Truly Innovative Companies: How They Do it Year after Year

Last Updated Nov 17, 2010 6:50 AM EST

Which companies are the most innovative?

If you thought of Apple, Google, or 3M, you'd be in plenty of company. Those three rank among the highest in a survey, mostly of R&D executives, that was conducted by my colleagues Barry Jaruzelski and Kevin Dehoff. Interestingly, though, these three companies are far from the top when it comes to spending. In the study of the 1000 highest investors in innovation, Apple ranks 81st, Google 44th, and 3M 84th. Microsoft-of course, the rival of both Apple and Google-is sixth in terms of reputation, but is #2 (after Roche Holdings) in spending. Proof once again that when it comes to innovation, dollars going in don't correlate with creativity coming out.

Some companies out-innovate their peers year after year after year. Why? Jack Welch is one among many people who have said that the way to get more hits is to swing at more pitches. Reward the risk-takers, and don't punish failure (much).

Other executives talk about the importance of shielding innovators from the established business-avoiding the innovator's dilemma by setting up a Skunk Works, a small group that works quickly (and with minimal bureaucratic intervention) to get a project off the ground. Others stress getting out of the office and meeting with customers, studying them with anthropological zeal.

An ocean of ink has been spilled on innovation-I once had a four-foot stack of books in my office, mostly, I confess, unread.

Jaruzelski and Dehoff, however, looked at the subject from a different angle. First, they identified three basic kinds of innovators:

1. Need seekers: They start by discerning an unmet customer need, desires customers cannot articulate or even deny having, then invent something to fill it. The Chrysler minivan is a great example, particularly because focus groups warned Ford and GM against producing similar vehicles.

2. Market readers: They ride trends, and often their innovation strategy is to improve on the work of a pioneer. For market readers, timing is everything, a lesson Microsoft has been taught several times when it waited too long to enter a hot new market. And it's a lesson it still struggles to learn. (Has any Zune owner ever found someone with whom to share songs?)

3. Technology drivers: Their approach is to start in the lab, then look to the market. It can be a long process. The weak adhesive that is used in Post-it Notes languished six years without an identifiable market until church-choir tenor Art Fry realized that could be turned into a product that could help him bookmark the day's hymns.

No one of these strategies is inherently better. Jaruzelski and Dehoff found big, consistent winners in all camps. Market readers tend to lag in the praise department; Microsoft gets relatively little respect as an innovator, Dell ditto. Though neither is a stock market sweetie this season, let's not forget that they totally ruled the 1990s. These days, market-reader Alberto Culver (soon to be taken over by Unilever) sports the best 10-year total return in its category.

Each strategy can win big, but being aware of the strategy you're using, so that you manage resources more efficiently and successfully, is key. Needs seekers require much deeper consumer-insights capability than the others. Market readers demand highly flexible, responsive supplier networks. A tech driver's scientists must be more aware of emerging technologies.

How you managed people--the teams you assembled, the project leaders you chose, the incentives you offered---all would be different, too. So would the go/no-go decision points and your tolerance for failure. As I said a couple of weeks ago, I can scarcely imagine the perplexity of a scientist from tech-driven 3M who went to work at needs-seeking Procter & Gamble.

That's what you'd do if you'd thought of it. Most companies haven't. Jaruzelski and Dehoff were able to measure the degree to which a company's R&D spending was coherent with its innovation strategy. Those which were most coherent had 22% greater profit margins than the others. Fully two-thirds of companies, however, didn't make the cut.

Illustration courtesy Flickr user Gregory Moine