Interview with Jay Rao, Ph.D Professor, author, consultant Babson College

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Dr. Rao teaches extensively in the Babson Executive Education programs. He teaches and consults in the areas of innovation, the implementation of innovation initiatives within firms, corporate entrepreneurship, and customer experience innovation. His research has appeared in The Sloan Management Review, The European Financial Review, IESE Insight, and the Journal of Innovative Management among others. Jay recently co-authored The Discipline and Culture of Innovation.

He is a member of the Innovation Advisory Board at Ocean Spray. He also has a family-business background and sits on the board of The HJKP Educational Trust (Bangalore, India). Jay can be reached at rao@babson.edu

Interview conducted by Doug Berger, Innovate LLC doug@innovate1st.com

Doug: How has the field of innovation been evolving over the past 10-20 years?

Jay: Innovation is a discipline like marketing with frameworks that we can learn, practice and master. Our understanding of innovation has changed significantly in the last 20 years. If we go back in history, we thought that innovation was R&D and invention. In the eighties, we realized that a very small portion of our patents actually got commercialized. Then innovation became commercializing new products. Then process innovation became very important to improving quality and reducing cost. In the early nineties service innovation started to take off followed by customer experience innovation. Then along came the dotcoms and business model innovation became huge. In the last 5 years there has been this realization that the biggest driver in the success of innovation is culture.

Doug: We want to focus on innovation as it relates to corporate executives in the C- suite. What is the underlying mindset of executives regarding what innovation actually means?

Jay: Executives are all concerned about growth. That is the primary driver. So whether they use the word strategy or innovation what they are really concerned about is having a dynamic workplace where they can attract great talent to create growth.

Where things get complicated is when we distinguish between mergers and acquisitions and organic growth. Buying growth is always an option. How to do organic growth is most challenging for them. “Why do we even have to worry about organic growth?” They may never say so, but executives realize that this takes a long time. You can set up stage-gate processes and invest in resources and accomplish that in 2-3 years. You need grit and you need patience to build a robust culture of innovation. Toyota did not become a great lean company in five years. It’s not a destination; it’s a journey.

Doug: One thing that seems to be in the back of executives’ minds is risk. It is easy to acquire growth. Those activities have been de-risked to a large extent. So what really is the risk that executives feel?

Jay: I think it is the difference between risk, uncertainty and ambiguity. Risk is actually known. It is about known products, known technologies, known customers, known business models. And you still have risk because you have competition and those knowns are constantly moving around you. You can quantify risk based on previous data and you can analyze risk.

Uncertainty is about the unknown. Uncertainty is much more difficult because you don’t have data. Uncertainty is about our known unknowns. You know the variables but you do not have the data, for example the price of oil.

But ambiguity is about true unknowns, so unproven technologies, unidentified customers, untested business models. Entrepreneurs are much better at managing that ambiguity. Uncovering those unknowns is about continuous experimentation. You cannot predict your way into the unknown. You cannot analyze your way into the unknown.

Doug: New areas of organic growth move executives outside of their comfort zone and their familiar zone. They know the businesses that they run; they know their customers.

Jay: Very few executives have actually created completely new growth markets. Those who have created something from nothing understand those challenges and they understand the game. Those who have never done it are afraid of that game. And so it becomes about continuous improvement and squeezing existing products, existing value. That is the known world. I know the technology, I know the product, I know the service, I know the competition, and I keep tinkering with it.

In the past we used to separate it out very cleanly. We would say, «Hey, you guys in R&D, you deal with the unknown, and leave the rest of the organization alone.» As our economy became more and more service oriented where you did not have these R&D departments per se, then the question became, who is responsible for future services, future growth? In a financial services company or media company it is very hard to identify who is responsible for organic growth.

Doug: What have you learned that is effective in advancing the thinking of executives and what have you learned that gets you into trouble?

Jay: The first thing that gets me into trouble is that I am an academic so the question becomes, what is my credibility? Therefore, this is the first thing that I put on the table. I tell them, «I do research and I learn what happens inside large companies; that’s all I do. I track what the best minds in innovation are saying and thinking and researching.” While executives are very successful people they cannot keep track of everything that is going on around them. They don’t know what they don’t know. So I establish credibility through extensive examples backed up with good data

Leaders can always mandate a following. However, to actually command vs demanding followership, leaders have to become good articulators. Leaders have to be good storytellers. I arm them to tell stories in a more coherent way so that they can energize their people into action.

The big challenge of large company executives is complexity. They are dealing with hundreds of products in dozens of countries. They may be juggling dozens of technologies and dealing with competitive forces that are enormous. So when you’re immersed in that complexity we as humans tend to look for solutions which are very complicated. From what little we know that we understand about chaos and complexity that is exactly the wrong thing to do. I help take executives to go from clutter to clarity. Anything you can do to reduce their clutter and lead them towards some clarity is very valuable.

All great innovation happens in a community. And the fundamental basis of any community is language. And the better your language the less you will be arguing and fighting. Finance has a very well-established language. Whenever they need to ask questions they turn to their income statement, balance sheet, their 10K, with very well-qualified language. So the lingua franca of a discipline is very important, and having that common language is the starting point for the journey.

Doug: What are areas that have the most clutter and what shifts them to clarity?

Jay: Strategy is not a multiple choice question; it is more a set of guiding principles and developing a point of view. Tesla has announced that they will build a $5 billion battery plant and suddenly everybody is saying, “This is scale that nobody has thought of.” Even for Panasonic this seems outrageous. What is the meaning of that? How could you make a decision like that? What is that guiding principle? What is it that Elon Musk is seeing that others are not seeing?

A lot of the clutter is lack of knowledge in the sense that there are prevailing industry idiosyncrasies, assumptions that certain things will never work in this industry. The innovators are always the ones who come and show them that in fact it can be done. With the right kind of data you can bring more clarity. Good research helps executives to ground their thinking and bring greater clarity giving them the insight, “Now I know why these things have not worked in the past.”

Doug: You draw the distinction between climate and culture.

Jay: At Babson we have always known that entrepreneurial mindset and behaviors were a determining factor. The research is quite clear. We know what these innovators, creative people do. We know that you can’t push people to be creative. We can’t force people to be creative. In fact, not only can’t we pay people to be creative, it actually backfires. What executives can do is to create a climate where people can be naturally creative.

Climate answers a very simple question. Climate tells me, «In the morning, am I energized to go to my workplace?” How does it feel when you walk into a place? That is climate. If the CEO is sitting in the middle of the call center then that is something that affects the climate. If the CEO never shows up that too affects climate. Climate can change quickly, but culture is more enduring. In addition to climate, culture is comprised of both rational and emotional building blocks—resources, processes, and values and behaviors.

When companies are very small you really do not have a culture. The enterprise just has the values and the behaviors of the founders. Through trial and error the survivors find a formula for success. Then the repeated reinforcement of your values, processes, behaviors, and resources as the company grows bigger and bigger become the culture.

Doug: What are a few actions and behaviors that cut through the clutter in the organization climate, which executives can begin taking?

Jay: Leaders have to do three things. Their job is to energize, engage and enable people. Energizing is really about storytelling; where are we going? What are the challenges? You may not have the right answers, but show people that we can navigate these challenges and thrive and be successful and challenge people to action.

Engagement is more how do I bring you along? How do I make sure that you are not checked out? How do I make sure that you want to get up in the morning and come to work? That is engagement.

Enablement is how you actually help them. Enable people to cut through bureaucracy; enable people when they are given challenges.

Values are not what we speak. Values are how we spend two things: time and money. Time is more important than money. Are you spending more time on Wall Street with analysts or more time with people in R&D? Are you spending more time with the supply chain people or with finance?

Today the leader has to be a little subtle. The leader does not have all of the answers. So don’t fake the answers. Asking the right questions is much more important than having the answers, which is where they have to rely on their people. You are asking the great questions and asking employees to help find good solutions to tough problems. Here are the ways that I will help you find those solutions. Maybe you need to learn new things, which you have not done before. This is how I want to enable you. I want to engage you in this dialog; I want you to master whatever craft you are here for and I have to give you guidance, support, autonomy, freedom in order for you to master that craft.

Doug: What are a few things that executives need to do to get growth moving organically?

Jay: The resources, the processes, the rational elements of the culture piece have to come into play. In order for organic growth to happen you need three levels of resources, especially people resources. You need a champion. The top C-suite people have to be champions for organic growth. They have to be obsessed about organic growth. But they are not the experts in the field. So you need to find experts who know the game of organic growth. You need champions, you need experts, and then you need talent for organic growth to happen.

Mentors and champions find the resources to build that sandbox. However you cannot just play in the playground without any rules. You need a coach. Even the best athletes have coaches who know how to play the game, who know the rules of the game and who understand how to play the game. Coaches are the ones who guide that talent to play this game. Those are big actionable things that executives can do in terms just of providing resources.

Not everybody is going to be playing the game. Not everybody is a marketing expert. Not everybody is a finance expert. Not everybody is a supply chain expert. Not everybody is going to be an innovation expert. However, we do need everyone to have the basics, just like everybody needs to have some basics of finance, marketing and quality. Everybody needs to understand the lingua franca of innovation. At the very least they need to know not to be a bottleneck or an obstacle to organic growth.

Doug: At a very strategic level companies play for both growth and profits. Many people whom I speak with find that profits take precedence over growth.

Jay: When I meet the top eight or ten executives in the company the supply chain people are there, the manufacturing people are there, the finance person is there. The thinking of strategy has changed considerably in the last 20 years. In the past we used to think that product leadership and operational excellence were competing. We would think that customer intimacy and operational excellence were in fact opposing forces. Remember, in the early days of quality we thought that to get very high quality you had to have a really high cost.

And then we found out that was not true.

Today the best of the best companies do not treat operational excellence and customer intimacy as competing forces. They look at them as consistent and reinforcing elements. The challenge is that there is never a balance. At times you have to push on the product leadership lever; at times you need to push on the operational excellence lever; at times you need to push on the customer intimacy lever. The companies who have these three machines well-oiled are of course the best performing companies.

Operational excellence throws a lot of cash, and you need that cash to create the new products, the new technologies, the new markets; and you need that cash to get better customer insight and get closer to your customer. As far as I am concerned that operational excellence is the bedrock that creates cash for your other more uncertain activities. A lot of operational excellence is about risk, and you can continuously improve that.

Doug: How do you help executives to not see those as competing areas?

Jay: I give them concrete examples of companies that have done this. I show them with the data which companies are doing it and how are they doing it. Singapore Airlines is a good example. The airline industry is one of the worst industries to be in with very high fixed assets and costs associated with flying 365 days a year, 24-7. Millions of passengers. It’s nightmarish. Singapore Airlines has one of the best reputations in the industry for winning almost all of the awards for the last 20 to 25 years …. not for 3 years, not 5 years, but for 25 years. They have amazing loyalty for customers. People love them. They have one of the lowest cost structures in the industry.

How do they do it? They spend a lot for everything that touches a customer— superior customer service and experience. They are very bare bones when something does not touch the customer. Their back-end IT systems and the HQ are very Spartan. The average age of the fleet is the lowest in the industry, around 6-1/2 years. The passengers immediately are experiencing the latest in technology and ambiance. They depreciate their planes incredibly fast. Their resale value is very high. Their planes are much more fuel efficient. And they make sure that they’re in impeccable condition. So they have fewer delays, more on-time arrivals, less time in the hangar and repairs, less mechanical problems. All of that leads to operational excellence.

Another example, Samsung has one of the lowest cost structures in the industry for memory chips. Yet they command one of the highest prices in the market. The reason that customers pay a high price is because they have a higher yield than the competitors – fewer impurities in their wafer chips.

And so with these concrete examples I am able to show executives how to think about presumed paradoxes in a more structured manner, rather than thinking theoretically.

Doug: What concluding remarks would you like to make?

Jay: We know that people are born creative. But as companies have become larger and siloed we wring some of this creativity out of people. A leader’s first job is to give everybody a chance. You never know who is going to come up with that next great idea, and it’s hard to predict. You give everybody a chance, give them some tools, give them some skills, give them the vocabulary, and show them what the game is. That means you invest in them.

Having invested in them, then hold them accountable. Give them a chance to play the game, which means use your skills, use your creativity. Three percent or five percent of your employees will pick up the gauntlet and they will run with it. They can do miracles for you.

So let us give everybody an opportunity, give them all some skills, give them the tools, show them the game, have that sandbox where people can play. If they want to play the game they will come. You can have great organic growth and the culture of innovation.

2 Comments on “Interview with Jay Rao, Ph.D Professor, author, consultant Babson College”

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