Leading the creative charge: by treating innovation as a legitimate business process, CEOs are encouraging the development of new ideas from a variety of sources — and managing the risk that goes with it - Innovation & the CEO - chief executive officers

Chief Executive, The, June, 2002 by Jennifer Pellet

* It's messy expensive, fraught with uncertainty and, well, just plain hard.

But innovation is also more essential for growth -- and even survival -- than ever. As we move from a period of economic exuberance to an era of greater uncertainty, companies are more likely to want to tighten belts and avoid risk than to pursue new ideas and opportunities. Yet savvy CEOs know that cost-cutting alone will not suffice and that future growth rests in the pursuit and execution of innovation.

Hiring smart people who come up with good ideas -- as evidenced by the dot-corn graveyard -- is but a small piece of the puzzle. "Innovation by itself is not worth much," notes Michael May, managing partner of Accenture's Strategy & Business Architecture service line. "The key is in being able to translate innovations into commercial reality very quickly."

Unfortunately, that's not easy. For every phenomenally successful product or market innovation -- Starbucks coffee, anyone? -- there are hundreds of abysmal, and costly, failures. For every big idea that transformed a company -- think Sony Walkman -- there are dozens of tales that illustrate the folly of pursuing an unworthy venture for too long and at too great a cost.

"Innovation is inherently risky," says Kathleen Eisenhardt, professor of management science and engineering at Stanford University and co-author of Competing on the Edge: Strategy as Structured Chaos (Harvard Business School Press, 1998). "If you ski fast, it's fun, exciting and creative, but you can also wipe out. That's the price you pay."

Finding that elusive balance between allocating resources and managing risk is one of the principal challenges CEOs face in driving innovation. To err too heavily on one side or the other is to court disaster, believes Eisenhardt's colleague, Robert Sutton, a professor of organizational behavior at the Stanford Engineering School and author of Weird Ideas That Work: 11 1/2 Practices for Promoting, Managing, and Sustaining Innovation (Free Press, 2001). "Organizations in nearly all industries need to devote the lion's share of what they do to cashing in on the services, products and business models that they have," says Sutton. "But if they only do that, they end up trapped in the past and in trouble. So for CEOs, the question is, what is the right mix of routine work versus innovative work?"

The answer? While much depends on the industry and the company, it's also essential to look more deeply at the time frames of the various innovations in question.

"First, you need to understand the role that innovation plays in the success of your business within your industry," says May. "Then you want to look at your time frame. Are you talking about a 10-year industry dislocation that might provide an opportunity, or something that's six months away in terms of how quickly you can commercialize it?

"Sometimes," May adds, "it's better to hit singles on a consistent basis than to focus on the big hits. At the same time, you clearly don't want to be investing so much in the present around innovation that you miss the next major dislocation out there. So you want a very distinct policy around the mix you have going on at any one time."

"Managed chaos"

There is no magic bullet for successful innovation. But nurturing a corporate culture that values innovation and accepts risk is no longer enough. It's now essential to create an innovation management system that evaluates new ideas, culling and implementing the keepers and discarding the rest.

While "innovation management system" might seem like an oxymoron, research suggests that companies consistently successful with developing and implementing ideas -- 3M, Intel and Disney Corp. are just three examples -- have found ways to organize what is essentially a chaotic process: Disney holds monthly "gong show" forums where anyone within the company can come and pitch an idea for a new attraction. At 3M, inventors compete for $50,000 "Genesis Grants" to develop prototypes and market tests. Each firm simultaneously emphasizes structure and strict procedures with its proven product and service lines.

"Intel is positively obsessive about its religion of 'copy exactly,' where every plant has the same pipe in the same place painted the same color, but when you switch to experimental stuff they have a different set of guidelines," says Sutton. "At Disneyland, everything from the way park employees greet visitors to the way the rides are operated is scripted and orchestrated to be consistent, but down the street at Disney Imagineering it's a different story. These processes are so opposed that it's important for CEOs to make that distinction clear, because you don't want any variance when it comes to building cars or cranking out soft drinks."

Studies suggest that the ability to drive out variation on one side of a business while amplifying it on the other affords a valuable competitive edge. In a research project looking at the innovation efforts in the U.S. and European computer industry, Eisenhardt found that what successful companies had in common was a balance between the structure necessary for stability and the "managed chaos" required for innovation. Meanwhile, companies that failed at innovation tended to fall into one of two camps: overly bureaucratic or too chaotic.