Four pre-requisites for successful innovation

Innovation is a broad term. Innovation can be incremental - the next BMW with more features, more refinement, or more desirable. It can be a new-to-the-world product like Google Glass. Or it can be a new product coupled with a new business model and, therefore, game changing, such as Apple's iPhone, or the global delivery model in IT services. In the developed world, innovation is largely driven by the need to get people to upgrade to the next new thing. In contrast, the big opportunity for firms in India, both Indian and foreign, is to come up with innovations that make things accessible to first-time users - like cellphones, cars or education, or else bring efficiency to an unorganised business like making bus reservations. With its combination of extreme diversity and adversity, India is a unique laboratory for this type of innovation. But the adversity of our country is daunting; success requires the patience of a saint and the pockets of a prince. What differentiates success from failure?

First and foremost, culture: Culture eats both opportunity and strategy for breakfast. To succeed, the innovation team must operate like a real start-up. Create a big and clear mission and hire people who are inspired by it. Find a leader who is passionate, entrepreneurial, resourceful and courageous. Bet disproportionately on hungry, passionate and edgy young people and give them big challenges that they aren't ready for - you need to be young and foolish to attempt the impossible. Have few rules and fewer policies. Reward experimentation and risk taking. Celebrate failure, not just success. Keep things extremely lean, simple and basic. Expect everyone to wallow in the customer's shoes to glean insights, not to gaze at Powerpoint presentations and spreadsheets in meeting rooms. In large companies what this invariably means is creating a separate skunkworks team, reporting to the CEO, firewalled from the bureaucracy of the mainstream.

Embrace lean thinking: This means avoid "big bang" high investment and high risk approaches. Favour "lean start-up" principles, which basically means: "Think big, start small, iterate quickly and scale fast". In the best of times, it's hard to predict what customers might like and pay for and what approaches might work. Given the extraordinary complexity of India, it is even harder to get all these variables right the first time. It is much smarter to field a simple prototype and see what works and what doesn't. If you are McDonald's, it makes sense to experiment and figure out how to run one restaurant profitably before building the next 100. Operating and experimenting on a shoestring ensures you conserve precious cash and buy the time needed to crack the success formula. Systematically running market experiments to test assumptions and hypotheses is smarter than a "spray and pray" approach.

A "no exit" policy: The difference between success and failure is often no more than tenacity. Many innovations fail simply because someone gave up prematurely. The bigger the mission, the longer it takes. At Tata Cummins, we took seven years to crack the code of success and another three years to become the dominant truck engine in India. McDonald's India took nearly a decade to get the model right. Unilever started its Pureit water purifier business over a decade ago and has yet to turn profitable, but they steadfastly keep at it. The Tata Nano is a game changer, but still has major challenges on product, branding, distribution and profitability. This is why Mukesh Ambani believes it is critical to have a "no exit policy"- failure is simply not an option. If at first you don't succeed, try, try, try yet again.

Leadership matters: Innovation means doing something counter-intuitive and going against the current way of thinking. Organisations - large ones especially - cherish predictability, and ensure that through structures, processes, rules, policies, budgets and controls.

Innovation is, therefore, an unnatural act. The bigger, older and more successful the organisation, the more unnatural act an innovation is. There is no shortage of ideas - it's merely that the ground for them is barren. This is why the role of the CEO is so critical. It is the CEO's role to assimilate ideas from all sources and then decide which one to back. It is the CEO's task to choose the maverick leaders who can be counted on to take on tough missions and then give them the air-cover they need. Only the CEO can decide what is the right balance between quarterly pressures and the longer term agenda. It is the CEO's responsibility to ensure a culture that is open to new ideas, tolerates experimentation and failure, and is externally-oriented. Look at any company that we regard as innovative - and it is invariably because the CEO is leading the innovation agenda personally - think of Steve Jobs or Ratan Tata. Too often, though, companies are led by executives who are financially or operationally-oriented. Theirs is the logic of margins, predictability and valuations rather than innovation, entrepreneurship and growth. Such leaders have a tendency to play defence not offence, preferring to protect and leverage their existing business instead of creating new ones. By not engaging hands-on with the innovation agenda, they allow the bureaucracy and budgeting process to emasculate the most promising new ideas and brightest talents.

Economist Joseph Schumpeter said profit is fundamentally a return on successful innovation. Industry shaping innovation is the CEO's most fundamental job. We should remember that as we look at CEO succession.

The writer is former chairman of Microsoft India and author of the forthcoming book Conquering the Chaos, excerpts from which appear below