Stanford Leading Matters, continued: Lecture on Innovation

Please read the Preamble of the previous post to understand the context of this article. As always, I encourage comments and responses. Remember that you can find and listen to the actual lecture on Stanford on iTunes.

"Harnessing Collective Wisdom" by Hayagreeva Rao, Professor of Organizations at the Stanford Graduate School of Business.

"Darwin's ideas of variations and selection apply to how the C-suite handles innovation."

Key questions about innovation in an enterprise: how do we encourage ideas without creating clutter? And how do we select some ideas, therefore kill some of them, without discouraging people from continuing to submit?

A study by McKinsey found that the way many companies measure innovation is flawed. Metrics and measures and useless without a good system of idea generation, which requires creative people and a positive climate, which in turn is created by good leadership.

In most companies, when you ask people what hinders innovation, you get two very different answers depending whom you ask:

• people at the top think that there aren't enough ideas generated by people below
• people in the trenches say that it is the top echelons of the company that act as a bottleneck

There needs to be a climate of confidence, trust and fun, enabling people to share their ideas and to try new things.

A good predictor of an organization's ability to innovate is how it handles failure. You have to:

1. reward people for trying hard enough that they will fail a certain percentage of the time;
2. make sure that failures are recognized quickly and that projects are stopped when they have failed, freeing resources to pursue others.

Peter Kim, head of the Whitehead Institute in Cambridge, Mass., used to tell people: "if you kill a project, I will give you stock options." At another company, the CEO frequently visits employees and hands them a business card, the back of which looks like a Monopoly "Get out of jail" card. Then he says: "Try something new! If it fails, give your boss this card, and I promise you won't get in trouble." At Amazon, Jeff Bezos gives a monthly award to an employee who did, without asking for permission, something that improved customer satisfaction.

Rite Solutions, a Rhode Island company, has created an internal stock market for ideas, called "Mutual Fun" (a pun on "mutual fund"). This virtual stock market trades cost reduction ideas ("savings bonds"), mildly aggressive ideas ("Bow Jones") and far-out innovations ("SPAZDAQ"). Once this market determines what are the most popular ideas, actual funds are allocated to them. Ideas are never killed by a corporate review board -- they are by the community when the corresponding shares don't sell. This approach also circumvents a common flaw of management review processes: senior managers tend to mostly empathize with people who are a lot like them.

At the end of his talk, Rao was asked about Open Innovation. He said that one size doesn't fit all. "You may not use the same incentives or the same rules with different actors."