Profiles in Growth, 2014 #17 Innovation Newsletter

Growth and innovation are the mantras in just about all companies, but what kind of growth is “good” growth, sustainable growth? And what are the keys to it?

We found some insights in a new Inc. research study of more than 100,000 U.S. midmarket businesses.

Called “The Build 100,” the study first identified companies that consistently grew their employee base for five years in a row starting in 2007, and then analyzed a subset of them to find out what made them tick. (The research focused on head count over revenue as a starting point, because that indicator was more predictive of future sustained growth.)

Two key points that emerge from their findings:

1. Companies that grow steadily grow sustainably. Over a 20-year timespan, the research shows that “the faster a company grew in one period, the less likely it was to grow again in the future (and the more likely it was to fail).”
2. Cultural factors, such as effective interaction among employees and between employees and customers, as well as collaboration on problem-solving, were much more important than financing or product characteristics.

Let’s take a look at these, and how they interplay with your company’s innovation system and strategic growth initiatives.

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What’s your growth profile?

If your company’s growth is inconsistent, you could be set up for a fall. As we see it, those kinds of results can indicate an approach to growth that is not systemic, but depends instead upon unique circumstances that lead to a quick hit, followed by lack of capability to consistently execute on new programs, an inability to balance the needs of new initiatives with those of the core business, and/or a culture of complacency that can follow success.

We suggest a couple of actions to get you started on a high-level analysis of your growth profile.

First, take a look at how your growth rate tracks over the last five to ten years, and how you are projecting it into the future. Has it plateaued? Are you forecasting a big bump next year, or have you just experienced one? As a benchmark, the companies highlighted in the Inc. Build 100 list have grown at an average annual rate of 35% over five years. That kind of consistency is not easy to achieve. According to the stats reported, fewer than 2% of companies researched have been able to grow headcount every year for five years. So it’s unlikely you will match those results, but focus on the consistency of your growth profile.

Second, take a hard look at the details of your growth strategy and its drivers, starting with this: Do you really have a detailed strategy? We often see companies set targets for revenue growth, but fall short on specific, well-articulated strategies to achieve them. You can start considering your business growth strategy and its connection to your innovation strategy using the following two questions:

1. How would you describe your organization’s approach to innovation?
2. New offerings are sporadic, mostly improvements to existing offerings, and/or are chosen based mainly on short-term ROI.
3. Our portfolio of new offerings presents major extensions to existing lines and/or new-to-market value propositions; they require investment, and are slated for near- or mid-term profitability.
4. We consistently launch new offerings that create new market segments, have a long growth horizon, and have the potential to spin off new businesses.
5. How is funding for innovation and new ventures managed?
6. We determine what to spend on new ventures on a one-off basis, depending on a detailed projection of capital investment and ROI.
7. We set a budget for R&D that is managed by functional areas, including some funds for general research or “skunk works.”
8. We actively manage a project portfolio that is overseen by top execs and the CEO; we allocate resources as needed to spin off the best new disruptive offerings.

If your answers lean more toward A than toward C, you may be in a position where organic growth from new initiatives is not systemic, and therefore unsustainable.

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What’s your innovation culture?

As the study points out, culture is important—more so than technical achievement, financial resources, or other more tangible factors. While that’s not a breakthrough revelation for most people in business, it can be a tricky one to own and a difficult one to influence.

Here’s a new twist on the drivers of cultural change and collective innovation. In his recent book Social Physics: How Good Ideas Spread—The Lessons from a New Science, MIT’s data maven Alex Pentland lays out the findings of his innovative research into how large groups of people interact, their collective intelligence, and how ideas spread, all of which may be useful to anyone interested in understanding and influencing the culture of an organization. It’s based on two big data studies covering millions of hours of interaction data over two years and probing how humans find and incorporate new ideas into decisions.

As quoted in a recent excerpt in Wired magazine, Pentland discusses the concept of “idea flow” and says, “When the flow of ideas incorporates a constant stream of outside ideas as well, then the individuals in the community make better decisions than they could on their own. Diversity of viewpoint and experience is an important success factor when harvesting innovative ideas.” Shared learning and active engagement drives fast exploration for new ideas, followed by a slower process of winnowing them down, developing it all into a kind of collective intelligence. Sounds good, but how does that happen effectively? There are three key points:

1. Social learning, or copying one another’s successes, combined with individual learning that happens in a more isolated way is dramatically better than individual learning alone – you need both.
2. Contrarians are important; they bring strong individual learning into the mix. But look for “contrarian consensus” around an idea to be sure your “wise guy” is not just an “oddball.”
3. Diversity is important; social learning alone can lead to dangerous “groupthink.” If social networks and your individualists are all in sync, you could be in what Pentland describes as an “echo chamber.” And regardless, you need to be pursuing diverse strategies (reference answer C to question 2 above).

As covered in our feature article from August/September 2013, Service Innovation—“My Job Is to Build a Culture of Innovation,” the top leader or leaders cannot do it all – it takes a village of innovators, and CEO-innovators know that; they energetically seek out and surround themselves with people that have different viewpoints and ideas, and they create communities of experimenters.

Here are a couple of key questions to get you started on thinking about your organizational structures and culture around innovation, which is after all what leads to sustained growth:

1. What best describes your organization’s innovation culture?
2. We focus on managing day-to-day operations and maintaining existing processes; new ideas that fall outside our comfort zone are not encouraged.
3. We look for best practices and new ideas inside (and sometimes outside) our industry; idea systems in our company yield some success, but don’t generate much in the way of big new concepts.
4. Collaborative networks of people, inside and outside the company, actively seek new ideas coming from anywhere; we engage directly with customers to deeply understand their jobs-to-be-done.
5. How does your organization manage innovation?
6. We have a traditional, departmental R&D approach to managing any new or improved offerings.
7. We have a standardized system for managing ideas and funneling them to the appropriate management structure for consideration and follow-up.
8. We allow new ideas to develop organically through informal collaborative networks before they emerge into our portfolio management process.

If your company environment sounds more like A than like C, it’s time to start taking responsibility for changing that.