To gauge how innovative an organization is, it helps to understand the concept of optimization. Jack Stack, cofounder and CEO of SRC Holdings Corp., defines optimization as the process of taking something you already do and figuring out how to do it better, cheaper, and faster by making incremental improvements. That's fine as far as it goes, Stack says, but what gets left out is the type of activity that leads to new quantum improvements -- namely, to innovation.

It's those quantum improvements that come to your rescue when you run into trouble in a recession, for example, or when some other big problem hits. If you've focused all your attention on optimizing, you won't have the new products, services, or businesses that could make up for the losses in your established lines. So one way to test your organization's aptitude for innovation is to look at its ability to deal with the marketplace's surprises. For example, how well is your organization prepared to handle:

  • A 20% drop in sales for three to six months?
  • The loss of a key customer?
  • A strike or shutdown at a key supplier's production plant?
  • The loss of a key staff member?
  • The introduction of breakthrough technology?
  • A six-month delay in the development of a new product?
  • If you can't honestly answer that your organization is prepared for any of those events, then chances are you need to jump-start the innovation process in your company. That means building mechanisms inside your company that encourage and support innovative thinking.

    SRC has a whole set of such mechanisms. One of the most important is a biannual sales-and-marketing meeting at which SRC's subsidiaries provide detailed analyses of the challenges they face in the coming months and the contingency plans they have -- or are developing -- to respond to any surprises. Those presentations lay the foundation for the company's "high-involvement planning process," which leads to the development of an annual plan, complete with specific, quantified goals. Using the plan as a guide, the entire workforce then monitors the company's progress toward its goals through weekly meetings, or "huddles." If the subsidiary runs into trouble, it brings out one of its contingency plans -- that is, one of its innovations -- to get itself back on course.

    So what do SRC's people look at during that sales-and-marketing meeting? A typical presentation includes the following elements:

    Market Analysis:

  • Economic outlook
  • Market and industry analysis
  • Market potential
  • Industry benchmarking
  • Competitive data
  • The Numbers:

  • Current year actual vs. plan
  • Five-year history (current year vs. previous four years)
  • Diversification efforts and next year's plan
  • Five-year growth plan (next year and following four years)
  • Marketing budget
  • Strategy:

  • Overall strategy and goals
  • Contingency plans
  • Employee survey (to measure understanding of and confidence in the strategy)
  • Comparison of acquisition targets (if any) to industry ratios
  • The Innovation and Optimization Quiz
    While every organization is under constant pressure to optimize, you have to develop your own internal mechanisms for driving innovation. Striking the right balance will improve the health of your financials and make for a more enduring organization.

    So how balanced is your organization? Note which of the items you believe to hold true in your company.

    Innovation:

  • You have regular meetings focused on developing new products and/or services.
  • You have spun off an entirely separate business from a new concept.
  • Your sales personnel are rewarded for developing new markets, not just more sales to existing customers.
  • Your organization could handle the loss of a customer or a significant shift in market demand.
  • Your company encourages experimentation and accepts the failures that come along with them.
  • Your coworkers are focused on driving out vulnerabilities.
  • Your organization is creative and entrepreneurial.
  • Optimization:

  • Your meetings focus on driving down costs and reducing waste.
  • You regularly have discussions with managers about improving productivity.
  • Your company focuses on doing old things better.
  • You've eliminated or avoided creating jobs in engineering, market research, or other support functions.
  • Your coworkers focus on process improvements.
  • Your company strives to be lean.
  • Your company's profits and efficiencies are in the upper tier of your industry.
  • Now find your position on the vertical axis of the matrix below by counting up the number of items you noted in the optimization part of the quiz. Next find your place on the horizontal axis by counting up the number of items you noted in the innovation part of the quiz. When you've arrived at both values, connect the two numbers on the matrix. (For example, if your innovation score was 3 and your optimization score was 5, your overall score would place you in the upper left-hand quadrant of the matrix, telling you that even though your ability to optimize is good, your innovation process still needs a little work.) The goal, of course, is to wind up in the upper right-hand quadrant. If you're not there yet, you probably need to work on developing some mechanisms of your own.

    So where should you begin? The first step is to make sure that you and your people have the information you need to assess where your company stands in relation to its direct competitors and the industry's leaders. What are their sales? How profitable are they? What do they spend on payroll? How are their people compensated? What lines of business are they in? What growth strategies are they pursuing? How do they innovate? And so on. You need to do a complete competitive analysis using whatever resources are available -- industry-association data, information from your banker or stockbroker, newspaper articles, whatever.

    Then you should have a meeting with your management team or, better yet, your managers, salespeople, and other employees who represent a cross-section of your workforce. All of you need to take a good, hard look at the competitive data and start brainstorming about:

  • What are your company's major vulnerabilities and weaknesses?
  • What new products, services, and/or spin-off businesses might help you address those vulnerabilities?
  • How can you structure your company to give people room to innovate and to reward them for doing it?
  • What mechanisms can you adapt -- or steal -- from other companies (such as SRC, 3M, and Merck) to get the innovation process going in your company?
  • Setting up a process of continuous innovation is hard work, and it may be a couple of years before you begin to see results, but over the long term the payoff can be immense. Since SRC launched its innovation process in 1987, sales have increased 300%, from $40 million to $160 million, and a share of SRC stock that was worth $13.02 back then had an appraised value of $81.60, as of the most recent valuation. Most important, the company has continued to grow through good times and bad.

    For more information on SRC's mechanisms, visit the Great Game of Business Web site at www.greatgame.com or call 1-800-386-2752. To purchase a copy of the new book by Jack Stack and Bo Burlingham, A Stake in the Outcome: Building an Ownership Culture for the Long-Term Success of Your Company (Doubleday/Currency), click here: www.stakeintheoutcome.com