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November 16, 2011

Innovation and Corporate Culture

Annually, Booz & Company analysts issue a report about corporate innovation. This year's study focuses on corporate culture. ["The Global Innovation 1000: Why Culture Is Key," by Barry Jaruzelski, John Loehr, and Richard Holman, Strategy + Business, 25 October 2011]. The authors of the study write:

"The elements that make up a truly innovative company are many: a focused innovation strategy, a winning overall business strategy, deep customer insight, great talent, and the right set of capabilities to achieve successful execution. More important than any of the individual elements, however, is the role played by corporate culture — the organization's self-sustaining patterns of behaving, feeling, thinking, and believing — in tying them all together."

Despite singling out corporate culture as the most important trait of innovative companies, the study concludes that "only about half of all companies say their corporate culture robustly supports their innovation strategy. Moreover, about the same proportion say their innovation strategy is inadequately aligned with their overall corporate strategy." I wish I could write that I find those statements surprising; but, I can't. By its very nature, innovation has a tense relationship with industrial age organizations. Innovation focuses on change -- organizational structure focuses on stability. There is nothing inherently good or bad about this corporate tension. It's how executives deal with this tension that determines whether it is helpful or hurtful. The authors continue:

"This disconnect, as the saying goes, is both a problem and an opportunity. Our data shows that companies with unsupportive cultures and poor strategic alignment significantly underperform their competitors. Moreover, most executives understand what's at stake and what matters, even if their companies don't always seem to get it right."

They go on to point out that even though most company executives claim to have the customer's best interests in mind, only those that put words into action rise to the top of the heap of innovative companies. The authors continue:

"If more companies could gain traction in closing both the strategic alignment and culture gaps to better realize these goals and attributes, not only would their financial performance improve, but the data suggests that the potential gains might be large enough to improve the overall growth rate of the global economy."

The Booz & Company analysts aren't the first to assert that corporate alignment is critical to success and they won't be the last. The fact that so many analysts harp on it, and yet so many companies remain out of alignment, is evidence of how difficult true corporate alignment is to achieve. In past posts about corporate alignment and corporate silos, I've discussed many of the reasons that breaking down those silos is difficult -- corporate culture is certainly one reason. For example, many executives are rewarded for maximizing key performance indicators (KPIs) related to specifically and uniquely to their silos rather than being rewarded for helping to achieve overall company goals. When the KPIs of different departments conflict (say between operations and marketing), executives are in a win-lose situation and the company is in a lose-lose situation. When the corporate culture encourages cooperation and alignment, and rewards executives on overall business success rather than silo KPIs, everybody wins. Changing a corporate culture, however, is normally very difficult. The Booz & Company study looks specifically at corporate culture and its relationship with innovation. The authors continue:

"The ways R&D managers and corporate decision makers think about their new products and services — and how they feel about intangibles such as risk, creativity, openness, and collaboration — are critical for success. As part of this year’s study, we surveyed almost 600 innovation leaders in companies around the world, large and small, in every major industry sector. As noted, almost half of the companies reported inadequate strategic alignment and poor cultural support for their innovation strategies. Possibly even more surprising, nearly 20 percent of companies said they didn't have a well-defined innovation strategy at all."

When executives look at companies like Apple or 3M, i.e., companies that recognized year after year for their excellence and innovation, it is hard to imagine that some executives still don't appear to believe that having a strategy for innovation is important. The authors of the study call this an "alignment gap." They write:

"Issues of culture have long been of great concern to corporate executives and management theorists alike, whether they apply to companies as a whole or to selected areas such as innovation. The reason is obvious: Culture matters, enormously. Studies have shown again and again that there may be no more critical source of business success or failure than a company's culture — it trumps strategy and leadership. That isn't to say that strategy doesn't matter, but rather that the particular strategy a company employs will succeed only if it is supported by the appropriate cultural attributes. ... Not surprisingly, companies saddled with both poor alignment and poor cultural support perform at a much lower level than well-aligned companies. In fact, companies with both highly aligned cultures and highly aligned innovation strategies have 30 percent higher enterprise value growth and 17 percent higher profit growth than companies with low degrees of alignment. ... Companies whose strategic goals are clear, and whose cultures strongly support those goals, possess a huge advantage."

The poster child for corporate innovation offered up by Jaruzelski, Loehr, and Holman is 3M. They claim 3M is successful because it has no alignment gap. Writing about companies that do have a gap, they report:

"In general, companies ... continue to show a range of significant gaps in how their strategic goals and cultural attributes contribute to performance and support their innovation. Companies that underperform their peers have much to gain if they can close these gaps and achieve much higher degrees of cultural and strategic alignment. We believe the way to do so lies in gaining a greater understanding of the cultural attributes that any given company needs to foster, given its particular innovation strategy. Soma Somasundaram, executive vice president of the Fluid Management segment at the Dover Corporation, describes the challenge this way: 'Poor innovation performance is usually not caused by a lack of ideas or lack of aspirations. What some companies lack is the structure needed to effectively dedicate resources to innovation. It's the lack of will to develop a strategy that can balance today's need versus tomorrow's.'"

In a previous post, I noted that one reason that long-term objectives have fallen victim to short-term goals is the fact that many CEOs are finding it more difficult to keep their jobs for a significant length of time. Boards and shareholders are looking for quick fixes and short-term wins. To save their jobs, many executives are willing to sacrifice tomorrow's needs on the altar of expediency. As a result, corporate culture and innovation are victims caught in the crossfire. Jaruzelski, Loehr, and Holman identified three principal innovation strategies based on a company's "approach to incremental versus breakthrough innovation and the role that end customers play in defining future product needs." The first strategy, which they label "Need Seekers," is very customer oriented.

"• Need Seekers actively and directly engage both current and potential customers to help shape new products and services based on superior end-user understanding. These companies often address unarticulated needs and then work to be first to market with the resulting new products and services."

Perhaps the most important part of that description is the fact that Need Seekers attempt to "address unarticulated needs." Clayton Christensen, noted in his book The Innovator's Dilemma that one of the things that many businesses do wrong is to listen to their customers. By that he means that manufacturers give customers what they say they want without really understanding what they are trying to accomplish -- that is, without understanding their unarticulated needs. Although I agree with that part of the strategy, I have my doubts about the value of the second part of the strategy, i.e., trying to be the first to market. Often, it is a very bad strategy. For more on that topic, read my post entitled First to Market vs. Late to the Game. The second strategy, which the authors call "Market Readers," is more cautious.

"• Market Readers closely monitor both their customers and competitors, but they maintain a more cautious approach. They focus largely on creating value through incremental innovations to their products and being 'fast followers' in the marketplace."

In their book entitled Beyond the Familiar: Long-Term Growth Through Customer Focus And Innovation, Patrick Barwise and Seán Meehan argue "that the heroic strategic shifts, breakthrough products and transformational acquisitions that are the stuff of business legend offer a perilous path to success." ["No need for acts of management bravado," Review by Andrew Hill, Financial Times, 30 March 2011] Barwise and Meehan believe that incremental innovation is generally the best strategy to follow. However, they agree with Booz & Company analysts when it comes to the subject of culture. Hill writes that they present a "crushing case study of General Motors' 'dismal' record over the past half-century. The company 'has had a culture which rejects unwelcome news, and its leaders have been unable or unwilling to change this', they write. The opposite of a GM-style culture of 'fear and denial' is the 'open organisation'." The final strategy identified by Jaruzelski, Loehr, and Holman, which they call "Technology Drivers," is obviously more technology focused. They write:

"• Technology Drivers follow the direction suggested by their technological capabilities, leveraging their sustained investments in R&D to drive both breakthrough innovation and incremental change. They often seek to solve the unarticulated needs of their customers through leading-edge new technology."

They conclude: "Just as companies following any of these three strategies can succeed, so any company can manifest strong strategic and cultural alignment, no matter which strategy it follows. A closer look at the survey results, however, does suggest that companies perfecting one strategy — the Need Seekers — are relatively advantaged. They consistently demonstrate better achievement on a number of strategic and cultural variables. Additionally, Need Seekers are more likely to financially outperform their rivals than companies following one of the other two strategies." For anyone interested in this subject, I suggest reading the entire study. Barwise and Meehan agree with Jaruzelski, Loehr, and Holman that corporate culture is critical and the ideal culture is one "where problems and ideas are freely discussed, managers get honest feedback and minions' mistakes earn a pat on the back." Unlike Jaruzelski, Loehr, and Holman, however, Barwise and Meehan disagree about which strategy is best. On reason is that they believe that maintaining the ideal corporate culture is difficult "as long as executives remain open to the temptations of heroism." You be the judge.

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