Yesterday we listed ten characteristics of innovative companies. These were:

• Innovative Business Model
• Continuous Investment in Innovation
• Skillful Blend of Design and Technology
• Steady launch of “paradigm shifting” products
• Lengthy track record of successful innovation
• Institutionalized Capabilities
• Ongoing and successful expansion into new areas
• Speed
• Products that allow “lock-in”
• Staying Power

Now we are going to discuss each of these in turn.

Innovative Business Model

Not everyone can be a Google. And even if you could, would you want to? Yes, Google looks very good now – but do you remember Netscape? They were the most innovative company around in the internet space with a new business model, and look at where they are now. It’s hard to succeed on the foundations of an entirely new business model and maintain that success – and at any given time, there can only be a few successful companies operating on an entirely new model.

That being said, without innovation, you’re not going to survive. So we’ll look at Toyota and 3M – more traditional companies in more traditional markets – and see that the innovation in the business model is the focus on the continual development and launch of innovative products for an innovation hungry marketplace – you don’t need a completely new business model, but your business model needs to be based on innovation.

Continuous Investment in Innovation

All of these companies invest significantly in R&D. Without a significant R&D investment, your potential for reward is limited. The reality is that innovation takes smart people – and in today’s economy – it takes lots of them as few products can be designed without a broad interdisciplinary team where each individual member has deep (PhD) knowledge in a relevant area and each area is covered by more than one person. (It’s hard to make progress in a vacuum, which is why the best research is usually produced by research groups, be they academic, industrial, or joint, with multiple experts in the common research area.) In other words, you’ll need a good team that is educated, experienced, and capable, and they’ll need tools and resources to support their research. It’s not cheap in the short term, but when you look at the payoffs the top five companies have achieved on their innovation investments, it’s a pittance in the long run.

Skillful Blend of Design and Technology

Good products are user friendly and appealing. Why else would someone shell out $400 for an iPod when other manufacturers offered high-end MP3 players with the same storage and sound quality for half the price? Make sure you include usability experts in your interdisciplinary team and that hardware, software, and marketing all work on, and off of, the same specifications.

Steady launch of “paradigm shifting” products

Innovative companies are always innovating – and always launching new products. This includes better versions of existing products as well as new products. It doesn’t even have to be a totally new product, just a product that is new-to-you and enhanced to add value that wasn’t there before to the market-place. If you need help managing your innovation, look to invention-on-demand, a modification of the TRIZ problem solving methodology.

Lengthy track record of successful innovation

Innovative companies have a good track record. Launch the right product at the right time with the right features and interface, and the market will come to you if it is bundled with the right message at the appropriate cost point, provided it is a quality product. The last factor is key. To build a track record, your products must be high quality. They must be easy to use and do what they are advertised.

Institutionalized Capabilities

Innovation is institutionalized in market-leaders, as well as knowledge and processes. You should use technology to help you manage the process. In particular, you should employ PLM (Product Lifecycle Management) and Innovation Management technologies. (Some examples of innovation management technology can be found in my post Innovation Matters.)

Ongoing and successful expansion into new areas

Innovators are never complacent about their position in the market. They are constantly looking to not only improve it, but to expand into other related markets, and, occasionally, to create a new market (based on a new breakthrough). Always be on the look-out for new opportunities and enhance your marketing capabilities to break into new markets when the time is right.

Speed

Innovators are fast. Their cycle time is usually half that of the industry average. They work in unison to take a product from conception to completion as efficiently as possible. There is no political infighting or unnecessary roadblocks. There is one team with one goal. When a milestone is reached, the product simply moves on to the next one. Schedules are accelerated when time permits and, more importantly, they are lengthened if required to achieve the desired level of quality. After all, the sooner an issue is addressed, the less impact it has to the overall cycle time.

Products that allow “lock-in”

Innovators develop easy-to-use products suitable for the mass-market at a price point that allows majority adoption and usage around common standards. This gives them the ability to effectively lock-up a significant portion of the marketplace, which they can continue to support and sell to with newer, better products in the future.

Staying Power

Innovators are in it for the long haul. That’s what gives them their staying power. They realize that innovation is not a quick-fix or a one-shot endeavor. It is a continual process.

Yesterday we discussed the results of the Boston Consulting Group’s Innovation 2006 survey and report that determined that not only do 72% of executives consider innovation a top-three strategic priority, but that innovative companies outperform the Global S&P 1200 median by 300 basis points with annualized increased profit margins of 3 percentage points higher.

We also discussed the top three commonalities of innovative companies as evidenced by the report:

1. Innovative Culture
2. Deep Customer Understanding and Focus
3. Market Focused

and how these were all people-focused. Innovative companies focus on their employees, customers, and the people in the market they operate in. They are run by innovative leaders who run an innovative culture that promotes creativity, learning, research, and development.

However, as we indicated, this is only the start. As I pointed out in my Purchasing Innovation Series on eSourcing Forum, innovation is not easy to manage, or to measure. Furthermore, it requires appropriate process and technology support.

For some additional insight here, we are also going to focus on the other characteristics of the five most innovative companies identified by the report:

1. Apple Computer
2. Google
3. 3M
4. Toyota Motor
5. Microsoft

The characteristics displayed by these companies include:

• Innovative Business Model
• Continuous Investment in Innovation
• Skillful Blend of Design and Technology
• Steady launch of “paradigm shifting” products
• Lengthy track record of successful innovation
• Institutionalized Capabilities
• Ongoing and successful expansion into new areas
• Speed
• Products that allow “lock-in”
• Staying Power

Tomorrow we’ll discuss each of these in turn to uncover some “secrets to success” that you can use to become more innovative.

This summer, Boston Consulting Group released their Innovation 2006 study where they determined that innovation remains a top strategic focus for many companies, with 72% of the 1,070 executives in 63 countries and all major industries ranking it a top-three strategic priority. Furthermore, they demonstrated that innovation does translate into superior long-term stock-market performance: the 25 most innovative companies (as defined by the survey respondents) had a median annualized return of 14.3% from 1996 through 2005, a full 300 basis points better than that of the S&P Global 1200 median. Furthermore, innovators increased median profit margins by an annualized 3.4 percentage points per year over the ten year period, vs. 0.4 percentage points for the median Standard & Poor’s Global 1200 company. In addition, they maintained revenue growth on pace – 9% per annum – with the index median.

There were a number of interesting results and insights in this study, which I’ll discuss further in a later post, but the insights I’m going to focus on are the attributes of an innovative company. The survey the report is based on asked respondents to rank the most innovative companies, and the results, in order were:

1. Apple Computer
2. Google
3. 3M
4. Toyota Motor
5. Microsoft
6. General Electric
7. Procter & Gamble
8. Nokia
9. Starbucks Coffee
10. IBM

In addition, it asked the executives why they thought the company was innovative, and summarized the results for the top five. The following commonalities shine through:

1. Innovative Culture
2. Deep Customer Understanding and Focus
3. Market Focused

One of the statements about Apple quoted in the article was “every single person in the company contributes to Apple’s innovation success every day“. One of the statements about Google that was quoted stated “Google has built reinvention and creativity into the core values of the company.” And one of the statements about 3M was “3M gives its employees time to work on, develop, and test their ideas” and “has a high tolerance for error“.

Quotes about Apple included “Apple is very focused on the user experience and how design impacts that experience.” One of the quotes about Microsoft was “They’re not always first, but they listen to customers or they wouldn’t have the market share they have.”

Quotes about Apple also included “Apple is telling its customers what’s next. It’s not following the classic ‘market-led’ innovation path that inevitably leads to incrementalism and ‘me-too’ innovation … Customers trust Apple and view it as a lighthouse guiding them on what to adopt next. If Apple has it, it must be useful.” Quotes about Microsoft also included “Microsoft has a complete and total ability to capture and retain an immense customer base.”

These quotes demonstrate the prevalence of an innovative culture, deep customer understanding and focus, and (core) market focus of innovative companies, since even their peers pick up on it.

However, what’s even more substantial, in my view, is the commonality all these traits posses – they are all people focused. Innovative companies focus on their employees, their customers, and the people who constitute the market in which they operate. They realize that innovation comes from people, that these people need to be supported, and everyone with an idea should be heard. They encourage creativity and free-thinking, even if it means that company employees will wander down the wrong path now and again. After all, the harsh reality is that experience is one of our greatest teachers, and learning from (small, contained) mistakes is a heck-of-a-lot better than not learning at all.

So what makes an innovative company? The answer should be clear now – innovative people supported by innovative leaders in an innovative culture that promotes creativity, learning, research, and development. That looks for answers within and without. That listens to its customers, its partners, market analysts, and works with them to define tomorrow’s product and tomorrow’s market.

Thus, the first step to becoming innovative is to decide you want to be innovative and develop an open, collaborative, and supportive culture. If this is beyond you, then I’d start questioning your ability to succeed in the marketplace of tomorrow, especially considering that over 90% of survey respondents indicated that they consider organic growth through innovation necessary for success in their industry. (And if this goes against every grain in your being, then maybe you should consider nominating your company for a Weasel Award next year, after all, you just might be weaseling your employees, customers, and shareholders out of an opportunity for future success.)

In a recent issue of APICS Magazine you will find The Road to Innovation (registration required) which consists of an interview with Elbert “Burt” Rutan, president of Scaled Composites LLC and a leading innovator in aviation, whose accomplishments include the production of Voyager – the first airplane to fly nonstop around the world without refueling – and SpaceShipOne – the first privately funded craft to reach space and winner of the 2004 Ansari X PRIZE.

Burt Rutan makes some very good points about the nature of innovation in the article. In addition to traveling the road less traveled, you need to take risks and you need to be aggressive. You’re more likely to get your money’s worth when you take a few risks.

However, achieving innovation isn’t easy. It requires the right mindset, the right processes and hard work in addition to risk-taking and aggressiveness. This week we’re going to discuss some characteristics of innovative companies and some metrics you can use to measure your innovative achievements.