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January 18, 2013

Does your Company have a bias against Innovation?

Posted by Simon Towers (View Profile | View All Posts) at 9:21 AM

A longtime client recently sent me an academic paper he'd just read that - much to my pleasure - singled out Infosys as a model of innovation. I share this story because receiving laurels from academics isn't always easy. They're a tough, discerning bunch.

I think the reason our company was mentioned in the paper says a little bit about the state of innovation among major organizations. The research, titled "Is Your Business Biased Against Innovation?," is the work of Rita McGrath, associate professor of management at Columbia Business School. In a nutshell, her 2011 essay says that it's a challenge for large, established corporations to remain as nimble and innovative as they were when they were first founded.

Two years on, the thinking presented in her article is more relevant than ever. The reorganization of the Western world's large banks is one example. The rates they charge to borrow money continue to hover at rock-bottom lows. And activity on much of their once-lucrative proprietary trading desks has all but dried up. Despite the fact that these are very large financial services firms, some of them are nevertheless thinking outside the box and reassessing their expertise in the search for new lines of business.

That said, newer and smaller firms don't necessarily have an advantage when it comes to innovation, either. A new company's advantage, McGrath writes, is that it doesn't have to fight against the old adage: "If it ain't broke, don't fix it." But the flip side, according to McGrath, is that if the company tries something and it blows up, it's dead. "Established companies have the opportunity to do more experimentation if they commit to consciously embracing new models, because they have more resources to buffer themselves in the advent of adversity," she says.

That's why she mentions Infosys. Our company, she says, has a systematic way of estimating how long a particular advantage is going to last, not to mention "systems that nurture innovation and processes that make sure the right people are at work on the business." These organizational features are terribly important in what has become a very competitive global economy. Established companies that will eventually be outclassed by competitors are operating on autopilot. "[These] companies exist to exploit existing businesses, not to create new ones," writes McGrath.

Just as a myopic view can get a business in hot water, so can traditional metrics. McGrath criticizes - quite rightly, I think - problems with the pressures involved making quarterly targets when you're in a publicly traded company. "You pay dearly for missing quarterly targets and don't get dinged at all for failing to invest in the future," she says.

She uses the theoretical example of an executive whose job it was to run the Walkman business at Sony back when that device sold like hotcakes. The executive in charge of Walkman had one thing to worry about, according to McGrath: the Walkman franchise going forward. "The numbers that mattered had to do with the performance of that business, not with Sony as a whole. So when the first little inklings appeared that there may be a shift from battery cassette players to solid state rechargeable digital music archives like the iPod, your incentive was not to embrace that reality but to eke out another quarter or two doing what you were already doing," she writes.

I dare say we've all been in situations like that in our respective organizations. We wish we could embrace the big picture but instead we have to concentrate on short-term gains. It's not the best way to foster innovation. But sometimes it's the bitter reality of moving an organization forward.

That said, we don't necessarily have to allow these realities to define our strategies and our businesses. That brings me to another tidbit that the professor of management mentions in her academic paper. It bears consideration as we enter a new year filled with possibilities for our organizations. And it's another reflection about what can often be counter-intuitive in today's organization.

Businesses, according to McGrath, need to frame priorities around customer outcomes, because if they instead frame them around their products, they'll be making a potentially erroneous assumption: that what customers are buying is in your product. "Most of your customers don't care," she says. "Products and services are merely vehicles to provide customers with a way to get the jobs that they want to get done, done."

So in 2013, take these lessons to heart. It's not the easiest thing to move out of your organizational comfort zone, but doing so can have its rewards. "It's really striking how quickly and frequently people change their business models today," says McGrath. "It's much more common than it used to be. Be prepared. Just because your model hasn't changed much yet doesn't mean that it won't."

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