Debunking Innovation Myths (#26)

Creative construction is, really, the art, if you will, of balancing the need to maintain the existing business, but then explore and create completely new innovation opportunities. It’s different than a startup because a startup gets to start from scratch, but larger, more established enterprises can’t.— Gary PISANO

[00:01:23.25] Ben: So, Gary, thank you so much for coming on the podcast! As I was saying to you before, I absolutely loved the book! I think what’s kind of special about it is it’s obviously very instructive about how to do innovation in the face of uncertainty, and imperfect information, and everything else. But it also challenges and debunks a lot of our received wisdom about innovation, including the central idea of constructive or creative construction. How do you define creative construction?

Gary: For a company, it’s like rebuilding the house as you’re living in it. So, for established companies, the knock on established companies is that they are so consumed with their existing businesses, they can’t do true innovation. So, this book tries to debunk that myth and provide some ways in which bigger companies can do that. But they face challenges, obviously, because they have existing capabilities, existing businesses. So, creative construction is, really, the art, if you will, of balancing the need to maintain the existing business, but then explore and create completely new innovation opportunities. It’s different than a startup because a startup gets to start from scratch, but larger, more established enterprises can’t. So I guess that’s how I would define creative construction: is that act or that art of searching for transformative innovation opportunities, all the while maintaining your existing business.

[00:02:56.12] Ben: Even though it’s harder for large companies to innovate and they have this treadmill effect of a bar that’s being constantly raised, they nonetheless do have many advantages when it comes to innovation, right? So, as you say in the book, they’ve got resources that startups can only dream of, and they can actually have a portfolio of different innovation projects they can work on at once. What other advantages would you say that large companies have when it comes to innovation?

I always say that strategy is where you spend your money and an innovation strategy specifies very clearly, “Here are the top priorities we have for how we’re going to innovate, the kind of innovations we’re going to do, and this is where we’re going to place our chips.” At a very simple level, that’s what an innovation strategy is. — Gary PISANO

Gary: I mean, they have a lot of skills and capabilities that often get overlooked, just things that are in some ways written off as blocking and tackling, but they’re incredibly important. So, logistics and distribution, salesforce that can cover the world, and knowledge about regulations, and experts in the company — the expertise in larger enterprises is actually quite deep. I mean, I’ve been involved in a lot of smaller companies and you get great people, but you’re smaller so you don’t always have the world expert in a particular market or a particular technology, so you’re always trying to reach out. But in a larger company, you actually do have a pretty deep bench. And so, there’s people to draw from that can be extraordinarily helpful in all facets of innovation, whether it’s the technology or the commercialization, the supply chain, the marketing. And I think that’s often overlooked as well, in thinking about their advantages.

[00:04:24.19] Ben: Do you think one of the most dangerous tendencies with strategy is to apply inductive logic? You know, this idea that just because a company over here did something in a certain way, and it worked for them, therefore, it must work for our company. Because, as you say in the book, there is no magic formula for strategy, and there are no universal sets of best practices for innovation. So, would you say that’s a really dangerous road to go down, that idea of ‘because it worked here, it must work there’?

Gary: Yeah, absolutely! I mean, you have to be thoughtful. You can use analogies — and people have written about that, and we all use analogies to reason in all aspects of our life, including business and including strategy — but you have to be thoughtful about how those analogies apply and what is applying, and most importantly, what is different. A lot of times, we focus on what’s the same, but we don’t focus on what’s different. I tell this funny little story to my students about it, because they often get the analogy, and I’ll say, Well, I play a game — my daughter is now four — I played this game with her called, “Are you a bear?” And I’d say to her, “Are you a bear?” And she’d say “No.” And I’d say, “Well, do you like honey?” She goes, “Yes.” “Well, bears like honey. Do you like to swim in the water?” She says, “Yes!” “Well, bears like to swim in the water. Do you like tuna fish?” She said “Yes.” I said, “Well, bears like tuna fish. I mean, you like to play outside — you like to do all the same things bears do so you must be a bear.” That’s the analogy of focusing on what’s the same. And we laugh about it, but that’s what companies do all the time. They look at what is the same and say, “Well, this is the same, this is the same, this is the same, therefore we must be the same.” It’s like, “No, you have to look at what’s different!” It’s a logical flaw that is so commonly made in strategy-making. And so, yes, you do want to use analogies, but you want to be really thoughtful and then understand what’s different here? And then, how do you adapt your strategy to what’s different about this situation?

[00:06:27.13] Ben: How would you describe an innovation strategy?

Gary: At a very simple level, it’s a commitment to how you’re going to spend your resources or focus your resources on the kinds of innovation you’re going to go after. I always say that strategy is where you spend your money and an innovation strategy specifies very clearly, “Here are the top priorities we have for how we’re going to innovate, the kind of innovations we’re going to do, and this is where we’re going to place our chips.” At a very simple level, that’s what an innovation strategy is.

Gary: At a more nuanced level, it’s also the kinds of values you’re trying to create, the similarities or the pattern of how you’re going to address the market. So, for instance, Apple has historically focused on ease of use. That’s been part of their whole business strategy. They have historically tried to innovate, to make things easier to use. Some companies have focused on safety and that’s been a pattern over time. It’s tying the innovation strategy to the business strategy. But it creates a clear set of priorities in everyone’s mind about what’s important and what’s not important.

a lot of innovation is not about the technology, it’s about the change in the business model. — Gary PISANO

[00:07:34.04] Ben: In your book, one of the quotes I liked was you said, “Without an innovation strategy, innovation improvement efforts easily become a grab bag of much-touted best practices.” What exactly do you mean by that? Just that they’re sort of completely unconnected?

Gary: Yeah. I mean, think about today. You know, you go into a lot of companies and you say, “How are you approaching innovation?” And they say, “Well, we’re doing open innovation, we’re doing crowdsourcing, we’re doing design thinking, we’re doing empowered teams” — and these are all perfectly reasonable practices but it’s like building a car by taking a bunch of components, really good components, and just throwing them down and say, “Well, but that’s not a car, that’s just a bunch of components.” You’re connecting those practices to the kinds of innovation you’re going after. So, for example, design thinking is great, but it doesn’t work for all kinds of innovation. And so, if your strategy is about a different kind of innovation, don’t do design thinking. Open innovation is terrific for certain kinds of innovation, but not for others. So, you have to ask yourself, “Is that the right tool to solve the strategic problem we’re going after?”

[00:08:36.06] Ben: Why do you think that happens, though? Do you think it’s just because there’s external pressure maybe from shareholders or the board to be doing something? And so, it’s very easy to self-demonstrate that you’ve opened up an innovation lab or whatever. And so, that almost supplicate some of those external parties, and it’s, in reality, much harder to come up with this integrated innovation strategy?

business models are, in a sense, promises to others. So, they’re kind of a promise to your customer about what’s the value we’re going to create for you. It’s a promise to your shareholders about the value you’re going to distribute, it’s a promise to your employees about the value you’re going to distribute to them. In a sense, a business model is really a set of contracts— Gary PISANO

Gary: Well, I think it’s partly that, but I think it’s partly because we all want simple solutions to complex problems. I probably fall into this trap myself when I think about my workout regime and what I’m reading and I want the perfect training program to get me ready for a marathon with as little effort as possible. Is there the once-a-month training program that will have me ready to run the marathon or something? I think we all, at complex problems, we want simpler solutions. And I understand that executives are busy, there’s a lot of pressure, there’s a lot going on. So, that kind of magic bullet, that universal solution is very appealing. And then, what ends up happening is you have people who sell these to you. Not to be cynical here, but there are consulting firms who make their money selling you a particular tool. And so, they’ll say, “This is design thinking.” And it all seems so easy: “If you just adopt this, your problems will be solved.” And I think what I tried to do in the book is get folks to realize it’s a lot harder than that. And, as I mentioned in the book, innovation is hard. That’s the value of it. If it were easy, everybody could do it and if everybody could do it, every company would be innovative, and it wouldn’t be a source of advantage. You know, there’s a reason companies like Google and Apple have market caps, I don’t know what they are these days because the market’s all over, but, you know, close to a trillion dollars — because they’re innovative and other companies have been less innovative. And so, it’s never going to be easy but I hope to make it a little easier, or maybe not quite as hard. And so, I think we have to dispel that. I think if you go into the innovation journey with that sense of, “This is actually not easy at all, and we’re not going to sell it as easy, and it’s going to take a lot of concerted effort, and we’re going to have a lot of stumbles along the way, but it’s our strategy to get there, and we’re going to keep focusing on it”, then I think you stand a reasonable chance.

[00:10:55.17] Ben: In the book, you include an Innovation Landscape Map, which I found to be really, really useful. Can you quickly just talk us through that Innovation Landscape Map?

Gary: Sure! Yeah. It’s based on not just my research, but many, many people have worked on trying to characterize innovation in the field, for decades now. So this was really a synthesis of both my thinking and many other people’s thinking. We often think about innovation in terms of the technology and the technical dimension: how big of a leap is this, technologically, for us? Are we a hardware company that’s now forced to do software? Etc. But there’s this other dimension, which I think we’ve learned about in the last 20 years, which is, there’s also a business model dimension. So a lot of innovation is not about the technology, it’s about the change in the business model. And so, you kind of put those together and that’s how you get the two by two of, is this a big change from a technology point of view or not? Is it a big change from a business model point of view?

Gary: And I think where that gets helpful is you get these four archetypes of innovation: routine, radical, disruptive, and architectural. You can, at least, start to understand or have discussions about, what is it the lever that we’re going to push on? Are we pushing on the technology dimension because we think our business model is actually quite strong, but we need better technology or new technologies to reinforce it? Or the problem is that our business model is obsolete, and we need to radically change our business model and do more disruptive things? Or is it a combination? And I actually think the combination gets interesting, as I think many times we fail to realize how technological change has implications for our business model. We put a graft on the technology, on our existing business model, when in fact, technology changes what we can do from our business model point of view.

[00:12:50.07] Ben: One of the things that I really liked about that map is it sort of gives almost equal importance to business model and tech, which is not something that normally happens, right? And, I suppose, one of the questions is, if a company should be constantly assessing its business model in the same way it constantly assesses the adequacy of its technology, whose job is it, within an organization, to be looking constantly at the business model? Because it seems a bit like that’s a blind spot.

Gary: You have hit it right on the head! I mean, if you ask in any company who’s in charge of technological innovation, they can literally point to a person; they could say, “So and so is the Head of R&D. So and so is the Executive Vice President of R&D, they ultimately have responsibility.” Then, if you ask the same question around, well, who’s responsible for business model innovation — you’ll either get no one or everyone, which actually means the same thing. And so, you’re right. So, no organization really has that. I think that’s why Senior Executives, Senior Leaders, General Managers really need to own business model innovation. So, just like the way you think about the Vice President of R&D or the Head of R&D owning technological innovation or being responsible for it, I think the business unit leader — the General Manager, the CEO — they own business model innovation. I think that’s the only solution. I think you can have groups that help you do it but I wouldn’t want to set up a separate group called ‘business model innovation’ because it’s really so part and parcel of everything the company does that I think it just belongs in the hands of the General Manager. That’s just an opinion. People haven’t really done a lot of research on it. But I think organizations that are good at evolving their business models, it’s really, they do come from the general management, the CEO or the business unit leaders.

[00:14:40.28] Ben: It is considered best practice to spend, I don’t know, like 80% of your R&D budget on routine bets versus 20% that should go on more radical bets or whatever; that there’s some sort of pre-determined formula for deciding which of these boxes to concentrate on. But, in reality, what you say in the book is that you need to be very careful in making the allocation because allocation looks different for every company. What’s the counsel that you give to companies about where to invest across this map?

Gary: Yeah. While there’s no universal formula, there are some things you can think about, there are some factors. I mean, certainly one is, you have to look at your core technologies and really understand their headroom for improvement. So, some technologies have been around a while, they’re running out of steam, you’re running into diminishing returns, and improving them in ways that would create value for customers, that’s got to worry, right? I mean, once you start to see that — and you can map some of these, actually quantitatively, if you have certain performance dimensions, and you can look at incremental improvement, and ask yourself, how much more can we improve this? You start to see this happening in semiconductors as you reach the incremental line with reductions and Moore’s law, and you say, how much more power can we get out of this, with the given technology we have? You could start to see these things somewhat in advance.

Gary: The second part, though, is really on more of the market side: what do customers want? And what are they willing to pay for? So, sometimes technology can improve, but the customer is not willing to pay for any more functionality there. They’re saying, “I’ve got enough!” I use the example in the book about the Gillette razor and how much closer do we want to shave. And, you know, I won’t pay that much more for a closer shave because, at some point, I can only shave so close before it’s scary. But I will pay for convenience. I will pay for other things. So, you have to look at that dimension as well: where are you in the market cycle?

Gary: And then, you know, you have to look at competitive dynamics. What are competitors doing? And how are competitors changing? So, several of those things kind of come together to help you plot out where you may want to lay your chips and say, look, the opportunity for us to create an advantage and create value is maybe more in business model innovation and technological innovation. Or maybe it’s the opposite; maybe, really, our business model is pretty rich and it has got a long way to go, but our technology is not able to deliver it. Or maybe you discover in this analysis, look, it’s both — if we push the technology in a certain way, the only way we’re really going to create value is by changing our business model. And that would then get you to start to do experiments with your business model, as well.

[00:17:37.06] Ben: Do you think is harder for a company to change its business model than to change its tech?

Gary: Yeah, absolutely! Because I think the business model really gets to a lot of the core DNA, the financial DNA of the company. And business models are, in a sense, promises to others. So, they’re kind of a promise to your customer about what’s the value we’re going to create for you. It’s a promise to your shareholders about the value you’re going to distribute, it’s a promise to your employees about the value you’re going to distribute to them. In a sense, a business model is really a set of contracts. I don’t think it’s ever been formally posed that way. My economics training is in a branch of economics, it’s actually in Contract Theory — Oliver Williamson, the Nobel Prize who I heard just died this past week, who started Transaction Cost Economics. That’s essentially what I was trained on. I was a student of one of his students. So, I always tend to think about things contractually and a business model, really, is a set of contracts, implicit, if you will, promises about the value you’re going to create and capture and distribute. And a business model change means changing those promises and there can be costs to changing those promises. Your shareholders may say, “Well, we don’t like that. That’s not what we signed up for.” Or employees may say, “That’s not what we signed up for.” You may have unhappy employees and that can get costly if you have to make changes there. And sometimes customers don’t like it. We’re living this now, in education, as we, in the last few months had to shift a lot of things online because of COVID. Our customers, our students were like, “But we did sign up for online. That’s not what we paid for.” I think you’re hearing this around the world, students saying, “We signed up for a different experience. That’s a different value proposition.”

[00:19:20.23] Ben: And, in some senses, is it also harder to spot when your business model is becoming obsolete? Because, in a way, if you spot that there’s a big technology chain coming, like, you know, cars are being electrified or whatever — that you have some time to react, and you can map out how that might impact your business? But, in some ways, it’s like, it’s more difficult to get the early-warning signs that your business model is not optimized, right? So, how does a company check-in and routinely test whether its business model is optimized?

Investing in flexibility when uncertainty is high is a really good idea. — Gary PISANO

Gary: Yeah. I agree. I think it can be more challenging, and I think the work of my late colleague, Clay Christensen, really bore upon this. He highlighted this issue around why companies were vulnerable. Disruption, was really, as he described it, was business model disruption. That’s why I call that ‘the business model disruption’. He was really the one who identified that phenomenon where it’s the business model change that companies can’t react to. And I think he had some things to say about that, which I think are still very relevant. For example, when you’re missing certain segments of the market, or certain segments of your customer base are defecting and don’t seem profitable, and you say, “Well, we don’t need them anyway.” That’s always a little warning sign that he mentions that when you’ve got customers that, I think he would describe it as you ‘fire those customers’, you say, “Well, we don’t need you. We have more profitable customers.” That can be the beginning of a vicious circle. I think you’re seeing some of this in some areas today. Again, the example I use in the book is with shaving, and I mentioned Gillette competing against players like Harry’s and Dollar Shave Club. I mean, they’re offering a different value proposition and I think, initially, the folks like Dollar Shave Club and Harry’s, they were viewed as “Yeah, they’re just taking the customers who are less profitable for us anyway, so who cares?” But then, it starts to grow and then it starts to become a bigger segment of the market. It’s not that it happens really fast. It’s actually the opposite. It happens really slow. Until it doesn’t. So, it’s like the boiling frog, which is, we start losing a few customers, we’re like, “Oh, I don’t even notice that.” So, I think you do need to track fairly carefully what’s happening with customers, but also, who are the customers you’re not addressing? And are there segments of the market that you’ve never thought about addressing, that might actually be quite attractive to others, serving them in a very, very different way.

[00:21:55.13] Ben: When you see that you’re kind of suffering from that kind of Clayton Christensen’s type disruptive innovation, you know, where somebody’s come from underneath, almost in your blind spot and then starts to take market share, then the natural conclusion is, you eat your own lunch or you cannibalize your own business just before the new competitor can? But, another section of the book I really, really liked was the one where you challenged that notion that is always best to eat your own lunch. And I found myself when I was reading, thinking, okay, I’ve also been guilty of this many times, and lazily thought that, okay, it’s always best to cannibalize your own business. Why is it not always a good idea to do that?

Gary: So, one of the problems with cliches like that is they grossly oversimplify in ways that can really blind us. And so, there’s really two reasons why I think that advice doesn’t always hold up. So, one is, these things, these disruptions — whether they’re business model disruptions or radical changes in a technology base that make your technology obsolete — they tend to look a lot more obvious in retrospect than they did in prospect. So, the advice of ‘eat your own lunch before anyone else’ assumes you have some foresight that most of us don’t have. And so, there’s lots of examples where companies have abandoned technologies that had a lot of room to grow and they committed the opposite error. IBM was being told in the ’80s, “Get out of mainframe computers.” Well, mainframe computers today process 90% of the world’s transaction, and they are the workhorse now if we’re talking about big data and AI. It’s all mainframes. You need a lot of big iron to do that. IBM has that. So, it’s a good thing they didn’t get out of that market. The market isn’t what it was relative to the ’60s, it isn’t what it was, then to now. I mean, relatively speaking, it’s smaller, but it’s still a good market. I mean, it’s still a very big market, and it may get bigger. In fact, it’s very likely to get bigger. So, a trouble I have with that is it gets you out of thinking about hedging your technology risk.

Gary: But then, the second thing — and it’s more troubling — is that even if you do that perfect foresight and something’s happening, there are often profound implications for profitability. There’s this assumption in the ‘eat your own lunch’ argument that the new thing that comes along is somehow got to be more profitable or as profitable. And there’s no law of economics that said that, there’s no theory in economics that said that, there’s no empirical evidence. That’s not necessarily true. So, an example I gave in the book is when digital photography came along. Digital photography hasn’t been profitable for anybody. I mean, it’s just been a bloodbath because the components are commodities, they’re out there, anybody can get them, they’re modular technologies — and it’s a bloodbath. And so, if you were Kodak and you had perfect foresight, it’s still not clear to me what you would have done to say, “Let’s get out of our really lucrative film business, to dive into this market, which is going to be a bloodbath.” So, sometimes you really are stuck between a rock and a hard place. And what I try to offer in the book is just some ways to think through those contingencies. So, you know, there are some times where the technology’s changing, or the business model is changing, but it’s going to be good for you anyway, so you might as well embrace it. Sometimes, that’s eating your own lunch to get an even better dinner, right? I mean, that’s just a better future. But sometimes it’s the opposite. Sometimes the technology is changing, or the business model is changing in ways that are just not going to be profitable for anybody. It’s a lot more complex than just, “Let’s just dive right into the new thing and eat our own lunch.”

[00:25:42.20] Ben: Do you think it’s really dangerous when CEOs kind of consult futurists? I don’t know what the record of futurists is, in terms of being able to successfully predict the future, but I guess it’s small, and yet nonetheless, you see a proliferation of these people. And so, is that one of the things you advise, to just avoid futurists?

Gary: Yeah. I mean I think I sort of say that in the book, I take a real shot at futurists because they tend to look back to all the time. And the bias of somebody who’s a futurist is to tell you how the world’s going to be different. You’re not going to hire a futurist to tell you the world is going to be the same. So, in some sense, you’re getting a biased view. By bringing in a futurist, you’re basically pretty sure going to be told the world’s going to change. The world always changes. So, I think that’s true. I mean, we know that. The world will be different tomorrow than it is today and it’ll be a lot more different further out in the future than it will be just tomorrow.

startup life is consumed with the fear that you’re going out of business because you’re generally running on fumes, in terms of resources and cash. And so, you are focused on one goal — surviving. And the people you attract to the enterprise are extremely comfortable with the ambiguity that they may not be in business the next year. So, you select people who are very comfortable with that calculus. If you’re in a major corporation, if you’re in Microsoft, with 20 plus billion dollars of cash on the balance sheet, you’re not going anywhere next year. That, I think, changes some of the tension and pressure. And you cannot replicate that in a large company. — Gary PISANO

Gary: I think you should listen to people who have interesting and provocative things to say about the future. Absolutely. Because they may stimulate your thinking in ways that you hadn’t before. So, actually, let me walk that back a bit before every futurist sends me nasty emails. There are so many folks that I’ve interacted with, that are very, very, very smart. And they do have provocative things to say. I don’t necessarily think they’re right. And I don’t think the value of what they have to say is in the prediction. So, if they say something’s going to be the case with electric vehicles, I don’t bet on what their vision of the future is. But listen to what they have to say, as a way just to challenge your own thinking about what the future might hold. And I do think it’s a helpful exercise for organizations and people to constantly be thinking about that and disciplining yourself, because you’re trying to prepare and it’s not that you can predict correctly — most of the time we get things wrong — but we can start to prepare ourselves and understand where the contingencies are, and what we might do today to prepare ourselves.

Gary: For example, right now, all businesses and universities and schools are going through this. We don’t know it’s a short-term thing, but what’s the COVID situation going to be like in the fall? Should we be online? We don’t know. So, the best thing you can do if you have the resources is, prepare, create options, build flexibility, because it’s going to have a high payoff. Choosing one or the other now, when there’s uncertainty, is not a good investment. Investing in flexibility when uncertainty is high is a really good idea. So, that’s where I think it’s helpful to be listening to futurists and others, and challenging yourself and listening to scientists. And I guess, I’d have to say my bias is more to listen to people who are content experts rather than futurists. Talk to customers. Farmers could probably tell you a lot about what’s going on in the farming world. They live it. And so, go talk to them, go watch them, go watch how people live. And again, it doesn’t hurt to start to imagine some futures as a way to stimulate your thinking, but just be careful to not confuse that with a prediction or a scenario.

[00:28:56.23] Ben: Up until now, we’ve talked mostly about putting in place an innovation strategy. What you say is there’s three parts to innovation, right? The first one is the innovation strategy and then the second part is the innovation system. What is an innovation system? And how does that support an innovation strategy?

Gary: Yeah. The system is really the way you start to execute. That is really, at a very simple level, your innovation system is how you search for ideas, how you combine ideas — what I call ‘synthesize’ — and how you select. So, it’s really, how do you go from ideas, find the ideas, digest the ideas, and pick the ideas to go forward with. So, it’s really internal because sometimes you’re involving lots of external people in it, but the system provides the capabilities to execute that strategy.

[00:29:43.19] Ben: Is the key to finding great ideas this, what you call in the book, ‘intellectual arbitrage’, or surrounding yourself and maximizing the number of inputs to every decision?

Gary: What I meant by intellectual arbitrage is just exposing yourself to ideas and people who you don’t normally get exposed to. We tend to talk to people and the experts in our particular business without thinking about what others from very different fields might have to say. And they have different ways to look at the problem and that can stimulate really interesting ideas. And sometimes they’re technology ideas. So, we see things move across fields all the time in terms of technology, but sometimes it’s business model ideas. An interesting one I just came across most recently in some new research I’m doing is, during World War Two, during wartime production in the US, car companies, which knew how to do things with mass production, but did not know much about making airplanes, were actually asked to make airplanes — B-29 bombers. Aircraft companies who knew quite a bit about making planes but didn’t know anything about mass production actually learned a ton from the auto companies about mass production. So, in the 1930s, airplanes were not produced with mass production techniques, at all. I mean, some of them didn’t even have interchangeable parts.

Gary: And so, it’s a great example of learning across sectors. They were kind of forced into it, in this sort of artificial setting, but, in that case, the aircraft companies learned from automobile companies a lot about production techniques. I think those examples are out there in all sorts of settings. We see today in healthcare, for a while, there were healthcare companies trying to learn from manufacturing companies; hospitals trying to learn about quality procedures from companies who manufacture cars. And, again, one has to be careful because analogies break down, sometimes. They’re not always perfect. But there is learning. And so, the idea is, can you expose yourself and expose your organization to a broader and richer mix of people?

Gary: Now, you mentioned lots of input into the decisions. The only thing there to be careful about is you don’t want to paralyze yourself either. So, I’m a big fan of having lots of input into decisions, but you need a decision-maker to make the call and move forward. But I think, in terms of exposing yourself and getting ideas on the palate of the organization or on the radar screen, I think most organizations need to broaden where they look and who they talk to. I’ll take a good example from my own world, in education. I think we have a lot to learn from companies in the entertainment business who produce fantastic multimedia content. We need to learn more about that. We don’t talk enough to people in Hollywood or the movie industry about that — how to tell a story. Maybe cases become more like that, they may become what we write down. We don’t normally think about that as a party we would talk to. But I certainly know that in my own experience as an academic, just the interactions I have with people outside — I’m trained as an economist and I work in a business school — but interactions with physicists interactions with people who do artificial intelligence, scientists or biologists. That’s where I suddenly get interesting ideas that connect back to my own field. So, it can be very, very stimulating.

[00:33:20.29] Ben: What you’re saying is that, if not maximize the number of inputs, at least you want to be exposed to different fields and different disciplines? And, at the same time, you make the point in the book that innovation is very infrequently linear, right? It goes perfectly from problem identification to solution. How does one build a system when the process is a bit random?

Gary: Yeah. So, the outcome is randomness, but the approach itself has to be very disciplined. And I use the analogy of evolution in life forms. Evolution, as a process, produces a massive variety of outcomes. It’s very innovative. We get everything from the smallest Amoeba to the largest Sequoia trees, to humans — complex forms of life. And yet, if you think about evolution, it’s a very rigorous process. It just works the same way all the time. There’s a few sets of letters in the genetic alphabet and there’s some rules for how things combine and replicate. And there’s not actually a lot of variance in the process, but there’s a huge variance in the outcome. And I use that analogy to think about, in organizations and in innovation, we want variance in the outcome, we want the breakthroughs. But to do that, we need to have a very disciplined and rigorous and repeatable process of design — test — iterate — design — test — iterate — design — test — iterate over and over and over again. And you need organizations that have not just that mindset, but you actually need processes to do that. So I think that sometimes gets forgotten. People feel like that’s bureaucratic, but it’s actually not. And when you look at how really great scientists work, they work with very strict discipline and rules. And it’s the same with artists, they work with really strict discipline and rules that they follow. The outcomes vary, and there’s creativity in the outcomes, but they’re often exceedingly rigorous and exceedingly disciplined and regimented in their approach.

[00:35:27.10] Ben: I’m not suggesting there’s an inconsistency, but on the one hand, you suggest in the book that you can’t just take a large bureaucratic organization, break it into smaller parts, and then to quote you, “it becomes magically endowed with entrepreneurial spirit.” That’s a fallacy, right? But, at the same time, you say, to do innovation, you need self-structures, you need temporary teams, you need project teams. So, what’s the difference between decomposing an organization into small parts and running project teams or small teams?

Gary: Yeah. Again, nothing wrong with small teams. I like small teams and you can do them in big companies. But I think the point I was trying to make in the book was that many times, companies confuse what is a cultural problem for a structural issue. So, they say, “We’re bureaucratic, and we’re slow, so let’s break this down. Let’s attack it structurally. Let’s make these smaller units. And now, suddenly, we’re going to be like a startup.” And the answer is, no, you’re not. You’re just going to be smaller versions of your old bureaucratic self. It’s actually hard to recognize what you can’t replicate about a startup. So, startup life — and I’ve been involved with startups, I’ve been a co-founder of a company, I’ve served on the boards of startups — startup life is consumed with the fear that you’re going out of business because you’re generally running on fumes, in terms of resources and cash. And so, you are focused on one goal — surviving. And the people you attract to the enterprise are extremely comfortable with the ambiguity that they may not be in business the next year. So, you select people who are very comfortable with that calculus. If you’re in a major corporation, if you’re in Microsoft, with 20 plus billion dollars of cash on the balance sheet, you’re not going anywhere next year. That, I think, changes some of the tension and pressure. And you cannot replicate that in a large company.

everybody loves the discipline until that discipline is applied to them — Gary PISANO

Gary: If you’re a large company, let’s think about what it is you really think make startups innovative — those are the things you can borrow. Create a sense of urgency. We’ve seen that in large companies. Today it’s fascinating what’s going on there. Big companies are being forced to be very urgent, because their worlds got changed dramatically. Look, I come from an academic institution that’s… Well, it’s a University — Harvard University is 350 years old or something and Harvard Business School is 100 years old — and we had to go online in a two-week period. Our students were on spring break and when the University president said because of COVID we could not have classes in-person, it would be risky and irresponsible. And so, in two weeks we had to figure out how to deliver education online. I think, if you had said to me last year, could that happen in a two-week period? I would have said no. But it had to happen. So, we made it happen. That’s the sense of urgency you can get. So, in a big company, you can do it. And we’ve been seeing this happen. So that’s what I encourage companies to do is, forget the whole startup thing; focus on the key attributes of innovative cultures — and those are some of them.

[00:38:23.12] Ben: When you talk about culture in the book, you talk about the paradoxes of innovative culture. One of the quotes you say is, “When it comes to innovation, the candid organization will outperform the nice one every time.” I suppose the question here is, how do you stop candor becoming aggression?

Gary: Yeah, great question! And absolutely you have to do. I mean, you have to watch for it. If you’re the senior leader, this is where you have to just be really attuned and you have to watch the visual cues — it’s a little harder these days if you’re remote — you’ve got to be able to, if you’re in the room, watch the body language of how people are reacting and be prepared to step in. And you have to model it yourself, that delicate balance of treating people with incredible respect and dignity but being very clear about what you think is a good idea, what’s working, what’s not working, how things can be improved. It is a delicate balance, and in an organization where people are passionate — which is what we want them to be — emotions get involved. And we know that emotion can get the best of us, at times, in a negative way. So, I think, as a leader, you have to be really comfortable with stepping in and being able to pull somebody aside and say, “Look, Ben, you were a little rough in that meeting. I get your point, but you might have ventured into, you were just brutal, not brutally candid, which is different. We’ve had the good argument, we’ve thrashed this problem out 100 different ways, and now we’re going to move forward and we’re still connected.” I think you have to build good personal relations between people in the company.

[00:40:14.07] Ben: So you need obviously candor with respect but if you don’t have the candor, then you’re just going to move too slow, because you’re going to be too nice and you’re not going to get to the point, and the whole pace of change will be too slow. Is that it?

Gary: Absolutely! And problem-solving requires candor. It’s, how do we make this better? You have to tell me what’s wrong with my idea. If I give you a book of mine, to read my next book, I give you the manuscript and you say, “Great job! Great job!” Yeah, you just don’t want to hurt my feelings. But that’s not going to help me. But if you say, “Look, I’ve got to be frank with you. Here’s three points in the book that don’t make sense at all” or “I don’t understand” or “They’re badly written” or, “They don’t add anything”, whatever. And you are clear about it. I might not want to hear that. In fact, I’m pretty sure I wouldn’t want to hear that. But the only chance I’d stand to make the book better is actually hearing that. That’s why candor is so critical to innovation. For any creative process, and particularly for innovation, it’s extraordinarily important!

[00:41:14.07] Ben: There’s another great quote I loved from the book, where you say, “An organization chart gives you a pretty good idea of the structural flatness of a company, but reveals little of its cultural flatness.”

Gary: Yeah.

[00:41:24.25] Ben: How do you lever this culturally flat organization?

Gary: That’s where the leader’s behavior is everything. What are their expectations of you and others and their role and how much autonomy they really give you? So, in some organizations, leaders make it clear that they want to be involved in every decision. So, I don’t care what the org chart looks like, it’s not flat. And they’re going to get involved with every detail, and people are going to learn and be conditioned over time that ‘you’d better ask the boss before you do anything’. In other organizations, the leaders say, “Look, here’s the direction I want to go on. I think I’ve made it pretty clear the general direction or the principle or the strategy. It’s really up to you how you do that. And it’s really, within broad latitude, I just want you to go forward. And if you need my counsel, I’m absolutely willing to provide you that counsel and help you, but don’t feel you have to ask my permission.” So there’s clear boundaries about where you have to ask permission and not. “I trust you.” It’s trusting people to make decisions, and then giving them feedback on those decisions, later.

[00:42:27.22] Ben: Two other paradoxes I wanted to pick up on. One is this idea of, you call it ‘tolerance for failure, but no tolerance for incompetence’. If you’re going to do experiments, you have to be allowing competent people to do them, right?

Gary: Organizations that are innovative have really high standards of people. So they draw a distinction between, something failed because biology got the best of us or physics got the best of us or the market. We tried something new. They draw a distinction between that and just, we were sloppy. We did a bad design. We did bad engineering. I didn’t motivate my team well. I didn’t listen to people who were giving me an impact. That’s incompetence. We’re not going to tolerate that. Innovation is hard enough. And that’s a harder edge. Everybody loves tolerance for failure but when organizations start talking about, look, we’re also not going to tolerate incompetence, that’s a scarier environment to be in, for a lot of people.

[00:43:28.13] Ben: You also talk about how there’s a given that experimentation is good, but you argue very strongly that, if you’re going to experiment, those experiments need to be bounded by a sense of what they’re going to teach you and how much you can afford to lose through those experiments, right?

Gary: So, it’s, what are we experimenting? Why are we doing this? And then, we’re going to generate data. We have to treat the data as sacred. We can’t just run an experiment, look at the data, and say, “Well, that’s not what we wanted. Let’s do this. Let’s keep doing it.” You have to ask yourself, if you’re getting results that you didn’t expect or that are less than optimal, why is that? What’s going on? And learn from it. And that’s the discipline. And I think there’s got to be a real discipline to experimentation. And everybody, again, loves the discipline until that discipline is applied to them.

[00:44:19.11] Ben: One of the things you said in the book is, as a leader, you have to be great at strategy, execution, and culture. And what I wanted to ask you was, how many people does that apply to? And then, do you think that kind of leadership only really comes in waves? I don’t know if you have ever read that Steve Blank article where he sort of says, you get one wave where somebody is great at innovation, and they surround themselves by people who are great at execution, and then when that person retires, or leaves, then you have a period where the company kind of sweats the asset or milks the existing innovations. And then, there’s not until the next generation of leaders that you then become innovative again. So, sorry to ask such a long question, but do you think it’s really difficult to have those qualities in a leader? And do you think they come in waves?

Gary: I agree with that observation. I do think they come in cycles. I think what happens is you do get the visionary leader, the innovative leader, who then surrounds themselves with people who are execution-oriented to kind of counterbalance them, which is probably a reasonable thing to do. But then, the problem is those people become the heads of the company, and there’s less innovation. And then, the company gets in some trouble and an innovative leader comes back. I think Microsoft’s a great example. I mean, I think they’ve gone through that cycle. How many leaders are good at strategy, systems, and innovation? It’s a great question! Probably very few. I think, as a leader, your task is three-fold: you’ve got to master strategy, you’ve got to be a good architect of the system, and you’ve got to be a good architect of the culture. But if they had to choose, I’d say, focus on strategy and focus on culture. Systems — there’s enough other people who can probably help you get that right. So, focus on strategy and focus on culture.

[00:46:06.16] Ben: We’re in a world now, where, the pace of change is constantly accelerating, we’re on a treadmill. And sustaining innovation is kind of like the new source of sustainable competitive advantage. Do you think that’s fair? I.e., this is really what makes or breaks companies today, and therefore, the leaders that are good at this kind of almost deserve to be paid whatever they’re paid, because this is just so critical?

Gary: Well, I want to be clear, because in terms of sustaining innovation means — and Clay Christensen used that term, ‘disruptive versus sustaining’. I’m not talking about sustaining innovation the way he did it. Sustaining your capacity for innovation is critical. I mean, that is what is really, I think, the skill that is in scarce supply. So, it’s not just being good at innovation. It’s building an organization that is capable of innovation. I think that’s the fundamental difference. The leaders should worry about building the organization that’s going to outlast them.

[00:46:57.09] Ben: So, the way you finish the book is you talk about innovation as agency, right? So, we all have a role to play in innovation. Is there a way for us to become, as individuals, in a practical sense, for us to become better at innovation and also to make our businesses more innovative?

Gary: Yeah, absolutely! Look, innovation starts with yourself and organizations want us to be innovative. I’m not innovative, but I want other people to be so. So, you kind of have to open it yourself, for sure. But I think, how do you do it individually, and in all walks of life? I go back to some of the things I talked about in the book: expose yourself to a wide range of people and ideas. So, get out of your comfort zone, get yourself in contact with people you’re not normally talking to. I think that’s probably the most important thing. The second thing is, get comfortable yourself with experimenting. And I think we’re all trying things and learning from them as an individual skill — getting comfortable with that I think it’s a prerequisite for having your organization be comfortable with that.

Gary: There’s lots of these things individually, you can practice. I mean, you can practice candor and learn how to do that, and challenge yourself to start to follow some of those cultural attributes. Get yourself comfortable with receiving candid feedback and not taking it too personally when your ideas are criticized. Learn how to do that. And again, I think some of it is, get yourself in situations where, if you’re outside your comfort zone in something you’re doing individually, that you’re not going to be very good at, and that you’re going to fail at it, and you’re going to learn that humility that comes from it — I took a drawing class two years ago. I’m a terrible artist, but my wife is an artist. So, she was taking me to a drawing class, and I took it, and I failed a lot at it, but that’s okay. I mean, I think it’s no fun to fail, but you have to realize that failing at things isn’t so bad — and innovating requires that. So, if you get comfortable with some of that yourself, you’ll become a more innovative person in everything you do. I think that, in an organization, you will be a better agent for innovation.

Ben: Fantastic! Gary, thank you so much for coming on the podcast and sharing all of your insights from your book! Just to reiterate, Gary’s book is called Creative Construction: The DNA of Sustained Innovation — and we highly recommend it!