The First Tenet of Innovation

In my last blog entry, I began the discussion of innovation in corporate America with a definition:

Innovation is the ability to see opportunity in places others don’t and then turn that vision into reality.

I emphasized that real innovation is not just having a creative idea; it’s also knowing how to turn that idea into reality. I then outlined the five tenets of innovation. In today’s entry, I’ll explore the first tenet.

Tenet #1: Any company that wants to grow needs to be good at innovation.

Consider two examples. First, think about the market for gasoline. When you fill up your car’s tank, what brand are you likely to choose? The answer most people give is “whichever one is cheapest!” We all know people who drive all the way across town to save a penny or two a gallon, oblivious to the fact the extra gas they consume getting there more than offsets any savings. Chevron, Shell, BP, and Exxon all have a tough challenge, for in the mind of the consumer the only differentiation among brands is price. In an era of stable demand, their only avenue for growth is to raise prices in the hope their competition will do the same.

Now think about smartphones. What brands come to the top of your mind? Apple’s iPhone? RIM’s Blackberry? Motorola’s Droid? What about Garmin, Asus, or HP? How many people even know HP makes a smartphone? The iPhone has established such a strong perception as the innovation leader that it can command a premium price even in the face of widespread competition.

The leading companies in any field put a high priority on innovation. Intel, Walmart, Google, Southwest Airlines, HP, and Amazon all devote considerable resources to out-innovating their competition. Why? Because innovative products and services are what distinguish you from everyone else. They give customers a reason to buy from you rather than your competitors. In today’s world, gaining that share of a customer’s mind is worth a lot.

Why is it that some companies are successful innovators while others aren’t? The first thing to understand is that annual surveys of “The World’s Most Innovative Companies” don’t tell the true story. Such surveys invariably confuse innovative ideas with innovative companies. Any company can come up with a single innovative idea. An innovative company is one that has installed processes allowing it to repeat that success time after time. In particular, the truly innovative company can generate sustainable profit, not just growth, from its innovations. Any company on a “Most Innovative Companies” list that hasn’t demonstrated a sustainable, multi-year track record of profitable innovation shouldn’t be there. Twitter may well deserve to be on the same list as Intel some day, but not yet.

The secret to innovation is that you don’t just turn engineers loose and wait to reap the rewards; you need to approach it methodically. This may seem strange—how can you structure innovation, which would seem to be an inherently unstructured discipline? When I first became an R&D manager, people told me “You can’t schedule invention. R&D engineers will take as long as necessary to get the job done, and you can’t predict in advance how long that will be.” As Einstein allegedly said, “If we knew what we were doing, it wouldn’t be research, would it?”

I eventually discovered this mantra was little more than a way to cover up poor planning. Most R&D activities—perhaps as much as 90 percent—are predictable tasks that can be readily scheduled. The other 10 percent—the “R” part of R&D—typically comes at the very beginning of a project before you have committed to a firm schedule. This is the time where you are inventing those few differentiating technologies that will be key to the product. It’s true that this period of invention doesn’t lend itself to precise scheduling, but by confining it to the earliest phase of a project you can keep the total investment under control.

This doesn’t mean that all uncertainty is limited to the early phase of a project. Unpredictable events will certainly occur later, such as when a circuit design fails to meet its performance requirements or a bug-filled software program crashes regularly. But these uncertainties can be accommodated in the schedule through time-proven statistical methods.

What does this have to do with innovation? Remember that innovation isn’t just coming up with novel ideas. It also means turning those ideas into reality. To be good at innovation, a company has to be good at execution. The best companies know how to embed these concepts into their cultures so they aren’t dependent on luck or the skills of a few “super-smart” individuals. Excellence in execution is an often-overlooked element of innovation. Don’t ignore it.

By now, some of you are probably thinking, “Why all this emphasis on a sustained track record of innovation? Why is execution so important? Look at Facebook. Look at Twitter. Look at Spotify, Ngmoco, and all the other fresh-faced startups on Fast Company’s list. These are some of the most innovative companies around, and they don’t have a track record in either area. Why shouldn’t they be on the “Most Innovative Companies” list?”

I have no doubt that these are all innovative companies. Many of them are exciting places for engineers—especially new graduates—to work. They should all be recognized for their creativity. And some of them may well stand the test of time necessary to earn the moniker, “Most Innovative Company.” But at the moment, it’s the difference between having a single innovative idea and being consistently innovative. Put them on a “Rising Stars” list or a “Ones to Watch” list. But don’t put them alongside companies that have a proven track record of sustained success. Of the 50 companies on Fast Company’s 2010 Most Innovative Companies list, 33 of them are new to the list. That’s more of a popularity contest than a true measure of innovation.

To illustrate my point, let’s look at two companies of the Internet age that truly deserve to be called Most Innovative: Amazon and Google. You may not agree with every business decision they’ve made (I don’t), but you have to admit they’re continually innovative.

Amazon opened for business in 1995 as an on-line retailer of books. They soon branched out to sell such other items as videotapes, CDs, and software. Over the years they have continued to add product lines to the point where today they are the world’s largest on-line retailer, with over $24 billion in revenues. Their product lines include everything from books to automotive supplies to musical instruments to groceries.

But it isn’t primarily the breadth of their product lines that defines Amazon as innovative. It’s their continual focus on growing their business by improving the user experience: such innovations as “Search Inside the Book,” one-click ordering, and the Kindle reader, to name few. One of their most powerful but least recognized innovations is their Amazon Associates program. At little cost to Amazon, it has turned countless third-party websites into virtual marketing arms of the company (I’ll explore this in a future blog entry). This ability to adapt and grow with the times while generating healthy profits is what distinguishes Amazon from the countless other on-line retailing sites that have come and gone over the years.

Google began in 1996 as a search engine research project by two Stanford Ph.D. students, Larry Page and Sergey Brin. It wasn’t the first search engine on the Internet, but it used a new algorithm that did a better job of putting relevant pages at the top of a search. This was a true innovation, but by itself wouldn’t have earned Google the right to be called a “Most Innovative Company.” They earned this right by the way they have done something few others have achieved: not only driving millions of people to visit their site every day, but generating a healthy profit in the process.

Google’s founders initially resisted the idea of a search engine funded by pop-up ads, but they eventually relented. Today, 99 percent of Google’s revenue comes from advertising. Their two primary vehicles are AdWords, in which companies place search-relevant advertisements on Google, and AdSense, in which third parties allow Google to place these ads on their own sites, thereby earning money for both Google and the third party.

Today’s Google is much more than a search engine. Such applications as Google Maps, Google Earth, Google Docs, and Gmail all provide free productivity tools to millions of users. How can Google give all this away for free? Because these tools draw users to the site and increase traffic on Google’s revenue-generating search engine. It’s a brilliant way to build traffic that generates profit, not just hits, for the website.

Google’s business model illustrates that to be an innovation leader, you don’t need to invent everything yourself. Google didn’t invent Google Earth, they acquired Keyhole, Inc, the company that did so. I’ll bet you never saw Keyhole on a list of “Most Innovative Companies” even though its product is widely regarded as a brilliant innovation. It was Google who figured out how to make it a commercial success.

This model also illustrates that not every brilliant innovation comes from R&D. Google’s AdWords and AdSense programs are marketing innovations. And they weren’t marketing programs tied to a single product launch, they cut across all product lines. As we will see next time, this kind of process innovation can be extremely powerful.

Compare this to Facebook. They have, according to their own website, 400 million users. That’s a great start. But web traffic that doesn’t generate profit is not a model for success. When will Facebook become truly profitable? To date, their financial model is essentially this: take money away from investors and redistribute it to employees. Only when they can change this to a model of taking money from customers and redistributing it to both employees and investors, will they have achieved success. Will this happen? It’s possible. Only time will tell. They now accept advertising but it isn’t yet profitable. They will need to continue innovating to figure out how to generate real profits from real customers. And like Amazon and Google, they will need to expand well beyond the single application they are today.

By now you should recognize that it takes more than a single bright idea to make an innovative company. The true innovators are companies that can achieve a sustained track record of success. And the best of them don’t just focus on product innovation; they are good at innovating across a variety of dimensions. That’s the topic we will explore next time.

Next: There are various types of innovation, and the best companies excel at all of them.