How Management Innovation Happens

Few companies understand how such innovation occurs — and how to encourage it. To foster new management ideas and techniques, companies first need to understand the four typical stages in the management innovation process.

Management innovation — that is, the implementation of new management practices, processes and structures that represent a significant departure from current norms — has over time dramatically transformed the way many functions and activities work in organizations. Many of the practices, processes and structures that we see in modern business organizations were developed during the last 150 years by the creative efforts of management innovators. Those innovators have included well-known names like Alfred P. Sloan and Frederick Taylor, as well as numerous other unheralded individuals and small groups of people who all sought to improve the internal workings of organizations by trying something new.

Consider how our ability to manage the consistency of manufacturing processes has evolved: from Ford Motor’s introduction of the moving assembly line in 1913 and Western Electric’s invention of statistical quality control in 1924, through the quality revolution begun by Toyota Motor and other Japanese companies in 1945 and on to such recent innovations as the ISO quality standards and Motorola’s Six Sigma methodology, which were both introduced in 1987.1 Similarly, the ability to keep control of a company’s finances has changed substantially over the centuries, through such innovations as discounted cash-flow analysis, capital budgeting and, more recently, activity-based costing. Even the foundation stones of the modern business organization were at some point created by inventive and farsighted individuals: Luca Pacioli popularized double-entry bookkeeping in 1494, and the limited liability company was created in 1856.2

A historical perspective is useful because it reminds us that nothing about our current ways of working is inviolable. There are management innovations under way all the time in organizations. Many fail, some work — and only a few make history. Over time, the most valuable innovations are imitated by other organizations and are diffused across entire industries and countries. Some management innovations, including Toyota Motor Corp.’s lean production system and Procter & Gamble Co.’s brand management model, gave the pioneering companies lasting competitive advantage. Others, such as Materials Requirement Planning and investment portfolio analysis, created broader- based productivity and societal benefits. Indeed, taken as a whole, the process of management innovation is probably as important to economic and social progress as technological innovation.3 Ray Stata, the former CEO of Analog Devices Inc., a semiconductor company based in Norwood, Massachusetts, argued that, “at Analog Devices, and many other U.S.

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References

1. J. Folaron, “The Evolution of Six Sigma,” Six Sigma Forum Magazine, August 2003, 38–44.

2. J. Micklethwait and A. Wooldridge, “The Company: A Short History of a Revolutionary Idea” (New York: Random House, 2003).

3. This point was first made by economist Joseph Schumpeter. See J. Schumpeter, “Capitalism, Socialism and Democracy” (New York: Harper and Brothers, 1947).

4. R. Stata, “Organizational Learning — the Key to Management Innovation,” Sloan Management Review 30, no. 3 (spring 1989): 63–74.

5. For one recent exception, see G. Hamel, “The Why, What and How of Management Innovation,” Harvard Business Review 84 (February 2006): 72–83.

6. A.D. Chandler, “Strategy and Structure: Chapters in the History of the American Industrial Enterprise” (Cambridge, Massachusetts: MIT Press, 1962).

7. R.M. Kanter, “The Change Masters” (New York: Simon and Schuster, 1984).

8. These attributes of knowledge assets were first identified by Sidney Winter. See S. Winter, “Knowledge and Competence as Strategic Assets,” in “The Competitive Challenge: Strategies for Industrial Innovation and Renewal,” ed. D.J. Teece (Cambridge, Massachusetts: Ballinger, 1987), 159–184.

9. R.S. Huckman and E.P. Strick, “GlaxoSmithKline: Reorganizing Drug Discovery (A),” Harvard Business School case no. 9-605-074 (Boston: Harvard Business School Publishing, 2005).

10. J. Birkinshaw and M. Crossan, “Wellington Insurance (A),” Richard Ivey School of Business case no. 9A93M001 (London, Ontario: Ivey Publishing, 1993).

11. This story is recounted in detail on Schneiderman’s Web site, www.schneiderman.com.

12. See www.schneiderman.com/Concepts/The_First_Balanced_Scorecard/How_the_Scorecard_Became_Balanced.htm

13. L. Edvinsson and M.S. Malone, “Intellectual Capital: Realizing Your Company’s True Value by Finding Its Hidden Brainpower” (New York: Harper Business, 1997).

14. For a detailed critique and references to other studies of Oticon, see N.J. Foss, “Selective Intervention and Internal Hybrids: Interpreting and Learning from the Rise and Decline of the Oticon Spaghetti Organization,” Organization Science 14, no. 3 (2003): 331–349.

15. Kaplan describes both processes in detail in a 1998 article. See R. Kaplan, “Innovation Action Research: Creating New Management Theory and Practice,” Journal of Management Accounting Research 10 (1998): 89–118.

16. See C.W. Adams, P. Gupta and C.E. Wilson Jr., “Six Sigma Deployment” (Burlington, Massachusetts: Butterworth-Heinemann, 2003).

17. For the GSK story, see Huckman, “GlaxoSmithKline.” For the Topeka story, see D.A. Whitsett and L. Yorks, “Looking Back at Topeka: General Foods and the Quality-of-Work-Life Experiment,” California Management Review 25, no. 4 (1983): 93–109.

18. G. Hamel and L. Valikangas, “The Quest for Resilience,” Harvard Business Review 81 (September 2003): 52–63.

Acknowledgments

The authors would like to thank Gary Hamel for his helpful suggestions in the preparation of this article.

2 Comments On: How Management Innovation Happens

  • tsmith | September 8, 2011

    This is a great article, and if your not a member, I’d still recommend buying it. Julian Birkinshaw and Michael Mol did a great job covering innovation in management.

  • Travis Barker, MPA GCPM | August 9, 2013

    This was a great article. The four step process for building management innovation represents a new perspective on how competitive advantage evolves at the management level. The dichotomy between innovation at the product/process level and the management level helps to further delineate the different processes, sources, resources, strategies, and risks inherent in pursuing effective management innovation.

    Localized innovation requires a different framework than the innovation that is identified, implemented, and realized at the systems level. The experiment on the peripheral of the organization represents a great strategy to avoid cultural and historical barriers to growth and innovation while avoiding the risks inherent in a poorly executed, or designed, strategy.

    The fact that management, or systems level innovation, is limited by the status quo is often unrealized by those accountable for localized products and processes. Innovation that challenges the status quo must be supported by the larger systems framework as well as role modeled.

    The pursuit of management innovations requires external validation in order to effectively, efficiently, and sustainably identify, evaluate, and challenge existing norms and traditions that limit the company’s competitive advantage. Processes to realize management innovations that rely on internal validation are likely to reinforce existing norms and customs and diminish the quantitative and qualitative returns of the investment. Furthermore, leveraging internal validation for the realization of management innovations is increasingly unlikely to identify stretch goals or leverage and allocated the new resources, technologies, and assets necessary to achieve these stretch goals.

    The power in leveraging processes and strategies to realize management innovations lies in its ability to completely change the company and realign its strategies, processes, and vision/mission with the company’s future. In an era of corporate mergers and economic recession the competency to develop management innovations may critically determine who grows and who leads.

    Travis Barker, MPA GCPM

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