Quick, think of something

There is nothing left to cut, and down-sizing has had its day. To survive in the brutal future, companies must innovate, says David Connell

Chief executives who have spent the last five years refocusing, down-sizing and re-engineering their companies are facing a new challenge - how to get the organisations they have created to deliver innovation and business growth. For many the experience is like trying to teach sumo wrestlers to dance the lambada.

The advanced economies are under pressure as never before. The falling cost of international communications and the ready availability, in some of the poorest countries in the world, of a disciplined labour force and an able management elite is fundamentally changing the competitive environment. Global competition is now the norm and, for an ever-increasing range of products and services, western companies can never again be cost competitive at manufacturing. The accelerating pace of competition is making product life cycle shorter and competitive pressures fiercer.

In many cases those very businesses had been built up largely through a process of acquisition. Cute deal-making, the stripping out of duplicated overheads, and the creation of global marketing networks have provided a simple strategic recipe which has enabled companies to remain competitive as their markets matured.

The process has been reinforced by business "tubism", the creation of independent business fiefdoms, under an overall corporate structure, whose overriding objective was to deliver against ever tighter financial targets set by the parent company.

As a formula for success, that approach has by and large succeeded. And there is no doubt that "re-engineering" has led to a wholesale re- examination of out-dated approaches. However, you cannot go on merging, down-sizing and cutting costs for ever. Two of the greatest gurus of re-engineering, Steven Roach and Michael Hammer, have publicly aired their concern that companies have taken re-engineering too far. As Stephen Roach, chief economist and director of Morgan Stanley, wrote in last December's Harvard Business Review: "The dynamics of competition insist that success be determined ... by uncovering new markets, new technologies, new products and new concepts. And that doesn't happen by down-sizing. Instead, it requires investment in both human capital and innovation."

So innovation is on the corporate agenda once again, and CEOs throughout Europe and North America are struggling with how to convert the cost-cutting and performance-chasing culture they have spent the last five years creating into one that can also deliver innovation and growth.

To address that question, The Technology Partnership has over the past nine months studied how large companies tackle innovation management. The task included interviews with the directors and managers of 22 of the world's leading companies, such as DuPont, Canon and Glaxo Wellcome and studies of successful new business development programmes.

The most important change in approach to innovation management during the 1990s has been the application to product development of the quality management philosophies used to improve the efficiency of the manufacturing, marketing and administrative functions. The term "stage-gate" has been coined as a generic title for a variety of broadly process based approaches. The approach is designed to ensure that development, marketing and manufacturing work as a team on each project, and resources are only made available for a given stage of work of the pre-appointed "gate-keepers" are satisfied that each of the preceding goals have been achieved.

Many companies adopting that approach have reported reductions in time to market of up to 60 per cent, as well as increased "ownership" of technical developments by commercial managers, and the focusing of resources on the best projects.

More and more companies are also realising that stage-gate type processes have two important weaknesses. First, they do nothing to encourage creative thinking; indeed some R&D managers would argue that they inhibit it. Secondly, if applied too rigidly, they can actually reduce time to market compared with other approaches.

One of the biggest problems remains the diseconomies of scale in R&D. Few client executives have a clear idea of the return on their R&D investment and prioritisation decisions easily become dominated by personal interests and past commitments. The focus, goal-driven cultures and fast decision- making characteristic of small entrepreneurial companies lead to innovation efficiencies far above those in large organisations and some multinationals are trying to replicate elements of the small company approach in-house. Canon has set up a network of small R&D centres around the world. Its 20-man European centre in Guildford is charged, not just with research and development, but with creating entire new businesses with their own revenue streams. The 120-man Services and Technology Group based at IBM's Hursley laboratories has a similar rationale. Yet nowhere is the approach to innovation less well developed than in the UK, where for many big companies, innovation has effectively been off the agenda for the past five years.

So three important challenges face CEOs seeking to achieve a step change in innovation performance.

The first is to set the culture, and ensure that innovation is treated as a priority by all directors and managers, so that projects are focused on the key challenges facing the organisation, and developments are owned by those who will have to implement them.

The second is finding a way to overcome the problems that come with size through a mixture of small, semi-autonomous groups and the adoption of non-bureaucratic, but effective innovation management processes in larger units.

And, the third and most important challenge is how to stimulate and exploit the natural creativity buried in all organisations.

The short-term pressures on today's corporation are so strong that their leaders will need to develop an increasingly schizophrenic style of management, with continuing pressure to reduce the operating costs of existing business matched by encouragement of the creativity needed to generate new revenue streams. If the primary means of increasing shareholder value in the Eighties was acquisition and in the Nineties re-engineering, the next decade will see the rediscovery of innovation as the real engine of growth

The writer is the head of strategy at The Technology Partnership.