Companies are increasingly recognizing that mastering innovation is becoming a competitive imperative. As formerly isolated markets collide and competitors from emerging markets hone disruptive approaches, product life cycles are shrinking and competitive advantage is dissipating more rapidly than ever before. The average length of time a company spends on the Standard & Poor 500 list has shrunk from thirty years to about ten. Long-term survivors underperform market indexes. Companies are accumulating hoards of cash, making massive acquisitions, and buying back stock because they cannot create organic growth. A managing director at Credit Suisse said, “Corporate America is the growth stock that can’t grow.”

Case studies of sweeping organizational transformation show that success is possible: Nokia moved from rubber boots to mobile phones, Kimberly Clark shifted from a paper provider to a consumer packaged goods leader, Apple sextupled its stock in five years after a decade of stagnation, Google moved from a technology company to an advertising powerhouse, and Procter & Gamble hopped from soaps, to laundry, to skin care, to health care. But the breathless hype behind these stories obscures a brutal reality: most efforts at innovation fail miserably. Just about every manager has lived through an innovation effort that starts brimming with unbridled hope and ends in crashing disappointment.

This unnerving and frustrating reality should not be a surprise. After years of pervasive “continuous improvement” programs, executives are reaping what they have sown. Their organizations, from executives down through to the rank and file, have been motivated and compensated to focus on incremental improvement. These improvements are measured quarterly and annually along competitive performance parameters established years before. To expect this system to create the breakthrough innovations that power transformation is simply unrealistic. Years of continuous improvement training have caused corporate innovation muscles to atrophy.

Many of the case studies of established companies that have successfully created new growth businesses detail a single success. The companies that have gotten it right once or a handful of times—such as ING’s creation of its rapidly growing ING Direct offering, Motorola catching the mobile phone market off guard with its ultra-thin RAZR phone, and Procter & Gamble creating new categories with products such as Swiffer, Febreze, and Crest WhiteStrips—surely demand respect and admiration. Managers of the success stories know all too well how hard it is to fend off the forces that make the creation of innovation-driven growth businesses tricky for market-leading incumbents.

Success, then, requires going beyond winning once to developing deep capabilities that allow a company to repeatedly disarm disruptive threats and seize new growth opportunities. To achieve this goal, companies need to organize in ways that maximize their ability and churn out successful growth businesses year after year.

This chapter examines three key focus areas to make the pursuit of growth through innovation more systematic:

Working through each of these areas and tailoring the design to fit their own circumstances will afford leaders the greatest opportunity for success and repeatable, predictable growth.

It is also important to note that organizing to innovate is different from organizing for research and development. Innovation goes beyond research and development. A properly structured innovation engine considers new business models, creative financing approaches, and unique partnership strategies, along with more traditional technology levers.

Our belief is that there is no one-size-fits-all way to organize for innovation. Rather, companies need to assess the strategic goals of their innovation structure and the degree to which active management is required to achieve those goals to pick the most appropriate structure (or structures).

Although clearly these questions simplify complex situations, they provide a helpful way to provide direction on the selection of an appropriate innovation engine architecture.

To address this problem, we suggest creating a team charter: a one-page document that helps the team set off in the right direction. Start that charter with the team’s objectives. You might not know what the ultimate successful growth strategy will be, but the odds are high that your first strategy is wrong in some meaningful way. However, you should have a good sense of your overall strategic objectives. Perhaps it is to develop a new growth opportunity in an identified adjacent market. Maybe you are seeking to find a way to leverage a particular technology in a new way. Regardless of the objective, we have found it helpful to summarize the team’s strategic objective in one sentence.

Following that sentence should be a description of what the team can unquestionably do, what it can consider doing, and what is off the table. Build off your corporate goals and boundaries to provide guidance to the team about dimensions such as the target customer and geography, distribution channel, steady-state revenue and margin target, type of offering, brand, and tactics.

The key is identifying what is desirable (what you want), what is dis cussable (what you will consider), and what is unthinkable (what is out of bounds). Making these parameters clear at the start and being willing to consider changing them as new information comes in can help ensure that teams focus on the right activities.

At other times, companies staff new growth initiatives with the diamonds in the rough. Innovation requires doing things differently, the argument goes, so getting people who think differently may seem like a good idea. In fact, assembling together the land of the misfit toys is unlikely to be the vehicle that drives growth either. These teams can lack the required discipline to move ideas forward and the appropriate organizational gravitas to influence internal resources.

When pursuing disruptive innovations, it is best to select team members who have attended schools of experience where they wrestled with challenges you can predict the team will encounter. To use the schools of experience model, ask two simple questions:

It is quite likely that the managers who have addressed identified challenges are not the typical names that bubble up to the top of the list for high-profile ventures. Disruptive pursuits almost always require very different experiences from what a manager faces in the core business. In fact, many of those schools of experience might have come from experiences that managers had in other parts of their career.

Although the challenges teams will encounter often are idiosyncratic, there are some schools of experience that are generally helpful for managers staffed on disruptive projects:

Identifying critical schools of experience gaps on the team can help inform internal staffing decisions. In addition, it can highlight the need to pull in outsiders who have had a greater chance of addressing the issue than the internal manager.

Intel and SAP staffed the Pandesic team with some of their best managers—leaders who had successfully led initiatives within the core SAP and Intel businesses. Pandesic ramped up to a hundred employees in eight months and quickly established offices in Europe and Asia.

Pandesic’s managers decided to take their lower-priced, easier-to-implement ERP package to market through the same channel partners it used for SAP’s large company systems. The product, initially intended to be a simple ERP solution delivered to small businesses over the Internet, evolved into a completely automated end-to-end solution.

The outcome was predictable. The channel was not motivated to sell Pandesic’s simpler, cheaper product that did not need implementation support, when it could make substantial money on the large-scale traditional SAP products. And so Pandesic ended up failing miserably. It sold very few systems and shut its doors in February 2001, after having spent more than $100 million.

What might have happened if SAP and Intel had sought managers who had had different schools of experience? Those managers could have realized that trying to sell the Pandesic product through the same channel as SAP’s core products was a huge mistake. This would have been obvious if they had wrestled with a problem like this before in a “school” they had previously attended.

The leaders of Pandesic were not incompetent; they did what made the most sense to them based on their own schools of experience. But they did not have the right schools to know the right questions to ask with a new disruptive venture.

Pandesic made a common mistake. Many companies rely on employees from the core organization to staff new ventures. Using these employees is tempting: they are close to the issues, and hiring managers usually have some previous experience working with them. However, they are grounded in work processes and decision-making patterns that may be dysfunctional in the new environment. Their thinking is also likely to remain focused on the core market, even if they are physically or financially separated from the parent organization.

Similarly, companies can make a mistake when bringing in senior leaders. One of the cases taught in Harvard Business School’s entrepreneurial management department describes key lessons learned from a venture capital firm, ONSET Ventures (Roberts and Tempest, 1998). ONSET studied all of its investments that were a success and all of its investments that had failed. One key success factor was hiring a CEO only after a successful business model had emerged. If the business model was not clear, hiring a CEO too soon could be a mistake, because the CEO would default to using a business model that had worked in the past for that person. Once the business model was clear, the search for a CEO became much easier.

True innovation is necessarily imprecise, particularly in the early days. Tools that force precision too soon can cut off great opportunities or force innovators to move in more sustaining directions to make the numbers.

Typically the very theory of how to use a tool needs to change. When a company is working on a close-to-the-core initiative, tools typically are used to validate hypotheses. If the data do not conform to a predetermined hypothesis, the default behavior is to use the tool again. For disruptive initiatives, tools need to be used for discovery. If data do not conform to a predetermined hypothesis, the team needs to examine the hypothesis. This distinction becomes particularly critical if the tool being used asks the wrong question for a disruptive project.

Companies that find that their existing tool kit is inadequate for disruptive growth have two choices. One is to change the tools they use. Instead of feeding results from a large-scale survey into a ten-year forecast, use qualitative data to estimate how passionate customers are about an idea. Alternatively, existing tools can be used in different ways. For example, instead of producing a point estimate of volume and net present value, companies can develop scenarios or create ranges for alternative scenarios. This approach can be difficult for senior managers who are trained in looking for the number, but it is a more realistic estimate of an idea’s potential.

It is important that senior managers and middle managers alike break these mind-sets. After all, many of the most important resource allocation decisions are the incremental choices made by project teams. Middle managers who do what they have always done can destroy the best intentions of senior managers; senior managers who still subscribe to these harmful mind-set traps can derail a middle manager’s well-designed approach. Companies need to have a common language related to innovation that allows them to work together in new ways.

Generally companies should involve external perspectives deeply in the innovation process. They should have well-defined ways to routinely and repeatedly interact with their core customers, learn from noncustomers, monitor ongoing industry experiments, scan for emerging technologies, and learn from other industries. Setting up regular ways to draw on these kinds of external stimuli, including some of the mechanisms described here, can expose previously invisible opportunities for innovation.

Getting incentives for innovation right is clearly a large hurdle for an established company. A start-up company can issue equity that allows managers to share in a venture’s upside potential. Following the same approach inside an established company requires some creativity. Companies need to find a way to link managed risk taking with pay structures, bonuses, or career progression, or some combination of these. It is unlikely that intrapreneurs will have the pure upside of entrepreneurs, but that is appropriate because they also have significantly lower downside risk. Despite the attention showered on the success stories, the vast majority of new ventures fail. If an internal venture fails, managers can easily move to another position instead of having to search for an entirely new job.

Finally, consider creating development paths that make it attractive for high-potential employees to spend time working on promising growth initiatives. Working on risky ventures can be an effective proving ground for emerging leaders because many of the challenges the venture will face will be general management issues.

As you develop human resource structures that will enable your organization to achieve its innovation goals, consider the incentive and learning value offered by rotation programs. Creating the possibility for high-potential employees or business unit members with relevant knowledge to participate in innovative growth initiatives can provide them with exposure to new ways of problem solving and new decision-making challenges. At a minimum, their experience working on such initiatives will provide them with rich learning to bring back to their core area after their participation. At the extreme, you might create the leaders of your next new core business.