Leadership Insight > Dr. Vijay Govindarajan

Dartmouth Business School Professor And Author Talks About the 10 Rules for Strategic Innovators

By Elizabeth M. Ferrarini

If a well-established company wants to carry out a breakthrough idea, it needs to build a new, somewhat self-contained business outside the bureaucratic confines of the established company. The new company must create its own business model, borrow selective resources from the parent company, and learn to succeed in its new environment. However, most companies have a difficult time trying to rewire their DNA to make this type of innovation happen. Culling from years of research about strategy and innovation of breakthrough businesses, Dr. Vijay Govdindarajan and Chris Trimble, professors a the Tuck School of Business at Dartmouth College, have written the ultimate guide book for executives who want to navigate the uncharted waters of, what essentially, could be called a business experiment. The 10 Rules for Strategic Innovators: From Idea to Execution focuses on strategic innovation, which is really about creating a new, unproven business model.

The BTM Institute recently sat down with Professor Govdindarajan to learn more about his strategic innovation model and to get his views on other types of innovation. He is currently on leave from Dartmouth College to pursue a one-year consulting assignment with General Electric. Here's what he had to say:

Throughout 2008, I will be at GE as a professor in residence and a chief innovation consultant. I won't be an employee. GE is engaging me as a thought leader to accelerate the company's innovation agenda. GE has embarked on some major innovation initiatives in the areas of global warming and water scarcity. GE wants to see how it can create breakthrough businesses in that space. My research is all about how can organizations, such as GE, can create businesses of tomorrow while they're managing excellence in the business of today, what tensions does it create, what challenges does it pose, and how do you handle it.

I'll have three roles -- to teach, to guide, and to consult. My teaching work will consist of giving the top 600 officers of GE ideas about innovation. As a guide, I'll work with the teams on several innovation projects. My agenda will be to as a facilitator to push their thinking and to give them some perspective on what they're doing. I'm going to bring some of my research to bear and to see how we can have an innovation agenda. As a consultant, I'll act more like an sounding board for executives who want to discuss ideas, such as making an organizational change.

Q. Are you going to apply your innovation model to GE?

Absolutely. GE wants to benefit from my 25 years of research as a thought leader. My model may not completely apply to all GE initiatives. Meanwhile, I'm going to learn a lot as well and to modify my own theory.

Q. What are the top three innovative companies in the U.S.?

I'm a big fan of IBM. If I wanted to name the top three innovative companies in the U.S., they would be IBM, GE and P&G. These companies have reinvented themselves.

Q. Can you briefly describe your strategic innovation model and when can companies benefit from it?

My model outlined in my book applies to companies that want to innovate a new business model. Keep in mind that a business model answers three questions -- who is my customer, what value are delivering to that customer, and what is the value chain architecture which we're going to create that value. If you can answer these questions consistently internally, you have a successful business model. You can do a lot of innovation without changing the business model. Microsoft introduced Windows 2008 without changing the business model. The value to the customer and the value chain architecture doesn't change. When Toyota introduces the next version of the Lexus, it's innovating the product, but not changing the business model.

Changing the answer to one of these three key questions invariably changes all these questions and, in turn, the business model.

Q. Carly Fiorina, the former CEO at HP changed the business model. Can you comment on how well she did?

Because I haven't studied HP, I can't comment on it. My model, however, can be applied if a company doesn't do a good job and has to change the business model. When the New York Times went digital, it had to change the business model. Unlike the print version of a newspaper, the online media world has a different definition of the customer, the value to the customer, and the value chain creation. That creates the challenge.

When you're launching a new business model within an existing organization, you must forget the success formula of the current business. You must still borrow some assets because you aren't talking about shunkworks or a spin off. New York Times Digital had to leverage some assets from the print newspaper, which was the borrow challenge. The learning challenge is all about launching a new business in an unknown territory. Here you have to resolve the unknown.

Apple changed its business model when it created the Ipod. On the other hand, Toyota and Southwest Airlines are innovating within an existing business model. My book is less applicable to this type of innovation.

Q. Should a well-established company be using a combination of models to create sustainable innovation?

Absolutely. Established companies, such as IBM or GE, have to excel in two types of innovation: sustaining innovation inside the existing business model, and changing the business model to create new breakthroughs. Sustaining innovation can apply to a process, a product, or be an incremental or a radical innovation. For example, the print version of the New York Times needed to innovate. It went from being a metro New York paper to a national distributed paper.

Changing the business model is a result of discontinuation or nonlinearships Companies have both linearships and nonlinearships. Nonlinearships force you to innovate your business model. The New York Times has the nonlinearship of the Internet. The Internet forced the New York Times to change its business model.

Q. Where do most companies fall short when it comes strategic innovation?

Most companies have an abundance of ideas, and thus, get caught up with idea generation of creativity. Thomas Edison said that genius is one percent inspiration and 99 percent perspiration. Execution is the 99 percent perspiration. That's what we focus on.

People misunderstand innovation. It's about making money out of creativity. To this end, the execution phase is extremely difficult to do a good job of. We keep coming back to the theme in our book. Most companies lack the framework and the discipline to execute successfully.

Q. What is the first thing you need to do to ensure a good execution of your strategy?

Whenever you're starting a breakthrough innovation, you need to go back to the drawing board and say what is your forgetting challenge, what is the nature of your borrowing, and what is the nature of your learning challenge. Then you need to be very tough minded about rewiring your organization on DNA. If you fail the significant forgetting problem, you have to get skills from the outside. You can't grasp for people from the established business. Most companies have a terrible time recruiting people from the outside.

Q. How can technology professionals contribute to driving innovation?

Without a doubt! I see a very big role for technology professionals, such as CTOs. However, they have to play the role very carefully. Take a look at GM's OnStar. This was a new business model for innovation. It is a service business, has a different customer base, and has a different value proposition and architecture. The CTO of GM has to think about innovating on the automotive side of GM. This's one type of technology innovation, such as how to improve processes. Meanwhile, the CTO also needs to support the OnStar business where technology resides at the heart of this organization.

Q. How do you feel about companies that drive innovation by acquiring companies?

I don't see acquisitions and organic growth as two completely different things. When you're changing the business model, you have to acquire new skills. You can recruit from the outside, or you can acquire a small company with the skills you need and integrate those skills. Acquisitions can help a company innovate within its existing business model. To this end, acquisitions should be viewed as part of an effort to innovate.

Q. How would you describe Craigslist's innovation?

Craigslist doesn't have any new technology or new products. You don't need new technologies for new business models. If you change any of these three questions, you create a new business model. Ipod isn't about new technology. It's basically a hand-held hard drive. Digital music existed before the Ipod. However, the Ipod is an example of a new business model. It changed the music industry game by changing the answers to these three questions.

Craigslist is a great example of changing the industry by creating a new business model. It changed the value proposition and the value chain architecture in which it was going to create that value.

Business model innovation is not the same as technology innovation or new product innovation. With new business model innovation, you're changing the strategy itself. I equate business model to strategy. Strategy is the answer to those three questions. When you innovate the business model, then you innovate the strategy. That's the toughest thing for an established company to do. This factor explains why the New York Times had a hard time launching New York Times Digital.

Q. When you move to a business model to innovate, then how do you reward key players?

Rewards for innovation have to be based on the way the organization is able to learn, not based on results. Profitability comes later for most breakthrough innovations. Most companies use the outdated reward system of tying peoples' rewards to their performance. If you do that, then you'll keep employees from taking risks. The book has an entire chapter devoted to this subject.

Q. Where are the most innovative companies coming from?

The United States still leads the world in innovation, but we're beginning to loose our edge. For example, we're conceding our manufacturing to low-wage countries like China because we're a high-cost country. Innovation is our competitive edge. It's been our world hallmark for the past 100 years.

Elizabeth M. Ferrarini is a writer from Boston, Massachusetts. Reach her at elizabethferrarini@yahoo.com.