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Sunday, November 27, 2011

Five Traits of Innovative Companies

Five Traits of Innovative Companies (audio, 13 min)
Rajesh Chandy, Professor of Marketing at the London School of Economics, discusses his research on what makes a company innovative. Here are the traits shared by most innovative companies:
René Magritte
"The Son of Man"
(one of my favorite innovative painters)
  1. Management is more future focused. This is the most important factor in driving innovation. Chandy and colleagues measured this by simply asking managers questions such as what percent of the time they tend to focus on the future vs. current customers and competitors. In other research, Chandy and colleagues used a different metric: proportion of future-oriented words such as "will", "shall", "may", etc in annual reports, board meeting notes, and related materials. These metrics agree with each other. Being focused on the future may sound simple, but it is not easy. CEOs on average spend only 5% of the time focused on the future needs of the company, with the rest of the time spent on putting out current fires, ribbon cutting, etc.
  2. The company is willing to cannibalize its own existing products to enable its future products to enter the market. For example, Gillette, now part of Proctor and Gamble, has had for years roughly the same world razor market share. The company purposefully allowed its new products to replace its own old products on the market. This reduced the return on investment on the old products, but was beneficial for the company as a whole in the long term.
  3. The company has a high tolerance for calculated risk.
  4. The company recognizes and promotes people with personality profiles of "product champions". Such people aggressively pursue new product ideas, tend to be more gregarious, and have wide networks.
  5. The company offers high rewards for innovation. Importantly, these rewards are asymmetric: rewards for success and much higher than punishment for failure. Rewards are both monetary and non-monetary, such as recognition and autonomy. (In a related post, I wrote about such non-monetary rewards.) Less innovative companies tend to offer rewards based on other criteria, such as seniority.
Interestingly, here are some factors that have been previously thought to be important ones for innovation, but turned out to be less important compared to firm-level factors above:
  1. Governmental regulation. These effects are probably reduced because the sample of countries studied is small (developed or rapidly developing countries only - notably absent are top corrupt countries), and its governments tend to copy regulatory policies from each other.
  2. National culture (religion included).
  3. Geography. Specifically, there is no support for the hypothesis that countries further from the equator have more innovative companies.
The most innovative companies also tend to copy practices from other innovative companies, both within and outside of their industries. This creates a shared core set of innovative practices.
To paraphrase Leo Tolstoy's "Anna Karenina", innovative companies are all alike; every laggard is a laggard in its own way.

References:
Gerard J Tellis, Jaideep C Prabhu, and Rajesh K Chandy (2009). Radical Innovation Across Nations: The Preeminence of Corporate Culture. Journal of Marketing: Vol. 73, No. 1, pp. 3-23.  [full text]

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