08:50 am - 10:05 am: Gary Hamel, a visiting professor at London Business School and author of Leading the Revolution, spoke on the topic of Continuous Management Innovation to kick-off the conference. According to Hamel, management innovation - more so than product innovation or technological innovation - is likely to result in long-term sources of competitive advantage. Unfortunately, most companies do not have the type of corporate DNA that makes them really good at innovation.
Hamel started off with a provocative question: What’s the future of management within your industry? In other words, what will be the types of cover stories on FORTUNE magazine in 2015? Most people don’t have compelling, broad visions of management. Have we reached the “End of Management,” much as Francis Fukuyama once argued that we have reached the “End of History”? Are we really only able to “tweak at the margin”? Is everything else just incremental innovation? NO!
The bottom line: We need to think more boldly about management. A good theoretical model is the “innovation stack” which consists of the following components:
(1) Industry architecture innovation (e.g. satellite radio, iPod platform)
(2) Business model innovation
(3) Product & service innovation
(4) Operational innovation.
As you move up the stack (from #4 to #1), the returns to innovation grow. It’s very hard to get any type of real lead advantage at the operational level or even the product level. Management innovation enables companies to cross fundamentally new performance thresholds. To think of “management,” organizations need to think in terms of “management practices” and “management processes.” Organizations need to re-think “how management gets done.”
The first great management innovation was the first R&D lab with Thomas Alva Edison at General Electric. The lab took advantage of advanced management practices to push R&D forward. The next great example was General Motors and Alfred Sloan. The basic idea was to “division-alize” the company into groups like operations, marketing, etc. During the 1980s, the real story at Toyota was radical management innovation. Toyota realized that it could leverage the problem-solving capabilities of its workers. It took Detroit nearly a generation to catch up. Also, consider the example of P&G building and managing the world’s great brands. The great innovation at VISA was to let banks compete and collaborate as part of a global organization; More recently, consider the example of open-source movement (e.g. LINUX) and creating complexity through a disparate army of global volunteers.
Innovation in management allows organizations to do fundamentally different things. Just like business, the military is also now investigating sources of management innovation. As the military recognizes, it is impossible to build a long-term advantage through purely technological innovation. Management is more important than weaponry.
The best management principles are usually “contrary” to the prevailing wisdom. For example, Microsoft is still scratching its head about the open-source movement. In one year, Japanese automaker Toyota accepts 540,000 new ideas from employees - something that Detroit automakers can’t match. Hamel recently reviewed business magazines (e.g. FORTUNE, Harvard Business Review) over past 75 years - there was almost nothing on management innovation.
STEP (1) Commit yourself to a worthy problem; It’s no longer the case that a rising tide lifts all boats; entire industries have fallen behind (music companies, major airlines, French vintners, US automakers, Broadcast TV, Phone companies, Wall Street, Pharmaceutical companies). Coca-Cola missed every major change; Microsoft missed every opportunity.
CHALLENGE #1: How do you create a company that is as nimble as change itself? The world is becoming more turbulent and challenging the resilience of companies; Look at the declining tenure of the average CEO. It takes a major event (like the major drop in revenue at IBM) to convince companies to change. Two kinds of stories of emerge — companies that changed at the margin and companies that embraced deep change. “Transformation is innovation that is tragically delayed.” According to Eric Schmidt at Google: For every Google, there are 100 companies that have failed. Google must create a “cauldron of creativity” that gets the companies “more at-bats” than its competitors. The problem with Google from Microsoft’s perspective - a new management model at Google. Among the innovations at Google - giving workers 10%-20% free time to work on new projects, keeping average team size extremely small (3-5 people each), lateral communication (separate Web sites, threaded communication), peer review of projects, continuous, real-time communication across company. Google is “building an evolutionary advantage.”
Intensifying competition is a problem. There are no longer barriers to entry (in the form of capital, regulatory requirements); low-cost competitors lurk around the corner; falling entry barriers; customer power is rising (zero search costs, falling transaction costs). The major impact of the Web has been the transfer of bargaining power to customers. In Britain, customers take advantage of YouSwitch.com - consumers can see side-by-side comparisons of switching costs.
CHALLENGE #2: How do you create a company capable of everywhere, all-the-time innovation? Hamel’s approach: go to the front lines and find out: HOW serious are you about innovation? Have you been trained as a business innovator? Where is innovation represented in your personal performance metrics? Where do you get experimental capital to advance a new idea? How do your company’s management processes reinforce innovation as a core value? One interesting example - WL Gore. (”the world’s most innovative company”) The management model matters. There are no titles at WL Gore and nobody is a boss of anybody else. No human being can give another human being a task at the company. Everything must be agreed to, bargained about. Employees get 10% time to work on interesting projects.
Companies must battle against knowledge leveling. Products and services are commoditized. Now it is knowledge that is being commoditized. Forces at work: offshoring, consultants (bringing knowledge from “fast” to “slow” competitors), industry consortia, strategic alliances, IT outsourcing.
CHALLENGE #3: How do you create more value per capital than any other company in your ecosystem? Apple iPod - “designed in California, made in China.” Where is the value created here - in California or in China?
(With apologies to Maslow’s Hierarchy) Gary Hamel’s hierarchy of human capabilities - obedience -> diligence -> intellect -> (all of these three are being commoditized, they can be purchased in India and China). Next… Initiative -> Creativity -> Passion. (passion = employees give 120% effort, Creativity = employees give 100% effort, Initiative = employees give 80% effort, Intellect = employees give 60% effort, Diligence = employees give 40% effort, Obedience = employees give 20% effort. The answer is clear - get people to be more creative and more passionate. How engaged are workers in the USA. According to a recent study, only 20% of employees are “highly engaged.” Does this mean that we need to invert our leadership model - in order to get more people engaged? Example: Whole Foods, Whole People, Whole Planet. Whole Foods goal: Build a company based on love, rather than fear; Build a company that is really a community — companies relies on small teams that are decentralized; executive compensation limited to 14x average employee to avoid disparities. In rest of corporate America, CEO pay is 300x average employee.
STEP (2) Deconstruct your management beliefs. Ask yourself the 10 things you believe about management. It takes a crisis to change a large company & it takes a new leader to effect this change — these are the two primary beliefs of workers. As Hamel points out, this sounds like a management plan for a place like Zimbabwe - have a coup and decapitate the leader. If power is concentrated at the top, then a relatively small number of people can hold the company “hostage” to its needs and demands. The problem is that management is often dealing with a mental model of the industry that is 5, 10 or even 15 years old. Example: Microsoft missed the boat on the Internet and on Internet Search.
Of these beliefs, how much is timeless truth? How much is true, but regrettable? How much is untrue, yet unchallenged (e.g. “it’s better to be a fast follower”)
STEP (3) Search for powerful new principles
What problem was management designed to solve? This is the historical model: efficiency and replication. Yet, this is not the problem that we are facing today: How do we make companies adaptable and innovative?
So… ask yourself: What is your management DNA? Five core principles of management DNA: standardization, specialization, hierarchy, planning & control, extrinsic rewards (e.g. financial compensation). Yet, all five of these are toxic to Adaptability and Innovation.
So what are the new principles to build the future of management? Must look at life itself for clues to evolution. Variety and Experimentation. Just as life constantly reproduces genetic material, companies must experiment with dozens of new ideas at any time. Evolution doesn’t have a CEO. “The next billion-dollar thing never starts off as a billion-dollar thing.” You can’t start off with something big. Intel learned this. Google has learned this. The NYSE has out-performed the performance of companies on the NYSE. Ironic, eh? The “market” is very good at re-allocating resources. In most companies, there is a monopsony (vs. monopoly) of new ideas, meaning that there is a single buyer of new ideas. You must go up the chain of command to get your idea heard. Angel investors in Silicon Valley vs. The Bill Gates VC firm. Which model would win? We can learn, too, from constitutional democracies (which absorb wave after wave of immigrants, etc.). Democracy compounds from the bottom, not from the top. Democracy was founded on the concept of activism - how to engage each member. Power is highly-distributed. Faith/religion is also very resilient. Faith is very enduring, faith gives meaning. We can also learn about resilience and innovation from cities. Dense connectivity and the ever-present chance of surprise within cities.
The key: HIGHLY RESILIENT SYSTEMS (Markets - flexibility, Life - variety, Cities - connectedness, Faith - meaning, Democracy - activism). We are dealing with 19th century management principles in a world of 21st century consumers.
STEP (4) Learn from positive deviants. We will learn not much by looking at “global leaders” and benchmarking. Need to be able to learn in new places. Innovation always begins at the fringe. (Sailors, bikers, Goth, and only then the middle Class: butterfly tattoo)
Examples of Deviants: (1) Grameen Bank in Bangladesh, which gives small loans to women; (2) Web and the democratization of the tools of creativity (throughout history, enormous amount of creativity has gone to the grave unnoticed). YouTube.com and video production. Technorati and blogs. Hackers, mash-ups. Yet, many companies do not use these tools of business innovation. Whirlpool is a good example of a company empowering its employees for innovation. (3) Markets for opinions (e.g. Intrade - can bet on prospects for peace in Middle East or on just about anything else); wisdom of crowds; the market doesn’t price a company’s stock only from input of 5-6 people!
Must be experimental. Do not have to be Immelt (GE) or Lafley (P&G) to be a big innovator. Example of Best Buy - it took only $100 for radical management innovation to take place. A single employee recognized that sales forecasts were not as good as they could be. Predictions only 90% accurate, at maximum. This single worker asked colleagues across Best Buy to predict sales - this was 99.9% accurate. Whose wisdom really matters here - that of management, or of the line worker?
Final thought: Management Innovation is just as important as product or technological innovation.
10:05 am - 10:40 am: In a thirty-minute on-stage interview, David Kirkpatrick of FORTUNE spoke with Robert Nardelli, the Chairman, CEO and President of Home Depot.