In the April 21, 2005 edition, The Economist newspaper led with a story that began:

“BOSSES seem to have lost their nerve. After the over-exuberance of the dotcom boom they wisely focused on cutting costs. And they have been very successful at it. … And yet many companies seem to have become so hooked on cost-cutting that a sort of anorexia has set in. That cannot be healthy in the longer term. … With so much stress on cutting costs, there is reason to fear that too few companies are investing in innovative new ideas that might generate organic growth.”

The Economist concludes by saying:

With so many firms stressing cost cutting, it might be clever to try, like Intel, to stand out from the crowd.

The Economist’s editorial policy is rumored to be “Simplify, Simplify, Exaggerate!” It’s a brilliant approach when it comes to analyzing and then setting strategy. It’s often useless when it comes to crafting tactics to achieve that strategy.

In this case, it is not an exaggeration to note that companies need to start focusing on innovation if they are going to generate extra ordinary new profit streams; ie growth of more than 3 to 5%. In its April 21, 2005 article, The Economist might have glossed over (or perhaps, even simplified) the difficulties that executives face when trying to work out how to structure organizations to generate a stream of profitable innovations.

The executives who will succeed in designing organizations that continually generate innovation are going to possess a rare and special insight into how to create an environment where motivated teams can truly produce change. My guess is that these are executives who have read Steven Johnson’s “Emergence”; they have turned to page 102 in Malcolm Gladwell’s “Blink”; and learnt how major Paul Van Ripper used independent agents to defeat the US army in a war game leading up to the invasion of Iraq. They have read “Lost and Found” by Sussman, Deep and Striber, and realized that you have to manage people differently today. Then, they will have read “It’s a Flat World” by Thomas Friedman, and they will have realized that no matter how much they move towards the sixth and seventh sigma, eking out minor new efficiency gains from existing processes only increases profits by small increments. These executives will have further realized that competition will always quickly erode these small gains. The challenge will come from the proverbial 900lb gorilla with a larger capital base, or, in our world of globalization, from a company with more opportunities to out source to cheaper places. These executives will realize the best source of significant profit is in constant innovation, always generating the profits associated with new products.

In some areas, this need for constant innovation is easy to see (such as new drugs that have big profits before they lose their patent and face challenges by generics), but the competition always arrives. Economists call these short-term profits economic rents. Roughly, they are the excess profits over and above the average return on capital that a company can expect to get from investing in the S&P 500. These excess profits come from innovative new products and services, but they only exist for a short period of time; the time it takes for the competition to realize that you are making excess profits, to copy you, compete in price and drive those profits down. So, what is an executive to do? She has to gear her company up for constant change and constant innovation. The way she can do this is to free her people from the confines of the silos they work in now, and empower them to work across internal bureaucratic and regional boundaries, to create project teams on the fly and eventually to become a truly emergent organization. This is what Van Ripper’s forces were doing. To do this, in the words of “Lost and Found”, her people have to know what is going on, they have to feel as if they own their projects, and they have to feel that they will grow.

The obvious question now is “how do you accomplish all of that?”

It’s easy for an executive to tell his or her people to take ownership and run with the ball. It’s much harder to actually get them do it, and, many organizations have found it is almost impossible to create an environment where they can actually succeed.

Success is possible, however. To create an environment where knowledge workers become innovation creators, the organization needs to take two main tactical steps:

First, give your people the power to share and find information across your whole organization.

Second, be realistic and set your team up for success; aim for lots of small innovations