Are you leading the way in innovation?

According to the late, great guru, the father of modern management, Peter Drucker, innovation is the specific instrument of entrepreneurship. But how do you find the kind of innovative ideas that make a difference to the company's balance sheet?

Even the two US presidential candidates have traded blows in the race to deliver innovation in the field of environmentally friendly motoring. John McCain has proposed hundreds of millions of dollars for the innovator of a better battery technology to power cars, while Barack Obama is pledging $150bn over the next decade on clean energies technology.

But how do you find innovative new ideas? Customers can be one important source. Paul Sloane, an expert on innovation, adviser to many leading companies and author of 17 books, says: "Many companies conduct conventional customer surveys and run focus groups - useful channels of feedback, but in terms of ideas they are likely to be disappointing. They are good at demanding incremental improvements in products, lower prices and better service, but they are notoriously poor at predicting significant new products or innovations to meet their needs."

Customers are likely to say they want more of what you offer and they want it better, faster and cheaper. But don't count on them to tell you about different ways to meet their needs. A more lateral approach to gain insights from customers, is to study in detail how they use your type of product or service and to observe what practical problems they have.

Sloane quotes the case of Fluke Corporation of Seattle, noted for hand-held measure-ment products. They sent teams to observe maintenance engineers in chemical plants. They discovered that the engineers had to carry a variety of different instruments to calibrate temperature and pressure gauges.

Calibrating success

They also noticed that after taking the calibration measurement the engineer would write the readings on a clipboard and then transcribe them into a computer. The process was time consuming and prone to errors. Fluke designed a new product that used flexible software to calibrate any gauge in the chemical plant and also record the results, which could be directly downloaded to the engineer's computer. The resulting product was the Fluke Document Process Calibrator, which became a great success.

Sloane also quotes the case of Haier, a leading Chinese manufacturer of white goods, whose engineers in rural China were surprised to find that people were using Haier washing machines to wash home-grown vegetables. Turning this unexpected use into a new application, the Haier development team came up with a wash cycle designed specifically for vegetables. On another occasion, a sharp-eyed engineer saw that a student had placed a plank between two Haier fridges to form a makeshift desk. The company responded by designing a fridge with a foldout desktop - ideal for small rooms that need an extra table.

"Asking customers for feedback is good," says Sloane, "but observing them can be much better. When times are tough, we need to examine and improve our business. As well as asking, 'How can we delight customers and increase sales?' we should ask, 'How can we cut costs and use less energy?"

Strong leadership is a prerequisite for success in innovation. According to the Boston Consulting Group's (BCG) 2008 Innovation Report: "If you are not able to assume the mantle of innovation yourself, you must appoint someone who is and give that person both your support and the ability to take action." Job title doesn't matter. What matters is that he or she has power and credibility throughout the organisation. "There needs to be someone who wakes up every morning worrying about how the organisation is going to become more innovative and who is able to do something about it."

Strong leadership equals innovation

Successful innovation leaders are a special breed, and not necessarily the most creative people. More important is the ability to be effective at moving large, complex organisations forward, instilling a new culture and a new set of processes, and providing the organisational tools that focus the company on how innovation can support its business strategy. BCG lists five common characteristics that distinguish the best innovation leaders:

• The ability to tolerate ambiguity;
• The ability to assess and be comfortable with risk;
• The ability to balance passion and objectivity;
• The ability to change;
• The ability to command respect, even from sceptics.

Yet there are fresh signs of a new sense of urgency sweeping through the US. A recent article in Business Week asked: 'Can America invent its way back?' Will 2009 be the year of innovation economics? Beneath the gloom, the article suggests that economists and business leaders across the political spectrum are slowly coming to an agreement: innovation is the best - and may be the only - way the US can get out of its economic hole. New products, services and ways of doing business can create enough growth to enable Americans to prosper.

According to the article, the Presidential candidates are certainly taking the idea seriously: "John McCain has proposed a $300m prize for the person or company that creates a better battery technology to power cars. Barack Obama has called for spending £150bn over the next ten years on clean energy technologies. The hoped-for outcome - more jobs, more competitive trade, less dependence on foreign oil."

The new field of innovation economics addresses this gap between spending and results. Economists are increasingly studying what drives successful innovation to learn how companies can get more bang from the bucks spent on R&D initiatives and understand what's working in the US and what's not. And, most importantly, economists are making concrete proposals about how to turn smart ideas into jobs and growth.

Yet innovation is at or near the top of most company's agendas as one of the three most important strategic priorities.

Who are we innovating for?

Innovation comes in many forms: from the creation of new industries to new products and product adjustments; from new technological developments to new products for new markets and lower priced products and services. According to the latest BCG survey, the safest pathway for innovation comes in the form of new offerings for existing customers, which were favoured by 89 per cent of respondents.

The second most popular choice was new offerings that allow for expansion into new customer groups, especially valuable for technology and telecommunications companies. New-to-the-world products were considered most valuable by automotive companies (76 per cent), travel, tourism and hospitality companies (76 per cent), and by Asia-Pacific companies generally (75 per cent versus a global average of 66 per cent).

But cost reduction in the case of existing offerings was identified as crucial by industrial goods and manufacturing and automotive companies. For the second year, Apple, Google and Toyota Motor were rated as the world's most innovative companies, followed by General Electric, Microsoft, Tata Group, Nintendo, Procter & Gamble, Sony and Nokia.

The BCG survey found that, despite frustration with investment returns, companies continue to attach considerable importance to innovation, with 43 per cent of executives considering it a top strategic priority and 23 per cent regarding it as their most important strategic priority; 63 per cent plan to raise their spending on innovation in 2008 and 29 per cent to raise it significantly. Not surprisingly, Asian companies have the most ambitious spending plans. Entertainment and media led the way, closely followed by travel, tourism and hospitality.

Why is it mostly newcomers to an industry who challenge the orthodoxy of existing products and break existing practices? Henry Ford challenged the assumption that automobiles were expensive, hand-built carriages for the wealthy. Anita Roddick challenged the assumption that cosmetics had to be in expensive bottles and introduced plastic containers. IKEA were probably first to enable customers to collect their purchases from the warehouse. Easyjet challenged the assumption that tickets had to be issued and sold through travel agents.

BCG's survey found that innovation is at or near the top of most companies' agendas, with 66 per cent of respondents considering it one of the three most important strategic priorities. On the other hand, fewer than half (43 per cent) are satisfied with the financial return on their investment in innovation.

Problems include lengthy development times, a risk averse corporate culture, and difficulty in selecting the right ideas to commercialise. Most companies have the means to greatly boost their return on innovation, according to the report, and gain a competitive advantage, but few are acting with the commitment necessary to achieve it.

Perhaps the most interesting finding is that there is a direct relationship between success at innovation and stock market performance. This is a timely reminder of why managers should want to be the biggest drivers of innovation in their company. The message is clear: innovation means success and managers must innovate.