The Innovator's Rule Book

What companies need now are mechanisms that allow them to come up with real innovations -- ones that produce major results -- over and over again. SRC Holdings Corp. has devised a system that does just that.

By Bo Burlingham |  @boburlingham   | 
 

Innovation -- when it occurs in companies at all -- tends to be random and unexpected. But at SRC, we've built a system of mechanisms that makes innovation happen like clockwork.

Wherever I go these days, I hear a buzz about innovation. The subject comes up in almost every conversation I have about how companies are doing, and it fills the business press. Even my bank has gotten into the act, sponsoring invitation-only conferences on innovation for the CEOs in its customer base. The sessions are packed.

You'd think that -- after all the hype about innovation during the Internet boom -- we'd be sick of the subject. So why is there suddenly such a sense of urgency about it now? I think the answer has to do with the current recession. During the 1980s and 1990s, much lip service was paid to innovation, and massive corporate expenditures on technology created the illusion that a lot of it was happening. But with the economic downturn, it has become increasingly clear that a lot less innovation has been going on than was commonly supposed. Rather than innovating, it turns out, a lot of companies have been caught in what you might call the optimization trap.

By optimization, I mean the process of taking something you already do and figuring out how to do it better, cheaper, and faster. It's about improving productivity, driving down costs, and reducing waste.

When you think about it, that's what we generally consider "management." In fact, optimizing has been the focus of just about every major management fad and business trend of the past 100 years, from Frederick Taylor's time-study engineering in the early 20th century to Michael Hammer and James Champy's reengineering in the early 1990s. It's all been geared toward helping companies become more efficient and productive, doing the old things better rather than doing anything new. The same can be said about the billions we've spent on technology.

Optimization defines our lives as managers. We spend virtually every hour of every workday trying to make those incremental improvements that will result in slightly better performance. We do that month after month, year after year, until we're ready to scream. We have no choice. You can't be successful in business without optimizing.

In the long term, however, optimization alone is not enough. Incremental improvements will take you only so far. If the leader in your industry earns 7% before taxes and you earn 6.5%, you no doubt have room for improvement, but the potential gain is not nearly as great as what you could achieve by coming up with a new product or marketing idea or an entire new business that would allow you to earn, say, 15% pretax.

More important, too much optimizing will leave you vulnerable to the dangers of the marketplace -- new technologies, new competitors, economic downturns, and so on. If you're focusing only on doing the same things better from year to year, you don't think about the big threats that lie farther down the road, and so you don't diversify. You don't make the investments required to come up with the new products, services, and businesses that can address your weaknesses and protect you when the day of reckoning finally arrives.

That's the optimization trap, and it's easy to fall into, especially during a period of sustained prosperity and expanding markets. As long as you get the annual improvements you need to remain competitive, you'll be satisfied. But when a recession hits, sales of your old products and services will drop, and you won't have new ones to pick up the slack.

Even worse, you may find that relentless optimizing has actually stripped out your capacity to innovate. To save money, you've gotten rid of engineering, market research, human resources, and every other support function, and you no longer have the people or the culture you need to come up with the breakthroughs that can save you.

There's only one way I know of to avoid that trap: you have to innovate and optimize at the same time. That takes a strong constitution. After all, you're under pressure to optimize 24 hours a day, but no one is pushing you to innovate. So somehow you have to develop your own mechanisms that keep innovation on the front burner, constantly showing you what you need to do, why you need to do it, and how far you need to go with it.

At my company, SRC Holdings Corp., we've managed to come up with a set of such mechanisms during the past 14 years. But before we were able to do that, we first had to change our whole perspective on business. For openers, we had to come to the realization that there's a lot more value in building companies than in building products. If you sell a pen, you can make a dollar. If you sell a pen company, you can make $10 million. When you play the game of business at the highest level, you understand that ultimately the company is your product, not the pen.

Once we made that leap, we began searching for opportunities to start new businesses. What did we find? They were all around us. So we developed a system that allowed us to start businesses using resources we already had and a minimum of capital. That system became our principal tool not only for growing and diversifying the company but also for generating a passion for innovation.

As it turned out, our experimental new venture would teach us a set of homegrown rules we would use to transform our company and make innovation an integral part of the way we would run SRC from then on.

In the beginning, however, we weren't looking for a system. I didn't even know that one existed. I was just trying to solve one of those annoying problems that drive CEOs nuts.

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    • Bo Burlingham

    Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants: Companies That Choose to Be Great Instead of Big. The book was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award in 2006. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business and A Stake in the Outcome.


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