By David James



Successful leadership is usually thought to be a matter of steering between opposites. Is it better to dictate to staff or be supportive? Is it better to manage costs or aim for revenue growth? Is it more important to implement or worry about getting the strategy right?

Leading innovation also has its oppositions. Is it better to concentrate on the creativity of individuals or develop an innovation culture? The answer is not self-evident. Creativity usually comes from individuals or small groups. But the ability to build on ideas, to innovate, depends on systems, a business's collective intent and its practices. The shorthand for this is "culture". The question is, how does a business develop an innovation culture when the creative spark usually comes from individuals?

First, define culture. The principal of the consultancy Bailey Austin, David Austin, defines culture as "just the way we do things around here". If the way a company does things is "well suited to its situation", it is an "appropriate" culture, he says.

This is a generic description, but what does it mean to have an "innovation culture" that creates something new? One requirement is to get beyond process management. The chief executive of the innovation consultancy Wave Global, Daryl Bubner, comments that most of the focus in Australian manufacturing tends to be on developing precise processes for existing business practices. Although this goes under the name of fostering innovation, it is more like its opposite.

Bubner says most manufacturing consultants and government industry agencies that provide funding to encourage "innovation" instead focus on manufacturing excellence, which is also called lean manufacturing. It is not focused on true innovation and opportunity creation.

He says the two are not mutually exclusive and both are important. But many consultants, because they are trained in conventional manufacturing processes that use models and measures that have operational excellence as the central focus, look only at agility and innovation at the periphery. Such thinking, he says, "dominates the manufacturing sector, despite the growing body of evidence that manufacturing excellence and methodologies like Six Sigma are a necessary but not sufficient basis for continuing international competitiveness".

Much depends on roles, Austin says. If a business defines its roles effectively for innovation, then it becomes less dependent on individuals. Staff turnover can be as high as 50%, and the company will stay innovative. "That role is informed by the culture," he says. "[Staff] know that if they don't fulfil that role, the organisation will get rid of you." Austin says the roles should be designed with an eye to individuals, groups and the whole organisation, with aims clearly outlined.

The principal of the consultancy The Conferre Partnership, Mark McLean, says teams for innovation should have a balance of people good at strategy and people good at implementation. He says the pendulum is swinging in Australian companies towards finding new forms of revenue, but many companies are ill-suited to the challenge. "If you have had to innovate the business to be lean and mean, it is a real challenge to find growth. So when people talk about innovation, it will tend to revert to the status quo."

On the margins

Resistance to change is not just an Australian phenomenon. It is arguable that many global companies are losing inventiveness, and innovate only on the margins. An example is the car industry, which is subject to market saturation and overproduction. Most car models now look the same or similar. Often, the only way to visually tell the difference between cars is the brand logo. When cars were first being mass-marketed in the 1920s, there were many more car companies and the differences in design and performance were great. The history of car design is one of increasing sameness. It is not just cars. As products become mature, there is a tendency for them to move towards norms, to become similar.

This does not necessarily mean that innovation loses its importance as a weapon of competitiveness, but it tends to be on the margin, in areas such as supply chains, distribution, network relationships. Few global companies are making bold bets on their product ranges, which suggests there is a loss of innovative dynamism in markets. Although there may be great gains in business model innovation, the options are fewer and the moves tend to be easy to imitate. The fate of the computer maker Dell, which was notable for its innovation in supplying computers without making any product innovations at all, is a case in point. Dell's extremely efficient supply chain and low overheads (the company has few sales staff, negligible inventory and close links to customers) gave it a price advantage. But Dell's innovation is being imitated by rivals and the company is struggling to adapt the business model.

Certain kinds of creativity are highly valuable, but implementing such creativity is becoming dauntingly difficult. One barrier is the tendency of big companies to gravitate towards norms, both internally and in the marketplace. Another problem is the speed with which innovations can be imitated, meaning that heavy capital investments in new products are often not financially justified. Another problem is saturation. When there is overproduction and too many competitors, it is harder to get customers' attention about an innovation. One example is the telecommunications industry. In 1989 there were 200 telecom carriers worldwide; in 1999 there were 3000 in the United States alone.

Kjell Nordstrom, a Swedish management expert and co-author of Karaoke Capitalism, is known for arguing about the importance of the "creative class", who he considers the new global elite. But, when pressed, he acknowledges that it is a very circumscribed form of creativity. "Maybe [the creative class is not as creative as previously thought]. There is a lot of variation going on. We even go as far as calling it karaoke capitalism, where they copy each other. The differences are not that big. We all know that."

Nordstrom says the globalisation of commerce allows companies to copy competitors with great speed. "No matter whether we are a product or a service or a concept, it will be on your or my desk soon. Of course, the response to that is 'wow - that brings everything in here now'. It uses all the best tactics of the world, no matter where it comes from. That is the first response to the information society, and that is roughly where we are now."

Radical innovations are few, although there are some. Nordstrom says Amazon.com can now do something that was once impossible: maintain a bookstore with five million titles, in which it is possible to find everything. "It is a genuinely new thing. They offer you and me something that is not bad. They sell a service, not books. Where they can use the same principle, because it is the principle that is interesting. Nanotechnologies of course will be interesting, the science of very small things."

Innovation at the small end

If big businesses tend to be poor at product innovation, the conclusion is that the culture they foster should be oriented towards other kinds of innovation, such as changes to the business models or relationships or methods of using resources. Product innovation is not likely to be as successful. It is revealing that the ailing car maker General Motors is the world's heaviest investor in research and development, while the successful computer maker Apple invests very little in R&D.

Instead, product innovation is probably better conducted by smaller businesses or independent groups within big firms. Porsche, for example, a small company, sells its technology to other car companies. Smaller companies can develop the more natural, self-organising culture that is required for true invention.

For big companies, it is an open question as to whether they should make bold innovation bets or just proceed in small steps. Both approaches can work. The Finnish company Nokia made a big bet, transforming itself from an industrial conglomerate in the mid-1990s to the world's biggest provider of mobile phones - an examplar of innovation that transformed the company, driven by the leadership. At the other end of the spectrum is Toyota, which is notable for incremental innovation that routinely starts on the shop floor. Toyota is perhaps the best example in the world of a sustained "culture" of innovation, which has much to do with "ba": the Japanese word for a sense of place.

It is also important to consider the national and local cultures. Among many attempts to track this is the work of Charles Hampden-Turner and Fons Trompenaars, who analysed the cultural differences in the organisations of different countries. But such cultural analyses may be losing relevance as businesses become more global. Global corporations simply have to manage across (national) cultures if they are to compete.

Instead, local cultures and industry "clusters" are becoming the main issue. Just as businesses should attempt to develop internal cultures to match innovation, so should they seek to be located in clusters, in which there is a external culture of innovation.

The Sun Hung Kai professor of business at the University of Hong Kong, Michael Enright, says the most globally innovative companies are often located in the same clusters. This is often to do with the local culture: Japan's lead in electronics, for example, can be traced to a history of precision in the silk industry.

Enright says: "If we look historically at how economies develop, they tend to develop around clusters of related firms and industries. National regional economies don't develop at random. What tends to happen is an industry appears. And then some supplier industries develop, and then maybe some customer industries, and then there are technological spill-overs and new horizontally related industries develop, and they progress and progress, and before long you get real economies.
"Very rarely do we see a significant economy develop with individual industries in isolation to each other. And this fact has been picked up on around the world by economic-development professionals and governments."

In North America, Enright says, four of the five largest telemarketing companies are in Omaha, Nebraska. Wall Street is obviously a finance industry cluster, Silicon Valley is an IT cluster. "You also find Dalton, Georgia, which produces 85% of the tufted carpets in the US. Or Providence, Rhode Island, which produces more than 70% of the costume jewellery in the US.

"Industries tend to be geographically concentrated in space, and some of the most important industries and successful industries in any country will be characterised by this clustering phenomenon."

It is not just industry clusters that have a geographically based culture. The very large companies often create a local culture around their headquarters: Microsoft in Seattle, for example, or Dow Corporation in Midland, Michigan.

Adapt and learn

So what is most required to have an innovative culture? Austin says the key is being able to adapt and change constantly. This, in turn, requires having an organisation in which people constantly learn. "A culture of innovation is a culture where relevant new ideas can get up and people can learn from how well they went."

The next step is to develop processes for systematic learning. What cultures of innovation have in common, Austin says, is the ability to reflect on an experience and learn from it. He says there must also be an effort to move away from the accepted orthodoxies. "Orthodoxies are what the culture has learnt over the years as a short-cut to thinking things through. This allows for quick, smart decisions by managers without careful thought. It becomes the usual way of doing things. If the world never changes, an inflexible culture works just fine, provided it learnt the right lessons in the past - and Darwinian survival suggests you did."

The problem is that this type of culture, defined by Austin as "the codification of the pattern of interactions that best support business survival", can often be a barrier to genuine innovation. "Change typically only happens when there is a powerful motivation," Austin says.

Usually it is not until there is a crisis that companies become serious about innovation. For companies that dominate their industry, the temptation is usually to revert to business as usual. Nordstrom says, bluntly, that big companies "are not capable of something radically discontinuous", which he describes as a "historical truth".

He says: "Change does not come from within, it comes from outside. The oddball who is working far out there somewhere. The system rewards standard thinking. I don't think the big changes will come from within. Google was started by 12 high-school dropouts."

Create innovation culture

• Develop business systems that build on the creativity of the workforce. From this emerges culture.
• Think carefully about what the innovation means to the customer. If it does not create value for the customer, it is likely to fail.
• In the innovation teams, create a balance of strategic thinkers and implementers.
• Do not think just of product innovation; this is only a small part of the possibilities and often the least effective. Supply-chain innovation, for example, can often be the most effective option.
• Consider the relationship between the capital invested and the length of time an innovation could create higher returns. Many innovations can be imitated quickly by competitors.
• Obversely, consider the costs of not innovating. Businesses that do not change can be easy prey for predators.
• Consider the implications of organisational size. The bigger the organisation, the less likely the innovation will be effective. Smaller teams tend to be more successful.
• If confronted by a crisis, try to use it to spur a more innovative culture.
• Consider the implications of overproduction and market saturation, which make it harder for firms to distinguish their offerings.
• Think through the incentive systems. Unless innovation is backed up with incentives, the enterprise will not develop the right culture.

Source: http://www.brw.com.au/freearticle.aspx?relId=20225