Building blocks of success

Volume 8 Number 5 May 14 - June 9 2012

Innovation can be a powerful accelerant for the future prospects of a business, even an entire economy. Now new research from the University’s Faculty of Business and Economics has identified the key components of innovation within organisations. By Eoin Hahessy.

Innovation is a much sought-after ingredient by companies in all sectors and policy makers in every economy. It has the power to catapult a company to become a leader amongst its competitors and ignite a country to become an economic powerhouse.

Forward thinking policy-makers across the globe actively try to create the conditions that will allow innovation to flourish, and certain companies intricately fine tune their internal set-ups to ensure they can engender innovation.

The rewards of tapping the potential of innovation can be significant.

Apple, the poster child of innovation, has spearheaded innovation in the field of consumer electronics and has contributed significantly to the US economy. Toyota, through the development of its Hybrid Synergy Drive technology, has become a world leader in hybrid cars, and companies such as Google, Facebook and Starbucks have all drawn from the well of innovation, and grown rapidly as a result.

Neglecting innovation within a company can be fatal and even formerly strong market leaders can be vulnerable. Just ask Kodak. There are numerous stories relating to companies that were once at the forefront of innovation in their industry but which now litter the corporate graveyard, replaced by companies with faster, simpler, and better technology.

In fact, not just companies, but whole industries - such as those involved in producing typewriters, instant cameras, and cassette tapes - have come and gone in the last century.

The idea that innovation both creates and destroys, which the economist Joseph Schumpeter so eloquently characterised to as ‘the gale of creative destruction’, is a very powerful insight. It hints at the fact that innovation makes our life better by producing cheaper and more convenient products, but that it also comes at some cost since workers are often displaced (and companies go bankrupt) as a part of the industrial evolutionary process.

According to Associate Professor Paul Jensen, an industrial economist specialising in innovation economics at the Melbourne Institute of Applied Economic and Social Research, the causes and effects of innovation are complex.

“Innovation is a very risky undertaking. Although it is often the case that the most successful firms are likely to be highly innovative, the fact is that many innovative companies also go bust,” he says. “New firms thrive in innovative industries, but are often more susceptible to macroeconomic downturns such as the recent global financial crisis, since they don’t have the cash reserves to insure themselves against temporary falls in demand”.

Within Australia there are companies setting the pace when it comes to innovation, illustrating to other sectors of the economy just how it can be achieved.

Professor of Management in the Faculty of Business and Economics, Danny Samson, recently conducted a project with the Department of Innovation, Industry, Science and Research, to identify the key principles of innovation common to innovation leaders.

Professor Samson says the aim of the project was to show that no matter what size a company is, certain principles can be adopted to drive innovation.

“We wanted to examine in detail both large and small innovative companies operating in Australia which consciously adopted a competitive strategy that is at least partly - if not significantly - based on their innovation capability.”

The result of this project was the creation of an in-depth report, ‘Innovation for Business Success – achieving a systematic innovation capability’, which examined the building blocks of innovation and identified successful principles adopted by ten Australian-based companies across varied industry sectors. Within the report Professor Samson underscores the importance of five key building blocks that can create the foundation for systematic innovation within a company.

The first block is strategy. A company must take the decision to state explicitly and consistently its strategic aim to be innovative, and engage actively and relentlessly in activities that drive innovation across the company.

The second key building block to ensure innovation within a company, according to Professor Samson, is that the operating practices and resources of a firm must be geared towards qualified risk taking, as opposed to conservatism or a ‘don’t change’ attitude. The report describes how some companies worked to ensure this occurs, with for example the Indian company Tata having an annual competition known as Innovista to inspire innovation amongst its staff. Locally, Lonely Planet has ‘Innovation days’.

A third crucial building block to create innovation is measures of performance within a company. “What gets measured gets done still applies and if a company wishes to create innovation, key performance indicators related to it are a necessary ingredient,” he says.

Ensuring staff are recognised and rewarded for innovation contributions is the fourth building block towards creating innovation.

“What gets measured gets done, but what gets measured and rewarded gets done very well. Our most innovative firms have systematic ways to measure innovation effectiveness, and they recognise and reward the people who contribute.”

The final building block to cement the process of innovation within a company is to instil a culture and behaviour towards innovation. “Firms must work to ensure innovation is second nature and embedded as part of daily work and not an addendum on Friday afternoons,” he says.

Professor Samson’s report cited the Minneapolis-based food manufacturer, General Mills, as one company which worked hard to ensure this outcome. It sent several employees to observe and learn from the fast changeovers applied in the pits at NASCAR races, which could then be taken away and applied to their production lines. Within months they had reduced changeover time on their production lines from three hours to 13 minutes. Innovation can be as much about process improvements and cost reductions as it is about new offerings to the market.

In addition to analysing these five crucial building blocks of innovation, Professor Samson’s report identified ten innovative Australian based companies, both foreign and locally owned, and varied in types and sizes, that spanned radically different industries such as tourism, car manufacturing, electronics, textiles, computers and mining.

“We carefully selected a group of companies which were substantial and successful innovators to take part in the study,” Professor Samson says. Interviews were conducted with senior executives in each company and analysis was undertaken to determine the underlying principles common to these effective innovators.

Through this work twenty principles of innovation were ascertained.

“From the companies we studied, we found that although they differed very much in size and structure, industry, and product or service offerings, deep down there were some common success factors. These were deep principles, not only of innovation, but also of the capability to successfully implement a series of innovations. I call it Systematic Innovation Capability.”

One of the salient principles in the twenty identified in the report is that of leadership. Strong, determined, energetic and dynamic leadership was a common feature of all the ten companies studied, and was one of the most important principles identified. Without the right leadership, the researchers found that resources would not be allocated or focused on innovation, measures would not be right, and so firm-wide innovation behaviour would not be in place.

Another principle identified among these ten companies was that innovation was achieved by involving partners from outside the organisation. There was a large degree of openness amongst these companies and they recognised that a firm does not have to work on its own in its innovation efforts. Toyota was one example of this. It placed its staff on secondment for extended periods so their suppliers became familiar with the ‘Toyota Way’.

An additional feature of these companies and a principal identified by Professor Samson in the report was that sustainable development objectives such as waste reduction, staff well-being, and environmental output improvements, went hand in hand with innovation.

“Sustainable development ideas are by definition innovations. In order to engage in energy use reduction, or staff well-being processes, innovation is required and changes are implemented. The concepts of innovation and sustainable development are entirely complementary. One can spur on the other,” he says.

The Department of Innovation, Industry, Science and Research has now condensed into a booklet the twenty principles of innovative companies identified in Professor Samson’s report, to encourage companies to reflect on their own approach to innovation.

Professor Samson believes the psyche of Australian business is ideally attuned to drive innovation and process improvement and he illustrates how in a new book, called Implementing Strategic Change.

“The book shows that nearly a day and a half of the five day working week is lost through a wide range of activities that don’t lead on to the next functional step in a particular process. We demonstrate how employees and managers can work together to identify wasteful activities, and we show how to create process changes and opportunities for both employee and employer in less than a month. Making such opportunities visible and widely acknowledged may help to prompt to engage Australians to make strategic gains from redeploying what amounts to a misappropriated $125 billion per annum of people’s time,” he says.

“The productivity of all organisations can be significantly lifted. The devil is in the detail of on-the-ground process innovation and we now know how to achieve it very efficiently.”

Professor Samson is of the opinion that innovation offers Australian companies the possibility of competitive advantage.

“Australia is an expensive country when it comes to labour costs, so we cannot compete on that front anymore. Likewise the old adage that Australian products while costing more are made better, is also ringing hollow, as low cost countries have improved their quality. Today, superior systematic innovation capability is where this country can compete and offer competitive advantage. Innovation is the ultimate competitive weapon, both in processes and in products and services.”

Professor Samson is conducting a larger national study on this subject later in the year that will involve the Australian Institute of Management.

“This report sheds some light on the principles of innovative companies but our aim is to explore this further so the possibility of unleashing innovation across the Australian economy can be driven harder and faster.”

Professor Samson’s book, co-authored with Tom Bevington, Implementing Strategic Change: Managing Processes and Interfaces to Develop a Highly Productive Organization, published by Kogan Page, UK is available in May 2012.