Understanding the potential of information technology and its management often marks the difference between a firm that leads and those that follow (and perhaps fall) behind.

— Donald Fisher

STAVING OFF "STALL POINTS"

A few years ago, a study by the Corporate Executive Board [5] examined why large corporations almost inevitably experience "stall points" — severe downward inflections in their growth rates that often herald the end of an era of high growth and the beginning of slow growth or decline. The study's analysis of Fortune 50 companies from 1955 through 1995 revealed that "despite their massive resources and access to the highest-quality information and advice, only a handful have been able to maintain anything resembling an unbroken growth run." The study also identified "mismanagement of the innovation process" or "innovation management breakdown" as the principal strategic error that contributed to the growth stalls. Thus it is not surprising that many CEOs view the handling of innovation management breakdown, as discussed in the aforementioned study, as their top priority.

Innovation is the key to survival and prosperity in this new "disruptive" age, which is dominated by both technological advancement and obsolescence, as well as a changing business environment. This is true for businesses of all sizes and in almost all sectors -- be they private or public, micro or large, local or global.

Of particular interest are innovations driven through advances in information and communication technology (ICT). As we saw in the mid-to-late 1990s, when the dotcom era was at its peak, ICT-based innovations have led to the creation of many new enterprises that engage in different types of business that were inconceivable before. Furthermore, ICT has led to major organizational changes -- traditional hierarchical structures were replaced by flattened collaborative units, and businesses were able to directly reach and sell to their customers, bypassing some intermediate agencies. Today ICT has gone from being a mere business support tool to being a creative business driver. Therefore, it is vital that the nature, source, and application of innovations, particularly ICT-based innovations, be understood in the business context.

We have found that achieving successful ICT-based innovations is a continuous process that requires a holistic, strategic approach. Adopting an innovation in a business often calls for changes in business practices, business operations, and business culture. Recognizing and planning for these changes is as important as the innovation itself. Successful implementations require full understanding of the business, the domain in which it exists, and continuous improvements during the implementation process.

In this article, we outline different kinds of ICT-based innovations, discuss how to foster and nourish such innovations, and suggest how to turn ideas into successful innovations that create value for the organization, customers, or other stakeholders in the shortest possible time. We advocate a comprehensive approach to implementation of innovations that considers not only the technical but also the organizational, business, and human aspects of adopting innovations.

INNOVATION: A NECESSITY, NOT AN OPTION

It is vital for businesses to understand that innovating and adopting the innovations is no longer a question of "choice." There are a number of factors influencing the modern business environment that make it almost obligatory for businesses to innovate or face oblivion. These factors include rapidly evolving ICTs, improved business processes, stiff global competition, higher levels of customer awareness, and the threat of technological and business obsolescence.

Easy and cost-effective communication, riding on the back of the ubiquitous Internet, is a double-edged sword. While it facilitates easy, convenient, and cost-effective communication and interaction with current and potential customers and clients, it also makes every small event in the business world known to every other business (and their stakeholders) almost immediately and irrespective of their location. This is why companies must "ride on the top of the wave" through continuous innovation, for simple implementations of best practices are not enough to survive and prosper today.

In fact, as research on Germany's mobile-telecom industry in the 1990s shows, a collective push for the same benchmark by numerous organizations may even erode the profitability of that entire sector or industry.¹ Therefore, innovations and successful implementations of innovations are increasingly being considered more important than best practices. In a recent survey, 1,000 CEOs identified innovation as the "key business lever or tool" that would help their companies capitalize on upcoming opportunities [10].

UNDERSTANDING INNOVATION

Though nowadays many individuals, most businesses, and even governments talk about innovation, what they mean or understand by the term varies widely. Many merely see innovation as a solution to a problem. For instance, according to a 2003 survey of 500 US senior business executives, 26% of companies define "innovation as a `solution' that identifies and addresses the unmet needs of customers" [4]. Very few viewed it more broadly, associating innovation with discovery, revolution, or creating or doing something new and different that adds value.

While innovation is much more than simply finding a solution, it is also distinct from invention, which means simply the creation of a new idea, artifact, device, or procedure. It should be clearly understood that there is no guarantee that an idea or invention will always turn out to be a successful innovation. As Robin Batterham, a chief scientist with the Australian government and chief technologist at the Rio Tinto mining company, has said:

Innovation is much more than invention or R&D. ... Innovation is the process that translates knowledge into economic growth ... It encompasses all activities encouraging the commercialization and utilization of new technologies -- scientific, technological, organizational, functional, and business [1].

Innovation is putting new ideas into practice and making them useful and successful. Once we understand innovation as the implementation of inventions, we also see that successful innovation will require us to follow a set of systematic activities, tasks, and guidelines. The discipline and practice of innovation will require a "roadmap," as discussed later in this article.

Taxonomy of Innovation

To understand innovations, it is helpful to recognize that there are three major kinds: incremental, transitional, and transformational.

Incremental innovation involves minor improvement of a product or service or part-by-part application of an idea. This is similar to what Gary Hamel and Liisa Valikangas of the Woodside Institute call "continuous reconstruction," a process that entails regular changes and refinement to organizational values, processes, and products in order to remain competitive in a changing environment [8]. This kind of innovation is particularly applicable in situations where the organization wants to keep the current business model and processes basically intact rather than attempting something that may involve larger risks, major investment, and/or extensive changes.

Transitional innovation, in addition to changing technology, brings about a change in the business practices, which results in a redesign of the current/traditional business model or process. This is expected to deliver more dramatic improvements.

Transformational innovation not only results in a complete redesign of the organization, business model, or business process, but it also influences the entire industry in which the organization exists. This is also called "disruptive innovation" or "creative destruction" [8]. This kind of innovation creates a more profound impact than the other two kinds of innovation, and it has the potential to construct a new paradigm.

Of the three kinds of innovation, most innovations in business and industry are incremental. It is estimated that over half of advances in technology and productivity and half of economic benefits are due to incremental innovations [4].

To get a better understanding of the influence of innovations, it is also useful to categorize innovations according to their locus of influence. For example, in the context of an organization, innovations could be categorized into four groups based on the unit(s) impacted by the innovation:

1. Local (or unit, department level) -- impact a unit in an organization

2. Intraorganizational -- impact one or more units of an organization

3. Interorganizational -- impact multiple organizations in the business chain (e.g., suppliers, distributors, wholesalers, retailers, and other businesses)

4. Global -- impact the end users, customers, and society at large

Innovation Framework

In order to better understand the relationships between the kind of innovation and its areas of influence within an organization, we propose a simple two-dimensional matrix, as shown in Figure 1. Professionals and innovators can use the matrix to place and visualize their ideas in action in a practical context and explore the opportunities that emerge as a result.

Figure 1 -- Innovation framework.

ICT-BASED INNOVATIONS

ICT has had, and continues to have, a profound impact on businesses and individuals. For example, it has dramatically transformed the travel business, enabling travelers to gather information, book flights, buy tickets, and even check in online -- thus making travel agents largely redundant in the process. The way we manage our finances and do our banking has also been dramatically transformed, as we can now do most banking activities online. ICT has revolutionized almost every sector of business -- transport, manufacturing, retail, real estate, and healthcare, to name a few -- in many different ways. With uptake of mobile phones and advances in wireless communication, one can trade shares while on the move with a few clicks, buy "electronic tickets" for a concert or sporting event, and even pay for roadside parking fees.

ICT-based innovations assume a central position in our modern world, and their role in shaping our future -- both the near and distant -- shouldn't be underestimated. Successful companies will be differentiated by how they leverage ICT to create new value for themselves and their customers. As we have noticed in recent years, future wealth-generating mechanisms and competitiveness of organizations will increasingly depend upon appropriate use of ICT in each and every field, and in every aspect.

As ICT has the capacity to influence and/or transform many different aspects of a business, it is vital that ICT innovation be understood, fostered, and managed well. As ACM former President Peter Denning observes, innovators exercise:

[L]eadership to design and bring about lasting changes to the ways groups and communities operate. Innovators watch for and analyze opportunities, listen to customers, formulate offers customers see as valuable, and manage commitments to deliver the promised results. Innovators are history-makers who have strong historical sensibilities. [6]

SOURCES OF INNOVATION: WHERE GREAT IDEAS BEGIN

While innovation is a complex process encompassing a wide range of activities, an essential ingredient of innovation is creative ideas or inspiration, which can originate from various sources. The sources of innovation can be categorized as internal (originating as a result of efforts substantially from within the organization) and external (those that are accessed from outside the firm and transferred in). The internal sources of innovation include coworkers, the R&D department, the marketing group, senior management, and other departments within the organization. There are several external sources of innovation, the major ones being the users or customers, other businesses (particularly competitors), suppliers and distributors, consultants, universities and other research institutions, professional publications, and the Internet [2].

The value of each of these innovation sources varies considerably. It also depends on employees' current knowledge and their ability to access, absorb, and exploit the ideas, information, and insights derived from these sources. A number of studies have found that customers are a great source of successful new product or service ideas. Furthermore, close contact with frequent users of the products/services, collaboration with universities and research institutes, and cooperation with R&D units of other companies all had a highly significant influence on technological innovation success.

As large firms can generally devote more financial and human resources to conducting research and turning research findings into innovations, and because they benefit from economies of scale, one might expect more innovative output from large firms. But several research studies have revealed, on the contrary, that the innovative output of small and medium-sized firms exceeds that of larger firms. These small firms and scrappy startups are able to react quickly to capitalize on the opportunities offered by changes in the environment and advances in technology. They are more willing to experiment and take risks, and they have productive informal communications and less bureaucracy [2]. Therefore, to capitalize on innovation, managers should develop a climate that seeks and incorporates innovative ideas that emanate from several different sources.

Customers as Innovators

David Siegel, a leading Internet strategist, talks about the customer-led revolution in his book Futurize Your Enterprise [13]. In this age of communication, customers can have a phenomenal influence on the products and services companies offer. This is because they are so well connected to the business and to the rest of the world that they can pass on comments and feedback on the product, service, or their "experience" immediately. This phenomenon has encouraged businesses to start listening to their customers far more intently. Obviously, this has had the spin-off advantage of customers participating in the innovation process itself.

Customer participation in implementing innovations has reduced the potential for product and service failures because, in many cases, products and services failed not because of some inherent fault in them, but because their developers didn't understand the needs and contexts of the intended end users. Engaging users early on offers the dual promise of avoiding risks in the commercialization of innovations and making the product development process more comprehensive and productive. As Mohanbir Sawhney and his coauthors have noted, companies innovate more effectively by facilitating communications among a wide variety of current and potential customers [11, 12].

Closed and Open Innovation

In traditional, closed innovation, the sources of innovation as well all the innovation activities and processes are found inhouse. In open innovation, on the other hand, external sources of knowledge and ideas -- including users and customers and an awareness of what is happening in the outside world -- become important. Open innovation assumes that firms can and should use both internal and external paths for taking ideas to market. Open innovation offers greater promise and better solutions as it admits external sources of technology and ideas into a firm's innovation process [3].

ROADMAP FOR ICT INNOVATIONS

Needless to say, innovation requires support from the top management and creativity and dedication from the members of the organization themselves. A number of thinkers have come up with a "roadmap" or a "process" for innovation that they have applied to business innovations. For example, management guru Peter Drucker, in his book Innovation and Enterprise [7], focused on the practice of innovation by discussing how "the innovator searches for opportunities and transforms them into new practice in the marketplace." In this section, we present our roadmap for innovation.

Innovation Process

Innovation is a catalyst. It can create and sustain wealth, enable growth, and provide competitive strength. But innovation is only a catalyst -- it is an ingredient in a process. If you don't follow the process and add other ingredients, innovation is worthless. Even if your innovation is revolutionary, if you don't have a process to take it to market, it won't create or sustain anything.

For successful innovation, organizations need to take a holistic, not piecemeal, approach. In a holistic approach, all aspects of the business processes and supporting IT and other infrastructure, as well as the linkages and interactions among them, are identified, analyzed, prioritized, implemented, and evaluated.

Among the key steps involved in transforming a bright idea into a successful innovation are: generating an idea, placing it in context, creating value, and assessing and managing risks (see Figure 2). For continued growth and competitiveness, organizations must make innovation a continuous, cyclical process, which involves repeating these steps.

Figure 2 -- The innovation process: generating ideas and creating value from them.

Generating an idea. Ideas are the key to innovation, and they may be triggered by many different sources or events and take different forms. For example, senior management might be prompted to act by a realization of what competitors have done, by the need to jump out of a stall point, or simply by a random instinct. Generating ideas that are creative and bring value is harder than we think, and there are several reasons for this. We may be immersed in our past glory and success, or conversely, we may be generally pessimistic about what we can achieve. We are often bound by concepts, processes, and strategies with which we are familiar. To generate new ideas and win the future, we need to break free from the past (although we may analyze the past to prepare for the future).

Placing it in context. Innovation succeeds in context. Having ideas is not good enough; ideas are just conceptual starting points. Ideas have to be put in context to generate new value by looking differently at markets, products, services, and our ways of doing things. To create value for an organization or society, an innovation needs to be connected with the organizational purpose and mission. This calls for deeper knowledge of the customers and their needs and wants. Success comes from careful selection and a willingness to reject all ideas until a good one emerges. Indeed, only a very small percentage of raw ideas see the light of day and meet with success [14].

Creating value. How do you create value for your company from ideas? You can create value in one or more of these ways:

• Achieving operational efficiency and flexibility
   
• Attracting new customers; entering an expanded global market
   
• Improving customer service
   
• Offering new products and services
   
• Redefining your business models and processes; doing things differently
   
• Developing new ICT protocols, standards, and development tools

Ultimately, successful innovation is achieved when ideas are turned into something concrete, real, and of value. Corporate executives surveyed in 2003 favored a "practical and customer-focused approach to innovation where success is judged by sales, revenue, and customer satisfaction" [4].

Assessing and managing risks. An innovation involves change and/or exploring an uncharted territory; hence, it involves risks. Innovation does not always work the way we might predict or hope for. To maximize the potential for success and minimize the chance of failure, identify the risks and their potential impact. One possibility is that someone else is fielding an application to achieve the same innovation as yours; consider the impact of such a thing happening. Work from the assumption that there will be hurdles, problems, and challenges and then plan for them.

INNOVATION MANAGEMENT

To bring about successful innovations, management needs to provide people with the necessary organizational support as well as both the opportunity and the incentives to reach beyond their formal jobs.

Middle managers play a major role in fostering successful innovations and encouraging people under their supervision to reach their creative potential. According to Harvard Business School Professor Rosabeth Moss Kanter, middle managers are the key to innovative growth in organizations and a source of hope. Innovative middle managers possess several characteristics: comfort with change, clarity of direction, thoroughness, and a participatory management style. They also understand that achieving their goals take time -- and tact.

Kanter also identified a strong association between accomplishing innovation and an empowering management style. The most successful innovations derive from situations in which people from a number of areas make contributions. Middle managers achieve success by persuading more than ordering, building a team, seeking input from others, acknowledging others' stake or potential stake in the project, and sharing rewards and recognition willingly [9].

Outsourcing Innovation

In the current environment, where many activities and functions of an organization are outsourced, one might wonder whether innovation could also be outsourced. Yes, innovation can be outsourced. In fact it has been happening for some time now, although organizations don't plainly call it outsourcing. This can be done in three different ways: takeover, assignment, and joint network.

Takeover. In this scenario, smart, enterprising individuals driven by some bright ideas form a small startup company with the assistance of venture capitalists to test and trial their ideas. Working hard, these small companies may demonstrate the potential of their innovations, but they don't have the resources to field them. To seize the opportunities these potentially successful innovations represent, a major player in a related business gets involved. Either the larger firm takes over the small company for a price, or it buys the intellectual property.

There are many examples of "takeover" innovation, particularly in ICT. In early 2003, Google purchased Pyra Labs, a three-year-old San Francisco company that created some of the earliest technology for writing weblogs. In 2001, Google also bought Deja.com, a company that had collected and continued to update Usenet "newsgroups" and Internet discussion forums, and used its technology to create Google News. Nokia acquired online game company Sega.com to get into the wireless game market. And a few years ago, Amazon.com acquired Junglee Corp., a provider of database technology, to help consumers find products on the Internet.

Corporate strategy experts David Harding and Sam Rovit have found through analysis of 15 years of data that acquisitions and mergers work well when they help a company to do what it does best or when they help it to evolve in the midst of competition.

Assignment. An enterprise could assign to another company the task of generating new ideas, trialing them, and demonstrating their potential. This is something like contract research and development. Major companies have already been subcontracting research and innovative product and service development to other small companies -- usually smart startups.

Joint network. As major breakthroughs and innovations often call for multidisciplinary expertise and expensive resources, businesses with a common interest and vision could form a network and work toward achieving their common goal, sharing the resulting intellectual property. This arrangement minimizes risks for an organization, as the impact of any failures is shared by all the partners of the network. Integrated circuit (IC) manufacturers such as Intel and Motorola have formed a joint network to support research and development on next-generation ICs, to cite just one example.

FORTUNE FAVORS THE BRAVE

History shows that future success can't be guaranteed by doing what we do well today. Failure to innovate equals failure to differentiate, and failure to differentiate equals failure to sustain or grow. It is worth investing in innovation even during an economic downturn or period of sluggish growth. According to a recent survey, more than half (54%) of US executives had increased investments in innovation over the past two years, even though most budgets were held flat or cut because of the sluggish economy [4].

We emphasize that ICT-based innovation is really essential for competing successfully. Organizations that play it safe -- sticking to Nicholas G. Carr's advice to follow and not lead -- can't maintain their competitive edge for long. We would like to further stress that there should be a genuine business motivation and need for developing and implementing ICT-based innovations, as blind adoption is often unproductive.

Innovation is a way to grow and be more successful. As a way forward, we recommend that you:

1. View innovation as a necessity, not an option

2. Be open to ideas coming from areas and scientific disciplines besides your own

3. Challenge your existing business assumptions and operations

4. Identify ways to use new technology, creating value for your organization and your customers through innovation

5. Bravely take the plunge, overcoming the fear of failure

6. Move toward your goals on an evolutionary path

7. Operationalize innovations more efficiently and quickly than your competitors

8. Keep your pioneering spirit and dreams alive to achieve greatness

NOTES

¹ For a discussion of this phenomenon, see the August 2004 issue of The McKinsey Quarterly.

REFERENCES

1. Batterham, R. The Chance to Change. Australian Department of Industry, Science, and Resources, November 2000.

2. Bommer, M., and D.S. Jalajas. "Innovation Sources of Large and Small Technology-Based Firms." IEEE Transactions on Engineering Management, Vol. 51, No. 1, February 2004, pp. 13-17.

3. Chesbrough, H.W. "The Era of Open Innovation." MIT Sloan Management Review, Vol. 44, No. 3, Spring 2003, pp. 35-41.

4. Cheskin. Fast, Focused & Fertile: The Innovation Evolution. Cheskin, September 2003.

5. Corporate Executive Board. Stall Points: Barriers to Growth for the Large Corporate Enterprise. Corporate Executive Board, 1998.

6. Denning, P.J. "Great Principles of Computing." Communications of the ACM, Vol. 46, No. 11, November 2003, pp. 15-20.

7. Drucker, P. Innovation and Entrepreneurship, paperback ed. HarperBusiness, 1993.

8. Hamel, G., and L. Valikangas. "The Quest for Resilience." Harvard Business Review, September 2003, pp. 52-63.

9. Kanter, R.M. "The Middle Manager as Innovator." Harvard Business Review, July-August 2004, pp. 150-161.

10. PriceWaterhouseCoopers. 6th Annual Global CEO Survey. "Leadership, Responsibility, and Growth in Uncertain Times." PriceWaterhouseCoopers, 23 January 2003.

11. Sawhney, M., and E. Prandelli. "Communities of Creation: Managing Distributed Innovation in Turbulent Markets." California Management Review, Vol. 42, Summer 2000, pp. 24-54.

12. Sawhney, M., E. Prandelli, and G. Verona. "The Power of Innomediation." MIT Sloan Management Review, Vol. 44, No. 2, Winter 2003, pp. 77-82.

13. Siegel, D. Futurize Your Enterprise: Business Strategy in the Age of the E-Customer. John Wiley & Sons, 1999.

14. Stevens, G., and J. Burley. "3000 Raw Ideas = 1 Commercial Success!" Research Technology Management, Vol. 40, No. 3, May-June 1997, pp. 16-27.