James Scott.CEO FORUM.APRIL 2012
Without the ability to innovate, businesses die. Yet firms often stumble when it comes to even modest attempts at innovation. The truth of the matter is that successful innovation is hard. Few businesses get it consistently right, but most can learn how to improve their innovation strike rate.
Innovation enjoys an exalted status. No one has a bad word for it. Is there a corporate mission statement anywhere that fails to mention innovation? Has anyone ever seen an organisation describe itself as ‘non-innovative’?
People certainly possess high expectations of innovation.
The website for the federal government’s Department of Industry, Innovation, Science, Research and Tertiary Education tells us that innovation ‘…is the key to answering the challenge of climate change, the challenge of national security, the age-old challenge of disease and want. It is the key to creating a future that is better than the past.’ It goes on to say that innovative thought is wasted if not properly captured and practically applied. That’s what the national innovation system is intended to do.
The department is very ambitious when it comes to innovation. Indeed it has spawned a whole ecosystem of innovation coordinating committees, innovation advisory councils and separate industry bodies devoted to the subject. In turn, much of this innovation infrastructure is replicated at the state and territory level. Australia even boasts a ‘festival of innovation’.
In short, innovation has become a patriotic duty.
Practically, most business people have somewhat more modest ambitions for innovation, although they are conscious of how, for example, innovation in information technology has given birth to entirely new industries, destroyed others, transformed consumer expectations and behaviours, and created a whole new dimension of business value.
Innovation has been described as change that adds value. It is the adding of value that is difficult — sometimes change simply produces something that is different, but not better. It can be difficult to make things even a little bit better and all too easy to make them quite a lot worse.
What we do know is that an organisation’s culture will often determine how successful it is at innovation. Innovation rarely just spontaneously happens. It has to be incubated and nurtured. Get the culture right and the rest will likely follow.
Last year KPMG and the University of Sydney decided to take another look at the link between innovation and organisational culture. The result was a study, Managing Successful Innovation, based on the real-life experiences of 27 CEOs drawn from the top 300 ASX listed companies. We collected 54 stories about innovation from these CEOs, half that were about successful innovation and the remainder that were about failed innovations. We grouped the CEO stories into categories representing three styles or types of innovation we had identified in typical business environments:
- incremental innovation (24 stories)
- evolutionary innovation (16)
- revolutionary innovation (14)
Yes, classifications of this kind are arbitrary, but they do help make sense of people’s experiences and, in this case, they do reflect what actually happens in the business world. We are interested in how CEO behaviour — particularly the force of the CEO’s personality and his/her approach to new ideas — supports or undermines particular innovation strategies or styles. Of course, the way in which CEOs think about innovation is at least partly shaped by the problems they need to solve, the contexts they find themselves in and entrenched organisational cultures. Nevertheless we believe the classification used in the study respects the varying forms innovation can take and the different demands it makes of organisations and their CEOs.
Incremental innovation is about doing what the organisation already does now, but doing it better. It often means solving problems rather than introducing something completely new. What needs to be done to make incremental innovation a reality is often well understood. The best person to solve the problem is not necessarily the CEO, but someone (or some group) at the organisation’s coalface.
Incremental innovation is usually driven from inside the organisation and typically extends the use of existing systems and processes. It is bottom up rather than top down. It often works best when senior management empowers people to make the changes, rather than trying to impose them from on high. It is typically non-threatening to powerful and influential people in the organisation; it does not demand a forceful personality to drive it through to completion.
The incremental approaches to innovation described by CEOs in the study were simple and made part of normal business practice. One organisation asked its people to write down and submit the details of any process they were involved with that did not make sense or seemed pointless. More than 2500 submissions were received over a 3-year period, most of which were considered very constructive.
Moderately high levels of uncertainty in an organisation’s external or internal environment can trigger evolutionary innovation. It is about significantly extending or changing the existing business model, but not throwing it out altogether. It can sometimes seem very threatening to people. It demands a great deal of the organisation and of the CEO individually. Indeed the CEO’s role is central.
For evolutionary innovation to succeed, the CEO has to believe in the idea. Australian CEOs typically consider an organisation’s culture as either the key enabler of evolutionary innovation, or the main impediment to its progress. The organisation’s structure is often the starting point. (If the structure is unsuitable to the task, it can be the finishing point too.) Three other interesting insights came out from the CEOs’ experience with evolutionary innovation.
- Process seemed to play an ambiguous role in the stories of evolutionary change. In recounting their success stories, CEOs never mentioned the need for more or better process, yet in their stories of failure the need for process was often raised. Then process was valued because it appeared to reduce uncertainty and risk.
- Many CEOs were suspicious of an ideas-based approach to innovation where the innovation was based on a single powerful idea or vision. Yes, ideas were the essential starting point, but being able to execute them effectively was what really mattered. Execution, in turn, came back to personality driven, culture sourced and process based styles and how these could be coordinated.
- CEOs agreed that successful evolutionary innovation had to cut through organisational hierarchies and silos. It was insufficient to possess the right culture if organisational structure stopped good things from happening.
Industry level or economy wide disruption is often the precursor of revolutionary innovation. Many believe this is precisely what is happening in many sectors of the Australian economy today. Revolutionary innovation can involve radical surgery to, or the replacement of, an organisation’s business model. The need for change can be so strong and obvious, that a collaborative, inclusive management style on the part of the CEO can be more effective than the possession of a strong personality.
Interestingly, the stories uncovered in our study suggest that revolutionary innovation in Australia is likely to be the result of collaboration between separate organisations. The explanation appears to be that because revolutionary innovation is innately high risk, forming partnerships and getting strong stakeholder buy-in are often regarded as essential to success. With several parties wanting the same outcome, the change process picks up added momentum and the imperative need to collaborate overrides personality factors.
By way of contrast, much of the American literature on innovation emphasises the pivotal role of the charismatic entrepreneur in driving revolutionary innovation. Australia, it seems, is different.
Consciously or unconsciously, some CEOs adopted a probability approach to revolutionary innovation. They accepted that most attempts at revolutionary innovation would fail, but if the organisation pursued a sufficient number of ideas, there would be some successes. The problem, of course, is that the cost of the failed ideas could be greater than the profit from the successful ones.
Our analysis also found that the cost of failed revolutionary innovation increased when CEOs failed to let go of an idea when the signals suggested they should. Excessive emotional engagement with an idea contributed to this problem, although a degree of emotional involvement is needed to overcome the obstacles to success.
Innovation in perspective
The moral of all this is that innovation takes different forms. It is rarely just the one big idea. Innovation is about possibilities and how well they are recognised and realised.
Perhaps the key conclusion that can be drawn from our study is that there shouldn’t be a single approach to different innovation forms and situations, risking failure where success might have otherwise been possible. Here CEO self-knowledge is a potential antidote. Recognising one’s own management style and one’s approach to innovation and change can result in a more informed, considered and balanced approach to the innovation task.
Our analysis came up with several other critical conclusions.
- An organisation in need of revolutionary change requires a CEO prepared to partner with others and manage uncertainty in a systematic manner.
- A CEO with a charismatic, personality driven management style is better placed to deliver evolutionary change than someone with a more detached approach.
- Successful innovation should not be too much of a gamble.
- Robust processes are critical for success, reducing both the probability and magnitude of failure.
- Belief and emotion are important factors in the CEO’s ability to engage with innovation, without distorting judgment
- It is wise for CEOs to think about the optimum level of resources they should allocate to innovation.