Innovator's DNA

by Jeff Dyer

  What’s New in This Edition?

  The goal of this updated edition of The Innovator’s DNA was to ensure that all of the content was cutting edge and fresh. Here are some of the things that are new in this edition.

  We’ve included stories and quotations from new interviews with folks like Jeff Bezos (founder and CEO of Amazon), Elon Musk (founder and CEO of Tesla and SpaceX), Indra Nooyi (former CEO of PepsiCo), Mark Parker (CEO of Nike), Arne Sorenson (CEO of Marriott), Len Schleifer (founder and CEO of Regeneron), George Yancopoulos (founder and CSO of Regeneron), Frédéric Mazzella (founder and CEO of BlaBlaCar), and others.

  We’ve added stories of how the original ideas were generated to launch Uber (Garrett Camp and Travis Kalanick), General Electric’s Adventure Series MRI Scanners (Doug Dietz), BlaBlaCar (Frédéric Mazzella), Owlet (Kurt Workman), and others.

  We’ve referenced new research, including our own, that provides even more empirical support for the Innovator’s DNA theories and framework.

  We’ve provided a list of the top 20 world’s most innovative companies for 2018 in chapter 7. In the original book, we provided a list of most innovative companies that was so compelling that Forbes wanted it to be that magazine’s list and asked us to create a new list each year. Since 2011, we have created an annual “Forbes 100 Most Innovative Companies” ranking in partnership with Forbes. We use companies from these lists as our models of innovation for chapters 7 through 10.

  We believe these changes will make the updated version of The Innovator’s DNA an even more interesting and compelling read.

  Finally, we want to be clear about what this book is not about. This book is about getting new ideas (at the individual or company level), not about how to test and validate a novel business idea. People often come to us with a creative idea for a new product or business and ask if it is worth pursuing (or worth pitching to their boss). Should they create a platform, like AirBnB, that connects people who need storage space with those who have extra storage space? Should they create a property-management app for landlords? For those looking for a process to test and validate an idea before making an investment to commercialize it, we recommend The Innovator’s Method: Bringing the Lean Startup into Your Organization, by Nathan Furr and Jeff Dyer, which offers a four-step method that will help you nail a customer problem, nail the solution, and nail the business model to take it to market.

  This book is also not about how you get the resources, both human and financial, to implement a novel idea. One of the difficult lessons that many innovators learn is that creativity is not enough. You need to be able to attract the necessary resources to commercialize a novel idea. Sometimes those resources must come from leaders inside an established company, and sometimes they must come from the startup financial community (e.g., VCs, angel investors). For those looking for how to be an effective leader of innovation by developing the capacity to acquire the resources needed to launch creative new initiatives, we recommend Innovation Capital: How to Compete—and Win—Like the World’s Most Innovative Leaders, by Jeff Dyer, Nathan Furr, and Curtis Lefrandt.

  But the starting point for innovation isn’t testing and validating a creative idea or getting the resources to launch the creative idea. It is getting the idea itself. And that’s why The Innovator’s DNA should be the first step in your own personal innovation journey.

  Introduction

  INNOVATION. It’s the lifeblood of our global economy and a strategic priority for virtually every CEO around the world. In fact, an IBM poll of fifteen hundred CEOs identified creativity as the number one “leadership competency” of the future.1 The power of innovative ideas to revolutionize industries and generate wealth is evident from history: Apple iPod outplays Sony Walkman, Starbucks’s beans and atmosphere drown traditional coffee shops, Tesla electric vehicles zoom past gas engine cars, eBay crushes classified ads, and Southwest Airlines flies under the radar of American and Delta. In every case, the creative ideas of innovative entrepreneurs produced powerful competitive advantages and tremendous wealth for the pioneering company. Of course, the retrospective $1 million question is, how did they do it? And perhaps the prospective $10 million question is, how could I do it?

  The Innovator’s DNA tackles these fundamental questions—and more. The genesis of this book centered on the question that we posed years ago to “disruptive technologies” guru and coauthor Clayton Christensen: where do disruptive business models come from? Christensen’s bestselling books The Innovator’s Dilemma and The Innovator’s Solution conveyed important insight into the characteristics of disruptive technologies, business models, and companies. The Innovator’s DNA emerged from an eight-year collaborative study in which we sought a richer understanding of disruptive innovators—who they are and the innovative companies they create. Our project’s primary purpose was to uncover the origins of innovative—and often disruptive—business ideas. So we interviewed nearly a hundred inventors of revolutionary products and services, as well as founders and CEOs of game-changing companies built on innovative business ideas. These were people such as Amazon’s Jeff Bezos, Tesla’s Elon Musk, Rent the Runway’s Jennifer Hyman, and Salesforce’s Marc Benioff. For a list of more of the innovators we interviewed whom we quote in this book, see appendix A. Virtually all of the innovators we quote—with the exception of Steve Jobs (Apple), Richard Branson (Virgin), and Howard Schultz (Starbucks), who have written autobiographies or have given numerous interviews about innovation—were interviewed by us.

  We also studied CEOs who ignited innovation in existing companies, such as PepsiCo’s Indra Nooyi, Procter & Gamble’s A. G. Lafley, Microsoft’s Satya Nadella, Intuit’s Scott Cook and Brad Smith, and Bain & Company’s Orit Gadiesh. Some entrepreneurs’ companies that we studied were successful and well known; some were not (for example, BlaBla Car, Cow-Pie Clocks, Terra Nova BioSystems, Owlet). But all offered a surprising and unique value proposition relative to incumbents. For example, each offered new or different features, pricing, convenience, or customizability compared with their competition. Our goal was less to investigate the companies’ strategies than it was to dig into the thinking of the innovators themselves. We wanted to understand as much about these people as possible, including the moment (when and how) they came up with the creative ideas that launched new products or businesses. We asked them to tell us about the most valuable and novel business idea that they had generated during their business careers, and to tell us where those ideas came from. Their stories were provocative and insightful, and surprisingly similar.

  As we reflected on the interviews, consistent patterns of action emerged. Innovative entrepreneurs and executives behaved similarly when discovering breakthrough ideas. Five primary discovery skills—skills that compose what we call the innovator’s DNA—surfaced from our conversations. We found that innovators “Think Different,” to use a classic Apple slogan. Their minds excel at linking together ideas that aren’t obviously related to produce original ideas (we call this cognitive skill “associational thinking” or “associating”). But to think different, innovators had to “act different.” All were questioners, frequently asking questions that punctured the status quo. Some observed the world with intensity beyond the ordinary. Others networked with the most diverse people on the face of the earth. Still others placed experimentation at the center of their innovative activity. When engaged in consistently, these actions—questioning, observing, networking, and experimenting—triggered associational thinking to deliver new businesses, products, services, and/or processes. Most of us think creativity is an entirely cognitive skill; it all happens in the brain. A critical insight from our research is that one’s ability to generate innovative ideas is not merely a function of the mind, but also a function of behaviors. This is good news for us all because it means that if we change our behaviors, we can improve our creative impact.

  After surfacing these patterns of action for famous innovative entrepreneurs and executives, we turned our
research lens to the less famous but equally capable innovators around the world. We built a survey based on our interviews that taps into the discovery skills of innovative leaders: associating, questioning, observing, networking, and experimenting. To date, we have collected self-reported and 360-degree data on these discovery skills from over twenty-five hundred innovators and over fifteen thousand executives in more than seventy-five countries (for information about our assessments for individuals and companies, go to our website: https://www.InnovatorsDNA.com). We found the same pattern for famous as well as less famous leaders. Innovators were simply much more likely to question, observe, network, and experiment compared with typical executives. We published the results of our research in Strategic Entrepreneurship Journal, the top academic journal focused on entrepreneurs (details of our study are reported in appendix B).2 We also published our findings in an article titled “The Innovator’s DNA,” which was the runner-up for the 2009 Harvard Business Review McKinsey Award.

  We then turned to see what we could learn about the DNA of innovative organizations and teams. We started by looking at Businessweek’s annual ranking of innovative companies. This ranking, based on votes from executives, identified companies with a reputation for being innovative. A quick look at the Businessweek lists from 2005 to 2010 shows Apple as number one and Google, number two. OK, intuitively that sounds right for that time period. But we felt that the Businessweek methodology (executives voting on which companies are innovative) produced a list that was largely a popularity contest based on past performance. But what about today? Indeed, we did not think that General Electric, Sony, Toyota, and BMW deserved to be on the list of most innovative companies in 2010, when we were writing The Innovator’s DNA. We felt they were on the list because they’d been innovative in the past.

  So we developed our own list of innovative companies based on current innovation prowess (and expectations of future innovations). How did we do this? We thought the best way was to see whether investors—voting with their wallets—could give us insight into which companies they thought most likely to produce future innovations: new products, services, or markets. We teamed up with HOLT (a division of Credit Suisse Boston that had done a similar analysis for The Innovator’s Solution) to develop a methodology for determining what percentage of a firm’s market value could be attributed to its existing businesses (products, services, markets). If the firm’s market value was higher than the cash flows that could be attributed to its existing businesses, then the company would have a growth and innovation premium (for our purposes, we’ll just call it an innovation premium). An innovation premium is the proportion of a company’s market value that cannot be accounted for from cash flows of its current products or businesses in its current markets. It is the premium the market gives these companies because investors expect them to come up with new products or markets—and they expect the companies to be able to generate high profits from them (see chapter 7 for details on how the premium is calculated). It is a premium that every executive, and every company, would like to have.

  Our innovation premium methodology was so compelling that Forbes wanted us to use it to create a ranking for the magazine. Since 2011, we have created an annual “Forbes Most Innovative Companies” ranking. (Note: Businessweek stopped publishing its list in 2012.) This has allowed us to continue to study, and learn from, the world’s most innovative companies.

  We unveil our list of the most innovative companies—ranked by innovation premium—in chapter 7. Not surprisingly, we found that our original top twenty-five companies in 2011 included some on the Businessweek list—such as Apple, Google, Amazon, and Procter & Gamble. These companies averaged at least a 35 percent innovation premium over the previous five years. But we also learned that companies such as Salesforce (software), Intuitive Surgical (health care equipment), Hindustan Unilever (household products), Alstom (electrical equipment), and Monsanto (chemicals) had similar premiums. And as we studied these firms in greater detail, we learned that they were also very innovative. As we examined both our list and the Businessweek list of innovative companies, we saw several patterns.

  Who Is Classified as an Innovator?

  Perhaps one of the most surprising findings from the past thirty years of entrepreneurship research is that entrepreneurs do not differ significantly (on personality traits or psychometric measures) from typical business executives.a We usually meet this finding with skepticism, since most of us intuitively believe that entrepreneurs are somehow different from other executives. Note that our research focused on innovators and, in particular, innovative entrepreneurs rather than entrepreneurs. Here’s why. Innovative entrepreneurs start companies that offer unique value to the market. When someone opens a dry cleaner or a mortgage business, or even a set of Volkswagen dealerships or McDonald’s franchises, researchers put them all in the same category of entrepreneur as the founders of eBay (Pierre Omidyar) and Amazon (Jeff Bezos). This creates a categorization problem when trying to find out whether innovative entrepreneurs differ from typical executives. The fact is that most entrepreneurs launch ventures based on strategies that are not unique and certainly not disruptive. Among entrepreneurs as a whole, only 10 percent to 15 percent qualify as “innovative entrepreneurs” of the kind we’re discussing.

  Our study includes four types of innovators: (1) startup entrepreneurs (as we described earlier), (2) corporate entrepreneurs (those who launch an innovative venture from within the corporation), (3) product innovators (those who invent a new product), and (4) process innovators (those who launch a breakthrough process). Our process-innovator category includes folks like A. G. Lafley, who initiated a set of innovative processes at Procter & Gamble that sparked numerous new product innovations. In all cases, the original idea for the new business, product, or process must be the innovator’s idea. While these different types of innovators have numerous similarities, they also have some differences, as we will show in the chapters that follow.

  a. This is evident in the conclusions of numerous studies on entrepreneurs, including the following:

  “After a great deal of research, it is now often concluded that most of the psychological differences between entrepreneurs and managers in large organizations are small or non-existent” (Lowell W. Busenitz and Jay B. Barney, “Differences Between Entrepreneurs and Managers in Large Organizations,” Journal of Business Venturing 12, no. 1 [1997]: 9.

  “There appears to be no discoverable pattern of personality characteristics that distinguish between successful entrepreneurs and non-entrepreneurs” (W. Guth, “Director’s Corner: Research in Entrepreneurship,” The Entrepreneurship Forum, winter 1991).

  “Most of the attempts to distinguish between entrepreneurs and small business owners or managers have discovered no differentiating features” (Robert H. Brockhaus and Pamela S. Horwitz, “The Psychology of the Entrepreneur,” in The Art and Science of Entrepreneurship, ed. Raymond W. Smilor [Cambridge, MA: Ballinger, 1986], 25).

  First, we noticed that compared with typical companies they were far more likely to be led by an innovative founder or a leader who scored extremely high on the five discovery skills that compose the innovator’s DNA (their average discovery quotient was in the eighty-eighth percentile, which meant they scored higher than 88 percent of people taking our discovery-skills assessment). Innovative companies are almost always led by innovative leaders. Let us say this again: Innovative companies are almost always led by innovative leaders. The bottom line: if you want innovation, you need creativity skills within the top management team of your company. We saw how innovative founders often imprinted their organizations with their behaviors. For example, Jeff Bezos personally excels at experimenting, so he helped create institutionalized processes within Amazon to push others to experiment. Similarly, Intuit’s Scott Cook shines at observing, so he pushes observation at Intuit. Perhaps not surprisingly, we discovered that the DNA of innovative organizations mirrored the DNA of innovative individuals. In
other words, innovative people systematically engage in questioning, observing, networking, and experimenting behaviors to spark new ideas. Similarly, innovative organizations systematically develop processes that encourage questioning, observing, networking, and experimenting by employees. Our chapters on building the innovator’s DNA in your organization and team describe how you too can actively encourage and support others’ innovation efforts.

  Why the Ideas in This Book Should Matter to You

  Over the last two decades, many books on the topic of innovation and creativity have been written. Some books focus on disruptive innovation, such as Clayton Christensen’s The Innovator’s Dilemma and The Innovator’s Solution. Others, such as Ten Rules for Strategic Innovators (Vijay Govindarajan and Chris Trimble), The Game-Changer (A. G. Lafley and Ram Charan), and The Entrepreneurial Mindset (Rita Gunther McGrath and Ian MacMillan), examine how organizations, and organizational leaders, encourage and support innovation. Others look more specifically at product development and innovation processes within and across firms, such as How Breakthroughs Happen (Andrew Hargadon) and The Sources of Innovation (Eric von Hippel). Other books on innovation look at the roles individuals play in the innovation process within companies, such as The Ten Faces of Innovation and The Art of Innovation (both by Tom Kelley of IDEO), or A Whole New Mind (Daniel H. Pink). Finally, books such as Creativity in Context (Teresa M. Amabile) and Creativity (Mihaly Csikszentmihalyi) examine individual creativity and, more specifically, theories and research about creativity. Our book differs from the others in that it is focused squarely on individual creativity in the business context and is based on our study of a large sample of business innovators, including some well-known innovators such as Jeff Bezos (Amazon), Pierre Omidyar (eBay), Michael Lazaridis (Research In Motion/BlackBerry), Elon Musk (Tesla), Indra Nooyi (PepsiCo), Michael Dell (Dell), Marc Benioff (Salesforce), Niklas Zennström (Skype), Scott Cook (Intuit), Peter Thiel (PayPal), David Neeleman (JetBlue and Azul airlines), and so on. The premise of our book is that we explain how these big names got their “big ideas” and describe a process that readers can emulate. We describe in detail five skills that anyone can master to improve his or her own ability to be an innovative thinker. For those of you who want to master the first of those five skills—questioning—we recommend Questions Are the Answer: A Breakthrough Approach to Your Most Vexing Problems at Work and in Life, by Hal Gregersen. For those of you who have already generated an idea and want a process to test and validate it, we recommend The Innovator’s Method: Bringing the Lean Startup into Your Organization, by Nathan Furr and Jeff Dyer and The Innovator’s Solution: Creating and Sustaining Successful Growth, by Clayton Christensen and Michael Raynor. For those who are struggling to get the attention and resources needed to launch your idea internally or as a startup, we recommend Innovation Capital: How to Compete—and Win—Like the World’s Most Innovative Leaders, by Jeff Dyer, Nathan Furr, and Curtis Lefrandt. For those who want to use the five skills to tackle poverty, one of the world’s biggest problems, we recommend The Prosperity Paradox: How Innovation Can Lift Nations of Poverty, by Clayton Christensen, Efosa Ojomo, and Karen Dillon.