Innovation Lab

Inside the innovation

lab

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Gary Hamel’s landmark book, co-authored with C. K. Prahalad, Competing for the Future, was BusinessWeek’s book of the year in 1995. Its 2000 sequel, Leading the Revolution , was also a bestseller. Add on globetrotting seminar appearances and lucrative consulting assignments and Hamel remains one of the key contemporary business thinkers. Indeed, the Economist called Hamel “the world's reigning strategy guru”. Peter Senge of MIT describes him as “the most influential thinker on strategy in the Western world”. Des Dearlove spoke to Hamel at London Business School, home to a new management innovation laboratory with which he is intimately involved. he cornerstone of Gary Hamel’s thinking is the vital importance of innovation. “My argument is the more difficult the economic times, the more one is tempted to retrench, the more radical innovation becomes the only way forwards. In a discontinuous world, only radical innovation will create new wealth,” he says. “Despite the dot-com collapse, look back over the last decade and most new wealth was created by new entrants or newer companies. Innovation drives wealth creation. There’s no other conclusion you can reach.” Of course, this is nothing new. Hamel, and others, have been espousing the benefits of innovation for some years now. At one level, executives appear to be getting the message. They know that they can’t do the same things. Innovation is routinely identified by companies and their leaders as a top priority. The rhetoric is convincing, but is often followed by inaction. The problem, says Hamel, is that employees lower down the corporate hierarchy have not been trained in innovation and there are few processes or support mechanisms to nurture innovation. Hamel compares our current understanding of innovation with the business world’s understanding of quality in 1970. At that time, people knew that quality was important but didn’t know the processes or systems which could enable quality to happen. The processes and systems, such as pareto analysis,

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quality circles and so on, which later became known as total quality management, were then being constructed largely in Japan. This thinking has led to his ongoing research – alongside London Business School’s Julian Birkinshaw – which looks at the innovation of business ideas. Researchers, Hamel and Birkinshaw lament, have traditionally paid relatively scant attention to the dynamics of management innovation – the processes through which organisational principles and practices evolve and, perhaps, advance over time. While many of the landmarks of management innovation are familiar to every business scholar – think of GE’s development of the modern research lab or GM’s development of the multidivisional organisation – there is no general model of management innovation as a dynamic process. Innovation means many things to a variety of different people so perhaps we can begin by defining terms. What do you mean by “management innovation”? Management innovation is innovation in management principles and processes that ultimately changes the practice of what managers do, and how they do it. It is different from operational innovation, which is about how the work of transforming inputs into outputs gets done. It is very easy to distinguish ¡

© 2006 The Author | Journal compilation © 2006 London Business School

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¡ management innovation from technology and product innovation, but not as easy to distinguish it from operational innovation. Can you clarify what the difference is? If you think of a company as a set of business processes that turn inputs into outputs, that turn labour and capital for example, into services and products, then business processes govern the workflow. This would include logistic systems, order processing, call centres, customer support, and manufacturing. Generally speaking, I’m not interested in innovation solely within this sphere. Surrounding the work of transforming inputs to outputs, however, is everything the managers do: pulling resources together, setting priorities, building teams, nurturing relationships, and forming partnerships. Toyota’s lean manufacturing is a good example. At one level, you can say that lean manufacturing is predominately an operational innovation. But what sits a level or two above the operational changes is the radical management idea that there could be a positive return on investment from using the problem-solving skills of your employees. Go back a few decades, and you find that if there was an efficiency or quality problem in the business, companies would send in staff experts. They would study the system, and then they would rewrite the standard operating procedures. And the employees would be asked to conform to those procedures. The idea that a company would actually give its employees the responsibility for making those changes, that it would take people with ten or 12

Whirlpool, and other international brands, are not very interested in this innovation. How can it be that people are “not interested in innovation”? They do not want to put engineering or marketing resources behind these new ideas. Almost inevitably, it is easier for them to crank one more dollar of earnings out of doing exactly what they are already doing. Whirlpool acknowledged that while it had created a supply of innovative ideas, it had not created a corresponding demand from the senior executives to nurture those ideas. So the organisation implemented a number of measures to remedy the situation. For a start it earmarked 15 per cent of its capital budget, for projects that were truly innovative. What effect did that have? It sent a very clear message to individual managers: if you do not bring us innovative projects then we will starve you of capital. Wall Street, the City, the financial markets, these hold Whirlpool to certain standards for growth, for margins, and other metrics. So why shouldn’t the organisation apply metrics to its managers to encourage them to develop innovative management practices? How important is management innovation? If you look over a hundred years of industrial history, typically it is management innovation that has allowed organisations to reach new performance

The challenge is to instil management innovation into organisations. years of education and then teach them statistical process control, that was just unthinkable. So, what looks like a purely operational innovation through one lens, actually turns out to stem from a radical new management principle. You have talked about Toyota before and managers know about what Toyota and other highly innovative companies actually do. Yet, many remain deeply uninnovative. How can you encourage management innovation in a firm? In a big company you can’t change what managers do in any direct way. You can only change it by changing the processes that govern their work. Look at domestic appliance firm Whirlpool. The company has trained thousands of people to be innovators; they have many great new ideas. The challenge for the company is that the people running the core brands, like Kitchen Aid, 6

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thresholds – more than any other kind of innovation. The challenge is to instil management innovation into organisations. Often, the technology you need to do new things is there long before you change the management processes in a way that allows you to use that technology. So it takes a while for management innovation to catch up? Look at something like Open Source development. It is made possible by communication technology, collaborative technology. Technology has made it easy for people to collaborate. Yet much of the technology used, such as the internet or Lotus notes, has been around for some time. Despite the technology being available it has done little to change the way power and information is actually distributed in many companies.

© 2006 The Author | Journal compilation © 2006 London Business School

Hamel: Ideas man

Most companies have been exploiting the web in ways that build on existing practice, moving more information to the centre, for example. They celebrate the fact that we have the global, digital dashboard. Now an organisation can tell how many widgets it sold in Pyongyang the previous day. Organisations use the new technology to reinforce the old management habits? Yes. Eventually, however, a company like Google, or an organisation like the Open Source movement breaks those habits and through management innovation uses the technology to allow things to be done in a different way. In your research, looking back through management history, what important management innovations have you identified? One of the earliest was capital budgeting. I believe this started in Du Pont the chemical company. As Du Pont grew, and expanded into more businesses, the question it faced was how to make rational judgements across projects for very different businesses, with very different economics, and technology, and so on. The capital budgeting process became a way to take very disparate kinds of projects, and create some common arithmetic around them. While there

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are all kinds of limits to that because, obviously, as you summarise complex businesses in simple arithmetic, you lose a lot of the richness, I still see it as an extraordinary first. And you say brand management is another? Yes that's right. By 1929, Procter & Gamble was already codifying its brand management knowledge. It recognised that, as you moved into a mass consumer society, the mere ability to produce a product and distribute it, would become less and less important to the consumer. Before this simply making something that was 99.9 per cent pure was a manufacturing marvel in itself. What Procter & Gamble could see was that, increasingly, competition would encompass more than the physical attributes of the product, and the ability to deliver it. It would include intangible aspects as well. What used to be brand management has today mushroomed into corporate image consultants, managing IP, and a host of other things. But the whole thread of how to create value out of nonphysical, intangible things starts with Procter & Gamble. They were the pioneers. Although I suspect Unilever might have something to say about that. So that is a huge innovation, because until then we lived in a physical world, we had no sense of how to create value out of things that are not physical. Any others? There are many. One that precedes the two I have mentioned is the invention of the modern industrial lab. This has a few antecedents in Germany, but started mostly with Edison at General Electric (GE). There the question was about how to take the messy process of science and bring some discipline to it. How to manage the unmanageable? GE figured out how to do that, or at least set a lot of the standards. Before the Second World War GE had more than half of the industrial patents in the United States. It was hugely important point in GE’s development, a step on the way to the company becoming an industrial power. You have said in the past that MBAs don't have the source code to their own management beliefs. What do we need to give these MBAs that will provide them with the necessary perspective? I think where you have to start is to give people an understanding of the historical context in which our management beliefs were born and grew up. Doesn't this happen already? What I find surprising is that I don’t think, and no doubt somebody will write in if I am wrong, but I doubt if many business schools teach the history of management to their students. ¡

© 2006 The Author | Journal compilation © 2006 London Business School

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In every other university discipline we have spent the last ten years deconstructing all of our beliefs, in linguistics, history, political science, to the point we have no more foundations. In a way, everything is up for grabs. But the business schools somehow seem completely oblivious to this challenge. Can you give me an example of what you mean? There is the famous story of when Ford decided to pay his workers the grand sum of five dollars a day. Overnight he more than doubled their salary. It was management innovation. There was a great debate both internally within Ford before this happened, and afterwards throughout American industry over whether this was a wise move or not. Because the assumption was that people would work as long as they needed to work in a week to earn their crust. Then they would go home. Many people believed that by the time it got to Wednesday, Ford would be without a workforce. And that was an ill-founded assumption? In a way it was illogical to believe that. Sure in agriculture, once you were done, you were done. You didn’t keep working because once the corn was picked, once the vegetables were harvested, there wasn’t much to do. And, even if you accumulated more wealth there wasn’t much more stuff to buy. Then with the advent of the industrial world, there is this cornucopia of goods and service. It is an ever expanding place to spend your dollars. There is a revolution of rising expectations and consumerism. And it is interesting how difficult it was for people to escape what they thought was a fundamental insight into human nature, which proved to be just an artefact of that age, and the way that labour was organised prior to industrial work. So what you have to ask yourself today is, how many of our beliefs are similarly context dependent? So you think we are stifled by our preconceived management beliefs?

I think a lot of what we believe is true, but it is not inevitable. One problem with all these books that summarise best practice is that you have to be very careful not to turn description into prescription. Otherwise soon that becomes: if it hasn’t been done, it can’t be done. We would be stuck if most people believed that. So, I think we have to understand the historical roots of modern management practice. Understand what assumptions are baked into our management processes: change starts at the top; people work primarily for extrinsic rewards; hierarchy is the most effective means for coordinating the work of a disparate group; the goal of strategy is to control strategic assets. Then challenge and discuss them. There is a set of very foundational assumptions that, in the course of an MBA, I am not sure ever gets exposed or talked about. Tell me more about the management innovation lab. The management innovation lab is an experiment in itself. For the sake of simplicity, there are two hypotheses. The first is that we can invent a methodology that will allow us to be much more purposeful about management innovation, and that will allow us to dramatically accelerate the evolution of management itself. The second hypothesis is that we can help organisations learn how to experiment with new management principles and processes in ways that won’t disrupt current success. In the same way that companies experiment with a new product, or with a new technology in a lab, we can bring that same experimental mindset to management itself. Will there be a physical lab? The London Business School is giving us a dedicated space. It will open by autumn 2006 at the latest. Then we will have a setting that is built to encourage management innovation, to encourage the creative questions, to encourage learning from other disciplines, to allow really close experimental partnerships between what I would call scholar inventors, and progressive organisations. I

Des Dearlove ([email protected]) is co-author of The Business World Atlas.

London Business School Regent’s Park London NW1 4SA United Kingdom Tel +44 (0)20 7262 5050 Fax +44 (0)20 7724 7875 www.london.edu A Graduate School of the University of London

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© 2006 The Author | Journal compilation © 2006 London Business School