STEP 3: Use the brains you hired

Smart entrepreneurs maximize innovation by encouraging all employees to think creatively about the business.

"You need to give people the license to take risks and to fail often enough to realize that they will not be punished for doing the right thing even though the outcome might not be what they expected," says Thomas Koulopoulos, author of The Innovation Zone, a study of corporate innovation. "Small failures encourage big successes."

When Koulopoulos was running Delphi Group, a technology and management consulting firm in Andover, Mass., he held hour-long innovation meetings once a week. Before each meeting a couple of employees would collect ideas and create an agenda for the conversations.

The sessions focused less on breakthrough innovations and more on continuous improvements in the business, but they helped Delphi expand its services and hit $15 million in revenues before Koulopoulos sold the business four years ago.

In 2007, Daren Cotter, owner of CotterWeb Enterprises in Mendota Heights, Minn., began sharing financial information with his 12 employees. It was seven years since he'd started the company, which administers Web-based customer loyalty programs. His goal: to build a tight-knit culture and boost morale by showing workers how their jobs affected the company's bottom line.

By 2008, Cotter was inviting all employees to strategic planning meetings that stretched over a period of weeks. "We have a lot of smart employees, and they have great ideas," says Cotter. "It would be crazy for us not to include them."

The investment paid off. In 2007, when Cotter invited half the staff to a strategic planning session, he ended up with 40 pages of ideas. The next year, with all 26 employees involved, he harvested several hundred pages.

One new hire suggested that any consumer who bought a product or service from one of CotterWeb's advertisers should receive an e-mail with a link to a Web page listing similar offers. Another offered that each salesperson should focus on a single industry, such as insurance or online education. CotterWeb's revenues rose 8.2% in the first half of 2009 -- thanks, Cotter says, to those ideas.

You don't have to drag your staff into the meeting room to get them brainstorming -- simply use their natural propensity to gossip. Each day employees at New York City executive job listing company TheLadders.com log on to an internal social network hosted by Spigit.com. They chat about what customers are saying, discuss problems with the company's Web site or with its business model -- and vote on potential improvements.

Depending on how well the group receives their ideas, Spigit users may earn points for rewards such as iPods, free lunches and laptop bags. (The reward system is built into the software.) The service costs companies $15 per user per month. Launched in November 2008, Spigit is gaining momentum with clients such as Allstate Insurance (ALL, Fortune 500),AT&T (T, Fortune 500), IBM (IBM, Fortune 500) and Wal-Mart (WMT, Fortune 500), along with 20 small businesses like TheLadders.

For San Francisco advertising agency owner P.J. Pereira, creativity is all in the hiring. When he launched Pereira & O'Dell in 2008, he sought employees with unusual backgrounds rather than advertising experience. Soon his staff boasted a wine industry veteran, a music producer and a Hollywood screenwriter.

Pereira also hired Russell Dodson, a baker turned shark wrestler. Four weeks into his copywriting job, Dodson came up with an award-winning promotion. Pereira, 35, wanted to create buzz about a new men's fashion collection at a San Francisco boutique called Carrots. Dodson, 28, suggested a beer made out of carrots.

"I didn't know how it was going to taste," says Pereira, "but it sounded interesting."

Dodson's crew created Carrots beer bottles and wrapped them in burlap emblazoned with a stencil of a drunk rabbit. These were handed out at events and given to friends of friends who could afford the boutique's high-end clothing. The beer was a hit, and the promotion won a prize at One Show Design, a major advertising and design award show in New York.

Pereira's growing client roster includes Lego, the University of Phoenix and Muscle Milk. He attributes his success to the unique perspectives that his 50 employees bring to their work.

"The simplest way to help a company think outside the box," he says, "is to bring in people who have lived in different boxes."