Improvisations

One of the challenges to successful management or process innovation in an existing business is the array of organizational structures that are designed to keep current processes running smoothly – and, as a result, may resist changes.  In a recent blog post on The Wall Street Journal site, management thinker Gary Hamel offers a case study about an employee empowerment initiative at The Bank of New Zealand that illustrates this point well.

Hamel describes how, when the bank’s general manager for retail banking allowed one bank branch to set its own hours, word spread to other branches — and other managers soon also wanted to set their own branch opening and closing hours, to suit the needs of local markets. The general manager agreed to give the branch managers that freedom.

The challenge?  At headquarters, this change in policy resulted in concerns from HR, risk management, IT and corporate marketing. “While many of the objections [from headquarters functions] were more political than practical, some were well-grounded and soon led to policy adjustments,”  Hamel observes.  For example, to avoid objections from the bank’s union, branch managers were required to get employees’ agreement before changing a branch’s opening hours.

Hamel’s post is well worth reading, and it contains an implicit lesson for would-be management innovators in established companies: Keep in mind that, if you unleash change, institutional forces may resist it — and you may need to compromise with them and work with them.

Vijay Govindarajan

How should companies think about innovation during a downturn like this one? Vijay Govindarajan, an expert on innovation and strategy from the Tuck School of Business at Dartmouth, thinks that businesses should be careful not to  abandon innovation in their quest for efficiency and cost control during a recession — but they may need to reduce their focus on risky breakthrough innovation plans. 

How should a company strike that balance? In  an interview published today  as part of Business Insight, MIT Sloan Management Review’s collaboration with The Wall Street Journal, here’s what Govindarajan suggested:

“I distinguish between two types of innovation: adjacency innovation, which is a little less risky because you are innovating in a business area adjacent to your existing core business, and breakout innovation, where you are going multiple steps outside of your core business. In a normal time, I would say spend about 50% of company resources on the core business and about 50% on adjacency and breakout innovation—perhaps 35% on adjacency innovation and maybe 15% on breakout innovation.

But during times like this, the percentages shift. I would shift to spending more like 70% on the core business and perhaps 25% on adjacency innovations—and maybe 5% on really breakout innovation. The investment in innovation in adjacency areas probably doesn’t change much, but you shrink some of the spending on real breakout innovation. The reason is: Breakout innovations are high-risk and high-payoff. And one thing you cannot afford during this economic crisis is to make a serious mistake.”

You can read more about Govindarajan’s thoughts on innovation and strategy during the downturn in the new edition of Business Insight.

Andrea Ordanini takes an interesting look at “crowd funding” in the latest edition of Business Insight. What’s crowd funding? It’s the emerging practice of consumers investing small amounts of money (as little as $1) in products they fancy by musicians or fashion designers. It’s yet another form of community activity facilitated by the Internet.

However, don’t expect an explosion of consumer-funded start-up businesses. Ordanini notes that the “crowd funding” process “works best with products for which customers feel a strong personal attachment — products like music and designer goods. Without that bond, customers are unlikely to support a product beyond simply buying it.”

Last week I blogged about an executive who thinks that environmental sustainability initiatives helped his company survive the last recession. Now, this week, here’s another example of a company reporting economic benefits from environmentally sustainable practices.

The new edition of Business Insight, which MIT Sloan Management Review produces in collaboration with The Wall Street Journal, contains a fascinating case study of a Subaru plant in Indiana that has found that reducing its environmental impact saves money.  For example,  the company says that it has reduced electricity-per-car consumption 14% since 2000. (Researchers Alan G. Robinson and Dean M. Schroeder report that they confirmed the company’s claims.)

The article goes into interesting detail — including a passage about how Subaru employees explored the contents of the company’s dumpsters to figure out ways to reduce waste. The most substantial cost-saving impacts, according to Subaru? “Where the biggest savings have been achieved, in descending order: reducing waste by revising processes, conserving energy; and working with suppliers.”

This week’s official launch of Tata’s Nano — the world’s most inexpensive car – represents not  only an innovation — but perhaps also a harbinger of more innovations in the future. The Christian Science Monitor reported: 

 Indeed, it’s the middle class in poor nations who will be the focus of innovation for years to come, much as the Internet has spawned new businesses over the past 15 years, says Vijay Govindarajan, professor at Dartmouth College’s Tuck School of Business. “Innovating in these countries does require a fundamental shift in the price paradigm,” says Dr. Govindarajan.

Related links:

• Govindarajan has published several articles in MIT Sloan Management Review,  on topics such as strategic innovation and building an effective global team.
• For more on lessons Western companies can learn from companies in developing countries, see “Surviving the Downturn: Lessons From Emerging Markets” in the current issue of Business Insight, which is a collaboration between MIT Sloan Management Review and The Wall Street Journal.

 It’s not uncommon to hear experts suggest that recessions are good for innovation — in part because hard times encourage new thinking. John Chambers, Cisco’s chair and CEO, goes even further. Earlier this month, in a Wall Street Journal column, he described  the current economic situation as “the biggest opportunity of our lifetime.” (Wall Street Journal subscription required to access full article.)

Why?  Not surprisingly, Chambers found the idea of a U.S. government stimulus package that includes spending targeted for broadband infrastructure promising. But more generally, Chambers thinks the economic crisis could accelerate the trend away from traditional top-down management and toward collaborative innovation, enabled by technology.  Wrote Chambers:

“We now have the opportunity to re-invent the way we manage companies and get work done…To be successful in a 24/7 global world, managers must give up on the idea that all decision-making must run through them and must discard the silo approach to developing and executing on strategy.”

As the downturn continues, some technology start-up companies are closing or being acquired at low prices, The Wall Street Journal reports. That, along with a reported decrease in angel investing, raise questions about the environment for innovation.

But the news isn’t all bad. The San Jose Mercury News recently highlighted entrepreneurial companies that are growing despite the economy, in sectors such as online video, software as a service (SaaS) and open source software. One key to getting venture capital now? Offering a business model that will save money for customers, according to The New York Times ”Bits”  blog. And there’s always the possibility of eschewing venture capital entirely:

• Xconomy.com reports on a biotech start-up that has launched without outside investors – in a sector where that’s tough to do. (The entrepreneur instead obtained research contracts from established companies.)
• Start-up expert Guy Kawasaki offers ten bootstrapping tips for self-financing your start-up.

The Wall Street Journal today contains an interesting article about companies that map their organizations’ informal communication networks in an effort to improve communication and productivity.  Readers of MIT Sloan Management Review will be familiar with this line of research, known as social network analyis: Rob Cross, who was quoted in The Wall Street Journal article, coauthored an article on this topic (“How ‘Who You Know’ Affects What You Decide,” with Robert J. Thomas and David A. Light) in the Winter 2009 issue of MIT Sloan Management Review. 

Cross also was one of the authors of “Six Myths about Informal Networks — and How to Overcome Them,” a classic primer on using social network analysis in business that appeared in MIT Sloan Management Review in 2002.

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?

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.

According to a June 13th article in The Wall Street Journal, some companies are starting to reexamine their decision to outsource production to China — because rising oil costs make the transportation of goods across the globe more expensive.

That’s a phenomenon Michael J. Mol might call a shift of the outsourcing curve. Mol, a senior lecturer at the University of Reading Business School, suggests in his book Outsourcing: Design, Process and Performance (discussed in the forthcoming Summer 2008 issue of MIT Sloan Management Review) that, if you could graph the relationship between a company’s possible outsourcing levels (on a horizontal axis) and the resulting business performance (on a vertical axis), the graph would look something like an upside-down U — at some optimum point the organization is outsourcing an ideal amount, at the high point of the curve, where the performance benefits are maximized. Outsource too much or too little — and the company’s resulting performance is farther down the curve and less than optimal.

But, Mol notes in his book, things like changes in transportation costs can shift a company’s outsourcing curve. And, when a company’s outsourcing curve shifts the business’s optimal level of outsourcing will change.

Case in point.