Author: Scott Anthony

You’ve been working at a small start-up for a while now when a large, deep-pocketed corporation comes knocking, asking you to join its innovation team. Should you take the job? Will this be the chance to exercise your entrepreneurial imagination in a more secure environment with ample assets? Or will you end up drowning in bureaucracy, pining for the white-knuckled start-up pace you’re used to?

We have similar concerns whenever we consider accepting an innovation engagement. Since 2009 we’ve conducted close to 500 innovation-related projects with about 100 large companies. Drawing on that experience, we’ve developed a set of questions that helps us to determine how effective our innovation efforts are likely to be, before we agree to sign on. Asking the five questions below can give you a sense of how receptive a company is likely to be to the uncertainties, pace, and culture innovators need to do their best work.

1. Is the company “healthy but worried?” It seems obvious that you’d want to join a company that’s growing or is at least financially stable. Certainly, companies in crisis are difficult environments for innovators to thrive within because management’s attention is overwhelmingly (and appropriately) focused on fixing the immediate misfortune. But a company in which everything is going gangbusters is likely to be one that does not feel the need to innovate (this is the innovator’s paradox).To be valued, innovators need to be in an organization that recognizes that maintaining the status quo carries significant risk and so is prepared to take on the uncertainties that come with innovation. The innovator’s sweet spot is at a company where commitment to transformative change outpaces the early warning signs of tectonic industry shifts.
2. Is leadership truly committed to innovation, or is it just giving it lip service? Admittedly, this question can be hard to answer from the outside, but the clearest signal is the amount of time leadership spends on topics related to innovation. If it is a meeting a quarter, be wary. Innovation is an unnatural act inside most companies, and without top leadership engagement innovators are likely to struggle. A good rule of thumb is that anything that takes up less than 20% of senior leaders’ time isn’t a priority to them. So look for someone on the top management team who is spending at least a day a week on innovation.
3. Does someone in top management or on the board have firsthand experience with innovation? Ideally, you want someone in a senior position to be intimately familiar with innovation’s trials and tribulations. For example, Intuit founder Scott Cook’s presence on Procter & Gamble’s board of directors has boosted P&G’s innovation efforts. Cook’s personal passion and innovation experience has helped P&G maintain its commitment to innovation even through downturns in economic cycles or struggles in its effort to systematize the pursuit of growth through innovation. Watch out for a management team stacked with industry lifers encountering disruptive change for the first time — particularly if the board is also stacked with management cronies.
4. Is inquisitiveness part of this company’s culture? Some companies encourage curiosity, looking to learn from companies both inside and outside their industry and displaying a willingness to try new approaches. They have a degree of humility, recognizing that they don’t have all the answers. It is hard for innovation to stick in overly insular environments that lack innate curiosity. Ideas that are different from the status quo tend to either be rejected or shaped until they resemble something familiar. Signs of inquisitive organizations include participation in cross-industry consortiums and conferences and investment in blue-sky academic research. Inquisitive organizations also carefully study innovation efforts that didn’t work out, seeking to extract useful lessons. Asking “How do you handle commercial failure?” can be a great way to gauge organizational curiosity.
5. Does this company have a problem it’s trying to fix? Ideally, you’d want to join a company that knows which areas it’s struggling with. Perhaps a competitor seems to keep getting the upper hand. Or leaders know the firm should be in a certain market but can’t figure out how to compete there. Or they know that a disruptive technology is getting close enough to the mainstream that it simply can’t be ignored any longer. These conditions create a need for demonstration projects that showcase the impact innovation can have.

If you happen to be considering an innovation role inside a company, consider how many of these conditions the company meets. Missing one is likely fine, but any more than that and odds are high that in less than a year you’ll be eagerly eyeing your next career shift.

I love Lean. In my eyes, the work Steve Blank, Eric Ries, and others have done to provide a cogent, accessible frame around the academic concepts of emergent strategy is one of the most important contributions to the innovation movement over the past few years.

I have repeatedly stated that the next wave of innovation will come from companies that harness the transformational power that too often lies latent inside their organizations. There is a growing sense that so-called lean start-up techniques — developing a minimal viable product, learning in the marketplace, and pivoting based on market feedback — can help to unleash this potential. Indeed, in this month’s Harvard Business Review cover story, Blank notes that the development of the lean start-up toolkit comes “just in time” to “help existing companies deal with the forces of continual disruption.”

If I had a quibble with lean techniques it is with the extreme perspective that some practitioners take that research and thinking are useless — that learning comes only from developing prototypes and testing in-market. That’s not right. Any initial strategy for a new growth business will be partially wrong, but the thinking that went into it is likely to be partially right, too. Good innovators invest the time to research their opportunities and formulate as robust hypotheses as they can so that they focus the learning from their experiments.

Consider the research Jeff Bezos did before he founded Amazon.com that led him to focus on books rather than music, clothing, or electronic appliances. Studying the book market then led Bezos to locate his company near some of the major book distributors. Sure, he might have gotten there through experimentation, but studying market dynamics helped him to cut a couple of corners. There’s no doubt that people inside large companies over-engineer business plans, but don’t let the pendulum swing too far the other way.

Of course, the value of a tool depends on its application. Innosight’s field experience helping large companies more systematically pursue the creation of disruptive growth businesses suggests that leaders looking to leverage lean should heed three pieces of advice.

• Create mechanisms to enable experiments. One of Blank’s most important points is that there are no answers inside the building — entrepreneurs need to learn in the marketplace. Corporate leaders can take steps to encourage this kind of market-based learning. Consumer packaged goods companies can test ideas in the corporate store where employees shop, for instance. Telecommunications companies can create a small secondary network where they can test ideas without running the risk of interrupting service to millions of customers. Service companies might have a handful of clients that agree to be guinea pigs for new ideas. These kinds of mechanisms help to reduce the friction of testing — and accelerate the process of learning.
• Pick people carefully. I call it the Jordan fallacy, in homage to Michael Jordan’s one-year with the Chicago White Sox AA affiliate. Jordan was undoubtedly one of the best basketball players we’ve ever seen. But when he left basketball to play another sport, he couldn’t compete with athletes who had spent their entire lives perfecting their craft. Sure, he was better at baseball than 99% of the population, but he simply wasn’t world class. Companies fall into the Jordan fallacy when they ask their very best operators, who are skilled at executing a known business model, to transform overnight into entrepreneurs who are skilled at searching for an unknown business model. That doesn’t mean that companies should either outsource the task or bring in entirely fresh blood. It’s vital to include people in innovation initiatives who know how to work internal systems and have a good understanding of the unique, difficult-to-replicate assets that create your company’s competitive advantage. The best candidates for this role might be hidden not among your top performers but among the “aliens” who live at the fringes of your organization.
• Be prepared for lean’s consequences. My colleague Mark Johnson notes how a company’s business model eventually leads to a set of implicit rules, norms, and metrics that govern its operation. Following the lean start-up methodology can require making rapid decisions about funding a particular venture; quickly killing ideas that hit too many roadblocks; or launching an idea before it has gone through the typical quality control process. Companies with rigorous annual-planning processes or ones with very deliberate, consensus-based decision mechanisms will struggle to truly embrace the lean start-up approach because it will run counter to many of these systems. Leaders have to carefully ensure that their resource allocation, portfolio management, and incentive systems encourage the rapid-fire experimentation that characterizes a lean start-up.

There are indeed substantial opportunities for companies to build cultures that are conducive to lean start-ups. Blank notes that Qualcomm, General Electric, and Intuit already have. By remembering these three pointers, leaders can maximize their chances of joining this list in practice, not just in theory.

Who is the world’s most innovative company? The editors of Fast Company say Nike. Last year, number crunchers at Forbes found that Salesforce.com is the company with the highest “Innovation Premium” baked into its stock price. MIT Technology Review didn’t pick a winner, but on its recent list of top 50 “disruptors,” the magazine mixed stalwarts such as General Electric and IBM with up-and-comers, Square and Coursera.

The difference of opinion isn’t a new thing — in fact, if you look back a few years at similar lists you’ll see less than 50% overlap. Why? Perhaps a company’s ability to innovate doesn’t last long. Or perhaps it is difficult to really tell how well a company’s innovation engine is functioning — so magazine editors are susceptible to the latest hot product or service.

There’s no doubt: measuring “innovation” is a fuzzy business. Part of the problem is there isn’t a clear consensus on what marks an innovative company. But there are some measurements that try.

Since the primary purpose of innovation for private companies is financial impact, ” Return on Innovation Investment (ROII) is a reasonable, aggregate measuring stick for innovation — you can calculate ROII by taking the profits or cash flows produced by innovation and dividing that figure by the cumulative investment required to create those returns. Conceivably, this ratio could look backwards (measuring the actual results of historical investment) or forward (measuring the expected value of current investments in innovation).

While ROII can be of some utility, it doesn’t precisely measure how a company achieved a particular result. That’s where the Dupont analysis come in.

In the 1920s, while companies used return on equity to assess their performance, DuPont recognized that the single metric had its limits. So it began disaggregating return on equity into three components.

Return on equity (net income divided by equity) results from multiplying three key operating ratios:

1. Profitability (net income over sales)
2. Operating efficiency (sales over assets)
3. Financial leverage (assets over equity)

This simple formula provides rich insight into a company’s business model, and can quickly diagnose a company’s strengths or opportunity areas.

With Dupont in mind, we can come up with a better measurement by sub-dividing ROII as follows:

1. Innovation magnitude (financial contribution divided by successful ideas)
2. Innovation success rate (successful ideas divided by total ideas explored)
3. Investment efficiency (ideas explored divided by total capital and operational investment)

This split would highlight different innovation strategies available to companies. Companies that played it relatively safe could have a high success rate, low magnitude, and high efficiency. A company could achieve the same returns by compensating for lower success rates with higher efficiency or magnitude.

This kind of breakdown would be valuable for both leaders and investment analysts who want to assess a company’s innovation capacity. It might even turn out that this framing highlights a few archetypical strategies that are more (or less) appropriate for different corporate circumstances.

One challenge today is that few companies have these numbers at their fingertips, and the lack of common definitions and publicly available statistics makes benchmarking difficult. Simple questions, like “what defines an idea?” or “what does ‘success’ mean?” need to be answered in consistent ways.

Given how critical innovation is for a company’s long-term success (and sometimes survival), perhaps it is time to mandate that publicly traded companies regularly report on their innovation pipeline and the key drivers of their innovation performance.

Until they do, at least be wary of the next company that graces a magazine cover. After all, half of the top 20 companies traded on U.S. equity markets* on BusinessWeek’s 2008 list ended up underperforming broader market indices between March 2008 and March 2013. While strong performance by Amazon.com and Apple meant an investment in those 20 companies beat an investment in the S&P 500, Blackberry (see Research in Motion), General Motors, Nokia, Sony, and Toyota certainly have had their share of difficulties over that time period.

* The top 23 also included India’s Tata Group and Reliance Industries and Germany’s BMW.

The Fog of Innovation — that moment when you realize that the data you need to make a critical decision about an innovative idea just isn’t clear. Unfortunately, the data rarely are.

For most large companies that find themselves lost in the fog, the default answer is to keep studying. After all, a risk that doesn’t pan out tends to have more negative repercussions than risks not taken. But remember: data only become crystal clear when it is too late to take action on that data. And time spent waiting for perfect clarity creates room for disruptive upstarts and hungry competitors.

Notably, there is a group that don’t get stuck in the fog: Venture capital-backed startups. (The do, however, have other issues.) How does a startup do it without all of the analytical horsepower of a large company? It works best when three components come together:

1. Active stakeholders with grounded intuition. Venture capitalists have significant pattern recognition skills related to both startup companies and specific markets. Good ones attract board members and other advisers with complementary skills. Ample experience and a diverse skill set helps stakeholders makes sense of what might not be obvious to others. Decision-makers assessing a market about which they know nothing not surprisingly demand significant proof before making a decision.

2. Quick decision making. At most startups, decision-making matches the pace of discovery rather than being held hostage by the complexities of calendar juggling. I remember distinctly a large company that proudly told me about how it got all of its most important executives to sit on an all-powerful innovation board that met every 90 days. “What if,” I asked, “the day after a meeting, the team discovered its strategy needed a wholesale revision?” Silence.

3. A scarcity mentality. Nothing focuses the mind like a dwindling bank account. Venture capitalists almost always stage investment in companies. Investment capital isn’t tied to an annual budget cycle; it is tied to estimates of what it will take to address key assumptions.

The military too faces the need to make decisions when information isn’t clear. (In fact, the idea for this blog post came while watching the Academy Award winning documentary on former Secretary of State Robert McNamara called The Fog of War.) One doctrine taught to Marines is the so-called 70 percent rule. The goal is to get enough data so that you are 70 percent confident in your decision, and then trust your instincts. If you have less data, you are making a close to random decision. If you wait until the data is perfect, the opportunity to make a decision that has impact probably passed you by.

When Karl Ronn recently said, “Companies that think they have an innovation problem don’t have an innovation problem. They have a leadership problem,” I listened carefully.

I featured Ronn, a former P&G executive (and current executive coach and entrepreneur), in several places in The Little Black Book of Innovation, most notably for his rant against the evils of focus groups. Ronn is thoughtful, widely read, a seasoned practitioner, and a great communicator.

Ronn’s basic idea was that four decades of academic research and two decades of conscious implementation of that work have provided robust, actionable answers to many pressing innovation questions. Practitioners have robust tools to discover opportunities to innovate, design, and execute experiments to address key strategic uncertainty; to create underlying systems to enable innovation in their organization; and to manage the tension between operating today’s business and creating tomorrow’s businesses. Large companies like IBM, Syngenta, Procter & Gamble, 3M, and Unilever show that innovation can be a repeatable discipline. Emerging upstarts like Google and Amazon.com show how innovation can be embedded into an organization’s culture from day one.

Yet, with all of this progress it still feels like a positive surprise when you see a large company confidently approach the challenges of innovation.

In Building a Growth Factory, my co-author David Duncan and I suggested at least one root cause: too many companies use point solutions to address a systematic challenge: Let’s run an idea challenge! Have an ideation session! Form a growth group! Open a corporate venturing arm! Create incentives for innovation!

None of these is bad, but point solutions don’t solve system-level problems. Duncan and I suggest working on four systems — a growth blueprint, production systems, governance and controls, and leadership, talent, and culture. It isn’t easy to do all of that, but it is what is required to really make innovation work at scale.

Ronn agrees, but notes that the responsibility for such systemic work ultimately rests with a company’s leadership team. And it’s absolutely necessary. Research by Clayton Christensen, Rita McGrath, Richard D’aveni, and Richard Foster make very clear that we are in a new era where competitive advantage is a transitory notion. (McGrath’s forthcoming book is provocatively titled The End of Competitive Advantage.) Any executive that doesn’t make innovation a strategic priority, ensure there is ample investment in it, and approach the problem strategically is committing corporate malfeasance.

Further, leaders can’t just set the context and hope that innovation happens. Innovation is enough of an unnatural act in most companies (which were built to scale yesterday’s business model, not discover tomorrow’s) that it requires the day-by-day attention of the company’s top leadership team or it simply won’t stick.

Critically, leaders have to figure out how to manage two distinct operating systems: one that minimizes mistakes and maximizes productivity in today’s business versus one that encourages experimentation and maximizes learning in tomorrow’s business. It isn’t either/or. It is both/and.

So what stops senior executives from rising to the innovation challenge? Leaders will typically highlight factors such as short-term pressures from investors, talent deficiencies, the challenge of implementing innovation-friendly rewards structures, the still fuzzy nature of innovation, and, in candid moments, their own discomfort with the different mental frames required to lead innovation.

Those are real issues that haven’t been comprehensively solved. But forward-thinking leaders need to heed the advice of Amazon.com’s Jeff Bezos, who says that innovation requires being “willing to be misunderstood for long periods of time.”

It’s time for leadership to step up. Match innovation rhetoric with personal involvement and investment. Move beyond narrow solutions to more systemic approaches. Raise aspirations from being the most innovative company among a tightly defined peer group to approaching innovation like Amazon, Pixar, 3M, or IBM. Actions that feel like luxuries today will be imperatives tomorrow, so get started.

Take a look at your innovation pipeline. Odds are it is overflowing with rich ideas brimming with growth potential… on paper at least. Look deeper. Identify the projects that are the most different and disruptive, the ones with the greatest potential to create new growth. How are they staffed? If you are like all too many companies, at least a few will be staffed with — or even led by — people who allegedly are spending five or 10% of their time on the project.

A sprinkle of this and a dash of that can make a nice soup, but it’s no way to create vibrant growth businesses. If you really want to disrupt, if you really want to transform, you need to make sure your high-profile projects have their Innovation Pig.

That title (sorry vegetarians) comes from the aphorism about the different role the pig and the chicken play in a ham-and-eggs breakfast. The chicken participates, but the ham is committed. (My colleague Joe Sinfield first shared this metaphor with me; others have used it to describe everything from investing in startups to successfully managing product development to a 2008 appearance in Dilbert.)

Ask yourself how many startups are successfully launched by teams of part-timers. Some of the early work can be of the legendary-seeming nights-and-weekend variety, but creating a new business requires diligent, consistent, daily work by a committed team.

There are plenty of tasks that can be done effectively by partially allocated teams. But creating a new growth business isn’t one of them. If you want to do something bold, make sure you have your Innovation Pig.

The other week I met with the leader of a new growth business for a large Asian company. The meeting was miles away from the corporate headquarters. The leader proudly showed me around her office, pointing out how the open, energetic feel compared to the closed-door, corporate nature of headquarters. The young staff certainly seemed to be enjoying itself in the lounge that was well-stocked with booze and snacks.

“So, what does your corporate parent give you?” I asked.

“Absolutely nothing,” the leader replied without some degree of pride. “Except funding, of course. Otherwise, they completely leave me alone.”

I didn’t want to burst the leader’s bubble, but I gently explained to her that what she said was actually quite troubling. The reality is she is fighting a tough battle with one hand behind her back. And the odds are pretty high that she is going to lose.

Yale School of Management Professor Dick Foster notes that a single firm cannot innovate faster than the market in which it participates. Why is that? Consider three key differences between a startup and an autonomous business formed by a large company:

1. Talent. A startup chooses the very best talent it can find to tackle an opportunity. The autonomous business more often than not chooses key leaders from its parent company, even if they haven’t had relevant experience (a problem I described here).
2. Funding. The startup receives a finite slug of funding to demonstrate its viability. It has to zig and zag to find success before it runs out of money. The autonomous business will typically draw funding via the annual budgeting processes. As long as it doesn’t fall on its face, it can chug along with its predetermined strategy. Since that strategy is likely to be wrong, the lack of adjustment is bad, not good. Too much capital can be a curse.
3. Governance. The startup is governed by a Board of Directors that typically includes an eclectic mix of founders, financiers, and advisors. That Board probably meets at least monthly and is on call if any quick decisions need to be made. The autonomous business is controlled by the parent company. Reviews might happen quarterly. Just getting a meeting on a senior leader’s calendar can take weeks. Forget about quick decisions.

The end result too frequently is the market speeds ahead of the autonomous organization. A large company just can’t innovate faster than the market.

But a large company can innovate better than the market.

There are some things that only large companies can do, because they have unique assets like technology, channel relationships, relationships with regulators, scale operations, and so on. In my recent HBR article, “The New Corporate Garage” I profiled fourth-era corporations that created powerful growth businesses by combining these kind of difficult-to-replicate assets with “just enough” entrepreneurial behaviors. And in “Two Routes to Resilience,” Clark Gilbert, Matt Eyring, and Richard Foster described how companies that have successfully transformed their business in the face of disruptive change have made smart use of a “capabilities exchange” that allows new growth businesses to selectively draw on unique enabling capabilities without being overly constrained by legacy business models and mindsets.

If a company really wants pure unbridled entrepreneurialism, it should invest in a startup rather than creating a compromised organization that neither has complete freedom nor truly unique capabilities. If a company really wants to do something remarkable, it has to confront the very real tensions between operating a big business and supporting entrepreneurial behavior and between leveraging unique capabilities and being constrained by them. Those tensions will always make a company move more slowly than an unburdened startup. But mastering these tensions can allow companies to do what a startup cannot.