Topic 5 – Overview

Innovation as change

Learning Objectives
 Distinguish and critically examine the types of innovation
 Evaluate the importance of building a creating climate
 Discuss the relationship between leadership and innovation

Introduction

As we discussed in Topic 1, to keep ahead of the ever changing external environment and
cope with competition, many commentators argue that organizations must also encourage
creativity and innovation. Also, we clearly said that innovation is linked to new ways of
organizing the work, quality circles, productivity flows, work processes, developing new and
better working practices and to providing customers with innovative services and products.
Following this line of thought, we defined innovation in the following way: ‘the adoption of
any device, system, process, programme, product or service new to that organization’
(Huczynski and Buchanan, 2007:610). The Toyota Way, for instance, is an innovative set of
principles, guiding the operations of TOYOTA through lean production, without changing
the product itself. On the other hand, companies like Ford Motor Company continue the
declining trend that had begun during the 1980s. More specifically, during the five-year
period 2003–7, return on equity averaged a negative 3.9% while operating losses in its
automotive business totalled over $24 billion. Ford's share of the U.S. car and truck market
declined from 21.8% to 16.8%. A new CEO, Alan Mulally, initiated vigorous cost cutting
and asset sales, but without any significant upturn in profitability.

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Moreover, to understand the sources of Ford's poor financial performance, it is useful to
compare Ford's automotive operations with those of the company that had displaced it as the
world's first automotive company in terms of innovation procedures and second largest auto
manufacturer (by volume)—Toyota. Combining data for 2006 and 2007, we can disaggregate
Ford and Toyota's return on capital employed into sales margin and capital turnover, then
disaggregate further into individual cost and asset productivity ratios (Grant, 2010).

Grant’s analysis reveals the following:

Ford's lower ROCE is wholly the result of a lower margin on sales than Toyota. This lower
margin results from a substantially higher ratio of cost of goods sold to sales. This could be
the result of higher costs (for example, of labor and parts), or lower unit prices for vehicles,
or both. Additional analysis suggests that Ford's higher COGS/sales ratio is the result of
lower productivity of labor—Ford produced 23.8 vehicles per employee compared with 31.9
for Toyota. Also, Toyota with just 17 manufacturing plants worldwide is likely to exploit
scale economies more effectively than Ford with its 113 plants. Clearly, innovation is not just
about the product. Innovation can be anything, from innovative processes of inventory
handling, to productivity and sales. This is discussed in the following section in more depth.

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 The distinction between sustaining, disruptive and operational
motivations

Earlier, we defined innovation as ‘the adoption of any device, system, process, programme,
product or service new to that organization’. However, Christensen, Bohmer and Kenagy
(2000) distinguish between sustaining innovations and disruptive innovations. Also, Hammer
(2004), discusses a focus on operational innovations. Let us see below the distinction
between the three:

Sustaining Innovations are those which make improvements to existing processes,

procedures, services and products. Think for instance the modification of an existing product,
or in other words, ‘product development’. Product development involves the substantial
modification of existing products that can be marketed to current customers through
established channels. The Product Development strategy often is adopted either to prolong
the life of current products or to take advantage of a favourite reputation or brand name. The
idea is to attract satisfied customers to modified products as a result of their positive
experience with the firm’s initial offering. A revised smaller and slimmer version of
Playstation or Xbox are examples of the product development strategy.

Similarly, PEPSI developed new flavours of the famous soft-drink, such as the PEPSI Twist
and PEPSI Blue, by adding lime, cherry, vanilla, and other flavours in the existing PEPSI
drinks. The product development strategy is based on the penetration of existing markets by
incorporating product modifications onto existing items.

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Disruptive Innovations are those which involve the development of wholly new processes,
procedures, services and products. For instance, some companies search for original or novel
ideas. The underlying rationale of innovation here is to create a new product life cycle and
thereby make similar existing products obsolete. Think for instance of APPLE’s iPod Shuffle
and iPad. Both products were innovative, high-tech devices appearing in the market for the
first time in history. Therefore, this strategy differs from the previous analysis on product
development of extending an existing product’s life cycle.

Operational Innovations are the invention of new ways of doing work. For instance,
Hammer describes a motor vehicle insurance company which introduced immediate response
claims handling, operating 24 hours a day. This involved scheduling visits to claimants by
claims adjusters who worked from mobile vans, and who would turn up within nine hours.
Previously when the adjusters were office-based it could take over a week to inspect a
damaged vehicle.

Also, the lean production system developed by Toyota is another example of an operational
innovation in 2001 which improves product quality and reduces costs by redesigning a
number of processes, from manufacturing to employee development – but without affecting
the design of the product. This is known as the TOYOTA WAY and includes a detailed
specification for a number of innovative principles. Toyota’s lean production system
combines low cost, high quality, and flexibility.

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Building a Creative Climate
The exploration is how organizations smother and stimulate innovation, leads to the so called
creative organization climate (Ekvall, 1996). According to Ekvall, climate in this sense is an
attribute of the organization, a combination of attitudes, feelings and behaviours of company
members in relation to innovation. The creative organizational climate has 10 dimensions that
are summarised by Huczynski and Buchanan (2007:615) in the following way:

1. Regard a new idea from below with suspicion, because it’s new, and because it’s from
below
2. Insist that people who need your approval to act first go through several other levels
of management to get their signatures

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 3. Ask departments or individuals to challenge and criticize each other’s proposals. That
saves you the job of deciding – you just pick the survivor
4. Express criticism freely and withhold praise. That keeps people on their toes.
5. Treat identification of problems as signs of failure, to discourage people from letting
you know when something in their area isn’t working
6. Control everything carefully. Make sure people count anything that can be counted
7. Make decisions to reorganize or change policies in secret and spring them on people
unexpectedly
8. Make sure that requests for information are fully justified and make sure that it is not
given out to managers freely.
9. Assign to lower level managers, in the name of delegation and participation,
responsibility for figuring out how to cut back, lay off, move people around, or
otherwise implement decisions.
10. And above all, never forget that you already know everything important about the
business.

The Best Practices Puzzle

In topic 1 we argued that innovation is not always a positive ‘thing’. Much commentary on
this concept has a ‘pro-innovation bias’, assuming that ‘new’ must be better. But some
innovations can be damaging. A good idea may work as well as better ideas that have been
sidelined. What works in one context may not work well in another. Research and experience
have shown that ‘best practice; is contingent, that there is no ‘one best way. In other words,
new ideas and methods that are developed and work well in one context are often not adopted
elsewhere. Known as ‘the best practices puzzle’, this is a long-running concern.

According to Rogers (1995, cited in Huczynski and Buchanan, 2007:612), the probability of
an innovation being adopted is increased when it is seen to have the following six properties:

1. Advantageous when compared with existing practice

2. Compatible with existing practices
3. Easy to understand
4. Observable in demonstration sites
5. Adaptable to fit local needs

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Moreover, unless you believe that an innovation will help you to improve on current
methods, you are unlikely to be persuaded. New ideas have to be adapted, sometimes
significantly, to fit local company conditions. In any case, innovation is and will remain an
organizational and managerial preoccu[ation for the foreseeable future.

Leadership and Innovation

A 2005 report by the Advanced Institute of Management research in co-operation with the
Chartered Management Institute draws attention to the impact of leadership on innovation.
The report refers to the dual role of leaders, first as motivators, inspiring people to transcend
the ordinary, and second as architects, designing an organizational environment that enables
employees to be innovative. ‘The impact of leadership on innovation goes well beyond the
motivating effect of the inspirational or charismatic leader. Leaders also affect innovation
trough organizational design and must create appropriate organizational environments to suit
the different innovation processes’ (cited in Mullins, 2007:386). The primary challenges for
organizational leaders in promoting innovation are to:
 Recognise and develop appropriate leadership for the different stages of the
innovation process; and
 Create organisational contexts that support complete innovation processes of different
degrees of novelty.

Moreover, the report distinguishes between leaders who primarily motivate through
transformational actions – a motivational perspective – and those take a more transactional
approach and emphasize the co-ordination of organizational tasks – a structuralist
perspective. In any case, there is a need for being mindful that leadership:

 Can manifest itself at all levels in the organisation, not just the top;
 Need not be concentrated in the person of a single leader but may act through
distributed leadership systems; and
 Sets the organisational context for followers’ activities both through motivation and
the administrative co-ordination of systems that support innovation.

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Besides, as we mentioned in previous topics, change agents are not necessarily senior
managers and do not need formal job titles. Also, most managers these days combine change
roles with their regular duties. In other words, there is an increased involvement of all levels
of organizational membership on change teams. Rosabeth Moss Kanter (1989, cited in
Huczynski and Buchanan, 2007:616) identifies seven essential change agency skills:

 Ability to work independently, without management power, sanction and support

 An effective collaboration, able to compete in ways that enhance co-operation
 The ability to develop high-trust relationships, based on high ethical standards
 Self-confidence, tempered with humility
 Respect for the purposes of change, as well as the content
 Able to work across business function and units, ‘multifaceted and ambidextrous’
 The willingness to stake reward on results and gain satisfaction from success

To sum up, whatever the approach to leadership, the change agent should be someone with
broad and well-developed range of skills and qualities. Also, it is important that the leader is
someone who influences the behaviour and actions of other people towards innovative and
creative thinking.