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Introducing the Four Components That Make Innovation Repeatable

Even the best-performing companies eventually stall. Sustaining momentum—and remaining a great growth company—takes a system.

Scott Anthony and David Duncan call this system a “Growth Factory.” They’ve seen it work in a small set of elite companies that have created environments where innovation is both repeatable and reliable, not relegated to an off-site or isolated division that has no real connection to the organization’s future.

In this HBR Single, Anthony and Duncan draw on their extensive experience working with these growth factory organizations—most notably Procter & Gamble and Citigroup. They highlight the four main components that make innovation repeatable and reliable, citing real examples of what P&G, Citi, and even their own firm, Innosight, have gone through to stay firmly on a path toward growth despite huge challenges. They offer practical advice on how you can put their system into action in your own company—whether it’s a large multinational or a small start-up.

HBR Singles provide brief yet potent business ideas for today’s thinking professional. They are available digitally at and through the Kindle Store, the iBookstore, and other ebooksellers.
Harvard Business Review Press
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Building a Growth Factory

Scott D. Anthony

David S. Duncan

Harvard Business Review Press

Boston, Massachusetts

Copyright 2012 Harvard Business School Publishing

All rights reserved

No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

ISBN 978-1-4221-9355-6

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The web addresses referenced and linked in this book were live and correct at the time of publication but may be subject to change.



Solving the Challenge: The Growth Factory

P&G and Citi


1a. Growth Types

1b. Growth Goals and Guidelines


2a. Robust Innovation Processes

2b. Idea Supply Chain

2c. New-Growth Groups

2d. Little Bets Labs

2e. M&A and Partnership Engines


3a. Idea Governance Systems

3b. Portfolio Tracking Systems

3c. Resource Allocation Systems

3d. Continuous Improvement Systems


4a. Lean-Forward Leaders

4b. Innovation Talent

4c. Measurement and Reward Systems

4d. Development Programs


Three Ways to Get Started

Final Advice for Leaders

About the Companies

Summary References

About the Authors

Introduction: Staring Down the Growth Challenge

IN 2012, two of the world’s largest multinationals celebrated momentous anniversaries: Procter & Gamble turned 175 years old, while Citigroup reached 200 years. While both companies have naturally had good days and bad days, surviving over such long periods is impressive and unusual. I; n fact, Citi is the oldest of America’s thirty largest companies and P&G is the fourth oldest.

Most leaders, of course, want to do more than survive over the long term. They want to perform. And to perform they need to grow. The bigger a company gets, the stiffer its growth challenge. P&G, whose annual revenues are about $80 billion, seeks an organic growth rate of about 5 percent a year. At first blush, that may seem mundane. But framed a different way, that’s like creating a brand the size of Tide (which is sixty-five years old), or a company the size of Hasbro (which is almost ninety years old) every single year. Hitting that target matters; growth creates the opportunities that attract and motivate top talent, ensures that P&G fends off competition, is a primary driver of long-term performance, and provides cash for investment in future growth.

When growth stalls, it can set off a devastating chain reaction. Company assets go underutilized, jobs are eliminated, competitors diffuse talent, and capital markets react. Management is forced to fight day-to-day fires rather than focus on innovation and growth, and the downward spiral intensifies.

The leadership challenge for many companies is finding a way to keep their growth engines humming to avoid this downward spiral. Common responses include declaring innovation a strategic imperative, launching a handful of high-profile new-growth ventures, and starting focused internal efforts to develop a stronger “culture of innovation.” But these piecemeal efforts often disappoint.

Every stalled company was, at one point, a great growth company. How can company leaders keep the momentum going?

Solving the Challenge: The Growth Factory

In this ebook, we’d like to propose an alternative approach. Work by leading-edge practitioners and decades of research have created a robust set of tools and approaches that allow companies to achieve their growth goals by making innovation repeatable and reliable. To do this, they need to go beyond isolated programs to develop a system of enablers working together in an integrated way. We call this system a “Growth Factory.”

Figure 1 displays the four key components of this system:

A growth blueprint that details growth types, goals, and guidelines

Production systems that transform the raw materials of innovation—ideas—into booming growth businesses

Governance and controls that help the factory to function at scale

Leadership, talent, and culture that feature the right people, in the right roles, doing and saying the right things

Fully functioning growth factories don’t spring up overnight, particularly in large, complex organizations. Building the factory’s foundation requires serious commitment from the company’s top leadership and dedicated resources. It also requires substantial patience. Efforts are likely to have false starts and unpredictable twists and turns. Companies shouldn’t seek to build a growth factory overnight. As the conclusion suggests in more detail, companies can start simply by working on a handful of demonstration projects, defining key innovation terms, and using the growth factory assessment shown in table 1 to identify the areas that need the most attention.


In an effort to make the book as practical as possible, each of the specific elements that follow includes implementation tips, specific questions to help leaders assess their own performance, warning signs that indicate potential trouble, and further reading. The introduction to each of the four components includes the relevant portion of the growth factory assessment to help readers visualize what strong performance looks like.

P&G and Citi

P&G and Citi are the two examples that we’ll draw on most extensively. Despite their long histories, they had (and have) significant challenges to overcome.

TABLE 1: Growth Factory Assessment

Component Element Requires attention On the way Desired state


blueprint Growth types No definition of growth types Defined growth types, at least one of which is noncore; nonspecific classification criterion Defined growth types with simple, agreed-upon classification criteria

Growth goals and guidelines No clear vision Directional vision lacking key specifics Codified and shared growth targets with detailed on- and off-the-table strategic options


systems Robust innovation processes Innovation treated randomly Innovation process defined, occasionally followed Robust, learning-based process to conceive of and commercialize ideas routinely followed

Idea supply chain No systematic mechanisms to source innovative ideas Mechanisms to source internal or external ideas Mechanisms to source internal and external ideas at or beyond the fringes of the company and industry

New-growth groups No safe spaces for incubation Informal mechanisms to shelter new ideas Formal mechanisms serve as safe spaces for new ideas

Little bets labs No mechanism to design and execute strategic learning experiments Mechanism to run single-variable experiments (e.g., product prototype) Structured ways to rapidly and affordably run multivariable experiments (e.g., transaction test)

M&A and partnership engines No formal approach to acquisitions or partnerships Acquisitions and partnerships occasionally made and in an ad hoc way Robust process to acquire and partner with promising ventures


and controls Idea governance systems No disciplined approach to manage innovation A single process to manage all types of ideas Distinct measurement and management approaches for different types of ideas

Portfolio tracking systems No tracking system Ad hoc tracking system Formal systems produce regular snapshot report that is the basis of leadership discussion

Resource allocation systems “Find it when we need it” mentality Dedicated pool of human and financial resources for innovation, with allocations reviewed episodically Dedicated pool of human and financial resources for innovation, with allocations reviewed regularly

Continuous improvement systems No continuous improvement systems Occasional SWAT teams to address identified issues Individual or small team that “innovates the innovation systems”—specifically spotting and removing bottlenecks

Leadership, talent,

and culture Lean-forward leaders No role modeling by leaders Desired cultural changes identified; inconsistent role modeling by leaders Leaders regularly role-model desired behaviors and intervene to shape the corporate culture

Innovation talent Growth efforts led by “usual suspects” Identified talent plan with detailed description of desired language and skills Established, skilled team supported by enabling language

Measurement and reward systems Working on new-growth efforts can negatively impact career Working on new-growth efforts has neutral impact on career Dual systems that reward operational excellence and innovation appropriately

Development programs No formal training mechanisms Episodic, not systematic, training efforts Formal mechanisms to teach key mind-sets and spread enabling language

The June 2011 issue of Harvard Business Review detailed P&G’s effort to systematize the pursuit of growth (“How P&G Tripled Its Innovation Success Rate”). The story begins in the year 2000, when P&G found its revenue shrinking despite a robust economy and substantial investment in research and development and consumer insight. An internal analysis showed that only 15 percent of P&G’s growth efforts were succeeding, and the ones that did were small. The analysis suggested that P&G’s growth pipeline was inadequate for its long-term aspirations. The interventions described in the article were transformational. By 2011, 50 percent of P&G’s growth efforts succeeded. Initiatives had doubled in size. That’s a sixfold boost in productivity. Most importantly, the article reported that P&G’s growth pipeline was sufficient to meet internal innovation targets. Proprietary analysis by innovation thought leaders Jeffrey Dyer and Hal Gregersen showed that in 2012 investors rated P&G as the world’s twenty-fourth most innovative company, based on the substantial “Innovation Premium” baked into its stock price.1

Consider the very different sorts of challenges facing Citigroup, one of the world’s biggest financial institutions. In December 2007, Vikram Pandit took over as CEO after Citi reported surprisingly disappointing third-quarter earnings (Pandit stepped down as CEO in October 2012). Of course, disappointing earnings were an early sign of the financial crisis that hit the global economy with full force in 2008. One of Pandit’s first actions was to commission an in-depth look at Citi’s current situation, strengths, and gaps. One finding was that innovation was no longer viewed as a core competency. While Citi had been responsible for many “firsts” during its history, including creating the first global foreign exchange network and connecting the world by financing initiatives such as the transatlantic cable and the Panama Canal, the assessment found that the innovation pipeline had dried up and that the culture had shifted away from manifesting innovation as a core value. Don Callahan, Citi’s chief administrative officer, told Pandit, “It’s worse than we thought. We’ve lost innovation.” Pandit’s response was direct: “Get it back.” Pandit believed that for Citi to not only survive but thrive, it had to urgently reestablish innovation—and the growth that innovation creates—as a central focus.

Citi is earlier in its journey to systematize the pursuit of innovation-driven growth than P&G, but despite the 2007–2008 financial crisis, the company had enough core strength to reboot, refocus, and reenergize its pursuit of growth, and since then has made substantial progress toward revving up its own growth engine. Notably, the appointment of a chief innovation officer and the creation of a new team, Citi Ventures, which operates in close partnership with some of Citi’s most innovative business units and leaders, have had real business impact and created an innovation system that Citi has begun to scale across the enterprise.

While P&G and Citi are both giant companies that we have worked with closely (Anthony was the coauthor of the P&G article mentioned earlier), many of the lessons apply to smaller companies as well. Building a Growth Factory also includes a handful of illustrative examples extracted from our firsthand experience at Innosight, an eighty-person professional services firm where we both serve as members of the global leadership team.

Whether you are the CEO of a multinational, multibillion-dollar company or the head of a three-person enterprise, we hope detailing the components of a functioning growth factory will help you to achieve the results you seek.

1. “The World’s Most Innovative Companies,”,, accessed September 17, 2012.

Component 1: The Growth Blueprint



IN LEWIS CARROLL’S classic Alice in Wonderland, a lost Alice seeks guidance from the Cheshire Cat.

“Would you tell me, please, which way I ought to go from here?” she asks.

“That depends a good deal on where you want to get to,” the Cat responds.

“I don’t much care where—” Alice says.

“Then it doesn’t matter which way you go,” the Cat concludes.

As the old saying goes, if you don’t know where you are going, any road will take you there.

A clear growth blueprint is an important first step in the transformation from treating growth as a gamble to approaching it in a more disciplined way. An ideal growth blueprint has two primary elements:

Growth types that clearly define the types of growth strategies the company will pursue

Growth goals and guidelines with specific, shared targets and clear definitions of tactics that are on and off the table

Table 2, which is extracted from the full growth factory assessment, shows how to get a quick view of your performance in this component.


Element Requires attention On the way Desired state

Growth types No definition of growth types Defined growth types, at least one of which is noncore; nonspecific classification criterion Defined growth types with simple, agreed-upon classification criteria

Growth goals and guidelines No clear vision Directional vision lacking key specifics Codified and shared growth targets with detailed on- and off-the-table strategic options

1a. Growth Types

Clear Definitions of the Types of Growth Strategies the Company Will Pursue

Before a company constructs a factory to manufacture a product, it must decide what specifically it wants to produce. The same holds for a growth factory: before constructing one, a company must define clearly the different types of growth it ought to produce. This clarification is important because, as discussed in other sections of this e-book, sustainable growth through innovation requires a company to pursue multiple types of growth at the same time. The company needs to measure, manage, and staff these different types in different ways. A lack of clearly defined growth types almost always suboptimizes one type of idea to the detriment of the whole enterprise.

A theme that we will repeat throughout is that there isn’t one perfect way to categorize different types of growth pursuits. For example, P&G has identified four distinct growth types:

Commercial—efforts to increase trial and usage of existing products without changing the product itself. P&G’s innovative Old Spice marketing campaign involving actor Isaiah Mustafa that generated close to 2 billion public relations impressions and propelled the deodorant into category leadership in 2010 was a powerful commercial innovation.

Sustaining—the “er” innovations that take existing solutions and make them better, faster, cheaper, and so on. Sustaining innovations like new scents or formulations for different washing machines helped the Tide brand grow significantly even in mature markets over the past decade.

Transformational—step-changes whose dramatic improvements reframe a category. An example of this form of innovation is Crest 3D White, a line of advanced oral care products, including one that whitens teeth in two hours.

Disruptive—new brands or business models that win through simplicity or affordability. P&G’s quick cleaning line of Swiffer products disrupted the staid mop-and-broom industry.

Citi has defined a different (though somewhat related) set of growth types to guide its innovation initiatives. Specifically, in 2011, Citi defined three types of innovation:

Core—improvements to existing offerings in existing markets or internal process improvements that increase efficiencies within the current business model. For example, the “Citi for Cities” team helps government clients improve service levels, efficiency, and security.

Adjacent—“new to Citi” innovations that either extend existing products to new markets or leverage existing Citi capabilities, assets, or relationships to bring new-to-Citi solutions to market. For example, in 2011, Citi launched “Citi Velocity,” a new online information channel that allows traders and clients to have instant access to Citi research and real-time market information.

Disruptive—“new to the world” innovations that reframe markets and create new ones. For example, Citi recently partnered with Jumio, a Silicon Valley start-up that leverages cameras in any mobile phone, tablet, or laptop to increase the security of remote payments.

Setting these definitions was an important step in Citi’s efforts to manage innovation more systematically. Common definitions enable each of Citi’s diverse business units to assess and describe their innovation portfolios consistently, positioning Citi to deliver against an important strategic goal of former CEO Pandit: the creation of a Citi-wide innovation portfolio view.

Despite differences in nomenclature, these two organizations define their growth types in ways that share important commonalities:

At least one type explicitly focuses on “noncore” growth from new markets or new customer segments.

There are explicit and well-documented differences between types. P&G has simple checklists that help teams ensure they are following the strategy they want to follow. Citi developed a tool to help teams categorize and evaluate innovation projects by answering a straightforward set of questions.

The types are integrated into other elements of the growth factory. For example, Citi Transaction Services uses the growth types to organize and optimize initiatives and investments for greatest impact and scale.

It’s impossible to imagine building a factory without first defining what that factory is going to produce. Detailing growth types is an important step on the road to the systematic pursuit of growth.

Diagnostic Questions for Leaders

Do we have clear definitions of the different types of growth we will pursue?

Does at least one type focus on sources of growth beyond today’s core business?

Do all our leaders understand these definitions, are they aligned on them, and are they using them to manage innovation efforts?

Are our growth types integrated into other management systems?

Warning Signs

Definitions with significant “wiggle room” in interpretation

Purely internal definitions that lack a market lens

Disconnects between growth types and critical governance and controls systems

Further Reading

Brown, Bruce, and Scott D. Anthony. “How P&G Tripled Its Innovation Success Rate.” Harvard Business Review, June 2011.

1b. Growth Goals and Guidelines

Specific, Shared Targets and Clear Definitions of Tactics That Are On and Off the Table

There is a persistent image of an innovator as an unshackled, improvisational change agent. In reality, unfocused innovation efforts tend to struggle. Instead, companies should create clear goals and guidelines for their growth factory.

Growth Goals

Any well-run manufacturing factory has a detailed production schedule that details desired output. Similarly, companies building a growth factory should have at least four different levels of targets:

Overall company performance targets that describe short- and longer-term revenue and profit goals

Specific targets for each growth type spelling out how much each will contribute to the overall targets

Operational targets splitting out growth goals by relevant operating units (e.g., business units, geography)

A short list of the strategic opportunity areas that offer the most growth potential (e.g., customer segments, big problems to solve, critical technologies to pursue, game-changing regulatory developments)

For example, Procter & Gamble has clearly articulated targets for its growth efforts over short, medium, and long time horizons. It carefully details where that growth should come from, developing a target portfolio that considers balances such as organic or acquisition; domestic or international; growth from existing categories or new category creation. P&G gets specific, analyzing which markets it plans to target and, by default, which markets it will not target.

Citi has begun to incorporate an innovation lens into how it sets its own growth targets. Some of Citi’s largest businesses are now analyzing and moving toward balancing their growth pipelines by focusing on Citi’s growth types of core, adjacent, and disruptive innovations. In addition, Citi has established a number of strategic opportunity areas that orient its innovation efforts. For example, the Citi Ventures unit, which is a primary catalyst for adjacent and disruptive innovation, has defined six strategic focus areas. These focus areas—influenced by globalization, social media, the consumerization of IT, and other trends—have allowed Citi to focus efforts to build deep expertise.

Identifying strategic opportunity areas is particularly important at industry inflection points. In 2006, the leadership team at Turner Broadcasting System’s entertainment networks (including TBS and TNT) approached the annual strategic planning process differently. At the time, the vast majority of the company’s entertainment programs were syndicated—that is, content that had previously aired on network television that Turner rebroadcasted on its cable network. Typically, the company created five-year plans detailing incremental changes from current results (e.g., 5 percent growth in year one, 7 percent in year two, 3 percent in years three through five). But leadership recognized several nonlinear shifts in its market, such as changes in viewer habits and advertiser behavior driven by emerging models such as YouTube and Netflix. The team used simulation tools to understand the potential impact these changes could have on its business in 2011. Its “future-back” analysis suggested that continuing today’s strategy carried significant risks. The team leading the analysis then identified five ways in which it would respond to the change, including increasing investment in original programming and developing new advertising models such as TVinContext, a marriage of Google’s online contextual search advertising and traditional thirty-second television advertisements. Today, Turner’s entertainment networks feature a range of original content, and its business has surged. Clarity in strategic opportunity areas served as a vital guide to these transformational efforts.

Beyond setting goals, companies should work to share goals throughout the organization. P&G uses a range of communication tools to ensure that key leaders share a common understanding of growth targets. For example, leadership creates simple documents summarizing strategic choices and the measures it will use to track progress. It spreads these documents through the organization to build strategic alignment. This alignment helps ensure that the company’s portfolio tracking systems monitor the right things, informing critical leadership discussions about innovation. This integrated view proved critical at two junctures. In the early 2000s, P&G recognized it was in danger of missing growth targets due to its low innovation success rate; the company then approached innovation more systematically and created its Connect + Develop program to source more ideas externally. In 2008, a strategic review led by select senior leaders highlighted that P&G’s pipeline was still bogged down with too many small projects. In response, the company increased focus on the transformation-sustaining growth type. P&G also created several dedicated new-growth groups, and revamped its strategy development and review process. In both cases, an integrated view of its growth blueprint enabled P&G to identify and respond to gaps in its current pipelines.

Finally, companies need to ensure that goals are consistent with measurement and reward systems in ways that ensure they are part of the everyday fabric of the company.

Growth Guidelines

In the pursuit of new growth, companies inevitably surface and explore a wide range of potential opportunities. Because it’s hard to identify tomorrow’s growth markets with precision, it pays to thoughtfully map out a set of tactical growth guidelines that can show the way to teams as they try to prioritize among different opportunities. These guidelines should include a clear articulation of what types of opportunities are off the table in order to prevent teams from wasting time on pursuits that will ultimately be shut down because they violate the company’s unstated boundaries.

To set growth guidelines, start by identifying a long list of relevant dimensions that define potential new growth opportunities. These dimensions might include the type of target customer, the distribution channel, the required steady-state annual revenues and profit margins, target geographies, and brand strategy. Then, for each dimension, make clear:

What is an “obvious yes”

What would be in management’s consideration set, though it would require some discussion

What is an “obvious no”

This approach has two benefits. First, it helps to highlight areas that management is willing to consider that insiders might find surprising. Second, it helps to highlight strategic no-fly zones. Most organizations find it hard to take things off the table, but disciplined innovators are more explicit about what they won’t do than what they will do.

One of the great (unintentional) lies managers tell is “we’re open to anything.” It sounds great to say it, but it feels less great when management shuts down a team that’s been exploring a space for six months that everyone thought was outside management’s comfort zone. That’s not a good use of anyone’s time. Instead, follow the guidance of Apple and its legendary focus. As CEO Tim Cook describes, “we believe in saying no to thousands of products, so that we can really focus on the few that are truly important and meaningful to us.”

You can build general alignment around growth guidelines relatively quickly. Start by holding a series of one-on-one interviews to surface areas where there is broad agreement and areas where there are differing perspectives. Then hold a half-day session with relevant leaders to hammer out an agreed-upon set of growth guidelines. Capture those guidelines on a simple “bull’s-eye” chart displayed in figure 2 with desirable elements in a green circle in the middle, discussable elements in a yellow concentric circle, and out-of-bounds elements in a red zone at the chart’s edge.


Detailing precise goals and guidelines is not an easy task for large, complex organizations. The investment is well worth it, however, since the strategic perspective on growth informs resource-allocation decisions, identifies capability gaps that need addressing, and serves as vital input into management control systems that keep the growth factory humming.

Diagnostic Questions for Leaders

Can all our leaders repeat our near-term and long-term growth goals?

Do we know how much of this growth we expect from our core business, and how much must come from other types of growth?

Have we agreed to and documented the highest-potential strategic opportunity areas?

Is there a documented set of growth guidelines detailing which strategic options are most attractive and which are off the table?

Warning Signs

Overly vague goals that are open to interpretation

Disconnect between top-down corporate targets and bottom-up operational goals

Failure to make strategic choices of what not to do

Further Reading

Anthony, Scott D., Mark W. Johnson, Joseph V. Sinfield, and Elizabeth J. Altman. The Innovator’s Guide to Growth: Putting Disruptive Innovation to Work. Boston: Harvard Business School Press, 2008, chapter 1.

Collis, David J., and Michael G. Rukstad. “Can You Say What Your Strategy Is?” Harvard Business Review, April 2008.

Component 2: Production Systems



PRODUCTION SYSTEMS—the set of processes, structures, and tools that surface new ideas and take them all the way to execution—are the heart of the growth factory. Like a factory assembly line, they gather raw inputs from different sources, transform them through a variety of steps, prototype and test them, and then scale them. And like many factories, a large company has multiple production lines, each for a different growth type.

This section describes the two key categories of production systems:

Robust innovation processes—explicit processes to conceive of and commercialize new businesses in each growth type

Production structures—a circumstance-appropriate configuration of up to four types of specialized structures – Idea supply chain—mechanisms to source “raw material” for growth at or beyond the fringes of the company and the industry

– New-growth groups—dedicated resources and “safe spaces” to incubate higher-risk ideas

– Little bets labs—structured ways to rapidly and affordably prototype and test ideas

– M&A and partnership engines—formal means to identify and form relationships with outside companies


Element Requires attention On the way Desired state

Robust innovation processes Innovation treated randomly Innovation process defined, occasionally followed Robust, learning-based process to conceive of and commercialize ideas routinely followed

Idea supply chain No systematic mechanisms to source innovative ideas Mechanisms to source internal or external ideas Mechanisms to source internal and external ideas at or beyond the fringes of the company and industry

New-growth groups No safe spaces for incubation Informal mechanisms to shelter new ideas Formal mechanisms serve as safe spaces for new ideas

Little bets labs No mechanism to design and execute strategic learning experiments Mechanism to run single-variable experiments (e.g., product prototype) Structured ways to rapidly and affordably run multivariable experiments (e.g., transaction test)

M&A and partnership engines No formal approach to acquisitions or partnerships Acquisitions and partnerships happen occasionally and in an ad hoc way Robust process to acquire and partner with promising ventures

Table 3, which is extracted from the full growth factory assessment, shows how to get a quick view of your performance in this component.

2a. Robust Innovation Processes

An Explicit Set of Steps for Reliably Conceiving and Commercializing Ideas

The centerpiece of most modern factories is the assembly line, where the combination of workers and production equipment transform raw materials into finished output. The same goes for a growth factory. Innovation—and the growth that it creates—should be managed in a disciplined way. To accomplish this, the growth factory needs to have as its backbone explicit and robust innovation processes that can reliably produce new products, services, and business models.

Many companies have a documented process designed to develop new products and services, typically with decision “gates” between different process steps (hence, the term “stage-gate”). However, these processes often do not reflect how successful innovations come into existence, even within those companies. Successful innovations often derive from informal, ad hoc processes that circumvent defined stage gates and are driven by strong-willed, passionate individuals. The best innovators combine the discipline of staged idea development with flexible structures that enable creativity to flourish.

While no two companies are alike, well-managed innovation processes have the following four stages:

Stage 1. Spot opportunities. Whether it comes from the market or the head of an engineer, innovation starts with the identification of a problem to be solved.

Stage 2. Design solutions. The next part of the process is coming up with a solution to identified problems, and doing so in a holistic way. Great innovators develop solutions that address the entire customer experience and then design a business model to deliver this experience in a way that satisfies the customer’s needs.

Stage 3. Test and learn. Because any innovation is by definition something different, it must start out with a number of critical assumptions underlying its future success; the more novel the innovation, the more uncertain the assumptions and the greater the associated risk. In simple terms, any idea is partially right and partially wrong. Successful innovators understand this and carefully manage risk by methodically identifying and testing the most critical uncertainties.

Stage 4. Scale. Companies don’t exist to create a lot of small experiments; they exist to make ideas as big as possible. Therefore, the final step in the process involves expanding an idea to reach wider markets.

Here is an example from P&G of an idea moving through these four stages. One of P&G’s explicit strategies is to win in developing markets. The men’s grooming market in India had vexed P&G for years. Relatively expensive Gillette-branded razors and razor blades were out of reach for lower- and middle-income consumers who relied on simple single- and double-edge razors. With a broad target market in mind, in the mid-2000s, P&G scientists spent more than two thousand hours in the marketplace to understand the unique realities of the target customer (spot). Rather than simply introducing a cheap product, Gillette developed a product called Gillette Guard with features uniquely attuned to the Indian market (design). For example, many customers lack running water and don’t shave every day, so the Gillette Guard was designed to clean easily, with minimal water, and to manage longer stubble. The product was affordable; the initial retail price was 15 rupees (33 cents), with refill cartridges costing 5 rupees (11 cents). Early tests showed that consumers preferred the new product to double-edged razors by a six-to-one margin and helped to refine marketing and distribution approaches (test and learn). The product launched in 2009 and quickly became a big success (scale).

Citi’s core innovation process unfolds in a similar fashion, with one important addition. Consider a recent collaboration between Citi’s Asia consumer bank and Citi Ventures. The project started with an up-front phase that Citi calls “focus,” where project teams define the scope of an initiative and clarify important assumptions about project boundaries and stakeholders. In this case, a strategic target of creating new consumer-banking experiences across consumer contexts and touch points led the team to focus on the commuting experience in collaboration with SMRT, Singapore’s leading multimodal public transport operator.

The team conducted ethnographic research and uncovered opportunities to streamline customers’ commuting experience (spot). The team designed a number of solutions, notably a combined commuting card/payment card that rewarded commuters with free rides for usage (design). Concurrently, the team launched a new banking space and experience at a busy transit hub that allowed customers to almost instantly sign up for and use the new transit card, as well as access other services. Not only did these solutions appeal to consumers; they also fit the goals of SMRT to introduce innovative and convenient services for commuters. Through prototyping and testing, the team learned that consumers wanted some services instantly during the morning commute (e.g., withdrawing cash, requesting a card), while others could be delivered to them on their commute home (e.g., picking up the card they requested in the morning). The team modified its strategy to match customer preferences (test and learn). After learning that these solutions were robust, Citi scaled the effort across Singapore and to other geographic areas, including Hong Kong, Delhi, Moscow, and Japan (scale). The project also surfaced other opportunities. For example, through the work with SMRT, the team learned of transit operators’ needs for more efficient cash management and innovative infrastructure financing and underwriting—both of which are now part of Citi’s broader “transit offering.”

Small companies should follow similar development stages, although the process is likely to be less formal and more fluid. For example, field experience taught Innosight that at least some companies had a need for training programs to help wide swaths of employees develop stronger innovation skills (spot). How to meet that need? Innosight’s first foray into the space in 2007 involved a partnership with a Boston-based training company called Linkage. The concept was that Innosight would certify Linkage instructors and allow them to use Innosight branding to promote programs. Those instructors would then execute training programs based on Innosight’s core intellectual property. Linkage would make money by charging fees for training programs and selling materials to participants; Innosight would take a cut of the total revenues (design). The idea seemed solid, but two critical assumptions stood behind success. First, Linkage facilitators had to be able to deliver Innosight material effectively. Second, organizations had to consider innovation important enough to offer workshops to wide audiences. To manage these risks, Innosight struck a focused agreement with two checkpoints (test and learn). First, experienced Innosight facilitators trained Linkage facilitators, watched them give workshops, and scoured over detailed feedback forms. The team at Linkage came through, earning scores commensurate with Innosight partners. Then, Linkage spent a few months trying to drum up demand. While it got some early sales, it was clear that the program wasn’t yet something that organizations were looking to deploy widely. So, Innosight and Link-age decided—amicably—to not build the partnership. Client demand for wider training programs picked up, so in 2011, Innosight built an internal training department that leveraged learning from Linkage and related experiments (scale).

Generally speaking, in large organizations, robust innovation processes should include the following characteristics:

Explicit—process stages are either documented in detail or so ingrained in a corporate culture that they are routinely followed.

Gated—there are decision points where idea governance systems determine whether an idea moves to the next stage, goes back for further development, or gets shut down.

Customized—while all innovation processes should include the four stages described above, specific activities in each stage will depend on the growth type the process supports. For example, for disruptive projects, P&G will be biased toward more market-based testing and learning activities (described in more detail in the little bets labs section).

Flexible—while different growth types tend to follow the four stages detailed above, they might go through the stages with different intensity, or in several iterative loops. Robust idea governance systems help hardwire this flexibility.

Integrated—the stages detailed above should not be viewed as purely discrete. In other words, when companies are identifying opportunities, they are also thinking about designing specific ideas and finding ways to get ready for implementation.

Intertwined—good innovation processes interface with the specialized production structures (e.g., idea supply chains, little bets labs, and M&A and partnership engines) described in this section.

Building a robust process sounds simple enough when described in fifteen hundred words. Living it, particularly inside a large company, isn’t easy (the resources below describe robust innovation processes in significantly more depth; Tuck School of Business professor Vijay Govindarajan’s work in this area is particularly useful). As noted above, large companies need to have multiple processes running in parallel with governance and control systems making resource-allocation decisions between different types of projects. Continuous improvement systems need to spot and remove critical bottlenecks. The process must seamlessly interact with key supporting structures and requires the right leadership, talent, and culture to operate and manage them. But imagine a manufacturing factory with real-time information systems, highly skilled workers … and no production capacity. It just doesn’t work.

Diagnostic Questions for Leaders

Can we define the key steps in our innovation processes? Have we detailed the inputs, activities, and outputs for each process stage?

Are our innovation processes customized to each type of growth we are pursuing?

Does the process hardwire iteration, with some projects moving through design and testing phases several times?

Is the process integrated with other elements of the growth factory?

Warning Signs

Incomplete documentation that leads to high variability and rework

An overly linear, noniterative process

One-size-fits-all process for all types of ideas

Further Reading

Anthony, Scott D., Mark W. Johnson, Joseph V. Sinfield, and Elizabeth J. Altman. The Innovator’s Guide to Growth. Boston: Harvard Business School Press, 2008, chapters 2–8.

Anthony, Scott D. The Little Black Book of Innovation: How It Works, How to Do It. Boston: Harvard Business Press, 2012.

Govindarajan, Vijay, and Chris Trimble. Reverse Innovation: Create Far from Home, Win Everywhere. Boston: Harvard Business Review Press, 2012.

Johnson, Mark W. Seizing the White Space: Business Model Innovation for Growth and Renewal. Boston: Harvard Business Press, 2010.

2b. Idea Supply Chain

“Raw Material” for Growth Sourced at or Beyond the Fringes of the Company and the Industry

The raw material for innovation is ideas—ideas for problems that need solutions, for solutions that need problems, or both. While it is a truism among successful entrepreneurs and venture capitalists (VCs) that by far the hardest part of innovation is not having the idea but executing on it, great innovations are built on great ideas. A well-functioning growth factory, then, needs to ensure it sources a steady supply of high-potential ideas from a broad set of sources. In other words, it needs a robust idea supply chain.

Companies report a number of common problems with managing their idea supply chain, including:

The ideas floating around the company are stagnant; people keep coming up with the same ideas over and over again.

The company is only tapping into a fraction of its collective creative potential.

Good ideas are scattered around the organization and don’t get funneled to the most appropriate place for them to be incubated, if such a place even exists.

Two distinct mechanisms help to address these issues:

Hunting at the periphery to pinpoint evolving customer needs and emerging disruptive solutions

Crowdsourcing and collaboration to tap into and amplify larger numbers of idea generators

Hunting at the Periphery

William Gibson is one of the world’s most celebrated science fiction authors. He coined the term “cyberspace” in the early 1980s, and his writing presaged the information age that arrived twenty years later. In a 1993 interview, he noted, “The future is already here—it is just not very evenly distributed.”

In his 2001 book Creative Destruction, innovation thought leader Richard N. Foster channeled Gibson by urging growth-seeking companies to “hunt at the periphery” to source tomorrow’s great growth business. Almost by definition, a company’s most attractive growth opportunities lie at or beyond the edges of its current business. Perhaps it is an overlooked geographic area. It could be a new customer group. Or maybe it is using a completely different business model. Companies need to have a way to get outside their industry domain to immerse themselves in external ecosystems of innovators and entrepreneurs.

Procter & Gamble has a variety of ways to explore the peripheries of its markets. Of course, one critical component is the company’s famous commitment to original consumer research. The company conducts more than twenty thousand market studies a year. Hundreds of people are solely dedicated to consumer research. But P&G’s commitment goes further than that. P&G employees—from the chairman down—make a regular habit of visiting consumers in their homes, shopping alongside consumers, or working with consumers. These efforts help give P&G a more intuitive feel for its markets, so it can understand not just what the consumers say they want, but what they want but cannot easily articulate.

MIT professor Eric von Hippel’s research shows that in some industries, customer-driven innovation outpaces company-led innovation. Consider all the postsales modifications avid bikers make on their bike frames or even recipes that inventive chefs develop. About a decade ago, P&G augmented internal efforts and its $2 billion annual investment in R&D with a program called Connect + Develop (C+D), where the company taps into individual inventors who have expertise in areas of interest to P&G. The company set—and exceeded—a goal that at least 50 percent of P&G’s innovations would have a connection to an outside inventor by 2008. When P&G refreshed its C+D goals in 2010, it sought to become the partner of choice for innovation collaboration and to triple C+D’s contribution to P&G’s innovation development. It has expanded the program to forge additional connections with government labs, universities, small and medium-sized entrepreneurs, and venture capital firms.

Citi Ventures, a key innovation engine formed by former CEO Vikram Pandit, helps Citi to have clear visibility into emerging technologies, companies, business models, and customer trends. Around half of the Citi Ventures team supports this priority by meeting with start-ups and VCs, participating in events both inside and outside the industry, and networking extensively. Citi Ventures does more than scout, however. The team makes strategic investments and establishes formal partnerships with companies to create technology capabilities, seed options, and simply to learn more and to actively shape emerging business models.

In 2011 alone, the Citi Ventures team met with more than six hundred start-up companies and invested in eight companies. For example, one portfolio company is ReadyForZero (RFZ). The early-stage Silicon Valley start-up’s software solution helps consumers overburdened with debt to understand their situation and develop a self-driven plan to work back to financial health. The unique consumer-centric way RFZ approached this interested Citi Ventures, and the team worked closely with Citi’s collections group to pilot RFZ as a new “front-end” solution that Citi could offer to help customers be more successful at managing their debt. This example demonstrates how Citi Ventures acts as a bridge between nimble start-ups working on fast cycles and a large, global enterprise.

Chief Innovation Officer Debby Hopkins placed Citi Ventures in the global innovation hubs of Silicon Valley and Shanghai to ensure that her team “lived” the markets of the future. The competition is fierce to become the partner of choice with promising start-ups, and Citi’s local—and active—presence in industry hot spots demonstrates the company’s commitment to the entrepreneur and VC communities. Similarly, in late 2011, Google announced plans to open up an incubatorin Israel.1 The incubator will be co-located with Google’s facility in Tel Aviv and will host about twenty early stage start-ups at any given time. It will give Google a front-row view of the start-up energy in the country that has the most start-ups per capita in the world.

As a much smaller company, Innosight uses two primary mechanisms to keep its finger on the pulse of its markets. First, it has external representatives on its governance committee. As Innosight partners own 100 percent of the business, it has no legal obligation to have external representatives. But the company finds that this approach keeps leadership abreast of the market; asks critical questions that are easy to overlook when you are in the stew of the business; and brings unique perspectives to important strategic issues. Innosight also has built a network of affiliates that it regularly interacts with. Some of these affiliates are academics in the innovation field, such as Tuck School of Business professor Vijay Govindarajan and INSEAD professor and coauthor of The Innovator’s DNA, Hal Gregersen. Other affiliates are retired clients, like Dave Goulait who worked for more than thirty years at Procter & Gamble. Keeping in regular contact with these affiliates broadens Innosight’s access to the best thinking about innovation and provides useful insights about changes to Innosight’s competitive landscape.

There are other simple ways to hunt at the periphery, such as partnering with academic programs at leading universities and, of course, using social networking tools like LinkedIn and Twitter to stay perpetually connected to what’s happening at the cutting edge.

Crowdsourcing and Collaboration Tools

The revolution in social media over the past few years has led to new tools that help companies to generate more—and better—ideas. In 2008, Citi recognized the potential of a global idea management system and began experimenting with corporate collaboration tools. It sought three primary benefits:

Mechanisms to allow more employees to participate in the innovation process

Improvement in the quality of ideas

A pathway for small ideas that might not otherwise find a path to implementation

In 2011, Citi rolled out “Citi Ideas.” Powered by software from Silicon Valley start-up Spigit, Citi Ideas enables groups within the organization to collaborate on problems in time-bounded challenges or on an ongoing basis. The technology gives employees permission to suggest new ideas, build on existing ideas, and rate the ideas of others. Incentives and gamelike aspects like leader boards spark competitive engagement and encourage wide participation. Citi launched 26 campaigns in 2011 with more than 35,000 people participating. In November 2011, Citi fielded its first global idea challenge to its 265,000 employees. More than 45,000 people from 13 business units and 97 countries generated and collaborated on more than 2,300 ideas. Usage is accelerating as multiple business units within Citi sign up to run additional challenges when they see the speed, collaboration, and creativity enabled by ideation at scale.

Maximizing the chances of success of these programs requires:

Active senior engagement—Citi’s early pilot activities taught it the importance of having multiple levels of leaders involved in the program.

Clear problem definition—vaguely defined problems get vague, difficult-to-implement suggestions.

Defined and ready path to execution—corporate cynicism sets in quickly if ideas don’t get implemented. A predetermined execution vehicle demonstrates commitment and drives participation in future efforts.

Finally, it is easy for a large company to lose track of all the ideas bouncing around its halls. A centralized idea repository helps to minimize unnecessary rework and can foster collaboration by revealing different pockets in an organization working on the same problem. A good idea repository includes ideas that the company decided to shelve, with clear explanation for what drove that decision. Leaders can regularly peer into what some companies call the “idea refrigerator” to see if anything has changed in ways that make an idea more exciting. Sometimes great ideas fail to deliver against commercial expectations simply because they were introduced before their time. For example, go to YouTube and look at an Apple Newton television ad from the mid-1990s. Then, watch an Apple iPad ad from 2011. While the Newton is popularly pilloried, the advertisements are almost exactly the same. The world just wasn’t quite ready for Apple’s Newton.

Companies often report that they lack exciting ideas. A robust idea supply chain ensures that companies have consistently high-quality raw materials to feed into their growth factory.

Diagnostic Questions for Leaders

Do we have a group designated to hunt at the periphery to find new ideas?

Do we have physical presences that allow us to tap into industry innovation hot spots?

Have we allocated funds to invest in external ideas?

Do we have mechanisms to tap into our collective creativity?

Do we have a centralized idea repository that includes shelved ideas?

Warning Signs

Externally focused activities centered in corporate headquarters, far away from in-market activity

A virtual suggestion box without mechanisms to select, provide funds for, and implement ideas, leading to employee cynicism

An insular focus that never approaches the periphery

Further Reading

Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market, and How to Successfully Transform Them. New York: Currency/Doubleday, 2001.

von Hippel, Eric. Democratizing Innovation. Cambridge, MA: The MIT Press, 2005.

Huston, Larry, and Nabil Sakkab. “Connect and Develop: Inside Procter & Gamble’s New Model for Innovation.” Harvard Business Review, March 2006.

2c. New-Growth Groups

Dedicated Resources and Safe Spaces to Incubate Higher-Risk Ideas

Large companies typically have intricate processes that stamp out waste and variation. But creating new-growth businesses is a messy process. Companies seeking to create new categories or business models need to consider creating a new-growth group that serves as a safe space to incubate high-risk ideas.

Companies often dub these groups incubators. It’s worth reflecting on the origins of that word. An incubator is defined as “an enclosed apparatus providing a controlled environment for the care of premature babies” or “an apparatus used to hatch eggs or grow microorganisms under controlled conditions.” The incubator provides a nurturing environment during fragile development stages. The goal isn’t to stay in the incubator forever; rather, once the infant (or the chick) gets strong enough, it leaves the incubator.

Perhaps the most famous corporate incubator is Lockheed Martin’s Skunk Works group. Charles “Kelly” Johnson formed the organization that would later be named Skunk Works in 1943. He and his team developed the XP-80 jetfighter in a remarkable 143 days. Over the past seventy years, the group (also known as the Advanced Development Programs) has helped to produce iconic products such as the U-2 spyplane, SR-71 Blackbird, and the F-22 Raptor. Johnson would go on to summarize fourteen helpful principles that guided his group’s efforts, including high degrees of autonomy, focused teams (“the number of people having any connection with the project must be restricted in an almost vicious manner”), and different incentives (rewards based on results instead of number of direct reports).

While P&G has always had dedicated teams focused on growth initiatives, in 2010 it established two dedicated new-business-creation groups, whose resources and management are kept carefully separate from the core business. These groups—dedicated teams led by a general manager—develop ideas that cut across multiple businesses and also pursue entirely new business opportunities. One group covers all of P&G’s beauty and personal care businesses; another covers its household care businesses. These groups joined a preexisting structure called Future-Works, whose mission is to enable different business models, often in conjunction with external entrepreneurs. In early 2012, P&G created a new president position to oversee these groups and related efforts.

These structures helped spur the creation of Tide Dry Cleaners, a high-potential growth initiative. It started when a team began exploring ways to disrupt the dry-cleaning market using proprietary technologies and a unique store design grounded in insights about consumers’ frustrations with existing options. Many cleaning establishments are dingy, unfriendly places. Customers have to park, walk, and wait. Often the cleaners’ hours are inconvenient. P&G’s alternative: bright, boldly colored cleaners featuring specialized treatments, drive-through windows, and twenty-four-hour storage lockers to facilitate after-hours drop-off and pickup. Following P&G’s robust innovation processes, the development team identified key assumptions about the proposed dry cleaners. For example, could the business model generate enough returns to attract store owners willing to pay up to $1 million for franchise rights? In 2009, P&G ran a small experiment—a three-store pilot in Kansas City—to find out. That year, P&G also formed Agile Pursuits Franchising, a subsidiary to oversee such efforts, and transferred ownership of the dry-cleaning venture to FutureWorks.

Beyond venturing externally with start-ups, Citi’s Citi Ventures acts as a growth group for certain innovation efforts. One of its most successful business-building initiatives, known as Smart Banking, illustrates its approach. The leader of Citi’s business in Japan asked the Citi Ventures team to help combat slowing growth in his market. The goal: rethink the staid bank branch. Under the code-name “Ubiquity,” the Citi Ventures team expanded earlier ethnographic research conducted as part of its Singapore transit (SMRT) initiative to inform the design of a smart platform to create an integrated banking experience built around speed, simplicity, and convenience. The team significantly reduced process flows from 156 to 12. The retail experience features media walls providing relevant international and local news as well as product information, touch screens where people can explore products and services on their own or with a specially trained Citi associate, and integrated video and self-service capabilities.

The impact in Japan was immediate. Citi enjoyed a 75 percent increase in customers and a 200 percent increase in assets under management. Its rating in the annual Nikkei retail banking customer satisfaction survey soared from number 57 to number 1 in less than a year. In 2011, Euromoney named Citibank the best bank in Japan. This new retail banking experience is now being rolled out in other geographic areas. Component parts of the Smart Banking platform have spurred further innovation, including a recently launched “360 Station,” which provides 80 percent of the functionality of a branch office in a kiosk.

There is no generally accepted best-practice to organize a new-growth group (though Johnson’s fourteen rules are a useful starting point). Some big companies have large multifunctional teams; others dedicate just a few employees to new growth; other companies where innovation is truly embedded within the culture, like 3M or Google, don’t have any separate growth groups.

A study of the handful of groups that at least survived for more than a decade—like Shell’s GameChanger unit and the franchise development team at Johnson & Johnson’s Ethicon Endo-Surgery (EES) unit—highlights three general principles:

Separation. Albert Einstein once described insanity as following the same process and expecting different results. A growth group has to have some degree of separation—a different physical facility, different governance and control systems, resource allocation systems, innovation talent with unique experiences—or it will churn out the same sorts of ideas that the core business could do on its own. For example, EES housed its growth efforts in a building separate from its core business to signal clearly how the work differs from the work of incrementally improving the base business.

Purposeful linkages with the core business. One of the quickest ways to kill a growth group is to completely separate it from the core business. Once the group finishes the incubation phase, the idea gets tossed over the wall to the core business … and languishes. Unless the growth group has the capabilities to go downstream and scale the business, purposeful linkages help to avoid the so-called not-invented-here syndrome. It also ensures that the core business benefits from the powerful learning that often comes from exploring new spaces. Shell’s GameChanger group involves ultimate stakeholders early in its process to make transitions to the core business function as smoothly as possible. Three of our colleagues (Matt Eyring, Richard Foster, and Clark Gilbert) have developed a very useful way to attack this challenge. In a December 2012 Harvard Business Review article they persuasively argue that companies should create a “capabilities exchange” to enable the thoughtful sharing of capabilities between the core business and new growth efforts.

External orientation. While the four stages of a robust innovation process always apply, a new-growth group needs to draw more of its energy externally. The group may work with outside idea submitters, contract with specialists to prototype new ideas, and run in-market little bets labs to qualify ideas. High uncertainty around the creation of new growth places premiums on substantial external linkages.

While a significant portion of the growth factory lives within a company’s existing structures and activities, the creation of new-growth businesses often requires the helpful nudge of a new-growth group that can help to incubate ideas with more transformational potential.

Diagnostic Questions for Leaders

Do we have a dedicated team set up to incubate new-growth ideas?

Does that team look and feel different from the core in important ways?

Are that team’s efforts appropriately linked with the core business?

Warning Signs

A disconnected structure that preens and positions itself as superior to the core businesses, inhibiting downstream implementation

A new-growth group lacking dedicated resources or external perspectives

Insufficient resources to do anything beyond developing plans on paper

Further Reading

Anthony, Scott D., Mark W. Johnson, Joseph V. Sinfield, and Elizabeth J. Altman. The Innovator’s Guide to Growth. Boston: Harvard Business School Press, 2008, chapter 9.

Conser, Russell. “Space to Free the Mind.” Strategy & Innovation 6, no. 4 (2008): 1, 6–9. (Conser leads Shell’s GameChanger program.)

“Kelly’s 14 Rules & Practices.”

Gilbert, Clark, Matthew Eyring, and Richard N. Foster. “Two Routes to Resistance.” Harvard Business Review, December 2012.

Govindarajan, Vijay, and Chris Trimble. The Other Side of Innovation: Solving the Execution Challenge. Boston: Harvard Business Press, 2010.

2d. Little Bets Labs

Structured Ways to Rapidly and Affordably Prototype and Test Ideas

In 2004, a Procter & Gamble team was developing a probiotic supplement that, if taken daily, could alleviate the symptoms of irritable bowel syndrome.2 More than 30 million people in the United States alone suffer from this condition. The best that most of them can do is to work around their condition by avoiding certain foods and activities. The idea was brimming with disruptive potential—a pressing problem with no adequate solutions; a potentially category-creating way to get the job done. The product had unique intellectual property developed by an external partner, and consumers who tried it reported that their lives literally changed.

And, of course, it was about to get shut down.

Why? Market forecasts said that the opportunity would be relatively small. Launching a new brand is expensive, and the team hadn’t yet worked out all the technological kinks. Big investment, high risk, and small return are not ingredients that garner corporate approval.

Yet the team persevered. It turned out the critical success factor in the market research was the likelihood that consumers would take the supplement every day (in industry language, their “compliance”). Many consumers told researchers that they doubted they would do so. Of course, since consumers had never experienced the benefit, there was a reasonable chance that their predictions weren’t accurate. The team conducted scenario analysis to identify what level of compliance would justify a full-scale launch. Management agreed to follow a venture capital approach: providing a small amount of seed capital to learn more about these assumptions. The team quietly created a website that offered the product. It didn’t spend tens of millions in advertising; rather, it used its existing sales force to push people in a few cities to the website. It turned out compliance in the controlled pilot was high enough to warrant expanding distribution to include other online channels such as

Important insights came from this experience. Consumers sometimes struggled to remember whether they had taken a supplement on a given day, so P&G changed the product’s packaging. Instead of simply having a vial with a bunch of pills in it, the Align team created a blister pack with days of the week on it to remind consumers to take the pill every day. Branding changed as well. Initial packaging had positioned Align as, “from the makers of Metamucil.” But P&G learned that combination confused consumers, so today Align stands alone. The product formally launched in the United States in 2009, and in early 2010 it collected a gold medal in the Edison New Products Award in the Consumer Packaged Goods–Consumer Drug Segment.

The team that followed this approach did it intuitively, but it demonstrated to P&G the usefulness of adding a new testing mechanism to its arsenal. P&G has always had a strong scientific bent. Researchers test new approaches in the laboratories; marketers carefully measure the impact of new communications approaches; researchers even assess the performance of research instruments. But the company learned that for some new-growth businesses, it also had to have ways to do more experiential learning. After all, anticipated and nascent markets are notoriously hard to analyze. For ideas with more business-model uncertainty, P&G now conducts transaction learning experiments (TLEs), in which a team “makes a little and sells a little,” thus letting consumers vote with their wallets. Teams have sold small amounts of products online, at mall kiosks, in pop-up stores, and at amusement parks—even in the company store and outside company cafeterias. In 2010, P&G formed a dedicated team to guide teams through TLEs.

TLEs are just one of the multiple types of little bets labs that exist within P&G. The name references a 2011 book from Peter Sims in which he uses examples from animation powerhouse Pixar, comedian Chris Rock, and architect Frank Gehry to illustrate how most big ideas can be traced back to small experiments. P&G has numerous structures to support these kinds of little bets. A nondescript warehouse about thirty minutes north of P&G’s Cincinnati headquarters hosts P&G’s Home of the Future, where researchers can watch consumers try out new products. Many P&G offices have physical settings where teams can share ideas with consumers or even learn to look at the world through the consumer’s eyes. For example, the headquarters of P&G’s baby-care business contains a room with oversized items so innovators have a toddler’s perspective.

Citi Ventures plays a critical role in helping project teams design and execute smart experiments. For example, industry experts have long heralded the breakthrough potential of mobile wallets. However, two critical constraints—the business model and the consumer experience—have inhibited uptake. After conducting a focused payments pilot in the United States in 2008, the Citi Ventures team worked to create a large-scale near field communication (NFC) pilot in India to address these constraints. It partnered with a portfolio start-up company, ViVOtech, as well as MasterCard, Vodafone and Nokia, to conduct the world’s largest NFC pilot in Bangalore. In 2009, the partners deployed thousands of NFC-enabled phones and equipped retailers to accept mobile payments. The effort validated that customers would make large-ticket purchases by mobile phone, and that the emerging NFC business model benefited other critical industry participants such as retailers and suppliers. The finding supported the company’s decision to form a new business unit focused on building the digital infrastructure to extend traditional business-to-business solutions to consumers.

As the Citi and P&G examples show, little bets labs can sit within new-growth groups or can be a specialist function that works more broadly within an organization. Regardless of the approach, it is helpful to have a special-purpose distribution channel for experimentation. Many consumer products goods companies use an employee store for just this purpose. The New York Times Company went a step further by creating a mechanism to conduct quick tests in full view of the public. On, consumers can play with ideas that aren’t quite robust enough to make it onto the Times’s main website. Exposing still rough ideas—what the design community would call “low-resolution prototypes”—to early feedback lets the Times accelerate the iterative process of disruptive discovery. Denise Warren, the general manager of and the chief advertising officer at the New York Times Media Group, called it a “permanent home to the tradition of innovation” that “invites our community in to help us formulate an opinion about the innovation and the new products.”3

Another key success factor is approaching experimentation purposefully. Don’t assume that launching a little bet is akin to spinning a roulette wheel. The best experimenters follow the scientific method. That is, they develop a hypothesis, define structured experiments to test that hypothesis, and carefully analyze the results of those experiments (innovation thought leaders Steve Blank, Eric Ries, and Rita McGrath provide useful tools on this topic). Clearly having staff people who are experienced in the design and execution of these experiments is important. Challenges go well beyond mastering intricate operational details (though that matters). An in-market experiment might require dozens of micro-adjustments a day to maximize learning, creatively overcoming obstacles, or finding scrappy ways to solve problems.

Finally, it is important that companies have mechanisms to capture and share learning. Experiments often surface unanticipated learning that can affect other parts of the business. Without sophisticated knowledge management systems, this kind of soft learning often ends up locked in the heads of a few employees.

Testing doesn’t require huge teams or deep pockets. In today’s world, a test is just a mouse click away. Find someone with a good eye for design on to bring your vision to life. Use LinkedIn to network with an expert in the industry and ask her a question about a critical assumption. Run online surveys using Tap into Amazon Mechanical Turk, which offers a cost-effective way to perform mundane tasks. Whether formally or informally, find ways to make the little bets that can help unearth powerful growth strategies.

Diagnostic Questions for Leaders

Do we have experienced people to support in-market experiments?

Do we follow a scientific approach when we design and execute experiments?

Do we have mechanisms that allow us to place little bets in the market?

Do we have sophisticated knowledge management systems to capture and spread learning from experiments?

Warning Signs

Overly complicated tests that make it difficult to distill key learning

Academic learning that relies on historical analysis versus applied learning from market-facing activities

Lack of qualified experts to help with test design and execution

Further Reading

McGrath, Rita Gunther, and Ian C. MacMillan. Discovery-Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity. Boston: Harvard Business Press, 2009.

Ries, Eric. The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. New York: Crown Business, 2011.

Sims, Peter. Little Bets: How Breakthrough Ideas Emerge from Small Discoveries. New York: Free Press, 2011.

2e. M&A and Partnership Engines

Formal Means to Identify and Form Relationships with Outside Companies

Apple is widely considered one of the world’s most innovative companies, for good reason. From 2001 to 2011, it launched four successful billion-dollar platforms—its iPod music player, iPhone mobile telephone, iPad tablet computer, and its retail stores. Based on this success, its valuation surged from close to $3 billion in 2001 to nearly $600 billion at the time of writing.

While the Apple story has been detailed exhaustively, one hidden part of the story is the critical role a handful of targeted acquisitions played in its success. While former Apple CEO Steve Jobs was typically portrayed as a control freak who wanted absolute authority over the innovation process, he and his leadership team had no problem making acquisitions. For example, in April 2005, Apple acquired a small company called FingerWorks that had unique gesture-recognition technology, which ended up as a critical enabler of its groundbreaking iPhone interface. From 2010 to 2011, it made close to $2 billion in acquisitions in the advertising (Quattro Wireless), memory (Intrinsity and Anobit), and software (Siri) spaces.

The Procter & Gamble story is similar. The company has a strong organic growth engine, but it doesn’t shy away from acquisitions. In 1985, P&G bought Richardson-Vicks, giving it ownership of the Vicks, Pantene, and Olay brands; in 2005, it plunked down $57 billion to acquire Gillette (which also made Venus-branded female grooming products, Duracell-branded batteries, Oral-B branded toothbrushes, and Braun-branded appliances). In addition to powerhouse brands, the acquisition gave P&G access to parts of retail stores that it had historically eschewed (as its portfolio had focused more on female consumers than male consumers), strengthened the company’s position in emerging markets, and gave P&G access to some of the cutting-edge systems Gillette had built to maximize the productivity of its innovation investments. In 2010, P&G bought the Ambi Pur brand from Sara Lee to help augment its air-care business.

There are, of course, other ways to work with outside companies. For example, Citi has developed joint ventures and partnerships to extend its capabilities and accelerate speed to market. Last year, Manuel Medina-Mora, CEO of Citi’s consumer banking business, brought the firm together with América Móvil in a venture designed to offer mobile banking services to millions of people throughout Latin America. Dubbed “Transfer,” this alliance—between the largest financial services and telecommunications providers in Latin America—allows customers to use basic mobile telephones to set up accounts, transfer money, withdraw cash from ATMs, make purchases in stores, receive payments, and pay bills. Starting in Mexico in the first quarter of 2012, Transfer will roll out to 35 million people over three years, enabling Citi to reach a new customer group with bank accounts and other services.

Smaller companies are much more likely to seek to form partnerships than to consummate acquisitions. For example, while Innosight has had a number of discussions through the years about pairing up with larger and smaller companies, it has (thus far) stayed independent. Through trial and error, it has formed a trusted network of specialist providers around its field—market research agencies, product designers, Web developers, and so on. These loose alliances allow Innosight to avoid fixed costs and still deliver unique service to corporate clients.

As the most intense form of corporate relationship, acquisitions merit special attention. Anyone who has been through an acquisition knows it is not easy. Therefore, a humming growth factory should routinize the process by which it scouts for, acquires, and integrates promising start-ups. Perhaps the most prolific acquirer of our times is Cisco Systems, which has truly turned the art of acquisition into a science. The company acquires more than a dozen companies a year. Many of the acquisitions are relatively small, so Cisco is really acquiring a promising management team or technology. As such, it has very defined processes to ensure postmerger integration goes smoothly.

Before executing acquisitions, companies should think carefully about the strategy of acquisitions. In a 2011 Harvard Business Review article, Innosight founder Clayton Christensen, Innosight senior partner Andy Waldeck, and two colleagues noted that, despite $2 trillion in annual investment, about three-quarters of mergers and acquisitions fail. In “The New M&A Playbook,” they suggest one failure mechanism is a mismatch between a company’s strategic intent and the companies it acquires. The article distinguishes between two types of acquisitions. So-called “leverage my business model” acquisitions (the kind Cisco typically pursues) involve finding companies that enhance the way a company currently creates, delivers, and captures value. These acquisitions work best when companies plug compatible resources into an established model; they struggle when companies have to manage discordant models. Companies can also acquire new business models (what the authors call “reinvent my business model” acquisitions), such as when information technology leader EMC purchased VMWare, whose virtualization technology has driven rapid growth in recent years. These acquisitions typically work best if they are kept separate from the acquiring company’s core.

M&A and partnership engines have strong linkages to other parts of the growth factory. The growth blueprint helps to identify areas to search for new ideas; idea supply chains turn up promising technologies; little bets labs can run focused experiments to figure out which external providers have the “secret sauce” of growth; and idea governance systems for each type of growth help to ensure that different types of acquisitions are treated distinctly.

It’s almost impossible for a single company to have a monopoly on the good ideas in its existing markets, let alone all the component pieces to drive growth in new markets. An external engine that identifies and consummates acquisitions, joint ventures, and partnerships with best-of-breed outside companies can supercharge growth.

Diagnostic Questions for Leaders

Do we have a formal strategy to work with outside companies?

Do we have a dedicated team to scout for and integrate ideas?

Do we have mechanisms to partner with third parties with specialized skills?

Warning Signs

Not-invented-here syndrome; overwhelming desire to go it alone

Pushing for a single, big-bang acquisition instead of a strategic approach to developing a rhythm around acquisitions

One-sided relationships with external parties versus win-win arrangements

Further Reading

Christensen, Clayton M., Richard Alton, Curtis Rising, and Andrew Waldeck. “The New M&A Playbook.” Harvard Business Review, March 2011.

Sidhu, Inder. Doing Both: How Cisco Captures Today’s Profit & Drives Tomorrow’s Growth. London: FT Press, 2010.

1. Amir Efrati, “Google to Launch Start-up Incubator in Israel,” Wall Street Journal blogs, November 14, 2011,

2. The Align case study is recounted in Scott Anthony, The Little Black Book of Innovation (Boston: Harvard Business Review Press, 2011), 169–171.

3. “New York Times Introduces Beta620, a Public Site for Its Experimental Projects,” Ad Age, August 7, 2011,

Component 3: Governance and Controls


and controls

UNDERNEATH THE HOOD of any company sits a set of systems and processes that help manage repeated tasks. Some of these systems are formal; others are informal (“that’s just the way we do things around here”). We call these governance and controls because they inform which projects move forward and which do not, how resources get allocated between projects, and how the growth factory itself maximizes throughput and productivity.

Specifically, a well-functioning growth factory features four key systems:

Idea governance systems that feature distinct measurement and management approaches for different types of ideas

Portfolio tracking systems that measure and track the full growth pipeline

Resource allocation systems that allocate human and financial resources between specific projects and broader growth types

Continuous improvement systems that reliably spot and remove critical innovation bottlenecks


Element Requires attention On the way Desired state

Idea governance systems No disciplined approach to manage innovation A single process to manage all types of ideas Distinct measurement and management approaches for different types of ideas

Portfolio tracking systems No tracking system Ad hoc tracking system Formal systems produce regular snapshot report that is basis of leadership discussion

Resource allocation systems “Find it when we need it” mentality Dedicated pool of human and financial resources for innovation, with allocations reviewed episodically Dedicated pool of human and financial resources for innovation, with allocations reviewed regularly

Continuous improvement systems No continuous improvement systems Occasional SWAT teams to address identified issues Individual or small team that “innovates the innovation systems”—specifically spotting and removing bottlenecks

Table 4, which is extracted from the full growth factory assessment, shows how to get a quick view of your performance in this component.

3a. Idea Governance Systems

Distinct Measurement and Management Approaches for Different Types of Ideas

Investors know that diversification generally reduces risk because diverse assets have unrelated risks. Naturally, investors use different mechanisms to measure and manage different types of assets. After all, investing in a three-person start-up is much different from investing in a commodity like gold. Both investments require discipline, but they are distinctly different types of disciplines.

While most executives understand this in the context of their personal investments, they frequently fail to apply the lessons to their companies by treating all growth efforts the same way. At many companies, the idea evaluation process revolves around detailed Excel spreadsheets, comprehensive PowerPoint-based business plans, and an orchestrated sequence of pre-meetings leading up to a decision meeting. This kind of disciplined approach works very well in circumstances where companies have knowledge that lets them be precise in their analysis, and executives have the relevant domain experience to make informed decisions. Applying this same discipline to nascent opportunities in new spaces can be disastrous. People spend days discussing Excel spreadsheets that contain nothing more than mathematical relationships between made-up numbers. Managers working on ideas discover paradoxically that detailed PowerPoint documents are their biggest enemy, because the details act as bait for nitpicking devil’s advocates. Endless pre-meetings crowd out more action-based learning.

In the early 2000s, Procter & Gamble learned it had to develop distinct governance systems. The company had adopted a stage-gate process to manage innovations, and the process was increasing the predictability and reliability of the company’s innovation efforts. However, the process seemed to be shortchanging more expansive ideas: P&G’s success rate was going up, but the size of initiatives wasn’t. The systems were designed to incrementally improve what already existed. That wasn’t bad, but it meant that the company wasn’t paying adequate attention to the more disruptive and transformational opportunities. Hitting growth goals required both predictable success and larger ideas.

At this point, companies can sometimes veer in the other direction, applying no discipline to more out-of-the-box ideas. This shift rests on the flawed assumption that more expansive innovation efforts are just random and unpredictable. Of course, something that hasn’t been done before by definition has uncertainty. But the best innovators follow a disciplined approach; it is just a different discipline from the one that characterizes managing more certain ideas.

From 2004 to 2009, P&G built thoughtful idea governance systems capable of maximizing the potential of different types of ideas (as noted, P&G in parallel identified four distinct growth types). It measures and manages each growth type in different ways. P&G has a sufficient process bent that it even went as far as creating a process manual for transformational and disruptive ideas. The manual is a step-by-step guide to creating these kinds of businesses. It includes over-arching principles as well as detailed procedures and templates to help teams describe opportunities, identify requirements for success, monitor progress, make go/no-go decisions, and more.

Another example of a company that has embraced idea governance systems for different growth types is IBM. The company explicitly categorizes growth strategies based on uncertainty and the length of time it will take to deliver impact. It has a separate new-growth group focused on what it calls “emerging business opportunities.” That group’s milestones are based on learning and assumption management rather than more traditional financial metrics like net present value and return on investment.

Good idea governance systems provide clear answers to the following questions for each growth type:

What metrics determine whether to fund an investment proposal?

What is the decision-making mechanism?

How is funding managed?

While idea governance systems can be very corporate-specific, it is helpful to highlight the broad differences between how companies typically manage the “edges” of more close-to-the core ideas and disruptive, market-creating ideas. Table 5 shows the conceptual differences between the two systems.

One element on this table deserves special mention. Many companies have the same group evaluate every idea, often during a single meeting. However, it can be very difficult for a single decision-making group to rapidly flip filters and evaluate fundamentally different ideas. Ideally, decision-making groups for more disruptive ideas adhere to four characteristics:


Close-to-the-core ideas Disruptive market-creating ideas

What metrics determine whether to fund an investment proposal? “Hard” financial metrics (NPV, ROIC), with expectations that numbers will be precise More qualitative metrics in early process stages given low level of knowledge

What is the decision-making mechanism? Core leadership team looks at list of ideas rank-ordered by defined investment criteria Special purpose group (ideally with outsiders) makes consensus-based decisions after robust debate

How is funding managed? Fully allocate funds to qualifying proposals Dole out small chunks of capital for teams to place knowledge-boosting little bets

They are not a replication of the executive committee in order to ensure that issues related to the core business don’t creep into (or occasionally dominate) discussions.

There is at least one outside representative.

At least one representative has experience with investing in low-knowledge, high-assumption circumstances (e.g., a venture capitalist).

They are relatively small, to facilitate quick decisions.

Idea governance systems not surprisingly work best when there are different budgets for each type of growth; a single pool of funding often leads companies to use a single approach. SingTel’s chief financial officer, Jeann Low, has a useful metaphor for this notion. She describes having separate growth “envelopes.” When it is time to discuss a disruptive project, for example, she takes out the disruptive envelope, looks at how much money is in it, and uses the appropriate questions to determine how much to invest.

Smaller companies generally don’t need systems as sophisticated as those that govern growth efforts at behemoths like P&G and IBM. But they should still think about how they will manage new-growth efforts that are outside business as usual. For example, not surprisingly, Innosight staff members bubble with innovative ideas for new service delivery or business models. Innosight follows two simple rules to govern early-stage development efforts. First, staff members who want to work on uncertain new ideas typically have to work on these ideas during their nights and weekends. Those who are passionate pursue their ideas; those who are not, do not. The second rule is to not lose any money. While that might seem to be too high a hurdle, generally, there is a huge amount that innovators can do without investing large sums of money, particularly for service businesses. It places focus on the little bets that can address the most critical assumptions behind a new-growth idea (the Linkage story detailed in the robust innovation processes section is an example of this). Once an idea begins to get traction, Innosight assigns dedicated resources to drive further development and commercialization.

Poor idea governance systems can squeeze the innovation energy outside a company by unintentionally underresourcing the ideas that have the most growth potential. Match the approach to the type of idea and reap the benefits.

Diagnostic Questions for Leaders

Have we written down the way we will track and measure different types of innovations?

Are there distinct governance mechanisms for different types of strategies?

Have we set aside separate envelopes for different kinds of growth strategies?

Warning Signs

A single group evaluating all ideas in a marathon quarterly review session

Vague or nonexistent decision criteria

Overly data-driven approaches for new-to-the-world ideas replete with assumptions

Further Reading

Anthony, Scott D., Mark W. Johnson, Joseph V. Sinfield, and Elizabeth J. Altman. The Innovator’s Guide to Growth. Boston: Harvard Business School Press, 200), chapter 6.

Govindarajan, Vijay, and Chris Trimble. The Other Side of Innovation: Solving the Execution Challenge. Boston: Harvard Business Press, 2010).

Ries, Eric. The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses. New York: Crown Business, 2011.

3b. Portfolio Tracking Systems

Mechanisms to Measure and Track the Full Growth Pipeline

Most manufacturing companies can provide reams of data about their production processes. The most sophisticated can access real-time information that pinpoints the precise location of each piece of inventory. Sophisticated tools help make sure factories are humming, minimizing waste, maximizing productivity, and alerting management when it needs to intervene.

Asking those same companies that expect precision in production to even list their growth initiatives draws blank stares. It’s hard to run a growth factory if you don’t have the underlying information to make key strategic decisions. The growth factory requires portfolio tracking systems that routinely produce usable data about ideas in development and fosters regular leadership dialogues on critical resource-allocation decisions.

Here’s an illustration of what happens when companies fail to track growth efforts appropriately. A few years ago, a large apparel company assumed its leadership had a shared understanding of its growth goals. It also assumed that there were divergent opinions about what it would take to achieve those goals. So, twenty separate executives used a simple two-by-two matrix designed to capture how the company would achieve its goals to help highlight areas of agreement and disagreement. On one axis was whether the company would target a new or existing market; the other captured whether it would use an existing offering or create a new one. Each executive assessed how much growth he or she thought would come from each quadrant in the matrix. Individual answers contained some variation, but leadership was pleasantly surprised to see a general consensus emerge: a disproportionate amount of growth would have to come from targeting new markets or introducing new offerings. Then the company mapped out the actual projects that it was pursuing. The first insight from the exercise was that a number of projects in the company’s strategy plan were unstaffed. That is, the projects existed on paper, but literally no one was working on them (a challenge addressed by robust resource allocation systems). The second insight was that there was a fundamental mismatch between the strategy and the projects the company was pursuing: the overwhelming majority of efforts involved minor changes to existing products in existing markets. Only one of about thirty different projects was clearly an effort to bring a new offering to a new market. Obviously, the company would have failed to achieve its strategic objectives if it did not intervene to rebalance its portfolio.

Over the past ten years, Procter & Gamble has built sophisticated portfolio systems to help managers identify and kill the least-promising programs and nurture the best bets. P&G creates projections for every active idea, including estimates of the financial potential and the human and capital investments that will be required. Consistent with our description of idea governance systems, the specific metrics depend on the type of idea.

Citi Transaction Services (CTS) is successfully implementing a similarly sophisticated system. CTS provides transaction services to multinational corporations, financial institutions, and the public sector. The scale and complexity of its customers’ needs typically require highly customized, innovative solutions. This combined with ambitious growth targets have led Francesco Vanni d’Archirafi, the business unit’s leader since 2009, to be at the forefront of developing Citi’s innovation infrastructure.

In collaboration with Citi Ventures, CTS developed and piloted tools and processes for innovation portfolio management. From 2011 to 2012, CTS integrated these into its financial planning and metrics systems. CTS used the tools to organize its innovation projects into four portfolios. It also has two full-time managers to oversee those portfolios.

Good tracking systems:

Are comprehensive, covering all of a company or business unit’s growth ideas

Provide close to real-time data, so executives have timely information to make decisions

Feature multimodal data, with key quantitative and qualitative metrics

Are at least somewhat automated, allowing information to be gathered without extensive intervention

Appropriate tracking systems provide three distinct sources of value:

Ensure that a company’s intended strategy matches the ways in which it is allocating its resources.

Identify projects that require course corrections early on. One consistent finding across the innovation literature is that the first plan and the right plan bear little resemblance. Identifying the need to change course early expedites discovering the right long-term strategy.

Help to get the right resources to the right projects. Many companies that complain about the lack of resources for growth suffer from “zombie projects”—the walking undead that have limited growth potential but still shuffle along. Transparent tracking systems surface these efforts so resources can be redeployed either to explore a new opportunity space or to accelerate a higher-potential effort.

As the great Peter Drucker noted, “what gets measured gets managed.” If you don’t measure and discuss growth, it is hard to manage growth.

Diagnostic Questions for Leaders

Have we identified the variables we want to measure?

Do we have a formal process—and process owner—for pipeline and portfolio tracking and management?

Are our tracking systems comprehensive and in real time?

Warning Signs

No owner of the master list of ideas

Developing a portfolio map requires months of manual effort

Projects described oversimplistically with a single number

Further Reading

Cooper, Robert G., Scott J. Edgett, and Elko J. Kleinschmidt. Portfolio Management for New Products, 2nd ed. Boston: Perseus Books, 2001.

Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market, and How to Successfully Transform Them. New York: Currency/Doubleday, 2001.

McGrath, Rita Gunther, and Ian C. MacMillan. Discovery-Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity. Boston: Harvard Business Press, 2009

Wheelwright, Steven C., and Kim B. Clark. Revolutionizing Product Development: Quantum Leaps in Speed, Efficiency and Quality. New York: Free Press, 1992.

3c. Resource Allocation Systems

Means to Allocate Human and Financial Resources Between Specific Projects and Broader Growth Types

One of the most important books about growth and innovation is Clayton Christensen’s 1997 masterpiece The Innovator’s Dilemma. In the book, the Harvard professor and Innosight cofounder highlighted a paradox: the root cause of corporate failure in many circumstances is good management practices. Companies listen to their best customers, innovate to meet their needs, produce the best products on the market, push prices up… and get blindsided by what Christensen termed a disruptive technology, a simple, convenient, affordable solution that quietly takes root far from the mainstream of the industry.

Why does the innovator’s dilemma exist? The basic challenge is one of resource allocation. Every day, managers make resource allocation decisions. Should I spend time on this project or that one? Should I call this customer or that one? Should I invest in this idea or that one? At most companies, the way in which time and money get allocated is tightly intertwined with the current business model. In other words, companies favor ideas that maintain or improve the status quo. They tend to under-resource or altogether ignore ideas that involve competing in new ways, targeting new markets, or following altogether different business models.

Building a well-oiled growth factory then requires wresting hold of the resource allocation process to ensure that time and money flow in ways consistent with overall growth goals. After all, a robust portfolio on paper is pretty meaningless if there aren’t resources to bring specific ideas to life.

Idea governance and portfolio tracking systems must translate into resource allocation decisions. One level of decisions relates to overall resource allocation. That is, has the company allocated sufficient human and financial resources to meet its overall and growth-type-specific goals? The next level of discussions occurs at the project level, where leaders make decisions to start, stop, or change initiatives. For example, after developing its portfolio view, Citi’s CTS unit consolidated seventy-five projects in its “mobile” portfolio into ten projects, freeing up resources and allowing for greater strategic focus.

The following three practices can maximize the impact of resource allocation discussions:

Ensure discussions are in fact discussions. Although P&G’s tools assemble a rank-ordered list of projects for each growth type, the company doesn’t treat resource allocation as a mechanical exercise; rather, it’s a leadership dialogue. Numerical input informs but doesn’t dictate decisions.

Integrate portfolio and strategy discussions. A few years ago, P&G revamped its strategy development and review process to increase the productivity of these discussions. Innovation and strategy assessments had historically been handled separately. Now the CEO, CTO, and CFO explicitly link company, business, and innovation strategies. P&G’s portfolio tracking system clearly interacts with its growth blueprint. Leaders regularly evaluate innovation pipelines to ensure they are robust enough to deliver against growth goals over the medium and long term. Evaluations are made of individual business units (feminine care, for example) as well as broad sectors (household care). This approach calls for each business unit to determine the mix of innovation types it needs to deliver the required growth. Citi has begun a similar process to align business planning and innovation strategy discussions. For example, to manage its innovation portfolio, CTS launched the first innovation council within Citi with leaders from the business unit and from Citi more broadly, as well as external advisers. The council meets monthly to review innov