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Innovation as a Weapon in Global Competition – Part 3

August 8, 2012

Today, we conclude Stephen Shapiro’s three-part series on Innovation as a Weapon in Global Competition with his best thinking on creating a culture of innovation.  Last week’s post addressed strategies that have worked, such as making everyone accountable, replacing rigid processes with clear business objectives, challenging employees to compete, encouraging employee innovations and rewarding them accordingly, focusing on core strengths, and linking strategy, customers, and capabilities. Even when you take all of these factors into account, it ultimately comes down to the culture of an organization and its ability to foster innovation.

Creating a culture of innovation
Typically, organizations are not comprised of five-year-olds with an infinite supply of creativity, energy, and flexibility. They are more likely composed of adults with long histories, territories to protect, and boxed-in thinking. This makes any kind of change difficult, and culture change particularly difficult.

As someone once said, “The only one who likes change is a wet baby.”

Structural changes alone are not sufficient for an organization to become innovative throughout. Changes must be made in virtually all parts of the organization, from the management style to the measurement systems. Ramming home a new change program without preparation would be a bit like dropping a high-powered engine into a Volkswagen Beetle without altering the transmission, the drive train, the suspension and so forth. It can be done, but chances are the finished product won’t work very well. It is important to recognize that even the greatest enthusiast has finite limits to the amount of change that he or she can tolerate since each company is made up of a unique bunch of individuals and each company’s capacity for change is unique. Any company’s plans have to take these limitations into account. The timing of the change, the approach to it, and the people who lead it will all vary depending on each company’s circumstances. There are no templates here.

In my experience, culture change goes through three waves as it moves toward a true culture of innovation. Each wave starts at a modest level, then builds up to a plateau. It then rests for a while (as if to take a breath) before gathering enough momentum to go to the next level. Successful companies move through three waves of S curves, each of which increase the company’s capacity for change:

  1. Leadership-Driven Capacity
    At this early stage, progress is invariably based on the tenacity and leadership of a single individual, someone who gets the bit between his or her teeth about an opportunity for improvement. By taking responsibility for it, the individual drives the change. This top-down approach requires the individual to create such a sense of urgency about the initiative that he or she prevents it from falling into what is all too common – a debilitating series of fits and starts. If there is no compelling need to change, change is unlikely to happen.
  2. Structural-Driven Capacity
    At this stage, the responsibility for change no longer rests with an individual. To some extent, it has been taken over by the organization. Mechanisms have been put in place to enable employees across the business both to implement change and to drive it. Typically, such mechanisms include various performance measures, organizational structures, and lines of communication. This often includes a move towards a process orientation. Process improvements in one area eventually help to build up the organization’s overall ability to improve. The better a company becomes in one area, the more skilled it becomes at getting better in other areas.
  3. Organic Capacity
    By this stage, the capacity for change has become built into the organization, and it is often being driven from the bottom, with employees seeing it as an integral part of their jobs. This comes about partly because companies that reach this level have focused specifically on developing change competencies in their employees. They have reached the idyllic stage where innovation is an integral part of the company culture. The path through these three waves will take years but the payoff can be great. Once completed, a company can avoid the continuous gut-wrenching change programs that have plagued organizations for so long. Change will happen much more continuously and pervasively throughout the business.

The impact on global companies
Due to the relative homogeneity of the United States, many American companies are structured in a more centralized and standardized manner. Control is driven from the center of the organization, with strong corporate governance. But this model has caused heartburn for many companies trying to expand overseas. I have worked with a number European companies over the past few years. Their approach to organization models is quite different. With their varying cultures, economies and (until recently) currencies across Europe and the world, non-American companies typically use a more decentralized structure. This enables businesses in each country to get close to the customers and markets and design propositions and ways of working that meet local needs. And while market turmoil can mean sharp swings in profitability, much can still be learned from these global companies.

One British company, Invensys, is a large, global electronics and engineering firm that was created by the merger of BTR and Siebe in 1999. At that time it operated globally through four divisions–Software Services, Controls, Power Systems, and Intelligent Automation. And within those divisions there were approximately 30 product groups, each of which operated in the countries of its choosing. Profit and loss accountability is at the product group level, giving a fair amount of autonomy and supporting the decentralized philosophy of the company. This “small business within a business” approach has enabled Invensys to reconfigure its portfolio from hardcore engineering to a focus on smart products via selective purchases of automation, and technology businesses. One of the ways this is achieved is by only allowing the strongest, most profitable, highest-growth areas of business to dominate, while others that are withering on the vine are lopped off. Invensys acquires and disposes of new operations as needed. And more importantly, its business model allows each of the countries to operate somewhat independently, enabling them to make decisions that meet local needs.

In their industries, Invensys leads in the area of global diversity, with over 50 percent of their business coming from sales outside of their home region. ABB, the Swiss-based technology and engineering company, is renowned for its ability to create a powerful global structure. ABB serves customers in power transmission and distribution; automation; oil, gas, and petrochemicals; building technologies; and in financial services (this last group is in the process of being sold at the time of writing). The ABB Group is comprised of 800-900 companies operating in 142 countries, and employs 170,000 people. ABB’s historical strengths lie in its decentralized management philosophy. This enabled local businesses to tailor offerings to the needs of the local market and respond quickly to changing market conditions. Throughout the 90’s ABB was the poster-child for how to create and run a global business. These types of structures have enabled these and other companies to quickly enter new markets or even new businesses. However, anyone who has followed these two companies knows that the past two years have been difficult for them and a number of other companies in their sector.

I contend one reason (but certainly not the only one) is that these companies did a great job of focusing on the “boxes”. Lots of little boxes (in contrast to one big box typically used by American companies). They created powerful, localized businesses. The problem is, they did not focus on the lines. Doing business internally with other operating units can be more difficult and expensive than buying product from external competitors. One company I am familiar with believes that nearly 50 percent of business transactions that could have been conducted internally across operating units, were sourced externally from competitors. This is not helped by the fact that it is not unusual for these companies to have dozens or even hundreds of different ERP systems. Unfortunately, each ERP system does not talk to the others, and typically has different number schemes for customers, suppliers, parts and products. This makes any level of collaboration as difficult as if each business were speaking a different language.

The Koch example
Earlier, I referred briefly to Koch Industries’ innovative safety program. This is a customer-focused innovative organization that believes deeply in the tenets of the free market. The company is the second-largest privately held firm in the United States and would rank 21st on the Fortune 500 if it were public. Koch is a conglomerate with a wide range of interests. But it is not so much what the company does that is interesting as the original way it does it. Koch Industries operates as a network of employee-entrepreneurs who work within a framework of appropriate incentives and decision-making powers. Anyone brought in specially to do a job within the group is immediately given the authority to spend money and to move people when and where he or she chooses.

Koch Industries is a highly entrepreneurial company that does also connects the dots. A clear mission, set of values, and culture are shared throughout the organization. Decision-making is decentralized as far as possible, and based on the best local knowledge and information, while knowledge is shared across the
company. But potentially most important is the company’s use of “internal markets”, which brings the price system of the free market inside the organization. This is done by applying internally the prices and services that employees actually use in their daily work. Koch allows any two units within the organization to account for an internal transaction at the prices they would seek in the open market, even if these prices differ (of course done in conformance with Generally Accepted Accounting Procedures). The important point is that this ensures that units are rewarded appropriately for co-operating with each other. The company reckons that up to 50 percent of its profit comes from such initiatives. These approaches have helped the company grow 200-fold over three decades, and helped it expand into new business areas previously not considered. What’s the bottom line?

So, what is the key for global companies trying to compete in today’s difficult, volatile environment? It is creating a culture of innovation where decision-making is pushed to the lowest levels of the organization. This then needs to be balanced with a set of simple structures, rules, and measures that enable coordination throughout the company. A one-size-fits-all structure will hamper the efforts of American companies to truly compete globally. It is rarely smart to try to export Los Angeles to Paris. But adopting a culture of flexibility through pervasive innovation, based on market and cultural realities, can lead to changes that suit the business environment. It is never quick and easy, it is never painless, but failure to face up to the challenge will almost surely mean losing advantage in the marketplace, and ultimately seeing the more creative competition take away business.

About the author
Stephen M Shapiro Linkage Thought Leader SeriesStephen Shapiro is one of the foremost authorities on innovation culture, collaboration, and open innovation. During the past twenty years, his message to hundreds of thousands of people in over 40 countries around the world has focused on how to enable innovation by bringing together divergent points of view in an efficient manner.

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