Innovation isn't just the new strategy; it's the only strategy for businesses that want to thrive in the new millennium.
Driven to stay competitive in the new, global marketplace, business leaders find they have squeezed all the efficiencies they can from flattened organisations and shrunken budgets. They now see that the only real way to achieve sustainable growth is to innovate-to turn knowledge into money by creating new products, new processes or new customer services that in turn produce competitive advantage.
Innovation is nothing new to American businesses. This is, after all, the country that gave the world Ford's assembly line, fast food and FedEx. The United States has earned and long enjoyed its reputation as the world's innovation leader. But what's new-and a little bit scary-is that this distinction is now being challenged in a way that calls into question America's ability to compete in the 21st century.
Last March, the Council on Competitiveness, a Washington, D.C.-based organisation that champions U.S. economic competitiveness and market leadership, released the findings of its Innovation Index, which examined research and development (R&D) and other trends in 17 member nations of the Organisation for Economic Cooperation and Development (OECD) and eight nations deemed "emerging economies." Based on research done in 1995, the index predicted that the United States would slip from the number-one to the number-three position by 1999, behind Japan and Switzerland, and will be in danger of falling to number six by 2005. The index, which tracks four key metrics -- dollars and personnel allocated to R&D, per centage of R&D funded by private industry and per centage of R&D performed by universities -- shows that U.S. R&D investment, as a per centage of GDP, peaked around 1985, just prior to the 1987 stock market crash and subsequent economic recession.
If we're innovating so badly, why is our economy so healthy? That's the point, says Scott Stern, an assistant professor of management at the MIT Sloan School of Management in Cambridge, Massachusetts, who co-developed the Innovation Index. Today's booming economy owes entirely to innovation investments (particularly in high-tech) made prior to the last crash, Stern says. And the only way to sustain or further grow a healthy, wealthy economy is for the United States to invest more in R&D now-to develop new products, processes and customer services for the 21st century. "It takes a long time for [R&D] investments to pay off," Stern says. "This is exactly the time when we should be making these investments." If we don't invest in innovation? Then be prepared to assume a humbling new image in the global marketplace. "One of the historic sources of America's industrial strength -- its ability to innovate -- is weakening," Stern says.
"[Innovation] has been a most critical part of the American economy, and now it's being threatened." The good news, Stern says, is that the government, academic and business communities are waking up and responding to the innovation challenge. "They're aware of the problem; the message is starting to diffuse," he says. Stern's assertion is validated by Philip D. Metz, Palo Alto, California-based principal in Arthur D. Little 's technology and innovation management practice. Metz, who directs consulting engagements at major companies throughout the United States, sees an increasing emphasis on innovation by business leaders. "Over the last 10 years, innovation has become more of a top-line concern, as opposed to bottom-line," Metz says. "Companies have gotten as lean as they could; people now realize that the only way to increase [business] value is through innovation." To become innovators, Metz counsels his clients to first create a vision-ask "what if?" and then visualize what guise innovative success might take-and, second, to develop not just a tolerance but a hunger for risk. "Executives need to send the message, 'We're going to do experiments, and not everything is going to succeed,'" Metz says. "If it does all succeed, then these companies probably aren't out there far enough." This year's CIO-100 honorees include some proven innovators that have either retained or regained their abilities to be out there far enough. From acknowledged heavy-hitters, such as 3M, IBM and Xerox , to relatively new contenders, such as Lucent Technologies , Maytag and Nokia, the CIO-100 list of innovators is long and distinguished. And although the innovations these companies have developed are as unique as the companies themselves, the honorees share a common bond: Innovation is core to their cultures. Senior executives have opened their doors to new ideas and new ways of doing business, and they've found creative ways to motivate and reward employees at all levels of responsibility to rethink their jobs -- to concentrate less on the task at hand and more on tomorrow's needs and solutions.
In October 1998, Raymond V. Gilmartin, chairman, president and CEO of Merck, delivered a speech on innovation at the New Leadership: Visions for the 21st Century conference sponsored by Harvard Magazine and The Conference Board "Innovation as a strategy can be high-risk," said Gilmartin, whose own company boasts a string of trailblazing pharmaceutical products. "But as a means to grow and compete in today's global economy, innovation offers, I believe, the highest return." Following are some innovation insights gleaned from senior executives among the CIO-100 honorees.
INNOVATION STARTS AT THE TOP
Actually, innovation can start anywhere in a company -- manufacturing, marketing, even IS -- but it can't succeed without a little evangelism and a lot of push from the executive suite. It's no surprise, for instance, that Merck's Gilmartin is out beating the drums about innovation; that's his way of publicly expressing Merck's vision to staff and shareholders alike. Similarly, 3M Chairman and CEO Livio D. DeSimone is very public about his company's commitment to innovation. In a commentary accompanying the Innovation Index report, in which 3M played a part, DeSimone boasts that the St. Paul, Minnesota-based company currently invests more than $1 billion annually (6.8 per cent of 1998's total $15 billion sales revenue) in R&D. And core among corporate goals is that 30 per cent of any given year's sales must come from products less than 4 years old-10 per cent of sales are expected from products less than just 1 year old. "Not so very long ago, a technological breakthrough could generate margins of leadership that would last for years," DeSimone writes. "Today the grace period of market dominance for new products and technologies is short-and getting shorter." Indeed, 3M is home to the apocryphal "I have a dream" story, which begins in the early 1970s with a hymn book and a strange, new glue. Art Fry, a 3M researcher who in his off-hours sang in a church choir, was stymied in his attempts to find an effective way to mark pages in his hymn book. Finally, he dabbed little pieces of colored paper in a permanently sticky glue that had been developed in 3M's labs but was rejected by some critics as "too weak." Voil! Fry had developed the prototype for Post-it Notes.
Today the ubiquitous Post-it Notes hardly stand out among dozens of consumer products manufactured by 3M, but they're a testament to the company's top-down devotion to innovation.
Innovation doesn't occur on any schedule, but that doesn't mean companies shouldn't schedule time for people to chase their dreams. At 3M, all of the company's approximately 70,000 employees worldwide are subject to the 15 per cent rule: They are encouraged to devote 15 per cent of their work time-unsupervised and uninhibited-to dreaming up and developing their own new product ideas. "That's the magical time," says Geoffrey C. Nicholson, 3M's staff vice president of corporate technical planning and international technical operations. "Some people don't use that time; some people take more.
But it's not the 15 per cent [figure] that's important. It's the message that it's OK to dream." If, during their 15 per cent time, employees develop what they believe to be the next Post-it Notes, they take their idea to a senior executive sponsor, who then subjects it to a cross-functional team of engineers, marketers and accountants. If the idea passes muster, it goes into development; if not, then, oh well. There is no penalty for failure; on the other hand, winners such as Post-it Notes inventor Fry and Nicholson (who led the Post-it Notes development team) can find themselves enriched by financial bonuses and opportunities to lead other new ventures.
But while time and resources are the keys to unleashing innovation at 3M-and only the company can provide those-employees have to supply their own stick-to-it-iveness to succeed. After all, Nicholson points out, Post-it Notes were originally pooh-poohed by market research. "It's a dumb project; why not kill it?" Nicholson recalls being told. Obviously the marketers were wrong. But Nicholson took away a valuable lesson from the experience. "If any product idea doesn't make people stop and argue against it, then maybe it's not worth pursuing," Nicholson says. "If the idea doesn't stop people in their tracks, then maybe it's just an incremental change and not an innovation at all." Given direction, time and resources, people will drive innovation within a company. Example: Nokia. Up until about 10 years ago, the 134-year-old Finnish conglomerate manufactured a broad range of products, from paper to chemicals to rubber goods and, oh, some mobile telephones. Today mobile phones account for more than 60 per cent of Nokia's net sales, and the company has repositioned itself almost solely as a global leader in digital communication technologies.
To support the new strategy, Nokia has invested greatly in R&D, pouring 9 per cent of net sales ($15.7 billion in 1998) into 44 R&D centers in 12 countries.
In all more than 13,000 employees are devoted to R&D, but most R&D centers are staffed by only a few hundred people. Nokia keeps the labs lean because big numbers tend to breed bureaucracy, which is exactly what company leaders seek to avoid.
Like 3M, Nokia encourages bottom-up development of new ideas. But the initial emphasis at Nokia is less on the individual, more on small, cross-functional teams. "Being on a cross-functional team allows people to ask more stupid questions," says Lauri Kivinen, Nokia's senior vice president of corporate communications in Espoo, Finland. "People who don't work in a particular area will often question things where others think the answers are self-evident but in reality are quite complicated." In one product development team several years ago, an employee from outside the manufacturing group asked why assembly lines were always laid out in a straight line. Why weren't they u-shaped to conserve space and allow supervisors a broader overview of the entire line? At first the manufacturing people tried to defend their position but then realized they didn't have one. Assembly lines were straight because that's how the manufacturing equipment was assembled.
Nokia executives then experimented with u-shaped assembly lines and discovered-surprise-that they did take up less space and give supervisors more control. Today the u-shaped assembly line is standard at Nokia, and while the company has not calculated its total savings from the innovation, Kivinen points out that Nokia manufactured 40.8 million mobile phones in 1998, so every penny saved in production translated to $408,000 in savings.
To tap into individuals' ideas, Nokia executives regularly poll employees and ask them for product and process suggestions, Kivinen says. And to encourage this communication, executives are quick to respond to every idea. The unworkable ones get a polite nay, the good ones get an encouraging yea, and if a new idea is put into practice, the originator gets rewarded with a one-time bonus.
"I don't believe in miracles, but I do believe in culture," Kivinen says. "If you create a culture where people believe that innovation is not just allowed but almost required for the company's success, then innovation will happen." Although business leaders generally land the lead roles in launching innovation strategies, CIOs can be pretty effective co-stars.
At Hewlett-Packard Co. in Palo Alto, California, the corporate IT group supplies the backbone technology that enables the company's central R&D organisation, HP Laboratories, to keep all 800 of its technical staff wired with bleeding-edge communications tools. But Lab Director Richard H. Lampman says these tools -- particularly the Internet-based technologies-are so good that they often inspire other new product ideas. A great example is HP's storied intranet, which the company's IT organisation began using in 1992 to manage remote desktop PCs. This solution proved so successful in IT that it was rolled out not just to the entire company but also to HP's corporate customers in a new desktop management suite of software and services. "In Silicon Valley, this scenario is called 'eating one's own dog food,'" Lampman says, "and in fact, we have a new project underway using HP technology on our own online business processes that some people around here refer to as "Project Alpo.'" But given HP's record for new product development, it's a safe bet that the Alpo collaboration will produce more purebreds than mutts.
At Lucent Technologies , the Murray Hill, New Jersey-based communications networks spinoff of AT&T , Vice President and CIO Herbert G. Vinnicombe's 7,000 IS staffers play a similarly supportive role for the 24,000 R&D folks in the company's Bell Labs. Vinnicombe has outsourced the noncore tasks -- data center, help desk, legacy systems-and kept his group focused on strategic functions such as network management, applications development, R&D support and client/server systems. "Any large company today can acquire the technology necessary to be successful," Vinnicombe says. "Our differentiator is our ability as a group to harness, integrate and deploy that technology clearly and efficiently." The challenge for the CIO in an R&D environment, Vinnicombe says, is to provide technology leadership -- to show non-IT people how technology solutions can help solve business problems but also to recognise that these non-IT people are the company's chief innovators. "We don't do R&D [in IT]," Vinnicombe says.
"We're not going to build an ERP system. We're much more focused on how to take existing technologies and deploy them effectively in our company." Which is not to say that innovation can't start in IS. Maytag, the $4 billion, Newton, Iowa-based manufacturer of home and commercial appliances, is five years into its Intelligent Innovation strategy of creating new, consumer-driven products and services. To date, this approach has resulted in products like Maytag's Neptune high-efficiency washer and Gemini two-oven range, which helped boost the home appliance group's profits to $505 million in 1998, up 44 per cent from 1997. In addition, new floor-care products, vending equipment and commercial cooking equipment have helped diversify earnings to the point where fully half of the company's profits now come from outside the core major appliance lines. And while much of Maytag's innovation is driven by the company's corporate technology group (which employs a bottom-up idea generation process similar to Nokia's), the IT group also plays an important, expanded role. "We help run the business on a day-to-day basis, but we're also much more involved in business processes such as new product introduction," says Edward Wojciechowski, Maytag's corporate vice president of IT. "We support, participate in and sometimes even lead [new product] initiatives. Our job is to bring thought leadership to these projects." Currently Wojciechowski has several senior IT people assigned to product development projects, where they ply their IT and project management skills, and he is leading some cross-functional teams built around his own Internet-based customer service initiatives. In part, IT's role in product development owes to the corporate philosophy, la 3M, that anyone can have a good idea. "Our chairman walks around this company and talks to people," Wojciechowski says. "It is relatively easy to engage a senior person with a new idea." But like Vinnicombe at Lucent, Wojciechowski has also done a good job of outsourcing nonstrategic tasks-network support, desktop support and so on-so that his IT people can concentrate on core business functions such as new application development. "Our philosophy is that if you can buy [the function] better from outside the company, then buy it. But if you can do it better inside the company, then do it." Of course, it is challenging to recruit IT staff with the right skill sets to succeed in an innovative environment. More than technologists, CIOs at these companies require people with business and interpersonal communications skills-team players. "I'll hire a personality fit over a technology fit any day," says Wojciechowski. "We can build the technology expertise; we can't build the personality." SIDEBAR: INNOVATION DEFINED Innovation can be a squishy term for a dollars-and-cents businessperson to grasp. But in the business context, it is defined as turning knowledge into money by developing new Products, la Hewlett-Packard, IBM and Xerox , repeat CIO-100 honorees that have distinguished themselves by consistently introducing new office and IT tools Processes, such as the assembly-line manufacturing system developed by previous CIO-100 honoree Ford Motor (and tweaked by 1999 CIO-100 honoree Nokia) Customer Service Models, as exemplified by CIO-100 honoree Federal Express , which, of course, developed a new way for people to ship and track delivery of small packagesHOW TO HIRE AN INNOVATOR Geoffrey C. Nicholson, staff vice president of corporate technical planning and international technical operations at 3M, cites six characteristics he looks for when hiring prospective innovators.
Creativity: People who ask questions and look for solutions, and from whom new ideas flow freely Broad Interests: Eager to learn, lots of hobbies, multidisciplinary skills Problem Solvers: They tinker, have multiple approaches to problems, aren't afraid to make mistakes, and they "do it first, explain it later" Self-Motivated: Self-starters, results-oriented, have a passion about what they do and take initiative Strong Work Ethic: Committed, flexible work habits, driven to completion, dedicated to results Resourceful: They network with colleagues and enlist their help to get things done.