World’s Most Innovative Companies by Forbes

Innovation & Business

How Innovative Leaders Maintain Their Edge

By Hal Gregersen and Jeff Dyer via Forbes

This issue marks our second year collaborating with Forbes to rank the The World's 100 Most Innovative Companies (Forbes - Full list) based upon an innovation premium. Since last year’s inaugural list was published, we’re often asked: “Why are some companies able to create and sustain a high innovation premium while others don’t?” While still in the early stages of an in-depth analysis of high- versus low-innovation premium companies, our initial results show at least three key things that the innovative companies do to create and sustain an innovation premium.

How well companies leverage people, process, and philosophies (what we call the 3Ps) differentiates the best in class from the next in class when it comes to keeping innovation alive and delivering an innovation premium year after year.

On the people front, the behavior of leaders matters—big time. In our initial study on disruptive innovators published with Clayton Christensen in The Innovator’s DNA, we found five “discovery skills” that distinguished innovators from non-innovators. Innovators ask provocative questions that challenge the status quo. They observe the world like anthropologists to detect new ways of doing things. They network with people who don’t look or think like them to gain radically different perspectives. Theyexperiment relentlessly to test new ideas and try out new experiences. Finally, these behaviors trigger new associations which let them to connect the unconnected, thereby producing disruptive ideas.

We also developed a self- and 360-degree assessment to determine how much individuals engage these skills. Our preliminary look at high (versus low) innovation premium companies found that senior leadership’s innovation skills make a serious difference. In fact, CEOs of high-innovation-premium companies scored at the 88th percentile of the five skills of disruptive innovators. By comparison, CEOs of average companies scored at only the 62nd percentile. From a different angle, innovative leaders spent approximately 31 percent of their time actively engaged in innovation-centered activities compared to only 15 percent by leaders of less innovative companies. Doubling the time a senior leader personally invests in getting new ideas typically delivers significant returns.

To illustrate, let’s look at a few leaders from this year’s crop—folks you may not know. For example, Fabrizio Freda, CEO of Estee Lauder (# 23 this year; #44 last year) excels at challenging the status quo by “playing the outsider.” He learned this lesson early in his career, as he moved from Procter & Gambleto Gucci SpA and back to P&G. “The experience outside [P&G] gave me a lot more authority in challenging the status quo,” says Freda, “I stayed the challenger forever.”

The trilingual (Italian, French, English) executive has lived throughout Italy — Naples, Rome andFlorence — and in Germany, Switzerland and Belgium. During his time at Gucci, Freda oversaw international marketing and strategic planning. While at P&G, he worked in many divisions including cough and cold, laundry, health and beauty, and most recently, as president of global snacks. Freda is the quintessential observer—and as he observers he both watches and listens. After arriving at Estee Lauder, he spent six months on a “listening tour,” zigzagging across Lauder’s worldwide operations in 140 countries. “I strongly believe in the power of listening,” says Freda. Listening, he says, helps him connect the dots. “The way my thinking and creativity goes is listening, connecting and creating.”

S.D. Shibulal, cofounder and CEO of Infosys (#19 this year; #15 last) is both observer and experimenter. In his 30 years at Infosys Shibulal says “there is nothing that I have not done.” He was the first sales person, has done account management, launched its internet consulting practice, is a network expert, helped design and launch its first ecommerce application, and has been the head of both delivery and sales. To get a new perspective, Shibulal took a five year sabbatical to work for another firm, Sun Microsystems.

He’s also known as an experimenter and “gadget freak.” Shibulal has always been fascinated with taking things apart and putting them back together. When he buys the latest device, he never uses it as it is. He examines it, takes it apart and refits it to his needs, turning fad into art. Before PDAs were popular, he had assembled his own version with different parts from a RadioShack Store. That’s why at Infosys, where geeks are a dime a dozen, he is revered as a “gizmo guru.”

Put simply, leaders at the top of this year’s most innovative company list behave innovatively. But putting innovators at high levels is not enough to create and sustain an innovation premium. It’s necessary, but not sufficient, for organizational success. We’ve found that successful leaders personally understand how innovation happens and they try to imprint their behaviors as processes and philosophies within their organization.

To illustrate, Marc Benioff (CEO of Salesforce.com: #1 on this and last year’s list) gets many new ideas by networking with young entrepreneurs, like Drew Houston, founder of DropBox, and Max Levchin, founder of Slide and an early PayPal executive. Benioff was personally involved in coming up with the idea for Chatter—social networking software for businesses that is a mix of Facebook and Twitter. Chatter helps folks in his company network better by helping them efficiently connect with others and see what work is being done and what ideas others are generating across the company. Chatter represents Benioff’s idea for how to help others be better networkers. Plus every Salesforce employee (management and non-management alike) gets at least two days of innovation training each year to help them maximize their contributions to company-wide innovation processes like Chatter. Benioff’s skill as an innovator has helped Salesforce generate a high innovation premium but if he doesn’t unleash the creative capacity of his employees through innovation processes Salesforce will be unable to sustain its high premium.

Similarly, Jeff Bezos (Amazon, #3) surrounds himself with people at Amazon who are inventive. He asks all job candidates: “’Tell me about something that you have invented.’ Their invention could be on a small scale – say, a new product feature or a process that improves the customer experience, or even a new way to load the dishwasher. But I want to know that they will try new things.” When the CEO asks all job candidates whether they’ve ever invented anything, it sends a powerful signal that invention is expected, and valued. It’s a taken-for-granted element of Amazon’s corporate culture. Bezos himself is also a great experimenter (with multiple patents to his name) and claims that, “I encourage our employees to go down blind alleys and experiment. In fact, we have a group called Web Lab that is charged with constantly experimenting with the user interface on the website to figure out improvements for the customer experience.” The point is that leaders like Benioff and Bezos don’t just do innovation themselves, they systematically replicate their own innovation skills throughout their companies.

In contrast, innovative companies with that don’t sustain their high innovation premium are often led by innovators who don’t seem to care about building others’ innovation skills. They excel at creative problem solving and often question, “Why delegate innovation to others who aren’t as good at it?” In fact, a challenge for any leader who masters a particular skill is that they often lack incentive to build the same skill in others. This can create a huge barrier to building a company with long-lasting innovation capability. So having innovative senior leaders is necessary but not sufficient for sustaining a strong innovation premium.

The bottom line is that leaders of innovative companies consciously set the example by modeling innovation behaviors—and imprinting those same behaviors as processes within their organizations. A CEO’s personal actions send a serious signal that innovation must matter to others. Apple’s performance under Steve Jobs, versus other leaders, powerfully illustrates the importance of innovative leadership. From 1980-1985 during Job’s initial tenure at Apple, the company’s innovation premium averaged 37 percent. Without Jobs, Apple’s premium dropped far below zero (an “Innovation Discount”) from 1985-1998. But with Job’s back at the helm Apple’s innovation premium eventually jumped to 50 percent. Job’s impact is undeniable when it comes to delivering an innovation premium over time. But what will happen now? Did Jobs sufficiently build innovation capability throughout Apple? Does Apple have the “right stuff” when it comes to innovation skills in the top management team and the right processes for encouraging and supporting others as they try to “think different” like Steve Jobs did? The jury is out and will stay that way for at least five years—both for Apple and for any leader attempting to create and sustain a significant Innovation Premium over time. What we do know as we wait is that if company leaders don’t “get” innovation by doing it themselves, the rest of the organization doesn’t stand a chance.