Innovations on the Decline

Innovation-Sjoo-2014

According to new research from Lund University, research and development innovations are declining and productivity within Sweden’s technology companies is slowing.

An innovation is created when a new product comes on the market and changes a particular pattern. A smartphone is an example of an innovation which changed the market for mobile phones and which is currently leading to change within many other markets. This important difference shows how an innovation isn’t the same as an invention. You might be able to say that Ericsson and Nokia invented the smartphone yet Apple was responsible for the smartphone innovation because they understood how the invention could be commercialized.

Innovations vs. Inventions

Joseph Schumpeter was responsible for defining the terms innovation and invention in the beginning of the 19th century. Innovations create new companies, new jobs and economic growth. However, an innovation isn’t solely a creative process – it is also a destructive one. For example, when Apple or Google’s Android developed smartphones, new jobs and huge profits were made for those companies. At the same time, the mobile phone industry in the Nordic countries was practically eliminated. Schumpeter referred to this phenomenon as creative destruction.

Fewer Innovations

New research from Karolin Sjöö and others at Lund University shows that Swedish industry has become less innovative since the 1980’s (as demonstrated by the red line in the graph above). Even more concerning is the fact that productivity within research and development has declined sharply within the same time period (as demonstrated by the blue line). Swedish companies invest more but get less out of it. According to Business Sweden, Sweden’s share of international exports has also declined. Researchers at Lund University have several theories for why innovations have been on the decline but none of them are completely convincing. However, there is other research that, together with our own research, points to an very important factor: projects.

Projects as Isolated Islands

At the end of the 1980’s and beginning of the 1990’s, Sweden’s industry increasingly used projects. Projects were described as the solution to every problem. There were early warning signs and many who paid attention to these signs. Companies that had started working in project form early on (such as Toyota, which started working with projects in the 1950’s), noticed an increasing degree of sub-optimization. Projects and project managers were singled out as the reason. American research in the 1980’s named autonomous projects as a problem. Even Swedish research in the 1990’s warned of this phenomena. A project can’t be seen as an isolated island, as Mats Engwall and Anna Jerbrant determined in their respective research. In all the companies we have studied there are significant problems with methods for managing research and development when using projects. All of these companies have significant problems with productivity. There are problems determining how much work is actually going on and there are complaints about the lack of resources when what is actually lacking is control and focus.

Bureaucratic Project Models

The project was promoted as a modern form of working based on cross-functional work. In reality, projects are bureaucratic monsters that create greater distance between people. Process-based development models (see stage-gate models, waterfall models), suppress creativity and, counter to their intentions, create a slightly chaotic business.

Popular definitions of projects maintain that a project has a clear goal yet reality tells us differently. Our studies shows that no one really knows the goal of the project or that there are many differing opinions about the goal of the project.

An Agile Network Organization

Road to an agile network organisation
Road to an agile network organisation

The solution to the inherent problems with projects is not to stop using them altogether. Rather, the solution is to implement a structure that allows management to prioritize and re-focus the organization. The solution is also to work with R&D at a strategic level, sometimes called a multi-project level. Toyota reformed their organization during 1991-1992 in order to have a more coordinated collaboration. These reforms were led by Takeshi Uchiyamada. As Chief Engineer within the new Pulse agile organization he developed a whole new kind of car: the Prius. He managed to accomplish this in record time – just 3 years. As Chief Engineer in the new organization he was a part of strategy-focused management. This differed from the old organization in that the different projects didn’t have to compete with each other for everything from resources to clients.

While working on the Prius, Uchiyamada continued to develop his multi-project solution by holding daily stand-up meetings in an Obeya. We call these Pulse meetings in a Pulse room. Scrum has developed a similar solution for project management that makes it possible to replace bureaucratic models with agile solutions.

As you just read, I outlined what Toyota did: they continued to develop their team-based approach while at the same time introducing a concept that made it possible to work strategically. Operations need to be decentralized when using projects yet at the same time they also need to be coordinated. In the entry “The Handlesbanken Way” you can find information about what being decentralized yet still being under the control of management entails. Thanks to agile multi-project organization, Toyota starting using a tool that enabled them to be both inventive and develop new technologies (including hybrid-drift and fuel cells), while at the same time being able to commercialize these inventions and thereby produce innovations. This might have been a more important step for Toyota than lean production. Just how important it has been is indicated by Uchiyamada’s career: after his role in the development of the Prius he has occupied several top posts, including head of development. Today he is the Chairman of the Board at Toyota Motor Corporation.

Increase Innovations!

The pulseroom where different teams has daily stand-up meetings.
The Pulse room, where different teams hold daily stand-up meetings.

There are some very frightening statistics that the researchers at Lund University are presenting today yet they come as no surprise to us. We know what the problem is. There are solutions that work and we know how to implement these solutions. Most companies have realized that they have a problem and during the past ten years, many companies  have taken the same steps as Toyota and implemented an agile network organization. It’s high time for the latecomers to upgrade their organizations because if they don’t there is a risk that Nordic inventions, like the smartphone, will become lucrative innovations somewhere else in the world.

The Handelsbanken Way

Handelsbanken has for several decades been Sweden’s most profitable bank. What makes The Handelsbanken Way so successful?

The Handelsbanken Way

Volumes have been written in Sweden about Toyota and The Toyota Way. Employees at Japanese Toyota have developed interesting methods to handle uncertainty. However, Handelsbanken in Sweden has developed its own method: The Handelsbanken Way.

Jan Wallander

Jan Wallander was headhunted by Handelsbanken in 1970 and appointed CEO. When he first joined the bank it was facing big problems. The problems were so great that Wallander’s task was to save the bank.

Wallander’s background was as a researcher and he was used to formulating theories, performing experiments to test his theories and drawing conclusions from the results. You have to be able to prove that the theory works in practice or the theory falls apart. There’s nothing strange about this but this kind of science-based approached is uncommon in business management. Instead, companies often copy each other because they believe that what everyone else does can’t be wrong. What Wallander realized is that everyone else can be wrong.

The Handelsbanken Way

Wallander and Handelsbanken developed an approach that in many ways differs from what is seen as the “correct” way to lead and manage a business. “Real” businesses have a budget but this is not the case at Handelsbanken. “Real” businesses have organization schedules yet Handelsbanken doesn’t. Furthermore, “real” businesses have a long-term strategy; Handelsbanken doesn’t.

In the book titled Decentralisation: The Why and How to Make it Work: The Handelsbanken Way, Wallanders writes about how he developed his own unique way to work. Budgets and long-term planning are just forecasts, Wallander explains. A forecast is built on projecting historical patterns into the future. The only thing that can accomplish is encouraging your employees to continue with the same work they are already doing. However, reaching that conclusion has entailed a lot of unnecessary work. Wallander reaches the conclusion that you should instead use the time and work on actions that create value for the business and the employees agree. To quote Wallander, “Now one could finally put this to the side with a sigh of relief and return to working the same way one always has.” What would be really helpful would be to foresee major changes and events such as the real estate crisis in the 90’s or the financial crisis that followed 20 years later but this isn’t possible.

The argument Wallander proposes regarding uncertainty is the same that practitioners such as Karl von Clasuwitz and Taichi Ohno have proposed and the same as scientist and meteorologist Edward Lorentz studied and explained: it’s not possible to create forecasts that are both useful and long-term (read more in my previous post).

Organization Charts

Wallander provides an interesting discussion on organization charts. At Handelsbanken everyone has a clear understanding of who their boss is as well as what responsibilities and authority one has. The problem with drawing up an organization chart, according to Wallander, is that when the chart changes the whole company is informed about someone’s promotion, demotion or transfer and this makes changes in the organization unnecessarily painful. Additionally, organization charts don’t fully describe how the work is done, as it would be to complicated. Therefore Handelsbanken found out that it’s better to not have an organization chart. If you need to know where someone works you can just look it up in the company phone-book.

Decentralization

Wallander’s guiding principle is decentralization. He writes that it’s easy to centralize but difficult to decentralize because of the many pitfalls. In order to decentralize an operation it’s necessary to have an infrastructure with resources that pull the whole operation in the same direction. To develop this infrastructure for a business is a challenge and requires stamina. Wallander mentions that some measures took almost 20 years to develop at Handelsbanken. Handelsbanken wasn’t the first company to develop semi-autonomous units; in fact, Wallander points out GM and DuPont as predecessors. These companies invented the concept of coordination of decentralized units as early as the 1920’s.

There are plenty of examples of decentralized companies being more successful than centralized ones. Wallander mentions ICA and Konsum as examples. Decentralized ICA, with the individual store manager in control, is very profitable while the centralized Konsum loses money year after year.

I can warmly recommend Jan Wallander’s book about the Handelsbanken Way to anyone interested in leadership and organization. Wallander’s ideas might seem radical but they are in line with today’s research.

The Agile Product Development Process

Agile Product Development ProcessThe agile product development process is based on a combination of iterative work and strategic positioning. The process is determined by the demands of each particular situation.

According to the current norms it’s necessary to have a product development process. An online search results in several images of what one may look like and all of them are noticeably similar: product development is depicted as a conveyor belt in which every step of the process is defined in advance. Why?

Process as a Noun

Organizational theorists have long championed an events-based approach. However, language is a hindrance to that. Languages are based around nouns – things you can touch. Events are verbs – something one does, change, a process. One of the first pioneers for an events-based approach was Mary Parker Follett in the 1920’s. She pointed out that decision are a result of the work of many people. Decisions should therefore be seen as processes rather than things. However, the images describing so-called processes aren’t verbs – they’re nouns. The fact that we can turn a verb into a noun is a side-effect of our noun-centric language. We can change something living into something dead.

The pictures of processes, oftentimes drawn, all have origins in the 1960’s along with depictions of strategic planning. When strategic planning, together with the conveyor belt principle, had been tested all over the world, heavy criticism from researchers and practitioners emerged. One notable critic was Jan Wallander at Handelsbanken, who claimed that the plans said more about the past than the present.

Process as a Verb

When organization researchers such as Parker Follett talk about processes it’s so we can understand that it’s what we do that’s important. They use terms such as strategizing instead of strategies and processes instead of plans.

When we at Pulse use iterative means to work with visual management instead of a plan, it’s a shift from a noun to a verb. Through people’s work and interaction at daily stand-up meetings and workshops a dynamic process is created. It’s important to understand that the development process can’t be determined in advance. However, it’s possible to plan and to organize but only as long as it’s about planning and organizing. That is to say that one works with the issues all the time, daily and continuously.

Agile Product Development Process

In the picture below the company is portrayed as a network of interacting groups, such as management groups, project groups and working groups. A company that uses their whole organization to understand the world at large can make decisions with far-reaching understanding in their strategies. They can home into the signals of the world at large early, process the information internally and implement the necessary measures. When management works using Pulse meetings in a Pulse room, we refer to it as an agile network organization.

Pulse room (obeya)
Pulse room (obeya)

The images seen on Pulse boards are a real-time image of the ongoing process. The image is always in flux. Because there is a collective image that represents reality, the management and others in the company can supervise what is happening and they can act on the company’s needs, just-in-time. Management can’t micromanage what the groups will do, and in that sense they don’t have control of every little detail. However, management exercises leadership through daily stand-up-meetings with full transparency about what is happening. Through their work, management creates strategizing in line with the company’s vision and mission statement. This makes the company agile and it has an agile product development process.

Adaptation

Companies that are successful have the ability to quickly adapt to changes. A company that has the ability to create changes in the market and can exploit new opportunities  has the potential to become very successful.

To adapt is a verb. You can observe the feedback that comes from the market through salespeople, service technicians and other channels. You can make yourself familiar with your current situation and find different possibilities for action. You can choose a course of action. And finally, you can act. This iteration is repeated all the time but the situation is always different. Each time you act the world at large changes. Also, you are not the only one changing the world around you.

Important factors for success include the ability to receive information and understand the world at large, to be able to show an internal versatility and the ability to get things done. A company that demonstrates a low degree of adaptation is low-dimensional. One example of low-dimensional companies are the businesses that work using detailed static process images. These companies risk being put out of  business.

Adaptation

So why do companies try to work using process descriptions? Because there is a notion that companies must have them. Images are powerful. It might be easier to bankrupt a company than to remove the process images.