Squeezing the Juice from Innovation

EPISODE #270 TRANSCRIPT

INNOVATION: THE ENGINE OF PROGRESS AND PROSPERITY

Whether we look at it from a company perspective, or at the level of countries and global economies, innovation fuels productivity and growth.

We've seen this over and over throughout the centuries, when a technological or scientific breakthrough has driven new levels of prosperity that were previously unimagined.

We now live in the most affluent times in human history: our life expectancy and our standard of living is massively higher than it's ever been. According to the United Nations, more than 1 billion people have been lifted out of extreme poverty since 1990. And just in the last 50 years, global life expectancy has increased from 58 to 73 years of age. Of course, it's higher again for developed countries… that’s phenomenal!

Innovation, at the market level, drives much of this prosperity and, at the level of the individual firm, innovation is an essential ingredient of competitive advantage.

Squeezing every last drop out of the innovation lemon requires trade-offs, and if you don't make these trade-offs consciously, they'll be made for you: in that case, you'll get whatever you get.

In this episode, I look at the factors that you need to balance in order to maximize the innovation that drives long-term value and competitive advantage—without letting it get out of control. You need to balance:

• Long-term versus short-term value;

• Process control versus creative adaptation;

• Centralized versus decentralized decision-making; and

• Accountability versus collaboration.

BALANCING SHORT-TERM AND LONG-TERM VALUE

One of the biggest enemies of future value is current performance. There's often a trade-off to be made between short-term, immediate results and long-term benefits. This is where the scene is set for innovation… or not.

Our political leaders seem to find it almost impossible to make long-term decisions. Doing things that are going to improve their chances of being reelected in the short-term will always trump their willingness to do the hard things that create long-term value for their constituents.

Chief executives of major corporations—with an average lifespan of about five years, and long-term incentives to match—find it really hard to invest in more future-focused value opportunities, beyond their quarterly earnings guidance. Given a choice between investing, say, $1m into developing a new product that has to be built from scratch, as opposed to investing $1m to generate more sales for an existing cash cow product? Well, the choice rarely falls in favor of the new innovation.

I've spoken at various times in the last five years on the No Bullsh!t Leadership podcast about short-termism, and it can have a significant impact on innovation. A couple of older episodes you might find valuable are:

• Ep.115: Does Innovation Create Value?, and

• Ep.203: Defending Against Disruptive Innovation.

Companies need to be profitable if they’re going to innovate, so the whole people before profits thing is a bit of a misnomer. Profitability brings choice; it generates employment; it underpins the long-term sustainability of any firm; and it enables investment into innovation.

If you’re struggling to turn a profit with your existing products and services, you’re extremely unlikely to reinvest in new products and services. Innovation is going to be totally stifled.

But even when you do have healthy profits, it can be really tricky to determine how much you should reinvest into market development (that is, growing today's profitability), as opposed to product development (which is creating profitability for tomorrow).

Highly innovative companies rely on a constant flow of new product ideas through their innovation pipelines. You can measure innovation at scale in a number of ways. The number of patents filed has always been a strong indicator of innovation.

The most prolific innovators are household names like Samsung, IBM, Apple, Canon, and LG. The top dozen or so most innovative companies each filed over 2,000 patents, just last year. This is built into their strategy, their funding, their investment processes, and their culture. Their mantra is to innovate or die, and they all have incredibly successful businesses competing in today's market, which supports the innovation that's going to build their future.

The very first step in squeezing the juice from innovation is to take a very deliberate approach to it:

• If you're in a position to do so, set aside quarantined funding, which can't be subsumed into the day-to-day demands of the business;

• Have targets for innovative breakthroughs; and

• Dedicate resources to it.

It's important to recognize, though, that innovation isn't just about inventing new widgets. At CS Energy, our strategic vision for the future (which was targeted to the year 2030), stated that 30% of our earnings would come from products and services that we weren't currently delivering.

We had a burning platform—if you'll pardon the pun—because almost all our revenue was generated by selling electricity from our coal-fired power stations. That could only last for so long, before the products of the future replaced them. So we started diversifying through innovative commercial deals, like our joint venture with retail business, Alinta Energy. This opened up new markets and new sources of revenue. And that’s squeezing the innovation lemon.

BALANCING PROCESS CONTROL AND CREATIVE ADAPTATION 

The second trade-off in the world of innovation is the trade-off between process control and creative adaptation. This is much trickier to manage than the trade-off between short-term and long-term value because it's much less visible. It's sometimes really hard to see where processes are being circumvented and people are making it up as they go along.

Processes are essential in any organization, and companies that execute really well have robust, mature processes to control their activities. Processes give us many advantages. They:

• Provide consistency of approach;

• Enable reliability and repeatability in how jobs are done;

• Reduce variation from established work practices;

• Reduce the cost- and time-intensity of tasks; and

• Mitigate key person risk.

But if you become a slave to process, it can stifle creativity.

Leaders start to focus too much on people doing things the same way. People stop thinking about whether the existing process is actually the best way to do something. And, sometimes even the processes themselves escape scrutiny, as people learn to rely on them without question.

Having led industrial businesses, I know how dangerous that can be… literally.

Process innovation can be a real source of value. Making incremental improvements to existing processes delivers greater efficiency and productivity. This is the better/faster/cheaper style of innovation. It drives sustainable competitive advantage, because any advantage that's embedded in organizational culture and process is really hard to replicate.

The only way to do this is to create a balance between following the process, and questioning the process.

The people closest to the work are the ones who are going to be able to see the inefficiencies, and these mostly arise due to snags, waste, rework, and complexity. But to make meaningful innovation in processes, a few things are essential:

• A respect for the existing processes, so that people don't just choose to do things their own way;

• A cultural expectation for every individual to question whether or not there's a better way to do something;

• A really good understanding of risk, and people's ability to articulate and manage those risks in their own work environment;

• Clear accountability and ownership of each and every process; and

• A simple method of challenging a process, and approving any changes.

Innovating processes isn't sexy, but it can be incredibly valuable. When you lead any team in any industry, there has to be a culture of continuous improvement to underpin the day-to-day work. Poorly designed or inefficient processes really drain your resources.

There's one other critical consideration when we talk about processes and innovation. If you focus too heavily on making incremental improvements to processes, it can distract your people from the main game. As long as your people are in the minutiae of process improvement, the big value drivers that they contribute to can be compromised or put at risk.

And, therein lies the complexity of process control versus creative adaptation. You're trading off the consistency and repeatability of processes with the awareness to modify those processes to make them more efficient. And you're trying to do this without distracting from the overarching deliverables that the processes are designed to serve.

This is by no means easy.

BALANCING CENTRALIZATION AND DECENTRALIZATION

Innovation can be greatly affected by your choices around centralization and decentralization of activities.

Centralization tends to reduce innovation, but it's a necessary evil, particularly in larger organizations. Centralization delivers economies of scale; it enables rare and valuable expertise to be pooled so that every part of the business has access to it; it provides essential oversight and control so that no one business unit can go rogue; and it provides a point of reference for making cross-business line decisions that affect the whole company: decisions like, where's the most useful place to invest our scarce resources?

But like anything, there's a downside to the level of control, centralized expertise, and company-wide oversight that this model offers. It often means innovation is stifled. People fall in line with the expectations that come from the mothership, and they stop thinking outside the box. And whereas this can provide a level of predictability and certainty in the short-term, the opportunity cost is sometimes really high for the long-term outlook of the business.

One way to combat this is to use the power of the centralized approval processes to encourage decentralized innovation.

I saw an awesome example of this many years ago when I was doing a short stint of consulting work at Qantas, the flying kangaroo. I distinctly remember seeing posters scattered around the Qantas head office in the heart of Sydney's downtown metropolis.

This poster had a bright yellow background and a black silhouette of a person's body from the chest up. The bold caption screamed, “$50,000 reward”. When I read the copy below, the basic gist was that any person who came up with an innovation that was implemented into Qantas's operations would be paid a $50,000 cash bonus.

I remember at the time feeling as though this was an incredibly smart way to encourage innovation. It used the power of the centralized model to its advantage. Decision-making accountability for which initiatives to implement was retained centrally, so there was really strong governance over the process. But the power was delegated to the teams where people were close enough to the action to recognize the innovations that would really make a difference.

And motivation was really high as, back then, $50,000 was a substantial amount of money for any employee below senior management.

Regardless of where the structure, the hierarchy, and the organizational power tend to pool, the most valuable innovations are going to be driven from a point that's much closer to the action. And unless we're talking about the massive R&D initiatives that drive industries like biotech and pharmaceuticals, the balance of power between centralized control and decentralized autonomy will always be a trade-off that requires careful thought and planning.

BALANCING COLLABORATION AND ACCOUNTABILITY

To finish off, let's just think about the trade-offs that we need to make between collaboration and accountability.

Collaboration can be a huge driver of innovation, as people exchange and refine their ideas. They can toss alternatives around, pressure-test them, and create unique solutions. But quite often, collaboration degenerates into consensus-driven groupthink.

Accountability for making decisions is still the key to getting sh!t done. And in my view, accountability should always be the dominant consideration—but it's a fine line to tread.

When an individual is accountable for a result, they often focus on that result too narrowly. There may be a number of potential innovations that would not only deliver a better result in the short-term, but provide lasting long-term benefits for the company. And, quite often these are dismissed fairly quickly because they might require additional time and effort to produce right now. This is an innovation killer.

In this scenario, we can see all our trade-off considerations coming into play simultaneously: long-term versus short-term value; centralization versus decentralization of control; process discipline versus flexibility; and accountability versus autonomy.

Without clear accountability for decision-making and delivery, things tend to go south pretty fast. Whereas single point accountability is essential, the trade-off between accountability and collaboration can be especially tricky, because it depends almost entirely upon the accountable person.

If the accountable person is, by nature, collaborative and consultative, then you're likely to get a more open approach to innovation. Exploring, listening, and deviating from a process is much more likely to happen when the accountable person is a natural collaborator. But if the accountable person is purely results- and task-focused, a lot of potential innovation will be stifled, no matter what its value might have been.

Equally, a lack of clear accountability leads to long, drawn out discussions and consensus-seeking, and this is damaging in a different way: the people involved in the collaboration stop examining the merits of other people's perspectives, and instead focus on the popularity of their perspectives. They hesitate to challenge other people's assertions, because that would open the door to having their own assertions challenged. So, they become excessively polite.

When accountability is weak or unclear, we can fall into the culture of decision-making by consensus and management by committee. And the endless, soul-destroying rounds of appeasement rob us of any drive we might've had to fight for a better outcome. When this happens, collaboration becomes an innovation killer rather than an innovation accelerator.

SET THE INNOVATION FRAMEWORK, THEN LEAD!

We tend to use the term ‘innovation’ pretty loosely these days. It has almost become a meaningless buzzword. To squeeze the juice out of your innovation capability requires real thought, some explicit trade-offs, and of course, strong leadership.

Your people will solve problems; they will find better ways to do things; and they will fuel your long-term growth strategy. But only if you create a culture that's conducive to bringing those innovative ideas forward, and you wrap that culture in a cocoon of strong governance and oversight that's conducive to smart decisions.

If you can manage to do that, the next step is even harder: keeping your people motivated to continually push their ideas forward… and that's a topic for another day..