A companys ability to grow revenue by creating new products and services is one driver of its stock value. But innovative management practices are necessary to get new products or technological breakthroughs to market and create wealth for the organization and its stakeholders. Finance can play a key role in value creation if finance executives understand how to create and support the management processes that foster innovation.
Members of the Innovation Network Inc., a Denver-based association of change agents that help companies become more innovative, put their heads together and developed The Innovation DNA model. This model, according to founder Joyce Wycoff, represents the nine dimensions that need to be in place for organizational innovation to occur. According to the model, the DNA of corporate innovation includes:
"Innovation" is one of those overused words that has become a cliché. Companies are told to innovate, managers are told to be innovative, and employees are encouraged to be innovators. But the fact is, it not only drives our economy; it is also a critical differentiator between companies. Those that innovate, succeed. Those that dont, fail.
And despite what some finance professionals may think, innovation is not just the purview of the marketing and research-and-development (R&D) departments. Financial executives also have an important role to play in supporting innovation at their companies. "People in finance have a responsibility to make sure their companys resources are protected," explains Tom Drucker, president of Consultants in Corporate Innovation, based in Marina Del Rey, Calif. "But they must also help with the creation of ideas that generate new resources and value for the company."
Innovation, in the corporate sense of the word, refers to a novel way of doing something that is useful. "Innovation is not just about thinking in creative ways," Drucker explains. "Its about turning that creativity into something of value" both for the company and consumers.
Innovation is and always has been an important driver of Americas economy. "When you think about what has been driving economic growth over the last 150 years, some of the things that come to mind are internal combustion engines, plant mechanization, coal processing and electronics," explains Joel Mokyr, an economic historian at Northwestern University in Evanston, Ill. "In fact, the vast amount of growth experienced in this country since the Civil War has been caused primarily by innovation."
To get some idea of the economic impact of new and worthy ideas, take a look at the last period of major innovation in this country. This period, which started with the railroads in the 1890s and lasted through the advent of television and jet travel in the 1950s and 60s, caused a quadrupling of real per-capita incomes. By comparison, the economy stagnated during the 1970s and 80s largely because there wasnt much technological progress. The computer revolution had yet to take off.
Fast forward to the 1990s. Over the last 10 years, innovations have been coming fast and furiously. The Internet exploded onto the scene. Biotechnology approached critical mass. The speed of information processing accelerated exponentially and shows no sign of stopping. The opening of global markets, along with the technology to reach them, means that more consumers are available to take advantage of these innovations. Thanks to these breakthroughs, the American economy has been growing at an average annual rate of more than 3 percent during this decade, vs. less than 2 percent in the 1980s.
A key factor in the success of these innovations is that they are the result of work being performed in private-sector laboratories. Although the government has long been involved in innovation witness the space program and nuclear power, for example the most successful innovations have always been developed by private companies in response to the profit motive. This automatically provides an incentive to seek out technologies that are economically viable.
But it would be a mistake to assume that all innovations are based on technology. They arent. While this may have been true in the past, today there are actually three kinds of innovation fueling economic and corporate success.
First are the innovations in technology. Second are innovations in business models, which allow companies to reach customers in new ways. The runaway success of Starbucks Coffee and Amazon.com shows how new business models can drive the bottom line and transform the marketplace. Third are innovations in management practices that allow companies to organize themselves in new and more efficient ways.
All of these innovations overlap to some extent, but the third type innovative management practices enables the other two. Whether an idea or technological breakthrough ever makes it to market depends on how skillfully management encourages and supports that idea. Because management practices are so important to innovation, this is where financial executives should put their focus.
There is another reason financial executives should care about their companies ability to manage for innovation: the stock market. According to Joyce Wycoff, founder of the Innovation Network Inc. based in Denver, the stock market places value on revenue growth and on the perception that a company will continue revenue growth in the future by coming up with new products, services and processes.
"Microsoft, for example, has been getting about $24 of market capitalization per dollar of sales," she says. "In comparison, other companies that are not perceived as innovative are getting between $1 and $5 of market capitalization per dollar. We call this the innovation gap. Companies that are perceived as being innovative are valued more highly than those that are not. To me, this says there is probably nothing more important a manager can be doing than increasing their companys ability to be innovative."
Managing for Innovation
For many companies, narrowing the innovation gap will require nothing less than a wholesale revamp of management practices. Why? "Because we have reached the end of incrementalism," explains Peter Skarzynski, CEO and founding partner of Strategos, a strategy and innovation consulting firm based in Chicago. Companies can no longer get ahead by merely improving existing products or wringing out inefficiencies in the system through reengineering or enterprisewide computing. Instead of scale, efficiency and replication, were entering an era where imagination, experimentation and agility set companies apart. Yesterday, caution and careful analysis mattered. Today, energy and ideas do.
This change represents a fundamental shift in the way we regard and conduct business. Fortunately, companies seem to be getting the message. In a 1998 survey on innovation conducted by Watson Wyatt Worldwide, 71 percent of companies polled said that the word "innovation" appears in their mission statements, corporate objectives and/or company values.
But what does innovation look like? What are the management practices that support and encourage new ideas? To get a sense of how companies foster innovation, take a look inside the entrepreneurial start-ups that have beaten the pants off of established competitors over the last decade companies such as Cisco Systems Inc., America Online Inc. and Starbucks. Better yet, head to Silicon Valley where, as research fellow Gary Hamel writes in a recent Harvard Business Review article, "Everybody understands that innovation is the only way to create new wealth." What youll find is a set of management practices that larger, more established companies can learn from. These include:
- Compelling vision. Jan Nickerson, president of The Prosperity Collaborative Inc., a Wayland, Mass., consulting firm focused on organizational collaboration and innovation, says that innovative companies have a clear, elevating and motivational vision. "There is a North Star that calls forth the ideas in people," she says.
- Intrapreneurship. According to Skarzynski, innovative companies find ways to create internal markets for ideas, talent and capital. They create the conditions necessary for employees to develop their ideas. This includes providing financial resources, allowing employees to risk and fail, and encouraging them to come up with ideas where the potential is great but the return isnt immediately obvious.
- Equity compensation. Companies that foster innovation share the financial rewards that come from new ideas with the employees who create them.
- Meritocracy. Instead of promoting employees based on how long theyve punched the clock, innovative companies promote people based on the quality of their ideas and accomplishments.
Put all these practices together, and you begin to see that in innovative companies, people are: 1) motivated by a big vision to come up with big ideas; 2) given the support and resources to develop those concepts; 3) financially rewarded for successful innovations; and, 4) granted personal career advancement because of the quality of their ideas.
Innovation and Finance
Finance executives create and support the management practices that foster innovation by understanding the following facts:
- Innovation is possible in the finance department. Finance executives who support innovation start by looking at how to be more innovative within their own function. Unfortunately, because many people tend to associate innovation with creativity, they also tend to assume that there is no place for either within the finance department.
"In seminars, Ive asked managers if there is any place they dont want creativity in their companies," writes business professor Teresa M. Amabile in the Harvard Business Review. "About 80 percent of the time, they answer accounting. Creativity, they seem to believe, belongs just in marketing and R&D. But creativity can benefit every function of an organization. Think of activity-based accounting. It was an invention an accounting invention and its impact on business has been positive and profound."
Innovation impacts the reporting process. In innovative companies, the tools of financial reporting are sophisticated. These tools not only deliver data directly to users desktops, but they also deliver the kind of data that allows managers to make more meaningful decisions. As Nickerson explains, "Innovative financial departments report on multiple measures that matter to the business not just on what short-term financial results are." These include providing data on customer satisfaction, quality, progress against long-term strategic measures, and even on the new ideas that are being generated. To become more innovative, financial managers need to ask their internal customers what measures matter most to them and then deliver that information when they need it.
Innovation changes a companys investment spending. When thinking about how to make their companies more innovative, many managers make the mistake that spending more money on computers is the answer. But in reality, there is a limit to what even the most sophisticated computers can do in terms of idea generation. Until artificial intelligence catches up with human intelligence, ideas, innovation and creativity will remain the province of human beings.
For this reason, companies that want to invest in innovation must invest in people. This means setting aside resources for intrapreneurship programs, providing more money for employee training and development, and investing in relationships with customers and key suppliers. "These things, not technology, are what help to create a culture for innovation," Nickerson says.
Innovation changes how you think about your job. The biggest hurdle many finance people have to overcome in becoming more innovative is the way they have been taught to think about their jobs. For financial executives to become more idea-driven, they must replace an "either/or" mind-set with a "both/and" mind-set. As Nickerson, who spent the first half of her career in corporate finance, explains, "The world is not black-and-white, and it is not either/or. Financial executives must train themselves to look at multiple perspectives and find what is right about another point of view."
Financial people must learn to value both process and results, not just results. "A lot of financial people are bottom line, task-oriented," Nickerson explains. "They want results no matter what it takes to get there." But to be innovative, people have to be willing to not know what the answer will be and how it will come about. They have to learn to trust the process.
The world is moving too fast today to have only one set of plans. Nickerson suggests that financial people strive to develop at least three but not more than five scenarios for any given situation. "You dont get to choose what happens to you in life, but you can be better prepared by having more than one set of plans in place."
In the final analysis, if you think the word "innovation" is already overused and that the importance of innovation is being overstated, brace yourself: You aint seen nothin yet. As economist Mokyr explains, "I believe that what we are experiencing is something close to a new industrial revolution, a revolution far different from what we have ever experienced and something that we are not yet in a position to fully evaluate."
Up to this point, the only way economists have been able to explain full employment, an economy growing at 3 percent a year and a stock market hovering at 11,000 is innovation and the only way it can continue is if companies learn to out-innovate the innovators.