Innovator's DNA

by Jeff Dyer

  As we analyzed these results in greater detail, we realized that investors not only cared about whether companies could produce innovations, but also cared about whether companies could generate profits from new products and services. For example, Sony (number nine on the Businessweek list) and Samsung (number twelve on the list) have historically produced innovations in the consumer-electronics industry, but investors hadn’t seen large profits from them and didn’t expect to in the future. However, competitor Nintendo (number seventeen on the Businessweek list) had an innovation premium of 26 percent, which means Nintendo not only had done a better job of generating profits from past innovations (such as the Wii), but was expected to do so in the future, giving it a much higher ranking on our list. Automakers BMW, Toyota, and Honda ranked low on our list not because they won’t innovate going forward, but because they will face severe challenges generating any profits from their innovations. Not only will these companies continue to fight ascending competitors (such as Korea’s Hyundai and China’s Chery), but a slew of brand-new competitors coming into the market, including battery-powered carmakers Tesla and Coda.

  Given the differences described, we decided to generate our own list of most innovative companies based on their innovation premium. (See table 7-2.) We focused on large public companies (more than $10 billion in market value), since the Businessweek list likewise focused on large companies. Our ranking—which we launched in 2011 as the Forbes List of Most Innovative Companies—revealed that, looking into the future, the top-ranked company was Salesforce (Marc Benioff’s disruptive cloud-computing company, featured in chapter 2), followed by Intuitive Surgical (maker of the da Vinci system of surgical robots, which we will describe later). These companies were right up there with Amazon, Apple, and Google, which ranked three, five, and six, respectively. Do Salesforce and Intuitive Surgical deserve to be at the top of the list? Investors seem to think so. Salesforce not only has led the charge with cloud computing but has also introduced the AppExchange—which Forbes called the “iTunes of business software”3 and which won awards from the Software & Information Industry Association, SD Times, and others. The AppExchange offers more than a thousand applications for businesses in much the same way that the iPhone offers a multitude of applications for consumers. Moreover, Salesforce has introduced multiple new products including Chatter, a new social software application, which it calls “Facebook for businesses.” Chatter takes the best of Facebook and Twitter and applies it to enterprise collaboration (as we describe in chapter 2).

  TABLE 7-2

  The world’s most innovative companies, 2011 (ranked by innovation premium)

  Source: HOLT and Innovator’s DNA LLC.

  Intuitive Surgical (number two) was an equally impressive innovator, having introduced robotic-assisted surgery to the world. For many surgeries—like prostate surgery—Intuitive’s da Vinci system has become the modus operandi in most operating rooms. But someday it could also play a major role in military surgical units. A surgeon in London could use it to operate on an injured soldier in any of the world’s military hot spots. The $1.5–2 million da Vinci system allows surgeons to operate using three-dimensional visualization and four robotic arms that work with a precision that most surgeons cannot duplicate. This results in smaller incisions, fewer mistakes, shorter recoveries, and reduced hospitalization costs.

  India’s Hindustan Unilever (number seven) not only has been a consumer-products innovator but, as described in chapter 3, has also used an innovative network-marketing approach to sell its products through thousands of underprivileged rural women throughout India. This has allowed Hindustan Unilever to sell in over 135,000 villages and become the most trusted Indian brand—used by two out of three Indians. The United Kingdom’s Reckitt Benckiser Group (number eight) has been an innovation powerhouse with roughly 40 percent of revenue in recent years coming from innovations launched in the prior three years. Many ideas come through networking with outsiders via its RB-Idealink website, where it lists jobs that need to be done and requests solutions. Denmark’s Vestas Wind Systems (number eleven) won the “Innovation Cup” as the country’s most innovative company. It is the world’s leading supplier of wind-power solutions and has spawned a number of innovations, including floating foundations for wind-power stations at water depths of over thirty meters.

  We believe our list better identifies the current and future innovators and is consistent with A. G. Lafley and Ram Charan’s argument that “an innovation is the conversion of a new idea into revenues and profits . . . In fact, there is no correlation between the number of corporate patents earned and financial success. A gee-whiz product that does not deliver value to the customer and provide financial benefit to the company is not an innovation. Innovation is not complete until it shows up in the financial results.”4

  If you agree with this statement, you probably prefer our ranking methodology to the Businessweek methodology. In fact, after launching our first list in 2011 with Forbes, the popularity of our list continued to grow and the popularity of the Businessweek list declined until the publication finally decided to drop the list. Our most recent Forbes list, of the top 20 for 2018, is shown below in table 7-3.

  TABLE 7-3

  The world’s most innovative companies, 2018 (ranked by innovation premium)

  Source: HOLT and Innovator’s DNA LLC.

  Companies that have emerged as innovators over the past few years include key software and services firms such as ServiceNow, Workday, and Salesforce, because they are playing a key role in helping companies achieve digital transformation. Other innovative companies joining the list include Tesla (transforming the automobile industry with electric vehicles), Netflix (transforming home entertainment), and Facebook (transforming social media/networking).

  The DNA—People, Processes, and Philosophies—of Innovative Companies

  Drawing on a sample of companies from our most-innovative-company lists over the past few years, we dove deeply into the practices of some of the world’s most innovative companies. We started by asking innovative founders at some of these firms, like Amazon’s Bezos or Salesforce’s Benioff, some questions: What makes your firm so innovative? What happens inside your firm that results in innovative new products, services, processes, or businesses? The first insight to emerge from these interviews is that founder innovators typically imprint their organizations with their own innovator’s DNA. To illustrate, Bezos described how he surrounds himself with people at Amazon who are inventive. He says to all job candidates: “Tell me about something that you have invented.” He adds, “Their invention could be on a small scale—say, a new product feature or a process that improves the customer experience, or even a new way to load the dishwasher. But I want to know that they will try new things.” When the CEO asks all job candidates whether they’ve ever invented anything, it sends a powerful signal that invention is expected and valued. “I also look for people who believe they can change the world,” Bezos told us. “If you believe the world can change, then it’s not a stretch to believe you can be a part of it.”

  He also talked about the importance of experimentation processes (as we described in chapter 6), stating that, “I encourage our employees to experiment. In fact, we have a group called Web Lab that is charged with constantly experimenting with the user interface on the website to figure out improvements for the customer experience.” Finally, he discussed the importance of culture, or company philosophy, saying that most companies’ big errors are “acts of omission” instead of acts of “commission.” “It’s the opposite of sticking to your knitting. It’s when you shouldn’t have stuck to your knitting and you did,” says Bezos. So he encourages people at Amazon to ask “why not?” when considering whether to launch something new. “It’s very fun to have a culture where people are willing to take these leaps. It’s the opposite of the ‘institutional no.’ It’s the institutional yes. People at Amazon say, ‘We’re going to figure out how to do this.’”
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  To sum up: Bezos looks for people with an inventive attitude like his. He personally experiments as a way to generate innovative ideas, so he’s created processes at Amazon that encourage and support experimenting by others. And he asks “why not” and is willing to take leaps (as he did leaving D. E. Shaw to start Amazon; he certainly did not “stick to his knitting” when he made that career decision). Not surprisingly, this philosophy has become part of the culture at Amazon, a culture in which others are also expected to ask “why not” and take leaps.

  Our observations at Amazon and other highly innovative companies confirm insights about the genesis of organizational culture made by MIT’s Edgar Schein in his classic work Organizational Culture and Leadership. Schein argues that organizational culture arises during the early stages of an organization, when the organization faces particular problems or must accomplish particular tasks. For example, the challenge might be: “How do we develop a new product?” or “How do we deal with this customer’s complaint?” In each instance, organization members responsible for resolving the problem sit down and decide on a method for resolving it. If the method works successfully, the organization likely uses it again and again when faced with similar problems, and it becomes part of the organization’s culture (a taken-for-granted way for how the organization addresses certain problems). If it does not work well, the organization’s leaders will pursue a different method for solving the problem and continue to search until a method successfully solves it. As any particular method for solving a problem is profitably used over and over, it becomes part of the culture. Not surprisingly, Schein observes that a company founder has a significant influence on the methods chosen to solve the organization’s early challenges. Ultimately, if the founder’s methods for reaching solutions work reliably and successfully, they come to be taken for granted for accomplishing particular tasks in the company. It is through the repeated, successful application of the founder’s initial solutions that they become embedded in the organization’s culture.

  The point, of course, is that the DNA of innovative organizations likely reflects the founders’ DNA. As we talked to innovative founders about creating innovative organizations and teams, they repeatedly discussed the value of populating the organization with people who are like them (in other words, innovative), processes that encourage the innovative skills they depend on (e.g., questioning, observing, networking, experimenting), and philosophies that encourage everyone to innovate and take smart risks. Our observations of other companies on our most innovative list revealed the same thing. This led us to develop a set of working hypotheses about the DNA of innovative organizations that we put into a 3P framework of innovative organizations.

  People

  First, we found that innovative companies were often led by founder entrepreneurs, leaders who excelled at discovery and who were not bashful about leading the innovation charge. In fact, key leaders of these companies showed a higher discovery quotient than leaders of less innovative companies (more on this in chapter 8). We also found that highly innovative companies had stronger discovery skills in all management levels and each functional area of the organization. They also monitored and managed the appropriate mix of decision makers’ discovery and delivery skills throughout the innovation process (from ideation to implementation). Finally, they often had created a senior-level position focused on innovation, which is what Lafley did when he hired Claudia Kotchka as vice president for design, innovation, and strategy at P&G. Put simply, these companies were filled on average with far more people who excelled at the five discovery skills described in chapters 2 through 6, and they were wiser than less innovative companies about the strategic use of discovery-driven people.

  Processes

  We discovered that just as inventive people systematically engage their questioning, observing, networking, and experimenting skills to spark new ideas, innovative organizations systematically develop processes to encourage these same skills in employees. Most innovative companies construct a culture that reflects the leader’s personality and behaviors. For example, Nike CEO Mark Parker has a personal passion for asking questions, and this encourages a questioning culture at Nike. “I happen to ask a lot of questions,” Parker told us. “I walk around and stumble onto new ideas by asking questions of people. ‘What are you working on? What are you excited about? What do you think has potential?’ And then you stumble across some things that wind up being game changing.” Former P&G CEO A. G. Lafley devoted hundreds of hours to observing customers, just as anthropologists observe tribes, and he put specific processes in place for observing customers at P&G. Marc Benioff is a great networker, and at Salesforce he introduced Chatter and other networking processes (including the company’s Dreamforce conference, which attracts 170,000 attendees) to help employees network both inside and outside the company for unusual ideas. As an exceptional experimenter himself, Jeff Bezos has tried to institutionalize experimentation processes at Amazon that allow employees to go down blind alleys in pursuit of new products or processes. By creating organizational processes that mirror their individual discovery behaviors, these leaders have built their personal innovator’s DNA into their organizations.

  Philosophies

  These organizational discovery processes are supported by four guiding philosophies that imbue employees with the courage to try out new ideas: (1) innovation is everyone’s job, (2) disruptive innovation is part of our innovation portfolio, (3) we should deploy lots of small, properly organized innovation project teams, and (4) we should take smart risks in the pursuit of innovation. Together, these philosophies reflect the courage-to-innovate attitudes of innovative leaders. Such leaders believe innovation is their job, so they constantly challenge the status quo and aren’t afraid to take risks to make change happen. To illustrate, the most innovative companies don’t relegate R&D to one unit. Instead, virtually everyone, including the top management team, is expected to come up with new ideas, which results in a democratization of innovation efforts. The notion that everyone should innovate and challenge the status quo is supported by a risk-taking philosophy, such as IDEO’s “fail soon to succeed sooner.” The remarkable companies we studied not only show a tolerance for failure; they see failure as impossible to avoid and a natural part of the innovation process. Moreover, since they believe that everyone can be creative, they work hard to keep units small so that each employee feels empowered and responsible for innovating (Amazon’s Bezos employs the company’s now famous “Two-Pizza Team” rule, meaning that teams should be small enough—six to ten people—to be adequately fed by two pizzas).

  In sum, our interviews and observations revealed that innovative companies build the code for innovation right into the organization’s people, processes, and guiding philosophies—the 3P framework that comprises the DNA of innovative organizations. (See figure 7-1.)

  FIGURE 7-1

  People, processes, and philosophies in the world’s most innovative companies

  Of course, the devil is in the details in making the 3P framework real to employees. Many organizations say that they have innovative people and that they encourage innovation through the company’s processes and guiding philosophies. But they can be clueless about how to embed the processes and philosophies deeply into the organization’s culture. In this chapter, we have identified some of the world’s most innovative companies and provided a framework to help you see how creative organizations do it.

  As we mentioned at the beginning of this chapter, chapters 2 through 6 focused primarily on how individual innovators do their work. In this chapter, we’ve suggested that the innovator’s DNA has some clear organizational analogs and applications. We think there are equally compelling applications to teams at work (where the principles apply as they do with individuals and organizations). We believe this because the boundaries between what an organization is and what a team is are becoming increasingly blurred in our fast-paced world, where organizations like Vodafone start e
ntirely new business units with twelve people. Is that an organization or a team? We see it as a classic case of both, since an organization is a collection of teams, and the innovator’s DNA works well in each. In the three chapters that follow, we describe in detail how innovative organizations and teams build the code for innovation into their people, processes, and philosophies.

  How Innovative Is Your Organization or Team?

  To get a quick snapshot of your organization or team’s innovation profile, take the following short survey (1 = strongly disagree; 2 = somewhat disagree; 3 = neither agree nor disagree; 4 = somewhat agree; 5 = strongly agree). Remember to answer based on the people, processes, and philosophies that actually exist within your organization or team, not what you would like them to be.

  People

  1. Our organization or team has leaders with a well-known track record for generating innovative ideas for new processes, products, services, or businesses.

  2. Our organization or team actively screens for creativity and innovation skills in the hiring process.

  3. Evaluating an employee’s creativity or innovation skills is an important part of the performance-appraisal process within our team or organization.