How Innovation Really Works

U.S. Companies are failing at innovation!

That bold statement was at the top of a letter I received, and it got my attention. I started to read about the reasons many organizations are struggling to innovate. It led me to the research by Anne Marie Knott, PhD. She’s a Professor of Strategy at the Olin Business School of Washington University. She was previously an Assistant Professor at the Wharton School. Her research is focused on innovation ranging from entrepreneurship to large-scale R&D. Her new book is How Innovation Really Works: Using the Trillion-Dollar R&D Fix to Drive Growth .

I followed up with her to talk about innovation, R&D, and what can be done about the current problem.

 

Companies Have Become Worse at Innovation

You say that companies have become worse at innovation despite the fact that it’s more important than ever. Why is this?

While companies have become worse at innovation, I don’t actually argue that innovation is more important than ever. It has always been the chief source of companies’ as well as the economy’s growth. I think the reason if feels innovation is more important is that companies’ R&D is only 1/3 as productive as it was in the past. Therefore, they need to do three times as much to generate the growth they used to enjoy–actually more than three times because each additional R&D dollar is less productive.

 

Research: Companies’ R&D is only 1/3 as productive as it was in the past.

 

What’s RQ?  

The catchy answer is that RQTM (short for research quotient) is the company equivalent of individual IQ—it’s how smart companies are.  The precise answer is that RQ is the percentage increase in revenues a company gets from a 1% increase in R&D investment.  So companies that have high RQs derive more revenue, profits and market value per dollar of R&D than low RQ companies.

 

How was it developed?

I didn’t set out to develop RQ (though I knew I needed such a measure from my time in industry).  I actually stumbled upon it while trying to solve an academic puzzle, in much the same way that Percy Spencer stumbled on microwave cooking while working on combat radar systems for Raytheon.

Once I discovered RQ, however, I went through a similar process companies go through with their R&D.  I worked out the theory to characterize how it related to growth; I tested alternative versions; then I validated that the current version matches theoretical predictions using 47 years of data across the full spectrum of US companies conducting R&D.

 

What are its implications?

RQ has a number of implications.  First, by tracking their RQ over time, companies can determine whether their R&D capability is improving or deteriorating.  If companies could have done this 30 years ago, it’s likely R&D capability wouldn’t have deteriorated so much.  Second, because RQ is derived from economic theory, companies can use RQ to determine how much an additional dollar of R&D should increase revenues, profits and market value—this helps them set their R&D budgets.  Third, RQ provides investors a way to value R&D, so now even Warren Buffet can invest in technology firms.  More importantly, when investors know how to value R&D, they won’t pressure companies to cut R&D in pursuit of current profits

 

Why Most Companies Fail at R&D

Why do most companies fail at R&D?
“Failing” probably applies more to projects than to entire R&D systems (which is where RQ applies), but if you’re asking why companies have gotten worse at R&D, I have a few thoughts.  I’m going outside the range of my evidence with this answer, but I believe the demise began with the “financial management” trend in the 1980s.  This was the idea that any company could be managed by anyone simply by controlling “the numbers” (think T. Boone Pickens and Carl Icahn). “The numbers” meant cost reduction in the case of operations and rank ordering investments by ROI (return on investment) in the case of new investment.  R&D can’t be managed that way.  A good R&D system has many longshots.  On average Industrial Research Institute (IRI) member companies report that it takes 125 funded projects to achieve a single commercial success.  The problem is that no “number” can identify the single success up front.  Companies have to carry portfolios of projects with the hope that that the “1 in 125” is in there.  If you throw out all the projects whose ROI can’t be quantified with confidence, you throw out all the lasers, geosynchronous satellites, and other exciting things we developed at Hughes.

 

“The most widely held misconception is that R&D should be more relevant.” -Anne Marie Knott

 

Your book walks through several misconceptions about innovation. Let’s talk about just one.

The most widely held misconception (80% of consultants and 90% of investment analysts/managers) is that R&D should be more relevant. This seems completely plausible.  After all, who wants to be “irrelevant.” The problem with that logic is best captured by the Steve Jobs quote, “A lot of times, people don’t know what they want until you show it to them.”  He’s entirely correct, as the iPod, iPad and most especially iPhone attest.  Work done by researchers at Duke supports his intuition.  Ashish Arora, Wes Cohen and John Walsh found that while customers are the most prevalent source of external ideas, those ideas have the lowest ability to increase sales.

 

“People don’t know what they want until you show it to them.” -Steve Jobs

 

Companies need more radical innovation. Would you share some context about this misconception?

Practice Intelligent Restraint to Drive Your Growth

Pacing for Growth

Chances are that you’re driven. You have goals, and you’re actively working on them. When you get to work, you’re off and running.

I know this because most people reading this blog are here for success tips to become better leaders and more successful. If you were lazy and drifting without goals, you probably wouldn’t be visiting.

As you push through obstacles, you likely don’t think much about the word “restraint.” In fact, if you do, you may think that the only thing that matters is removing all restraints so you can get to your destination. Fast.

 

“Never let others define what success means for you.” -Alison Eyring

 

That’s why I was drawn to the work of Dr. Alison Eyring. Her book, Pacing for Growth: Why Intelligent Restraint Drives Long-Term Success, is about the balance between speed and restraint. I asked her to share some of these principles with us so we could learn from her research into what she calls “intelligent restraint.” Alison Eyring is the founder and CEO of Organisation Solutions, and she has advised some of the world’s most innovative companies on leadership and growth.

 

Solve Your Growth Challenge

How has competing in long-distance runs and triathlons impacted your approach to business?

Like all business leaders, I struggle to drive my business to perform today, as I also lead transformation for the future – all without damaging the business or my team. It’s so much easier to focus on just one of those things, but we have to do all three for long-term success.  My experience training for endurance races led me to discover a growth philosophy I call “Intelligent Restraint” that helps solve this growth challenge.

 

Can you tell us more about “Intelligent Restraint”?

Intelligent Restraint is a growth mindset that helps you build the right capabilities for growth at the right pace. Sometimes it means going slower, and other times it means going faster.

When you are training for an endurance race, you have to push yourself to go as far and as fast as you can but then no further so that you don’t get hurt or burned out.  In my book, I describe practical ways leaders can apply this growth mindset. For example, you can define and measure “maximum capacity” of the business and then create a plan to bridge the gap between current levels of performance and “maximum capacity.”

Another way leaders can put this way of thinking to work is by practicing what I call “Rules of Intelligent Restraint.” Like rules of restraint in endurance training, these rules help leaders drive growth in a way that conserves energy and can be sustained. My favorite rule is “routines beat strengths.”

 

“Routines beat strengths.” -Alison Eyring

 

Alison's 8 Insights from Endurance Training

  1. Always train for the right race.
  2. Don’t let any mountain defeat you.
  3. Be good enough when good is enough.
  4. Find many ways to maintain your own energy.
  5. Don’t spend your life doing only what you do well.
  6. Never let others define what success means for you.
  7. Be courageous and be humble; persevere and be willing to stop.
  8. Never be intimidated by anyone who looks stronger and faster than you.

 

Train for the Right Race

How do leaders find the right balance between the sprint and the marathon?

You can’t sprint and run long distance unless you’ve trained properly. A midfielder in soccer, for example, will sprint the entire game AND also run several miles. They’ve trained for this. On the other hand, if you ask a world class sprinter to run a marathon tomorrow, they might possibly complete a half marathon but they’ll be in tremendous pain.

As leaders, we need to train our business and our people for the right race. We all want to succeed over the long-term as a business, but there is seldom a long-term unless we can deliver in the short-term and have enough energy to keep going. Leaders who can practice the rules of Intelligent Restraint and manage energy strategically can achieve this.

 

“Focus overrules vision.” -Alison Eyring

 

Focus Overrules Vision

How to Build A Customer Driven Growth Engine

Customer Culture

Not too long ago, I spoke with Jeanne Bliss about the 7 Inhibitors to Customer Driven Growth.  Jeanne’s new book Chief Customer Officer 2.0: How to Build Your Customer-Driven Growth Engine is a success roadmap for leaders wanting to build a customer-focused organization.

Jeanne also answered my questions about how to establish a customer culture, social media strategy, leadership, earning the right to grow, and establishing a sense of urgency:

 

Establishing a Customer Centric Culture

“Culture is the action, not the words.” How do you connect corporate aspirations with employees’ actions?

For customer-driven work to be transformative and stick, it must be more than a customer manifesto. Commitment to customer-driven growth is proven with action and choices. To engender this culture, people need examples. They need proof.

 

“Culture is the action, not the words.” -Jeanne Bliss

 

Customer culture is talked about by many leaders but misunderstood by most organizations. “Commitment” to customers must be attached to deliberate operational behavior, such as, “We will go to market only after these 12 customer requirements are met” or “Every launch must meet these five conditions, which the field requires for success. We won’t launch without them, no exceptions.”  People inside organizations need to see the commitment translated to actions that they will feel proud to follow and emulate.

Moving well past words, a deliberate and united set of leadership actions and behaviors practiced in unison is required.

One of the first activities we often undertake to unite leaders is to employ the journey framework to build an operational “code of conduct.”

 

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