Leading innovation
McKinsey Quarterly, September 4,2008

It is my opinion, sustainable growth -- particularly when current business designs/models must change -- MUST be top down driven. Leaders MUST play an active role as implied by this simple summary from McKinsey Quarterly. In our work with the Market Driven Growth process, leaders must set clear objectives, set the right climate or culture (as highlighted in this article, particularly around constructive risk taking), ensure that all the ideas from inside and outside the company are considered, and they acknowledge an appropriate process to enable the effort. They must continue to play a hands-on role in clearing any internal barriers, legitimizing the effort both inside and outside the company, and ensure full resource allocation even if tough portfolio decisions must be made.

While senior executives cite innovation as an important driver of growth, few of them explicitly lead and manage it. About one-third say that they manage innovation on an ad hoc basis when necessary. Another third manage innovation as part of the senior-leadership team’s agenda. How can something be a top priority if it isn’t an integrated part of a company’s core processes and of the leadership’s strategic agenda and—above all—behavior?

According to 19 percent of the senior executives, neither growth nor innovation is part of the strategic-planning process, which focuses solely on budgeting and forecasting. Just under half indicated that innovation is integrated into the process informally. Only 27 percent said that innovation is fully integrated into it. But these executives feel more confident about their decisions on innovation and say that they have implemented ways to protect it and to ensure that it gets the right talent.

In a separate survey of 600 global business executives, managers, and professionals, the respondents pointed to leadership as the best predictor of innovation performance. Those who described their own organization as more innovative than other companies in its industry rated its leadership capabilities as “strong” or “very strong. Conversely, those who believed that the ability of their own organization to innovate was below average rated its leadership capabilities as significantly lower and, in some cases, as poor.

As with any top-down initiative, the way leaders behave sends strong signals to employees. Innovation is inherently associated with change and takes attention and resources away from efforts to achieve short-term performance goals. More than initiatives for any other purpose, innovation may therefore require leaders to encourage employees in order to win over their hearts and minds. Our sample of 600 managers and professionals indicated that the top two motivators of behavior to promote innovation are strong leaders who encourage and protect it and top executives who spend their time actively managing and driving it. Indeed, senior executives believe that paying lip service to innovation but doing nothing about it is the most common way they inhibit it. The failure of executives to model innovation—encouraging behavior, such as risk taking and openness to new ideas, places second. Rewarding nothing but short-term performance and maintaining a fear of failure also make it to the top of the respondents’ list of inhibitors.

Holding leaders accountable for encouraging innovation makes a big difference. Thirty percent of the senior executives in the survey were accountable for it, through formal targets or metrics, in their performance reviews. They were more likely than the broader group of respondents to view innovation as one of the primary growth drivers, to manage it formally as part of the leadership team or through an innovation council, and to learn from their failures to achieve it.
Our research implies that most senior executives do not actively encourage and model innovative behavior. If they did, they could give employees the support needed to innovate.

They can also take a number of other practical steps to advance innovation

1. Define the kind of innovation that drives growth and helps meet strategic objectives. When senior executives ask for substantial innovation in the gathering of consumer insights, the delivery of services, or the customer experience, for example, they communicate to employees the type of innovation they expect. In the absence of such direction, employees will come back with incremental and often familiar ideas.
2. Add innovation to the formal agenda at regular leadership meetings. We observe this approach among leading innovators. It sends an important signal to employees about the value management attaches to innovation.
3. Set performance metrics and targets for innovation. Leaders should think about two types of metrics: the financial (such as the percentage of total revenue from new products) and the behavioral. What metrics, for example, would have the greatest effect on how people work? One company required that 20 percent of its revenue come from products launched within the past three years. Leaders can also set metrics to change ingrained behavior, such as the “not invented here” syndrome, by requiring 25 percent of all ideas to come from external sources.

Senior executives say that the top three ways they spend time making decisions about innovation involve determining what types or strategies to focus on, who gets to work on the resulting projects, and how to commercialize the fruits. Few spend time on targets, metrics, and budgets for innovation. That is telling, since executives whose companies do have such targets and metrics feel the greatest confidence in their decisions.