Excerpted from "The Future of Management," by Gary Hamel with Bill Breen. Look for new excerpts weekly.

In a world where strategy life cycles are shrinking, innovation is the only way a company can renew its lease on success. It’s also the only way it can survive in a world of bare-knuckle competition.

In decades past, many companies were insulated from the fierce winds of Schumpeterian competition. Regulatory barriers, patent protection, distribution monopolies, disempowered customers, proprietary standards, scale advantages, import protection, and capital hurdles were bulwarks that protected industry incumbents from the margin-crushing impact of Darwinian competition. Today, many of these fortifications are collapsing:

• Deregulation and trade liberalization are reducing the barriers to entry in industries as diverse as banking, air transport, and telecommunications.

• The power of the Web means upstarts no longer have to build a global infrastructure to reach a worldwide market. This has allowed companies like Google, eBay, and MySpace to scale their businesses freakishly fast.

• The disintegration of large companies, via de-verticalization and outsourcing, has also helped new entrants. In turning over more and more of their activities to third-party contractors, incumbents have created thousands of “arms suppliers” that are willing to sell their services to anyone. By tapping into this global supplier base of designers, brand consultants, and contract manufacturers, new entrants can emerge from the womb nearly full-grown.

• Incumbents must also contend with a growing horde of ultra-low-cost competitors—companies like Huawei, the Chinese telecom equipment maker that pays its engineers a starting salary of just $8,500 per year. Not all cut-price competition comes from China and India. Ikea, Zara, Ryanair, and AirAsia are just a few of the companies that have radically reinvented industry cost structures.

• Web-empowered customers are also hammering down margins. Before the Internet, most consumers couldn’t be sure whether they were getting the best deal on their home mortgage, credit card debt, or auto loan. This lack of enlightenment buttressed margins. But consumers are becoming less ignorant by the day. One U.K. Web site encourages customers to enter the details of their most-used credit cards, including current balances, and then shows them exactly how much they will save by switching to a card with better payment terms.

• In addition, the Internet is zeroing-out transaction costs. The commissions earned by market makers of all kinds—dealers, brokers, and agents—are falling off a cliff, or soon will be.

• Distribution monopolies—another source of friction—are under attack. Unlike the publishers of newspapers and magazines, bloggers don’t need a physical distribution network to reach their readers. Similarly, new bands don’t have to kiss up to record company reps when they can build a fan base via social networking sites like MySpace.

Collapsing entry barriers, hyperefficient competitors, customer power—these forces will be squeezing margins for years to come. In this harsh new world, every company will be faced with a stark choice: either set the fires of innovation ablaze, or be ready to scrape out a mean existence in a world where seabed labor costs (Chinese prisoners, anyone?) are the only difference between making money and going bust.

Given this, it’s surprising that so few companies have made innovation everyone’s job. For the most part, innovation is still relegated to organizational ghettos—it is still the responsibility of dedicated units like new product development and R&D, where creative types are kept safely out of the way of those who have to “run the business.”

Today innovation is the buzzword du jour, but there’s still a yawning chasm between rhetoric and reality. If you doubt this, seek out a few entry-level employees and ask them the following questions:

1. How have you been equipped to be a business innovator? What training have you received? What tools have you been supplied with?

2. Do you have access to an innovation coach or mentor? Is there an innovation expert in your unit who will help you develop your breakout idea?

3. How easy is it for you to get access to experimental funding? How long would it take you to get a few thousand dollars in seed money? How many levels of bureaucracy would you have to go through?

4. Is innovation a formal part of your job description? Does your compensation depend in part on your innovation performance?

5. Do your company’s management processes—budgeting, planning, staffing, etc.—support your work as an innovator or hinder it?

Don’t be surprised if these questions provoke little more than furrowed brows and quizzical looks. Truth is, there are not more than a handful of companies on the planet that have, like Whirlpool, built an all-encompassing, corporatewide innovation system.

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Excerpted from "The Future of Management," by Gary Hamel with Bill Breen. Look for new excerpts weekly.

There’s little that can be said with certainty about the future except this: sometime over the next decade your company will be challenged to change in a way for which it has no precedent. It will either adapt or falter, reinvent itself or struggle through a painful restructuring. Given the recent performance of industry incumbents around the world, the latter is more likely than the former. Few companies, it seems, are able to change ahead of the curve.

There have always been dinosaurs—companies like Kodak, Sony, Sears, General Motors, Toys “R” Us, and Sun Microsystems—that have failed to reinvent themselves on a timely basis and have paid the price.

Yet in recent years, entire industries have been caught behind the change curve. Television broadcasters and newspaper publishers, record companies and French vintners, traditional airlines and giant drug companies, American carmakers and European purveyors of haute couture—all have been struggling to rejuvenate seriously out-of-date business models.

Sure, many of the companies in these industries will regain their footing—eventually. But in the meantime, billions of dollars and millions of customers will be lost. Such is the price of maladaptation.

What accounts for this epidemic of senescence? Is it that executives around the world have suddenly become dull-witted? Unlikely. If once-immortal business models are abruptly going toes-up, it’s because the environment has changed—and what has changed most remarkably is change itself. What distinguishes our age from every other is not the world-flattening impact of communications, not the economic ascendance of China and India, not the degradation of our climate, and not the resurgence of ancient religious animosities. Rather, it is a frantically accelerating pace of change.

Over the coming decades the adaptability of every society, organization, and individual will be tested as never before. Luckily, perturbations create opportunities as well as challenges. But the balance of promise and peril for any particular organization depends on its capacity for adaptation. Hence the most critical question for every 21st-century company is this: Are we changing as fast as the world around us? As we’ve already seen, the answer for many companies is “no.”

While executives readily acknowledge that products and services need to be periodically refreshed, they often assume that strategies, business models, competencies, and core values are more-or-less immortal. Such an assumption is increasingly foolhardy. Companies miss the future when they mistake the temporary for the timeless; and today, just about everything is temporary.

A review of the extensive library on managing change reveals a disturbing fact. Nearly all the accounts of deep change—entailing big shifts in a company’s business model or core mission—are stories of turnarounds, with a new CEO typically cast as the hero. It seems that deep change is nearly always crisis-led, episodic, and programmatic—accomplished through a top-to-bottom cascade of tightly scripted messages, events, goals, and actions. Sadly, it is rarely opportunity-led, continuous, and a product of the organization’s intrinsic capacity to learn and adapt. While one can celebrate Lou Gerstner’s turnaround at IBM, Carlos Ghosn’s Lazarus-like resurrection of Nissan, or Rosemary Bravo’s revitalization of the Burberry fashion brand, a turnaround is transformation tragically delayed—an expensive substitute for well-timed adaptation.

The goal, then, is to build organizations that are capable of continual, trauma-free renewal. An apt analogy is found in the body’s autonomic systems. When you step on a treadmill and start to jog, your heart automatically increases the blood supply to your muscles. When you stand up in front of an audience to speak, your adrenal gland spontaneously pumps out a hormone that accelerates your heart rate and heightens your faculties. And when you glance at someone who is physically attractive to you, your pupils dilate reflexively, drinking in the agreeable visage. Automatic. Spontaneous. Reflexive. These aren’t the words we typically use to describe deep change in large organizations. And therein lies the challenge: to make deep change more of an autonomic process—to build organizations that are capable of continuous self-renewal in the absence of a crisis.

Many factors contribute to strategic inertia, but three pose a particularly grave threat to timely renewal. The first is the tendency of management teams to deny or ignore the need for a strategy reboot. The second is a dearth of compelling alternatives to the status quo, which often leads to strategic paralysis. And the third: allocational rigidities that make it difficult to redeploy talent and capital behind new initiatives. Each of these barriers stands in the way of zero-trauma change; hence each deserves to be a focal point for management innovation.

Visit the Gary Hamel home page

MORE ON CHANGE MANAGEMENT:
Adaptive Enterprise: Creating and Leading Sense-and-Respond Organizations (Hardcover)
Lead Change--Successfully, 3rd Edition (HBR Article Collection)
What You Really Need to Know About Change (HBR Article Collection)
The Future of Management (Hardcover)

Excerpted from "The Future of Management," by Gary Hamel with Bill Breen. Look for new excerpts weekly.

If management innovation has been mostly incremental in recent years, it may be due to a lack of daring in the choice of problems to tackle. Ask yourself, has your company ever taken on a management challenge that was truly unprecedented, where you couldn’t rely on another company’s experience as a guide? General Electric has.

In 2006, chairman Jeff Immelt set his colleagues the goal of growing GE’s top line at twice the rate of global GDP growth—net of acquisitions. No company of GE’s size has ever managed to sustain this sort of growth, yet that didn’t deter Immelt from taking on the challenge. There’s no guarantee that GE will achieve its growth goals, but if it fails, it won’t be for a lack of moxie

While big problems don’t always yield big advances, small ones never do. As the Nobel Prize–winning zoologist Sir Peter Medawar once put it: “Dull or piffling problems yield dull or piffling answers.” So you’re going to need to think big.

If you are worried about biting off more than you can chew, keep two things in mind. First, you don’t always have to take big risks to solve big problems. Innovation is usually an iterative process where solutions emerge through trial and error. In the early years of the U.S. space program, scientists sent more than ten monkeys into space before strapping a human being to a rocket. You don’t have to take a big gamble to test out a bold new management idea.

Second, if the problem is big enough, progress of any sort will be valuable, even if you never find a “solution.” I once heard former U.S. Secretary of State George Shultz draw a distinction between “problems you can solve” and “problems you can only work at.” As a seasoned diplomat, Shultz knows that some problems, like ethnic strife, global poverty, and terrorism, defy once-and-for-all solutions. Yet he also understands that when you’re up against problems of this scale and significance, even modest advances can yield big dividends. It may turn out that many of the 21st century’s most perplexing management problems are ones we can only work at—they will resist attempts at a quick fix, but will reward persistent, imaginative effort.

It takes ingenuity, pluck, and perseverance to solve big problems. These human qualities are most abundant when the problem to be addressed is not only weighty but soul-stirring as well. As a devout Quaker, Frederick Taylor’s single-minded devotion to efficiency stemmed from a conviction that it was iniquitous to waste even an hour of human labor when a task could be redesigned to be performed more efficiently. That Taylor could spend days studying the most productive ways to shovel coal was evidence not only of an obsessive mind, but of a missionary zeal for multiplying the value of human effort. This passion shines through in the introduction to his 1911 opus, Principles of Scientific Management: “We can see and feel the waste of material things. Awkward, inefficient, or ill-directed movements of men, however, leave nothing visible or tangible behind them. Their appreciation calls for an act of memory, an effort of the imagination. And for this reason, even though our daily loss from this source is greater than from our waste of material things, the one has stirred us deeply, while the other has moved us but little.”

Given Taylor’s singularly influential role in the history of management, we would do well to heed his example: to maximize the chances for precedent-breaking management innovation, devote yourself to a problem that is consequential and inspiring, essential and laudable.

If you don’t already have such a challenge in mind, here are a few leading questions that will help you focus your search:

• First, what are the new challenges the future has in store for your company? What are the emerging discontinuities that will stretch its management processes and practices to the breaking point? What’s the “tomorrow problem” that you need to start working on right now?

• Second, what are the tough balancing acts your company never seems to get right? Is there a critical trade-off where one side always seems to prevail at the expense of the other? What’s the frustrating “either/or” you’d like to turn into an “and”?

• Third, what are the biggest gaps between rhetoric and reality in your company? What are the values it has the hardest time living up to, or finds the most difficult to institutionalize? What’s the espoused ideal you’d like to turn into an embedded capability?

• Finally, what are you indignant about? What are the frustrating incompetencies that plague your company and other organizations like it? What’s the “can’t do” that needs to become a “can do”?

Visit the Gary Hamel home page

MORE ON MANAGEMENT AND INNOVATION:
The Future of Management (Hardcover)
Staying Ahead of Your Competition (HBR Article Collection)
Payback: Reaping the Rewards of Innovation (Hardcover)
The Why, What, and How of Management Innovation (HBR Article)

Excerpted from "The Future of Management," by Gary Hamel with Bill Breen. Look for new excerpts weekly.

Given the power of management innovation to deliver peer-beating performance, it is odd that so few companies possess a well-honed process for continuous management innovation. A stroll through the pages of the world’s leading business magazines confirms the steerage-class status of management innovation.

Over the last 70 years, the terms “technology innovation” and “technical innovation” have appeared in the title or abstract of more than 52,000 articles. More than 3,000 articles have focused on “product innovation.” The comparatively new topic of “strategic innovation” (which includes terms like “business innovation” and “business model innovation”) has been covered in more than 600 articles. Yet taken together, articles on “management innovation,” “managerial innovation,” “organizational innovation,” and “administrative innovation” number less than 300, and nearly all of these focus on the diffusion, rather than the invention, of new management practices—a bias that’s understandable only if you believe it’s better to follow than to lead.

Today, every CEO claims to be a champion of innovation—so why the barn-sized blind spot when it comes to management innovation? I believe there are three likely explanations. First, most managers don’t see themselves as inventors. Unlike technologists, marketers, and, more recently, strategists, innovation isn’t central to the average manager’s role definition. In most companies, managers are selected, trained, and rewarded for their capacity to deliver more of the same, more efficiently. No one expects managers to be innovators. Rather, they are expected to turn other people’s ideas into growth and profits.

Second, many executives doubt that bold management innovation is actually possible. R&D staffers and product-development specialists are sustained by the belief that the next big thing is just around the corner. How many executives, by contrast, are buoyed up by the hope that they might get the chance to lead the next great management revolution? Strangely, managers are unsurprised when science advances by leaps and bounds, yet seem unperturbed when the practice of management fails to do the same.

When confronted with this discrepancy, many executives claim that the immutable laws of human nature constrain the range of feasible options for mobilizing and organizing human effort. There are limits, they argue, to the number of people that one person can effectively supervise, to the degree to which accountability can be distributed, to the extent to which employees can be trusted, to the willingness of individuals to subordinate their self-interests to the interests of the corporation as a whole. Whether these limits are real or imagined (mostly the latter, I will argue), they offer managers a soothing alternative to the premise that it is a lack of imagination that constrains management innovation.

Most managers see themselves as pragmatic doers, not starry-eyed dreamers. In their experience, management progress is accretive rather than revolutionary—and they have little reason to believe it could ever be otherwise. But it can be otherwise, and it must be—the future demands it.

Visit the Gary Hamel home page

MORE ON MANAGEMENT AND INNOVATION:
The Future of Management (Hardcover)
Staying Ahead of Your Competition (HBR Article Collection)
The Why, What, and How of Management Innovation (HBR Article)

Excerpted from "The Future of Management," by Gary Hamel with Bill Breen. Look for new excerpts weekly.

Management innovation tends to yield a competitive advantage when one or more of three conditions are met: the innovation is based on a novel management principle that challenges some long-standing orthodoxy; the innovation is systemic, encompassing a range of processes and methods; and/or the innovation is part of an ongoing program of rapid-fire invention where progress compounds over time.

Consider first the auto industry. Why, after decades of trying, have America’s indigenous automakers so far failed to duplicate Toyota’s hyperefficient manufacturing system? This was the question I put to a senior executive group in one of America’s big car companies a few years back. We had just finished a sumptuous dinner at an elegant hotel when, over coffee, one of the carmaker’s top finance executives mentioned that the company had just completed its 20th annual benchmarking study of Toyota.

What, I wondered aloud, had the company learned in year 20 that it hadn’t learned in years 19, 18, 17, and so on? The blunt subtext to my question hung in the air like acrid cigar smoke: Why are you still playing catch-up? After a moment of embarrassed silence, a senior staffer spoke up, and offered an explanation that went something like this:

Twenty years ago we started sending our young people to Japan to study Toyota. They’d come back and tell us how good Toyota was and we simply didn’t believe them. We figured they’d dropped a zero somewhere—no one could produce cars with so few defects per vehicle, or with so few labor hours. It was five years before we acknowledged that Toyota really was beating us in a bunch of critical areas. Over the next five years, we told ourselves that Toyota’s advantages were all cultural. It was all about wa and nemawashi—the uniquely Japanese spirit of cooperation and consultation that Toyota had cultivated with its employees.

We were sure that American workers would never put up with these paternalistic practices. Then, of course, Toyota started building plants in the United States, and they got the same results here they got in Japan—so our cultural excuse went out the window. For the next five years, we focused on Toyota’s manufacturing processes. We studied their use of factory automation, their supplier relationships, just-in-time systems, everything. But despite all our benchmarking, we could never seem to get the same results in our own factories. It’s only in the last five years that we’ve finally admitted to ourselves that Toyota’s success is based on a wholly different set of principles—about the capabilities of its employees and the responsibilities of its leaders.

Amazingly, it took nearly 20 years for America’s carmakers to decipher Toyota’s advantage. Unlike its Western rivals, Toyota believed that first-line employees could be more than cogs in a soulless manufacturing machine. If given the right tools and training, they could be problem solvers, innovators, and change agents. Toyota saw within its workforce the necessary genius for never-ending, fast-paced operational improvement. In contrast, U.S. car companies tended to discount the contributions that could be made by first-line employees, and relied instead on staff experts for improvements in quality and efficiency.

Such was the disdain for the intelligence of frontline workers that Henry Ford once wondered querulously, “Why is it that whenever I ask for a pair of hands, a brain comes attached?”
Over the past 40 years, Toyota has gotten more out of its people, day by day and year by year, than its competitors have gotten out of theirs—an advantage that has been reflected in Toyota’s ever-rising market share and market value. While U.S. carmakers are now working hard to more fully utilize the brainpower of their employees, they have paid dearly for a management system that was rooted in intellectual feudalism.

As this example illustrates, management dogmas are often so deeply ingrained as to be nearly invisible, and so devoutly held as to be virtually unassailable. When it comes to management innovation, the more unconventional the underlying principle, the longer it will take for competitors to respond. In some cases, the head-scratching can go on for decades.

Visit the Gary Hamel home page

MORE ON ORGANIZATIONAL CULTURE AND INNOVATION:
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Excerpted from "The Future of Management," by Gary Hamel with Bill Breen. Look for new excerpts weekly.

Innovation comes in many flavors: operational innovation, product innovation, strategy innovation, and, of course, management innovation. Each genre makes its own contribution to success, but if we were to array these various forms of innovation in a hierarchy, where higher tiers denote higher levels of value creation and competitive defensibility, management innovation would come out on top. Understanding why this is so is an important step in building your company’s commitment to management innovation, so let’s work our way up from the bottom.

At the base of the pyramid is operational innovation (see figure below). In a world of hypercompetition, operational excellence is essential, but in the absence of some Toyota-like management innovation or Ikea-style business model breakthrough, operational innovation seldom delivers a decisive, long-term advantage. This is true for several reasons. First, operational preeminence often depends heavily on the quality of a company’s IT infrastructure.

Unfortunately, advances in hardware and software tend to diffuse rapidly, making IT-based advantages notoriously difficult to defend.13 Secondly, many companies today outsource a wide range of business activities to third parties—vendors who often serve several companies within a single industry, and who typically lack the incentives to help a single customer build a standout advantage. While outsourcing and offshoring can help a company stay even with the competition, they seldom yield a significant proprietary advantage. Finally, there is a growing swarm of consultants who work long days transferring best practices from exceptional companies to mediocre ones. This, too, tends to level out operational advantages.

Next up the food chain is product innovation. There’s no doubt that an iconic product can lift a company from obscurity to cult status in short order (think, for example, of Dyson’s bagless vacuum cleaners). Yet in the absence of enforceable patent protection, most products are quickly knocked off. In addition, an ever-accelerating pace of technological progress often gives upstarts the opportunity to leapfrog yesterday’s pioneers.

As a result, breakthrough products seldom grant a company long-lasting industry leadership. For example, it only took a few years for Samsung to improve upon Nokia’s superslick mobile phone designs, for other golf club makers to match the playability advantages of Callaway’s Big Bertha irons, or for Hoover to come up with its own “Cyclonic” vacuum cleaner.

Further up the stack is strategy innovation—bold new business models that put incumbents on the defensive. Standout examples include Ryanair, Europe’s leading low-cost airline, Apple’s iTunes music store, and Zara’s chic but cheap couture. A killer business model can generate billions of dollars in market value for the innovator—but on average, a distinctive business model is more easily decoded and counteracted than a heretical management system.

Wal-Mart’s supposedly invincible lead in discount retailing hasn’t prevented other retailers, like Costco and Target, from flourishing. America’s crop of low-cost airlines, including Frontier, JetBlue, AirTran, and America West (recently merged with US Airways), have purloined entire chapters from Southwest Airlines’ once-unique playbook. And although India’s outsourcing pioneers—companies such as Infosys and Wipro—have become industry giants, they must still scramble every day to defend their lead from a horde of envious and determined wannabes who are equally eager to exploit India’s wage advantage.

The point is, not all types of innovation are created equal. When focused on big, chunky problems, management innovation possesses a unique capacity to create difficult-to-duplicate advantages. Why? Become some heresies are more heretical than others. You, for example, would probably find it easier to adjust your fashion preferences than to transpose your religious beliefs. Similarly, most executives find it easier to acknowledge the merits of a disruptive business model than to abandon the core tenets of their bedrock management beliefs.

Visit the Gary Hamel home page

MORE ON MANAGEMENT AND INNOVATION:
The Future of Management (Hardcover)
Innovate--Inexpensively (HBR Article Collection)
The Why, What, and How of Management Innovation (HBR Article)

Excerpted from "The Future of Management," by Gary Hamel with Bill Breen. Look for new excerpts weekly.

For our purposes, management innovation is anything that substantially alters the way in which the work of management is carried out, or significantly modifies customary organizational forms, and, by so doing, advances organizational goals. Put simply, management innovation changes the way managers do what they do, and does so in a way that enhances organizational performance.

So what is it that managers do?

Over the last hundred years, business scholars have pretty much agreed on what constitutes the work of management. In 1917, Henri Fayol, an early management theorist, described the work of management as planning, organizing, commanding, coordinating, and controlling—a definition that would provoke little argument from modern-day executives. My own synthesis of a century’s worth of management theory suggests that the practice of management entails:

• Setting and programming objective
• Motivating and aligning effort
• Coordinating and controlling activities
• Developing and assigning talent
• Accumulating and applying knowledge
• Amassing and allocating resources
• Building and nurturing relationships
• Balancing and meeting stakeholder demands

These tasks are central to the accomplishment of human purpose, be it mounting a mission to Mars, running a middle school, producing a Hollywood blockbuster, or organizing a church bake sale. Anything that dramatically changes how this work gets done can be labeled as management innovation.

Management innovation also encompasses value-creating changes to organizational structures and roles. Companies consist of business units, departments, work groups, communities of practice, and alliances with suppliers, partners, and lead customers. A new way of connecting these entities can constitute a management innovation. For example, InnoCentive, a spin-off from Eli Lilly and Company, has created a global market for scientific expertise that allows “seeker” companies to bid out tough technical challenges to a network of more than 70,000 scientists around the world. In the three years following its launch, InnoCentive channeled more than $1 million in “bounty” payments to its community of “solvers,” who often succeeded in cracking problems that had stumped internal R&D teams. While the goal of InnoCentive is scientific innovation, the processes and structures that support its global network of seekers and solvers is a first-rate example of management innovation, in that it involves new ways of aligning effort, coordinating activities, and applying knowledge—all components of managerial work.

While operational innovation focuses on a company’s business processes (procurement, manufacturing, marketing, order fulfillment, customer service, etc.), management innovation targets a company’s management processes—the recipes and routines that determine how the work of management gets carried out on a day-to-day basis. Typical processes include:

• Strategic planning
• Capital budgeting
• Project management
• Hiring and promotion
• Training and development
• Internal communications
• Knowledge management
• Periodic business reviews
• Employee assessment and compensation

These processes establish standard protocols for common management tasks such as evaluating an employee or reviewing a budget request. They propagate best practice by translating successful techniques into tools and methods that can be broadly applied. They also shape management values by reinforcing certain behaviors and not others. Put simply, management processes are the “gears” that turn management principles into everyday practice. In even a medium-sized organization, it’s impossible to change the what and how of managing without changing the processes that govern that work.

Visit the Gary Hamel home page

MORE ON MANAGEMENT AND INNOVATION:
The Future of Management (Hardcover)
Staying Ahead of Your Competition (HBR Article Collection)
The Why, What, and How of Management Innovation (HBR Article)