Fixing the Culture

The impact of organizational culture on creativity and idea generation was discussed in several chapters of this book. In the absence of a supportive culture, creativity and innovation are like seedlings planted in arid, rocky soil. They simply won’t germinate and grow without it.

Michael Tushman and Charles O’Reilly point to pre-Louis Gerstner IBM as a culture in which innovation fell on poor soil. It was, in their words, “a culture characterized by an inward focus, extensive procedures for resolving issue through consensus and ‘push back,’ arrogance bred by previous success, and a sense of entitlement on the part of some employees that guaranteed jobs without a quid pro quo.”¹ If those words describe your company’s culture, then creativity and innovation are not likely to flourish. And the most innovative people will become discouraged and dispirited. The antidote is cultural change, which is a job for senior leaders. Those leaders should ask themselves:

• Is our current success making us self-satisfied and complacent?
• Are we inwardly focused?
• Do we punish risk takers who fail?
• Are creative people and new ideas unwelcome in this company?
• Are we excessively bureaucratic in how we handle new ideas?
• Do we fail to reward acts of creativity?

If you answered yes to any one of these questions, a serious change in organizational culture may be in order. Unfortunately, cultural change is probably the most difficult type of change. Top management and a small team of consultants can change the structure of an organization by fiat through reorganization, merger, or divestiture. Change that involves downsizing can also be commanded from the top. But to change an organization’s culture, people must be motivated and induced to think and act differently. That’s a major shift that takes time and the support of people at every level. It cannot be commanded.

A major crisis—even a near-death experience—is often a prerequisite of successful change. British Airways, Continental Airlines, and IBM each experienced crises in the 1990s, and in each case a combination of immediate peril and strong leadership provided the motivation that employees needed to support cultural change.

This raises an important question: “Do we have to wait for a crisis before change is possible?” No, according to Harvard Business School professor Michael Beer. He believes that change leaders can create legitimate concerns about the current situation, and offers these four approaches for doing so:

• Use information about the organization’s competitive situation to generate discussion with employees about current and prospective problems: Top management, Beer says, often fails to understand why employees are not as concerned about innovation, customer service, or costs as they are. Too often this is because management has failed to put employees in touch with the data. In the absence of that data, everything appears to be fine.
• Create dialogue on the data: Providing data is one thing. Creating dialogue on the data is something entirely different. Dialogue should aim for a joint understanding of company problems. Dialogue is a means by which both managers and employees can inform each other of their assumptions and their diagnoses.
• Create opportunities for employees to educate management about the dissatisfactions and problems they experience: In some cases, top management is out of touch with the weaknesses of the business or with emerging threats—things that frontline employees understand through daily experience on the factory floor or in face-to-face dealings with customers. If this is your company’s problem, find ways to improve communications between top management and frontline people.
• Set high standards and expect people to meet them: The act of stating high standards creates dissatisfaction with the current level of performance.²

Establish Strategic Direction

Setting strategic direction is another responsibility of senior leaders. If creative people don’t understand where the company is headed, they are likely to generate and pursue ideas that don’t fit with current capabilities, that eat up resources, and that will eventually be rejected prior to commercialization. That costs money and dissipates energy.

Since both creative energy and money are usually scarce, it makes sense to encourage idea generation within boundaries defined by company strategy. For example, if you’re a direct-mail apparel merchandiser, you may wish to encourage ideas that fall within the boundaries of “forming better linkages with our customers and providing fast and accurate order fulfillment.” Within those strategy-related boundaries, new ideas for improving customer intelligence, order processing, and logistics would be welcomed. Set the boundaries right and your company’s creative energies will naturally focus in areas with the greatest payoff potential.

The effect of setting strategic direction and establishing boundaries for ideas will be much greater if you do three things:

1. Communicate: This might seem obvious, but it’s rare to find an organization whose employees can clearly articulate company strategy—particularly employees at lower levels. “I just do my job,” they’ll say. So communicate strategic direction clearly and often.
2. Hire right: Make employee selection and recruitment a critical issue, not a distraction. Use every hiring opportunity to populate the organization with people whose special training, experience, or personal interests and passions are aligned with the strategic direction of the company.
3. Align resources with strategy: People follow the money. Once they see ideas that fall within stated boundaries being funded for development, they’ll channel their creative energies in that direction. Senior management should also review its existing development projects and pull the plug on those that no longer enjoy a strategic fit.

Be Involved with Innovation

Some of the best and most successful executives are happiest and most effective when they were down in the R&D lab rubbing elbows with bench scientists and technicians. Bill Hewlett, David Packard, Bill Gates, and Motorola’s Bob Galvin fit that description. It’s impossible to make a direct correlation between the R&D involvement of these executives and the success of their organizations, but we know intuitively that leaders cannot make good decisions if they operate in a vacuum or think of innovation as a mysterious force. They must understand the technical issues facing their organizations and the portfolio of ideas and projects that are in the pipeline at any given time. Hewlett, Packard, Galvin, and Gates all did this.

Most corporate leaders do not or cannot keep their connection with the innovation side of their business—and they pay a price. In a speech given to the Industrial Research Institute in 2003, former GE executive Lewis Edelheit reflected on the problem that senior managers have when they are pulled away from R&D work and immersed in the business side of the enterprise. “It is impossible,” he said, “if you are in the middle of a business to see what’s happening from the outside.” ³

More importantly, leaders must assess the individual innovators who drop new ideas into their laps from time to time. Because they are enmeshed in the world of the business, and less in the world of technology and customers, they must ask questions like:

• Who are these idea people anyway?
• Do they have good judgment?
• Do they understand customers and the way customers see the world?
• Are they cautious optimists or hucksters who’ll give me all the reasons to say yes but conceal every reason for saying no?

These questions cannot be answered if decision makers and innovators operate in orbits that never intersect. The best way to answer these questions and provide leadership for innovation is to be personally involved. So visit the research center on a regular basis. Have lunch with project teams. Get to know key people one-on-one. Try to understand the technical hurdles that stand between appealing ideas and commercialization.

Research by Harvard Business School professors Kim Clark and Steven Wheelwright indicates that few senior leaders follow that advice. Their involvement in development projects typically begins when projects are nearing the end of the development process: in the pilot or manufacturing ramp up stages. This is too late in the game to affect the shape or direction of projects, and reduces the role of senior leadership to “kill” or “go.”⁴

Organizational leaders should do just the opposite. They should be visible and personally involved in the early stages of the innovation process. Doing so has four important benefits:

1. It sends a powerful signal to employees that innovation matters.
2. It provides senior management with opportunities to articulate the strategic direction of the firm and the boundaries within which innovation should be pursued.
3. It gives senior management a direct hand in the design of products and services that will define the company in the future.
4. It educates leaders on technical and market issues and prepares them to act as recognizers and patrons of good ideas.

So if you are a senior manager, ask yourself these questions:

• Am I spending only a very small percentage of my time on the innovation front?
• Am I leaving early design decisions to low-level personnel who may not understand the big picture of our business?
• Have I become insulated from the technological issues shaping our business?
• Is my involvement so late in the innovation development process that my only interest is in whether a project will clear financial hurdles?

If you answered yes to any one of these questions, reconsider how you’re spending your time. Innovation and R&D are the crucibles within which the future of your company is being formed today—you need to be there.

Be Open but Skeptical

Close contact with innovation and R&D will test your judgment. Some people will “pitch” their ideas to you and look for support and resources. Approach these encounters with a balance of open-mindedness and scientific skepticism. That means two things: (1) demonstrating an interest in new ideas, even when they challenge the company’s current products and ways of operating; and, (2) simultaneously maintaining scientific skepticism. The two are not incompatible ; they can be achieved through honest dialogue, as in this example:

Notice how the leader in this example demonstrated an interest in the idea by suggesting a course of action but reserved judgment until the uncertainties are reduced. Responsibility for reducing those uncertainties was placed on the shoulders of the idea generator. If you use a stage-gate system, each gate provides an opportunity to test the validity of ideas and projects in this way. As a leader, you should participate in that system at the most strategic and critical points. In most cases, those will be the initial gates, where the idea’s fit with strategic direction is generally determined.

Improve the Idea-to-Commercialization Process

Earlier chapters in this book described an innovation process that begins with idea generation, and then proceeds though various stages that evaluate and develop worthy ideas into commercialized products and services. Like every process, the innovation process should be continually scrutinized for improvement opportunities. Make sure that your process:

• Generates a sufficient number of good ideas; if it’s not generating enough good ideas, find the cause and fix it
• Is free of bottlenecks that impede promising ideas and frustrate innovators
• Is free of politics
• Encourages calculated risk taking, but isn’t afraid of killing off bad ideas
• Is nonarbitrary
• Creates cheap failures
• Channels resources and the brightest people to the most worthy projects
• Involves people who understand the company’s capabilities, its strategy, and its customers

Like culture change, improving the innovation process is a job for senior management. And it’s one of the most important jobs they will ever handle.

Exercise Flexibility

We live in a business era dominated by hurdle rates (the minimal rate of return an investment must achieve), discounted cash flow measurements, and other quantitative performance yardsticks. Anything that doesn’t measure up gets the ax. The ruling logic is that projects that cannot forecast returns equal to or greater than the company’s current return on capital will reduce that return—thus they should be abandoned. Many critics complain that this iron rule favors incremental projects that support existing businesses over true innovations, whose future rewards are difficult to know. Indeed, these rules sometimes produce perverse effects, as a manager in a textbook publishing company discovered several years ago. Looking back at the revenues generated by the first editions of his company’s three topselling books, which together accounted for over 30 percent of total revenues, this manager found that not one of those best sellers would have been published under his company’s current quantitative rules.

“In each case,” he said, “the first edition of our current best sellers enjoyed very modest sales. But someone decided to go ahead with new editions anyway, and each subsequent edition was more widely adopted. Today, those books are all in their tenth and twelfth editions, and are the biggest cash cows we have.”

Be flexible as well when considering the size of new businesses developed through innovation. Even projects that legitimately forecast acceptable returns are terminated if anticipated revenues are judged “too small” relative to the business as a whole. For large companies, a new venture that cannot forecast annual revenues of $10 million within five years of commercialization is generally dropped. The logic: “It’s too small for us to mess around with.” Harvard Business School professor Rosabeth Moss Kanter cites the example of Time, Inc., the magazine division of Time Warner, as an example of this problem.⁵ During the 1980s and early 1990s, Time was so intent on finding the next Sports Illustrated or People—two of its huge successes—that new magazine launches ground to a halt. No new concepts were found with sales magnitudes equal to those past ventures.

So what are leaders to do? Initial markets for truly innovative products and services are often small; though many have the potential to grow over time to the point where they eclipse the revenues of the established business. Assuming that supporting resources are available, leaders must periodically take calculated risks on projects that, though small, might surprise everyone by growing into future cash cows.

Don’t Overlook Innovations in Processes, Finance, and Distribution

Companies are always looking for the new product and service breakthrough that will give their income statements a big boost. This appetite for new products (and services) is nourished by breathless stories in the business media: how the iPod sent Apple share prices through the roof, how 3M gets upward of 30 percent of annual revenues from products released in the past five years, how eBay made billions out of its online auction service, and so forth.

Innovative new products and services are surely important, but leaders should never overlook the importance of innovation in business processes, finance, distribution, the supply chain, and other functional areas. The reduced manufacturing costs that result from process improvements, for instance, can be as helpful to the bottom line as the launch of an innovative new product. Further, the risks associated with process innovation may be less. The product or service innovator faces two fundamental risks: First, “Can we make this work?” Second, “If it works, will the market accept it?” The process innovator must successfully address only the first of these questions.

Put People with the Right Stuff in Charge

Some of the most important decisions that senior executives make involve the selection of R&D managers. They are the people closest to the activities that determine the company’s future products, processes, and services. But what types of people are most suitable? Generally, executives should look for people with four qualities:

• Strong technical backgrounds—they should have a good feel for the trajectories of technologies important to the company
• Familiarity with the strategic concerns of the organization
• Experience with customers and their problems
• Strong interpersonal and communication skills. As Rosabeth Moss Kanter has put it, “Innovations need connectors—people who know how to find partners in the mainstream business or in the outside world.”⁶ Many overlook that advice.

Create an Ambidextrous Organization

Michael Tushman and Charles O’Reilly propose that successful leaders of innovation create “ambidextrous” organizations—that is, organizations that can “get today’s work done more effectively and [also] anticipate tomorrow’s discontinuities.”⁷ These are two very different and contradictory capabilities. Organizations that have both are capable of excelling in the present even as they create the future. Their leaders defend current product/technology positions through incremental innovation while simultaneously developing new ones that will either displace current offerings or address new markets.

Richard Leifer and his colleagues reached a similar conclusion in their study of radical innovation in established companies. In their view, the greatest challenge for senior management is balancing their focus on the short-term performance of the existing business as they pursue long-term growth through innovation.⁸ These are two very different games, and few companies play both well. The source of the challenge is not hard to understand. Success in the current business is usually driven by certainty, efficiency, and cost control; the future business, on the other hand, is the product of an innovation process that is uncertain, inefficient, and costly. Not many executives can operate successfully in these two very different activities. Most are so absorbed with the current business that the future business is treated as a stepchild, attended to when time and resources permit.

The best way to create an ambidextrous organization is to:

1. Assess where you are in terms of innovation trends: Are your current products and technologies on the rapid upward slope of the S-curve, or are they in the mature phase of the curve? Do new technologies have the potential to undermine your business?
2. Assess your company’s operations: Are they effective, fast, and efficient? Are major cost improvements possible through process innovation?
3. Based on your answers to items 1 and 2, reorder your priorities and resources: You need to be very good at both current operations and innovation.

Summing Up

While most idea generation and creativity takes place at midlevel and lower ranks, the organization’s leaders play a key role. This chapter has explained what leaders can do to stimulate creativity and increase the pace of innovation. It is their responsibility to:

• Develop a culture that nurtures creativity and innovation
• Establish the strategic direction within which innovation should take place
• Improve the idea-to-commercialization process

Finally, the senior leadership must take responsibility for creating an ambidextrous organization—one that is effective at two very different activities: getting today’s work done (operations) and anticipating the future. Few organizations do both well.