The Keys to High-Impact Innovation

One of the most common frustrations we hear about in our hundreds of interviews with senior executives is the lack of "disruptive" or "breakthrough" innovations in their pipelines. One marketing director put it like this: "We're great at incremental innovations, line extensions, that sort of thing. But our CEO keeps asking for real breakthroughs. I don't blame him, but I don't see them coming from our current innovation process, either."

This CEO's demand for innovation isn't unique. We hear the same need, expressed in a variety of ways, from top management thinkers, such as C. K. Prahalad: "Traditional prescriptions, such as cost reduction, reengineering, and outsourcing...cannot solve the problems of margin pressure." And we hear it from top CEOs, such as GE's (GE) Jeffrey Immelt: "You're not going to stick around this place and not take bets."

The pressure is on to generate big breakthroughs, and most companies are willing to take bets on disruptive opportunities. The real question is: How?


  Over the past two years, my colleagues at Peer Insight and I, with the cooperation of more than 30 global corporations, have analyzed nearly 60 recent innovations in the service industry. We studied an equal mix of successes, failures, killed-before-launch projects, and those still too-soon-to-tell. Through in-depth interviews with key team members, we deconstructed each innovation to identify the critical decisions or moments that led to the project's outcome.

After synthesizing the data, we distilled it into what we call "The Discipline of Service Innovation." It's a list of principles that we think can be useful for companies seeking to change. When it comes to encouraging high-impact innovation, we found that four principles are particularly important:

• A clear challenge statement that expresses aspirations to a worthy goal without prescribing the means. This should be expressed in terms of a customer need, not a business need.

• A well-designed, well-facilitated process that includes multidisciplinary participation and sources of cutting-edge ideas.

• Emphasis on developing concepts that combine multiple elements of innovation (e.g., business model, IT platform, and channel) to increase impact and distinctiveness.

• Techniques and structures that counterbalance the forces of risk aversion.

The fourth principle is especially important. Big enterprises are large because they're successful, and success itself poses a barrier to innovation. Why try something radically new when you're successful at what you're already doing? As one source explains: "Success is a narcotic." Under its influence, why take a risk?

We looked carefully to discover how companies overcome this hurdle, and found a wide variety of techniques and structures.

Hold a high-stakes competition. In 1989, Mazda had two teams, one from the U.S. and one from Japan, compete to come up with a design for what was to become the Miata. This winner-take-all approach introduced a great amount of stress and unleashed the breakthrough thinking that resulted in one of the world's most popular sports car.

Fund exploration. Fluke Corp. creates new business opportunities through the use of "Phoenix teams," which are empowered to spend "$100k and 100 days," as they see fit, to develop and prototype a disruptive innovation. Senior executives have green-lighted enough projects to double Fluke's revenues in five years.

Remove the naysayers. Every organization has powerful people who immediately know three reasons why any new concept won't work. One company we studied simply removed two such execs from the leadership group that governs service innovation. The atmosphere changed immediately to focus on how to make unfamiliar concepts succeed.

Change your risk-analysis mindset. In lieu of a risk-adjusted return-on-investment approach, one company evaluates high-potential concepts by defining the worst-case outcome and asking the leadership team, "Can we survive it?" If the consensus is "yes," they charge ahead and work to make the successful outcome occur. This conversation often occurs at the board level.

Form a special petri-dish environment where new concepts can grow. Pitney Bowes (PBI) has a concept studio designed to explore opportunities far afield from its existing lines of business. IBM (IBM) has a similar unit, called "EBO" for Emerging Business Opportunities. This approach minimizes distraction to the ongoing business and permits concentration of special innovation skills. Successful projects are then sold back to the business units.

Overcoming risk aversion is a key to succeeding at service innovation. The best companies are studying how to do it. They're taking risks. To paraphrase novelist Erica Jong, companies that don't risk anything risk much more.

Jeneanne Rae is a co-founder of Peer Insight, a research and consulting firm currently focused on innovation issues for Fortune 500 companies. She is also an adjunct professor at Georgetown University where she teaches New Product and Service Development in the MBA program.

Before it's here, it's on the Bloomberg Terminal.