When Pure Digital released its handheld video camera - the Flip - skeptics believed that the product, with its basic functions and no zoom lens, should instead be named Flop. Yet, the company's founders held firm, convinced that even in a gadget-obsessed world, there exists a niche for a simple video camera.

The cameras weigh a few ounces and plug directly into a desktop with a USB connector, allowing users to capture video and send it to friends easily. The company grew quickly and was sold to Cisco this year for $590 million.

Pure Digital offers a textbook case of innovation. Its leaders surveyed market trends, acquired feedback from customers, and went in reverse. Whereas the technology world thrives on increasing complexity and multiple features, they offered simplicity.

Initially, the company sold disposable cameras to pharmacies. The idea for a simple video camera was suggested by one pharmacy. No new technology was created. Video technology already existed as did handheld video recorders.

"That's the beauty of innovation. It's not just high tech, low tech, or no tech. If the end consumers see benefits and it's different from your competitors, then you've got a winner," says Thomas Kuczmarski, a consultant and faculty member at Northwestern University's Kellogg School.

When people think about innovation, they imagine a tangible item such as a handheld product. That is only half of the concept. Innovation is another buzzword used so frequently that it has lost its meaning. People know it when they see it but have difficulty defining it and greater trouble practicing it in the workplace.

Responding to a market demand is the real source of innovation, not a spontaneous idea that flashes in one's head. While talking to a general whose soliders were badly burned during a severe fire in Iraq, DRIFIRE's founder, Charlie Bicek, realized that fire-retardant gear could literally save the skin of soldiers, firefighters, and electrical workers. So his company designed fire retardant shirts that are comfortable as well as highly functional. The company now counts the federal government among its biggest customers.

"Innovation is not about creating something new," says Thomas Koulopolos, a consultant and author of The Innovation Zone. "It's about taking something that exists and aligning it with the market's needs. It's also about how you understand the behavior of the marketplace and do not stick to a business model when the market resists."

Koulopolos believes that the current economic stimulus packages are failing to encourage small and medium-sized businesses, which are the incubators for innovation. However, the large companies are better suited to delivering innovative products and services to a wider market.

Scott Anthony, a consultant and author of The Silver Lining: An Innovation Playbook for Uncertain Times, says people mistakenly believe that innovation is synonymous with creation - the kind dreamt up by scientists in lab coats. Invention is creating something that did not exist, whereas innovation is putting invention to work - something that a lot of people do.

Companies with an innovative spark

"People think that they can't be innovative because Steve Jobs is innovative or because Thomas Edison is innovative," Anthony says. "People are more innovative than they realize."

Industry leaders are usually not the first to discover something. Instead, they are the ones who refine or augment an item. Apple was not the first company to produce an MP3 player. Google did not launch the first search engine. Amazon is not the first book retailer. All three innovators transformed established concepts into another market segment.

Sometimes innovation isn't even about something created; it's about reaching an audience in a new way. Method, a San Francisco - based producer of green cleaning products, sought to change the image of household cleaners. The founders, Eric Ryan and Adam Lowry, wanted products that could be shelved openly and be free of toxic ingredients. On the company's website, the founders' story is told in a tongue-in-cheek fashion, mimicking a superhero's rise to power.

"They had a clear image in mind to create something that didn't exist," says Amy K Hutchens, an author and speaker who studies innovation. "They gave everyone the middle finger and said that you can make cleaning products that are environmentally sensitive, gorgeous to look at, and not things that need to be hidden under the sink."

Red Bull built a successful brand on a small budget simply through a grassroots marketing campaign - by sending enthusiastic representatives to bars to connect directly with customers. Turner Broadcasting uses I-reporters - people who record their own reports on webcams that are then broadcast during live news shows.

While the industry giants are often thought of as innovators, they are just as often hamstrung by their bureaucratic structure or by demands of quarterly performance reports.

Now that small and large manufacturers can produce similar products, the dynamic has shifted toward appealing to customers in a savvy way, such that smaller organizations can find a niche that was passed over by bigger providers. Illustrating this is Threadless.com, where customers can submit their own t-shirt designs, and the best submissions are posted on the home page in a kind of pageant.

In an era where frustrated customers are often passed like a baton up the chain of command, only to receive the same answer, online retailer Zappos built a devoted customer following with its dedication to customer service. Customers can return a product for any reason within a year. Shipping is free, and the company covers return shipping. An 800 number is posted at the top of the website along with a live chat option.

Zappos will even offer to pay employees to resign, not only as a way to separate poor performers but to weed out employees who are solely motivated by financial rewards, according to Hutchens.

Finding fresh ways to interact with customers is crucial, especially for businesses that rely heavily upon their reputation. British Airways CEO Colin Marshall wanted to create a more customer-friendly organization. Cabin crews were often handcuffed when trying to assist passengers with lost items. Management gave them latitude to ask customers what needed to be done to fix the mistake, along with an unlimited budget.

Airline employees working at customer check-in counters were permitted to leave the counter to assist passengers instead of waiting for a replacement which limited their ability to help. Such changes required permitting flexibility in the work environment, according to Paul Birch, managing director of Visionjuice.

General Motors, which has dubiously failed to innovate, much less adapt to the market, boasts one notable exception. The company introduced OnStar, the hotline service in cars, to the market in just nine months - warp speed for the automobile industry.

Process improvements are just as important as creating new products. In the 1960s, auto manufacturers needed six to eight hours to prepare the shop floor from one model to another.

In the 1970s, Toyota was able to cut the transition time to a matter of minutes, which placed it ahead of American manufacturers, according to Anjan Thakor, senior associate dean and professor of finance at Washington University in St. Louis. Today automakers are down to just minutes for each changeover, but finding a method to cut production time by seconds is crucial.

"Most organizations don't think about their processes," Thakor says. "They focus on what they make or what they sell. In the past 100 years we've created more innovation in business design and management processes than in products. That's an enormous source of value creation."

Introducing something tangible to customers is just part of the equation. There are other ways organizations can be innovative.

"Most people think you need to create a quantum leap in a product or service," says Thakor. "That's only one form of innovation." Thakor has identified four types.

Collaborative. Collaborative innovation involves employees working together to communicate more effectively or improve interaction among teams. Thakor cites Southwest Airlines, McKinsey, Emerson, and universities as models.

Control. A second form is control, whereby an organization focuses on internal process improvements such as upgrading contacts within a supply chain. Dell Computer mastered this element with patents for more than 500 business processes. The resulting model eliminated the need for a distribution chain.

Competitive. A third type is competitive innovation, whereby an organization focuses outside its walls, specifically addressing interaction with customers and suppliers. In the 1990s, Cisco was a signature competitive innovator, averaging 75 new acquisitions annually. When Cisco does not possess a particular technology to expand, it purchases smaller startups, as it did with the acquisition of Pure Digital.

Breakthrough. The final type, breakthrough or quantum leap innovation, is readily identifiable. Organizations create something that did not exist in the marketplace, such as eBay or Motorola's early mobile phones. These are creations that changed the market.

Floundering efforts

A host of roadblocks often discourage new ideas from being executed. In some organizations, individuals who have an idea may be reluctant to share it out of fear that it will be co-opted by management. Another element is the fear of failure. In organizations that are risk averse, unorthodox ideas could easily be ridiculed by cynical colleagues.

An idea that fails to reach the market is not necessarily a bad one. Office products giant 3M is famous for this, being one of few businesses able to harvest success from failure. The company catalogues its ideas, even failed efforts. While searching for a semipermanent glue, the first result was a product that sticks to hard surfaces without being permanent. At first, the company walked away from the idea but later introduced the popular Post-It notes.

With a great deal of fanfare, some executives seek to spur innovation by gathering employees together and sponsoring an idea contest which rewards ideas that could be executed in the marketplace. Kuczmarski believes this is the wrong step to take. Instead leaders should reward teams that successfully bring an idea into the marketplace and not the individual who generated the idea, which often changes over time.

Most organizations are unwilling to dedicate staff entirely to innovation. If all an organization does regarding innovation is the CEO telling employees that "it is your job to innovate," then that is likely to fall flat once employees return to their cubicles.

Businesses should meet regularly with customers to find out what they want, conducting aggressive market research, according to Kuczmarski. Most organizations simply reply that their sales staff meets with customers, but they are focused on selling, not ideas.

Discussions where participants answer questions with more questions are an indicator of innovation because nobody in the room pretends to have all the answers. During brainstorming sessions, participants need to "affirm and add," whereby they build upon others' creativity instead of dismissing it. Ideas discussed freely among colleagues foster greater innovation and more mature ideas.

"If two actors are on stage, and one actor says, 'There's a purple tiger,' and the other actor says, 'No, there isn't,' that kills the scene. But if the second actor says, 'It's a purple tiger carrying a briefcase,' that's affirming," Hutchens says.

Individuals need to question their own assumptions in order to overcome the attitude of "this cannot be done" or "this isn't possible."

For companies that do not innovate, Thakor identified two primary reasons. The first is that innovation is not part of the overall strategy. The executive might talk about it but doesn't actually believe in it or invest any resources toward the goal.

For innovation to take hold there needs to be some "organizational slack" granting employees time to think about their work or about new products or services. 3M allowed employees 20 percent of their time for innovation, amounting to one day per week. When CEO James McNerney took the reins, new rules were established, placed a priority on efficiency over innovation.

"Organizations often go too far in one direction," Thakor says, describing the cycle at 3M. "Their emphasis on efficiency almost killed innovation. The new CEO [George Buckley] brought back the old culture. Now they're reinventing themselves."

The most innovative organizations are usually ones that are uncomfortable with the status quo. They take time to celebrate successes but quickly look to find new ways to innovate. The typical innovative employee asks why a particular task is performed a certain way and offers a more efficient route.

Institutions not known for progressive ideas can do as the city of Chicago did when it began paving alleys with ground-up tires. The reworked alleys do not absorb heat and are able to provide effective drainage. The concept earned the city a local innovation award, which Kuczmarski founded and presents annually.

Now that the conservation of natural resources has consumers' attention, the next wave of ideas is likely to emerge in the energy sector. Ausra, a solar energy company in Nevada, is seeking ways to bring affordable energy to market. The company CEO Robert Fischman targets a cost of 12 cents per kilowatt hour, a major reduction from current costs, according to Hutchens.

"In their case, they said there has to be a way to generate electricity without the costs," Hutchens says. "Innovative organizations are looking to lead a movement, not produce a widget."

When employees gather to discuss ideas, the pressure to generate something profound is great. Participants then hesitate, thinking that any idea short of overwhelming colleagues is inadequate. Routine measures can be addressed first.

Inside one Florida hospital, nurses noticed an abundance of gloves of various sizes when only one size, medium, was typically used. Other departments were stocking unused sizes and ordering from different vendors. Working together, the hospital units ordered a single size from the same vendor.

Greater efficiency in terms of reduced costs is a major step. A maintenance worker at Baptist Healthcare in Florida realized that by turning down a steam valve in the boiler room by one notch, the hospital could save $20,000 per month without any noticeable difference in performance.

"Those are [significant] contributions to workplace innovation," says Pam Bilbrey, an author and Florida-based organization consultant. "They sound small, but they add up to a lot when you have every person in the organization thinking like that."

Short-sighted

The conservative tendency of businesses to calculate every new initiative in terms of an investment also stifles ideas. Innovation requires a willingness to embrace risk, along with a readiness to discard some of the typical measurements used to calculate reward and success. The kinds of risk/loss measurements used to justify new projects or risks will not reflect value.

"Efficiency and productivity measurements are rear view measures," says Jeff DeGraff, a professor of management and organizations at the University of Michigan's Ross School of Business. "Part of the reason efficiency measures are so popular is because they are easy to measure. Breakthrough innovations lose money at the beginning. You have a negative return for now. Organizations just have to deal with it."

DeGraff cites Marshall McLuhan's definition of innovation in four stages. Step one is an enhancement over existing competitors. Next, the new entry destroys competitors, much as discount brokerage houses such as Charles Schwab did to full-service brokerages.

During step three, some aspect of nostalgia is introduced (a notable example is Barnes & Noble's reinvention of university caf style seating and tables, allowing people of all ages to go back to school).

Finally, innovation creates new problems in its wake, albeit unintentionally, as users are unprepared for the consequences of the new offering. Email was expected to transform communication for the better, yet communication skills are worsening as writing ability diminishes and time management of email becomes a job in itself.

For those who think that sharing ideas is tantamount to giving away the store, that is also untrue. A group of CEOs from noncompeting industries meet regularly at Vistage, a membership group of executives, to swap ideas. More than 13,000 members belong, and all sign confidentiality agreements, according to Hutchens.

There are a few organizations that innovate as a business model. Ideo in California is hired by many large customers to design new products from shoes to sunglasses to a space shuttle for NASA. They design 100 new products annually, according to Thakor. A range of specialists including biologists, linguists, engineers, and psychologists are part of the team.

Designers build a prototype for the client without delving into the technical details of how a space shuttle would operate. Companies that think big prefer to stay small - Ideo branches out into new offices when the staff headcount reaches 50 people.

Oftentimes, the brain behind an organization steps aside or is forced out in favor of an individual who can expand the business or right the ship. Such leaders might clean up the balance sheet while stifling innovation. It creates a chicken or egg situation whereby innovation is needed, but not supported.

"Organizations are not led by innovators," says Nicole Morgenstern, practice leader for emerging business at the American Management Association. "They're led by performers who excelled in some area tied to the bottom line. That's typically what's rewarded in organizations."

Good ideas exist in multiple forms and need not win awards or draw raves. They simply take one step forward. However it takes shape, innovation cannot survive when individuals believe that everything worthwhile has been done. t+d