Is it about creativity and speed? Or is it about cost cutting and risk avoidance? New ideas and opportunities? Or the stock market and layoffs? We all know the simple truth: You can't cost-cut your way to the future. The future depends on innovation. To refocus the conversation, Fast Company gathered 10 business leaders for a fast-paced, 90-minute roundtable discussion in San Francisco. The questions: What is the state of innovation? How are leaders competing on innovation? The answer: an approach to innovation that matches this new business environment -- smart, practical, and continuous. Here is an edited transcript of a lively Fast Talk conference about the power of innovation.
Innovation Is Alive and Well -- and It's Here Among Us!
Alan Webber: Think of one thing -- a product, an organizational model, a way of working -- that's genuinely innovative.
Peter Moore (President and COO, SEGA of America Inc.): My world is interactive entertainment, and I'm always amazed by the incredible things that young people can generate from what seems to me to be such limited experience in life. Guys in their twenties devise games that blow me away.
Chip Conley (Chairman and CEO, Joie de Vivre Hospitality): I'm in the hospitality business, and I'm most impressed with Ian Schrager's Hudson Hotel in New York. But it creates style for the masses in what has historically been a dinosaur industry.
Mike McCue (CEO, cofounder, and chairman, Tellme Networks Inc.): I'm totally consumed by a combination of the telephone and the Internet. The phone is a trillion-dollar industry, and everything about it is changing.
Rusty Rueff (Senior vice president, human resources, Electronic Arts Inc.): I love things that suddenly end up in the middle of pop culture. The Razor scooter is one of the coolest examples. Somebody got really smart when he decided to put a handle on a skateboard. It makes me wish I were 12 years old again.
Linda Yates (Mentor capitalist, partner, Painted Wolf Ltd.; cofounder, former CEO, and adviser, Strategos): What jazzes me is more than just a particular product. It's the fact that the startup is still alive. We have to stop worrying about the dismal state of the NASDAQ and the Dow. There are entrepreneurs out there. There are ideas out there.
Arno Penzias (Venture partner, New Enterprise Associates; 1978 Nobel Laureate in physics): I'm here as the token old-economy techie. I'm jazzed by fluid self-assembly. Imagine silicon chips the size of grains of sand. You mix them in a glass of water. You pour the mixture over a piece of plastic. The little chips fall in the holes, and now you can build a two-way radio for about a penny. We'll be making them in a couple of years.
Beth Sawi (Executive vice president and chief administrative officer, Charles Schwab & Co. Inc.): I see innovation in what's happening today with AIDS in poor countries, where people are breaking the rules on pharmaceuticals. The women in South Africa who are breaking the rules to fight AIDS are going to prove everybody wrong.
Tim Brown (President and CEO, Ideo Product Development Inc.): I think that iTunes is a wonderfully innovative little piece of software that turns a Mac into a real home appliance. It speaks to an issue that I think is crucial: Innovation is only valuable when you implement it beautifully and elegantly.
Simon Jeffery (President and COO, LucasArts Entertainment Co.): One of the things that attracted me to George Lucas was the fact that in the mid-1970s, he completely reinvented the way movies are made. The special-effects industry and the sound-editing industry have both been completely changed.
Ron Beegle (Executive vice president, Gap Inc. Direct): There's a marriage going on at two different ends of the spectrum: old and new, big and small. In my business, it's fashion items versus basic items. Companies are figuring out how these two things cohabit and how they can make something big even bigger.
The Role of Innovation
Polly LaBarre: Not long ago, we were living in the midst of irrational exuberance. Now we seem to be in the midst of irrational pessimism. What's the role of innovation in companies today?
Ron Beegle: We talk about innovation a lot at the Gap. To keep up with some of the nimble startups, we had to change the way we do business. But we were still careful to play by the old rules: having structure, insisting on fiscal discipline, and developing a long-range plan. We were careful when we created Gap Direct. Everybody thought that online business was separate. We didn't think that way, and, in retrospect, that was smart. Today we have a business that is built for the long haul, and one that is prepared to operate by the oldest business rule: Make money.
Tim Brown: At Ideo, innovation is our lifeblood. For us, it's as fundamental as accounting. You need to know how much money you've made. You also need to have new ideas. One of the challenges that a lot of companies face is creating a culture that sustains innovation. At the same time, we're seeing a lot less frivolous innovation going on. These days, we don't have conversations with people who walk in the door saying, "I have this really cool idea" -- which often isn't so cool -- "and a lot of money to spend on it."
Beth Sawi: In large organizations, everyone says, "I want ideas." Then a lot of the managers add, "But I only want ideas that are going to be successful." If you really want to encourage innovation, you have to accept failures. You have to expect things to blow up on you. We used to have a thing where we would make an L shape with our fingers and put it on our heads. The "L" was for "learning" -- not for "loser." That's the point. Since the only way you ever learn is by making mistakes, you have to let that happen in your organization and not punish it.
Rusty Rueff: I want to talk about the idea of culture and safety. During the past couple of years, working inside a creative organization, I've learned that there still has to be tension. For most of us, our most productive days come when we feel like our backs are up against the wall -- because that's when creativity comes out. That's one reason I think that the best ideas are yet to come: We're in a cycle where we feel that tension, and if we combine tension with an environment that encourages us to take risks, we'll see big ideas emerge.
Linda Yates: Historically, people have looked for "the big idea." Now they are trying to learn how to build a continuous capacity for innovation inside their organizations. The ecosystem for innovation is changing. It's no longer just a big company and what it can do internally or a brand-new startup and what it can get from Silicon Valley or Austin, Texas. Now you see people banding together to support innovation -- internal, cross border, or cross culture. It even changes how you raise capital for innovation. The question now is, How do you create an open market for capital inside the organization?
The Organization of Innovation
Alan Webber: It's conventional to think of innovation as stemming from a certain set of circumstances or occurring in a certain place, whether it's a protected R&D lab, a quiet think tank, or a creative shop. But in tough times, you may have to be more innovative about where you find innovation. Are there any new rules of thumb or new places to look?
Arno Penzias: The one thing about Bell Labs that made it great was that it was not protected. To the outside world, it always looked like an ivory tower, but what made it work was the fact that it had no research buildings. Every research group in the company was colocated with development people. If it hadn't been, invention is all that you would have gotten. "Invent" is a very important word: It's the creative product of the human mind. You have to start with invention. But innovation means changing somebody's world. Pressure is really important. The pressure that we're feeling now is a great thing. I think that it will serve as an engine for changing the world.
Peter Moore: To really be innovative, you have to live and breathe it. We put our development teams for the games all around the world. You may have heard of Sonic the Hedgehog. The Sonic team is all Japanese, but everyone on it lives in San Francisco, because for that genre of game, the creativity flows more from Japanese culture than from American culture. That's absolutely critical -- particularly if you're dealing with a youth culture that changes every 15 seconds.
Chip Conley: The hospitality business used to be all about predictability. What we've learned over time is that people choose their hotels based on the brand as a mirror. So every time we create a new hotel, spa, or resort, we imagine a magazine that defines the hotel. We choose five words that define the magazine, and by doing that, we get the psychographic fit. We've learned that those five words are the identity-refreshment words that describe our most loyal customers for that product. The words that a person might use to describe that hotel are the words that he would use to describe himself. Then not only do you get inside the customer's head, you get inside his heart.
Beth Sawi: One of the things that we're finding is that you can -- and must -- innovate, even in tough times. We are trying to do some important things now for our employees. We have a set of visions and values that we talk about. It's easy to say that you believe in something when times are good. It's harder when you suddenly have to make tough choices. We have employees on two tracks: those who are going to stick around and those who are going to be asked to leave. We want both sets of employees to feel good about the experience. That's where innovation comes in. Charles Schwab is a great innovator. He said, "Let's set up a scholarship fund for people who are being laid off, so that they can go back and continue their education if they want. Or let's do hire-back bonuses of $7,500." Those kinds of ideas show commitment to the employees. And it shows that the company is innovative, even though it's going through tough times.
Mike McCue: In our performance reviews, we have a section on innovation. We actually measure our employees on it. When I first added that part, people looked at me like, "How are we going to do that?" What's interesting is that people have gotten innovative about measuring people on innovation.
Ron Beegle: In our business, the young folks are the innovators -- they have the dreams. But frankly, they would love to know where the potholes are. They've gotten a lot of inspiration from talking to the folks who have been down the road once or twice and can say, "You know what? Keep going, but beware of this, or think about that. I've seen it before."
The Opportunity for Innovation
Polly LaBarre: What are you seeing in terms of opportunities for innovation? Are there patterns that you can describe to us that say, Here's where people are looking today?
Tim Brown: Innovation is largely about making unexpected connections between things. That's one of the differences between innovation and invention. Innovation means looking for new places to make connections. We've spent the past few years developing a whole bunch of new channels for getting things to people using mobile technology and the Web and for connecting some of those channels seamlessly. People seem to be looking for opportunities to connect.
Arno Penzias: Somebody once said to me that new technologies don't create innovations. It's always two technologies coming together with a market that makes the difference. Sam Walton took the cash register and connected it to a database and changed the face of retailing. Suddenly, everything on his shelves went on spec, because he connected two things together. Any place where you can see a gap, you have an opportunity.
Rusty Rueff: I'm looking at how people have traditionally worked to find new ways of working in teams. We won't publish organizational charts -- they're too confining to the thought process. An organization works like a bad telecommunications map of the United States: People get together and do things, whether it's in the external world, raising money for a startup, or it's internal, grabbing people to brainstorm. We have org charts. But we won't publish them or give them out.
Linda Yates: That's especially useful in an organization like yours, because you're after a hierarchy of imagination as opposed to a hierarchy of experience. By doing away with the org charts, you can get people to stop focusing on, "He's above me, and therefore he must be smarter."
The How-to of Innovation
Polly LaBarre: Now it's time to get to the "how-to." How do you create a culture where innovation can thrive?
Chip Conley: The real challenge is to live with a left brain-right brain tango: to find a way for individuals and organizations to feel comfortable in a place of chaos and order simultaneously.
Simon Jeffery: It's important to recognize that innovation is relative. It happens in companies of different sizes, at different levels. Innovation can be a clerk who finds a way to make filing 20% more efficient. It's important that we notice innovation, nurture it, and reward it. The interactive-game industry has some interesting challenges. On one hand, we have the technology people who see innovation in a very binary sense: It's in the software that they are creating. Then you have the artistic guys and the game builders, who see technology as the canvas for their art. It's often hard to get those people to work side by side smoothly. But when these teams do work together, it can create a seedbed for innovation.
Ron Beegle: The folks who you expect to be the innovators aren't necessarily the ones who come up with the innovations. We spend a lot of time just free-thinking, where everybody talks about what we are doing and how we are doing it. That includes everybody from the accountants, to the operations guys, to the creative people. Let everybody think; let everybody dream.
Tim Brown: Don't just let them talk -- have them build things. The other key to innovation is that you have to build stuff. You have to prototype. As one of our guys says, "Never turn up at a meeting without a prototype." When you start to make an idea tangible for other people, they can get a hold of it and start to participate in it.
Linda Yates: I've always said that investment isn't the scarcest resource -- imagination is. It goes back to your earlier point about tension. Tension comes in many ways. For example, you don't throw $5 million, $10 million, or $15 million in financing to a company. What you are seeing now is the maturing of corporate venturing. People are creating a new venture process for both internal and external ideas and to bring them together.
Rusty Rueff: We've found that we need to provide structure in order for innovation to occur. When we were trying to develop games for the PlayStation 2, the only way we could think of to move faster with bigger ideas was to bring people from our 13 different studios together around their disciplines. For example, we had a group of artists who didn't want to create independently on the new platform. They wanted to be so much better than anybody else in the industry that they were willing to come together and share their ideas. We thought that was wild. So we immediately created the artists' counsel. Then we created a technical counsel, a graphics counsel, and a sound-and-audio counsel, and we started bringing these people together on a regular basis with some structure. Soon, ideas started to come out of the group. That's what we can do as leaders: Provide the forum and the structure to bring people together who otherwise wouldn't have met.
Linda Yates: There's an ecosystem of innovation inside big companies, and it requires at least three players: the idea person or the entrepreneurs, the angels or the VC equivalent internally, and what I like to call "mercenary managers." Those are people who may never have an idea, but they provide the functional excellence that actually takes an idea, executes on it, and creates innovation out of it.
Beth Sawi: Ideas are a dime a dozen; getting them into the marketplace is much harder. Rarely does the idea that's written on paper show up that way in the marketplace. We use the analogy of sailing: Your destination's here, but you have to tack over here, then over there.
The Innovation Action Agenda
Alan Webber: Last round. What's your actionable advice for creating a more innovative organization?
Ron Beegle: Simple. Have dreamers, have planners who can take the dream and put together a plan, and then have executors who can make that plan a reality. And let all of those people interact and work very closely together.
Simon Jeffery: Surround yourself with excellence. Don't accept the first people who walk through the door in a job interview. Make sure that you get the very best people for every role.
Tim Brown: I would argue that many of the best innovators are also the best implementers. Some of the best idea people are most satisfied by seeing their ideas get out there. The really valuable ones are those who have been around that cycle a few times. Whatever you do, don't lose those people.
Beth Sawi: Focus on making your customers' lives better. If they can't see that your innovation is going to make their hotel experiences better, their game experiences better, or their shoes better, you might as well stop now.
Arno Penzias: Change starts with the individual. So when I get up in the morning, the first thing I ask myself is, "Why do I want so strongly to believe what I believe?" Constantly examine your own assumptions.
Linda Yates: We need to create a new, tangible venture process inside organizations. Ideas need a home. They need a place to go. They need people to review them.
Rusty Rueff: The most powerful tool that we have to give people in order to be creative is recognition. One of the most creative people in our company always says, "When I deal with my developers, they have two questions: 'What's in it for me?' and 'What do I get out of it?' "
Mike McCue: Do what you love to do, and surround yourself with people who also love to do that thing and who are full of talent. If you do that, you can build a great business, you can build a big business, or you can build a small business. But you will be passionate about it, and you will be innovative as a result.
Chip Conley: The best ideas can come from your newest staff member. So we have a program called "Fresh Eyes." Usually, an employee in a service business gets a top-down review after 30 days; we have a Fresh Eyes review. The employee doesn't just review us in terms of our competency; she also asks us questions such as, "Why haven't you done it this way?"
Peter Moore: I'm a child of World War II from Liverpool. My parents grew up during the Blitz, and they enthralled me with stories of how Winston Churchill got them through as they sat in rooms with blackout curtains drawn, listening to a crackling radio, with bombers flying overhead. I have a plaque with a Churchill quote on it next to my computer. It says something like, "The pessimist sees the difficulty in every opportunity. The optimist, the opportunity in every difficulty." My advice is to see things the way an optimist does. Innovation isn't a difficulty -- it's an opportunity.