Systemising Innovation in Construction

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Thursday, March 31st, 2016
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There is no single or magic recipe for innovation. Every organization must develop its own unique innovation strategy in response to its own business environment, culture, opportunities, constraints, resources and capabilities.

However, over 50 years of research in the field of innovation has shown that there are some common attributes which seem to define the world’s most innovative firms – such as IKEA, Hewlett Packard (HP), IBM, Proctor and Gamble, Google, Cisco, Tata, Apple, Sony, Samsung, Toyota and Disney.

This research shows that these firms are differentiated by a ‘systematic’ innovation capability which is too often missing from the construction sector for a whole host of reasons related to the culture of the industry and the fragmented way in which we regulate, organize and procure the building process. Nevertheless, it also shows that the rewards for firms which can break free of construction industry’s norms can be enormous and that this requires a relentless focus on six simple principles of organisation.

Principle 1: Customer focus

Innovative firms tend to articulate a clear direction and inspirational vision of creating ‘new value’ for customers. While senior managers drive the strategy personally and play a pivotal leadership role in modelling innovation, effective innovation is also ‘needs-driven’ and ‘customer-focused.’

For example, in companies like 3M, feedback from lead users who are interested in trying new products and services are often the sources of new ideas. In contrast, companies with a poor record of innovation tend to have ‘competitor focused’ strategies, using them as a benchmark in strategy formulation.

Principle 2: Collectively challenging orthodoxies

Innovative firms develop both formal and informal processes which encourage people to challenge orthodoxies and put new ideas forward.

For example, IKEA challenged existing orthodoxies when it questioned whether furniture needed to be delivered already assembled. So did Toyota when it developed the Prius, the world’s first hybrid mass market car. In highly innovative firms, innovation has less to do with individual creativity than with assembling the right sorts of insights to provoke new breakthroughs. What defines these firms is their ability to combine knowledge from various domains to view things from new perspectives.

Principle 3: Dedicated resources

Innovative firms commit ongoing and substantial budgetary resources to key innovation activities such as R&D, training and development, environmental scanning, marketing and user interfacing. They are also adept at securing external resources for innovation.

For example, Cisco and IBM wait for venture capitalists to capitalize companies with promising technologies and then, when successful, purchase their innovations through acquisitions. Other firms like Tata in India provide resources for promising ideas through competitions and grants. In 2015, Tata’s innovation competition received over 2,000 entries from its many subsidiaries.

Principle 4: Measuring return on investment

The returns from innovation activity can be complex and difficult to measure, especially in the short term. Nevertheless, most innovative companies attempt to do so using a range of measures which include inputs measures (such as the ratio of R&D to total staff numbers); innovation process intensity (quantity and quality of innovation activities); and innovation outputs (revenue generated, new processes, products and services, patents, reputation and so on).

Principle 5: Recognise and reward innovation

Innovative firms develop reward systems that link rewards to long-term measures of success. They realise that short-term measures of success can discourage risk taking and deter investments in blue-sky initiatives which strategically position an organisation for the future and lead to longer-term success.

The linking of rewards to long-term performance tends to be an attribute of Asian companies such as Toyota, which tend to have relatively low fixed wages with a large bonus linked to long-term overall firm performance. In contrast, the tendency for western firms is to have high fixed wages which are linked to short-term individual performance.

Principle 6: Accountability for innovation

Innovative companies tend to have strong corporate cultures which encourage experimentation and risk taking but which also tolerate change and failure.

For example, at HP, a strong culture of innovation has been developed through senior managers who have access to a central pool of resources dedicated to the creation of new ideas and are expected to personally drive innovation through the business. While these managers have to report on the effectiveness of their activities against well-defined innovation goals, there is also tolerance to the fact that not all ideas will produce immediate returns and some might require repeated injections of resources.

Principle 7: Culture building strategies

Innovative companies tend to employ a variety of strategies to build an innovative culture.

For example, companies like IBM, Colonial First State, Allianz, Deloitte and ANZ are experts at utilizing new social networking technologies to enable staff to exchange, test and assess new ideas. These firms consider themselves as part of an ‘innovation ecology’ which extends far beyond their businesses to supply chain partners, universities, research institutes, customers and clients. They also use employee forums and clubs; peer-groups/networks, and regular ideas functions to promote ideation, interaction and cohesion.

Staff are also encouraged to ‘play’ with their favorite ideas. For example, companies such as Lockhead, 3M, Shell and Google use skunks and bootlegging as a way to produce innovative ideas and branch their business out into new growth areas. This involves allowing staff to spend time working on special projects which are proposed by staff around personal interests.

Google also has a 70/20/10 rule which requires all staff to work 70 per cent of their time on their specific tasks, 20 per cent on a project related to their job and 10 per cent on anything they want. This has led to many new products such as Google Earth (which came out of the 10 per cent allocation). In companies like Google, staff can also create their own job subtitles to reflect the way they use their discretionary 30 per cent.

It is this flexibility and the ability for people to define their jobs that contributes to the very high retention rates of these companies. To encourage lateral thinking, many innovative organizations create ‘free radical’ positions for external thought leaders and internal staff who have demonstrated a sustained record of invention and innovation which is recognized among their peers. These people are given considerable freedom to read, talk, wander and explore new business ideas and trends.

At IBM, these people are called IBM Fellows and are typically appointed for a five-year period with the objective to shake up the system, and to be dreamers, heretics, mavericks and geniuses. This strategy has led to a number of Nobel Prizes.

Arup uses a similar strategy and an appointment to one of these positions is recognition of high achievement and respect not only within the organisation but in the wider community.

Other culture-building strategies include study scholarships, secondments and rotations, skills clubs, study tours, creativity training, business academies, business schools and corporate universities, internal innovation journals and conferences, creative work environments which break down traditional organizational silos and alliances with innovative firms in other sectors which can bring fresh thinking to an industry. For example, Australia Post advertises an exclusive partnership with Circus OZ to run its “high flying leaders” leadership program.

There is much innovation that happens in the construction industry and our people are as creative as any other industry. However, most of our innovation is reactive and in response to problems we create for ourselves. It also mostly happens at the coal-face rather than in the board room.

For many firms, failure to innovate will be deadly. To avoid a dire fate, we need a more systematic and strategic approach to innovation. In a low margin, project-based industry which is driven by such short-term priorities and goals, this is not easy. However, most of the above basic principles are low cost and can be implemented by any company of any size in the construction sector. They just require imagination, courage and leadership.

Some firms in the construction sector are experimenting with a few of these ideas, but change is isolated, incremental and slow. The government is looking for more radical innovation to move us up the international innovation league tables, where according to the most recent Global Innovation Index, we currently languish at 17th in the world.

The construction industry needs to step up, innovate and play its part. At some point in the future, it would be great to see a firm from the construction industry recognized and celebrated as one of Australia’s most innovative organisations.

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