The Innovation Factor

Nabisco is the largest maker of cookies and crackers anywhere. Period. Yet this behemoth of the biscuit world couldn't solve its own Fig Newton problem. Customers, it seemed, wanted less fat in their chewy-rich-and-gooey, but Nabisco's fat-free batter stuck stubbornly to the cutting equipment. So Nabisco turned to Foster-Miller, a privately held engineering company in Waltham, Mass. Focusing its formidable inventive powers on the dilemma, Foster-Miller came up with a newfangled noncontact cutting machine to which fat-free batter won't cling. As a result of this small business's ingenuity, the world is a slightly better place. For dieters anyway. Or at least for the ones who like Fig Newtons.

Foster-Miller's approach to inventing products from scratch is just one of the strategies you'll read about in Inc's report on America's most innovative small companies. We asked CHI Research, an intellectual-property consultancy in Haddon Heights, N.J., to compile a list of businesses with under $100 million in revenues that had accumulated 30 or more patents between 1996 and 2001. CHI has been tracking and analyzing patents for decades, and senior policy analyst Diana Hicks says patents are a good -- if not perfect -- gauge of an organization's technological inventiveness. Businesses that spend money on patents, she explains, are protecting earlier investments in research and development, and those investments indicate a commitment to innovation.

The innovators that CHI uncovered for Inc are not your typical small businesses. Many are venture funded. Many are public. And then there's the question of what they actually do all day. The Patent Journal identifies the five industries that have the highest rates of growth in patent activity from 1995 through 2000. Four of the five (telecommunications, semiconductor manufacture, biotech, and pharmaceuticals) are heavily represented on our list.

Such businesses -- with their corporate alliances, healthy research coffers, and rocket-scientist staffs -- may seem alien to a company that makes wine coolers or paper clips. But in interviews with our reporters, the leaders of those companies described many familiar management challenges: Keeping employees engaged. Developing new products while refreshing old ones. Funding the development of unproven ideas. Thinking up stuff.

We asked those leaders how they manage to keep cranking out novel products and features when so many companies stall out after the big bang that created them. Here's what they told us.

Manufacturing: The Upside of Vertical

It's the difference between assembling a puzzle and painting a picture. The puzzler manipulates a prescribed number of variously shaped pieces to reproduce an image devised by someone else. The painter wields the spectrum of colors and an infinite vocabulary of form to create an image that is wholly new. Innovative companies, like great painters, want maximum control of their own palettes. To create truly unprecedented products, they believe, you must also make the components on which those products are based.

Norman Rautiola, for example, is fanatical about building everything himself. His company -- Nartron Corp. -- makes electronic systems for a variety of industries; its innovations include the first electrically powered steering system, the first keyless automobile-entry system, and the first touch-controlled range. All those products, and dozens of others dreamed up by Rautiola and his staff over 30 years, are made from plastic parts and housings and switches and molds and coils that Nartron engineered itself, from its own designs. The company buys a few staples, such as microprocessors, brass, steel, copper, and plastic resin. Otherwise it's all homegrown.

Rautiola's reasoning is simple: The whole is the sum of its parts; ergo, if you create better parts, you get a better whole. "Our parts look different from other people's because we keep adding functionality," says Rautiola. "We optimize the mechanical design of a part that goes into a new product. We optimize the electromagnetic portion. By doing so we optimize the entire product."

Rautiola says that making his own parts also helps control costs and develop employees' technical smarts. That, in turn, allows the company to "run rings" around the competition. "I compete with Texas Instruments," says Rautiola. "I compete with Motorola. But they can't compete with me technically because none of them has those kinds of capabilities under a single roof."

R&D: Divide and Conquer

Products -- like children -- need different things at different points in their development. So innovative companies often divide up their research-and-development efforts by the stages of a technology's life cycle. What does that look like in practice? Capstone Turbine Corp., a maker of power-generating systems, splits the engineers who are working on its products into four groups:

  • Maintenance and reliability. "It's unglamorous work, but it is so important," says president and CEO Ake Almgren of the cost-reducing tasks that occupy the existing-products group.
  • Functionality. This group creates significant new versions of Capstone's chief technology platforms -- generators that burn various fuels, for example. "Brazil uses a lot of ethanol," says Almgren. "If we decided to target Brazil, these engineers would develop a version that burns ethanol."
  • Product management. These engineers concentrate on market research, figuring out what's needed in the market and which new-product designs might be feasible.
  • New-product development. At Capstone, this is the group that creates wholly new platforms. One project under way attempts to ease the strain on utility grids during the summer by creating air-conditioning that runs on heat, rather than on electricity. "The goal is to have a less custom solution that maximizes fuel and cost efficiency," says Almgren.

"It's unglamorous work, but it's so important."

--Ake Almgren of Capstone Turbine Corp.

Managing Employees: Where the Action Isn't

Six years ago the hot winds of the Web swept through companies, igniting wildfires of excitement. Marketers and technologists competed to be assigned to speculative but glamorous E-commerce projects. Managers, meanwhile, struggled to maintain morale among those on the not-so-cutting edge.

Innovative companies experience that tension every day. Something revolutionary appears, and employees -- who were hired, after all, for their talent and creativity -- strain yearningly toward it. "I actually have some big hairy Halloween knuckles that I wear into meetings where I have to tell people to stop working on something new because we promised something to customers," says John Moussouris, founder and CEO of MicroUnity Inc., a designer of microprocessors for communications. "If you hire people who are very innovative, sometimes you have to be the Neanderthal."

But no one has to play the caveman at Advanced Tissue Sciences Inc. The company, whose products replace or repair damaged tissue and organs, requires employees to devote 80% of their time to existing product lines. For the remaining 20%, however, "we allow them to work on anything that they find exciting that's much, much longer term," says founder and vice-chairman Gail Naughton. "That keeps their energy and their enthusiasm alive." The program, which is administered at the discretion of individual managers, extends beyond R&D to other departments, such as corporate communications.

Naughton, who has informally benchmarked her company against 3M, also believes that companies with cultures that promote innovation should define the concept broadly so as to include seemingly small ideas that make a big difference to the bottom line. Toward that end, Advanced Tissue Sciences bestows recognition on all good ideas, whether they're technical breakthroughs or process improvements. "To be successful we have to come up not only with new products but also with ways to continually improve our product and reduce the cost of manufacturing," says Naughton. "We reward everything equally. We have to."

Another effective tactic for keeping staff focused on current business: frequent exposure to customers, which in Advanced Tissue's case means patients. "On a routine basis we bring in burn victims and families of burn victims, or diabetic patients who have been spared an amputation because of our product, and we make sure that all of our associates understand how their work has touched these people's lives," says the founder. Although she recognizes that most companies' patrons won't have such dramatic stories to share, she believes that customer contact is imperative for motivating folks in the trenches.

"It's important to put a personal face on your product or service," says Naughton. "It makes your customer real to everyone working in the organization."

Compensation: Pay Per New

To foster innovation, you must reward innovation. Most of the companies on our list do so with cash or stock options for specific inventions. Consider the incentive program at InterDigital Communications Corp., which develops advanced wireless technologies. Employees who come up with a patentable invention get more than 2,000 options: one-third vest when the patent is filed, two-thirds when it's granted. There's also an Inventors' Dinner for those who've filed for or have been awarded patents that year. The dinner recognizes -- with cash awards -- the individual or team named as inventor on the year's most valuable patent, the person named as inventor on the most patents, and employees who've reached certain "plateaus" (by being named inventor on 5, 10, or 15 patents, say). Cash awards start at less than $1,000 and grow with the number of patents. The program was created to encourage "an atmosphere of collegial competition," says patent lawyer Kimberly Chotkowski. It's worked. In 2001, InterDigital applied for 256 patents, five times the number it applied for in 1999.

An effective tactic for keeping staff focused on current business: exposure to customers.

Financing Innovation: The Game of Risk

Radically new ideas need time to mature. Radically new products need time to develop. And radically new anything needs time to find its market. But time costs money, so companies must devise strategies for keeping projects afloat and reducing risk. Among the best sources of funding and support:

Universities and government. When universities apply to government agencies for research dollars, they may not have all the skills to complete the proposed project. If the missing pieces have anything to do with computing and the sense of touch, Louis Rosenberg, founder of Immersion Corp., expects his phone to ring. Immersion's engineers collaborate with universities' faculty and students on government grants. At Harvard, for example, an Immersion team helped develop underwater robots for repairing oil wells, at the behest of the Office of Naval Research. (Immersion's contribution: a tactile-feedback system for sending data to the robot's operator.) Rosenberg cultivates academic relationships so that the company's name pops up at every opportunity. "We wouldn't be able to develop [a technology like the feedback system] on our own dime because it's too speculative," Rosenberg says. "But we learn a lot by doing it."

Customers and suppliers. John Moussouris of MicroUnity calls his approach to commercial partnerships the "big tent" theory. "If you have a new technology that can make money for a lot of related companies, then you can get other companies to help fund the deployment," the CEO explains. For example, MicroUnity is working on a technology that improves computers' high-speed communications. Under the company's big tent are chip vendors, network operators, content providers, and others -- all enterprises that stand to profit from MicroUnity's innovations. When the company devised a new way to print on silicon, for example, Moussouris and his team persuaded two manufacturers to charge them less than the cost of production. "Once they had mastered the technique, they could sell it to other people," he says. "The ideal situation for a small company is to have the booth near the entrance of the big tent but to allow lots of other folks to come in."

Intellectual assets. Sometimes it's a simple trade-off: companies finance new innovations by selling off old ones. Two years ago, Cygnus sold its drug-delivery business (comprising 43 patents) to a Johnson & Johnson subsidiary to raise money to develop a glucose-monitoring watch. Then there's Angeion Corp., which spent 10 years developing technology for implantable cardiac defibrillators, winning 114 patents in the process. When the company hit a wall trying to compete with industry giants, it sued a competitor for patent infringement -- and then licensed its entire patent portfolio to that same competitor. "The intellectual property wasn't enough for a viable business model," says CEO Rick Jahnke. With the cash from the settlement and the license, Angeion bought a company that makes devices for detecting lung and heart disease. Jahnke is selling the new products not only to Angeion's hospital customers but also to health clubs, where personal trainers can use a modified version to help members assess their fitness levels.

Capturing Ideas: Who? What? Where? Why? When? How?

In the earliest stages of innovation, ideas float freely in the cranial ether. But as every business guru or leader of a pioneering company will tell you, innovation without execution is meaningless. And the first stage of execution is to capture the basic idea in words (and sometimes pictures), tease technical and business nuances from the inventor's mind, and ensure that the whole package reaches the people who will assess its viability. Innovation-disclosure forms -- either paper or on-line -- accomplish all that and more. Ramtron International Corp., a maker of nonvolatile memory chips, uses what it calls a "product-justification form" to capture input, not just from an idea's originator but also from other departments, such as marketing and manufacturing. Among the blanks that Ramtron wants filled in are these:

  • What's the application of the product?
  • Do we service that segment of the industry?
  • Do we have the core competency to make it?
  • Do we have the design staff to make it in the right time frame?
  • When does it need to be introduced?
  • What's the forecast for the revenues it will bring in?
  • How much will it cost to make?
  • How many man-hours will it take to make?
  • What will be the return on investment?
  • What will the margins be?
  • How will that contribute to our revenue goals?

Innovation without execution is meaningless.

Marketing: Teach Your Potential Customers Well

It's hard enough to create buzz for products that customers know they need. Try selling something that's so far ahead of its time that only a fraction of the potential market sees its value.

That was the problem facing Tessera Technologies Inc., inventor of the chip-scale package, which allows semiconductor companies to keep their products as small as possible. Tessera's licensees weren't focused on packaging, and neither were the licensees' suppliers -- companies that provide the equipment and materials needed to install packages in final products. So Tessera set out to educate everyone in its industry. "The issue became, How do you as a small company bring together all the critical members in your industry to push forward as a de facto standard?" says Chris Pickett, senior vice-president of licensing business and general counsel.

Tessera's answer was a magazine. Having beefed up its marketing department with an ad-sales rep, a designer, and an associate editor, the company launched the 80-page bimonthly Chip Scale Review. The publication, whose advertisers were the very suppliers that Tessera wanted to bring into the fold, used single-theme issues to elucidate problems its technology could solve.

With a paltry ad-to-edit ratio of 30 to 70, Chip Scale Review lost money for most of the two years it remained in-house. Tessera turned it over to a professional publisher when company managers felt that the industry was mature. For similar reasons Tessera sold its conference, Chip Scale International. The event had attracted several thousand paying attendees and exhibitors. But like the magazine, it was designed to create a market rather than profits. And both ventures, in the company's judgment, have succeeded. "The Chip Scale Review is read by everyone in the industry," says CEO Bruce McWilliams.

Products: Seeing It Fresh

Companies can't rely on divine inspiration for eureka-grade ideas. Rather they must encourage staff to see established products as a source of infinite possibilities.

The original idea: NCT Group had a system that sent the mirror images of sound waves through ceramic tiles to cancel out noise.
The insight: An engineer wondered what would happen if he sent music instead of "anti-noise" through the tiles. He hooked up a radio to the unit, and out came the sound of the Beatles.
The innovation: Realizing it could produce high-quality audio using flat panels like the tiles, NCT created two-inch-thick wall-mounted speakers for the consumer market.

The original idea: Cygnus Inc. had developed patches that deliver drugs through the skin.
The insight: While taking apart a patch, a researcher realized that not only did it deliver substances through the skin, but it could also extract material from inside the body.
The innovation: Cygnus used the discovery to create a line of watchlike devices that monitor diabetics' glucose levels.

The original idea: Foster-Miller Inc. had a technology for putting tiny rods through certain composites to prevent them from delaminating.
The insight: Engineers noticed that aircraft manufacturers were pushing plastic pin mats into jet-engine parts to make tiny holes for deadening sound. But pins were left behind in the holes.
The innovation: Foster-Miller adopted its technology to ensure that engine pins came away when the mats were removed. Savings resulted.

Head-to-Head: Are Customers a Good Source of Innovative Ideas?

"Usually the most innovative products are the things people don't think they need when they come to the marketplace."

--Phil Egan, CEO, Tensar Earth Technologies

Centuries ago in China, workers buried adobe blocks to shore up buildings. In the 1960s steel became the standard. Then, in the 1980s, Tensar Earth Technologies created something new in the world of soil-reinforcement: a polymeric grid as strong as steel and elastic enough to go where no steel had gone before. It was, says CEO Phil Egan, the birth of an industry.

But Tensar's customers didn't know that. "It was like when DuPont came up with nylon," says Egan. "People didn't know what to do with it, so DuPont had to come up with applications -- like hosiery."

For the past two decades, Tensar has been busy dreaming up applications for its "geogrids": in retaining walls, for building on top of closed landfills, and for holding up the roofs of underground mines. Many ideas emerge from twice-a-year off-sites where leaders "totally blue-sky for two days," says Egan. "In our last session we had 43 ideas. We culled that down to 18. Of the 18 I'm hoping to get 5 or 6 gold nuggets."

Tensar also has an applications group that "identifies the applications before customers come to us," says Egan. "Then we have to demonstrate for the customers the value these new technologies create."

"Our new ideas come from sending our engineers out to customers and letting them roll around in the mud together."

--George Calhoun, chairman, Isco International

George Calhoun sums up the source of his company's great ideas in one word: customers. Isco International makes front-end systems and filters for wireless communications. The company has customers worldwide, and Calhoun, the chairman and former CEO, makes sure they get face-to-face attention from engineers. "One of our best people is in China now," says Calhoun. "He'll come back with observations that will stimulate new thoughts about how to design our systems." Ideas that are captured during customer visits are submitted in a "trip report," so nothing slips into the cracks.

Calhoun says that customer input produced one of Isco's most important new products: a filter that eliminates in-band interference on wireless transmissions. It's not something that would likely have come straight from the lab. "Not to demean pure research," says Calhoun, "but pure research is a very small part of what we do."

Product Development: If You Come, They Will Build It

Foster-Miller Inc. develops products and production equipment for private- and public-sector customers. Its creations range from a robot that labors in nuclear facilities to a net that's used by police to trap fleeing perps. Inc asked president and chief operating officer William Ribich about the challenges of inventing in so many different areas.

What questions do you ask yourselves when you're starting a project?

We start with the question, What are we really trying to do? That means we must stand back and define the objective in the broadest terms. For example, instead of saying "We need a new syringe," it may be better to say "We need a means for introducing a drug below the skin."

What kinds of problems and technical challenges do you find the most intriguing?

When you're involved with both product design and production-machinery design, there are many more avenues for really innovative solutions.

How do you know whether a project demands genuine innovation?

We look at the state of the art. In the case of manufacturing equipment, we search for standard or modified standard equipment. In product development we want to know what existing components or known technology we can use. Because we work in many industries, we can transfer technology from one to another. For example, we used metallurgical heat-treating technology to develop a candy-manufacturing process.

If you hit a wall, how do you shake things up to get at new possibilities?

We bring in more or different people to work on it. We have 202 degreed engineers, so we have a lot to draw on. In addition, we have a worldwide network of university professors, independent consultants, and other companies with whom we have confidentiality and patent-rights agreements. So if we're faced with a temporary blank wall, we shake our tree of resources.

Leigh Buchanan is a senior editor at Inc. Thea Singer is an associate editor. Christopher Caggiano, Ilan Mochari, Kate O'Sullivan, and Tahl Raz also contributed to this story.

The Innovation Factor

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