Our business is innovation." That is a quote from the CEO of a pharmaceutical company (G.V. Prasad of Dr Reddy's Laboratories, for the curious), where innovation is, indeed, the core business.
But with costs soaring, the market place getting increasingly cluttered, and customers becoming more demanding, innovation is bound to become every company's single-most important business.
In India, where the investment in research & development (R&D) makes up a mere 0.8 per cent of the GDP (1.23 per cent for China), innovation is a relatively new concern-at least, in the private sector, which accounts for just a fifth of the total R&D spend.
What scares private enterprise away from R&D is, of course, the fact that returns don't just take a long while coming but sometimes don't come at all. Yet, the fact is, to compete in the new global economy, companies must constantly innovate in everything they do. The good news: Some of the companies in India have already adapted to the new reality, as the Monitor Group's lead article that follows reveals.
Besides, innovation isn't as complex or difficult as it is made out to be. In fact, innovation isn't invention. To shatter the myths that surround the subject of innovation, we invited Vijay Govindarajan, who is a professor at Tuck School of Business, author of best-seller 10 Rules for Strategic Innovators, and GE's newly appointed Chief Innovation Consultant, to write an article. Last but not the least, we profile the Most Innovative Companies-in the alphabetical order of their industries.
The state of innovation in India
Indian firms face both a domestic and a global environment that is more competitive than ever before. For years, these firms have focussed on reducing costs, increasing operational efficiencies, and targeting their products and services carefully at specific customer segments. Increasingly, however, that is not enough. To remain competitive in today's business world, every firm must make innovation a central pillar of its strategy for differentiation and growth. But how ready are Indian firms to make innovation an integral part of their growth strategies? To find the answer, Business Today and Monitor Group jointly surveyed more than 75 senior executives across sectors (nearly half of them through in-depth interviews) on their innovation-related attitudes, beliefs and practices. We also surveyed investors to find out how they view the state of innovation among Indian companies. The results show clearly that Indian firms recognise how critical innovation is to thriving (or even just surviving) in today's global market, and some have taken important steps towards building the kinds of leadership, strategy, systems, partnerships, and culture required for innovation. At the same time, senior executives also believe that their efforts to build truly innovative Indian firms confront significant constraints.
Many of our results are encouraging. More than 90 per cent of CEOs surveyed said that innovation is "very important" to achieving their organisations' goals and is an explicit part of their corporate strategies. Bharti Airtel, for one, has established the Future Factory- a "center of innovation" that aims to develop innovative applications specifically targeted at individual customer segments. Wipro has established an "Advisory Board" and "Innovation Council" to invest in and manage innovation projects. Tata Motors has initiated a "New Product Introduction" process that defines business processes for new products-tackling everything from understanding customer requirements to commercialisation, and everything in between.
The survey also revealed, however, that more than 73 per cent of CEOs are unsatisfied with the current level of innovation in their organisations. CEOs repeatedly said that their organisations had too many competing priorities, faced difficulty in cross-functional coordination, were overly focussed on short-term results, and faced resource constraints that make innovation difficult.
Interestingly, firms around the world routinely point to these same barriers to innovation. But those companies that lead the pack on innovation view it as a necessity rather than a choice-and fight to overcome these barriers. Google, for example, started as a search engine but realised that it had to do more than that or else risk falling behind some upstart company. Today, Google's leadership has ensured that innovation is an integral part of the company's strategy, systems, processes and culture. Marissa Mayer, Head, Google's Idea Factory, searches for the best ideas, talent and resources and then drives them to commercialisation. The result is visible to all: with remarkable products like AdSense, Google Earth, Google Checkout and Google Notebook, Google towers over its competitors.
Innovation leadership-CEOs with a vision
A successful, companywide culture of innovation starts with a rocksolid commitment by company leadership. Business leaders must lead the innovation agenda. They must define innovation broadly and build space for individuals to innovate. They must set "stretch" targets to encourage employees to look beyond the core business. They must assign a dedicated team to drive the firm's innovation agenda. And, finally, they must create a culture that inspires people to take risk.
According to the BT-Monitor Group survey, most organisations in India rely on the CEO or a team of directors to drive innovation. Most CEOs also say that they spend more than 10 per cent of their time on innovation-related projects. At companies like TCS, Dr Reddy's Laboratories and Ranbaxy, the CEO spends more than 30 per cent of his time on innovation-related activities.
The most innovative firms define "innovation" broadly. They believe that innovation is not just about developing new products and services but, more fundamentally, about discovering new ways to create value. At Marico, for example, innovation is referred to as "uncommon sense". According to Ameya Naniwadekar, Marico's Head of Strategy, "Uncommon sense is a mindset that seeks to create and unlock new value by challenging prevailing rules of the market." According to ICICI: "Innovation is the ability to identify opportunity and seek new growth horizons continually using people, processes and delivery mechanisms as the platform." A broad definition of innovation helps companies to think beyond R&D and to move to the next level of innovation: creating new processes, new distribution channels, new business models and new ventures (see Pathways for Innovation).
But thinking broadly about innovation is not enough. A company's CEO and board of directors must set stretch growth targets to drive breakthrough innovation. Global innovation leader 3M has the "35 per cent Rule": 35 per cent of the company's revenues must come from products and services that have been introduced in the last four years. Similarly, at the US aluminium giant Alcoa, stretched cost-reduction targets are used to drive out-of-the-box ideas and partnerships, and employees are compensated far more handsomely for meeting stretch targets than they are for meeting planned targets.
Indian firms also need to create a role for individuals or teams to operationalise the innovation agenda, build innovation capabilities and support business units' innovation efforts. All of these goals can be accomplished more readily when a firm designates one individual who is accountable for the company's innovation agenda. Global giants such as CEMEX, Frito-Lay and Hitachi have already created the Chief Innovation Officer (CIO) position, which reports directly to the CEO. These officers ensure that there is enough focus on innovation programmes, and help link innovation efforts to the firm's strategy and growth. They ensure that innovation is an integral part of the company and get innovation projects executed to ensure that stretch targets are met.
Finally, business leaders drive a company's innovation culture. They must encourage the company to experiment and create options. Business leaders should see failures as opportunities to learn and not opportunities to punish individuals and should help employees overcome or lower barriers to innovate. We explain this further towards the end of the article.
| High Performance Innovation Framework|
Based on work over the past decade with companies across multiple sectors and geographies, Monitor Group has developed "High Performance Innovation" framework that outlines the key elements required to drive innovation leadership. In addition to innovation environment, the framework has four elements: leadership, strategy, structure/processes, and people. Since innovation is managed as a system, weaknesses in any one of these elements can result in poor innovation performance.
The external Environment of a company helps define the growth objectives of a company and intensity required to compete. These factors then translate to the urgency and importance of innovation as a pillar for survival, growth and leadership.
Leadership is the clarity of the vision for driving innovation in the firm. It includes how committed leadership is on the topic of innovation; how clearly and often the importance and urgency of innovation is communicated to the organisation; and how it is linked to the strategic intent of the firm.
The top half of the diamond represents the Strategy element of the framework and evaluates the sophistication of the innovation strategy of a company. It tests questions like does the firm view innovation strategy as search for a silver bullet or as an organisational capability? How does the company manage risk, uncertainty and ambiguity? What is the role of partnerships? Are there notions about options and hedges?
The bottom half of the diamond covers the hardware and linkages needed to allow ideas to move quickly and effectively from concept to commercialisation. Specifically, it covers issues with Organisation, Processes, Systems and Assets.
The Culture and Metrics satellites spinning around the diamond represent the importance of people and culture in making innovation happen. This element helps reveal the propensity for an organisation and individuals to take risk, collaborate, and be entrepreneurial.
Indian firms must likewise define platforms that drive the firm's strategic agenda. Senior management must identify the platforms that will focus the organisation on where to innovate, unlock the latent creativity across all levels of the organisation and harness the energy in a coordinated manner.
While some Indian firms have started recognising innovation as more than new product development, the innovation portfolio of many companies still consists primarily of short- to medium-term projects focussed on new products, services or processes and less so around new growth engines, channels or business models. In the BTMonitor Group survey, firms stated that less than a quarter of their investments are in new business models or ventures. In terms of tenure, more than 75 per cent of their investments are in short- to mediumterm projects with tenures of fewer than three years. The specific proportion should depend on a given company's overall strategy and on its ability to take risk.
Indian firms must work to rebalance their innovation portfolios by altering the current distribution across short-, medium-, and longterm investments, as well as across incremental versus breakthrough innovations.
Partnering for success
|How do we define Platforms?|
Innovation platforms are powerful launching pads for new ideas, products, services and businesses. A platform should consist of a series of elements and a structured process that can transform ideas into value for the company. Innovation platforms should not be at an organisation's tactical level, but rather at its strategic level, generating focussed innovations that build competitive advantage. Innovation platforms should not be understood to serve only the core business, but should overlap into adjacencies and connect to the future. They should neither be viewed as a "technology push" nor a "market pull," but as tools to integrate both to drive technically actionable and market-meaningful innovations. Innovation platforms should not just leverage a single core competency, but rather a bundle of competencies and assets-including those of partners, which make the platforms even more differentiated and difficult to replicate.
In India, most partnerships are used for transactional purposes, which means that partners are used for tasks such as information gathering for addressing short-term needs. In the recent BT-Monitor Group study, fewer than 25 per cent of companies stated that they have market-forming or innovative alliances. Even amongst the innovation leaders identified by our survey, only 50 per cent of innovation leaders use partners for marketforming alliances. Companies like Infosys, TCS and Samsung Electronics (India) are among the few in India that have tied up with academic institutions and universities for undertaking specific R&D initiatives.
Moreover, our survey reveals that only about 34 per cent of a given Indian company's ideas come from external sources. This compares somewhat poorly with global innovation leaders, which get nearly 50 per cent of their ideas from external sources. Indian companies should do more to get ideas from suppliers, partners, distributors and end-consumers.
Indian firms need to assess their own strategic direction and the role of partnering in their competitive positioning. Partnerships should not be viewed simply as a means to closing capability gaps within a company. Rather, a company should think more broadly about what all it might be able do if it had Toyota, Google, Motorola or some other such company as a partner. With convergence in telecom, electronics, media and financial services, SK Telecom of Korea is leading the charge in setting partnerships to create options to play in banking and retail.
In addition, it is equally important to create a partnership-friendly culture, so that people across levels think about partnerships while thinking about growth. A small Korean team from LG Electronics forged a relationship with Sprint to make a camera phone that neither Nokia nor Motorola was willing to make. As a result, LG became a major player in the US cell phone market. Even with all the cultural, linguistic and geographic barriers, the Koreans are teaching the world about partnering, whether it is Samsung and Sony in flat-panel televisions, Hyundai and XM Satellite Radio, or SK Telecom and Google.
Innovation structure, process and systems
Just as structures and processes are required to achieve any business goal, an organisation needs innovation processes to reach its innovation goals. These structures help speed innovations from idea generation to commercialisation by improving the interfaces between functions for optimal resource allocation, teaming and rapid decision making.
It is well understood that structure, systems, processes and capabilities must follow business strategy. The same goes for innovation. Processes and systems built in the absence of an innovation strategy will result in idea management and other knowledge management systems collecting dust and forgotten over time. Idea management system could be limited to a business unit or could invite externals into the process. This is a choice that is defined by the innovation strategy.
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For instance, Ananth Krishnan, Chief Technology Officer, TCS says that it is a part of his responsibility that 20 per cent of the organisation time is spent on disruptive innovation. According to him, this is a huge commitment to innovation, as this implies dealing with short-term priorities. Krishnan admits that it is tough to meet this target on a weekly or monthly basis, but TCS meets these targets on a quarterly basis. Senior executives are also unsatisfied with the quantity and quality of ideas generated-only 30 per cent of respondents were completely satisfied with the quantity and quality of ideas generated. Do firms have the right systems to permit the flow of ideas across functions and with external sources? Perhaps not. Indian firms must have the right idea-management systems to ensure this happens. Looking at the survey results closely, firms that claimed to have ongoing idea-management processes across their organisations were more satisfied than others on both the quantity as well as quality of ideas. This included companies such as Airtel, Citibank and IBM Daksh, all of whom have already introduced various ideamanagement systems.
As we mentioned earlier, Indian firms source about 70 per cent of their ideas from internal sources (spread across the organisation) and the remainder from external sources (consisting primarily of consumers and partners). Indian firms must leverage external sources more and increase the percentage of idea contribution from customer-facing functions such as the sales department; sales currently contributes only about 10 per cent of internally generated ideas.
Companies like Nestle, BMW and 3M have these systems globally. For instance, Nestle has a structured process to capture information needs from the company, gather this information and spread it out to the appropriate people or areas. Similarly, BMW has committed to maintain its leadership in technology- it has created an internet portal where others can contact BMW with suggestions for innovation projects. 3M, too, creates crossfunctional teams for innovation projects, and makes its lead users a part of the ideation process and sessions. Indian firms must soon initiate such processes to use their employees and partners effectively for innovative ideas.
Innovation culture and metrics
Today, the majority of Indian companies say they believe in promoting an open, entrepreneurial culture. In fact, 35 per cent of the organisations surveyed, including LG India, Wipro and ICICI Bank, said that they have an energised and innovative culture, and that their employees drive change. A similar number of companies have already introduced balanced scorecards to evaluate their employees on innovation-related activities.
But creating such a culture does not come easily to Indian companies. The Indian education system focusses more on theory than on experiential learning, which tends to generate inherently risk-averse students. Until recently, commerce students in India were not even exposed to basic principles of raising money, or selling their ideas to customers and investors. And many Indian firms have established an "authoritarian" approach, whereby managers expect their juniors to follow their instructions strictly and without asking too many questions. Failures are not well tolerated, further diminishing employees' desire to take initiative or to take risks.
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Indian firms must create a collaborative, risk-free environment empowering people to experiment with new ideas. Various global innovation leaders such as 3M and Google allow their employees to spend some of their office time on projects that specifically interest them. Google engineers experiment with new features and new services, present early versions of them to the public, and incorporate feedback they receive during this trial phase. Similarly, 3M believes that no "mistake" is a failure unless the same mistake is made twice. 3M employees that pursue innovative ventures within the firm are guaranteed a return to their former positions if their venture fails.
Also, to promote an innovation culture, organisations need to measure and reward employees for innovation-related activities. P&G, for example, has made innovation central to its strategy and has integrated innovation into its personal goal-setting and reward system. Alongside senior management support and a cultural emphasis on innovation, P&G makes "innovativeness" a part of employees' annual reviews and provides such incentives as faster promotions, non-monetary benefits and innovation fellowships in order to promote innovation.
Bottom line: Innovation for companies is not so different from Darwin's evolution for creatures. Those that are not able to adapt to changing environmental conditions eventually disappear. Do you have the vision, diversity, flexibility and DNA to survive and flourish?
The Monitor team consisted of Nikhil Prasad Ojha, Pranay Mehrotra, Anurag Dwivedi, Meenakshi Chhabra and Ritika Goel. Dr Hitendra Patel, a senior leader at Monitor Innovation, worked with the team as an advisor and key contributor to the study.
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