"We're now living in a world where it's innovation that creates wealth," says Hamel, founder of the consultancy Strategos and a visiting professor at the London Business School.
For more than 20 years, Hamel has studied what companies need to do to compete. He pioneered, with C.K. Prahalad, the concept of core competencies, the unique expertise a company possesses that provides competitive advantage. In 2000, Hamel's book ‘Leading the Revolution' exhorted readers to embrace change as the dotcommers had and reinvent their business models.
In his new book, 'The Future of Management', Hamel argues that the principles and practices used to run most companies were invented to solve a problem, how to be more efficient, that today's businesses have largely mastered. "The most critical prerequisite to driving higher levels of efficiency is conformity, to policy and standards and guidelines and quality protocols, and yet, obviously, the most fundamental kind of prerequisite for innovation is diversity in thought and action."
Hamel suggests revamping every management concept, from how employees use their time to how funding is allocated to projects so that managers may inspire workers, identify the most promising business ideas and marshal the resources to execute them.
IT organisations will play a critical role in two ways: first, by building systems that companies will use internally to facilitate innovation and second, by identifying how companies can use new technologies to upend established business models and deliver new products and services. He spoke recently with CIO executive editor Elana Varon about what IT leaders need to do differently.
CIO:People have always complained that management squelches innovation. What made you decide they were right?
Gary Hamel: Partly, it's having worked for the last 20 years to help companies of all sorts innovate. The work that my company, Strategos, has done through the years with companies like Shell and Nokia and others created billions of dollars in market value. But as soon as you turned your back, organisations reverted to type.
It seemed to me it was time to go back to the genetic foundations of management and of large organisations and understand how we make companies systematically more innovative than they have been over the last hundred years.
CIO: Do you think there is a difference between old companies and new companies? The examples in your book, such as Whole Foods Market and Google, employed unconventional management models from the start.
Gary Hamel: It is certainly easier to build a more innovation-friendly management model if you're starting with a clean sheet of paper. Having said that, most of the people who start new companies come out of large companies. So you find that industrial age management DNA in a lot of young companies. One exercise I sometimes do with folks is to suppose they want to start an entirely new company. How radically would they change the way that company is organised or managed? Most people can't think of a very radical alternative.
CIO: What do you mean when you say that the internet is the best metaphor for 21st-century management?
Gary Hamel: Management is about doing two things. One, it's about amplifying human capabilities to create the conditions that inspire people and to encourage people to give the best of themselves. The second dimension is aggregating human capability so people can do collectively what they couldn't do individually. Like building a Boeing 787, for example.
The internet is doing exactly what management is supposed to do. It's amplifying and aggregating human capabilities. It's democratising the tools of creativity, from digital cameras to blogs to the ability to do mash-ups. The 'net is also surprisingly good at aggregating human capability. Linux is the fastest evolving piece of software that human beings have ever created.
The three big challenges for companies over the next generation are going to be: Adaptability, how you build things that can transform themselves. Innovation, how you mobilise the imagination of every single person in your organisation. Engagement , how you create organisations that are so engaging emotionally and intellectually that people want to bring their capabilities to work. What's the most adaptable innovative and engaging thing on the planet? The internet.
CIO: IT leaders aspire to be enablers of business innovation. How do IT departments have to change to do that?
Gary Hamel: Think about the insights that people need to be innovative, the insights they need into customers, into technology, into competitors. In most companies, those insights are held very narrowly in functional specialties across the company. Number two, you have to be able to experiment and try new things. The third thing you need to innovate is resources, and most companies today are run so tightly that it would seem that every dollar of capital and every hour of human effort is already dedicated to some mission-critical project.
We've done work at Whirlpool to help them create an IT-enabled innovation system where every employee has access to those insights, where it's easy for employees to propose their ideas, where there's a process for peer review for new ideas so you can bring the wisdom of the entire organisation to bear.
It's not anything here that's rocket science. It just requires a new set of priorities for IT people. One of the questions you have to ask is, to what extent do our IT systems make us more adaptable as a company, or less? When I'm innovating in companies and we want to try something new, the single biggest brake on that is almost always the IT function. First of all, they're going to tell you they're so overwhelmed that they can't get to the request for the next six months. Number two, they're so driven by issues of security and control that if you want to touch the IT system, it almost takes an act of God.
When we're helping companies innovate, whatever we do with IT we almost always do around the existing systems, but it just takes too long and it's too top-down and it's too centred on control to be very helpful.
CIO: You say operational innovation seldom delivers decisive long-term advantage, but that's where CIOs typically focus.
Gary Hamel: One of the things I talk about in the book is a hierarchy of innovation. At the bottom is operational innovation, the kinds of things that companies do to run leaner or be quicker or deliver 24/7 customer service. A step up from that is product innovation that delivers the next wonderful flat-screen television. A level up from that you have business model innovation. Dell, at one time, was a business model innovator. And a level up from that you have what I'd call architectural innovation. This is when you get a whole industry thinking differently; what Apple did with iTunes to get all these music companies to agree to a new digital rights management system.
At the top you have management innovation. All of my research suggests that it is management innovation that has created the most enduring source of competitive advantage. But the distribution of IT effort is in inverse proportion to the potential to create value. Most of it's at the bottom and almost nothing at the top. If I were a CEO, the first question I'd ask in every budget meeting and in every review meeting with my CIO would be what percentage of our total budget and time is going into projects that will allow us to do something unique in our industry.
So many companies are now running the same software platforms, whether Oracle or SAP or whatever. Increasingly, we rely on the same handful of offshoring companies or IT service companies. There are a whole lot of things that IT folks have to do to keep up as part of the IT arms race, but in the end the only thing that's really going to make a difference is whether you're using IT in a unique way to do unique things where you don't find any other benchmarks. If you ask the average CIO what percentage of his total budget and headcount is devoted to things that are unique to his industry, I think it's probably too small a number.
CIO: What should the number be?
Gary Hamel: Given the size of IT budgets, I think it should be somewhere between 30 and 50%, and any place where we don't think we can't create competitive advantage, let somebody else do it.
CIO: IT leaders learn that the key to success is to collaborate with business managers who will champion their projects. But you say that "people with the boldest most useful ideas...are probably not the folks managing those processes right now". That sounds like a big disconnect.
Gary Hamel: It is a disconnect. If I'm an IT person and I want to raise my value-added in the organisation, one way is by being responsive to and solving the problems of the VP core. But if that's my view of how I'm adding value, then my capacity to add value is limited by the imagination of those folks.
As a CIO, you need to be bringing ideas to the party. You have to be more than merely responsive. You have to be in there with your ideas, with your point of view and bring opportunity to the table that those business leaders would have never thought of. If you're a CIO, you need to spend a lot of time out on the fringes of the Web because that's where the innovation's taking place. You need to spend a lot of time with people under 25 years old.
CIO: What skills do technology managers need to be innovative?
Gary Hamel: I don't think you can improve innovation performance unless you understand where innovation comes from.
Number one, innovation comes from challenging industry dogma. You can teach yourself and you can teach others how to be contrarian. Ten years ago in the airline industry, every CEO would have said that the only way to compete was by running a hub-and-spokes route system, until Southwest and JetBlue changed those rules.
Number two is understanding the early warning signs of big shifts in demographics, technology, regulation or whatever it may be that most of the industry simply isn't paying attention to. I talk about Whole Foods in the book. If you look at the trends on which they built their business model, people becoming more concerned about what they were eating, about the integrity of the food chain, about the impact of herbicides and pesticides on the environment, these are things you could see emerging for the last 25 years. But traditional supermarkets weren't paying attention.
The third kind of personal competence you need to innovate is a deep empathy with the hidden or unarticulated needs of your customers. If you understand the frustrations you're causing them, you start to understand there's something you could do differently.
I think the last competence as an innovator you need today is you can't think about your company in terms of what it makes and what it does. You have to think of it in terms of what it owns and what it knows, its strategic assets. Then you can say "OK, what else could we do with these?" Companies stop innovating when they end up hostage to a very narrow definition of who they are.
CIOs need to be the most creative people in their organisations and therefore, they need to have those skills.
Gary Hamel is one of the world's most sought-after management speakers and an advisor to CEOs, boards and governments. He is a member of the Global Business Network, a fellow of the World Economic Forum and on the board of the Strategic Management Review. Hamel has written a number of books, including bestsellers Leading the Revolution and Competing for the Future. His latest book, The Future of Management, was published by Harvard Business School Press in October 2007.