The DNA of the World's Most Innovative Companies

Innovation makes millionaires and undermines monopolies. It raises the profitability of companies and puts a premium on the shares of the most successful. But how can companies foster it? New research sheds light on the innovation process and how firms can tap into it to raise their performance and their share price.

Innovative business leaders typically share certain qualities. They are always asking questions, experimenting, observing and networking. While building on past successes, they keep the doors open to future innovation.

 

In a world where success often breeds more success, such behaviour can boost the market value of their companies well beyond what current profitability would justify. In a newly published study of what makes a successful innovator, “we looked at people who lead incredibly innovative companies”, says Hal Gregersen, INSEAD Senior Affiliate Professor of Leadership and Director of the Learning to Lead executive education programme and one of the study’s co-authors. “And we realised that these companies seemed to be incredibly valuable.”

In reaching this realisation, Gregersen and his co-authors, Jeffrey H. Dyer of Brigham Young University and Clayton Christensen of Harvard Business School, had hit on what they call the “innovation premium”. And in their book, “The Innovator’s DNA”, they explain how for some of the world’s most innovative companies it can add 50 percent or more to their market value.

“Investors pay a stock price based upon two things,” says Gregersen. “One is the cash flow - the money coming from existing products, services and markets. The other is the belief that the company will develop new markets, new services and new products tomorrow.”

More jam tomorrow

Take a company like Amazon. Given its reputation, suggests Gregersen, an investor might well say: “I’ll pay you this amount for your stock for the existing products and services, and for the markets that you’re in. But I also believe you will do something different in the future. You’ll have new markets. You’ll have new services. You’ll have new products you don’t even have today - and because of that, I’ll pay you a premium.”

Building on this insight, Gregersen and his co-authors worked with HOLT, a unit of Credit Suisse Group, to draw up an innovation premium roll-call of innovative companies based on analysis of the relationship between their cash flow and their share price. To qualify, companies had to be listed on a stock exchange and have a market capitalisation of at least US$10 billion. They also had to have published financial statements over at least the past seven years.

The results were striking. Companies like Toyota, Sony and Samsung, which frequently feature on other lists of innovative companies, sank to negative ratings. In their place emerged a number of unexpected and relatively unknown companies - firms like California-based Intuitive Surgical, which builds systems for robotically assisted, minimally invasive surgery, Natura Cosméticos, a Brazilian manufacturer of cosmetics made from plants from the Amazon forest, and Keyence Corporation, a Japanese producer of electronic sensors for automated factory systems.

Cut-throat car market

The list includes household names like Amazon, Apple and Google. But what makes it different from other similar lists is that it ranks firms not just by past achievements but by what investors expect going forward. “Our list is future-looking, forward-looking and it’s based on past performance predicting the future,” Gregersen explains. “These are organisations that systematically, over at least a five-year period, have generated this kind of premium. Investors bet with their wallets: this company is innovative, not only now but in the future.”

Common to all companies on the list is the fact that their share prices are 25 percent or more above what would be justified by cash flow alone. The leader is cloud computing company Salesforce.com, with its AppExchange that offers more than 1,000 applications for businesses, and which recently launched Chatter draws on features of Facebook and Twitter to provide social software for enterprise collaboration. Market expectations for further innovations have given it a premium based on 2010 results of no less than 75 percent. Bringing up the rear, PepsiCo scrapes in at number 50, with a premium of 25.45 percent. Companies like Toyota and BMW, by contrast, despite their known capabilities for innovation are nowhere to be seen. That, says Gregersen, is because investors expect them to find it hard to earn dividends from new innovations in the face of tough competition from Chinese manufacturers in today’s cutthroat car market.

Think different, behave different

So how do companies develop the innovative qualities that enable such results? “There are three elements to this,” says Gregersen. “The people in the company, the processes they have and the philosophies they have.” The essence of the innovator, he adds, is that he or she not only thinks differently from other people, but also behaves differently.

Take Steve Jobs, the founder of Apple. “If we walked into his world and followed him for a day, we could see him behaving in ways that will generate new ideas. He lives the Innovator’s DNA skills. He observes the world really carefully. He talks to all different kinds of people. He’s more than willing to engage in different kinds of experiments, constantly peppering the world and the people around him with questions that provoke people and challenge the status quo.”

Or take Mike Lazaridis, founder and co-CEO of Research in Motion, the firm that gave the world the BlackBerry, or Scott Cook, the founder of Intuit. They, too, are always asking questions and looking out for the unexpected: “Why not this? Why couldn’t we do that? What’s going on here? How could we do this better?” When someone “behaves that way, acts differently, asks lots of questions, observes like an anthropologist, experiments constantly, networks for new ideas,” Gregersen observes, “they’re likely to get incredibly insightful ideas about new businesses, new products, new services, breakthrough processes: things that will make a difference for any company or country.”

Down on the farm

That’s something most companies in today’s environment would pay dearly for. And the good news for those who really want to innovate is that, given the right environment, innovation can be within the reach of anyone.

“About 25 to 30 percent of our innovation capacity is a genetic component, it’s our DNA,” says Gregersen. “But that’s one-third of the equation. The other two-thirds is the world we live in. It’s fascinating when we interview these famous entrepreneurs to realise that they grew up in worlds where adults paid attention to these innovation skills.” Most often these adults were parents and grandparents, but in about one-third of the cases they were master teachers at Montessori or Montessori-like schools.”

To show how curiosity and willingness to experiment can be nurtured, he cites the founder of Amazon, Jeff Bezos, and the chair of Bain & Company, Orit Gadiesh. “Bezos had grandparents who taught him and reinforced to him that experimentation matters. He lived on a farm with them in the summertime and when things broke down, they fixed the things that broke down. They learned that when you try and experiment you can figure out a solution.”

As for Gadiesh, “She grew up in a family where questioning was everything and it was reinforced to her that she question. So they both not only had some genetics around these skills, but they grew up in a world that said ‘keep them, pay attention to them, use them, do something with them’. And then when they became adults they actually went out and did something with them.” 

Talk to us about our 28 day program to strengthen your innovation capabilities to drive growth. 

Everybody’s job

What lessons does Gregersen draw for other firms that want a piece of this innovation bonanza? Firstly, innovation starts at the top. “Companies on this list are led by leaders who spend at least a day more a week than a non-innovative CEO doing these innovation skills: asking provocative questions, going out there and making real observations and not relying on second-hand data.”

Secondly, innovation must be allowed to permeate every level of the company. In a truly innovative company, innovation has to be everybody’s job. “It’s just part of what you do when you walk in through the door today when you come to work. You need to figure out a better way, a more innovative process, a better product, better service.”

Finally, however, a warning: innovation can be disruptive, and in a company with no innovation philosophy, it’s likely to be unwelcome. In this case, says Gregersen, a would-be innovator faces a Catch 22 situation. “If I’m in a company that’s not innovative and I just do what they ask me to do, I’ve sealed my fate to not have a future. If I start engaging these skills, on the other hand, I may get a lot of pushback and irritation, and I may even get fired.”

In such a worst case scenario, he concludes, it’s time to use these skills in a more receptive environment, so as to “create a future that otherwise won’t be there”.

The book's research led to the publication by Forbes of the Innovation Premium List of the 100 most innovative large companies in the world. via knowledge.insead.edu & Nichloas Bray. 

 Consulting, Speaking & Coaching. Driving Growth through Innovation  

Innothink Group is a strategic management and innovation consultancy. Where many consulting firms are reluctant to bear risks or tie their rewards to project outcomes, we decided to build a better model. We align our success with yours. We’re outcome obsessed, outcome paid, putting over a third of our fees at risk subject o hitting predetermined milestones. More than a guarantee we wanted from the outset to create true partnerships. 

For speaking, coaching or consulting inquiries contact: 

CEO Jim Woods

+1 719- 649-4118

 

For Some of the World’s Poor, Hope Comes Via Design and Innovation

It is late. About 12:10 in Colorado Springs. I am fascinated by the social and business ramifications associated with Mike Kimmelman's New York Times story on design and technology through "Why didn't someone think of this before" solutions. The photos below provide a multitude of implicit ways to better the world locally. Indeed Kimmelman’s article is awe inspiring not from the standpoint of observation but transformative participation. Which is the point. 

Below a renovated public walkway, along the canal in Bangkok, where residents are helping to design cleaner places to live. With families in flimsy homes on stilts above polluted waters, architects from nearby Sripatum University were enlisted to devise row houses, detached houses and semidetached houses, along the lines of what residents said they wanted.

via nytimes.com

In the photo above the solution is absolutely simple. They have enriched a community. That enriches familes. Do you think the value of the improvements have been achieved? 

A community cooker is fueled by refuse that residents collect in return for time using the oven.

A few solutions:

1. a filtered drinking straw that prevents the spread of typhoid and cholera
2. a bamboo treadle pump that helps poor farmers in Cambodia and India extract groundwater during the dry seasons
3. The Q Drum, a doughnut-shaped plastic container, easily rolled, even long distances by children, which is used to transport up to 13 gallons of water.  I suggest reading this article in entirety via New York Times.

 Consulting, Speaking & Coaching. Driving Growth through Innovation  

Innothink Group is a strategic management and innovation consultancy. Where many consulting firms are reluctant to bear risks or tie their rewards to project outcomes, we decided to build a better model. We align our success with yours. We’re outcome obsessed, outcome paid, putting over a third of our fees at risk subject o hitting predetermined milestones. More than a guarantee we wanted from the outset to create true partnerships. 

For speaking, coaching or consulting inquiries contact: 

CEO Jim Woods

+1 719- 649-4118

IDEO’s chairman and founder David Kelley talks about regaining creative confidence: Innovation 101

Innovators aren't exceptional as much as they are confident. So says David Kelley, the founder of the venerable Palo Alto, Calif., design firm IDEO.

Mr. Kelley, whose company is responsible for designing a wide range of products and services, including the modern computer mouse, believes—and research suggests—that virtually everyone has the capacity to innovate. It's just that somewhere around the fourth grade most of us stop thinking of ourselves as creative, he says, so our ability to innovate atrophies.

Mr. Kelley has made it his life's work to help people regain their creative confidence. In his three decades as a designer and as a professor in the design program at Stanford University's engineering school, from which he graduated in 1978, Mr. Kelley has developed a set of techniques for solving all kinds of problems—techniques that he came to believe could be taught as a methodology. His approach is called "design thinking."

Six years ago, with a $35 million gift from German software magnate Hasso Plattner, co-founder of SAP AG and a onetime IDEO client, Mr. Kelley founded the Hasso Plattner Institute of Design at Stanford—dubbed the d.school—a nondegree program that draws students from all seven of Stanford's graduate schools. The program aims to help students unlock their creative potential by teaching them to become, among other things, more open to experimentation, more comfortable with ambiguity and less afraid of failure.

Teaching the Process

The best way to unleash creativity, Mr. Kelley says, is to give students an "experience," or in d.school speak, a design challenge. Under his teaching model, however, students aren't just handed a problem to solve—they must define the problem themselves through research and direct observation.

David Kelley says most of us stop thinking of ourselves as creative somewhere around the fourth grade

One group of students, for example, was tasked with designing an incubator for the developing world, where infant mortality is high and expensive incubators are scarce. But when the students were dispatched to Nepal to spend time with mothers and doctors, they found that most births take place in rural areas far from hospitals, so flooding hospitals with cheaper incubators would be of no use to most premature and low-birth-weight babies.

Equipped with this knowledge, and, as Mr. Kelley sees it, a newfound empathy for their subjects, the students reframed the problem. "This was about keeping babies warm, not cheaper incubators," explains George Kembel, executive director and co-founder of the d.school.

The second step in the process is "ideation," where students visualize and brainstorm potential solutions with one another. The students decided that what was needed was an inexpensive baby-warming device that could function in rural communities—one that was transportable, simple to use and sanitize, and worked without electricity.

Next comes "prototyping." The students made sketches and three-dimensional models of potential incubators that they could test, modify, and test again, in an iterative process that is at the heart of design thinking. By the end of the class they had a finished prototype—a kind of sleeping bag made of special material that could be wrapped around a premature infant and kept clean and warm with nothing more than boiling water. The students went on to form a nonprofit company in the hopes of bringing their Embrace incubator to market.

Mr. Kembel says the learning experience at the d.school is centered on a few basic beliefs. One is that people learn by doing, so the more projects students tackle the better. The same goes for developing prototypes. Speed and quantity are encouraged in the hope that students will fail early and often. "If you go through lots of little tests, you learn more than if you just do one test," says Mr. Kembel.

Another guiding principle is that people learn best by collaborating with others who have radically different points of view, so classes should be made up of students and teachers from a variety of disciplines—the more the better.

Moreover, "everyone needs to have an equal voice," says Mr. Kembel, "because everyone in a sense is learning, even the faculty." So the old model of teacher at podium lecturing students has been thrown out in favor of classrooms that look more like studios, with tables and chairs scattered about.

Mr. Kembel says a lot of time at the d.school is spent helping students unlearn things they learned in elementary school. Fear of failure is rampant among students who have been drilled in standardized-test taking, he says. "What we want the graduate students to do is work with others and go out and take risks," says Mr. Kembel.

Making Waves

The d.school is reporting progress on several fronts.

It now enrolls 700 students per year, up from 30 six years ago. Applications are running at two to three times the number of available slots, Mr. Kembel says, and increasing numbers of students are choosing to attend Stanford because of the d.school. He also says employers are starting to seek out students with d.school credentials.

The d.school has produced several companies, including d.light design, which makes solar-powered lanterns for the developing world; Alphonso Labs, which markets Pulse, a news-reading application for iPhone, iPad and Android devices; and of course, Embrace, which hatched from the incubator project.

Almost weekly, educators from around the world make the pilgrimage to Palo Alto to take tours and get advice on how to set up d.school-like programs of their own. Dozens of colleges have programs in various stages of development.

More recently, the d.school has been teaching K-12 teachers how to employ design-thinking techniques in their classrooms. Last year alone, more than 500 educators attended workshops at the d.school's K-12 lab. Research is under way, but early indications are that K-12 students exposed to design thinking are more engaged and motivated to learn, say Rich Crandall, director, and Adam Royalty, founding member and lead researcher, of the K-12 lab.

To Mr. Kelley, that is the Holy Grail of design thinking. He says it is behavioral change that enables students to gain innovation confidence, something he believes is as important as gaining literacy skills. "For me this is a mindset," he says. "It's a way of thinking that you can use in every part of your life."

Ms. Geer is a writer in Connecticut. She can be reached at reports@wsj.com. via online.wsj.com

 Speaking 

As the CEO and founder of InnoThink Group, Jim can help your organization enhance the strategic innovation and competitiveness of your business policy and strategy, with an emphasis on increasing top line growth. 

If you’re interested in having Jim speak at your next event, simply use this form to send us your details and speaking requirements, and we’ll be in touch shortly. Or you may call us at 719-649-4118. Thank you!