The ultimate goal of innovation is to improve C′ (capital productivity). Every organisation has to innovate to maintain the relevance of its value proposition to attract and retain key stakeholders such as customers, members, and donors.
Key thoughts
- There are three types of creative change.
- There are three innovation frames.
- Immitation typically precedes innovation.
- Innovation is managed differently from operations.
- Always keep the end, C′, in mind and don’t get distracted by faddish means.
Three types of creative change
The three broad approaches to innovation require different levels of change, as shown in the following figure. The simplest is alpha (α) change, which transforms a task. Beta (β) changes a system, and the most complex is gamma (γ), which transforms a business model.
The three types of creative change in a socio-technical system
Task digitization (alpha change)
The most common form of alpha change is task digitisation. An information system is implemented to raise a person’s productivity level when performing a relatively ‘routine’ assignment. However, the notion of a routine task changes with advances in digital technology. For instance, current Large Language Models (LLMs) make some document summary and preparation tasks feasible. Using Microsot’s Copilot to help write computer code is another example of an alpha change. Alpha change is often amenable to experimental testing in a pilot project before full implementation. As a result, the ROI can often be assessed with some precision.
Systems transformation (beta change)
The impact of a system transformation (redesign or digitisation) is more difficult to assess because of the interplay of technology, tasks, and systems. People take time to learn new systems, especially if they alter social practices and established routines. The financial impact of a beta change is difficult to compute because of the proficiency time lag. Disruption of established social practices might create resistance or become an obstacle. For example, the adoption of a large medical technology company’s new system worked well in its home country but failed in many other regions because of different laws and regulations and conflicts with local sales cultures. A current common beta change is implementing AI to make a decision rather than through a human informed by an IS. It is difficult to assess the outcome of a novel beta innovation.
Business model redesign (gamma change)
Business model changes occur infrequently. They are often the result of external events forcing an organisation to transform or decline. Gamma change sets an organisation on a voyage of uncertainty for which the compass cannot be set with any certainty. Many traditional retailers could not transform rapidly enough to survive the advent of Amazon. A software company that converts from building traditional transparent information systems to installing opaque machine learning models undertakes a gamma change. The outcome is uncertain, and companies embark on a gamma change only when simple fixes have not worked. Executives leading a gamma change largely rely on informed action, such as looking for case studies of businesses facing similar problems.
Three innovation frames
Three frames can guide innovation: repertoire, repurposing, and reinvention. Most organisations can innovate through repertoire and repurposing. Reinvention is the exception.
Repertoire
With experience, you accumulate a set of frames or mental models for analysing a problem and fashioning a solution. When you face an important problem, you can search this collection for similar contexts and implement a prior solution modified to fit the features of the current problem.
Ben Bernanke spent much of his academic career at Princeton University studying banks and financial crises. He focused on analysing the Great Depression of the 1930s. While Chairman of the US Federal Reserve from 2006 to 2014, he was confronted with the financial crisis of 2008. He successfully applied his model of the Great Depression to resolve the 2008 financial crisis.
Executives can consciously build their repertoire of mental models by assessing all critical incidents and recording their major characteristics and effective interventions. When facing a grave event, leaders can review past critical incidents with features analogous to the current problem. Successful leaders reuse their experience. By documenting prior incidents, they avoid memory gaps and create a shared organisational resource.
Repurposing
Practices in one industry can often be repurposed and applied in another domain. Vigilant leaders who environmentally scan outside their industry can recognise transferable innovations that can be reframed and adjusted to their context.
In Sweden in the 1950s, furniture was generally purchased “for the ages” and passed on to the next generation. The founder of IKEA, Ingvar Kamprad, observed that as clothing became cheaper, it was worn for a limited time rather than years. He conjectured that if furniture were inexpensive, consumers would treat it like clothing. His insight has made IKEA the world’s largest furniture retailer. IKEA’s buy back & resell service supports Kamprad’s insight that affordable furniture is like cheap clothing.
Ingvar Kamprad
Swedish business magnate
“Simplicity and common sense should characterize planning and strategic direction.”
Reinvention
Reinvention creates a novel frame that fundamentally changes a view of the world or a design for capital creation. Arguably, Darwin’s proposal that all species are descended from a common ancestor was the world’s most profound reframing. His work is the foundation of modern biology and is ultimately responsible for many advances in healthcare and longevity.
Jeff Bezos revolutionised retailing with the launch of the Amazon bookstore, with an initial investment of USD 1.6 million. At that time, the industry-leading bookseller was Barnes & Noble, with a nationwide chain of 400 stores with annual sales of USD 2 billion. Thinking that a new bookstore would instantly threaten the industry behemoth was unimaginable. Amazon’s revolutionary capital creation recipe was an immediate strategic threat to Barnes & Noble. Online retail challenged nearly every traditional retailer to adjust or disappear.
Jeff Bezos
Founder of Amazon
“The biggest neddle movers will be things that customers don’t know to ask for.”
Very few people change how the world thinks and behaves, but many can repurpose a revolutionary change. For example, Netbank used online retailing as a model to create the first standalone US Internet bank. It grew its number of accounts by a compound 275% p.a. during 1997–2001 and was profitable every quarter.
Imitation precedes innovation
Imitation typically prepares the way for innovation as an organisation adopts established best practices and current technology that are vital to competing. Ultimately, the goal should be to create more efficient practices and apply technology in novel ways. If you’re always playing catch-up, you never get a chance to create a compelling value proposition that attracts customers from your key competitors. China was a technology follower for a few decades and is now a technology leader in many industries. It made the switch from imitator to innovator.
However, transitioning from imitator to innovator requires a cultural change and new types of human capital. There must be sufficient organisational flexibility to give innovators time to think, experiment, and fail. The winners of the productivity game are those who splice innovation Into their corporate DNA.
Innovators cannot be managed with a Six Sigma methodology. Management styles that succeed in routine operations will likely fail to inspire innovators. The economy has a few innovators and many imitators because most senior executives have difficulty managing a two-sided enterprise. They tend to focus on short-term operational excellence at the expense of long-term capital creation through innovation.
George Bernard Shaw
Irish Playright
“The reasonable person adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable person.”
Mindsets and innovation – 3M and a tale of two CEOs
3M is an American multinational based in St. Paul, Minnesota. In 2023, its revenue was USD 33 billion, and it employed 85,000. 3M has 8,500 scientists, 10% of its workforce, in 85 locations worldwide. Its website states: “At 3M we are always in pursuit of solutions that make lives better.”
In 2001, James McNerney, recruited from GE, was appointed as the first outsider CEO at 3M. From 2001 to 2005, McNerney was 3M’s chairman of the board and CEO. When he left abruptly to become Boeing’s CEO, he was replaced by George Buckley, former chairman and CEO of Brunswick Corporation. The contrasting missions and actions of the two 3M leaders are captured in the following table.
A comparison of two 3M CEOs
| James McNerney (2001-2005) | George Buckley (2005-2011) |
|---|---|
| Increase profitability | Bring back creativity and maintain operating efficiency |
| Corporate wide adoption of Six Sigma | Reduce Six Sigma use in research labs, but keep it in manufacturing |
| Hold R&D spending constant and allocate funds to promising new markets, such as pharmaceuticals | Boost R&D spending, and refocus on ‘core’ research and move away from ancillary markets such as pharmaceuticals |
| Instill the GE approach to management | Reignite innovation and encourage risk taking |
3M has traditionally been a science company with a focus on systems of inquiry across a wide range of technologies. McNerney’s background in manufacturing at GE and his implementation of the 3M Board’s charge to improve profitability resulted in a shift of attention to systems of production, Six Sigma, and efficiency. His replacement, Buckley, swung the pendulum back to systems of inquiry and creativity.
Ultimately, every company must create economic capital, and the traditional path for 3M was
Organizational → Organizational → Economic
3M leverages knowledge (organisational capital) to create more knowledge, which engineers then convert into marketable products (economic capital). Its success is based on building what it knows to create a scientific foundation for new products.
McNerney changed the template to
Organizational → Economic He inhibited innovation by focusing on knowledge exploitation and ignoring the need to create new knowledge.
Stifling innovation to boost profits can be a successful short-term strategy but creates a long-term problem. As organisational capital ages, engineers have less knowledge to convert into products. At the same time, it is important to recognise that applying the same managerial methodologies, such as Six Sigma, to R&D is counterproductive. McNerney failed to recognise the fundamental differences between creativity (systems of inquiry) and efficiency (systems of production). You cannot schedule innovation. For example, the rotavirus vaccine took over ten years to develop. Manufacturing at 3M benefited from Six Sigma and greater attention to costs, but R&D suffered.
The 3M case illustrates the tension leaders increasingly face in a knowledge economy. They run a two-sided business and each side must be run differently. One creates knowledge; the other consumes it to make products or deliver services. One is about systems of inquiry, and the other is about systems of production. If a top management team can’t manage a two-sided business, it should consider creating a partnership or ecosystem for one of the sides. Apple, for example, relies on third parties for its system of production.
William McKnight
President of 3M 1929 – 1949
“Listen to anyone with an original idea, no matter how absurd it may sound at first. If you put fences around people, you get sheep. Give people the room they need.”
Critical reflections
- Are you building your repertoire by recording how you solve critical incidents?
- Are you continually scanning to identify reinventions and innovations you can repurpose?
- Do you manage innovators differently from operators?
- What organisational capital do you need to leverage the talent of your innovators?
- Are you tracking changes in legislation and regulation that will create organisational capital that will require you to innovate or will facilitate your innovation?
- Do you have the right balance between creativity and production?
Rick Watson
Research DirectorRegents Professor; J. Rex Fuqua Distinguished Chair for Internet Strategy Emeritus, University of Georgia
