Allocational Rigidity - What Is Will Always Beat What Might Be

Contribution Summary

Summary

All too often, legacy programs get richly funded year after year, while new initiatives with potentially much higher returns go begging for funding.

Moonshot(s)

Transcend traditional trade-offs

Description

New initiatives that do not closely align with existing (“core”) businesses are penalized when it comes to allocation of scare resources. This institutional bias against innovation is deeply rooted, with human nature (fear of the unknown, and a desire to preserve personal stature) playing a significant role.

Illustration

The Palo Alto Research Center, founded in 1970 as a subsidiary of the Xerox Corporation, is a useful case study. Despite developing or refining a number of breakthrough technologies (including the computer “mouse,” laser printing, the Ethernet, the modern graphical user interface (GUI), and ubiquitous computing) Xerox largely failed to capitalize on these innovations, instead allocating resources to its core copier business.

Root Causes

In most organizations, a manager’s power is directly correlated with the resources he or she controls, and the success of the products or initiatives with which they are linked, creating a disincentive for managers to redeploy their assets to new (and potentially more valuable) initiatives. Within most companies, there is a monopsony for new ideas; that is, all ideas, no matter how big or small, must work their way up the chain of command to senior management, thus penalizing ideas that originate at the bottom of the organization and must work their way past a greater number of gatekeepers. The level of uncertainty (and hence risk) associated with truly novel ideas does not match well with the traditional process for allocating resources, which demands a level of certainty about volumes, costs, timelines, and profits. This “novelty penalty” ensures that managers are rarely penalized for continuing to invest in existing businesses.

Solution

Create multiple markets for new ideas within organizations, providing “sellers” of new ideas with alternatives to traditional process. Create mandates for innovation (i.e. set targets for sales from new products a la Google). Remove financial disincentives for “self-cannibalization” (i.e. profits lost due to cannibalizing existing initiatives or products are made whole when calculating compensation).

Credits

Gary Hamel

Input

Comments

Ben Biddle

May 10, 2012 at 11:30am

Another great example of how organizational inertia can hold back progress. In addition to setting up a market of ideas, you need to take some of the politics out of decision making. Power needs to be more decentralized, and fewer managerial rungs in the ladder to climb.

It would be great if we could completely reframe what it is to advance to mean taking on bigger, more challenging and innovative projects. Creating a pull for innovative projects will be much better than mandates - a push approach.

It is really almost as though firms need to operate with two parallel organization - one focused on scaling and optimizing the core business, the other innovating and experimenting with new ventures and growth opportunities. There seems to be an inherent tension between the two, and some kind of buffer needs to be put in place to prevent interference.

Aaron Anderson

April 8, 2011 at 5:00pm

This reflects two major concerns that provide resistance to change efforts:

1) Often times, the policies and procedures created to build an operation become rigid, codified such that they are hardened and protected institutionalized barriers to change. In effect, the very structure of the organization that led you to your current successful location in whatever industry you play in is what is keeping you from becoming competitive by fusing the status quo (or freezing, as Lewin would suggest, that which needs to be unfrozen).

2) Most change efforst fail the resource allocation tests. That is, almost all the time, employees are asked to continue doing and what they are doing, and rewarding for the status quo while new initiatives or practices are simultaneously not reward. Pfeffer would suggest that this all falls into resource dependency theory, and March & Simon clearly said about a half century ago, you get what you pay for.

If companies and leaders of them want to foster innovation, the culture of of the operation must embrace and reward the chaos that change brings, and divert the funding models such that change is rewarded, the status quo crutches are kicked to the curb, burned, and old practice no longer rewarded.

Here in lies a particular snag. Do/can rewards actually breed change? I showed the following video to my students this past semester, and it got them thinking - do rewards really incentivize behaviors that breed innovative change?