Driving growth through innovation.

• Author: Anthony, Scott D.

Ted Williams, one of the greatest baseball hitters ever, said: "Baseball is the only field of endeavor where a man can succeed three times out of 10 and be considered a good performer." Williams sported a lifetime 0.344 batting average--the seventh highest of all time. He obviously never tried to create a new growth business, where success rates of 20 to 25 percent are not uncommon.

While mastering innovation has never been easy, today's leaders have it tougher than ever. A rocky economic climate constrains innovation budgets. Intense competition leaves little margin for error. Impatient stockholders lessen the risk tolerance of almost any executive.

The reason it's so difficult is that companies historically have lacked the right approaches to successfully mastering the forces of innovation. Fortunately, decades of research have highlighted patterns that identify differences between successful and failed efforts. Fieldwork over the past decade has translated those patterns into practical tools that allow companies to take the mystery and guesswork out of innovation.

Driving growth through innovation is possible when companies learn how to translate the known patterns, principles and practices into action. It starts by describing how to get ready for innovation, then implementing a simple process to create booming new growth businesses and finally, embedding innovation capabilities within the organization.

Getting Ready

Imagine that you are a 50-year-old who has let his or her health and fitness regimen lapse. You are overweight and haven't found a way to fit exercise into your routine. A friend calls and says, "Let's run the Boston Marathon together." Would you sign up? Of course not. You simply aren't ready for that level of competition.

Companies have to make sure they are ready for innovation. It's not as easy as it sounds. Many have spent the last two decades focusing on operational effectiveness, and innovation muscles at many corporations have atrophied.

Getting ready for innovation involves three actions: gaining control over your core business, defining your innovation strategy and allocating resources to realize that strategy.

* Gaining control over your core business. Generally speaking, when your core business is in control you are rarely surprised by financial performance. Revenues and profits are growing at least at the average for your industry, and you don't regularly scramble to respond to innovations launched by competitors.

This does not mean that your core business must be thriving. Sometimes your core business will be in structural decline, and that's fine--as long as your company is managing that decline well.

Sometimes you'll have to shed assets or shut businesses down to gain control over your core business. An example is Intel Corp. choosing to exit the dynamic random access memory (DRAM) market in the early 1980s. DRAMs had long been the growth and profit driver of the company, but fierce competition meant that Intel was investing heavily in what had become a commodity business. Shifting focus from DRAMs to microprocessors set Intel on a phenomenal growth trajectory.

* Innovation Strategy. Companies that are just starting their innovation efforts often begin by getting a group of people together and telling them: "It's innovation time!" Such efforts rarely succeed.

Instead, companies should create an innovation strategy that details clear targets and tactics. Targets help internal innovators know what they are shooting for. A reasonable starting place is to imagine what success looks like five years in the future. Are you seeking to double your business? Hold it steady? Something else?

* Allocating Resources. Consider the sources of growth. How much can you reasonably expect your core business to contribute? What contribution can you reasonably expect from what is already in your development pipeline? A tip: make sure to risk adjust your pipeline. To assume all of your projects will succeed, is being wildly optimistic.

Finally, calculate the gap (it will almost always be a gap) between where your projections suggest you will be and where you want to be. That gap is your target for new innovation efforts.

One large cable broadcaster conducted a gap-calculating exercise in late 2006 on the heels of record-breaking financial performance. The company had all of its executives come up with a set of reasonable estimates for key variables that drove the business' financial performance. It had executives detail what were conceivable ranges for each of those variables.

It fed the ranges into a simple simulation model, and found that there was a frighteningly high chance that it could miss its projected earnings by close to $500 million in five years, an event that...