Innovation has long been a priority for many CEOs. Now, the pandemic has added new urgency to the quest: COVID-19 has driven a jump of 10 percentage points (to 75 percent) in the share of companies reporting innovation as a top-three priority—the largest year-over-year increase in the 15 years of BCG’s Most Innovative Companies survey.
But how do companies become innovative? We know how to improve innovation based on InnovationOne’s evolving empirical research. Organizations first need to establish an innovation orientation and then implement business practices that support innovation. Innovation orientation is a comprehensive enterprise-wide measure of innovation culture. Innovation orientation includes four critical organization dimensions. They are leadership, resources, knowledge management, and processes that support innovation. The business practices that support innovation include culture management, open innovation, analytics, innovation management software, crowdsourcing, design thinking, measuring innovation, stage-gate, and scientific discovery.
While it sounds simple enough, many companies fail at innovation. It requires treating innovation as a strategic imperative, as important as the firm’s sales and marketing plan and financial plan, and with the visible dedication of the CEO and executive staff.
In their most recent academic article, InnovationOne, LLC, Founder C. Brooke Dobni, and two co-authors, uncover why highly innovative Japanese firms are more competitive and achieve greater performance than their less innovative counterparts. Their findings closely match their earlier research on how highly innovative firms in North America and Europe are innovative. Most innovation orientation research, to date, has explored its relationship with performance. However, the academic literature on innovation is unclear as to what innovative companies do differently to achieve superior performance. This article, and a previous article, clarifies the practices that give highly innovative organizations an advantage.
This column is based on excerpts from the article, “Business practices of highly innovative Japanese firms,” published in August 2021, in the business journal Asia Pacific Management Review, by C. Brooke Dobni, Ph.D., Grant Alexander Wilson, Lecturer of Management and Mark Klassen, Assistant Professor of Accounting.
The InnovationOne Health Index© was used to measure innovation culture and explore its correlation with the firm’s strategy, competitiveness, and performance. The Index was based on C. Brooke Dobni’s research on innovation and was published in this landmark 2008 academic paper. His paper showed that highly innovation-oriented firms created more value for their customers, engaged in further market segmentation, developed more new products and services, and offered greater product customization than their less innovation-oriented counterparts. It has also been shown that firms with high innovation orientations achieved greater revenue growth, attained higher levels of customer satisfaction, realized greater return on investment, and earned more profit than firms with low innovation orientations.
Several other academic researchers have used Dobni’s Index to measure innovation culture and its impact on a firm’s performance and competitiveness. These papers can be found at (Dabić et al., 2019; Dobni, 2008; Dobni, 2011; and Rosenbusch et al., 2011). In Rosenbusch et al.’s (2011) meta-analysis of innovation orientation and performance research, Dobni’s (2008) measure was reported as a common measure of innovation culture and correlated with competitive and performance outcomes. Dabić et al. (2019) further validated the benefits of innovation orientation, showing that increased sales and growth were greater among firms with high, versus low, scores.
What is meant by innovation orientation? Innovation orientation is a comprehensive enterprise-wide measure of innovation culture. Innovation orientation includes leadership, resources, knowledge management, and processes that support innovation. Here is a quick review, and please see the graphic at right:
- Leadership includes goals, employee connectivity (with the organization’s mission, coworkers and manager), and a firm’s strategic model (or thought more broadly as its strategic planning model).
- Resources include employee skills and creativity, organizational learning, and technical and financial support for innovation.
- Knowledge management is comprised of knowledge generation, knowledge transfer, and knowledge decision-making.
- Innovation processes include alignment (how well do the organization’s measures, performance management, and rewards support innovation), idea management (leaning to breaking through boundaries rather than being confined by them, and employee empowerment (delegating resources and decisions to innovation teams).
After establishing an innovation orientation, executives in highly innovative organizations implement business practices that support innovation. The various business practices include culture management, open innovation, analytics, innovation management software, crowdsourcing, design thinking, measuring innovation, stage-gate, and scientific discovery. Please see the chart below, which is Table 1 from the “Business practices…” article. It shows the relationship between the four organizational dimensions of innovation orientation and business practices.
Japan was selected for investigation because it has been recognized as a global leader in innovation, creating some of the most impactful discoveries of the 20th century. To name a few, Japanese companies have been responsible for creating the bullet train, pocket calculator, portable music players, video games, video players, android robotics, and gene editing technologies (Thomson, 2016). However, as Dobni et al. (2015) aptly acknowledge, similarities among firms do not always extend organizational cultures. Therefore, it is reasonable to assume that not all Japanese firms are innovative despite the country’s international reputation.
Using data from 261 Japanese firms, this study finds that high innovators, as compared to low innovators, are more likely to engage in many of these business practices. Until this study (which was jointly conducted in 2019 with the assistance of The Conference Board and the Japanese Productivity Center), some of these business practices were not empirically shown to be correlated with high innovators, much less explored in the same study. This paper also offers a stepwise approach for executives seeking to enhance competitiveness via innovation. Specifically, executives should first create an innovation orientation and subsequently implement such business practices discussed above.
Interestingly, despite Japan’s reputation as a country of highly innovative firms, many firms had low innovation orientations and did not engage in the same business practices.
In order to review the statistical analysis and correlations for innovation components and business practices and their results with high and low innovative firms, please see the article at https://www.emerald.com/insight/content/doi/10.1108/SL-11-2020-0136/full/html.
Below we will uncover what the highly innovative firms did that set them apart from the low innovators.
First, High innovators were more likely to engage in culture management. As Mumford et al. (2002) suggest, leadership is a core predictor of innovation. This finding was congruent with existing academic innovation literature that suggests innovation needs to be supported by senior leadership. Culture needs to be managed, but only senior leadership can create and sustain an organizational culture (Senge, 1990). Japanese as well as other global firms need to create a culture for innovation in order to strategically differentiate from competitors and achieve superior performance.
Second, Open innovation was found to be correlated with high and low innovators, suggesting that this new breed of innovation (Chesbrough & Appleyard, 2007) is actively practiced. Although open innovation has been shown to enhance performance (Cheng & Huizingh, 2010; Tomlinson, 2010), too much sharing of resources outside of the firm has competitive disadvantages (Laursen & Salter, 2006). Given that open innovation is trendy (Huizingh, 2011), it may be that many firms, regardless of their innovation orientations, are practicing it because of its popularity.
Third, Knowledge management practices, including big data analytics, innovation management software, crowdsourcing, and design thinking were all correlated with high innovators. As Trabucchi and Buganza (2019) suggest, firms that capitalize on information from analytics can use the data to make decisions that enhance their innovativeness and competitiveness. Not surprisingly, innovation management software was also correlated with high innovators, as the software can help with the generation, development, selection, and implementation of novel ideas (Dobni & Klassen, 2020; Troshani et al., 2011).
The correlation between crowdsourcing and high innovators corresponds with research that reports on crowdsourcing’s popularity among innovative firms (Dobni & Klassen, 2020; Jeppesen & Frederiksen, 2006; Poetz & Schreier, 2012; Sivula & Kantola, 2016). It is likely that innovation-oriented firms are seeking external collaboration and ideation to enhance their competitiveness. In contrast, non-innovation-oriented firms may not be seeking such collaborations due to a lack of strategy sophistication.
Design thinking was a business practice of high innovators as opposed to low innovators, further supporting the works of Wattanasupachoke (2012). The relationship between innovation orientation and design thinking is intuitive, as design thinking is the ability to conceptualize a fully developed marketplace (Brown, 2008) and innovation orientation is a firm’s commitment to creating superior value for its target market. It can be concluded that innovation-oriented Japanese firms are better at understanding the expressed and latent needs of their target markets, enabling them to effectively serve them and outcompete non-innovative counterparts.
Fourth, Processes such as measuring innovation, stage-gate systems, and scientific discovery were all correlated with high innovators. Per Drucker (1954), the measurement and management of activities are inseparable. As such, the measurement of innovation naturally leads to its management. High innovators were found to be more likely to engage in measuring innovation. Therefore, to enhance innovativeness, firms need to measure innovation systematically.
Stage-gate systems were also correlated with high innovators. Stage-gate systems have been shown to accelerate the innovation process (Cooper, 1990; Sommer et al., 2015), and Japanese firms have been particularly effective at implementing them (Anderson, 1993). This finding empirically supports previous literature in general and in the context of Japan. Scientific discovery has long been associated with innovativeness, and as Roberts (2007) describes, innovation is ideation, via discovery, and execution. Like Dobni and Klassen (2020), this study finds that high innovators, as compared to low innovators, are involved in scientific discovery. Naturally, innovators are at the frontier of discovery, creating discontinuous innovations.
Except for open innovation, all of the proposed delineated business practices were positively correlated with high innovators instead of low innovators. It is clear that these business practices should be considered and implemented in highly innovative organizational cultures. Furthermore, low innovators cannot begin to think about the implementation of such business practices without a cultural context (e.g., innovation culture) that supports them. It is recommended that executives looking to become more competitive and achieve superior performance must first implement a culture that promotes innovation. Only after an organization’s leadership, resources, knowledge management, and processes support innovation can a firm effectively engage in the described business practices.
As noteworthy, the paper by Dobni, Wilson, and Klassen offers a stepwise approach to enhancing competitiveness via innovation. Executives should first look to creating an innovation orientation and subsequently engage in these business practices. It is evident that firms with low innovation orientations cannot begin to think about big data analytics or scientific discovery, to name a few, without a strong and supporting underlying innovative culture. Innovation orientation and the business practices that it supports are critical for competitiveness, performance, and survival, underscoring the importance of their implementation.
Their findings are similar to earlier empirical research that sets apart the practices of highly innovative firms in North America and Europe. (Please see “Five strategy shifts for innovation,” in Strategy and Leadership on May 14, 2021. It is the copyright of Emerald Publishing Limited, ISSN 1087-8572. DOI 10.1108/SL-11-2020-0136.)