Step 2: HOLT then projects future free cash flows over the next thirty-eight years from existing businesses based on fade algorithms developed from an analysis of historical cash flows from over 45,000 firms and more than 500,000 data points. The concept of fade embodies the commonsense notion that competition is the one enduring constant in free markets (à la Schumpeter’s “creative destruction”) and that technological change and changing market dynamics all militate against the persistence of excessively high returns (this is in accord with prior research that consistently shows a “regression to the mean” effect with regard to firm profitability).
The fade algorithm for a given company is based on the following:
The forward two-year consensus estimate of ROI level. Firms with higher levels of profitability and ROI maintain higher returns into the future. However, the historical experience of most firms shows a “regression to the mean” effect, meaning that high ROIs will gradually fade toward the average ROI of firms in the economy. The higher the current level of profit, the faster the expected decline. (Firms will tend to maintain their rank order; however, the spread between the top and bottom performers tends to narrow.)
Historical ROI volatility (over the previous five years). The greater the volatility of ROI historically, the faster the firm’s ROI tends to fade toward the average of all firms going forward. Firms with consistent and stable ROI are more likely to maintain a consistent ROI into the future.
A company’s reinvestment rate. The faster a company’s recent growth and the greater the amount of cash it has reinvested, the faster the firm’s ROI will fade toward the mean profitability of firms in the economy. It’s hard enough for a management team to maintain high levels of financial performance; doing this while also growing rapidly is even more difficult.
Step 3: The difference between the company’s total enterprise value (market value of equity plus total debt) and this value of existing business constitutes the innovation premium, expressed as a percentage of the enterprise value.
While HOLT’s fade algorithm is based specifically on the historical and future projected performance of the given firm, it may appear to reflect sector identification or industry position. To the extent that firms in an industry or sector share the characteristics of ROI level, variability, and reinvestment, the pattern of fade will also be similar. There is also an apparent correlation between a company’s fade expectations and its position in the industry, since most industry leaders have higher and more stable rates of ROI and, having been through their growth phase in achieving their leadership position, no longer need to grow at above-average rates.
We require at least ten years of financial data for a given firm in order for that firm to be considered on our list of most innovative companies. We also use a “research and development” screen requiring that companies make some investment in R&D. Also, to control for size differences, we include only those with a market value greater than $10 billion. In very rare cases when a company derived more than 80 percent of its revenues from a single high-economic-growth market (e.g., India, China), we assumed a small portion of the company’s innovation premium [5 percent of the difference in growth] was derived from domestic market growth rather than entering new products, services, or markets. Accordingly, we made a slight downward adjustment to the firm’s innovation premium, but this only made a minor change in a firm’s ranking and did not move any companies on, or off, the list. The innovation premiums shown in the tables in this chapter reflect a weighted average innovation premium over five years with the weighting as follows: most recent year (30%), years 2–4 (20%), year 5 (10%).
2. Our ranking must exclude private companies like Virgin (number 16 on the original Businessweek list) and Tata (number 25) because they do not have publicly traded stock and do not report financial results.
3. Dan Frommer, “Top 10 Disruptors of 2006,” Forbes, January 23, 2007, https://www.forbes.com/2007/01/22/leadership-disrupter-youtube-lead-innovation-cx_hc_0122lede_slide.html.
4. A. G. Lafley and Ram Charan, The Game-Changer (New York: Crown Business, 2008), 21.
Chapter 9
1. Rama Dev Jager and Rafael Ortiz, In the Company of Giants (NewYork: McGraw-Hill, 1998).
2. Carmine Gallo, The Innovation Secrets of Steve Jobs (New York: McGraw-Hill, 2011), 31.
3. Gallo, The Innovation Secrets of Steve Jobs, 96.
4. “The Deep Dive,” Nightline (ABC News), February 9, 1999.
5. Julio Vasconcellos and Matt Wyndowe, interview with David Kelley, founder of IDEO, Stanford University’s business and design school, August 21, 2006, http://sites.google.com/site/wyndowe/iinnovateepisode3:davidkelley,founderofideo.
6. “Deep Dive,” Nightline.
7. Vasconcellos and Wyndowe, interview with David Kelley.
Chapter 10
1. Steven Levy, The Perfect Thing: How the iPod Shuffles Commerce, Culture, and Coolness (New York: Simon & Schuster, 2006), 118.
2. The categorization of innovation projects as “derivative,” “platform,” or “breakthrough” comes from the Aggregate Project Planning framework introduced by Steven C. Wheelwright and Kim B. Clark. See Clayton M. Christensen, “Using Aggregate Project Planning to Link Strategy, Innovation, and the Resource Allocation Process,” HBS No. 301-041 (Boston: Harvard Business School Publishing, 2000, revised 2017).
3. The concept of aggregate project planning was first introduced in Steven C. Wheelwright and Kim B. Clark, “Creating Project Plans to Focus Product Development,” Harvard Business Review, March–April 1992, 10.
4. Larry Page and Sergey Brin, “Letter from the Founders: ‘An Owner’s Manual’ for Google’s Shareholders,” Google Inc., Form S-1 Registration, April 29, 2004.
5. Julia Kirby and Thomas A. Stewart, “The Institutional Yes,” Harvard Business Review, October 2007.
6. David A. Vise and Mark Malseed, The Google Story (New York: Delacorte Press, 2005), 256.
7. John Battelle, The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture (New York: Penguin Group, 2005), 141.
8. Letter to Shareholders. Amazon, 2015, ir.aboutamazon.com/static-files/f124548c-5d0b-41a6-a670-d85bb191fcec.
9. Richard Branson, “Five Questions on Business Philosophy,” Entrepreneur.com on NBCNews.com, October 23, 2010, http://www.nbcnews.com/id/39526296/ns/business-small_business/t/richard-branson-five-questions-business-philosophy/#.XHbFGINKh7N.
10. Keith H. Hammonds, “How Google Grows . . . and Grows . . . and Grows,” Fast Company, March 31, 2003.
11. “Lessons on Designing Innovation,” from an interview with Apple’s Jonathan Ive at the Radical Craft Conference, Art Center College of Design, Pasadena, California, Bloomberg Businessweek, September 25, 2006.
12. Ken Robinson with Lou Aronica, The Element (New York: Penguin, 2009), 15.
Appendix C
1. These online assessments also provide a development guide with your customized assessment report to help you understand your strengths and potential areas of improvement with regard to your discovery skills and delivery (execution) skills. The development guide also helps you build a skill-development plan to leverage your strengths and improve on any major weaknesses that could derail your career.
2. For a deeper dive on how to build better questioning skills in the next generation, see chapter 8 of Questions Are the Answer: A Breakthrough Approach to Your Most Vexing Problems at Work and in Life, by Hal Gregersen.
Index
Abilla, Pete, 206–207
Aby, Sharon, 203
action, 247–248
Activision Blizzard Inc., 166
Acuson, 208
Adams, Matt, 217, 219
Adobe Systems, 170
Adsense, 228
Alcon Incorporated, 166
Alder, Nate, 147, 249
Alder, Preston
, 49–50
Alexa, 139, 231, 233
Alstom, 7
Alstom SA, 166
Amazon, 5. See also Bezos, Jeff
autonomous business units of, 236–237
culture of, 171, 172
experimentation at, 138–140, 215
hiring processes, 36, 201, 203
innovation premium, 164, 166, 169
Kindle, 139, 231, 233
leadership of, 171–172
mistakes at, 26
project teams, 234–235
resources devoted to innovation at, 233–234
Two-Pizza Team rule, 175, 235
AmerisourceBergen, 170
Amorepacific, 170
Amritanandamayi, Mata, 42
analogies, 49–50, 63–64
analyzing, 31
Anderson, Chris, 158
Anderson, Philip, 106
Angiotech Pharmaceuticals, 74
anomalies, 105–109
anthropologists, 94–95
AppExchange, 167
Apple, 1, 4, 5, 162. See also Jobs, Steve
business creation at, 37
disruptive innovation by, 231
hiring practices at, 203
innovation at, 18–21, 181, 183
innovation philosophy at, 223–224
innovation premium, 12, 164, 166, 183
leadership of, 181, 183
product creation at, 85
questioning process at, 207
resources devoted to innovation at, 233
risk taking at, 239
“Think Different” ad campaign, 18, 38, 223–224, 248
Apple II, 18–19
Apple QuickTake, 233
Apple Watch, 231
architectural innovations, 106
Ariely, Dan, 227
Aspen Ideas Festival, 47, 128
associating, 3, 22–23, 30, 41–65
comparison of skills in, 51
defined, 44–45
diverse experiences and, 45–49
at innovative companies, 218–219
innovative ideas and, 41
process of, 49–52
tips for developing skills in, 60–65, 263–264
where it happens, 45–49
associations
forcing new, 60–62
places for new, 58–60
search for new, 52–58
unexpected, 49
Atlassian Labs, 228–229
Autodesk, 170
autonomous business units, 236–237
Azul, 78–79, 129
Bacon, Penelope, 83
Bain & Company, 58, 68
Bean, Dan, 186–187
Becht, Bart, 213
behavior
creativity and, 3, 21, 38
experimenting, 24
networking, 24
observing, 23–24
questioning, 23
Beiersdorf AG, 166, 214–215
Benioff, Marc, 2, 9, 249
idea creation by, 41–44
idea generation by, 50, 59
innovation by, 179, 223
on innovative companies, 161
networking by, 121, 174
social problems addressed by, 244–245
“better-than-average” effect, 225
Bezos, Jeff, 2, 6, 8, 9, 17, 249. See also Amazon
on company culture, 221
expansion by, 233–234
experimenting by, 138–140, 143, 174, 215
five-whys process and, 205–207
forward thinking by, 26
hiring process of, 36, 201
idea networking by, 128
on innovation at Amazon, 171–172, 223
innovation by, 179, 180
on mistakes, 26, 237–238
motivations of, 25
observation by, 114
questioning by, 205–207
Bharat Heavy Electricals, 166
Big Idea Group (BIG), 75–76, 99, 190–192
big picture, 54–55
BlaBlaCar, 50, 97–99
BlackBerry, 52–53
BMW, 164, 165
Bowen, Kent, 126
Box, George, 138
Bozer, Ahmet, 88
brain, storage of knowledge in, 49
brainstorming, 87–88, 218–219
Branson, Richard, 2, 56, 89, 130, 143, 238, 243, 247
breakthrough ideas, 3
Brin, Sergey, 53, 228
building-block ideas, 56–58
Burt, Ron, 121–122
business innovation, 194–195. See also innovation
business life cycles, skills needed throughout, 33–37
business schools, 37
Businessweek, 4, 5, 7, 34, 162–164, 165
Camp, Garrett, 50, 116–118
Campus Pipeline, 76
Casino Royale, 117
Catmull, Ed, 24
Celgene Corp., 166
Celltrion, 170
CEOs
personal networking groups of, 130–133
questioning dilemmas for, 83–84
Charan, Ram, 168
Chatter, 43–44, 167, 174
Chery, 165
children, developing discovery skills in, 262–268
China, innovation in, 46–47
Christensen, Clayton, 1–2, 8, 95, 106, 194–195
Clark, Kim, 106, 231
cloud computing, 43, 139–140, 165, 233, 236
Cloyd, Gil, 183
coach, 261
Coca-Cola International, 88
Coda, 165
Cohen, Orna, 114
Colgate-Palmolive Co., 167
Collins, Mike, 75–76, 99, 190–192, 249
combinations, odd, 52–54
combinatorial play, 43
companies. See also innovative companies
assessing level of innovation of, 177–178
experience in multiple, 147
observing, 113, 208–210
company cultures, 84, 221–241
competency-destroying changes, 106
competency-enhancing changes, 106
competitive advantage, from innovation, 1
complementary skills, 185–196
conferences, 135
Connect + Develop (C&D) initiative, 212
constraints
eliminating, 82, 85
imposing, 81–82
Cook, Scott, 2, 8, 9, 49, 91, 249
discovery skills of, 29–30
on experts, 127
observing by, 105, 112
questioning by, 75
corporate culture, 84, 171, 172–173, 174
corporate entrepreneurs, 6
associating skills of, 50
experimenting skills of, 141
networking by, 119–120
observing skills of, 100
questioning skills of, 72
counterintuitive questions, 73
country culture, 84
courage to innovate, 25–27
Covey, Stephen, 261
Cow-Pie Clocks, 144–146
CPS Technologies, 125–127
creative communities, 135
creative thinking, 41
creativity, 1
behaviors and, 3, 21, 38
capacity for, 18
constraints and, 81–82
development of, 21–22
making connections and, 45, 60
questioning as catalyst for, 85–86
research on, 9
Crocker, Gary, 101–102, 249
cross-pollination of ideas, 45, 113
Csikszentmihalyi, Mihaly, 70
CSL Limited, 166
cultures
differences among, 84
experience of different, 146
organizational, 221–241
curiosity, 10
curiosity boxes, 64
customers, observing, 101–104, 112–113, 208–209
Daimler, 111
data-driven analysis, 36
da Vinci system, 168, 208
Davos conference, 47, 128
de Bono, Edward, 56
decline stage, of business life cycle, 36–37
deconstruction, 148–149, 156–157
Deep Dive brainstorming, 218
defocusing attention, 58–59
delivery-driven executives, 80, 119, 143, 181
delivery skills, 30–37, 180–181
as complementary to discovery skills, 185–196
profile quiz, 38–40
Dell, Michael, 9, 188, 249
on complementary skills, 185
discovery skills of, 29–30
experimenting by, 142, 143, 148–149
on innovation at Dell, 131
questioning by, 86
Dell Computer, 148–149, 185
DePuy Synthes, 166
derivative innovation, 230, 235–236, 246
desktop publishing, 20–21
detail-oriented implementing, 31
details, 54–55
Dialogue in Silence, 114
Dialogue in the Dark, 114, 245–246
Dietz, Doug, 91–94, 95
disciplined executing, 31
discovery-driven people. See also innovators
finding, 200–203
networking by, 119
new experiences and, 143–144
discovery quotient (DQ), 34–35
discovery skills, 3, 7–8, 180–181
acquisition of, 22
assessing your, 259
associating, 22–23, 30, 41–65
in business life cycle, 33–37
in children, developing, 262–268
combining, 216–220
complementary, 185–196
developing, 257–268
experimenting, 24, 137–158
improving your, 32
innovative ideas and, 22–23, 38
of innovators, 34–35
need for, 10
networking, 24, 115–136
observing, 23–24, 91–114
practicing, 244, 260
profile quiz, 38–40
questioning, 23, 30, 67–90
return on, 144
strengths in, 28–30
success and, 11
time spent on, 25–27
Disney, 85. See Walt Disney Company
Disney, Walt, 44–45
disposition to act, 247–248