Monday, June 18, 2007

Have It Both Ways

"Ambidextrous" companies can handle incremental change and bold initiatives

By Jeneanne Rae Viewpoint:
BW 6/11/07 The debate: Six Sigma vs. Innovation

The next few postings will deal with the critically important topic of creating the right corporate climate for innovation. Specifically, when to use tools like 6 Sigma and when not to when driving growth through innovation. I had many battle scars when I first introduced our Market Driven Growth (MDG) process at DuPont that was deep in the 6 Sigma culture; the 6 sigma black belts wanted to do everything with their methodologies.

The following visual really does it for me. We discuss this in our executive ed class at Kellogg and it is a critical component of implementing the MDG process at our clients.

The three distinct phases of an initiative must be recognized and managed differentially – the “ambidextrous” company. The work at the early stages of a new initiative is driving for strategic clarity. The metric is knowledge and the tool is Options Management. The next phase, the zone of highest business risk-- the combination of uncertainty and spend rate – is where you selected a single path and you must scale it in an environment of relatively high uncertainty (represented by the rapids). The metric is revenue growth and the tool is Discovery Driven Planning. The final stage – optimization – is the region of low uncertainty but execution is critical. The metric is earnings growth and the tool is 6 Sigma. Finally, note the different types of personal needed at each phase. It is critically important to match the DNA of individuals with the task.
Now for the article.

"I can't stand this," said a senior executive of a Standard & Poor's (MHP ) 500 company recently. "One minute the management team is telling us to innovate, and the next minute they are giving us our marching orders in deploying Six Sigma. It's crazy to tell people they should be focused on becoming more efficient while at the same time you want them to explore untapped growth potential. This is making me nuts."

The objectives of Six Sigma seem noble enough for any organization. So what's the rub with simultaneous efforts to innovate? By its nature, Six Sigma fosters a very low tolerance for risk because risk increases variation.

Innovation, on the other hand, seeks to brave undiscovered, uncertain territory. Such fledgling efforts are inherently inefficient. Innovation requires a tolerance for risk-taking and failure.

A corporate culture dominated by Six Sigma management theory will be inclined toward inwardly focused, continuous, incremental types of improvements in process, customer service, systems, operations. A culture that fosters disruptive innovation will be more entrepreneurial, outwardly focused on new markets, technologies, and business models. You explore big new growth platforms that add significant chunks of revenue and profit.

Given the huge management and cultural implications inherent in each approach, it would be difficult to launch both efforts at the same time. Most organizations, like General Electric (GE ), become grounded in one and then attempt the other. In GE's case, Six Sigma came first, and its new innovation initiative, Ecomagination, is now rolling out.

In a Harvard Business Review article, "The Ambidextrous Organization," Charles O'Reilly III and Michael Tushman, business school professors at Stanford and Harvard, respectively, acknowledge the paradox of exploitative vs. explorative efforts. They conclude that smart companies separate the more ambitious efforts at innovation from ongoing efforts at continuous improvement. That allows for different processes, structure, and cultures to emerge within the same company.

An "ambidextrous" organization, they write, has independent project teams integrated into the existing management hierarchy. A tightly integrated senior team makes sure the activities of the right hand don't work at cross-purposes with the goals of the left. Both the traditional business and the fledglings report to the same executive team but are managed under a very different set of rules, depending on where each is in its maturity cycle. Remarkably, in the professors' study of 35 attempts at breakthrough innovation, ambidextrous structures were successful 90% of the time. Other models, such as cross-functional teams and unsupported skunkworks-style groups, were successful less than 25% of the time. Jim Burnick, senior vice-president for quality and productivity at Bank of America (BAC ) and leader of the bank's innovation efforts, says that if managed properly Six Sigma and innovation can go hand in hand. Thanks to Six Sigma, "Paragraph it is now possible for us to think as one organization across fiefdoms and business units to improve every type of customer's experience. This ends up as business-model innovation, which in the banking business is very uncommon."

Here are three strategies for managing incremental and disruptive innovative initiatives simultaneously:

- Separate the efforts. Don't expect people running mature businesses to behave the same as those in charge of startups. Each type has its own incentives, organizations, and talent needs.

- Appoint an ambidextrous senior manager to oversee both efforts. A general manager with responsibility for both traditional and new businesses will foster efficiency by sharing such resources as HR, marketing, and finance, and by promoting integration of the initiatives when the time is right.

-Support both teams appropriately. Don't shortchange one over the other. It kills me to see so much investment in reengineering, training, and employee time being poured into Six Sigma initiatives in the name of cost savings when innovation gets starved for critical research requirements like white-space analysis, ethnographic research, or prototyping. It's as if leadership believes companies can shrink their way to greatness.

Innovation and Six Sigma are different methods that beget different results and require different management styles. They can coexist. Just recognize that each requires its own formula for success.

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