TC091 Using Market Forces to Drive Internal Innovation

8/8/2019 TC091 Using Market Forces to Drive Internal Innovation

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USING MARKET FORCES TO DRIVE

INTERNAL INNOVATION

Three key factors for getting it right

By Professor Stuart Read, Philippe Margery and Dr. Nicholas Dew - November 2008

IMD

Chemin de Bellerive 23PO Box 915,CH-1001 Lausanne

Switzerland

Tel: +41 21 618 01 11Fax: +41 21 618 07 [email protected]://www.imd.ch


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USING MARKET FORCES TO DRIVE INTERNAL INNOVATION | Three key factorsfor getting it right

When it comes to driving innovation, small start-up companies have a significant edge overtheir bigger counterparts. But does this have to be the case? Professor Stuart Read, PhilippeMargery and Dr Nicholas Dew share their findings on how to design an innovative start-upspirit within a large corporation.

Prior research into innovation showed that, given the same research and developmentinvestment, new ventures outperform large firms about three times in terms of number ofpatents generated, number of new products and the profitability of those products.

But why is this the case? What is so different about these two types of organizations? In bigger

companies you tend to find more hierarchical structures and vertical integration in place.Command and control. In contrast, new ventures operate more like a market internally, andalso interface (relatively) more with the external markets for capital, ideas, employees,customers and suppliers.

So we decided to consider the opposite to a hierarchical system. What would a large firm looklike if it operated more like a market? The first thing we did was to describe the three coreelements that enable the market to function inside and outside a new venture:

1. Autonomy providing employees the freedom to pursue what they perceive to beinteresting ideas

2. Rewards if you create an innovation you derive some benefit, and3. Psychological Safety the assurance that if you have an idea and explore it yet it fails,

you wont be fired or penalized for it.

We then studied around 6,000 firms representing some 2.5 million employees. We found thatall three of these elements are very significantly related to innovation.

But the element that stands out, where the relationship to innovation appears to be twice assignificant, is psychological safety. It seems the most important variable to promote innovationin the culture of an organization is the support of employees, allowing them to weather thestorm of failure. People should feel safe to try out innovative, experimental ideas without fearof being penalized for it.

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Internal markets: mini case studies

Internal markets already exist and function within some companies. The classic example ofthe use of markets inside an organization is 3M Corporation. 3M uses a very market-likeallocation system in terms of the use of employee time; employees are given one day a weekto work on whatever ideas they like.

Just look at Post-It notes. Starting with a failed technology (glue that didnt stick), Art Fry, a3M employee, was working on this idea in his own time and generated one of 3Ms biggestsuccesses.

Another example is Koch Industries, a large privately owned US corporation trading in oil andfertilizers. It practices market-based management which gives employees broad decisionrights and performance-related pay.

And in Silicon Valley, employees at highly successful Google can use 20% of their time to workon whatever projects they want.

Looking again at the difference between a hierarchical organization and an internal market,this also has an impact on decision making and the progression of ideas. The traditionalhierarchical system is like a monopoly if you come up with a good idea and your boss doesntlike it, it can go no further.

In contrast, in a market you give over the responsibility to a team of people where there iscompetition for ideas and there is competition for funding. More than one person who can sayyes the idea being that the wisdom of the crowd will result in a better decision than any oneindividual or expert.



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Rewards. Nearly two-thirds of respondents said they would be better rewarded for creatinginnovation outside their own organization. This suggests large firms are systematicallyencouraging entrepreneurs to leave the moment they have a good idea. It is important to lookat your reward system and see if it is encouraging people to develop ideas internally or takethem elsewhere.



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Psychological Safety. Encouragingly, only 40% somewhat agreed that they would be penalizedfor experimenting with a new idea and failing. However, if we asked the same question inSilicon Valley, this figure would be closer to 0%. There it is almost a badge of honour intechnology you have to have failed to be credible.

The real question here is how can companies institutionalize the idea of using failure as alearning for the organization? After all not every project will result in a positive financialoutcome, but there will always be a positive knowledge outcome.

The challenge now is can you harness that knowledge, embrace the idea of an internal marketand liberate your employees to think freely? Yes? Then your companys next great idea may be

just around the corner.



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Professor Read is Dean of Research, Development and Publishing at IMD. He is co-Director of

the Program for Executive Development and also teaches on the Advanced StrategicManagement and Strategic Marketing in Action programs.

Philipe Margery is a Research Associate at IMD.


Dr Nicholas Dew is Assistant Professor at the Graduate School of Business and Public Policy,Naval Postgraduate School, Monterey, California.


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TC091 Using Market Forces to Drive Internal Innovation