CHAPTER EIGHT

INNOVATION AND ORGANIZATIONAL POLICY

JEAN-JACQUES-RÉGIS DE COMBACÉRÈS sat quietly in his study in his childhood home of Montpellier, France. He was an old man, but an old man with a remarkable history of achievement. His life had by no means been devoid of either reward or challenge. Certainly, there had been grand highs and depressing lows, but on balance, life had been good. Now, his time was short.

Most of his life he had spent as a jurist. Since his modest but privileged beginnings as a lawyer in a legal family, his star had risen (and occasionally fallen) precipitously. At age 39, he was elected to the Convention and voted at the trial of Louis XVI. He was a member of the Council of Five Hundred. In 1799 he was appointed Minister of Justice. He was archchancellor of the empire in 1804 and made Duke of Parma in 1808. The culmination of his public career came with his exile from France at the Second Restoration.

It was now 1818, and at the age of 65, he had returned to France from exile in Belgium. In the autumn of his years, he could look back on a life of public service and influence at the highest levels of government. Thinking back on his roots as a jurist, his greatest satisfaction came from his contribution to the creation and implementation of what came to be known as the Napoleonic Code, first introduced into areas under French control in 1804 and later to territories conquered by Napoleon.

The Napoleonic Code was generally recognized later to be the first successful modern attempt to produce a uniform national code of law that was expressed in clear terminology and arranged in logical order. Little could Combacérès have known that in the 21st century, his code would still be used in Belgium, Luxembourg, and Monaco and had been introduced in the new world in Haiti, the Dominican Republic, Bolivia, Chile, Ecuador, Colombia, Uruguay, and Argentina.

Further north, Louisiana relies to this day on a civil code with roots in Napoleon’s Code. The same is true of the Canadian province of Quebec. Few people can claim a longer or more significant contribution to society than Jean-Jacques-Régis de Combacérès through his contribution to the Code of Napoleon.

THE POWER OF ORGANIZATIONAL POLICY

THOUGH THE POLICIES created by corporations and other nongovernmental organizations can’t approach the scope and magnitude of the Napoleonic Code, organizational policy still presides with great effect over the frequency and success of innovation. Policy is seldom mentioned concurrently with issues of innovation, but they are closely related. We don’t know precisely which policies encourage and generate innovation. If that were possible, a simple list would solve the problem. Instead, we have identified some of the kinds of policies that hinder and constrain an innovative environment and have a negative impact on innovation. We have many examples.

Corporate policies, particularly those directed at the treatment and reward of employees, are generally well intended and created to address some specific situation or problem. Policies—rules—are often treated as if cast in stone, and as if once committed to paper no judgment is either required or even permitted. It is precisely this attitude that makes policies an appropriate topic for discussion in the context of innovation. Ill-conceived policies can cripple innovation, often in ways that would be a total surprise to those who enacted them. The way around this minefield is to appreciate the complex nature of our business and social organizations and, once again, to take a systems view.

Management and policy share much the same literature. They go together. In fact, when most people think of management, they are actually envisioning the policies and practices instituted and supported by the people who direct the organization’s activities. Policies are created to support recurring activities that, in turn, support achievement of organization goals. Unfortunately, innovation is seldom one of the clearly stated goals. The dilemma is compounded by the inherent fragility of the innovation process. Innovation seems to be more sensitive than most activities to the unexpected and undesirable impact of ill-conceived policies. The unusually fragile nature of innovation (and innovators) provides good reason to explore the role and impact of policy decisions on innovation.

WHAT IS POLICY?

WHAT DO WE mean by policy, and what kind of policies are we talking about? According to Webster’s New Collegiate Dictionary, a policy is “a definite course or method of action selected from among alternatives in light of given conditions to guide and determine present and future decisions.” That’s a pretty good definition for our purposes. It is our view that policy should be enlisted to do a number of things, among them to help managers support achieving corporate objectives. Policies should also act to focus the organization on what is thought to be important, hopefully better serving customers. Conserving customers—that is, retaining and acquiring customers—must be at the very foundation of policy foundation. Finally, policies should support the development and retention of desired capabilities. Because it’s easy to see how well-intentioned lower-level managers can lose sight of the big picture, conscious attention to policy proliferation and misapplication should be on the minds of senior management.

Readers will be familiar with the often-published fact that 3M permits all of its research employees free use of 15 percent of their time to work on projects of their choice. Someone at a very high level decided to institutionalize that value, that policy, throughout the entire 3M development organization. That is policy—a clear statement of the 3M commitment to innovation.

A less positive example is demonstrated by the incident some years ago of an R&D director at a midwestern manufacturing company. He was an amiable gentleman of the traditional school who asked a young researcher who was reading a book in his workstation what he was doing. The researcher replied that he was reading a great new book that contained new information related to his project. The director seemed not to hear his answer and then proceeded to inform the researcher that “reading books is something you do on your own time. You’re supposed to be working while you’re here.” Apparently, reading (learning) was outside the realm of research in the director’s mind. It requires little imagination to guess the effect of the director’s comments. The staff member was dumbstruck. Looking busy—like you’re doing “real work”—was apparently more important than learning something new. The researcher began to reevaluate his fit in such a department and decided to transfer to another opportunity within the company. The director was eventually replaced under the auspices of reorganization, probably none the wiser.

Policies certainly matter. Sometimes the simplest oversight in some apparently obscure regulation turns out to be far more destructive to the vitality of the system than anyone anticipated. In the case of the young worker cited above, the organization was at the least deprived of a promising researcher. Imagine the total number of such instances that occur daily in the average large organization. The overall negative impact is certainly much greater than we ever know about.

In an environment of open communication, these problems usually surface quickly and can be promptly corrected. However, when communication is guarded, when trust is absent, it may take a very long time for management to learn that a problem even exists. The damage, once done, can contaminate the environment long after the issue has passed.

SOURCES OF POLICIES

WHERE DO THESE policies come from? Surely they come from all quarters of the organization, but some of the most common sources of policies having an impact on innovation originate with:

•Executive management

•The human resources department

•Accounting and finance

•Department heads

The kinds of policies exerting the most influence on innovation are generally those that:

•Determine project direction and objectives (strategic).

•Affect rewards and compensation (managerial).

•Prescribe specific work practices (managerial).

•Either encourage or preclude personal control of work (managerial).

Let’s refer these policies back to the Innovation Management Model (Figure 8-1). We see that direction and strategy fall within the province of Systems III and IV. The remainder fall mostly within Systems II and III. At System III and IV, the focus of management is typically well targeted on the desired result. When clear focus is combined with experienced managers, major failures are less likely. When less experienced employees are drafting tactical policies and procedures, they may fail to anticipate the consequences of some well-intended paragraph. Expense reporting is sometimes a case in point. Those charged with monitoring compliance with policies on what is a legitimate expense and what is not can cause considerable mischief when too enthusiastically enforcing what they see as the “law of the land.” Mindless enforcement of rules, devoid of judgment and human understanding, is seldom desirable or defensible.

Flexibility in implementation is the obvious answer. What is much less obvious is just how to exercise that flexibility. Some would rightfully ask: What is the purpose of policies if every manager can exercise his individual judgment? Others would counter: Are we supposed to be automatons? What are we paid for as managers if not for good judgment? In an organization that exercises great trust in its managers, we are likely to find an environment much closer to the second case. Where trust is less abundant, the situation is probably closer to the first case, with greater reliance on rigid rules. Ultimately, the answer probably lies in the shared corporate values. And shared values are hard to acquire and difficult to change.

FIGURE 8-1.THE INNOVATION MANAGEMENT MODEL.

A STRIKING EXAMPLE OF FAILED POLICY

Another example of failed policy is seen in the case of a company that had just completed an exciting new office building. Some of the country’s most knowledgeable consultants were employed to recommend new and effective ways the building could support better communication and, hence, innovation. One of the many recommendations was to include small “coffee centers” throughout the building, within easy walking distance of all employees. These would not be the traditional cold, linoleum-clad “break rooms” one so often sees. No, these were elegant, with comfortable lounge seating, surrounded by marker boards and offering really good, fresh-brewed coffee (or tea). The idea was to actually encourage workers to hang out and talk to each other! Pretty revolutionary at the time. And, to make this even more attractive, the coffee was free. (Coffee had always been available, but down in the cafeteria at the normal price.) As it turned out, the idea was a little too revolutionary, at least at the time (1989–1990).

Needless to say, these attractive coffee centers had the desired effect. People collected there, talking and drawing ideas and concepts. Pretty good, eh? Well, almost. As it happened, someone in another building complained about people in the new building getting free coffee. This led the vice president in charge of (among other things) food services to decide to solve the problem by requiring the folks at the new building to pay for the coffee just like everyone else. Why should they be treated specially and get something for nothing? The memo went out, and tin boxes began to show up at all the coffee centers so people could make honor-system payments for their coffee. It should have been a hint to management when copies of the memo, carefully annotated by some recipient, began to appear pinned up at the coffee centers throughout the new building. Such guerrilla tactics were not common at this unusually contented company.

The result was predictable. Most people, having been told they would have free coffee, liked the situation that way, and most weren’t overly fond of this vice president anyway, so they continued to enjoy free coffee, pretty much ignoring the tin boxes. (Most would throw in the occasional quarter.) At this point, the company could have accepted a workable compromise: to tell people they had to pay for the coffee, yet leave the coffee still essentially free since no one was watching them pay. The coffee centers then flourished and abounded with active discussion—their intended purpose.

But a workable compromise wasn’t good enough for the stiff-necked vice president. He now became intent on making sure these thieving scoundrels paid for their coffee. Prescience, it seems, was in short supply. Memos about cheating on the coffee were drafted and sent to all building occupants. These memos, of course, exacerbated an already annoying situation and, in true Dilbertesque fashion, the vice president became the brunt of numerous and frequent jokes. After a month or so of continued noncompliance, the VP—not to be outmaneuvered—ordered all the new and expensive fresh-brew coffee equipment torn out and replaced with tens of thousands of dollars worth of coin-operated coffee machines that dispensed a foul sludge reminiscent of used motor oil in a leaky cup. The inevitable memos announcing the new machines included an extensive discussion on how the coffee from the machines had been tested by impartial testing sources and found to be superior in quality and taste. You can guess how the employees felt about those memos.

Within a week or so, the coffee centers were empty of people, conversations, sketches, and ideas. Heavy-handedness had won the battle—and lost the war. The VP had showed those scoundrels, all right. A carefully conceived and sizable investment to support innovation and communication had been shut down virtually overnight. A small policy issue had, in effect, negated a large and forward-thinking investment in the coffee centers as communication enhancers.

THREE LEVELS OF POLICY

LET’S EXAMINE THE policy issue a step at a time. We have identified three levels of policy, those directed at:

1.Managing specific innovations

2.Managing programs of innovation

3.Managing portfolios of completed innovations

Each level will be studied in depth.

MANAGING SPECIFIC INNOVATIONS

At the individual project level, the relationship between policy and performance is both direct and ever present. The story above about the book-reading researcher is such an example. Policies focused on the goal, rather than on the process, will be the best received and are likely to yield the most successful results.

For System III-level managers, managing projects in broad sweeps rather than ensuring compliance with tollgate after tollgate permits greater latitude to fit analysis and verification to the need rather than requiring rote compliance with procedures, even when the procedure may be a waste of time. Proceed with the end firmly in mind. Permit System I teams to select the most useful and appropriate methods and tools. This does not imply a slapdash approach to project management. It does advocate flexibility and knowledgeable exceptions.

Tollgate processes (formally scheduled management presentations whereby the project requires approval—passing through the “tollgate”—in order to proceed), which tend to become progressively more detailed and demanding, are usually little more than an acknowledgment that management doesn’t believe the team members are either aware of the goals for the project or able to manage their own approach to achieving them. The process often comes to be seen as a substitute for responsible team members. If the intention is to regulate rather than guide team members, the results are likely to be unsatisfactory. Overburdened tollgate processes weigh on the innovative process like a big rider on a small donkey. The rider is uncomfortable, the donkey is in agony, and you arrive at your destination late—if at all.

MANAGING PROGRAMS OF INNOVATION

We’ll differentiate between individual innovation projects and programs of innovation because the responsibility inevitably lies at different levels. Most organizations have teams or groups working on some project or problem, but not all have an organized and planned program of innovation.

If we raise the bar for innovation to include activities extending beyond the individual project, we’ve moved to a new level of concern and oversight. To stimulate and support innovation on a broad scale, there needs to be higher-level consideration of needs, and this implies a higher strata of organization. Innovation projects are typically within the province of System I teams, operating under the authority of System III managers. On the other hand, programs of innovation are much more likely to be the responsibility of the System III managers, operating within the context conceived by System IV.

MANAGING PORTFOLIOS OF COMPLETED INNOVATIONS

One might view this role as a kind of “product management for innovations.” Many of the same tools and practices apply. Portfolios of innovations are those collective accomplishments that have been completed. The investment has been made, and the portfolio includes both those projects that have been implemented and also those innovations that, for whatever reason, have not. Both implemented and unimplemented innovations have value, and the policies may already be in place to manage these assets. (For example, innovations not appropriate to one organization can often be sold to another.) Implemented innovations, however, are not “over” just because they’ve been implemented. It may be possible to extend the reach and application of the idea into other related or unrelated areas of the organization. Innovations are valuable and should not be cast off into the corporate ozone.

Some organizations are appointing “knowledge managers” charged to look after organizational knowledge in the recognition that knowledge, of which innovations are part, is indeed valuable—that it’s an important corporate asset and worthy of being carefully handled. While the jury is still out on the overall success of the new knowledge managers, the focus would seem to be in the right direction. More commonly, however, little is done to husband this essential innovation resource.

Other organizations institute a policy of strict secrecy surrounding their development efforts. There are certainly cases when such secrecy is justified, but not always. Openness can yield big benefits. A case in point is the Wood Division of Steelcase, Inc., in Grand Rapids, Michigan. Steelcase brings many customers to its home offices to visit plants, meet executives, and see existing and new products. And Tim Stern, the director of design for the wood furniture division, actively seeks opportunities to show new and partially completed concepts to visiting customers.

Because the offices of Tim’s design group are near the airport, it is a popular stop for visiting corporate customers on their way home. Tim’s department—called the “treehouse” because it is located on an overhanging mezzanine—is constantly abuzz with collaboration and littered with new product mock-ups and concept drawings. Visitors are welcome to question the designers and view the mock-ups. Tim reports that from this he and his designers get a direct pipeline to new and existing corporate customers. This fast and continuous feedback has produced innumerable modifications and improvements in the products and reduced cycle time over previous methods.

In addition, the exposure to customers has provided support for some concepts that might not have seen the light of day without the positive customer reactions. The customers, on the other hand, love the visit and the chance to see ideas before they become public, and they like to provide their suggestions and input. Hearing firsthand what real customers like and dislike doubtless enhances the product designs. Tim’s designers really like the direct input rather than having to develop products in a vacuum. The benefit is enormous. Everybody wins.

SUPPORTING THE INNOVATIVE
ENVIRONMENT WITH POLICIES

IF THIS IS all true, then we should be able to look at policy formation with an intent to actively supporting the innovative process and environment. We feel this is precisely the way policy should be evaluated. Supporting people is, after all, what policies are for. Using policies to “control” employees hints at an organization in conflict with itself, and that’s hardly in the scope of an innovative organization.

Several specific areas are candidates for this supportive role. Every manager should take a look at her own policies in terms of the following areas of impact. Do your policies support your people? Here is our shortlist of candidates for evaluation:

•Values form the base, and policies derive from the values. What are the values inherent in your policies? Trust, openness, judgment, flexibility, and sincerity are all positive values that support positive policies.

•Education is supported and valued.

•Reward systems do not pit one employee against another, but rather encourage cooperation and collaboration.

•HR policies cover a wide range and may overlap some of the other categories named here. HR people are generally sensitive to the needs we are advocating and are likely to be even more so if they know there is a concern for supporting innovation.

•Work rules and policies should support cooperation and innovation.

•Cooperation inside and competition outside without needs be a golden rule. Policies that encourage competition inside the organization are seldom supportive of innovation. Competition should be reserved for the marketplace, not coworkers.

PLANNING INNOVATION

IS IT POSSIBLE to plan innovation? Sure. Frank Bacon and Tom Butler wrote a book with precisely that title—Achieving Planned Innovation (Free Press, 1998)—and it’s a book worth reading. Is it possible to plan to have a creative thought? Maybe, but it’s not likely to work all the time. Anyway, this is not the kind of planned innovation we’re talking about.

We are specifically advocating the need to plan ahead to achieve those innovations that offer the greatest and most productive impact on the welfare of the organization. After all, strategy is policy, at least insofar as it sets a direction people follow. We’re not suggesting simple blue-sky dreaming, but rather a pragmatic evaluation of the innovations or areas of exploration and development that offer a reasonable likelihood of producing the desired results. Not only is such a proposition reasonable, but it is downright prudent. One would think that every organization would develop a clear picture of its future innovation investment, but it’s not usually the case.

SELECTING INNOVATIONS TO PURSUE

ORGANIZATIONS FORTUNATE ENOUGH to have a surplus of innovation are simultaneously presented with a dilemma: How to choose those to be pursued and funded? Selection is certainly guided by economics (the funding of innovations is discussed below), but the key to consistent and effective selection of innovations is a decision screen.¹ A decision screen is a brief document containing the criteria for the selection of new products, acquisitions, or innovations to pursue. To arrive at the decision screen, the responsible management group gathers to carefully and thoughtfully determine the criteria once, to be used over and over again. The group uses a rigorous approach to setting the criteria for success, thus ensuring that the selection criteria are both appropriate and efficient. Needless to say, the decision screen must be consistent with the innovation strategy.

Spending a day or two of management time to get this right once will save countless hours hashing the same discussion over and over as recurring decisions come round. Take the time to get it right, so it’s not necessary to revisit the screen criteria each time a selection decision is required. Publish the screen with the criteria for success for all who should know. In this way, many ideas will be prescreened before reaching the management group. Finally, use the screen consistently. Otherwise, the effort will be wasted because everyone will know it’s not the real decision criteria.

FUNDING INNOVATION

UNFUNDED INNOVATION IS not innovation. It’s just a regrettable waste of time. Only when innovations are implemented—i.e., funded—do they produce benefit. Implementation invariably costs something, sometimes a great deal. The idea may come free, but getting innovations up and working is never free. But that should not be an obstacle so long as innovation is treated like the necessary investment that it is.

The criteria for funding innovations should, of course, be included in the decision screen, but what evaluation method is appropriate? Is it the same as investing in a new punch press? Maybe, maybe not.

Whether or not to fund innovations that return investment in any one planning period (annual operating plan) should be a simple decision at the lowest level possible. While it is desirable to keep track of your innovations (see Chapter 11 on measuring innovation) to know how well you’re doing, it’s a mistake to unnecessarily inhibit the process. The best way to slow it down is to keep bumping approval authority to higher and higher levels.

Innovations showing longer paybacks pose a different kind of problem. Setting too restrictive criteria may obviate innovations that could yield tremendous benefits, but may require more investment over a longer period. These are the decisions executives are paid to make. These are the decisions—the opportunities—that affect corporate strategy. Setting the bar too high just serves to institutionalize the presence of exceptions. But setting reasonable criteria for funding innovation permits more innovative activity while letting the system manage more of it.

Of course, the decision to fund an innovation ought to be based on more than just hard numbers. Considerations should include both the tangible benefits analysis (the hard numbers) and those less tangible factors that may, in fact, be more important than the traditional financial analysis alone might imply. For example, quality certainly offers financial benefits, benefits in operations, and lower repair/replacement costs. Quality may also offer benefits in perceived value to the customer that, in turn, may reduce selling costs. Quality may improve the product’s “appropriateness for use.” The better mousetrap should be reflected in sales, but what if the better mousetrap is part of a mouse-catching system, and the whole system benefits? Valuing this benefit is more difficult, but it might be even more important.

Thus, our innovation might incur benefit from several sources. Each would ideally be included in the decision to fund the innovation. Each should be included in the decision screen. In general terms, these include:

•Direct financial return (as measured by ROI, ROA, EVA, and cash flow)

•Quality impact (operations savings, replacement savings, and perceived value)

•Market impact (sales, position, and share)

•Synergy with other products, processes, or customers

The issue of synergy can present something of a two-edged sword. While it is important, because it is difficult to verify in advance, synergy can become the favorite justification of the true believer who, convinced that he has just discovered sliced bread, uses this intangible justification to seek approval of an otherwise unsuitable project. To its credit, the synergy justification requires a broader, more encompassing vision of the innovation, the ability “to see what isn’t there”—yet. It involves being able to see potential—to be able to see a tangible product as part of a bigger process. It is the best means of visualizing the leverage present in an innovation. Used wisely and prudently, it’s a valuable skill.

SOURCES OF FUNDING:

In some cases a new innovation requires more resources than the organization can muster internally. Then the organization must consider different sources of funding, each with its advantages and limitations. The primary sources of funding are:

•Bank financing

•Bond issues

•Venture capitalists

•Stock issues

•Joint ventures

•Strategic alliances

CONCLUSION: SETTING THE
POLICIES THAT SUPPORT INNOVATION

ANECDOTAL EVIDENCE SEEMS to point toward the attempt to overcontrol organizational behavior through rules and policies as reducing innovative behavior. One often hears the assertion that most of the innovation in business today comes from the small, fast-moving companies, and certainly the less bureaucracy, the more flexibility. But this doesn’t seem to explain why most of the innovations still come from the largest organizations. Sure, many of the innovations are commercialized by smaller companies—either because employees leave to start these smaller groups, or the bigger organization simply lets it slip away from them—but a very large portion of today’s innovation still happens in large organizations.

This means these organizations need to find better ways to encourage and capitalize on their innovations. In large organizations, the issue of policy proliferation is a valid source of concern. And smaller organizations should resist the temptation to overcontrol in the first instance. Finding the balance of control and flexibility is a moving target, but the closer one can get to the self-organizing, self-managing system, the more innovation can be expected to flourish. We favor approaches that encourage a deeper understanding of the complex interrelated organizational system behavior. Such an improved understanding offers greater promise for the innovative, dynamic organization than does heavy-handed regulation.

SUMMARY

•Policies can discourage innovation when they are excessively rigid and inflexible.

•Management flexibility in policy interpretation and implementation can reduce the rigidity of policy implementation.

•The objective, inasmuch as possible, should be to guide rather than regulate employee behavior. Innovation will benefit.

•Policy is encountered at three levels: (1) the project level, (2) the program level, and (3) the portfolio level.

•Funding policies can either encourage or stifle innovation activities, depending on how funding is implemented. Sometimes the amounts in question are very modest.

•Policies intended to overcontrol employees should be avoided.

NOTE

1. For an in-depth discussion of decision screens, see Roger Bean and Russell Radford, Powerful Products: Strategic Management of Successful New Product Development (New York: AMACOM, 2000).