovate. There are insufficient processes for
identifying and managing new ideas, filtering them, and then nurturing
them through a development process. A lack of metrics, communications, and
clear decision-making processes encumber management’s capacity to
understand opportunities, and allocate resources appropriately. Functional
silos within the organisation impede business processes that depend on
cross-functional collaboration, often a prerequisite for good innovation.
Innovation is hardly the exclusive domain of the “creatives.?Structure
plays a critical role in successful innovation. Until recently, innovation
has been a buzzword which most corporations applied to themselves without
a real understanding of what it entailed. Now, as innovation becomes more
and more important to achieving future growth, companies will need to come
to terms with its meaning. They will recognise that innovation requires
more than simply letting people loose in the organisation. They will learn
that new ideas have no value unless they are effectively connected to
processes within the business at large.
Culture to Innovation
In fact, ideas can emerge in the organisation, and formal structures can
be in place to support innovation, but innovation can still systematically
fail. If the culture and behaviours imbedded in the organisation are not
conducive to innovation, then they can undermine ideas and processes in
such a way as to jeopardize the entire innovation programme.
Proctor & Gamble’s diaper business was the first to develop a pull-up
diaper to be used as a transition mechanism during toilet training. By
simulating underwear in an absorbent, disposable format, this product was
intended to extend the lifecycle of the Pampers product line, and
reinforce P&G’s market position. However, the concept was rejected at P&G,
and disbanded. A short time later, P&G’s competitor, Kimberly-Clark,
introduced the same concept in the market with remarkable success. To this
day, Kimberly-Clark retains the leadership position in this segment, and
enjoys the associated rents.
The loss of this incredibly lucrative opportunity triggered considerable
soul-searching at P&G. The organisation suffered, at the time, from a lack
of coordinated communications between various different parts of the
business. Though world-class in its marketing capabilities, P&G’s
marketing insights were largely contained to its marketing organisation.
Its R&D group, though responsible for much of the product development
effort, had limited access to rich consumer insights. The R&D group
promoted new ideas within the organisation; and the marketing group
provided critical feedback, based on its more refined understanding of the
market. This dynamic became self reinforcing. It led the R&D group to
develop its ideas further and further, in greater and greater isolation of
the marketing group; in order to assure that when the idea was presented,
it addressed all conceivable criticisms. Naturally, the marketing group
became increasingly alienated from the product development process.
Marketing recoiled from new ideas, concerned that the development process
was too isolated from the market. Resulting dissension led to a breakdown
in the ability to build on ideas from other business functions. Good ideas
were lost, and market opportunities forgone.
Innovation knows no functional, geographical, divisional barriers. It
spans across the enterprise, and even beyond the enterprise to other parts
of the value chain. It is entirely dependent upon interactions between
people. Since the culture of the organisation dictates the manner in which
interaction happens, culture then is crucial to innovation. Like insights
and discipline, culture can make or break innovation in the organisation.
Without any one of these elements, the system of innovation will collapse.
Culture of Innovation.
Going back to the example of Royal KPN, we observed a company that due to
serious overreach and industry restructuring had retrenched from all
business development activities, and focused exclusively on efficiency. In
more typical circumstances, however, companies maintain a balance of both
development and productivity. Companies must be efficient in their
mainstream (i.e., legacy) operations; and they must find new sources of
Consider Intel. Its strategic decision to focus on PC chips led to the
development of mega-production facilities focused on driving down the unit
cost of production. In doing so, Intel built a leading market position in
its target market, and rose to prominence. In recent years, however,
Intel’s market value has stagnated, while that of rival AMD has
sky-rocketed. In response, Intel has elected to enter adjacent markets,
exploiting its core capabilities to develop and support applications that
will allow its customers to reposition themselves in their respective
markets. In making this move, Intel’s culture will be radically redefined.
R&D and the PC-processor groups must now cede to a growing marketing
function and to new growth businesses. 20,000 new hires, including a broad
swathe of social scientists will join 90,000 employees who all must find
new jobs in a company which has elected to reinvent itself.
Under such circumstances, the challenge is to manage a dichotomy. On the
one hand, the current business must continue to thrive in order to fuel
the reinvestment programme in new growth areas. But on the other hand, the
prevailing culture, the unwritten rules of how business gets done, must
not preclude an emerging culture which values a new way of doing business.
The challenge is to promote both, and not one at the expense of the other.
The corporate call to “be innovative?is not enough. After suffering from
a failure to innovate in the 1990s, P&G, as exemplified by the diapers
example, pursued a corporate programme around innovation. Programs were
undertaken in the name of innovation. ‘Multi-functional participation was
heralded? but cross-functional coordination was lacking. By 2000, the
programme had exposed P&G to confusion around priorities, and spiraling
costs. The stock price fell, and management was replaced.
Building a Culture of Innovation
The business environment is littered with stories of successful and
unsuccessful innovation. Nokia reinvented itself from a boot-maker to the
world’s leading manufacturer of mobile phones. After failing to
successfully sell its mobile arm to Ericsson in 1992, Jorma Ollila pursued
his belief that markets would respond more favourably to fashion-forward
devices than to technically advanced ones. Nokia’s mobile arm aligned
itself around this view, and pursued its development programs accordingly.
Nokia channeled its R&D investments more feverishly into design innovation
(and associated technical requirements, such as battery size and antenna
location) than into performance innovation (and the associated technical
requirements, such as signal strength and chip speeds). Organisational.
alignment around a new vision of the future is central to creating a
culture of innovation.
All too often, the hallmark examples the new vision of the future are
associated with smaller, entrepreneurial companies. The challenge is to
foster the same sort of spirit within substantially larger organisations.
Leadership and innovation are integrally related. In this case, leadership
does not refer to the formal management structure within the context of
the firm. Senior management is instrumental to innovation. But innovation
requires leadership from across the organisation. Any call for innovation
must be met by a willingness of individuals within the business to depart
from their respective zones of safety, and venture into an environment of
uncertainty and risk. Typically, the individual within the firm ascribes
the failure of a firm to innovate to structural barriers inherent in the
firm. All too often, however, the individual is complicit in failure to
innovate, lacking in the courage to intervene in the organisation when
opportunities exist to contribute new ideas, or improve processes. The
individual perpetuates the norm, for fear of failure.
Organisations that aspire to innovation must support the individual, and
foster an environment that rewards a willingness to step into new, less
comfortable territory. Management must provide a clear mandate for
innovation, and back it up with the systems required to demonstrate that
the mandate is indeed genuine. Such systems include processes by which to
share, promote, and nurture ideas. Metrics systems must assess the success
of internal innovation initiatives. Decision-making protocols must be put
in place to allocate resources effectively to new business opportunities.
And personnel evaluation mechanisms must examine not only contributions to
business .productivity, but also to business development.
It is not the responsibility of the management of the organisation to make
innovation happen. Management must provide a vision, and promote an
environment that is conducive to innovation. Then individuals within the
business must contribute the ideas that fulfill the vision, and bring it
to life. To be successful, the individual must act as a leader, reaching
inside himself or herself to find the courage necessary to put oneself at
risk for his or her ideas.
Innovation as a Mechanism for Change
Innovation cannot be managed in the organisation as a special project.
Rather, it is a model for working across the business, and with oneself.
It is a part of the very fabric of the organisation. As such, a programme
around innovation in the organisation is tantamount to a programme of
Such a programme is not so much about the mandate from on high, though one
is necessary. It is about enabling people in the organisation. Change will
only occur when individuals operate in an uninhibited fashion, putting the
interests of the firm before interests in self preservation.
The venue of leadership changes in such a model. Structural leadership,
while important, is supplemented with distributed leadership, as
individuals take on meaningful accountability for the developing and
nurturing new ideas. This accountability will require them to depart from
conventional reporting structures and networking models, and expand into a
broader set of interrelationships within the enterprise, and beyond.
Individuals will consider their role within the enterprise quite
differently, and a culture of collaboration and innovation will prosper.
Such retooling results in an organisational transformation. This
transformation, in turn, will deliver an innovation premium ?a premium
that will be enjoyed in financial markets, in labour markets, with
customers, and with strategic, partners.
Courtesy: Monitor Group