4 Myths about how Great Companies Innovate

The following is an excerpt from Relentless Innovation: What Works, What Doesn’t--and What That Means for Your Business  by Jeffrey Phillips.

HOW DO APPLE, GOOGLE, AND 3M CONTINUE TO DISRUPT THEIR MARKETS? THE TRUTH DOESN'T LIE IN COMMON MYTHS ABOUT VISIONARY LEADERS OR BUSINESS STRATEGY, BUT RATHER SIMPLER TRUTHS, ARGUES JEFFREY PHILLIPS IN "RELENTLESS INNOVATION."

In the United States alone there are hundreds of large, successful firms with recognizable brand names that we encounter every day. We constantly hear innovation success stories about firms like Apple and Procter & Gamble, but we rarely hear about innovation in their direct competitors, Dell and Unilever, much less about innovation in any of the thousands of firms worldwide that compete in these markets. In every region and industry the same pattern is repeated: A small handful of firms are recognized as consistent innovators, used as case studies and examples, while we hear little or nothing about innovation in the vast majority of the other firms in those industries.

So what is it that differentiates a successful, consistent innovator from its close competitors, firms of the same relative size that compete in the same industries and geographies, that aren’t viewed as innovative? What factors or attributes accelerate innovation in these successful companies? Are those factors or attributes lacking or underrepresented in lower performing firms? Or are firms like Apple and Google better at attracting marketing and publicity? Is it safe to say that the majority of firms in every region of the globe are not innovative, or is it simply that they don’t receive as much media attention? What happens at Target that does not take place at Kmart? What is Apple doing that Dell is not? And what about 3M compared to Avery Dennison?

Several possible factors spring to mind, including the executive management, the nature of the industry, or the capabilities of a firm’s research and development teams. Much of the mythology built around innovation identifies these factors as the main components of innovation success and it is true that each of them may contribute to a stronger innovation capability. But in the long run, none of them are the key drivers. Let’s review the myths and debunk the conventional wisdom, then confront the simpler realities.

EXECUTIVE MANAGEMENT.

 Myth: Individual, innovative leadership accounts for the majority of a firm’s success. 

 Truth: Sustained innovation success does not rely on visionary leaders alone.

In the 1990s, a cult of personality arose around some senior executives, especially individuals like Jack Welch of General Electric and Lou Gerstner of IBM. The media led the public to believe that these CEOs accounted for much of their firms’ success while they were at the helm. During Welch’s tenure at GE he implemented several programs that were attributed with driving new value and differentiation for the company, including ranking employees into categories and only participating in markets or industries in which GE could be one of the top three players. Many analysts have also attributed much of GE’s success in the 1980s and 1990s to Welch’s leadership.

ALTHOUGH HE WAS A VISIONARY, OLSON DID NOT FORESEE IMMINENT CHANGES.

Strong, visionary leaders matter, but do visionary leaders account for the differences in innovation competence? Certainly, to some degree. For example, everyone recognizes Steve Jobs’s influence on Apple and the company’s decade-long dominance in consumer electronics and innovation. Jobs, however, isn’t the only visionary leader in the computing space, which was created by a number of innovative trend-setters.

Look no further than Kenneth Olson, the founder of Digital Equipment Corporation (DEC), who disrupted the mainframe market with minicomputers, but failed to see the further disruption of the minicomputer market by the personal computer. He is attributed as saying “there is no reason anyone would want a computer in their home.” Although he was a visionary leader, Olson did not foresee the imminent changes in the computing market, and DEC was soon disrupted by personal computer (PC) manufacturers such as Compaq, which made the first “portable” PC.

Michael Dell at Dell Computer is every bit as dynamic a leader as Jobs is at Apple, and he was heralded as an innovative leader in the 1990s, constantly on the cover of magazines like Fortune and Forbes. Dell disrupted the existing business model in the PC market, which enabled his company to grow faster and supplant many larger and well-established firms, including Compaq. In fact, far more people own Dell PCs than own Apple PCs, yet Jobs is constantly feted as an innovator while Dell is hardly considered in the same league.

Dell and Olson were both recognized for their vision and innovative capabilities at a point in time, but their firms did not sustain innovation over time. But, back to the initial question of how much impact a CEO has on innovation. If we assert that Jobs is a unique case, can we identify innovative firms that don’t have visionary CEOs? Certainly; W. L. Gore is an excellent example.

W. L. Gore is a privately held firm with more than $2.5 billion in revenue, headquartered in Newark, Delaware. Gore manufactures Gore-Tex, the waterproof, breathable fabric that is used in a wide range of outdoor clothing and gear. The company has sought and found numerous uses for its PFTE polymer, creating dental floss, coatings for guitar strings, medical devices, and other applications. Beyond product innovation, however, Gore is also an innovator in organizational structure. Gore has an exceptionally flat organizational structure with no formal reporting hierarchies or organizational charts--its CEO was actually elected by its employees. Innovation at the company is therefore driven not by a single visionary CEO, but by the individuals and teams throughout the business.

Further, consider Target or 3M, firms identified earlier, which are far more innovative than their competitors. While these firms are recognized as innovation leaders, I suspect most people would have difficulty picking out any member of the executive team of either firm in a police lineup.

Another thought experiment may help clarify whether or not executive leadership is a significant driver or barrier for innovation. Let’s assume that Steve Jobs could be magically and instantly transported to Austin, Texas, where he becomes the CEO of Dell. If this were to happen, do you think Dell would become dramatically more innovative overnight, or even in several years? If Target’s CEO was recruited to Kmart, or 3M’s CEO was remanded to become the CEO of an abrasives company, would those firms instantly become innovative? Would these firms attain the level of relentless innovation of the leaders in their industries or markets, even over time?

I’d stipulate that the answer is no. Simply put, there’s more to sustained innovation than a visionary executive. Visionary, innovative, executive leadership may occur periodically, and while it may contribute to sustained innovation, it is not the only contributor to successful, long-term innovation. Sustained innovation success does not rely on visionary leaders alone.

INDUSTRY COMPETITION AND SPECIFICS.

 Myth: The level of industry competition dictates the amount of innovation.

Truth: Industry competition is a factor in fostering innovation, but it doesn’t guarantee innovation leadership.

If executive leadership alone doesn’t account for innovation success, then perhaps the level of industry competition fosters more innovation. After all, it seems some industries are more innovative than others. A look at the mobile phone handset market provides perspective on a highly competitive and innovative industry. Consumers expect their wireless devices to offer valuable new features and capabilities. Yet, recent history suggests that while many firms in the space have been considered innovative, few of them have sustained leadership for any length of time. Nokia is a great case study in this regard as it was considered the market leader in innovative handsets for many years.

NOKIA’S CEO WROTE AN OPEN LETTER, DESCRIBING THEIR POSITION AS A 'BURNING PLATFORM.'

Nokia is an example of a company that has reinvented itself as times and needs changed. Originally a paper company, the firm has shifted its focus and business model at least three times over the course of almost 150 years. Nokia entered the cellular handset market in the late 1980s and as of 2010 was the leading handset manufacturer in terms of volume. Yet its market share has dropped precipitously according to industry analysts as it has failed to anticipate new needs and offer compelling new products.

At the time Nokia was the leading handset developer, its researchers actually designed a touchscreen mobile handset (this was years before Apple’s iPhone), but the concept was rejected by executive management, which had become complacent and comfortable with current profits. In early 2011, Nokia’s CEO wrote an open letter to his employees, describing Nokia’s position in the handset space as a “burning platform” based on the company’s shrinking market share.

As Nokia stumbled, Motorola took its place as the innovation leader in the handset industry with the RAZR phone, for a short period. The designers of the RAZR were featured in the business press and were hailed as the new leaders in cell phone design. Yet in just a few years Motorola was dethroned by Apple, showing that it was no more able to innovate consistently over time in the cell phone space than Nokia. It remains to be seen whether Apple will suffer a similar fate with the introduction of the Android operating system and new smartphones based on that technology.

While the competitive nature of an industry does increase the likelihood of innovation, it does not guarantee a firm will sustain innovation focus.

The point is that within less than a decade several firms wore the crown as the “innovation” leader in cell phone/smart-phone development and design, and all of them demonstrated periodic innovation. Yet only Apple appears to be able to sustain innovation. Just because one firm held the leadership mantle and received higher profits during its own leadership period has not meant that such firms could sustain innovation over time.

THE FAST FOLLOWER

 Myth: It is possible for firms to copy the product or service offerings of market leaders while retaining competitive advantage through low costs or higher service. 

 Truth: To remain competitive, firms must increase their innovation capabilities instead of playing 'follow the leader.'

A quick review of firms in the United States demonstrates that most industries or markets have one well-established innovator and several “fast followers.” The majority of firms in any industry don’t heavily invest in innovation. Most companies assume they can copy the strategies of the leader in their market and still retain competitive advantage through low cost or higher service--or simply through the lethargy of their customer base. Such organizations will even argue that their strategy is to be a “fast follower.” This strategy, however, is usually a difficult one to pursue and it is increasingly a dangerous proposition. There are at least four problems with a business plan of this kind.

'FAST’ FOLLOWERS SUFFER THE MOST AS NEW INNOVATIONS ENTER A MARKET.

The first problem is in the word “fast.” Customer demand and expectations are changing much more quickly than many firms have the ability to keep up with. Few products or services have the luxury of extended life cycles or little competition. A growing base of consumers with new expectations and new demands only fuels the fire for more products and services. Firms that claim to be fast followers are often merely just followers. As a firm grows and matures, its bureaucracy, decisions, and approvals inhibit its ability to bring a new product to market quickly. The company can’t respond fast enough to innovators or consumer demands. In this period of rapid change and global competition, innovation isn’t a “nice to have” but an important core competence; those firms that can’t keep up will inevitably perish.

The second problem with “fast” followers is that they become accustomed to following. Since these companies don’t exercise any creativity or innovation skills, those capabilities have atrophied or they aren’t valued within their organizations. This lack of innovation skills leaves the fast follower with only one recourse: to eliminate costs and inefficiencies since they can’t hope to command the attention and margins that accrue to innovators. Given new economic shifts, global competition, and customer demand, firms that cannot create new, interesting products and services exist on the very brink. To remain competitive, firms that haven’t relied on innovation as an advantage must increase their innovation capabilities, not try replicating others’ successes.

Third, “fast” followers often don’t understand what features or benefits the customer values in a product, and what challenges or issues exist in those products. By simply copying an existing product or service, they risk duplicating all the problems or issues that exist within the innovative product. Since the “fast” follower does little research, the company often doesn’t know which features or benefits are important and should be emphasized, or what hidden issues or concerns exist with the product. “Fast” followers often make the same mistakes as innovators do, but they have less opportunity to respond and encounter a customer base that has recognized both the benefits of the product or service and the issues or constraints.

'FAST’ FOLLOWERS OFTEN DON’T UNDERSTAND WHAT FEATURES OR BENEFITS THE CUSTOMER VALUES IN A PRODUCT.

Finally, “fast” followers suffer the most as new innovations enter a market. They are more accustomed to implementing the business models and offerings of the innovation leaders after the models have been proven. Fresh entrants, unbound by the shape and structure of the market or competition, will enter to disrupt the existing order and make older products, services, and companies obsolete. Innovators by their very nature are constantly scanning the horizon, looking for emerging threats and new entrants. They spot disruptive trends and shift nimbly into new opportunities. Industry laggards and fast followers are impacted by disruptions far more than innovators, but the impact is more severe on fast followers since laggards really had little to lose. Since such companies are neither fast nor particularly insightful, they lose the most in a market disruption as they can’t shift away from their existing models and structures quickly enough.

The “fast follower” strategy is increasingly a difficult business proposition. Firms that focus their efforts on innovation rather than fast duplication will succeed.

As Michael Treacy established in his book The Discipline of Market Leaders, there are three differentiated positions in any market: product leadership, operational excellence, and customer intimacy. Innovation is a tool that can help an organization achieve leadership in any one of these differentiated pursuits, but clearly only one firm in an industry can be the “best” at any of these strategies. For example, we could argue that in the retail space, Target is the product leader, partner-ing with leading designers to bring interesting, attractive, and affordable products to the mass market. Wal-Mart is the operational efficiency leader, innovating new data streams and distribution tactics to keep costs and prices low. Nordstrom is the customer intimacy leader, creating a completely unique and valuable relationship with its customers. Every other retail firm lags behind these firms in one or more of the three strategic areas, and new competitors seek to enter the retail space and disrupt the leaders, much less the laggards.

Innovation is a long and winding road. Thankfully, you can steer.

SUSTAINED INNOVATION.

 Myth: Due to changes in a globalizing world, no firm can sustain innovation leadership over the long term. 

 Truth: Sustained innovation resides in factors that companies can control.

Some observers argue that given heightened competition, accelerating global trade, and increasing customer demands, no firm can sustain innovation leadership over the long term. This argument, however, ignores the results of a firm like 3M. Except for a brief period between 2000 and 2005 under former GE executive James McNerney, whose focus was on profitability and efficiency, 3M has had a long history of innovation leadership, creating a range of products and services. Certainly the Post-It is probably the most well known, but over the last 50 years 3M has entered countless markets and industries, tailoring new innovations to different geographies, technologies, and market needs. Though 3M continued to innovate in spite of McNerney’s focus on efficiency, when George Buckley replaced him as CEO, one of Buckley’s first actions was to reemphasize innovation as a core capability, providing fresh focus and funding for those activities.

In my experience, it is completely possible for a firm to develop and sustain an innovation capability over time, just as a firm is able to create and sustain market leadership over time. Innovation capability resides less in markets, strategies, technologies, or leadership than we typically suppose, and more specifically in factors that companies can control--culture, business attitudes and perspectives, focus, and intent. That’s the real lesson we can learn from relentless innovators: what drives long-term, successful innovation are the same factors that shape the way people think and act in any business--operating models, strategies, rewards, culture, and processes.

[Images: Jule Berlin , Denis Kornilov , Jimmy Lu , Vladimir Wrangel ,mikeledray  via Shutterstock]

Jeffrey Phillips leads the innovation consulting team at OVO Innovation, a consulting and training firm working primarily with Fortune 500 firms.