Innovation, Strategy, and your Innovation Strategy

What’s your innovation strategy?

The question often stumps executives, who tend to think innovation is something outside the normal work routines, not something that can and should be directed. Yet how much of your company’s strategic plan depends on innovation — on the development of new products, new processes, or (often) both — that will provide tomorrow’s competitive advantage?Most of a company’s strategic plan is about re-allocating investments in existing activities: growing the marketing budget in South America, shifting manufacturing capacity to Asia (or now back to the U.S.), shuttering underperforming units. And yet a non-trivial portion of almost everyone’s strategic plan includes innovation-driven growth. Not just doing more of the same thing, but doing new things.

In one consumer goods company, for example, the overall growth strategy called for $2 billion in growth over the next five years, and innovation — “new products” — accounted for roughy 50% of that growth . When I asked how they were investing to build $1B in new business, I heard the usual wing-and-a-prayer response: “we rely on the individual units to come up with those innovations.”

In other words, innovation is not something they wanted to direct from the top. In a way, they’re right. But without the right investment in capabilities, the individuals, teams, and business units that might drive innovation can’t be expected to either.

An Innovation Strategy represents how the firm’s focus, investments, and capabilities will support the kind of innovation that will serve the firm’s overall strategy. What will it take, in other words, for a particular company to generate $1B in new business through innovation over five years?

The answer will be different for a particular company at a particular time and with each particular strategy they consider.

Apple_store_silhouettes

Take Apple’s retail stores. Apple launched their retail stores in 2001 — a strategic response to the company’s shrinking presence and poor performance in the major retail chains like Best Buy and CompUSA. This strategy for growth was immediately shot down by critics: BusinessWeek titled their 2001 response, “Sorry Steve, Here’s Why Apple Stores Won’t Work;” “It’s desperation time in Cupertino, Calif.,” wrote TheStreet.com. “I give [Apple] two years…” predicted another.

Yet today, there are around 400 retail stores worldwide, and at $16B in revenue are responsible for 13% of the companies revenues, 14% of its profits, and over half of all employees (41,800). Jerry Useem wrote in Fortunein 2007 of the success of these stores:

“Saks, whose flagship store is down the street [from Apple’s NYC store], generates sales of $362 per square foot a year. Best Buy stores turn $930 – tops for electronics retailers – while Tiffany & Co. takes in $2,666. Audrey Hepburn liked Tiffany’s for breakfast, but at $4,032 per square foot, Apple is eating everyone’s lunch”.[18] (from Apple Stores)

How did Apple do it? Did the idea of a retail store simply occur to them—a flash of inspiration, like most stories of innovation would have us believe?

In fact, their commitment to building a retail presence was driven by their overall strategy of just maintaining a retail presence, and one that followed other attempts to achieve the same goal through deals with their existing retailers (including a “store within a store” design at CompUSA stores).

In 1999, Jobs personally recruited Mickey Drexler, who had been at the Gap since 1983, to join the board of directors. He became CEO of that company in 1995 and presided over the company as it experienced explosive growth largely due to its retailing environments and marketing rather than its products or competitive prices.

Jobs took an active role in the development of the retail strategy (not unprecedented in Apple and NeXT history) and made his next, and most important, hire himself, Ron Johnson. Ron Johnson had turned Target from an upscale K-Mart into a bastion of good design with the Michael Graves line of consumer products. Jobs led the committee that brought Graves to Target and, as retail officer, played a role in redefining the company’s brand. (from Apple Stores)

The same thing happened when Henry Ford bet the Ford Motor Company’s strategy on mass production and interchangeable parts. Rather than “invent” the process, he hired two engineers, Walter Flanders and Max Wollering, who had extensive experience building, installing, and running machine tools for the mass production of sewing machines, agricultural equipment, and other industries. As Wollering once said:

There was nothing new [about interchangeability] to me, but it might’ve been the Ford Motor Company because they were not in a position to have much experience along that line.[^1]

And in the 1990’s, as the Internet’s growth was at its peak and communications technologies were changing faster than any one company could lead, let alone follow, Cisco, feared that simply spending more money on R&D would not be enough to stay ahead of the curve. So it pursued a different innovation strategy: R&D by acquisition. Build the capability to acquire the new companies already bringing promising technologies to market. To do that, they invested heavily in the ability to identify these companies (relying on their salesforce, and customers, to do that); to analyze and act quickly on the M&A; and to rapidly and seamlessly integrate the new companies into Cisco.

What makes this different from just hiring the right people to execute to your plan? For one, you’re hiring the people who will come up with your plan (or investing in creating those people internally). For another, they’re not sure yet what they’re going to do.

Bringing in the right people and other resources helps you to see what is happening, to see what will happen next, and to see what could happen differently. Sure, inevitable changes in the market, the available technologies, and even the firm’s overall strategy means that investing in the right capabilities doesn’t guarantee success — but ignoring the necessary capabilities is a pretty good guarantee you’ll fail.

 

[^1] From David Hounshell’s brilliant book, From the American System to Mass Production, 1800–1932: The Development of Manufacturing Technology in the United States (JHU Press, 1985)