Organizing for Innovation
How corporations can empower new people with new ideas to drive more inclusive growth.
The arc of progress is shaped by divergent responses from institutions to the threats and opportunities created at critical junctures.
As the Bubonic Plague swept through Europe in the mid-14th century, the institutional seeds for the social and industrial revolutions that were to take place in centuries to come were already being planted. And while the country by country responses varied only slightly at the outset, institutional drift compounded over time and laid the foundation for many of the international trade and power structures that exist to this day.
Economists Daron Acemoglu and James A. Robinson explored the role of critical junctures in Why Nations Fail:
The Black Death is a vivid example of a critical juncture, a major event or confluence of factors disrupting the existing economic or political balance of society. A critical juncture is a double-edged sword that can cause a sharp turn in the trajectory of a nation. On one hand it can open the way for breaking the cycle of extractive institutions and enable more inclusive ones to emerge, as in England. Or it can intensify the emergence of extractive institutions, as was the case with the Second Serfdom in Eastern Europe.
In England, the emergence of more inclusive markets in response to the development of more inclusive social and political systems expanded the surface area for innovation. Newly empowered entrepreneurs and workers were free to allocate their talents to the highest value activities. This fanned the flames of creative destruction.
The parallels to our current situation are striking and we find ourselves at a similarly monumental critical juncture today.
The rapid onset of the Covid-19 pandemic has laid bare many of our most foundational social and economic vulnerabilities and has led to the inspirational and impactful Black Lives Matter protests for racial equality that have spread across the United States.
Corporations have an important role to play in shaping society’s response to this critical juncture. As we will explore in this analysis, the corporations that take action with a bias towards creating inclusive institutional incentives won't just be on the right side of history — they will prosper relative to competitors incapable of evolving.
The opportunity for impact starts with direct action — “Make the hire. Send the wire.” — and extends to the creation of institutional incentives and the implementation of strategies that make it possible for corporations to thrive in the face of economic uncertainty and foster a more inclusive, sustainable form of innovation-enabled growth.
We will start by looking at the surprising foundations of modern management theory and its view on the importance of inclusive economic and social institutions.
From there, we will evaluate what is at stake for corporations thanks to the persistent impact of disruptive technology platforms and bridge that to a roadmap for how corporations can employ cultural and strategic frameworks to expand their own innovation surface area in the face of uncertainty.
In the coming weeks, months, and years, much will change. And what follows is a narrow look at what shape that change must take.
There are, however, two near certainties that will be central to our discussion going forward.
Society needs newcomers to introduce the most radical innovations. These newcomers and the creative destruction they wreak must often overcome several sources of resistance, including that from those in power.
Adaptable, long-term oriented corporations focused on creating value through the development of non-zero sum external partnerships will be best positioned to harness the innovation brought to market by these newcomers and more effectively serve an increasingly diverse set of employees, customers, and other stakeholders, leading to sustained growth and market power.
It is worth stepping back and asking given the weight of the current moment why corporate growth and strategy even matter in the first place. With millions in the streets fighting for a seat at the table, what good can business do?
I believe it can do a lot, especially if the strategy in question is aimed at (say it with me again) helping corporations expand their surface area for innovation.
As we will look at later, a corporation that effectively organizes for innovation is, by definition, opening itself up to a broader set of influences and ideas than it can generate internally.
This broader set of influences and ideas on corporate direction is necessary to keep the business-led American growth story from running out of steam. Extractive economic and social institutions have a shelf life.
Peter Drucker, widely regarded as the founder of modern management, deeply understood the role business strategy played in a broader social context.
I would hope that American managers—indeed, managers worldwide—continue to appreciate what I have been saying almost from day one: that management is so much more than exercising rank and privilege, that it is about so much more than "making deals." Management affects people and their lives.
Drucker wasn’t just paying lip service. As a young writer, he took real risks to stand up to unjust, extractive institutions:
Partly as an act of protest—to hold up a German of an earlier generation as an exemplar of tolerance—Peter published a pamphlet on Friedrich Julius Stahl (1802-1861), a legal philosopher, a liberal parliamentarian, and a Jew. The Nazis burned it. Drucker recalls that after sitting through a foul-mouthed harangue against the Jewish faculty delivered by the Nazi goon now in charge of the university, "I knew I would leave Germany in forty-eight hours."
It should come as no surprise that his management theory is rooted in a similarly inclusive philosophy. As he wrote in Management: Tasks, Responsibilities, Practices, “to make our institutions perform responsibly is the only safeguard to freedom and dignity”.
The institutions Drucker concerned himself with most throughout life were capitalist business institutions, believing that a society built around the market could achieve "freedom and justice through economic development".
Taking the long view
Drucker’s perspective echoes a central idea of Acemoglu and Robinson in Why Nations Fail:
Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people. For sustained economic growth we need new technologies, new ways of doing things, and more often than not they will come from newcomers.
They go on to note that “innovation is rooted in new people with new ideas, developing new solutions to old problems.” As we are seeing play out in real time, there are no shortage of old problems to be solved and no shortage of people with the skills and motivation to solve them.
What is at stake?
The rise of disruptive technology platforms and the business models they ride to market alongside are often accelerated during periods of economic or social turbulence, with the spear of innovation pointed directly at the problems that created, were exposed by, or directly resulted from the crisis at hand.
At every critical juncture, society undergoes significant cultural and social shifts that create the opportunity to kick off a virtuous circle of accelerating innovation. During the Industrial Revolution in England, this came in the form of more secure and efficient property rights that helped re-organize society in favor of innovation.
Could a confluence of factors like ending the drug war or the demilitarization of police forces around the United States have a similarly catalytic effect in our time? While not a given, it is certainly possible.
Pair that shift with the accelerated and persistent impact that disruptive technology platforms are having on nearly every industry and it is clear that that the opportunity at stake for any corporation — and the threat of not harnessing the potential of this emerging paradigm — is significant.
To paint a picture of the scale of economic opportunity, ARK Invest estimates that more than half of incremental business value creation measured by global equity market capitalization will be driven by five core technology platforms — artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology. This represents tens of trillions of dollars of market value.
Given the nascency of these emerging platforms, their futures will be determined by how effective we are at mobilizing “new” innovators at scale to tackle their development and implementation.
The question within the context of this analysis then becomes — what steps can corporations take to attract, empower, and retain the innovators and entrepreneurs capable of bundling these emerging technologies with aligned business models and cultural comprehension to drive sustainable, inclusive growth and gain market power?
Organizing for Innovation
In turbulent times, economic metabolisms are certain to speed up. But the large company that organizes for innovation will have an advantage.
I'll note before we move forward that the principles underlying how corporations should organize for innovation weren't developed by starting with the question of what can corporations do to improve diversity and inclusion? Instead, they were developed by starting with the question of how can corporations gain market power in the face of mounting competition and uncertainty?
They just happen to be principles that bend towards the establishment of a more inclusive form of innovation — shifting decision-making away from the C-suite to the edges of a company where (a more diverse set of) individuals and small teams better grasp the tactile realities of the situation on the ground.
At its core, organizing for innovation amid uncertainty means embarking on a systematic search for emerging opportunities.
Organizing for innovation takes time and requires trade-offs. This is especially true now, as the health and well-being of a company’s stakeholders is undoubtedly priority number one. There are, however, actionable steps companies can take to bridge the ideas discussed so far to real-world execution.
1. Develop self-awareness in the C-suite
A company’s strategy, no matter how well conceived, is useless without an aligned culture through which it can implement said strategy. Company culture is the bridge between theory and action. It is the operationalization of a company’s values and it expresses itself as a set of frameworks that a company uses to make decisions under uncertainty — in good economic times or in bad.
As uncertainty about the future increases at a company — whether due to industry-specific factors, a macro downturn , or social upheaval — there is a tendency for executives to seek control in an effort to mitigate complexity. This often means centralizing decision-making and limiting investment in developing external partnerships.
In the near term, this approach may seem to have the effect of simplifying and focusing a company’s direction in the face of adversity. In reality, it leaves the organization more susceptible to the hidden risks that rear their head in times of turbulence and cuts off creative destruction-enabled growth paths — namely, growth paths with a focus on harnessing new innovation brought to bear by a new class of innovators. This, in turn, creates damage that lasts well beyond whatever period of uncertainty the changes were put in place to weather.
Self-awareness about the challenges of resisting this command and control instinct must remain front and center for executives committed to leading innovation-focused change.
2. Push power to the edges through "bottoms up" resource allocation
Antifragility — the notion of “negative fragility” conceived by Nassim Taleb — can be challenging to conceptualize. It is not durability or robustness. Instead, it is the opposite of fragility, something that actually gains strength from disorder as opposed to suffers from it.
During times of turbulence, operating from a position of antifragility is critical. Specifically, organizational antifragility means optimizing for decentralization. As Alex Danco writes:
Antifragile systems and organisms tend towards a common theme: bottoms-up decision-making, rather than top-down decision making. Antifragility requires real options, and real options are low-cost. Antifragility is only successful if you can actually detect, react, and grow in response to deviations from your present state in real time; the only way you can feasibly do this is for disorder detection and response to take place at a small enough resolution, and tight enough turnaround time. Top-down systems have a hard time with antifragility, because for them, all options are costly.
Capital allocation, as I've written in the past, is best done with a bottoms-up mindset.
This is true both in how leaders should structure their own decision-making process and in the culture they must push throughout their organizations. The two necessarily go hand in hand.
It is, as Peter Fenton of Benchmark is fond of saying, crucial for any capital allocator to understand that their “job is not to predict the future, it is to see the present very clearly.”
A focus on seeing the present clearly does away with the type of pattern matching that has defined corporate decision making in the past and instead seeks to understand the tactile reality of the situation at hand by listening to newly empowered influencers and decision-makers from across and outside of the organization.
3. Get the structural incentives right
Commitment to a growth focused culture and bottoms-up resource allocation only goes so far.
Without the right structural incentives, even the best intentions fall by the wayside in the face of heightened stress and uncertainty. The development of these structural incentives should be done with the goal of accomplishing the following:
Ramp up internal transparency around metrics and key activities
Focus on high leverage, controllable business inputs instead of outputs
Organize around small, multi-disciplinary teams
It will come as no surprise that Amazon (who features in all of the links above) embodies the decentralized approach to growth better than almost any large company in the world. And while Amazon and its multi-decade success is truly unique, these three core building blocks can be emulated by companies across industries seeking to drive inclusive growth.
We again come back to Drucker as we look at how corporations can make the leap from conceptual optionality and decentralization to a structure that allows for the implementation of such an adaptive approach.
In order to structurally incorporate these concepts into an organization, Drucker recommends companies adopt a two-track budgeting strategy
An operational budget for the things that are already being done, and an opportunities budget for the proposed new and different ventures. The operational budget will be much more voluminous than the opportunities budget...yet both should be given the same amount of top management time and attention.
Corporations are typically prone to errors in predicting the future, especially when using top-down approaches that many executives cling to in times of heightened uncertainty. To combat this, companies should seek to develop a structure that pushes investment to each end of the barbell by optimizing for resilience (the strengths in the core business) and optionality — new opportunities attacked by new people with value captured (and shared) via an external platform.
The idea of an external platform is key, both in its ability to insulate innovation focused efforts from the concerns of the core business of a corporation and also to amplify surface area for new ideas brought to bear by external innovators (namely, ventures). Companies, like countries, that turn inward in order to maintain stability do so at the risk of halting creative destruction that creates a foundation for long-term, inclusive growth.
Seventeenth century China, described in Why Nations Fail, provides a cautionary tale worth considering for corporate executives struggling with understanding the importance of external ideas and collaboration:
In 1661 the emperor Kangxi ordered that all people living along the coast from Vietnam to Chekiang — essentially the entire southern coast, once the most commercially active part of China — should move seventeen miles inland. The coast was patrolled by troops to enforce the measure, and until 1693 there was a ban on shipping everywhere on the coast. This ban was periodically reimposed in the eighteenth century, effectively stunting the emergence of Chinese overseas trade.
This trade-off of innovation and growth for political stability — a trade often made by corporations around the world — led to centuries of stagnation and significantly delayed development.
While separating innovation-focused activities with high upside from the concerns of the core business is important in any environment, this buffer becomes increasingly paramount in more uncertain circumstances. Thus, as Drucker suggests, corporations must create structural barriers to ensure the persistence of organized innovation.
When the Daily Active Crisis momentum of the current moment recedes, structural incentives will be what sustains a push towards reforming economic and political institutions towards inclusivity.
As I wrote at the top of this essay, the arc of progress is shaped by divergent responses from institutions to the threats and opportunities created at critical junctures. It is also shaped by the effectiveness of those institutions in empowering an entirely new cohort of innovators who had previously been blocked from contributing and benefitting equitably.
By organizing for innovation and investing in the creation of structural incentives that foster inclusive growth, corporations have a unique opportunity to be the core drivers of this economic empowerment. The resulting change will benefits stakeholders (in the broadest sense) and create the foundations for sustainable, compounding competitive advantage.
Corporations that organize for innovation won't just be on the right side of history. They will prosper.
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