Innovation is the key idea that is shaping corporate life, helping leaders conceive previously unimagined strategic options. Take acquisitions, as an example. Most are justified on the basis of cost and capital reduction: for example, the merger of two pharmaceutical companies and the global rationalization of overhead and operations and the savings from combining two sales forces and R&D labs. You can, however, buy earnings through acquisitions for only so long; cost-control, however necessary, is a defensive strategy.
Innovation enables you to see potential acquisitions through a different lens, looking at them not just from a cost perspective, but also as a means of accelerating profitable top-line revenue growth and enhancing capabilities. For example, the innovation capabilities of P&G were enhanced by its acquisition of Gillette. Its market-leading brands (such as Gillette, Venus, Oral B, and Duracell) are platforms for future innovations; and core technologies in blades and razors, electronics, electromechanics, and power storage strengthen the technology portfolio from which P&G can innovate in the future.
Innovation also provides an edge in being able to enter new markets faster and deeper. In large part, it is P&G's revived innovation capacity that is allowing it to make inroads into developing markets, where growth is double that in rich countries.
Innovation puts companies on the offensive. Consider how Colgate and P&G, effective serial innovators, have innovated Unilever out of the U.S. oral-care market. The company that builds a culture of innovation is on the path to growth. The company that fails to innovate is on the road to obsolescence. The U.S. domestic automakers and major companies such as Firestone, Sony, and Kodak all used to be industry leaders, even dominators. But they all fell behind as their challengers innovated them into second place (or worse).
Peter Drucker once said that the purpose of a business enterprise is "to create a customer." Nokia became number one in India by using innovation to create 200 million customers. Through observing the unique needs of Indian customers, particularly in rural villages where most of the population resides, it segmented them in new ways and put new features on handsets relevant to their unique needs. In the process, it created an entirely new value chain at price points that give the company its desired gross margin. Innovation, thus, creates customers by attracting new users and building stronger loyalty among current ones. That's a lot in itself, but the value of innovation goes well beyond that. By putting innovation at the center of the business, from top to bottom, you can improve the numbers; at the same time, you will discover a much better way of doing things -- more productive, more responsive, more inclusive, even more fun. People want to be part of growth, not endless cost cutting.
A culture of innovation is fundamentally different from one that emphasizes mergers and acquisitions or cost cutting, both in theory and practice. For one thing, innovation leaders have an entirely different set of skills, temperament, and psychology. The M&A leader is a deal maker and transactionally oriented. Once one deal is done, he moves to the next. The innovation leader, while perhaps not a creative genius, is effective at evoking the skills of others needed to build an innovation culture. Collaboration is essential; failure is a regular visitor. Innovation leaders are comfortable with uncertainty and have an open mind; they are receptive to ideas from very different disciplines. They have organized innovation into a disciplined process that is replicable. And, they have the tools and skills to pinpoint and manage the risks inherent in innovation. Not everyone has these attributes. But companies cannot build a culture of innovation without cultivating people who do.
Myths of Innovation
The idea of innovation has become encrusted by myth. One myth is that it is all about new products. That is not necessarily so. New products are, of course, important but not the entire picture. When innovation is at the center of a company's way of doing things, it finds ways to innovate not just in products, but also in functions, logistics, business models, and processes. A process like Dell's supply chain management, a tool like the monetization of eyeballs at Google, a method like Toyota's Global Production System, a practice like Wal-Mart's inventory management, the use of mathematics by Google to change the game of the media and communications industries, or even a concept like Starbucks's reimagining of the coffee shop -- these are all game-changing innovations. So was Alfred Sloan's corporate structure that made GM the world's leading car company for decades, as was P&G's brand management model.
Another myth is that innovation is for geniuses like Chester Floyd Carlson (the inventor of photocopying) or Leonardo da Vinci: Throw some money at the oddballs in the R&D labs and hope something comes out. This is wrong. The notion that innovation occurs only when a lone genius or small team beaver away in the metaphorical (or actual) garage leads to a destructive sense of resignation; it is fatal to the creation of an innovative enterprise.
Of course, geniuses exist and, of course, they can contribute bottom-line-bending inventions (see Jobs, Steven). But companies that wait for "Eureka!" moments may well die waiting. And remember, while da Vinci designed a flying machine, it could not be built with the technology available at the time. True innovation matters for the present, not for centuries hence. Another genius, Thomas Edison, had the right idea: "Anything that won't sell, I don't want to invent. Its sale is proof of utility and utility is success," he told his associates in perhaps his most important invention -- the commercial laboratory. "We can't be like those German professors who spend their whole lives studying the fuzz on a bee," he said. Generating ideas is important, but it's pointless unless there is a repeatable process in place to turn inspiration into financial performance.
Innovation is a Social Process
To succeed, companies need to see innovation not as something special that only special people can do, but as something that can become routine and methodical, taking advantage of the capabilities of ordinary people, especially those deemed by Peter Drucker as knowledge workers. It is easy to put it off because you are rewarded for today's results, because the organization doesn't seem to support or value innovation, because you don't know where to find ideas, because innovation is risky, or because it is not easily measured. But these are excuses, not reasons. We have both observed and practiced innovation as a process that all leaders can use and continue to improve. It is broader, involves more people, can happen more often, and is more manageable and predictable than most people think.
But making innovation routine involves people. In real life, ideas great or good do not seamlessly work their way from silo to silo. No, from the instant someone devises a solution or a product, its journey to the market (or oblivion) is a matter of making connections, again and again. Managing these interactions is the crux of building an innovation organization. In a phrase that will recur throughout this book, innovation is a social process. And this process can only happen when people do that simple, profound thing -- connect to share problems, opportunities, and learning. To put it another way, anyone can innovate, but practically no one can innovate alone.
When you as a leader understand this, you can map, systematize, manage, measure, and improve this social process to produce a steady stream of innovations -- and the occasional blockbuster. Innovation is not a mystical act; it is a journey that can be plotted, and done over and over again. It takes time and steady leadership, and can require changing everything from budget and strategy to capital allocation and promotions. It definitely requires putting the customer front and center, and opening up the R&D process to outside sources, including competitors. But it can be done.
And no, belying another myth: Size doesn't matter. Innovation can happen in companies as large as P&G, Best Buy, GE, Honeywell, DuPont, and HP and as small as my father's shoe store in India. I remember vividly how we used to sit up on the roof to get a whiff of relief from the evening heat, talking about what to do better and how. When I was nine years old in 1948, we changed the game of the shoe business in Hapur, the town where we lived and our business was located. Even though we had no sophisticated understanding of branding -- in fact we never used the word brand -- we named a line of shoes "Mahaveer" (after my cousin) and targeted it at the "rich people" largely associated with the local grain trading exchange, the second largest in India. We persuaded manufacturers to produce a special line of shoes for this target audience and became number one in town in less than two years. The profits from this innovation funded my formal education in India.
This was excerpted from the book, The Game Changer, by A.G. Lafley and Ram Charan. For more information about the book visit: http://www.ram-charan.com/game_changer.htm
A.G. Lafley is the chairman and CEO of P&G, which is consistently recognized as one of the most admired companies in the world and a great developer of business leaders. Ram Charan is the coauthor of the bestseller Execution and the author of What the CEO Wants You to Know, Know-How, and many other books. He advises the leaders and boards of companies around the world, including GE, DuPont, Nokia, Verizon, and the Thomson Corporation.