7. Innovative Cultures

SINCE THE STARTUP CORPORATION lives within an established organization, the management of that organization has important implications for the success of strategic discoveries. The following chapters examine the aspects of established organizations that influence the Startup Corporation. We refer to them as the foundations, which encompass the soft aspects of culture and leadership as well as the hard aspects—strategy, incentives, and management systems. In this chapter, we focus on culture (table 7.1).

Culture can be the fertile soil that nurtures developing ideas, or it can be the hard ground that thwarts them before they have a chance to grow. Take, for example, a large Silicon Valley– based company in the software industry with a top-down, execution-focused culture. Every quarter, targets were set for each employee and closely tracked. One employee spotted an opportunity in Asia, but it required an upfront investment. At her quarterly meeting with her boss, he came with his usual list of goals for her. During their discussion, the employee told her boss about the opportunity. He did not dismiss the idea; instead, he added it to her list of goals with a 5 percent weight on her bonus (basically making it clear that she should not spend time on it). The employee who went into her meeting with an idea to potentially help the company came out of it with more work and no additional resources to pursue it. The message was: “So, you have an idea? Great, but you can explore it only in addition to your regular job, and we’ll provide you with no additional resources. Ideas worth the time and resources of the company come from top management alone.” That idea was her last with the company. A culture in which people who contribute ideas end up accountable for them but have no resources to pursue them will quickly kill bottom-up innovation.

Table 7.1. culture as a foundation of strategic discoveries

Organizations that enjoy lasting success do so in part because they have developed a strong and positive culture.¹ General Electric explained in its 2008 annual report (and featured on their website until 2012), “At GE, we consider our culture to be among our innovations. Over decades our leaders have built GE’s culture into what it is today—a place for creating and bringing big ideas to life. Today, that culture is the unifying force for our many business units around the world.” Google’s founders thought that managing the culture of their fast-growing organizations was so important that in 2007 they added the title of chief culture officer to its human resources director, with the mandate to “retain the company’s unique culture and keep the Googlers happy.”

Culture is “the way we do things around here.” More formally, “culture comes down to a common way of thinking, which drives a common way of acting.”² Culture is about how people think, which then translates into how people behave throughout the organization (across countries, functions, departments, and hierarchical levels as well as across time). Culture is built through years of accumulated experiences, and it is constantly evolving. Culture shapes people’s reactions to issues as diverse as relying on outsiders for ideas, learning from (rather than punishing) failures, taking calculated risks, and going after hard but high-potential challenges. Innovation is fragile, and destroying an innovative culture is much easier than building one. A risk-averse, defensive company will need a powerful leader to change its culture into one conducive to fostering strategic discoveries.

CHANGING AN ORGANIZATION’S CULTURE

Altering an organization’s culture requires modifying its common way of thinking, which is much easier said than done. Most “cultural change programs” fail because they ignore a counterintuitive but long-known aspect of human functioning: people act rather than think their way into new attitudes. In Nicomachean Ethics, written almost twenty-five hundred years ago, Aristotle explained that “we do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly. … Moral virtue comes about as a result of habit. … For the things we have to learn before we can do them, we learn by doing them, e.g. men become builders by building and lyreplayers by playing the lyre; so too we become just by doing just acts, temperate by doing temperate acts, brave by doing brave acts.”³ Reshaping the culture of an organization hence requires reshaping the behavior of enough people for long enough for them to internalize the new behavior.

Organizations can (re)shape culture through a combination of hard and soft mechanisms such as employee abilities, processes, organizational structure, performance indicators, top management behavior, information, and resource availability (table 7.2).

Applying strong and consistent alterations with any of these mechanisms can change employee behavior reasonably rapidly. However, that behavioral change trickles down into a cultural change slowly. While personal behavior can change in months, cultural changes may take years, depending on how big the change is, how deeply anchored the previous behaviors are, how powerful and aligned the applied forces are, how many individuals are affected, how geographically dispersed the individuals are, and how easy it is to monitor behavior and enforce changes. Management needs to be persistent and consistent over years for new behaviors to translate into a new culture.

The British-based retailer Tesco illustrates how a large organization developed a strong culture of high employee engagement, customer-focused innovation, and excellence in execution.⁴ Twenty years ago, Tesco was perceived as a second-rate local organization. Since then, and despite an unsuccessful attempt to enter the US retail market, Tesco has become the third-largest and second most profitable global retailer in the world.⁵

One reason for Tesco’s success has been a relentless stream of innovations. Some of these innovations have been incremental—building on the existing strategy, but executing a little better—but others have contained a significant breakthrough component. The introduction of financial services, home shopping, and branded Tesco product lines all did their part to change the market landscape.

Innovation nurtures itself by making new combinations of existing ideas. A number of Tesco’s innovations were adapted from other companies’ products, services, and business models, while still others came from inside. Some of the practices and mechanisms are individually quite clever, but not one alone explains the organization’s remarkable growth. The difference is that Tesco has used all of them, all the time, with the same high intensity, and over several years. Tesco employees do not just “do things” to “tick the box”; they invest time and energy into each activity.

EMPLOYEE ABILITIES

To seriously pursue breakthrough innovation, recruiting talented people is crucial. While Steve Jobs is celebrated for numerous qualities (including his creative genius, extraordinary charisma, and unique sense of style), perhaps less well known is the enormous emphasis that he put on recruiting. Said Jobs, “One of the things that I’ve always felt is that most things in life, if you get something twice as good as average you’re doing phenomenally well. Usually the best is about 30 percent better than average. … But what became really clear to me in my work life was that, for instance, [Steve] Wozniak was twenty-five to fifty times better than average. And I found that there were these incredibly great people at doing certain things, and you couldn’t replace one of these people with fifty average people. … And so I have spent my work life trying to find and recruit and retain and work with this kind of people.”⁶ Employees’ motivation to innovate is crucial, but their ability to do so is equally relevant.

Recruiting Talent

Most organizational problems start at recruitment. Zappos’ founder, Tony Hsieh, is explicit about the importance of fit in the company’s hiring process. In fact, he’s so explicit that at the end of the company’s extensive New Hire Training, trainees who are still not sure that they want to work for Zappos are given $3,000 to leave.⁷ Still, this effort to find people who fit within the culture has to be balanced with the diversity that innovation demands.⁸ Companies must be specific about non-negotiable qualities, but they should also ensure that these criteria allow them to recruit a set of individuals with a range of experiences, cognitive styles, and points of view. For example, L’Oréal, the world’s largest cosmetics and beauty company, recruited separately for a group they called the “unconventionals”—individuals whose profiles were interesting but who might have gathered less attention from a recruiting process often oriented toward the short-term filling of positions with specific criteria.

Both hiring and retaining individuals with high innovation potential can be challenging, as they are not necessarily the easiest people to like or to manage. These “mavericks”—who have a propensity to be innovative, independent-minded, goal-focused, and successful at risk taking—are also often more egocentric and less agreeable, behaving less as team players than average employees.⁹

Google X, Google’s corporate research lab whose mandate is to “take moonshots,” has recruited an impressive lineup of technical talent, including a number of top-notch academics disenchanted with academic life. These individuals combine extraordinary intellect and credentials with an equal passion for technology.¹⁰ Having such talent on your team is never a bad thing. Still, selecting the right talent requires a careful selection process that often spans several interviews before making a hiring decision. Google and the biotech company Genentech—both consistently ranked among America’s most innovative and best companies to work for—regularly put candidates through ten to twenty interviews before extending an offer.

Working With Existing Employees

An innovative culture depends on hiring talented, passionate people and then keeping them. But too often, employees’ initial fervor falls victim to the forces in the organization that sap people’s talent and creativity. Except in R&D units, employees typically spend most of their time and energy going after today’s objectives, which are embedded in standardized processes and bound by the existing paradigm. Over time, this emphasis on optimizing existing resources reduces employees’ ability to imagine other products, services, processes, or business models.

To maintain employees’ passion to discover, organizations can provide spaces for people with similar interests to meet and explore fields that initially may appear to be unrelated to the company’s existing business. Exposing employees to the world outside the organization through learning expeditions on specific subjects, for example, can help staff break out of their everyday way of doing business.

By supporting external interactions, an organization enables individuals to broaden their personal and professional networks as well as be exposed to new practices and ideas. Such exploration calls for giving employees time and resources. Job rotation—which ensures that managers and other employees do not stay on any job long enough for it to become stale—is another way to maintain interest and engagement. Innovation is far more likely to happen if employee hearts and minds are involved in innovation-pursuing activities at least part of the time. While this requires employees to be willing and able to engage, it also requires managers to be willing and able to display a leadership style that supports employees’ innovation efforts.

SUPPORTING INNOVATION ACTIVITIES

Once the right people are in place, nurturing activities that support innovation plays a large role in whether or not an organization innovates. Management designs the ways in which experimentation, learning, understanding customers, tracking competition and technologies, and capturing and exploring ideas all happen.

Experimentation and Learning

One of the best ways of managing risk is to experiment—through storyboarding; prototyping for inspiring, evolving, and validating ideas; and pilot testing. Netflix CEO Reed Hastings describes the company’s extensive use of testing: “We are trying to set this up as a continuously learning organization. … My role is creating that learning atmosphere.”¹¹ Design-thinking companies such as Frog Design, Continuum, Luma Institute, IDEO, and SIT encourage rapid and frequent experimentation as ideas move through their design processes. Tesco is also famous for its ability to pilot ideas in a few stores, monitor the results, make adjustments, and roll out to market.

Contrast these systematic approaches to experimentation with the way the new CEO of JC Penney, Ron Johnson, attempted to turn around the declining fortunes of the retailer. Determined to take the company upmarket, in 2012 Johnson embarked on a massive change program throughout JC Penney’s 1,100 stores. The change involved redesigned stores (a strategy of “stores within a store”), new marketing, and simplified pricing to replace frequent discounting, but it never gained traction. Worse, customers started to take their business elsewhere, and the company ended the year with sales down 25 percent. At an investment conference, a leading shareholder and member of the board commented, “One of the big mistakes was perhaps too much change too quickly, without adequate testing what the impact would be.”¹²

Systematic emphasis on learning from experiences bolsters innovation. Process innovation, in particular, can spring from employees being encouraged to ask themselves regularly what they can learn and improve. Experimentation requires both patience and rigor, and relevant tests with appropriate resources upfront need to be set up. Without experiments, innovation is betting on a hunch—much like JC Penney did.

Focusing on Customers

Highlighting the importance of customer focus in the innovation process, Tesco’s longtime CEO Terry Leahy argued that “all our innovations come from close observation of the way customers’ lives are changing.”¹³ Similarly, Amazon’s Jeff Bezos describes customer focus as a cultural issue that distinguishes Amazon from other companies, whose chiefs “craft strategy in competitive terms. When they’re in the shower in the morning, they’re thinking about how they’re going to get ahead of one of their top competitors. Here in the shower, we’re thinking about how we are going to invent something on behalf of a customer.”¹⁴ One of top management’s roles is to ensure that the voice of current and future customers is heard loud and clear throughout the organization. Doing so requires employees to be regularly exposed to today’s and tomorrow’s customers, to the point where the customer’s experience permeates the organization. Toward that end, Tesco devised the TWIST (This Week in Stores) program to give managers an opportunity to spend one week per year in stores observing and interacting with customers. The better an organization understands the experience of the customer, the better able it will be to improve that experience.

The use of “big data” also shows great potential. Tesco, for example, developed a strong lead by analyzing data generated by its loyalty cards to develop insights about its customers better and faster than their competitors. Learning about customers through the lens of big data allows Tesco to customize specific store offerings, as well as identify trends in consumer behavior.¹⁵

While customers typically can explain what they do not like, they are often much less insightful about what they might like in the future. In fact, customers’ initial tests have been negative toward breakthrough concepts that proved to be successful, such as the first Chrysler minivan and the Sony Walkman. Asking for customers’ views on current and future products is not the only way—and probably not the best way—to develop products or services that truly change the existing paradigm. Henry Ford has been quoted as saying, “If I had asked customers what they wanted, they would have said ‘a faster horse.’” Customers can only judge possible products based on what they already know, and sometimes what is needed is the ability to imagine what they cannot yet see.

Being Sensitive to Competition and Technology

Another aspect that shapes organizational culture is devoting time, attention, and resources to monitoring and understanding the most innovative competitors. Several times, Amazon has been a fast and efficient second to market. Amazon’s MyHabit site was launched on the heels of the success of flash-sales sites such as Gilt, Groupon’s momentum in daily deals led to Amazon Local, and Amazon Mom followed Diapers.com (later purchased by Amazon). As Jeff Bezos explains, “It’s very important not to be hermetically sealed. But you don’t want to look at it as if, ‘Okay, we’re going to copy that.’ You want to look at it and say, ‘That’s very interesting. What can we be inspired to do as a result of that?’ And then put your own unique twist on it.”¹⁶

Appreciating Employees’ Ideas

Ideas are only as good as their ability to be captured, disseminated, and realized. People work on ideas if:

• they like the organization and want it to succeed

• they think the idea will be picked up

• they view the organization as open to ideas

• they have the time

• they think their contribution will be acknowledged

To foster an environment that encourages inquiry and exploration, some organizations have developed and institutionalized the “astonishment report.” At the end of their induction period (generally three months), new hires are required to write and discuss with their boss a short report documenting anything and everything that they found interesting or surprising since they joined the company.

Other companies work to capture ideas from their employees by getting people together to exchange thoughts, and enabling them to connect dots across technologies and capabilities. For example, Sodexho, a world leader in the catering industry, organizes a biannual fair at which the company’s 18,000-plus operating units showcase and view internal examples of innovation and best practice.¹⁷ There are as many ways to leverage the ideas of internal employees as there are organizations (or employees!).

GOALS AND EVALUATION

In the movie Invictus, Nelson Mandela discusses with the captain of the South African rugby team, François Pienaar, how difficult but essential it is to inspire the team to do better than they think they can. Perhaps true of rugby, this is especially true of innovation.

One way to push employees to perform better than they think they can is to set stretch goals for the team. The Tata Nano, a car that can be sold for less than $2,500, is a case in point. Designing such a car is impossible within the existing paradigm of car design; yet the inspiring objective of making a car available to a wider range of people drove the design team to come up with unexpected solutions. Henry Ford used a similar approach to bring his Model T—far more than just a “faster horse”—to the mass market.

Intelligently selected stretch goals cannot be achieved by “beating the drum faster” or doing things incrementally better. They must require a breakthrough. They also require balancing tensions between different departments and collaborators to prevent the optimization of one angle at the expense of another, equally important one. To inspire and motivate, stretch goals need to be:

• important for the organization but even more crucial for society

• fun to achieve

• seen as difficult but not impossible

• simple enough for the team to visualize itself succeeding

Individuals, groups, and organizations that have previously succeeded possess the self-confidence to believe they can do it again. Less experienced groups often need help from leaders. Expressing confidence in a team’s ability—and hence in the team’s probability of success—can translate into actual success. Reminding groups of past achievements—including those that may not have been celebrated but were nevertheless impressive—can also boost confidence.

Team members must not spend too much time and energy fearing the consequences of not reaching their stretch targets. The more they worry about the future, the less they pursue productive endeavors. Leaders need to embrace goals but also convey that performance evaluation will be fair.

ROLE MODELS AND STRUCTURES

The culture of an organization is best reflected in the attitudes of top managers. People throughout the company look to management for cues about what behaviors are accepted. Values and company traditions that are at odds with top management behavior create unsustainable tensions. A culture that supports strategic discoveries is evident in top management’s attention to fresh concepts and praise of people who take risks. In contrast, top management that says it wants innovation but penalizes risk, focuses on the short term, and shows no interest in ideas and new strategies will fail to develop innovation. The Startup Corporation is not simply a set of policies, processes, systems, and structures. It lives in a culture. Without the proper culture, these design aspects will fail.

RESOURCES, CULTURE, AND INNOVATION

The presence of excessive slack resources rarely leads to superior performance,¹⁸ but the total absence of slack is equally problematic. In many companies, cuts to discretionary spending have gone beyond those necessary to eliminate waste. For employees to see the potential for improvement (and, even more, to allow them to pursue opportunities), they must have at least some resources to do so. Too much or too little slack inhibits innovation. Too much slack breeds complacency rather than healthy discipline, while too little slack prevents experimentation whose success is uncertain. People who fight fires ten hours a day cannot be expected to spend an extra fifteen minutes at the end of the shift contemplating how they might improve things. Setting up explicit “innovation time” when employees can explore new ideas can go a long way in fostering creativity.

Reshaping the culture of an organization requires reshaping the behavior of employees over many years, which demands consistency. Individually, the mechanisms described above will have little effect on innovation. Together, however, they can contribute to reshaping the behavior of employees in a more innovative direction and, in time, helping an organization develop a new set of innovation-supporting habits. With the nurturing of an innovative culture, the innovation paradox becomes less and less of an obstacle.

But often an organization really needs a leader.