Ed's Ink: Best Kept Secrets Of Successful Innovation

Tomorrow's job inevitably attempts to create entirely new businesses, entirely new business models, entirely new products, entirely new markets, entirely new operating methods of more than trivial dimensions.

Today's job is to continuously improve what is being done, exploit existing successes by increasing usage within existing customer groups, creating new users for existing products and services, finding new uses for existing products, and more.

 Peter F. Drucker and Harvard's Ted Levitt showed the most important task of the existing organization is to get today's job done. Rules, procedures, and standards define what is to be done, and how. 

Newness Destabilizes ‘Today's Job’ Systems

Injecting newness into what might be termed a stable system designed to achieve smoothly efficient operations of day-to-day activities (such as running the plant, directing tactical sales activities, managing the finances) tends to be fiercely resisted.

 Levitt observed "Allegiance to the daily task remains the predominant and inevitable focus …

 ... Within this powerfully constraining context, to focus on trying to get powerful innovations - to do entirely new and therefore disruptive things ... is an especially difficult and fragile undertaking."

 Most organizations establish order and discipline, that is, deep routinization of a significant part of the work required to produce today's products and services.

 In other words, organizations are structured institutions. They require direction, set into motion by people of purpose accompanied by standards of performance appropriate to what must be done.

 The point? To impose on managers responsible for today's job the additional job of managing for tomorrow is typically a prescription for condemning much-needed innovations to the scrap heap.

In short, an inescapable clash occurs between those charged with the responsibility of getting today's job done and those charged with making the organization into a new organization for a new future.

Take-home message: Newness is unsettling and disruptive to daily tasks.

When tomorrow's job involves developing new businesses and products, expect the existing organization to unintentionally (and sometimes intentionally) sabotage innovative efforts.

 Alibis Versus Explanations

There are three popular explanations for the failure of an organization to do new things: 

– Our salesforce focused on proven winners and gave little attention to the new product or service. 

– We need better people capable of producing and managing much-needed innovations. 

– Our performance-based compensation system penalizes executives responsible for the new and different – so if forced to do new and different things, they attempt to minimize losses by under-marketing/under-spending when attempting to launch an innovative new product or service. 

All three, while true in many cases, are alibis rather than explanations. 

Truly innovative organizations realize from the beginning that in order to nurture the true innovation, it must be treated as a "separate business" rather than as an add-on activity. 

This article explores one but very crucial aspect of the innovative task – the necessity for establishing separate centers of initiative for creating innovation that can lead to new business units or new businesses altogether. 

Top Management's Role In Innovation

Said Drucker: "The people responsible for the existing business will always be tempted to postpone action on anything new, entrepreneurial, or innovative until it is too late…" 

Take, for example, Radio Corporation of America (RCA). The telecommunications and media empire was founded in 1919 and led by David Sarnoff. It included both RCA and NBC and at one point became one of the largest companies in the world. 

RCA's extremely profitable radio receiver manufacturing business was a global leader. Several books (and Wikipedia's thumbnail sketch) detail how RCA made television into a commercial success. According to Levitt: 

"When Vladimir Zworykin, the father of television, demonstrated the first crude and enormously bulky TV system to his top management at RCA, the unimpressed reaction of one highly successful one executive was typical: 'Why don't you take this guy off this foolishness and put him and his team on something useful?' – like cutting costs on radio receivers, for example." 

When David Sarnoff, RCA's results-focused chief, got wind of what the new television group was attempting, the venture received unqualified backing to move onward and independently with the project. 

Sarnoff equivalently made the unit into a separate, autonomous operating unit and divorced it from the ongoing business. 

Otherwise, the innovative project would have likely been denied of required resources, leading to inevitable setbacks and delays. Overspending typical in projects of this kind would have led to abandonment. 

Even though Zworykin estimated the venture would cost about $100,000 to bring to market (it eventually cost $50 million), Sarnoff stayed with it because he believed "it was a risk RCA could not afford not to take." 

Innovation Measurements Differ From Measurements For the Ongoing Business

The RCA story also illustrates the need for different measurements and different uses of budgets and budgetary controls from the ongoing business. 

To impose on innovating efforts, as is typically done in the majority of organizations, the measurements, and especially the accounting conventions that fit the ongoing business, is to paraphrase Drucker: "A surefire way to cripple the innovative effort … It's like putting a 100 pound pack on a six-year-old going on a hike …" 

The most innovative corporations (DuPont, HP, 3M, Apple) learned these lessons long ago. The right structure, does not guarantee innovation results. But the wrong structure aborts results & smothers even the best-directed innovation efforts. 

Said Drucker: "To impose the same measurements that fit the ongoing business is misdirection." 

Important Distinctions

Existing businesses focus on return on invested capital. Sometimes this is called the productivity of capital. 

If the productivity of capital decreases in the existing business, the organization begins to examine what and how it should abandon programs, activities, and even businesses. 

Abandonment frees capital (i.e., monies and people) to work on those activities that show promise. 

But with respect to innovation, a different scenario emerges. 

Drucker often referred to the most successful managerial control system developed in the 1920s by the DuPont Company, which, developed a much- praised return on investment model for all its businesses. 

Said Drucker: "As long as a business, a product line, or a process was in the innovating stage, its capital allocation was not included in the capital base on which the individual DuPont division was in charge of the project had to earn a return… 

…  Nor were the expenses included in its expense budget … Both were kept separate … 

… Only after the new product line had been introduced in the market and had been sold in commercial quantities for two years or more were its measurements and controls merged into the budget of the division responsible for the development …" 

Drucker’s Point

Division managers inevitably resist innovation because they view it as a threat to their earnings record and performance. The proven way to prevent this is to creatively imitate the DuPont model when engaging in major innovative activities. 

Also, observed Drucker, the DuPont model "makes sure that expenditures on, and investments in, innovative efforts can be tightly controlled … It makes possible to ask at every step, ‘what do we expect at the end, what is the risk factor, that is, the likelihood of non-success.'"

Without doubt, in many instances, entrepreneurial faith is what is required to keep going when a new venture project is beset with difficulties.

Yet, sooner or later, the Drucker-inspired question: "Can we justify continuing this particular innovative effort or not" must be asked and answered. 

No organization wants to fund problems. Funding solutions to recognized problems is a different story. 

If changes in strategy and tactics makes economic/marketing sense, then the project in all likelihood will be continued. 

But if doing more of the same is the only path recommended, it's quite possible the venture should be abandoned. 

Summary & Conclusions

To succeed with an innovative venture, the first and most serious questions are always: Is this the right opportunity? Do we have the required people with the appropriate skill sets and knowledge to succeed in the marketplace? 

An important question to ask is whether or not the new venture has the right knowledges. For example, decades ago when banks ventured into the credit card business they thought "credit management" was the essential knowledge required. 

It turned out while credit management was important, direct response marketing skills were also essential to success. And this was a skill that banks (50 years ago) did not possess or even realize was needed. 

(In a future article we will discuss how to carry out a knowledge analysis). 

After answering the above-mentioned questions, decisions concerning how to organize the innovative effort "as a business" must be addressed. 

A major mistake involves treating the innovative venture the same way as the ongoing business. Budgets for the ongoing business and budgets for innovative efforts should be kept separate. 

Following the DuPont formula, a separate measurement system for innovative efforts makes it possible to assess the three factors that determine the eventual outcome of the venture – namely, the realistic upside to the opportunity being exploited, the risk of failure, and expenditures needed to produce and manage an innovative new business.