Making Innovation Work

TONY DAVILA leads the Entrepreneurship Department and Entrepreneurship and Innovation Center at IESE Business School, and is one of the world’s leading scholars, speakers, and advisers on entrepreneurship and innovation. Building on his doctoral work at the Harvard Business School, he works with both large industrial companies and Silicon Valley startups to design management control and performance measurement systems that drive innovation.   MARC J. EPSTEIN is Distinguished Research Professor of Management at Jones Graduate School of Business at Rice University. Previously Visiting Professor at Harvard, he has been a senior consultant to leading corporations and governments for more than thirty years, specializing in strategy implementation, innovation, governance, accountability, and performance metrics. He has also served as professor at Stanford Business School and INSEAD.   ROBERT D. SHELTON is the Leader of the Innovation Practice at a major global consulting firm. Through many years as an innovation consultant, his client list is a “who’s who” of innovative companies including leaders in high tech, consumer goods and services, software, financial services, cleantech, aerospace, and healthcare industries. He was Vice President and Managing Director with Arthur D. Little, and Managing Director of the SRI Worldwide Technology Management practice.

Introduction to Updated Edition xiii

Introduction xliii

Chapter 1  Driving Success: How You Innovate Determines What You Innovate 1

Innovation Is the Power to Redefine the Industry 1

The Innovation Imperative: Driving Long-Term Growth in Top and Bottom Lines 5

How to Make Innovation Work: How You Innovate Determines What You Innovate 7

The Rules of Innovation 9

1. Exert Strong Leadership on Innovation Direction and Decisions 12

2. Integrate Innovation into the Business Mentality 15

3. Match Innovation to Company Strategy 16

4. Manage the Natural Tension Between

Creativity and Value Capture 18

5. Neutralize Organizational Antibodies 23

6. Cultivate an Innovation Network Beyond the Organization 24

7. Create the Right Metrics and Rewards for Innovation 25

Summary: The Innovation Company 28

Chapter 2  Mapping Innovation: What Is Innovation and

How Do You Leverage It? 29

A New Model of Strategic Innovation 29

Business Model Change 31

Value Proposition 32

Supply Chain 33

Target Customer 34

Technology Change 35

Product and Service Offerings 35

Process Technologies 36

Enabling Technologies 37

Three Types of Innovation 39

Incremental Innovation 42

Semiradical Innovation 47

Radical Innovation 51

Ersatz Radical Innovation 55

Disruptive Technologies 57

Innovation Model and the Innovation Rules 58

Chapter 3  Choosing Your Destiny: How to Design a Winning Innovation Strategy 59

Choosing the Right Strategy 59

Play to Win and Play Not to Lose Strategies 60

Play to Win Strategy 60

Play Not to Lose Strategy 63

Too Much of a Good Thing 71

Clearly Defined Innovation Strategy Drives Change 72

Do You Select an Innovation Strategy? 75

Internal Factors 76

External Factors 77

Risk Management and Innovation Strategy 78

Innovation Strategy: The Case of the Pharmaceutical

Industry 79

Attempts to Solve the Innovation Problem 81

Changing the Innovation Approach 82

Strategy and the Innovation Rules 85

Chapter 4  Organizing for Innovation: How to Structure a Company for Innovation 87

Organizing for Innovation 87

Developing an Internal Marketplace for Innovation 88

Balancing Creativity and Value Creation 89

The Balance Changes as the Organization Matures 91

Five Steps to Balancing Creative and Commercial Markets 98

Outsourcing Innovation 100

Making Good Use of Your Partners 103

Integrating Innovation within the Organization 105

The Value of Networks and Innovation Platforms 106

The Corporate Venture Capital Model 110

The Ambidextrous Organization 112

The Leadership Role 115

Organization and the Innovation Rules 116

Chapter 5  Management Systems: Designing the Process of Innovation 119

Systems and Processes Make Things Happen 119

The Objectives of Well-Designed Innovation Systems 120

Choosing and Designing Innovation Systems 124

Systems for Ideation: Seeing the Gaps 127

Structured Idea Management 128

Experimentation 130

Prototyping 131

Making Deals 133

Innovation That Fits 134

Management Systems Comparison 137

Electronic Collaboration 139

Management Systems and the Innovation Rules 142

Chapter 6  Illuminating the Pathway: How to Measure Innovation 145

To Measure or Not to Measure? 145

What Gets Measured Gets Done 146

The Three Roles of a Measurement System 148

A Balanced Scorecard for Measuring Innovation 150

The Business Model for Innovation 150

Inputs, Processes, Outputs, and Outcomes 151

From the Business Model to the Measurement System 155

Designing and Implementing Innovation Measurement Systems 159

Measures for Ideation 160

Measuring Your Innovation Portfolio 163

Measuring Execution and Outcomes of Innovation 168

Measuring Sustainable Value Creation 170

The Barriers to Effective Performance Measurement. 176

Measurement and the Innovation Rules 178

Chapter 7  Rewarding Innovation: How to Design Incentives to Support Innovation 181

The Importance of Incentives and Rewards 181

Motivation 182

Different Strokes for Different Folks 183

A Framework for Incentive Systems’ Design 185

Setting Goals for Measuring Performance 188

Specific vs. Broad Goals 188

Quantitative vs. Qualitative Goals 190

Stretch vs. Expected Goals    190

Success-Driven vs. Loss-Avoidance Goals 191

Performance Evaluation and Incentive Contracts 193

Team vs. Individual Rewards 193

Subjective vs. Objective Evaluation 196

Relative Performance vs. Absolute Performance Evaluation 198

Incentive Contracts 199

Expected Level of Pay 200

The Shape of the Pay–Performance Relationship 200

Timing Incentives 202

Delivery of Compensation 203

Key Considerations in Designing Incentives Systems for Innovation 204

The Danger of Overuse 205

The Negative Effect on Intrinsic Motivation 206

Fear, Failure, and Fairness 207

Incentives and Rewards, and the Innovation Rules 208

Chapter 8  Learning Innovation: How Do Organizations Become Better at Innovating? 211

The Importance of Learning 211

A Model of Learning 214

Learning to Act 215

Learning to Learn 216

Learning Systems for Innovation 217

Systems for Delivering Value 218

Systems for Refining the Current Model 220

Systems for Building Competencies 221

Systems for Crafting Strategy 223

How to Make Learning Work in Your Organization 224

Knowledge and Ignorance Management 224

The Project Roadmap 226

Failures As Part of the Process 228

Learning Histories 228

The Dynamic Nature of Innovation Strategy 229

The Technology Stage 230

The Performance Stage 232

The Market Segmentation Stage 233

The Efficiency Stage 234

The Complementarities Stage 234

Learning and the Innovation Rules 235

Chapter 9  Cultivating Innovation: How to Design a Winning Culture 237

How Culture Affects Innovation 237

Is Innovation the New Religion? 238

The Danger of Success 240

Organizational Levers of an Innovative Culture 244

The Levers of an Innovative Culture 244

Legends and Heroes 251

The Physical Environment 252

Different Country Cultures Breed Different Innovation Cultures 252

People and Innovation 254

Recruiting to Build an Innovative Organization. 255

Turn Your Recruitment Strategy Upside-Down! 256

The Role of Senior Management 258

Leading Innovation 258

The Role of the CEO 260

Culture and the Innovation Rules 261

Chapter 10  Conclusion: Applying the Innovation Rules to Your Organization 263

Combining Creativity with Commercial Savvy 263

Smart Execution 264

The Role of Leadership 266

Leadership Must Define the Innovation Strategy and Link It to the Business Strategy 266

Innovation Must Be Aligned with the Company Business Strategy, Including Selection of the Innovation Strategy 267

Leadership Must Define Who Will Benefit from Improved Innovations 268

Diagnostics and Action 269

Stage Gate Systems 278

The Venture Capital Model 280

The Technology Innovation Model 281

Time-Driven Systems 282

Organizing Initiatives 285

Fine Tuning 285

Redirection/Revitalization 285

Generating Innovation Value 286

Endnotes 289

Bibliography 307

Additions to Bibliography for Updated Edition 329

Index 333