It's not often a management guru keynoting a conference for business leaders comes straight out and suggests industry best practices may not be the right way to grow your business. It seems counter-intuitive.
But that's exactly what Vijay Govindarajan told several hundred attendees of the recent SAS Institute's Premier Business Leadership Series.
Why? After a decade of research, Dr. Govindarajan, the Earl C. Daum 1924 professor of international business at the Tuck School of Business at Dartmouth College in New Hampshire, has concluded that "best" practices and innovation don't necessarily mix.
In fact, the thinking and processes involved in operations, where best practices are usually implemented, have little to do with the strategic mindset needed for innovation. He challenged conference attendees to sort their current projects into these three boxes, pointing out only one of them involves the here-and-now:
1. Managing the present.
2. Selectively forgetting the past.
3. Creating the future.
Dr. Govindarajan says what he finds in his research is that most projects are likely weighted toward box one, and while businesses often think that's strategic, it's boxes two and three that are all about strategy. "Strategy has nothing to do with competing for the present," he explains. "Strategy is all about you preparing for the future by managing the present."
Box-one concepts such as Six Sigma (quality management) and kaizen (continuous improvement) are linear, he explains, and they rely on incremental changes. Boxes two and three are non-linear (the "a-ha!" moments that send you off in a different direction), and they form the basis for innovation. The Internet, for example, was a non-linear shift.
"Box-one leadership continually improves existing things, but you can only do that if the world never changes," Dr. Govindarajan says.
Independent analyst Carmi Levy agrees. "While every company needs to nurture and build a culture that tightly integrates best practices into their operational framework, the increasing pace of innovation in any given competitive market means that this is no longer sufficient. While adopting best practices across the board will allow you to tread water, they won't get you across the pool before your competitors, if at all."
"Best-practice benchmarking is not strategy," Dr. Govindarajan adds. "Strategy is about creating next practices, not adapting to the best practices of industry today."
Consider the Grameen Bank. The bank and its founder, professor Muhammad Yunus, a Fulbright scholar at Vanderbilt University and a professor at the University of Chittagong, won a Nobel Peace Prize in 2006 by essentially doing everything wrong.
During the Bangladesh famine in 1974, a group of impoverished villagers needed a small loan of $27. Banks, understandably, considered them a poor risk: they had no assets and many of them were illiterate. Prof. Yunus loaned them the money, and he was repaid, with interest. At that point, says Dr. Govindarajan, Prof. Yunus realized he could make money by converting non-consumers of banking into consumers.
According to Dr. Govindarajan, Prof. Yunus then went to the leading commercial banks, asked for their best practices, and proceeded to do exactly the opposite at the Grameen Bank. It offers microcredit only – tiny loans, less than $100, repaid in small weekly instalments. Interest payments can never exceed the value of the original loan.
While big banks require credit history and signed agreements, Grameen relies on peer pressure – borrowers are placed in small groups that screen participants, and since a default by any member of a group means no others in that group can ever get a loan, they're self-policing. In a society where women are very much second-class, Grameen focuses on female borrowers. And the borrowers themselves own more than 90 per cent of Grameen shares, with the Bangladesh government holding the rest.
Dr. Govindarajan says all of this was based on next practices, not best practices. And despite apparently flouting every best practice in the book, Grameen Bank is profitable, with a repayment rate of 97 per cent, and it has expanded internationally, including to unexpected countries such as Australia and the United States.
The most challenging part of innovation can be letting go of the past. "I think the biggest problem is what I call shifting mindset, which is really the box-two problem, the forgetting problem," Dr. Govindarajan notes. "Because most companies develop assumptions, biases based on their core business, and forgetting that is what is needed to innovate, the forgetting is the biggest problem."
They need to be able to step away from their comfort zones and selectively dispense with some of the assumptions under which their core business operates so they can move into new areas.
"It's why everyone who buys and reads the same self-help books ends up in the same place," Mr. Levy adds. "It's why the millionaires who wrote those self-help books never spent time in the bookstore's self-help aisle. True innovation and competitiveness don't come from a book, a manual or a list of best practices. They come from close examination of your business model, your competitive environment, your road map and your people.
"They come from a willingness to uncover the competitive opportunities and try things that haven't been tried before, that haven't been published before, and that may not ever apply to any company aside from your own."
But forgetting everything isn't always a good idea. Dr. Govindarajan says there are three challenges when innovating, and only one of them is selectively forgetting the old rules. The second is, at the same time, borrowing appropriate bits from the old model. The third? Learning, in order to resolve the unknowns resulting from the first two. And, he adds, you need a dedicated team to lead innovation – the core team can't execute box-three strategies because its goal in running the business is efficiency, and innovation is about non-routine and unpredictability.
For example, the same people who kept The New York Times print edition running could not produce its successful online product. Until the company created an independent organization that wasn't tied to the old guard and its old ways, the web edition struggled. It had, Dr. Govindarajan says, "the forgetting problem."
Innovation is every bit as important to small firms as it is for the behemoths such as The New York Times. The Statistics Canada paper, Innovation: The Key to Success in Small Firms, evaluated the characteristics of companies that grew most strongly and found they consistently moved beyond the core proficiencies that let any business survive. "The most successful firms are productive and nimble," the report said. "They constantly strive to introduce product and process innovations, as well as evolve their business model."
Toronto-based BlueCat Networks, for example, was founded when its owners recognized existing methods of managing Internet Protocol (IP) addresses for devices at their current company were difficult and cumbersome, and decided to develop an appliance to help them with the task. BlueCat now has 187 employees and more than 1,300 customers worldwide. It was named the most innovative information and communications technology company at CIX 2010, the Canadian Innovation Exchange's annual honours for hot IT, clean tech and digital media ventures.
"The simple message: the future is now, the future is not what you do in the future," Dr. Govindarajan says. "You have to do projects in box one, and also in boxes two and three, to succeed."
Special to The Globe and Mail