How to foster innovation.

Post 540 - Peter Drucker once told me, "There are only two profit activities in business: innovation and marketing. Everything else is expense." Drucker said his intellectual model was Walter Bagehot, the famous editor of The Economist. Like Bagehot, Drucker saw the tension between the need for continuity and the need for innovation and change as central to society and civilization. There are only three basic business strategies: Operational excellence (low cost models), Innovation, and Customization. That's it. Everything else is a derivative.

Andrew Hargadon, an expert in technology management, management of innovation, entrepreneurship and new product development at UC Davis Graduate School of Management, calls innovation “a phenomenon of networks connected by 'technology brokers' - people or organizations that link isolated groups and industries to integrate previously unrelated viewpoints and technologies to resolve new problems." This suggests that innovation occurs by bringing together different ways of looking at common and mundane ideas. For example, Gutenberg married two different tools - a coin stamping tool-and-die process, and a winepress - to come up with the printing press. New ideas come from having different perspectives and juxtaposing different theories. However, only innovation that depends on technical platforms or infrastructure that others lack will provide a sustainable source of competitive advantage. Little lasting advantage accrues today solely from developing clever technical applications.

According to Theodore Levitt, "Creativity is thinking up new things. Innovation is doing new things." Texaco provides a useful example. Worried about political obstacles to its overseas exploration plans in the late 1980s, Texaco began turning more of its attention to increasing production in its domestic fields. In 1992, Stephen Hadden, then a 40-year old petroleum engineer, was sent to the declining, 100-year old Kern River oilfield in California to help breathe new life into its operations. A minor miracle resulted: Production increased from 80,000 barrels a day and surpassed 100,000 by 1998. Production per worker surged from 150 barrels a day in 1992 to 250 barrels in 1995, and Texaco raised its estimates of recoverable oil at Kern River by 66 million barrels, good for another ten years of production.

The turnaround began when Hadden assembled a group of 25 engineers, geologists, technicians, field workers, and outside contractors, and put them through a nine-month brainstorming program where they developed proposals about ways to improve operations. He abolished the old lines of authority and replaced them with a team system, thus freeing the field workers from many traditional management restraints. As Hadden remembers, “We simply started a conversation with each other asking why we were where we were.” The brainstorming team met each morning to discuss problems and to develop new ways of dealing with them. As a result, employees were given new powers to act on their own, including freedom to communicate with other departments without management approval.

They also had unrestricted access to a new central computer system that stored data on all aspects of operations, including each well’s history and the location of underground rock formations. Information that previously took weeks to obtain could now be retrieved in minutes. The computer was also linked to Texaco’s research laboratories in Houston. Initially, the new approach resulted in mostly small improvements. But the daily meetings eventually led to innovations that revolutionized how oil was extracted as technicians introduced a new method of injecting lower-pressure, lower-heat steam into much larger sections of the underground layers of rock and sand. As a result, Kern River increased its recovery rate from 50% to 66%, and eventually push this to 80%. Hadden says his operating strategy was, “to stay out of the way and give people the resources they needed to get the job done.”

An OECD study of the Japanese automobile industry estimated that 60% of innovation in Japan came from the place of work, not from the universities or the research departments. To get this level of innovation, you must allow freedom. But to have a network, you have to have a certain amount of control. Also among the prerequisites for innovation, employees should have a sense of security and a sense of possibility.

Writer-director Brad Bird of Pixar says, “Involved people make for better innovation. Passionate involvement can make you happy, sometimes, and miserable at other times. You want people to be involved and engaged. Involved people can be quiet, loud, or anything in-between - what they have in common is a restless, probing nature: ‘I want to get to the problem. There’s something I want to do.’ If you had thermal glasses, you could see heat coming off them.”

Useful knowledge is widely dispersed and expensive to collect. What economist F. A. Hayek called “competition as a discovery procedure” allows companies to find new ideas through decentralized trial and error, through adaptation and improvisation. Without a peripheral view of the data however, it's easy to get blindsided when something new turns up. Trends are easy enough to predict but abrupt innovations are harder to anticipate. There’s an aphorism that any time you jump three orders of magnitude, (say from 10 to 10,000) you have a whole new science.