By Victor Assad, Managing Partner

Research shows that innovation and culture can be measured. And, just as importantly, strong cultures of innovation lead to the creation of sustainable competitive advantage and higher financial performance.

The key to innovation in organizations, according to InnovationOne LLC’s research, resides in the ability of leaders to define, instill, and reinforce an innovation vision, culture, and capability among the organization’s employees and external ecosystem.

Innovation flourishes in dynamic, collaborative cultures led by leaders who articulate a strategic vision for innovation, and invest in it. The investment includes putting in place the training, systems and processes for ideation and knowledge management, and organizational processes to successfully commercialize the best ideas.

Innovation remains a priority for CEOs because innovation improves business and financial outcomes. We have learned — from our extensive research over 20 years and the publishing of over 30 academic, peer-reviewed articles, and our consulting practice — that highly innovative companies have seven traits. The disruptive companies practice these traits tirelessly.

The companies scoring in the top quartile of our InnovationOne Culture Index© reported higher financial performance than bottom quartile performers by as much as 22 percent. The top innovators earned a 6.3 percent total shareholder return premium (stock price appreciation and dividends) over three years. Companies that have been on the top innovators’ list for 10 years or more delivered a four percent premium over those 10 years.

Our recently completed joint study with the US Department of Energy shows that higher innovation culture scores improve R&D lab performance. In fact, improving a culture score by just one point (on a 100-point scale) can increase performance in innovation, commercial deployments, partnerships with industry, and academic publications by up to 30 percent.

Below are the seven traits of highly innovative organizations:

1-Executives embrace innovation and create an innovative vision, strategies, and tangible goals that they help communicate across the organization to the point employees and external ecosystem understand how they can contribute to innovation.

With many of the organizations we work with, this is the one action executives can take to improve innovation. While the executives themselves don’t have to be innovators, they need to signal to their workforce and external partners that they embrace innovation and have a compelling vision and strategy.

Based on two recent Global Innovation Surveys of 843 companies, our research has identified another vital criterion of executives in highly innovative organizations These executives make innovation an important aspect of their strategic planning processes. Innovation is a way of thinking. Strategic planning is a process. Our research found a polarity between high and low innovative organizations. The polarity manifests itself in a variety of strategic approaches that together change how organizations make decisions. Executives in highly innovative companies have incorporated innovation into their strategic planning processes.

Their strategic planning is action-orientated, not process orientated. These organizations thought through their innovation agendas and developed actions plans for execution. High innovators relentlessly stick to their innovation plans but revise their goals and milestones to learn from their experimentation and external partners. On the other hand, low innovators often changed their leadership focus and sponsorship, negatively impacting their innovation culture. Additionally, their strategic planning process was static and bureaucratic.

2-Employee and external partner creativity is unleashed, and learning is encouraged. There is usually no shortage of creativity and suggestions from employees. To ignite employee creativity, executives must create transparent cultures of innovation and give employees permission to ask questions, make suggestions, and collaborate. For example, collaboration with external entities – vendors, customers, universities, startups, and financiers – is proving to be materially successful for highly innovative firms and presents a strategy shift to innovation. Many executives tend to hoard their most recent market data, customer feedback, and latest trends. This is the wrong instinct for innovation. Executives need to share what they know (short of proprietary information, of course) and invite employees and external partners to look for business opportunities as well as solve problems. When employees are intrinsically aligned with the company’s purpose, believe that their suggestions will be taken seriously, and know they will be recognized for their achievements, a fountain of innovation will flow forth.

You can tell when creativity is unleashed because management encourages organizational learning and experimentation, which is a crucial to innovation success. In the book, Experimentation Matters, Stefan Thompke writes of the value of experimentation. He observes that it may take 200 experiments to develop a billion-dollar-plus disruptive innovation.

Along the way, management must create a culture of failing frequently and furiously with this motto: What did we learn today? What is tomorrow’s experiment?

Our research reveals that the leaders of these innovation teams are renowned for being great sponsors and building trust with their employees and teams. They ensure their teams are aligned with the company’s strategies and know their role in the organization and their goals and milestones. These leaders use measures to learn about the team’s successes and failures, the obstacles to be overcome. Based on what they learn, they get additional experts, equipment, or money for the team. They don’t micro-manage the team. They know that not every innovative idea will pan out. However, it is the empowered team, not the manager, who will come back and say this innovation is not ready now and cite the reason with data, often freeing up resources for a different solution.

3-A clear “knowledge management” process exists allowing employees to move ideas forward quickly and efficiently, experiment with them, gather feedback, and present their ideas to management for a quick go-no-go decision.

Many innovative ideas die on the vine because there is no clear process to advance the idea, experiment with it, gather analytics, prototype it, compare it with competing ideas, and decide which idea to move forward. These processes need to be dynamic and highly interactive. They should also be transparent. This is an area where collaborative digital technology can be helpful, but without a culture that supports innovation, even technology can fail.

Overwhelmingly, in many of our organizational-wide surveys, employees told us they lack the empowerment and process to advance new ideas efficiently and quickly. High innovators have invested in methods and tools to move ideas forward, and the investment is paying off. There is also evidence that methods and tools establish environments for even more ideas. The research found that high innovators create space and time for ideation and innovation. Our survey found that design thinking and stage-gate processes were the highest scoring innovation methods to advance innovation ideas.

4-An effective environment for communications exists within and across the organization’s divisions. Highly innovative companies create an environment that supports experts sharing their expertise with other employees trying to innovate. Sharing and collaborating is rewarded by the organization’s performance management system.

Some organizations also invest in digital knowledge management platforms to collect information, share knowledge, and transform this knowledge into better decisions. Our research with The Conference Board found over a 20 percent difference between high and low innovators related to knowledge management systems that fostered collaboration. [Highly innovative organizations use real-time collaboration infrastructure. Employees on innovation teams in highly innovative organizations have access to digital libraries of information, and internal and external experts. The culture supports sharing and collaborating between experts and teams. As a result, they are quicker at identifying value-creating strategies and more efficient at bringing them to market.

Many companies hesitate to involve external experts and thought leaders. But without the involvement of external thought leaders, they cannot fully assess the needs of the future marketplace, customers, and potentially disruptive social trends. Transparent, open innovation cultures that reach out to external experts are vitally essential to guard against “not invented here” thinking and closed-mindedness.

Even when effective knowledge management systems are in place, if the company’s culture is too risk-averse, it will never commercialize the next significant innovation.

5-Resources, skills, time, advanced technology, digitization, and space are dedicated to supporting innovation. Innovation needs investment, and the initial investment often isn’t expensive. In some industries, the investment is simply time to allow employees to experiment. The investment often includes training employees on collaborative behaviors. The investment is expensive for organizations dependent on sophisticated technology, such as the pharmaceutical, biotech, and aerospace industries, and advanced research and development labs.

They require a culture of rapid experimentation for the complex issues they face. Failing fast, frequently, and often is the mantra they live by. What did we learn today? What’s our experiment tomorrow?

The innovation in these companies requires investment in applied technology, clinical trials (in pharma and biotech), capital equipment, labs, training employees on new technologies, and filing volumes of detailed reports for regulatory evaluation and approval by dozens of government regulatory agencies across the globe. But innovation is an expense that must be made.

The status quo is a failing business strategy.

Our most recent global surveys show that investment in advanced technologies inform existing strategies and spur new ideas. Not only were technologies such as data analytics and artificial intelligence more widely adopted by high innovators, but according to our research, these technologies are now being used beyond singular “project” level initiatives and becoming engrained in the operational foundations to drive innovation. As examples of how this works in practice, a low innovator will enact a data analytics project to gain insight into a product, service, or program but does not use these tools broadly and continuously.

In contrast, a high innovator will embed data analytics into continuous analysis and predictive decision-making of its innovation knowledge management infrastructure. As a result, strategic choices are informed by real-time insight from predictive models embedded in the operations. Strategy shifts to reduce, expand, or disrupt current products or services, or business models are now becoming automated. High innovators also successfully used advanced technologies like artificial intelligence, Open AI, and supporting technologies such as crowdsourcing and innovation management software.

6-Employees in highly innovative organizations are empowered by their managers to use their creativity to benefit the organization.

Our research has shown that the most innovative of these managers empower their employees, and they build trust. They are not “cupcakes.” They set challenging goals, hold employees and the team accountable, and encourage constructive conflict and problem solving to overcome tough challenges. It is how they do this that matters. They are great communicators, provide honest feedback, and are supportive. Our research has shown they have these ten traits.

  1. Constantly communicate new information, clarify goals, roles, and operating norms, and provide performance and development feedback.
  2. Treat their employees with mutual respect and build trust.
  3. Know the skills and abilities of their employees.
  4. Encourage employees to make suggestions and value their contributions.
  5. Allow time to innovate.
  6. Encourage constructive conflict, debate, and problem solving while assuring collaboration.
  7. Open doors and provide resources to overcome obstacles.
  8. Reinforce and reward innovation.
  9. Measure progress.
  10. Manage performance and hold employees and teams accountable.

7-Performance management systems incent and encourage innovation. For many mature organizations and government agencies, performance management systems reinforce a safe and status quo culture to assure execution excellence. These cultures discourage risk-taking and collaboration. Enlightened executives know that they can keep the organization’s focus on meeting this quarter’s commitment to stakeholders while also creating a collaborative and learning culture for innovation. To achieve execution excellence — and innovation — a company’s performance management system needs to motivate meeting commitments while creating expectations for innovative behaviors and rewarding questioning, initiative, and reasoned risk-taking.

In these organizations, OKRs are frequently used for setting goals and not just SMART goals.

For a long time, executives have used SMART goals, often requiring the employee to achieve 100 percent of the goals. (A format for setting goals that call for Specificity, Measures, are Action-orientated, and will be viewed by the employees as Achievable and Relevant and have Timelines.) Research shows that this process often encourages relatively safe goals that the employee and manager believe are safe to achieve, and they provide modest improvement in productivity.

Executives who want to dramatically increase their success should implement Objectives with Key Results (OKRs). Research shows that executives who set such goals can significantly improve the performance of their organizations as opposed to simply telling their employees to “just do their best.”  Moreover, OKRs allow organizations to change measures and tactics as new information or test results are known to adjust to today’s digital pace of business.

OKRs are different from SMART goals. Like SMART goals, OKRs have objectives, measures, and timelines, but they are more ambitious and allow for the writing of tactics as part of the objective “cluster.” The OKR process also allows changes to be made quickly, depending on the results. Like SMART goals, OKRs are deployed down into the organization, but the OKR process emphasizes that managers and teams write their own challenging OKRs.

OKRs are used by companies such as Microsoft, LinkedIn, Workday, and Netflix.

Innovation is not easy. However, it is worth the effort and provides better growth,  business outcomes and financial results for companies and government agencies. The status quo saves the effort but is a failing business strategy.

About InnovationOne®, LLC.

InnovationOne®, LLC helps organizations worldwide build a culture of innovation and make it sustainable. InnovationOne® uses a scientifically developed assessment to measure, benchmark, and improve your company’s culture and capability to innovate and enjoy better outcomes and financial results. We have conducted research with The Conference Board and the US Department of Energy. Companies scoring in the top quartile of our InnovationOne Culture Index© reported higher financial performance than bottom quartile performers by as much as 22 percent. US Department of Energy labs scoring high on our assessment can have up to 3x higher performance over the lower scoring labs. Measure and ignite your culture of innovation.

Contact us today to measure and ignite your culture of innovation.