When we look at companies that have created new growth businesses, we often focus on single success stories. Procter & Gamble Co., for example, surely deserves our respect for creating the Swiffer, which as a product became a new category unto itself. It is really hard for market leaders to create innovative growth businesses.
The punishing thing about innovation, however, is that the contest never ends. Create a new market and other companies come rushing in. Parry one threat and up pops another. To succeed, companies need to go beyond isolated wins and develop the capabilities to repeatedly disarm disruptive threats and seize new growth opportunities. They must churn out successful growth businesses year after year. Success requires, in effect, institutionalizing innovation.
How can companies do this? They must begin by planning for innovation well before they need to. Crucially, this means having conversations about the direction new growth should go and putting parameters on these directions. Fieldwork conducted over five years at more than 50 companies points the way.
It may seem counterintuitive to begin articulating what the organization “wants to be” and to put parameters on new growth. But the best thing executives can do is first define their companies’ strategic goals and boundaries. Leaders may be skeptical, because they might believe that their strategy is already well defined and broadly known. Or they might hesitate because they believe that the best thing to do when trying to get managers to identify new growth opportunities is to actually remove boundaries.
But it’s very important to articulate what organizations hope will be the outcomes of their companies’ innovation efforts and where they expect to find growth — whether it’s from organic efforts, acquisitions or moves into adjacent markets. They also need to have rough estimates of their financial targets and how much growth they expect from each category.
Consider how this can be useful: At a large consumer products company, executives estimated how much growth they expected from the company’s core and from products in the development pipeline. They were shocked to learn that even under the most optimistic scenarios, the company would still need to generate almost a billion dollars in new growth to meet its 10-year strategic objectives. Before this exercise, leaders vaguely sensed that innovation was important. After the exercise, innovation became the organization’s first priority.
Next, executives must determine which strategies the company will and will not consider. Companies must have consensus around what is desirable, discussable and even unthinkable along a number of strategic dimensions.
Bear in mind that misalignment reigns, even in organizations that go to great lengths to develop strategic plans. Asking “What business are you in?” can prompt different and even contradictory answers from members of the same management team. And where there are disjointed pursuits, there are disjointed strategies. So it helps to start at the center: Delegate goal and boundary definitions to business units only after you’ve created goals and boundaries at the corporate level. That way, there will be context for the subunits’ narrower goals.
Also, realize that boundaries can be liberating. Managers frequently believe in letting chaos reign — they think it can unleash innovative energy. But having a blank slate can make it surprisingly hard for managers. As a senior manager at a leading consumer health company put it, “What are our odds of success if we trawl the ocean, hoping to catch a whale?” Don’t let teams waste months investigating a strategy that a company will never embrace. Constraints can help innovators know what a company wants to do and what it won’t do, which lets them focus their creative efforts.
Setting boundaries requires striking a balance. If defined too loosely, managers can lose their way. If defined too tightly, innovators can miss new growth businesses that might ultimately transform their industry. But when boundaries are set well, teams should have the focus they need to succeed.
This article is adapted from “Institutionalizing Innovation,” by Scott D. Anthony, Mark W. Johnson and Joseph V. Sinfield, which appeared in the Winter 2008 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.