HBR Blog on Disruptive Technologies

Here is my latest HBR blog, "The Idea that Led to 10 Years of Double Digit Growth" - Clay Christensen and Joe Bower's "Disruptive Technologies" that we used at Medtronic to spawn our 18% per annum growth (

Full Text Here:

In the mid-90s as CEO of Medtronic, I was concerned about whether we could sustain the remarkable success in innovation that we had enjoyed during the previous 10 years. As we grew, I knew it would be very difficult to continue to create the breakthrough innovations that had led to Medtronic's high growth rate, which had exceeded 18% per annum for a decade. Then I read Clay Christensen and Joe Bower's 1995 article "Disruptive Technologies: Catching the Wave" in HBR. 

Christensen and Bower's article offered the counterintuitive notion that great companies fail for the same reasons they initially experience success. They listen to their best customers — something we did religiously at Medtronic — making increasingly complex products to meet those customers' most sophisticated needs. This process leaves companies vulnerable to competitors who develop new forms of technology that initially fail to serve the "best" customers well, but quickly improve.

This process of "disruptive innovation" enabled new competitors to create entirely new product categories. For example, early cell phones were woefully unreliable, and their voice quality paled in comparison with land lines. Then rapid improvement in cell phone technology combined with sharp reductions in cost opened up massive new markets that existing terrestrial business telecommunications companies had missed.

Impressed by the HBR article's framework for resolving the tension between existing businesses and innovative ideas, I wrote an article for our employees titled "Reinventing Medtronic" that captured the essence of what was required to sustain our growth. We then initiated 12 radical innovations that challenged our conventional businesses. We organized these initiatives around small venture units, incubating them separately (and far away) from existing businesses. Venture innovators had greater freedom to deploy their independent R&D budgets. In financial terms these were small bets, with very low overhead. (See Peter Sims' book, Little Bets, for a more complete description of how this works.)

One example was Medtronic's reinvention of mainstream coronary artery bypass surgery. This involved minimally invasive cardiac surgery that eliminated the need to crack open a patient's chest and put the heart on Medtronic's bypass equipment. Clearly, this was threatening to people in Medtronic's core business. Nevertheless, we steadfastly supported the venture. The new procedure proved to be effective and now accounts for 20% of heart surgeries while producing better outcomes.

Another innovation was a super low-cost pacemaker that reduced production costs 80% by challenging many of the traditional rules of pacemaker design. The product worked effectively, but never became a big seller. Still, it enabled Medtronic to expand into the Chinese market. Meanwhile, the mainstream pacemaker designers borrowed many of the creative ideas, resulting in a 40% cost reduction across the entire line. As I told our executives, "If we don't make these innovations, our competitors will."

All in all, the "Disruptive Technologies" article helped Medtronic broaden its ability to fulfill the mission of "alleviating pain, restoring health, and extending lives." First, we increased our R&D budget from 9% to almost 12% of revenue. Second, we separated the ventures from existing business units so they could focus on disruptive innovations while the strategic business units focused on better engineering our existing product categories. Third, we made selected acquisitions of new technologies that fit in our product platforms or enabled Medtronic to expand into related product categories. Finally, our top executives gave the ventures the support required to go full throttle on innovation, spending time in the labs with them, understanding their work, and championing it throughout Medtronic.

Thanks to the HBR article, Medtronic avoided the lost years of stagnation that Hewlett-Packard and other once-great innovators experienced because they were unable to reinvent themselves. As a result, Medtronic's revenue growth continued at 18% per annum for the next decade. 

Mindfulness Helps You Become a Better Leader

For Harvard Business Review

Ever since the financial crisis of 2008, I have sensed from many leaders that they want to do a better job of leading in accordance with their personal values. The crisis exposed the fallacies of measuring success in monetary terms and left many leaders with a deep feeling of unease that they were being pulled away from what I call their True North.

As markets rose and bonus pools grew, it was all too easy to celebrate the rising tide of wealth without examining the process that created it. Too many leaders placed self-interest ahead of their organizations' interests, and ended up disappointing the customers, employees, and shareholders who had trusted them. I often advise emerging leaders, "You know you're in trouble when you start to judge your self-worth by your net worth." Nevertheless, many leaders get caught up in this game without realizing it.

This happened to me in 1988, when I was an executive vice president at Honeywell, en route to the top. By external standards I was highly successful, but inside I was deeply unhappy. I had begun to focus too much on impressing other people and positioning myself to become CEO. I was caught up with external measures of success instead of looking inward to measure my success as a human and a leader. I was losing my way.

My colleague, Harvard Professor Clayton Christensen, addressed this topic in his HBR article, How Will You Measure Your Life? Clay observed that few people, if any, intend at the outset of their career to behave dishonestly and hurt others. Early on, even Bernie Madoff and Enron's Jeff Skilling planned to live honest lives. But then, Christensen says, they started making exceptions to the rules "just this once."

At Harvard Business School, we are challenging students to think hard about their definition of success and what's important in their lives. Instead of viewing success as reaching a certain position or achieving a certain net worth, we encourage these future leaders to see success as making a positive difference in the lives of their colleagues, their organizations, their families, and society as a whole. The course that I created in 2005, Authentic Leadership Development (ALD), has become one of the most popular elective MBA courses, thanks to my HBS colleagues who are currently teaching it. It enables second-year MBAs to ground their careers in their beliefs, values, and principles, following the authentic leadership process described in my 2007 book, True North. More recently, ALD has become a very popular course for executives of global companies.

With all the near-term pressures in today's society, especially in business, it is very difficult to find the right equilibrium between achieving our long-term goals and short-term financial metrics. As you take on greater leadership responsibilities, the key is to stay grounded and authentic, face new challenges with humility, and balance professional success with more important but less easily quantified measures of personal success. That is much easier said than done.

The practice of mindful leadership gives you tools to measure and manage your life as you're living it. It teaches you to pay attention to the present moment, recognizing your feelings and emotions and keeping them under control, especially when faced with highly stressful situations. When you are mindful, you're aware of your presence and the ways you impact other people. You're able to both observe and participate in each moment, while recognizing the implications of your actions for the longer term. And that prevents you from slipping into a life that pulls you away from your values.

I don't use the word "practice" lightly. In order to gain awareness and clarity about the present moment, you must be able to quiet your mind. That is tremendously difficult and takes a lifetime of practice. In 2012, I had the privilege of presenting my ideas on authentic leadership to his Holiness the Dalai Lama. When I asked him what it took to become an authentic leader, he replied, "You must have practices that you engage in every day."

My most important introspective practice is mediation, something I try to do for twenty minutes twice a day. In 1975 I went with my wife Penny to a Transcendental Meditation (TM) Workshop. Although I never adopted the spiritual portion of TM, the physical practice became an integral part of my daily routine. Meditation has been a godsend for me. As an active leader who has held highly stressful roles since my mid-twenties, I was diagnosed with high blood pressure in my early thirties. When I started meditating, I was able to stay calmer and more focused in my leadership, without losing the "edge" that I believed had made me successful. Meditation enabled me to cast off the many trivial worries that once possessed me and gain clarity about what was really important. I gradually became more self-aware and more sensitive to the impact I was having on others. Just as important, my blood pressure returned to normal and stayed there.

In recent years, medical studies have found evidence of meditation's many benefits, including protecting against health problems from high blood pressure and arthritis to infertilityreducing stress, improving attention and sensory processing; and physically altering parts of the brain associated with learning and memory, emotional regulation, and perspective-taking — critical cognitive skills for leaders attempting to maintain their equilibrium under constant pressure.

While many CEOs and companies are embracing meditation, it may not be for everyone. The important thing is to have a set time each day to pull back from the intense pressures of leadership to reflect on what is happening. In addition to meditation, I know leaders who take time for daily journaling, prayer, and reflecting while walking, hiking or jogging. I also find it extremely helpful to share the day's events with Penny and seek her counsel.

Regardless of the daily introspective practice you choose, the pursuit of mindful leadership will help you achieve clarity about what is important to you and a deeper understanding of the world around you. Mindfulness will help you clear away the trivia and needless worries about unimportant things, nurture passion for your work and compassion for others, and develop the ability to empower the people in your organization.

Developing the Global Leader

By Julia Hanna for Harvard Business School Working Knowledge

What skills do today's executives need to develop to become effective global leaders of tomorrow? And how do corporations teach these skills to their own leaders?

"The shift from a country centric corporation to one that is more global in its outlook will have a radical impact on leadership development," says Professor of Management Practice William George, the former chairman and chief executive officer of Medtronic.

George developed and taught for many years the popular second-year MBA course Authentic Leadership Development (ALD), which he has compressed into a five-day Executive Education program at Harvard Business School.

"The most successful leaders will not necessarily be those with the highest IQ," he says. "Of course, they will need to be intelligent. But they'll also need to have a high level of cultural and emotional intelligence."

According to George, additional characteristics of a successful global leader include:

  • An intellectual understanding of the global business context—in other words, an ability to comprehend just how complex it can be to do business around the world.
  • The capacity to simultaneously develop a global and local perspective. "This is much easier said than done," George says. "And it's almost impossible to achieve without a great deal of experience living in different parts of the world."
  • Being able to overcome the dominant thinking at headquarters. "Leadership has to lean in favor of nondominant thinking," says George. "That requires a tremendous amount of intercultural empathy and a passion for diversity in life experiences." In other words: "An insatiable need to learn about other cultures."
  • A knack for cross-boundary partnering. "You need to feel comfortable engaging a team in India and giving them as much power as a team in Germany or the United States. There's a certain level of executive leadership maturity involved in having the respect and capacity to pull the best out of each area of the corporation."
  • A self-awareness and self-assurance when it comes to one's values and sense of purpose. At the same time, however, "you need to be flexible in learning from and empowering others."
  • The ability to develop networks that are internal and external to the organization. "It's a process of shifting from vertical management to horizontal collaboration. One's title and role are far less important than the capacity to get things done."

How should one cultivate these qualities? One of George's first recommendations for would-be global leaders is to live in a country where the language spoken is different from that in one's home country.

"When my wife and I lived in Japan we had a two-year-old child, which meant we had to dive in and learn very quickly," he recalls. "Doing this gives you a heightened sensitivity to cultural differences, and how those differences are tied up in language."

After 60 or so hours of Japanese language instruction, George could more or less carry on a conversation, and did so with a retired chairman of Mitsubishi—who gently informed him that he was speaking "female Japanese."

Get lost

"These are great learning experiences," he says. "The first weekend after I had moved to Belgium, I asked someone how I should explore and get to know the place. I was told to go get lost, which is great advice. It's about really engaging in the culture and learning to be vulnerable."

Accepting one's vulnerabilities is a primary objective of ALD, which requires participants to work together in six-person groups.

"It's more than a knowledge transfer from HBS to individuals; it's also an exchange between people and a process of understanding who I am, what I desire, what is my purpose, and what are my values," says George, who notes that this year the number of participants who can enroll in ALD has doubled to 240 people.

Also coming next July is The Global Enterprise Leader, a course developed with Professor Krishna Palepu that will extend ALD's objectives to include cultivating a greater capacity for cultural intelligence. "It's not so much about understanding geopolitics," George says. "The characteristics that I've cited above are far more important."

Aligning employees across a diversity of geographies and experiences is easier said than done, George concedes, although he does highlight a few standouts, including Coca-Cola (which has had five non-American CEOs), Nestlé, Unilever, Siemens, IBM, and Novartis, among others.

"Ultimately, a global organization is measured by how well the diversity of its leadership reflects the diversity of its customer base and how well that leadership can leverage the skills of teams working around the world," he says, adding that Medtronic's CEO is Omar Ishrak, a native of Bangladesh who was educated in London and has worked in the United States for nearly 20 years.

"We're looking to companies to create a global cadre of people who are comfortable operating anywhere in the world," George concludes. "That's where we're heading."

Documentary: Integrity in Business with Robert Maybery

Here is a recent documentary I did on integrity in business with Robert Maybery, a South African business executive. Your feedback is welcome. The documentary is in four parts:

Innovation Is the Real Winner in Apple v. Samsung

Apple's big win over Samsung for patent violations is monumental in the tech world. It has significant implications for American innovation that go far beyond the products in question. While patents have been a hot litigation topic for years, the outcome of this case sets a precedent for how future cases will be handled. The jury's $1 billion award to Apple for damages, combined with the still-pending injunction decision, not only impacts the smart phone market, but is sending out powerful shock waves about copying popular designs with knock-offs.

The jury got this verdict right. Former I.B.M. executive Al Sabawi said Samsung deserved to lose because they were “lazy copycats ... who think cutting and pasting is an intellectual achievement.” Patents protect research and development by providing both garage entrepreneurs and large corporations alike with an incentive to invest in innovation. Those who make the big investments in innovation and take big risks have the right to big rewards. Otherwise, investments in original ideas will eventually dry up and incremental improvements will be all we can expect. Business may find the status quo more attractive than the next frontier.

The jury's decision has brought screams of protest from would-be innovators. Many of them think all existing designs are fair game to use as platforms to develop improved products. They hope to avoid the high cost and lead time of creating original designs as Apple has done throughout its history. That sounds good to entrepreneurs just starting companies who would like to build on the investments of the majors. But if copycats quell innovation, breakthrough innovations will cease.

I anticipate that IT companies will start to act more like pharmaceutical and medical technology companies in vigorously defending patent rights. They will become much more aggressive in claiming the full value for their inventions, either in the marketplace or through licensing agreements that will be increasingly costly.

This verdict also vindicated Steve Jobs and his work over the years for Apple. Jobs believed that a product’s look and feel is just as important as how it works.  Let's hope this type of verdict paves the way for the next generation of innovators to create and transform entire industries.

The Apple decision also has enormous implications for American competitiveness. The U.S. is far and away the most innovative country on earth and bears the brunt of the costs of research and new product development. This is our strongest competitive advantage in the global markets of the 21st century. If patents are enforced, U.S. inventors and investors will be incentivized to spend more heavily on R&D, attract more creative people, and transform entire industries with yet-to-be-invented technology.

Consider the alternate scenario: If Apple had lost this case, it could have triggered hundreds of companies in Asia and elsewhere to copy its designs and sell them at far lower prices. In the short-run that may sound good for consumers, but the reality is that lack of intellectual property protection will destroy future investments in technology and innovation, and consumers will be the long-term losers.

Kudos to Apple for defending its IP rights and paving the way for others to do the same.

Footnote: Many people are critical of Apple for outsourcing much of its production work to Asian subcontractors. The facts don’t bear out this criticism. Apple currently has 70,000 employees, of which 47,000 are based in the U.S. Since the recession hit in 2008, Apple has added 20,000 employees in the U.S. alone. Thus, for every job sent overseas, two jobs are created in the U.S. Not a bad ratio. Meanwhile, Apple reports that in a study by Analysis Group, it has created, directly or indirectly, 304,000 jobs in the U.S. Wouldn’t it be great if we could create dozens of other companies that take global leadership and become the job creators of this decade? (Source:

Harvard's Bill George: A Model of 21st Century Leadership

Posted by Warren Bennis on September 4, 2012 for Bloomberg Businessweek

Last Saturday morning, Aug. 26, I called my old friend Bill George for two reasons, mainly to wish him a happy birthday on his 70th—I was two weeks early—and to discuss an unlikely article in that morning’s Financial Times, “The Mind Business.” It reported that some of the “west’s biggest companies are embracing eastern spirituality as a path to bigger profits.” Among them, General Mills (GIS), Google (GOOG), First Direct, Target (TGT), Aetna (AET), plus many Silicon Valley firms such as Facebook (FB), Twitter, and LinkedIn (LNKD) that share ideas on yoga, meditation, and mindfulness, a popular form of Buddhist practice, which advocates feel helps them stay “grounded,” even calm, in our hyper-manic digital age.

In the FT piece, Bill makes the business case for meditation, which he’s been practicing, along with his longtime spouse and partner, Penny, since 1974: “William George, a Goldman Sachs (GS) board member [also, I have to add, ExxonMobil (XOM)] and a former chief executive of healthcare giant Medtronic (MDT) … is one of the main advocates for bringing meditation into corporate life. … ‘If you’re fully present on the job, you will be more effective as a leader; you will make better decisions and you will work better with other people. … I tend to live a busy life. This keeps me focused on what’s important.’”

(Have you met anyone recently who isn’t rushed? I bought a ticket last month to hear a speaker discuss his book, Rushed, and, yeah, I was too rushed to make it.)

But meditation is only a skip and a hop in the arc of Bill’s career trajectory, which isn’t close to peaking. After his undergraduate degree at Georgia Tech, he did go for an MBA and went on to work for prominent global companies on three continents, resigning from Medtronic when he was 58, which nowadays I would call “early adulthood.” I decided to ask him a question the other morning I always wanted to but shied away from, why he “retired so young.” He responded with a Minnesota-nice but defiant, “I didn’t retire, Warren,” softening his voice when he came to my name. “I vowed never to remain more than 10 years as a CEO or top gun in any organization. Ten years is plenty, more than enough time to make your mark in any organization.”

Bill went on to say some extremely wise things about a topic rarely discussed openly (or, at best, at six degrees of elusiveness) about the stages of a management career, especially about the retirement phase. Bill has never given much thought to retirement, “the very last thing execs should think about. Anyway, I’m going to live to a hundred! I’ve talked to too many retirees who go to Florida to play golf and despite their parched and faux words, such as ‘I’ve been a success at retirement,’ or ‘saved a lot in state taxes,’ they just look tired more than retired.”

I don’t want to make light of the issue. None of us is immortal. And who’s going to tell you that you’ve lost your marbles or “your touch.” A young friend of mine, meaning to be respectful and gentle, told me a few months ago, lowering his head to avoid eye contact, “Well, I’ll say this about you: You may not be at the top of your game but you’re still at the top of your field.” I retorted acidly, absent respect or kindness, ‘Thank you, DoctorJones, for damning me with faint praise.” Emphasis mine. He’s a psychiatrist, of course.

Retirement is a difficult issue and doesn’t have a positive connotation, perhaps especially so in our culture. My American Heritage Dictionary heartily confirms this. It states, “Despite the upbeat books written about retiring and the fact that it is a well-earned time of relaxation from the daily business of work, many people do not find it a particularly pleasant prospect.”

I’ll have more to say about this in some future blog but want to end on a positive note, using young Bill George as an example, one that today’s MBA students would do well to consider as they ponder the long arc of their own careers. He responded to my question about why he retired so young this way: “I had to go out in the wilderness again to renew, reinvent myself. Had to engage in spiritual projects in a way, which for me, meant learning how to impart whatever I’ve learned to others. So I’ve been teaching for the last dozen or so years. At Harvard, I’ve introduced a course pretty much based on two books I wrote since my Medtronic days, Authentic Leadership and True North. Chances are that I’ll be looking for a new shore one of these days.”

I think of Bill George as a protean leader, based on the Greek myth of the early sea god Proteus, “an old man of the sea,” as he was called, “with flexibility, versatility and adaptability.” Bill George in no way is “old,” whatever that means today. He’s still swimming upstream, probably at this minute, in Vail, Colo., in water that, sitting here in sunny Santa Monica, chills me to the bone.

Another Labor Day Passes with Little Progress on Creating Jobs

Three years ago, Labor Day 2009, I appeared on The Today Show to discuss the jobs crisis. The appearance was to promote 7 Lessons for Leading in Crisis, a book released about that time which set forth principles leaders could apply to resolving significant crises.

At the time, I argued that we were in a structural jobs crisis and that the Obama administration’s stimulus aimed at creating or “saving” public sector jobs was not effective. The impact of such policies efforts, I predicted, would expire long before jobs bounced back.

Using the “7 Lessons” as a framework, I posited that the U.S. had to “face reality” (Lesson #1) that jobs lost in 2008-09 were not coming back. We had to address the “root cause” (Lesson #3) that American labor was not cost competitive in global markets for low- and mid-scale jobs and lacked the trained workers required for high-skilled jobs.

Three years have passed and the economists still haven’t recognized the root cause.  They continue to believe (and act like) we’re in a cyclical recession. Unemployment remains stuck at 8.3% and underemployment (including part-time workers and workforce dropouts) hovers around 15%. Meanwhile, the temporary jobs created by the stimulus bill disappeared two years ago. The “saved” public service jobs are under enormous pressures from budget cuts at state and local levels shedding 700,000 jobs.  The stimulus bill just delayed the inevitable.

The New York Times published statistics last Friday showing that in this downturn five million high- and mid-wage jobs were lost, and only 1.5 million returned. In contrast, 500,000 more low-wage jobs have been added than were lost in the recession. Thus, average wages declined for those fortunate enough to have a job. Many formerly high-paid workers are now holding down two and even three jobs and still not maintaining their former level of income. But here’s the catch: 3 million high-skilled jobs are vacant with no one qualified to fill them! Clearly, this is a structural crisis.

In the past decade many traditionally high-skilled jobs have been replaced by automation. Today’s skilled jobs require more sophisticated mathematical and computer-based skills. Since we have failed to develop the skilled work force to do these jobs, they either remain unfilled or are migrating overseas. Contrast these results with the decade of the 1990s when we added 23 million jobs, business was booming, and the federal government balanced its budgets for three consecutive years.

There’s an obvious solution to this skills imbalance: government, business and labor need to collaborate to create skills-training programs and apprenticeships in collaboration with local community colleges and vocational-technical institutes. This has been done with success in eastern Michigan by the Big 3 auto producers and in Charlotte by the energy sector, and a promising initiative is underway in Minnesota.

Unfortunately, on a national basis there is little collaboration between government and business. The leaders of both sectors seem to feel they have diametrically opposed objectives. As a result, deep-seated distrust has developed over the past three years. Most regrettably, this has led to “win-lose” relationships, and contributed to the political chasm that defines today’s America.

Our predicament is in sharp contrast to Germany, where workers are doing better than ever, and unemployment is low, especially in the former West German states. In Bavaria, for example, unemployment is 2.2%.  Workers have solid incomes, good pensions, and effective health care.

What’s the difference? Ten years ago then-Prime Minister Gerhard Schroeder brought the leaders of business and labor together and challenged them to develop a plan to make Germany fully competitive in global markets for the 21st century.  Leaders of the three sectors decided to focus on ensuring a skilled, competitive work force in five major industries: machine tools, automobiles and auto parts, chemicals, electrical equipment, and construction. As the direct result of these negotiations, wages and benefits were moderated to be competitive on a world scale, inflation held to around 1%, and government deficits reduced to only 3% of GDP, compared with 7% in the U.S. This rapprochement has not only fostered Germany’s growth but led to a favorable balance of trade of $200 billion, compared with America’s negative $500 billion trade balance. Germany’s trade surplus isn’t just with the European Community; its largest positive balances are with China, India and Japan.

Could the same thing happen here if the political climate supported it? Of course it could. No country in the world can match America’s entrepreneurial drive or innovative genius. The U.S. is by far the best place in the world to start a new company, complete with the private start-up funding and infrastructure required for entrepreneurs. We tower over other countries in the growing fields of information technology, health care and energy. Yet our government constrains all three industries in obtaining visas for foreign workers, approving innovative new products, and limiting energy production.

We also need business, labor and education leaders to collaborate to train and develop the skilled workers required to compete on a global scale. That takes a “win-win” approach, something rarely observed in today’s toxic and highly partisan political arena. We cannot let political differences to continue to hold us back. Now is the time to get on with the monumental task of ensuring America’s economic competitiveness and rebuilding a jobs machine. We did it in the 1990s. What are we waiting for?

Rotman Magazine: Thought Leader Interview: Bill George

In this recent interview with the Rotman School of Business in Toronto, I talk about the importance of leaders following their True North in order to avoid being derailed, including your compass for the journey and making the transition from "I" to "We." To read the article, click here.

Developing Innovative Leaders

From MWorld Summer 2012

Steve Jobs has become a symbol of innovative leadership. Sad to say, there aren't many leaders like him. Most of them -- Google's Larry Page, Amazon's Jeff Bezos, Facebook's Mark Zuckerberg, Genentech's Arthur Levinson, and Starbucks' Howard Schultz -- are entrepreneurs who founded and built their businesses. 

These days virtually all large companies want to be innovative, yet they aren't producing innovative leaders. What has happened to these leaders in large corporations? Have they been squeezed out by constant focus on producing short-term results and replaced by financially-oriented managers who respond to Wall Street's demands for quarterly earnings? Or do corporate leaders lack the basic understanding of what is required to lead innovative organizations? While hundreds of books and articles have been produced on innovation, very little has been written on what is required to produce innovative leaders. 

Research and Product Development Are Not Innovation

In this era, many companies are investing heavily in research and product development, yet they fail to create innovative products and ideas. U.S. pharmaceutical companies like Pfizer and software companies like Microsoft illustrate that heavy spending on research and product development doesn't necessarily yield innovations. In contrast, the breakthrough ideas that created Genentech, Google, and Facebook illustrate what can be done with limited budgets. It is important to recognize that research, product development, and innovation are radically different disciplines. 

Research is based on well-established scientific principles. At its best, research produces scientific breakthroughs that extend knowledge like Schottky's invention of the transistor and Novartis's breakthrough drug Gleevec for treating chronic myelogenous leukemia. Product development, on the other hand, follows established engineering principles to improve existing products.

Innovations result from unique ways of looking at problems that produce original solutions. Another approach to innovation takes existing ideas and combines them into unique solutions. In retrospect, the outcome may seem obvious, yet is highly original. Apple's iPad is an example, combining Apple's iPod, iPhone, and iMac to create a breakthrough product. 

  1. Because research and innovation require long time frames, the pressure on business-unit leaders to produce near-term success often results in funds being shifted from innovative projects to product development and product extensions. 
  2. Large organizations that are heavily dependent on previous successes frequently squeeze out innovative ideas and the innovators who create them. Not infrequently, the most innovative ideas run into significant difficulties in their infancy and get killed or underfunded in favor of high-profitability development projects. 
Qualities of Innovative Leaders

To overcome these pitfalls, organizations need innovative leaders at the top willing to sacrifice near-term financial results to support their innovators through success and failure. The characteristics of great innovative leaders are dramatically different from traditional business managers. Here are five essential qualities they must have to lead innovation: 
  1. Passion for innovation. Innovative leaders not only have to appreciate the benefits of innovation, they need a deep passion for innovations that benefit customers. Just approving funds for innovation is insufficient. Leaders must make innovation an essential part of the company's culture and growth strategy. 
  2. A long-term perspective. Most investors think three years is "long-term," but that won't yield genuine innovation. Major innovations can change entire markets as the iPod and iTunes did, but they take time to perfect products and gain adoption by mainstream users. Leaders cannot stop and start innovation projects as if they were marketing expenses; they must support innovation regardless of the company's near-term prospects. 
  3. The courage to fail and learn from failure. The risks of innovation are well known, but many leaders aren't willing to be associated with its failures. However, there is a great deal to be learned from why an innovation has failed, as this enhanced understanding can lead to the greatest breakthroughs. At Medtronic, our failures with implantable defibrillators in the 1980s led to far more sophisticated approaches to treating heart disease in the 1990s. 
  4. Deep engagement with the innovators. Innovative leaders must be highly engaged with their innovation teams: asking questions, probing for potential problems, and looking for ways to accelerate projects and broaden their impact. That's what HP's founders Bill Hewlett and David Packard did by wandering around HP's labs and challenging innovators. 
  5. Willingness to tolerate mavericks and defend them from middle management. The best innovators are rule-breakers and mavericks who don't fit the corporate mold and are threatening to middle managers following more typical management approaches. That's why innovative leaders must protect their maverick's projects, budgets, and careers rather than forcing them into traditional management positions. 

How can companies develop innovative leaders capable of ascending to top management? They need to identify these emerging leaders and then give them their most challenging projects, while protecting them from failures and organizational conflicts.

Some Examples of Innovative Companies

When I joined Medtronic in 1989, it was evident that the innovation process had broken down. My first week, I was informed that all innovative ventures were being divested because they were losing money and the company needed improved short-term results. The company had many highly innovative people, who were demoralized by lack of senior management support. Engineering problems and product development overruns were absorbing all their funds. To solve both problems simultaneously, we created entirely separate organizations with different profit-and-loss structures and put disciplined leaders in charge of the established organization and innovative leaders in charge of breakthrough ideas. 

To solve engineering problems, a highly disciplined engineer restructured the product development process. He cut new product lead times from 48 to 18 months with a rigorous approach that kept unproven ideas and innovation off the critical path. He selected disciplined engineers as project leaders and produced a steady stream of products resulting in near-term success. This provided the profits and cash flow to fund innovative ideas as well as refuel the product development process. 

Meanwhile, two very innovative senior executives led the creative side: a scientific leader and a medical doctor with a keen interest in technology and innovative medical ideas. They created a series of venture projects addressing unmet medical needs. Although many projects failed, enough succeeded to propel Medtronic to sustain a growth rate in excess of 18% for a 20-year period. This built the company from $400 million to $16 billion in revenue and gave Medtronic a reputation as "an innovation machine." More important, innovations resulted in a dozen major medical breakthroughs to treat intractable disease, including original therapies for heart failure, spinal pain, cerebral palsy, and Parkinson's disease. 

Because the established business organization contained most of the people and budgets, I focused more attention as CEO on the innovators. This ensured their projects and their careers didn't get crushed by the established organization that produced near-term profits. Since many of the innovations couldn't withstand careful scrutiny at their outset, they had to be protected from engineering and financial analysis until they were sufficiently proven to put them through rigorous product design and clinical testing. 

In recent decades the creators of America's great growth corporations have been succeeded by established business leaders lacking the innovative drive to sustain growth. The stories of Hewlett-Packard and Amazon are particularly instructive. For 30 years, HP was the role model of innovation, producing 20% revenue growth and 20% operating profits. As it grew, HP became complacent and bureaucratic. In response, its board divested its original businesses and went outside four consecutive times to appoint commercially oriented CEOs, none of whom has restored the company's innovative capacity. 

In contrast, Amazon founder Jeff Bezos never wavered in his commitment to online retail marketing, even when the dot-com bubble burst in 2002 and Amazon's stock declined more than 90%. More recently, Bezos ignored short-term profitability to expand into hardware with the Kindle. Faced with mounting costs and technical difficulties, Amazon's financial chief asked him how much he was prepared to lose on this venture. Not flinching, Bezos replied, "How much money do we have?" He was so committed to this venture that he was prepared to stake the company's future on its success. As a result, Amazon is transforming the book world from printed books to electronic. 


For America to regain its global competitiveness, a new generation of innovative leaders needs to take over top roles in our leading corporations, not just found startup companies on the West Coast. This new generation seems to be emerging, led by IBM's Sam Palmisano, Ford's Alan Mulally, PepsiCo's Indra Nooyi, Lilly's John Lechleiter, and General Mills' Ken Powell. For America to regain its competitive edge, we will need many more like them. 

The Long-Term Value of Internet Companies

From New York Times Deal Book:

A decade after the last technology bubble burst, the signs are everywhere that it is happening again.

Look at what’s happened to the highly publicized initial public offerings: Facebook’s value has declined $30 billion since its I.P.O., costing investors nearly half their investment. Zynga shares have plummeted. Groupon shares trade at such an extreme discount that there should be a Groupon for them. Pandora’s stock, once $17, has touched $7. Companies like Friendster and MySpace, meanwhile, toil in oblivion.

These declines didn’t have to occur. Creating new markets is a messy, fast-moving process in which many companies will collapse. Instead of mourning Facebook’s inability to surpass the market capitalization of General Electric, we should be celebrating the success of companies that have navigated early-stage minefields.

An aggressive approach to early-stage venture investing has led to a bubble in start-up financing. Financial analysts of these growth companies make a host of assumptions to project performance to justify outsize valuations.

As a consequence, promising young companies like Groupon and Zynga get overvalued. To support its I.P.O. valuation of nearly 100 times its earnings, Facebook would have to sustain an unrealistic growth rate. Even at its lower valuation, Facebook’s market capitalization is 12 times its revenue. Last week, Facebook reported respectable growth across all its important metrics: new users, active users, total advertising revenue and operating income. Yet, the vicissitudes of volatile markets caused its stock to decline 12 percent after its earnings announcement.

In a prudent financing environment, investors would be banking on Facebook’s future instead of wondering why it had lost so much of its I.P.O. value. Critics have argued that Facebook’s backers increased value for the company’s original investors by aiming for the highest valuation during the I.P.O. Did they lose sight of the importance of creating long-term value by having a base of stable committed shareholders who understand the business and are focused on its long-term success?

As we learned during the financial crisis, speculative traders looking for outsize returns can increase the volatility of company valuations. In turn, management gets trapped into trying to justify excessive valuations by focusing on short-term results. These huge swings in valuation have consequences. They jeopardize acquisitions. They demoralize employees who are compensated with stock. Most important, they distract senior leaders from their real job: creating great products that serve their customers.

Entrepreneurs who want to build for the long term should avoid going public until they have positioned themselves as market leaders with diverse and stable revenue streams. Even then, they shouldn’t strive to notch 80 times price-to-earnings ratios or a 100 percent pop in its shares on the first day of trading. Google is a classic example of the right way to go public. It delayed going public until six years after its founding. Since its I.P.O. in 2004, Google stock has moved steadily upward, rewarding its investors with a 500 percent return. Google’s $200 billion market capitalization is justified by $40 billion in revenue and $10 billion of net earnings.

Rather than trying to maximize the value of their I.P.O.’s, start-ups should align themselves with capital partners who are builders themselves, interested in sustainable growth and wary of unrealistic valuations. They should select board members committed to the long-term success of the company, compensating their directors with restricted stock. Founders should accept lower valuations in order to attract the right investors – financial partners who will invest in the brand, research and development and operational engine to create sustainable competitive advantage.

The striking example of Warren E. Buffett contrasts markedly with what we observe happening with the social media start-ups. Mr. Buffett cautions his investors about overpaying for assets and often talks down expectations for Berkshire Hathaway stock. He has taken the high road in treating his shareholders like long-term business partners. While shareholders don’t get one-time pops, they have compounded earnings at more than 20 percent a year for 50 years.

These days, the scrutiny of public company leaders is intense, and public markets are unforgiving. The high turnover in hedge fund portfolios makes Wall Street a place where fortunes are made, not where businesses are built.

In contrast, the best entrepreneurs are business builders. They should keep a laserlike focus on precisely that and never deviate to please short-term traders.