These days, hardly a day goes by without hearing the word innovation. We hear how innovative companies disrupts well-heeled incumbents and how some well established, large companies have transformed to develop an innovative edge in the hyper-competitive market. The innovation reality, however, is limited to startups and select few larger companies. For the majority of larger and older companies, the ground realities is actually “business as usual”. Some of them tend to innovate by acquiring others who have innovative edge rather than transforming their own core operations. The employees, in these companies, come in to work, stick to what is expected of them while aligning themselves as much as possible to company’s vision, mission and goals. These employees tend to operate in a centralized hierarchies with command and control structures. Many of these employees still endure the oppressing bell curve rating during the year end that determines their compensation and year end bonuses. In other words these employees are stuck in the box, constrained, unable to contribute to the innovation frontier.

However, there is an ever increasing desire among corporate leaders and organizational psychologist to figure out theory & practices to get the people off the “business as usual” trance and enable the ordinary to do extraordinary work. Various academic studies has firmly established the correlation between employee engagement and motivation to producing creative output. As a mean to further the innovation agenda, companies look to hire intrinsically motivated, engaged and talented individuals to help transform the organization. They do this, because it is clearly established that intrinsically motivated employees are driven and are more conducive to creativity.

Intrinsically motivated employees are highly engaged and produce creative output only when they operate in an environment that involves task variety, decision rights, and intellectual freedom. But in reality, companies that hires these intrinsically motivated top talent, end up making them work in an environment that has remained the same for many years. In the environment process & procedures reigns supreme, decision rights are restricted or at the best limited and organizational red tapes are a norm that constantly reminds what should not be done. In this environment, the employees finds the work banal, constrained and unimaginative. In such a settings the intrinsically motivated employees have two choices (1) Confirm to become a “clocker” or (2) leave to another company where s/he can thrive. These companies, that is seeking the best from the employees, tends to motivate them through extrinsic means which involves year end appraisals and a bell-curve rating which provides support for annual “rank and yank” round-tables. While from a company standpoint the “reward system” seems fair and logical it, this form of motivation leads up to detachment and overall reduction in creativity.

So the natural question is how entrepreneurial companies are able to leverage the same pool of talent available to larger ones but still execute on transformational idea better than larger ones? The answer is the environment in which people operate. In an entrepreneurial company, the leaders are not risk averse. They encourage risk with fail-fast, fail-often and learn fast approach. This type of environment is unthinkable in a command & control hierarchy where employees responsible for any failure are often viewed unfavorably relative to others who are risk averse. The year end rank and yank process ensures these “bad apples” are yanked out. The second attribute of an entrepreneurial firm is low barrier to communication/collaboration. Collaboration happens in a highly networked context where information and ideas flows freely and are fully vetted out. In case of larger firms, collaboration is replaced by meetings where the problem shifts from solving problem at hand to finding time that works for all the participants to meet. The third attribute that makes small entrepreneurial firm effective is speed of decision making. In a small flat hierarchy it is easy to talk to the decision makers and get to decision faster. Speedy decision enables speedy execution. In large organizations, however, decision making takes months and sometimes years because it needs to be vetted out every manager in the hierarchy effectively creating bottleneck as decisioning process moves up and down the chain. Employees also spend inordinate number of hours preparing justification powerpoints that are tailored to whims, fancies and format preference of executives. The fourth attribute is task variety. In smaller firm, an employee perform multiple roles and has the freedom to try out new things without fear. He/she has unconstrained, multi-dimensional learning opportunities. In larger firms, however, employees are generally stuck in a straight-jacket with very little elbow room to try anything new. Big firm risk aversion culture means, the firm would rather hire a new employee from the street rather than empower an internal employee with desire, ambition and ability. The fifth attribute is nimbleness. The small firm is able to react fast to the market condition and incorporate market feedback rapidly. The distance between market feedback provider and the person who is able to incorporate the feedback is small, and hence the probability of information dissipation due to “chinese whisper” is low. In case of large firm, market feedback flows through large hierarchy chain and takes many days or even months before it gets to the person in charge of implementing the change. In addition, there is high probability of feedback gets mutated along the way.

Even in the case nimble entrepreneurial firm, as the innovative product takes a foothold in the market, the firms starts focusing on scale economies. With scale the firm gets larger, the founders start to lose “control” and the work environment mutates. The environment or culture that reflected the founder entrepreneurial spirit now starts to become more “organized” and banal. The differences in resources, collaboration and coordination costs slowly increases. Leaders, to achieve better control, tend to put in place process & procedures which results in increased bureaucracy and routinization of work. This standardization produces a degree of “command & control” generally results in diluting individuals’ sense of ownership and responsibility for their work. The routinization, however, enables firm to transfer work to cheaper location further diluting individuals sense of ownership. In such set up, the company starts to loses the innovation advantages that was primarily because of the intrinsically motivated and highly engaged employee. With employees now operating in a production line mode, innovation becomes a jargon and a lofty goal.

In the age where innovation edge dictates if the firms will survive the next decade, larger companies need to start doing things differently. These companies need to make best use of their assets which are not buildings, not products, not equipments but their people. To control cost and to be fundamentally be innovative, companies need to fundamentally rethink how the organization is designed, how work is conducted, how engaged are employees, and how people are rewarded. Without such inside-out people transformation, the only other way to innovate is by acquiring small innovative trendsetter. But the best long term strategy would be a inside out metamorphosis rather than externally induced transformation. In my next article I will provides some of my ideas on how big firms could re-do their organizational architecture to better compete.

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