Everything You Need to Build a Culture of Innovation

In this post, we will have a look at what you need to create and foster a lasting innovation culture in your company.

 min read

Tiny plastic bricks: the Lego innovation story

It was the year 2003, and Lego was in real trouble. 

Despite a loyal fanbase, an established brand, and off-the-charts product recognition around the globe, the children’s toy company was facing a dire financial situation. 

In response to stagnant sales in the late 1990s, the company had over-diversified its product line, investing big in costly new ventures such as theme parks, childrens’ jewelry, a clothing line, and even a video game manufacturing arm. 

Unfortunately, these new activities resulted in massive new costs for Lego. Even worse, they did little to drive core revenue, leaving the beloved company with a sizable problem on its hands. Sales had dropped year-on-year by as much as 30%, leaving Lego in debt to the tune of $800 million. All this for a company over 70 years old that hadn’t posted a loss until the late 1990s

For incoming CEO Jørgen Vig Knudstorp, the stakes were high. Without a fundamentally different approach to business, the company was on track to go under, leaving the world without everyone’s favorite colorful bricks.

Lego CEO Jørgen Vig Knudstorp. Source: Lego

Jump ahead to 2017, and the company’s fortunes couldn’t look any more different. That year, Lego sold over 75 billion bricks around the world, overtook Ferrari to become the world’s most powerful brand, and was voted toy of the century by the British Toy Retailers Association. 

Underpinning these major achievements was a dramatic U-turn in profitability. From 2008 to 2010 the company quadrupled its profits, exceeding even Apple’s sales growth. In 2015, Lego posted an astonishing $5.2 billion US in global sales.

The crown jewel in this golden run was the release of ‘The Lego Movie’, one of the most universally beloved films of 2014. Even better, 2017 follow-up ‘The Lego Batman Movie’ received more positive reviews than any of the recent handful of ‘serious’ Batman movies.

Now, in 2019, Lego continues to be on top of the world. Sales are strong, and the company’s product lines are stable, even in a global climate of falling toy sales. In fact, it is even predicted that there are now more Lego people in the world than actual people.

So, what happened to turn things around? What saved all those tiny plastic bricks, keeping them coming off the production lines and into the hands of adoring kids and adults around the world? 

The answer, as explained in David C. Roberson and Bill Breen’s excellent book Brick by Brick, is that Lego rebuilt itself from the ground up, with a strong focus on innovation and creativity baked into every layer of the company.

Not only did Knudstorp slash the company’s production inventory to a manageable level - he also rewrote the rules on product development. Now, Lego employees are actively encouraged to collaborate with fans and customers in coming up with new ideas for sets and other products.  

Knudstorp created a strong culture of innovation throughout the company, and put Lego’s innovative potential to use in all the right ways, including: 

  • Encouraging Lego leadership to sponsor and guide innovation projects
  • Engaging its customer base through its ‘Lego Ideas’ open innovation portal
  • Partnering with talented and capable firms to successfully complete side projects (like the Lego films), rather than doing this all in-house
  • Empowering its employees to bring their depth of skills and experience to the table in forging a new direction for Lego

There’s so much to dig into when it comes to understanding Lego’s amazing innovation journey, but don’t worry - we’re going to leave no brick unturned. 

In this guide, we’ll take a deep dive into how businesses of all shapes and sizes can build a culture of innovation, and how they can use this culture of innovation to drive sales, market presence, and brand prestige. 

In addition to breaking innovation culture down into its four key elements - leadership, management, investment, and measurement - and showing how these elements work together, we’ll look at some instructive and helpful case studies along the way. 

From toy giants like Lego and Fisher-Price, through to manufacturing stalwarts General Electric and 3M, and the darlings of Silicon Valley like Microsoft, Google, and Apple, we’ve got plenty of real-life examples to help explain the difference a culture of innovation can make.

But first up, let’s start with a few basics. What do we mean by a culture of innovation?

What is a culture of innovation? 

What do General Electric, Sony, and Microsoft all have in common? 

Besides being market leaders for decades, each of these companies has a strong culture of innovation. Employees at every layer of these outfits know that the status quo is never enough. Instead, they’re committed to staying on top via constant improvement. 

A culture of innovation is one of the most critical elements of business survival over time. It allows companies to stay ahead of changes in technology, weather global economic events, and adapt to - or even anticipate - evolutions in fashion and consumer preference.

But what do we mean by this term, exactly? What is a culture of innovation?

Put simply, innovation is any differentiating change producing a sustainable competitive advantage. In business, having a culture of innovation means empowering employees with leadership and management techniques to find creative solutions to problems and offer better products, services, and experiences to the world. 

This may sound complicated, but it isn’t. A culture of innovation simply encourages employees at all levels of business to find new and better ways of doing things.

There are four broad ways a business can innovate:

  1. Business model innovation: Business model innovations are changes in the fundamental model driving business, for example, the McDonald brothers’ reinvention of the fast food industry, or Rolls-Royce’s move to sell aircraft engine services by the hour
  2. Product & service innovation: Product innovations are new market offerings creating a competitive advantage, for example, Apple’s release of the iPhone combining computing functions with mobile phone technology in a groundbreaking digital innovation. 
  3. Process innovation: Process innovations involve finding new or significantly improved production or delivery methods with the potential to alter the commercial landscape, for example, Amazon’s rollout of same-day delivery with Amazon Prime.
  4. Technology innovation: Technology innovations are inventions derived from advances in research and development, for example, 3M’s creation of the humble post-it note by combining new low-grade aviation adhesive to note paper. 

To drive new innovations, companies need to understand the different types of innovation they’re trying to foster. This is because the different types of innovation can require different attitudes and skill sets. 

For example, the skills and expertise driving innovations in technology (science, research and development) are different, though related, to those driving business model innovations (market knowledge, analysis of customer need, and economic theory, among other things). 

A strong culture of innovation supports each of these four types of innovation, and recognizes that in order to survive, a company must remain in a state of constant reinvention. 

A state of constant reinvention

To have an established culture of innovation is to understand that nothing ever stays the same, and that there’s always a better way of doing things - if you’re willing to look for it. In innovative companies, each and every employee is constantly driving change, looking for fresh approaches to common problems, and chasing the ‘aha moment’.

Having an innovative culture recognizes that creative blue sky thinking isn’t just something you do on a company retreat once a year. Rather, it’s a daily mindset built and maintained through an ongoing commitment from leadership and management.

That’s why Lego CEO Jørgen Vig Knudstorp took active steps to make product innovation part of daily life at the company. He recognized that in order to survive, the company couldn’t afford to stay still - Lego needed to be constantly reinventing itself to better suit its customers’ tastes.

Embracing dissatisfaction

This may sound a little negative, but trust us - an attitude of dissatisfaction is precisely what propels some of the world’s most innovative companies.

No matter how well your company or your products are doing, you should always look closely at your weak spots - even when this means second-guessing conventional wisdom. This healthy sense of dissatisfaction is how the best companies stay on top, and why some one-time market leaders fall out of the top spot. 

Kodak - an example of the risks of company contentedness. Source: Harvard Business Review

For a great example, look at how Kodak’s culture of contentedness led the company to miss the threat of digital photography technology in the 1970s - even though a Kodak employee was responsible for the original invention of this technology.

Kodak was so satisfied with its current range of products, it failed to see the potential disruption to its business model. Unfortunately for the company, that disruption completely decimated the company, leading to Kodak filing for bankruptcy protection in 2012. 

Prizing curiosity and creativity

Truly innovative companies prize curiosity, and recognize the importance of creativity in surviving today’s commercial world.

The impulse to seek new information and experience is a basic attribute of human thought. The best companies look for ways to encourage this impulse on a daily basis, and to channel it to creating value for customers and clients via innovative thinking.

As research shows, when our natural human curiosity is triggered, we tend to think more deeply about decisions, and are more open to second-guessing existing beliefs and finding better ways of doing things. This kind of curiosity helps to sidestep confirmation bias, allowing people to see past their habits and preferences to discover new products, services and markets. 

Whether this comes down to investing in research & development, giving employees time for unstructured blue sky thinking, or simply asking people their thoughts on new directions in products or services, innovative companies always reward curiosity. 

And this isn’t just a good thing for product development and sales, either. The more a company rewards curiosity and creativity, the more engaged its employees are likely to be.

Why should you create a culture of innovation?

What good is a culture of innovation, anyway?

Business writers and consultants tend to focus a lot on the mystique of innovation, talking about it in almost religious terms.

In reality, however, innovation isn’t all TED Talks and turtlenecks. The benefits of innovative cultures are very real, and can make a huge difference for your company by giving you an advantage over your competitors and allowing you to discover untapped markets.

Competitive advantage 

It sounds obvious, but it’s worth repeating: successful innovations have the potential to give your company a huge competitive advantage. 

Whether you’re talking about a revolutionary new product or a fundamentally different business model, commercial innovations can be game-changers. With a commitment to creative thinking, your company can stay current and see off any potential market threats or disruptions.

Microsoft’s moves with MS-DOS created a huge competitive advantage. Source: Wired

For a great example here, look at Microsoft’s rollout of MS-DOS way back in 1981. This transformative programming interface completely changed the way software licensing worked, making coding and development a lot more accessible for customers.

This bold move by Microsoft put the company head and shoulders above its rivals, including IBM and Sun Microsystems. By making MS-DOS indispensable for computer enthusiasts around the globe, Microsoft all but assured its market dominance for the coming decades.

Employee engagement and retention

True innovation takes a mixture of creativity, lateral thinking, problem solving, and applied logic. When it comes to motivating and engaging your employees, there’s truly nothing better.

Study after study has shown that employees tend to be happier and more productive when they’re pushed to innovate. This helps explain why businesses with an established culture of innovation have a much easier time attracting and retaining talented staff

Google’s world-leading commitment to innovation helps engage its staff. Source: Neil Patel

Google is an excellent example here. As well as having a world-leading commitment to innovation, Google’s stated goal is “to create the happiest, most productive workplace in the world”. This is one reason why the company was named the best place to work in 2014

Discovering and defining new markets

A culture of innovation and creativity can also help companies completely sidestep their competition by discovering totally new - and uncontested - markets. 

As outlined by W. Chan Kim and Renée Mauborgne in their seminal text Blue Ocean Strategy, businesses using innovation to discover untapped markets can define these markets for years, and even decades.

Electronics giant Canon is an excellent example of this market discovery at work. As Kim and Mauborgne note, the company’s sideways move from selling commercial copiers to focusing on domestic households allowed them to dominate the home printing market.

The FAX-L770, one of Canon’s many market-defining products. Source: Canon

In the mid-80s, Canon realized the potential to cut out the middleman and market what was once considered specialized printing technology directly to households. This led to an incredible run of product innovations from 1988 to 1995, cementing Canon’s status as the market leader.

[Infographic: ‘Advantages of innovation culture’: competitive advantage, employee retention & engagement, market discovery, sketches of examples / products]

So, that’s an overview of what it means to have a culture of innovation, and the benefits an innovative culture can bring to your business.

Now, we’ll take a look at how you can begin to build a culture of innovation. 

Where should you begin? 

To create a culture of innovation, you first need to know more about what you’ve got on your hands right now. Looking under the hood, kicking the tires: whatever car-based metaphor you prefer, that’s what you have to do to get started. 

We’re talking about conducting an innovation stocktake. 

Conduct an innovation culture stocktake

Before you can improve your ability to innovate, you need a detailed understanding of your present innovative capacity. This means looking hard at your current levels of innovation, your recent innovation performance, and areas you need to improve most urgently.

There are four key areas you need to look into to determine where your current innovation strengths lie, and where there are opportunities for future development:

  1. Responsiveness: How capable are each of your teams to respond proactively to innovation opportunities? Do your people tend to embrace new challenges and technology, or do people cling to the status quo?
  2. New products and services: Are your teams generating ideas for new products and services? If so, at what rate? What percentage of these ideas are successful? How much yearly revenue stems from products released in the last two to three years?
  3. Leadership involvement: Is every member of your executive leadership team sponsoring innovation projects? Are they getting involved with these projects directly, helping drive collaboration across business units? If not, why not?
  4. Recruitment and retention: Are you placing enough emphasis on innovation in the recruitment process? Are you doing enough to retain your most talented innovators? How do you identify and reward intrapreneurs?

When it comes to innovation, your exact expectations should differ according to the industry you’re in, as well as the size and maturity of your business. While all businesses change over time, some industries tend to be more innovative than others.

For example, a software company would arguably have a greater need for innovation than a company manufacturing traditional furniture. That’s because the furniture company is more likely (though not guaranteed) to be insulated from year-to-year changes in taste or fashion. 

Ask the right people

An innovation stocktake only works if you ask the right people.

The exercise should be collaborative and wide-ranging, and should include adequate representation from all areas of the business.

Don’t just focus on the traditional areas of innovation like product development or corporate strategy, either. As history shows, many world-changing innovations come from unexpected places, like the Playtex seamstresses designing the Apollo spacesuits.

Apollo spacesuits: a great example of unexpected innovation. Source: NASA

Try to involve representatives from accounts, human resources, marketing, and purchasing. Each of these business units can be a repository of great innovative ideas, and the employees there may have different ways of identifying problems and working towards solutions.

Be brutally honest

When it comes to auditing your present capacity for innovation, there’s nothing to be gained from staying polite. You’re going to be asking some tough questions, and you need to hear the answers, warts and all.

Getting to the heart of the barriers to innovation will help you identify where your company’s creative potential is getting stuck or bogged down. Until you can identify these barriers, you won’t be able to realize your company’s true capacity for creativity and innovation. 

So, make sure people know it’s safe to be honest when participating in the innovation stocktake, and do everything you can to encourage frank feedback. Commit to active listening, and ask participants to be clear and specific when responding to questions. 

Trust us: if you can convince people to lower their guard and be forthright about what they see as the barriers to innovation, the feedback you get will be a lot more useful.

4 levers to foster a culture of innovation

Now that you’ve completed your innovation stocktake with all the right people, you’re probably looking at a long list of improvements to get things on track. 

This can be a little unsettling. The barriers to innovation may be big things, like fundamental changes to your business’s management style. On the other hand, they might be small things, like making sure everyone has the right tools to collaborate. 

Whatever it is, now’s the time to take a deep breath. Then, make a plan.  

No matter how big the job might be, you can make things easier by breaking everything down into these 4 elements impacting your company culture and ultimately your capacity to innovate:

  1. Leadership: Setting the right tone from the top, including rewarding innovation, communicating clearly, and setting an innovation strategy to guide the business. 
  2. Management: Empowering your people by removing barriers to innovation, embracing open innovation, and recognizing the potential of every employee to contribute. 
  3. Investment: Allocating your resources to support a portfolio of innovation, spreading the risks involved in pursuing innovation, and investing in creative and curious people.
  4. Measurement: Setting metrics and KPIs to track innovation performance, collaborating across the business, and making innovation measurement an ongoing conversation. 

Get these four elements right, and you’ll be on your way to building a strong culture of innovation. 

1. Leadership

For every successful company, a culture of innovation starts with leadership

No matter which industry you’re in, your employees need to see the importance of innovation and creativity coming from the very top. Your leadership group needs to set the right tone by celebrating successful new products, striving to discover better ways of doing things, and demonstrating how much your company values applied creativity. 

There are a bunch of ways to do this on a day-to-day basis, but the most important is to develop an innovation strategy.

Develop an innovation strategy

Every company needs a strategy to guide and inform innovation. 

Unfortunately, most businesses don’t put enough time and effort into thinking strategically about innovation. As a result, their attempts to innovate often lack a clear, coherent direction.

As Gary P. Pisano, author of Creative Construction: The DNA of Sustained Innovation notes, an innovation strategy is a set of coherent, mutually reinforcing policies aimed at achieving a company’s innovation goals. Put simply, it sets out how a company wishes to innovate.

An innovation strategy should outline guiding principles for employees at all levels, and should be a roadmap for each step of the innovation process. When done well, an innovation strategy can align diverse groups, and can clarify a company’s creative goals.

There are a few different ways to develop an innovation strategy, but the main idea is that company leadership provide helpful guidance to staff.

For example, writer Keith Bendes suggests outlining company priorities for the four quadrants of innovation (listed from lowest risk to highest): 

  1. Manage: Innovation priorities for existing company offerings.
  2. Extend: Goals for reinvigorating or expanding current products.
  3. Adapt: Targets for adapting company products or services to find new markets.
  4. Create: Goals for developing completely new market innovations.

Having an innovation strategy is essential to the development of new products and services, as well as thinking about changes to a company’s business model. An innovation strategy helps people to understand company appetite for taking on risk, as well as innovation priorities.

Everyone in the business should be able to draw a straight line from the innovation strategy to their day-to-day responsibilities, and should be able to articulate how they are contributing to the priorities within this strategy.

An innovation strategy isn’t just helpful for employees, either. The process of determining company priorities is a great opportunity for leaders to make sure they’re on the same page when it comes to innovation, and that they’re communicating the same messages to staff.

Communicate clearly

Clear and open communication is a central element of all leadership, especially when it comes to innovation. 

When everyone in your business can see that innovation is being taken seriously, and that the results of innovation and company creativity are being communicated and celebrated, they’re a lot more likely to view innovation as part of their daily working experience.

As TED Talk curator Chris Anderson notes, innovation is communication: “Every meaningful element of human progress has happened only because humans have shared ideas with each other and collaborated to turn those ideas into reality.”

For company leaders wishing to develop a more innovative culture, this makes it crucial to communicate to the wider business on matters of creativity and problem-solving, and to emphasize accessibility and openness. 

And remember: open communication isn’t a one-way street: company leaders also need to be willing to listen to people about new ideas, and the tools and resources they need to innovate effectively.

The Sony PlayStation, a great example of the fruits of open communication. Source: Mediamatic

For an example of the importance of open communication to the innovation process, look no further than the best-selling gaming console of all time: the Sony PlayStation. 

The early concept for the PlayStation came from a junior-level employee named Ken Kutaragi. Following initial hesitation from upper-level management, Kutaragi’s persistent enthusiasm, combined with Sony’s culture of open communication, helped drive this disruptive innovation. 

Reward innovation - and don’t punish failure

Even the most creatively gifted employees need a good reason to put in the time and effort to innovate. That’s why rewarding innovation is so important.

Companies can offer prizes (for example, Westin Hotels’ quarterly innovation travel award), or can keep track of employee innovations on a public leaderboard. Alternatively, companies can simply provide recognition and praise at wider staff meetings.

It’s equally important that you don’t expect 100% success from every innovation. As the Harvard Business Review observes, the best way to arrive at a successful innovation is through making room for subsequent failures until things work out. 

Innovation author Micah Solomon agrees, stating that a blame-free culture is the most important part of building an innovative culture. By embracing productive mistakes, he says, employees can learn from them, rather than worrying about their reputation or livelihood.

Google has a radical acceptance of innovation failure. Source: Nicole Bartini

For example, one of the major drivers behind Google’s continuing dominance in the digital innovation sector is its capacity to learn from productive mistakes. Rather than punishing employees for failure, Google rewards staff for taking risks with new products or services. 

In fact, Google even has an official process in place to capture all the lessons learned from innovation failures, aptly called the ‘postmortem’. This process makes sure lessons from failed innovations are spread throughout the company, and can inform staff in the future.

2. Management

After leadership, empowering employees to make innovation a daily consideration through management is the most important part of building a culture of innovation. 

The fundamental goal of managing innovation? Making it as easy as possible to innovate. 

Make innovation as easy as possible

It sounds simple, but a lot of companies don’t think about how inconvenient it may be for their employees to innovate on a day-to-day basis. After all, if you’re constantly running into roadblocks when trying to get an exciting new idea off the ground, you won’t get far. 

To get the most out of your people, you need to ease the barriers to creativity and serendipitous innovation. Talk to people about what makes innovation hard, ask them where the roadblocks are, and start from there.  

Once you have an idea of the pain points, you can start to give people the frameworks and tools they need to innovate. This can involve:

  • Training: Upskilling your staff in specific techniques, such as problem definition and refinement or collaborative design.
  • Software: There’s a great range of innovation software out there to help guide creative processes. Take a look at some of the options, and think about how they could help.
  • Collaboration opportunities: More companies are now finding new ways to break the barriers to innovation with events like hackathons, idea workshops, or innovation days.
  • Innovation labs or hubs: If you’re fortunate enough to have an innovation lab or hub near you, take a look at whether it could help stimulate your business creativity.

The most important thing is to give people the time and space to share knowledge and experience, and to apply themselves to unstructured creative thinking. If people are too busy with their core responsibilities, they’ll have a hard time finding the headspace to innovate.

Daily innovation practices such as collective problem-solving or meeting in a collective innovation space can make all the difference. Even better, you can tailor these to scale - they don’t need to take a huge amount of time or company resources. 

The most innovative companies recognize that innovation is a skill, not a natural gift. Like other skills, it can be developed with tools and training, and by asking people to work together on complex projects.

[Infographic: ‘Removing the barriers to innovation’ checklist, focusing on four areas: training, software, collaboration opportunities, and innovation labs/hubs]

A great example here is credit card giant MasterCard, which has established collaborative projects across the business giving employees the time, space, and tools needed to bring an entrepreneurial approach to specific projects.

Empower the entire business

Although innovations do sometimes come from the very top of a company’s leadership or management structure, they’re far more likely to emerge from other parts of the business and be picked up by leadership.

That’s why it’s so important to empower your entire business to think innovatively.

This is where management techniques come in. Encourage your people to think about innovation in all aspects of their business - not just in the development of new products or services. You also need to incentivize people to work beyond hierarchies when innovating.

Empowering people to innovate is also a question of workflow management. For example, rather than giving a new project to whoever could finish it most easily, ask yourself who would be challenged by the project, and who would rise to this challenge with creativity and energy. 

This is what McKinsey refers to as ‘innovation parenting’. The technique is more than simply providing encouragement - you need to grant autonomy to employees, because when people feel like they have a level of autonomy, they’re more likely to contribute their best ideas. 

A great example here is L’Oreal cosmetics, which tasked chemist Balanda Atis to develop a new line of foundations to suit her skin tone, something she’d always struggled to find. 

Even though Atis wasn’t working in the makeup development when she proposed the project, L’Oreal recognized her potential to find a new solution to a problem they didn’t even know about, and put her firmly in the driver’s seat. 

Manager of L’Oreal’s Women of Color Lab Balanda Atis. Source: Fast Company

As this example shows, valuable innovations can come from any team or business unit, both internally and externally. This includes via open innovation. 

Embrace open innovation

As well as removing barriers to innovation and empowering staff, management must embrace every potential source of creativity - including open innovation. 

Open innovation involves partnering with third parties (most often customers, but not always) to identify and develop ideas for new products and solutions to common problems.

Companies have long turned to the market for feedback on products and services, but only in recent decades have businesses committed to open innovation on a mass scale. This commitment has led to some incredible breakthroughs.

For example, Lego has its hugely popular Ideas Hub, where customers and fans can go to submit ideas for new sets or product lines. So far, this has led to the release of hundreds of popular sets, and has done a lot to boost customer engagement.

DHL’s Chicago Innovation Center, a great example of open innovation. Source: Business Wire

There’s also DHL’s Innovation Centers around the world, where DHL employees work alongside clients and experts to develop solutions to their hardest problems, like parcel delivery in remote areas, and secure delivery technology.

Even Porsche is getting in on the action with the launch of its ‘Mobility for a Better World’ competition seeking innovative ideas for sustainable mobility technologies. 

Getting open innovation right takes hard work, with close management of customer relationships and the clear communication of stakes for participants. However, when open innovation is managed well, it can lead to some transformative innovations for the companies involved.

3. Investment

A commitment to innovation should be reflected all the way through your business, including within your investments in technology, resources, and people. 

As the Lego example shows, investing too heavily in innovation (or in too many different types of innovation at once) can be risky. A great way to manage this risk is through developing an innovation portfolio in line with a company’s innovation strategy. 

Tailor your innovation portfolio

Every company should strive to invest in developing new products and services. However, this investment should support the company’s innovation strategy, and shouldn’t deviate from the company’s focus on core customer offerings.

Striking this balance is what Clayton M. Christensen advocates in his seminal innovation text The Innovator’s Dilemma. Companies, says Christensen, need to find ways to invest in innovative subsidiaries without risking the viability of the company or its core products.

How a business responds to this challenging question forms the basis for its innovation portfolio. An innovation portfolio is a tool used by companies to balance and prioritize their investments in different areas of innovation with varying risk profiles.

This is the same question McKinsey aimed to solve with their ‘Three Horizons of Growth’ framework, an approach illustrating how to manage current innovation performance while also maximizing opportunities for future growth.

This framework breaks innovations down into three core categories of investment over time:

  1. Operators: The core businesses most readily identified with the company name, and those providing the greatest profits and cash flow.
  2. Business builders: Emerging opportunities beyond core businesses, including rising entrepreneurial ventures likely to generate substantial profits, but also requiring considerable investment.
  3. Visionaries: Viable ideas for potentially profitable growth down the road, for example, small ventures such as research projects, minority stakes in emerging businesses, or pilot programs.
McKinsey’s ‘Three Horizons of Growth’ model. Source: Medium

The innovation portfolio and three horizons model both provide helpful ways to structure investment in innovations, and have been put to use in novel ways by businesses around the world.

For example, American insurance company CSAA Insurance Group uses an innovation portfolio to invest in three categories of innovation (incremental, evolutionary, and disruptive). This way, the company can distribute resources to the areas of innovations it matters most.

Contrary to popular wisdom, one of the most common issues facing innovative companies isn’t a lack of innovative ideas and projects, but an excess of them. This is precisely what happened with Lego in the early 2000s - the company ended up committing to too many projects at once, and ran up huge costs as a result.

For companies facing an excess of choice when it comes to how to innovate, an innovation portfolio can help sift through the best of the bunch, and ensure your research and development budget isn’t completely swamped.

Spread your risk

Besides being a great way to support the development of potentially market-changing ideas, investing in innovation also helps companies to spread the risk of being overtaken by competitors or new developments in technology.

This way, investments in research and development aren’t just strategic - they’re also a defensive measure insulating a company from future market developments.

Fisher-Price’s ‘Future of Parenting’ project, a risk-spreading investment. Source: The Toy Book

A great example of a company spreading its risk through a tailored portfolio of innovation investments is Fisher-Price’s ‘Future of Parenting’ project, produced in partnership with design and consulting firm Continuum.

Here, Fisher-Price knew it needed to enlist the services of others beyond the company in undertaking this innovation project. By partnering with Continuum, the company was able to split the burden of innovation, while also accessing skills and expertise beyond the company itself.

Invest in curious people

Investing in innovation isn’t just about dedicating the right mix of resources to the right projects. It’s also about finding curious and creative people, and providing them with the incentives to contribute their best thinking to your business.

When it comes to the question of how to find the most creatively talented people, we’ve seen some interesting approaches. Chief among them is Google’s now infamous billboard math puzzle recruitment approach.

In 2004, this anonymous billboard appeared on Highway 101 in the center of Silicon Valley:

Google’s obscure approach to finding creative problem solvers. Source: Statistically Insignificant

The answer then led to a second, more difficult equation to solve. Those dedicated enough to push on through the gauntlet were then invited to submit a job application to Google, and were pursued as potential employees. 

This approach reflects the extent to which Google prizes and values curiosity, and the lengths to which the company will go to land those most driven by a natural curiosity. 

We’re not suggesting you go to the same lengths. But whatever you do, you do need to invest in people with the right mixture of curiosity, creativity, and discipline.

4. Measurement

As with all things in business, you can’t know what you don’t measure. 

It may sound a little backwards, but measuring company innovation is one of the most crucial elements of building an innovation culture. By tracking your innovation results in detail, you can better understand where things are going well, and where changes are needed. 

The first step in measuring company innovation? Setting metrics and KPIs.

Set innovation metrics and KPIs

Innovation is a conscious and purposeful practice, and should be measured on an ongoing basis just like any other company metric. 

Unfortunately, McKinsey reports that while 77% of business leaders see innovation as a priority, only a mere 22% have metrics in place to measure innovation. 

This is a shame, because paying attention to innovation metrics such as new product revenue and overall investment in innovation can do a lot to boost engagement in innovation - especially when companies make these metrics part of regular performance conversations. 

Accurately measuring your innovation requires a bespoke mixture of metrics tailored to your industry, the maturity of your business, and the specific areas you’d like to focus on. 

To do this, you need to use a blend of:

  • Timesheet metrics (for example, employee hours dedicated to innovation activities).
  • New product metrics (for example, the number of new products launched each year).
  • Financial metrics (for example, the percentage of sales resulting from new products).
  • Training and staff competency metrics (for example, the number of innovation training sessions completed each year).
  • Management and leadership metrics (for example, the number of innovation projects sponsored by leadership members).

You also need to balance input metrics (metrics tracking the resources dedicated to innovation, for example, employee hours) with output metrics (metrics tracking the results of these input metrics, for example, new product sales contributions).

[Infographic: ‘Innovation metrics and KPIs’ - the five categories of metrics, and the distinction between input and output metrics]

Yum! Brands - an example of innovation metrics at work. Source: PYMNTS

For a great example of innovation metrics in action, check out Yum! Brands’ use of new product revenue metrics in foreign markets. By tracking Chinese sales metrics, Yum! Brands found they needed to tweak their fast food products for the local market. The resulting product innovations trebled their sales in China, showing the value of tracking innovation. 

Make measurement a collaborative exercise

Measuring innovation shouldn’t just be something that is done to people. Instead, this process should be as collaborative as possible. 

For the measurement process to be truly effective, employees need be on board with innovation metrics and KPIs. Employees should be encouraged to think about how best to accurately capture innovation performance information, and how innovation can be improved.

Before you start measuring your company’s innovation, open up the conversation and ask people how they think you should measure your efforts when it comes to innovation. This way, you’ll be less likely to end up tracking misleading or meaningless metrics. 

Start an ongoing conversation

Finally, innovation metrics and KPIs are only useful if they are made available to employees, and are used to form the basis of decision-making. 

You need your people to know that innovation metrics are an ongoing part of their experience at the company, and will be used to assess company creative performance and inform future innovation efforts. 

Unfortunately, it seems the majority of companies don’t learn from failures in innovation. Accenture’s 2015 Innovation Survey shows 60% of US businesses report struggling to learn from their past innovation mistakes, meaning there’s plenty of room for improvement. 

So, track and report on innovation metrics on a regular basis, and encourage your people to make innovation metrics a key part of their performance management conversations.

Innovation requires organizational change

In addition to these 4 elements, it’s important to think about building company innovation as organizational change. 

After all, changing your company culture to enable more innovation is a large and complex job - you have to work hard to change the social development of the company.

You’re not just flicking a switch

Building a culture of innovation takes time, resources, and a joint effort from all parts of the business.

Not only do you have to develop and implement your innovation strategy and get your leadership on the same page, but you also have to ensure your management approach reflects a commitment to innovation.

There are resources and tools to think about, investment priorities to implement, and innovation metrics and KPIs to set and measure. Beyond all of that, you need to make clear to each person in your business precisely what’s expected when it comes to creativity and innovation.

All of this is to say, don’t expect change to happen at the drop of a hat.

To return to our Lego example, incoming CEO Jørgen Vig Knudstorp couldn’t forge ahead with all of his innovation priorities at once. Doing so would have immobilized the business, not to mention confusing staff. 

Instead, Knudstorp had to prioritize, starting with getting costs under control by trimming the current range of inventory, then tasking managers and advisors to think of better ways to engage customers. By taking things one step at a time, Knudstorp was able to right the ship.

Some guiding principles

You should approach strengthening your culture of innovation like any change management process. And like any other change management process, it’s helpful to bear in mind a few guiding principles:

  • Function comes before form: Before you decide on the shape or structure of a new department (including an innovation department), be clear about what you expect from it. 
  • Remember your innovation strategy: You’ve put all that effort into developing an innovation strategy - don’t forget about it when making change management decisions.
  • Define key roles: Building a culture of innovation is a lot easier if you’re able to define key innovation roles (for example, Chief Innovation Officer) nice and early.
  • Strive for clear communication: Ambiguity over what’s expected from individual staff can cause a lot of stress for people - sometimes for your most talented thinkers.

Bearing these principles in mind will help the transition to a more innovative company culture, and will help you protect what matters most to your business - your people.

Protect your most important asset - your people

Just like any other change, fostering innovation can be a bumpy ride. 

Some employees may react negatively to the exercise, and feel that the status quo is being challenged. After all, change can make some people anxious, particularly if they’re unclear on the wider direction of the business.

Your first priority should be to ensure your employees understand why you’re doing what you’re doing, and that they’re well-placed to cope with the changes. After all, your people are the engine room of innovation - you need to take steps to protect them during this process.

So, do what you can to make employees feel safe and well during the change process, and give them the support they need. Get this right, and you’ll be rewarded with greater enthusiasm, loyalty, and creativity from your people.

How do you know you’ve succeeded?

Innovation is an ongoing process, and not an individual event. It isn’t some magical state that will cause confetti to fall from the ceiling - unless you’ve got something special planned! 

However, there are some things you can do to make sure you’re getting it right when it comes to innovation. This includes seeking staff feedback, letting the metrics tell the story, and regularly assessing your innovation maturity. 

Seek staff feedback

Knowing how well you’re innovating can be as simple as asking the right questions and listening without judgement. Be sure to seek staff feedback through surveying all levels of the company on innovation. When you’re done, let people know what the results are saying. 

Let the numbers tell the story

If you’re setting and tracking the right innovation metrics, you’ll be able to know soon enough whether you’re succeeding in building a culture of innovation.

Collect and track performance information against innovation KPIs, and let the metrics tell the story. For example, tracking the sales contribution of products released within the last two to three years will give you a great sense of how productive your innovation culture really is.

As companies which have made innovation metrics a key part of business (such as 3M and Disney) show us, the regular measurement and communication of innovation metrics can help focus the entire business on creative thinking and product innovation. 

Assess your innovative maturity

If you can commit to each of the steps and techniques we’ve discussed, you’ll be well-placed to realize your company’s innovative potential and stay ahead of changes in the market. 

Get it right when it comes to leadership, management, investment, and measurement, and you’ll find yourself progressing in your innovation capability from emerging innovation, through to developing, strengthening and leading innovation. 

Here, we’ve listed what you can expect at each stage of the innovation evolution, and the steps you’ll need to take to move from one stage to the next: 

1. Emerging innovation

Nature of innovation: inconsistent, happening without coordination, driven by individuals in isolation, lack of deliberate connection between innovation and business direction, any wins accidental

Steps needed to improve: develop investment strategy, use innovation management techniques, develop innovation portfolio

2. Developing innovation

Nature of innovation: limited coordination, teams starting to work together, patchy communication of innovation wins and challenges, some engagement by leadership and management

Steps needed to improve: bring innovation activities in line with investment strategy, strengthen communication and organizational change

3. Strengthening innovation

Nature of innovation: deliberate coordination between teams and divisions, leadership communicating innovation priorities in clear and consistent terms, innovation successes tracked and measured

Steps needed to improve: establish innovation metrics, make measurement a key consideration for all staff, document innovations

4. Leading innovation

Nature of innovation: strong and proactive commitment to innovation, culture of creativity built in to recruitment and retention processes, company recognized as innovation leader

Steps needed to improve: measure and maintain current innovation levels, commit to ongoing innovation audits

So, make sure you regularly assess your innovative maturity, and set regular and specific targets for future improvement.

Conclusion: why Lego survived

It could quite easily have gone very wrong for the world’s favorite brickmaker.

After all, Lego’s financial situation in 2003 was sobering, and its challenges as a company seemed insurmountable. In the same situation, a lot of other companies would have folded up completely.

Instead, by committing to a complete and total transformation of the business, Lego built a company culture that prizes innovation at every step, and managed to survive as a result.

Lego CEO Jørgen Vig Knudstorp, immortalized in plastic. Source: The Guardian

From the design of the company offices, to collaborating with fans on ideas for new Lego sets, and even in customizing staff business cards in the form of - you guessed it - Lego miniatures, Lego has wasted no opportunity to celebrate and encourage employee innovation and creativity.

Lego survived because it built a strong culture of innovation with all the elements we’ve discussed in this guide. By focusing on the four elements of innovation culture (leadership, management, investment, and measurement), Lego was able to turn itself around.

Now, the company is on top once again. And with its ongoing commitment to innovation, it’s looking like it will stay that way. 

If you want to build a stronger culture of innovation, consider the steps and techniques we’ve outlined in this guide, and make a detailed plan focusing on your top priorities. Brick by brick, you’ll be able to get the job done. 

And just in case you’re in need of even more guidance, we’ve got a handful case studies to help you out. 

Innovation in practice: three case studies

You can have all the theories in the world, but nothing tells a story like a good case study. 

Here, we’ve got three practical, real-world examples of innovation culture to demonstrate the concepts we’ve covered in this guide. Let’s start with Chinese tech platform Meituan Dianping. 

#1: Meituan Dianping - doing everything at once

The Chinese tech platform Meituan Dianping has experienced an unbelievable trajectory in recent years, with the average individual Meituan user relying on the platform 38% more often in 2018 than in 2017. That’s a huge rate of growth.

Given the incredible range of functions supported by the platform, this performance makes perfect sense. Meituan Dianping is pretty much reinventing online shopping in china, offering consumers a one-stop spot to book food, accommodation, travel, entertainment, and more.

Meituan-Dianping’s interface. Source: Forbes

Commonly referred to as ‘the Yelp of China’, Meituan-Dianping started with a focus on restaurant reviews and recommendations. The platform’s focus quickly turned transactional, however, as leadership realized the potential market for food purchase and delivery.

Now, Meituan-Dianping has emerged as a heavy-hitter in the Chinese online landscape, with over 382 million users at late 2018. The company’s secret to this incredible growth? A commitment to innovation at every step of the customer experience.

For example, the Meituan-Dianping platform is incredibly powerful at leveraging user consumption data, and using this data to recommend other services and experiences they’ll like. Combine this with the hundreds of thousands of businesses available on the platform, and you have a recipe for innovation with the potential to transform the Chinese consumer landscape.

Meituan-Dianping’s innovative user services. Source: Klook

Meituan-Dianping’s innovations don’t stop there, either. The platform’s Smart Dispatch system schedules which of its 600,000 delivery workers will be responsible for the millions of daily food orders. This system now calculates 2.9 billion route plans every hour, allowing workers to pick up and drop off up to ten orders at once, boosting their income by a third overall. 

These two innovations are great examples of Meituan-Dianping’s strong culture of creativity. By setting a strong focus on innovative technology at the highest levels of leadership, and by tasking employees to innovate in every part of the business, Meituan-Dianping drives new and better ways of serving their users and customers. 

The company’s long-term vision is a great example of the value of an innovation strategy, too. By setting clear goals and principles, the company is able to channel creative energies across every team in pursuit of a common goal: transforming the consumer experience in China.

It’s this capacity for innovation that has pushed the company towards a valuation of $55 billion U.S. dollars, and a feverish level of attention from international investors. 

#2: Otis - moving people through innovation

When you think of innovative industries, elevators and escalators might not be the first thing that comes to mind. After all, there’s only so much scope for creativity when it comes to getting people from one place to another, right? 

Well, elevator company Otis plans to change all that. 

With its recent unveiling of the Otis Experience and Innovation Center in Hong Kong, Otis has established a place to showcase the company’s latest innovations, while also displaying creative ideas and solutions for the people-moving industry. 

The Otis Experience and Innovation Center in Hong Kong. Source: Otis

A tech-focused and minimalist building, the Experience and Innovation Center is a place for employees across the company to work with customers and experts on ideas for new products and services. This could transform the way Otis products help people in their daily lives.

Otis’s establishment of this center is an excellent example of open innovation in action, and a great reminder that promising ideas for innovation can come from anywhere - including from working alongside clients and customers with close knowledge of company products. 

As the world’s leading manufacturer of elevators, escalators, and moving walkways, Otis has a strong incentive to stay on top of industry developments and trends. Committing to a physical hub to focus open innovation efforts is an excellent way to do this. 

This example demonstrates the importance of a culture of dissatisfaction to innovation. Even industry leaders like Otis have to cultivate a sense of restless innovation, and must always be pushing to discover new avenues for products and services. 

#3: 3M - innovation management in action

There’s a great reason manufacturing giant 3M is such a common go-to example when it comes to company innovation. Actually, there isn’t just one reason - there are quite a few. 

First up, there’s 3M’s radical approach to innovation management. Not only does 3M seek to remove barriers to innovation by creating a range of centers and forums for employees to pool and develop new product ideas, but 3M scientists also go on regular field trips to observe the customer experience and understand pain points.

3M’s Innovation Center in St. Paul, Minnesota. Source: NY Times

3M has also set up Innovation Centers across the world, including in Japan, Brazil, Germany, India, China, Russia, and elsewhere. These centers foster innovation by allowing for a richer understanding of customer needs, then linking these with 3M technologies. 

Then there’s 3M’s famous 15% program, an approach that allows company employees to dedicate 15% of their paid time for attempts at unstructured innovative thinking. According to 3M, employees typically use this time to pursue discoveries made during the usual course of work, but which they didn’t have time to follow up on.

Launched way back in 1948, the program may seem like an overly generous gift for employees. However, it has led directly to the production of many of the company’s best-selling products, including Post-It Notes, Cubitron sandpaper, and more. 

It’s also a major drawcard for the company when it comes to attracting the right talent, as people relish the freedom to work autonomously on things that interest them. 

The humble post-in note - a great example of the fruits of innovation. Source: Uline

Finally, there’s 3M’s world-leading approach to measuring and reporting on innovation. The company comprehensively measures innovation results, most notably keeping a close eye on the percentage of yearly revenue contributed by products launched in recent years.

By tasking executives to meet or exceed targets of 10-15% of yearly revenue stemming from recent innovations, 3M sets the expectation for the company to be constantly reinventing itself. This expectation helps to reinforce the company’s strong culture of innovation. 

All of these factors add up to a company that has stayed at the top of the market through relentless innovation. These features are why 3M was awarded the United States National Medal of Technology, and why the company is so often singled out as an innovation leader.

Article by

Jonathan Livescault

Braineet CEO & Co-Founder

Former Strategy Consultant turned Entrepreneur. Excited to help every day corporate innovation teams get results and build their company's future.

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