innovations

Creativity and innovation have become the supposed guiding lights of 21st century business. Virtually all managers pay lip-service to the cause of new ideas and new businesses. But very few companies are actually organized to achieve the requisite flow of inspiration. Nor is it only a question of ideas. By far the most important aspect of innovation is translating ideas into action - and that is still the fatal stumbling block in business after business.

There will never be a sadder example than that of Xerox. An inspired top management established the Palo Alto Research Centre (PARC), apppointed brilliant leaders who in turn recruited the brightest and best minds in electronics, and gave these people carte blanche and ample finance to follow their own predilections. PARC duly produced, not only the key innovations which made the personal computer possible, but also a working prototype. Their benevolent parent thereupon ignored the brilliance completely.

No Xerox PC was forthcoming. None of the innovations was incorporated into Xerox product lines. Tiny upstarts like Apple cheerfully made billions out of PARC's inspirations - and all because PARC operated in independence from operating divisions which were coining money from copiers and other familiar technology. PARC also lacked a powerful champion on the board. It's a classic dilemma. The people who have the ideas don't have power. And the people who have power don't have or appreciate the ideas.

The dilemma has achieved alarming new proportions with the advent of the internet. The new go-getters - the Interpreneurs - are wholly committed to innovation. They have no established products or services to defend or enjoy. Rather, their success in raising investment funds depends substantially on the novelty and uniqueness of their selling proposition. Amazon is a perfect example. Nobody else was selling books over the World Wide Web: and in Webworld, the prime mover's pole position can become a permanent victory.

E-sceptics will wag fingers at another prominent aspect of Amazon - its continuous and continuing losses. That raises a second crucial point about innovation. You must turn a unique and powerful idea into action, but must also turn the action into profit by constructing a 'business model' that leaves you with nourishing gross margins. That may require (Amazon could again be an example) considerable trial and error. But this is where the traditional business, averse to experiment and wedded to profit, may be at a significant disadvantage.

Clayton M.Christensen rammed this point home in his brilliant book, The Innovator's Dilemma. His case studies showed that, time and again, major innovations in an industry threaten existing profits and are therefore ignored. The PC, for a most conspicuous instance, began humbly enough - IBM even (and wrongly) regarded it as an 'entry system' from which customers would graduate to proper computers. As PC power and speed increased exponentially, though, 'proper' computers came under devastating attack - and the great beneficiaries were innovative upstarts like Microsoft, Compaq, Dell and Intel.

Christensen's moral, endorsed by practically every other guru, is that companies are best advised to launch major innovations outside the established businesses. The evangelistic Tom Peters has long urged the use of 'skunk works', innovative groups which operate outside of, and physically remote from, the parent organization. That's fine in the development phase. But the Xerox case makes it devastatingly clear that the skunks' achievements will wither on the vine without plans for creating a major business round the innovation

The very existence of independent centres of innovation, followed by successful exploitation of the innovators' ideas, will, however, stimulate the entrepreneurial culture which business leaders so desire. That is especially true if the new business gets spun off, wholly or partially, creating fortunes for its stars. Such enrichment is another key element in changing the culture. It injects new and richer blood into the organizational veins if young, pushy entrepreneurs can make real money from the corporation.

But the impact of in-company breakaways (that may actually break away) can be even greater than spurring new businesses and new ambitions. The skunk-works approach requires a different kind of management control. The innovators have targets expressed in deadlines and break-points, rather than return on capital or sales. Their leaders are left to their own operational devices, with their spending controlled but their activities untrammelled. This contrasts vividly with the typically over-controlled corporation, where second-guessing and vetos of initiatives are commonplace.

The skunk-works ethos, though, is spreading into the bureaucracies (or corpocracies). Much more work is being conducted by project teams, not only within divisions, but cutting across them. The objectives are very similar to those of the breakaway, primarily completion to specification, on time and within budget. Some companies now place the introduction of new products and/or services high among the factors by which managers are judged when the time comes round for bonuses and stock options. This follows the pattern which has created so many Silicon Valley fortunes.

Valley and e-firms are still mostly so young that they haven't had to pass the ultimate test: continually refreshing the founts of innovation. Most haven't yet reached what Andy Grove, chairman of Intel, calls the 'strategic inflection point'. This point is extremely difficult to locate, even in hindsight. It occurs when the existing business is going great, but the ground is beginning to shift beneath its feet. The arrival of the PC is a case in much point. The mainframe computer companies (even ultimately IBM) missed the strategic inflection point and never caught up.

Winners start a new, second generation business before the original fount of riches dries up - thus Intel providentially had the supreme microprocessor innovation to take over and eventually far excel the memory chip. Guru Charles Handy has his own version of Grove's point, the 'Sigmoid Curve'. He urges companies to entrust second generation strategy, which aims to create a new upward curve, to second generation managers - younger people from the age-group which, anyway, will have to make the strategy work.

That demands an act of abdication by senior management, whose role would change from day-to-day directorial (and often dictatorial) overlords to that of year-to-year mentors, guides, recruiters and financiers. That supplies internally that venture capitalists provide externally for the dot.coms and other gee-whiz start-ups. But failure to surrender day-to-day powers is one reason why established companies have lagged behind the internet entrepreneurs in innovation - even when the old-liners have turned to new recruits as a source of fresh ideas.

Sometimes, that may well be justified. But all companies suppress a rich array of creative talent that is already in their ranks. This tremendous waste is so ingrained that it takes mighty efforts, such as those mounted in 1999 by Jack Welch at General Electric, to set the people free. His divisions were ordered to turn fresh minds, mustered in operations called 'destroyyourbusiness.com', to the task of challenging their existing business models - and maybe disrupting, even destroying them.

The philosophy here is 'let's do it to them' (the competition) 'before they do it to us'. Note that Welch's initiative, taken with his 2001 retirement fast approaching, is itself an innovation. It's a natural mistake to think of innovations as solely concerned with products and services. Processes can have just as much impact on the bottom line and in establishing competitive advantage: Dell Computers, for example, draws untold benefits from its supply chain innovations and the lucrative elimination of the middleman.

Welch's eminently successful innovations at GE have centred round management processes. He has tried to turn his vast collection of businesses into an inovative powerhouse that will win, in his words, not by whips and chains, but by ideas. There's some contradiction and irony here, since Welch's top-down decision will only succeed if significant power is devolved, allowing decisions to bubble bottom-upwards. The analogy is what has happened in whole industries like computing: small companies at the bottom have generated innovations that have turned the existing order upside-down.

The critical development today is that all industries are threatened by existing or potential Web-world innovators. They have to respond or face falling off the Sigmoid Curve. Fortunately the very technology that threatens them is also on their side. Becoming a genuine e-company, as Cisco boss John Chambers has emphasised, enables CEOs to free lower managers to create and innovate without weakening essential controls.

But the influence of the Web is more pervasive still. To succeed in e-commerce, 'me-too' is no good: 'me different' and 'me-better' are essential. That demands innovation in areas that are by definition strange and new. Established companies are thus being forced to think and act more like genuine start-ups. Do that, and you can have your creative cake and eat it, blending the fruits of innovation into a continuing business that can expand securely into a richer future. The alternative is to have no cake.