When I wrote Relentless Innovation, I hoped to uncover some of factors that allow firms like 3M, Google, Apple, P&G and Gore to sustain innovation over time, while remaining efficient and productive. In the book I identify two factors that sustain efficiency and can become barriers to innovation: “business as usual” operating models and middle managers who sustain business as usual. In this article, I’d like to build on those two factors by examining other, less evident barriers and conflicts that a modern business creates for innovation.
Here’s the question I’ve set myself, hoping to expound: Does the existing emphasis on efficiency and short term profitability create barriers for innovation? Honestly, I think the answer is “yes”, based on my consulting experiences and my observations of the struggles many firms have to become more innovative. If the answer to the first question is “yes”, then the next question is: what is it about a focus on efficiency and short term profitability that creates barriers to innovation. In this short paper I’ll look beyond business as usual to examine some of the mental models and resource constraints that block innovation.
The first barrier to innovation is expectations. Many firms have a well-defined operating model with very specific processes. This operating model has been constantly refined over time, and it is efficient because the model works to a consistent set of inputs and outputs. The processes and models expect simple concepts and are engineered to accommodate products, services and business models that are closely aligned to the products, services and business models that preceded them. The model will remain highly efficient as long as expectations are met. The more new ideas and new products look like and act like existing ideas and products, the more efficient the model becomes. Thus, there is an inherent bias toward incremental change or even more simply continuous improvement. Existing models begin to break down when expectations change dramatically. If customer needs change significantly or the market shifts significantly or new competitors force significant change, existing operating models can’t adjust, because they are tuned to work under existing expectations.
No one wants to inflict change on a highly structured, highly engineered operating model. Everyone recognizes the investments that were necessary to construct and optimize the operating model, so rather than force changes or change expectations, managers insulate the operating model from outside influences and unnecessary change. These actions simply reinforce the rigid structure of the operating model, and make it even more difficult to introduce radically new products and services. Operating models are creatures of our own creation, but just when we need to change them they work against change.
The second barrier is based on our perspectives. A focus on short term profitability (ie making the next quarter) has radically reduced the vision and time horizons most businesses seek to understand and achieve. As the time horizons shrink, efforts to understand and uncover future trends and market needs seem less important. The focus on short term profitability creates a vicious circle, placing less and less emphasis on future needs, opportunities and threats and reinforcing the ever smaller time horizon, to the point where many firms have little or no understanding of the emerging trends and potential significant market shifts or competitive threats. As time horizons and perspectives shrink, managers and executives become ever more comfortable in the predictability of the adopted time horizon, and become uncomfortable with exploring time horizons that are beyond their comfort zone. Yet no firm can control the externalities and changes even within its chosen time horizons, and all are buffeted by changes outside of their control and chosen time horizons. Rather than seek to understand the potential future, executives become comfortable with what appears to be far more predictable short term horizons, constantly surprised by the shifts that are just outside their perspectives.
Worse, the acceptance of short term horizons creates the expectation of a future that looks very much like the present, and people and ideas that question a static future are rejected. What’s more, anything that can’t be predicted or scheduled is considered to be “uncertain”, and our perspectives reject any uncertainty within the operating model. At a time when managers should be broadening their perspectives, the emphasis is on a short term perspective.
The third barrier is attitudes. Many commentators, me included, have accused tools such as Six Sigma and Lean as contributing to the barriers to innovation. Thinking more deeply, it is obvious that the tools aren’t to blame, but the attitudes the tools promote are to blame. Six Sigma, Lean and other management tools are focused on improving what exists, taking out costs and redundancy and improving efficiency and productivity. While there is nothing wrong with incremental innovation, your most significant competitors aren’t focused on small changes. The disrupters in your market don’t plan to overtake you one small feature at a time. They hope to completely upset the existing order. At the same time, market shifts, customer expectations and new entrants are changing the playing field. Continuous improvement and incremental innovation are valuable as long as the product life cycles are long and entry into a market is difficult, but these barriers are falling rapidly.
Our attitudes are based on competition, markets, economies, product life cycles and profit curves that were true in the 80s, 90s and into the turn of the century, but are increasingly being called into question or have already been overturned. Our attitudes about competitors, new entrants, markets and customers have been shaped by forces that are changing. Therefore, our attitudes must change as well.
The fourth barrier is risk. Over time the balance between risk and reward has been lost. Many businesses seek to eliminate risk, rather than explore the tradeoffs between appropriate risk and ensuing reward. As time horizons shrink and efficiency measures increase, managers believe they have eliminated or tamed risk. Instead, what most businesses have created are organizations that reject all risk rather than seeking interesting, valuable opportunities with acceptable risk. Increasingly, any and all risk seems dangerous, rather than representing potential opportunities to exploit. Every action a business takes has risk associated with it, but the only risk that seems to matter is the risk of introducing new products or the risk of change. The risks of status quo are de-emphasized or ignored. The risk of standing still while the pace of change in the environment is accelerating is actually the greatest risk.
Over time, expectations, attitudes and perspectives have led many businesses to reject risk, or to seek to contain it. Anything new, any change or change that introduces uncertainty is deemed too risky to pursue. What’s strange is that every business is born from a risky decision – the entrepreneurial idea – but many become inured to risk and seek to isolate themselves from risk, rather than embracing risk in appropriate ways and at appropriate times. Too many managers are focusing on the wrong risks, while ignoring the greatest risk of all, the risk of doing nothing.
The fifth barrier is resources. A constant, persistent focus on efficiency has left most firms operating on the bleeding edge of productivity, with no resources or bandwidth available for anything other than achieving short term financial goals. There is no time, no money, no interest in exploring new ideas, and even within the few people who have an interest, there is no incentive to do so. Everything in the business is optimized to focus on short term achievement of financial goals, efficient and productive. There’s simply no room, no resource, and increasingly no skill or capability to explore something new. Even if, by some unseen accident a valuable new idea is created, there’s no funding and no ability to convert the idea into a new product or service, and no marketing funds or personnel to launch a new concept effectively. The modern organization is a paragon of efficiency, to its innovation detriment.
All the while, markets, customers, competitors, demographics, and other factors are shifting and accelerating, increasing the demand for more new products with far different capabilities and features. Time scales are shifting and new business models are emerging. We’ve built, in many cases, a perfect operating model to compete in the market conditions extant in the late 1980s and early 1990s, when we need a corporate model that can compete effectively in a time that demands more agile, creative, insightful firms that anticipate customer needs and produce new products, services and business models far more quickly, and on a far more regular basis.
I’ve established that existing corporate models are paragons of efficiency and short term achievement. The “business as usual” frameworks are built to sustain efficiency and, based on the discussion above, reject or tamp down innovation. Yet we also know that a handful of firms manage to innovate and remain consistently efficient in their operations, demonstrating that the efficiency/innovation spectrum does not have to be mutually exclusive. What can we learn from firms like P&G, 3M, Apple, Google and Gore that we can use and translate into other businesses?
I think the most important idea is that existing “business as usual”, focused on efficiency and short term profitability, is important, but must not become the sole focus of the business. Historically there’s been a better balance between efficiency and innovation, and the best firms understand that that balance must be restored and maintained. Firms cannot reduce their focus on efficiency, but must increase their focus and capabilities where innovation is concerned, restoring a balance between short term profitability and efficiency and longer term investments in innovation. The relentless innovators I’ve described above understand this and manage to instill what I call an “innovation business as usual” operating model. In this model, efficiency is important but innovation is also valued. Equal weight and emphasis are placed on both goals, so that the firm uses inputs and resources effectively but also consistently generates valuable, interesting new products and services.
The longer a “business as usual” framework is in place and the more it is reinforced, the more this outcome effects expectations, perspectives, attitudes, resource levels and risk tolerances. As Aristotle said, “You are what you repeatedly do”. To paraphrase the rest of his quotation: “Innovation, then is not an act but a habit.” Without intending to do so, corporate thinking, time horizons and risk tolerances have become cramped, based on an increasing focus on efficiency and short term profitability, choking off the potential for innovation. We can’t simply become more innovative by introducing new tools and methods, we must understand the existing attitudes, expectations and perspectives and influence or change them as well.
Jeffrey Phillips is a senior leader at OVO Innovation. OVO works with large distributed organizations to build innovation teams, processes and capabilities. Jeffrey is the author of “Make us more Innovative”, and innovateonpurpose.blogspot.com.