How Great Innovation Is Hiding In Plain Sight

Much writing about innovation today presents a dismal picture. The innovation accomplishments of yesteryear, like IBM in the 1990s under Lou Gerstner, Nokia in the early 2000s, Intel under Andy Grove, or Sony under Akiro Morita, vanished, seemingly without trace. Prominent innovation professors lament how innovation budgets are routinely cut in ways that never happen to more mundane corporate functions. Still other writers lament that innovation initiatives are delivering little return on investment across all industries.If innovation writers have anything positive to offer, it is often to suggest that their own innovation process, branded with a catchy metaphor. or perhaps their legendary consulting services, will surely fix the situation.

This discouraging picture is partly accurate: it’s no surprise that innovation succumbs to a system of management that is preoccupied with short-term stock market gains (and executive bonuses tied to those short-term stock market gains).

A Different Kind Of Management

Yet this picture misses two key aspects of today’s management reality: a different way of viewing innovation and a rethinking of the very concept of management itself. In this part of the economy—perhaps 15% of the whole, the goal of the firm is not short-term shareholder value. Instead, it is creating value for customers; shareholder value is a result, not a goal.

In this different type of management, innovation is not an optional add-on. It is an integral aspect of everything that happens in the firm. This different kind of management has been called digital-age management, although other names are used.

Happily, this concept of management doesn’t have to be imagined or invented. It already exists in varying degrees in the most valuable firms on the planet, as shown in Figure 1. Innovation in these firms has been remarkably stable, even as Steve Jobs hands over to Tim Cook, and Jeff Bezos hands over to Andy Jassy.

These firms see no point in “starting an innovation program” within the traditional industrial-era management. It would be only a matter of time before the industrial-era mindsets and processes combine to crush the innovation. What they embrace is a different concept of management in which innovation is normal and central to everything that happens.

In effect, the only reason to understand the mindsets and processes of industrial-era management is to avoid and move beyond them, to this new world of digital-era management.

Back To Basics: What Is Management?

Management is a group of mindsets and processes that becomes embedded within an organization and that determines behavior within the firm. Initially, the mindsets drive the creation of the processes, which come to be seen as the right way to run the organization (or indeed any organization).

Over time, the processes in turn reinforce the mindsets, and tend to prevent any aberrant thinking or behavior from ever taking root in the firm. The mindsets and processes thus operate like the auto-immune system of the human body. They are difficult to change once they become established, especially when they are taught in business schools, and assumed in management journals and the financial press, as the right way to run any company, and form the basis for executive compensation.

Management worked well in the 20th century when the mindsets and processes were a good fit with the industrial economy. As the mindsets and processes of industrial-era management became an increasingly poor fit with the digital economy, firms run in this way can’t move fast enough, or be sufficiently responsive to customers.

What Is Industrial-Era Management?

Anyone who has ever worked in a large firm knows what industrial-era management feels like. As Gary Hamel explained in 2014 “Strategy gets set at the top. Power trickles down. Big leaders appoint little leaders. Individuals compete for promotion. Compensation correlates with rank. Tasks are assigned. Managers assess performance. Rules tightly circumscribe discretion.” Bureaucracy “constitutes the operating system for virtually every large-scale organization on the planet.” Budgets are battles of units for resources. HR’s function is to control employees. The key performance indicator is the level of quarterly profits. Executives are generously compensated in stock while employee compensation stagnates.”

With variations, this is still the gist of management in most major corporations today. It isn’t written down. It doesn’t need to be. It’s implicit in the teaching at most business schools and in the writing in most management journals. When changes are put forward, they are typically about changes to one or two aspects of the fifteen-dimensional management system. Yet without adjusting the entire system, the changes won’t survive.

The modus operandi of industrial-era management is rarely discussed in boardrooms, business schools, or on Wall Street, in part because there is no perceived alternative. It’s simply “the way things are done.” It is so deeply ingrained in everyone’s consciousness that it becomes invisible. The participants cannot imagine another way of running the firm.

What Is Digital-Age Management?

Meanwhile, this other more productive, enduring, and profitable way of running a company has emerged. Its origins aren’t recent: Peter Drucker enunciated the driving principle back in 1954. “There is only one valid purpose of a corporation: to create a customer.”

Like most revolutionary insights, Drucker’s insight suffered neglect for half a century. Its truth was counter-intuitive: everyone knew the purpose of a firm was to make money. It was only with the rapidly growing market capitalization of software firms that the centrality of creating customer value was recognized.

Digital age management is a set of mindsets and processes that have emerged, not through the advice of the management commentariat, but rather through a process of “survival of the fittest.” The commentariat is thus often slow to recognize what is happening in front of their eyes.

The mindsets of digital-age management are the opposite of the mindsets of industrial-era management:

· Goal: Instead of short-term shareholder value, the goal is to create value for customers, along with a business model that generates profits as a result.

· Structure of work: Instead of bureaucracy, firms assume work will mostly be done in self-organizing teams

· Hierarchy: Instead of steep hierarchies of authority, digital-age firms tend to assume horizontal networks of competence.

To support these mindsets, the firm typically embraces processes that are the opposite of industrial-era management.

· Leadership: Instead of leadership being the preprogative of the top, leadership is now expected at every level.

· Strategy: Instead of strategy limited to protecting the existing business, strategy is dynamic, interactive, and value-creating;

· Innovation: Instead of innovation limited to marginal improvements to existing products, Innovation creates new businesses;

· Sales and Marketing: Instead of being about ‘making the numbers”, it is now about making a difference for customers and users;

· People: Instead of HR as an agent of control, this is now about attracting and enabling talent;

· Operations: Instead of a focus on outputs and efficiencies, operations are about exceeding outcomes at lower cost.

· Budgeting: Instead of budgeting being a battle for resources among the silos, budgeting is driven by strategy.

While no individual firm implements all these mindsets and processes perfectly, these patterns of digital-age management are the modus operandi of the largest and fastest growing firms in history. Its exponents are the well-known firms shown in Figure 1 and Figure 2.

While most writers on innovation “stay in their lane” and write little about what is happening in management more broadly, some business school professors like Rita McGrath at Columbia get the bigger picture. it. As she wrote in her HBR article on the permissionless corporation. “making the transformation … will require companies to completely rethink how people work; it’s not enough to streamline a process here or there or take out one layer of traditional structure.” Digital-age management is thus spelling out what it means to “completely rethink how people work.”

And as Harvard professor Amy Edmondson has declared, there is nothing more important than re-imagining capitalism.”

And read also:

Twelve Obstacles That Inhibit Management Innovation

Five Key Lessons From The 2008 Moonshots For Management