11.2 Creating an Innovative Culture

Creating an Innovative Culture

Creating an innovative culture at work can improve employee satisfaction, team productivity, and the quality of the company’s products and services. It can also help grow brands, attract prospective employees, keep talent in the workforce, and help generate revenue (Indeed Editorial Team, 2021). While innovation strategy varies depending on the market and business goals, some challenges are universal. For example, if an executive may be struggling to manage the company’s innovation efforts to produce the results planned for.  The leader of an innovation project may be finding it hard to garner the support needed from senior management (Swisher2016).

What is an Innovative Culture?

An innovative culture is a work environment that fosters and rewards employee creativity instead of focusing on deadlines and revenue. Tech companies often have an innovative culture since the tech industry constantly changes and generates new ideas. Key characteristics of an innovative culture include (Indeed Editorial Team, 2021):

• Unique strategy: An innovative strategy often involves specific goals and a strategy specifically designed for and by the company.
• Autonomy: When the workplace has an innovative culture, it often gives employees freedom in how they work to accomplish goals.
• Trust: An environment of trust encourages employees to share ideas and attempt new methods to accomplish goals.
• Accepting failures: Innovation may lead to some failures along the way. Allowing these failures helps employees be more creative without the fear of defeat or making a mistake.
• Leadership: Good leaders with effective management abilities help maintain an innovative culture. However, it’s best implemented when employees act as leaders, too.

_{Watch this video: Amazon’s culture of innovation | London Business School by London Business School [6:36] (Transcript Available).}

Why Have an Innovative Work Culture?

An innovative work culture encourages continuous improvements which can help the company produce improved products and services to retain existing customers and attract new customers.  An innovative company also attracts investors and new talent (new employees). Innovation can improve the company’s image and make it a leader in the industry, again bringing more customers, investors, and profit. Innovative companies often have higher revenues than their competitors in the market, and they make more profit.

When companies trust, encourage and reward their employees, their employees feel more creative and create new ideas at work. This is a benefit to the company.  Often innovative cultures create happier and more productive employees.  Innovation can prepare a company to adapt to its industry and market and this ability to adapt can lead to a company’s longevity as it must keep up with its competition to stay relevant. When a team searches for new methodologies or processes and creates new products, it may discover a groundbreaking idea or predict a future problem it may face. Both can help the company adapt to a changing landscape. To summarize, the benefits of having an innovative work culture include the following (Swisher, 2016):

• Sets a course for improvement
• Helps develop new ideas
• Leads to company growth
• Gives a competitive advantage
• Increases team efficiency
• Develops an adaptive nature
• Appeals to more talented professionals
• Improves the company brand

How Can Leaders Build an Innovative Work Culture?

How Can Leaders Nurture Innovation?

Internal Collaboration

It is important to create cross-departmental teams and make communicating across departments easy. When, for example, the marketing team only speaks to the marketing team this creates a recipe for GroupThink. To ensure employees understand how the different parts of the company work and how they must work together to achieve progress, leaders might, for example, create a policy whereby anyone who wishes to become a business unit general manager must have worked in at least two functional areas for two or more years. The CEO of a very successful technology company requires the R&D people to spend about 10% of their time in marketing and sales and vice versa (Gupta et al., 2017).

A great example of internal or cross-company collaboration is Starbucks. As the rise of café culture birthed hipster pop-ups and independent shops, the dominant chains began to lose ground. Keen to avoid a Kodak moment, Howard Schultz jumped to action. The Starbucks CEO invited store managers from all over the world to come together for a conference to redesign the café experience (Richards, 2021).

Innovation Labs and Intrapreneurship

Designing innovation labs is one way to foster and support innovative initiatives.  Some well-known organizations create innovation lab spaces where their employees can experiment and work on innovative ideas.  Some companies share successful ideas from employees by supporting them in intrapreneurship initiatives which often takes the form of company spin-offs or subsidiaries whereby the employee who came up with the idea often becomes a top-level manager of the new spin-off company. Innovation Labs can also be external, such as a consulting firm that supports the innovation process of other businesses. Innovation labs are strategic and goal-focused, and are used as tools to address specific company innovation requirements.

Innovation Time for Employees

Leaders who build innovation into their culture may offer “free time” to employees who wish to work on innovative initiatives. Leaders want to encourage innovation in non-obvious areas. Getting employees to expand their definitions of innovation is essential, so leaders should explicitly spell out for employees distinct areas that are ripe for innovation within the company, such as product, process, or business model, and let employees know the company is seeking contributions in any of these areas (Solomon, 2018).

Companies like Google, 3M, and a host of others are known for letting their employees spend 15 to 20 percent of their time each week working on creative side projects, innovations, and ideas – and it pays off. (This is how Gmail and Google Earth were created.) In addition to creating space for employees to innovate, leaders should also be prepared to reward employees for their creativity. For example, employees might be promised a certain percentage of net revenue for any employee who comes up with a new product that goes to market (Abrams, 2021).

Partnerships and Acquisitions

Forming partnerships with other organizations to create a new innovation is often a great idea since it will reduce the risks of innovating for each company because each partner shares in the risks. With that said, each collaborating organization will also share in the rewards.  An organization that may be weak in some areas and has determined it would not be feasible to expand operations, purchase technology, or obtain patents that would be needed to develop a specific innovation, might gain the strengths needed (e.g., supply chain, manufacturing, technology, patents, trademarks, etc.) through a partner company that would share these with the innovation team.  (Note that some of these concepts were discussed in the chapter on innovation risks.)

Sometimes larger companies work with smaller businesses that have a niche, expertise, technology, or specialty that the larger company does not have.  Sometimes large organizations purchase (acquire) these smaller companies so that the larger organization can expand its innovative skillset, technologies, processes, patents/trademarks, and expertise with what the smaller company brings. For example, software and application development might not be the company’s thing so the company might consider partnering with a Python developer to launch a brand new web application that the industry has never seen (Abrams, 2021).

Cisco’s acquisition strategy generally targets smaller companies that have developed innovative new products,  but the key to making these acquisitions pay over the long term is the company’s ability to retain the talented engineers and managers from the acquired companies. They’ve been very successful at this, bolstered of course by the company’s increasing stock value (Morris, 2007).

The government often partners with businesses toward innovation, especially social innovation, technology innovation, and environmental innovation. Governmental organizations across the globe have launched their own innovation hubs often partnering with businesses to find innovations that will bring value to entire communities. (Note that some of these concepts were discussed in the chapter on innovation risks.)

Innovation consultants can help guide the innovative process.  Companies can outsource these experts if they do not have an organizational structure for innovation or lack talent within the organization. (Note that some of these concepts were discussed in the chapter on innovation risks.)

Open Labs for Co-Creation

An “open lab” can offer real benefits for organizations, for example, reinforcing corporate commitment to innovation and creativity in a physical space. Auto manufacturer, BMW, has a co-creation lab where its customers can share their ideas and become an integral part of concept vehicle development (Orange Business Services, 2019). Collaborating with customers by inviting them into innovation projects through gathering feedback to participating in development, customers have helped companies make great strides. Companies might consider co-creation partnerships with customers, universities, suppliers, start-ups, and even competitors. In early 2018, Swedish furniture and home goods retailer IKEA launched ‘Co-Create IKEA’, a digital platform encouraging customers and fans to develop new products. In 2018, Coca-Cola entered into a co-creation experiment with customers to make sure its Southeast Asia product strategy reflects the tastes of the region and its people (Livescault, n.d.).

Structuring for Innovation

“The most important goal of innovation is to gain a competitive advantage by increasing the speed and effectiveness with which your company learns—and acts on that learning. Innovation is about experimentation—failing early and often” (Swisher, 2016).

Innovation Strategy is about mapping an organization’s mission, vision, and value proposition for defined customer markets. It sets boundaries to innovation performance expectations by simplifying and structuring the innovation work to achieve the best possible outcome. For a business to thrive in today’s world of intensified competition it is critical that innovation initiatives are aligned with corporate strategy. (Note, additional details about innovation strategy are provided within the chapter on growth strategy.)

An innovation strategy is a clearly-defined plan of structured steps a person or team must perform to achieve the growth and future sustainability goals of an organization. An innovation strategy provides people with a framework for critical decision-making. Leaders may consider the following questions when devising a strategy (Richards, 2021):

• In what areas will we invest?
• How much will we invest?
• Who will make investment decisions?
• What capabilities will we need to develop to support our investments?
• What capabilities can we not build, which we must then acquire or form a partnership to provide?

Holding on to traditional practices just because “that’s what we’ve always done” is not a strategy for success. That rigid approach is guaranteed to fail in the face of disruption, as proven by Kodak and Blockbuster.

Leaders who want an innovative company must ensure a balanced innovation portfolio; a combination of core, adjacent, and transformative innovation initiatives. Generally, 70% of innovation investments are in core innovations, 20% in adjacent innovations, and only 10% in disruptive innovations. In terms of value creation potential, however, the ratios are inverted:  core innovation efforts typically contribute 10% of the long-term cumulative return on innovation investment, adjacent initiatives contribute 20%, and transformational projects yield a huge 70%.  The right balance of innovation investment will vary from company to company according to particular factors like age of the company, its competitive position in the market, and characteristics of the industry served (e.g. number of suppliers, market growth,  regulatory patterns, etc). Most companies tend to be heavily oriented toward just core innovation and whilst this is understandable in terms of avoiding the greater risks and uncertainties associated with adjacent and transformational initiatives, the result will be a steady, long-term decline in business and attractiveness to customers if a company never tries some adjacent or transformational projects (MBA Knowledge Base, n.d.). _{(Note that some of these concepts were discussed in the chapter on innovation risks.)}

Leaders must create corporate structures that continuously nurture innovation. They should build connections to innovation within the company vision, mission, and values and ensure that company values and goals are communicated throughout the organization. It is also important for the leaders of the organization to model the behaviors they want to see in their employees and create a culture of innovation through providing training, motivation, encouragement, and support to employees. Leaders must examine new ideas with an open mind.  Many ideas are in their infancy when they first appear and it may take time to refine and perfect the concept.

Leaders must continually look for opportunities and threats and examine the company’s strengths and weaknesses so as to build weaknesses into strengths, use strengths to combat threats, and take advantage of opportunities (SWOT, competitive analysis, PEST, Porter’s Five Forces, Ansoff Matrix, Innovation Matrix, etc.).

Leaders must be ready to accept risk and understand it is acceptable to fail and try again, as this is part of the innovative process. Investing in a knowledge management system will help the company make it easy to share information and ideas, track innovation progress, manage the budget, track ROI, and keep track of lessons learned from past failures so as to avoid these pitfalls in the future. An electronic system allows companies to capture the benefits of, and lessons learned from innovation.

Smaller businesses do not have much problem with the organizational structure getting in the way of innovation because most employees who have an innovative idea can speak directly with the owner of the business to get the idea reviewed and approved. Larger corporations have several types of organizational structures and some of those, such as hierarchical have many layers, so an employee may speak with their direct manager who then speaks to an area manager who then speaks to another manager, and so on.  Often in these large organizations, different departments are responsible for their own profit and loss, so they essentially compete with each other for company resources which is not the best structure to support collaborative innovation or make it easy to get big ideas into the innovation pipeline.

From small businesses to large organizations like global megacorporations, companies across the globe generally rely on four different types of organizational structures in the mechanistic model: Functional, Divisional, Matrix, and Hybrid. Matrix structures combine functional structures with divisional structures in a grid arrangement that combines vertical functions (e.g., organizational roles and titles) with horizontal divisions (e.g., directors of various product lines, projects, etc.). A matrix organization decentralizes decision-making and provides teams with increased autonomy while simultaneously improving cross-functional collaboration to boost overall productivity and encourage innovative approaches to problem-solving. Hybrid is similar to matrix structures, yet allows for collaborative sharing of data and resources while preserving division-specific specializations (Del Vecchio, n.d.).

While the four organizational structures above are the most common, companies around the world also use four other types of organizational structures which are more organic in nature: Process, Circular, Flat, and Network. Process structures concentrate on end-to-end workflows for specific processes. This improves adaptability and flexibility to meet changing demand and market conditions. A circular structure is intended to encourage the dissemination of information and inspiration from the center and allow different divisions to participate as components of a single whole. In flat structures, management and executive staff take a more collaborative rather than supervisory role, working and communicating closely with team members and project managers (Del Vecchio, n.d.).

To ensure operations are running smoothly, many businesses follow an organizational structure that best supports their size and business goals. Having and communicating a clear organizational structure helps employees understand their roles and corresponding expectations and informs goal-setting (Indeed Editorial Team, 2021).

_{Watch this video: How Apple Is Organized for Innovation: The Functional Organization by Harvard Business Review [4:35](Transcript Available).}

Funding and Budgeting for Innovation

The process for establishing a funding source will differ depending on the company. For example, Allstate CIO, Suren Gupta, has described how a formal Innovation Council evaluates ideas and allocates funding. In other companies, if the innovation ties closely to a particular business unit, then funding may come from that group’s budget. The actual size of the budget depends on whether a company lab is building the technology itself, partnering with other organizations, or acquiring a company, product, or talent. Amazon and Google have spent millions of dollars developing parcel delivery drones. Meanwhile, companies like UPS and Daimler AG have opted to partner with—and make strategic investments in—established drone makers. This lowers both the risk and the cost of innovation while still allowing the company to develop new capabilities. Regardless of how funding is established—or the size of the budget itself—it is critical to measure how much money was spent at each stage of the process: preparation (i.e., percentage of capital budget allocated to innovation projects), development (i.e., R&D spending at each phase of development the innovation process), and results (i.e., percentage of sales from innovation projects). As with the portfolio approach to general innovation metrics, the use of financial metrics across the innovation lifecycle reduces the focus on ROI, and too much focus on ROI can cripple innovative projects in the early stages (Davis, 2015).

“Leading Innovation” in Leading Innovation by Kerri Shields is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.