Rao and Weintraub iQ 1 What's Your Company's ...

What’s Your Company’s Innovation Quotient? Jay Rao and Joe Weintraub

Today’s executives want their companies to be more innovative. They consume stacks of books and articles, attend conventions and courses on innovation, hoping to discover the elixir of success. They are awed by the ability of young companies such as Google, Zappo, and Facebook to create and market breakthrough products and services. They marvel at how some older companies—Apple, IBM, Procter & Gamble, 3M, and General Electric, to name a few—reinvent themselves through generations of technology and changing customer needs. And they wonder, “How do these great companies do it?” Both experience and research tells us that sustained innovation is the product of an innovative culture.1 Unfortunately, enterprise culture is a slippery concept. Scholars define it as the bundle of attitudes, experiences, values, norms, assumptions and beliefs embraced by managers and employees; these, in turn, guide behavior. Alas, these elements of culture’s definition are equally slippery, with the result that any executive who wants to create a culture of innovation will have no way to measure the current culture; and without measurement, he or she will find no clear point at which to intervene and create positive change. Recognizing this problem, we set out to accomplish two things: (1) to identify the building blocks of innovative culture and their component parts—which we call ‘factors’ and ‘elements’ respectively, and (2) to develop a practical tool that any executive or manager can use to measure the strength of the culture building blocks under his or her control. We call that measure “i-Q.” Measurement opens the door to practical actions for improving the climate of innovation. Experience with companies in different industries tells us that the measurement tool we have developed is valid, and that it can be applied at any level--from enterprise-wide to individual division or unit. Six Building Blocks of Innovation Our studies indicate that an innovative culture rests on a foundation of six building blocks: resources, processes, values, behavior, climate and success (Exhibit 1). These building blocks are dynamically linked. For example, the values of the enterprise have an impact on people’s behaviors, on the climate of the workplace, and how success is defined and 1

A McKinsey survey of nearly 1,400 executives from around the world reported that 94 percent of respondents unanimously concluded that people and corporate culture were the most important drivers of innovation. The same study showed that applied resources and processes were either underutilized or not achieving scale to have a financial impact. See, “Leadership and Innovation,” The McKinsey Quarterly, 2008, No. 1. Other factors often mentioned in the literature on the subject (e.g., access to skilled labor, availability of capital, government regulation and national culture) were not judged important. See “Radical Innovation Across Nations: The Preeminence of Corporate Culture,” Journal of Marketing, January 2009.

Rao and Weintraub i-Q

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Electronic copy available at: http://ssrn.com/abstract=1987866

measured. Most enterprises, consulting firms, and academic researchers have given substantial attention to resources, processes, and measurement—the left-brained, toolsoriented building blocks—while the right-brained, people-oriented determinants of innovative culture—values, behaviors, and climate--have gotten far less attention.2 It is no surprise, then, that companies have done a better job of managing those ‘left-brain’ aspects of innovative culture. As every manager knows, anything that involves peoples’ values, behaviors, and the climate of the workplace is more intangible and difficult to handle. As one CEO put it, “The soft stuff is the hard stuff.” Yet experience tells us that those difficult people issues have the greatest power to shape the culture of innovation. Exhibit 1 Building Blocks of an Innovative Culture

Our six building blocks are derived from previous research. For instance, the works of Clayton Christensen demonstrate the importance of resources, processes and values while the classic work of Ed Schein on culture have shown the importance of past success and its impact on norms (values) and behaviors. The Forum Group’s extensive work on climate is also well known. Each of the six building blocks in our analysis is composed of three factors (nine in all), and we have deconstructed each factor, in turn, into three underlying elements--54 in all (see Exhibit 2). Values Values in our model are what an enterprise stands for—and what its people will fight for. Values drive priorities and decisions, which are reflected in how a firm spends its time and money. Truly innovative enterprises spend generously on being entrepreneurial, promoting creativity, and continuous learning. 2

Note: The old Sperry model of the two sided brain has been replaced by the learning and recall model of Kandel and his colleagues. However, we use the old model as a convenient way of organizing our thoughts to convey a point.


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Behaviors Behaviors describe how people act in the cause of innovation. For leaders, those acts would include a willingness to kill off existing product with new and better one, energizing employees with a vivid description of the future, the removal of bureaucratic red tape, and so forth. For employees, action in the support of innovation might include doggedness in overcoming technical roadblocks, “scrounging” resources when budgets are thin, and listening to customers. Climate Climate is the tenor of workplace life. An innovative climate is marked by simplicity, collaboration, and trust among employees. A healthy climate cultivates enthusiasm, challenges people to take risks within a safe environment, fosters learning, and encourages independent thinking. Because innovative climate increases employee engagement and openness to productive change, it is the mediating building block between individual and firm-wide performance.3 Resources Resources in our model explain how innovation efforts are supported. This building block, in turn, has three main factors: people, systems and projects. Of these, people--especially “innovation champions”—are critical. Their leadership has a powerful impact on the firm’s values and climate. Over time, the people factor should develop into a community of champions, mentors, and coaches with a common vision and a common language of innovation. Even today, nearly 60 percent or all patents are given to groups of three or less. However, innovations are almost always a community effort. Collaboration, communication systems, and tools play an important part in their work. Processes Processes explain the course of innovation in a particular enterprise. These may include the familiar ‘funnel’ used to capture and sift through ideas, ‘stage-gate’ systems for reviewing and prioritizing projects, prototyping, fast failures, scale-up and so forth. Like resources, the process building block has three factors: ideate, shape, and capture. While many companies have demonstrated great skill in building and implementing these innovation processes, many fail to take the next important step: building the human and social infrastructures that those processes need to operate effectively. For example, executives spend liberally on the installation of a stage-gate system and think that their work is done. Only later do they discover that their new system does not perform as anticipated. The reason: they failed to build a strong team environment, a suitable rewards system, or an effective process for making decisions on innovative projects. Good business processes are very important, but they are simply mechanisms; they require complementary human systems.

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David Rock, “Managing with the brain in mind,” Strategy + Business, issue 56, Autumn 2009


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Success This building block describes how innovation output is defined, measured, and rewarded. In our scheme, success can be captured at three levels: external, enterprise, and personal. The first is generally well understood; companies know how to measure the output of innovative projects. At the enterprise level, 3M regularly calculates its innovative capabilities as the percentage of annual revenues generated by products launched within the previous five years. It states this metric as one of its corporate goals. How individual employees measure their personal success, on the other hand, is just as important but less often considered. If a company scores well on every measure of innovation, but its people feel burnt out, short-changed, or left out of decisions that affect them, its culture of innovation will be diminished. Success measures feed back into other building blocks of innovation, reinforcing the enterprise’s values, behaviors and processes. And they drive many actions and decisions: who will be rewarded, which people will be hired, which projects will get the green light. Building Blocks at Work While our six building blocks many seen abstract, studies and our own observations find one or several of them at work within truly innovative companies. Here are a few examples. Ideo: Values and Behaviors Few firms better exemplify innovative values and behaviors than Ideao, the Palo Alto-based design firm. This company puts a high value on productive creativity, which it links to playful behavior. And it supports both in tangible ways. Its work routines model the playfulness of children: exploration that generates many ideas; learning through hands-on building; and gaining empathy for users through role-playing. Placards placed around the company’s workspaces proclaim Ideo’s principles for ‘diving deep’ into problems:    

Encourage wild ideas Defer judgment Build on the ideas of others, and Stay focused

While Ideo’s culture evokes the creativity of childlike play, it provides a transition to adult style decision making, control, and implementation. This spectrum of behavior styles— from playful to businesslike--has given the world hundreds of products, from the computer mouse to medical equipment, that combine the best of form and function. W. L. Gore: Climate “Safety” is an essential factor of an innovative climate. A workplace free of fear liberates people to take the risks that innovative requires. W.L. Gore, famous for its Gore-Tex® and other high-performance products, provides an instructive example of safety. Here, mistakes made in the pursuit of novel solutions are accepted as part of the creative process.


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When a project fails, a post-mortem is conducted. Was the concept flawed or was there poor execution? Were poor decisions made? The goal of these post-mortems is to learn and to improve. When a project is killed, W.L. Gore people celebrated with beer and champagne. Rite Solutions: Processes and Success Rite-Solutions is a Rhode Island USA software company. Recognizing that they have no monopoly on brainpower or good ideas, it two founders have developed a unique process for drawing on employees’ know-how and creativity. Mutual Fun, the company’s stock market game, has created an internal free market of ideas with monetary rewards for success. Here’s how it works. Dozens of stocks (project ideas) are listed and described in detail on the company's internal “market,” and all new listings begin trading at $10 per share. Every employee is given $10,000 of play money with which to invest, and each uses his or her judgment in allocating that money among the available “stocks.” Employees can also volunteer to work on projects they favor. This “architecture for participation” draws out the collective wisdom of the entire employee population. Management uses this collective wisdom to make decisions on which projects will be funded. Play money is redeemed for real cash if and when projects turn into Rite Solutions commercial products. Zappos: Resources Online shoes seller Zappos exemplifies many of our six building blocks, but we’ll focus on just one here: resources. For this company, happy and energized people are considered the greatest resource. Convinced that satisfied employees create satisfied customers, Zappos goes to extreme lengths to create a high-energy and participative workplace. That begins with employee selection. Management hires only “happy” people; and it keeps them in high spirits through a variety of practices, which include celebrations, games, and a serious career development program for each person. To separate truly committed recruits from all the rest, Zappo routinely offers $2,000 to every successful graduate of its employee training program who agrees to leave. No strings attached! Some take the money and go. Those who don’t join the ranks of loyal employees. The result is that Zappo has almost no voluntary employee turnover and ranks near the top of Fortune’s annual list of the best place to work in the United States. Exhibit 2 captures the six building blocks of innovation, the three factors that define each, and the 54 underlying elements of those factors. Notice how, moving left to right, the enterprise qualities of the innovative culture become more concrete, more manageable, and more measurable. It is around those 54 underlying elements that we developed and tested a questionnaire to diagnosis the culture of innovation in enterprises.


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Exhibit 2 Components of an Innovative Culture

Assessing Enterprise i-Q The set of questions we have developed and tested over the past three years allows us to assess the innovativeness of an enterprise’s culture—it “i-Q” The questions address each of the 54 elements described in Exhibit 2. Those questions are both mutually exclusive and collectively exhaustive, and have been found to be statistically sound. 4 We have applied this measurement tool at a number of companies—in telecommunications, financial services, and manufacturing. In each application, we calculated an average for each question, a distribution in the responses for each question, and an average for each building block of three related questions. For example, Exhibit 3 indicates our questions for the ‘behaviors’ building block. The average scores and distributions in the three right-hand columns are based on responses from participants at one company.

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Confirmatory factor analysis revealed that 16 out of the 18 factors were reliable at a 0.7 or above; the other two were above 0.6. A complete item analysis showed that item discrimination was 0.3 and above.


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Exhibit 3 Selection of Survey Questions

Enable

Engage

Energize

Questions

Average

Our leaders inspire us with a vision for the future and articulation of opportunities for the organization. Our leaders frequently challenge us to think and act entrepreneurially. Our leaders model the right innovation behaviors for others to follow. Our leaders devote time to coach and provide feedback about innovation in a timely manner. In our organization, people at all levels proactively take initiative to innovate. Our leaders provide support to project team members during both successes and failures. Our leaders use appropriate influence strategies to help us navigate around organizational obstacles. Our leaders are able to modify and change course of action when needed. Our leaders persist in following opportunities even in the face of adversity.

3.73

# 5

Distibution 1 2 3 4 5 2 10 26 59 20

3.64

3 10 31 55 18

3.57

1 15 26 66 9

3.21

5 21 41 44 6

2.90

# 4

Factor Average

6 33 47 25 4

3.36

3 13 47 44 8

3.39

1 16 41 54 5

3.65

1 12 26 66 12

3.65

2 11 27 62 14

3.65

# 2

3.16

3.56

Scale: 1 = Not at All; 2 = To a Small Extent; 3= To a Moderate Extent; 4 = To a Great Extent; 5 = To a Very Great Extent

Everyone’s opinion counts Our initial applications administered the survey instrument to company executives. How did they assess company i-Q? This was not the optimal approach. We found that people at or near the top—the individuals who make the decisions and control activities—typically had a much rosier view of their cultures than did mid- to lower-level managers and rank and file employees. This was confirmed by our experience and by other forms of enterpriseal diagnosis. Executives, like everyone else, naturally think that they are doing a good job. Also, executives do not always have a complete view of enterprise reality; they simple cannot see everything that goes on. Executives were also at odds with their employees in terms of where they saw the greatest strengths. Most executives rated their companies as being stronger in the “right brained” building blocks (values, behaviors, and climate) than in the left (resources, processes, and definition of success). People lower in the enterprise made the opposite assessment. The solution to this ‘rosier view’ problem is to survey a broader group of employees—in effect, a 360-degree feedback approach that captures the insights of many, and that embraces the many things that the bosses cannot possible see.


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Striking variations may also be found between operating units. For example, in the case of a global manufacturing company based in Europe we found that its different divisions rated the elements of innovative culture very differently. Pinpointing areas of strength and weakness A broad survey of the employee population with our instrument produces a snapshot of how well or how poorly an enterprise is doing in terms of each of the 54 elements of innovative culture. Using survey data, management may see, for instance, that it is very good at generating new ideas (see “ideate” in Table 1), but that it does a lousy job of shaping those ideas through prototyping and ‘fast, cheap’ failures. It may learn that employees are energized by the challenges put before them, but find little enterprise support or rewards for the work employees are inspired to do. Diagnostic insights such as these have real value for management. Those insights become even more valuable when we disaggregate survey data by operating unit, department, or by employee class. Any broad-based survey result is bound to contain variation. So, while employees, on average, might feel energized, disaggregated data may reveal that the company’s small cadre of bench scientists feels uninspired and disaffected. The feelings of this important employee sub-group would be masked within aggregated survey results. From Assessment to Action By disaggregating survey results, management can get a clear, data-supported picture of where the culture is strong and weak. It can then focus on specific areas where improvement is most needed and most likely to pay off: in personnel selection, rewards, coaching, team-building, idea filtering systems, and so forth. Poor scores on any of the 54 questions tell management where to intervene. For instance, if the survey question, “Our leaders persist in following opportunities, even in the face of adversity,” consistently receives low scores from customer service personnel, that is a cue to management that should get to the bottom of problems in the customer service unit. Disaggregated survey results also provide opportunities for learning. High scores in one or another unit may indicate best practices that managers in less well-performing units can study and emulate. This was the case with our European manufacturer, which had substantial survey result differences between divisions. Each division had something to learn from the others. Our assessment tool is designed to reveal inconsistencies between thought and action; between perceptions and real behaviors; between and within groups. For instance, we find that most senior executives rate themselves highly in terms of their desire to explore new opportunities; yet these same respondents do not always provide their people with the time, space or money to pursue those opportunities. Similarly, they give themselves high scores for providing the freedom to pursue new opportunities; meanwhile, their subordinates describe their workplace climate as rigid and bureaucratic.


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Conclusion One practical virtue of our assessment tool is that it can be applied at any level. Even in a company with a caustic culture, its possible to build islands of innovative thinking and action. By asking subordinates to respond to the 54 questions, the leader of any subunit— division, department, or team—can determine the innovation quotient of his or her area of responsibility, then begin a campaign to make positive change. For best results, these leaders should aim initially for small victories. They should pick only one element from each building block, then invite others to work on those. Success with this initial effort should trigger a widening circle of improvement until the unit achieves a high innovation quotient.


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