Real source of competitive advantage

Research was undertaken a few years ago by looking at historically successful companies as well as the current stars about their real source of competitive advantage and the secret formula that allows companies to steal a march on their competitors not just for a few months but for many years or even decades.

Researchers identified plenty of the usual suspects, including enlightened human resource practices, customer focus and charismatic leadership. They have also noticed one surprising candidate that has not previously received much attention: management innovation that is a company’s ability to effect fundamental changes in its own internal way of working.

For example, GE’s rise to iconic status in the early years of the 20th century was driven by its creation of the world’s first modern R&D lab. By bringing management discipline to the chaotic process of scientific discovery, the company was able to bring more new products to market more effectively than any of its early competitors. And Toyota’s long and uninterrupted reign as the best volume car manufacturer in the world owes much to its success in harnessing the problem skills of all employees.

More recently, GSK spilt its drug discovery activities into seven autonomous “centers of excellence” to recreate the fast and flexible environment of a biotechnology company while not sacrificing the benefits of scale while UBS, the Swiss bank, abolished its traditional budgeting system because it was blocking the company’s growth ambitious. Both companies are generating very promising early results out of these management innovations.

These and many other examples suggest to us something intriguing about the phenomenon of management innovation. All are prisoners of the same management systems that shape the way people behave and even the way they talk. It is hardly surprising that we find it difficult to imagine an alternatives set of structures of techniques that might replace them. But when a company does have the courage to innovate in this way, the very same qualities make the innovation for competitors to copy.

A physical R&D lab is needed to do technological innovation. In the same way awareness and dedicated resources are needed to take management innovation seriously. Very few companies do this at the moment.

Create a problem solving culture:

Employees faced with an unusual problem or challenge in the company may resort to a standard solution that has already been endorsed by competitors. But if they look deeper, see the problem in new ways and start to hypothesize about new ways of solving it only can lead the company toward management innovation.

Seek out analogies and exemplars from different environments:

If the challenge is to become more resilient, try looking at highly resilient social systems, such as parliamentary democracies, cities or faith systems. If the problem is one of increasing the motivation of employees then look at the Scouting movement, or Open Source Software. Benchmarking competitors is not going to do the job.

Build capacity for low-risk experiments:
Instead of forcing new and questionable ideas on the entire organization managers must try an experimental approach where each innovation can be tested with a limited number of people and for a limited period of time. Companies run even one day experiments with genuinely valuable outputs.
Make use of external change agents to explore your new ideas:

There is value in selectively making use of outsiders as sources of new ideas and analogies and as sounding boards and sense makers but own innovation activities are needed.

These points are not a formula, because there will always be a heavy dose of serendipity and randomness is how management innovation comes about. But it is to increase the likelihood that a company will become a successful and consistent management innovator.