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Steve Denning RETHINK

Because it is its purpose to create a customer, any business enterprise has two – and only these two – basic functions: marketing and innovation.

The June issue of Harvard Business Review is—happily—about one of a business’s two basic functions: innovation. The cover title is “How Great Leaders Unleash Innovation”. The “Spotlight” inside includes four articles on product innovation:

How Procter & Gamble [PG] has gone from achieving 15% of the profit and revenue objectives in 2000 to 50% today by setting up an “innovation factory” (p. 64)
How the “ambidextrous CEO” at Misys (and elsewhere) manages the tension between innovation and core products (p.74)
How Scott Cook at Intuit [INTU] catalyzed his employees to innovate (p. 82).
How Rain Bird (among other firms) discovered hidden gold in its reject pile (p.88).

Three other articles also bear on the topic of innovation:

The birth of outsourcing back-office services in India at Genpact [G] (p. 45)
How customers can inspire employees (p. 96).
How firms can compete against free (p.104).

The alarming state of innovation in business today

The seven articles are presented as illustrations of management excellence and thus exceptions to what is happening in organizations more generally. As it happens, the articles collectively give us an illuminating picture of the normal state of innovation in business today—perhaps even more illuminating than the editors and authors intended.

Before we get to evaluate the recommendations contained in the seven articles (which I will do in later parts of this article), let’s first take stock of what the articles say about the general status of innovation today. In this way, we will be able to see whether the recommendations in the articles are responsive to the problems that business enterprises face today.

The picture is not pretty.

Innovation is consistently assigned low priority

Given that innovation is one of the two basic functions of an enterprise, it is strange to learn that in business today:

“competition for resources and attention usually gets resolved in favor of the established business.” (p.77) (emphasis added)

Innovation is viewed as “an irritating drain on resources.”

Just think about that for a moment. Instead of innovation being one of only two main functions of an organization, in the world of business today innovation “usually” gets no look-in at all. Rather than being the main function of the firm, management is typically hostile to innovation.

For instance, at one company, when the CEO asked his senior executives to prepare a plan for coping with global economic crisis in 2008, their response was a proposal to cut a $3 million investment in disruptive innovation.

Remarkable! Is this unusual? No. As the authors say:

“It’s a familiar story.” (p.75)

In an example from another firm:

“A new innovation emerged: the portable handheld scanner. A small team, several layers down within the scanners unit developed a portable scanner. They believed the innovation would revolutionize the market, but they couldn’t get the attention from managers whose focus was winning market share for the flatbed [scanner].” Then a senior executive “intervened with $10 million of funding to validate the portables business, but within months, the scanners had diverted the funds to plug a hole in its budget. The portables R&D team was left with no funds and no authority.” (p. 78)

And why is that? We learn that

“executives almost always bow to the more pressing claims of the core business, especially when times are hard. Innovations … face an uphill battle to secure a share of the firm’s capital. They lack scale and resources and are usually underrepresented at the top table. At best, the leaders of the established business units ignore such projects. At worst, they seem them as threats to the firm’s core identity and values. Often innovation’s only friend is the CEO.” (emphasis added)

Extraordinary! This is after all 2011 that HBR is talking about, not 1911. This is the world of global competition and whitewater technological change, where innovation is crucial to the future. Future is apparently not management’s problem. It’s the lone CEO versus the entire management structure.

“At the best of times, innovation investments can be painful. Typically success rates are low and returns on investment far from assured. The returns that do materialize moreover rarely do so in the short term. That makes innovation hard to justify when cash is tight—even when everyone knows it’s essential to the long term success.” (p.89)

Where innovation teams do exist:

“most consisted of part-time members—employees who had other responsibilities pulling at them.” (p.71).

Even the CEO often ducks responsibility

And what is the role of our CEOs? We learn that

“often … the CEO pushes the key decisions about the right balance between investment in new and core businesses down into the units, ceding much of his or her own power and creating a collection of feudal baronies.” (emphasis added) (p76).

Amazing! Now innovation doesn’t have a single friend.

Communications are poor and cynicism is pervasive

We learn also that communications are far from open and authentic:

“when leaders attempt to deliver inspiring messages, many employees react with skepticism, question whether leaders are just trying to work harder.” (p.98)

As a result:

“In many companies the majority of frontline employees are cynical about leaders’ motives and intentions.”

The lack of transparency is a two-way street. Following one presentation to the C-suite, one CEO questioned the presenter:

“When I pressed him, he admitted that he didn’t agree with anything he had just said and that he was presenting what he had been told to present.” (p.79).

False assumptions about motivation

This may be because of wrong assumptions about motivation:

“In national surveys, over the past three decades, the majority of American shave identified meaningful work as the single most important feature they seek in a job.”(p.98)

But:

“Rarely do executives suggest imbuing the work with greater meaning and purpose. Fewer than 1% say that managers should show … how [employees'] work makes a difference.” (p.98) (emphasis added).

“Most executives start from the assumption that employees are ultimate self-interested, proposing performance incentives such as pay increases, promotions, recognition, food and breaks—interventions that… managers had already tried to no avail.” (p.99). (emphasis added)

The problems are systemic

The problems are not just a few individuals straying from the way. The problems are structural and systemic:

“In many companies, innovation units find themselves measured against the performance standards of the core business. This puts the innovation unit at a disadvantage as it struggles to a well-established business that has proven itself.” (p. 79)

The constraints are embedded in the very systems by which firms are being run.

“One obstacle is the profit center structure which makes it impossible to consider a product’s revenues and costs separately. Another is the cost accounting system which is not good for identifying the actual expense of generating new offerings.” (p.138).

It should not be surprising therefore that given these management practices and attitudes

“some think it’s foolish to even attempt to create innovative-growth businesses.” (p.72)

The disastrous results of these management practices

It should hardly be surprising therefore that the results of these management practices are dismal. As shown by Deloitte’s magisterial study of 20,000 US firms between 1965 to 2010,

The rate of return on assets is only one quarter of what it was in 1965.
The life expectancy of firms in the Fortune 500 has declined from around 75 years half a century ago to less than 15 years and continuing to decline.
Executive turnover is accelerating.
The topple rate of leading firms is increasing.
Only one in five workers is fully engaged in his or her work.

Nor should we really be surprised at the finding by the Kauffman Foundation that between 1980 and 2005 in the US, firms older than five years created practically no new net jobs. Almost all of the 40 million net new jobs were created by firms younger than five years.

And should we really be surprised to find that the US economy is undergoing a series of jobless recoveries, while most people’s incomes remain flat?

The lowly status of innovation today

The disastrous picture of the typical big firm that emerges from these articles is extraordinary:

Instead of innovation being regarded as one the firm’s two main functions, management typically assigns innovation low priority.
Both CEOs and mid-level managers exhibit pervasive attitudes and behaviors that are hostile to innovation.
Innovation receives inadequate resources and staff.
Managers do not communicate authentically to inspire staff to innovate.
Processes and accounting systems conspire to undermine innovation.

According to the articles, we are not dealing with a few ineffective managers or a few minor problems amid basically sound management practices.

In effect, the problems of innovation are systemic and structural and common to most large organizations.

Systemic problems require systemic solutions

To deal with systemic and structural problems, effective solutions need to be systemic and structural.

For the most part, however, as we shall see in later parts of this review, the recommendations contained in the various HBR articles are based on one-shot actions by individual CEOs or managers. These single-fix solutions deal with symptoms of the problem, rather than the underlying disease.

The apparent short-terms gains from these one-time individual single-fix solutions are unlikely to survive the relentless antagonistic pressure of embedded managerial attitudes, habits, practices, processes and systems.
In effect, the leash from which “Great Leaders” need to “unleash” their organizations is none other than management itself. For innovation to flourish on a sustained basis, individual one-shot actions are not enough. Management itself must be transformed.

Solving The Innovation Enigma:

Image via Wikipedia

As noted yesterday in part 1 of this article, the June issue of Harvard Business Review puts a spotlight on product innovation with four separate articles

“P&G’s Innovation Factory”: How Procter & Gamble [PG] has gone from achieving 15% of the profit and revenue objectives in 2000 to 50% today by setting up an “innovation factory” (p. 64)
“The ambidextrous CEO”: How the “ambidextrous CEO” at Misys (and elsewhere) handles the tension between innovation and core products (p.74)
“Intuit’s catalyzing employees”: How Scott Cook at Intuit [INTU] helped catalyze his employees to innovate by hiring a lot of innovation coaches (p. 82).
“Gold in the reject pile:” How Rain Bird (among other firms) discovered hidden gold in its reject pile (p.88).

The four ideas are presented separately like pieces of a jigsaw puzzle that has not been put together.

None of the articles attempts to explain why the typical corporation systematically undermines innovation, as discussed in the first part of this article, namely:

Instead of innovation being regarded as one the firm’s two main functions, management typically assigns innovation low priority.
Both CEOs and mid-level managers exhibit pervasive attitudes and behaviors that are hostile to innovation.
Innovation receives inadequate resources and staff.
Managers do not communicate authentically to inspire staff to innovate.
Processes and accounting systems conspire to undermine innovation.
Organizational structures (“profit centers”) and traditional cost accounting get in the way of innovation.

The articles offer no coherent explanation of the innovation enigma, i.e. why do most managers—highly intelligent, well-educated and well-paid—think, speak and act in a way that undermines innovation and thus the future of the organization and ultimately the economy. In the articles, it is taken for granted that this is what “often” happens in “most organizations.” It’s the way things are. There is no attempt to explain why this is the way things are. Without understanding why things are this way, the proposed solutions risk not dealing with the real problem.

None of the articles for example explains that these beliefs, attitudes and behaviors reflect a mental model of management that was dominant in the 20^th Century and is still pervasive in the Fortune 500 today.
The main principles of this mental model can be seen in most management textbooks and many business school teachings. They comprise:

The goal of the organization is to produce goods and services through a supply chain that makes money for the shareholders.
The role of the manager is a boss, namely, a hierarchical controller of individuals.
The coordination of work is achieved through rules, plans and reports, i.e. bureaucracy.
The predominant value of the organization is efficiency, principally by saving money and economies of scale.
Communications are hierarchical in nature, through commands and instructions.

The principles are interlocking, so that attempts to change any one by itself will be undermined by the other principles.

These interlocking principles also help explain why innovation has such a hard time in organizations today.
They also explain why the separate innovation ideas in the four HBR articles are by themselves unlikely to provide a lasting solution to the enigma of innovation.

The ambidextrous CEO

Thus the “ambidextrous CEO” (p.74)—who, the article says, is often the “only friend” of innovation in the whole organization (p,78)—will be pitted against the perceived goal of the organization to make money and the role of the managers to get the supply chain moving ever more efficiently. Even if the occasional CEO succeeds in encouraging innovation in the short term, eventually the systemic forces of the mental model of traditional management will cause the organization to revert back to its “normal” mode of operation—grinding out the core products and services to make money for shareholders. Since managers are rewarded for making money in their “profit center”, they will be tempted to focus on making money and neglecting innovation. The chances of a single “ambidextrous CEO” consistently winning battles against this array of systemic forces are low.

The “ambidextrous CEO” is thus likely to be become another management casualty. More seriously, the firm itself will become another organizational casualty as it fails to innovate fast enough for today’s marketplace, where continuous innovation is a necessity.

A single ambidextrous individual is not enough to generate continuous innovation on a sustainable basis. What is needed instead is for everybody in the organization to become ambidextrous in managing the tension between core products and innovation. The article, alas, gives no hint that this might be possible or how to accomplish it. With everything resting on the heroic shoulders of a single individual—the “Great Leader”—the system of traditional management will be the inexorable winner. Systems are more powerful than individuals.

Catalyzing staff

Similarly the excellent idea of Scott Cook at Intuit to use coaches to catalyze staff to get on with the task of innovation through rapid experiments with customers (p.82) may get short term results, as one can see from the rapid rise in share price of once Intuit succeeded in generating continuous innovation to delight its customers.

Over time, however, unless Intuit changes the fundamental assumptions of traditional management, managers, financial controllers and consultants will question the substantial resources being spent on “innovation coaches” (“What’s the rate of return?”) and prove in detailed spreadsheets that the company would be more profitable if it focused more sharply on making money for the shareholders. If the principles of traditional management remain in place, eventually the firm will succumb to the arguments and declare success and fire the coaches so that it can improve the bottom line with tighter control of employees, more elaborate plans, more frequent reporting, and clearer instructions to become more efficient. In effect, the system of traditional management will eventually defeat the individuals trying to do things differently.

P&G’s innovation factory

In the Procter & Gamble article (p.64), we see a more ambitious effort over ten years to graft an “innovation factory” on to the structures and processes of traditional management. Managers of “profit centers” are now assigned new-growth goals. Processes are put in place to achieve the new growth through sustaining innovations, commercial innovations, and sustaining-transformational innovations, as well as disruptive innovations that undermine existing businesses. The processes include training on disruptive innovation, innovation manuals, innovation guides, an innovation college and a FutureWorks division. The impressive results over ten years include a doubling of Tide’s revenues over ten years, new products such as cheap razors for developing countries and even a new-style dry cleaning business.

Whereas in 2000, P&G’s new growth efforts were achieving only 15% of their targets, now they are accomplishing 50% of their targets. The progress is impressive. P&G has doubled its share price over ten years and is doing better than traditional stalwarts like GE, Wal-Mart or Cisco. But this progress leaves open the question: why is P&G only half-way towards meeting its new-growth goals?

The answer is not difficult to detect if one reads the HBR article carefully. The large-scale innovation effort is in tension with the underlying assumptions of traditional management which the article indicates are still largely intact at P&G. The goal of the firm is still perceived to be that of making money for shareholders with each “profit center” responsible for achieving its part of the goal. Innovation is seen as another way of making money. In the “innovation factory”, the managers still act as bosses or controllers of individuals. The work of the “innovation factory” is still coordinated with the familiar bureaucracy of traditional management through “stage gates”, reports and financial targets. In such an environment, it is not surprising that, despite the massive management effort and support, innovation still has a hard time fully thriving.

Solving the innovation enigma: systemic change

What would it take for P&G to achieve 100% of their growth targets? What would it take for firms like Misys and Intuit to achieve innovation on a sustained basis like firms such as Apple, Amazon or Salesforce.com with exponential growth in their respective share prices over many years?

To accomplish these kinds of exponential gains on a sustained basis, single-fix ideas of the kind presented in these HBR articles will not do the job.

Resolving the enigma of innovation entails recognizing that the problem is systemic. To solve it, the solution itself must also be systemic. In effect, the underlying principles of traditional management need to be transformed. Management has to be reinvented.

Reinventing management: five basic shifts

A number of books point to the principles of the transformation of management, including my book, The Leader’s Guide to Radical Management (Jossey-Bass 2010), The New Capitalist Manifesto by Umair Haque, The Power of Pull by John Hagel, John Seely Brown and Lang Davison Reorganize for Resilience by Professor Ranjay Gulati, The Responsible Business by Carol Sanford, and Leadership in a Wiki World by Rod Collins. There are five major shifts:

The firm’s goal (a shift from making money for shareholders to delighting the customer through continuous innovation).
The role of managers (a shift from controller of individuals to enabler of self-organizing teams).
The mode of coordinating work (a shift from bureaucratic control to dynamic linking).
The values practiced (a shift from economic value to the values that will grow the firm: radical transparency and continuous improvement).
The communications (a shift from top-down command to adult-to-adult conversation).

“Delighting the customer” is an operational business objective, not some vague, abstract or subjective chimera. Measurement is central.
Individually, none of these shifts is new. What is new is doing them together as systemic change. When only one or two of these shifts is pursued without the others, the change tends to be unsustainable because any improvements are undermined by conflicts with the principles of traditional management.

The tension between innovation & core products dissolves

Once these principles replace the principles of traditional management, it becomes clear why traditional management systematically fails at innovation as well as how the separate and seemingly unconnected ideas of the articles in HBR fit within a coherent set of interlocking management principles. As a result, innovation has the possibility of being sustainable. Innovation is no longer fighting with the firm’s own DNA. Innovation has become part of that DNA.
Specifically:

Once the goal of the firm is to delight the customers, the CEO is no longer “the only friend of innovation” (p.75). Now everyone in the entire organization is focused on delighting the customers with a clear line of sight to customers so that everyone knows whether and to what extent customer is being delighted. Innovation becomes part of everyone’s job.
Now it is no longer a big deal whether it is the CEO handles “the tension between innovation and core products” or whether this is delegated to middle managers because now everyone in the organization is tasked with resolving the tension in the way that best delights the customer.
Now the middle managers are evaluated not just on how much money they are making the shareholders, with the temptation to shortchange innovation to plug holes in the budget for core products (p.78). Now the middle managers are evaluated on whether they are delighting the customers, for which innovation is essential. Merely grinding out the core products won’t get the job done.
Because the firm is consistently measuring progress in delighting customers, there is much less temptation for individual managers to divert money from innovation to core products: the impact of any such diversions will be systematically revealed by the firm’s measurement systems.
Because delighting the customer is much more profitable in today’s marketplace than grinding out the firm’s core products, there is no longer any tradeoff between innovation and making money. Innovation becomes hugely profitable.

Innovation stops being “an irritating drain on resources” or “a threat to managers”, because the goal of delighting the customer makes it part of everyone’s job.

Because delighting the customer and continuous innovation are now central parts of everyone’s job, there is little temptation for middle managers to staff innovation activities with part-time assignments, as happens in traditional management (p. 71). When customer delight is the firm’s goal, innovation becomes the most important task, requiring the best people.
Because the organization adopts the values of radical transparency and horizontal communications, along with the processes needed to support those values, managers and employees stop saying things they don’t believe (p.79). As a result, impediments to innovation are identified and problems get solved earlier.
Because managers communicate transparently and horizontally rather than through top-down commands, the risk of apathy and cynicism is drastically reduced. (p. 98).
Because the organization adopts throughput accounting techniques, in addition to rudimentary cost accounting (cf. p. 138), managers can see clearly what how financial resources relate to the goals of innovation and delighting customers.

Because the firm sees its mission as delighting customers, rather than making money for shareholders, it looks at its divisions as “customer delight centers” rather than merely as “profit centers”. As a result, the organizational structure doesn’t get in the way of promoting innovation (cf. p. 138).

Coherent management principles for innovation

Once the principles of radical management are adopted, the ideas for innovation mentioned in the HBR articles can be seen for what they are: good single-fix ideas that will only work sustainably if they are adopted as part of a coherent set of management principles that are very different from traditional managment:

The ambidextrous CEO who can reconcile the tension between innovation and core products (p. 74) is not a bad idea. It’s just not a big enough idea to resolve the enigma of innovation. For innovation to flourish, everyone in the organization must be ambidextrous. And that will only happen sustainably if the basic management assumptions change.
The idea of catalyzing staff at Intuit through coaching to accelerate innovation (p. 82) is a good idea. Self-organizing teams are a central feature of innovation. But by itself, delegating to staff is not enough. For such innovation to flourish sustainably, the goal of the firm, the role of managers, the processes for coordinating work, the values of the firm and the communications also have to change.
The idea at P&G of putting in place systems and processes to promote innovation (p.64) is a good idea, but implementation will be hobbled, if the systems and processes are grafted on to the principles of traditional management, which are inherently antagonistic to innovation.
The idea of looking through the reject pile to find usable innovation (p.88) is a good idea, but it would be even more powerful if it wasn’t just a one-off initiative, but rather the job of everyone every day. For instance, at Toyota, employees come up with around a million innovation suggestions every year.
The idea of using customers to inspire employees (p.96) is an excellent idea, but again, implementation will be hobbled unless the goal of the firm shifts from making money for shareholders to delighting customers, and work is coordinated by dynamic linking so that customer feedback is built into everyone’s job.

Tomorrow, in part 3 of this article, I will talk more on the significance of dynamic linking, and show how it resolves the false dichotomy between chaos and bureaucracy.

Bureaucracy, anarchy & innovation amnesia:

Thomas Edison, half-length portrait, facing front

Image via Wikipedia: Thomas Edison

P&G’s innovation factory

In the June 2011 HBR article on P&G, (p.64), we learn that after ten years of effort, massive investments of financial and human resources, and the strongest possible top management support, Procter & Gamble [PG] has been able to improve performance from achieving only 15% of its new-growth profit and revenue targets in 2000 to around 50% today. This progress is impressive. But the question remains: why after all this effort is P&G still only half-way towards meeting its new-growth goals?

First disconnect: the factory image

P&G is a large old organization (127,000 employees, founded in 1837). It is perhaps not surprising that its leaders set out to build an innovation “factory”. According to the article, it was designed to be a combination of the creativity of Thomas Edison’s industrial research lab (circa 1870) and the speed and reliability of Henry Ford’s production line (circa 1910).
The thinking and imagery are thus early 20^th Century in provenance and industrial in nature. The assumption seems to be that the way to succeed in business is to invent something (Edison) and then deliver it (Ford). The thinking is inside-out: “we make it and customers will take it.” The crucial question whether any customer will actually buy your invention is not explicit.
This thinking and imagery were valid for much of the 20^th Century when big oligopolies were in charge of the marketplace. But it is out of sync with the 21^st Century marketplace reality where there has been a power shift from seller to buyer: the customer is now the boss. The customer now has good information as to what is available and many options to choose from. Whether the firm can invent and build new products has become less important than whether customers will actually buy them. Unless customers are delighted, they won’t.

In practice, we learn in the article that the customer is very much present in P&G’s innovation activities. Thus in addition to the $2 billion spent on research and development, P&G spends “$400 million in foundational consumer research, conducting some 20,000 studies involving more than 5 million consumers in nearly 100 countries.”

There is also a recognition at P&G that “there needs to be an emotional component as well—a source of inspiration that motivates people. At P&G, that inspiration lies in a sense of purpose driven from the top down—the message that each innovation improves people’s lives.”

But when innovation is managed by “profit centers”, it is clear that the message about improving people’s lives is subordinated to the dominant management message: make money for the shareholders.
When a company does one thing, while telling people to do another, the risk of organizational dysfunction is significant. It can lead to the introduction of processes and systems that don’t fit what the work of innovation requires.

Second disconnect: bureaucracy

In fact, the processes that P&G set up to handle innovation as described in the article sound like bureaucracy. The managers of the profit centers are assigned new-growth goals. To help achieve those goals, processes have been put in place that include formal training, manuals, guides, a “robust stage-gate process”, portfolio management, an innovation college, courses on entrepreneurial thinking and disruptive innovation and a FutureWorks division.

Such arrangements provide a sense or order, comfort and familiarity to managers steeped in a culture of 20^th Century manufacturing. The arrangements might be appropriate for activities whose parameters and dynamics are largely known and predictable. It is less obvious that they are good fit for the complex, mercurial, inherently unpredictable world of disruptive innovation in the 21^st Century, where new business models and platforms are rapidly transforming apparently mature sectors.

This is not to say that innovation can’t happen in a bureaucracy. The experience of P&G has shown some remarkable individual successes. But the fact that P&G is only attaining 50% of its new growth objectives after ten years of massive effort suggests that there is still room for improvement. Whether bureaucracy is the right way to manage innovation is perhaps one of the avenues that P&G management might want to explore.

Genpact: “light a fire and see what happens”

At the opposite end of the spectrum, in the same issue of HBR, there is an account of a non-bureaucratic startup (p. 45). As head of GE Capital in India, Pramod Bhasin tells how he set out in the late 1990s to offer back-office services across GE Capital. He created a division that was eventually spun off as a separate company, Genpact [G], thus giving birth to an entire outsourcing industry.

Bhasin explains:

“I didn’t do any business plan modeling or studies to prove that an opportunity existed. To me it was obvious. I knew that if we could get sophisticated technology to support us… we had the raw talent to offer our services at a small fraction of the cost elsewhere…

We couldn’t just sit down and do the proper analysis to plan it, because this was uncharted territory. We did draw up a business plan, but there was so much finger-in-the-air stuff that I don’t think it had much credibility. We didn’t even know at the start how big the venture could be. We just said: “Let’s light a fire and see what happens.”

Bhasin was ultimately successful in growing the idea into a separate organization with 45,000 employees and sales of $1.2 billion that was spun off from GE. It operates 39 facilities in 13 countries and serving 400 other companies.

Bhasin’s non-bureaucratic approach of “lighting a fire and seeing what happens” was successful in part because of his energy and entrepreneurial spirit, and in part because the nature of the services to be provided was already known and Bhasin had a large existing customer for the services of his division.

Looking across the broader field of innovation today, where the key issue is whether customers will buy the innovation, the approach of “lighting a fire and seeing what happens” has not been consistently successful, as it tends to lead to anarchy. Big investments end being made for products that no one will buy. Since such experiences are anathema in a large organization, organizations tend to re-introduce the controls of bureaucracy.

Often managers often think that these are the only two alternatives: bureaucracy or anarchy. Since the firm doesn’t want anarchy, it is stuck with bureaucracy.

In reality, a quarter of century ago, we learned in the pages of Harvard Business Review itself that there is a third alternative.

What works in innovation: dynamic linking

In 1986 in a famous article entitled, “The New New Product Development Game,” Professors Hirotaka Takeuchi and Ikujiro Nonaka described how a range of firms had been successful in innovation. Some of the examples were in Japan, like Toyota, Fuji Film, and Honda, and a couple were American firms like HP, 3M, and Xerox. They showed how these companies had set up teams that became extraordinarily innovative and productive—without bureaucracy.

Typically the companies set up self-organizing teams. They analyzed the competitive threat and then pulled together a team of their very best people. It was generally a cross-functional team, with people from R&D, engineering, finance, sales, marketing, and support.

They would then give the team a challenging mission. At Honda, for instance, the challenge was to design a car that would appeal to young people and yet be cheap and of high quality. Then they would step back and let the team figure how to make it happen.

At first, the people on the team would be concerned that this was a new form of layoff. After a while, they would settle down and would socialize with each other. And then they would wake up and realize that unless they got cracking, they would never finish by the deadline. So the team would suddenly grasp the urgency of the situation and start to work together.

Takeuchi and Nonaka noted that when this happened, the well-documented phenomenon of self-transcendence within the group would occur. Self-transcendence is a big word, but it simply means that the individuals started to feel that the goals of the team were more important than their own part in it, their own careers, their own preferred position, their prior attitudes. If they were thinking only about themselves—their own goals and their own interests—the team would get locked into suboptimal patterns of work. Takeuchi and Nonaka noted, “A project takes on a self-organizing character as it is driven to a state of ‘zero information’—where prior knowledge does not apply. Ambiguity and fluctuation abound in this state. Left to stew, the process begins to create its own dynamic order.”
The psychology of this phenomenon was described by Mihaly Csikszentmihalyi in his classic book, Flow. He wrote about those times in our lives when, instead of being buffered by anonymous forces, we “feel in control of our actions, masters of our own fate. On the rare occasions that it happens, we feel a sense of exhilaration, a deep sense of enjoyment that is long cherished and that becomes a landmark in memory for what life should be like. . . . The best moments usually occur when a person’s body or mind is stretched to the limits in a voluntary effort to accomplish something difficult and worthwhile.”

Dynamic linking

Since 1986, the approach sketched by Nonaka and Takeuchi has been developed much further, particularly in software development, in a family of practices known as “Lean”, “Agile”, “Scrum” “Kanban” and “Lean Startups”. See for instance my article: “Scrum is a major management discovery.”

These practices, which may be collectively called “dynamic linking”, have in common that (a) the work is done in short cycles; (b) the management sets priorities in terms of the goals of work in the cycle, based on what is known about what might delight the client; (c) decisions about how the work is to be carried out to achieve those goals are largely the responsibility of those doing the work; (d) progress is measured (to the extent possible) by direct customer feedback at the end of each cycle.

In dynamic linking, one meshes the efforts of autonomous teams of knowledge workers who have the agility to innovate and meet the shifting needs of clients while also achieving disciplined execution.
As The Power of Pull points out, one proceeds “by setting things up in short, consecutive waves of effort, iterations that foster deep, trust-based relationships among the participants… Knowledge begins to flow and team begins to learn, innovate and perform better and faster.… Rather than trying to specify the activities in the processes in great detail.., specify what they want to come out of the process, providing more space for individual participants to experiment, improvise and innovate.”

It’s not bureaucracy and it’s not anarchy. It gets the best of all worlds. It has the decisiveness of a hierarchical bureaucracy but without its inflexibility, its rigidity and its tendency to de-motivate workers and frustrate customers. It creates an environment that is radically more productive for the organization, more congenial to innovation, and more satisfying both for those doing the work and those for whom the work is done.
It’s been implemented for over fifteen years in organizations large and small with great success. It’s discussed in detail in chapters 6 and 7 of The Leader’s Guide to Radical Management: Reinventing the Workplace for the 21st Century , along with the specific practices needed to make it operational.

Management amnesia

Intellectual disciplines that advance systematically keep track of the evolution of the subject. Writers are careful to give credit to predecessors, signal alternative viewpoints and demonstrate sensitivity to the evolution of the subject as a whole.

By contrast, in subjects that don’t advance, journals systematically eliminate traces of earlier thinking about the subject at hand. It is as though the articles have “a virgin birth” and emerge into the world without any legitimate parentage.

Thus you could read the articles on product innovation in the June issue of HBR without being made aware of the famous 1986 HBR article, “The New New Product Development Game,” Professors Hirotaka Takeuchi and Ikujiro Nonaka, which paved for the way for the later management discoveries of Agile, Scrum and Kanban, and Lean Startups. There is a lack of historical perspective in the writing.

As a result, P&G ‘s “innovation factory” can be presented as “a big new thing”, when in reality more advanced thinking about innovation was available in HBR itself some twenty-five years ago.

At the same time, some amnesia might be valuable. It could be useful for instance to forget about the romanticized version of the hierarchical bureaucracies of Thomas Edison (circa 1870s) and Henry Ford (circa 1910).

With a suitably clear mind, one could then focus on the world of 2011 and examine how companies like Apple, Amazon and Salesforce.com are getting exponential gains from innovation by radically transforming management.

In effect, the leash from which “Great Leaders” need to “unleash” their organizations is none other than management itself.