Behavioral Issues In

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CHAPTER - IX

BEHAVIORAL ISSUES IN

BUSINESS MODEL INNOVATION

Introduction

A recent study by PWC Consulting[1] of innovation in corporations with an annual turnover of $1 billion or more, reveals that the market capitalization of those companies deriving 80 percent or more of their turnover from products and services less than five years old, at least doubled during this period. On the other hand, the market capitalization of those companies producing 20 percent or less of their turnover from new products and services during the same five years remained static or fell. Clearly, the rewards of successful innovation are evident.

Yet most organizations find it difficult to innovate. The reason in many cases is not lack of resources, but a wrong mindset. In this chapter, we try to examine the behavioral issues, which established players need to come to grips with, to stay ahead in the innovation game. The focus is on established players where issues like culture and coping with change are more relevant. Behavioral issues are less important in the case of startups which do not have any baggage and the type of mindset problems which bigger, successful companies have.

The challenge for companies is to create an innovation driven culture, balancing creativity with discipline. Employees must be given sufficient latitude to try out new things, challenging conventional wisdom when necessary. Not only must new ideas be generated but also the promising ones must be implemented quickly.

The essence of an innovative business model is execution. An idea which is great on paper is of little use if it is not commercially exploited to create value. As Tushman and O’Reilly III[2] have explained, “Strategic clarity is alone not adequate. Many competitors have similar visions, strategies. Success comes not from articulation of vision, strategy and objectives but from their execution. To succeed, managers need to build organizations that are capable of accomplishing their strategic objectives more rapidly than their competitors… Innovation results from creative ideas successfully implemented.”

Often, the quantum of R&D spending is used as a yardstick to gauge a company’s commitment to innovation. But the PWC survey has found that R&D spending alone does not guarantee innovation. Low-performing companies, often spend much more money on research and development than their high performing counterparts, typically up to 3% of sales, compared with 1.2% for the higher performers. But the output in terms of both generation of new ideas and their implementation is inadequate. In high-performing companies, innovation is an enterprise wide habit, where anyone can come forward with an idea and expect it to be considered seriously. High-performing companies also have lower barriers to turning ideas into action.

Clearly, the cultural factors associated with innovation must not be underestimated. This chapter discusses what companies can do to shape a culture that thrives on innovation.

Getting around the obstacles

According to Constantinos Markides[3], established players face four types of obstacles when managing innovation:

• When we are having a good time and we are making money, why should we change?
• Even if we are prepared to change, what should we change into?
• How do we know that something new we are attempting, will turn out to be a winner?
• Even if we decide to jump, how can we be sure that employees will jump with us?

According to Markides, “Advising companies to question their way of playing the game and think of alternative ways, especially when they are successful, is fruitless. They simply do not do it, even though they know and agree with the principle. It’s like advising people that they should not wait to get sick before visiting a doctor, but that they should do so every few months. Although most human beings agree with these sentiments, few actually do it. The same is true with companies: even though few managers disagree with the need to fundamentally question the way they do business before a crisis strikes, few do it.”

To overcome these obstacles, companies must monitor not only their current financial health but also their future strategic health. From time to time, they must create a crisis to galvanize the company into active thinking. They must also change the conventional top-down strategic planning process. They must institutionalize an attitude that questions basic assumptions. Successful innovators incorporate the essential features of the capitalist system into their organizations. They create internal variety often at the cost of efficiency and then allow the outside market to decide the winners and losers. To overcome internal resistance from people threatened by a change in status quo, such companies also set up a separate organizational unit to support the new initiative and shelter it from the mainstream bureaucracy.

Avoiding defensive routines

Only learning organizations can innovate on a sustained basis. All CEOs talk about building learning organizations. But few succeed because employees are not sufficiently oriented to the challenges involved. Employees must have the capability to explore complex and subtle issues, by listening to the views of others carefully. They must know how to deal with defensive routines which protect people from threat and embarrassment but block learning. The source of defensive reasoning is the thinking that lies behind our views. Defensive reasoning protects people from learning about the validity of their reasoning. Exposing their reasoning is threatening to employees because they are afraid others will find errors in it. The perceived threat from exposing their thinking starts early in life and for most people, is steadily reinforced in school and later in work. The more effective, defensive routines are, the more effectively they cover up the underlying problem and make it difficult for employees to embrace new ideas. Defensive routines should be challenged by inquiring deeply into the problems at hand, by revealing one’s assumptions and reasoning, by making them open to influence and encouraging others to do likewise. A shared vision and a commitment to telling the truth about the current reality are needed to get around defensive routines. Companies where defensive reasoning is common among employees, will find it difficult if not impossible to innovate.

Managing Mental Models

The mental models of employees often retard the process of innovation. Over time, employees in an organization tend to develop mental models, that are manifested in the culture, routines and unwritten rules of behavior. The dominant mental models condition the behavior of an organization. Mental models help employees to process information and make decisions quickly and are useful in many situations. But, they also make employees think passively, as information processing becomes routine. Moreover, when the mental models are strong, employees tend to hear and see what supports their existing beliefs and reject new information which seems to contradict these beliefs. New insights are not taken seriously and implemented because they conflict with deeply held internal images of how the world works. Mental models are all the more problematic because people are often not aware of them.

An organization must be able to deal effectively with mental models, if it wants to be good at innovation. To manage mental models, organizations must help employees develop skills of both reflection and inquiry. People’s minds tend to move very fast and leap to generalizations. They abstract from particulars and substitute simple concepts for many details. This abstraction limits learning when employees are unaware of the leaps from particulars to general concepts. As Peter Senge[4] has put it, “Leaps of abstraction occur when we move from direct observations to generalization without testing. Leaps of abstraction impede learning because they become axiomatic. What was once an assumption becomes treated as a fact.” Leaps of abstraction can be spotted by asking some basic questions. What do you believe about the way the world works? How have you arrived at the generalization? Could this generalization be inaccurate or misleading?

Until employees become aware of the leaps of abstraction, they may not realise the need for inquiry. So practicing reflection as a discipline is extremely important. Employees must also have a better grip on how their mental models operate in particular conditions. They can do this through what Senge calls the left-hand column exercise. Here one can write down on the left column, what he is thinking and on the right column, what is actually said. This exercise can bring hidden assumptions to the surface. It will reveal ways by which we manipulate situations to avoid dealing with how we actually think and feel.

The most dominant mental model in a company is its perception of what business it is in. This definition determines the way the company operates. But unfortunately, the definition may have been framed several years back and lost its relevance. By reexamining the definition of the business, a company can broaden its horizon and understand the possibilities which exist, even if a better way to compete cannot be immediately identified.

According to Hayashi[5], “various traits of human nature can easily cloud our decision making… (Another) potential pitfall is our tendency to see patterns where none exist. That our gut instincts are often wrong is exacerbated by the factors that prevent us from realizing just how faulty our intuition can be.” Hayashi mentions the tendency to invest more heavily to support a decision (the self fulfilling prophecy), and overconfidence in our own ability.

The importance of systems thinking

Peter Senge emphasizes the importance of systems thinking in solving business problems. Business endeavors are systems. But we tend to focus on isolated parts of the system. Systems thinking makes the full pattern clearer and helps us to see how to change it effectively. Systems thinking involves a shift in mindset to seeing inter-relationships rather than linear cause-effect chains. It involves seeing processes of change rather than snapshots. Systems thinking helps us to see the deeper patterns lying behind the events and details. It makes us aware of compensating feedback. For example, when a product starts doing badly, more money is typically invested in advertising. This reduces profit margins. To compensate, the company may dilute the product quality. According to Senge, we wrongly assume that cause and effect are closely related in time and space. Thus, if there is a problem in the manufacturing line, we look for a cause within manufacturing. If sales targets are not being met, we come up with new sales incentives and sales promotions. More often than not, innovation is a matter of identifying where by introducing a small amount of change, a lasting, significant improvement can be achieved. Systems thinking represents a refreshingly different approach to doing business. Companies which believe in systems thinking are more likely to come up with useful new ideas. Systems thinking must be taken seriously to encourage an innovation driven culture.

Encouraging new ideas

Most big organizations are designed for maximizing operational efficiency: to get the work done, control performance, spot problems, and focus on short term financial performance. The structures, processes, and systems that maintain order within the company cut off the generation of good ideas and block their movement through the organization.

Many CEOs attempt to drive innovation in their organizations by setting audacious goals, writing new vision statements, delivering speeches and launching change initiatives. They devise complicated incentive programs, rules, checklists, policies and procedures. But in the process, they unwittingly add layers of bureaucracy which in turn promotes predictability and conformity.

One of the best ways of stimulating creativity is by encouraging employees to have a strong personal vision and life goals. At the same time, they should be made to realise where they are currently. The gap between vision and current reality can act as a source of creative energy. Senge refers to this as creative tension. When we master creative tension, the current reality becomes our ally, not our enemy. A truly creative person is fully aware that he is working within constraints. He is very much aware of the ground reality. So, he constantly looks for ways to improve, by staying alert and keeping eyes and ears open to new ideas.

According to Nonaka[6], “The essence of innovation is to recreate the world according to a particular vision or ideal. To create new knowledge means quite literally to recreate the company and everyone in it in a non-stop process of personal and organizational self-renewal.” Nonaka emphasizes that the key to progress is personal commitment, the employees’ sense of identity with the enterprise and its mission. Only personal commitment can result in the meaningful use of the subjective insights, intuitions and hunches of individual employees for the benefit of the organization. Personal commitment becomes especially important in the process of converting tacit knowledge into explicit knowledge and vice versa.

Jim Collins, the famous strategy guru and the author of “Good to Great” suggests the need for catalytic mechanisms to spur innovation. A catalytic mechanism produces desired results in unpredictable ways byredistributing power across the system, often to the great discomfort of those who have traditionally wielded power. It forces the “right” things to happen even though those in power often have a vested interest in preventing them from happening. A catalytic mechanism challenges bureaucratic tendencies and encourages individual initiative.

3M, one of the most innovative companies in the world, has always believed in the consistent development of new innovative products. In 1956, the company instituted a catalytic mechanism. Scientists were urged to spend 15% of their time doing experiments in the area of their own choice. But no one was told what products to work on. The loosening of controls led to a stream of successful new products. Most traditional controls are designed to get employees to act the "right" way and do the "right" things, even if they are not so inclined. Catalytic mechanisms, focus on getting the right people, energizing them with the company’s vision and leaving them free to work on their own.

If idea generation is accepted as an important activity, organizations must have a basic understanding of the type of people to attract and encourage and the type of training to impart. Davenport, Prusakand Wilson[7], have profiled people who are good in contributing new ideas. Idea practitioners, as they call such people, are heavy readers, take part in conferences and have an open mind. They tend to be optimistic and self confident. They bring an inter disciplinary perspective while solving business problems. They do not just generate ideas but think how they fit the needs of the organization. Idea practitioners find early adopters and attempt to convince leaders and managers about the new idea. And most importantly, idea practitioners are good at implementation. They understand the importance of change management, which lies at the heart of the innovation process. They realise that implementing new ideas in organizations often has political implications. So they build personal networks within their organizations and know whom to enlist in their efforts. These networks help them to make a direct pitch to the CEO, when required. Organizations must encourage idea practitioners, give them a meaningful role, provide them latitude and reward them for their contribution.

Middle managers have a crucial role to play in screening new ideas within an organization. They play the role of gatekeepers between the junior and senior levels of management. As Christensen and Raynor[8] put it, the job of middle managers “is to sift the good ideas from the bad and to make good ideas so much better that they readily secure funding from senior management.” But middle managers have an understandable bias. They tend to support ideas where the market seems assured. They make an evaluation of the size of the market, typically by seeking opinion from existing customers or by examining markets for similar products. In their anxiety to ensure their own career advancement, middle managers are unlikely to take much risk. They are more inclined to support tried and trusted ideas, not those which represent unconventional thinking or a clear break with the past.

Balancing creativity with discipline

If creativity is important, taking the new idea to the market place is even more so. Most organizations emphasise creativity. But few of these companies are clear about how to implement new ideas speedily and effectively.

According to the famous marketing guru, Theodore Levitt[9] in any modern organization, there is really very little shortage of creativity and of creative people. The major problem is that so-called creative people often shirk the responsibility of implementation to others.