Change and Leadership: Building the capacity for innovation

In the volatile competitive environment of today there is only one thing we can be sure of – the pace of change will increase. Organisations that transform themselves to use innovation to reinvent markets will do better than competitors. To reinvent markets, organisations need the capacity to innovate.

But how do leaders of established organisations with no innovation track record lead the process of change and transformation?

This is precisely the issue that Prof Axel Johne and I investigated as part of a seven-year programme into organisational change and radical innovation  – Johne, A &  Davies, R (1999) Approaches to stimulating innovation in mature insurance companies, British Journal of Management, 10 (Sept): 919-930.

By the early 1990s many established players in the insurance industry were faced with massive changes from multiple directions. These changes included the entry of new competitors such as Direct Line; declining industry boundaries with the entry of UK retail banks into the distribution chain, and new IT solutions that provide the capability to rapidly reduce expenses. The British insurance industry was also hit by the combined effect of an economic recession and a downturn in the profit cycle. The financial impact of these changes was dramatic with some companies making losses equal to 30% of turnover. CEOs realised that traditional strategies were now ineffective and that capacity must be generated within their organisations to conceive and implement innovation.

It was the process of creating a sustainable capacity for innovation that we focused on. This study embraced eight companies. Successful companies were those that developed strong capacity to innovate in three interlinked ways:

* Product innovation

– the capacity to deliver fundamentally new products – i.e. of a type that the organisation has never offered before.

* Market innovation

– the capability to enter new markets. A good example would be an established broker-based insurer deciding to enter the market for directly distributed products.

* Process innovation

– developing new processes capable of reductions in the organisation’s cost base.

At the start of the research all eight companies studied faced exactly the same competitive problems. There was lack of experience of radical organisational change, and an absence of a clear strategic direction. Interestingly, at the end of the change process, which lasted between three to four years, both the successful and less successful innovators looked structurally surprisingly similar. All had all reduced management layers, designed more customer focus structures, introduced team working and developed new competencies. What separated them was not so much the end structures of the organisation but more the process of change itself.

The less successful tackled the process of change “by the book”, focusing firstly upon the creation of new strategies and then the implementation of new structures and systems to implement the new strategic direction. In the successful companies the change process took a more tortuous route, characterised by rapid shifts in the personal management style of the CEO and in the structure of the organisation. It can be broken down into three fast moving but distinctly different phases.

In successful innovator companies attention was focused on ensuring everyone in the organisation understood the true nature of the internal problems within the organisation. Instead of strategy creation, the first phase of change focused upon developing the capacity of the organisation to learn inwardly. The successful CEOs focused initial efforts on initiating change by:

* A realignment of the top management team to free the organisation of senior executives that were not totally committed to the need for radical change.

* The introduction of structural changes to remove traditional power bases and enable the organisation to develop clearer accountability.

* The implementation of more efficient and clearer communication systems.

* Creation of a new set of internally focused competencies such as portfolio analysis and pricing to support internal learning.

During this first phase, in successful companies, the CEO was the sole architect and driver. At this point, the CEO was on his own and had personally to batter down barriers that lay in their paths with a style they, themselves, described as “interventionist”. The focus was upon developing a clear picture of the organisation’s true status. Competency development was concentrated upon internal learning skills – there was no effort either to develop new strategies or new forms of innovation – these activities had to wait until later.

The second phase shifted the focus of learning and competency creation from understanding the problems of the internal organisation to understanding the problems and challenges in the rapidly changing external environment. Again, the CEO was the sole architect of change. CEOs of successful innovators during this second phase concentrated upon introducing new, more customer focused structures; developing new externally focused core competencies such as product development, marketing and distribution skills, and encouraging an experimental atmosphere to support the first cautious innovation attempts.

The introduction of new competencies and more tightly customer-focused structures was accompanied by a dramatic shift in the personal style of the CEO from barrier-breaker to supplying encouragement. The successful CEOs took it upon themselves personally to sponsor and lead the competency development process. Typically, this second phase of the change process took between 12 to 18 months to complete. And it is only at the end of this second phase of change that totally new strategies and the capability within the organisation to conceive and deliver radical innovations in each of the product, market and process dimensions appeared.

In the third and final phase, in successful companies yet another structural and stylistic shift was undertaken, this time aimed at reinforcing the organisation’s newly created innovative ability. Until this point the CEO alone was the architect of the change process. In all the successful companies the CEO now encourages staff to design and implement their own working structures to optimise new-found innovation capability. In terms of competency building the focus is now upon organisational process and design skills.

This three phase process is illustrated below:

Phases of Strategic Change and Innovation

In the heat of battle, when new competitors are grabbing market share it is difficult and takes courage to avoid the temptation to develop new strategies to take on the competition immediately. This research identifies the need to create within the organisation new internal and competencies before turning attention to the development of new external strategies. Taking this route may take more time to deliver results, but the results are more likely to be sustainable and importantly give the organisation the capacity to take a continuing lead.

There are some important pointers that can be drawn from this research, especially from the perspective of a new CEO drawn in to turn around an ailing organisation:

1. It is always tempting to focus upon creating a new strategy for the ailing organisation. The research shows us that there are many reasons why such a move may fail:

* Incumbent key members of the organisation may not buy into the process of developing a radically new strategy.

* The view of the organisation itself and the competitive environment, as possessed by top managers, may be fundamentally flawed.

* There may be no experience of delivering, for example, radically new web-based solutions.

* Typically, the information won’t exist to generate anything more than an extrapolation of historic strategies.

2. Instead of worrying about long-term strategy concern yourself with:

* Forming a top management team that is hungry for change. Getting the team that reports to you in the right shape is the most important single action that you will take. If you don’t do this at the outset of the change process the project will probably fail to deliver radical new innovation.

* Getting information about the true state of the organisation. You will probably need to develop better financial reporting systems and network personally across the organisation to get the information you need.

* Talking to business level – customer and distribution facing staff. Instil the urgency for change and listen to their views of the organisation’s problems.

3. When these actions have been completed think about encouraging experimentation with the three forms of innovation that were introduced above. Use this experience to generate the thinking in the organisation that will be necessary to build radically new strategies.

4. Only when your organisation has gone through its first attempts at managing innovation should you turn your – and your new top team’s attention to the issue of defining a new long-term strategy for the organisation. This might be eighteen or more months after the whole process started.

5. Remember, successful CEOs get close enough to their businesses to sense when a major change in their personal management style is required to push the process of building innovation capacity to its next stage.