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Sustaining Innovation is Challenge for Incumbents

Article in Research-Technology Management · July 2009

DOI: 10.1080/08956308.2009.11657579

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 SUSTAINING INNOVATION IS
CHALLENGE FOR INCUMBENTS
As firms grow, they encounter seven inhibitors to their ability to innovate.
But five interventions can help overcome them.

Ashley Braganza, Yukika Awazu, Kevin C. Desouza

OVERVIEW: In today’s competitive environment, the tions and turning them into innovations. Instead, they will
ability of an organization to innovate is paramount. tend to invest in minor, incremental innovations that fit
While most organizations have flashes or spurts of in- their current organizational design.
novation, only a handful have been able to innovate
on a continuous and sustained basis. This paper surveys Patterns of behavior that inhibit innovation arise natu-
the challenges faced by firms when trying to build sus- rally in maturing organizations. First, as firms mature
tainable innovation programs. These findings have been they tend to become too comfortable doing what they
derived from an examination of innovation programs normally do; this comfort leads to myopia and also dis-
in over 30 organizations in North America, Europe and courages risk-taking outside their comfort zone. Second,
Asia. core values and the structures in place become rigid over
time, thereby encouraging only a narrow focus on opera-
KEY CONCEPTS: innovation, disruptive innovation, tions and mission. This results in incremental innovations
strategy, portfolio management. compatible with existing structures. Third, firms lose the
drive that got them where they are; that is, they lose the
creative energies, the openness to risk-taking and experi-
Firms facing disruptive innovation often exhibit incom- ments that allowed them to carve a niche and disrupt the
petence and respond inappropriately. The organizational incumbents when they first entered the market.
structures, routines and systems that were tailored to
existing operations prevent these same firms from adapt- Losing creative energies that lead to disruptive innova-
ing to the quite different processes of calibrating inven- tions is a significant problem for incumbent firms.

Ashley Braganza is the director of the Centre for Orga- organization. She has co-authored Engaged Knowledge
nizational Transformation and a senior lecturer in the Management (Palgrave Macmillan, 2005) and her ar-
Leadership and Organizational Development Commu- ticles have appeared in a number of business and aca-
nity at Cranfield School of Management, United Kingdom. demic journals. She received her M.A. in economics and
He directs NEXUS—The Knowledge Exchange and M.B.A. degrees from the University of Illinois at Chicago.
Achieving Strategy through Business Process Change, [email protected]
an executive development program. He advises orga-
Kevin Desouza is on the faculty of the Information School
nizations in the areas of process, transformation, and
at the University of Washington, Seattle. He is a director
change and knowledge management. Before joining
and founding faculty member of the Institute for Innova-
Cranfield, he spent ten years in the banking industry,
tion in Information Management (I3M) and the Institute
involved with all forms of lending. He has completed
for National Security Education and Research, both at
a Ph.D. in process and change management and
the University of Washington. His most recent book is
holds an M.B.A from Strathclyde Business School.
Managing Knowledge Security (Kogan Page, 2007).
[email protected]
He has published over 100 articles in practitioner and
Yukika Awazu is an inaugural Henry E. Rauch Doctoral academic journals, and has advised major international
Fellow at Elkin B. McCallum Graduate School of Busi- corporations and government organizations on strategic
ness at Bentley College, Waltham, Massachusetts. Her management issues ranging from knowledge manage-
immediate past position was president of The Engaged ment to competitive intelligence and crisis management.
Enterprise, a global research and strategy consulting [email protected]

46 Research . Technology Management

0895-6308/09/$5.00 © 2009 Industrial Research Institute, Inc.
Consider, for example, how Google has so far beaten Pursuit of stability
Microsoft in the search engine business. Although Mi-
Organizations create formal structures that are often still
crosoft had better financial resources and the ability to
based on Taylor’s principles. The silo structure, which
be a leader in the business, it failed to recognize search
groups people by expertise and the specialist work they
as a business opportunity. Microsoft spent too much time
perform, ensures high levels of efficiency. Moreover,
and too many resources on improving its existing busi-
institutionalized mechanisms, such as appraisal, person-
ness products and services.
al performance plans and bonus systems linked to the de-
Apple’s takeover of the online music business by iPod is livery of individual pieces of work, reinforce stability (1).
another example. Sony, the inventor of the Walkman, These mechanisms result in changes to the order or con-
had an opportunity to lead in that business. However, it tent of work being in no one’s interest. Organizations that
focused on improving its existing products and did not achieve high levels of stability operate in a state of internal
come up with a product to integrate the online music equilibrium.
business. However, organizations do not exist in a vacuum; they
In this paper, we report on the challenges faced by firms have to thrive and survive in a dynamic marketplace in
trying to build sustainable innovation programs. Our which stakeholders—customers, suppliers, regulators, and
findings derive from an examination of innovation pro- competitors—produce change every time they modify
grams in over 30 organizations based in North America, their expectations. These can take the form of customers
Europe and Asia. Seventy percent of the firms studied expecting higher levels of service, better margins for
were listed in the Fortune 100. The remaining firms suppliers, stricter regulatory controls, and employees seek-
were smaller and newer, operating in high technology ing higher wages. Stakeholder theory suggests that stake-
and working on emerging products (e.g., bioengineer- holders are rarely passive and that they will use their
ing) and services (e.g., information technology). They power to achieve their own ends (2). Organizations that
ranged from information technology firms, to manufac- resist or fail to detect changes in stakeholder expecta-
turing centers, to government research and development tions will struggle to compete. For instance, in the 1980s,
laboratories. We interviewed well over 50 executives, McDonald’s failed to change its packaging despite public
with most interviews lasting about two hours, and taking concerns about environmental matters (specifically, CFCs).
a semi-structured form. Our findings were presented in Consumers were unwilling to accept this situation and
several executive briefing sessions and input from these stopped buying the company’s products. Eventually,
sessions was used to refine our conclusions. McDonald’s changed its packaging to be environmen-
tally friendly. More recently, the company faced wide-
spread concern over the increase in Americans’ obesity
Innovation Inhibitors rates and the harm being caused to their health. Actions
by parents who stopped taking their children to McDon-
As firms grow, they tend to exhibit common behaviors ald’s, as well as by individuals such as the makers of the
that prevent them from being adaptive to new environ- 2004 movie Super Size Me, led to the company changing
ments, thereby limiting their ability to sustain their inno- both products and practices.
vation drive. In this section, we briefly discuss the inhibitors
that incumbent firms face as they build sustainable in- Today’s organizations are also faced with the astonishing
novation programs. The inhibitors are summarized in speed of technological development. For the originators,
Table 1. disruptive technologies provide great gains, but for

Table 1.—Inhibitors to Sustainable Innovation

Inhibitors Description
Pursuit of stability. Internal systems and structures such as standardization, efficiency and lean
management lead to steady-state equilibrium.
Risk avoidance. Organizations attempt to evade the risks associated with implementing radical change.
Constrained by experience. Organizations cling to competencies and strategies that are inappropriate for current
and future challenges.
Lack of options. Organizations get locked in by the resources they have.
Legacy systems. Investments in information systems are an extension of the past rather than designed to
support innovation.
Complex power structures. Disruptive innovations shift power—however, those who have power resist yielding it.
Myopic managers. People focus internally rather than externally.

July—August 2009 47
incumbents they create major disruptions in the business
environment that require them to respond quickly. How-
ever, many established organizations fail to recognize
Organizations that
innovations that compete for their target markets and are
caught unawares when innovations change market or
environmental factors. Telecom companies, for exam-
resist or fail to
ple, overlooked the rise of voice-over-Internet-protocols
(VOIP) technologies. Many simply didn’t want to notice
detect changing
because they could see their core revenues being reduced
significantly, if not wiped out. stakeholder
Leaders often perceive disruptive innovations as threats,
while strong competitors see opportunity. These differ-
ences in perception are important because they lead to
expectations will
debate over the best course of action to pursue. However,
senior managers may procrastinate over taking decisions
struggle to compete.
and allow energy-sapping in-fighting and turf wars to be
waged.
Samsung, the electronics company, tries to minimize this absorb such risks. A director in a global grocery business
by creating a “hothouse”—The Value Innovation Program told us:
(VIP) Center. The VIP Center is a physical research space One of the most difficult challenges I face is going into the board
in which engineers, scientists and managers from differ- room and asking for changes in our operations, because three main
ent vertical competencies are brought together to create board members wrote the original manuals about 15 years ago.
an environment that values speed of innovation. People While these have been updated and amended, any fundamental
stay in the VIP Center and don’t go home for several weeks changes are picked over and, well, quite frankly resisted. The level of
pushback can be quite intense.
until the problem is resolved or the innovation com-
plete. Managers are constantly under pressure to en-
sure that no time is wasted. Risk avoidance
Each silo in a vertical, hierarchical structure will absorb Commercial organizations that pursue the elimination of
the disruptive innovations in different ways that reflect risk as a strategy will be disappointed. Risk cannot be
the idiosyncrasies of an individual silo. For example, eliminated; nevertheless, many organizations attempt to
a large clothing retailer found its market share being follow a risk avoidance strategy by making incremental
eroded by new, low-cost entrants. The logistics director, changes even when the circumstances require radical
anticipating a round of cost cutting, renegotiated terms changes. For many years, IBM clung to the past by mak-
with the delivery outsourcing supplier to reduce the ing incremental changes to its product lines, service
numbers of deliveries to the retail stores and hence proposition and market orientation. Increasingly, it be-
demonstrate to the rest of the organization that she had came separated from its marketplace, customers and
squeezed cost out of the business. Meanwhile, the mar- employees, until it took the herculean effort of a new
keting director, also feeling the heat of falling market leader, Lou Gerstner, to make the breakthrough changes
share, ran major promotional campaigns to generate that IBM needed to compete again.
customer demand. Each director acted in the organiza- Attempting to avoid risk by sidestepping the implemen-
tion’s best interests; however, the organization struggled tation of radical change is futile; organizations are more
to meet even small increases in demand because deliver- effective when they manage risk. However, in the face
ies to stores had been cut back. When organizations are of disruptive technologies, it is critical to know which
faced with disruptive innovations, they need a concert- risks to manage. Three categories of risk require the
ed, coordinated response rather than each silo taking iso- close attention of incumbent organizations: people, pro-
lated actions. cesses and knowledge.
Senior managers faced with disruptive innovation have People-related risks stem from inertia in well-established
to dismantle the very edifices they have created to organizations. Individuals in senior positions become
achieve and sustain stability. The mindset hurdle they bounded by the security of their position in the organiza-
have to overcome should not be underestimated. People tion, by the status conferred upon them and by their
who have learned to operate within these structures have vested interests. They may learn the language of change
to deal with the uncertainty of working without clear and disruption and appear to support the internal changes
controls and structures. There can be considerable iner- required to deal with the threats and opportunities,
tia and resistance from people who are unwilling to but there is often little substance to their words. Key

48 Research . Technology Management

individuals who lack the will to change can stymie the
entire organization’s response to the disruptive technol-
ogy (3,4). On the other hand, organizations that can as-
Attempting to avoid
sess peoples’ willingness to change are better positioned
to manage people-related risks. risk by sidestepping
Process-related risks are outdated practices and routines
that people follow. As these are often deeply embedded
and therefore difficult to change, senior executives often
the implementation
accept the flawed assumption that the introduction of
new information systems will drive process changes.
of radical change
The notion that the implementation of enterprise-wide
systems will yield a transformed organization has led
many large companies such as FoxMeyer and Norfolk
is futile.
Southern Corp. to spend millions of dollars over their
original budgets (5). Much of this overspending results
from people refusing to abandon familiar routines or to take up new routines and change their mindset, they
organizations attempting to build extant practices and hold onto core competencies that are no longer relevant.
routines into the new system. One global organization Those competencies that created success in the first
in the telecom industry spent over $50 million on new place become core rigidities that prevent the organiza-
enterprise-wide systems that have, in the words of one tion from competing. Solutions that worked in the past
director, “left more blood on the walls than can be imag- may simply be irrelevant to the future.
ined” and have yet to yield any financial benefits.
While there is much discussion in the academic litera-
In terms of knowledge, organizations have a tendency to ture on corporate memory, little thought is given to cor-
continue developing areas of expertise which they know porate dementia, that is, the need for organizations to
and are comfortable with. Rarely do organizations give forget aspects of their past. Holding onto past glories can
equal care to developing areas of knowledge that are become a barrier to absorptive capacity, which describes
unknown to them. One reason for this is the inability to the ability of an organization to “recognize the value of
manage the unknown. Consider the case of an R&D lab new information, assimilate it, and apply it to commer-
where one of the managers remarked to us: cial ends” (7).
We continue to hire chemists, physicists and engineers from a select The strength of past success drives organizations to look
group of universities… we realize that this is a very narrow-minded
at technologies that reinforce what they already know,
manner of hiring, but we have great difficulties in hiring from places
that we do not have a history with… what we have realized recently,
while overlooking potential disruptive technologies that
is that many of the researchers who come from schools outside our lie outside their spheres of knowledge. For instance, Procter
list are coming up with the real breakthrough discoveries. & Gamble determined that one of the main hurdles it
faced was the “not-invented-here syndrome.” As a P&G
Disruptive innovations require organizations to alter interviewee told us, its move to open innovation was
patterns of information flow to ensure that people or held back because solutions being developed by external
systems have the substantive information needed to ful- sources were picked over by internal scientists.
fill their responsibilities or operations. Identifying and
managing changes to patterns of information flow can Incumbent organizations are often reluctant to try new
be difficult to implement when people withhold their technologies because they rely on tacit knowledge that is
knowledge (6). accumulated over many years. Tacit knowledge is the
range of routines and behaviors that organizations develop
from their experiences (8) and are a source of competitive
Constrained by experience advantage (9). Yet organizations may well benefit from
some degree of corporate dementia, that is, the need to
In an organizational context, the adage that “success discard tacit knowledge that is no longer relevant.
breeds success” applies where the environment in which
the organization’s initial success occurred remains fairly Because tacit knowledge is associated most closely with
stable. In stable environments, organizations learn from knowledge within individuals, this may well require the
patterns of past success and future successes tend to be very people who created past successes to leave when
incremental. However, the adage breaks down in envi- they are unwilling to change their routines and behaviors.
ronments where disruptive innovations cause change— This is a tough message and goes against the grain of con-
successful incumbents rely on their past expertise and ventional thinking. Yet, unless organizations change the
fail to meet the new challenges. Constrained by bounded deeply held tacit knowledge that drives current behaviors
rationality that limits the extent to which they are willing they will remain constrained by their past experiences.

July—August 2009 49
Lack of options
The resource-base theory of the firm argues that organi-
zations can gain competitive advantage by focusing on
Solutions that
developing differentiable internal resources. Resources
are defined as “all assets, capabilities, organization pro-
worked in the past
cesses, firm attributes, information, knowledge, etc., con-
trolled by a firm that enables the firm to conceive of and
implement strategies that improve its efficiency and ef-
may simply be
fectiveness” (10, p. 101). In order to compete on resources,
organizations have to ensure that they develop and in-
irrelevant to the
vest in their resources so that these become Valuable,
Rare, Imperfectly Inimitable, and Non-substitutable (the
VRIN attributes).
future.
A resource is deemed to be valuable if it enables the
organization to take advantage of opportunities or helps plified by statements of issues to investors that allow for
to neutralize threats. A rare resource is possessed by a sin- year-on-year comparison. Organizations face the dual
gle organization—in other words, a resource that is challenge of investing in non-traditional assets that fill gaps
unique among its set of competitors. Imperfect inimita- in their resource set while adapting tried and tested in-
bility refers to the difficulty firms face in obtaining their vestment appraisal routines.
competitor’s valuable and rare resources. Non-substitutable Many organizations that suffer after disruptive innova-
resources are those for which there are no strategically tions find that taking decisions to invest in new resources
equivalent clones. Consequently, organizations invest in can be a slow and cumbersome process. Incumbent firms
resources such as their brand, processes, customer and have a hard time acknowledging that resources have a
supplier relationships, products, and reputation to sustain natural life span, and at some time need to be replaced
the VRIN attributes. The emergence of a disruptive in- or renewed. This is no easy feat, calling for changing in-
novation that threatens these resources can limit the range vestment options and acknowledging gaps in an organi-
of responses available to an incumbent. zation’s current collection of resources.
New organizations have greater flexibility and a wider
range of options because they are not tied to specific re- Legacy systems
sources. They are able to develop new working methods
and operations that incumbents are unable to copy be- American organizations have invested billions of dollars
cause of their prior financial and psychological invest- in information and knowledge-based systems. Once in use,
ment in extant resources. In the European airline industry, however, these systems create their own rigidities: orga-
for instance, Ryanair is able to offer flights at the cost of nizations demand a return on their investment and hence
a few pennies. Unlike incumbent national carriers such resist further changes; people in the business become
as British Airways and Air France, Ryanair is able to avoid familiar with the systems; and suppliers, customers and
cost structures embedded in traditional structures like other stakeholders align their systems with those of the
the selling of tickets through travel agents or passenger organization.
expectations of free meals and unlimited alcohol. Ryanair These legacy systems can also constrain new entrants
has established new relationships with airports that now that want to compete on flexible product and service offer-
pay the airline for bringing passengers to them. National ings. Incumbent organizations that have to invest in new
carriers have to pay the airports for landing slots. The technology have to ensure that these technologies align
range of options available to national carriers to respond with existing technological platforms and systems ap-
to Ryanair is greatly constrained by their unchangeable plications. The continuity of systems is perceived to be
resources. dependent—the future use of systems becomes an ex-
tension of the past. This limits the incumbent’s ability to
A critical routine in every large organization is the annual
respond appropriately to disruptive technologies. Exec-
review of investments and the appraisal of investments. utives in incumbent organizations are likely to face an
These routines are managed most often by the finance uphill struggle to make the case to change all technolo-
function. Large organizations get locked into continuing gies in use and therefore write off prior investments. Yet
investments in resources that either provide diminishing taking the bold step of consigning legacy systems to his-
returns or that may be inappropriate to future competitive tory may be the most important decision they make.
environments for several reasons. This may be due, in
part, to international accounting standards, exemplified Incumbent firms can also be held back by employees
by amortization principles, and financial reporting, exem- at all levels who resist new technology. After all, they

50 Research . Technology Management

understand the existing systems, they know their faults
and shortcomings and have developed routines and ways
to compensate. They recognize the reports they receive
Consigning legacy
and the quality of the information produced. The intro-
duction of new systems removes these certainties and
creates high levels of anxiety as people have to learn
systems to history
about new systems. It may expose areas of weakness
that department managers have been able to mask with
may be the most
the existing system. Unsurprisingly, people have little
motivation to implement the technologies necessary to
address disruptive innovations.
important decision
In larger, more dispersed, organizations, the ability to
integrate information across different systems is vital,
an executive makes.
and changes to a system in any one geographic area can
cause significant difficulties. In one global organiza- Power battles can blind people to innovations that are in
tion we talked to, there was little agreement on the the proverbial “grey space” or “white space.” Grey space
number of customers or the volume of products sold represents innovations that are at the intersection of the
each month. This occurred because the individual coun- capabilities of two groups. Grey space ideas often stimu-
tries had one set of figures, the regions (a collection of late heated debates over which group will pursue them.
countries) had their own figures, and the head office (a Grey space innovations are often found in the public sector
collection of regions) had different figures. Executives where two departments bat an idea about without either
attempting to analyze performance of the group would department taking ownership of it.
receive phone calls from country managers complaining
that their figures were being misrepresented. Signifi- White space represents innovations that do not fall under
cant effort was spent reconciling the figures rather than the responsibilities of any one group. Ideas in the white
dealing with the online competitors that entered this or- space never go anywhere as there is no enticing environ-
ganization’s market space and eroded market share. ment present for cooperation to thrive and a joint unit to
take advantage of these opportunities. One large actuar-
ial firm lost millions of dollars in business because
Complex power structures neither the pensions nor the healthcare divisions took
One way to think about organizations is as complex po- heed of global clients requesting products that provided
litical networks based on power structures that have many their employees with an integrated package relevant to
different sources. When, for example, a disruptive inno- the employees’ local situation.
vation requires an organization to come up with a new
product, it can move resources to do so or, alternatively,
Myopic managers
invest those resources in the existing product set. The
decisions surrounding this example lead to significant Too often, incumbent firms cause their managers to be-
disputes and internal conflicts. People argue their corner come myopic. As firms grow and become established, they
and attempt to reach compromise solutions that meet in- begin to functionalize their operations; the room for cross-
ternal needs but fail to address the external threat. pollination of ideas becomes smaller. Moreover, there is
seldom any effort made to educate managers about the
Overcoming the power and political structures requires nature of innovation, its creation, its management, etc.
strong leadership and a clear, single-minded vision. In the
early years of Jack Welch’s tenure at GE, many battles In speaking to over 30 firms, we found only one where
and arguments were fought against his changes. Many of managers were trained in how to calibrate new inno-
GE’s subsidiaries had been overtaken by competitors vations for internal use. Managers in this firm were often
who had shown that they could be more innovative than given resources to gain more in-depth knowledge of
the incumbent GE operations. functional areas. For example, the minute new accounting
legislation is passed, a manager might take a class to learn
Welch’s rule—be number one or two in your sector or how to apply it in daily work. However, the manager will
get sold—was simple enough to remember and measure not learn what opportunities for innovation are offered by
and, more importantly, it was followed through with this new legislation. That’s why it’s important for manag-
ruthless commitment from the top. Senior executives ers to learn the innovation process, the need for it, and the
who built up strong power bases and defended a subsid- ways to encourage innovation in their organization.
iary that was not number one or two were moved or
removed. This weakened the network of connections It is also important for the organization to help managers
that enabled people to retain their power over decisions. take an interdisciplinary approach. Most managers focus

July—August 2009 51
within their disciplines to meet their operational needs,
which is only natural given their work assignments and
deliverables. However, in order to innovate, especially in
Too often, incumbent
today’s environment, the need to combine knowledge from
disparate disciplines is important. Many managers are not
trained in how to engage in such interdisciplinary settings
firms cause their
and hence cannot identify ideas from disciplines outside
their areas of expertise. They also find it difficult to lead
managers to
interdisciplinary innovative teams.
The early success of GM’s Saturn project and the Japa-
become myopic.
nese use of quality circles are examples of the power
of interdisciplinary teams (11). Yet, rather than build
bridges across silos, many managers are aided and abet- resources for these efforts. They resist the temptation to
ted by specialist institutes and training and education invest only in areas they know. Air Products offers an
establishments in creating artifacts that form barriers. example of this type of leadership. It formed a specific
These artifacts include language—consider the acronym group of individuals—the Corporate Development Of-
soup that exists when you cross marketing with finance, fice (CDO)—whose role is to: 1) ensure that the com-
exemplified by the 4 Ps, 7Ps, RoI, EBITDA, and NPV, to pany has a healthy business portfolio; 2) that the portfolio
name a few. Many institutes develop conventions that meets and exceeds investors’ profitability and growth ex-
members have to adhere to in order to remain a legiti- pectations; 3) the company is well positioned to generate
mate member of the club. solid and sustainable returns for the foreseeable future;
and 4) to critically examine performance based on inter-
Interventions nal and external comparisons. About 25 individuals work
for the CDO, focused roughly on four major activi-
Organizations cannot avoid aging or natural growth cycles. ties: 1) corporate and business strategy development, 2)
The process of maturing as an organization even offers transactional growth levers (i.e., mergers and acquisi-
strong benefits to employees, customers and stakehold- tions), 3) economic forecasting and modeling, and 4)
ers. However, stability should not be traded in for low new platform development and incubation.
innovation. Thus, when combating aspects of organiza-
tional aging, the above inhibitors cannot be avoided, The Air Products CDO brings the executives ideas that
but can be managed from the outset. Furthermore, it is have the potential to generate significant value for the
worth remembering that these inhibitors have been de- organization in the next three to five years. The CDO
fined with respect to radical, disruptive innovation. In- group does not get involved in the day-to-day running of
cremental innovation benefits from many of the stages the various business units (e.g., Homecare). Instead, the
of maturation in an organization. We suggest that incum- group looks to the future. It studies new ideas that have
bent firms need to balance the various organizational high risks and high payoff, while of course trying to bal-
factors. A summary of interventions is shown in Table 2. ance the portfolio of opportunities. The CDO works with
the Growth Board (a senior leadership team involving
Allocate innovation resources with portfolio approach the COO, CFO, CTO, and VP of corporate development)
to screen, fund, incubate, and develop future business op-
Successful incumbent firms that innovate take deliberate portunities. One of the major functions of the CDO is to
steps to fund novel ideas and manage the allocation of engage the senior leaders of the organization with ideas

Table 2.—Interventions to Overcome Inhibitors

Intervention Description
Use a portfolio approach to allocate resources for innovation. Invest in traditional and novel products and markets.
Train managers to be innovators. Distribute innovative competencies rather than leaving
innovation in the hands of a few employees.
Communicate the value of innovation. Explain the challenges and rewards of implementing innovative
ideas.
Revisit the organization’s mission. Align the organization’s mission with the innovation policies.
Governance of innovation. Dual power structures allow ideas to emerge from the bottom-up
(decentralized power) and promote organization-wide
implementation (centralized power).

52 Research . Technology Management

that might be risky or radical—as our interviewees noted
several times, if you want senior executives to bet on risky
concepts it is best to get them in the loop ahead of time.
Successful
The Air Products CDO works to fund three kinds of
ideas, either within an existing business unit or an inde-
incumbents resist
pendent incubator: white-space ideas (ideas that might
be between the domains of existing businesses), grey
space (ideas that overlap multiple businesses and that have
the temptation to
long-term potential), and the blue space (ideas that are
“out there”). The group also conducts an annual portfolio
invest only in areas
review, holds business-unit executives accountable for
returns on their innovation projects, works with the vari-
ous business managers to ensure that they have robust
they know.
business strategies, and consults with business units on
issues of mergers and acquisitions, etc.
the managers. In addition, the use of postmortems is com-
Boston Scientific, HP Labs and others have put in place mon in these organizations. Postmortems are conducted
distinct approaches to evaluating novel ideas for prod- after the completion of a project, and lessons can take
ucts and services. Traditional methods of evaluating the form either of a report, like a highly structured pre-
their future value and impact will not be beneficial if the sentation of critical learning, or a more interactive arti-
riskier ideas are compared to the incremental ideas. The fact in the form of a story. Stories, like case studies, are
risk associated with incremental innovation is low, and prepared for projects that are highly novel or where the
hence those projects will always look better on paper. learning was significant enough to warrant the effort.
These postmortems are then used on a regular basis to
Leading firms also try to segment their investments into help managers become better leaders and also to manage
products and services based on their place in the life innovation projects (see “Learn from New Product Fail-
cycle. If the product or service is in its early stages, in- ures,” pp. 31–39, this issue).
vestments are made to develop the ideas and get them to
a stage of maturity so that the organization can use them
for differentiation in the marketplace. However, if the Communicate value of innovation
product or service uses a technology that is already
Hewlett-Packard has taken concrete steps to communi-
mature, organizations will only continue to invest so
cate the value and process of innovation to its employees.
long as the returns are guaranteed.
These include hosting a Power-UP event (think road-
Taking risks on mature technologies is not advisable show!) at which H-P showcases its cutting-edge ideas and
as the chances of an organization carving out a niche projects across the enterprise. H-P makes it clear to every
through incremental innovation are minimal due to fierce employee that coming up with innovative ideas is hard
competition. An organization should invest resources in work. The chances of an employee actually developing
areas it believes are novel or emerging, i.e., where R&D a new business practice are slim; some refer to this as the
efforts are underway and new products and services can “Valley of Death.” This is not to discourage employees,
be expected within five years. but to make them aware of the effort and care needed to
move these ideas ahead. One executive remarked that
Novel areas are those that are considered high risk to- when he joined HP Labs, he was told that “ideas are
day. They are mostly found in university R&D labs. In- cheap.” After all, only a few ideas make it to market.
vesting in these areas gives an organization access to
knowledge and insights that will help to position it for John Meyer, director of H-P’s Digital Printing & Imaging
the future. Lab, told us, “My job is to provide an environment where
innovation is fostered … I do not want to interfere with
my engineers and the technical staff … I need to give
Train managers to be innovators them the tools and support needed to help them succeed.”
Air Products runs an internal university for its managers. This thinking is rare—most managers want to be the ones
Employees and managers can take classes on innova- making decisions on innovation. They want to be the
tion or business strategy and even work on related case “judges” of innovative ideas, even if they lack the techni-
studies. cal competence to judge them. Hewlett-Packard has un-
derstood that this approach does not work and so the
Other leading organizations use the case-study method organization does not interfere with the minds of brilliant
to train their managers on innovation management. Suc- employees. The role of the manager is to make sure that the
cess stories, or failures, are read and discussed among outputs generated by these minds can be commercialized.

July—August 2009 53
H-P has a number of ways to encourage employee in-
novation. For example, there is TechCon, which is anal-
ogous to a research conference. Employees submit papers,
Hewlett-Packard has
which are refereed and judged. The best papers are se-
lected for presentation and some are chosen for poster
sessions. TechCon receives over 1,000 papers from em-
taken concrete steps
ployees. About 550 employees are selected to attend this
event and the discussions here foster future innovative
to communicate the
efforts.
Leading organizations know how to communicate the
value and process of
value of sustained innovation. Their communication pro-
grams ensure that: 1) all employees know their precise innovation to its
role in the innovation programs; 2) the link between in-
novation and business value of the organization is clearly
articulated; 3) there is clear communication of what ex-
employees.
actly the innovation process is and how employees should
proceed in terms of leveraging ideas; and 4) rewards and
recognition for innovation are clearly communicated so decades ago, without including innovation elements, they
as to energize the organization. Moreover, leading orga- may treat the new policy as merely a fad and not take it
nizations use a portfolio of communication media to get seriously. If, on the other hand, the mission statements
their message out in a sustained manner. For instance, are revised to reflect the new innovation policy, they may
intranets, email messages, having the message delivered encourage employees to act on them. Incumbent firms need
via banners and even face-to-face meetings, and town to use their mission statements wisely to engage employ-
hall meetings are among the strategies employed. ees in change, in the dynamics of the environment, and for
refocusing their innovative energies in important areas.
Revisit the organization’s mission Thus, the mission statements of innovation-based enter-
prises need to be revised and updated on a regular basis.
Incumbents often retain obsolete mission statements. At Robust action is “an action that accomplishes short-term
the outset, mission statements represent initial firm goals, objectives while preserving long-term flexibility” (14).
which effectively leverage the ability, passion and re- For instance, Leifer et al. observed how chess masters
sources of employees to achieve those goals (12). As firms make moves. Chess masters were believed to have fixed
grow, however, they can become fixated on the historical plans with numerous moves and then select the moves
origins of their mission and don’t take the time to revise tailored to their strategic goals. However, Leifer found
them. Consider Amazon.com, whose original mission that their strategy is more emergent and adaptive, respond-
was “to be the world’s largest online bookstore (13).” Its ing to opponents’ moves (15). Their strategy is highly
focus was on a single product category. Due to fierce dependent on the choices made by the opponent. Similarly,
competition among e-sellers, however, Amazon changed organizations that overlook changing their mission to align
that mission to “high-quality customer service over the with the external circumstances will ossify over time.
Web,” which allowed it to pursue many product catego-
ries. Amazon still kept selling books and used the fa-
miliar web interfaces for new products, so customers felt Governance of innovation
only gradual change and accepted the mission and prod- A fundamental tension exists in governance mechanisms
uct shift. New product/service additions and alliances around innovation. Decentralization is suitable for gener-
have allowed Amazon to increase its revenue base. ating and developing ideas, but centralization is more
Most organizational mission statements are defined too suitable when it comes to choosing and implementing the
narrowly and hence may limit the organization’s innova- ideas. Power concentration helps ideas to be commercial-
ized by resolving conflicts, disagreements and controver-
tion opportunities. For example, the mission might be to
sies (13,16). These conflicts are often incited in a time of
offer the best services in the area of web services but not
organizational decline (17). Organizations need to have a
include how employees ought to act when in contact with
dual power structure that allows for innovation. Ideas that
customers. This is sometimes a problem when incumbents
respond to the decline need to emerge from a decentral-
try to implement innovation and there is a gap between
ized power structure, but the implementation of the ideas
the new innovation policy and the goals of the organiza-
should be centrally managed.
tion. For example, if employees hear that organizations
encourage innovations from employees, but the mission One way to think of this is analogous to the organization
statement repeats the same goals that were relevant two acting like a funding agency (13,16). For example, the

54 Research . Technology Management

organization sets priorities for innovation in a top-down
manner but also by listening to the ideas that emerge in a
grassroots fashion. Given these areas, the organization so-
An organization
licits employee proposals for innovation. Employees can
identify the areas they want to contribute in, most notably
in areas of competence. In addition, they can form com-
that does not
munities of practice by assembling their own teams
and work plans. After proposals are submitted, a screen-
continuously
ing process is commissioned. This often involves other
employees who review proposals against clear criteria
such as metrics to choose proposals for funding.
reinvent itself is
To build on a previous point, reviewers should be en-
couraged to support risky efforts and novel discoveries,
bound to become
in addition to traditional incremental efforts. Once funds
are allocated, the team should be left alone to deliver
extinct.
results. At regular intervals, the team should be asked to
provide reports and updates on their efforts. When the
ideas mature and are ready to be taken to market or dif- the benefits of reselling them to multiple parties. Moreover,
fused in the organization, it is time to get a bit more cen- the organization will be able to stretch the range of its
tralized in the management orientation. Here is where operations and in doing so extend the scope and scale of
the organization should have a well-oiled process to take the efforts to serve many more customers. The emphasis
these ideas and turn them into innovations. is on process innovation more than on product innovation,
i.e., scaling the business processes to extend the firm’s
The level of uncommitted resources affects organiza- reach. However, this line of thinking will be apt for only
tional capability to be innovative during organizational a short time, because soon there will be new firms in the
decline. 3M and other companies allow their employees marketplace who will be trying to overthrow the firm, in
to spend time working on their innovations. Slack is the same way that it entered the market originally.
built into organizational plans and there is room for
reflection and thinking. This is very important if an As a result, the organization moves to the third phase—
organization wants to sustain its innovation programs. adaptation. Here, the firm focuses on imitating the work
Uncommitted resources allow organizations to be flexi- of the newer firms and responding to them. The focus
ble enough to conduct risky investments. Committed here is not so much on scaling the product or service
resources such as salaries and benefits are difficult to delivery efforts but on quickly adding components to the
mobilize for risky investments. Reducing salaries and current offerings so as to keep them from obsolescence
benefits by downsizing can have negative behavioral and preventing the loss of market share and clientele.
consequences that do not contribute to long-term share- During this time, the organization realizes that it needs
holder value (18). to go back to its bread and butter—product innovation—
which got it into the business in the first place.
Stages of Innovation Organizations that make it through this stage will enter
the stage of exaptation. Exaptation is a term borrowed
In an organization’s early days, it will likely be small from biology—it means the ability to use your existing
and focused on operability and on transforming the col- features for novel functions. In business, that means us-
lective know-how of the personnel into products and ing existing assets to create or apply to new markets,
services; its innovative behavior will be high. The entire products or services that you did not know existed be-
focus of the organization will be to disrupt incumbents fore. Organizations similarly will be able to innovate us-
in the industry and carve out a niche for itself with one ing their existing resources in novel ways—they will use
or two products or services. Moreover, the need to make their existing structure to develop breakthrough innova-
an impact in the industry will be the overriding concern tions, most often in the context of new products or re-
and the driving force behind the creative spirits. It is vised business models.
common to see organizations in this mode of operation
go after almost any option or opportunity so as to show- The final stage in this model is where the organization
case the skills possessed by the organizational mem- displays agility in terms of its innovative capabilities.
bers. This will occur if the organization can sustain its capac-
ity to innovate on a continuous basis.
The organization thrives on flexibility in its next phase,
where the focus will be on reusing the knowledge and There are risks in moving through the phases noted
experience captured in products and services and reaping above. Most organizations get trapped in the stage of

July—August 2009 55
flexibility. After all, the organization has just expended a myopic. Hence, the organization must devote sufficient
great deal of energy getting through the initial operabil- resources to explore new spaces for deploying its exist-
ity stage and now would like to take a breather and reap ing capabilities and developing novel innovative capa-
the benefits of the inventions created in the initial stage. bilities.
Moreover, a comfort factor sets in as the organization
realizes that it has carved out a niche and no longer must
consistently innovate to continue the business. Instead, Acknowledgement
it only has to scale up to redistribute the innovation on a This research was funded in part by the Institute for In-
wide scale. Failing to address that task seriously and novation in Information Management (I3M) as part of
with respect for core innovative capacities leads to stag- the Leveraging Ideas for Organization Innovation Proj-
nation. ect. We are also thankful for support from the Institute
The other risk is when organizations get trapped in the for Engaged Business Research, the think-tank of The
adaptability stage. They may simply try to imitate and Engaged Enterprise.
continually try to keep up with their competitors rather
than work to redefine the competition. Most organiza- References
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56 Research . Technology Management

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