MIT Sloan Management Review

“Open innovation” – in other words, an approach to innovation that incorporates working with innovators who are outside an organization — is all the rage these days.  But, when working with external innovators, should companies seek to organize them into communities – think open-source software projects, for example – or into competitive markets — more along the lines of InnoCentive?

That’s a question that Kevin J. Boudreau and Karim R. Lakhani tackle in their article “How to Manage Outside Innovation” in the Summer 2009 issue of MIT Sloan Management Review. One of the key issues to consider, according to Boudreau and Lakhani, is whether your innovation challenge involves “cumulative knowledge, continually building on past advances”; if so, the authors note, innovation communities have built-in advantages.

On the other hand, if your innovation challenge is best tackled “by broad experimentation across a set of technical approaches or customer groups,” Boudreau and Lakhani suggest that organizing external innovators into competitive markets can be advantageous.

Johnson & Johnson provided an unanticipated demonstration of the increasing influence of social media this week, when it pulled an ad for its Motrin pain reliever from the brand’s website – and a marketing VP issued a statement apologizing for the ad. The reason? Some blogging and Twitter-ing moms had denounced the Motrin ad campaign — which suggested that carrying a baby in a sling or carrier is fashionable yet might cause back pain – and a video of mothers’ critical comments appeared on YouTube. Not exactly the kind of viral marketing companies aim for — but nonetheless a cautionary lesson in the increasing power of social media to cause corporations to change course. As Advertising Age reported in an article about the controversy:

“We now have indisputable proof that online marketing, YouTube and Twitter and all that it encompasses is meaningful and has arrived,” said Gene Grabowski, chair of the crisis and litigation practice at Levick Strategic Communications.

Fortune has posted an interesting interview with author Malcolm Gladwell, known for his books The Tipping Point and Blink. Gladwell’s new book Outliers: The Story of Success – to be released next week — delves into what makes extremely successful people perform so well. And, according to Gladwell, what differentiates the ultra-successful is not so much extraordinary talent as much as a background that makes a person extraordinarily well-suited to a particular type of work. Notes Gladwell on his website:“I do think that we vastly underestimate the extent to which success happens because of things the individual has nothing to do with.”

Take Bill Gates’ early success. According to Gladwell, there was more to it in than just programming genius: Due to some unusual circumstances, Gates was able to start programming on a mainframe at 13 in 1969 — an advantage few teenagers in that era had. As Gladwell observed to Fortune: 

Bill Gates has this utterly extraordinary series of opportunities. When he’s 13, it’s 1969. He shows up at his private school in Seattle, and they have a computer room with a teletype machine that is hooked up to a mainframe downtown. Anyone who was playing on the teletype machine could do real-time programming. Ninety-nine percent of the universities in America in 1969 did not have that.

Then, when he was 15 or so, classmate Paul Allen learned that there was a mainframe at the University of Washington that was not being used between two and six every morning. So they would get up at 1:30 in the morning, walk a mile, and program for four hours. When Gates is 20, he has as much experience as people who have spent their entire lives being programmers. He has this incredible headstart.

What’s the takeway for companies that want to cultivate innovation?  It sounds cliched but, in the Fortune interview, Gladwell’s  advice to businesses is: ”invest in people” — and think in terms of developing talent rather than acquiring it. That’s his advice — but one could also conclude from his argument that it makes sense to hire people whose experience and background make them particularly well-suited for the work at hand.

Technology Review  has published an interesting article about the increasing popularity of open-source hardware — and its use by companies ranging from Nokia to start-up Chumby.  The article quotes MIT Sloan School Professor Eric von Hippel about the open-source hardware trend:

Von Hippel observes that open-source hardware actually predates open-source software by centuries: people have always shared blueprints and sketches for such things as furniture and machinery. But the visibility of the open-source-software community “has created a new awareness of what has long been the historical practice in hardware,” he says.

What’s different about today’s open hardware is that the Web and new types of design software are making it easier to build, share, distribute, and modify hardware designs. “Most products are designed in software first,” says von Hippel. “So you’re designing and simulating on the computer, and in the last step you turn it into hardware. If you think of open-source software as an information good, then open-source hardware is also an information good until the very last stage.”

Here’s an intriguing finding from a new working paper:  Companies that use modern management best practices tend to also use less energy. A team of researchers from Stanford, the London School of Economics and Cambridge University studied a sample of mid-sized manufacturing companies in the U.K. The researchers surveyed plant managers about 18 management practices, ranging from process improvement procedures to methods for attracting and retaining workers.  The research team then matched those responses to information from a U.K. business census about firms’ output and energy usage.  The authors’ conclusion? “Better managed firms are less energy intensive…. We demonstrate that the best managed firms are not only more productive, but also more effficient consumers of energy.”

One possible explanation? One of the best practices the researchers asked about was adoption of “lean” manufacturing methods — and lean manufacturing focuses on reducing waste of materials and energy. If so, the authors note, improving management processes at manufacturing companies could help lower greenhouse gas emissions.

However, the authors caution that their data doesn’t demonstrate causality between modern management practices and lower energy use – and some other factor could be at work. For example, they note, it could be that some companies hire management consultants who both improve management methods and reduce energy consumption.

Are performance reviews passé? At the very least, they are a hot discussion topic  –  judging from reactions to the lead story in this week’s edition of Business Insight, which we at SMR produce in collaboration with The Wall Street Journal.  The article’s author, UCLA management professor Samuel Culbert, opines that performance reviews are  “little more than a dysfunctional pretense,” with bosses out to justify predetermined compensation ranges. Meanwhile, Culbert argues, subordinates become unwilling to admit vulnerabilities because they know such admissions may come back to haunt them at future performance reviews.   

Culbert’s article garnered dozens of comments. Many readers agreed with Culbert that performance reviews need improvement. Wrote one: “As a knowledge worker, performance reviews feel like some anachronistic, industrial-era tool designed to assert dominance in employee relationships… It is hard for me to imagine a motivated professional who benefits from this type of defined periodic review instead of ongoing trusted communication.”  Others disagreed, with some noting that formal performance reviews help managers avoid litigation if they need to later fire a poor performer.

What’s your experience? Are performance reviews worthwhile — or not? How can they be improved?

Cisco yesterday announced the winner of its first global innovation contest, the I-prize. More than 2,500 contestants from more than 100 countries competed for prize money — by submitting ideas that could potentially form new billion-dollar businesses for Cisco.  The winning team, a computer science student in Germany and her husband and brother, proposed an idea for energy management.   

Cisco’s contest is part of a trend toward corporate-sponsored innovation competitions as a way of attracting new ideas from outside the corporation. And apparently, one of the winners of this contest was…Cisco.  While being fairly vague about the details of the winning innovation, Cisco senior vice president Marthin De Beer called the winning entry  “one of the most compelling ideas we’ve seen in a very long time” in a video posted on the I-prize web page.  De Beer did say that the winning idea involves an approach for energy management across the electrical grid, uisng IP networking technology. More specifically, one journalist reports it’s an idea for requiring devices to ask for power from the electical grid when they need it, rather than consuming power automatically.

The response to the contest reportedly exceeded expectations at Cisco, despite some off-topic entries such as an idea for massaging socks. How happy was Cisco with the contest’s results? Well, let’s just say the corporation has just launched another contest, this time for software developers.

The economic news of the last few weeks has been grim. But things may not necessarily be so bad in the start-up sector. Opines venture capitalist Carl Weissman in a recent posting on Xconomy, “The investments that I am making…are generally years from accessing public markets or being acquired, so current market conditions are not high on my list of considerations. Great technologies emerge in both bull and bear markets…”  As a result, Weissman wrote, he’s viewing his work in the current economy as ”pretty much business as usual.”

What’s more, there’s definitely a school of thought that maintains recessions are good  times to start businesses. The thinking goes thusly: talent and space are cheaper, you don’t get caught up in overoptimism, you develop a culture of thrift — and only the strong survive.  Of course, it’s easy to say that in retrospect, but several successful company founders who launched innovative products shared with Inc. magazine stories of how starting in a recesssion was good for them. “Starting a business in a recession is like vacationing in the off-season,” one entrepreneur told Inc.. “It’s a little less crowded, and everything starts going on sale.”

Maybe it was a case of the “not-invented-here” syndrome — the common phenomenon where organizations aren’t open to innovations or ideas they didn’t come up with — in Washington.  Or maybe it was just the pressure of time. But, whatever the reason, one thing that wasn’t included in the financial-sector bailout package that Congress passed was extensive perspectives from many academic economists, suggests an article in The Chronicle of Higher Education. Titled  “Washington Puts Academics on Sidelines in Bailout Plan” (subscription or day pass required), the article describes how academic economists drafted plans and working papers in response to the crisis — but many felt they didn’t have much influence in the debates over the bailout plan. On September 25th, one Senator did wave a petition signed by 200 academic economists skeptical of the proposed plan and the haste to pass it. Then, one of the petition’s signers who works in the Washington area was called in at the last minute to testify to the House Republican Policy Committee — on a Sunday afternoon.  But, overall, according to The Chronicle,  Congress’s attempts to reach out for academic counsel were “apparently sketchy and last-minute.”

Today’s Wall Street Journal features an article that highlights a subtle but interesting difference in management style between Toyota Motor Corp. and Detroit’s Big Three. Toyota in the U.S. currently finds itself with excess capacity for models such as pickup trucks. Rather than paying its workers but not requiring them to show up when they are not needed on the factory floor — as the big U.S.-based auto companies often do — Toyota is, yes, paying those workers not needed on the production line – but is using the down time to send them to classes to improve their productivity and quality skills and generate new ideas for improving production.  For example, during this down time, one assembly worker has developed a Teflon ring that may help avoid damage to vehicles’ paint that can occur during one phase of production. 

The article brings to mind an essay by MIT Sloan School professor Thomas Kochan in the Summer 2006 issue of MIT Sloan Management Review. Kochan argued that U.S. companies face a choice.   One option is what he called “taking the managerial high road” and investing in becoming a “knowledge-based, high-trust organization — which requires training and empowering employees and harnessing their full motivation and talents to generate innovative solutions that drive productivity and service quality.” The alternative? Focusing on controlling labor costs.  Kochan cited Toyota as an example of a company that has competed successfully by taking a cooperative approach to working with its U.S. workforce.

Anyone who’s read management literature for more than 15 seconds is no doubt sick of Procter & Gamble constantly being dragged out as the default example of how companies should innovate. Still, P&G’s innovation culture, by company chairman A.G. Lafley and homeless uberconsultant Ram Charan in the latest strategy+business, adds some interesting new wrinkles to the story. It’s an extension of The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation, which the pair published earlier this year.

Lafley’s main essay has some of the usual CEO chest-puffing, but behind such pronouncements as “We are constantly innovating how we innovate” you’ll find some concrete examples, and one great riff on how people usually considered overhead by a business’s innovators can contribute to a culture of innovation:

“Our long-standing middle managers, people who have grown up in the P&G system (as I did), are starting to recognize that better innovation processes can expand their personal and leadership skills. They’ve all been through cost-cutting and productivity exercises. But that’s not the same as creating top-line opportunities that can earn kudos from consumers. Nobody is telling them they have to be the geniuses who invent an idea. They will get credit for turning ideas into replicable processes and learning from their mistakes. In operating cross-functionally, they are also moving away naturally from the old silos.”

Charam’s accompanying “Becoming a Great Innovation Team Leader” lists four best high-level practices (”Establish clear criteria and don’t hesitate to shift resources”; “Concentrate on possibility”; “Cross boundaries and help others do the same”; “Reward effort and learning”), but begs to be fleshed out some more. That, I suppose, is what their book is for.

We read transcripts of old Ben Bernanke speeches so you don’t have to:

Seventeen months ago, Federal Reserve Chairman Ben Bernanke spoke to a Fed-sponsored conference in Georgia about Regulation and financial innovation. It’s a typical Fed-chairman speech (read: zzzz), but one paragraph is worth zeroing in on:

Financial innovation has great benefits for our economy. The goal of regulation should be to preserve those benefits while achieving important public policy objectives, including financial stability, investor protection, and market integrity. Although financial innovation promotes those objectives in some ways, for example by allowing better sharing of risks, certain aspects of financial innovation–including the complexity of financial instruments and trading strategies, the illiquidity or potential illiquidity of certain instruments, and explicit or embedded leverage–may pose significant risks. These risks should not be taken lightly.

One can read this many ways in the light of recent events. For our purpose, though, let’s look at how Bernanke uses the word “innovation.” It could “provide great benefits”; it could “pose significant risks.” All leaders say they love innovation, but a little thought about the ramifications of an innovation (beyond “we’ll make a lot of money”) is essential. What good will your innovation cause? Sometimes there’s a fine line between innovator and scam artist.

Depressed about the state of the real-world economy? Maybe you should attend tomorrow’s Virtual Goods Summit 2008, an event in San Francisco looking at the growing business of buying and selling ”virtual goods” in online games and on social-networking sites — for real-world money.

How real is the virtual goods market?  Last year, one rough estimate of the worldwide market for real-money trading of virtual goods was around $2 billion. Lightspeed Venture Partners’ blog recently estimated that Facebook is currently selling virtual gifts — such as digital hugging teddy bears — at an annualized rate of about $35 million a year.  Lightspeed’s blog also reports that Sulake, a Finnish company,  is getting the majority of its revenue from selling virtual goods.

But it’s not all sweetness and cuddly teddy bears in the world of virtual goods. One area of controversy is international outsourcing – as online game players outsource time-consuming tasks in the games to workers in countries such as China — a phenomenon that has been called  a form of “virtual offshoring.” 

Ge Jin, a graduate student at the University of California, San Diego, has been working on a documentary about Chinese workers — known as “gold farmers” – who play computer games for a living.

  Not surprisingly, all this new economic activity has attracted the interest of academics. If you want to stay current on the virtual economic scene, The Virtual Economy Research Network offers a compendium of news and research related to this emerging field.

Mixed news this week from American Airlines: On the plus side for most people, American plans to respond to flight attendants’ concerns and ban porn on its in-flight Wi-Fi system. On the negative, the company plans to charge for more amenities once considered part of a ticket price, such as blankets and soft drinks. What’s next as an a la carte item: the SkyMall catalog?

Two recent publications of MIT Sloan Management Review have particular relevance to the vagaries of managing in the no-longer-so-friendly skies:

In the fall issue of the Review, editor Michael S. Hopkins talks to longtime airline industry watcher Thomas A. Kochan in search of The Management Lessons of a Beleaguered Industry. You can guess Kochan’s solution from the title of his new book: Up in the Air: How the Airlines Can Improve Performance by Engaging Their Employees.

Dan Ariely has a book of his own making noise these days, Predictably Irrational, and, in the latest issue of Business Insight, which we produce with The Wall Street Journal, he talks to the Review’s Alden M. Hayashi about The Irrationalities of Product Pricing. Whether it’s airline amenities or some of the pungent examples Ariely uses from technology (TiVO, iPhone), what we think something is “worth” may be all in our minds.

Remember that next time you need to pay $5 for a two-hour rental of a tiny blanket.

Martha wrote a few weeks back on Pixar’s creative culture, based around a Harvard Business Review piece, How Pixar Fosters Collective Creativity, credited to Pixar president Ed Catmull.

There must be something in the air, because we’ve just come across an even stronger interview with a Pixar exec. Innovation lessons from Pixar: An interview with Oscar-winning director Brad Bird (registration required), from The McKinsey Quarterly, is a terrific nuts-and-bolts piece. In it, the director of The Incredibles and Ratatouille talks specifically about what sort of people can be part of networked innovation — and what sort of people you have to look out for. He does deliver the occasional bromide, such as “The only thing we’re afraid of is complacency,” but the interview is full of useful observations from someone who has to herd cats all day. Particularly useful is his differentiation between people who want to get a project over the finish line and people who want to get a perfect project over the finish line. We’re usually dubious when leadership magazines showcase entertainment companies as examples for how stodgier companies should innovate. Those examples tend to be full of obvious bromides (embrace your mistakes) and unrepeatable examples (try as he might, your CEO is no Steve Jobs). This interview is light on those bromides, but you can forgive the occasional bromide from a team that can create something like this:

Right now, it’s hard to escape being inundated with new headlines about the financial crisis. But amid the din of ever-changing news soundbites, it’s not easy to make sense of the bigger picture. Here are two thoughtful perspectives that can help you do just that :

•  An article in today’s New  York Times explores how a little-noticed 2004 SEC decision allowing the largest investment banking firms to take on more debt paved the way for the current crisis in the U.S. financial markets. ”We foolishly believed that the firms had a strong culture of self-preservation and would have the discipline not to be excessively borrowing,” Professor James D. Cox of the Duke School of Law told the The New York Times.  One of the investment banks that sought the deregulation in 2004? Goldman Sachs, then headed by Henry M. Paulson, Jr. – now U.S. Treasury secretary.
• But it’s a mistake to think the current financial crisis is just a result of overleverage or trouble in the housing market, according to economists Simon Johnson and Peter Boone. On their new website, The Baseline Scenario, Johnson, a professor at the MIT Sloan School of Management and Boone, an Associate at the Centre for Economic Performance at the London School of Economics, argue that the real issue is a crisis of confidence among creditors – analogous to the one that roiled emerging markets such as Thailand and Brazil in 1997 and 1998.  The Baseline Scenario offers a weekly analysis of the economic crisis, with policy recommendations – as well as updates throughout the week.

First there was open source software. Now, Scientific American reports, there’s an open source prosthetics community working on better artificial hands and arms.   The reason? In the United States, the number of amputees missing an arm or hand is too small to justify a lot of commercial research and development.  As a result, a community of users, The Open Prosthetics Project, is working to improve designs, starting with a popular design known as the “Trautman hook” whose manufacturer went out of business in the 1990s.

And, more generally, user-driven innovation has become a subject of increasing interest among academics. For example, MIT Sloan School professor Eric von Hippel has done extensive research about user innovation networks. Meanwhile, in an interview in the new Fall 2008 issue of MIT Sloan Management Review, Marten Mickos of MySQL describes how MySQL grew through open source innovation.  Mickos explains the four biggest reasons programmers contribute voluntarily to MySQL:

1. To get the product they need.                                                                  
2. To build a reputation.
3. To prove something to themselves.
4. To get satisfaction from seeing their work have effect.

User communities like the Open Prosthetics Project are a good example of motivation #1 that Mickos mentions.  

The new issue of MIT Sloan Management Review

Score one for Henry Mintzberg, the well-known management scholar and professor at McGill University. In an essay that has been posted on his website since 2007 but that now seems eerily prescient, Mintzberg predicted that 2008 would see a substantial downturn in the U.S. economy.  In his essay, Mintzberg wrote from the perspective of someone looking back at 2008: ”The American trade imbalance had been disastrous for years; the Bush administration was piling up massive budget deficits; Americans were not saving — indeed many were re-mortgaging their homes to maintain spending — while investors from abroad, particularly the government of China, were being relied upon to cover the shortfalls. It couldn’t last, the economists agreed in retrospect, and in 2008 the tipping point was reached.”

Let’s hope Mintzberg’s not also right about the aftermath of the crisis: In his commentary, he writes as someone in the future looking back  – at “the great depression that began in 2008.”  He attributes the U.S. economic problems to poor business leadership, with an excessive focus on stock prices, short-term profits and individual executive leadership. Mintzberg, who is the author of the book Managers Not MBAs, has written a number of articles for MIT Sloan Management Review, including Beyond Selfishness (2002) and The Education of Practicing Managers (2004).

The Economist this week highlights Lenovo, the Chinese computer company that some years back bought IBM’s PC business, as an example of the new era of business innovation emerging from developing economies. One interesting fact about Lenovo, The Economist notes, is that the  company has become so globally oriented that no longer has a corporate headquarters; instead, the company rotates its senior management meetings among various offices around the globe.

Could the company-without-a-country model be a wave of the future? Well-known scholar C.K. Prahalad of the University of Michigan’s Ross School of Business (and author of the influential book The Fortune at the Bottom of the Pyramid), apparently thinks so. In an article last spring for Strategy+Business, Prahalad and coauthor Hrishikesh Bhattacharyya articulate a model of a company that, rather than having one central headquarters, has “twenty hubs and no HQ.”  Such a company, the authors suggest, would be ”the modern version of an empire on which the sun never sets.”

Who has time to keep up with more social networking sites? There’s an interesting dialogue going on about that question at the New York Times’  Bits blog. Reporter Claire Cain Miller raised the question of whether new Web 2.0 applications have reached an important obstacle to greater adoption: People’s limited time.