Why Innovation Matters

Innovation is the key idea that is shaping corporate life, helping leaders conceive previously unimagined strategic options. Take acquisitions, as an example. Most are justified on the basis of cost and capital reduction: for example, the merger of two pharmaceutical companies and the global rationalization of overhead and operations and the savings from combining two sales forces and R&D labs. You can, however, buy earnings through acquisitions for only so long; cost-control, however necessary, is a defensive strategy.

Innovation enables you to see potential acquisitions through a different lens, looking at them not just from a cost perspective, but also as a means of accelerating profitable top-line revenue growth and enhancing capabilities. For example, the innovation capabilities of P&G were enhanced by its acquisition of Gillette. Its market-leading brands (such as Gillette, Venus, Oral B, and Duracell) are platforms for future innovations; and core technologies in blades and razors, electronics, electromechanics, and power storage strengthen the technology portfolio from which P&G can innovate in the future.

Innovation also provides an edge in being able to enter new markets faster and deeper. In large part, it is P&G's revived innovation capacity that is allowing it to make inroads into developing markets, where growth is double that in rich countries.

Innovation puts companies on the offensive. Consider how Colgate and P&G, effective serial innovators, have innovated Unilever out of the U.S. oral-care market. The company that builds a culture of innovation is on the path to growth. The company that fails to innovate is on the road to obsolescence. The U.S. domestic automakers and major companies such as Firestone, Sony, and Kodak all used to be industry leaders, even dominators. But they all fell behind as their challengers innovated them into second place (or worse).

Peter Drucker once said that the purpose of a business enterprise is "to create a customer." Nokia became number one in India by using innovation to create 200 million customers. Through observing the unique needs of Indian customers, particularly in rural villages where most of the population resides, it segmented them in new ways and put new features on handsets relevant to their unique needs. In the process, it created an entirely new value chain at price points that give the company its desired gross margin. Innovation, thus, creates customers by attracting new users and building stronger loyalty among current ones. That's a lot in itself, but the value of innovation goes well beyond that. By putting innovation at the center of the business, from top to bottom, you can improve the numbers; at the same time, you will discover a much better way of doing things -- more productive, more responsive, more inclusive, even more fun. People want to be part of growth, not endless cost cutting.

A culture of innovation is fundamentally different from one that emphasizes mergers and acquisitions or cost cutting, both in theory and practice. For one thing, innovation leaders have an entirely different set of skills, temperament, and psychology. The M&A leader is a deal maker and transactionally oriented. Once one deal is done, he moves to the next. The innovation leader, while perhaps not a creative genius, is effective at evoking the skills of others needed to build an innovation culture. Collaboration is essential; failure is a regular visitor. Innovation leaders are comfortable with uncertainty and have an open mind; they are receptive to ideas from very different disciplines. They have organized innovation into a disciplined process that is replicable. And, they have the tools and skills to pinpoint and manage the risks inherent in innovation. Not everyone has these attributes. But companies cannot build a culture of innovation without cultivating people who do.

Myths of Innovation

The idea of innovation has become encrusted by myth. One myth is that it is all about new products. That is not necessarily so. New products are, of course, important but not the entire picture. When innovation is at the center of a company's way of doing things, it finds ways to innovate not just in products, but also in functions, logistics, business models, and processes. A process like Dell's supply chain management, a tool like the monetization of eyeballs at Google, a method like Toyota's Global Production System, a practice like Wal-Mart's inventory management, the use of mathematics by Google to change the game of the media and communications industries, or even a concept like Starbucks's reimagining of the coffee shop -- these are all game-changing innovations. So was Alfred Sloan's corporate structure that made GM the world's leading car company for decades, as was P&G's brand management model.