Spark of business innovation? Study concludes company culture is biggest factor

Minnesota has spawned more than its share of innovations over the decades, from pacemakers to Post-It Notes and from round thermostats to Rollerblades.

You might credit the cold for our inventive spirit because there’s a body of research out there that says cultures are more innovative the farther they’re situated from the equator.

A surprising new research paper co-authored by a University of Minnesota marketing professor, however, suggests that the culture within a company is actually the biggest driver of innovation.

I spoke with the Carlson School of Management’s Rajesh Chandy via telephone last week from London, where he is on sabbatical and teaching at the London Business School.

“The paper was somewhat controversial in the review process,” Chandy said. “We didn’t go into it expecting that culture at the firm level would be so important to innovation.”

The study debunks conventional wisdom that companies located in places with a skilled workforce, plentiful investors and supportive governments have a major advantage when it comes to innovating.

Business innovation has ripple effect on national economies
Business innovation is important because such companies tend to lead their industries and lift their countries’ economies.

Companies that master innovation unlock a powerful tool, one that “can propel small outsiders into industry leaders and can bring down large incumbents that fail to innovate,” according to the research paper, “Radical Innovation Across Nations: The Pre-eminence of Corporate Culture” (PDF).

Chandy co-authored the report with Gerard Tellis of the University of Southern California and Jaideep Prabhu of Cambridge University. They looked at the data that already existed and then did their own survey of 759 companies in 17 countries to come up with their results.

Such factors as labor, capital and government policies are still important ingredients for fostering innovation. But they are more “hygiene factors,” Chandy said. They alone won’t help a company differentiate itself from competitors.

That’s because, as Thomas Friedman would say, the world is getting “flatter.” Technology and globalization are making it possible for labor and capital to move around the globe more freely than in the past.

In theory, the advantage of being headquartered adjacent to a top-ranked university or financial center is less defining today. Many tasks can be outsourced to other parts of the world, and hundreds of banks are a mouse-click away.

Meanwhile, those trends in technology and globalization have encouraged governments to more closely align the principles they use to regulate and support businesses.

So today, a company in rural Minnesota — or rural India, for that matter — can more easily access those innovation prerequisites without having to be headquartered in Boston, Mass., or Silicon Valley.

So what do innovative firms have that others don’t?

Innovative companies share cultural traits
The survey found innovative companies — regardless of industry or location — shared common cultural traits that make them innovative.

Chandy said it reminds him of Leo Tolstoy’s opening line from Anna Karenina: “Happy families are all alike; every unhappy family is unhappy in its own way.”

The researchers identified three key attitudes that make innovative companies all alike.

First was a willingness to “cannibalize” assets. They’re not afraid to invest in new ideas and technologies — even ones that could make their current products, investments and expertise obsolete.

Fujifilm offers a good example, Chandy said. The company was built around manufacturing film, but it invested early on in digital photography technology. Today, Fujifilm is doing well, while Kodak, which was more reluctant to change, struggles.

Secondly, innovative firms are focused on the future. “Easy to say, but hard to do,” Chandy said. Most CEOs spend only 3 to 4 percent of their time thinking about the future. It’s easy to get consumed by the day-to-day press of business, even when things are going well.

Medtronic is an example of a future-focused company, Chandy said. Its leadership tends to think about the future and look for ways to grow the company by creating new divisions, he said.

And innovative companies tolerate risk, the report notes. Another thing that’s easy to say, hard to do: “[T]rading a current sure stream of profits for a future uncertain stream of profits is risky and does not come naturally to managers,” it says.

A few practices appear to help translate those innovative attitudes into action from employees.

Innovative companies empower “product champions.” That means they give employees with ideas the resources to play around with them, even though their future value is uncertain.

3M has cultivated hundreds of these product champions. Chandy said it comes from a “make a little, sell a little” attitude. The company doesn’t demand every new product be a blockbuster. As a result, 3M sells nearly as many products as it has employees, Chandy said.

And there’s another reason to think about 3M, Chandy said. “Innovative firms tend to be pretty good about reinventing themselves. It’s worth remembering that 3M started out as a mining company, and they have reinvented themselves several times.”

Innovative companies have “asymmetric incentives” that decouple rewards from seniority, he said. The rewards for success are disproportionately greater than the punishments for failure. And they have healthy competition, or internal markets, among divisions of the organization, Chandy said, again pointing to Medtronic as an example.

The lesson for companies seeking to become better innovators, Chandy said, is that they should cast a wide net when looking for practices to emulate.

“There’s a wonderful set of role models within Minnesota if companies are willing to look outside their industry,” Chandy said.

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