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Improving Innovation

Indra Nooyi, Chairman & CEO of Pepsi, shared in a recent article they’ve spent the last eight years “overhauling” their approach to innovation. They’ve changed organizational structure, front-end methodologies, process (stage-gate), performance monitoring, investment (up 40%), design capabilities, and the approach for developing markets.

All that time and effort increased new product contribution to 9% of total revenues but overall net revenues are -6% in the first quarter of this year, -0.3% last year.

Eight years, very smart people, massive efforts, and more new products than ever, but revenue is down.

Did I mention EIGHT YEARS? Is this what can be expected from massive efforts to improve innovation?

Emphatically no.

I know how hard it can be. I led the efforts when I was a strategy executive at Kraft Foods a decade ago. We took a nearly identical approach. In fact, along with a colleague working for me at the time, we actually patented a process at Kraft (#7,051,036) that nearly every PLM system in the world is likely violating in some way. Pretty cool stuff. But although there were many improvements, we did very little to move the overall revenue needle.

That was then. This is now.

Sooner or later, almost all mature businesses undertake an initiative to improve some aspect of innovation. And they almost all focus primarily on a few things: organizational structure, process, technology, and capabilities. No surprise. These are all tightly woven together and inform each other in a number of ways. But for transformation purposes, they can all be classified together in one domain: operating practices. And the reason most of these efforts fail (upwards of 80%) is that Operating Practices is only one of five domains for successful transformation.

The good news is that research and experience show four other domains that are equally important in making large improvements to innovation. In addition to Operating Practices, there’s Purpose, Leadership, (a culture of) Innovation, and Metrics.

Purpose is important because 70% of the workforce and 65% of managers are disengaged or actively disengaged from your business. Purpose re-engages them and pays off. Purpose-driven companies outperform the market 15:1 and their peers 6:1.

Leadership is important because only 15% of employees trust their leaders to do the right thing. Leading innovation requires five virtues that can be learned. And some behaviors encourage innovation while others discourage it. Leaders need to learn what behaviors they want to see in the organization and then set the tone at the top and model those behaviors. After all, leading means going first.

Innovation culture means everyone is involved. It becomes part of the very fabric of the organization, every job, and everyone knows how to move from idea to “market”. But to change the culture, you have to involve everyone in the effort. In short, you have to socialize the changes you want to see. This results in employees feeling valued and creates an “idea meritocracy”.

Metrics channel organizational and individual behaviors. But metrics often create “silos” at cross-purposes with each other each optimizing their own metrics while sub-optimizing the whole (examples include things like a package designer that optimizes shelf presence but sub-optimizes packaging line utilization). Just as a keystone “locks” all the other stones of an archway into place enabling them to bear weight, so keystone metrics harmonize efforts cross-functionally and enable optimization of the whole.

Knowledge about innovation has grown significantly over the last several years. But far more importantly, what we know about business transformation has grown dramatically. Now there is hope for not only better innovation methodologies, we can transform the business, quickly, and sustain the change until it becomes necessary to transform again. And we can do it all with better results and much, much faster than 8 years.

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