In the weeks leading up to the FORTUNE Innovation Forum in New York City on November 29-30, the Business Innovation Insider is pleased to present a regular series of thought pieces with innovative thinkers in business and academia. At the FORTUNE Innovation Forum, world-renowned strategy guru Gary Hamel, a visiting professor at London Business School and the author of books such as Leading the Revolution and Competing for the Future, will be speaking on the topic of Continuous Management Innovation. In this Business Innovation Insider exclusive, Gary Hamel outlines why management innovation is the kind of innovation that matters most:
“Innovation is Topic A in companies around the world. This shouldn’t be surprising. After all, innovation is the only way to create wealth over the medium-term. In the short-run, companies can cut costs through off-shoring and outsourcing, they can capture the efficiency gains from industry consolidation and plump up the share price via stock buy backs. But in the longer-term, there are no substitutes to innovation.
Importantly, though, some forms of innovation deliver more in the way of competitive advantage than others. My research, and that of my colleagues at the London Business School, suggests that management research—fundamental advances in the way companies allocate capital, motivate employees, organize activities, create strategies, and set priorities—has the most potential to create long-lasting competitive advantage. Indeed, if one looks back over the last 100 years of industrial competition, it is management innovation, more than any other sort, that has produced big and enduring shifts in industry leadership. A few examples:
* Managing science. In the early 1900s, General Electric perfected Thomas Edison’s most notable invention, the industrial research laboratory. GE’s success in bringing management discipline to the chaotic process of scientific discovery allowed Edison to claim that his labs were capable of producing a minor breakthrough every 10 days and a major invention every six months. This was no idle boast. Over the first half of the 20th century, GE won more patents than any other company in America.
* Allocating capital. DuPont played a pioneering role in the development of capital-budgeting techniques when it initiated the use of return on investment calculations in 1903. A few years later, the company also developed a standardized way of comparing the performance of its numerous product departments. These advances addressed a pressing problem: how to allocate capital rationally when confronted with a bewildering array of potentially attractive projects? DuPont’s new decision tools would help it to become one of America’s industrial giants.
* Managing intangible assets. Procter & Gamble’s preeminence in the packaged goods industry has its roots in the early 1930s, when the company began to formalize its approach to brand management. At the time, the idea of creating value out of intangible assets was a novel management notion. In the decades since, P&G has steadily built upon its early lead in building and managing great brands. In 2005, P&G’s product portfolio included 16 brands that produced $1 billion-plus in sales every year.
* Capturing the wisdom of every employee. As the world’s most profitable car-maker, much of Toyota’s success rests on its unmatched ability to enroll employees in the relentless pursuit of efficiency and quality. For more than forty years, Toyota’s capacity for continuous improvement has been powered by a belief in the ability of “ordinary” employees to solve complex problems. Indeed, people inside Toyota sometimes refer to the Toyota Production System as the “Thinking People System.” In 2005, the company received more than 560,000 improvement ideas from its Japanese employees.
* Enabling a network of volunteers. Linux, the ubiquitous computer operating system, is the best known example of a radically new approach to organizing human effort: open source development. Based on subsidiary innovations like the general public license and online collaboration tools, open source development has proved to be a highly effective mechanism for eliciting and coordinating the efforts of a geographically dispersed group of volunteers.
Given the power of management innovation to deliver peer-beating performance, it is odd that so few companies possess a well-honed process for continuous management innovation. Today, it’s a rare company that lacks a formal methodology for product innovation. Hundreds of companies have R&D groups that explore the frontiers of science. And in recent years, virtually every organization on the planet has been obsessed with operational innovation—reinventing core business processes for the sake of speed and efficiency. Yet a troll through the pages of the world’s leading business magazines quickly reveals the steerage-class status of management innovation.
Over the last seventy years, the terms “technology innovation” and “technical innovation” have appeared in the title or abstract of more than 52,000 articles. More than 3,000 articles have concerned themselves with “product innovation.” The comparatively new topic of “strategic innovation” (which includes terms like “business innovation” and “business model innovation”) has been covered in more than 600 articles. Yet taken together, articles on “management innovation,” “managerial innovation,” “organizational innovation,” and “administrative innovation” number less than 300, and nearly all of these focus on the diffusion rather than the invention of new management practices—a bias that’s understandable only if you believe following is better than leading.
When it comes to innovation, most companies have a barn-sized blind spot. Perversely, the sorts of innovation that are least likely to produce long-term competitive advantage—operational innovation and product innovation—are those that invariably get the most attention. What accounts for this myopia?
Firstly, managers typically don’t see themselves as inventors. Unlike technologists, developers and, more recently, business strategists, innovation isn’t central to the average manager’s role definition. In most companies, managers are selected, trained, and rewarded for their capacity to deliver more of the same, more efficiently. No one expects them to be innovators. Rather, they are expected to turn someone else’s innovation into growth and profits.
Secondly, while technologists have a near-religious faith in the advance-ability of scientific knowledge, few executives hold on to similarly buoyant hopes for radical innovation in management. Managers are unsurprised when science advances by leaps and bounds; but there’s little evidence they expect the practice of management to do the same.
When forced to account for a lackadaisical pace of management innovation, executives typically claim that immutable laws of human nature constrain the range of feasible options for mobilizing and organizing human effort. In this view, there are natural limits that circumscribe the scope of management innovation. There are limits, it is argued, to the number of people one person can effectively supervise, to the degree to which accountability can be distributed, to the extent to which employees can be trusted, to the willingness of individuals to subordinate their self-interests to the interests of the corporation as a whole. Whether these limits are real or self-imposed (mostly the latter, I think), they offer a reassuring alternative to the premise that it is a lack of imagination that most severely constrains management innovation.
Today companies face an array of daunting new challenges: the commoditization of knowledge, the emergence of ultra-low cost competitors, the rapid growth of customer power, unrelenting change, and collapsing barriers to entry. These unprecedented problems demand unprecedented solutions—solutions that will only emerge when companies learn to innovate as boldly around their management systems and processes as they do around their products, services and strategies.
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