Management innovation

Every company today wants to become more innovative. CEO of GE recently stated that innovation is “the central necessity� at GE, and few would challenge this statement. But the concept of innovation is still viewed too narrowly by most. It usually refers to the implementation of new technologies, new products or new services. Some companies have recognized the power of business model innovation, as exemplified by Dell’s well-known strategy of selling direct to customers. And a few have realized that they can derive great benefits from management innovation.

Management innovation involves putting in place new practices or processes that deliver higher returns to the basic functions of management. Famous historical examples are Du Pont’s creation of modern capital budgeting techniques and Toyota’s investments in the problem solving skills of their factory workers. More recent examples are Swiss bank UBS eliminating the budgeting system in its Wealth Management business to enable rapid growth, and Procter & Gamble’s “Connect and Develop� strategy: a network of thousands of scientists around the world whom P&G can tap into for new ideas.

Such innovation has the potential to deliver long term competitive advantage, but they are rare. Research conducted at the Management innovation Lab in London suggests that most management innovation occurs in an ad hoc fashion, and through the efforts of one or two key individuals.

Of course, that is partly just the nature of innovation, but it is worth considering what would happen if companies put dedicated effort into management innovation, in the way that they have applied themselves to product or process innovation. Our research suggests that three elements have to come together for management innovation to emerge.

Dedication to a big, gnarly problem

Management innovation never works in a vacuum — it is always a response to a strategic issue. UBS eliminated budgeting because it was standing in the way of their aggressive growth targets. Or consider Glaxo Smith Kline’s decision to break up its bulky drug discovery organization into seven semi autonomous ‘centers of excellence’ — this was done to counteract its decreasing levels of R&D productivity.

Inspiration from other sources

It is hard to create new management practices when you are benchmarking the Fortune 500, all of whom use the same consultants and read the same business press. Management innovators look further a field – they up ideas from “bleeding edge� Silicon Valley startups, or even from non-business organizations. Lars Kolind, CEO of Danish hearing aid company Oticon, put in place a radically decentralized “spaghetti organization� in the 1990s that built on his experiences of collaboration and common purpose in the world wide Scouting movement.

Management innovators are adept at turning conventional principles on their head. Why should an employee with bright idea has to go through four layers of hierarchy to get funding when an entrepreneur can knock directly on the door of a venture capitalists? This question was asked in Shell in the 1990s, and the result was the creation of Game changer, a unit which hands out seed investments to budding entrepreneurs within four to six weeks.

There is no recipe for management innovation, but companies can certainly increase the odds of it happening if they work on the above lines.