Organizational Learning — The Key to Management Innovation

FOR MORE THAN fifteen years, Analog Devices grew consistently at a rate of about 25 percent per year. Then for the first time, between 1982 and 1987, we missed our five-year goals — and by a country mile. True enough, like other semiconductor companies we were affected by the malaise in the U.S. electronics industry and by the strong dollar. But the external environment was only part of the problem: something was also wrong internally, and it had to be fixed.

But what was the problem? We had the largest share of our niche market in high-performance linear integrated circuits. We had the best designers and technologists in our business. We had excellent relations with a highly motivated workforce. We were not guilty of underinvestment, nor of managing for short-term profits. The only conclusion was that there was something about the way we were managing the company that was not good enough. So I set about to understand what was wrong and how to make it better.

In the 1980s, our plight was not uncommon in corporate America. Companies that for decades enjoyed world leadership in their markets were being brought to their knees. Of course, there are many purported reasons for the loss of U.S. competitiveness. The high cost of capital, an overvalued dollar, a deteriorating education system, overconsumption at the expense of investment, government regulations, misplaced emphasis on military as opposed to economic security, and undisciplined government spending certainly all contributed to this decline. However, many who have studied the situation believe that the root of the problem is our declining rate of innovation. If this is true, then the challenge lies in better understanding innovation and in determining how to do more of it.

Usually we think of innovation in terms of technologies that give rise to a new class of products or to improvements in the design and manufacture of existing products. But at Analog Devices, and many other U.S. companies, product and process innovation are not the primary bottleneck to progress. The bottleneck is management innovation.

Peter Drucker points out that the rise to industrial dominance of Great Britain, Germany, and the United States was based on technological innovation in engines, electricity, chemistry, aviation, agriculture, optics, and so forth.1 Japan is the first nation whose rise to industrial power was clearly based on management innovation, not technological innovation in the traditional sense.