Each year, Bill Gates escapes to a hideaway on Washington State’s Hood Canal to ponder Microsoft’s next leap forward. Any Microsoft employee can submit a written proposal for a new product or service for him to consider during the days he is there. He promises to read them all.

Gates’ ritual is part of his push to ensure that Microsoft remains at the forefront of innovation in the software industry. If Gates likes an idea, he’ll return to the company’s Redmond, Wash., headquarters and launch a new initiative around it.

Few bosses — Gates’ official title these days is chief software architect — devote that kind of energy to innovation. But for Microsoft, Gates’ attention to it has paid off. Though Microsoft is a giant with a market capitalization of nearly $300 billion, its executives say it retains the agility of a startup when it comes to introducing new products and improving old ones. It was named the world’s third most innovative company, behind Apple and 3M, in a poll conducted last year by Boston Consulting Group and Knowledge at Wharton.


In November 2005 Knowledge at Wharton and the Boston Consulting Group teamed up to host the Ben Franklin Forum on Innovation at the Wharton School. Attending were representatives of many of the companies that senior executives around the world identified as the 20 most innovative in the world. The goal of the meeting was to examine innovation from every angle — what it means, why some firms do it better than others, and how even established giants can jumpstart their ability to innovate.

The companies identified as the most innovative by the BCG-Knowledge at Wharton survey were: Apple, 3M, Microsoft, GE, Sony, Dell, IBM, Google, Procter & Gamble, Nokia, Virgin, Samsung, Wal-Mart, Toyota, eBay, Intel, Amazon, Ideo, Starbucks and BMW. Many of these organizations sent their representatives to the event to share ideas about innovation as well as to be recognized for their achievements. In addition, winners of the Wharton Infosys Business Transformation Awards also participated in the Forum. The Mack Center for Technological Innovation at Wharton collaborated with Knowledge at Wharton to organize the event. WHYY Advantage, a unit of a Philadelphia-based public television station, produced a video to honor these 20 companies and describe their approach to innovation.

Innovation, of course, has become a corporate buzzword. It’s as much a part of today’s jargon as “total quality management” was in an earlier era. You can hardly skim the chairman’s letter in an annual report without coming across hosannas to it, the participants noted. But swearing fealty to an idea is very different from practicing it: One is about hope; the other, action. Innovators act.

Measurement and Management

Many companies spend a great deal of time and effort on measuring innovation, according to Jim Andrew, senior vice president and head of innovation at the Boston Consulting Group. “While none of these measures individually may be perfect, a suite of measures allows you to get your arms around measuring the progress of innovation,” he said. “It allows you to learn and change as it becomes necessary. Companies sometimes fail to measure and manage innovation, but that is a mistake that can be avoided.”

How, then, should companies measure innovation? According to Andrew, many different ways exist. “We have found in our work that companies should measure three main things,” he said. “First, you should track the outputs of the innovation process. Next, you also need a set of measures to track the inputs. This is where innovation can be most precisely measured. People track the amount of money they spend on research, and they also track specific people. In our experience, human capital is in much shorter supply than financial capital. The scare resource is always your best people.  The third area is the effectiveness of your process. To sum up, you’ve got to measure inputs, outputs, and process performance.”

Companies that measure and manage innovation will find that this helps prevent their businesses from becoming commoditized. “It’s all about finding new ways to create customer value,” noted Hal Sirkin, senior vice president of the Boston Consulting Group. “If you are selling widgets, if you can make a widget that is inherently better for the customer, you can charge more for it. And by charging more for that widget, you end up creating more value.”

Sirkin added that companies with innovative cultures retain their people better. “They create more opportunities for people both because of the growth and also because of the environment that inherently comes with innovation. It’s not a boring job…it’s exciting because you keep thinking of new ways to meet customer needs. Everybody wants to help their customers do better. It’s just part of who we are as human beings. And so by doing that, you create more value for your people too. It’s a win-win.”

Innovation vs. Invention


To understand innovation, you first have to distinguish it from invention; too many people confuse them, according to Linda Sanford, an IBM senior vice president. “Invention is just the starting point,” one of the participants noted. A company’s portfolio of patents reveals its smarts as an inventor. IBM, for example, remains formidable in this regard, racking up record numbers of patents for the last decade. But patents aren’t enough. Their technology has to find its way into products.

Not all innovations are created equal. Paul Schoemaker, a Wharton adjunct professor of marketing, pointed out that many people cite only of “hits” like the Blackberry or Starbucks coffee shops when talking about innovation. “But some companies don’t play that game,” he said. “They play a percentage game of incremental innovation, like Toyota. And some companies aren’t really innovators at all. They play a loss-avoidance game. Think about the airlines.”

But even in a hidebound business like air travel, firms can innovate. Witness Southwest Airlines, whose chairman, Herb Kelleher is profiled in Knowledge at Wharton’s book, Lasting Leadership: What You Can Learn from the Top 25 Business People of Our Times. Southwest has used a series of incremental advances — like abandoning assigned seats and the hub-and-spoke routes and flying only Boeing 737s—to grow and remain profitable while competitors have been hobbled first by recession and now by high fuel prices.

Tom Kelley, general manager of IDEO, a design and innovation consultancy, parsed the problem differently. He argued that many firms strive to deliver hits and incremental innovations—or at least they should. “Customers demand the incremental stuff, so you’re compelled do it,” he explained. “Meanwhile, you have to do the leaps yourself. Breakthroughs are important but not urgent.”

A Holy Trinity


Just as critical as defining innovation is figuring out what distinguishes innovative ideas from humdrum ones. Steven Berlin Johnson, author of Everything Bad is Good for You, took that as his task.

To Johnson, three of the best innovations in recent years — the web, Google and the iPod — share three qualities. They have simple user interfaces. They reuse existing information. And they were created by small groups of people, not cumbersome committees. “With the web, the powerful insight was the ability to click on a blue word and go somewhere — the linking,” he said. “Networking theorists thought you had to have two-way communication, multiple link levels and more authoring built in. Those are all good ideas, but the beauty of the web is that you just click on a blue word.” Even the most computer-phobic person can point and click.

Google is nearly as easy to use. When it began, competing search engines often employed busy graphics and organized their results in opaque ways. Google presented only its memorable moniker, a mostly white screen and a text-input field.  Likewise, the genius of the iPod is its scroll wheel, which allows a user to rapidly spin through hundreds, even thousands, of songs. These three innovations make existing information easier to find and organize, Johnson pointed out. They allow a person to recombine text, photographs and music in ways uniquely useful to him. “The iPod is a tool for taking information — digital music files — and creating your own media experience,” he said. But none of them is a philosopher’s stone, turning lead into gold. Rather, each recycles. That even applies to the web, which has revolutionized communications. It merely lets users to share knowledge, whether in academic papers or news reports, and products, whether from eBay or L.L. Bean, in new ways. 

The Vision Thing


A visionary chief executive goes a long way to ensuring that an organization will innovate. No one embodies this notion better than Jobs. He, of course, started Apple with Steve Wozniak in his parents’ California garage. A few years later, he introduced the Macintosh, the first commercially successful computer with a graphical user interface. After leaving and then returning to Apple, he led the introduction of the iMac and iPod. While all of this was happening, he also helped to start Pixar, the computer animator that created such hits as Toy Story and Finding Nemo, and which was recently acquired by Disney.

A chief executive who looms as large in a company’s innovative ability as Jobs does in Apple’s can present problems, argued P.K. Gupta of Intel. A cult of personality arises around the boss, with employees assuming that all great ideas flow from him. “What happens when he’s gone?” Gupta asked. Apple’s history in this regard isn’t encouraging. Jobs left in the mid-1980s after a power struggle with a chief executive whom he had recruited. Without its founder, the firm floundered and didn’t regain its innovative edge until he returned in 1997.


Tonic for the Troops


An antidote to dependence on a visionary boss is building a companywide culture of innovation. That requires both tangible steps like creating the right teams, procedures and rewards but also intangible ones like giving employees room to be creative.

After becoming boss of Xerox in 2001, Anne Mulcahy wanted to pump up that company’s innovative abilities even as she pared away costs. She sought out the advice of one of a Xerox researcher with lots of patents. “He said that most innovation happens by accident and experiment not design,” she recalled in a recent speech at Wharton. “It’s allowing people to push barriers.”

That doesn’t mean that companies should allow workers to wander around like wannabe Franklins, waiting for eureka moments. They must provide structures that ensure that work gets done but let innovation flourish. And they must create channels through which promising ideas become profit-making products.

Microsoft, for its part, employs a variety of means to make sure that these things happen. It has seven research labs worldwide, including ones in Redmond, San Francisco, Beijing and Bangalore, India. Each lab has carved out a specialty. “Bangalore is focused on emerging markets and low-cost computing,” according to Ian Sands, a director at the company. “Beijing brings the same sort of local strength in speech and character recognition.”

The company also employs three chief technology officers, each with an area of expertise and an incubator for cultivating pet technologies. The highest profile member of this trio is famed software entrepreneur Ray Ozzie. Ozzie, creator of the Lotus Notes program, joined Microsoft earlier this year when it acquired his Groove Networks. He already has shown why folks in the software business revere him. In October, he penned a manifesto, widely circulated on the web, about Microsoft’s future as a provider of advertising- and subscription-based software services.

Sands, who manages Microsoft’s industry innovations group, leads a team that is part incubator and part internal venture capitalist. He seeks out new ways in which cutting-edge Microsoft technology can be deployed. “We’re thinking about how R&D can apply to the pain points in a variety of industries as well as in the mixing of industries,” he explained. “We’re finding new white space between industries.” His group, for example, has teamed up with Umpqua Bank in Portland, Ore., to enable the bank’s customers to use their cell phones and personal digital assistants to execute transactions.

Sands emphasized that old-fashioned methods, delivered in newfangled ways, can spur innovation. Microsoft, for example, has a virtual suggestion box into which anyone affiliated with the company — an employee, contractor, vendor or customer — can submit an idea for a new product or service. “There’ve been some complaints that it’s a black hole,” he admitted. “But in response we say, ‘Here are the things that have come from it.’”

Losing by Winning

Many big, successful companies were, at one point their evolution, innovators — they wouldn’t have grown big if they weren’t. Ford, which like GM is struggling today, invented modern automotive manufacturing. “Winners become losers,” Schoemaker quipped. “Look at what happened to Sears and AT&T. The prediction would be that Microsoft won’t be on top of the world in 20 years. Maybe the attempt to be rational squeezes out the ability to be innovative.” 

Firms begin to stifle creativity as they become wedded to established ways of operating, said Kelley of IDEO. “People start to edit themselves so that they don’t make the boss angry,” he pointed out. “There’s a sense that, ‘We’re big and it’s hard to change.’” Success also breeds complacency, added Sally Solis-Cohen of Philadelphia’s WHYY radio station. “I grew up in Akron, Ohio, where everybody was fat, dumb and happy in the tire business. They were beyond complacent. Then along came radial tires by Michelin, and their defense was, ‘Who’s going to buy tires from French people.’” Radials upended the traditional tire industry, and Michelin today is the world’s biggest tire maker.

Sands conceded that all of these tendencies exist, even at Microsoft, but added that his company is fighting to build a culture that resists them. “It’s an ongoing struggle, but we know to be competitive that we have to be innovative.” 

From Also-Ran to Innovator


These gloomy prophecies do ignore one powerful reality: Big, established firms with staid cultures can change. Consider Procter & Gamble, maker of such famed consumer products as Crest toothpaste, Ivory soap, Pampers diapers and Tide detergent. “In the old days, things were pretty much top-down at P&G,” Kelley said. “Now there’s a new CEO, A.G. Lafley, and he’s turned the big battleship in three or four years.’”

IBM exemplifies the same sort of trajectory. In its early years it was the leading innovator in the computer industry. Then in middle age, the company slumped, as computing moved away from mainframes — IBM’s traditional stronghold — to PCs and the internet. But in the 1990s, former chief Lou Gerstner brought the firm back from also-ran to innovator. At both Procter & Gamble and IBM, the culture had to be shocked into changing. At the IBM, the threat was real — the company was losing market share to more nimble competitors and bleeding money.

Procter & Gamble, in contrast, seemed to be thriving when Lafley took over in 2000, said Jeff Weedman, P&G’s vice president for external business development. Even so, the new boss set ambitious — and to many folks — surprising goals. “At P&G for many years, you could get by not making any mistakes,” Weedman explained. “But Lafley came in and said, ‘I want innovation across the spectrum — in how we market, manufacture and distribute.’

“He was quoted as saying that he wanted 50% of our revenues to come from new products. Later he was asked, ‘How’d you get to that number?’ and he said, ‘I made it up.’ Fifty-fifty is a philosophical approach. The actual number will be demonstrated by good ideas winning in the market.” Prophets don’t always have time to check facts.

Despite Procter & Gamble’s commitment to innovation, it refuses to pay bonuses for patents filed by its researchers, Weedman said. A study suggests that doing so is counterproductive. “Someone at Rockwell found that October was their most innovative month of the year in terms of patent filings,” he explained. “It takes about 90 days to get a patent. So people were paying their bills from the holidays with their patent bonuses.” Plus, as IBM’s Sanford pointed out, patents don’t necessarily translate into innovations.       

Numbers and Novelty


A business adage says you can’t manage what you can’t measure. But measuring innovation is trickier than toting up sales or counting costs savings. What’s the best metric? Participants at the conference couldn’t agree, but argued that a measurement would emerge, even if it’s evolving.

“If innovation means profit, you can always measure it,” said Ashwani Rishi, president and chief executive of ITC-Infotech USA. ITC is an Indian conglomerate, with investments in cigarette making, hotels and technology, and began its life as Imperial Tobacco Co. Rishi proposed a metric that he called “intellectual horsepower.” It would take into account such factors as total number of new ideas, the number of those that are implemented and the number of implementations that yield profitable products. 

Microsoft’s Sands likewise argued that profits are the acid test: “Show me the money is what it comes down to,” he said. Yet a company typically needs need more than a year to develop and roll out an innovation. So profits aren’t useful as a shorter-term measure. That’s why Microsoft Research tracks the sorts of stuff that Rishi would incorporate in his metric: the number of ideas that find their way into products and the number products shipped with those features, Sands said. 

P&G’s Weedman, who like Sands oversees new business development, said he looks at whether his company’s divisions are allocating time and money on the new ideas that he brings to them. “Is it good enough that they’re spending scarce resources on it? Are they staffing the project? Talk’s cheap.” In the end, though, he agreed that innovation means nothing if it doesn’t yield profitable offerings. “In the market, the consumer is the boss, and every day is election day.” His boss, Lafley, put the same idea slightly differently in a recent interview: “All of the scientists — and we employ a lot of them — understand that innovation is in the consumer’s eyes. Innovation has to be good value. It’s not innovation at any price or cost.”

Knowledge at Wharton is joining hands again with the Boston Consulting Group to conduct a survey on innovation. A new partner this year is Nightly Business Report, the most popular daily business show on U.S. television. To take part in the survey, please click here.