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mastering innovation

  1. 1. mastering innovation: roadmap to sustainable value creation using strategy-driven innovation sm The DeSai Group Learning, Innovation and Values TM by Mr. Jatin DeSai - The DeSai Group 199 oakwood avenue - west hartford - connecticut - 06119 - p: 860-233-0011 - e:
  2. 2. mastering innovation: roadmap to sustainable value creation using strategy-driven innovation sm To succeed and thrive, a business cannot accidentally or occasionally be innovative. It must innovate at a rate faster than current (or future) competitors – with a high degree of predictability. innovation defined There are many definitions of innovation one can adopt. At DeSai, our working definition of innovation is: “Harvesting the deep insights of an organization’s human spirit and knowledge, generating a pipeline of ideas that are evaluated, selected, and ventured using disciplined tools, methods and processes that advances growth objectives for an organization.” 2
  3. 3. the relationship between innovation and sustainable value creation Innovation makes big difference. But some companies are much more successful in innovating than their industry counterparts. Companies that focus on the innovation with focused management and rigor greatly improve their business performance compared to companies that see innovation as something best left to chance. In our work with CEOs and executive leaders, it’s not that they don’t understand the nature of innovation itself. Most would agree with a vision of successful innovation as the transformation of a company’s business vision and strategy into profitable products, services and/or solutions delivered to the customer. Much of the frustration, instead, points to lack of clarity around purpose of innovation. Leaders are not explicitly clear about what exact value a given company’s innovation investment is supposed to yield. In our experience, innovation excellence means making a clear choice between three sources of value creation and then aligning innovation efforts towards one of those choices. Each one requires unique approaches to be successful towards building a predictable innovation engine (See Figure-1). TOP-LINE GROWTH STRATEGIC INTENT BOTTOM-LINE SHAREHOLDER OPTIMIZATION VALUE Figure-1 The right choice for innovation for value creation depends on the business strategy. Two companies in the same industry can make very different choices. We argue that successful innovation is not about how much you spend, but why and how you spend it. In other words, it’s about knowing what kind of value your business is aiming to create, and then managing innovation in the most appropriate way given the context in which your business actually operates. Therefore, innovation must be targeted towards a clearly defined value creation focus: 1) Top-Line growth - innovation activities that primarily generate revenue. 2) Bottom-Line optimization growth – innovation activities that yield profit. 3) Shareholder value growth – innovation activities that increase the value of the company – elements that will increase Net Present Value (NPV). 3
  4. 4. the unforgiving markets Along with productivity and cost control, the imperative to innovate transcends economic cycles and remains constant as the only long-term means of creating and maintaining the value of the enterprise. Over the last three decades, focus and attention on quality, strategy execution, process automation, etc. have given business leaders strong results in achieving cost containment, process improvement and operational efficiencies – all tools for improving corporate performance. The hard truth is that there is only one roadmap to long-term sustainable value generation – continuous, profitable, top-line growth. Historically, the market has consistently rewarded profitable companies with higher values than those organizations that achieve their growth primarily through cost-cutting. “Profitable Grower” companies were rewarded 26% Market Value using a Compound Annual Growth Rate formula, while “Cost Cutters” were rewarded only 16% in Market Value CAGR.1 Accepting that profitable growth drives shareholder value, the next logical question is: What are the primary drivers for profitable growth? While the list of growth levers – addition of product lines, expansion into new markets, acquisitions, strategic alliances and partnerships, joint marketing, to name just few – is certainly large, research indicates that innovation sits at the heart of profitable growth strategies. In fact, Return on Invested Capital (ROIC) is achieved best when an innovation framework is aligned to corporate strategy and when it is enabled with the voice of the customer (VoC) every step of the way.2 In a recent report3, and in DeSai’s own applied field experience, the data pattern can be used to conclude a direct correlation between innovation and sustainable growth. According to the report, a study of large U.S. and European companies found that discontinuous growth (the opposite of modest, gradational, ongoing, incremental growth) initiatives represented 14% of total projects but fully 38% of new revenues and 61% of new profits. Just as discontinuous growth (generally attributed to discontinuous innovation ) is a major component of overall corporate growth, corporate growth is a major piece of overall shareholder value. A company’s market value can be thought of as the sum of the expected value of the company’s current operations extended into the future, plus a “growth premium” – in other words, investors’ expectations regarding the company’s growth opportunities. The growth premium of GE in 1999, for example, was a full 60% of overall market value (Value of Current Business at GE=$230B, while Total Market Capitalization was $482B in 1999, a 60% 1 - 2005 Mercer Management Consulting report difference). For GE, investors were sending a clear signal that the value they ascribed to was 2 - Booze Allen December 2007 Report: The driven largely by the prospects for future growth through innovation. Customer Connection: The Global Innovation 1000 3 -“Value Innovation: The Strategic Logic of High Growth” published in Harvard Business Review (January-February 1997) by W. Chan Kim and Renee Mauborgne (authors of popular business book “Blue Ocean Strategy) 4
  5. 5. What’s true at GE is true at most of the Fortune 1000. Nearly two thirds of the world’s largest companies derive a material percentage of their market value from investors’ expectations of continued growth. In other words, 30% or more of their market value is represented by the growth premiums. This obviously creates very tangible benefits, such as the ability to use equity capital to acquire assets and fuel further innovation. Also, this clearly illustrates the innovation imperative. Growth, whether driven by company promises or investor expectations or both, is at the center of most companies’ long-term value-creation strategies. Consider the incredible growth of Cisco Systems since early 1990s. As the NASDAQ swung from historical highs to dramatic lows across the board, Cisco’s growth premium changed significantly. What’s more interesting is how high it remained between 1995 and 2000, despite the company’s loss of some $386 billion in market value. While down from a peak of 90%, Cisco’s growth premium of 70% signified that investors still expected that almost three-quarters of its value would be derived from growth and innovation. Consider the examples of unforgiving markets where value often is destroyed with surprising severity and swiftness: In October 2000, Intel lost $91 Billion in market value because it issued guidance on 10/14/2000, predicting that its quarterly revenue would increase just 3-5 percent from the second quarter, well below the 9-12 percent increase analysts expected. The one-day loss equaled 22% in market cap.4 During December 2000, Cisco lost $83 Billion because Merrill Lynch issued a downgrade, citing fears regarding slowing capital spending in information technology. The four-day loss equaled 24% in market cap.5 Corning lost $32 Billion around October 21, 2000 due to Nortel Networks reporting disappointing third quarter revenue gains, igniting a sell-off among fiber-optics and communication-equipment stocks. The four-day loss equaled 34% in market cap.6 Home Depot lost $33 Billion when it warned that third quarter earnings would fall below expectations due to slower-than-expected sales growth on October 12, 2000. The one-day loss = 29% in market cap.7 Therefore, it is clear that sustainable, profitable growth drives value creation; this principal holds true regardless of economic conditions or legitimate focus on cost 4 - Wall Street Journal, September 25, 2000 containment and productivity in the near term. Still, relying on growth to justify 5 - Wall Street Journal, December 18, 2000 market values is a high-stakes game. With so much value tied up in the promise of future continued growth, companies cannot afford to lose sight of the growth 6 - Wall Street Journal, October 26, 2000 imperatives; because when they do, or when they miss their growth targets, the 7 - Wall Street Journal, October 13, 2000 punishment by the markets is swift and severe. 5
  6. 6. value creation through organic growth “Today, organic growth is absolutely the biggest task. I want imagination breakthroughs… I want game changers… If we don’t hit our organic revenue targets, people are not going to get paid!… We are just a moment away from commodity hell!” Jeff ImmelT, CeO Of General eleCTrIC Why organic growth? The other major source of growth in the past has been acquisitions, which often proved a valuable way to complement and consolidate existing offerings and expand into new markets. But many companies are finding an acquisition strategy inadequate to meet growth targets. Majority of companies have found that most of the attractive acquisitions (from a value perspective) are gone. Since 2005, the stock market has advanced prices, and there is over $150 billion of “dry powder” in the hands of private equity firms, the leading competitor to strategic investment by companies. Strategic investors have typically paid one or two multiples of EBITDA (earnings before interest depreciation taxes and amortization) higher than have private equity firms, depressing Return on Invested Capital (ROIC), which is further depressed by changes in GAAP and the tax code. This has had the effect of depressing shareholder returns. Further, research data has found that only 23% of acquisitions are ultimately successful.8 There is one substantial difference in acquisition vs. innovation strategies to grow: Acquisitions are an all-or-nothing path since they require the company to commit completely at the time of acquisition. Innovation and the subsequent organic growth, if done right, allows the company to place smaller bets with similar payoff. While focused acquisitions will always be an important option for increasing market footprint, companies will have to rely on organic growth to a far larger extent to sustain above-average shareholder returns. We argue this critical principal – innovation and growth are central to value creation – remains true regardless of economic cycles or the industry. While the absolute size of the growth premium clearly changes as market conditions change, the larger point holds. 8 - Tom Copeland in the book Valuation 6
  7. 7. burning platform: institutionalizing innovation So, sustainable growth through innovation is not only not optional — it is central to the valuations of large commercial enterprises, regardless of economic conditions. While large companies possess resources, and capabilities, that give them unique opportunities to innovate, very concrete roadblocks often stand in the way. The central questions relating to the innovation imperative, then, are not whether to innovate, or even how to, but rather how to institutionalize innovation -- especially in a large - company environment; that is, how to build a climate and culture of innovation, agility, and entrepreneurship while maintaining standards and controls necessary for ongoing governance. The DeSai Group believes that the framework presented below maps the major opportunities and challenges, along with best practices, to successfully achieve the highest organizational maturity level from innovation activities. for ceos, what are the innovation barriers ? Knowing that the markets are very unforgiving and will always continue to be unfriendly, and that embracing innovation is not an option, the next logical question might be obvious. What must CEOs do to embrace innovation while managing the associated risk and overcoming the barriers? TOP-LINE GROWTH STRATEGIC INTENT BOTTOM-LINE SHAREHOLDER OPTIMIZATION VALUE INNOVATION MANDATE Figure-2 First, answer lies in developing a clear innovation mandate - a strategic statement that describes innovation in the context of your business, the value it promises to generate for growth and disciplined process by which to get there (See Figure-2). innovation mandate must be vividly clear for everyone in your organization; it must be concise to help drive alignment to business unit initiatives, and it must help articulate specific employee behaviors necessary at all levels for innovation climate to take root. When designed correctly, it is clearly linked and driven by the business strategy. 7
  8. 8. Additionally, keys to become innovative are highly dependent on your ability to address four critical barriers that are incumbent in most organizations. When not addressed together, the journey towards sustainability and value creation invites a higher risk of failure, potentially minimizing the results of innovation investments. The first barrier is that most organizations do not have the mindset to harvest ideas and manage those ideas as Venture Capitalists do. The sole role of Silicon Valley was to quickly take the best ideas and apply entrepreneurship and agility to turn those ideas into commercial ventures. Silicon Valley did this because they recognized that large corporations are unwilling to abandon the tightly-knit safety net of resource allocation. It is clear that the amount of “innovation opportunities” available to large companies dwarfs the potential available to small companies. So the myth that only small, nimble businesses can be most agile and innovative is completely false. In fact, here’s case in point (not to mention hundreds of other such examples): Medtronic, a Fortune 500 Minneapolis based global leader in medical technology, on average, earns 70% of its sales from products introduced in the previous two years alone. This has resulted in long term sustainable growth of 20% and has created a high barrier for its competition to enter into Medtronic’s markets. the bottom line: new ideas are easy to find in every corporation; it’s the distinctive capability of turning them into commercial ventures that most companies fall short on. The second barrier is not recognizing and then not aligning the abundance of resources available to large organizations for investment in innovation. Even when overwhelming evidence shows that the companies who invest in innovation consistently outperform their peer groups, why haven’t most organizations taken innovation seriously? The challenge is not that an organization does not have resources to invest in innovation; rather it’s where to most effectively funnel those resources. Innovation in most organizations is a mandate that cuts across functional areas, making effective resource allocation decisions very difficult. The few common themes that arise are: prioritizing effectively for the same competing resources across business units, designing solutions that may be ideal for a single business unit but not for the corporation as a whole, and balancing between the need to build markets while servicing existing customers. the bottom line: resources are available, but the allocation and ownership for innovation is fragmented responsibility across most companies. 8
  9. 9. The third barrier is to recognize the sheer size of the human capital assets that are under-utilized and disengaged from an organization’s creative capacity. The opportunity for most organizations is to dedicate talented “New Game Teams”, focused on harvesting the creative ideas and leadership competencies, to build new top-line growth capacity. Proctor and Gamble’s global research and development organization employs over 7,500 scientists; GE trains 10,000 managers every year and performs over 5,000 detail performance reviews of its senior-most employees; and Cisco has increased its engineering workforce by 300% since 2000. the bottom line: developing a holistic and integrated human capital strategy for innovation is critical so it promotes “value creators” and rewards them to continue to create value while staying in workable compensation systems. The fourth and final barrier relates to the broad product and delivery capabilities that large-scale organizations possess. For example, since the mid-1980’s in the financial services industry, the typical company has gone from handful of delivery channels (Branches, Relationship Managers) to literally 15-20 channels (Branches, Direct Mail, Internet, National Sales Force, Business ATMs, Corporate Cards, Affinity Marketing, Wireless, etc.); all the while expanding its product offerings by ten-fold. “Anytime, Anywhere” banking has become the price of entry across the industry as providers strive to meet the need of large and diverse customer bases. This has created a huge challenge, since those dedicated assets to serve the wide variety of customers are not fully leveraged for new innovation. The complexity of providing the right product to the right customer through the right delivery channel in real-time – in a way that doesn’t destroy the economics of the company – becomes a monumental challenge with each new innovation. Add to this, the overwhelming issue of tying the employment brand to the product brand in the marketplace and the various components of talent acquisition. the bottom line: the accomplishment of end-to- end alignment between products, channels, and talent acquisition (employment offers) is the single largest challenge facing large companies today. The DeSai Group has developed diagnostics and alignment processes to help you create your own roadmap for continuous value creation using innovation. Our tools helps you quickly identify your propensity to overcome these barriers, and calibrate your innovation activities with purposeful execution. 9
  10. 10. the game of innovation It takes many elements to nurture innovation. Innovation is elusive; it cannot be produced on demand, nor can it be corralled or scheduled. Real innovation that matters and has a major impact in practice is extremely difficult to achieve. At best, the organization can create an environment in which innovation seeds are planted and nurtured— so the fruits can be harvested quickly thereafter. A famous innovation myth is the one about Newton’s discovery of gravity. Of course, gravity always existed before that – the pyramids were already built as were many other beautiful structures by the ancient cultures in every corner of the world before Sir Isaac Newton walked on Earth. It was not the apple that caused Newton to automatically discover gravity, but decades of research and experiments in physics and math that led him to that ‘final’ moment. This last piece of the puzzle he was looking for, represented by the falling apple, gave him the needed insight to declare the definition of gravity. There are thousands of such innovation myths that are misunderstood. For each, it took deep conviction, persistence, and a nurturing climate for successful innovations to arise. Also, most innovations were developed from existing innovations already available. A classic example is the computer keyboard we all use – created by engineering variety of plastics, language, semiconductors, electronics, electricity, metal, USB cable, etc. It took the right climate for innovation and discipline for it to become a computer keyboard. harvesting internal innovation: Innovation needs to be nurtured at every level of the organization and, most of all, by each person deep within himself or herself. Each person may not create as unique innovations such as the understanding of gravity or a keyboard everyday. But, each person can, contribute to ideas and elements of future innovations yet to be discovered for your organization – if there is a climate and culture for them to successfully innovate! building external innovation networks: Innovation is also not just about harvesting from within, but creating future competitive advantage by depending on “innovation networks” -- individuals and organizations outside a company that can help it solve problems and find new ideas for creating growth. Larry Huston was vice president of knowledge and innovation for many years at Procter & Gamble, where he was the architect of its connect + develop program, an approach that helped extend the company’s innovation process to include 1.5 million people outside of P&G. Boeing has implemented a collaborative innovation network for its new commercial 787 dreamliner, particularly around building supply networks that are solving critical problems. Microsoft has implemented external software developer ecosystems – called microsoft solution providers, as has IBM and others. 10
  11. 11. In the near future, successful innovation opportunities will be to figure out how an organization can build growth-platforms utilizing ideas outside the company for remarkable disruption in the marketplace. Like a game of soccer or ice-hockey, innovation is arduous, difficult and tricky. Be prepared to score a game-winning hat-trick once, maybe twice – but only if you are ‘in the game of innovation’. risk, employee engagement and innovation Innovation always involves risk. It can be hedged, mitigated, insured against, and shared with others, but — by definition — risk can never be eliminated from innovation, nor should it be. Leaders and companies that will not take enough risk will never be able to achieve payback through innovation. Companies that say they want to innovate, but then do everything possible to remove all the risk, will confound the process and drive innovative people away. In our experience, the company that learns to assess and live with risk will achieve a significantly higher rate of return than companies that do not. An idea that is chosen deliberately, whose goals are clearly defined, and that is commercialized and realized with rigor, but still does not produce the desired return can rarely be considered a complete failure. “Intelligent failure is the way you react and learn—you learn more from failure than success,” said Peter Dubreil of Renault. 9 “But if you want to learn, you have to work at it. You have to spend sufficient time and intelligence in checking why the failure occurred to understand it completely.” Therefore, as a leadership issue, the primary risk for innovation is the disengaged workforce. With employee engagement, comes creativity; with creativity, comes ideas; and with ideas comes innovation. Without engaged employees – no sustainable innovation. Risk-tolerance and employee engagement are two sides of the same coin. Intelligent failures require employees to take risks. When they do; engagement and productivity can improve. Also, it is important to remember that employee engagement arises from corporate culture. Engagement cannot be cultivated or rooted in a ‘corporate program’. It happens only when you remove barriers to work, and those barriers are unique to every work group. Recent findings strongly suggest that when companies emphasize strengths development through organized learning and talent management strategies, the chances are greater that a culture of innovation and creativity will exist. In recent Gallup research, 30% of respondents strongly agreed that their organization is committed to building the strengths of each associate. Of 9 - Interview on January 21, 2006 those, a majority (54%) also strongly agreed that their current job brings out their most creative ideas. In contrast, of the nearly 50% of respondents who disagreed that their 10 - The Gallup Study, May 10, 2007 organization is committed to building the strengths of each associate, only 1 in 10 strongly agreed that their current job brings out their most creative ideas.10 When examined through the employee engagement lens, the impact of focusing on strengths and encouraging new ideas for innovation is even more evident: 65% of all engaged employees stated that their organization is committed to building employee strengths and encouraging new ideas that 11
  12. 12. defy conventional wisdom. Among actively disengaged employees, this number plummets to a mere 2%. It is also a well-known fact that managers play a significant role in the “talent development + engagement = innovation” equation. Fifty-two percent of workers who said their supervisor “focuses on my strengths or positive characteristics” also said that “My current job brings out my most creative ideas.” Previous Gallup research has shown that higher levels of engagement are strongly related to higher levels of innovation. 12
  13. 13. introducing DESai’S: strategy-driven innovation sm framework So, how do you play this game? The DeSai Group has discovered that organizations can approach and get into the game of innovation using four different approaches or “Levers”. To truly create a sustainable long-term, value-creating engine, a company must achieve mastery in all four dimensions outlined in the framework below. To restate, you must first start with choosing what value (Top-Line, Bottom Line, or Shareholder) are you driving towards; which is generally governed by your business strategy. Based on that as your target, you must define your organization’s innovation mandate – at corporate level and at each business unit level. Next, you must learn about the game of innovation and associated risks and rewards to help you make informed decisions about moving forward. Finally, then you will need to make investments to manage innovation activities. TOP-LINE GROWTH STRATEGIC INTENT BOTTOM-LINE SHAREHOLDER OPTIMIZATION VALUE INNOVATION MANDATE STRATEGY- DRIVEN INNOVATION FRAMEWORK Figure-3 SM desai’s strategy-driven innovation sm framework (sdi) is based on 25 years of innovation experience with our regional and global clients across numerous industries. SDI, using systematic execution methods, directly addresses your specific mandate for innovation, and therefore moves your organization towards the value target you are trying to hit. (See Figure-3) 13
  14. 14. Managing innovation is like, but also unlike, managing anything else. It is similar because it does respond to planning, motivation, investment, measurement and training. However, it is dissimilar in that it is found everywhere in the business, and is volatile, and is easy to cripple. The SDI framework can help you design a customized roadmap for innovation. Specifically, it offers four different entry points (SDI Levers) showing barriers, opportunities, and outcomes that should be considered as best practices for your innovation journey (See Table-1). It is supported by tools, methods, training, and technology platform from DeSai. Within desai’s strategy-driven innovation sm framework (sdi), each sdi lever has numerous solution dimensions to help overcome the challenges and barriers based on overall strategic intent and organizational imperatives you are addressing (See Table-1). sdi levers: lever - i lever - ii lever - iii lever - iv climate and lever venturing for agility for speed behaviors for culture for description: best growth success “We have established opportunity “We have an endless “We have resources “We have large talent variety of products, for number of ideas and available for pool and resourceful customers and innovation is size of new revenue investments in workforce” within grasp: distributional and streams” innovation” delivery channels” “What do we “How do we overcome “No one owns “Our rewards are need to address our internal barriers innovation – it is misaligned with barriers and overwhelming to turning ideas into fragmented. How do entrepreneurial challenges complexities of behaviors we need for to overcome: commercial products we fix that?” aligning products, or services?” innovation. How do we channels, customers solve for this?” and employees?” Organizing design for Building and Climate and Culture Developing the Venture Innovation and Agility integrating model for sustainable target Market mindset and outcome: Entrepreneurial innovation methods for new Behaviors to support business ventures innovation Table-1 As an organization begins to develop the innovation muscle after initial prototyping with one of the Levers, it can accelerate innovation activities by pulling other Levers for expansion and impact towards sustainable culture of innovation. 14
  15. 15. lever - i: venturing for best Here, the Company adopts a more efficient internal market for capital and ideas. Since it is crucial to leverage all internal resources to sustain growth, with Lever-I, the organization can identify and explore opportunities by replicating external market mechanisms so that the organization’s capital, talent and ideas are always achieving their highest possible return. In order to achieve this, companies must clarify and reengineer the way investments and resource allocation decisions are made. As an example, here is a typical venture capital funding process that can be adopted: 1. Potential investment opportunities are solicited for consideration. 2. These opportunities are then screened using a robust set of evaluative criteria. 3. The best of those opportunities are then selected for funding. Active Dimensions: Using stage-gated, or incremental, funding resources are provided towards each stage- gate goal. If the venture falls short at any stage-gate, the funding is ceased. This internal funding process closely resembles the external venture capital process with entirely independent decision-making powers and budgetary authority. The process is open to all employees and to all types of ideas. A universal database captures all ideas, which then can be used by all employees as the basis for further idea development. Training and coaching to develop innovation and entrepreneurial skills are also designed to improve business focus and to foster innovation among all employees, and managers. This approach of soliciting and developing internal ideas is a powerful method of unlocking value creation by employees and can lead to significant development of products and services. The Lever-I process is very useful for developing both new business opportunities and new working methods or solutions to improve internal operations. This approach also boosts employment brand, resulting in improving the attraction and retention of top talent in the marketplace. bottom line questions for inquiry: Does your corporation have clearly defined ways for innovators to obtain funding, staffing and other resources in order to pursue new ideas that would be of benefit? Is it at least as easy for your employees to obtain funding for their new ideas internally as it is externally from venture capitalists? Do your employees collaborate with one another on the development of new ideas such that the collective knowledge and expertise of the organization is fully leveraged? Do new ideas and knowledge flow quickly within your organization as quickly and completely as they do among individuals and organizations externally? 15
  16. 16. lever - ii: agility for speed Most organizations have come to realize that organizational structure and, more importantly, organizational decision-making processes are primary determinants of whether the organization will be innovative and agile. Successful companies make an explicit determination to remove the organizational barriers to innovation and agility. Based on our research and experience, it is evident that standardized approaches to organizational management – where all business units in a corporation required to adhering to the same set of organizational policies, practices compensation system and the like – can stand in the way of innovation and agility. Since the mid-1990s, there has been a surge of ‘horizontal soft structures’– teams, councils, task-forces, etc. -- in most organizations. The purpose of such structures has been to be better connected across functional silos to optimize customer service, reduce cycle-times, etc. Such strategies have provided agility and speed-to-market. In contrast, the management and governance of internal business systems continue to be more vertically aligned – creating continuous chaos and increased friction between lines of business and functional support areas. This is a sure formula to prevent innovation to grow. In order to develop a climate and culture of innovation, successful organizations have recognized the transformational migration from vertical to horizontal methods will yield higher performance returns. These companies have successfully designed organizational structures - teams and groups - to support a conduit between each new venture and the organization’s overall governance process, with the specific mandate to help launch, align, and learn from the ventures. For innovation, the ongoing debate regarding “best” organizational structures, no matter how complex, often returns to a single dilemma: centralization or decentralization of decision-making. Successful companies have developed an innovative answer to this question – it is all about the way in which you decentralize decision making that makes all the difference in the world. bottom line questions for inquiry: Are new ventures and initiatives able to quickly and easily obtain necessary resources and support from across the corporation? Do you have an explicit strategy and approach for ensuring synergies between new and old lines of business – particularly between the traditional organization and eBusiness initiatives? Does your business have a method for ensuring that “lessons learned” by new ventures and initiatives are transferred back to other parts of the corporation? 16
  17. 17. lever - iii: behaviors for growth Here the focus is on how culture and behaviors factor into building a culture of innovation and an entrepreneurial enterprise. The premise is that innovation and adaptiveness are not things that can be mandated from headquarters or from the top-leadership team. The business’s ability to innovate and adapt depends on employees who are creative, engaged and seeking to drive change. In other words, corporations need their workforce to behave like agile entrepreneurs. There are at least two fundamental requirements that a corporation must fulfill in order for its employees, and the company’s culture, to become more innovative: First, the company must identify, make explicit and communicate the behaviors that employees are expected to exhibit. Enterprise cannot expect employees, particularly those who have spent their formative working years in command-and-control corporate environments, to spontaneous change and exhibit the new behaviors expected of them. Second, corporations need to provide a work environment that fosters and supports creativity and engagement among employees. Critical here is the role that managers and senior executives play in creating this kind of environment. Examples exist of a high-tech global company who has translated its core values into a set of innovation and entrepreneurial behaviors. These 30 behaviors are tied to the company’s four core values. For each of the 30 behaviors, an in-depth definition was developed with set of examples in order to make each behavior concrete. These behaviors are then integrated into other Business and HR Systems to assure integrity and success for innovation and agility – including recruiting and selection systems. bottom line questions for inquiry: Does your company’s performance management system explicitly identify a set of behaviors and attitudes expected of employees to drive innovation? Are employees promoted, recognized and rewarded for exhibiting and supporting positive innovation behaviors and attitudes? Are new hires selected on the basis of having previously exhibited innovation and entrepreneurial behaviors and whether they will thrive in an entrepreneurial environment? Are line managers held accountable for the extent to which their employees are creative, engaged and committed? 17
  18. 18. lever - iii: climate and culture for success In this Lever, the most fundamental lesson and focus is the importance of adopting an integrated, comprehensive approach to building a culture of innovation and entrepreneurial spirit – where the result is agility and actualization of strategic intent – to generate wealth and increase market valuation. Put simply, if implemented correctly, Lever-IV can ensure that all of the enterprise “cockpit” elements – design elements such as strategies, resource allocation mechanisms, delegation of authority, information management, organization of work and roles, organizational structure, etc. – and all of the corporation’s workforce management systems are aligned to foster innovation and agility. Traditionally, this approach is for those corporations who have recognized that they must transform from the old economy to the new economy; for example, from a formerly highly- regulatory industry to take advantage of new deregulation, or from a national player to a global marketer, or from a product company to a service company, etc. One consistent theme here is the need for overhauling, antiquated processes and replacing them with practices that prioritize, enable and reward innovation, speed and adaptiveness. The DeSai Group has developed five practices to promote innovation and agility for organizations that are ready to realize rewards from such an engine: 4. 1. internal venture fund – providing everyone access to venture funding to test new ideas 1. 2. talent mobilization – assuring that each business or division is achieving maximum “return on people (ROP)” 2. 3. enterprise ideation – assuring that executives have access and visibility to all the ideas from everywhere within the organization for maximizing leverage 4. universal 360-degree reviews – establishing clear and individual priorities 3. and accountability for each employee and their manager 4. 5. employee branding through engagement – creating clear and consistent messages that emphasize the company’s entrepreneurial environment and communicates this message to target audiences 18
  19. 19. The creation of a successful and sustainable enterprise absolutely requires an integrated and holistic approach; isolated, one-off practices are likely to have little (or even negative) effect. bottom line questions for inquiry: Does your Company’s organizational design elements (structure, delegation of power, information flows and access, resource allocation systems, workloads and roles,) work together to foster greater innovation and agility? Does your Company’s workforce management systems (performance management, compensation, staffing, internal labor market, leadership and executive development, employment branding) work together to foster greater innovation and agility? Does the CEO of your organization and senior executives publicly embrace and support efforts to create a more entrepreneurial culture and work environment? Do meaningful opportunities exist for managers and employees to constructively challenge the status quo within the Company? Are frontline supervisors and employee provided with the business information that they need in order to have the strategic context for their decisions and actions? 19
  20. 20. the innovation opportunity: “Innovation can happen - can be made to happen - anywhere and everywhere in your organization. Insights that lead to innovative ideas are being discovered everyday - right under our organizational nose. You can achieve radical growth with innovation. It will require entrepreneurial behaviors, agile climate, execution discipline, and courageous leadership – the critical predispositions for innovation performance. are you ready to fully harvest your organization’s creative power already within your grasp to jettison for the next growth level? Will you do it fast enough? Can you do it before the market forces you to? The key to innovation success has nothing to do with how much money you spend. It is directly related to the effort expended to align innovation with strategy and your customers, and to manage people and the entire process with discipline and transparency.” JaTIn desaI, fOunder & CeO The desaI GrOup 20
  21. 21. the promise of strategy-driven innovation sm The challenge that corporations face is moving from the legacy of yesterday’s industrial- era management model (marked by command-and-control governance, top-down strategy formulation and the need to minimize risk) to a very different management model in which: Decision-making and strategy formulation is distributed throughout the organization. The goal is to achieve the highest possible return from every newly-emerging opportunity. Workforce is more resilient - for constant change - while highly engaged in performing what is most meaningful for personal and professional growth. With strategy-driven innovation sm, you should expect to move from the Old Economy Model to the Innovation-Driven Economy Model of business: old economy innovation-driven economy competitive environment competitive environment - General stability - Creative destruction - Gradual, predictable change - Frequent, discontinuous change - Power from incumbency - Competitive advantage hard to sustain - Employee loyalty - Employee free-agency business imperatives business imperatives - Internal orchestration and - External focus coordination - Discontinuous innovation - Incremental improvements - Speed-to-market - Consistency and control - Continuous improvement - Quality - Operational excellence - Mass customization - Distinctive customer service - Routine customer service - Strategic partnering - Value chain dominance management model management model - Command-and-control governance - Distributed decision- making - Top-down strategy formulation - Emergent strategy formulation - Risk minimization - Opportunity maximization - Limited access to information - Empowerment through information - Workforce conformity - Employee creativity and engagement hr’s focus hr’s focus - Job descriptions and org charts - Organizational design - Ensuring “internal equity” - Market management - Policy development - Culture management - Employee advocacy - Internal communication management - Performance review administration - Workforce environmental diagnostics - Recruitment management - Transitioning the workforce - Skill-based screening - Behavior-based screening - Training administration - Employment brand management 21
  22. 22. about the author: jatin h. desai co-founder & ceo, the desai group Jatin is a seasoned business executive, strategic advisor, and a coach for senior leadership teams. Jatin has extensive field experience in the areas of strategy alignment, corporate innovation, talent management, culture development, and information technology. Jatin has been active in leadership and operating roles since 1983, and as a consultant in pre and post-IPO companies. Throughout his career Jatin has found that one of the things he truly enjoys and is most passionate about is creating opportunities for others, empowering them and seeing them fully realize their potential. He has successfully led, coached, mentored and consulted with many management teams from small family owned business to Fortune 100 corporations. Jatin has experience in large scale change initiatives as an advisor and a consultant to organization in the areas of innovation, creativity, values, executive development, and organizational effectiveness. His firm’s clients are mostly Fortune 1000 companies such as The Hartford, Aetna, Cigna, Merck, Wal-Mart, Ketchum, Infosys, Prudential, ESPN, Duracell, United Technologies Corporation, Pratt & Whitney, Carrier Corporation, Sikorsky Aircraft, Hamilton Sundstrand, MassMutual, and many more. Jatin has written papers, speaks at numerous conferences, and gives training workshops on Strategic Alignment for Executive Teams, Enterprise Innovation, Enterprise Learning, Organizational Effectiveness, Values and Leadership, Living with Human Values, and Spirituality in the Workplace. Jatin was born and raised in Gujarat, India and immigrated to United States at a young age in 1973. Jatin holds B.S. degrees in Electrical Engineering and Computer Science from University of Connecticut. He currently lives with his wife and three children in Hartford, Connecticut, USA. 22
  23. 23. acknowledgements Numerous people contributed significantly to this paper, and first and foremost among them are our many clients. We’ve had the pleasure and privilege of working with great people and great organizations on projects relating to enterprise innovation, organizational development, strategy, leadership, and developing solutions to various business problems. Thanks to you all! I wish to give special thanks our colleagues Dan Browne and Ron Dukenski for hours of collaboration and conversation, as well as editing, which significantly raised the clarity of my thought, insight and writing. My appreciation also goes to William Miller and Alain Rostain for helping me enter the field of innovation. Copyright © 2008 by The DeSai Group. All rights reserved. Printed in the U.S.A. Cover design and layout by Ali Slayton, Slayton Design LLC. Copying this material in any form is not permitted without prior written approval from The DeSai Group; write to The DeSai Group 199 Oakwood Avenue West Hartford, CT 06119, USA T: 860-233-0011 disclaimer These materials and the information contained herein are provided by The DeSai Group and are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Accordingly, the information in these materials is not intended to constitute accounting, tax, legal, investment, consulting or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. These materials and the information contained therein are provided as is, and The DeSai Group makes no express or implied representations or warranties regarding these materials or the information contained therein. Without limiting the foregoing, The DeSai Group does not warrant that the materials or information contained therein will be error-free or will meet any particular criteria of performance or quality. The DeSai Group expressly disclaims all implied warranties, including, without limitation, warranties of merchantability, title, fitness for a particular purpose, non-infringement, compatibility, security, and accuracy. Prediction of future events is inherently subject to both known and unknown risks, uncertainties and other factors that may cause actual results to vary materially. Your use of these materials and information contained therein is at your own risk and you assume full responsibility and risk of loss resulting from the use thereof. The DeSai Group will not be liable for any special, indirect, incidental, consequential, or punitive damages or any other damages whatsoever, whether in an action of contract, statute, tort (including, without limitation, negligence), or otherwise, relating to the use of these materials or the information contained therein. If any of the foregoing is not fully enforceable for any reason, the remainder shall nonetheless continue to apply. 23