It is commonly assumed that to preserve basic values, corporations must be effective innovators. Maintaining a strong capability to innovate seems to be at the center of value preservation. But how can this capability be maintained as corporations grow?
Ever since Josef Schumpeter introduced the concept of creative destruction in 1939, it has become widely accepted that innovations typically take place primarily in smaller corporations, and that most large firms tend to become too bureaucratic and formalistic to be able to maintain effective drive to innovate. This thesis, namely that innovativeness and size typically do not go well together, has been further argued by several researchers, and perhaps above all by Professor Clay Christiansen of Harvard Business School. Now, another HBS professor, Cary Pisano, has published new research that seems to refute this theory. His findings seem to indicate the opposite, namely that larger companies might indeed be capable of innovating; i.e., thriving in a world of change. Dr. Pisano argues that leaders of large firms can create capabilities for transformative innovation through developing explicit strategies to develop organizational systems to enhance innovations, and to stimulate a creative culture rather than waiting for creative destruction to upend their businesses.
Dr. Pisano stresses that the task of innovation is naturally difficult. He states that “innovation is a deeply human activity” and focuses a lot on the way that human behavior interacts with strategy.
The book falls into three parts, each discussing how large companies may also be strong innovators. In the first part of the book, the author discusses how to develop more effective strategies encompassing innovation. He advocates for three main ideas:
Try to develop technologies that may be hard to imitate. Large companies typically have the resources to do this.
Try to evolve one’s business model to emphasize its innovative effects. He developed the so-called RV3 approach to this:
Resources
Value creation
Value captors
Value distribution
Attempt to move quickly.
Dr. Pisano also discusses at length how to develop strategic responses to potential disruptions, ranging from highly optimistic (“a new day is dawning”) to pessimistic (“the party is ending”), as consequences from switching strategies. In the former case, profitability is preserved; in the latter, it is eroded.
In the second section of the book, the author analyzes approaches for delivering innovative administrative systems to enhance innovation. This part of the book is perhaps the most valuable, at least to this reviewer. For instance, how might administrative systems contribute to a more effective search for new opportunities? The author proposes several measures for this, all involving how people might become more creative: have more people around, mix the talent pool, learn through analogies, experiment, be open-minded, and so on.
The author then argues for bringing together various elements that may become an innovation. It is simply not enough to have bits and pieces in various parts of one’s organization, i.e., in various organizational silos. It must all come together! Soft organizational boundaries are key; people who have the ability to synthesize are equally so.
It is often important for firms to choose between competing innovation projects. After all, strategy means choice! There is always uncertainty and ambiguity with such decisions. Financial analysis can, of course, help somewhat, and real-options valuation methods are typically better than the classic discounted cash flow analysis (based on the possibility of incorporating the potential consequences of abandoning a project midway if it becomes impractical to finish).
Administrative systems’ approach to selection should be seen as a learning process. Analysis should lead to vigorous debate, raising questions rather than imposing concerns; project selection implies that we are faced with a process of learning about what might be effective aspects of innovation, e.g., experience-building.
In the final part of the book, Dr. Pisano discusses the all-important organizational culture. How can it become more innovation-driven? The author draws on an analogy to IT here. Culture might be considered an organization’s “software,” in contrast to administrative systems, which might be considered the “hardware.”
The author sees four balancing paradoxes:
Tolerance for failure, but no tolerance for incompetence
Willingness to experiment, but in a highly disciplined fashion
A psychologically safe culture that must be brutally candid
Collaborative (“we, we, we”), but with individual accountability (“me, me, me”)
In addition, he feels that the culture should be essentially flat (non-hierarchical).
How can a leader impact an organizational culture so that it might become more open to innovations? The author proposes another four potential answers:
The CEO should take direct ownership of cultural problems (for instance, to fight back-biting)
Be a clear example regarding the behavior that the CEO expects
Incubate and protect unorthodox practices (it is ok to break norms!)
Try to find people who might make it easier for the CEO to move toward the desired culture
And, once more, speed is key. A good CEO moves!
In the final chapter of the book, the author discusses how a CEO might become a more creative construction leader. This last chapter is indeed a brief summary of the book, and I shall not repeat here what has already been discussed, except to stress one key factor that might serve as the book’s main message: To view innovation as the competitive weapon. The book does indeed give many useful answers in this regard. As such, it is a “must read” for all of us, especially those concerned with value preservation.
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