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The Innovation Factor: Inside the Idea Mill

What's better than one blockbuster innovation? A company designed to crank out innovations one after another.

The Innovation Factor

It was a humble scrap of foam, but Scott Augustine found it compelling. Something about its texture and the tender way it submitted to the pressure of his fingers told the CEO that this vendor sample might prove to be one of his many grails: material for sealing a patient's airways during surgery. Excitement stirring beneath his midwestern composure, Augustine rushed the sample to R&D and placed it in the care of Randy Arnold, a former theatrical-prop builder whose job as senior design engineer is to make Augustine's visions flesh. Arnold shaped the foam with a band saw, hand-carved a plastic frame, inserted a bit of tubing, and a few hours later presented himself in Augustine's office with a rough prototype of an airway seal. Pausing only to spray his throat with a topical anesthetic, Augustine plunged the device down his own throat. Later that day he announced to his staff that they would be selling the airway product in three months.

Abstract ideas don't stay abstract for long at Augustine Medical, a 15-year-old, $64-million maker of medical devices based in Eden Prairie, Minn. The company, which has been profitable since its third year, has 108 U.S. patents, three product lines and two more under development, and a business plan that calls for the creation of one new "paradigm shifting" product a year beginning in 2005. With his eye on the public markets, Augustine wants to create a kind of innovation mill, where invention is detached from that unreliable progenitor called inspiration and becomes instead the stuff of routine. To do that he is building something that is unusual even among highly creative companies: a continuously experimenting organization, one that is capable of churning out profitable products one after another.

Augustine is barking up the right tree, business experts would agree. Peter Drucker proclaimed innovation's primacy to business at least 50 years ago; today it is more important than ever, thanks to the breathless competition spawned by globalization and easy access to information. Innovation is also "enormously profitable," says intellectual-capital consultant Frances Horibe. In her book Creating the Innovation Culture, Horibe cites a study showing an average rate of return of 56% for 17 products considered innovative by their industries. That compares with an average return of 16% for all American business over a 30-year period. Looking beyond products to companies, researchers at MIT's Sloan School of Management have calculated that each 1% increase in spending on research and development produces a 4.3% increase in a company's market-to-book-value ratio. CHI Research, in Haddon Heights, N.J., has even patented a stock-analysis method that ties companies' innovativeness (as measured by the quality and quantity of their patents) to market performance.

But if the "why" of innovation is beyond dispute, the "how" is often far from clear. Does innovation mean spending huge amounts on R&D? If so, that leaves out most small companies. Or does it require some sort of creative alchemy -- an occurrence as rare as it is mysterious? To Drucker, the answer to both questions is no. Innovation, he writes, is simply "organized, systematic, rational work" that can be pursued by companies of any size. And it goes well beyond R&D to include nearly every facet of a company's operation.

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STAGE CRAFT: Randy Arnold used to build theater props. Now he builds medical devices. The two jobs are pretty much the same: dream something up, build it, then break it down.

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Drucker wouldn't get an argument from Scott Augustine, whose company pursues innovation in some very innovative ways. Augustine's R&D group, for example, employs not just engineers but also a healthy complement of prop builders recruited from regional theater and opera companies. It is a kingdom of tinkerers, where no one needs permission to build whatever pops into his or her mind, and where home-workshop tools are favored over sophisticated computer-aided design. But innovation doesn't stop at the lab door. Augustine requires every department, from marketing to information technology, to be just as experimental as his new-products team. "One thing that will get a senior manager in trouble fast is if I detect there's nothing new going on in their department," says Augustine. "I ask people constantly, 'What experiments have you done lately?' It might be how to shuffle paper faster or how to eliminate a step in manufacturing -- I'm not fussy. But if you can't tell me two or three things you've tried, that's a good way to get on my bad side."