Why Is Innovation So Hard?

The article “Why Is Innovation So Hard?” outlines cultural challenges that prevent innovation from taking root. As we have discussed many times, development of disruptive capabilities can often fail to achieve their intended results.

This means that in order to innovate we need to change our attitude toward failures and mistakes. Contrary to what many of us have been taught, avoiding failure is not a sign that we’re smart. Being smart is not about knowing all the answers and performing flawlessly. Being smart is knowing what you don’t know, prioritizing what you need to know, and being very good at finding the best evidence-based answers. Being smart requires you to become comfortable saying, “I don’t know.” It means that you do not identify yourself by your ideas but by whether you are an open-minded, good critical and innovative thinker and learner.

How to get the best from corporate R&D

MIT Sloan Review has an interesting article about corporate functions (Are CEOs Getting the Best From Corporate Functions?). Many of the larger organizations I worked with have a central R&D organization that focuses on longer term, disruptive or innovative research. Some of the lessons in the article are quite useful to these organizations. Overall it appears that most corporate functions feel that they are not tightly coupled in to the business and their performance is rarely evaluated for their true contributions:

In our survey, fewer than one in 10 function heads felt they had received sufficient guidance on how their function should contribute to the company’s overall strategy. Instead, they were expected to develop their own ideas and functional strategies.

The root cause seems to be poor strategic alignment and inadequate guidance from the executive team. The result is that the corporate functions become self serving and are not incentivized to provide practical support to business divisions:

Without sufficient guidance, corporate functions can become — often unintentionally — self-serving. Instead of developing policies and processes to give divisions the practical support they want and need, corporate functions measure themselves against industrywide best practices or implement initiatives that increase their influence or simplify their own work. The result is often a lack of cooperation from operating managers.

Here is my interpretation of the four suggestions from the article to address this situation:

1. Define key performance measures beyond division (P&L) goals: Develop a strategy for how the corporation can function better. Express the strategy in three to seven sources of corporate value creation. Ask each corporate functions to develop a plan on how they will contribute to the said value creation. In case of corporate R&D, this can be as simple as number of technologies or innovations transitioned into product development. We have discussed many such metrics for R&D in the past. We can even develop similar approaches for functions such as training:

A Danish company recently defined three main sources of added value at the corporate level: helping businesses make better capital investment decisions, ensuring that businesses drive down costs even in good years and building a pool of executive talent superior to its competitors’. All corporate functions were then asked to assess their activities against these objectives. Significant changes resulted.

2. Monitor and guide corporate function performance to meet the defined measures: The article suggests at least annual reviews to ensure that functions are progressing along the defined strategy. As we have discussed in the past, large reviews and meetings tend to waste a lot of time, so these reviews need to be focused:

Most companies occasionally conduct a major review of the size and value of the corporate headquarters. However these large-scale projects can engender a defensive response that gets in the way of the objective, and any staff reductions that result often disappear again in the following years. Annual reviews allow the CEO and the heads of divisions to nudge corporate functions regularly toward better performance.

3. Develop a comprehensive approach to corporate improvement initiatives: Many disjointed initiatives from different functions may reduce the effectiveness of initiatives AND reduce morale in corporate functions. We have discussed that organizations need to build a sense of urgency before taking on change initiatives. This article suggests that the corporations develop a central matrix of all ongoing initiatives and coordinate their impact:

This helps different functions take an integrated approach and helps anticipate potential problems. For example, the CEO can see whether an initiative is likely to place unreasonable demands on an individual business unit, given the unit’s commercial pressures. The head of IT can assess whether IT resources are sufficient to support all initiatives.

4. Break out shared services from corporate functions: Pretty self explanatory. Services should be managed differently from functions.

The result is often an order of magnitude change in performance: better service at lower cost in the shared-services division, as well as clearer policies and controls that focus on adding value within the remaining corporate functions. In the early 1990s, Shell was one of the first companies to create a separate services division, transforming its sprawling corporate functions into a headquarters team of 100 and a professional services division of some thousands. More recently, the Dutch specialty chemicals company DSM completed a major project to separate all of its corporate services into a shared-services division.

Taking organizational redesigns from plan to practice

A quick post about a McKinsey Quarterly article with lots of interesting benchmarking info (Taking organizational redesigns from plan to practice):

Organizations often redesign themselves to unlock latent value. They typically pay a great deal of attention to the form of the new design, but in our experience, much less to actually making the plan happen—even though only a successfully implemented redesign generates value.

There are many reasons why organizational redesigns are risky (or may fail to generate results). Here is a comprehensive list from the article:

This is explained by the results of the survey (not sure how anyone is able to estimate shareholder value generated by a reorg):

“Though a majority of respondents at publicly traded companies say their redesigns increased shareholder value, only a very small group of respondents—8 percent of those who have been through a redesign—say their efforts added value, were completed on time, and fully met their business objectives.

Here are some key takeaways: 1) Good reorgs take less than six months to implement; 2) they have clearly defined goals and objectives; 3) focus on how the new org would work (not just how it would look); 4) determine how the org cultures, processes, tools, roles and changed; and 5) leadership is fully engaged in change and not fighting it.

A key to success seems to be clear objectives on what the reorg is supposed accomplish (detailed goals about how the org will work, not just how it would look). Here is some data about the importance of defining detailed goals:

Respondents are much likelier to say their organizations set broad goals than detailed ones for their redesigns (Exhibit 1). Notably, this is true even of redesigns that could have had very specific numeric goals.

Minority rules: Scientists discover tipping point for the spread of ideas

Some good insights for R&D managers trying to drive change in their organizations in the article Minority rules: Scientists discover tipping point for the spread of ideas:

Scientists at Rensselaer Polytechnic Institute have found that when just 10 percent of the population holds an unshakable belief, their belief will always be adopted by the majority of the society.

We can use this to form concrete communications strategies. We should plan on getting at least 10% of the stakeholders committed to a change. The 10% number can be used as a metric to guide success of change related training or buy-in…

When the number of committed opinion holders is below 10 percent, there is no visible progress in the spread of ideas. It would literally take the amount of time comparable to the age of the universe for this size group to reach the majority,” said SCNARC Director Boleslaw Szymanski, the Claire and Roland Schmitt Distinguished Professor at Rensselaer. “Once that number grows above 10 percent, the idea spreads like flame.

Customer value to drive urgency in change management

Research & Technology Executive Council has a couple of good pointers for change management in Taking Process Excellence to the Next Level: “

To push change across the organization, leaders must create and communicate a compelling case for change and orchestrate the deep commitment of people at various levels and in various departments.

We have discussed the sense of urgency and commitment and pointed out several effective approaches to communicate them. This article adds a new twist: Using customer value proposition to communicate the value and benefit of the change.

A compelling case for change is typically built on either an imminent threat or a perceived major opportunity, and the best test of this is whether people step forward as willing followers and whether they act with urgency. This is where viewing operations from the customer’s point of view becomes important. In building a compelling case for change, highlighting the gap between current and desired performance for customers can be a powerful way to touch people’s emotions. In this respect, the factors that motivate employees to act are often different from those that resonate with the members of the senior leadership team. Factors such as growth, profit, and competitive advantage are likely to capture the attention of executives, while other factors such as customer satisfaction and pride in their work may do more to engage employees in the case for change.”

What Really Happened to Toyota?

MIT Sloan Management Review has an article (What Really Happened to Toyota?) that adds a bit more color to my post about Toyota from yesterday (Toyota’s quality improvement changes aren’t enough). The article points out two root causes of the problems at Toyota. The first being rapid growth and inability to manage the growth or a culture that could not support growth while maintaining traditional values. However, the most of the root cause analysis is the increased complexity.

Product complexity The other root cause of Toyota’s quality problem can be linked to the growing technical complexity of today’s vehicles.For a variety of reasons — stricter government regulations on safety, emissions and fuel consumption, and rising customer demand for vehicles with “green” and luxury features — cars are becoming increasingly sophisticated both in terms of how they are designed and how they are manufactured. A typical auto sold in the United States or Europe has more than 60 electronic control units and more than 10 million lines of computer code — a fourfold increase over what was common a decade ago.17 In effect, cars have become computers on wheels.

The article does not point out the a key contributor to increased complexity – the asynchronous changes in electronics that control cars and the mechanical elements of the car. The interactions between elements of mechanical systems are much more complex and in many cases indeterminate. Everyone is getting used to the Moore’s law and resulting increase in capacity / features. Consumers start expecting similar improvement in their cars, and that is where the trouble starts.

Lead time between exterior design approval and start of sales was compressed to less than 20 months. Accelerated design cycles strained the company’s development and production systems and pushed human resources to the limit, creating the conditions for quality failures. Although Toyota’s Lexus and Prius models accounted for less than 25% of its sales in 2010, they were among the most technologically complex products and were involved in more than half of the number of recalls.

When new mechanical elements are introduced (such as regenerative breaking), it takes a long time to figure out what impact these elements might have on other elements (such as brake pads). Many times these interactions are unknown and extensive testing is needed before they can be discovered / delineated. Unfortunately, the competitive pressures do not permit companies to have slow product development cycles. If one does not come up with new features, the competitors will. However, the growth targets clearly complicated the problems:

To be sure, other auto companies, not just Toyota, have had to come to grips with the issues of product complexity. The competitive pressures to produce vehicles that are safe, clean, fuel-efficient and comfortable are industrywide. But for Toyota the challenges were even more intense, complicated by the already considerable challenges associated with global growth, including rapid expansion of manufacturing capacity and the proliferation of hybrids and other technologically advanced new models. Between 2000 and 2007, Toyota’s North American sales increased from 1.7 million units to 2.9 million units, and the company’s offerings grew from 18 to 30 models.

Clearly, other companies also have the same problems, but the Toyota culture of long apprenticeship could not absorb this rapid pace. The Toyota culture was embedded in every aspect of company’s product business.

The combination of rapid growth and increased product complexity has had major implications for Toyota’s supplier management system and its overall performance. Around 70% of the value added in Toyota’s vehicles comes from parts and subassemblies produced by its suppliers. So the consequences of the growth and complexity were felt across the company’s supply chain. First, Toyota personnel were stretched increasingly thin as the company’s growth accelerated. In response to the growth, Toyota had to delegate more design work to outside contract engineers and take on new suppliers because the internal engineering resources and existing supplier base couldn’t keep up with the demands.

The company had to move away from the long apprenticeship model:

A high-level Toyota executive publicly acknowledged in 2010 that, facing internal manpower shortages, the company had no choice but to use a large number of new contract engineers to boost engineering capacity. In his view, that contributed to the increases in quality glitches. The company came to use outside engineers for as much as 30% of its development work globally. That meant hiring contract engineers overseas; it also gave rise to a new policy of hiring temporary engineers in Japan, which challenged the company’s established ways of doing business. Toyota engineers had been accustomed to communicating among themselves and with Japanese suppliers with whom they had established long-term relationships that often relied on tacit knowledge built up over the years. The influx of new, mostly non-Japanese-speaking engineers and overseas suppliers during a short period of time led to problems of coordination and miscommunication.

The author fails to point out however, that the traditional model is slow. Long term relationships take a long time to develop and require a lot of communication.

Takahiro Fujimoto, a leading Japanese researcher on Toyota, reports that in the wake of rapid growth, Toyota increasingly failed to properly evaluate and approve components designed by outside overseas suppliers. As a result, Toyota’s relationships with suppliers became less collaborative, thereby weakening the company’s distinctive “relational contracting” system characterized by long-term close OEM relationships with suppliers. Ironically, it was the collaborative practices that had originally distinguished Toyota from its Western competitors.

Whether Toyota chose to grow at a fast pace or not, the traditional R&D model would have had to change. The customer-base expects their new iPhone to sync with their car stereo. So, to me the complexity problem along with the Toyota culture caused the problem. The source of the problem is the slow culture facing a rapid product development cycle. I do not believe that the way to fix that problem is increasing quality control. But somehow, that is the obvious answer and that is what Toyota has chosen to do:

Furthermore, Toyota has reorganized and, in effect, deliberately slowed down the product development process by establishing a new team of about 1,000 quality engineers and by greatly expanding its rapid quality response teams around the globe. Although driver error appears to have been the primary cause of the acceleration problems, user error can be reduced by good design. In today’s environment, that is a corporate imperative. To that end, Toyota has reconfigured the shape of the accelerator pedal in response to its floor mat problems.

I hope somewhere someone is also addressing other problems.

What do the product recalls say about the effectiveness of the company’s legendary production system? Why should other companies try to emulate Toyota if it is struggling with so many serious design and production issues itself? The reality is that Toyota’s problems were not caused by a faulty production system but by poor management decisions.

Sense of Urgency Critical to Driving Change

I have seen many a process improvement and organizational change projects fail. In fact, studies have shown that 90% of cost cuts are reversed within 3 years. In fact, 60% of the organizations are dissatisfied with their return on process improvement tools such as six sigma. Here is another interesting insight from Forbes about change management (The Biggest Mistake I See: Strategy First, Urgency Second) :

Some people think a “burning platform” gets people urgent and committed to change. Other leaders think that they can announce the change and then leave it to everyone else to make it happen. Both are mistakes. But the biggest one I’ve run into is when someone says, “We’ve done our research, we have our strategy, we’re ready to get everyone on board.” In the video below I talk about why this approach just doesn’t work for large-scale change, and what you need to do instead: start with a sense of urgency.

The message is clear, a strategy is not enough. Change requires a clear purpose, vision and urgency from senior management. Change also requires continued engagement from executives, leaders. Finally, change requires clear accountability, metrics and reinforcement systems to ensure it sticks.

The psychology of change management

I have discussed the problem with process improvement and change management in the past. We have seen that 90% of cost cuts obtained through organizational change are reversed within 3 years. It has been shown that senior executives are much more likely to imagine that change management projects are successful than middle managers. I liked this 2003 McKinsey article that has a different take on the problem: The psychology of change management:

Companies can transform the attitudes and behavior of their employees by applying psychological breakthroughs that explain why people think and act as they do.

The article suggests that there are four conditions to make changes stick:

A purpose to believe in: The leaders have to develop and describe a story of why the change is needed and why it is important. The story needs to be communicated to build a sense of purpose within the organization around the change. People are more likely to change their individual behaviors if they believe in the purpose (especially when change might cause some people to loose power / benefits).
Reinforcement systems: We have talked about this previously. Metrics and rewards needs to be aligned to make change stick. However, psychological research shows that people get bored of rewards. Rewards alone are not enough to change behavior over the long-term. Hence, the other four conditions have to be satisfied.
Skills required for change: Changes do not happen because many people do not know how to change. We have seen research suggesting extended involvement of mentors (such as six sigma black belts) to make sure change happens and sticks. This will only work if the organization launches a few, highly visible change programs, with a clear purpose.
Consistent role models: I have seen many change management projects fail because the senior managers did not actually change their behavior. Their words were different from their actions. People can easily see the difference between a real change and one in name only. Again, we have seen research that shows that managers need to stay involved in the change for a long time to make results stick.

Overall a great article and worth reading….

Success of change (improvement) programs

Financial Times has another interesting take on success of process improvement projects in Management – Failing to cope with change?

At the meeting, survey data were presented which suggested that, while 37 per cent of UK board members believed that their change programmes were generally successful, only 5 per cent of middle managers did.

As we discussed in the recent post on key success factors for lasting process improvement results, managers have an inordinate amount of responsibility and power to drive success.

A confident leadership team may know that the right choices have been made. But it may take longer for this to become apparent to the rest of the organisation. Of course, there are two other possible explanations for this gap in perception: wishful thinking in the boardroom or plain bad communication.

The keys to success (real not imaginary) remain the same: long-term focus, metrics, rewards/raises tied to metrics and manager involvement. I guess the point the article makes may be important to – a consistent simple message from the executives (and board) to the teams:

Send a small number of simple messages again and again,” he advised. “And the larger the organisation, the simpler the message has to be.

Where Process-Improvement Projects Go Wrong

Here is a very interesting article from MIT Sloan Management Review on effectiveness on Where Process-Improvement Projects Go Wrong. I have read the results of a survey on cost cutting that more than 90% of the organizations surveyed failed to maintain savings for more than 3 years. This article mentions another interesting result: more than 60% organizations adopting 6 sigma are dissatisfied with the results.

The underlying thesis is that even though process improves under the management attention in improvement projects, it revers back to original unless organizations puts in place concrete practices to make sure changes stick. Normally, the pre-improvement practices exist because of culture / team member tendencies. These are difficult to change and or maintain. The article points out four lessons:

First, the extended involvement of a Six Sigma or other improvement expert is required if teams are to remain motivated, continue learning and maintain gains.

Second, performance appraisals need to be tied to successful implementation of improvement projects. Studies point out that raises, even in small amounts, can motivate team members to embrace new, better work practices.

Third, improvement teams should have no more than six to nine members, and the timeline for launching a project should be no longer than six to eight weeks. The bigger the team, the greater the chance members will have competing interests and the harder it will be for them to agree on goals, especially after the improvement expert has moved on to a new project.

Fourth, executives need to directly participate in improvement projects, not just “support” them. Because it was in his best interests, the director in charge of the improvement projects at the aerospace company created the illusion that everything was great by communicating only about projects that were yielding excellent results. By observing the successes and failures of improvement programs firsthand, rather than relying on someone else’s interpretation, executives can make more accurate assessments as to which ones are worth continuing.

I think the fourth point is probably the most important one. I have seen many a six sigma projects failed because there was no real incentive to change, no pressure from the executive in-charge to drive performance and no clear way to measure performance to start with…