Who's really innovative?

If you were compiling a list of the world's most innovative companies, which businesses would top your list? No one would be surprised if you picked Google, Apple, or Amazon, but what about Wal-Mart? (Huh?) Or PG&E (a utility, for crying out loud)? Surely there must be some mistake! Or how 'bout the Chinese data equipment maker Huawei (umm, who are they)? While a few of these companies might not have made it onto your top 10 list, all of them were featured in Fast Company's 2010 ranking of innovation all-stars.

This article was originally posted on the Management Innovation eXchange (MIX), an open innovation project aimed at reinventing management for the 21st century.

The list toppers:

1. Facebook
2. Amazon
3. Apple
4. Google
5. Huawei
6. First Solar
7. PG&E
8. Novartis
9. Wal-Mart
10. HP

As you might expect, BusinessWeek has its own list of innovation standouts:

1. Apple
2. Google
3. Microsoft
4. IBM
5. Toyota
6. Amazon
7. LG Electronics
8. BYD
9. GE
10. Sony

Apple, Google, and Amazon are the only companies that appear on both top 10 lists. Three of BusinessWeek's picks (Toyota, LG Electronics and Sony) don't make it into Fast Company's top 25, and Facebook, #1 on Fast Company's list, ranks a lowly 48th on BusinessWeek's roster (that's five places behind Fiat, if you can believe it). Conversely, three of Fast Company's top 10--Huawei, First Solar, and Novartis--don't show up on BusinessWeek's top 50 list.

What gives? Is the definition of innovation so murky that even business editors can't agree on which companies are truly inspired and which are not? Apparently so.

There's a reason for the befuddlement. Trying to rank the planet's most creative companies is a bit like trying to rank the world's most accomplished athletes. How can one possibly compare the hard-charging physicality of Sidney Crosby, a hockey player, with the explosive speed of Usain Bolt, an Olympic sprinter, with the strength and balance of Yang Wei, a world champion gymnast, with the extraordinary conditioning of Petter Northug, winner of the 50km cross-country skiing event at the 2010 Winter Olympics? The answer is you can't--but that doesn't prevent list-aholics from trying. A couple of years back, a five-person panel selected by the Wall Street Journal named Roman Sebrle as the world's preeminent athlete. (You know, that Roman Sebrle.)

While always entertaining, lists of this sort are more likely to start an argument than end one.

And so it is with innovation rankings. They're not much help to anyone who is actually trying to learn something about innovation--because they fail to distinguish between five distinct types of innovators.

First are the tyros, young companies built around whacky new business models. Recent examples (from Fast Company's extended list) include Gilt Groupe, an online luxury retailer; Hulu, which delivers TV shows via the Web; and Spotify, a music streaming service. Like other tyros, these newbies are growing rapidly and still working out the details of their inaugural strategies. None of these upstarts has yet been challenged to reinvent its initial business model--a test history suggests many of them will fail.

Like a child star whose fame fades as the years advance, many once-innovative companies become less so as they mature.

Fact is, inventing an innovative business model is often mostly a matter of serendipity. Despite that, a fortuitously fortunate founder often ends up being venerated as a perpetually prescient prophet. As a result, the company becomes over-dependent on the vision of one or two key individuals and never develops a broad-based capacity for ongoing business model innovation. When the founder's vision fades, the pace of innovation slows and the company tumbles down the innovation league table.

In 2006, Starbucks, Southwest, IKEA, and eBay all ranked among Business Week's top 25. Yet four years later, none of these companies were that highly ranked. As bambinos, they were industry revolutionaries, but as they aged, they fell out of the innovation vanguard (though all remain well-run companies).

If you want a measure of just how difficult it is to stay innovative, consider this: Two-thirds of the businesses on Fast Company's 2009 list of the 50 most innovative companies didn't make into the 2010 edition. When it comes to innovation, few companies stand on the winner's podium for long.

Nevertheless, it is worth paying attention to the tyros. While they don't have much to teach us about how to build a systematically innovative company, their game-changing strategies often illuminate important new categories of business model innovation. Thus while innovation at Starbucks may have gone from steaming to tepid, there's still a lot that can be learned from the company's success at turning a low-value product into a high-value experience.

Next are the Nobel laureates. These companies are consistently innovative, albeit in a narrow, technologically oriented, sphere. They spend billions each year on R&D and employ thousands of crazy-smart boffins. Perennial benchmarks include Intel, LG Electronics, Samsung, Novartis, Microsoft, and Cisco.

These laureates show up year after year on just about every list of innovation pacesetters; they also dominate the rankings of most patents won. This is a testament not just to their prolific inventiveness, but to the barriers to entry that newcomers face in building world-class research organizations. Fundamental advances in physics, genetics, and biochemistry are hard to come by--you need dozens of PhDs, lots of patience, and deep pockets. It's easier to invent a new model of online retailing, for example, than to master the intricacies of atomic scale manufacturing--that's one of the reasons Intel, Samsung, and Toshiba are pooling their resources to produce 10 nanometer computer chips.

Inventive as they are, the laureates are a bit unidimensional--they're great at pushing back the frontiers of science, but typically not so great at innovation in other areas. Microsoft may win hundreds of patents each year, but it has struggled to stay in front of the profound business model shifts that have rocked the computer industry in recent years--like open source and cloud computing. Or take Samsung. Despite having been awarded more than 3,600 US patents in 2009, Samsung isn't the #1 LCD-TV brand in the US. That honor belongs to Vizio--a company founded in 2002 that has fewer than 200 employees. Unlike its R&D-centric, vertically integrated competitors, Vizio buys its flat screens from independent Asian suppliers. Following Dell's playbook, Vizio has "deverticalized" its corner of the consumer electronics industry. Turns out that inspired business model innovation can occasionally trump a multi-billion dollar research budget.

Nevertheless, if you want to learn something about maximizing R&D productivity or managing a patent portfolio, the laureates have plenty to teach.

The artistes comprise a third and much smaller category of innovation heroes. These firms are in the creativity business--innovation is their product. Among the most feted are IDEO, BMW DesignWorks, and Grey New York (an ad firm)--all of which are among Fast Company's top 50.

These companies are filled with individuals who wear black jeans, own $1,000 espresso machines and are able to produce side-splitting viral videos that feature a highchair-bound baby shilling for an online brokerage. While these artistes deserve all of the awards they win each year, they do have something of a built-in advantage. After all, everything about these firms--the way they hire, develop talent, manage workflows and organize their workspaces--has been designed to incite lateral leaps of genius. Everything about your company has been designed, well, for something else. So artistes sell the fruits of their right-brain thinking to clients who are, shall we say, hemispherically challenged.

Now, make no mistake: coming up with an out-of-the-box design, like a $25 dollar latrine for impoverished villagers, is always going to be a challenge--but it's a whole lot easier when you're sitting in a buzzy, energetic design firm like IDEO than when you're crouched in a colorless, coffin-sized cubicle deep in the innards of a six sigma-obsessed industrial colossus.

Specialization has its advantages. If you work for an artiste, you don't have to spend half your day defending the very idea of innovation to a boss who believes that if penguins only tried harder they could fly.

Most companies don't have the luxury of focusing exclusively on innovation. They have to innovate while stamping out zillions of widgets or processing billions of transactions. Still, there is much that can be learned from the artistes. While your company may never be an innovators' sanctuary, you can still weave some of IDEO's time-tested design principles into the workflows in your business . . .

1. Encourage wild ideas
2. Build on the ideas of others
3. Stay focused on the topic
4. One conversation at a time
5. Be visual
6. Go for quantity
7. Defer judgment

(For more on IDEO's approach to creative thinking see David Kelly's book, The Art of Innovation.)

Fourth are the cyborgs, companies like Google, Amazon, and Apple that have been purpose-built to achieve super-human feats of innovation. You won't find much industrial age DNA in these organizations. These companies have been built around principles like freedom, meritocracy, transparency, and experimentation. They are so endlessly inventive and strategically flexible they seem to have come from another solar system--one where accountants are treated as servants rather than gods.

The cyborgs don't just have innovative business models, they are filled with alien management practices--like Google's 60:1 span of control or Apple's top-to-bottom obsession with "joy-of-use." Like the tyros, many of the cyborgs are run by charismatic founders. But unlike most tyros, these visionaries--Jeff Bezos, Steve Jobs, Sergei Brin and Larry Page--haven't allowed themselves to become hostage to one particular strategy. They have worked hard to embed within their organizations a capacity for continuous renewal--and have mostly succeeded. Over the past few years Amazon has transformed itself from an online bookseller into a web services powerhouse. Google has spawned dozens of new online services that complement its core search business. And Apple has moved so far beyond its core computer business that it is now the world's second most valuable business.

Unlike the laureates, the cyborgs are innovative in all kinds of ways; and unlike the tyros, they're going to show up on next year's "most innovative" list or the one after that.

Problem is, with their bionic capabilities, the cyborgs can make the rest of us feel like dolts. If you work in a company that's merely human--one that's riddled with stale, conformance-inducing management practices--another chirpy anecdote about Google or Apple may make you puke. Your organization wasn't built from the ground up to be innovative. You figure you'd have an easier time stealing Angelina from Brad (or vice versa) than turning your company into an innovation hottie--and that's where you'd be wrong. Truth is, there are a few geriatrics out there who've cracked the innovation code. In my view, these born again innovators--companies like Procter & Gamble, IBM, and Ford--are the most notable of all.

For decades these behemoths were top-down and buttoned-down, hierarchical and stultifying. Year after year they found themselves out-maneuvered by less orthodox upstarts. And then one day they faced up to their failings and got religion--not the twice-a-year-only-on-holy-days facsimile of faith, but the whole down-on-your-knees-reborn-from-the-inside-out-all-encompassing conversion experience. And so they set about reordering their priorities and reassessing their lifelong habits.

At Ford, Alan Mulally has been working tirelessly to dismantle the company's functional silos and rekindle a passion for making great cars. Over at P&G, A.G. Lafley, who stepped down as chairman in 2010, launched a major initiative aimed at opening up the company's innovation pipeline to ideas from across the world. IBM has been even bolder in rethinking its innovation processes. Over the past decade, its process for incubating "Emerging Business Opportunities" and its global "Innovation Jams" have helped the once-insular company generate billions of dollars in new growth. (IBM's EBO process is detailed in my book, The Future of Management.)

If you dive into these cases you'll discover that each underscores the same fundamental point: turning an innovation bumbler into a benchmark requires a fundamental retooling of a company's management processes--the way it plans, budgets, allocates resources, measures performance, hires, and compensates. Most of our management rituals were designed (a very long time ago) to promote discipline, control, alignment, and predictability--all laudable goals. But to outrun change or head off a newcomer at the pass, these processes have to be re-engineered so they facilitate rather than frustrate bold thinking and radical doing.

What limits innovation in established companies isn't a lack of resources or a shortage of human creativity, but a dearth of pro-innovation processes. In too many organizations one finds that . . .

• Few, if any, employees have been trained as business innovators.
• Few employees have access to the sort of customer and industry insights that can help spur innovation.
• Would-be innovators face a bureaucratic gauntlet that makes it difficult for them to get the time and resources they need to test their ideas.
• Line managers aren't held accountable for mentoring new business initiatives or lack explicit innovation goals.
• Innovation performance isn't directly tied to top management compensation.
• The metrics for tracking innovation (inputs, throughputs and outputs) are patchy and poorly constructed.
• There's no commonly agreed-upon definition of innovation and hence no way of comparing innovation performance across teams and divisions.

Weirdly, neither BusinessWeek nor Fast Company ranks Whirlpool among the top 50 "most innovative" companies. This is surprising to me since I know of no other company whose conversion has been more complete. Over the past ten years, the Benton Harbor, Mich., appliance maker has re-crafted all of its management processes to serve the innovation gods. The payoff: an innovation pipeline whose value has increased from close to zero to more than $4 billion over the past 7 years, this according to a recent conversation with Nancy Snyder, Whirlpool's vice president for innovation. If you want a detailed guide on how your company can go from innovation chump to champ, have a look at Nancy's new book, Unleashing Innovation. It's the best "how to" I've come across.

So there we are: tyros, laureates, cyborgs, artistes, and the born again. That's my classification system for the world's most innovative companies--what's yours?

What taxonomy would you use to distinguish among different types of innovation performance? And what companies would you put at the top of your list--and why?

 

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This post was originally published on Gary's Wall St. Journal blog, then at the Management Innovation eXchange.