| Excerpt from www.NDMA.COM, © 2024 N. Dean Meyer and Associates Inc.
Use Case: Innovation
don't just lead an innovative project or two; drive innovation into every corner of your organization
by N. Dean Meyer
[excerpt from the book, How Organizations Should Work]
You probably don't need to be convinced of the existential importance of innovation.
It's not enough to lead an innovation project or two. This might make you look like a hero, but it also makes you the bottleneck for innovation in your organization. Innovation should continually come from every corner of an organization. Remember, Thomas Edison didn't do it alone. He built a team of innovators. Similarly, it's not enough to replace senior leaders with people you consider more innovative -- "paladins" brought in to save the organization from its doldrums. That broadens the bottleneck, but they're a bottleneck nonetheless. And if there are systemic obstacles to innovation in your organization, even the most creative people will be ineffective and frustrated. The real challenge is to engender more innovation throughout your organization.
The Innovator's DilemmaClay Christensen's widely discussed Innovator's Dilemma talks about how startup companies with innovative products that appeal to niche markets decimate well-managed, established companies -- like the progression from IBM to Digital Equipment Corp., and then to Microsoft and Apple. These niche players may not add much functionality to existing product lines; but customers generally don't use all the functionality that's already there anyhow. What these innovators do is bring new levels of convenience or integration, innovative capabilities, or lower costs.
These are things that niche markets really want. But traditional customers value them as well, perhaps more than yet-more extensions to existing products. Eventually, these startups grow beyond the niche and take over the mainstream market. Christensen points out that good management practices for extending existing products (like focusing on existing customers' values, margins, and revenue growth rates) are exactly what kill disruptive innovations that open new markets (with different customers' values, low margins at first, and tiny revenues until they outgrow their niche). Based on this, Christensen concludes that you need to set up a separate organization to pursue disruptive technologies -- a separate company, or at least a separate group (like an "incubator" or a "skunk works") that's exempt from those management "best practices." Charles A. O'Reilly and Michael L. Tushman agreed, and labeled a separate group for breakthrough innovations, linked to the rest of the organization through senior management, an "ambidextrous organization."
The Costs of a Separate Innovation GroupDo you need a separate group for disruptive innovation? Hopefully not, because there are significant costs to this approach. Both types of innovation, sustaining and disruptive, require mostly the same kinds of capabilities -- the same professional knowledge, skills, tools, even design and production methods. If you split a given professional discipline into two groups -- one for the current business and one for innovation -- you've just reduced your depth of specialization in that discipline. That impacts everybody's performance. For example, that separate group can't contain the same depth of expertise as the collection of all the specialists throughout the rest of the company put together. So, it can't keep up with the literature in all those fields of study. Over time, it becomes a bottleneck for innovation.
Instead, innovation ventures should have access to all the depth of talent the firm can muster, wherever it reports. It's ineffective to expect one little group to go it alone. Furthermore, a separate innovation group creates two classes of citizenship: one group that gets to do all the politically visible, fun, future-oriented strategic initiatives; and the 'drudges' who just keep today's business running. That's a terrible way to treat much of your staff. It's certainly demoralizing for everybody outside the incubator. And it wastes all those bright minds throughout the rest of the organization who could be very creative if given the chance, but still face the impediments to innovation that created the problem in the first place. Additionally, you don't want to set up one group whose job is to put another group out of business. When the rest of the staff have reasons to resent the innovation group, and the innovation group has reasons to be defensive about its privileged position, relationships are strained and cooperation breaks down. The innovation group loses access to all the talent and institutional knowledge of legacy groups. And the transition of an innovation into production becomes more difficult. There's another problem with a separate innovation group: how to determine its appropriate headcount. There's no fixed answer. Some innovations require a lot of resources and others do not. And at some times during an innovation venture, you'll need major projects that engage lots of different competencies; while at other times, a small team may suffice. There's no way a fixed group of people would represent the right level of investment all the time. Thinking onward, what happens when that innovation group comes up with something that goes into production? Does the innovation group go on supporting and extending that technology? If they have operations to run, those separate groups are no longer in the disruption business. Worse, they become a whole separate business unit with its own infrastructure. This is a slippery slope. Do you end up becoming just a holding company with a bunch of little companies operating independently -- no synergies? That's far from the vision of a fully integrated, maximum-synergies, high-performing organization. Conversely, you could transfer the breakthrough innovations back into your mainstream organization once the concept is proven. But that has problems too.... The other groups have to climb the learning curve, studying what the innovation group already knows, which can be costly and time consuming. And sometimes, the "not invented here" syndrome slows things down. Of greater concern, if that innovation group doesn't have operational responsibilities, then they don't have a strong incentive to design future products for manufacturability and supportability. They don't even have a strong incentive for first-time quality. They might say, 'Get it out, get the glory, and let those poor saps in the rest of the company deal with defects and production difficulties.' And worse still, you've violated the Golden Rule of empowerment. One group decides another group's future. How could you then hold your operational groups accountable for their businesses when they can't control their future products!? Here's a summary of the dysfunctions of separate innovation groups:
Innovation In Every GroupSo, what's the alternative? Christensen's concerns about management practices that kill innovation should be taken seriously. But we came to a different conclusion about the root causes and the solutions.
Using the framework of the five organizational systems, you can get to the real root causes, the obstacles to innovation that you can remove at the systemic level, obstacles that are preventing everybody from being more innovative. Structure: The root cause of the Innovator's Dilemma is not structure in the form of a separate box on the org chart. The goal is innovation everywhere -- innovation ventures within your existing structure. All internal entrepreneurs should be innovating, including disrupting their own product lines. But your organiational structure does play a role. Jobs must be defined to include innovation. That happens when your structure is defined by lines of business rather than roles in processes, responsibilities for tasks, or types of expertise. In a Market Organization, every box on the organization chart is defined as a business within a business, and every manager is responsible for the future of their business. More on obstacles to innovation in organizational structure....
Organizational structure includes both your organization chart that defines people's jobs, and the cross-boundary workflows that assemble various specialists into teams. (You can't change one without changing the other.) There are at least three ways that structure can be an obstacle to innovation: 1. Jobs may be defined in vague terms, like a few words in a box. Or they may be defined by tasks and processes (as in traditional "roles and responsibilities"). Staff then understand that they're to focus on today's work, not think about the future. Solution: Every box on your organization chart should be defined as an entrepreneurial business within a business. That makes every manager accountable not just for today's business, but also for keeping their little business viable in the future. 2. There may be conflicts of interests built into the organization chart. For example, if both operations and engineering report to the same person, you're telling staff to both keep things stable (operations) and invent the future (engineering). Typically, short-term operational imperatives override innovation. And since innovation inevitably disrupts operational stability, there's an incentive to resist any major changes. Solution: Position the operations and engineering lines of business as peers, with defined customer-supplier relationships that facilitate teamwork. 3. If cross-boundary teamwork isn't working well, then people have to be self-sufficient. They build "silos" so as not to have to depend on their peers. This forces staff to attempt to cover too many different specialties; as generalists, they won't have time to keep up with innovations in all those fields. Solution: Build explicit mechanisms for high-performance, cross-boundary teamwork. That permits a higher degree of specialization (without silos), which improves every aspect of performance (including innovation). Internal economy: Everybody's lack of time and money can be addressed in your internal economy, especially your budget process. Everybody should designate time and resources for ongoing, sustaining innovation, built into their rates. On top of that, you'll need explicit channels of funding for ventures. Major innovation initiatives should be explicit line items in everybody's budgets. In addition, you might establish an innovation fund. All your entrepreneurial leaders can propose ideas. Then, you can award grants (seed money) to get an idea to the point of a venture proposal that'll go into your budget. More on obstacles to innovation in the internal economy....
The internal economy comprises all your resource-governance processes. Its scope includes budgeting and rate-setting, demand management, and accounting (reporting). There are at least four ways that your internal economy can impede innovation: 1. If you don't set aside "unbillable" time in your budget planning, you'll think you have more hours available for projects and services than you should. You'll be prone to promising more deliverables for a given level of funding than you should. Solution: Be sure you've set aside time for ongoing innovation before you promise a set of deliverables for a given level of budget. 2. Major innovations require funding for staff's time, as well as capital and other expenses. If you don't have an explicit channel of funding for innovation ventures, they won't get done. Solution: In your budget planning process, make major innovation projects a line-item right alongside customer-driven projects. Include funding for the entire project team, not just the group that's leading the innovation initiative. 3. If you don't have effective demand-management processes, your internal customers will expect more of you than you have resources to deliver. In a sincere (but futile) attempt to satisfy unmitigated demands, staff sacrifice their own time for innovation. Solution: Set aside unbillable time for innovation before you calculate available hours to work on customers' projects. Then, design a business-driven demand-management process that constrains customers' expectations to available billable hours. 4. In organizations that charge for their products and services, rates include compensation costs. The cost per hour should be calculated as billable hours divided by total compensation costs. If you don't account for sufficient unbillable time, staff will have to sell more to break even, and they won't have time for innovation. Solution: Be sure to set aside sufficient time for unbillable sustenance activities such as innovation when you calculate your available billable hours and rates.
Culture: Widespread innovation depends on everybody thinking and acting like an entrepreneur, with responsibility for keeping their business within a business viable in the future. This mindset is a matter of culture, including entrepreneurship and judicious risk-taking. More on obstacles to innovation in culture....
Organizational culture includes both common beliefs, values, and attitudes; and common practices, rituals, and habits (behaviors). Values and behaviors are interlinked in a cycle, each shaping the other. Culture is often ill defined, and left to evolution and the personalities of senior leaders. There are many ways that a haphazard culture can block innovation, ranging from simply not encouraging it to blatantly blocking it. Solution: Define the behaviors you expect of everybody in tangible, actionable principles. In doing so, define exactly what you mean by key aspects of culture related to innovation such as entrepreneurship and risk. Metrics: To Christensen's point, don't require market analyses and ROI when you look at disruptive innovation proposals. Instead, use the statistical concept of expected-value: Odds times Stakes. The odds of a real market disrupter might be slim; but the stakes of being the first mover, or of going out of business if you don't get there first, are huge! Of course, investing in ventures brings down everybody's margins, at least in the short term. But at the enterprise level, so would funding a separate innovation group. The key to innovation everywhere is to exclude innovation ventures from any metrics of profitability in current businesses. That's one example of the need for changes in your traditional metrics. More on obstacles to innovation in metrics....
Metrics includes both periodic performance appraisals and the dashboards people use to guide their work on a continual basis. There are at least two ways that metrics can impede innovation: 1. Metrics can impede innovation if they focus on near-term deliverables (easy to quantify), but not the future viability of the organization (more difficult to quantify). Such metrics are akin to the short-term mentality on Wall Street which constrains long-term investments. The effect is greater when rewards (bonuses, raises, recognition) are tied to those metrics. Solution: Ensure that metrics include long-term results such as competitive position, even if that means they're not quantitative. It's better to be comprehensive than precise. 2. We need innovation not just in our products and services, but also in how we produce those results. If performance metrics assess conformance to processes, people will not seek innovative new ways to achieve better results. (Process metrics are fine for dashboards, but not for performance metrics.) Solution: Limit performance metrics to results, and empower staff to find the best way to achieve those results. Also, consider refining your strategic planning process. In a strengths-weaknesses-opportunities-threats (SWOT) analysis, it's wise to proactively look for vulnerabilities to disruption, and design strategies to be the first to disrupt your own markets.
Systemic InnovationThe Holy Grail is to induce continual innovation in every corner of your organization. A lack of innovation is probably not because your staff aren't bright, creative, or motivated. Note that even people who appear passive on the job go home to creative hobbies, or even innovative small businesses. The obstacles to innovation are generally systemic, your organizational structure, internal economy, culture, and metrics. Really effective leaders see their jobs as removing obstacles so that all their staff can contribute to the maximum -- in pursuit of innovation and every other organizational objective.
The way to do that is to build a high-performing Market Organization. And the way to do that is to deliberately design the ecosystem in which we work -- the five organizational systems.
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