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"The fastest way to succeed," IBM's Thomas Watson, Sr., once said, "is to double your failure rate." In recent years, more and more executives have embraced Watson's point of view, coming to understand what innovators have always known: Failure is a prerequisite to invention. Although companies may grasp the value of making mistakes at the level of corporate practices, they have a harder time accepting the idea at the personal level. In this article, psychologist and former Harvard Business School professor Richard Farson and co-author Ralph Keyes discuss how companies can reduce the fear of miscues. What's crucial is the presence of failure-tolerant leaders--executives who, through their words and actions, help employees overcome their anxieties about making mistakes and, in the process, create a culture of intelligent risk-taking that leads to sustained innovation. Drawing from their research in business, politics, sports, and science, the authors identify common practices among failure-tolerant leaders. These leaders break down the social and bureaucratic barriers that separate them from their followers. They engage at a personal level with the people they lead. They take a nonjudgmental, analytical posture as they interact with staff. They openly admit their own mistakes. And they try to root out the destructive competitiveness built into most organizations. Above all else, failure-tolerant leaders push people to see beyond traditional definitions of success and failure. They know that as long as a person views failure as the opposite of success, rather than its complement, he or she will never be able to take the risks necessary for innovation.

In most companies, investments in innovation follow a boom-bust cycle. For a time, the cash flows. Then, as the economy sours or companies rethink their priorities, the taps go dry. But when research budgets are slashed, the strong projects are often abandoned along with the weak ones. When disruptive changes in the competitive landscape come, companies are caught flat-footed. Sustainable innovation requires a new approach: Instead of being largely isolated projects, innovation initiatives need to gain access to the insights and capabilities of other companies. But how can businesses traffic in such sensitive information without giving their competitors an advantage? The answer, the author contends, lies in a practice that's been common since the Middle Ages: the use of independent intermediaries to facilitate the exchange of sensitive information among companies without revealing the principals' identities or motives and without otherwise compromising their interests. A network of innovation intermediaries would be in a unique position to visualize new opportunities synthesized from insights and technologies provided by several companies--ideas that might never occur to businesses working on their own.

How much of innovation is inspiration, and how much is hard work? The answer lies somewhere in the middle, says management thinker Peter Drucker. In this HBR classic from 1985, he argues that innovation is real work that can and should be managed like any other corporate function. Success is more likely to result from the systematic pursuit of opportunities than from a flash of genius. Indeed, most innovative business ideas arise through the methodical analysis of seven areas of opportunity. Within a company or industry, opportunities can be found in unexpected occurrences, incongruities of various kinds, process needs, or changes in an industry or market. Outside a company, opportunities arise from demographic changes, changes in perception, or new knowledge. There is some overlap among the sources, and the potential for innovation may well lie in more than one area at a time. Innovations based on new knowledge tend to have the greatest effect on the marketplace, but it often takes decades before the ideas are translated into actual products, processes, or services. The other sources of innovation are easier and simpler to handle, yet they still require managers to look beyond established practices, Drucker explains. The author emphasizes that innovators need to look for simple, focused solutions to real problems.

As companies try to keep pace with rapid changes in technology and cope with unstable business environments, their research departments have to do more than simply invent new products. They must design the new technological and organizational architectures that make a continuously innovating company possible. In this 1991 article, John Seely Brown, then director of Xerox's Palo Alto Research Center (PARC), describes the business logic behind this distinctive vision of research's role and the ways Xerox PARC tried to realize that vision. Its researchers developed prototypes of new work practices as well as new technologies and products. They designed new uses for technology to encourage the local innovation that, they found, occurs naturally at all levels of any big company. And they experimented with new techniques for what the author terms "coproducing" technological and organizational innovations with Xerox's customers. Xerox's business is technology, but Seely Brown argues that any company, no matter what its business, must eventually grapple with the issues he raises. The successful company of the future must understand how people really work and must adapt its technology to the work rather than the other way around. It must know how to create an environment that allows for continuous innovation by all employees. McKinsey Award Winner.

Consistent innovation is the key to market leadership. Outstanding companies know that and build their success on it. And other organizations can do the same, the author explains in this HBR article from 1988, by making a systematic effort to concentrate on five key activities. Start at the top. Innovation begins with a CEO or general manager who believes change is the way to survive. Spread that mind-set through the organization by setting challenging, measurable goals; getting everyone focused on beating a specific competitor; and supporting individuals who take risks. Allow innovation to rise. New ideas need champions, sponsors, a mix of creative types (for ideas) and operators (to keep things practical), and separate systems to get ideas to top management early and quickly. Know the competitive dynamics of your business cold. A realistic strategic vision will channel innovative efforts to ideas that will pay off in the marketplace. Determine where innovation lives. Look hard at your customers to find new segments, at your competitors to see what's already working, and at your own business to determine where you can leverage existing strengths. Once an idea is well developed, go for broke. Set priorities. Think through every step of the launch.

Champions of virtual corporations urge managers to subcontract anything and everything. And because several high-profile corporate giants have been outperformed by more nimble, "networked" competitors, the idea of the virtual organization is tantalizing. Many executives have come to believe that a company that invests in as little as possible will be more responsive to a changing marketplace and more likely to attain global competitive advantage. But is that really the best way to organize for innovation? In this HBR article from 1996, Henry Chesbrough and David Teece argue that the virtual corporation has been oversold. Innovation is not monolithic. For some innovations, joint ventures, alliances, and outsourcing can play a useful role. But for others, they are inappropriate--and strategically dangerous. The authors present a framework to help managers determine when to innovate by going virtual, when to form alliances, and when to rely on internal development. They provide a range of cases to illustrate how to match organizational strategy to the type of innovation being pursued. Long-term success requires considerable and sustained investment within a company.

Creativity is often touted as a miraculous road to organizational growth and affluence. But creative new ideas can hinder rather than help a company if they are put forward irresponsibly. Too often, the creative types who generate a proliferation of ideas confuse creativity with practical innovation. Without understanding the operating executive's day-to-day problems or the complexity of business organizations, they usually pepper their managers with intriguing but short memoranda that lack details about what's at stake or how the new ideas should be implemented. They pass off onto others the responsibility for getting down to brass tacks. In this classic HBR article from 1963, the author, a professor emeritus at Harvard Business School and a former HBR editor, offers suggestions for the person with a great new idea. First, work with the situation as it is--recognize that the executive is already bombarded with problems. Second, act responsibly by including in your proposal at least a minimal indication of the costs, risks, manpower, and time your idea may involve. Extolling corporate creativity at the expense of conformity may, in fact, reduce the creative animation of business. Conformity and rigidity are necessary for corporations to function.

Many of the greatest discoveries happen by accident, not design. Innovations often emerge not at the center of a company's field of focus, but at its periphery, hidden in the mass of work done in the pursuit of some other goal. Everyone knows that innovation is risky, and it's rare that you arrive at your expected destination. But maybe the destination isn't so important. Maybe what you should be paying attention to are the little detours along the way: It's down those back roads and byways that the real payoff usually is found. The discovery of penicillin and the creation of e-mail are just two examples of such stumblings into brilliance.

Some companies are better at scouting out new market opportunities than others are. Those that lack the time or the talent for this work should consider outsourcing it to reconnaissance experts.

Diversity, cohesiveness, and autonomy may seem critical to the creative work that teams do. But new research shows that too much of those things can thwart innovation.

Not long ago, it seemed far-fetched to think that feature films could be made on computers. Pixar cofounder Ed Catmull discusses how his company turned improbability into reality with the blockbusters Toy Story, A Bug's Life, and Monsters, Inc.

Regions where social ties are tight are the worst places to put your innovation operations. Look instead for communities that promote tolerance, diversity, and creativity.

Product returns have become an increasing burden for makers and sellers of almost every kind of good. But some savvy companies are finding that a good returns-handling system can actually enhance relationships with customers and suppliers--and ultimately boost profits.

Mergers that instantly boost earnings per share may gain favorable attention from Wall Street, but dilutive deals can outperform accretive deals in the long term because executives are pressed to rigorously analyze and execute on the promise of their acquisitions.

Too many companies have run into trouble because their boards won't stand up to management. Good governance requires a balance of power between the board and the CEO and a healthy tension between them, says former Medtronic CEO William George.

It's one thing for people to believe in providing superior customer service; it's quite another to keep busy, ambitious, and largely autonomous managers focused on delivering it. Here's how they did it at Enterprise Rent-A-Car.

Businesses spend billions on health insurance. And what do they get for their money? A lot of unhappy employees. Workers fret about the quality of the care they receive, the burden of their out-of-pocket expenses, and the gaps in their coverage. For businesses, health care has become a lose-lose proposition: They pay way too much, and they get way too little. The problem is that the health care industry has been shielded from consumer pressure--by employers, insurers, and the government. As a result, costs have exploded even as choices have narrowed. But if companies embrace a new model of health coverage--one that places control over both costs and care directly into the hands of employees--the competitive forces that spur productivity and innovation in consumer markets can be loosed upon the inefficient, tradition-bound health care system. Moving to consumer-driven health care requires that companies revamp their health benefits in six ways: Give employees incentives to shop intelligently; offer a real choice of insurance plans; charge employees prices that accurately reflect the company's costs; let providers set their own prices; adjust payments for each enrollee based on need; and provide relevant information.

When it comes to management styles, newer isn't always better, or so chef Anthony Bourdain tells us in his best-seller Kitchen Confidential and in this conversation with HBR associate editor Gardiner Morse. But his old-fashioned approach--complete with a rigid hierarchy and a sacrosanct code of conduct--produces a counterintuitive result. Bourdain's kitchen at brasserie Les Halles in New York is a politically incorrect, frenzied workplace that demands and cultivates hard work, high performance, and unqualified loyalty. Bourdain runs his kitchen according to the old-school ethic developed by legendary chef Auguste Escoffier. Escoffier developed the "brigade system" after serving in the army during the Franco-Prussian War and ran his kitchens with a command structure much like the army's. According to Bourdain, the military model works because when people are laboring under extreme conditions, they come to feel that they are members of an elite. Bourdain's kitchen is a little society that depends on the kind of loyalty and mutual dependence needed in any crisis situation. And Bourdain "returns loyalty with absolute loyalty." Equally so, he lays down the law about lines that cannot be crossed. His kitchen allows people many personal freedoms but within a rigid framework. Workers must be punctual, take care of their work areas, and focus on making a great product every time. Protected by their highly structured work relationships, people become free to say what they think. Ego simply disappears because it's unnecessary and unwelcome, and resentments aren't allowed to simmer. Most of all, Bourdain says, the mix of informality and order serves to build great teams.

On September 11, 2001, in the space of a few horrific minutes, Americans realized the fragility of trust. The country's evident vulnerability to deadly terrorism rocked our faith in the systems we rely on for security. Our trust was shaken again only a few months later with the stunning collapse of Enron, forcing us to question many of the methods and assumptions underpinning the way we work. These two crises are obviously very different, yet both serve as reminders of the perils of trusting too much. The new doubtfulness runs contrary to most management literature, which has traditionally touted trust as an organizational asset. It's an easy case to make. When there are high levels of trust, employees can fully commit themselves to the organization because they can be confident that their efforts will be recognized and rewarded. Trust also means that leaders don't have to worry so much about putting the right spin on things. They can act and speak forthrightly and focus on essentials. In short, trust is an organizational superglue. Nevertheless, two decades of research on trust and cooperation in organizations have convinced social psychologist Roderick Kramer that--despite its costs--distrust can be beneficial in the workplace. Kramer has observed that a moderate form of suspicion, which he calls prudent paranoia, can in many cases prove highly beneficial to the distrustful individual or organization. In this article, he describes situations in which prudent paranoia makes sense and shows how, when properly deployed, it can serve as a powerful morale booster--even a competitive weapon--for organizations.

At a time when companies are poised to seize the growth opportunities of a rebounding economy, many of them, whether they know it or not, face a growth crisis. Even during the boom years of the past decade, only a small fraction of companies enjoyed consistent double-digit revenue growth. And those that did often achieved it through short-term measures--such as mergers and inflated price increases--that don't provide the foundation for growth over the long term. But there is a way out of this predicament. The authors claim that companies can achieve sustained growth by leveraging their "hidden assets," a wide array of underused, intangible capabilities and advantages that most established companies already hold. To date, much of the research on intangible assets has centered on intellectual property and brand recognition. But in this article, the authors uncover a host of other assets that can help spark growth. They identify four major categories of hidden assets: customer relationships, strategic real estate, networks, and information. And they illustrate each with an example of a company that has creatively used its hidden assets to produce new sources of revenue. Executives have spent years learning to create growth using products, facilities, and working capital. But they should really focus on mobilizing their hidden assets to serve their customers' higher order needs--in other words, create offerings that make customers' lives easier, better, or less expensive. Making that shift in mindset isn't easy, admit the authors, but companies that do it may not only create meaningful new value for their customers but also produce double-digit revenue and earnings growth for investors.