TWELVE

Change Management and Company Culture: An Innovation Manifesto

CHAPTER SUMMARY: This chapter lays out our innovation manifesto and considers how leaders and managers need to adjust their thinking to empower change at their companies or organizations. To stimulate debate and thought on the topic, we include several checklists about the state of the organization’s or company’s culture as it relates to innovation.

The Birth of Amazon Prime

In 2004, an Amazon engineer named Charlie Ward dropped an idea into the companywide digital employee suggestion box. This box was an open invitation to all employees to pitch ideas to improve the business. Ward’s idea was simple yet provocative: offer free rapid shipping to customers who paid an annual fee. This new program would be a radical and risky departure from Amazon’s policy on free shipping on orders over $25, but Ward thought this might induce people to shop more often and spend more money.

Amazon CEO Jeff Bezos, who regularly reads employee improvement suggestions, found the idea compelling. He gathered a group of executives in November 2004 at the boathouse of his home near Seattle, Washington, and told them they had to come up with a proposal to make this new shipping policy viable before Amazon’s upcoming earnings call at the end of January 2005.¹ As Greg Greeley, an Amazon executive who was present at the meeting, told The Seattle Times in 2015, “We knew we were building something that was going to be new and different. We knew we were onto something.”

Thus was born Amazon Prime, in February 2005. Logistics experts doubted that Amazon could cover the shipping bills. But Amazon Prime attracted tens of thousands of customers within a few months, each paying a $79 annual fee. In the spring of 2018, Amazon exceeded 100 million Prime users, who are contributing an annual company revenue of $10 billion through their (now $99) annual Prime subscriptions alone.² Prime has also become, just as Ward envisioned, an incredibly “sticky” way to get shoppers to make Amazon their default purchase option.

Bezos is now preparing Prime to accelerate delivery from two-day to same-day delivery of most products. “Customers love the transition of Prime from two days to one day—they’ve already ordered billions of items with free one-day delivery this year. It’s a big investment, and it’s the right long-term decision for customers,” Bezos said during a company earnings call in the summer of 2019.³

Since Prime’s inception, Amazon has used it as a way to improve and better tune its supply-chain logistics and warehouse systems on several key fronts: keeping better track of where any given item might be in Amazon’s warehouses, calculating the best path by which to get it to a Prime subscriber, and then taking best advantage of an ad hoc delivery network involving several providers and, as increasingly is the case, Amazon’s own logistics capabilities. Now, Amazon is building a full-blown logistics business, with dozens of planes and thousands of trucks. This business is likely to become, in the near future, yet another business unit selling its services to the outside, in keeping with Bezos’s mandate to design any internal service in such a way that external businesses can become its customers.

The Lesson from Prime: Give Employees Permission to Innovate

Prime might have happened anyway; but the way it did come about shows how key management practices can have a disproportionate effect on innovation. To change the trajectory of the standard legacy company and allow that company to envision a transformation to newer and better business models, CEOs and leaders must give employees permission to innovate, considering the possibility that each one of their workers has the potential for a billion-dollar idea.

This has long been the approach of Japanese manufacturers, which have created some of the most recession-proof, well-run, innovative manufacturing businesses on the planet (carmaker Toyota being the epitome). In Japanese manufacturing, management seriously evaluates any suggestion for process or product improvement from anyone, from a junior laborer to a senior vice president.

This openness is the core of what has made Toyota such a resilient business. Curiously, such openness has also resulted in lucrative business lines in some of the most notable technology companies. We’ve already mentioned the example of 3M. Google’s Gmail began as a so-called 20 percent project, an exploratory effort that Google expressly permitted by awarding its engineers 20 percent of their work week to pursue any project. Gmail has since become a multi-billion-dollar business line for the search giant.

Small Innovation Ideas Can Add Up Quickly

Innovation and ideas do not, though, need to be enormous in order to be useful; that’s the beauty of fostering a culture of innovation and ideation. For example, British Airways, which also runs a digital suggestion box and closely monitors ideas, received a simple idea that saved nearly $1 million per year in costs: to descale (or aggressively clean) toilet pipes on planes.⁴ This reduced the weight of the planes and, by extension, reduced fuel costs. Descaling pipes was one of 200 ideas submitted. Not all the ideas were implemented, but implementing the descaling idea, along with a handful of others, resulted in the airlines’ reducing costs by $20 million per year.

A digital suggestion box is a great first step. A senior manager must read the suggestions, acknowledge them, and personally thank their submitters. And it’s equally important that suggestions and improvements be celebrated and lauded, as employees must feel that the ideas they contribute will be considered and honored.

That may sound impracticable for a company of a size such as Amazon’s today, with hundreds of thousands of employees. But it is critical to keep listening, companywide, even on such an enormous scale. It must be a usual frame of mind and a continual practice, not a one-off during an annual innovation contest or idea festival. From this simple mindset change can grow more radical changes; a broader embrace of risk-taking; and a corporate culture giving employees permission, space, and encouragement to innovate.

An Innovation Manifesto and Mindset for Change

With that in mind, we lay out a manifesto for creating a corporate culture that fosters innovation.

Great ideas can come from anywhere, so provide for them to come by assuming that everyone is an innovator. Many know the origin story of the Post-It Note at 3M, a runaway product success created by a company chemist named Spencer Silver. What’s less well known is the overall effect of 3M’s innovation program. 3M has 22,800 patents. Many of those patents come from ideas generated during that program. This inclusive innovation effort is not a secondary component of 3M’s enduring success. As Kurt Beinlich, a technical director for 3M, told Fast Company, “It’s really shaped what and who 3M is.”⁵ 3M is a company founded in 1902 in Minnesota as the Minnesota Mining and Manufacturing Company. Today, it is one of the world’s leading industrial manufacturing companies, with tens of thousands of products. It has remained relevant and innovative by constantly embracing change, trying new products and ideas, and expanding into new markets.

In fact, it goes deeper than this. A growing body of research indicates that home inventors contribute massively to economic growth and new product initiatives. According to MIT innovation scholar Eric von Hippel, “In just six countries surveyed to date, tens of millions of individuals in the household sector have been found to collectively spend tens of billions of dollars in time and materials per year developing products for their own use.” According to surveys by von Hippel and others, more than 5 percent of the U.S. population is engaged in some form of creative invention or innovation.⁶

Von Hippel believes, despite Joseph Schumpeter’s widely accepted innovation thesis that scientists and researchers are the most common sources of innovation, that home inventors and everyday innovators make a far larger contribution to economic development than was previously understood. Because this inventive work is not measured unless it results in an actual company selling products or services, economists cannot easily place a value on their economic activity. Increasingly, these home innovations spill over into the commercial realm and become entirely new product categories and industries.⁷

An example that von Hippel cites is the mountain-bike industry. A group of cyclists began to experiment by riding beach cruisers equipped with fat tires down the sides of hills in Marin County, California. Riding a bike down a mountain required stronger brakes, a stiffer frame, and shock absorbers on the wheel forks and seat posts. For years, bike manufacturers refused to acknowledge the nascent sport, and even complained about it, saying that this was not the way to treat a bike and that the mountain-bike pioneers were violating warranties. It was not until tens of thousands of people had jury-rigged mountain bikes and an underground industry was thriving that major bike manufacturers decided to take part. Today, there are tens of millions of mountain-bike riders in the United States, and the industry pulls in billions of dollars in annual sales—none of which would be likely save for the efforts of some stubborn, fun-loving backyard inventors.

The future of company innovation, then, may be to tap into these backyard inventors when they are on their day jobs. The idea factory does not turn off merely because one is inventing for others; inventive people solve problems as part of their nature. So, for legacy companies to innovate and succeed as their startups do, they need to treat their people as Google, Toyota, 3M, and British Airways treat their workers: as founts of ideas. They must recognize that entrepreneurship is only a state of mind and does not depend on age, skin color, sex, or background. Following logically along this path, companies that want to chase exponential innovation and massive self-transformation must facilitate and motivate employee activities in innovation and ideation.⁸ This cannot be window-dressing. At Toyota, it’s the regular team meetings. At 3M, it’s the idea fairs. At Amazon, it’s the constant tending of the digital suggestion box. At Google, it’s the ability to float a product idea and recruit a small team to work on a prototype with few barriers. We cannot stress too much that treating everyone as an innovator is the most basic and essential part of building an innovation culture that works. It is essential to an organization of any size, but it is particularly so to larger and older companies that have rigid, ingrained hierarchies and communication structures.

Motivate, Facilitate, Collaborate: Coaches, Not Bosses

The days of rigid work hierarchies are gone. Workers, for their part, hate hierarchies, and so do most CEOs. Smart CEOs understand that enforced hierarchies separate them from what is really going on in the company or organization, often to their detriment or peril, and they know that they’re more effective helping, supporting, and partnering than merely directing from on high.

Coach and Motivate

These skills can be encapsulated in the phrase “coaches, not bosses.” Bosses are prescriptive and definitive. Coaches question and listen, asking workers to come up with their own answers and guiding them rather than telling them. This approach, however—and even the ability to follow it—remains in a minority. In a study conducted by academic Julia Milner and leadership expert Trenton Milner that focused on testing managers’ management and coaching styles, the researchers found that “when initially asked to coach, many managers instead demonstrated a form of consulting. Essentially, they simply provided the other person with advice or a solution. We regularly heard comments like, ‘First you do this’ or ‘Why don’t you do this?’”⁹

This was a relatively small study, but our experience in observing management in many old-school companies sadly suggests that it represents the norm. It probably didn’t work well when employees used to be less mobile and less willing to quit their jobs. It certainly doesn’t work now, when workers are far less loyal to their companies than they were in the past and the companies are competing for skilled workers more than skilled workers are competing for their jobs.

Telling knowledge workers (or even manufacturing and service workers) how to do their jobs results in unhappy workers. Yes, training is necessary. Yes, continuing education is vital. But there’s a tremendous difference in delivery and approach between telling and teaching.

Facilitate

Facilitation works hand in hand with motivation: it is far easier to motivate engaged employees who feel well supported. Employees crave learning, in fact. In 2018, Facebook’s talent management team compared data they had collected on employees who left within the following six months with data on those who stayed. The workers who had chosen to remain at Facebook “found their work enjoyable 31 percent more often, used their strengths 33 percent more often, and expressed 37 percent more confidence that they were gaining the skills and experiences they need to develop their careers.”¹⁰

Collaborate

Collaboration is the third pillar. Legacy companies too often divide themselves internally by department or function. This stifles innovation. Creating a company environment that lubricates collaboration between employees on interesting work is what leads to serendipity and great ideas. We think better and can solve problems more efficiently in collaboration. The movie studio Pixar, which has produced an unprecedented string of successes, is a practitioner of totally open collaboration channels. Its then CEO Ed Catmull described it in this way:

Members of any department should be able to approach anyone in another department to solve problems without having to go through “proper” channels. It also means that managers need to learn that they don’t always have to be the first to know about something going on in their realm, and it’s OK to walk into a meeting and be surprised. The impulse to tightly control the process is understandable given the complex nature of moviemaking, but problems are almost by definition unforeseen. The most efficient way to deal with numerous problems is to trust people to work out the difficulties directly with each other without having to check for permission.¹¹

Furthermore, a diversity of viewpoints helps collaboration yield ideas that are more creative and have more economic advantages than those emerging from monocultures.

It’s important to note that collaboration does not mean the classic “brainstorming” model: putting everyone in a room and asking them to come up with ideas, no negativity or criticism allowed. Researchers found out 50 years ago that this model for innovation actually produces fewer good ideas than allowing individuals to brainstorm alone. Brainstorming is more effective when individuals brainstorm separately and then come back together to assess ideas. This helps overcome the tendency for the loudest voices in the room to dominate the discussion.¹² Facilitated brainstorming, which is part of Google’s innovative Design Thinking program, can be effective in group settings. Incorporating visual elements (such as drawing ideas) is another technique that can improve brainstorming and, by extension, collaborative ideation.

Empower and Experiment

No one can be innovative without some sense of agency and self-determination. The best ideas never emerge from originators who feel powerless in their roles. So smarter companies chasing innovation must give employees and managers the power to step up and try things quickly and independently. This may mean that they can circumvent procurement rules or buy ads on the fly to test a concept on Google or hire a videographer or a programmer in a more streamlined fashion: that they be able to follow their natural tendencies to figure out solutions to problems and test their products. In enabling innovative employees and managers to plot their own course, the company must ask that in return they experiment and move as quickly as possible.

It is possible to remove their fear of failure by making clear that failure means not that they have made a mistake, but they haven’t tried enough times yet. To build a culture of experimentation that shrugs off failure and congratulates success, the company can hire entrepreneurs to come and work as intrapreneurs; give them one-year contracts; and ask them to build a product, letting them show your team how it can be done on the outside and helping them get it done in the same way on the inside. The reeducation and experimentation process may take a long time, but cultures cannot be replaced wholesale at a push of a button, as making employees familiar with and fluent in entrepreneurship and innovation can take years. This makes paramount the need for a firm, public, demonstrable commitment by the powers that be.