Organization Design for Innovation

Rashi Goel 30th Oct 2012

Scope
What Organization Design principles would build innovation as a competitive advantage?
Business Performance Discontinuous Innovation

Incremental Innovation

Effort (Funds) on Innovation

Concepts
Organizations can be designed to spur or curb innovation Innovation purpose differs by industry, life stage, resources, culture, therefore, organization design changes accordingly

Organization design can be adapted to meet a new innovation purpose

Innovation process Unilever, PepsiCo, Himalaya Healthcare

DNA of Organizations

EXPLOITERS
Growth by driving efficiencies in the core business -Stable well understood strategy -Exploiters emphasize retention -Constant cost reduction -Continuous quality improvement -Berate Failure

COMBINATION
Managing the present growth by driving efficiencies, while building future growth engines

EXPLORERS
Growth by driving entry into new businesses or product lines -Explorers emphasize variation -Look for new bases of competitive advantage -Incentivize Failure

Organization Design: ARC

Architecture Formal Rules and Ways of Working
Org structure functional or divisional; centralized or decentralized Incentive schemes Salary/Promotion/Hiring Processes/Firing Policies
Easy to change

Routines The how of rules Connectors

Day-to-day activities

Interfaces between parties for coordinating activities & allocating resources

Culture
Commonly held values/beliefs that constrain & enable actions

Celebrations
Hard to change

Architecture and Routines need to be changed first, to bring about cultural change over time
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DNA of Organizations
EXPLOITERS Growth by driving efficiencies in the core business

COMBINATION
Managing the present growth by driving efficiencies, while building future growth engines

EXPLORERS
Growth by driving entry into new businesses or product lines

Explorers Vs. Exploiters

Interdependence-tightly knit vs. loosely knit Dell Vs. Lenovo Central Control of Change- e.g. MacDonalds Resource Allocation on core vs. new businesses Unilever, PepsiCo/Coca Cola

Inward vs. outward oriented in learning

Slack Vs. Waste: Exploration requires slack in the organization Eg. bootlegging time & defying management at 3M/Googles fast flip website came out of bootleg time Hard for managers to distinguish slack that promotes exploration from simple waste

Explorers Vs. Exploiters

Incentive Difficult to create incentives for exploration, because benefits of exploitation are more clear & immediate Typical Incentive systems & cultures tend to celebrate risk-taking but punish failure (Even if it was a good bet that turns out bad) Explorers also face the challenge of sustainability Short term monopolies (eg. from patents): 3M (VHS) Need to continually innovate & find new niches Higher risk suggests a need for many small bets rather than a few big bets (Venture Fund Mentality) - But then coordination & capturing spillovers becomes challenging

Explorers Vs. Exploiters

Architecture
Tight JDs Functionally organized Hierarchy Well defined KRAsgrowth, share revenue, bottomline Same KPIs across organization Culture fit, functional skills Tight rules on timings Flat No tight roles Cross functional interaction Hire for skills/personality rather than hierarchy/personal enthusiasm

Routines
Fixed tasks SOPs Short term orientationquarter reviews/weekly IT man friday

Culture
Bureaucracy Process oriented Low risk/experiement Low tolerance for failure

EXPLOITER

EXPLORER

Brain storming Informal chatting Slack-free time No time sheets Diverse hiring

Autonomous Knowledge sharing-informal Meritocracy of ideas Speed Experimentaion/risk taking

Examples: ARC
Functional Structure vs Divisional Structure: who leads strategy-function or division? Glocal or Local?

Incentives: sales vs. profit; growth vs. share gain; cost cutting vs. revenue increase
Hiring: hire for brilliance; or diversity; or attitude; or skills; technology vs. FMCG Planning Calendar -Time Management: Work Life Balance/I&GP, AOP: PepsiCo. / Coca Cola Work Vs. HUL Vs. Godrej How do you spend your money: Start Up- Cash Starved; vs. cash rich Importance of Leader (skincare in HUL), Industry (tech vs FMCG), Life Stage of Organization (Mature vs Nascent)

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A Trade-Off?
There is a trade-off between an organization being an explorer or an exploiter
Eg. Slack is inefficient for an exploiter

May be possible for a company to include structurally separated organizational units (or sub-systems) that have their own ARC
P&G has successfully accomplished this very successfully under the leadership of A.G.Lafely
centrally led innovation organization Foray into cutting edge innovation processes like open innovation, crowd sourcing and design thinking localized activation organization

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Unilever India ARC-1

Structure
Activation vs. Innovation Structure Bifurcated Career Paths on both streams

Hiring & Selection

Slightly modified set of competencies are laid down for innovation managers for PDR Innovation team new entrants are handpicked to form a diversity of backgrounds, creativity, and skill sets. Encouraged to be mavericks and think out of the box After a certain level of seniority, brand managers are slotted into innovation or activation career oaths Different Training Programs for activation/Innovation

Evangelical Consumer Connect- no one allowed to speak in meetings without

completing the required consumer hours Minimum 100 meaningful consumer hours for all innovation members 50 consumer hours for activation/100 trade hours for activation 12 Regular consumer immersion programs (rural day, live with consumers for a day)

Unilever India ARC-2

Processes that support innovation
Gate Meetings religiously followed Online Gate Documents Uploaded for 100% of projects Standardized processes for each innovation activity-gate documents, insight activator, ideation, creative briefing, fragrance/flavor appreciation, project management Regular, and rigorous (attendance mandatory), training, books and collateral available for all processes

Symbolism that celebrates innovation

Conference room converted into a real replica of a consumers living room 3-D innovation funnel to visualize status of innovation projects

Slack
Each Innovation manager leads only 2 innovation projects at one time Organization focuses only on big bets for the future, small volume ideas not pursued Informally, flexi time is accepted

Culture
Intelligent Speak/word smithing Innovation is for cool people/ dressing/exposure
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ARC Processes for Innovation to co-exist in Exploiter Organizations

Skunkworks
Xerox PARC PepsiCo-VC Nokia-VC

Structural Change
Unilever P&G PepsiCo (small extent)

Open Innovation
P&G s open innovation process (retention)

Outside Help
Project-PepsiCo Meet Indra Nooyi

Acquisitions
Naked, Ben & Jerrys, Body Shop, Innocent

Leader Led- Apple, Google Hire Innovators-IDEO, Designers Function Led-only happens when the competitive advantage is driven by that function e.g. engineers in technology, designers/creative/consultants in agencies/services. Recruitment plays a big role, individual personality driven, incentive is internal, more than external

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Concepts
Exploiter organizations Vs. Explorer (pure innovation) Organizations & how mostly organizations today are a combination of both Organization Learning process around- variation, selection and retention-VRS guides explorer, exploiter and combination organizations. Specifically use 3M, Google and IDEO as examples, Red Bull, Clorox, Rx, Ben & Jerrys (Combination) Learning Organization Design through the Architecture, Routines and Cultures framework Exploring how the Architecture, Routines and Cultures for explorer organizations differ from Exploiter and how combination organizations are working through ARC. Specific examples from P&G, IDEO, 3M, GE, PepsiCo, Google, Apple, Xerox & PARC, Microsoft, Amazon, Red Bull

Impact of external environment-industry and life stage of industry play a role. E.g. technology led industries vs. hygiene led industries or mature industries vs. nascent industries or nature of competition (e.g. organic players in detergents, or fortified drinks in beverages)

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Unilever Innovation Process

Stage 0 Exploratory Execution

Idea Evaluation

Preliminary Business Case

Full Development

Launch Preparation

Market Execution
(Test or Full)

Decision to Charter Project

Decision To Develop

Decision To Launch ( or Test)

Decision to Produce

Feedback Corrections

Post Launch Review

Idea Evaluation Stage

Idea Evaluation

Preliminary Business Case

Full Development

Launch Preparation

Market Execution
(Test or Full)

Secondary Data Mining Analysis customers, consumers, markets

Idea creation Use brainstorming techniques/ creative tools to write out ideas

Classification and refinement of ideas Sequential recycling with consumers green, dustbin, rework Refinement of ideas Idea Selection Check strategic/technical fit Inno checkuniqueness, ITB, ITP

Decision to Charter
Input Consumer Results; Strategic fit; Technical fit Delivery until next gate Resources needed until next gate Output from Excom GO/NO GO/HOLD decision to make a project Allocate project team Allocate project funds

Prelim Business Case Stage

Idea Evaluation

Preliminary Business Case

Full Development

Launch Preparation

Market Execution
(Test or Full)

Concept Concept Development Development Deep consumer understanding-consumer tension Develop concept Quantitative concept test results Develop final concept

Concept

Preliminary

Validation
Develop product brief Feedback from relevant functions (Financial, SRA,R&D, Commercial, QA, Legal) Pre-prototyping Need based Qualitative tests Need based

Business Case
Develop preliminary GTM out sales plan Define preliminary target business case (GM level) Key Success Factors, Risk assessment

Decision to Develop
Input Final Concept Preliminary business case Development plan and resources needed for full development Output from Excom GO/NO GO/HOLD decision to develop project Allocate project team Allocate project funds

Full Development Stage

Idea Evaluation

Preliminary Business Case

Full Development

Launch Preparation

Market Execution
(Test or Full)

Product Development Flavor and Product development Product refinement qualitative CPT

Commercialization

Develop Sales & Marketing Plan A&M allocation Communication development GTM closures

Business Case Validation Bases if needed Final Business Case

Supply Chain and Manufacturing Trial runs Propose Capex NPPR written and uploaded

Decision to Launch
Input Business case Communication plan GTM recommendation test or national Research Results Output from Excom GO/NO GO/HOLD decision to launch/test Allocate project team Approve/Not approve capex

Launch Preparation Stage

Idea Evaluation

Preliminary Business Case

Launch Activation Plan

Full Development

Launch Preparation

Market Execution
(Test or Full)

Sales Team Planning

Production Plan

Business Case Finalization

Packaging artwork development and shade cards Launch plan at city/outlet level

Launch conference planning Develop incentive plan, agree DM/TM POSM and visibility agreements

Capex approved, machinery in NPPR approvals Concentrate order placed RM/PM orders First production of concentrate

Set-up volume plan and Financials validation Review launch success criteria Update risk assessment Finalize Business Case

Decision to Produce
Input Detailed Launch Plan Communication Package Output from Excom GO/NO GO/HOLD decision to produce

Launch Review Stage

Idea Evaluation

Preliminary Business Case

Full Development

Launch Preparation

Market Execution
(Test or Full)

Post Launch Review

Input Neilsen Market visit reports Retail audit Consumer data Output Actual versus Plan analyze Lessons learned Recommended Process Improvement If test, recommend scale up or not