Bridging the innovation gap

By Nigel Montgomery

No company is capable of stimulating and capitalising on innovation on its own. Each must close the gap between itself, its customers and its partners, making every effort to collaborate effectively. That was the underlying theme at IBM’s recent Business Leaders Conference.

IBM CEO and event host Sam Palmisano mentioned fast-moving consumer-goods maker Procter & Gamble (P&G) as a prime example. More than half of P&G’s new products result from collaboration with its customers, he claimed. Collaboration is therefore clearly a basic ingredient of competitive innovation.

In fact, innovation emerged as the top theme from the 765 interviews IBM recently conducted for its 2006 CEO study. In the 2004 study, innovation was just one consideration among many. Today, it has become the principal tenant of the ‘mental real estate’ of CEOs.

Companies that look primarily to external sources – customers and partners – for innovation, and that collaborate effectively with those outside entities, have higher revenue growth and operating margins, concluded the study. But CEOs listed research and development (R&D) as the eighth most significant factor on a list of nine possible sources of innovation – a distressing finding for those who put great stock in traditional corporate R&D.

Palmisano repeatedly drove this point home with additional examples intended to prove that we live in a world where differentiation is no longer vertical, it’s horizontal. It’s about with whom we effectively collaborate.

BP’s approach: doing well by doing good

One of the most insightful speakers, Lord Browne, group CEO of energy giant BP, suggested that the starting point must be to establish purpose, and that management must ensure consistent re-alignment to that purpose. Purpose is the overall goal – the reason for existing – not the tactics employed to get there.

Lord Browne offered a few further pieces of advice:

If you do things with one focus only, what else haven’t you done?
Do not bother asking questions when the answer is obviously no. The answer will not change simply because you ask the question. In other words, do not lose the plot and begin knee-jerk reactions to challenges;
Determine the purpose and then unfold it to a level that attaches to every individual.

Many companies focus on generating money for shareholders or, alternatively, proving that the company is upholding corporate social responsibility. Lord Browne suggested that doing one or the other on its own was insufficient as a primary purpose. Companies must do both.

"A successful business must realise that it is part of society. Innovation is the upfront response to change." BP is a case in point. The company is a pioneer in the development of alternative fuels, recognising that society has to respond to the threat of global warming and that it can play a major part in that change. BP’s success is evidence that it has a sound strategy.

High-tech industry imperative: stop pushing

Howard Stringer, chairman and CEO of Sony, commented that innovation has the power to change companies and individuals, while all the speakers agreed that the world of invent, create and push was gone for good.

An example of the globalisation that is already well underway, particularly in the high-tech industry, is Sony’s long-awaited PlayStation 3 (PS3) games machine. The PS3 contains processing power that, not so long ago, would have categorised it as super-computer. This processing power will not sit within the datacentres of major corporations, it’ll be available to ten-year-olds in homes around the world. Each will be instantly connectable to the internet, the ultimate collaboration vehicle.

Embarking on a global program to become increasingly innovative is not a quick process either. Kunio Nakamura, president of Japanese electronics giant Matsushita (better known by its principal brand, Panasonic), said that his company is currently only half-way through its plan after five years – although, going by its figures, it looks ahead of that plan, with profits of $3.4bn generated by its 335,000 staff worldwide.

Nakamura said that Matsushita adheres to some strict guiding principles. The company considers itself a public entity, with responsibility to the public at large. Customers always come first and, more radically, each day the company starts afresh, he said. In other words, it is in a constant state of renewal, stimulating a culture of innovation. This social responsibility theme was reiterated with every successful company presenting its case.

One point that became clear from the outset of the event was that for innovation to flourish, it must be led from the top. Cisco CEO John Chambers commented that a sled only goes as fast as the lead dog. Palmisano, gesturing to his own senior management in the room, said that another requirement of successful innovation is the "lowering of the centre of gravity". That means decentralising decision-making and empowering the individual, but senior management needs to have the courage to let go first.

Every speaker at the conference emphasised that they’re no longer fighting to be the best – they’re fighting to be unique. It’s a sombre message, but one which must have been music to Palmisano’s ears, having just launched a $500m global advertising campaign with The Kinks’ 1966 B-side ‘I’m Not Like Everybody Else’ as its anthem. Trust me – the tune is one you’ll find yourself singing in an unguarded moment.

Nigel Montgomery is director of European research at analyst group AMR Research. He can be contacted at nmontgomery@amrresearch.com