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Making Innovation WorkHow to Manage It,
Measure It,and Profit from It
Updated Edition
Tony DavilaMarc J. Epstein
Robert D. Shelton
Contents
Introduction to Updated Edition xiii
Introduction xliii
Chapter 1 Driving Success: How You Innovate DeterminesWhat You Innovate 1Innovation Is the Power to Redefinethe Industry 1
The Innovation Imperative: Driving Long-Term Growthin Top and Bottom Lines 5How to Make Innovation Work: How You InnovateDetermines What You Innovate 7
The Rules of Innovation 9
1. Exert Strong Leadership on InnovationDirection and Decisions 12
2. Integrate Innovation into the Business
Mentality 15
3. Match Innovation to Company Strategy 16
4. Manage die Natural Tension Between
Creativity and Value Capture 18
5. Neutralize Organizational Antibodies 23
6. Cultivate an Innovation Network Beyondthe Organization 247. Create the Right Metrics and Rewardsfor Innovation 25
Summary: The Innovation Company 28
Chapter 2 Mapping Innovation: What Is Innovation andHow Do You Leverage It? 29A New Model of Strategic Innovation 29Business Model Change 31
Value Proposition 32
Supply Chain 33
Target Customer 34
viii MAKING INNOVATION WORK
Technology Change 35
Product and Service Offerings 35
Process Technologies 36
Enabling Technologies 37
Three Types of Innovation 39
Incremental Innovation 42
Semiradical Innovation 47
Radical Innovation 51
Ersatz Radical Innovation 55
Disruptive Technologies 57Innovation Model and the Innovation Rules 58
Chapter 3 Choosing Your Destiny: How to Designa Winning Innovation Strategy 59Choosing the Right Strategy 59Play to Win and Play Not to Lose Strategies 60
Play to Win Strategy 60
Play Not to Lose Strategy 63
Too Much of a Good Thing 71Clearly Defined Innovation Strategy Drives Change 72
Do You Select an Innovation Strategy? 75
Internal Factors 76
External Factors 77
Risk Management and Innovation Strategy 78
Innovation Strategy: The Case of the PharmaceuticalIndustry 79
Attempts to Solve the Innovation Problem 81
Changing the Innovation Approach 82
Strategy and the Innovation Rules 85
Chapter 4 Organizing for Innovation: How to Structure aCompany for Innovation 87Organizing for Innovation 87Developing an Internal Marketplace
for Innovation 88
Balancing Creativity and Value Creation 89
The Balance Changes as the OrganizationMatures 91
CONTENTS ix
Five Steps to Balancing Creative and CommercialMarkets 98
Outsourcing Innovation 100
Making Good Use of Your Partners 103Integrating Innovation within die Organization 105
The Value of Networks and Innovation Platforms. . . 106
The Corporate Venture Capital Model 110
The Ambidextrous Organization 112
The Leadership Role 115Organization and the Innovation Rules 116
Chapter 5 Management Systems: Designing the Process ofInnovation 119Systems and Processes Make Things Happen 119The Objectives of Well-Designed Innovation Systems . . . . 120Choosing and Designing Innovation Systems 124
Systems for Ideation: Seeing the Gaps 127
Structured Idea Management 128
Experimentation 130
Prototyping 131
Making Deals 133
Innovation That Fits 134Management Systems Comparison 137Electronic Collaboration 139Management Systems and the Innovation Rules 142
Chapter 6 Illuminating the Pathway:How to Measure Innovation 145To Measure or Not to Measure? 145
What Gets Measured Gets Done 146
The Three Roles of a Measurement System 148
A Balanced Scorecard for Measuring Innovation 150
The Business Model for Innovation 150
Inputs, Processes, Outputs, and Outcomes 151
From the Business Model to the MeasurementSystem 155
Designing and Implementing InnovationMeasurement Systems 159
x MAKING INNOVATION WORK
Measures for Ideation 160
Measuring Your Innovation Portfolio 163
Measuring Execution and Outcomes
of Innovation 168
Measuring Sustainable Value Creation 170
The Barriers to Effective Performance Measurement 176
Measurement and the Innovation Rules 178
Chapter 7 Rewarding Innovation: How to Design Incentivesto Support Innovation 181The Importance of Incentives and Rewards 181Motivation 182
Different Strokes for Different Folks 183
A Framework for IncentiveSystems' Design 185
Setting Goals for Measuring Performance 188
Specific vs. Broad Goals 188
Quantitative vs. Qualitative Goals 190
Stretch vs. Expected Goals 190
Success-Driven vs. Loss-Avoidance Goals 191
Performance Evaluation and Incentive Contracts 193
Team vs. Individual Rewards 193
Subjective vs. Objective Evaluation 196
Relative Performance vs. Absolute Performance
Evaluation 198
Incentive Contracts 199
Expected Level of Pay 200
The Shape of the Pay-Performance Relationship . . . 200Timing Incentives 202
Delivery of Compensation 203Key Considerations in Designing Incentives Systems
for Innovation 204
The Danger of Overuse 205
The Negative Effect on Intrinsic Motivation 206
Fear, Failure, and Fairness 207Incentives and Rewards, and the Innovation Rules 208
CONTENTS xi
Chapter 8 Learning Innovation:How Do Organizations BecomeBetter at Innovating? 211The Importance of Learning 211
A Model of Learning 214
Learning to Act 215
Learning to Learn 216
Learning Systems for Innovation 217
Systems for Delivering Value 218
Systems for Refining the Current Model 220
Systems for Building Competencies 221
Systems for Crafting Strategy 223
How to Make Learning Work in Your Organization 224
Knowledge and Ignorance Management 224
The Project Roadmap 226
Failures As Part of the Process 228
Learning Histories 228
The Dynamic Nature of Innovation Strategy 229
The Technology Stage 230
The Performance Stage 232
The Market Segmentation Stage 233
The Efficiency Stage 234
The Complementarities Stage 234Learning and the Innovation Rules 235
Chapter 9 Cultivating Innovation:How to Design a Winning Culture 237How Culture Affects Innovation 237Is Innovation the New Religion? 238The Danger of Success 240Organizational Levers of an
Innovative Culture 244
The Levers of an Innovative Culture 244
Legends and Heroes 251
The Physical Environment 252Different Country Cultures Breed DifferentInnovation Cultures 252
xii MAKING INNOVATION WORK
People and Innovation 254
Recruiting to Build an Innovative Organization 255
Turn Your Recruitment Strategy Upside-Down!.... 256
The Role of Senior Management 258
Leading Innovation 258
The Role of the CEO 260
Culture and the Innovation Rules 261
Chapter 10 Conclusion: Applying the Innovation Rules to YourOrganization 263
Combining Creativity withCommercial Savvy 263
Smart Execution 264
The Role of Leadership 266
Leadership Must Define the InnovationStrategy and Link It to the Business Strategy 266
Innovation Must Be Aligned with theCompany Business Strategy, IncludingSelection of the Innovation Strategy 267
Leadership Must Define Who Will Benefitfrom Improved Innovations 268
Diagnostics and Action 269
Stage Gate Systems 278
The Venture Capital Model 280
The Technology Innovation Model 281
Time-Driven Systems 282
Organizing Initiatives 285
Fine Tuning 285
Redirection/Revitalization 285
Generating Innovation Value 286
Endnotes 289
Bibliography 307
Additions to Bibliography for Updated Edition 329
Index 333
