How Nimble Companies Stay That Way
In a world of ceaseless change, how can companies ensure that their strategies will evolve as rapidly as the opportunities arising around them? A team of researchers says that the secret is flexibly organized decision-making mechanisms called Strategy Innovation Routines, or SIRs. Rarely designed deliberately by senior managers, SIRs emerge as a company struggles with crisis, and, say the researchers, companies should preserve the ingeniousness of these processes.
The researchers — Robert Chapman Wood, a post-doctoral research fellow in the organizational change program at Harvard Business School; Kenneth J. Hatten, a professor of strategy and policy at Boston University; and Peter Williamson of INSEAD's Euro-Asia Centre — examined what they call the preconditions for strategy development. The research, which was funded by Strategos, the Menlo Park-based strategy firm founded by management guru Gary Hamel, follows up an observation Hamel made in the winter 1998 issue of MIT Sloan Management Review — namely, that the strategy industry does not understand where good strategy starts.
The research, completed last summer, reveals that successful SIRs vary greatly from company to company. For example, at GE Capital, the annual strategic-planning cycle embodies key innovation routines, but that is not so at the other highly innovative companies examined. At Enron, internal teams propose new ventures to peers working in specified departments, such as legal, finance or risk management. Although this works for Enron, it may seem cumbersome to outsiders.
The crisis that spawns an SIR may result from market forces or be generated by a senior manager. Enron's crisis occurred after a major trading loss in 1987, when the company's survival was in doubt. Jack Welch deliberately generated a crisis when he assumed leadership of General Electric in 1981 and announced he would sell or close businesses whose performance did not improve. Certain leaders choose to use a crisis to “unfreeze” the organization, pushing people to address the challenge in real time.
Enron's practices illustrate how SIRs can emerge. When deregulation caused gas prices to fluctuate wildly, Enron's CEO encouraged a small team to borrow from Wall Street's risk-management techniques and offer fixed-price and inflation-indexed gas contracts to producers and buyers of gas. To avoid potentially disastrous losses, Enron created a comprehensive risk-management system. By ensuring that all possible risks had been addressed in fixed-price gas deals, the company devised a highly effective method for vetting new ideas to relevant departments in the organization. Once the system was proven, Enron leaders encouraged entrepreneurial people within the company to take other new ideas through the risk-management process to prove their viability. The result: successful innovations for long-term contracts, for trading electricity, for setting up power grids in other countries and for reorganizing the entire power-supply system for utilities. According to the researchers, planning systems that are designed “rationally” rarely mobilize a company's creativity as effectively as those emerging from a crisis.
At GE Capital, the way managers improvised their response to the original, Jack Welch-driven crisis in the early 1980s still affects how the organization innovates. GE Capital had been an unexciting finance company, providing loans for GE products such as refrigerators and locomotives. However, GE's renowned unfreezing coincided with an unusual short-term opportunity: Ronald Reagan's first tax changes to stimulate business. Managers quickly realized they could lease products to unprofitable companies and take enormous tax deductions. But the new rules were far too generous. Recognizing, in the words of former GE chief executive Gary Wendt, that “the world isn't going to be like this for long,” they set out to convert opportunistic success into long-term success. Looking for sustainable ways to make money, they discovered that other firms were succeeding by identifying types of service that customers needed along with financing. So GE Capital also began to offer financing with related services, such as the leasing of trailers at construction sites, fleets of autos and aircraft.
When interviewed 17 years later, Wendt still referred to the leasing story as “the best example” of GE Capital's way of innovating. The experience established a style of opportunistically exploiting GE Capital's tight operating discipline. After its first leasing experience clarified the firm's goal, GE Capital created opportunities in the planning cycle for improvising in similar ways and dedicated business-development groups to finding similar opportunities. These are now innovation routines.
In all cases studied, the keys to SIR success were unfreezing inertia, innovating outside existing routines and then repeating processes that worked. Senior managers were not assured of the outcomes —but they knew they needed new solutions. And they got them.