The innovation machine

IN HIS new book, “Still Surprised: A Memoir of a Life in Leadership”, Warren Bennis, a management theorist, tells a story about Sigmund Freud's flight from Vienna to London in 1938. On arriving in his new home Freud asked Stefan Zweig, a fellow Viennese intellectual, what it was like. “London? How can you even mention London and Vienna in the same breath?” Zweig thundered. “In Vienna there was sperm in the air!”

Today there is no hotter topic in management theory than “sperm in the air”. How do companies generate new ideas? And how do they turn those ideas into products? Hardly a week passes without someone publishing a book on the subject. Most are rubbish. But “The Other Side of Innovation: Solving the Execution Challenge” is rather good. Its authors are Vijay Govindarajan and Chris Trimble, two professors at the Tuck School of Business at Dartmouth College. Last year Mr Govindarajan and Mr Trimble (hereafter: G&T) published a seminal article, with Jeff Immelt, the head of General Electric, on frugal innovation. In their new book they address two subjects that are usually given short shrift: established companies rather than start-ups and the implementation of new ideas rather than their generation.

The fashion these days is to focus on the supply side of innovation: for example, by encouraging everyone to think big thoughts. 3M, the maker of Post-it notes, expects its workers to spend 15% of their time on their own projects. Google expects them to spend 20%. This approach is attractively democratic: by giving everyone a chance to innovate, it makes everyone feel special. Or so the theory goes. G&T are ready with the cold water. The let-them-loose approach spreads resources thinly and indiscriminately. Companies dissolve into a thousand small initiatives rather than focusing on a few big problems. It also produces far too many ideas: managers have to spend weeks sorting through the chaff to find a few grains of wheat.

A second approach focuses on closing the loop between ideas and results. Nucor Corporation, a steelmaker, gives its workers bonuses if they can produce steel more efficiently. Deere & Company, a maker of farm machinery, has produced a detailed playbook on how to design new tractors. G&T concede that this approach is an excellent way of making incremental improvements to existing products and processes, but suggest that it has little chance of producing a big breakthrough.

G&T say that you need to start by recognising that innovation is unnatural. Established businesses are built for efficiency, which depends on predictability and repeatability—on breaking tasks down into their component parts and holding employees accountable for hitting their targets. But innovation is by definition unpredictable and uncertain. Bosses may sing a pretty song about innovation being the future. But in practice the heads of operational units will favour the known over the unknown.

Many would-be innovators deal with the trade-off between efficiency and innovation by rejecting traditional management entirely. They repeat mantras about “breaking all the rules” and “asking for forgiveness rather than permission”. They set up skunk works (small, autonomous units with a remit to innovate) and mock the boring corporate types who write their pay-cheques. But again this is counter-productive. Mocking the corporate establishment only encourages it to starve you of resources. And producing ideas in isolated skunk works ignores the basic reason for working for a big company in the first place—to use its superior resources to supercharge what you are doing.

G&T argue that companies need to build dedicated innovation machines. These machines need to be free to recruit people from outside (since big companies tend to attract company men rather than rule-breakers). They also need to be free from some of the measures that prevail in the rest of the company. But they must avoid becoming skunk works. They need to be integrated with the rest of the company—they must share some staff, for example, and they must tap into the wider company's resources as they turn ideas into products. And they must be tightly managed according to customised rather than generic rules. For example, they should be held accountable for their ability to learn from mistakes rather than for their ability to hit their budgets.

Brake-out groups

G&T offer several examples of successful innovation machines. Harley-Davidson, a firm whose customers tend to be fiercely loyal, was struggling to woo new ones. So it created a group to come up with ideas for attracting beginner motorcyclists, such as safety courses and rental programmes. BMW, a carmaker, realised that its established system for producing brakes might be a hindrance when it came to designing brakes for hybrid vehicles (which benefit from capturing wasted energy and putting it back to work). So it set up an innovation team in which battery specialists regularly talked to brake specialists. Allstate, an American insurance company, noted that insurers had come to accept widespread customer dissatisfaction as a fact of life. So it asked marketers to help risk-adjustment specialists to design car insurance. They came up with industry-changing ideas such as accident forgiveness and cash rewards for good driving.

G&T undoubtedly get carried away with their model. Innovation machines come in many shapes and sizes. Sometimes it is wiser to buy something than to make it yourself. Unilever, for example, would not have invented “Chubby Hubby” ice-cream if it had not bought Ben & Jerry's. But G&T are nonetheless right to argue that students of innovation must pay more attention to big companies. They have the muscle to chase big prizes, from alternative fuels to clean drinking water. But they need to learn how to conquer new territories while continuing to cultivate old ones.

Economist.com/blogs/schumpeter