By Claudio Feser
Some firms can resist the aging process: they adapt and thrive in dynamic markets, and sometimes they create value for decades. I call them Serial Innovators.
The average life expectancy of firms at listing is about 15 years, and only 1 in 20 lives longer than 50 years. Set up on the back of an innovative idea, firms grow, and sometimes they blossom into admired world-class firms. But then they age. Their development slows, they lose their momentum, they become bureaucratic, their profitability decreases. Eventually they die. History is full of firms that were once admired global leaders but that no longer exist: General Foods, Pan Am, Enron, or Lehman Brothers just to name a few.
The process of aging seems to unfold inexorably and naturally—similar to the processes of aging in biological organisms. But the truth is that the aging of organizations is not a natural, biological process. The process of organizational aging originates in the fact that, while markets are dynamic, organizations typically aren’t. It is hard to shift large organizations quickly, when circumstances change and new opportunities arise. The reason is that – as organizations develop and mature – they develop rigidities, of two types.
First, firms develop individual rigidities. One form of individual rigidities is mental biases. Firms that have successfully survived the early years often develop mental biases that prevent change. Recent research of behavioral economists has shown that the human brain works with shortcuts or rules of thumb to solve problems it faces regularly. The human brain embodies successful rules of thumb, and over time these become mental biases; they become the way to think about a problem or an issue. These biases are highly efficient. They allow quick decision making and action, especially when confronted with familiar challenges. They can represent a major risk, however, when the context in which they were developed, or the marketplace, changes significantly. The following statement, made in 1977 by Ken Olson, the founder of Digital Equipment Corporation, is an example of mental biases at work: “There is no reason why anyone would want a computer in their home.”
“It is hard to shift large organizations quickly when circumstances change and new opportunities arise.. The reason is that – as organizations mature – they develop rigidities of two types: individual and organizational rigidities.”
Second, firms develop organizational rigidities in form of organizational constructs. Organizational structures, processes, performance management and reward systems, supporting cultures, and capabilities are constructs that allow firms—groups of individuals—to fulfill their common mission and to implement strategies at scale effectively and efficiently. Without them, performing large tasks, or implementing complex strategies requiring the effective and efficient collaboration of hundreds or thousands of individuals would not be possible. However, these constructs are rigidities that may prevent organizations from adapting rapidly when markets change. Organizational rigidities tend to grow over time. To deal with the increasing complexity and demands of dynamic markets, firms tend to add additional functions, councils, processes, values, and norms onto existing organizations. Only seldom do firms eliminate older organizational constructs that have become obsolete—older processes, older functions, or older committees. As a consequence, layers of new constructs are added onto older ones, making firms bureaucratic, inward-oriented, and slow in adapting to changes in the market.
However some firms resist the aging process. They adapt and thrive in dynamic markets; they continuously innovate and reinvent themselves. They sometimes create value for decades, sometimes longer, for their customers, their shareholders, and their employees. I call them Serial Innovators.
Serial Innovators (SI) have seven secrets.
“Serial innovators leverage the desire of human beings to contribute to something that matters and to make a difference in life.”
1. SI engage their organizational members with their mission, making an impact and a difference to their customers and in society
Serial innovators leverage the desire of human beings to contribute to something that matters and to make a difference in life.
Traditional economics argues that the purpose of a business is to maximize shareholder value. This view is being increasingly challenged by academics, and in practice. In fact, more often than not, companies articulate the shareholder value objective through a focus on stock price movements and quarterly results. A recent survey of more than 400 US chief financial officers concluded that a majority of firms would forgo value-creating long-term investments if it meant missing their earnings targets. In recent years several economists and company leaders have put forward the view that shareholder value should not be an objective in and of itself; rather, it should be seen as a fundamental constraint, as a boundary condition, that has to be met for business to succeed. Or as Collins and Porras, the authors of Built to Last, put it: “Profit is like oxygen, food, water, and blood for the body; they are not the point of life, but without them there is no life” (Collins and Porras 1994).
But if not shareholder value, what should drive a company? Organizations consist of human beings. The brains of human beings are predisposed to a search for meaning. Insights from neuroscience indicate that people naturally (neuronally, in fact) long to make a difference in their lives. People spend a significant part of their lives at work, so that firms and employees can both profit when they act passionately in the same cause. Also, insights from anthropology would suggest that people, in addition to self-interest, have an altruistic bias, an innate need to help and support others.
Companies that focus on helping others are powerful in providing mean-ing to their members. These are not companies with mission statements like “Our mission is to be the company most admired for its people and performance,” or “Our mission is to grow profitably,” but those with mission statements such as “Our mission is to improve patients’ lives” or “To promote the financial well-being of our customers and their families”.
Leveraging people’s passion to make a difference can backfire, however, and quickly result in widespread cynicism if it is done in a manipulative manner. A firm’s purpose should therefore be first and foremost honest and meaningful to the firm’s leaders, and they should visibly commit to it, well beyond mere words. Visibly committing means investing leadership time, incurring costs, or forgoing other gains.
2. SI are led by a diverse set of people who complement each other with differing experiences and points of view
Getting the composition and the dynamics of the top team right is key to company adaptation and innovation. In companies that are serial innovators, executive management is likely to need four characteristics.
First, they will need to have a strong sense of self-efficacy. Leaders with this inner strength set higher goals, apply better problem-solving techniques, and are more resilient.
Second, members of the top team will need to have a positive attitude towards learning. Individuals with this mindset are more flexible and adaptive. They are less defensive of their own past work and tend to view challenges and setbacks not as personal failures but as learning experiences.
Third, top-team members will need to have diverse mental models. Peoples’ mental models are shaped by their experiences, as people come to see things differently when their experiences vary. Diversity of mental models, especially at the top, is a huge asset for companies in dynamic and complex environments. If they have a broad set of experiences and mental models, leaders are more likely to recognize new, unfamiliar challenges when they arise.
Fourth, they will need to be able to work in teams. Self-efficacy, a learning attitude, and diversity are not sufficient if people do not collaborate, and work in teams. Members of a well-performing team must be aligned on goals, encourage critical challenges through effective dialogues, and regularly assess themselves as a unit.
“Members of an organization are more likely to engage in problem-solving and behavioral change that happens in a positively loaded emotional context.”
3. SI have a positive and engaging vision of the future
Recent advances in neuroscience suggest that members of an organization are more likely to engage in problem-solving and behavioral change that happens in a positively loaded emotional context. A positively framed direction—engaging visions of the future and convincing strategies to get there—appealing to positive emotions helps nudge people into continuous problem-solving and learning, and makes firms adaptive.
Steve Jobs’s turnaround at Apple shows the impact of positive framing, of providing a direction that is simple, positive, and emotional. When he returned to the company after a long exile, he reframed the image of Apple from being a marginalized player fighting for few points of market share to being the home of a small but enviable elite: The creators who dared to “Think different.”
This view is in stark contrast with the recommendations of many change gurus, who put forward the view that firms need to develop burning platforms in order to change continuously. The fundamental problem with this view is that it misses the way firms actually adapt, morph, and change continuously. While it is true that situations loaded with negative emotions lead to changes in behavior, firms are unlikely to be in extreme crisis situations, such as imminent bankruptcy, all the time. Continuously and artificially creating crises for the sake of continuous change may end up breeding cynicism and making change efforts void.
This does not mean that when a firm finds itself in a challenging environment, and when several trends are affecting it negatively, its leaders should talk only about positive developments. People are not naive, and in today’s information-intense world, members of organizations often know all about the problems and challenges that their organization is facing. Denying challenges will only foster cynicism and may be as counterproductive as continuously creating artificial crises. A firm’s leadership should ideally acknowledge its challenges openly and engage the organization in fact-based, articulated, realistic, but positively framed movement forward.
4. SI are organized into small, nimble units
Serial innovators break themselves up into small, autonomous, and nimble business units, called self-managed performance cells. Self-managed performance cells have three characteristics.
First, they are guided by performance metrics. Depending on the specific objectives and activities of the team, these metrics can be very different. In sales or customer management, they would include cross-selling rates, revenues, or service quality. In production, they would include default rates, scrap rates, or unit costs.
Second, they have the ability to organize themselves to continuously improve the outcome or results. This means that they are delegated the responsibility for decisions on the resources that are most pertinent for achieving their objectives (hiring or making investments within decision limits).
Third, they have periodic sessions for learning and joint problem solving. Depending on the size and nature of the performance cell, these sessions may happen yearly (the planning and budgeting process of a division, for example), in quarterly or monthly performance reviews, or in weekly or daily team problem-solving sessions (the daily learning sessions in kaizen, for instance).
One of the first applications of the concept of autonomous units was the reorganization of General Motors (GM) by Alfred Sloan, its long-standing president and chairman. In the 1950s, he reorganized GM into five divisions, effectively five independent car companies, each with its own brand and its own profit and loss statement. This allowed GM to grow and—at the time—to become the world’s largest company.
This concept has since been applied in many companies and industries, as they have reorganized into business-unit structures. In the past decade—inspired by firms such as IBM and Procter & Gamble—several corporations have started to apply the concept of the notional company to other areas as well, creating manufacturing companies and so-called global business support (GBS) companies, specialized firms providing shared back-office services such as accounting, payroll services, and infrastructure services. The concept doesn’t stop at the level of business units or notional manufacturing and service companies, however. It can be applied much lower down the organizational hierarchy. Inspired by the kaizen concept at Toyota, many firms have created more autonomous, self-managed teams in a large variety of functions. We now often find them in functions such as sales, manufacturing, or back-office operations. These teams are often referred to as lean teams.
5. SI develop the self-confidence of their employees
Individuals with high sense of self-confidence, are more ambitious, are able to learn from failure, are more resilient, apply better problem solving techniques, and are more adaptive. They help organizations to adapt when circumstances change.
“Serial innovators build confidence of their employees in two ways – through the performance management and reward system, and through capability building.”
Serial innovators build confidence of their employees in two ways – through the performance management and reward system, and through capability building.
Many firms have practices built into their performance appraisal systems that foster a low sense of self confidence. Some firms sort their employees into ability groups (so-called forced rankings), which convert performance evaluations into negative experiences for most, and which over time lead to a depletion of self-confident performers in an organization. Instead, firms should work with individualized performance assessments—in which the ratings are relative to individual achievements (deviation from budget or degree of individual target achievement). Individualized assessments are more powerful in developing a large cadre of self-confident, adaptive, and resilient members of an organization. Companies should set ambitious but achievable goals. They are engaging, and foster motivation and innovative thinking. Positive achievements support the development of self-confidence. They build self-confidence, lead to better problem solving, and get people to set even higher goals for themselves.
Building self-confidence needs significant leadership skills in leaders, and Serial Innovators focus on building these skills. Firms may use different approaches to develop leadership capabilities. Some focus on selection, starting at the recruiting level. Procter & Gamble, for example, devotes a great deal of attention to recruiting the right people, sometimes reviewing more than 50 resumes for one position. Or, they focus on developing management capabilities through formal training programs, a classic example being officers’ training in the U.S. Army. Other organizations focus on on-the-job training, and regard the development of leadership capabilities as a line manager’s task. One approach to fostering line responsibility for leadership development is to establish a norm of preparing succession plans. Managers who have good succession plans, and who are eager to progress in their own careers, often look for their replacement among the people who work for them, and are therefore more likely to develop them as leaders. Finally, some firms focus on rotating future leaders between different geographies, functions, and roles.
6. SI experiment. Therefore, when circumstances change, they’re much faster than other organizations to build new capabilities and skills
A firm is restricted in the wealth-creation opportunities it can capture. At any one time, its existing assets and skills determine its opportunities. Assets and skills that are needed to succeed in the market may include market-specific know-how (such as customer insights, or knowledge of a specific geographic market), functional capabilities (such as marketing, sales management, manufacturing, R&D), and know-how about potential emerging opportunities (such as technologies or relevant adjacent industries).
“In continuously seeking external information and critical challenge, serial innovators are more likely to innovate, to adapt, and to recognize and capture opportunities for value creation when they arise.”
Since markets are dynamic and the sources of competitive advantage change continuously, companies rarely possess all the assets and skills they need to succeed in new businesses and new environments, and they need to be able to develop such assets and skills fast.
SI use different approaches to quickly develop new capabilities. Importantly, they experiment a lot (by making venture investments or by pursuing several smaller strategic moves in areas of potential interest).
7. SI continuously challenge themselves, always asking could we do this better or differently.
Organizational culture can be leveraged to complement the organization’s formal structure, and in reducing the need for dense hierarchies and processes. Culture can help guide the daily activities of employees in the absence of written rules or policies. It thus enables greater decentralization, providing general guidance, but leaving the specific how up to the individual, allowing more space for adaptation at the front line.
It is often argued that organizations need to create an environment in which people can exchange perspectives, debate matters, learn, and progress. While this is right, it is incomplete. It should be kept in mind that organizations are created to perform tasks: to implement and execute strategies and business plans. A corporate culture will therefore probably be more effective when it makes use of values and cultural norms that foster both execution and challenge. In continuously seeking external information and critical challenge, serial innovators are more likely to innovate, to adapt, and to recognize and capture opportunities for value creation when they arise.
*Adapted with permission of the publisher John Wiley & Sons, Inc. (www.wiley.com) from Serial Innovators: Firms That Change the World by Claudio Feser. Copyright (c) 2012 by McKinsey & Company.
About the author
Claudio Feser, author of SERIAL INNOVATORS: Firms That Change The World (Wiley), is a Director of McKinsey & Company, where he leads the McKinsey CEO Network that focuses on CEO training and coaching. Feser previously managed McKinsey offices in Switzerland and Greece.
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