The world and the customer are changing rapidly.   To keep up with these changes and to truly differentiate themselves in the marketplace, companies need to innovate.

Yet, too many companies still rely on small updates, upgrades, or makeovers of their product lines as their “innovation.”  That is just not good enough.

“We live in a world where the returns on incrementalism are going down and the returns on real innovation are going up.”  Gary Hamel (Strategy Consultant)

To become and remain as an innovative company is deceptively difficult.  Looking across industries, we see larger, established companies struggling mightily to innovate despite their significantly larger R&D and marketing budgets.  Even in the once innovative pharmaceutical industry, established companies are unable to innovate well enough to fill their drug pipeline.  Instead, they acquire start-ups and smaller companies that have successfully innovated.

To be successful in the long term, companies must innovate.  Below, I list out the five ingredients that need to be in place before any company can truly become an innovative company.

1.    The Leadership Team is Committed to a Culture of Innovation

Senior management needs to be committed to innovation through and through.  This means creating a culture where creativity, free thinking, and new ideas are valued and nurtured.   To do this, requires that the leadership team be steadfast in removing any roadblocks or obstacles that prevent innovation from flourishing throughout the company.

Without this top level commitment and daily support, the forces of inertia and bureaucracy will easily stifle innovation.  The finance department (and others) will see all the inevitable false starts and failures and shrink R&D and other innovation-related budgets to save money or re-direct to other more productive “pursuits.”

2.    Mistakes and Mis-starts are Tolerated

A fundamental part of any culture of innovation is that mistakes and mis-starts are allowed.  By its very nature, the hit ratio on innovation will be less than 100%.  Not everything works.  But, to be innovative, companies and their leaders need to be willing to fail and they need to create a culture where failure is OK and not career-ending.  If the company culture does not accept failure then people will not take the risks required to be innovative.

“There are two sides to every coin…As soon as you say, ‘failure is not an option,’ you’ve just said, ‘innovation is not an option.'”  Seth Godin (American entrepreneur and author)

“Companies that want to compete on innovation are well-advised to become more tolerant of errors in practice and develop better methods for capturing the lessons from mistakes.”  Paul J.H. Schoemaker (Author of Brilliant Mistakes)

3.    Brainstorming and Original Thought are Valued

Innovation is all about doing something different and unique.  To come up with these ideas requires original and creative thought.  As famed strategist Gary Hamel writes:

“You won’t make change by benchmarking the Fortune 500.  You have to challenge dogma, explore the fringe and experiment.”

First, the company needs to attract and employ creative and insightful individuals and teams with ‘fresh eyes’ who are not bound by the status quo.  Then, the companies need to spend the time and effort encouraging brainstorming in order to get the original thoughts that lead to innovation.  Finally, the company needs to listen to what this group and others (closer to the market) are saying.

“Pay attention to what’s happening on the fringe of your market and plan from the future back to the present.”  Adam Hartung (Consultant and author on business growth and innovation)

“Look outside your group.  An idea mundane (and seemingly intuitive) in one group can be a valuable insight in another.”  Ronald Burt (Author of The Social Origins of Good Ideas)

4.    Innovation is Encouraged and Appreciated Throughout the Organization

Innovation needs to flourish throughout the organization from top to bottom.  This requires top, middle and lower management to buy into the culture of innovation.

“In a survey by McKinsey of 600 executives, those at the top thought the main reason why their company wasn’t innovative was that it didn’t have enough of the right people.  Lower level management held a markedly different view – that the company had the right people, but the culture kept them from innovating as they should.”  Geoff Colvin (Author of Talent is Overrated)

Innovation cannot be the job of the corporate strategy or R&D department alone.  It needs to flourish at the bottom and throughout the organization as well.  Importantly, those at the bottom are less constrained by the status quo and the way things have always been done.  And they have a better and closer understanding of the customer.  As Curtis Carlson, CEO of SRI international says:

“Innovation that happens from the top down tends to be orderly but dumb.  Innovation that happens from the bottom up tends to be chaotic but smart.”

It is the “crazy ideas” and the chaotic innovation from the front lines that innovative companies and their leaders listen to and act on.

5.    Innovation has a Definite Goal – Solving a Customer Problem

Finally, the strategy of innovation needs to be driven and focused on the customer and solving a customer problem or creating a better customer experience.

“Innovation is the match between a solution and a need, connected in a novel way.”  Christian Terwiesch (Professor at Wharton business school)

“I never perfected an invention that I did not think about in terms of the services it might give others.  I find out what the world needs, then I proceed to invent.”  Thomas Edison (American inventor)