Costas Markides and the future of innovation

Innovation, innovation, innovation! It has been the buzzword of the last decade and yet we are still struggling to overcome the obstacles that we face in achieving it within organizations.

Costas Markides,  Professor of Strategy & Entrepreneurship, London Business School has spent over two decades studying business strategy and innovation. We had a chat with him to discuss what an organization must look like and which strategies must they adopt in order to survive the digital age.

We wanted to know: How do companies build environments that give rise to innovation? What’s role does HR have to play in this? And what does technology have to do with it all?

UNLEASH: What are the top three obstacles that organizations face when trying to embed innovation in their corporate culture?

Costas: The first is a  lack of clarity. There are different types of innovation: product innovation, process innovation, technological, business model innovation, etc. You cannot embark on the journey of innovation until you define the type of innovation you want to achieve. The second is the Organizational environment. 70% of employees’ behaviour depends on the underlying environment. Four aspects create the ‘environment’. A. The culture and values; B. Incentives and rewards structure; C. Fundamental structures and processes of an organization. D. People you hire. We tell people how they should behave in order to achieve innovation, yet often times the incentives and organizational culture are not conducive to such behaviour.

The third major obstacle is that Innovation involves risks. While people may know what steps to take to achieve innovation, many of us remain risk-averse. Even more so if your working environment has made you a success. Sudden changes will not be immediately welcomed if they re-define processes that have been working out for you up until now.

Innovation involves risks. While people may know what steps to take to achieve innovation, many of us remain risk-averse.

UNLEASH: Have you come across any companies that, in your opinion, are doing it right in terms of innovation? 

Costas: The smaller the company, the easier it is to foster the culture for innovation as well as put the right mechanisms in place. Therefore, there is a long list of small companies doing it right. So now let me give you a couple of examples of big organizations. One of the things we know is that radical, disruptive innovation is very difficult to develop within an existing organization. You will find that many big companies establish separate units, where they create a distinct culture, incentives and a mindset that promotes innovation. Nestlé, for example, is an organization that develops smaller units within the big company to map out future possibilities: Nespresso is such an independent unit within Nestlé. The unit, if you think about it, is radical and disruptive to Nestlé because the more Nespresso you sell, the less Nescafé you sell.

One of the things we know is that radical, disruptive innovation is very difficult to develop within an existing organization

Other companies like Google, IBM, Cisco go about innovation differently. They create equity partnerships with small companies and start-ups around the world. They allow these companies to create new solutions, services and processes, then acquire them in order to scale them up. It is important to remember that innovation is not only the process of discovery and creation. It is also the ability to take the result and scale it up into a larger market.  

UNLEASH: What role do you believe HR departments should play in creating agile organizations?

Costas: The two most important components of agility are autonomy and decentralisation. An agile organization gives its employees the freedom and the autonomy to monitor the market and provide quick responses. Compare that with an organization where you have to collect relevant information, send it to headquarters, wait for it get analysed, and, only then, are orders passed down to employees.

The issue is, of course, giving autonomy to people and creating a decentralised organization without fearing that such freedom will lead to damaging actions that will put the entire company at risk. This is where the HR department comes in. How to give autonomy to people without losing control? In my opinion, the best control mechanism is strong values.

The stronger the values of an organization are, the more embedded its values will be in the heart of employees. This means they can be given more autonomy without the risk of them making counter-productive or reckless decisions. While anyone can create a set of values, it is vital to make them a part of your company’s fabric. Only when people internalise them, will they believe in the common values and therefore act accordingly.

An agile organization gives its employees the freedom and the autonomy to monitor the market and provide quick responses.

Costas Markides, London Business School

UNLEASH: Many thought leaders argue that we should get rid of hierarchies from the industrial age and rather create flat organizations. What is your stance on this?

Costas: Increasingly, you see more decentralisation due to new technologies. (1) People can work from anywhere and everywhere – at home, on a plane, etc. (2) Millenials are now key players in the workforce and they don’t like authority, they don’t like hierarchies. There is much pressure to relieve. (3) Work has become more dynamic, meaning we need to respond to changes much quicker on a daily basis. Hierarchical organizations are just too formal and too slow to respond to these changes. As a result, companies are bound to become increasingly flatter.

Having said that, I don’t think we are going to eliminate hierarchy completely, as it does offer a number of benefits. We are going to see less hierarchy, but flatter organizations will bring their own set of problems and managerial challenges. If you are going to have an organization that is less hierarchical you have to make sure to provide firstly strong values as a control mechanism, and secondly a very strong sense of purpose that guides the behaviour of people; not to be confused with the company’s vision or mission. In the traditional hierarchy you have a boss, rules and regulations – all to guide the behaviour of employees.

Removing these structures requires implementing a different mechanism. Take companies like Apple or Google. Employees in these companies are like passionate soldiers. They will fight for their companies because they strongly believe in what their companies are trying to do – change the world, make a difference. You are replacing the rules and regulations of the hierarchy with these soft mechanics of values and purpose in a less hierarchical organization.

UNLEASH: When creating an agile organization what attributes should a leader possess?

Costas: You have to think in terms of the components that would give us agility. One of them is decentralisation and autonomy. How often are leaders actually able to give autonomy to their people, for example? As leaders, we value information and control. The leaders that will do well in an agile organization are those who are first of all confident enough to allow more autonomy.

Secondly, they are the people who can work with fewer structures and rules. Of course, if they don’t have regulations and structures in place, the question becomes how do they manage their employees? It needs to be by example. If you want people to question things, you must question things yourself first. If you want them to stick their necks out, stick your own neck out first. If you want them to cooperate, you cooperate with other people first. We need leaders who do not manage by force or by position of power. Unfortunately, I don’t think there are too many of these types of leader yet. We will increasingly need leaders who are not managers, but coaches. They are not just emperors, who order people around. They guide their teams and motivate them towards a common objective. They manage by inspiration not by instruction.

THE LEADERS THAT WILL DO WELL IN AN AGILE ORGANIZATION ARE THOSE WHO ARE FIRST OF ALL CONFIDENT ENOUGH TO ALLOW MORE AUTONOMY

UNLEASH: How is technology shaping modern organizations?

Costas: One of the biggest impacts of technology is not so much on the products, but the internal processes of an organization. For example, we increasingly see the notion of open innovation. While companies used to conduct their entire R&D internally, open innovation allows us to look for ideas outside. Technology facilitates that.

Another process I see changing is the strategy process. In the good old days, top management would get together in a strategy retreat and develop ideas for the future of the company. Today we ask, why only top management? Why not get everybody in the organization to contribute? Technology enables the process, especially in large organizations. Furthermore, it allows leaders to maintain control over processes while giving employees a higher degree of autonomy.

Finally, technology is also influencing the field of financing and investment. Back in the day, if you wanted money for a new enterprise you went to the bank and asked for a loan. Technology enables us to crowdfund our new business. We now have peer-to-peer lending. We no longer need banks to act as intermediaries. We can pitch our investment ideas to capital providers directly.