When Stanley Works merged with Black & Decker Corp. in 2010, it inherited a floundering power-tool unit.
"We were losing our way," says John Cunningham, president of the consumer products division of Stanley Black & Decker Inc., who had been with Dewalt, part of Black & Decker, before the merger. "As we changed leadership, we were faced with turning the brand around and reinvigorating it."
One of the new leadership team's first moves: carve out innovation teams freed of daily time-to-market pressures. Now, one team based in Maryland focuses on applying new technology to current products and a second one in the U.K. develops what Cunningham characterizes as "disruptive technologies." They're given time, money and regular access to senior leaders.
"Give me the solution," Cunningham tells them. "I'll make the decision about whether we can make money at this idea."
One of the first hits: a motion-activated screwdriver. The Black & Decker Gyro grew from a Maryland engineer's curiosity about applying the concept behind a Nintendo Wii controller to a screwdriver. Time magazine dubbed it "one of the best inventions of the year."
Stanley Black & Decker and others know that clinging to convention can be fatal. That's why innovation has become the top priority of CEOs worldwide. More than 80 percent of respondents to a recent survey by Workforce said innovation had become much more important to their organizations and they expected it to remain so. But more than 40 percent considered their organizations ineffective at fostering innovation. So what can be done?
Delivering innovation relies on managing people correctly. But there's a new formula for brewing up great products and services.
The new recipe: Lay a base of trust. Mix risk-taking with job security. Subtract strict chains-of command and barriers that impede ideas from rising. Add professional development. Separate rewards into two units: excellence in routine activities and efforts to find breakthroughs. Don't forget a dash of fun. And when trials result in errors? Openly discuss failure to learn from it.
That's not to say it is easy or inexpensive to cook up greater creativity. Experts agree big breakthroughs typically are years in the making, and shifting a corporate culture to ignite innovation takes time and resources as well.
But there's a payoff. Some consultants and researchers call it the "innovation premium:" higher market value based on Wall Street's belief that the company will continue delivering new products, finding new markets or creating better processes.
"Great innovative companies have created the right environment, attracted the right employees who constantly want to learn, and they've figured out how to get people highly engaged in innovative processes without fear and without the dominance of quarterly earnings," says Edward Hess, professor of business administration at the University of Virginia Darden School of Business.
Concern about innovation dominates everything from water-cooler conversations to keynotes at conferences. It ranked as the top challenge in the most recent survey of executives by The Conference Board, a nonprofit economic research group. It has become so important that some CEOs track promising ideas that need their personal protection to ensure the ideas are given time to incubate.
Organizations also are starting to measure innovation efforts and results. One metric: track how much of a company's revenue comes from products introduced within the past five years. Creating the right environment for such innovations starts with building confidence among the workforce that leaders make good on their promises, says former Campbell Soup Co. CEO Douglas Conant.
"You have to create a high-trust culture because you need to take risks with innovation," says Conant, who ran Campbell from 2001 until his retirement in July 2011. "In low-trust cultures, people are unwilling to lean into ideas because they feel it's a high risk and they don't have confidence that they will be appropriately recognized for taking those kinds of risks."
Conant oversaw the rollout of a ready-to-eat microwaveable line of soup during his second year at the helm. Campbell's Soup at Hand opened up what Conant estimates to be a $500 million market.
"It didn't seem like a breakthrough idea," he says, "but all of a sudden we were making the soup portable and we were making soup that was relevant to a whole new generation of consumers."
You also need the right talent. Don't confuse valuing trust with sacrificing performance standards, Conant says. At Campbell, he replaced 300 of the top 350 executives during his first three years in what he calls "probably the most substantial turnover out of any Fortune 500 company."
"People welcome high standards as long as they know you care as well," Conant says.
Then you need to declare your innovation ambition. "Say it out loud—what are you trying to accomplish with and through innovation," says Lisa King, vice president of insights and innovations at Newell Rubbermaid, which makes everything from its namesake containers to Lenox saw blades.
There's no ambiguity at Newell Rubbermaid Inc.. Every employee and guest at its Atlanta headquarters passes a large display that lists innovation as a core part of its "growth game plan." It's also discussed in regular town hall meetings led by President and CEO Mike Polk.
Recent innovations include a hole saw by Lenox that lets electricians and plumbers cut circular holes faster and quickly eject the plug from the saw cup so they may move on to the next hole. An absence of innovation leads to your products becoming less relevant to consumers, whose needs are always evolving, King says. She advocates a balance between short- and long-term efforts. "There are innovation sprints and innovation marathons—but both are timed races," King says.
As the Lenox speed-slot hole saw suggests, "innovation" can mean different things to different companies. So you need to define it. "We typically talk about innovation as the successful commercialization of invention," Kings says.
Rick Lash, co-leader of Hay Group's Best Companies for Leadership study, says once companies clarify what they mean by innovation, those with records of success go on to provide ways for new ideas to rise no matter their source.
"These best-in-class organizations encourage people to think strategically and provide forums for people's ideas to be heard and, in particular, for younger people to come up with new ideas," Lash says.
IBM Corp., which ranks No. 3 on Hay's list, has what it calls the Global Innovation Hub—or as Chuck Hamilton calls it, "the world's largest suggestion box"— where employees from any level post ideas online. "People come in and comment on their idea and work with them through their ideas and volunteer to push their ideas further," says Hamilton, the lead for mentoring, social learning and smart play at the IBM Center for Advanced Learning. "They build a community around that idea."
Other organizations have tweaked their structures to provide venues to air proposals. Wanting a more robust pipeline of ideas, building-products-maker Owens Corning Inc. added a cross-functional "innovation council" to each business unit. Anyone from a sales representative to a researcher can pitch an idea. Greenlighted ideas receive staff and funding to move to the next part of the phased-in gate process.
"Even products that are 70 years old can be innovated on," says John Hillenbrand, chief innovation officer of Owens Corning, which used its process to develop its eco-friendly insulation made from natural and recycled content. "It doesn't always have to be iPhones and iPads."
Intel Labs encourages its staff to spend 10 percent of their time on exploratory research. 3M Co.'s "15 percent rule" allows technical employees to spend that amount of time pursuing whatever they want. 3M annually awards 15 grants from $50,000 to $100,000 to pursue such ideas, spokeswoman Jacqueline Berry says. The company famously credits the rule as the springboard for Post-it notes.
Not every far-flung thought leads to a $1 billion market. Given the axiom that 90 percent of innovation fails, leaders must show they don't attach stigma to it, particularly those that come early.
Companies show that failure serves as a learning experience by asking those involved to write about it and talk about it so others learn from it and to quickly place them on new projects, says the Darden Schnool's Hess, who is the author of The Physics of Business Growth: Mindsets, System, and Processes.
"First and foremost, our approach is that when we try something new that doesn't work, we learn from it," says Rocio Echeverria, director of product management and engineering at Xylem Inc., which makes water pumps. "We never talk about failing in a bad way."
At General Electric Co., executives are assessed on their ability to handle failure. It reflects a culture where innovation has been deemed so important that CEO Jeff Immelt tracks what he calls "imagination breakthroughs," promising but risky ideas that need his help so they have a chance.
Internally, GE measures the contribution to growth and the bottom line from three "investment horizons": improving its core business, identifying "adjacencies" such as finding new markets for current products, and exploring new areas such as new product lines or new business models. Immelt has seen to it that performance evaluations assess behaviors associated with innovation. Examples include whether employees collaborate horizontally to tie together disparate ideas or whether executives allocate time and money into not only smaller short-term improvements but also bolder long-term possibilities. It's a marked change from the previous era led by legendary CEO Jack Welch, who was known for championing data-driven approaches that drove operational efficiency.
"Jack Welch did not have imagination as a core value of the company," says Rob Reilly, chief marketing officer for GE Healthcare. "We did not assess employees on their imagination on their annual reviews under Jack Welch. That's a big statement: One of the five or six things we're going to assess you on is your imagination. Then people say, 'I get it. Maybe I'm not very good on that.' That's when you say, 'OK we need to give them the skills and tools to be able to do that.' "
Among other tactics, training comes in the form of a course called "leadership, innovation and growth." More than 10,000 GE executives have completed the course.
Professional development plays a key role at McDonald's Innovation Center, which tests everything from new menu items to workflows. For example, employees visit competitors and retailers and then discuss what they observed. Guest speakers address topics like multigenerational workplaces.
"Learning is part of the culture," says Laurie Gilbert, vice president of restaurant innovation at McDonald's. "Candidly, fun is a big part of the culture."
Once a quarter, the center has its own version of the Food Network TV show Iron Chef. Upon arrival, a group of employees is given a theme and told to create a lunch for everyone else inspired by the theme, using only ingredients available in a McDonald's kitchen. A recent theme: Chinese New Year.
"It creates a lot of teamwork and camaraderie," Gilbert says. "It also reinforces creativity, which is an important part of what we do."
Zebra Technologies Corp., which makes bar-code printers and radio-frequency-identification printing systems, has a special banquet for employees who have earned patents in a particular year. The company also offers cash awards, and honorees receive certificates or plaques and are recognized at quarterly meetings broadcast globally. "We do a variety of things to encourage people to take some shots at the basket," says Michael Terzich, senior vice president of global sales and marketing at Illinois-based Zebra.
Bally Technologies Inc. offers rewards such as iPads to the top-rated inventions posted online and voted on by employees. The slot-machine-maker also honors "inventor of the year" and "inventor of the quarter."
"We try to let people know this is key," says Bryan Kelly, senior vice president of technology.
But if you have a team dedicated to innovation, you may want to rethink some elements of your compensation strategy. New research suggests companies should think twice before using a standard pay-for-performance strategy for such teams.
"For most of the tasks out there, standard pay-for-performance works really well because they're routine tasks," says Gustavo Manso, an associate professor of finance at the University of California at Berkeley's Haas School of Business. Manso's research looks at compensation for innovation. "Innovation tasks are very different. We don't know what the best way to succeed is."
The trick: tolerating short-term failure and rewarding long-term success that benefits from it. Effective rewards range from promotions to stock-option re-pricing, with a lower exercise price. And researchers are less likely to chase bold ideas if they're worried about job security, he says. He holds up tenure in academic settings as a model that doesn't incentivize only small quests.
All of this places human resources professionals at the fore of discussions.
"All of a sudden HR is at the table in innovation," Darden's Hess says. "Why? Having the right people having the right environment, defining the behaviors, having leaders role model the behavior, training—all of this is mission critical if you want to be an innovative company."
Todd Henneman is a writer based in Los Angeles. To comment, email email@example.com.