Matt Tenney, Contributor
In the 1950’s the average lifespan of the largest US companies (companies listed on the S&P 500 Index) was around 60 years.
Today, as written in this article, Credit Suisse believes that the average life expectancy of S&P 500 companies is about 18 years.
Yale professor Richard Foster believes the life expectancy is closer to 15 years, according to this BBC article.
While one component of the shortened life expectancy is due to increased mergers and acquisitions, another component is the increased speed of change in today’s business environment.
In order to survive, today’s businesses need to make continuous innovation a top priority.
A very important component of being able to continuously innovate is creating the right workplace culture.
A strong organizational culture drives innovation by creating an environment in which innovation is likely to happen on a consistent basis. In this type of culture, employees feel safe to challenge leaders, to challenge the status quo, and to run experiments.
In this article, we’re going to explore how organizational culture affects innovation and the key components of an innovation culture.
How An Organization’s Culture Affects Innovation
A farmer cannot make fruit appear on demand.
However, a farmer can create the conditions for fruit to appear by engaging in certain practices, like taking care of the soil, planting seeds at the right time, and tending to growing plants.
In the same way, business leaders cannot force innovation to happen.
However, they can create the conditions for innovation to occur by creating a culture that is highly conducive to innovation.
In fact, research suggests that innovation is highly unlikely to occur in organizations that lack the right culture.
As Robert Angel explains in this study, “There is no guarantee that an innovation culture will lead to innovation, but it certainly is a prerequisite.”
In a culture conducive to innovation, the following characteristics are common:
- Innovation is a top priority, so processes are developed to drive innovation
- There is ample diversity in the organization
- Leaders identify and take care of high-potential innovators
- Team members feel safe to challenge management and the status quo
- Team members feel safe to run experiments that are likely to fail
In Cultures That Drive Innovation, Innovation Is A Top Priority And There Are Innovation Processes In Place
In organizational cultures where innovation is occurring on a consistent basis, innovation is a top priority.
In addition to devoting appropriate resources to maintaining the current business model, products, and services, these organizations also devote ample resources to uncovering new solutions.
The importance of innovation is discussed frequently, if not ad nauseum, because the leaders of these organizations know that failing to innovate means the organization will not survive for long.
When innovation is a priority, and everyone in the organization is aware of its importance, there tends to be repeatable processes for innovation.
In a study published in MIT Sloan Management Review, summarized in this article, the authors point out the necessity for making innovation a priority and having innovation processes in place, and also share the processes found to be common among 30 innovative organizations.
Here, we’ll explore two essential components of the innovation process that many organizations seem to lack.
First, it is critical to have proven, repeatable processes in place for idea generation.
To create one successful innovation – a differentiated solution that is highly valued in the marketplace – it is likely that dozens of ideas will need to be generated and modified before one experiment can even be designed.
Then, it is likely that only one out of every 10 of those experiments will result in a successful innovation.
This is why cultures conducive to innovation have processes in place for consistently soliciting, collecting, organizing, and screening new ideas from employees at all levels in the organization.
Quickly Proving or Disproving Hypotheses
Although some people perceive innovation to be simply a matter of generating creative ideas, innovations almost never result from one idea exactly as it first arises.
The ideas that form the basis of an innovation almost always change significantly over time.
One of the most important aspects of innovation is exposing ideas to the end consumer as quickly as possible, thus allowing the ideas to be improved upon by the intended end consumer, rather than being modified internally.
Although there can be some merit to getting general feedback about an idea from an end consumer, this is not a reliable way to prove or disprove the hypothesis that the idea will be valued by the consumer.
The only way to prove or disprove the hypothesis that the solution will be valued by the consumer is to ask them to pay for the solution.
Many, many products have been brought to market and failed miserably, because they failed to acquire this type of validation early enough in the process.
Thus, cultures that drive innovation have processes in place for getting from idea to minimum viable solution (the most simple, basic form of a solution that will actually solve the problem for the consumer) as quickly as possible.
Once that minimum viable solution is identified and created, processes are also in place for asking an ideal end consumer to pay for the solution, getting feedback on why they purchased or did not purchase the solution, and then iterating or pivoting as appropriate.
How A Diverse Culture Influences Innovation
Another important element of how organizational culture drives innovation is the diversity of the people that make up the organization and its culture.
Homogeneous cultures tend to be significantly less innovative than those that are diverse.
Rocio Lorenzo, a partner at Boston Consulting Group, has made this very clear in her research published in the Harvard Business Review, which surveyed more than 1,700 companies across eight countries (the U.S., France, Germany, China, Brazil, India, Switzerland, and Austria) and a variety of industries and company sizes.
Lorenzo and her team examined diversity in management positions, measured with respect to gender, age, national origin, career path, industry background, and education.
They found that there was a statistically significant relationship between diversity and innovation outcomes in all countries examined.
They also found that the most diverse organizations had both 19% points higher innovation revenues and 9% points higher EBIT margins, on average.
Lorenzo’s research makes it clear that diverse organizational cultures drive innovation.
If you’d like to see Lorenzo discuss her findings in her TED talk, you can see that below.
The Importance of Hiring Innovators
Another essential element of how company culture drives innovation is how well the leaders identify and take care of high-potential innovators.
As pointed out in this Fast Company article, even if all other aspects of a workplace culture are conducive to innovation, an organization will not be consistently innovative unless there are natural (high-potential) innovators who work for the organization.
This is because it is fairly difficult to help someone become more innovative if she or he is not naturally innovative.
As E. Ted Prince points out in his research, published in a number of respected journals, including MIT Sloan Management Review, people who are innovative tend to have a personality, developed at a young age, that makes them very likely to challenge the status quo.
Most people tend to want to avoid challenging the status quo because it seems very risky to do so.
Prince’s research suggests that only about 3% of people have highly-innovative personalities.
Unfortunately, these people often tend to be very difficult to work with, and can often be harmful to the organizational culture as a whole, unless leaders do well to protect the innovators from the rest of the team, and vice versa.
Thus, a company culture that is most conducive to innovation is one that includes natural innovators and is strong enough to have natural innovators on the team without disrupting the cohesiveness of the team.
How Caring Leaders Create A Culture That Drives Innovation
One of the biggest obstacles to innovation is fear.
If a company gets everything else right in terms of building an innovation culture, but fails to create an environment that is free of fear, that company will be at a significant disadvantage to competitors who have been able to create stronger cultures.
As detailed in research published in this article published by McKinsey, most CEOs understand that a fearful environment is detrimental to innovation.
Leaders who truly care about employees devote a good deal of time to create and sustain an environment that is free of fear.
This results in an organizational culture that is better able to drive innovation.
Employees need to have no fear of challenging the status quo in an organization or in a market.
Employees need to have no fear of sharing ideas that challenge the direction of senior leadership.
Employees need to have no fear of taking time to explore potential solutions that are likely to fail.
When leaders truly care about employees, and build healthy, trusting relationships with employees, the fears above are removed, and one of the biggest obstacles to innovation is thereby removed as well.
How Encouraging Failure Drives Innovation
Organizational cultures that are most conducive to innovation not only remove the fear of failure, they actively encourage failure.
As Richard Farson and Ralph Keyes point out in this article in the Harvard Business Review, “In recent years, more and more executives have embraced this point of view, coming to understand what innovators have always known: that failure is a prerequisite to invention. A business can’t develop a breakthrough product or process if it’s not willing to encourage risk taking and learn from subsequent mistakes.”
In company cultures that drive innovation, it is assumed that out of every 10, well-designed experiments, 9 of them are going to “fail,” meaning that a solution will not be found that can be successfully brought to the market.
It is understood that the cost of those 9 “failures” is minimal compared to the upside potential of the one successful innovation.
It is also understood that the cost of not risking those 9 failures is a company that will likely become obsolete in a much shorter period of time than those that encourage those 9 failures to happen.
Thus, in innovative cultures, there is a built-in expectation that constant experimentation is a must, and that means lots of failures.
As IBM’s Thomas Watson, Sr. said, ““The fastest way to succeed is to double your failure rate.”
The result is a culture in which people are expected and even encouraged to be routinely failing with well-designed experiments.
Matt Tenney is an active CEO who aspires to create the best workplace culture in the world. Matt is also the author of Serve To Be Great: Leadership Lessons from a Prison, a Monastery, and a Boardroom, and The Mindfulness Edge: How to Rewire Your Brain for Leadership and Personal Excellence. Matt is frequently invited to present keynote speeches at leadership conferences and meetings. His TEDx Talk has been viewed over 1,000,000 times since January, 2020.