Leadership and innovation37Leadership and innovationMcKinsey research reveals a wide gap between the aspirations of executives to innovate and their ability to execute. Organizational structures and processes are not the Barsh, Marla M. Capozzi, and Jonathan DavidsonLike short skirts, innovation has traditionally swung into and out of fashion: popular in good times and tossed back into the closet in downturns. But as globalization tears down the geographic boundaries and market barriers that once kept businesses from achieving their potential, a company’s ability to innovate—to tap the fresh value-creating ideas of its employees and those of its partners, customers, suppliers, and other parties beyond its own boundaries—is anything but faddish. In fact, innovation has become a core driver of growth, performance, and research bears out this point. More than percent of the senior executives in a survey we recently conducted say that innovation will be at least one of the top three drivers of growth for their companies in the next three to ve years. Other executives see innovation as the most impor- tant way for companies to accelerate the pace of change in today’s global business environment. Leading strategic thinkers are moving beyond a focus on traditional product and service categories to pioneer innovations in business processes, distribution, value chains, business models, and even the The McKinsey Quarterly conducted a survey of executives on leadership and innovation in September , receiving responses from executives at the senior vice president level and above and from lower-level executives around the world. The respondents represented a broad range of industries. See “How companies approach innovation: A McKinsey Global Survey,” , October . See “An executive take on the top business trends: A McKinsey Global Survey,” , April .Chris Hosmer
38The McKinsey Quarterly 2008 Number 1functions of management (see “Innovative management: A conversation with Gary Hamel and Lowell Bryan,” in the current issue).Our research also shows that most executives are generally disappointed in their ability to stimulate innovation: some percent of the senior executives we surveyed were only “somewhat,” “a little,” or “not at all” con dent about the decisions they make in this area. What explains the gap between the leaders’ aspirations and execution? Even starting to build an organization in which innovation plays a central role is often far more frustrating than most executives ever imagine it to be. Many of those who mimic the approaches of the most successful practitioners have found that path to be ineffective. Sustaining innovation to create real value at scale—the only kind of innovation that has a signi cant nancial impact—is even are no best-practice solutions to seed and cultivate innovation. The structures and processes that many leaders re exively use to encourage it are important, we nd, but not suf cient. On the contrary, senior executives almost unanimously— percent—say that people and corporate culture are the most important drivers of experience convinces us that a disciplined focus on three people-management fundamentals may produce the building blocks of an innova- tive organization. A rst step is to formally integrate innovation into the strategic-management agenda of senior leaders to an extent that few companies have done so far. In this way, innovation can be not only encouraged but also managed, tracked, and measured as a core element in a company’s growth aspirations. Second, executives can make better use of existing (and often untapped) talent for innovation, without implement- ing disruptive change programs, by creating the conditions that allow dynamic innovation networks to emerge and ourish. Finally, they can take explicit steps to foster an innovation culture based on trust among employees. In such a culture, people understand that their ideas are valued, trust that it is safe to express those ideas, and oversee risk collectively, together with their managers. Such an environment can be more effective than monetary incentives in sustaining list of steps is not exhaustive. Still, given the limited time and means— as well as the short-term performance pressures that executives constantly face—pursuing innovation with anything other than existing talent and resources often isn’t an option. These three fundamentals are a practical “How companies approach innovation: A McKinsey Global Survey,” , October .
Leadership and innovation39starting point to improve an organization’s chances of stimulating and sustaining innovation where it matters most—among a company’s innovationWhile senior executives cite innovation as an important driver of growth, few of them explicitly lead and manage it. About one-third say that they manage innovation on an ad hoc basis when necessary. Another third manage innovation as part of the senior-leadership team’s agenda. How can something be a top priority if it isn’t an integrated part of a company’s core processes and of the leadership’s strategic agenda and—above all—behavior?According to percent of the senior executives, neither growth nor innovation is part of the strategic-planning process, which focuses solely on budgeting and forecasting. Just under half indicated that innovation is integrated into the process informally. Only percent said that innovation is fully integrated into it. But these executives feel more con dent about their decisions on innovation and say that they have implemented ways to protect it and to ensure that it gets the right a separate survey of global business executives, managers, and pro- fessionals, the respondents pointed to leadership as the best predictor of innovation performance. Those who described their own organization as more innovative than other companies in its industry rated its leadership capabilities as “strong” or “very strong.” Conversely, those who believed that the ability of their own organization to innovate was below average rated its leadership capabilities as signi cantly lower and, in some cases, as with any top-down initiative, the way leaders behave sends strong signals to employees. Innovation is inherently associated with change and takes attention and resources away from efforts to achieve short-term performance goals. More than initiatives for any other purpose, innovation may there- fore require leaders to encourage employees in order to win over their hearts and minds. Our sample of managers and professionals indicated that the top two motivators of behavior to promote innovation are strong leaders who encourage and protect it and top executives who spend their time actively managing and driving it. Indeed, senior executives believe that paying lip service to innovation but doing nothing about it is the most In August , McKinsey surveyed global business leaders—including senior executives, middle managers, and professionals in many industries—about innovative business cultures. The global business leaders in the survey were asked to rate how innovative their own organization was compared with other companies in the same industry.
40The McKinsey Quarterly 2008 Number 1common way they inhibit it. The failure of executives to model innovation-encouraging behavior, such as risk taking and openness to new ideas, places second. Rewarding nothing but short-term performance and maintaining a fear of failure also make it to the top of the respondents’ list of leaders accountable for encouraging innovation makes a big differ- ence. Thirty percent of the senior executives in the survey were accountable for it, through formal targets or metrics, in their performance reviews. They were more likely than the broader group of respondents to view innova- tion as one of the primary growth drivers, to manage it formally as part of the leadership team or through an innovation council, and to learn from their failures to achieve research implies that most senior executives do not actively encourage and model innovative behavior. If they did, they could give employees the support needed to innovate. They can also take a number of other practical steps to advance innovation: . De ne the kind of innovation that drives growth and helps meet strategic objectives. When senior executives ask for substantial innovation in the gathering of consumer insights, the delivery of services, or the customer experience, for example, they communicate to employees the type of innovation they expect. In the absence of such direction, employees will come back with incremental and often familiar ideas. . Add innovation to the formal agenda at regular leadership meetings. We observe this approach among leading innovators. It sends an important signal to employees about the value management attaches to innovation. . Set performance metrics and targets for innovation. Leaders should think about two types of metrics: the nancial (such as the percentage of total revenue from new products) and the behavioral. What metrics, for example, would have the greatest effect on how people work? One com- pany required that percent of its revenue come from products launched within the past three years. Another established targets for potential revenues from new ideas in order to ensure that they would be substantial enough to affect its performance. Leaders can also set metrics to change ingrained behavior, such as the “not invented here” syndrome, by requiring percent of all ideas to come from external executives say that the top three ways they spend time making decisions about innovation involve determining what types or strategies to “How companies approach innovation: A McKinsey Global Survey,” , October .
Leadership and innovation41focus on, who gets to work on the resulting projects, and how to commer- cialize the fruits. Few spend time on targets, metrics, and budgets for innovation. That is telling, since executives whose companies do have such targets and metrics feel the greatest con dence in their innovation networksChances are your organization has some people who are passionate about innovation and others who feel uncomfortable about any topic related to change. Recent academic research nds that differences in individual creativity and intelligence matter far less for innovation than connec- tions and networks—for example, networked employees can realize their innovations and make them catch on more quickly. Since new ideas seem to spur more new ideas, networks generate a cycle of innovation. Furthermore, effective networks allow people with different kinds of knowledge and ways of tackling problems to cross-fertilize ideas. By focusing on getting the most from innovation networks, leaders can therefore capture more value from existing resources, without launching a large-scale change-management -network analysis can help executives to diagnose existing networks in order to ascertain their characteristics, such as the frequency of col- laboration and the degree of cross-functional interactions among members, and to identify people who broker information and knowledge. This kind of information can also serve an essential role in the creation of effective innovation networks by clarifying the mind-sets of individuals and one company, for example, we found three groups with distinct perspec- tives on innovation. One believed that the company was innovative, but the other two, with percent of its employees, thought that it wasn’t—indeed, that it was actually bureaucratic, slow moving, inef cient, and stressful. A separately developed network map highlighted the company’s hierarchical structure but also showed that cross-functional departments were well we combined the analysis of personal perspectives on innovation with the network map, we found opportunities for improvement. Paradoxically, the analysis revealed that those employees, largely middle managers, with the most negative attitude toward innovation were also the most highly sought after for advice about it. In effect, they served as bottlenecks to the ow of new ideas and the open sharing of knowledge. A further analysis of the people in this group highlighted their inability to balance new ideas Lee Fleming and Matt Marx, “Managing Creativity in Small Worlds,” California Management Review, , Volume , Number , pp. – .
42The McKinsey Quarterly 2008 Number 1with current priorities and to behave as leaders rather than supervisors. We have observed that middle managers pose similar challenges in many management used this analysis to create a network of middle man- agers who were encouraged to generate newer and bigger ideas. Members of the network regularly discussed new ideas with senior executives, and these ideas were evaluated collectively by mutually agreed-upon innovation networks is both an art and a science. Any network is unpredictable and, in the end, impossible to control. Focusing on the replacement of one or two ineffective members has less impact than establish- ing the conditions for vibrant networks and taking advantage of the connections through which they networks more decentralized is another way to improve collabo- ration and performance (Exhibit ). Consider the case of two geographically separate units that undertake the same activities. A larger leadership group with an open and positive mind-set is a distinguishing feature of the higher-performing unit. Its information network is also more decen- tralized, with a larger number of connections. Hierarchy is still evident in the higher-performing unit, but its information and knowledge network Q1 2008is more distributed, and more of the members participate actively. The lower-Innovationperforming unit has just one leader, who controls most of the interac- Exhibit 1 of 3tions and has a negative mind-set about openness and collaboration, and Glance: Decentralizing a network can improve collaboration and performance. there are far fewer connections. The network design is more centralized. The role of leadership mind-sets in networksNetwork maps, disguised example of similar units in different geographiesHigh-performing unitLow-performing unitIndividual in network; size of circle represents individual’s degree of connectivity—the larger the circle the more connected the individual; the more central the circle in the map, the more connected the individual. Collaborative individual Uncollaborative individual Indicates tie or connection between individuals in network; arrow indicates direction of interaction. t A number of leaders are central; t 1 leader is central, has most have collaborative mind-sets uncollaborative mind-set t Team structure is decentralized; t Team structure is extremely network is rich in interactionscentralized, with fewer interactions
Q1 2008InnovationExhibit 2 of 3Leadership and innovation43Glance: There are four critical steps to designing, implementing, and managing innovation networks. Designing an innovation network1 Connect 2 Set boundaries and engaget Find pockets of people with right mind-sets for t Define role of network in meeting innovationorganization’s strategic goalst Combine people with different approaches t Establish network goals and objectives,to innovation (ie, idea generators, researchers, as well as targets for success experts, producers)t Define clear expectations t Ensure a mix of people with different levels of t Establish time frame and time seniority and skills as well as performance commitment required Set t Define as 1 network or include sub-t Plan how to establish trust among Connectboundaries networks devoted to specific network members and engage and engagetasks, objectivesthem quicklyDynamic and flexible4 Manage and track3 Support and governtt Define how members will be Define network’s sponsorship and recognized for contributions leadershipManage and Support and tt Establish performance-management criteria Determine technology support required trackgovern based on both individual and group successes for network memberstt Establish tracking criteria Determine role of face-to-face meetings tt Define timing for assessment, review, and Define additional support as necessary modification of network, and determine who will (eg, facilitators, administrative help) t have these responsibilities Define key knowledge and t Decide how new members enter network and information inputs—both internal and current members leaveexternal to networkt Plan process to facilitate network and its impactThe four critical steps in designing, implementing, and managing an innovation network are presented in Exhibit . In addition, executives can ne-tune the network’s goals by identifying the appropriate mix and balance of employees. Innovation networks, like cross-functional teams, require different skills and attitudes. In our experience, they include combinations of several archetypes:• Idea generators prefer to come up with ideas, believe that asking the right questions is more important than having the right answers, and are willing to take risks on high-pro le experiments.• Researchers mine data to nd patterns, which they use as a source of new ideas. They are the most likely members of the network to seek con- sumer insights and to regard such insights as a primary input.• Experts value pro ciency in a single domain and relish opportunities to get things done.• Producers orchestrate the activities of the network. Others come to them for new ideas or to get things done. Producers are also the most likely mem- bers of the network to be making connections across teams and kind of staf ng is clearly an inexact science. A team or network in need of more ideas might get additional idea generators to ll the gap. If the challenge is commercializing the right ideas, management might opt to add
44The McKinsey Quarterly 2008 Number 1producers and experts. In our survey of professionals, respondents who regarded their companies as more innovative than competitors in the same industry were also more likely to work for companies that had larger numbers of of trustSenior executives say that making top talent available for projects to meet innovation goals is their single biggest challenge in this area. Some percent of them also believe that they do not have enough of the right kinds of talent for the innovation projects they pursue. A different view emerges from below, however. Employees are more likely to believe that their organizations have the right talent but that the corporate culture Many paths to success: Excerpts from a McKinsey online discussion on innovationTo learn more about how innovation is managed at There isn’t even agreement on whether innovation companies where it is a priority, we identified should be discussed formally. One executive senior executives who, in our fall survey, had des- says, “Innovation can be seen as another thing on cribed their company that way and invited the corporate agenda or as streamlined into busi- them to join an online discussion. One major topic ness as usual, as one of many avenues for agenda-was how leadership groups manage innovation. setting initiatives. The latter approach tends to Discussion participants describe a wide variety of work better for us, by keeping innovation active and approaches to innovation ownership, the degree real as opposed to [being] a separate thing.” to which it is part of their leadership agenda, how Another says, “There are quarterly meetings inter- to motivate innovators, and how innovation- nally to see how the businesses are perform- related performance metrics are applied to leaders ing versus their innovation targets, and there are and to every six months to dissect the inno- vation pipeline.” In contrast, another participant says One company has a structured approach to man- that, at his company, leaders generally have aging innovation that includes the whole leadership “lengthy, informal discussions” about innovation, while team: “We take very good care that the innova- another says, “We do not plan specific times to tion topics are on our watch list and recur as impor- spend on innovation as an executive team.”tant topics in our regular meetings. . . . Our leadership team starts the day with the discussion Several participants actually caution against too of innovation. Some topics are discussed over much discussion. One explains, “Ten percent of months again and again to check if our first decision our time is well spent driving innovation and 10 per- on it is still OK or if we need to make a change.” cent of our time is lost in the debate about whether An executive at another company says, “There is new ideas are innovations or product enhancements.” a split [on our leadership team] between abstract Another says, “Our discussions are quite lively! . . . thinkers and pragmatic operators. The pragmatists That said, we recognize the potential to dive into rat understand the value of reaching for new/ holes or digress into too much detail. We try to creative solutions, but want measurable improve- be careful to keep our discussion on track and mean- ments. In our company, that balance seems ingful. . . . All talk and no action is not a recipe to be effective in guiding the conversation.” And for success!”a third says there is “very little sustained dis- cussion” among leaders at his organization, adding, Beyond the leadership team, discussion participants “Innovation [is] generally handled by one or stress the importance of ensuring that innovation two leaders while the rest focus on operations.”is clearly understood and employees are engaged,
Leadership and innovation45inhibits them from innovating (Exhibit ). We, for our part, believe that de ning and creating the right kind of culture, however elusive, greatly increases the prospects for successful and sustained innovation innovation (see sidebar, “Many paths to success”).Managers and employees broadly agree about the attitudes, values, and behavior that promote innovation. Topping the list, in our research, were openness to new ideas and a willingness to experiment and take risks. In an innovative culture, employees know that their ideas are valued and believe that it is safe to express and act on those ideas and to learn from failure. Leaders reinforce this state of mind by involving employees in deci- sions that matter to them. Respondents to our survey of executives to varying degrees, throughout the organization. A We do have continuous improvement targets [for senior executive explains, “We are trying to get business units] that clearly generate innovation. the communication [about innovation’s importance] to We are good and getting better at moving thoughts originate from the employees themselves. We to plans to projects to production.” Another says, can speak about it a lot but we want the conversation “Innovation is part of our key factors for success. So to continue after the meeting, without us around.” you cannot be successful if you do not manage Another participant sums up the risk companies face innovation right. Ultimately this translates in sales 1when the whole organization isn’t engaged and EBIT or targets to develop new markets. with innovation: “When colleagues complain or But it is true that I can hardly remember any specific resist innovation the spark will be snuffed out.”innovation target in our target portfolio.” A third has an even stronger view: “I see innovation to be But executives are dubious about how much they evaluated in long-term business success. Hard can really do. Many agree that getting every- criteria—for example, time spent on innovation one to innovate isn’t realistic. One executive says thinking—is not feasible in my eyes.”that, at his company, “Mentoring people into becoming more open-minded is a long process. We At another participant’s company, the approach sometimes find it’s a necessary investment is quite different: “The leadership team has a tar- not so much to make them innovators but to get get to achieve around innovation, the results them to accept innovation and prevent them are measured, and actions are taken to achieve the from becoming innovation anti-champions.” Another results on a quarterly basis.”observes, “Some [business unit leaders] realize the importance of being innovative and spend con- And at yet another company, innovation targets are siderable time to generate new ideas. Others used throughout the organization. This company’s find it quite difficult and frustrating, especially those executive explains that, in the short term, her com- who have worked in the company for many years. pany uses an “internal point system, which might One of our greatest challenges is to make the process be weak and in some way subjective.” But, she adds, constantly evolving.”“On a long-term view, we try to replace people who don’t take part in our permanent innovation process In managing innovators, one of the biggest chal- and tell people to look for another company to lenges for many companies is measuring the work for.”contributions of these people. Companies’ practices vary particularly widely here. One executive Earnings before interest and , “We do not have specific innovation targets.
Q1 2008InnovationExhibit 3 of 346The McKinsey Quarterly 2008 Number 1Glance: Senior executives and their employees have different ideas about what their organizations need for innovation projects. What inhibits innovation% of respondentsC-Level leadersProfessionalsDo not have enough of the right 4082% more C-level executives than professionals people for the types of innovation22selected this the right people, and 27leaders protect innovation25People not allocated 18to innovation17Have the right people, but 12150% more professionals than C-level culture inhibits progress30executives selected this : “How companies approach innovation: A McKinsey Global Survey,” , October .and managers indicated that trust and engagement were the mind-sets most closely correlated with a strong performance on innovation. In the same survey, percent of the professionals surveyed said that they were far more likely to seek out a trusted colleague than an expert or manager to get new ideas and feedback on their own is also widespread agreement about the cultural attributes that inhibit innovation: a bureaucratic, hierarchical, and fearful environment. Such cultures often starve innovation of resources and use incentives intended to promote short-term performance and Related articles on intolerance of failure. Only percent of the senior Better strategy through organizational designexecutives in the survey Coaching innovation: An interview with Intuit’s Bill Campbellsaid that they are more likely The adaptable corporationto focus on the risks of innovation than on the oppor- tunities, but only per- cent said that they actively learn from innovation failures and encourage the organization to do so as well. Even more alarmingly, only percent of the employees believe that their organizations encourage them to learn from failure. To make a corporate culture friendlier to innovation, managers must acquire new skills to engage and lead the staff. Many fall under the head- ing of leadership skills, such as coaching (as opposed to ordering) sub- ordinates and facilitating collaboration across silos. Corporate-wide change programs not only are daunting and time consuming but also often have only a limited impact. Our experience helping com- panies to change and become more innovative suggests that they can make progress without such programs. We have described a number of leadership
Leadership and innovation47role-modeling and formal organizational mechanisms to promote innova- tion. When top management reinforces them with commitment and energy to build capabilities for speci c tasks, the combination can yield impressive results. Top teams can help build a more innovative culture in several ways: . Embrace innovation as a top team. It’s not enough for the CEO to make innovation a personal goal and to attend meetings on innovation regularly. Members of the top team must agree that promoting it is a core part of the company’s strategy, re ect on the way their own behavior reinforces or inhibits it, and decide how they should role-model the change and engage middle management. . Turn selected managers into innovation leaders. Identify managers who already act, to some degree, as network brokers and improve their coaching and facilitation skills so that they can build the capabilities of other people involved in innovation efforts more effectively. The goal: making networks more productive. . Create opportunities for managed experimentation and quick success. Not surprisingly, this approach is typically the best way to start any change effort in large organizations. Quick success matters even more with innovation: people need to see results and to participate in the change. To get going quickly and learn along the way, select an innova- tion theme or topic area and then create small project teams. While you try out topics and ideas, test the most effective leadership and orga- nizational approaches for your business. The goal isn’t to get it right the rst time but to move quickly to give as many in uential employees as possible a positive experience of innovation, even if a project doesn’t generate pro ts immediately. A positive experience will make all the difference in building the organization’s capabilities and con is a big idea with a big potential. But it is wise to approach it in small steps, implementing just one or a few of the ideas we propose and building from there. For many companies, the initial steps on this value-creating journey are the most critical of all. QJoanna Barsh is a director in McKinsey’s New York of ce, Marla Capozzi is an associate principal in the Boston of ce, and Jonathan Davidson is a director in the London of ce. Copyright McKinsey & Company. All rights welcome your comments on this article. Please send them to quarterly_comments@.
