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Question: What’s the secret to innovation?

Gary Hamel: Today everybody knows that innovation is important and in a downturn, it's more important than ever before, because the only way that you can kind of maintain your growth trajectory, the only way you can outperform your competitors in a downturn, is if you're out innovating them.  And the good news about innovation is that there's very little correlation between investment and return.  There are companies that have ploughed a lot of money into some new technology. Think of all the money the auto companies have put in over the last few years into fuel cells.  It may or may not pay off.  I think of Motorola with their big satellite phone project a decade ago, Iridium.  You could invest a lot of money in something and have almost nothing to show for it.

On the other hand, there are a lot of examples where people have come along with fundamentally just a new idea, a new concept, and it was so powerful, so intriguing, it takes off with very little investment at all.  Facebook, for example.  I don't know what it took to start Facebook as a company, but it's probably a decimal point in the average Fortune 500 organization.

So that's a great thing.  I mean, innovation is much more about the quality of the idea and its power.  In fact, the more truly innovative an idea, usually the less money you need to blow it into the marketplace because it's going to sail with its own momentum.  People are hungry for the thing, it creates new value, meets new needs.  It's going to be easy to sign on business partners who will help you to defray the risks and so on.

So rather than thinking that a recession is somehow toxic to innovation, a recession is a perfect time to turn up the heat in the organization, to really be asking people for ideas that are more radical.  Not necessarily more risky, not things that require more investment, but things that really do have the power to change customer expectations, industry economics, have the power to change the basis for competitive advantage.  We need those ideas more in a recession than in any other time.

But innovation is not only about products.  It's not only about new strategies and new business models.  Perhaps the most powerful form of innovation of all is innovation in management itself.  And we don't think usually about management innovation, that's kind of almost even an oxymoron.  But when you go back over the last 100 years and you look at competitive history.  You ask yourself, what accounts for big and enduring shifts in competitive advantage?  How did leadership in the auto industry move from Ford to General Motors and Toyota?  Why was it GE at the beginning of the 20th century that became one of the world's first great industrial companies?  Why Visa rather than all those other potential credit card companies that were vying for industry supremacy 30, 40 years ago?  What happened there?

When you go back and you review that history, you find that those enduring shifts in leadership were not primarily the result of product innovation or strategy innovation.  They were the result of management innovation.  General Electric back in the beginning of the 20th century, working with Thomas Edison, to invent the world's first R&D labs.  People had been doing science forever, but GE brought management discipline to science, so that Edison could say, we'll produce a minor breakthrough every six weeks, a major breakthrough every six months.   They put science on a schedule and within a few decades, GE had more industrial patents than any other company in the world.

Think about Ford, really perfecting the assembly line.  This whole new way of bringing people together.  Running a highly vertically integrated company.  Coordinating all of those inputs to produce the Model T.  Or a couple of decades later, General Motors invents the divisionalized organization structure.  So centralized finance, centralized policy, decentralized operations.  You let divisions even compete with each other, which was a radical idea and that fueled General Motors past Ford.

Sadly, it was the last time that General Motors was a management innovator.  And then you look at Toyota about 30 years ago. The great idea at Toyota was not about quality or efficiency of a lean manufacturing, the great bold idea was a management idea.  The idea that you could train ordinary people to be extraordinary problem solvers.  You teach them statistical process control, pareto analysis.  You give them the right to stop a billion dollar production line if they see a problem.  That was a management breakthrough and it was so profound and such a radical reshaping of responsibilities inside the organization, that it took their American competitors more than a generation to truly figure out what Toyota had done.

Recorded on August 15, 2009

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