Innovation is the key


n May 2004, Royal KPN, the Dutch incumbent telecommunications carrier surprised financial markets when it announced that it had exceeded first quarter profit expectations, tripling its quarter-on-quarter net margin. This exceptional performance was a stark contrast to the performance of the company in prior years. All European carriers suffered when the Internet bubble burst in 2001. However, KPN arguably owned the dubious distinction of being the national incumbent carrier that came closest to bankruptcy. Overextended in its Internet, mobile, and international operations, KPN’s stock price plummeted from 2001, and its management was eventually ousted. New management raced to dispose assets, shed headcount, and reduce debt in order to stabilise the company. Growth programs were put on indefinite hold to reduce costs. And the firm focused on a return to profits through cost management and productivity improvements.

The Role of Culture in Building an Innovative Organisation



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 weaknesses.

What is Innovation?

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.

Requirements 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.

Importance of 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.

Balancing a 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 profitable growth.

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 change.

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.

Alex Roth
Courtesy: Monitor Group