The Leader's Guide to Storytelling

by Stephen Denning

  Ultimately Hamel's diagnosis is wrong. The main challenge in innovation is not a problem of generating more ideas. It's figuring out how to take the good ideas and make them happen. To do that, eventually you have to win the battle of persuasion. And not just once, but repeatedly. The problem for management is that the conventional tools of communication—reason, numbers, bullet points—aren't adequate to the task. Unfortunately, even success does not breed success when it comes from unexpected sources in the organizational hierarchy.

  Systems Thinking and the Learning Organization

  Whatever happened to the learning organization? On rereading Peter Senge's The Fifth Discipline, I was struck by how brilliantly he describes the goal of the learning organization: “where new and expansive patterns of thinking are nurtured, where collective aspiration is set free and where people are continually learning how to learn together.”9 Less persuasive, however, is his proposal on how to get to this goal. The critical element, according to The Fifth Discipline, is systems thinking—a way of looking at systems as a whole that will enable people to see complex chains of causation and so solve complex problems.

  The difficulties? First, getting large numbers of people to adopt systems thinking would itself be a massive challenge of innovation. How could an organization make this happen?

  Second, even if systems thinking was widely adopted, it wouldn't necessarily lead to action. Innovation is less about understanding the problem than about getting people to act differently, often contrary to well-established assumptions and practices. Ways around many of the disruptive challenges that have killed businesses were intellectually obvious. The problem was that they weren't adopted with enough energy and enthusiasm.

  Third, implicit in systems thinking is an engineering mind-set that is ill adapted to problems involving human beings, their objectives, and their feelings. Habits and emotional attachments aren't based on rational foundations that will lapse simply because intellectual understanding is entrained by systems thinking. For these things to change, people's hearts must change as well as their minds. For this purpose, systems thinking is just thinking—it's operating in the wrong part of the body.

  Use Data-Driven Strategic Innovation

  Michael Schrage maintains that the key to innovation is data-driven strategic innovation. According to Schrage, it's no longer enough for innovators to be sensitive to potentially provocative correlations. Today's innovators must explicitly generate them en masse. Capital-intensive innovators increasingly structure their research initiatives to ensure that unexpected correlations trigger recognition and review. Correlation becomes the crucible for innovation and insight. According to Schrage, “The future of innovation will increasingly be determined by the future of data-driven statistical techniques.”10

  This approach will doubtless produce some new ideas, and some of the ideas may generate significant revenue—for instance,

  Organizations like GE's aircraft engines division already rely on data-driven techniques to predict the need for maintenance and repairs before significant problems actually happen. Significant savings accrue from this insight.11

  In pharmaceutical research, it appears possible that statistical analysis of trials will reveal hidden opportunities in compounds that initially fail as drugs for the entire population.12

  Data-driven innovation thus will be a useful component of an overall innovation strategy. But it's difficult to agree with Schrage that development of data-driven statistical techniques will be what drives the future of innovation. It will be a component of sustaining innovation but not a very large component of disruptive innovation. It will generate ideas—but not the business-busting ideas that transform a sector in a single stroke.

  Use Open Innovation

  Another widely discussed approach in innovation theory is open source innovation. According to Henry Chesbrough, “Successful innovators are finding they must complement their in-house R&D with external technologies and offer up their own technologies to outsiders. R&D at large companies is shifting from its traditional inward focus to more outward-looking management—open innovation—that draws on technologies from networks of universities, startups, suppliers, and competitors.”13

  Until recently, R&D was viewed as a vital strategic asset and, in many industries, a barrier to competitive entry. Research leaders like DuPont, Merck, IBM, GE, and AT&T did the most research in their respective industries—and earned the most profits as well. According to Chesbrough, “The change is striking…. Most of the premier industrial research laboratories of the 20th century have retreated from their historic mission of independent scientific discovery because of the low yields they're experiencing.”14

  And here lies the heart of the problem: the research laboratories of large companies are experiencing low yields. Why? Is it because of lack of ideas? Or because of the business-as-usual assumptions that hamper innovation in the big companies? Chesbrough himself answers the question: it's the constraints that firms place on their own research that stifles innovation: “The big toy makers constrain their search by insisting that any new toy bring in $100 million or more in its first year. Even such leading toys as Barbie and Hot Wheels would have failed to bring in a comparable amount when they were introduced in 1959 and 1969, respectively. An insistence on large initial sales condemns the toy manufacturers to merely extending existing brand franchises, or acquiring at a high price new toys successfully launched by smaller innovators.”15

  Similarly in pharmaceuticals, where big companies are struggling despite immense investments in R&D, the perspective of internal R&D must also change: from a focus on finding small molecules to produce a single blockbuster pill that will knock out a major disease for the entire population to more diverse approaches.

  This is not to say that open source innovation won't help. Whereas old-school research labs took new technologies from basic science to finished product, open innovation labs can develop technologies that embrace and extend existing intellectual property—even those that might otherwise run into the “not invented here” syndrome.

  So open source innovation isn't a bad idea. It's a supplement to the steps needed to resolve the basic problem of innovation, not a solution in itself. The fundamental problem in innovation isn't one of finding more new ideas; it's a matter of establishing a way of running the organization that is open to exploring new ideas and willing to back the most promising of them with resources and talent. To present open source innovation as “the solution” will generally result in a distraction from attacking the core problem, which isn't outside the organization at all. It's right there in the very heart of the organization itself.

  Create a Chief Innovation Officer

  Another approach to solving the problem of innovation proposed by Debra Amidon in Innovation Strategy for the Knowledge Economy is to create the senior position of chief innovation officer (CIO).16 Given that the existing hierarchy is inimical to innovation, the solution is to create a new high-level position to support innovation.

  The idea is interesting, and yet one has to ask: What sort of person would be appointed to such a position? And what sort of incentives would govern his or her actions? What is the likelihood that the CIO would actually tackle the rest of the hierarchy?

  One obvious risk is that a CIO would be selected in the image of the existing management mind-set and would encourage innovations that fit the mold that the hierarchy expects—namely, tame me-too extensions of the existing way of doing business, not bold and disruptive revolutionary changes.

  Another concern is whether a CIO would be good at sparking heterodox ideas. Powerful people who climb the hierarchy and arrive at the senior positions in large organizations get there because they have been good at maintaining order and focus and discipline. This is good for organizational efficiency and optimization but not always friendly to basic innovation.

  The Design of Business

  Roger Martin's book, The Design of Business, proposes a dif
ferent approach. There is a need, he says, for a better compromise between the reliability of the supply chain (producing consistent, predictable outcomes) and the innovativeness of the design function (creating new value for customers). Thus, today's organization should achieve a better balance between operations that deliver goods and services and the design function that operates with creativity, with more emphasis on the latter.

  The result of the improved compromise, however, is still usually “war in the boardroom,” as Al Ries and Laura Ries describe in their book of the same name.17 The left-brain thinking of the supply chain, supported by traditional management theory, business school teaching, and Wall Street assumptions, tends to crush the creativity of right-brain thinking about new ways to add value for customers.

  The design school of innovation is still mainly about innovation “initiatives”—time-limited efforts to solve specific problems—while the rest of the organization continues in its business-as-usual mode of operating that is inimical to innovation. The approach still embodies the fundamental assumption of the twentieth-century management that the default mode of managing is scalable bureaucracy. As a result, it fails to deal with the heart of the problem of innovation.

  Solving the Paradox

  In this chapter so far, I've been exploring why the commonly proposed theories of innovation don't work. Is there no way that organizations can succeed in coping with disruptive innovation?

  The very fact that none of the leading theories offers a solution suggests that they are looking for it in the wrong place. If innovation is a true paradox, then—as with any other paradox—the resolution must lie in rethinking fundamental assumptions.

  Alan Murray gives us a clue in his Wall Street Journal article, “The End of Innovation”: “Market-leading companies have missed game-changing transformations in industry after industry … not because of “bad” management, but because they followed the dictates of ‘good’ management. They listened closely to their customers. They carefully studied market trends. They allocated capital to the innovations that promised the largest returns. And in the process, they missed disruptive innovations that opened up new customers and markets for lower-margin, blockbuster products.”18 Murray puts his finger on the key issue here: it is the very nature of good traditional management that inhibits innovation.

  The solution lies in rethinking the underlying assumptions of traditional management. To generate continuous innovation requires a radically different kind of management that is as good at both game-changing innovation and disciplined execution. Instead of innovation and organizational learning being the responsibility of a few courageous individuals or departments, we need management in which innovation is an organization-wide capability, a part of the firm's DNA.

  My book, The Leader's Guide to Radical Management, spells out in detail what this fundamentally different kind of management involves. It entails seven principles and more than seventy practices.19

  The Seven Principles of Continuous Innovation

  The Leader's Guide to Radical Management describes seven basic principles of continuous innovation, along with more than seventy supporting practices.

  Radical management is a fundamentally different approach to management, with seven interlocking principles:

  1. The goal of work is to delight clients. Radical management aims at delighting clients and focuses not on just the marketing department, but on the entire organization on this goal.

  2. Work is conducted in self-organizing teams. Self-organizing teams draw on the full talents and inspiration of the people doing the work.

  3. Teams operate in client-driven iterations. Client-driven iterations are key, because delighting clients can be approached only through successive approximations.

  4. Each iteration delivers value to clients. Client-driven iterations focus on delivering value to clients by the end of each iteration. This forces closure and enables frequent client feedback.

  5. Managers foster radical transparency. Self-organizing teams working in an iterative fashion, in turn both enable and require radical transparency.

  6. Managers nurture continuous self-improvement. Continuous improvement means having the entire workforce find better ways to give value to clients.

  7. Managers communicating interactively, through stories, questions and conversations. An underlying requirement of all of these principles is interactive communication. Unless managers and workers are communicating interactively, using authentic narratives, open-ended questions, and deep listening, rather than treating people as things to be manipulated, none of the above works.

  The most important shift is a change in goals. Traditional management of the twentieth-century organization was focused on the simple, linear goal of delivering goods and services to make money. The main method of improving productivity was through achieving economies of scale.

  The radically different management that is needed to deliver continuous innovation focuses on the difficult, complex goal of delighting customers; making money is the consequence of the continuous new value that it creates for customers, not the goal.

  Merely aiming at delivering goods and services cripples innovation because of the underlying assumption that the firm knows in advance what goods and services need to be delivered. In a rapidly changing marketplace, in which not even the customers themselves know what they really want, the assumption is increasingly unfounded.

  When a firm adopts the complex goal of delighting customers, innovation becomes the driving force of everyone and everything in the organization, with adaptation and agility as central preoccupations.

  The change in goal changes everything.

  The traditional management goal of delivering goods and services can be accomplished in its entirety. Through economies of scale, “the system” enables work to be done progressively more cheaply, albeit with declining returns. Through outsourcing and downsizing, the economies can be continued. Rules can be put in place. Processes can be established. Structures can be built. Mistakes can be eliminated. If mistakes do occur, people can be blamed and punished. In this way, a predictable environment can be built. The system operates as a closed universe. The customer is treated as a thing to be manipulated to buy the products and services generated by the system. The employees are treated as “human resources” (that is, things) to be exploited and discarded as necessary. The entire system is inimical to innovation, because any significant innovation risks destabilizing the simple, linear, finite world that has been created. The continuation of the system becomes an end in itself. For a time, this way of managing worked well enough: in a stable marketplace like that of the 1950s and 1960s, with strong demand, established firms could get away with manipulating customers and treating employees as resources to be mined.

  But the world changed. Today the customer is in charge. There has been a fundamental shift in the balance of power between sellers and buyers. Now, unless a firm is inspiring workers to provide a continuous stream of new value for customers, the customers can—and will—go elsewhere. Moreover knowledge workers are unwilling to give their best if they are treated as resources to be mined. As a result, productivity depends on their being treated with respect as adult human beings.

  The changes involved in having organizations embrace continuous innovation are substantial. This is more than a minor shift at the periphery. It's more than a new process or structure. It's more than a new management methodology. This is a phase change, even a paradigm shift, to use Thomas Kuhn's expression.20

  For most organizations, embracing the goal of delighting customers entails a major shift in the complexity of what a firm is undertaking. The goal of a firm becomes difficult and complex rather than simple and linear. Now continuous innovation becomes a central preoccupation of everyone in the organization, rather than a distraction and a destabilizer. Now the firm is involved in continuous experimentation to find out what works and what doesn't in terms of adding new value for clients. Now mistakes are
welcomed as an essential element of the learning process rather than being elements that can be eliminated. Now everyone in the organization is focused on what can be done to add more value to customers and clients.

  Now structures and rules and processes are formulated so as to enable and reinforce the creativity and energies of the people doing the work rather than undermining them. Now customers and employees are treated as adult human beings with whom the organization has adult-to-adult relationships rather than being treated as “human resources” to be manipulated. Innovation now becomes the driving force of the entire organization. Everyone is responsible for finding new ways to add value to customers. The firm is no longer an end in itself. It becomes “other directed”: it is focused on meeting the needs of the customers and stakeholders.

  In this radically different mode of managing, the firm still has structures and processes, but the structures and processes create a space to liberate rather than stifle the talents and energies of those doing the work. The structures and processes are designed to create delight customers rather than placate or frustrate them.