6152020 Building an Innovation Strategy Scoring Guidehtt.docx

6/15/2020 Building an Innovation Strategy Scoring Guide
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BMGT8136/190700/Scoring_Guides/u10a1_scoring_guide.html
1/2
Building an Innovation Strategy Scoring Guide
Due Date: End of Unit 10
Percentage of Course Grade: 40%.
CRITERIA NON-PERFORMANCE BASIC PROFICIENT
DISTINGUISHED
Select and describe an
appropriate for-profit
organization.
16%
Fails to identify an
organization to build an
innovation strategy that
address organization design,
impact of alliances and
collaborations, culture of
innovation, innovation
competencies, organizational
innovation processes, roles
of customers and markets,
people and innovation,
innovation measurement,

sustainability and innovation
and practical applications of
innovation.
Partially outlines an
organization to build an
innovation strategy that
addresses organization
design, impact of alliances
and collaborations, culture of
sustainability and innovation
innovation.
Describes an appropriate
for-profit organization to
build an innovation strategy
that address organization
competencies,
organizational innovation
processes, roles of
customers and markets,
sustainability and innovation,

innovation.
Describes an appropriate for-profit
organization to build an innovation
strategy that address organization
design, impact of alliances and
innovation processes, roles of
customers and markets, people
and innovation, innovation
measurement, sustainability and
innovation and practical
applications of innovation.
Comprehensively highlights the
industry and surrounding
environment.
Apply organizational design
models and systems
principles to assess an
organization's innovation
competencies, capabilities,
and deficiencies.
20%
Fails to connect
organizational design models
and systems principles to
assess an organization's
innovation competencies,
capabilities, and deficiencies.
Links some organizational
design models and systems

and deficiencies.
Applies organizational
design models and systems
and deficiencies.
Applies organizational design
models and systems principles to
assess an organization's
innovation competencies,
capabilities, and deficiencies.
Application is exceptionally
relevant and convincing.
Apply the concepts of
building an innovation
strategy, namely elements
of organization design,
innovation, and innovation
competencies, to a for-profit
organization.
22%
Fails to understand or apply
the concepts of building an
innovation strategy, namely
elements of organization

organization.
Outlines but does not apply
elements of organization
organization.
Applies the concepts of
strategy, namely elements of
organization design, impact
of alliances and
organization.
Applies, with exceptional
precision, the concepts of building
an innovation strategy, namely
elements of organization design,
organization.

6/15/2020 Building an Innovation Strategy Scoring Guide
https://courserooma.capella.edu/bbcswebdav/institution/BMGT/
BMGT8136/190700/Scoring_Guides/u10a1_scoring_guide.html
2/2
CRITERIA NON-PERFORMANCE BASIC PROFICIENT
DISTINGUISHED
Apply the concepts of
strategy, namely elements
of organizational innovation
processes, roles of
sustainability and
innovation, and practical
applications of innovation,
to a for-profit organization.
22%
Fails to understand or apply
elements of organizational
innovation, to a for-profit
organization.

Outlines but does not apply
organization.
Applies the concepts of
strategy, namely elements of
organizational innovation
processes, roles of
organization.
Applies, with exceptional
precision, the concepts of building
an innovation strategy, namely
innovation processes, roles of
customers and markets, people
and innovation, innovation
measurement, sustainability, and
innovation and practical

applications of innovation, to a for-
profit organization.
Communicate effectively
and follow APA formatting
guidelines throughout.
20%
Does not communicate
effectively and does not
follow APA formatting
guidelines.
Communicates adequately
and follows APA formatting
guidelines to some extent.
Communicates effectively
and follows APA formatting
guidelines throughout.
Communicates succinctly and
persuasively and follows APA
formatting guidelines and
principles
ARTWORK Damián Ortega
Controller of the Universe, 2007
found tools and wire, 285 x 405 x 455 cm
Spotlight
100 Harvard Business Review January–February 2011

SPOTLIGHT ON BUSINESS MODEL INNOVATION
1568 JanFeb11 Casadesus-Masanell.indd 1001568 JanFeb11
Casadesus-Masanell.indd 100 12/3/10 3:52:19 PM12/3/10
3:52:19 PM
Joan E. Ricart ([email protected]
edu) is the Carl Schroder
Professor of Strategic Man-
agement and Economics
at IESE Business School in
Barcelona.
Ramon Casadesus-
Masanell ([email protected]
gmail.com) is an associate
professor at Harvard Busi-
ness School in Boston.
How to Design
A Winning
Business Model
Smart companies’ business models generate
cycles that, over time, make them operate
more eff ectively. by Ramon Casadesus-Masanell
and Joan E. Ricart
STRATEGY HAS been the primary building block of
competitiveness over the past three decades, but
in the future, the quest for sustainable advantage
may well begin with the business model. While the
convergence of information and communication
technologies in the 1990s resulted in a short-lived

fascination with business models, forces such as de-
regulation, technological change, globalization, and
sustainability have rekindled interest in the concept
today. Since 2006, the IBM Institute for Business
Value’s biannual Global CEO Study has reported that
senior executives across industries regard develop-
ing innovative business models as a major priority.
A 2009 follow-up study reveals that seven out of 10
companies are engaging in business-model innova-
tion, and an incredible 98% are modifying their busi-
ness models to some extent. Business model innova-
tion is undoubtedly here to stay.
That isn’t surprising. The pressure to crack open
markets in developing countries, particularly those
at the middle and bottom of the pyramid, is driving
a surge in business-model innovation. The economic
slowdown in the developed world is forcing compa-
nies to modify their business models or create new
ones. In addition, the rise of new technology-based
and low-cost rivals is threatening incumbents, re-
shaping industries, and redistributing profi ts. Indeed,
S
STRATEGY HAS been the primen the p
competitiveness over the pacompetitiveness over the
in the future, the quest for sin the future, the quest fo
may well begin with the businmay well begin with the b
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technologies in the 1990s restechnologies in the 1990s
fascination with business mofascination with business mo
regulation, technological chanregulation, technological chan
sustainability have rekindled sustainability have rekindled
today. Since 2006, the IBM Itoday. Since 2006, the IBM I
Value’s biannual Global CEO Siannual Global CEO S
senior executives across induves across ind

ing innovative business modbusiness m
A 2009 follow-up study revea-up study
companies are engaging in bucompanies are eng
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January–February 2011 Harvard Business Review 101
3:52:32 PM
1122111 33222
the ways by which companies create and capture
value through their business models is undergoing
a radical transformation worldwide.
Yet most enterprises haven’t fully come to grips
with how to compete through business models. Our
studies over the past seven years show that much of
the problem lies in companies’ unwavering focus on
creating innovative models and evaluating their ef-
fi cacy in isolation—just as engineers test new tech-
nologies or products. However, the success or fail-
ure of a company’s business model depends largely

on how it interacts with models of other players in
the industry. (Almost any business model will per-
form brilliantly if a company is lucky enough to be
the only one in a market.) Because companies build
them without thinking about the competition, they
routinely deploy doomed business models.
Our research also shows that when enterprises
compete using business models that diff er from one
another, the outcomes are diffi cult to predict. One
business model may appear superior to others when
analyzed in isolation but create less value than the
others when interactions are considered. Or rivals
may end up becoming partners in value creation.
Appraising models in a stand-alone fashion leads
to faulty assessments of their strengths and weak-
nesses and bad decision making. This is a big reason
why so many new business models fail.
Three Characteristics of a Good Business Model
How can you tell if a business model will be eff ective? A good
one will meet three criteria.
Is it aligned with
company goals?
The choices made while designing a busi-
ness model should deliver consequences
that enable an organization to achieve its
goals. This may seem obvious until you
consider a counterexample. In the 1970s,
Xerox set up Xerox PARC, which spawned
technological innovations such as laser
printing, Ethernet, the graphical user
interface, and very large scale integration
for semiconductors. However, Xerox PARC
was notoriously unable to spawn new

businesses or capture value from its inno-
vations for the parent due to a distressing
lack of alignment with Xerox’s goals.
Is it self-reinforcing?
The choices that executives make while
creating a business model should comple-
ment one another; there must be internal
consistency. If, ceteris paribus, a low-cost
airline were to decide to provide a level
of comfort comparable to that off ered by
a full-fare carrier such as British Airways,
the change would require reducing the
number of seats on each plane and off er-
ing food and coff ee. These choices would
undermine the airline’s low-cost structure
and wreck its profi ts. When there’s a lack
of reinforcement, it’s possible to refi ne
the business model by abandoning some
choices and making new ones.
Is it robust?
A good business model should be able to
sustain its eff ectiveness over time by fend-
ing off four threats, identifi ed by Pankaj
Ghemawat. They are imitation (can com-
petitors replicate your business model?);
holdup (can customers, suppliers, or
other players capture the value you create
by fl exing their bargaining power?); slack
(organizational complacency); and sub-
stitution (can new products decrease the
value customers perceive in your products
or services?). Although the period of eff ec-
tiveness may be shorter nowadays than
it once was, robustness is still a critical

parameter.
Moreover, the propensity to ignore the dynamic
elements of business models results in many compa-
nies failing to use them to their full potential. Few ex-
ecutives realize that they can design business mod-
els to generate winner-take-all eff ects that resemble
the network externalities that high-tech companies
such as Microsoft, eBay, and Facebook have created.
Whereas network eff ects are an exogenous feature
of technologies, winner-take-all eff ects can be trig-
gered by companies if they make the right choices
in developing their business models. Good business
models create virtuous cycles that, over time, result
in competitive advantage. Smart companies know
how to strengthen their virtuous cycles, weaken
those of rivals, and even use their virtuous cycles to
turn competitors’ strengths into weaknesses.
“Isn’t that strategy?” we’re often asked. It isn’t—
and unless managers learn to understand the dis-
tinct realms of business models, strategy, and tactics,
while taking into account how they interact, they
will never fi nd the most eff ective ways to compete.
What Is a Business Model, Really?
Everyone agrees that executives must know how
business models work if their organizations are to
thrive, yet there continues to be little agreement on
an operating definition. Management writer Joan
Magretta defi ned a business model as “the story that

3:52:40 PM
explains how an enterprise works,” harking back
to Peter Drucker, who described it as the answer to
the questions: Who is your customer, what does the
customer value, and how do you deliver value at an
appropriate cost?
Other experts defi ne a business model by speci-
fying the main characteristics of a good one. For ex-
ample, Harvard Business School’s Clay Christensen
suggests that a business model should consist of
four elements: a customer value proposition, a profi t
formula, key resources, and key processes. Such de-
scriptions undoubtedly help executives evaluate
business models, but they impose preconceptions
about what they should look like and may constrain
the development of radically diff erent ones.
Our studies suggest that one component of a busi-
ness model must be the choices that executives make
about how the organization should operate—choices
such as compensation practices, procurement con-
tracts, location of facilities, extent of vertical inte-
gration, sales and marketing initiatives, and so on.
Managerial choices, of course, have consequences.
For instance, pricing (a choice) aff ects sales volume,
which, in turn, shapes the company’s scale econo-
mies and bargaining power (both consequences).
These consequences infl uence the company’s logic
of value creation and value capture, so they too must
have a place in the defi nition. In its simplest concep-

tualization, therefore, a business model consists of a
set of managerial choices and the consequences of
those choices.
Companies make three types of choices when cre-
ating business models. Policy choices determine the
actions an organization takes across all its operations
(such as using nonunion workers, locating plants in
rural areas, or encouraging employees to fl y coach
class). Asset choices pertain to the tangible resources
a company deploys (manufacturing facilities or sat-
ellite communication systems, for instance). And
governance choices refer to how a company arranges
decision-making rights over the other two (should
we own or lease machinery?). Seemingly innocuous
diff erences in the governance of policies and assets
infl uence their eff ectiveness a great deal.
Consequences can be either flexible or rigid. A
fl exible consequence is one that responds quickly
when the underlying choice changes. For example,
choosing to increase prices will immediately result
in lower volumes. By contrast, a company’s culture
of frugality—built over time through policies that
oblige employees to fl y economy class, share hotel
rooms, and work out of Spartan offi ces—is unlikely
to disappear immediately even when those choices
change, making it a rigid consequence. These dis-
tinctions are important because they aff ect competi-
tiveness. Unlike fl exible consequences, rigid ones
are diffi cult to imitate because companies need time
to build them.
Take, for instance, Ryanair, which switched in
the early 1990s from a traditional business model to

a low-cost one. The Irish airline eliminated all frills,
cut costs, and slashed prices to unheard-of levels.
The choices the company made included offering
low fares, fl ying out of only secondary airports, ca-
tering to only one class of passenger, charging for all
additional services, serving no meals, making only
short-haul fl ights, and utilizing a standardized fl eet
of Boeing 737s. It also chose to use a nonunionized
workforce, offer high-powered incentives to em-
ployees, operate out of a lean headquarters, and so
on. The consequences of those choices were high
volumes, low variable and fi xed costs, a reputation
for reasonable fares, and an aggressive management
team, to name a few. (See “Ryanair’s Business Model
Then and Now.”) The result is a business model that
enables Ryanair to off er a decent level of service at a
low cost without radically lowering customers’ will-
ingness to pay for its tickets.
Idea in Brief
There has never been as much
interest in business models
as there is today; seven out
of 10 companies are trying to
create innovative business
models, and 98% are modify-
ing existing ones, according
to a recent survey.
However, most companies
still create and evaluate
business models in isola-
tion, without considering the
implications of how they will
interact with rivals’ business
models. This narrow view

dooms many to failure.
Moreover, companies
often don’t realize that busi-
ness models can be designed
so that they generate virtu-
ous cycles—similar to the
powerful eff ects high-tech
fi rms such as Facebook, eBay,
and Microsoft enjoy. These
cycles, when aligned with
company goals, reinforce
competitive advantage.
By making the right
choices, companies can
strengthen their business
models’ virtuous cycles,
weaken those of rivals, and
even use the cycles to turn
competitors into comple-
mentary players.
This is neither strategy nor
tactics; it’s using business
models to gain competitive
advantage. Indeed, com-
panies fare poorly partly
because they don’t recognize
the diff erences between
strategy, tactics, and busi-
ness models.
Business

Model
Choices
POLICIES
FLEXIBLE
Consequences
ASSETS
GOVERNANCE
RIGID
A business model comprises
choices and consequences.
HOW TO DESIGN A WINNING BUSINESS MODEL
HBR.ORG
3:52:46 PM
How Business Models Generate
Virtuous Cycles
Not all business models work equally well, of course.
Good ones share certain characteristics: They align
with the company’s goals, are self-reinforcing, and
are robust. (See the sidebar “Three Characteristics

of a Good Business Model.”) Above all, successful
business models generate virtuous cycles, or feed-
back loops, that are self-reinforcing. This is the most
powerful and neglected aspect of business models.
Our studies show that the competitive advan-
tage of high-tech companies such as Apple, Micro-
soft, and Intel stems largely from their accumulated
assets—an installed base of iPods, Xboxes, or PCs,
for instance. The leaders gathered those assets not
by buying them but by making smart choices about
pricing, royalties, product range, and so on. In other
words, they’re consequences of business model
choices. Any enterprise can make choices that allow
it to build assets or resources—be they project man-
agement skills, production experience, reputation,
asset utilization, trust, or bargaining power—that
make a diff erence in its sector.
The consequences enable further choices, and so
on. This process generates virtuous cycles that con-
tinuously strengthen the business model, creating
a dynamic that’s similar to that of network eff ects.
As the cycles spin, stocks of the company’s key as-
sets (or resources) grow, enhancing the enterprise’s
competitive advantage. Smart companies design
business models to trigger virtuous cycles that, over
time, expand both value creation and capture.
For example, Ryanair’s business model creates
several virtuous cycles that maximize its profits
through increasingly low costs and prices. (See
the exhibit “Ryanair’s Key Virtuous Cycles.”) All of
the cycles result in reduced costs, which allow for
lower prices that grow sales and ultimately lead to
increased profi ts. Its competitive advantage keeps

growing as long as the virtuous cycles generated by
its business model spin. Just as a fast-moving body
is hard to stop because of kinetic energy, it’s tough to
halt well-functioning virtuous cycles.
However, they don’t go on forever. They usually
reach a limit and trigger counterbalancing cycles, or
they slow down because of their interactions with
other business models. In fact, when interrupted,
the synergies work in the opposite direction and
erode competitive advantage. For example, one of
Ryanair’s cycles could become vicious if its employ-
ees unionized and demanded higher wages, and the
airline could no longer off er the lowest fares. It would
then lose volume, and aircraft utilization would fall.
Since Ryanair’s investment in its fleet assumes a
very high rate of utilization, this change would have
a magnifi ed eff ect on profi tability.
It’s easy to see that virtuous cycles can be cre-
ated by a low-cost, no-frills player, but a diff erentia-
tor may also create virtuous cycles. Take the case of
Irizar, a Spanish manufacturer of bodies for luxury
motor coaches, which posted large losses after a
series of ill-conceived moves in the 1980s. Irizar’s
leadership changed twice in 1990 and morale hit an
all-time low, prompting the new head of the compa-
ny’s steering team, Koldo Saratxaga, to make major
changes. He transformed the organization’s busi-
ness model by making choices that yielded three
rigid consequences: employees’ tremendous sense
of ownership, feelings of accomplishment, and trust.
The choices included eliminating hierarchy, decen-
tralizing decision making, focusing on teams to get
work done, and having workers own the assets. (See

the exhibit “Irizar’s Novel Business Model.”)
Ryanair’s Business Model Then
This depiction of Ryanair’s business model in the 1980s
highlights the airline’s
major choices at the time: off ering excellent service and
operating with a stan-
dardized fl eet. The airline was forced to redesign its business
model in the face
of stiff competition.
FEW TICKET
RESTRICTIONS
FIRST-RATE
CUSTOMER
SERVICE
44-SEAT
TURBOPROPS
LEAN STAFF
Large
volume
Low fares
Low
cost
Economies of scale
REPUTATION FOR
FAIR FARES

RYANAIR’S KEY VIRTUOUS CYCLES
CYCLE 1 Low fares >> High volumes >> Greater bargaining
power with suppliers >> Lower fi xed costs >> Even lower
fares
CYCLE 2 Low fares >> High volumes >> High aircraft
utilization >> Low fi xed cost per passenger >> Even lower
fares
CYCLE 3 Low fares >> Expectations of low-quality service
>> No meals off ered >> Low variable costs >> Even lower
fares
3:52:53 PM
Irizar’s main objective, as a cooperative, is to in-
crease the number of well-paying jobs in the Basque
Country, so the company developed a business
model that generates a great deal of customer value.
Its key virtuous cycle connects customers’ willing-
ness to pay with relatively low cost, generating high
profi ts that feed innovation, service, and high quality.
In fact, quality is the cornerstone of Irizar’s culture.
Focusing on customer loyalty and an empowered
workforce, the company enjoyed a 23.9% compound
annual growth rate over the 14 years that Saratxaga
was CEO. Producing 4,000 coaches in 2010 and gen-
erating revenues of about €400 million, Irizar is an
example of a radically diff erent business model that
generates virtuous cycles.

Competing with Business Models
It’s easy to infuse virtuousness in cycles when there
are no competitors, but few business models operate
in vacuums—at least, not for long. To compete with
rivals that have similar business models, companies
must quickly build rigid consequences so that they
can create and capture more value than rivals do. It’s
a diff erent story when enterprises compete against
dissimilar business models; the results are often un-
predictable, and it’s tough to know which business
model will perform well.
Take, for instance, the battle between two of
Finland’s dominant retailers: S Group, a consumers’
cooperative, and Kesko, which uses entrepreneur-
retailers to own and operate its stores. We’ve tracked
the firms for over a decade, and Kesko’s business
model appears to be superior: The incentives it off ers
franchisees should result in rapid growth and high
profi ts. However, it turns out that the S Group’s busi-
ness model hurts Kesko more than Kesko’s aff ects
the S Group. Since customers own the S Group, the
retailer often reduces prices and increases customer
bonuses, which allows it to gain market share from
Kesko. That forces Kesko to lower its prices and its
profi ts fall, demotivating its entrepreneur- retailers.
As a result, Kesko underperforms the S Group. Over
REPUTATION
FOR FAIR
FARES LOW FIXED
COST

TOUGH
NEGOTIATORS
ANCILLARY
BUSINESS
(BUS SERVICE)
RIGID
CONSEQUENCE
STANDARDIZED
FLEET OF 737s
SHORT-HAUL
FLIGHTS
SECONDARY
AIRPORTS
HIGH-POWERED
INCENTIVES
CHOICE
NON-
UNIONIZED
WORKFORCE
SPARTAN
HEADQUARTERS
REINVEST
NOTHING
IS FREE
NO MEALS

LOW COMMISSIONS
TO TRAVEL AGENCIES
ALL PASSENGERS
TREATED EQUALLY
LOW FARES
Bargaining power
with suppliers
Flexible
consequence
High volume
Attracts
combative team
Low-quality
service
expected
Additional
revenue
Low
variable
cost
High profi t
YOUNG AND
LEISURE
TRAVELERS

WORD-OF-
MOUTH
ADVERTISING
Ryanair’s Business Model Now
Ryanair’s current business model rests on the key choices of off
ering customers low fares and
providing nothing free. The rigid consequences include a
reputation for fair fares and low fi xed
costs. Ryanair’s choices are aligned with its goals, generate
cycles that reinforce the business
model, and are robust given that it has been operating as a low-
cost airline for 20 years.
High aircraft
utilization
HOW TO DESIGN A WINNING BUSINESS MODEL
HBR.ORG
3:52:59 PM
time, the S Group’s opaque corporate governance
system allows slack to creep into the system, and
it is forced to hike prices. This allows Kesko to also
increase prices and improve profi tability, drive its
entrepreneur-retailers, and win back more custom-
ers through its superior shopping experience. That
sparks another cycle of rivalry.

Companies can compete through business mod-
els in three ways: They can strengthen their own vir-
tuous cycles, block or destroy the cycles of rivals, or
build complementarities with rivals’ cycles, which
results in substitutes mutating into complements.
Strengthen your virtuous cycle. Companies
can modify their business models to generate new
virtuous cycles that enable them to compete more
eff ectively with rivals. These cycles often have con-
sequences that strengthen cycles elsewhere in the
business model. Until recently, Boeing and Airbus
competed using essentially the same virtuous cycles.
Airbus matched Boeing’s off erings in every segment,
the exception being the very large commercial trans-
port segment where Boeing had launched the 747 in
1969. Given the lumpiness of demand for aircraft,
their big-ticket nature, and cyclicality, price compe-
tition has been intense.
Historically, Boeing held the upper hand because
its 747 enjoyed a monopoly, and it could reinvest
those profi ts to strengthen its position in other seg-
ments. Analysts estimate that the 747 contributed 70
cents to every dollar of Boeing’s profi ts by the early
1990s. Since R&D investment is the most important
driver of customers’ willingness to pay, Airbus was
at a disadvantage. It stayed afl oat by obtaining low-
interest loans from European governments. Without
the subsidies, Airbus’s cycle would have become
vicious.
With the subsidies likely to dry up, Airbus modi-
fi ed its business model by developing a very large
commercial transport, the 380. To dissuade Airbus,

Boeing announced a stretch version of the 747. How-
ever, that aircraft would cut into the 747’s profi ts, so
it seems unlikely that Boeing will ever launch it. Not
only does the 380 help maintain the virtuousness of
Airbus’s cycle in small and midsize planes, but also
it helps decelerate the virtuousness of Boeing’s cy-
cle. The increase in rivalry suggests that the 747 will
become less of a money-spinner for Boeing. That’s
why it is trying to strengthen its position in midsize
aircraft, where competition is likely to become even
tougher when sales of the 380 take off , by develop-
ing the 787.
Weaken competitors’ cycles. Some compa-
nies get ahead by using the rigid consequences of
their choices to weaken new entrants’ virtuous cy-
cles. Whether a new technology disrupts an industry
or not depends not only on the intrinsic benefi ts of
that technology but also on interactions with other
players. Consider, for instance, the battle between
Microsoft and Linux, which feeds its virtuous cycle
by being free of charge and allowing users to contrib-
ute code improvements. Unlike Airbus, Microsoft
has focused on weakening its competitor’s virtu-
ous cycle. It uses its relationship with OEMs to have
Windows preinstalled on PCs and laptops so that it
can prevent Linux from growing its customer base. It
discourages people from taking advantage of Linux’s
free operating system and applications by spreading
fear, uncertainty, and doubt about the products.
In the future, Microsoft could raise Windows’
value by learning more from users and off ering spe-
cial prices to increase sales in the education sector, or
decrease Linux’s value by undercutting purchases by
strategic buyers and preventing Windows applica-

tions from running on Linux. Linux’s value creation
potential may theoretically be greater than that of
Windows, but its installed base will never eclipse
that of Microsoft as long as the software giant suc-
ceeds in disrupting its key virtuous cycles.
Turn competitors into complements. Rivals
with different business models can also become
partners in value creation. In 1999, Betfair, an online
betting exchange, took on British bookmakers such
as Ladbrokes and William Hill by enabling people to
anonymously place bets against one another. Un-
like traditional bookmakers who only offer odds,
Betfair is a two-sided internet-based platform that
allows customers to both place bets and off er odds
to others. One-sided and two-sided businesses have
diff erent virtuous cycles: While bookmakers create
value by managing risk and capture it through the
odds they off er, betting exchanges themselves bear
no risk. They create value by matching the two sides
of the market and capture it by taking a cut of the net
winnings.
Over the past decade, Ladbrokes’ and William
Hill’s gross winnings have declined, so Betfair has
hurt them, but not as much as expected. Because
Betfair has improved odds in general, gamblers lose
less money. They then place more wagers, and when
bookies pay out, bettors gamble again, feeding a vir-
tuous cycle. This has expanded the British gambling
market by a larger proportion than just the improve-
When Irizar—a Spanish
cooperative that manu-
factures luxury motor
coach bodies—created

a radically diff erent busi-
ness model, it made sev-
eral innovative choices.
SHARED
OWNERSHIP
> Workers own assets
and contribute fi nan-
cially to join Irizar
> Teams set their own
goals and choose
leaders
> No bosses, only
coordinators
> Flat hierarchy, with only
three levels
> No overtime pay
TRUST
> Decentralized decision
making
> Shared information and
transparency about
performance
> No walls inside plants
or offi ces; no assigned
parking spaces

> Tenure after three years
of probation; no evalua-
tion or fi rings thereafter
> No clocking in and out
QUALITY
> Only one product for all
markets
> Most repetitive tasks
outsourced
ACCOMPLISHMENT
> Relatively high product
prices
> Pay scale ratio of just
3:1
> Some profi t (or loss)
sharing every year
These choices have led to
innovation, high quality,
and excellent service,
generating high sales vol-
ume as well as customer
loyalty.
Irizar’s Novel
Business Model

3:53:05 PM
ment of odds might suggest. The better odds Betfair
off ers also help traditional bookmakers gauge mar-
ket sentiment more accurately and hedge their ex-
posures at a lower cost. When a new business model
creates complementarities between competitors, it is
less likely that incumbents will respond aggressively.
The initial …
P
e
te
r
C
ro
w
th
e
r
Innovation
INNOVATION

SPOTLIGHT ON
1692 Dec09 Dyer Layout.indd 601692 Dec09 Dyer
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Five “discovery skills”
separate true innovators
from the rest of us.
| by Jeffrey H. Dyer, Hal B. Gregersen,
and Clayton M. Christensen
The Innovator’s
DNA
hbr.org | December 2009 | Harvard Business Review 61
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62 Harvard Business Review | December 2009 | hbr.org
The Innovator’s DNA
Innovation
INNOVATION
SPOTLIGHT ON
These are questions that stump senior executives,
who understand that the ability to innovate is the
“secret sauce” of business success. Unfortunately,

most of us know very little about what makes one
person more creative than another. Perhaps for this
reason, we stand in awe of visionary entrepreneurs
like Apple’s Steve Jobs, Amazon’s Jeff Bezos, eBay’s
Pierre Omidyar, and P&G’s A.G. Lafl ey. How do
these people come up with groundbreaking new
ideas? If it were possible to discover the inner work-
ings of the masters’ minds, what could the rest of us
learn about how innovation really happens?
In searching for answers, we undertook a six-
year study to uncover the origins
of creative – and oft en disrup-
tive – business strategies in par-
ticularly innovative companies.
Our goal was to put innovative
entrepreneurs under the micro-
scope, examining when and how
they came up with the ideas on
which their businesses were built.
We especially wanted to examine
how they diff er from other execu-
tives and entrepreneurs: Some-
one who buys a McDonald’s fran-
chise may be an entrepreneur,
but building an Amazon requires
different skills altogether. We
studied the habits of 25 innova-
tive entrepreneurs and surveyed
more than 3,000 executives and
500 individuals who had started
innovative companies or invented
new products.
We were intrigued to learn that
at most companies, top executives

do not feel personally responsible
for coming up with strategic inno-
vations. Rather, they feel responsi-
ble for facilitating the innovation
process. In stark contrast, senior
executives of the most innovative
companies – a mere 15% in our
study – don’t delegate creative
work. They do it themselves.
But how do they do it? Our research led us to
identify fi ve “discovery skills” that distinguish the
most creative executives: associating, questioning,
observing, experimenting, and networking. We
found that innovative entrepreneurs (who are also
CEOs) spend 50% more time on these discovery ac-
tivities than do CEOs with no track record for in-
novation. Together, these skills make up what we
call the innovator’s DNA. And the good news is, if
you’re not born with it, you can cultivate it.
What Makes Innovators Different?
Innovative entrepreneurs have something called
creative intelligence, which enables discovery yet
diff ers from other types of intelligence (as sug-
gested by Howard Gardner’s theory of multiple
intelligences). It is more than the cognitive skill of
being right-brained. Innovators engage both sides
of the brain as they leverage the fi ve discovery skills
to create new ideas.
In thinking about how these skills work together,
we’ve found it useful to apply the metaphor of DNA.
Associating is like the backbone structure of DNA’s
double helix; four patterns of action (questioning,
observing, experimenting, and networking) wind

around this backbone, helping to cultivate new in-
sights. And just as each person’s physical DNA is
unique, each individual we studied had a unique
innovator’s DNA for generating breakthrough busi-
ness ideas.
Imagine that you have an identical twin, en-
dowed with the same brains and natural talents
that you have. You’re both given one week to come
up with a creative new business-venture idea. Dur-
ing that week, you come up with ideas alone in
your room. In contrast, your twin (1) talks with 10
people – including an engineer, a musician, a stay-
at-home dad, and a designer – about the venture,
(2) visits three innovative start-ups to observe what
they do, (3) samples fi ve “new to the market” prod-
ucts, (4) shows a prototype he’s built to fi ve people,
and (5) asks the questions “What if I tried this?” and
“Why do you do that?” at least 10 times each day dur-
ing these networking, observing, and experiment-
ing activities. Who do you bet will come up with the
more innovative (and doable) idea?
“How do I fi nd INNOVATIVE PEOPLE
for my organization? And how can
I become more innovative myself ?”
The habits of Steve Jobs, Jeff
Bezos, and other innovative CEOs
reveal much about the underpin-
nings of their creative thinking.
Research shows that fi ve discov-
ery skills distinguish the most in-
novative entrepreneurs from other
executives.

DOING
Questioning » allows innovators
to break out of the status quo and
consider new possibilities.
Through » observing, innovators
detect small behavioral details –
in the activities of customers, sup-
pliers, and other companies – that
suggest new ways of doing things.
In » experimenting, they relent-
lessly try on new experiences and
explore the world.
And through » networking with
individuals from diverse back-
grounds, they gain radically
different perspectives.
THINKING
The four patterns of action »
together help innovators associate
to cultivate new insights.
IN BRIEF
IDEA
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Studies of identical twins separated at birth in-
dicate that our ability to think creatively comes
one-third from genetics; but two-thirds of the in-
novation skill set comes through learning – fi rst
understanding a given skill, then practicing it, ex-
perimenting, and ultimately gaining confi dence in
one’s capacity to create. Innovative entrepreneurs
in our study acquired and honed their innovation
skills precisely this way.
Let’s look at the skills in detail.
Discovery Skill 1: Associating
Associating, or the ability to successfully connect
seemingly unrelated questions, problems, or ideas
from diff erent fi elds, is central to the innovator’s
DNA. Entrepreneur Frans Johansson described this
phenomenon as the “Medici eff ect,” referring to the
creative explosion in Florence when the Medici fam-
ily brought together people from a wide range of
disciplines – sculptors, scientists, poets, philosophers,
painters, and architects. As these individuals con-
nected, new ideas blossomed at the intersections of
their respective fi elds, thereby spawning the Renais-
sance, one of the most inventive eras in history.
To grasp how associating works, it is important
to understand how the brain operates. The brain
doesn’t store information like a dictionary, where
you can fi nd the word “theater” under the letter
“T.” Instead, it associates the word “theater” with
any number of experiences from our lives. Some
of these are logical (“West End” or “intermission”),

while others may be less obvious (perhaps “anxiety,”
from a botched performance in high school). The
more diverse our experience and knowledge, the
more connections the brain can make. Fresh inputs
trigger new associations; for some, these lead to
novel ideas. As Steve Jobs has frequently observed,
“Creativity is connecting things.”
The world’s most innovative companies prosper
by capitalizing on the divergent associations of
their founders, executives, and employees. For ex-
ample, Pierre Omidyar launched eBay in 1996 aft er
linking three unconnected dots: (1) a fascination
with creating more-effi cient markets, aft er having
been shut out from a hot internet company’s IPO in
the mid-1990s; (2) his fi ancée’s desire to locate hard-
to-fi nd collectible Pez dispensers; and (3) the inef-
fectiveness of local classifi ed ads in locating such
items. Likewise, Steve Jobs is able to generate idea
aft er idea because he has spent a lifetime exploring
new and unrelated things – the art of calligraphy,
meditation practices in an Indian ashram, the fi ne
details of a Mercedes-Benz.
Associating is like a mental muscle that can grow
stronger by using the other discovery skills. As in-
novators engage in those behaviors, they build their
ability to generate ideas that can be recombined in
new ways. The more frequently people in our study
attempted to understand, categorize, and store new
knowledge, the more easily their brains could natu-
rally and consistently make, store, and recombine
associations.
Discovery Skill 2: Questioning

More than 50 years ago, Peter Drucker described
the power of provocative questions. “The important
and diffi cult job is never to fi nd the right answers, it
is to fi nd the right question,” he wrote. Innovators
constantly ask questions that challenge common
wisdom or, as Tata Group chairman Ratan Tata
puts it, “question the unquestionable.” Meg Whit-
man, former CEO of eBay, has worked directly with
a number of innovative entrepreneurs, including
the founders of eBay, PayPal, and Skype. “They get
a kick out of screwing up the status quo,” she told
us. “They can’t bear it. So they spend a tremendous
amount of time thinking about how to change the
world. And as they brainstorm, they like to ask: ‘If
we did this, what would happen?’”
Most of the innovative entrepreneurs we in-
terviewed could remember the specifi c questions
they were asking at the time they had the inspira-
tion for a new venture. Michael Dell, for instance,
told us that his idea for founding Dell Computer
sprang from his asking why a computer cost fi ve
times as much as the sum of its parts. “I would take
computers apart…and would observe that $600
worth of parts were sold for $3,000.” In chewing
over the question, he hit on his revolutionary busi-
ness model.
To question eff ectively, innovative entrepreneurs
do the following:
Ask “Why?” and “Why not?” and “What if?”
Most managers focus on understanding how to
make existing processes – the status quo – work a
little better (“How can we improve widget sales in
Taiwan?”). Innovative entrepreneurs, on the other

hand, are much more likely to challenge assump-
tions (“If we cut the size or weight of the widget
in half, how would that change the value proposi-
tion it off ers?”). Marc Benioff , the founder of the
online sales soft ware provider Salesforce.com, was
full of questions aft er witnessing the emergence of
Amazon and eBay, two companies built on services
delivered via the internet. “Why are we still loading
and upgrading soft ware the way we’ve been doing
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Innovation
INNOVATION
SPOTLIGHT ON
all this time when we can now do it over the inter-
net?” he wondered. This fundamental question was
the genesis of Salesforce.com.
Imagine opposites. In his book The Opposable
Mind, Roger Martin writes that innovative thinkers
have “the capacity to hold two diametrically op-
posing ideas in their heads.” He explains, “Without
panicking or simply settling for one alternative or
the other, they’re able to produce a synthesis that is
superior to either opposing idea.”
Innovative entrepreneurs like to play devil’s ad-

vocate. “My learning process has always been about
disagreeing with what I’m being told and taking
the opposite position, and pushing others to really
justify themselves,” Pierre Omidyar told us. “I re-
member it was very frustrating for the other kids
when I would do this.” Asking oneself, or others, to
imagine a completely diff erent alternative can lead
to truly original insights.
Embrace constraints. Most of us impose con-
straints on our thinking only when forced to deal
with real-world limitations, such as resource al-
locations or technology restrictions. Ironically,
great questions actively impose constraints on our
thinking and serve as a catalyst for out-of-the-box
insights. (In fact, one of Google’s nine innovation
principles is “Creativity loves constraint.”) To initi-
ate a creative discussion about growth opportuni-
ties, one innovative executive in our study asked
this question: “What if we were legally prohibited
from selling to our current customers? How would
we make money next year?” This led to an insight-
ful exploration of ways the company could fi nd
and serve new customers. Another innovative CEO
prods his managers to examine sunk-cost con-
straints by asking, “What if you had not already
hired this person, installed this equipment, imple-
mented this process, bought this business, or pur-
sued this strategy? Would you do the same thing
you are doing today?”
Discovery Skill 3: Observing
Discovery-driven executives produce uncommon
business ideas by scrutinizing common phenomena,
particularly the behavior of potential customers. In
observing others, they act like anthropologists and

social scientists.
Intuit founder Scott Cook hit on the idea for
Quicken fi nancial soft ware aft er two key observa-
tions. First he watched his wife’s frustration as she
struggled to keep track of their fi nances. “Oft en the
surprises that lead to new business ideas come from
watching other people work and live their normal
lives,” Cook explained. “You see something and ask,
‘Why do they do that? That doesn’t make sense.’”
Then a buddy got him a sneak peek at the Apple
Lisa before it launched. Immediately aft er leaving
Apple headquarters, Cook drove to the nearest res-
taurant to write down everything he had noticed
about the Lisa. His observations prompted insights
such as building the graphical user interface to look
just like its real-world counterpart (a checkbook,
for example), making it easy for people to use it.
So Cook set about solving his wife’s problem and
grabbed 50% of the market for fi nancial soft ware
in the fi rst year.
Innovators carefully, intentionally, and consis-
tently look out for small behavioral details – in the
activities of customers, suppliers, and other compa-
nies – in order to gain insights about new ways of
doing things. Ratan Tata got the inspiration that led
to the world’s cheapest car by observing the plight
of a family of four packed onto a single motorized
scooter. Aft er years of product development, Tata
Group launched in 2009 the $2,500 Nano using a
modular production method that may disrupt the
entire automobile distribution system in India. Ob-
servers try all sorts of techniques to see the world
in a diff erent light. Akio Toyoda regularly practices

Toyota’s philosophy of genchi genbutsu – “going to
the spot and seeing for yourself.” Frequent direct
observation is baked into the Toyota culture.
Discovery Skill 4: Experimenting
When we think of experiments, we think of scien-
tists in white coats or of great inventors like Thomas
Edison. Like scientists, innovative entrepreneurs ac-
tively try out new ideas by creating prototypes and
launching pilots. (As Edison said, “I haven’t failed.
I’ve simply found 10,000 ways that do not work.”)
The world is their laboratory. Unlike observers, who
intensely watch the world, experimenters construct
interactive experiences and try to provoke unortho-
dox responses to see what insights emerge.
The innovative entrepreneurs we interviewed all
engaged in some form of active experimentation,
whether it was intellectual exploration (Michael
Lazaridis mulling over the theory of relativity in
high school), physical tinkering (Jeff Bezos taking
apart his crib as a toddler or Steve Jobs disassem-
bling a Sony Walkman), or engagement in new
surroundings (Starbucks founder Howard Shultz
roaming Italy visiting coff ee bars). As executives
of innovative enterprises, they make experimenta-
tion central to everything they do. Bezos’s online
bookstore didn’t stay where it was aft er its initial
Sample of
Innovative
Entrepreneurs
from our Study
SAM ALLEN
ScanCafe.com

MARC BENIOFF
Salesforce.com
JEFF BEZOS
Amazon.com
MIKE COLLINS
Big Idea Group
SCOTT COOK
Intuit
MICHAEL DELL
Dell Computer
AARON GARRITY
XanGo
DIANE GREEN
VMWare
ELIOT JACOBSEN
RocketFuel
JOSH JAMES
Omniture
CHRIS JOHNSON
Terra Nova
JEFF JONES
NxLight; Campus
Pipeline
HERB KELLEHER

Southwest Airlines
MIKE LAZARIDIS
Research In Motion
SPENCER MOFFAT
Fast Arch of Utah
DAVID NEELEMAN
JetBlue; Morris Air
PIERRE OMIDYAR
eBay
JOHN PESTANA
Omniture
PETER THIEL
PayPal
MARK WATTLES
Hollywood Video
COREY WRIDE
Movie Mouth
NIKLAS
ZENNSTRÖM
Skype
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success; it morphed into an online discount retailer,
selling a full line of products from toys to TVs to
home appliances. The electronic reader Kindle is
an experiment that is now transforming Amazon
from an online retailer to an innovative electron-
ics manufacturer. Bezos sees experimentation as so
critical to innovation that he has institutionalized it
at Amazon. “I encourage our employees to go down
blind alleys and experiment,” Bezos says. “If we can
get processes decentralized so that we can do a lot
of experiments without it being very costly, we’ll get
a lot more innovation.”
Scott Cook, too, stresses the importance of cre-
ating a culture that fosters experimentation. “Our
culture opens us to allowing lots of failures while
harvesting the learning,” he told us. “It’s what sepa-
rates an innovation culture from a normal corpo-
rate culture.”
One of the most powerful experiments innova-
tors can engage in is living and working overseas.
Our research revealed that the more countries a
person has lived in, the more likely he or she is
to leverage that experience to deliver innovative
products, processes, or businesses. In fact, if man-
agers try out even one international assignment
before becoming CEO, their companies deliver
stronger fi nancial results than companies run by
CEOs without such experience – roughly 7% higher
market performance on average. P&G’s A.G. Lafl ey,
for example, spent time as a student studying his-
tory in France and running retail operations on U.S.
military bases in Japan. He returned to Japan later

to head all of P&G’s Asia operations before becom-
ing CEO. His diverse international experience has
served him well as the leader of one of the most
innovative companies in the world.
Discovery Skill 5: Networking
Devoting time and energy to fi nding and testing
ideas through a network of diverse individuals gives
innovators a radically diff erent perspective. Unlike
most executives – who network to access resources,
to sell themselves or their companies, or to boost
their careers – innovative entrepreneurs go out of
their way to meet people with diff erent kinds of
ideas and perspectives to extend their own knowl-
edge domains. To this end, they make a conscious
eff ort to visit other countries and meet people from
other walks of life.
They also attend idea conferences such as Tech-
nology, Entertainment, and Design (TED), Davos,
and the Aspen Ideas Festival. Such conferences
How Innovators Stack Up
This chart shows how four well-known innovative entrepreneurs
rank
on each of the discovery skills. All our high-profi le innovators
scored
above the 80th percentile on questioning, yet each combined the
dis-
covery skills uniquely to forge new insights.
Rankings are based on
a survey of more than

3,000 executives and
entrepreneurs.
100
80
60
40
PERCENTILE
Noninnovators
QUESTIONINGASSOCIATING OBSERVING
EXPERIMENTING NETWORKING
Michael Dell
Michael Lazaridis
Scott Cook
Pierre Omidyar
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Innovation
INNOVATION

SPOTLIGHT ON
draw together artists, entrepreneurs, academics,
politicians, adventurers, scientists, and thinkers
from all over the world, who come to present their
newest ideas, passions, and projects. Michael Laza-
ridis, the founder of Research In Motion, notes that
the inspiration for the original BlackBerry occurred
at a conference in 1987. A speaker was describing
a wireless data system that had been designed for
Coke; it allowed vending machines to send a signal
when they needed refi lling. “That’s when it hit me,”
Lazaridis recalls. “I remembered what my teacher
said in high school: ‘Don’t get too caught up with
computers because the person that puts wireless
technology and computers together is going to
make a big diff erence.’” David Neeleman came up
with key ideas for JetBlue – such as satellite TV at
every seat and at-home reservationists – through
networking at conferences and elsewhere.
Kent Bowen, the founding scientist of CPS tech-
nologies (maker of an innovative ceramic compos-
ite), hung the following credo in every offi ce of his
start-up: “The insights required to solve many of
our most challenging problems come from outside
our industry and scientifi c fi eld. We must aggres-
sively and proudly incorporate into our work fi nd-
ings and advances which were not invented here.”
Scientists from CPS have solved numerous complex
problems by talking with people in other fi elds. One
expert from Polaroid with in-depth knowledge of
fi lm technology knew how to make the ceramic
composite stronger. Experts in sperm-freezing tech-
nology knew how to prevent ice crystal growth on

cells during freezing, a technique that CPS applied
to its manufacturing process with stunning success.
Practice, Practice, Practice
As innovators actively engage in the discovery skills,
they become defi ned by them. They grow increas-
ingly confi dent of their creative abilities. For A.G.
Lafl ey, innovation is the central job of every leader,
regardless of the place he or she occupies on the
organizational chart. But what if you – like most ex-
ecutives – don’t see yourself or those on your team
as particularly innovative?
Though innovative thinking may be innate to
some, it can also be developed and strengthened
through practice. We cannot emphasize enough
the importance of rehearsing over and over the
behaviors described above, to the point that they
become automatic. This requires putting aside time
for you and your team to actively cultivate more
creative ideas.
The most important skill to practice is question-
ing. Asking “Why” and “Why not” can help turbo-
charge the other discovery skills. Ask questions
that both impose and eliminate constraints;
this will help you see a problem or opportunity
from a diff erent angle. Try spending 15 to 30
minutes each day writing down 10 new ques-
tions that challenge the status quo in your com-
pany or industry. “If I had a favorite question to
ask, everyone would anticipate it,” Michael Dell
told us. “Instead I like to ask things people don’t
think I’m going to ask. This is a little cruel, but
I kind of delight in coming up with questions

that nobody has the answer to quite yet.”
To sharpen your own observational skills,
watch how certain customers experience a
product or service in their natural environ-
ment. Spend an entire day carefully observing
the “jobs” that customers are trying to get done.
Try not to make judgments about what you see:
Simply pretend you’re a fl y on the wall, and
observe as neutrally as possible. Scott Cook ad-
vises Intuit’s observers to ask, “What’s diff erent
than you expected?” Follow Richard Branson’s
example and get in the habit of note taking
wherever you go. Or follow Jeff Bezos’s: “I take
pictures of really bad innovations,” he told us,
“of which there are a number.”
WHY DO INNOVATORS
question, observe, experiment,
and network more than typical
executives? As we examined what
motivates them, we discovered two
common themes: (1) They actively
desire to change the status quo, and
(2) they regularly take risks to make
that change happen. Throughout our
research, we were struck by the con-

sistency of language that innovators
use to describe their motives. Jeff
Bezos wants to “make history,” Steve
Jobs to “put a ding in the universe,”
Skype cofounder Niklas Zennström
to “be disruptive, but in the cause
of making the world a better place.”
These innovators steer entirely clear
of a common cognitive bias called
the status quo bias – the tendency to
prefer an existing state of affairs to
alternative ones.
Embracing a mission for change
makes it much easier to take risks
and make mistakes. For most of the
innovative entrepreneurs we studied,
mistakes are nothing to be ashamed
of; in fact, they are expected as a cost

of doing business. “If the people run-
ning Amazon.com don’t make some
signifi cant mistakes,” explained Be-
zos, “then we won’t be doing a good
job for our shareholders because we
won’t be swinging for the fences.”
In short, innovators rely on their
“courage to innovate” – an active
bias against the status quo and an
unfl inching willingness to take
risks – to transform ideas into power-
ful impact.
Put a Ding in the Universe
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To strengthen experimentation, at both the
individual and organizational levels, consciously

approach work and life with a hypothesis-testing
mind-set. Attend seminars or executive education
courses on topics outside your area of expertise;
take apart a product or process that interests you;
read books that purport to identify emerging trends.
When you travel, don’t squander the opportunity
to learn about diff erent lifestyles and local behav-
ior. Develop new hypotheses from the knowledge
you’ve acquired and test them in the search for new
products or processes. Find ways to institutional-
ize frequent, small experiments at all levels of the
organization. Openly acknowledging that learning
through failure is valuable goes a long way toward
building an innovative culture.
To improve your networking skills, contact the
fi ve most creative people you know and ask them
to share what they do to stimulate creative thinking.
You might also ask if they’d be willing to act as your
creative mentors. We suggest holding regular idea
lunches at which you meet a few new people from
diverse functions, companies, industries, or coun-
tries. Get them to tell you about their innovative
ideas and ask for feedback on yours.
• • •
Innovative entrepreneurship is not a genetic pre-
disposition, it is an active endeavor. Apple’s slogan
“Think Diff erent” is inspiring but incomplete. We
found that innovators must consistently act diff er-
ent to think diff erent. By understanding, reinforcing,
and modeling the innovator’s DNA, companies can
fi nd ways to more successfully develop the creative

spark in everyone.
Jeffrey H. Dyer ([email protected]) is a professor of
strategy at Brigham Young University in Provo, Utah,
and an adjunct professor at the University of Penn-
sylvania’s Wharton School. Hal B. Gregersen (hal.
[email protected]) is a professor of leadership
at Insead in Abu Dhabi, UAE, and Fontainebleau,
France. Clayton M. Christensen ([email protected]
hbs.edu) is a professor of business administration at
Harvard Business School in Boston.
Reprint R0912E To order, see page 131.
Try spending 15 to 30 minutes each day
writing down questions that challenge the
status quo in your company.
“The numbers aren’t working.”R
o
y
D
e
lg
ad
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Copyright 2009 Harvard Business Publishing. All Rights

Reserved. Additional restrictions
may apply including the use of this content as assigned …
Business
ENTREPRENEURSHIP WHAT IT TAKES – p17
DalE mURRay VOICE OF A BUSINESS ANGEL – p24
DOmINIC laKE THE CANTEEN WAy – p25
will only take you so far. “You cannot
cost-cut your way to greatness,” as the
saying goes, though the likes of Ryanair
and Wal-Mart call such a statement
into question.
The unfortunate result of all this
is what Bill Joy, a co-founder of Sun
Microsystems and now a venture
capital investor, calls the innovation
gap in large companies. But there’s
a smidgeon of good news. Savvy
mEaSURINg UP
DaSHBOaRDINg
FOR INNOVaTORS
“If you cannot measure it, you
cannot improve it,” remarked
Lord Kelvin in the 19th century.
Organisations and managers have
been heeding his advice ever since.
But what does this mean for new
ventures? John Mullins and
Randy Komisar measure up.

Launching a radically new product
or a new venture — whether tucked
away in a corner of a large company
or in the garage of a spanking new
start-up full of hope and enthusiasm
— is never easy. But there’s a pair
of problems that makes this new
venture challenge especially daunting,
wherever it is found. First, everybody
knows what happens to most
new ventures, their rosy forecasts
and well-crafted business plans
notwithstanding. They fail. Second,
for those that do eventually succeed,
most of the time the business that is
ultimately successful bears modest
— sometimes, little — resemblance to
what was conceived at the outset. For
the business we now know as PayPal,
what ultimately worked was Max
Levchin’s seventh idea for how
to apply his cryptography expertise.
Thus innovation is risky, and
companies worried about their quarter
to quarter stock market performance
too often shy away from it. But without
innovating, companies are — sooner
or later — left in the dust. Cost cutting,
perhaps essential during a downturn
like the one we’re just experiencing,
entrepreneurs, fully aware that Plan A,
their initial idea, is unlikely to work out
as planned, have borrowed a great tool
for better managing their innovation

efforts from big companies and,
counter intuitively but wisely, turned
it upside down.
That tool, the dashboard, as used in
large companies, brings together a set
of key performance indicators (KPIs)
that signal whenever the corporate ship
For PayPal, what
ultimately worked
was Max Levchin’s
seventh idea.
01 A sign for Internet payment
transaction portal paypal
stands outside the eBay
Germany headquarters.
02 Max Levchin, co-founder of
paypal and current chief
executive officer of Slide Inc.
01
02
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7www.london.edu/bsr BUSINESS STRATEGY REVIEW
DASHBOARDING FOR INNOVATORS
There are many explanations why
big companies don’t innovate:
culture, incentives, risk averse
behaviour, and more. Arguably,
the recent infatuation with “open
innovation” is a reflection of
this fact and an admission that
they might as well just give up
at innovating internally and buy
their innovations outside, as
companies like Cisco and, more
recently, procter & Gamble, do
so successfully. Our research
suggests that big companies’
failure to innovate rests, at
least in part, on inappropriate or
misaligned expectations of their
new ventures, as can be seen in

the following table:
WHy BIg
COmPaNIES
DON’T INNOVaTE
REalITy
plan A rarely works
Management’s real job
is to find a plan B that
will actually work
Effective use of a dashboard
means empirically testing a
few life-or-death assumptions
so that course corrections
are made quickly, before too
much time and money are
squandered
The right kind of new venture
leader is one skilled at
experimentation and learning
ExPECTaTION
plan A will work
Management’s job is
to faithfully implement
the plan they pitched
Rigorous use of a dashboard
will make sure the plan gets
implemented and the ship
remains on its intended course
The right kind of new
venture leader is one skilled
at implementation and at

achieving “the plan”
01 Cisco Systems: The world’s
biggest start-up company,
San Jose, California, U.S.
02 p&G: In innovation we trust.
03 ‘Everyday Low price’ signs are
displayed at a Wal-Mart store
in Secaucus, New Jersey, U.S.
veers ever-so-slightly off course. Any
deviations are quickly spotted so that
adjustments — in people, processes,
strategies and more — can be made to
get the ship back on course.
Dashboards in new ventures
Keeping the ship on course, however,
is probably the wrong thing to do in a
nascent venture, where what is likely
to work is not what was planned at
the outset (never mind the original
business plan, which probably argued
it would!). Our research has shown us
that dashboards are, indeed, powerful
tools for navigating the uncharted
waters in which new ventures sail.
But their purpose in such settings
isn’t to keep the venture on course. It’s
to capture data from the marketplace
and signal that mid-course corrections
are urgently needed, because Plan

A is not working as expected! Is this
subtle but radical difference, together
with the expectations that underlie
big-company dashboards, one reason
why most large companies don’t
innovate well? (See Sidebar: Why Big
Companies Don’t Innovate) And does
it also hold a key to understanding why
so many new ventures of any kind fail?
Might it even hold a key to moving the
new venture failure rate needle down a
few notches?
01 02
03
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8 BUSINESS STRATEGY REVIEW issue 1 – 2011
Their efforts were deemed innovative
and successful. Yet the results were
disappointing and unsettling: Whittle
and Kuraishi were not confident that
the large amounts of money they were
injecting into the country were having
the impact they were seeking, nor
that it had reached the people on the
ground who needed the most help.
Let’s consider an example. Dennis
Whittle was frustrated. He had just
spent a year developing new processes
that would help the World Bank,
where he was a senior executive, fight
poverty. He had at his disposal a $5
million budget and the services of a
top consulting firm. He, his colleague
Mari Kuraishi, and their team of
development professionals were running
a programme that had funneled billions
of dollars to the Russian Federation for
Economic Development.
glOBalgIVINg CaSE STUDy
DaSHBOaRDS
lIgHT THE Way

A woman pushes a baby stroller
through a run-down housing
development in Kamchatka
peninsula, Russia.
Theirs was a familiar problem:
funds targeted at urgent human needs
didn’t always end up where they were
intended to go. All too often, too many
of the funds seemed to find their way
into the personal Swiss bank accounts
of government officials. In Whittle’s
view, a radical new approach was
needed. He asked Kuraishi to join
him and help shake things up.
Kuraishi quickly pulled together
strategy staffers and personal friends
from other parts of the bank for
an all-day brainstorming session.
They divided a whiteboard into two
sections. The left side was labeled
“Existing World Bank Processes” and
the right, “What Is the Opposite?”
On the left, they wrote things like
“top-down loans; $100 million grants;
two-year processing time; 200 pages
of documentation;” and on the right,
“bottoms-up grants; $100,000 loans
or grants; two-day processing time;
two pages of documentation.” The
outcome of this process looked nothing
like what constituted business as usual
at the World Bank.

A development marketplace
sparks an idea
In February 2000, 700 people
crowded around 270 cramped booths
in the usually pristine atrium of the
World Bank in Washington. Each
was intent on pitching an idea for
alleviating poverty in the first-ever
Development Marketplace. These
finalists had been selected from
1,130 applications from more than
100 organisations based in more
than 80 countries. The proposals
were limited to four pages, and a
15-minute presentation.
At the end of this two-day
carnival of ideas, James Wolfensohn,
the president of the World Bank,
Their efforts were
deemed innovative and
successful. Yet the results
were disappointing
and unsettling.
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DASHBOARDS lIGHT THE WAY
stood on the stage and made awards
totalling $5 million to 44 teams.
The event was an overwhelming
success. As Whittle explained, “The
Development Marketplace not only
surfaced exceptionally innovative
ideas and projects, but it enabled
funding decisions to get made in two
days, lightning speed by World Bank
standards. This was a radical and eye-
opening innovation.”
When the awards ended, a South
African woman approached Whittle
and Kuraishi. In a strong voice,
she said, “I did not win.” Whittle
replied, “Well I am sorry, but this is
a competition, and not everyone can

win.” She retorted, “I am telling you
that my idea is a good one, and just
because the World Bank did not finance
it does not mean that there are not
others out there who will finance it.”
Whittle was haunted by the
truth of the woman’s words. Several
months later, he and Kuraishi walked
away from successful careers in the
development establishment. They were
committed to building a marketplace
for development project funding
where there could be more winners
than losers. It would prove to be a
challenging journey.
Building a dashboard
With not very much effort, Whittle
and Kuraishi identified more than
1,000 compelling projects in developing
countries that could make a significant
impact with a small to moderate
infusion of funding. It seemed logical
that if projects like these could be
made visible to a large community
of potential funders, money would
flow. But their business was far from
proven, and it felt too early to establish
a foundation to channel charitable
contributions to their favourite projects.
So the pair established a partnership
with the nonprofit Calvert Foundation,
which had the necessary apparatus
for accepting tax deductible donations

under the U.S. tax system, an important
incentive for American donors.
But the crucial issue was whether
Whittle and Kuraishi could harness the
internet — an eBay for development
projects, in a sense — to match
philanthropic contributions with global
development projects in an efficient
and economically sustainable manner.
In particular, there were three key
questions, leaps of faith, as we call them:
1 Will attractive, high quality,
legitimate projects participate
over the internet?
2 Will sufficient numbers of donors
contribute directly over the internet?
3 How can we fund and structure
the marketplace to achieve financial
sustainability? In other words, is there
a business model that will work?
Getting answers to these
questions — the fundamental life-
or-death issues that would determine
whether their idea had real potential
— meant launching a pilot site
and experimentally testing some
hypotheses. They built a dashboard
to guide and track their experimental
journey, as shown on the next page.

Disappointing data
Happily, there was an immediate and
positive response to the Development
Space concept. Donations began to
trickle in. The news media gave the
venture positive coverage as well. But
the challenges outweighed the good
news. Development Space’s results
showed that customers needed an
assurance as to the quality — indeed,
the legitimacy — of the projects
listed on their website. Based on the
eBay analogy, Whittle and Kuraishi
envisioned the same kind of user
rating system that was so powerful for
eBay. Why couldn’t donors rely on the
ratings of other donors to gain comfort
about project quality?
But two things made this clearly
unworkable. First, the recently enacted
Patriot Act required significant
vetting of charitable contributions
to ensure that funds were not going
to organisations with terrorist ties.
Second, before making a charitable
contribution, donors wanted assurance
from a credible third party that
the project was sound. As Whittle
explained, “People were comfortable
buying things on the basis of the
opinions of other consumers, but they
wanted reliable expertise involved in
helping them find legitimate projects to

fund with their philanthropic dollars.”
The model would have to be adapted
to identify projects through credible
sponsor organisations who could
conduct due diligence on the ground.
Another problematic hypothesis
involved donors. Based on the eBay
experience, the hypothesis was that
if the marketplace existed, donors
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BUSINESS
contribute directly to international
development projects. And even Heifer
made no clear link between individual
donors and specific recipients, as
Development Space wanted to do.
Finally, the team found that relying
on the Calvert Foundation website to
process donations created a disjointed
customer experience. In fact, donors
felt as if they didn’t know where their
cash was going once they were sent to

the Calvert website.
A funding drought
To make matters worse, the dot-com
bubble had long since burst. Financial
investors weren’t lining up to put
money into an internet marketplace
for global development. And
unfortunately, Whittle and Kuraishi
needed a small infusion of cash to stay
true to the pleas of the South African
woman, as well as for many other
worthy projects. It had been more than
two years since her words had kick-
started their entrepreneurial journey.
Their difficulties might have
caused them to give up. But Whittle
and Kuraishi were determined to
keep going. As Whittle recalled, “Even
though the marketplace was not taking
off as quickly as we had expected, we
could see that the potential was there.
01 GlobalGiving project:
Rehabilitating healthcare facilities
and services in areas of pakistan
affected by the severe floods.
02 Dennis Whittle, CEO
of GlobalGiving.
03 Hewlett-packard (Hp) was
interested in Development
Space from the start.

04 GlobalGiving project: providing
microloans, business training
and technical support to
struggling South Sudanese
women refugees in Uganda.
would come. But the marketplace
for “used stuff ” that eBay brought
to the Web already existed in the
form of classified ads and garage
sales. The same wasn’t true of the
marketplace for global development
projects. Total spending on foreign
aid programmes was running close
to $100 billion per year, with roughly
one-quarter to one-third of the funds
coming from private individuals,
companies and foundations. But there
were few vehicles other than Heifer
International that allowed donors to
We were learning at a rapid pace and
needed to adapt our approach based
on what we learned.” The data, as
reflected in the initial dashboard, were
speaking loudly and clearly. While their
initial dream remained alive, the initial
idea simply was not panning out as
originally conceived. It was time for
Plan B.
Development Space becomes
GlobalGiving
Whittle and Kuraishi created a Plan B

that was markedly different from their
first set of ideas. On the project side,
new emphasis was placed on building
a sponsor network and relying on
sponsors to identify and help position
suitable projects for the marketplace.
Ashoka, a highly credible organisation
that identifies and builds networks
among promising social entrepreneurs
in the developing world, signed up as
the first project sponsor. With Ashoka
came a chain of relationships, as well as
trust, giving projects credibility.
But the venture was desperate for
new donors. What good was it to have
projects if there were no funders?
This was the area where the initial
hypotheses were furthest from the
reality that had unfolded to date.
Fortunately, Hewlett-Packard (HP)
had been interested in Development
Space from the start. As a technology
company committed to innovation and
social responsibility, HP was looking for
ways that technology could accelerate
economic development beyond the
“bridging the digital divide” concept of
giving everyone access to the internet.
Excited by Whittle’s and Kuraishi’s
idea to use the internet to transform
global development funding, HP
invited Development Space to be a part
of its employee giving campaign. This
was a big “Aha”, a way to aggregate

donors in a potentially much more
efficient fashion, without spending
scarce resources on donor acquisition.
In addition, the time was ripe for
Development Space to establish a
foundation of its own, to clear up the
confusion created when donors were
directed to the Calvert Foundation. At
the same time, the company changed
its name from Development Space
to GlobalGiving, a name the new
conTinued page 14
HP was looking for
ways that technology
could accelerate
economic development.
01
02
03
04
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DEVElOPmENT SPaCE
STaRT-UP DaSHBOaRD
Source: GlobalGiving
Will attractive, high-
quality, legitimate
projects participate
in the marketplace?
Will sufficient
numbers of donors
participate in the
marketplace?
How can the
marketplace
be funded and
structured to
achieve financial
sustainability?
01

02
03
leap of faith questions
Business plans will be
a good proxy for project
quality. Due diligence
can be conducted after
projects apply.
As with eBay, if the
marketplace exists,
donors will come.
Social and strategic
investors will be the
best sources of capital.
A for-profit structure
paired with a
foundation partner
could work.
Existence and quality
of business plans.
Value of business
plans to prospective
donors.
Cost and reliability of
due diligence.
Number of donors in
first eight months.

US$ raised
Most projects had
no business plans
or needed extensive
technical assistance
to create them.
Donors didn’t care
about business plans.
Due diligence after the
fact was unaffordable
and unreliable
<100
US$3 million
investment from Hp
and World Bank’s
IFC seemed almost
certain, but
fell through.
US$100,000 raised
in relatively small
increments.
Having an online
marketplace branded
“Development Space”
and directing donors to
a non-profit partner to
make the contribution
was a problem in terms
of brand identity and
credibility.

Solid relationships
with sponsor
organisations and a
“chain of trust” are
needed to ensure
project quality and
legitimacy, particularly
post patriot Act.
We need a plan B!
Marketing to
prospective donors
is required.
We need a plan B!
After the dot-com
bubble burst,
investment capital
unavailable.
Are philanthropic
grants the answer?
We need a plan B!
A structure is needed
that would allow for a
unified brand.
We need a plan B!
projects will self
identify with minimal
guidance.
Number of projects
submitted.
Size of projects.
Type of projects/

descriptions.
100 projects
submitted;
25 qualified.
Size range: US$1,000–
US$250,000.
Some too conceptual
to appeal to donors
(e.g., Argentina fiscal
adjustment).
Need to find projects by
mining relationships in
the field.
We need a plan B!
Smaller, community
based projects most
attractive to donors.
Compelling project
descriptions key to
marketplace success.
Hypotheses metrics Findings Insight/response
BUSINESS
Donors can be
aggregated through
companies/corporate
partnerships.

Corporations and
foundations are the
best targets.
Need to create
a foundation to
collaborate with
for-profit organisation
under a coherent brand.
Number of corporate
relationships.
Number of donors
achieved through
relationships.
US$ in donations
US$ raised
Structure acceptable
to funders?
Ability to accept
private investment
maintained?
Flexibility to
reinvest earnings
in foundation?
3–4 key corporate
partnerships/
sponsorships to
build credibility
and momentum.
Less than the US$5
million in corporation

and foundation
money sought.
All foundation funders
OK with hybrid
structure
yES
yES
Good vehicle for
getting started but
expense of doing
customisation and
servicing relationships
is too high for this to
be a viable long-term
strategy.
We need a plan C as
a donor strategy!
The sale cycle is long.
Time to breakeven
will be significantly
longer than originally
expected.
Major time and energy
will have to be invested
in raising money for
an extended period
of time.
plan C needed here, too.
Hybrid structure
provides flexibility
but governance
is complex.

A network of trusted
sponsor organisations
will identify attractive,
quality projects.
Number of projects
submitted.
Size of projects.
Type of projects/
descriptions.
300 qualified projects
< US$100,000 in size.
Community-based
projects.
project sponsors (first
was Ashoka) created
credibility; floodgate
opened.
Hypothesis confirmed!
Must limit number of
projects to maintain
balance with donor
volumes.
Revised hypotheses metrics Findings Insight/response
glOBalgIVINg
REVISED DaSHBOaRD
Ashoka signed on first,
four others followed.
projects are donor-
ready.

Sponsorship is the way
to go. No follow-on due
diligence necessary.
Hypothesis confirmed!
Number of trusted
project sponsor
organisations.
Cost and reliability of
due diligence.
project sponsors will
validate quality and
legitimacy, create a
chain of relationships
and trust.
EVOlUTIONaRy
STagES OF
glOBalgIVINg
FRUSTRaTION
Dennis Whittle and Mari Kuraishi
identify the need for a new
approach by the World Bank to
fight poverty more effectively.
BUSINESS aS UNUSUal
Identify existing World Bank
processes and contrast with the
alternatives. Business as usual

no longer acceptable.
DEVElOPmENT
maRKETPlaCE
February 2000 sees the first ever
Development Marketplace. $5
million awarded to 44 teams.
CREaTINg SPaCE
Whittle and Kuraishi launch
Development Space, an eBay
for development projects.
PlaN B
progress is slow, but kickstarted
by new emphasis on sponsors and
creating a sponsor network.
NEW DIRECTION,
NEW NamE
Development Space is
re-christened GlobalGiving.
STIll gIVINg
GlobalGiving has now funded
thousands of projects. plan B

is working.
foundation took as well. A separate
board was set up for the foundation
and appropriate mechanisms were
put in place to provide the level of
independence needed to ensure
legal compliance.
GlobalGiving had evolved a
financial model that depended on
many components, one of which was
philanthropic support for the new
foundation. Thus, at about the same
time, Whittle and Kuraishi launched a
major fundraising campaign, targeting
foundations and high net worth
individuals, and attracted enough
money to take the next steps.
Last, the original, barebones
technology platform needed work.
Whittle and Kuraishi needed better
tools for tracking and analysing traffic
and user behaviour, and they needed a
new-look website to improve usability
and the overall donor experience.
With all of these changes, it was

time for a new dashboard to affirm
or refute their new leaps of faith. The
three initial leaps of faith remained
unchanged, as neither the company’s
ability to attract enough good projects,
enough donors, nor build a business
model that would work had been
proved in the first iteration. Based
on the learning from the earlier
dashboard, however, the hypotheses
were updated to reflect the decisions
that embodied GlobalGiving’s Plan B.
When the new site was launched,
things started to pop. With Ashoka
as a project sponsor, the floodgates
opened, in part due to the credibility
that Ashoka lent. Three hundred
projects came so fast and furiously
that the team temporarily stopped
adding projects to avoid an untenable
imbalance between the number
of projects listed and the volume
of contributions coming in. Once
HP’s employee giving campaign got
under way, the almost immediate
uptick in the number of donors and
dollars provided an all-important
psychological boost for the team.
HP also helped promote this idea
to other companies. Partnerships with
several other companies, including
Visa, Advanced Micro Devices, and the
North Face soon followed, augmenting

the original open marketplace model
with customised sites for specific
organisations.
Is GlobalGiving’s Plan B working?
As we write, GlobalGiving has
funded thousands of projects and has
established a strong sponsor network,
as well as robust mechanisms to ensure
project legitimacy. While these numbers
are not entirely on track with early
projections, momentum continues
to accelerate and the team remains
committed and optimistic. Whittle and
Kuraishi now laugh about some of their
early hypotheses and how much they
have learned. Plan A did not stand a
chance, but Plan B is working!
What lies ahead for GlobalGiving?
Continuous learning to drive
innovation lies at the very heart of
the GlobalGiving culture. As Dennis
Whittle says, “What matters most is
not the quality of the initial business
plan, but instead the ability of the team
to iterate successive business plans
as a means to finding what works.
The trick is to experiment quickly but
intelligently, and with discipline.”
“ The trick is to
experiment quickly
but intelligently, and
with discipline.”

conTinued from page 11
GlobalGiving project:
Haiti earthquake
recovery programme
helping survivors rebuild
communities and get
back on their feet.
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Four themes stand out in the
GlobalGiving story:
1 The founders’ laser-like focus on
the biggest risks on the table at
each point in time
2 The changing nature of the
dashboards as the nature of the
unanswered leaps of faith changed
over time
3 A considerable emphasis on
quantitative measures
4 An experimental mindset that
assumed from the get-go that plan
A probably was not quite right.
While dashboards nearly everywhere
embody the third of these themes, it’s
the others that set entrepreneurs’ use
of dashboards apart from that of their
big-company brethren.
New venture dashboards will differ,
of course, from venture to venture,
reflecting the prior experiences of the
management team, the organisation’s
culture, the nature of the current leaps

of faith on the table, and the stage of
the business. But their essence endures:
n Leap of faith questions are
the drivers
n These generate hypotheses
n Which are tested with clear metrics
n At a particular point or period
in time
n Yielding insights for decision
making and, in all likelihood, for
mid-course corrections, too.
Using dashboards to drive your
innovation process
Any dashboard is only as good as the
unanswered questions or unverified
assumptions — the leaps of faith —
that drive it. How can you come up
with the leaps of faith that really matter
right now? Ask yourself any or all of
the following questions:
n What assumptions underlying your
venture make you feel uneasy, or
keep you awake at night?
n What would you like to know that
you don’t?
n What information would lead you
to a different conclusion than the one
under which you are operating now?

n What crucial question, if answered
affirmatively, would make you feel
vastly more comfortable that your
venture is on the right track?
n What crucial question, if answered
negatively, would cause you to alter
your course immediately?
What to tell your investors
Almost every new venture requires at
least some money from somewhere.
Whether your backers are your large
company’s innovation unit or a start-
ups three F’s (family, friends, or fools)
or perhaps angel investors or Venture
Capitalists, the reader might wonder
how these perhaps controversial ideas
— that the Plan A in which they invested
probably isn’t going to work — will play
out in the eyes of their investors.
The good news is this. The best of
such investors — those who have been
down the entrepreneurial path many
times before — know that changing the
plan is simply part of the landscape. If
you pitch properly up front — enticing
investors to join you and fund your
experimental and carefully disciplined
(thanks to your well thought out
dashboard) journey to a better Plan B,
with all of the risk (your leaps of faith
and more) which that journey entails

— they …
ISSN 1822-6515 ISSN 1822-6515
EKONOMIKA IR VADYBA: 2011. 16 ECONOMICS AND
MANAGEMENT: 2011. 16
954
COMPETENCIES AND INNOVATION WITHIN LEARNING
ORGANIZATION
Jarmila Šebestová1, Žaneta Rylková2
1Silesian University, Karvina, Czech Republic,
[email protected]
2Silesian University, Karvina, Czech Republic,
[email protected]
Abstract
Organizations which learn and encourage learning among their
people are learning organizations. The
purpose of the paper (which is funded by Internal University
Grant System IGS/5/2011 and IGS/7/2011) is to
examine important role of skills and knowledge in learning
organizations and find the answer to the following
questions: Which skills develop innovative environment in
organization? Which type of organizational
setting must be used to adopt innovations, deal with risk and
support learning? In the paper you can find
innovated model “Assumptions leading to the effect of
innovation” by adding part of competency model to
prepare organization for innovation process, creativity support
and learning organization. We also suggested

competency model called 5C (Care, Competitiveness,
Communication, Clarification of Relationship,
Culture), which could be used in the future as a metrics of
knowledge network. Finally, we believe, that
SMEs should be more innovative and competitive when they
cooperate, so original output is to measure
SMEs preparedness for the innovative network as EISE metrics
(Elements, Interactions, Self organization,
Emergency).
Keywords: learning organization, innovation, competency
model, skills, knowledge.
JEL Classification: L20, L21, L29.
Introduction
Basis of all changes, that are in business the basis of
development, have to be change in people
thinking and there must be established good conditions for
planning and realization of needed changes.
Already today we generally work with conception of standard
minimum level of knowledge and skills. It is
necessary to learn that human capital is the main asset of each
company, motive power for enterprise. In the
long term a sustainable high position in performance of
companies is getting currently into jeopardy
(entrepreneurship risk) and only human capital is the bottom
line for its overcoming.
Nowadays we are meeting with changes, which are managed,
that means with innovations, which
assume creative and untraditional thinking. New ideas and
vision formation, acceptation of all ideas,
formation of model situations – that all form the basis of change
command. Most frequently we are finding
the conception – systematic innovation - because innovations

play basic role in actual economics and social
transformation. Above mentioned produces a very flexible and
opened organization where people will accept
and adapt to new ideas and change through shared vision.
Building a learning organization is a means to
become an innovative company.
Learning Organization
By authors Senge (1990); Pedler, Burgoyne, Boydell (1991);
Garvin (1993), we define a learning
organization as an organization that is committed to learning.
By committed, we mean that the organization
is ready to change the way it does things by combining existing
knowledge or incorporating new knowledge.
Thus, organizational learning processes are neither necessary
nor sufficient conditions for a learning
organization. But, the existence of organizational learning
processes will help the organization to learn. We
define organizational learning as the organizational processes
aimed at adding value to the knowledge
acquired and communicated throughout the firm. As such,
organizational learning processes encompass the
acceptance and the assimilation of knowledge. We can say that
organizational learning is the process that
should lead to the building of firm´s competencies and that a
valuable learning experience will lead to firm-
specific, distinctive competencies.
Organizational learning is a strategic process and a learning
organization is the output of this process
that will allow the development of new or regenerated core
competencies and products. Many studies of
learning organizations have attempted to diagnose the
characteristics of learning organization. Although
different authors stress different elements, the characteristics of

the learning organization incorporated in this
study have been proposed important features: open
communications, risk taking, support and recognition for
mailto:[email protected]
ISSN 1822-6515 ISSN 1822-6515
EKONOMIKA IR VADYBA: 2011. 16 ECONOMICS AND
MANAGEMENT: 2011. 16
955
learning, resources to perform the job, teams, rewards for
learning, training and learning environment,
knowledge management.
Innovation and Learning
As for innovation, learning may occur at the individual, group,
organization and industry levels
(Shrivastava, 1993). As new outputs, innovations may come
from new knowledge as well as from the
combination of existing knowledge to create innovations
(Henderson and Clark, 1990), using combinative
capabilities. Learning means integrating new knowledge or
mixing existing knowledge in different ways,
learning leads to newness, and thus to innovation. Innovation
will be the by-product of a learning
organization. A learning organization is a innovative
organization. Organizational learning should be
positively related to innovation. If a company is good at
acquiring new knowledge and articulating existing
knowledge with new knowledge or existing knowledge in a

different way, this company should be good at
producing innovations (product or process). Furthermore, the
better the organizational learning process sis,
the greater the capacity to develop radical innovations (product
or process) will be.
It is important to know, that organizational learning is not
necessarily related to innovation´s success.
Innovation and innovation´s success are two different
dimensions. A successful learning organization leads
to the capacity to innovate (Burns and Stalker, 1961), which is
the ability of the organization to adopt or
implement new ideas, processes, or products successfully
(Hurley and Hult, 1998). There is important
strategy because if the innovation is not in line with the strategy
and the environment of the firm, the
innovation may fail and thus the learning-innovation link will
not be related to performance. Learning more
or faster does not imply that you learn that you have to in order
to perform better than your competitors.
Learning must be customized to the circumstances of an
organization and the work it conducts. Each
organization is different, but the work styles of any
organization fall under four models: process, systems,
network, and competence. Figure 1 highlights the characteristics
of particular work settings and hints thereby
at learning needs of each. In brief, the process and systems
models correspond to work settings that are
routine and require little interpretation. What is needed to
perform tasks is know-how, learning takes place
through generalized learning and development training with the
help of how-to guides. Evaluation and other
reports can help as well. However, the network and competence
models call for much higher levels of
judgment and depend on deeper understanding and insight as

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