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The importance of building a culture ofinnovation in a recession
Jaideep Prabhu
Abstract
Purpose – The purpose of this paper is to determine how corporate culture can be harnessed to fosterradical innovation in a recession.
Design/methodology/approach – The paper uses the findings of a survey and archival data from 750public firms in various manufacturing industries across 17 major economies of the world in 2003-2004.The firms in the sample come from developed economies such as the USA, UK, Germany and Japan, aswell as developing economies such as China and India, thus allowing the comparison of the drivers ofinnovation across very different national contexts.
Findings – The paper finds that, if certain attitudes, practices and behaviours are shared by membersof a firm, it is more likely to have a forward-looking, risk-taking culture.
Practical limitations/implications – Managers can benchmark their corporate culture against threecrucial attitudes and three related practices.
Originality/value – Previous studies have focused on how national policies drive innovation; the paperchallenges those conventional views. This work can enable HR managers to overcome the challengesposed by the economic climate to develop a more enterprising corporate culture.
Keywords Innovation, Culture (sociology), Risk management, Patents, Recession
Paper type Research paper
In the current economic climate, many firms are downsizing and restructuring their
workforces to create a lower cost base and remain competitive. However, this poses a
multitude of challenges to the HR professional, who must continue to maintain the
support of employees and, more critically, make sure that the organization is primed for
innovation. After all, the development of new products and services is one of the keys to
recovery.
Radical innovation drives the growth of firms, markets and the economies of nations. It can
take small companies to the heights of success and bring down those that fail to innovate. In
fact, firms that commercialize radically new products dominate world markets (Tellis et al.,
2009). For these reasons, managers and governments see innovation as vitally important,
even in a recession. But in tough economic times, when a bold approach gives way to
conservatism and a focus on cost control, it may be difficult for firms to get themselves on to
the innovation frontline. Where should they focus their resources to ensure the ongoing
radical innovation that will keep them in the lead?
Finding the innovation drivers that lead to success
Radical innovation differs substantially in firms across nations and these differences have
been explained in numerous ways. Our research looked at 750 public firms of various sizes
and sectors across 17 nations. We examined what drives innovation in companies and what
makes one firm more innovative than another. We looked at 42 drivers of radical innovation,
including skilled personnel, patents, R&D and the culture of nations and individual firms. Of
DOI 10.1108/14754391011022208 VOL. 9 NO. 2 2010, pp. 5-11, Q Emerald Group Publishing Limited, ISSN 1475-4398 j STRATEGIC HR REVIEW j PAGE 5
Jaideep Prabhu is based at
the Judge Business School,
University of Cambridge,
Cambridge, UK.
these drivers, 31 operate at the country level and 11 at the firm level (Tellis et al., 2009).
Figure 1 draws them together under four main groups – labor, capital, government and
culture. Our research indicates that some of these are more effective than others at driving
innovation and leading to financial value for firms, as we shall show.
It is very clear from our study that in order to channel resources towards the drivers that
matter and to ensure that the entire process of innovation is efficient and productive, it is vital
to measure the outputs of radical innovation – i.e. radically new products – instead of inputs
such as R&D spending or skilled labor. In the past, there has been a tendency to measure
surrogates such as patents and country-level scientific talent (Acs and Audretsch, 1987; von
Hippel, 2005). However, we have found that R&D spending and numbers of scientific
personnel across countries do not automatically lead to the creation of new products or
guarantee financial value. Firms and nations need to measure radical innovation directly in
order to gauge where they really stand on the ultimate outputs that count, rather than on
inputs or intermediate outputs that reflect costs. Following are our related findings.
Patents are not as important in influencing financial value as radical innovations
Patents have been widely used as a measure of innovation. This is because they seem to be
a pre-condition for innovation and because they appear to offer protection to intellectual
property. However, our study shows that they are not as important in influencing financial
value as radical innovation itself. Furthermore, many high-tech firms now realize that patents
provide only partial protection for their inventions, and firms can be highly innovative without
patenting. Indeed, a senior executive at a Fortune 50 firm in the USA said to us: ‘‘We have
many technologies and patents sitting on the shelf. Our problem is getting them out to
market.’’
Look at Apple – a firm that has a little over a hundred patents and yet managed to steal
Sony’s market for mobile music with the iPod. Sony was hugely successful with its Walkman,
and has thousands of patents, but it failed to keep its eye on the future market and so lost out
in the battle for the next generation technology. It is clear to us, therefore, that firms need to
focus directly on the outputs rather than the inputs such as patents – or at least they should
focus on making sure that patents lead to the commercialization of radically new products.
Figure 1 Framework of the drivers of radical innovation and value creation
Labour
Capital
Government
Culture
RadicalInnovation
ValueCreation
Nation Firm
Nation Firm
Nation
Nation Firm
PAGE 6 jSTRATEGIC HR REVIEWj VOL. 9 NO. 2 2010
Radical innovations significantly increase the market-to-book value of firms
At the country level, we find that country capital and country population have a significant
impact on the market-to-book ratio. At the firm level, skilled labor, which can be measured by
the percentage of R&D employees in the organization, is also a strong predictor of
market-to-book ratios. Nevertheless, radical innovation has a significant effect on the
market-to-book ratio, even after controlling for industry-fixed effects.
Corporate culture has a greater impact on innovation than country-level drivers
Our research shows that while many professionals, including policy makers, are still
focusing on country-level drivers of innovation, such as government regulation, scientific
talent and investment, these are no longer so relevant in our increasingly globalized
economic environment. As world economies converge and governments rapidly adopt
internationally acknowledged best practice and policy – and as barriers to the mobility of
labor and capital are lowered – country-level drivers become less important as
discriminators of firms’ performance.
Take the USA, for example. It is a traditionally innovative country, which is home to radically
innovative firms like Apple, but it is also home to firms such as Kodak that have failed to
cannibalize successful products. Then there are firms like Samsung and Infosys that are in the
lagging economies of Korea and India but have leapfrogged ahead of the slumbering
American giants. In fact, the corporate culture in some of these innovative firms has developed
precisely to overcome aspects of their home economies that would otherwise hinder them.
So, what we see is a ‘‘flattening’’ of differences at the country level. On the other hand,
differences at the firm level reflect features that are unique to each firm. Here we find that
internal corporate culture is the most important driver of radical innovation. It is not that
country-level factors such as government, culture, labour and capital are unimportant.
Rather, in the current environment, corporate culture is more important in predicting radical
innovation in firms across nations.
These findings have significant implications for HR professionals. It puts them at the centre
of the struggle to steer their organizations to success in the post-recession economy. But
how exactly can HR professionals manage a firm’s human resources to maintain that
all-important culture of innovation – particularly today, when they may be faced with reduced
staff, more dispersed teams and the increased use of outside contractors?
Understanding corporate culture
The first step on the road to creating a corporate culture that is fertile for innovation is to
understand the nature of an organization’s existing culture. Corporate culture refers to a core
set of attitudes and practices that are shared by the members of the firm (Denison, 1996;
Hatch, 1993; Martin, 2002; Schein, 1999). It is a uniquely human product that develops slowly
within firms and is not easily transferred (Jassawalla and Sashittal, 2002; Schein, 1999).
Indeed, our study suggests that firms are special forms of organization that increasingly
transcend national boundaries, constraints and systems. Their cultures are often tacit, and
tough to observe andmeasure. Above all, they can be very difficult to change. Success in one
generation of technology can be the source of the next generation’s decline. It can breed an
attitude of complacency and invulnerability, which can blind a firm to radical innovations on the
frontier. Encyclopaedia Britannica learned this lesson when it lost its position as leading
information provider after failing to exploit multimedia CDs and the internet.
‘‘ Radical innovation drives the growth of firms, markets and theeconomies of nations. ’’
VOL. 9 NO. 2 2010 jSTRATEGIC HR REVIEWj PAGE 7
Innovative firms share similar cultural practices and attitudes despite differences in
location (Golder and Tellis, 2001). The success of firms such as Apple is not due to the
number of patents they have or the number of skilled engineers, but to their corporate
culture. As Business Week put it: ‘‘Apple’s best feat may be the culture that helps
generate so many folks who’ve gone on to create great products elsewhere’’ (Business
Week, 2005).
Managers need to become attuned to these cultural factors that make for success in
innovatory firms. They need to measure them in their own organizations and then foster
them to maintain a culture of relentless innovation. Even though some attitudes do not
come naturally at a time of recession, particularly perhaps the tolerance of risk, such a
focus may bear more tangible fruit than one that relies on government to invest in or
protect markets. Indeed, we found that the appeal by firms for government relief, or
intervention is often a cover for cultural deficiencies in their organizations that they may
have hitherto overlooked.
Foster a culture of innovation even in a climate of economic decline
Creating and maintaining a culture of relentless innovation is never easy and in today’s
economic climate it is particularly tough. However, in the course of our research, we have
identified three attitudes and three practices that can help firms foster that all-important
innovative culture. The attitudes are:
1. a future market orientation;
2. a willingness to cannibalize existing successful products; and
3. risk tolerance.
The practices are:
1. empowering product champions;
2. creating internal competition; and
3. providing incentives for enterprise (see Figure 2).
These attitudes and practices are discussed below.
Concern yourselves with future development rather than remaining complacent about a
successful past
A firm that is successful in one generation of technology is under pressure to focus on the
micro problems of managing its success. However, it is important to adopt a future
orientation in order to be alert to the limitations of the current technology and be ready for the
emergence of a new generation of technology that may become dominant. Market research
should be aimed at obtaining customers’ future needs and resources should be devoted to
detecting shifts in technology, regulation and competition.
Firms can involve employees in the creation of new ideas and in coming up with the next
‘‘hot’’ products. Take the example of Bill Gates who, while CEO of Microsoft, went into retreat
for a week twice a year to think about the future of his company. He would read manuscripts
fromMicrosoft associates on topics that ranged from suggestions about new products to the
future of technology. Any employee could send their ideas in. Gates says he had read over
100 papers during one of his ‘‘Think Weeks’’ (Guth, 2005).
‘‘ . . . internal corporate culture is the most important driver ofradical innovation. ’’
PAGE 8 jSTRATEGIC HR REVIEWj VOL. 9 NO. 2 2010
Cannibalize successful products for future innovations
The stream of profits that emerge from current products and services can be a hindrance to
enduring innovation. Firms tend to marshal their resources to protect these profits and any
change or innovation that might threaten them is vetoed. However, managers need to adopt
an attitude that supports new projects although they might undermine existing ones. They
should even be willing to sacrifice sales of existing innovatory successes to improve
potential sales of future ones. Indeed, a willingness to cannibalize assets will allow the firm to
get ahead with the next generation of innovations.
Embrace risk rather than avert it
Trading a current sure stream of profits for a future uncertain stream of profits is risky and
does not come naturally to managers. Nevertheless, the firms that succeed are those where
managers favour riskier but higher return investments and those that are prepared to
engage in untested business ventures. It is vital that a firm promotes a tolerance for risk to
make that essential trade-off. Think of the pharmaceutical industry, which spends millions of
Figure 2 How innovatory is your firm? In line with AIM Research’s objectives to impact on
management practice, a diagnostic tool has been developed to test your
corporate culture and benchmark your firm against others in the industry
Innovation Benchmarking Tool
Decide how far you agree with the following statements and circle the corresponding score:
Radical Product Innovation
StronglyDisagree
StronglyAgree
Disagree AgreeNeither
1. Our firm frequently introduces products that are radically different from existing products in theindustry.
2. Our firm leads others in introducing products based on radically new technologies.
3. We have no difficulty in introducing products that are radically different from existing products inthe industry.
Willingness to Cannibalize
Future Market Focus
Risk Tolerance
4. We are very willing to sacrifice sales of our existing products to improve sales of our newproducts.5. We tend to support new projects that could take away from sales of our existing products.6. We will aggressively pursue a new technology even if it causes existing investments to lose value.
7. Our firm gives more emphasis to customers of the future relative to current customers.8. Market research efforts in our firm are aimed at obtaining information about customers’ needs inthe future, relative to their current needs.9. We are quick to detect fundamental shifts in our industry (e.g. competition, technology,regulation).10. Our firm is orientated more towards the future than the present.
11. Managers in our firm often take risky decisions.12. Relative to other firms, we tend to favour higher-risk, higher-return investments.
13. We are keen to engage in untested business ventures.14. We believe that it is often necessary to take calculated risks.
15. Employees with new product ideas receive a lot of support in our firm.16. Top managers in our firm strongly support champions of ideas for new products.
17. We provide generous monetary rewards to innovative employees.18. We provide many non-monetary rewards (e.g. recognition, autonomy) to innovativeemployees.
19. New product and process decisions in our firm do not require the approval of the corporateoffice.20. Most strategic actions can be taken in divisions in our firm before the corporate office approvesthese actions.
21. Divisions in our firm frequently enter markets served by other divisions.21. Divisions in our firm actively compete with one another to gain new markets.
For every response assign yourself a score from ‘1-5’, where 1 = ‘strongly disagree’ and 5 = ‘strongly agree’. Then just add up your responses for yourfinal score:
Scores between 22 and 44 indicate an extremely low level of innovation, with a need for drastic change across the boardScores between 45 and 66 indicate that attempts towards innovation have been made but major change is still requiredScores between 67 and 88 indicate a moderate level of innovation, but with some area for improvementScores between 89 and 110 indicate a firm which is willing and able to innovate
Product Champions
Incentives for Enterprise
Autonomy
Internal Competition
VOL. 9 NO. 2 2010 jSTRATEGIC HR REVIEWj PAGE 9
dollars every year pursuing drugs that may never make it to market. The successful
companies are the ones that are prepared to take those risks.
Empower product champions
Empowering a product champion means giving an individual the resources to explore,
research and build on promising, but uncertain, future technologies. Google, for example,
has become a master at this. In recent years, the company has moved from an informal
product-development system with little oversight by senior managers to one in which
employees are encouraged to present new ideas to the firm’s chief executive and its
co-founders (The Economist, 2009).
It is clear that employees with new product ideas should be given maximum support within
the firm and that top managers should be involved in reviewing their ideas. In effect, the
strategy of empowering product champions embeds within the firm the enterprising spirit
that enabled it to initiate the original innovation that brought success.
Foster internal competition
The creation and maintenance of internal markets are also critical to success. This practice
involves two elements:
1. internal autonomy; and
2. internal competition.
Internal autonomy refers to the extent of decision-making authority that division managers in
a firm enjoy, relative to the corporate office. Managers need to be free to make decisions
about new products and act strategically without having to get prior approval.
Internal competition enables divisions or groups of employees within the firm to compete
among themselves to identify promising technologies and build innovations on those
technologies. Divisions in a firm should be able to enter markets served by other divisions
and compete with them to gain new markets. A firm with an active internal market brings the
market place within itself, ensuring that an innovator from outside will not upstage the firm.
Provide incentives for enterprise
Firms need to establish incentives for enterprise, such as generous financial rewards and
non-monetary awards of recognition and greater autonomy. By this practice, the firm refrains
from only rewarding seniority or the management of current products. Rather, it ensures that
adequate incentives are reserved for employees who explore new enterprises for the firm.
Winning the innovation battle
Of course, there is no perfect system for detecting, nurturing and exploiting radical
innovation. However, HR professionals can do a lot to increase their firms’ prospects of
success. Above all, they must understand the importance of orienting their firms towards the
future, of embracing risk and cannibalizing existing successes. In the end, those who can
find the solution to building the right corporate culture in the face of current challenges will
emerge as winners in the new post-recession economy.
‘‘ . . . the firms that succeed are those where managers favourriskier but higher return investments and those that areprepared to engage in untested business ventures. ’’
PAGE 10 jSTRATEGIC HR REVIEWj VOL. 9 NO. 2 2010
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About the author
Jaideep C. Prabhu is an innovation fellow for the Advanced Institute of ManagementResearch (AIM Research), Jawaharlal Nehru Professor of Indian Business and Enterpriseand director of the Cambridge Centre for India & Global Business at the Judge BusinessSchool, University of Cambridge. Jaideep C. Prabhu can be contacted at:[email protected]
VOL. 9 NO. 2 2010 jSTRATEGIC HR REVIEWj PAGE 11
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