CHAPTER
6

Innovating Management

Management does not stand still. The way managers manage in the second decade of the twenty-first century is already substantially different from the way they managed at the end of the last century. Even so, a powerful call for revolution rather than evolution has filled the managerial air in recent years.

Leading the calls to the managerial barricades are Julian Birkinshaw of London Business School and Gary Hamel, best known as the coauthor of Competing for the Future. They have focused on the importance of management innovation, a company’s ability to effect fundamental changes in its own internal way of working. Looking into the performance of exceptional organizations, Birkinshaw and Hamel identified management innovation as a crucial but largely overlooked factor. As they say:

Consider GE’s rise to iconic status in the early years of the twentieth century. This was driven by its creation of the world’s first modern R&D Lab. By bringing management discipline to the chaotic process of scientific discovery, GE was able to bring more new products to market more effectively than any of its early competitors. To take a contemporary example, think of Toyota’s long and uninterrupted reign as the best volume car manufacturer in the world. This massive achievement owes much to Toyota’s success in harnessing the problem-solving skills of all of its employees as to technological mastery.

Management innovation lies at the heart of both GE’s and Toyota’s success. Innovating the way things were done in both these organizations—and many others we discovered—was key to securing competitive advantage. Additionally, it was notable that the advantage achieved through management innovation was very difficult—sometimes impossible—for competitors to copy.¹

Birkinshaw and Hamel’s research, under the auspices of the Management Innovation Lab that they formed, found that there are several vital ingredients that always come together when management innovation happens:

• A distinctive and novel point of view on the future

• A clearly articulated problem or challenge that needs resolving

• A core group of heretical thinkers and action takers who push the new idea through the organization

• A deep understanding of the traditional orthodoxies that need to be overcome

The Tyranny of Experience

Hamel’s take on management innovation is typical of his take on any number of devices by which a company sets its course and might be accurately (if too succinctly) summed up as: get outside your comfort zone. “Strategy making should be subversive,” he has said. “Great strategies come from challenging the status quo and doing something different.”

The impetus to make that happen, he believes, should come from the highest offices: “The bottleneck is at the top of the bottle. The most powerful defenders of strategic orthodoxy are senior management, and strategy making needs to be freed from the tyranny of their experience.” To those who grasp their company’s strategic processes far too tightly, he advises, “Strategy making is about letting go.”

What’s the penalty for not letting go? According to Hamel, it’s falling prey to the twin killers of success in the twenty-first century: retrenchment and incrementalism. “Most companies don’t have any strategy which goes beyond retrenchment,” he has asserted. “Retrenchment doesn’t buy you growth, it doesn’t buy you a future. At best it buys you time.”

Incrementalism, in Hamel’s opinion, perhaps had its place during the last century. At the beginning of the 1980s, companies aimed for greater size and success through downsizing, flattening, reengineering, and other fad instruments such as total quality.

“Today, the goal of becoming incrementally better is ingrained in our thinking, in our language, in our reward mechanisms, and in everything we do,” he asserts, adding that such techniques must be consigned to the dustbin of history. “We have to create new metrics. Most of the metrics that companies use—ROI, EVA, and so on—push us into thinking simply about incremental improvements. We still have a very deep belief in management processes that are the antithesis of innovation.”

Such new metrics might best be related somehow to the presence of two interrelated elements: newcomers and passion. Companies need to trust the “new voices” that emerge coincident with “top management relinquishing its hold on strategy and introducing newcomers. Young people and people from different groups bring richness and diversity to strategy formulation.” This is, he says, “the only way for incumbents to renew their lease on success. . . . The same people talking the same issues over and over again leads to sterility; new opportunities arise from juxtaposing formerly isolated people.”

And when that happens, passion makes its critical contribution to strategy of a uniquely effective sort: “Strategy that is passionately believed in, that is competitively different, and that is articulated in a fine enough grain to act on.”

Profound Advantage

In Hamel’s corporate world of the twenty-first century, strategy must be directed, above all, toward innovation, and innovation can neither be relegated to departments such as R&D nor be limited to periodic corporate innovation blitzes. Instead, it must be a constant concern in every corner of the company: “My argument is that the more difficult the economic times, the more one is tempted to retrench, the more radical innovation becomes the only way forward. In a discontinuous world, only radical innovation will create new wealth.”

Radical innovation isn’t your father’s innovation, the kind found when “CEOs . . . say that they need to innovate and put innovation as one of their top two or three priorities.” The trouble is, Hamel argues, that the buck stops there: “Go down a few levels in the organization and talk to midlevel employees . . . it’s obvious that most companies have not institutionalized innovation in a meaningful way. . . . It is not seen as the responsibility of every single employee every single day.”

Yet the rewards of making it so are decisive for long-term corporate success: “Companies that commit themselves to innovation—like Whirlpool, Cemex, Shell, and a few others—are going to have a profound advantage. . . . Over the last 40 years, Western car makers haven’t recaptured even a single point of market share from their Japanese competitors.”

To avoid a similar fate, Hamel says, “requires a fundamental rethinking of your most basic business principles. . . . Innovation has to be central to the purpose of organizations. We have to systematically train people in new ways of thinking. . . . We have to reengineer management processes to minimize the time between an idea and wealth creation. It’s not the supply chain that needs shortening and automating, it’s the innovation chain that needs shortening and automating. True innovators are never bound by what is; instead, they dream of what could be.”

In those dreams, Hamel believes, lies what he calls economic progress.

There’s social innovation, institutional innovation, technology innovation, and finally management innovation. It was management innovation that delivered actual economic progress. Until we learned how to bring people together, to do things at scale in highly productive ways, all that other innovation was great, but it didn’t fundamentally result in anything that actually changed our standard of living. . . . The evidence would suggest that management innovation—fundamental breakthroughs in how we motivate organize, plan, allocate, evaluate those things—tends to produce longer-lasting advantages.

Totally Rad

Hamel’s talk about business innovation in the twenty-first century is punctuated with recurring use of the word radical, as in: “Can you envision radical and far-reaching changes in how managers do what they do?”

While corporate chieftains of the Fortune 500 ilk may find the word disquieting, Hamel seems to find it profitably provocative, given that Strategos, the Silicon Valley consulting firm he founded, claims to aid client efforts aimed at achieving “radical innovation.”

Hamel warns that radical change and radical innovation are no longer optional for companies. “Could the practice of management change as radically over the first two or three decades of this century as it did during the adolescence of the twentieth century? I believe so. More than that, I believe we must make it so. The challenges facing twenty-first-century business leaders are at least as intimidating, exciting, and unprecedented as those that confronted the world’s industrial pioneers a hundred years ago.”

One may expect that most corporate leaders, contrary to sentiments expressed by the Beatles, are not among those who would want a revolution that would change the world. Hamel might argue that the world has changed with or without companies’ senior management: “Only those companies that are capable of creating industry revolutions will prosper in the new economy.”

Hamel sympathizes with the executives’ plight: “We’ve learned how to use our positional prerogatives, our access to power and our polished professionalism, to get ahead,” he wrote in The End of Management. “Talk about revolution—particularly management revolution—makes us jittery. Who, one wonders, will come out on top if the rules and roles of management are turned upside down? Yet despite our reservations, . . . real progress demands a revolution.”

It’s no surprise, then, that an earlier Hamel book was Leading the Revolution, in which he advised companies to adopt Hamelian prescriptions: Set unreasonable goals. Define the business broadly. Create a cause. Listen to your newcomers. Divide big companies into cells. And so forth.

Hamel seems to think that not many companies will ultimately heed his advice, as he says, “Truly revolutionary, global-scale business models don’t come along every day or even every decade.” That should keep him in heavy demand for as many more years as he cares to toil.

Hamel on Innovation

Talking with Hamel, we asked:

What’s wrong with management now that we need to remake it?
I think we have to start by asking, why did we invent management in the first place? And we don’t often think about management as a technology, but I argue that it is a technology: it’s the technology of human accomplishment; it’s what we use to do things at scale as human beings. And management in some sense goes back as far as recorded history, but really, modern management got created about 100 or 120 years ago to solve one primary problem, which is how do you take semiskilled or illiterate people and get them to do the same things over and over again with ever-improving efficiency? That was an important problem to solve. The fact that today you can have a couple of cars in the garage and a digital device in every pocket, that you’re not spending 80 percent of your time cultivating your own food, all of this is thanks to that group of management pioneers who figured out how to do things at scale in highly productive ways.

Unfortunately, efficiency and simply doing things on a large scale are no longer the most important problems for most organizations today. They’re worrying about, How do we become more adaptable? How do we become more innovative? How do we truly engage the minds and creative energies of the people who work within our organizations? And these are problems that largely lie outside the scope of our old Management 1.0 model.

You put your reputation where your mouth is and started this Management Innovation Lab, the MLab.
What we really started to ask ourselves was, what is management’s equivalent of the human genome project, or putting someone on the moon, or finding a cure for AIDS? Why can’t we dramatically change this technology that we so often just take for granted? We perpetuate the practices and principles that have been with us for the last 100 years. So, it’s really a project aimed at accelerating the evolution of this technology. And the primary way we’re hoping to do that is by creating an open innovation platform where people from around the world can contribute their breakthrough ideas on how we get better at allocating resources, creating our plans, setting direction, measuring performance, compensating, and motivating human beings. But what we’re really trying to do is create an opportunity for anybody around the world to have the chance to hack management, if you will.

And we’re talking specifically about management innovation, which is different from innovation per se. Can you explain exactly what the difference is?
Yes. I think we can think almost of a hierarchy of innovation, if you will. At the bottom is operational innovation—the things that organizations do every day to get incrementally more efficient and more productive; a lot of stuff goes on around IT, customer support, and so on. A level up from that, you have product innovation of the sort that delivers the latest flat-screen television or some new financial instrument. Above that, you have business model innovation, which created Facebook, IKEA, Southwest Airlines—pick your example.

But really at the top you have management innovation—fundamental breakthroughs in the way we organize human beings in productive ways. And if you go back over the last 100 or so years of industrial history, what you’ll find is that the most significant and enduring shifts in competitive advantage came not from innovation in products, technology, or business models, but from innovation in management itself.

So, management innovation is anything that changes the way the work of management gets done (how we allocate, plan, direct, and so on) or changes who does that work. And in an organization of any size, the only way you change the work of management is by changing the processes, the routines that govern the way that work gets done: how you submit a budget requisition, how you evaluate an employee, and so on. So, management innovation is really focused on those core management processes that drive the organization forward.

Can you give some examples?
Let me pick three or four examples that would be clear standouts. Back at the very beginning of the twentieth century, General Electric worked with Thomas Edison to invent the world’s first R&D labs. People had been doing science for a long time, but GE brought management discipline to science. So Edison could say, we can now create a minor breakthrough every six weeks and a major breakthrough every six months. No one before had ever put science on a schedule, and within a couple of decades, GE had more industrial patents than any company in the world.

You go forward a decade or so, a couple of decades, and General Motors was this big, sprawling empire, with no economies of scale or scope. The chairman at the time turned to a young staffer, Alfred Sloan, and said, “How do we get some order to this chaos?” And he invented the notion of the divisionalized organization—centralized finance policy, but decentralized operations. That has become the template for every multibusiness company since. Every large organization has some General Motors DNA in it. Sadly, that was the last time GM was a bona fide management innovator.

Coming a bit more recently, 37 years ago, one of Toyota’s great breakthroughs was the notion of employee-focused problem solving. So, how do you take first-line employees, teach them statistical process control and Pareto analysis, and hold them responsible for improving quality, efficiency, and so on over time? This is a radical break with the past.

More recently, we see things like open innovation. I think that even a decade ago, if we’d surveyed a thousand CEOs across the world and said, “Can you foresee a time when a ragtag collection of volunteers around the world with little in the way of hierarchy or formal management processes will be able to create things as complex as a computer operating system with millions of lines of code?,” many of them would have had a hard time imagining that this could be true. So those are a few examples of the signal changes in how we think about management. And when you go back and look at how a lot of those changes happened, you find that it often involved a fairly tight collaboration between a very progressive manager and often somebody out of the academic world, like Frederick Taylor or W. Edwards Deming, working together to really experiment and try things.

And sadly, I think, over the last couple of decades, we’ve lost that experimental sense of let’s just go try new things in the way we manage, lead, organize, plan, and allocate. And part of what I’m hoping to do, both inside organizations and very much in the community of management faculty, is to rekindle that spirit of adventure and experimentation in how we do the work of management.

Is that because people are under too much pressure now? Is it because we’ve got this short-termism, with CEOs constantly having to report to Wall Street and say, “Profits are up again”? Does that not give us any space to experiment?
I think that certainly pressures organizations, and sometimes it makes it difficult to try things that don’t have an immediate payoff. But I would have said that the much bigger thing holding us back is our own embedded management models. The fact of the matter is, if you think of management as a technology, if you plotted its evolution over the last 100 years or so, you’d find that it follows this very classic S-curve where there’s a lot of innovation in the beginning and then it flattens out.

Certainly over my lifetime, the way we manage our organizations has changed hardly at all. If we could somehow resurrect a 1960s-era CEO and put him back in the executive suite, there are certain things that would surprise him—the 24/7 pace of business, the amount of information he had at his fingertips—but much of the way we manage would be very familiar to him. The hierarchy still looks pretty much the way it always did, people with big titles and big positions still make the big decisions, power pretty much flows from the top down, credentials determine share of voice, budgeting works the way it always has, and so on. And indeed, when you go from organization to organization even today, you find that the technology of management varies only slightly from firm to firm.

That’s why a CEO can go from one industry to another—somebody can go from running Nokia to being the chairman of Shell—and when she walks into the executive suite, the levers and dials are pretty much in the same place. Which, by the way, is another way of saying that most organizations don’t have a management advantage; despite all the work and all the energy they put into all those processes, very little of that creates anything that’s truly distinctive in terms of organizational capability.

But why has management stopped evolving? There are a couple of possible hypotheses. One is that we’ve solved all the really tough problems: we know how to run these great global organizations with people all over the world and we can coordinate massive projects, so there’s nothing really new to be done anymore. I think the second and more likely hypothesis is that we’re all just being held hostage by the same set of hand-me-down beliefs that we inherited from ex-CEOs, management gurus, and pioneers, most of whom are long dead, long retired, or long in the tooth. But we’ve just assumed that this is the only way to do it until somebody comes along and says maybe there’s a different way here.

Rescuing Management

As Hamel’s observations suggest, in recent times, management has been downplayed to such an extent that it often appears peripheral and deeply rooted in tedious bureaucracy. This does management a grave disservice. It is important.

“For many people today, the word management conjures up images of hierarchy, control and formal procedures, for reasons that have nothing to do with the underlying meaning of the term. ‘Management’ and ‘large industrial firm’ became intertwined in the 1920s, and they are still tightly linked today,” laments Julian Birkinshaw.

Such a narrow model of management blinds us to the range of alternative management models that exist. Sports teams, social communities, aid organizations (even families) operate with very different principles from large industrial companies, and these alternative principles are potentially very useful today.

This narrow definition also leads us to assume, incorrectly, that large industrial companies are inherently superior to other forms of organization. Yes, there are certain industrial processes that are best suited to economies of scale and scope, but we would be misunderstanding history if we assumed that mass production was the only feasible model of industrial organization. We need to recognize that management models other than the hierarchical, bureaucratic organization have their own important merits.

Management is alive and well, but it is no longer the management created and modeled by Henry Ford, Alfred P. Sloan, and the like. It is more fluid, flexible, and powerful than ever before—more innovative.