Fostering an Innovative Environment, Part 1

Stephen DeAngelis

November 26, 2012

Gwen Moran reports that results from a survey conducted earlier this year by CapGemini Consulting, indicated that “two-thirds of respondents said they are working on developing a culture of innovation, and the percentage of leading businesses with a formal innovation role jumped 10 percent.” [“How to Develop a Culture of Innovation,” Entrepreneur, 11 October 2012] Those results beg the question: What constitutes an innovative culture or environment? From my studies of innovation, there is no single answer to that question. There are, however, characteristics that must be present in an innovative environment. There must, for example, be a high tolerance for risk, a certain amount of freedom for employees to explore ideas, and support from the top. Developing a culture of innovation seems straight forward, but, as Moran admits, “Developing a culture of innovation is a coveted, yet sometimes elusive goal.”

Jeffrey Phillips, co-founder of OVO, expressed to Moran his belief that an innovative environment is “a discipline that’s possible to develop, … but it takes time and attention. Moran’s article draws on an interview she conducted with Phillips about “how any company can create a more innovative environment.” An innovative culture, Phillips told her, begins with the right mindset. Innovative firms are always looking for ways “to deliver a new product or service or feature into the market” whereas less innovative firms simply try to defend their market or customer base. As Phillips puts it, less innovative firms “play defense rather than offense.” He told Moran that companies should ask themselves, “How much are we willing to embrace new ideas to continue expansive, engaged thinking? … Am I willing to allow the sort of conceptual structure of the business to change and to adapt as new people and new ideas or new demands emerge?”

Philips’ insistence that organizations need to embrace the idea of structural change to adapt to new situations is a non-trivial matter. After all, organizations are established to support the status quo (i.e., create stability and resist changes that could disrupt efficiency). Change can be both difficult and expensive. Phillips states that a lot of organizations are “afraid of change.” Phillips offered a couple of examples where traditional companies in “heating-and-cooling equipment” have changed from a business model directed at selling a system to a business to one where they maintain “ownership of those systems and selling them as a service.” He told Moran, “They didn’t change the product, but they changed the entire business model. That’s the kind of innovation that can change an entire industry, but it wouldn’t have happened if leaders weren’t open to change.” As a side note, what Phillips described is part of what is being called the circular economy. To learn more about that concept, read my post entitled Supply Chain Sustainability and the Move towards a Circular Economy.

Unfortunately, Phillips really doesn’t go into any more detail about how one can foster an innovative environment. He did tell Moran, however, that to develop such an environment you have to work at it. “If you want a certain portion of your revenue stream to come from new products,” he told her, “you’d better always be working on developing those ideas. You can’t simply break the glass in case of emergency and suddenly be good at innovating.” He did tell Moran that one way to kill innovation is “ignoring what the market tells you. Another is relying on secondary market research instead of doing your own research with your own customers. And a third is failing to spot the trends. Trends don’t just come from competitors but also from places like the government or society.” My only caveat here is drawn from the work of Harvard professor Clayton Christensen who has argued that “listening to customers” can result in a company getting blindsided. In his best seller The Innovator’s Dilemma, Christensen noted that customers will tell you they want what you are selling right up until the moment that something better (or good enough and cheaper) comes along.

Nilofer Merchant believes that organizational size shouldn’t be a concern when talking about fostering an innovative environment. “You can find plenty of people who disregard bigger enterprises, stating they are not the future,” she writes. “Plenty of people … espouse the theory that big companies can’t innovate. This argument is both old and wrong. … The key for every firm — regardless of size — is to figure out how to consistently create value in a demanding, ever-changing market. That is hard no matter what size you are, no matter what industry you’re in.” [“Innovation Isn’t Tied to Size, but to Operating Rules,” Harvard Business Review Blog Network, 31 October 2012] Merchant believes “if we’re to actually get better at innovation, we need to understand the operating conditions that lead to it and move past the bigotry and biases.” As the title of her post states, Merchant believes that operating rules can play a significant role in fostering innovation.

To strengthen her argument, Merchant compares two well-known tech companies, IBM and HP, both which are led by high profile, female CEOs. She writes, “IBM and HP are two amazing companies with long and meaningful histories. Both CEOs are notable in what they have done, and are doing to lead their companies and both companies rank highly on the Fortune 500 List. HP is #10 on the 2012 list, and IBM is number 19.” Merchant points out that both companies have gone through some turmoil and HP is still in the midst of its troubles. Merchant asserts, however, that the mindsets demonstrated by HP’s Meg Whitman and IBM’s Ginny Rometty are very different and have led to very different innovative environments.

Despite the fact that most people believe that the HP CEOs who preceded Whitman were taking the company “in the wrong direction,” Whitman’s “first decision when she returned was to ‘stay the course’; that involved keeping its PC-making personal systems group because that ‘product line allowed better supplier cost negotiation with Intel, Seagate and others.’ The logic was ‘together we are stronger’. … She shared plans for revenues and profits to decline for another year to then return to growth in three years, with the key to the turnaround being ‘stability’.” To use Phillips’ analogy, Whitman is playing defense. Rometty brought an entirely different mindset to IBM. Merchant reports:

“The new CEO, Ginny Rometty has been quoted as saying that IBM believes it needs to persistently reinvent the value proposition and ‘take new things on.’ And the CEO sees enabling a culture of collaborative innovation as key. ‘Culture,’ Rometty has also said, has ‘become the defining issue that will distinguish the most successful businesses from the rest of the pack.’ And ‘strategic beliefs may be more important than strategic planning when thinking about how you keep the long view,’ she said. ‘Clients say, “What’s your strategy?”, and I say,
“Ask me what I believe, first.” That’s a far more enduring answer.'”

Rometty is playing offense. Obviously, Merchant believes that IBM will be more successful in the coming years creating and marketing innovative products. “Innovations are not a function of size or even industry-specific strategies,” she writes, “but an embodiment of a set of ideas.” She then offers three stark comparisons between how HP’s ideas and IBM’s idea will play out. The first comparison sounds a lot like what Phillips discussed earlier, namely: Trying to Preserve Market Position vs. Cultivating the Ability to Adapt. Merchant writes:

“Instead of worrying about power over their suppliers, HP needs to be focused on leaping to their next opportunity, which is what IBM persistently does. Organizations must acknowledge that any advantages are short-lived, and the thriving business is one that figures out how to persistently reinvent their product lines, and business models.”

Merchant’s second comparison involves people, namely: “Seeing People as ‘Production Units’ vs. Essential to the Success Equation. She writes:

“As HP continues to burn-n-churn people, they are signaling that people are cogs in the machine — dispensable and easily replaced. Imagine what that does to recruitment, let alone energetically to the people who work there? In the Social Era, the greatest asset isn’t the stuff you lock up — like the building or manufacturing capabilities — but the people who walk out the door each night still thinking of creative solutions and ideas that will make a difference. The role of leadership is to unlock that talent, just as IBM has done when they jointly built a shared understanding of ‘why we’re here’ and connecting people through purpose. Culture, Talent, and Purpose matter crucially when what you are making is a function of creativity and ideas. Who we are is what we make, and if we treat talent like Kleenex, innovation doesn’t happen.”

Merchant makes a profound point about innovation. Innovation is mostly about people, creating an innovative environment isn’t primarily about processes, infrastructure, or technology; it’s about equipping people with the tools they need to succeed. Her final comparison is about organization culture, namely: Organizations are Open to New Ideas vs. Closed. She writes:

“A vast portion of our economy is now freelance (the US range is between 45-50%), which shows that ‘work is freed from jobs.’ In all the examples I give about Social Era, it’s clear that value can be created independent of ‘a job’ and by the very way we structure innovation, we can pull in ideas from anywhere. By engaging with others — regardless of whether they work for or in our firms — we engage new ideas. … The crux of the issue is that organizations need to stop thinking of who creates value as the people who work ‘for us.’ Often new ideas and innovations can and do come from outside the perimeter of an organization — especially from people who, without vetting or permission, create unexpected value. Open is more than a way of thinking about crowdsourcing or open innovation, it’s a way of thinking about who is allowed to create value. IBM embodies this as their Smart Planet, Watson, and digital initiatives show (comprising about 20% of their revenue stream); HP continues to limit who is allowed to create value for the firm.”

Merchant insists that, if you don’t think that the things she writes about matter, you are wrong. “IBM has recently reached the highest stock valuation in its 100+ year history. HP, on the other hand has lost 35% of its value since its new CEO and over 70% since 2010 — over $90 billion of value from its peak.” She concludes, “If an organization knows what principles of innovation work, then innovation follows — regardless of size.”

As I stated at the beginning of this post, there is no single answer to what constitutes an innovative environment or a single course of action that guarantees you’ll achieve it. I believe, however, that Phillips and Merchant provide some excellent food for thought on the subject. The final part of this two-part series will focus on some suggestions for creating a culture of innovation provided by Scott Edinger, Josh Linkner, and Tony Schwartz.