Nurturing creativity: putting passions to work

Q:   Why is innovation important?

A:   If you look at economic history, innovation is the only thing that creates economic value over the medium and long term. In the short term there are all kind of substitutes: you can do some financial re-engineering, buy back your shares, you can do another round of downsizing and cost cutting, but over the medium, innovation is the only thing that created growth and wealth.

Innovation is not simply new technology. There is a hierarchy of innovation. At the bottom you have operational innovation of the sort that helped Wal-Mart create the world’s most efficient logistics system.

A level up, you have product innovation, then business model innovation of the sort that created IKEA, or easyJet. Then industry architecture innovation, for example the redesigning of a whole industry like iTunes. The innovation is not the iPod: anybody can make an MP3 player. The innovation was getting all the music companies together, inventing a new digital rights management system, orchestrating all of the various players in that industry in a way that changed the customer experience in a fundamental way.

At the top you have management innovation – big breakthroughs in how companies allocate capital, create strategies, motivate employees, or organise human effort. Shell’s GameChanger programme is a stand-out example of management innovation [Gary Hamel helped found GameChanger in 1996 – ed.] Companies have to become adept at every sort of innovation, there is no substitute in terms of creating growth and prosperity.

Q:   Why do large companies often find it difficult to be innovative?

A:   The core reason it’s difficult for large companies to innovate is that their managerial DNA, the basic management values and principles around which they were built, is basically incompatible in many ways with innovation. The thing that’s important to remember is that all the management systems and processes were invented to solve a very specific problem: that of efficiency and control. By 1920 or 1930 most of the technology of management that we are using today was already set: capital budgeting, variance analysis, planning.

Management was built on a set of principles: standardisation, hierarchy, control, specialisation and the use of financial rewards to align individual effort. Those are important principles. But they serve the cause of efficiency and control and don’t serve the cause of innovation. None of these little programmes that companies put in place to try to spur innovation really amount to the kind of genetic re-engineering that you ideally want to make a company perpetually and deeply innovative. I think there are very few companies in the world that have really begun to think about the problem at that level.

Over the last 10 years, companies re-engineered their business process around the goals of speed and efficiency. Now they must re-engineer their management processes so they become powerful catalysts for continuous, game-changing innovation.

Q:   What are typical innovation killers?

A:   A classic example is if you are four, five, or six levels down the hierarchy and have a new idea, in most companies there is only one place to go with that new idea and that is your boss. By analogy, imagine that here in Silicon Valley we only have one venture capital company, there’s only one place to go for funding. Imagine further that the company was run by Bill Gates. How much real innovation would there be? If you didn’t come with an idea that extended the Windows franchise, you probably wouldn’t get funding. 

I think that’s exactly how large companies work. In most companies historically there was only one buyer for a new idea and that was up the chain of command. To make a company more innovative, one of the things you have to do is to make it easier for innovators to get the time and funding to pursue new ideas. There should be many sources of experimental funding, rather than just one or two.

Q:   What must companies overcome to be truly innovative?

A:   You can’t have an adaptable or innovative company unless employees are truly engaged in their work. Think of a hierarchy of human capabilities, where at the bottom you have obedience, followed by diligence, then knowledge, initiative, creativity and at the top, passion.

You can buy the lower capabilities, obedience, diligence and knowledge anywhere in the world for almost nothing. What will distinguish successful companies from unsuccessful ones is the extent to which you can create a work environment in which people want to bring their initiative, creativity and passion to their jobs every day.

You can command obedience and diligence, but you cannot command creativity and passion. Those are gifts people choose to bring to work or not. We’re nearly going to have to invert our management model: instead of asking how do you get people to serve the organisation’s goals, increasingly we’re going to have to ask how are we going to build organisations that allow people to serve their own goal and meet their own needs. The first objective I set for companies today is to build a company where an ever-increasing proportion of your employees are able to devote an ever-increasing proportion of their time to projects and work of their own choosing. You can’t get that creativity and passion and imagination in a command and control organisational structure.

Q:   Are there companies that have already adopted such a model?

A:   It’s already happening at some companies. The fundamental battle in business in the new millennium is not going to be between companies or economic regions. It will be between what I would call the members of the “bureaucratic class” who want to protect the privileges and prerogatives of their senior executive positions, and those elsewhere in the organisation who want to build a management system that is fiercely meritocratic and energises people.

There’s potentially a real battle about how to reinvent organisations so they are truly innovative to their core. I don’t think you can do that without challenging some of the fundamental notions about who is in control and about hierarchy.

Q:   Is innovation a good to be pursued per se?

A:   It depends a little on what you mean by innovation. Take the example of Toyota, now by far the world’s most successful car company. The real breakthrough came several decades ago and was a management innovation. If you go back a few decades – it was true in Europe, the USA – companies looked at their manufacturing employees on the front line almost as robots. We didn’t believe they had brains, or expect them to think.

Toyota believed there was a positive return on investing in the problem-solving skills of their employees. So they took first-level employees and taught them about statistical process control and Pareto analysis [to identify the most important quality problems] and they gave them the right to stop a big production line if they saw a problem. Last year, Toyota’s Japanese employees came up with 540,000 suggestions for improvement. I would argue every one of those suggestions is kind of a micro-innovation. They are not going to create a new billion-dollar market, but every one of them is challenging precedent. Innovation can be used to create new products, but innovation can also be used to transform the economics of your core business.

Toyota looks at every single employee as a problem-solver and a potential innovator. Most companies, even today, don’t. In many companies there is a kind of “creative apartheid” where some people in R&D or in technology are really creative, but most people aren’t. But creativity is a distinguishing characteristic of almost every human being. And the people at Shell when they go home probably work on their digital photos, write a blog, mix a dance tune online, or they are in Second Life creating an avatar. When they come to work we often don’t expect people to bring those creative energies to their jobs, nor do we help them to do so.

Q:   What lessons can we draw from the dot-com boom which saw the rise of corporate incubators and Internet venture funds?

A:   The real challenge for most large companies is how to reinvent the core business as the environment changes around you. If you have 25,000 or 100,000 people working in the core business, your future success is much more dependent on your capacity to evolve and adapt that business than it is on creating something that is pretty much unrelated to what you’re doing. Starting one of these corporate incubators or venture funds is a bit like putting a belly-button ring on grandma’s navel. It’s kind of an interesting detail, but its not going to change grandma’s health.

Q:   Why did corporate incubators fail to ensure innovation?

A:   Many corporate incubators actually became orphanages for unloved ideas that had no internal support or in-house sponsorship. The idea was: “We’ll give a bunch of 20-something-year-olds a few million dollars and tell them to go out and build a new business.”

But the venture funds and incubators were organisationally isolated. Other than simply the cash, they weren’t leveraging much of the competencies or capabilities of the company as a whole, so they had no advantage over the folks innovating in their garages or the start-ups, and most were bound to fail.

There were very few companies where incubators and venture funds made a material difference to shareholders. The challenge is how to bring innovation to the core. And how to exploit the competencies and skills you already have in the core business.

IBM has been very thoughtful about this. Over the last seven years it created 22 major new businesses, many of them now with over a billion dollars in revenue. IBM took each new business and located it within the operating unit that had the most relevant skills. The head of the operating unit acted as a surrogate parent to the new venture, but wasn’t allowed to claw back the venture’s funding to meet short-term financial goals. Also, each new venture was reviewed every month by IBM’s top executives – so if a divisional executive was failing to help support the new venture, it became immediately obvious and corrective action was taken.

Q:   How should management be re-engineered to spur innovation?

A:   In most organisations the strategic process is still largely controlled by a small group of people at the top. I think that is inappropriate in a world where change often undermines the old business models and the old thinking. I would argue that as fast as the world is changing today, what I need in my strategic planning project is a lot of participation from individuals out of the fringes of the organisation who are close to what’s changing in the regulatory environment, with technology and with customers – people who have not spent their whole career in the industry and therefore have different ways of thinking and looking at things.

Q:  How can companies nurture such an attitude?

A:   That’s one of the things my colleagues and I have focused on in recent years. We are building a new Management Innovation Lab at the London Business School. Our goal is to help companies become as experimental and bold with their management processes as they are with technology or anything else.

If I were a CEO or a chairman of any company, I would want to hold my key executives responsible for management innovation just like I hold them responsible for other sorts of innovation. Every year I want to ask the folks in the finance function, the HR function, and the strategic planning function, in internal communications, I want to ask them: “How are you reinventing our management processes in ways that make us more adaptable as a company, or more innovative as a company, or a more engaging place to work for our employees?”

Most companies don’t talk about management as a focal point for innovation and yet, until we innovate in management, we’re going to have a hard time being good at it in other areas.

* Gary Hamel spoke to Wendel Broere

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