Author: Vijay Govindarajan and Srikanth Srinivas

In three recent blog posts we looked at the innovation mindset in individuals, profiling game changers Jerry Buss, Peter Jackson, and Shantha Ragunathan. These three innovators share common qualities, which we call the innovation mindset, a robust framework which can be applied at the micro (individual) as well as macro (organizational) levels: they see and act on opportunities, use “and” thinking to resolve tough dilemmas and break through compromises, and employ their resourcefulness to power through obstacles. Innovators maintain a laser focus on outcomes, avoid getting caught in the activity trap, and proactively “expand the pie” to make an impact. Regardless of where they start, innovators and innovative companies persist till they successfully change the game.

Take, for example, 3M Corporation. 3M was awarded the US government’s highest award for innovation, the National Medal of Technology. Over a 20-year period, 3M’s gross margin averaged 51% and the company’s return on assets averaged 29%. 3M has consistently been highly ranked, often in the top 20, in Fortune magazine’s annual survey of “America’s Most Admired Corporations.” How do they do it?

Innovative companies provide forums for employees to pursue opportunities.

One of 3M’s strengths (PDF) is how it treats promising employees: give them opportunities, support them, and watch them learn and thrive. 3M provides a rich variety of centers and forums to create a pool of practical ideas that are then nurtured into opportunities and provided the necessary resources for success. Scientists go out into the field to observe customers to understand their pain points. Customers also visit Innovation Centers set up specifically for the purpose of exploring possibilities, solving problems, and generating product ideas. Scientists share knowledge and build relationships at the Technical Council, which meets periodically to discuss progress on technology projects, and the Technical Forum, an internal professional society where 3M scientists present papers— just two of 3M’s fruitful forums.

Arthur Fry, a 3M employee, attended a Technical Council where Spencer Silver spoke about trying to develop a super-strong adhesive for use in building planes; instead, Silver accidentally created a weak adhesive that was a “solution without a problem.” Fry, who sang in a church choir, had the niggling problem of losing the bookmark in his hymnbook. Fry noticed two important features of Silver’s adhesive that made it suitable for bookmarks: the note was reusable, and it peeled away without leaving any residue. Fry applied for and received funding to develop a product based on Silver’s accidental discovery. Thus was born the Post-it note.

Innovative companies create an environment that fosters the right tension with “and thinking.”

One critical balance at 3M is between present AND future concerns. Quarterly results are important but should not be the sole focus; staying relevant is also important but cannot come at the cost of current performance. 3M has several mechanisms to sustain this “and thinking.” Employing the Thirty Percent Rule, 30% of each division’s revenues must come from products introduced in the last four years. This is tracked rigorously, and employee bonuses are based on successful achievement of this goal. 3M also uses “and thinking” in their three-tiered research structure. Each research area has a unique focus: Business Unit Laboratories focus on specific markets, with near-term products; Sector Laboratories, on applications with 3-to-10 year time horizons; and Corporate Laboratories, on basic research with a time horizon of as long as 20 years.

Innovative companies create systems, structures, and work environments to encourage resourcefulness and initiative.

Reporter Paul Lukas best expressed the resourcefulness of 3Mers: “A 3M customer identifies a problem, and a 3M engineer expresses confidence in being able to solve it. He bangs his head against the wall for years, facing repeated setbacks, until management finally tells him to stop wasting time and money. Undeterred, the engineer stumbles onto a solution and turns a dead end into a ringing success.”

Richard Drew is just such an engineer. Running some Wetordry sandpaper tests at an auto-body shop to improve paint removal, he noticed that the painter was not able to mask one section of a two-tone car while painting the other. The tapes available at the time, back in the 1920s, either left a residue or reacted with the paint. Drew assured the painter that 3M could solve the problem and worked on it for two years, eventually receiving a memo from senior management instructing him to get back to work on the waterproof Wetordry sandpaper. Drew did, but he continued working on the tape project on his own time. The result: Scotch tape.

3M has a rich set of structures and systems to encourage resourcefulness:

• Seed Capital: Inventors can request seed capital from their business unit managers; if their request is denied, they can seek funding from other business units. Inventors can also apply for corporate funding in the form of a Genesis Grant. (The Post-it was funded by a Genesis Grant.)
• New Venture Formation: Product inventors must recruit their own teams, reaping the benefit of 3M’s many networking forums as they seek the right people for the job at hand. The recruits have a chance to evaluate the inventor’s track record before signing up. However, if the product fails, everyone is guaranteed their previous jobs.
• Dual-career ladder:: Scientists can continue to move up the ladder without becoming managers. They have the same prestige, compensation, and perks as corporate management. As a result, 3M doesn’t lose good scientists and engineers only to gain poor managers, a common problem in the manufacturing sector.

Innovative companies focus on the right set of outcomes. They tailor what is measured, monitored, and controlled to suit their focus, and strike the right balance between performance and innovation.

3M has created measurement and reward systems that tolerate mistakes and encourage success. 3M rewards successful innovators in a variety of ways: the Carlton Society, named after former company president Richard P. Carlton, honors top 3M scientists who develop innovative new products and contribute to the company’s culture of innovation, and the Golden Step is a cash award. 3M also has a rich tradition of telling the
stories of famous failures that subsequently created breakthrough products— such as the weak adhesive that inspired Post-It notes— to ensure a culture that stays innovative and risks failure for unexpected rewards. Another
3M failure story from its early days, still repeated inside the company: 3M’s initial business venture was to mine corundum, a material they planned to use to make grinding wheels. Instead, what they found was inferior abrasive. After much experimentation came their first breakthrough product: Wetordry sandpaper.

Innovative companies have strong mechanisms to ensure a continuing focus on expanding the pie, by effectively converting non-consumers into consumers, and providing richer solutions to current consumers. In the process they transform their industry, community, country, and sometimes even the world.

3M uses a research and development focus and a unique “15% rule” to ensure continuing effort on expanding the pie. 3M spends approximately 6% of sales on research and development (PDF), far more than a typical manufacturing company. This has resulted not only in new products but also the creation of new industries. David Powell, 3M’s vice president of marketing, affirms R&D’s importance: “Annual investment in R&D in good years— and bad— is a cornerstone of the company. The consistency in the bad years is particularly important.”

William McKnight, who rose from his initial bookkeeping position to eventually become chairman of 3M’s board, best explained the logic of the 15% rule: “Encourage experimental doodling. If you put fences around people, you get sheep. Give people the room they need.” 3M engineers and scientists can spend up to 15% of their time pursuing projects of their own choice, free to look for unexpected, unscripted opportunities, for breakthrough innovations that have the potential to expand the pie. For example, some employees in the infection-prevention division used their “15% time” to pursue wirelessly connected electronic stethoscopes. The result: In 2012, 3M introduced the first electronic stethoscope with Bluetooth technology that allows doctors to listen to patients’ heart and lung sounds as they go on rounds, seamlessly transferring the data to software programs for deeper analysis.

The innovation mindset is a game-changing asset for companies as well as individuals. Innovative companies like 3M use creative “and” thinking and resourcefulness to pursue promising opportunities and strategically meet outcomes, all the while “expanding the pie.” Such organizations create the structure, systems, and culture to enable their people to think and do things differently in order to achieve extraordinary success.

This January, we met Shantha Ragunathan, an illiterate woman from Kodapattinam, a remote village in Tamil Nadu, India. Her story is at once heartbreaking and inspiring, showing that game changers can come from all walks of life, all over the world.

At six, Shantha lost her parents. By her twenties, she was stuck in a seemingly dark pit without a glimmer of hope: with two children and little financial support from her husband, she could not afford even one square meal a day. Although she was poor in resources, she possessed the innovation mindset shared by many game changers: they see and act on opportunities, use “and” thinking to resolve tough dilemmas and break through compromises, and employ their resourcefulness to power through obstacles. Innovators maintain a laser focus on outcomes, avoid getting caught in the activity trap, and proactively “expand the pie” to make an impact. Regardless of where they start, innovators persist till they successfully change the game.

Hopeless as her situation was, Shantha engaged in “and” thinking. She imagined a future when her family would be out of poverty AND her kids would start their adult life educated. Unimaginable as it may seem, she had no real-life role models in her village for this dream. Some of her neighbors had given up all hope and fallen into alcoholism; others exploited their kids with child labor to earn money; still others sacrificed their entire lives in an attempt to get their children out of the vicious circle of poverty—with few successes, despite their sacrifices and heroic efforts.

Shantha’s “and” thinking powered her dream and kept her alert to opportunities. When Ms. Sasikala, a Block Development Officer (BDO), talked to the Kodapattinam villagers about microfinance, only Shantha, of all the villagers, saw the opportunity and took action.

To participate in a microfinance campaign, the village had to form a Self Help Group (SHG) of about 20 people, with each member contributing a certain amount of money every month. To keep the math simple, let’s say $10 (although in this case the currency was Indian rupees): 20 people x $10 each = $200. The bank (in this case Indian Bank) would then loan a matching amount, bringing the available funds to $400. Any member of the SHG, either individually or as a team, could pitch a proposal to use the available funds to a microfinancing committee of bank officials and village elders.

For example, a member could propose to use the money to buy an income-producing asset, such as a cow. Selling the cow’s milk would create an income stream, a portion of which would repay the loan; the remainder would lift the cow-owning entrepreneur out of poverty. The microfinancing committee decided which proposal to fund each month, giving out $400 month for approved proposals: $200 from the SHG contributors and $200 in matching loans from the bank.

While most folks who heard the Block Development Officer’s presentation thought that microfinance was too much work and gave up, or froze into inaction not knowing what to do, Shantha’s resourcefulness kicked into high gear. She went door to door, pleading and pitching. In her own words, “I had to go back over 50 times knocking on the same door because they wouldn’t trust me enough to even give ten rupees [about 20 cents]. I talked to them about how we can work together to solve our problems.” Undeterred, Shantha persisted until she persuaded the required number of people to sign up for the microfinance project.

Shantha formed the SHG and went to the bank, assuring the loan officers that her SHG would start fruitful businesses, like buying cows and selling milk, with the loaned money. She was awarded the bank’s matching micro-credit loan. Then Shantha made her pitch to the microfinancing committee, describing how, with traditional bank loans, they would borrow at very high interest rates and get stuck in a poverty cycle, barely making enough money to repay the interest. The committee, moved by her courage and business acumen, approved her funding.

Shantha was driven, focusing on outcomes. She started with one cow, and with the income from the cow’s milk she repaid the loan and also bought more income-producing assets: sheep, goats, small corner stores, sewing machines, and audio systems rented out for village events. Over a 14-year period, Shantha converted that first, tiny microfinance loan to wealth, including her own house and a college-level education for both of her children. (Her daughter is now a teacher and her son an engineer.) She was so successful that she was appointed by the BDO as a mentor and a consultant to rehabilitate unsuccessful SHGs.

Although she had no formal education, Shantha had strong business acumen and innate leadership qualities. When asked how she learned to manage a business, she said, “I watched the shops in my village. I noticed that those that had sales revenues more than their costs, succeeded. Those that had costs more than their sales revenues, failed. I knew I wanted to succeed. So I made sure revenues exceeded costs.” She trained six other villagers to lead the SHG in her absence—clearly understanding the importance of building a leadership pipeline, without the benefit of an MBA education.

Shantha expanded the pie. She helped other villagers form SHGs and found ways for SHGs to grow. For example, when she heard that a tissue manufacturer was having productivity problems because of constant power cuts, she convinced the company to invest in an SHG that manually assembled the tissue boxes. This resulted in jobs for many villagers as well as cost savings for the company: the tissue boxes were assembled for far lower cost than the machines, but at the same quality.

Shantha Ragunathan is truly a game changer. Shantha’s success spread in a ripple effect from her family and her village to dozens of neighboring villages, ultimately affecting thousands of individuals. From the edge of society, unable to be a consumer, she got “into the game” by acquiring wealth. She brought along with her thousands of people, who also became active participants in the game. Even more important, by serving as a role model, she created the foundation for many more such leaders and game changers to emerge.

We can all make a difference in areas in which we are “poor.” Shantha was poor in money, but others of us are poor in business, health, relationships, career, respect, relationships, or time. We can lift ourselves out of this poverty the way Shantha Ragunathan did: by applying the innovation mindset and changing the game.

Here is a leadership lesson: Be selfish. Be very selfish.

For this message to be an effective leadership tip, we need to understand what selfishness is. Selfishness is typically defined as “concerned excessively or exclusively with oneself.” If someone hears that the CEO is being selfish, the thought that is likely to come to mind is, “The leader is maximizing personal financial rewards even at the cost of the company’s interests.” If that is the case, it is unfortunate and unacceptable. But there is a fundamentally different way to view selfishness. If leaders selfishly take care of their feelings, it will benefit not only them, but also everyone around them, including the companies they lead.

In order to achieve this, leaders must stop harming themselves and, instead, start benefiting themselves. Consider these questions: What are the mental aspects of selfishness that will help us as leaders? What are the mental states that cause us harm that we should reduce or eliminate, and the mental states that will give us benefits that we should acquire or increase?

The first step in becoming a selfish leader is to remove the harmful emotions and negativities that distract us from clear and effective decision making. Take anger, for example. Anger releases neurotransmitter chemicals known as catecholamines that give us a burst of energy. Our heart rate accelerates, our blood pressure rises, and our rate of breathing increases. Our attention narrows and becomes locked onto the target of our anger, and we can’t pay attention to anything else. We are now ready to fight or flee. In the jungle, all this would have been very helpful, but in the modern world where it gets bottled up behind a desk, it has nowhere to go and thus gets tangled within — or worse, spent outwardly toward our employees. The adrenaline-caused arousal that occurs during anger lasts many hours, sometimes days, and lowers our anger threshold, making it easier for us to get angry again later on. In other words, we can easily get trapped in the vicious circle of anger. Just ask yourself a simple question: “As a leader, have I ever made a good decision when I was angry and out of control?”

All negative states of the mind have similar effects. They create a tendency to suck us into a vicious circle. This list of negative states includes hatred, ill will, revenge, fear, ego, entitlement, jealousy, restlessness, anxiety, and depression. The chemicals that cause these feelings can build up over time, and the result is a whole host of psychosomatic diseases. By realizing that we are harming ourselves through these feelings and attempting to stop them for our own good, we are in effect helping ourselves and helping others at the same time. After all, we distribute what we have, magnified many times over. What you feed grows. If you feed anger, it grows. So when we have these negative states, we spread those negativities to others around us. This saps morale and reduces productivity. In other words, the most selfish thing we can do — for ourselves and for others — is to reduce or eliminate negative states.

The second step is to selfishly benefit oneself, and the biggest benefits we can give ourselves are positive states of mind: empathy, kindness, compassion, goodwill, pardon, egolessness, and gratitude. These positive states of mind release serotonin, oxytocin, and other related chemicals that reduce stress, improve our immune system, and drastically reduce our tendencies for psychosomatic diseases. As leaders, when we have positive states of mind, we start distributing those to others around us. We distribute what we have, magnified many times over. This creates a more congenial atmosphere, and improves morale and boosts productivity.

Equally important for leaders and decision makers is the fact that these chemicals improve the clarity of the mind (PDF) significantly, and help us to connect the dots and be creative, understand problems from multiple perspectives, get to the depth of problems quicker, and make quick decisions that are good for us and good for others. Who would have thought that focusing on yourself first can do so much?

There are many ways we can master this level of selfishness. One such approach is a meditation technique called vipassana, which means to see things as they really are (and not as they appear to be, as we want them to be, or as we imagine them to be). Business judgment of leaders is all about getting to quickly decipher what is not so evident at the surface level. When a leader is selfish, there is nothing clouding his or her understanding of the current reality as it is — not as he or she would like it to be, as it appears to be, or as the media describes it to be.

A word of caution: This is easy to understand, yet difficult to practice. But it’s incredibly worthwhile. Awareness of the fact that negative states harm us — whether or not they harm the person the negativity was targeted at — opens the doors to change.

We spread what we have within. When we are angry, we don’t limit that anger to ourselves. We magnify it and throw it on others. Similarly, when we have compassion, we spread that compassion. So as leaders, it is particularly important for us to be selfish — to care for our own state of being over anything else — so that we can then spread the selfishness far and wide.

It’s a jungle out there.

While this simple phrase has been used time and time again to discuss the many obstacles people and companies face, an animal metaphor does describe required innovation actions rather effectively.

Imagine a 2×2 matrix with size on the y-axis and speed on the x-axis. Size can be represented as market share, revenue, or units sold, depending on the context. Speed is the speed of innovation of a company relative to the industry. When a company, product, or service is ahead of the competition, speed is high. When it is lagging behind the competition, speed is low.

But why is relative speed so important? Consider a story where two hunters encounter a lion with no ammunition left in their guns. When one starts to run, the other claims the lion will eat him either way. The first replies, “Not as long as I can run faster than you!”

Just like in the jungle, if you are not faster than the competition, you can get eaten up. The key question is, “What actions can be taken to get ahead of the pack?” — to become a jaguar or to stay a jaguar, as you see in the matrix below.

As a tortoise, breakthrough innovation is critical. An all-out effort at breakthrough innovation should be the primary focus. There are no other options available for companies in this quadrant.

As a rabbit, speed of innovation is high, but it is not translating into size, and it is time to reevaluate. Why is the speed of innovation not translating to size? Do we really understand customer value? Is the breakthrough innovation providing a way to leapfrog in cost or performance? If not, why not? Is usability constraining growth? Is the message not reaching across? Is it too complicated? Or are we so far out that customers are having difficulty embracing the idea? If so, what can be toned down without sacrificing value? Or is there need for more education?

An elephant is the most difficult spot to be in. The size has lulled the organization into overconfidence, complacence, and at times, arrogance. This has to be shaken up to re-instill the spirits that brought on the size in the first place. While protecting today, resources must be channeled to bridge the gap and regain the lead. It is time to step up the game.

And while every company, product, or service strives to be a jaguar, even a jaguar has some steps to take. A jaguar has to be alert — very alert. Otherwise, it can easily become tomorrow’s elephant and the day-after-tomorrow’s tortoise. In fast-changing industries, these moves can be extremely swift. Consider the competitive world of smartphones.

Apple’s iPhone was a jaguar. Big, and years ahead of the competition. It got there through a series of breakthrough innovations: the touchscreen, an integrated smartphone, pricing where the end customer pays $199, and the app store. It was moving fast, but the competition was moving faster. It slipped from jaguar to elephant rather swiftly, and Samsung took over that spot with its Galaxy.

Over a four-year period, the Galaxy caught up with all that Apple had to offer and added several innovations, the key ones being a bigger screen, better GPS functionality, a range of phones to cover all segments from low-end to high-end, better rendering of websites with flash players, and better working relationships with partners — operating system partners like Google and Android, carriers like Verizon, and retailers like Best Buy. It didn’t help that, in addition to complacence, Apple was also arrogant and failed to listen to customer needs. Wall Street recognized this shift early and has punished Apple stock in spite of great quarterly financial performance.

But there have been others. RIM and Nokia were jaguars only a few years ago. They were the leaders in the world of smartphones. The inability to keep pace with innovation got them to the tortoise quadrant rather rapidly. They did not anticipate the pace of change. RIM stuck with its physical keyboard for far too long. Nokia stuck with a dated operating system and bet on a Windows-based platform that took far longer to mature. As a result, both have been reduced to tortoises, and leadership that was built over decades was decimated in just a few years. Their only option now is breakthrough innovation. Unfortunately, they are still attempting to imitate the competition rather than trying breakthrough innovation. They may eke out a living this way but will remain at the mercy of the industry unless they break out of it.

Meanwhile, Microsoft has remained a tortoise in the world of smartphones. While it was successful in getting into a market after others had proven its size and viability many times before, in this case Microsoft has not been able to replicate that, primarily because its previous successes revolved around leveraging the desktop-based Windows franchise. In the case of smartphones, that was not something it could leverage. Its partnership with Nokia was too little too late. HTC is attempting an interesting breakthrough experiment where Facebook becomes more like an ecosystem, rather than an app; it becomes the home screen of the phone. If there are enough Facebook fans that would see extreme value in this, this may give HTC the growth it needs. However, there is no guarantee that this will be a hit. It needs to treat this like a disciplined experiment and fine tune the parameters actively as it gets market feedback. At the same time, HTC needs to sow more seeds of breakthrough innovation, have disciplined experiments, and discover a new value curve that translates to size.

Clearly, every organization must have some seeds of breakthrough innovation and must cultivate its patch in order to ensure a good harvest tomorrow. However, some organizations have a stronger sense of urgency than others, a bigger need to pick up the pace, and the need to move faster. This jungle framework helps put this in perspective.

For a diversified company, this framework can also help it to visually see its portfolio of companies and decide where it should emphasize breakthrough innovation; reevaluate whether something is working or not; shake up overconfidence, complacence, and arrogance; and stay alert and ensure that it continuously strengthens its moat.

Companies face increasing pressure on two fronts — ever-shortening product life cycles that can either grow the top line if they are ahead of the innovation curve or shrink the top line dramatically if they are not, and an increasing array of technologies that can alter the fundamental cost structures and business models. Under such conditions, it is critical for companies to manage their innovation portfolios proactively.

In our last post, we asked the question, “What’s the connection between counting squares and innovation?” In order to come up with the answer, we presented you with the following figure and asked you how many squares you could find. It turns out, the answer isn’t so simple.

It was clear that this was a fun, engaging exercise, as we had 400 comments in the HBR blog post, an additional 312 comments in Facebook, and about 40 individual email responses. We enjoyed reading the comments and seeing the enthusiasm with which you wrote them. Given the number of good responses, we could not choose the top five; instead, we will be giving a copy of Reverse Innovation to 20 winners.

How you arrive at the answer can make a big difference in what you find. In the first “systematic” analysis, we can find 30 squares.

16 (1×1 squares) + 9 (2×2 squares) + 4 (3×3 squares) + 1 (4×4 square) = 30 squares.

The squares were always there, but you didn’t find them until you look for them. At first glance, you can easily see 16 squares. But the reality as it appears to be is often different from the reality as it is — 30 squares. You need to spend time and dig deeper to understand the reality as it is. Innovative solutions are always there for the problems we face, but you won’t find them unless you look for them.

There is a method to the madness (systematically going through 1×1, 2×2, 3×3, and 4×4 squares in this case). It takes time to find the method, but when you do, it opens up many more solutions and opportunities for any innovation problem. To quote one of the commenters, “We need to look beyond what meets the eye and what we are told, for more innovative perspectives both on the problem as well as the solutions born out of detachment to either.”

But can we do even better than a systematic analysis? On a more creative note, there are 30 squares with black edges and 30 squares with white edges. We’ve now discovered 60 squares. Out-of-the-box thinking can open up even more solutions. The foundation of systematic method, combined with out-of-the-box thinking, can result in order-of-magnitude change in performance. There were several creative replies with many more squares, all the way to infinity. Thank you for stretching our thinking. There are no limits to out-of-the box thinking. Only our own imagination is the limiting factor. To quote on of the commenters, “Don’t think it’s impossible, stretch the limits, bend the rules without breaking them — be curious — seek something new — have fun!”

Titan, an Indian company that is part of the giant industrial conglomerate the Tata group, used this theory in practice. Titan wanted to make a new watch, one that someone could use every day. It needed to meet the demands of everyday use under tough conditions in India — water-resistant and able to withstand heat and dust. At the same time, they wanted it to look elegant and ultraslim. Even the Swiss, the leaders in watch manufacturing, thought this was impossible. A watch can either be water-resistant or ultraslim, but it can’t be both. Why? In order to make a watch ultraslim, they must miniaturize the battery. But to make the watch water-resistant, the back cover has to be sealed, making it difficult to replace the battery. A miniaturized battery has a shorter lifespan and would require frequent replacement. Hence, water-resistance and ultraslimness were considered irreconcilable goals.

To the team at Titan, this only meant that they needed to redouble their efforts. They applied breakthrough thinking to resolve what were thought to be design tradeoffs with “and” thinking. They looked at three main components of the watch:

1. The glass cover: The team had the choice between a thick, strong glass casing or a thin glass casing that was flimsy. In the end, they reconciled the paradox and found a solution that was both thin and strong: sapphire crystal glass. It was thin, attractive, and at the same time sturdy. Like the squares in our puzzle, the sapphire crystal glass was always there (the properties of sapphire crystal glass were well-known), but nobody found them until Titan looked for them systematically.
2. The metal casing: Here, they had to choose between a thick, water-resistant cover and a thin cover that was not water-resistant. They resolved this tradeoff by using titanium. It was thin, sturdy, and could provide a water-resistant casing.
3. The battery: As mentioned above, water-resistant means the back casing had to be completely sealed, causing battery changes to be difficult. So they had to double battery life while at the same time miniaturizing the battery. They looked systematically at ways to have a small battery that still did not have to be changed frequently. In other words, they found the 30 extra squares in the puzzle. In doing so, they drastically reduced the movements in the watch, so the battery had less work to do. They also innovated on a motor design that reduced power consumption by 50%, thereby again extending battery life. Finally, they identified a supplier who could miniaturize the battery without any loss in battery life. Thus, Titan ended up with a miniaturized battery that had 200% of the life of a normal battery!

Some of the solutions Titan uncovered were well-known. However, they used systematic thinking to achieve dramatic improvements. They complemented the systematic analysis with out-of-the-box thinking. The end result was the Edge line of watches from Titan that were very successful. The watch was 3.35 mm thin, encompassing a movement that has only 1.15 mm thickness and weighs less than 36 grams. The watch won multiple awards, and thanks in part to the Edge’s success, Titan is now the fifth largest watch manufacturer in the world.

Breakthrough innovation isn’t easy, and while systematic approaches help, taking it a step further with out-of-the-box thinking can lead to new, different, and in some cases, award-winning solutions. So when you’re staring at your next innovation puzzle, don’t stop at 30 squares. Think creatively to find what other solutions may be hiding in plain sight.

Take a look at the following figure, and then consider the questions below.

1. How many squares are there in this picture?
2. How did you arrive at this number?
3. What connection (if any) do you see between this exercise and breakthrough innovation?

We will provide the answers to these three questions in a separate post on Wednesday. In the meantime, you can submit your answers by posting a comment below, along with your email address. We’ll pick five commenters that we feel answer these questions best, and they will be given a copy of the book Reverse Innovation.

Your company’s organizational memory might be holding it back. Consider the following parable:

Two monks — one old and one young — were walking to a village far from their monastery. Along the way they saw a beautiful, young woman waiting at the edge of a stream, too afraid to cross. The young monk reminded himself of his vow not to touch women and continued walking. But to his amazement, the elder monk sped right past him while carrying the young woman, safely across the stream, on his back! When the old monk put her down on the other side of the stream, she thanked him with a respectful bow. The old monk, in turn, gave her a bright smile, and continued walking.

The young monk considered and reconsidered the old monk’s action back at the stream. He could not stop churning. His thoughts grew angrier and angrier. Finally, hours later, he ended up shouting at the old monk, “You broke your sacred vows! You are not supposed to touch a woman! How can you forgive yourself? You should not be allowed back in the monastery!”

Surprised at his outburst, the old monk replied calmly, “I dropped her hours ago. Why are you still carrying her?”

Like the young monk, many organizations carry a heavy burden, and for far too long. The result — obsolete policies and practices, outdated assumptions and mind-sets, and underperforming products and services. This organizational memory creates biases that get embedded in planning processes, performance evaluation systems, organizational structures and human resource policies. This becomes a big burden when non-linear shifts occur.

Examples of the burden of such organizational memory include Blackberry — it could not forget about the physical keyboard when the world had moved on to touch screens, and Microsoft — it could not forget about the desktop as the key computing device when the world had moved on to mobile devices on the one hand and cloud-based services on the other.

How can established organizations be more like the elder monk — and transcend the clutches of the burden of organizational memory when there is a need to respond to non-linear shifts?

Let us look at how Infosys succeeded in this transformation. Infosys initially provided only IT services. However, they noticed that their most demanding clients were frustrated by having to work simultaneously with multiple service firms, each lacking full accountability. They realized that in this frustration lay the seeds of a non-linear shift — and that they would either have to respond quickly and master the shift or become victims of it. They perceived the need for an organization that would provide management consulting services, redesign operations, and write specifications for new IT systems; then develop, test, install and maintain it; perhaps even accept responsibility for executing routine client operations such as transaction processing.

They also realized that the current organizational memory would be a burden for this new reality. So they created a parallel world with different people and distinct processes.

They focused on three key areas:

1. Strategy Making — Instead of linear extrapolation from the past using rigorous data analysis, they focused on anticipating non-linear shifts by bringing in non-traditional voices such as, for example, key clients, and youth (who would have little, if any, organizational memory).
2. Accountability — Instead of focusing on on-time, to spec, within budget delivery, they focused on disciplined experiments with the primary emphasis on learning rapidly, thus eliminating the defensiveness inherent in traditional organizations.
3. Organizational Design — Instead of optimizing the way individuals collaborate through job specifications, work processes and organizational design, they formed special teams with a good mix of “outsiders” to challenge assumptions and bring a fresh set of skills and competencies.

All these changes helped Infosys overcome the burden of the organizational memory of a very successful IT services company, while retaining all of the essential elements that were responsible for its success. As a result of this successful transformation, Infosys grew 25-fold over the decade from 2000 to 2010 — from $200 million to $5 billion.

If you too sense big non-linear shifts in your markets, remember that “organizational forgetting” may be essential to meeting the challenges successfully.

How many times have you seen an incentive system produce the exact opposite of the desired behavior? Why is that? And why can’t organizations see, let alone fix, the problem?

For example, I (Srikanth) went to visit a client in an Asian city. I stayed in a hotel in the middle of the city, and had to meet the client at his factory location that was quite far away. The client suggested that I catch the bus and gave me instructions. I went to the bus stop and waited. Several buses came close to the stop, but they all whizzed by without stopping. It wasn’t that the buses were full. In fact there were plenty of empty seats. After half a dozen buses came tantalizingly close but without stopping to pick up passengers, I finally caught a cab. Upon my later than planned arrival at the factory, I apologized to the client and told him the cause for my delay. The client laughed and said, “The driver’s bonus depends on whether or not he reaches his destination on time. So during peak traffic when they find they are running behind, they don’t bother picking up passengers!”

Here was the height of insanity — an incentive system that succeeded only in defeating its original purpose. At peak time, exactly when more passengers need to be picked up, it was better for the driver to go empty. Frustrated citizens, lost revenue and increased costs all thanks to the incentive system and the driver’s desire to maximize his individual gain. Further, every “man on the street” seemed to know the problem, but not the organization that ran the buses. Or, equally baffling, they knew it and chose to ignore it.

Ever since this incident, we have become more attuned to seeing the misalignment between what people do (reach destination on time) and their underlying purpose (carry passengers to their destination). It turns out this misalignment is far more wide spread than we realized:

• Bankers maximize their bonuses and forget about the health and integrity of the financial system;
• Call center employees hurry you up or transfer you so they can meet their quota of number of calls per hour;
• Sales people maximize their commissions and forget about what best meets client needs (they “upsell,” “supersize,” or promote what has the best commission potential), or what is best aligned with firm capabilities (they sell what doesn’t quite yet exist, as has been the case with many software firms). And when it is the “C” level executive incentivized to maximize their bonus and options, the result is “channel stuffing” — overloading retailers with goods just prior to the end of reporting periods, as was the case with Sara Lee;
• Wherever production is incentivized on units produced or unit costs, organizations produce in bigger batches. As a result, there is more inventory, more cash tied up in inventory and, at the same time, there is less flexibility to cope with changing demand.

If you look around, you will realize that what we have listed here is but a tip of the iceberg; we are sure you will start noticing misalignments all around, and at every level. Steve Kerr, in one of the most popular academic articles ever published, mentions several such instances of improper incentives .

Why are organizations oblivious to these frustrating, and costly, mismatches?

Awareness of the problem can help organizations take the next step — effective measures to correct it. Once management teams understand the behaviors that are driven by their measurement and reward systems, they should calibrate to make sure they are incentivizing exactly the behaviors they want from their people. They should remind managers and employees alike of what should be measured and rewarded. They should also be on alert and watch for undesirable behaviors and trace back its connection with reward systems.

But even the best designed incentive systems can only go so far. In the final analysis, it is essential that leaders have a strong inner compass to do the right thing in spite of measurement and incentive systems. Purpose has to shine through loud and clear. Narayana Hrudayalaya (NH) is one such organization where purpose shines through in everything they do: “affordable, quality cardiac care for the masses.” In spite of the fact that only 40% of the patients pay the full fee and they are cheaper than comparable Indian hospitals by at least 50% (and much cheaper by international standards), they are a profitable organization. How did they do it? Because they started with the question, “How can we provide quality, affordable care to the masses?“; not with, “How do we maximize stockholder returns by designing the right incentives?“. That led them to a strategy that involved attracting paying patients with its reputation for high quality and, at the same time, having a relentless focus on lowering costs; and to use the surplus gained from the paying patients to subsidize the rest. With the large volume of surgeries performed and with specialization of surgeons, their productivity was high and the quality outcomes were world class, but at a fraction of the cost. There are no incentives based on volume or revenue for the surgeons or for the employees. Purpose was the driver. Profits were the enabler of their dreams.

Clearly, there are no easy answers. On the one hand, good measurement systems are needed to track progress, and incentive systems are needed to motivate and align people. On the other hand, it is far more important to stay true to the purpose. We believe the pendulum has swung too far one way, and that balance needs to be restored.