How to incubate innovation – Christian Catalini

MIT Sloan Professor Christian Catalini

MIT Sloan Professor Christian Catalini

From Business Value Exchange

The first thing an organization can do to nurture innovation is to tap into its own human capital. At a high level, all organizations care about ideas, and more often than not, in corporate settings, people already have ideas. Staff have expertise, know the customers, and throughout the organization they can interface with interesting sources of data and information.  It’s just that their day-to-day requirements do not allow them to execute. Slack time can be an important lever for incubating creativity and a meaningful way for executing ideas employees have had in mind for some time.

But if you ask employees to be entrepreneurial, it’s not same – they may end up directing their own unit, but not building and scaling a multi-billion dollar start-up. It’s hard when you have the safety and surroundings of a large organization to act like entrepreneurs who have to attract capital from outside. The challenge is once you identify talent and the ideas inside to incentivize to execute an experiment as though it were a start-up. Perhaps the biggest organizational change is to think like a small start-up.

From an organizational perspective, firms can learn a great deal from university accelerators. At MIT, we have Global Founders’ Skill Accelerator, where we get students with good ideas to scale businesses. The interesting thing is that students who have no experience of entrepreneurship get feedback and advice from a set of seasoned entrepreneurs. Similarly, an enterprise may have skills and expertise on the tech side, but no track record of taking an idea and scaling it to a multi-billion project. The challenge is how to recruit entrepreneurs to train employees with the good ideas to take them to the next level.

In terms of nurturing innovation within the staff, on the employee side, there needs to be a competition or a prize, so winners earn the right to contribute. Not every employee is able to be in that zone, but the winner could get 6 to 12 months to try and develop their idea. In later stages, the company has to decide whether it sees it as a strategic investment and the company founders could get equity to try and replicate the conditions and incentives of the market – and the outside world. Some influential inventors are able to get royalties or something that resembles equity.

Crowdsourcing as a Way to Generate Ideas

A crowdsourcing contest is a way of engaging with the employee base and generating innovative solutions among staff – when the prize is well designed. You may want everyone to think about new ideas, but you have to keep the business running, too. So there’s a tension between how much creative freedom to give or not, or under what conditions.

Crowdsourcing can also be a useful tool for killing off bad ideas. If there are five different products in contention, one way to select is to get a massive focus group online.  Large firms don’t always want to expose their brand – the failure would be public. Many have a white label brand at first to conceal their brand; if it works out, it gets endorsed and scaled.

Crowd management does need risk mitigation, and there are intellectual property and PR issues that could emerge. For example, what direction the contest takes and the way that comments and ideas are filtered can have an impact on perception. Often, the problem is that no one engages and that is embarrassing, and so a form of failure. It’s also controversial to invite – and then not reward – the crowd for contribution.

What Must Leaders Do to Support Innovation?

Leadership in innovative organizations must bring in new ideas, but also think about trade-offs. It needs to think hard about how to design a culture and system of incentives that nurtures innovation. It needs to think about how to make boundaries permeable and the challenges this brings. A good leader of innovation needs to be open. Often ideas and innovations evolve rapidly – what is true today is not necessarily true tomorrow. To learn is to collect data along the way, to bring in a culture of experimentation.

Critically, the leader has to convert innovation into real things, and often the best ideas are not the things that a company focused on – it depends on short-term or long-term viewpoint. This is where a CEO can make a difference – executing on all good ideas, allowing for experimentation. At a high level, a company cannot assume the best ideas come from within. You need a mix.

The key element is accepting failure and cultivating tolerance. Inventive outcomes are extremely skewed – most Kickstarter ideas fail, most venture capital-funded deals won’t return capital. So you have to take a portfolio view. The few outcomes that are really successful repay the whole portfolio.

Balancing Innovation and Daily Operations

Some companies create a separate entity [when scaling innovation]. For example, when you go back to IBM when it was trying to innovate with PCs, a separate division was created because it would never have survived within a large organization that earned business from mainframes. Of course, there is always difficulty for a large incumbent to cannibalize its own product. It’s an interesting dynamic: in the short term, an innovation may be seen as a competitor and not developed further; in the long run, it may mean the survival of the firm.

But it’s important to think about the fact that many people have good ideas that just won’t pan out. Internal capital markets are more imperfect than external ones. If someone is well respected internally and has a new project, even if the signals are negative, the company may keep investing. A company doesn’t want to reward failure, but it must not be intolerant of failure, either. So the enterprise has to think about how to incentivize and how to strike a balance between doing a lot of experimentation, while keeping the quality high.

This article is excerpted and modified from Business Value Exchange.

Christian Catalini is the Fred Kayne (1960) Career Development Professor of Entrepreneurship and Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management.

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