Established companies rarely seem to produce innovative leaps. No taxi company invented Uber. No hotel chain invented Airbnb. Kodak didn’t invent digital photography. (Well, actually Kodak did, but failed to bring it to market.) For companies that lead their industry, “innovation” often means improving existing products and other incremental, low-risk strategies.
There are exceptions, though. Amazon has enormous scale and dominates its key markets, but continues to innovate within those markets as well as enter new ones.
Why do so many companies, even those that where highly disruptive to begin with, stop innovating? Author Safi Bahcall has a scientific explanation for this. As a Ph.D. physicist, he uses the metaphor of phase change in a material, as when liquid water turns to ice. Bahcall suggests that many companies reach a point where they become risk-averse and reward conservative strategies with limited growth potential.
For years, we’ve heard the saying, “Culture eats strategy for breakfast.” (Sometimes, lunch is the meal of choice.) Often attributed to Peter Drucker, the quote suggests that even the best strategy won’t work unless there is a motivated and cohesive team to implement it.
While one can’t argue with that sentiment, Bahcall offers a different variation: “Structure eats culture for lunch.” In his book Loonshots, subtitled “How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries,” he suggests that companies almost always evolve to a point where the rewards of rank, that is, being promoted, getting pay raises, etc. are more beneficial to the individual than introducing a successful new product. That’s when the phase change occurs.
In my conversation with Bahcall, he points out that the stake that the individual has in the outcome of a project or initiative are different in small firms compared to most large ones. “In a small company it’s huge, in a large company it’s kind of tiny,” he notes.
Think about it... if a startup hits a home run with a new product, everyone wins big. Money flows in. Stock options become valuable. If the key product or service fails, though, everyone loses. Options are worthless. Everyone ends up looking for a new job.
In a typical large company, though, the primary motivation for ambitions executives can become what Bahcall terms, “perks of rank”—higher salary, better benefits, a bigger office, and so on. In contrast, leading a successful project will likely have minimal direct impact on salary, the value of options or shares, etc.
When promotion is the path to higher salary and better benefits, an ambitious large firm worker succeeds by pleasing the boss and making the boss look good.
If role changes happen every couple of years, short-term initiatives with a low probability of failure are the most likely path to promotion. Long-term projects with more risk are bad bets—they are unlikely to pay off before reassignment. Even worse, a failure might diminish the promotion chances for both the project leader and the person who approved it.
Bahcall suggests that an innovation-oriented culture won’t produce results when the incentives reward advancing in rank:
“If you reward rank, you’re going to get a political culture. If you celebrate intelligent risk taking and ideas, you’re going to get an innovative culture... No amount of asking people to sing kumbaya or hold hands, or watch two hour movies about brotherhood is really going to change culture very much. But a small change in structure can do it.”
Bahcall talks about “return on politics”—the benefits the individual drives from pleasing the boss or other key individuals. In most companies, one’s direct manager determines pay increases and promotion. In that situation, making the boss happy becomes the most important task. If the boss is taken out of that loop and promotions are determined by an independent executive, performance and innovation become the path to success.
McKinsey, the consulting giant where Bahcall spent the first few years of his business career, uses this approach. Taking away the manager’s ability to promote sounds like a strange idea, but it reduces politics and increases cooperation.
Bahcall advocates for a focus on incentives by defining that as a key function in the organization. He thinks that all too often the human resources department is a rubber-stamp for promotions. It’s essential to ensure that processes throughout the organization are structured to reward innovation. One way to do accomplish this, Bahcall says, is to create a Chief Incentives Officer. This person’s primary task is to ensure that promotions, pay, and other incentives reward risk-taking and innovation, not politics.
Loonshots is a must-read for anyone who wants to foster business creativity and encourage audacious, game-changing strategies. Culture is important, but the company’s structure determines how that culture evolves and what it values.