www.hbr.org A R T I C L E The Why, What, and How of Management Innovation by Gary Hamel Included with this full-text Harvard Business Review article: The Idea in Brief—the core idea The Idea in Practice—putting the idea to work 1 Article Summary 2 The Why, What, and How of Management Innovation A list of related materials, with annotations to guide further exploration of the article’s ideas and applications 13 Further Reading Product 3420
Transcript
www.hbr.org
A R T I C L E
The Why, What, and How of Management Innovation
by Gary Hamel
Included with this full-text
Harvard Business Review
article:
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work
1
Article Summary
2
The Why, What, and How of Management Innovation
A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications
Breakthroughs in your company’s manage-ment processes—such as creation of intel-lectual property, brand building, talent de-velopment—deliver potent competitive advantages. By perfecting the industrial re-search laboratory, for example, General Electric won more patents than any other U.S. company. And by revolutionizing brand management, Procter & Gamble created a product portfolio that scores $1 billion in sales annually.
Yet most companies focus their innovation efforts on developing new offerings or achieving operational efficiencies—gains competitors quickly copy. To stay ahead of rivals, you must become a
serial manage-ment innovator
, systematically seeking breakthroughs in how your company exe-cutes crucial managerial processes.
The keys to serial management innovation? Tackle a big problem—as General Motors did by inventing the divisional structure to bring order to its sprawling family of compa-nies. Search for radical management princi-ples—as Visa’s founders did when they envi-sioned self-organization—and created the first non-stock, for-profit membership enter-prise. Challenge conventional management beliefs, which Toyota did by deciding that frontline employees—not top executives—make the best process innovators.
You can’t afford to let rivals beat you to the next great management breakthrough. By becoming a serial management innovator, you cross new performance thresholds—and sustain your competitive edge.
To become a serial management innovator:
Commit to a Big Problem
The bigger the problem you’re facing, the big-ger the innovation opportunity. To identify meaty problems, ask:
•
What tough trade-offs do we never get right?
For example, does obsessive pursuit of short-term earnings undermine our will-ingness to invest in new ideas? Is our orga-nization growing less agile while pursuing size and scale advantages? What other “ei-ther/or’s” can we turn into “and’s”?
•
What is our organization bad at?
For in-stance, do we have trouble changing be-fore we’re forced to? Unleashing first-line employees’ imaginations? Creating an in-spiring work environment? Ensuring that bureaucracy doesn’t smother innovation? Imagine a “can’t do” that you can turn into a “can do.”
•
What challenges will the future hold for us?
For example, what are the ramifications of escalating consumer power? Near-instant commoditization of products? Ultra low-cost rivals?
Challenge Your Management Orthodoxies
Conventional wisdom often obstructs innova-tion. Ask your colleagues what they believe about a critical management issue. Identify beliefs held in common. Then ask if these beliefs inhibit your ability to tackle the big problem you’ve identified. If so, consider alternative assumptions that could open the door to fresh insights.
Example:
In your firm, common beliefs about change might include “change must start at the top.” But this belief may be toxic to your or-ganization. Why? It makes employees as-sume that they can’t influence the com-pany’s business model or strategy. Thus they withhold their full engagement and passion—essential ingredients for contin-
ual organizational renewal. A more helpful alternative belief? “Change must start ev-erywhere in our organization.”
Exploit the Power of Analogy
Identify decidedly unconventional organiza-tions, and look for the practices they apply that might help you solve your problem.
Example:
If you seek ideas for funding ordinary em-ployees’ glimmer-in-the-eye projects, study Bangladesh’s Grameen Bank. It makes micro-loans to poor people with no collat-eral requirement and little paperwork. Bor-rowers—which by 2004 numbered more than 4 million—use the funds to start small businesses that benefit themselves and their communities. Ask: How can we make it equally easy for
Over the past century, breakthroughs such as brand management and
the divisionalized organization structure have created more sustained
competitive advantage than anything that came out of a lab or focus
group. Here’s how you can make your company a serial management
innovator.
Are you a management innovator? Have youdiscovered entirely new ways to organize,lead, coordinate, or motivate? Is your com-pany a management pioneer? Has it inventednovel approaches to management that are theenvy of its competitors?
Does it matter? It sure does. Innovation inmanagement principles and processes can createlong-lasting advantage and produce dramaticshifts in competitive position. Over the past 100years, management innovation, more than anyother kind of innovation, has allowed companiesto cross new performance thresholds.
Yet strangely enough, few companies have awell-honed process for continuous manage-ment innovation. Most businesses have a for-mal methodology for product innovation, andmany have R&D groups that explore the fron-tiers of science. Virtually every organization onthe planet has in recent years worked system-atically to reinvent its business processes forthe sake of speed and efficiency. How odd,then, that so few companies apply a similar de-gree of diligence to the kind of innovation that
matters most: management innovation. Why is management innovation so vital?
What makes it different from other kinds of in-novation? How can you and your company be-come blue-ribbon management innovators?Let’s start with the why.
Why Management Innovation Matters
General Electric. DuPont. Procter & Gamble.Visa. Linux. What makes them stand out?Great products? Yes. Great people? Sure.Great leaders? Usually. But if you dig deeper,you will find another, more fundamental rea-son for their success: management innovation.
• In the early 1900s, General Electric per-fected Thomas Edison’s most notable inven-tion, the industrial research laboratory. GEbrought management discipline to the chaoticprocess of scientific discovery and, over thenext 50 years, won more patents than any othercompany in America. Much of GE’s currentcompetitive prowess can be traced to that ex-traordinary accomplishment.
The Why, What, and How of Management Innovation
harvard business review • february 2006 page 3
• DuPont played a pioneering role in the de-velopment of capital-budgeting techniqueswhen it initiated the use of return on invest-ment calculations in 1903. A few years later, thecompany also developed a standardized way ofcomparing the performance of its numerousproduct departments. These innovations,among others, helped DuPont become one ofAmerica’s industrial giants.
• Procter & Gamble’s preeminence in thepackaged goods industry has its roots in theearly 1930s, when the company began to for-malize its approach to brand management. Inthe decades since, P&G has steadily built uponits early success in creating value out of intangi-ble assets. P&G’s product portfolio includes 16brands that have produced $1 billion-plus insales every year.
• Visa, the world’s first near-virtual com-pany, owes its success to organizational innova-tion. When Visa’s founder banks formed a con-sortium in the United States in the early 1970s,they laid the groundwork for one of the world’smost ubiquitous brands. Today, Visa is a globalfinancial web that links more than 21,000 finan-cial institutions and more than 1.3 billion card-holders.
• Linux, the computer operating system, isthe best-known example of a recent manage-ment innovation: open source development.Based on other innovations like the generalpublic license and online collaboration tools,open source development has proved to be ahighly effective mechanism for eliciting and co-ordinating the efforts of geographically dis-persed individuals.
As these examples show, a managementbreakthrough can deliver a potent advantageto the innovating company and produce a seis-mic shift in industry leadership. Technologyand product innovation, by comparison, tendto deliver small-caliber advantages.
A management innovation creates long-lasting advantage when it meets one or moreof three conditions: The innovation is based ona novel principle that challenges managementorthodoxy; it is systemic, encompassing arange of processes and methods; and it is partof an ongoing program of invention, whereprogress compounds over time. Three briefcases illustrate the ways in which managementinnovation can create enduring success.
Harnessing employee intellect at Toyota.
Why has it taken America’s automobile manu-
facturers so long to narrow their efficiency gapwith Toyota? In large part, because it took De-troit more than 20 years to ferret out the radicalmanagement principle at the heart of Toyota’scapacity for relentless improvement. Unlike itsWestern rivals, Toyota has long believed thatfirst-line employees can be more than cogs in asoulless manufacturing machine; they can beproblem solvers, innovators, and changeagents. While American companies relied onstaff experts to come up with process improve-ments, Toyota gave every employee the skills,the tools, and the permission to solve problemsas they arose and to head off new problems be-fore they occurred. The result: Year after year,Toyota has been able to get more out of its peo-ple than its competitors have been able to getout of theirs. Such is the power of managementorthodoxy that it was only after American car-makers had exhausted every other explanationfor Toyota’s success—an undervalued yen, adocile workforce, Japanese culture, superior au-tomation—that they were finally able to admitthat Toyota’s real advantage was its ability toharness the intellect of “ordinary” employees.As this example illustrates, management ortho-doxies are often so deeply ingrained in execu-tive thinking that they are nearly invisible andare so devoutly held that they are practicallyunassailable. The more unconventional theprinciple underlying a management innova-tion, the longer it will take competitors to re-spond. In some cases, the head-scratching cango on for decades.
Building a community at Whole Foods.
It’stough for rivals to replicate advantages basedon a web of individual innovations spanningmany management processes and practices.That’s one reason why no competitor hasmatched the performance of Whole FoodsMarket, which has grown during the past 25years to 161 stores and $3.8 billion in annualsales. While other grocery chains have beenslashing costs to fend off Wal-Mart, WholeFoods has been rapidly evolving an extraordi-nary retail model—one that already deliversthe highest profits per square foot in the in-dustry. What may not be obvious to health-conscious consumers and growth-loving inves-tors is that the company’s management modelis just as distinctive as its high-margin businessmodel. John Mackey, the company’s founderand CEO, says his goal was to “create an orga-nization based on love instead of fear” and de-
Gary Hamel
([email protected]) is a visiting professor at London Business School and a founder of Strategos, an interna-tional consulting company based in Chicago. He is also the director of the Woodside Institute, a nonprofit re-search foundation based in Woodside, California.
scribes Whole Foods as a “community workingtogether to create value for other people.” AtWhole Foods, the basic organizational unitisn’t the store but small teams that manage de-partments such as fresh produce, preparedfoods, and seafood. Managers consult teamson all store-level decisions and grant them adegree of autonomy that is nearly unprece-dented in retailing. Each team decides what tostock and can veto new hires. Bonuses are paidto teams, not to individuals, and team mem-bers have access to comprehensive financialdata, including the details of every coworker’scompensation. Believing that 100:1 salary dif-ferentials are incompatible with the ethos of acommunity, the company has set a salary capthat limits any executive’s compensation to 14times the company average. Just as startling isthe fact that 94% of the company’s stock op-tions have been granted to nonexecutives.What differentiates Whole Foods is not a sin-gle management process but a distinctivemanagement system. Confronted by manage-ment innovation this comprehensive, rivalscan do little more than shake their heads inwonder.
Growing great leaders at GE.
Sometimes acompany can create a sizable management ad-vantage simply by being persistent. No com-pany in the world is better at developing greatmanagers than GE, even though many busi-nesses have imitated elements of the com-pany’s leadership development system, suchas its dedicated training facility in Crotonville,New York, or its 360-degree feedback process.GE’s leadership advantage isn’t the product ofa single breakthrough but the result of a long-standing and unflagging commitment to im-proving the quality of the company’s manage-ment stock—a commitment that regularlyspawns new management approaches andmethods.
Not every management innovation createscompetitive advantage, however. Innovation inwhatever form follows a power law: For everytruly radical idea that delivers a big dollop ofcompetitive advantage, there will be dozens ofother ideas that prove to be less valuable. Butthat’s no excuse not to innovate. Innovation isalways a numbers game; the more of it you do,the better your chances of reaping a fat payoff.
What Is Management Innovation?
A management innovation can be defined as a
marked departure from traditional manage-ment principles, processes, and practices or adeparture from customary organizationalforms that significantly alters the way thework of management is performed. Put sim-ply, management innovation changes howmanagers do what they do. And what do man-agers do? Typically, managerial work includes
• Setting goals and laying out plans; • Motivating and aligning effort; • Coordinating and controlling activities; • Accumulating and allocating resources; • Acquiring and applying knowledge; • Building and nurturing relationships; • Identifying and developing talent; • Understanding and balancing the de-
mands of outside constituencies. In a big organization, the only way to
change how managers work is to reinvent theprocesses that govern that work. Manage-ment processes such as strategic planning,capital budgeting, project management, hir-ing and promotion, employee assessment, ex-ecutive development, internal communica-tions, and knowledge management are thegears that turn management principles intoeveryday practices. They establish the recipesand rituals that govern the work of managers.While operational innovation focuses on acompany’s business processes (procurement,logistics, customer support, and so on), man-agement innovation targets a company’s man-agement processes.
Whirlpool, the world’s largest manufacturerof household appliances, is one companythat has turned itself into a serial manage-ment innovator. In 1999, frustrated by chroni-cally low levels of brand loyalty among appli-ance buyers, Dave Whitwam, Whirlpool’s thenchairman and CEO, issued a challenge to hisleadership team: Turn Whirlpool into a font ofrule-breaking, customer-pleasing innovation.From the outset, it was clear that Whitwam’sgoal of “innovation from everyone, every-where” would require major changes in thecompany’s management processes, which hadbeen designed to drive operational efficiency.Appointed Whirlpool’s first innovation czar,Nancy Snyder, a corporate vice president, ral-lied her colleagues around what would be-come a five-year quest to reinvent the com-pany’s management processes. Key changesincluded
• Making innovation a central topic in
The Elements of Management Innovation
In most companies, management in-novation is ad hoc and incremental. A systematic process for producing bold management breakthroughs must include
Commitment to a big management
problem
Novel principles that illuminate
new approaches
A deconstruction of management
orthodoxies
Analogies from atypical
organizations that redefine what’s
possible
The Why, What, and How of Management Innovation
harvard business review • february 2006 page 5
Whirlpool’s leadership development programs; • Setting aside a substantial share of capital
spending every year for projects that meet acertain tough standard of innovativeness;
• Requiring every product developmentplan to contain a sizable component of new-to-market innovation;
• Training more than 600 innovation men-tors charged with encouraging innovationthroughout the company;
• Enrolling every salaried employee in anonline course on business innovation;
• Establishing innovation as a large part oftop management’s long-term bonus plan;
• Setting aside time in quarterly businessreview meetings for an in-depth discussion ofeach unit’s innovation performance;
• Building an innovation portal that grantsWhirlpool’s employees all over the world accessto a compendium of innovation tools and dataon the company’s global innovation pipeline;
• Developing a set of metrics to track inno-vation inputs (such as the number of engineer-ing hours devoted to innovative projects),throughputs (such as the number of new ideasentering the company’s innovation pipeline),and outputs (such as the pricing advantagesgained from more-distinctive products andhigher customer loyalty).
Whirlpool didn’t make all these changes atonce, and there were plenty of false starts anddetours along the way. (For more on howWhirlpool built its innovation engine, see“Change at Whirlpool Corporation,” HarvardBusiness School case nos. 705-462, 705-463,and 705-464.) Translating a novel managementidea (like innovation from everyone, every-where) into new and deeply rooted manage-ment practices requires a sustained and broad-based effort, but the payoff can be substantial.Jeff Fettig, Whirlpool’s current chairman, esti-mates that by 2007, the innovation programwill add more than $500 million a year to thecompany’s top line.
How to Become a Management Innovator
I have yet to meet a senior executive whoclaims that his or her company has a praise-worthy process for management innovation.What’s missing, it seems, is a practical method-ology. As with other types of innovation, thebiggest challenge is generating truly novelideas. While there is no sausage crank for inno-
vation, it’s possible to increase the odds of a“Eureka!” moment by assembling the right in-gredients. Some of the essential componentsare
• A bewitching problem that demands freshthinking;
• Novel principles or paradigms that havethe power to illuminate new approaches;
• A careful deconstruction of the conven-tions and dogma that constrain creative think-ing;
• Examples and analogies that help redefinewhat’s possible.
Chunky problems. Fresh principles. Unor-thodox thinking. Wisdom from the fringe.These multipliers of human creativity are aspivotal to management innovation as they areto every other kind of innovation. If you wantto turn your company into a perpetual man-agement innovator, here’s how you can getstarted.
Commit to a big problem.
The bigger theproblem, the bigger the opportunity for inno-vation. While big problems don’t always pro-duce big breakthroughs, little problems neverdo. Nearly 80 years ago, General Motors in-vented the divisionalized organization struc-ture in response to a seemingly intractableproblem: how to bring order to the sprawlingfamily of companies that had been assembledby William C. Durant, GM’s first president.Durant’s successor, Pierre Du Pont, who tookcharge in 1920, asked one of his senior associ-ates, Alfred P. Sloan, Jr., to help simplify GM’sdysfunctional empire. Sloan’s solution: Estab-lish a central executive committee chargedwith setting policy and exercising financialcontrol, and set up operating divisions orga-nized by products and brands, with responsi-bility for day-to-day operations. Thanks to thismanagement innovation, GM was able to takeadvantage of its scale and scope. In 1931, withSloan at the helm, GM finally overtook Fordto become the world’s largest carmaker.
It takes fortitude and perseverance, as wellas imagination, to solve big problems. Thesequalities are most abundant when a problem isnot only important but also inspiring. Freder-ick Winslow Taylor, arguably the most impor-tant management innovator of the twentiethcentury, is usually portrayed as a hard-nosedengineer, intent on mechanizing work andpushing employees to the max. Stern he mayhave been, but Taylor’s single-minded devotion
There is no sausage
crank for innovation, but
it’s possible to increase
the odds of a “Eureka!”
moment by assembling
the right ingredients.
The Why, What, and How of Management Innovation
harvard business review • february 2006 page 6
to efficiency stemmed from his conviction thatit was iniquitous to waste an hour of humanlabor when a task could be redesigned to beperformed with less effort.
This passion for multiplying the impact ofhuman endeavor shines through in Taylor’s in-troduction to his 1911 opus,
The Principles ofScientific Management:
“We can see and feelthe waste of material things. Awkward, ineffi-cient, or ill-directed movements of men, how-ever, leave nothing visible or tangible behindthem. Their appreciation calls for an act ofmemory, an effort of the imagination. And forthis reason, even though our daily loss fromthis source is greater than from our waste ofmaterial things, the one has stirred us deeply,while the other has moved us but little.”
To maximize the chances of a managementbreakthrough, you need to start with a prob-lem that is both consequential and soul stir-ring. If you don’t have such a problem in mind,here are three leading questions that will stim-ulate your imagination.
First, what are the tough trade-offs that yourcompany never seems to get right? Manage-ment innovation is often driven by the desireto transcend such trade-offs, which can appearto be irreconcilable. Open source develop-ment, for example, encompasses two antitheti-cal ideas: radical decentralization and disci-plined, large-scale project management.Perhaps you feel that the obsessive pursuit ofshort-term earnings undermines your com-pany’s willingness to invest in new ideas.Maybe you believe that your organization hasbecome less and less agile as it has pursued theadvantages of size and scale. Your challenge isto find an opportunity to turn an “either/or”into an “and.”
Second, what are big organizations bad at?This question should produce a long list of in-competencies. Big companies aren’t very goodat changing before they have to or respondingto nimble upstarts. Most fail miserably when itcomes to unleashing the imagination of first-line employees, creating an inspiring work en-vironment, or ensuring that the blanket of bu-reaucracy doesn’t smother the flames of inno-vation. Push yourself to imagine a companycan’t-do that you and your colleagues couldturn into a can-do.
Third, what are the emerging challenges thefuture has in store for your company? Try toimagine them: An ever-accelerating pace of
change. Rapidly escalating customer power.Near instant commoditization of products andservices. Ultra-low-cost competitors. A newgeneration of consumers that is hype resistantand deeply cynical about big business. Thesediscontinuities will demand management in-novation as well as business model innovation.If you scan the horizon, you’re sure to see a to-morrow problem that your company shouldstart tackling today.
Search for new principles.
Any problem thatis pervasive, persistent, or unprecedented is un-likely to be solved with hand-me-down princi-ples. The pursuit of human liberty requiredAmerica’s founders to embrace a new principle:representational democracy. More recently, sci-entists eager to understand the subatomicworld have been forced to abandon the certain-ties of Newtonian physics for the more ambigu-ous principles of quantum mechanics. It’s nodifferent with management innovation: Novelproblems demand novel principles.
That was certainly true for Visa. By 1968,America’s credit card industry had splinteredinto a number of incompatible, bank-specificfranchising systems. The ensuing chaos threat-ened the viability of the fledgling business. Itwas at a meeting to discuss this knotty problemthat Dee Hock, a 38-year-old banker from Seat-tle, volunteered to lead an effort to resolve theindustry’s biggest conundrum: how to build asystem that would allow banks to cooperate incredit card branding and billing while still com-peting fiercely for consumers. Faced with thisunprecedented challenge, Hock’s small teamspent months coming up with a set of radicalprinciples to guide their work:
• Power and function in the system must bedistributed to the maximum degree possible.
• The system must be self-organizing. • Governance must be distributed. • The system must seamlessly blend both
collaboration and competition. • The system must be infinitely malleable,
yet extremely durable. • The system must be owned cooperatively
and equitably. These principles owed more to Hock’s fasci-
nation with Jeffersonian democracy and bio-logical systems than to any management text-book. After two years of inventing, designing,and testing, Hock’s team brought forth Visa,the world’s first nonstock, for-profit member-ship organization—or, as Hock put it, an “orga-
The Why, What, and How of Management Innovation
harvard business review • february 2006 page 7
nization whose product was coordination.” It’s hard to know if a management princi-
ple is really new unless you know which onesare strictly vintage. Modern managementpractice is based on a set of principles whoseorigins date back a century or more: special-ization, standardization, planning and con-trol, hierarchy, and the primacy of extrinsicrewards. Generations of managers havemined these principles for competitive advan-tage, and they have much to show for their ef-forts. But after decades of digging, the chanceof discovering a gleaming nugget of new man-agement wisdom in these well-explored cav-erns is remote. Your challenge is to uncoverunconventional principles that open up newseams of management innovation. Your questshould begin with two simple questions:What things exhibit the attributes or capabili-ties that you’d like to build into your organi-zation? And what is it that imbues those ex-emplars with their enviable qualities?
Let’s suppose your goal is to make yourcompany as nimble as change itself. Youknow that in a world of accelerating change,continuous strategic renewal is the only insur-ance against irrelevance. Moreover, you real-ize that all those management principlesyou’ve inherited from the Industrial Agemake your company less, rather than more,adaptable. Specialization, for all its benefits,limits the kind of cross-boundary learningthat generates breakthrough ideas. The questfor greater standardization often leads to anunhealthy affection for conformance; the newand the wacky are seen as dangerous devia-tions from the norm. Elaborate planning-and-control systems lull executives into believingthe environment is more predictable than itis. A disproportionate emphasis on monetaryrewards leads managers to discount thepower of volunteerism and self-organizationas mechanisms for aligning individual effort.Deference to hierarchy and positional powertends to reinforce outmoded belief systems.
So where do you look to find the designprinciples for building a highly adaptable orga-nization? You look to systems that have dem-onstrated their adaptability over decades, cen-turies, even aeons.
For more than 4 billion years, life hasevolved at least as fast as its environment.That’s quite a track record. Nature inoculatesitself against the risks of environmental
change by constantly creating new genetic ma-terial through sexual recombination and muta-tion. This bubbling fountain of genetic innova-tion is the key to nature’s capacity foradaptation: The greater the diversity of thegene pool, the more likely it is that at least afew organisms will be able to survive in a dra-matically altered landscape. Variety is one es-sential principle of adaptability.
Markets, too, are adaptable. Over the past 50years, the New York Stock Exchange has out-performed virtually every one of its membercompanies. Competition is a hallmark of bothmarkets and evolutionary biology. On theNYSE, companies compete to attract funds,and investors are free to place their bets asthey see fit. Decision making is highly distrib-uted, and investors are mostly unsentimental.As a result, markets are very efficient at reallo-cating resources from opportunities that areless promising to those that are more so. Inmost companies, however, there are rigiditiesthat tend to perpetuate historical patterns ofresource allocation. Executives, eager to de-fend their power, hoard capital and talent evenwhen those resources could be better usedelsewhere. Legacy programs seldom have tocompete for resources against a plethora of ex-citing alternatives. The net result is that com-panies tend to overinvest in the past and un-derinvest in the future. Hence, competitionand allocation flexibility are also important de-sign principles if the goal is to build a highlyadaptive organization.
Constitutional democracies rank high on anyscale of evolvability. In a democracy, there is nomonopoly on political action. Social campaign-ers, interest groups, think tanks, and ordinarycitizens all have the chance to shape the legisla-tive agenda and influence government policy.Whereas change in an autocratic regime comesin violent convulsions, change in a democracyis the product of many small, relatively gentleadjustments. If the goal is continuous, trauma-free renewal, most large corporations are stilltoo much like monarchies and too little like de-mocracies. With political power concentratedin the hands of a few dozen senior executives,and with little latitude for local experimenta-tion, it’s no wonder that big companies so oftenfind themselves caught behind the changecurve. To reduce the costs of change in your or-ganization, you must embrace the principles ofdevolution and activism.
The Why, What, and How of Management Innovation
harvard business review • february 2006 page 8
These management principles—variety,competition, allocation flexibility, devolution,and activism—stand in marked contrast tothose we’ve inherited from the early decadesof the Industrial Revolution. That doesn’tmake the old principles wrong, but they are in-adequate if the goal is continuous, preemptivestrategic renewal.
Whatever big management challenge youchoose to tackle, let it guide your search fornew principles. For example, maybe your goalis to build a company that can prevail againstthe steadily strengthening forces of commod-itization—a problem that certainly demandsmanagement innovation. It isn’t just productsand services that are rapidly becoming com-modities today but also broad business capabil-ities like low-cost manufacturing, customersupport, product design, and human resource
planning. Around the world, companies areoutsourcing and offshoring business processesto vendors that provide more or less the sameservice to a number of competing firms. Busi-nesses are collaborating across big chunks ofthe value chain, forming partnerships and join-ing industrywide consortia to share risks andreduce capital outlays. Add to this a worldwidearmy of consultants that has been workingovertime to transfer best practices from thefast to the slow and from the smart to the notso clever. As once-distinctive capabilities be-come commodities, companies will have towring a whole lot of competitive differentia-tion out of their ever-shrinking wedge of theoverall business system.
Here’s the rub: It’s tough to build eye-poppingdifferentiation out of lower-order human capa-bilities like obedience, diligence, and raw intel-ligence—things that are themselves becomingglobal commodities, available for next to noth-ing in places like Guangzhou, Bangalore, andManila. To beat back the forces of commoditi-zation, a company must be able to deliver thekind of unique customer value that can onlybe created by employees who bring a full mea-sure of their initiative, imagination, and zeal towork every day. You can glimpse those higher-order capabilities in Apple’s sleek and sexyiPods, in IKEA’s cheap and cheerful furniture,in Porsche’s iconic sports cars, and in Pixar’smagical movies. The problem is, there’s littleroom in bureaucratic organizations for pas-sion, ingenuity, and self-direction. The machin-ery of bureaucracy was invented in an agewhen human beings were seen as little morethan semiprogrammable robots. Bureaucracyputs an upper limit on what individuals are al-lowed to bring to their jobs. If you want tobuild an organization that unshackles thehuman spirit, you’re going to need some decid-edly unbureaucratic management principles.
Where do you find organizations in whichpeople give all of themselves? You might startwith Habitat for Humanity, which has builtmore than 150,000 homes for low-income fam-ilies since 1976. Talk to some of the folkswho’ve given up a weekend to pound nails andhang drywall. Share a beer with a few of thepart-time hackers who have churned out mil-lions of lines of code for the Linux operatingsystem. Or consider all those volunteerswho’ve helped make Wikipedia the world’slargest encyclopedia, with more than 1.8 mil-
Twelve Innovations That Shaped Modern Management
Surprisingly, scholars have paid little attention to the process of management inno-vation. Seeking to correct this oversight, I have been working with Julian Birkinshaw and Michael Mol, both of the London Business School, to better understand the gen-esis of the twentieth century’s most important management innovations. First we identified 175 significant management innovations from 1900 to 2000. To whittle this list down to the most important advances, we evaluated each innovation along three dimensions: Was it a marked departure from previous management practices? Did it confer a competitive advantage on the pioneering company or companies? And could it be found in some form in organizations today? In light of these criteria, here are a dozen of the most noteworthy innovations.
1. Scientific management (time and motion studies)
2. Cost accounting and variance analysis
3. The commercial research laboratory (the industrialization of science)
4. ROI analysis and capital budgeting
5. Brand management
6. Large-scale project management
7. Divisionalization
8. Leadership development
9. Industry consortia (multicompany collaborative structures)
10. Radical decentralization (self-organization)
11. Formalized strategic analysis
12. Employee-driven problem solving
Important innovations that didn’t quite make this list include Skunk Works, ac-count management, business process reengineering, and employee stock ownership plans. There are more recent innovations that appear quite promising, such as knowledge management, open source development, and internal markets, but it’s too early to assess their lasting impact on the practice of management.
The Why, What, and How of Management Innovation
harvard business review • february 2006 page 9
lion articles. Each of these organizations ismore of a community than a hierarchy. Peopleare drawn to a community by a sense of sharedpurpose, not by economic need. In a commu-nity, the opportunity to contribute isn’tbounded by narrow job descriptions. Control ismore peer based than boss based. Emotionalsatisfaction, rather than financial gain, drivescommitment. For all those reasons, communi-ties are amplifiers of human capability.
Whole Foods, you will remember, long agoembraced the notion of community as an over-arching management principle. The com-pany’s stores, sparkling temples of guilt-freegastronomy, are about as unlike the averageKroger or Safeway as one could imagine. That’sthe kind of differentiation you get when yourmanagement system encourages team mem-bers to bring all their wonderful human quali-ties to work—and when your competitors’management systems don’t.
Deconstruct your management orthodox-ies.
To fully appreciate the power of a newmanagement principle, you must loosen thegrip that precedent has on your imagination.While some of what you believe may be scien-tific certainty, much of it isn’t. Painful as it is toadmit, a lot of what passes for managementwisdom is unquestioned dogma masqueradingas unquestionable truth.
How do you uncover management ortho-doxy? Pull together a group of colleagues, andask them what they believe about some criticalmanagement issue like change, leadership, oremployee engagement. Once everyone’s be-liefs are out on the table, identify those thatare held in common. (More tools for identify-ing and challenging management orthodoxiesare available at www.hamelfeb06.hbr.org.) Forexample, if the issue is strategic change, youmay find that most of your colleagues believethat
• Change must start at the top; • It takes a crisis to provoke change; • It takes a strong leader to change a big
company; • To lead change, you need a very clear
agenda; • People are mostly against change; • With any change, there will always be win-
ners and losers; • You have to make change safe for people; • Organizations can cope with only so much
change.
Empirically, these beliefs seem true enough,but as a management innovator, you must beable to distinguish between what is apparentlytrue and what is eternally true. Yes, big changeinitiatives like GE’s Six Sigma program typi-cally require the support of an impassionedCEO. Yes, right-angle shifts in strategic direc-tion, like Kodak’s embrace of all things digital,are usually precipitated by an earnings melt-down. And yes, just about every story of corpo-rate renewal is a turnaround epic with the newCEO cast as corporate savior. But is this theonly way the world can work? Why, you shouldask, does it take a crisis to provoke deepchange? For the simple reason that in mostcompanies, a few senior executives have thefirst and last word on shifts in strategic direc-tion. Hence, a tradition-bound managementteam, unwilling to surrender yesterday’s cer-tainties, can hold hostage an entire organiza-tion’s capacity to embrace the future. So whileit is true that it usually takes a crisis to moti-vate deep change, that isn’t some law of na-ture; it’s merely an artifact of a top-heavy dis-tribution of political power.
As a management innovator, you must sub-ject every management belief to two ques-tions. First, is the belief toxic to the ultimategoal you’re trying to achieve? Second, can youimagine an alternative to the reality the beliefreflects? Take the typical assumption that theCEO is responsible for setting strategy. Whilethis seems a reasonable point of view, it maylull employees into believing that they can dolittle to influence their company’s strategic di-rection or to reshape its business model—thatthey are the implementers, rather than the cre-ators, of strategy. Yet, if the goal is to acceleratethe pace of strategic renewal or to fully engagethe imagination and passion of every em-ployee, a CEO-centric view of strategy formula-tion is unhelpful at best and dangerous atworst.
Is there any reason to believe we can chal-lenge this well-entrenched orthodoxy? Sure.Look at Google. Its top team doesn’t spend alot of time trying to cook up grand strategies.Instead, it works to create an environment thatspawns lots of “Googlettes”: small, grassrootsprojects that may one day grow into valuablenew products and services. Google looks for re-cruits who have off-the-wall hobbies and un-conventional interests—people who aren’tafraid to defy conventional wisdom—and,
after it hires them, encourages them to spendup to 20% of their time working on whateverthey feel will benefit Google’s users and adver-tisers. The company organizes much of itsworkforce into small, project-focused teamswith only a modicum of supervision (one Goo-gle manager claimed to have 160 direct re-ports!) but with a lot of lateral communicationand intramural competition. Its developerspost their most-promising inventions on theGoogle Labs Web site, which gives adventur-ous users the chance to evaluate new concepts.
Few companies have worked as systemati-cally as Google to broadly distribute the re-sponsibility for strategic innovation. Its experi-ence suggests that the conventional view of theCEO as the strategist in chief is just that: a con-vention. It’s not entirely wrong, but it’s a longway from being totally right. And when youhold other management maxims up to thebright light of critical examination, you arelikely to find that many are equally flimsy. Asold certainties crumble, the space for manage-ment innovation grows.
Exploit the power of analogy.
Servant lead-ership. The power of diversity. Self-organizingteams. These are newfangled notions, right?Wrong. Each of those important managementideas was foreshadowed in the writings ofMary Parker Follett, a management innovatorwhose life was bracketed by the AmericanCivil War and the Great Depression. Considera few of the farsighted management tenets inFollett’s book,
Creative Experience,
first pub-lished in 1924:
Leadership is not defined by the exercise ofpower but by the capacity to increase the senseof power among those who are led. The mostessential work of the leader is to create moreleaders.
Adversarial, win-lose decision making is de-bilitating for all concerned. Contentious prob-lems are best solved not by imposing a singlepoint of view at the expense of all others butby striving for a higher-order solution that inte-grates the diverse perspectives of all relevantconstituents.
A large organization is a collection of localcommunities. Individual and institutionalgrowth are maximized when those communi-ties are self-governing.
Follett’s heretical insights didn’t come froma survey of industrial best practice; they grewout of her experience in building and running
Boston-based community associations. Vestedwith little formal authority and faced with thechallenge of melding the competing interestsof several fractious constituencies, Follett de-veloped a set of beliefs about managementthat were starkly different from those that pre-vailed at the time. As is so often the case withinnovation, a unique vantage point yieldedunique insights.
If your goal is to escape the straitjacket ofconventional management thinking, it helps tostudy the practices of organizations that aredecidedly unconventional. With a bit of dig-ging, you can unearth a menagerie of exotic or-ganizational life-forms that look nothing likethe usual doyens of best practice. Imagine, forinstance, an enterprise that has more than 2million members and only one criterion forjoining: You have to want in. It has virtually nohierarchy, yet it spans the globe. Its worldheadquarters has fewer than 100 employees.Local leaders are elected, not appointed. Thereare neither plans nor budgets. There is a corpo-rate mission but no detailed strategy or operat-ing plans. Yet this organization delivers a com-plex service to millions of people and hasthrived for more than 60 years. What is it? Al-coholics Anonymous. AA consists of thou-sands of small, self-organizing groups. Two sim-ple admonitions inspire AA’s members: “Getsober” and “Help others.” Organizational cohe-sion comes from adherence to the 12-step pro-gram and observance of the 12 traditions thatare outlined in the group’s operating princi-ples. AA may have been around for decades,but it is still in the management vanguard.
Just how far can you push autonomy andself-direction in your company? Is there someset of simple rules that could simultaneouslyunleash local initiative and provide focus anddiscipline? Is there some meritorious goal thatcould spur volunteerism?
The example of Bangladesh’s Grameen Bankis another spur to inventive managementthinking. The bank’s mission is to turn thepoorest of the poor into entrepreneurs. Tothat end, it makes microloans to five-personsyndicates with no requirement for collateraland little in the way of paperwork. Borrowersuse the funds to start small businesses such asbasket weaving, embroidery, transportationservices, and poultry breeding. Ninety-fivepercent of the bank’s loans go to women, whohave proven to be both creditworthy borrow-
It usually takes a crisis to
motivate deep change.
But that isn’t some law of
nature; it’s merely an
artifact of a top-heavy
distribution of power.
The Why, What, and How of Management Innovation
harvard business review • february 2006 page 11
ers and astute businesspeople. Microcreditgives these women the chance to improvetheir families’ well-being and their own socialstanding. As of 2004, Grameen Bank had pro-vided funds to more than 4 million borrow-ers. Isn’t it a bit odd that a desperately poorwoman in a developing country has an easiertime getting capital to fund an idea than afirst-level associate in your company? IfGrameen Bank can make millions of unse-cured loans to individuals who have no bank-ing history, shouldn’t your company be ableto find a way to fund the glimmer-in-the-eyeprojects of ordinary employees? Now, thatwould be a management innovation!
A final analogy: As I’m writing this, WilliamHill, one of the UK’s leading bookmakers, is of-fering odds of 3.5:1 “off” on Tiger Woods in the2006 Masters golf tournament. That is, Woodsis estimated to be three-and-a-half more timeslikely to lose than to win. The odds on PhilMickelson are rather longer at 10:1, while Ser-gio Garcia’s chances are rated at 26:1. The oddsare probability estimates based on two kinds ofdata: the expert judgment of odds compilersand the collective opinion of sports-mad punt-ers laying down their bets. Having set an initialprice on a particular outcome, bookmakers ad-just the odds over time as people place addi-tional bets and the wisdom of the crowd be-comes more apparent.
What’s the lesson for would-be managementinnovators? Every day, companies bet millionsof dollars on risky initiatives: new products,new ad campaigns, new factories, big mergers,and so on. History suggests that many projectswill fail to deliver their expected returns. Isthere a way of guarding against the hubris andoptimism that so often inflate investment ex-pectations? One potential solution would be tocreate a market for judgment that harnessesthe wisdom of a broad cross section of employ-ees to set the odds on a project’s anticipated re-turns. An executive sponsor would set the ini-tial odds for a project to achieve a particularrate of return within a specific time frame.Let’s say those odds get set at 5:1 “on,” meaningthat the sponsor believes there’s a five-to-onechance that the project will deliver the antici-pated return. Employees would then be able tobet for or against that outcome. If many moreemployees bet against the project than for it,the sponsor would have to readjust the odds.While a CEO could still back a long-shot
project, the transparency of the process wouldreduce the chance of investment decisionsbeing overly influenced by the sponsor’s poweror personal persuasiveness. Who would havethought that bookies could inspire manage-ment innovation? Your challenge is to huntdown equally unlikely analogies that suggestnew ways of tackling thorny managementproblems.
Get the Rubber on the Road
OK, you’re inspired! You have some great ideasfor management innovation. To turn your pre-cedent-busting theories into reality, you needto understand exactly how your company’s ex-isting management processes exacerbate thatbig problem you’re hoping to solve. Start byanswering the following questions for eachrelevant management process:
• Who owns the process? • Who has the power to change it? • What are its objectives? • What are the success metrics? • Who are the customers of this process? • Who gets to participate? • What are the data or information inputs
for this process? • What analytical tools are used? • What events and milestones drive this
process? • What kind of decisions does this process
generate? • What are the decision-making criteria? • How are decisions communicated, and to
whom? • How does this process link to other man-
agement systems? After documenting the details of each pro-
cess, assemble a cross section of interested par-ties such as the process owner, regular partici-pants, and anyone else who might have arelevant point of view. Ask them to assess theprocess in terms of its impact on the manage-ment challenge you’re seeking to address. Forexample, if the goal is to accelerate your com-pany’s pace of strategic renewal, you may con-clude that the existing capital approval processdemands an unreasonably high degree of cer-tainty about future returns even when the ini-tial investment is very small. This frustrates theflexible reallocation of resources to new oppor-tunities. You may find that your company’sstrategic planning process is elitist in that itgives a disproportionate share of voice to se-
The Why, What, and How of Management Innovation
harvard business review • february 2006 page 12
nior executives at the expense of new ideasfrom people on the front lines. This severelylimits the variety of strategic options your com-pany considers. Perhaps the hiring processoverweights technical competence and indus-try experience compared with lateral thinkingand creativity. Other human resource pro-cesses may be too focused on ensuring compli-ance and not focused enough on emancipatingemployee initiative. The net result? Your com-pany is earning a paltry return on its invest-ment in human capital. A deep and systematicreview of your firm’s management processeswill reveal opportunities to reinvent them inways that further your bold objectives.
Of course, you are unlikely to get permissionto reinvent a core management process at onego, however toxic it may be. Like renowned so-cial psychologist Elton Mayo, who some 80years ago conducted human behavior experi-ments in the Hawthorne Works of the WesternElectric Company, you’ll have to design low-risk trials that let you test your managementinnovations without disrupting the entire orga-nization. That may mean designing a simula-tion, where you run a critical strategic issuethrough a novel decision-making process to seewhether it produces a different decision. Itmay mean operating a new management pro-cess in parallel with the old process for a time.Maybe you’ll want to post your innovation onan internal Web site and invite people fromacross the company to evaluate and commenton your ideas before they’re put into practice.The goal is to build a portfolio of bold newmanagement experiments that has the powerto lift the performance of your company everhigher above its peers.
• • •
Most organizations around the world have
been built on the same handful of time-testedmanagement principles. Given that, it’s hardlysurprising that core management processeslike capital budgeting, strategic planning, andleadership development vary only slightlyfrom one company to another. Although wesometimes affix the “dinosaur” label to chron-ically underperforming companies, the truthis that every organization has more than a bitof dinosaur DNA lurking in its managementprocesses and practices. In the corporate eco-sphere, there are little dinosaurs and big dino-saurs, rambunctious toddlers and totteringoldsters. But no company can escape the factthat with each passing year, the present is be-coming a less reliable guide to the future.While there is much in the current manage-ment genome that will undoubtedly be valu-able in the years ahead, there is also a greatdeal that will need to change. So far, manage-ment in the twenty-first century isn’t much dif-ferent from management in the twentiethcentury. Therein lies the opportunity. You canwait for a competitor to stumble upon thenext great management breakthrough, or youcan become a management innovator rightnow. In a world swarming with new manage-ment challenges, you’ll need to be even moreinventive and less tradition bound than allthose management pioneers who came beforeyou. If you succeed, your legacy of manage-ment innovation will be no less illustriousthan theirs.
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Further Reading
A R T I C L E S
Deep Change: How Operational Innovation Can Transform Your Company
by Michael Hammer
Harvard Business Review
OnPoint
April 2004 Product no. 6573
As you reinvent key managerial processes, also make operational innovations that sup-port those reinvented processes. For exam-ple, Wal-Mart’s cross-docking distribution sys-tem and Dell’s build-to-order model have been central to these companies’ huge suc-cess in executing their strategies. Operational innovations defy conventional assumptions about how work should be done. Zero in on assumptions that interfere with achieving your strategic goal—then get rid of them. A hospital, for instance, began responding to physician referrals more quickly when it chal-lenged the assumption that beds had to be assigned
before
patients could be accepted. Now it assigns beds
after
accepting pa-tients—while the individuals are en route.
Building an Innovation Factory
by Andrew Hargadon and Robert I. Sutton
Harvard Business Review
OnPoint
May—June 2000 Product no. 6102
The authors describe a systematic method for innovating that you can apply on many fronts—including managerial processes. The keys? Capture good ideas by investigating multiple industries for proven management processes and learning how and why they work. Keep those ideas alive in your company by encouraging people to discuss them widely. Design your organization’s physical layout to get people talking constantly about their work and about how they might per-form it better. And quickly translate promising ideas into new or reinvented managerial pro-cesses that you can test and improve.
Decoding the DNA of the Toyota Production System
by Steven J. Spear and H. Kent Bowen
Harvard Business Review
OnPoint
September—October 1999 Product no. 2904
The Toyota Production System (TPS) is a leg-endary example of breakthrough manage-ment innovation that has led to sustained competitive advantage. Using TPS, people throughout Toyota continually improve the processes required to carry out their work. They generate rules specifying how every ac-tivity should be performed. When they spot deviations from the specifications, they re-spond immediately with real-time experi-ments to either remove obstacles to following the specs or change the specs to improve work quality. Result? A disciplined yet flexible and creative community of scientists who continually push Toyota closer to its zero-defects, just-in-time, no-waste ideal.
Learning to Challenge Management Orthodoxy: Worksheet 1
1. Produce a 2-foot-by-3-foot copy of Worksheet 1 and 2. Produce additional copies if you anticipate having more than one team working on this exercise.
2. Place Worksheet 1 in the middle of a large table or on a wall adjacent to a large table. (Worksheet 2 will be used later).
3. Convene a team of 4–8 individuals around the table. (Multiple teams can work at multiple tables on additional copies of Worksheet 1).
4. Make sure you have a good supply of “sticky” notes (at least 10 notes per team member).
5. Pick a management issue from those identified in Table 1 on Worksheet 1. Write the name of this
topic at the top of Column 1. (Pick an issue that is timely for your firm, or is relevant to some particular management challenge your firm is facing.)
6. As an individual, reflect on your “core beliefs” about the chosen issue. For example, if the issue is “change,” you may believe that “it takes a strong leader to change a large organization.”
7. Make a list of 4–5 core beliefs you hold relative to the management issue under consideration. Record each belief (no more than 10 words) on a sticky note. When finished, place your sticky notes (4–5) in Column 1.
8. Have one team member read all
the stickies in turn. If the meaning of any note is unclear to a team member, he or she should ask the author for clarification.
9. Now, work as a team to identify clusters of similar beliefs. You may want to rearrange the stickies in Column 1 so that similar beliefs are together. You can draw a circle encompassing clusters of similar beliefs. The goal is to identify 5 core beliefs that a majority of the group hold in common concerning the particular management issue under consideration.
10. Record your 5 common beliefs in the appropriate spaces in Column 2 on Worksheet 1.
Learning to Challenge Management Orthodoxy: Worksheet 2
1. Continue with the team or teams you convened for the exercise around Worksheet 1.
2. Make sure you have a good supply of “sticky” notes (at least 30 notes per team member).
3. Place Worksheet 2 on your table. Take the 5 commonly held manage beliefs that you listed in Column 2 on Worksheet 1 and write each belief in one of the five squares in Column 1 on Worksheet 2.
4. As an individual, think about the “underlying assumptions” to each of these commonly held beliefs. For example, some of the underlying assumptions to the belief that “it takes a strong leader to change a large organization,” might be: “change starts at the top,” “change is painful and most people prefer the status quo,” “a leader needs a very clear change agenda,” or, “to succeed, the leader has to ‘sell’ the change agenda to others in the organization.” As an individual, write down 2–3 underlying assumptions, one per sticky, for
each
management belief listed in Column 1 on Worksheet 2. Limit each sticky to no more than 10 words. Have each team member post his/her assumptions (2–3 stickies per team member) in the appropriate space in Column 2.
5. As a team, cluster similar underlying assumptions within Column 2. (Group similar stickies together). As a team, choose the one assumption (for each commonly held belief) that you think most deserves to be challenged. For example, you might decide that the assumption that “change is painful and most
people prefer the status quo” deserves to be challenged. In choosing an assumption to challenge, team members may want to ask themselves what assumption, if challenged, would represent the greatest break with management orthodoxy. Having chosen an underlying assumption to challenge, circle the relevant sticky (or stickies). Within each of the five boxes in Column 2, draw a circle around the sticky or stickies that refer to the one assumption you think most deserves to be challenged.
6. As a team, think about each of the assumptions you circled in turn. For each assumption ask, can we think of any case or cases where this assumption has been proven invalid or hasn’t held true. For example, if the assumption is that “most people are against change,” you might ask, “can we think of examples where a large group of individuals have enthusiastically endorsed change?” The examples can be drawn from within your organization or without. Ask yourselves, what was it about this example that made it an exception to the general assumption? For example, maybe a group of people was deeply involved in developing a change agenda and, therefore, were more willing to embrace it eagerly. For each counter-example, try to find a key lesson or two and note each of these in Column 3.
7. As an individual, based on the insights listed in Column 3, and on your own imagination, think about what you company could do, practically, to successfully challenge
each of the assumptions listed in Column 3. For each assumption, try to come up with one unconventional idea that might represent an alternative to conventional wisdom. For example, if one of the assumptions to be challenged is “change is painful and most people prefer the status quo,” you might suggest that “a company’s change agenda should be defined by employees, rather than being imposed upon them,” or “a company should create incentives for employees to champion and lead change” or “if employees were much better informed about the external environment, they would know when the status quo was unsustainable.” Write each of your assumption-defying alternatives (one per assumption) down on a sticky (not more than 10 words). Have each team member put his or her stickies into the appropriate boxes in Column 4.
8. Have each team member read his or her alternatives from the stickies he or she posted in Column 4. Having heard each of the alternatives, the team should choose the one alternative they think might have the best chance of being translated into practice (e.g., operationalized). Within Column 4, draw a circle around what the team regards as the best “unconventional alternative” for each of the “assumptions to be challenged.”
9. Finally, discuss ways in which you might turn each of your unconventional alternatives into management practice.
