The Problem: Where You Stand Depends on Where You Sit

The Innovation Stage-Gate is concerned with innovation capability. It is focused on creating an innovation engine that is productive and that fits in the corporate setting.

The next challenge is to manage the dynamics of innovation in the corporate setting, which often means dealing with organizational resistance. Resistance to innovation is so prevalent in large companies that it is almost a proverb. It cuts across functions and across hierarchical levels and is a major reason that so many innovation programs do not achieve the business success that they could.

Dealing with resistance to innovation starts with the observation that resistance—though frustrating—is not irrational. People in organizations behave as you yourself would behave if you were in their shoes. Consciously or not, they calculate the best response to an innovation initiative—for their organization and for their own careers—and they act on that calculation. For those in the core functions, deviating from standard procedures is risky, at both a personal and a functional level. It is safer to stick to established ways of doing things. That the response is counterproductive to innovation is a side effect, not the objective.

Innovation teams often fail to appreciate this perspective. Instead, they tend to view those in the corporate functions as recalcitrant, reactionary, and unduly risk averse. As a result, they become angry, frustrated, and disempowered. They dig in their heels or escalate the lack of cooperation to higher management.

These are unproductive responses. They do not take into account that the people in the company’s core functions have legitimate concerns. If the innovation team does not understand these concerns, and does not actively seek to manage the interaction between the venture and the core company, the innovation program can be slowed, or even smothered to the point of suffocation.

A few examples illustrate the point.

The “Other” Category in Procurement

Something similar is happening in Procurement. The director of that function is considering a request from the innovation team for a new tracking system. She is asking herself, “What is this device, and what does it have to do with our business?” It doesn’t fit in any of the standard procurement categories, so she is not sure why it has landed on her desk. Not a problem, really; she can identify alternative suppliers, qualify them, and get the selected vendors put on the approved vendor list. Then she can put out a Request for Proposal (RFP) and bid the thing out. The only problem is that there really aren’t several vendors. If there were, she doesn’t know what expertise would be required to qualify them, and her team is busy (as usual). The deal itself is for less than ten thousand dollars, hardly worth a big effort. Still, if the new venture ever goes forward, the company may buy millions of them. Better to negotiate now rather than wait for the pilot to end when her company might be locked into a supplier with no leverage. On top of these issues, the director is concerned that the vendor doesn’t have the company’s standard liability insurance coverage, and the company is so small that it doesn’t seem capable of getting it. She can just imagine the liability risk. She sets up a meeting with her team to discuss alternate suppliers, but the innovation team wants to make the purchase now. The director longs for another straightforward purchase of 100 tons of carbon black!

You get the picture. Each department has analogous concerns and similar pressures. For these departments, the innovation team’s requests come with little upside and a lot of (potential) downside (see Figure 5.1). No one says this out loud, of course, because innovation is a priority.

Back at the innovation department, people are pulling out their hair. Moving the new venture even a small step closer to reality seems to take Herculean effort. No one really says no, but everything drags out forever. Rapid iteration is not even possible. The tension builds. There has to be a better way.

The Root Causes of Resistance

Govindarajan and Trimble have coined a term for the functions that appear to resist innovation—the “performance engine.” [Govindarajan and Trimble, 2010] The performance engine exists to maintain effective, efficient, and continuously improving operations—not to drive innovation. Innovation disrupts the performance engine and makes it harder for the people in the functions to keep the core business running. There is therefore an inherent conflict between the innovation team and the performance engine. This is what results in the appearance of resistance to innovation initiatives.

Lean Startup exacerbates this conflict in two general ways—through disruption of work and through the undermining of standards. Business experiments disrupt the work of the functions, yet they are the lifeblood of the Lean Startup method. They require people to set aside standard operating approaches and do things differently, at least for this project. Supporting innovation in this way can be risky for the people who work in the core for several reasons. First, it is easier to make mistakes in unfamiliar areas. Second, supporting a new venture may cause the function to shortchange its commitments to the core business client, a cardinal sin for a support group. Finally, supporting an innovation initiative may come at the risk of defying a supervising manager who is opposed to the initiative. Each of these risks is real to individuals in the functions, and they need to be acknowledged by innovation teams.

The second way that Lean Startup exacerbates the conflict is by undermining standards. For people who are leading functions—especially first-line managers—supporting innovation may mean making exceptions to the function’s established standards. This can be hard for the function to accept. The innovation team may want to bypass the existing Stage-Gate‘ product development process, for example, or it may need to use non-standard technologies (or even technologies for which the company does not yet have a standard operating environment). Standard practices for managing intellectual property or procurement may need to be relaxed to speed experimentation with clients or customers.

For the core functions, exceptions feel like a slippery slope. The processes and standards that they worked so hard to establish and to communicate and enforce will be undermined. The standards may not make sense for a new venture, but the functions fear that relaxing them will open a Pandora’s box of exceptions. Any resulting erosion of standards will increase day-to-day costs for the function and raise the specter of future cost increases as the functions struggle to support non-standard products.

Both of these risks—to the individuals within the functions and to the standards that are essential to routine operations—need to be recognized and managed if a venture is to succeed in a corporate context. The good news is that this is possible. It starts with an innovation team understanding (and even honoring) the roles of those in the performance engine. Once the interests of the functions are well understood, they can be harmonized with the work of innovation.

The Role of Game Theory

Making a collaboration between the functions and the innovation team work requires understanding the underlying dynamics of the organizational games being played. There is a branch of mathematics that can be used to do just that: Game theory. Game theory can help to identify and explain people’s personal “payoff matrices”—the calculations that drive them to behave as they do. Once you understand these forces, you can make changes that shift the rules of the game in subtle but productive ways [Ritti and Funkhouser, 1977].

Game theory uses mathematical techniques to predict the behavior of actors in a social context. The underlying assumption is that people will, subconsciously or consciously, calculate their risk/reward (payoff) from any situation (game). It predicts that rational participants will act in a way that will minimize their maximum loss. Both of the general patterns of resistance to innovation can be explained with game theory and this heuristic for decision-making.

Many different types of games have been articulated and modeled by systems modelers. Each has its own payoff matrix and dynamics. Two of these games are important for internal innovators: The Samaritan game and the Watchdog game.

Summary: Managing Resistance to Innovation

There is a saying: Where you stand depends on where you sit. In other words, the way you view a particular issue depends on the role you play in the company. This is certainly true for a company’s functional leaders. This insight is at the heart of game theory, which assumes that each party will act according to his or her personal assessment of the payoff matrix. What the payoff matrix looks like depends on where you sit in the company.

To change behavior, you need to shift the payoff matrix for key players in the organizational games that are always going on. How you shift a given individual’s payoff matrix depends on the issue and the game being played. In the Samaritan game, the personal risks associated with helping the innovation team can be reduced with air cover and with dedicated resources to support the innovation effort. Watchdog games, which revolve around the organizational risks functions face in helping the innovation team, can be managed via graduated engagement and risk-sharing.

Suggestions for managing the inherent conflict with corporate functions are covered in a paper that Abhijit Ganguly and I wrote on “Conducting Business Experiments.” An excerpt of that paper is included in this chapter.

Conducting Business Experiments

Abhijit Ganguly and Jim Euchner

Govindarajan and Trimble (2010) discuss the inherent conflicts between any innovation initiative and what they call the company’s “performance engine.” These conflicts arise frequently in the context of business experiments, as experiments can challenge the working practices of existing functions and at times require exceptions to those practices. The specifics of the conflicts will vary by industry and cultural factors, but there are patterns. The most common conflicts concern intellectual property, marketing, risk management, procurement, and sales.

Intellectual Property. A strong intellectual property regime can be a key element of competitive advantage, and business experiments often come with the risk of exposing elements of intellectual property related to the concepts being tested. In many companies, concern about even limited exposure of an idea before patent applications are filed drives strict policies regarding disclosure. Goodyear protects intellectual property in business experiments but takes a different approach than that of the core business. Customers participating in experiments are informed that the information they will see is confidential and are asked to agree to keep it confidential. In some cases, that agreement is a simple, one-page form; in others, it is a verbal communication. In a few cases, when the concept seemed likely to result in a patentable invention, we have filed provisional patents before sharing it. We have not had any intellectual property issues arising from business experiments.

Marketing. Companies spend significant resources and time developing their brands. On occasion, concerns may arise that an experiment could damage the brand image with a particular customer set or some other stakeholder. Often, this concern can be avoided by not using the brand or logo in the experiment. When the brand is central to the experiment—when we believe that the success of the endeavor depends on its being offered by Goodyear—we work closely with the marketing function in designing the experiment. If the experiment is conducted in a local test market for a limited period of time, and if the marketing function has the chance to review the materials ahead of the experiment, it is often (but not always) possible to move forward with the experiment.

Risk Management. There is the potential in any experiment for something to go wrong, whether through a failure of the technology or a failure of the concept. It is possible that the failure might result in consequential damages. The need to manage liability can therefore be an impediment to conducting certain experiments. However, at times there is no way to learn about a new concept without conducting a real-world experiment, with all of its attendant risks. When we do such an experiment, we seek to identify the risks before the experiment begins, mitigate them as much as possible, note any concerns that can’t be fully mitigated, and document how they will be handled if they arise. We engage in practices analogous to those we use when conducting trials of new products in the core business. Careful experimental design, together with open discussion of possible risks with participating customers, is critical.

Procurement. We often conduct experiments with technology developed by partners. These experiments are generally designed to provide an opportunity to learn about the technology’s potential to support a new business. These experiments come with a risk that the collaboration could compromise future negotiations with that partner in some way. At Goodyear, we have mitigated the risk of ill feeling or compromised negotiating position by creating different types of agreements for different stages of business building. At the early stages, we may experiment with an off-the-shelf offering. If the partner is a startup or a small enterprise, we may enter into a joint development arrangement to pilot the technology, with intellectual property terms defined but business terms to be determined. In other instances, business negotiations may be deferred until we are clear about the business potential and can negotiate with clear intent. This flexibility works to the benefit of both parties; without it, the experiments can be significantly delayed.

Sales. Because business model innovation is aimed at creating growth in areas adjacent to the core business, we often work with customers of the company’s performance engine. This can create issues with the sales organization for two reasons. First, anything that is not a sale of a core product can be a distraction to the sales force, which already must meet challenging targets. Second, the sales organization may not agree with the concept being tested and may not want to expose it to customers. Sales organizations also have a natural concern that the innovation function may appear to promise something that may never be brought to market, and by doing so, may disappoint the customer. When approaching customers, we work with the sales organizations; we spend time discussing the concept and the experiment design with sales management. Often, we get useful feedback on the concepts. We also get good insight into which customers might be the right first targets. Done well, these discussions result in better experiments. Early in the business model innovation process, sales personnel will often accompany the innovation team in meetings with customers; over time, as trust builds, access to customers typically becomes more open.

Business experiments present clear risks in each of these areas, but there are also risks in not conducting experiments. Principal among these is that you will build the wrong product or service, partner with the wrong partner, or go to market with the wrong business model. Furthermore, the learning from these experiments, and from customers in particular, is very powerful in building internal support for the business you are building. Conducting experiments—even “quick” experiments—can take time, but they can help the organization to understand the opportunity and ultimately lead to a stronger offering.